<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-21179
QUEEN SAND RESOURCES, INC.
(Name of small business issuer in its charter)
STATE OF DELAWARE 75-2615565
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3500 OAK LAWN, SUITE 380
DALLAS, TEXAS 75219-4398
(Address of principal (Zip Code)
executive offices)
ISSUER'S TELEPHONE NUMBER: (214) 521-9959
Securities registered under Section 12(b) of the Exchange Act: none
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.0015 per share
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 []
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulations S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. __
State issuer's revenues for its most recent fiscal year. $4,381,035
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, of such common equity, as of September 24, 1997 was $82.8 million. (In
computing this number, issuer has assumed all holders of greater than 5% of the
common equity and all directors and officers are affiliates of the issuer.)
State the number of shares outstanding of each of the issuer's classes of common
equity, as of September 24, 1997: 22,375,552.
The information required by Items 9, 10, 11 and 12 under Part III of this report
is incorporated by reference from the issuer's definitive proxy statement for
its 1997 Annual Meeting of Stockholders (to be filed with the Commission not
later than October 28, 1997).
Transitional Small Business Disclosure Format: Yes [ ] NO [ X ]
<PAGE> 2
QUEEN SAND RESOURCES, INC.
FORM 10-KSB
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
----
<S> <C>
PART I
ITEM 1. DESCRIPTION OF BUSINESS 1
ITEM 2. DESCRIPTION OF PROPERTY 12
ITEM 3. LEGAL PROCEEDINGS 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
PART II
ITEM 5. MARKET FOR COMMON EQUITY 17
AND RELATED STOCKHOLDER MATTERS
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF 18
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 7. FINANCIAL STATEMENTS 27
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS 27
ON ACCOUNTING AND FINANCIAL DISCLOSURE
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS 27
AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A)
OF THE EXCHANGE ACT.
ITEM 10. EXECUTIVE COMPENSATION 27
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS 28
AND MANAGEMENT
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 28
ITEM 13. EXHIBITS AND 28
REPORTS ON FORM 8-K
GLOSSARY 32
SIGNATURES 34
FINANCIAL STATEMENTS F1
</TABLE>
ii
<PAGE> 3
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Queen Sand Resources, Inc. (the "Company") is an independent energy
company engaged in the acquisition, development, exploitation and operation of
crude oil and natural gas producing properties in traditional on-shore oil and
natural gas regions of southwestern United States using conventional operating
techniques. This niche focus is complemented by undertaking further development
activity to increase reserves and production and by making operational
improvements to enhance productivity and cash flow. The Company's
growth-by-acquisition strategy emphasizes: a geographic concentration in the
southwestern United States; existing production and cash flow; a mix of proved
and undeveloped reserves; conventional recovery techniques in onshore locations;
improved operating results through workovers and remedial work; and
comprehensive recompletion and drilling programs to achieve full development of
recoverable reserves.
Certain capitalized terms used in this Annual Report on Form 10-KSB are
defined in the "Glossary" included herein.
BUSINESS STRATEGY
The Company's strategy for growth involves: acquiring oil and natural
gas properties with significant exploitation, development and/or exploration
potential, obtaining operational control of its significant properties,
developing the properties to maximize production and reserve recovery and
achieving a low operating cost per barrel of oil and/or Mcf of natural gas.
Through this strategy the Company strives to increase reserves, production and
cash flow from operations.
Since the commencement of its current business plan on August 9, 1994
the Company has invested approximately $26 million in 14 separate acquisitions
and the subsequent development of some of those properties. As a result, the
Company has, based on reserve reports from independent petroleum engineers at
June 30, 1997, (on a proforma basis after giving effect to the acquisition of
the Collins & Ware Properties. See "Recent Developments") estimated reserves of
approximately 7,560 MMbbls of crude oil and 22,449 MMcf of natural gas with a
pre-tax PV10 value of $49.2 million. See "Description of Property".
RECENT DEVELOPMENTS
Recently Joint Energy Development Investments Limited Partnership, a
Delaware limited partnership ("JEDI") and a wholly-owned subsidiary of Enron
Corp. ("Enron"), became a significant stockholder of the Company.
On May 5, 1997, the Company amended its Certificate of Incorporation to
increase the number of authorized shares of the Company's common stock, par
value $0.0015 per share (the "Common Stock"), from 40,000,000 to 100,000,000
shares and to authorize the issuance of up to 50,000,000 shares of preferred
stock, par value $0.01 per share (the "Preferred Stock"), which shares of
Preferred Stock may be issued in one or more series at the discretion of the
Board of Directors of the Company. The amendment to the Certificate of
Incorporation of the Company was approved by Forseti Investments Ltd., a company
organized under the laws of Barbados ("Forseti") and EIBOC Investments Ltd., a
company organized under the laws of Barbados ("EIBOC"), as the collective
holders of approximately 54% of the Company's then outstanding Common Stock, by
written consent in lieu of a meeting of stockholders dated March 27, 1997 and
effective May 5, 1997 and was also approved unanimously by the Board of
Directors.
1
<PAGE> 4
On May 6, 1997, the transactions contemplated under (i) the Securities
Purchase Agreement, dated March 27, 1997 between the Company and JEDI, and (ii)
the Securities Purchase Agreement, dated March 27, 1997 between the Company and
Forseti were completed. Pursuant to these transactions, (i) JEDI purchased from
the Company 9,600,000 shares of its Series A Participating Convertible Preferred
Stock (convertible into 9,600,000 shares of Common Stock) for initial
consideration of $5 million, plus contingent future payments not to exceed $9.4
million (which would be used to fund certain additional contingent payments to
Forseti), and (ii) the Company purchased from Forseti 9,600,000 shares of Common
Stock for $5 million. In addition, the Company issued to JEDI and Forseti
warrants to purchase additional shares of Common Stock. For more detailed
information of these transactions, see the Company's Current Report on Form 8-K,
dated May 6, 1997.
On August 1, 1997 the Company arranged a revolving loan facility of $75
million with the Bank of Montreal, Houston, Texas ("Bank of Montreal") to, among
other things, refinance indebtedness outstanding under the Company's prior
credit facility, fund working capital and make additional acquisitions as and if
appropriate opportunities are identified. The Company has received approval from
the Bank of Montreal to borrow up to $17 million under this revolving loan
facility. As of September 24, 1997 the Company had borrowed $12 million
thereunder. In addition, the Bank of Montreal has issued two letters of credit
on behalf of the Company totaling $2 million. These letters of credit are
secured under this loan facility. The outstanding balances under the loan
facility are secured by pledges on assets of the Company representing
approximately 80% of the total assets of the Company.
On August 1, 1997, the Company completed the acquisition of 77 gross
productive wells (12.35 net productive wells) located in New Mexico, Texas and
Oklahoma from Collins & Ware, Inc., of Midland, Texas (the "Collins & Ware
Properties acquisition"). As estimated at June 30, 1997, these acquired
properties include proved reserves for the Company totaling 851 Mbbls of crude
oil and 1,476 MMcf of natural gas. The consideration for this acquisition
consisted of $6 million in cash and 1 million shares of the Company's Common
Stock which it valued at $3.125 per share. For more detailed information on this
acquisition, see the Company's Current Report on Form 8-K dated August 1, 1997.
During the period from July 1, 1997 to September 24, 1997 the Company
raised approximately $1.6 million in equity. These funds were arranged by the
private placement of 350,000 shares of Common Stock pursuant to Regulation S.
The Company believes that this additional equity, in addition to the $3 million
of unutilized borrowing capacity available under the Bank of Montreal loan
facility, provides the Company with the funds required to undertake a
significant capital expenditure program on its existing properties. This capital
expenditure program is expected to significantly increase production and improve
the reserves of the Company.
COMPANY HISTORY
The Company was incorporated under the laws of the state of Delaware on
May 11, 1989 under the name "Park Avenue Capital Corp." Prior to March 1995, the
Company had no substantive operations other than raising initial capital and
searching for a business to acquire. The Company operates its business through
three subsidiaries, Queen Sand Resources, Inc., a Nevada corporation ("QSRn"),
Northland Operating Co., a Nevada corporation ("Northland"), and Corrida
Resources, Inc., a Nevada corporation ("Corrida"). Unless the context requires
otherwise, the term "the Company" refers to and includes QSRn, Northland,
Corrida and all other subsidiaries and partnerships of which the Company owns a
greater than 50% interest.
On March 6, 1995, the Company acquired all of the outstanding common
stock of QSRn in exchange for 19,200,000 shares of common stock of the Company.
For accounting purposes, the acquisition has been treated as a recapitalization
of QSRn with QSRn as the acquirer. The historical financial statements of the
Company prior to March 6, 1995 are those of QSRn. QSRn and Corrida own the
material assets of the Company.
2
<PAGE> 5
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-KSB contains certain forward-looking
statements, including, without limitation, statements containing the words
"believes", "anticipates," "expects" and words of similar import. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, financial condition,
performance or achievements of the Company (defined below), or industry results,
to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: adverse changes in the oil and gas industry
conditions, commodity price risk, environmental risk, competition, the impact of
present or future environmental legislation and compliance with environmental
laws, the ongoing need for capital improvements, the availability and
replacement costs for rig related equipment, spare parts and supplies, financing
costs, changes in operating expenses, attraction and retention of skilled
employees, adverse changes in applicable tax laws, adverse changes in
governmental rules and fiscal policies, civil unrest, acts of God, acts of war,
and other factors referenced in this Annual Report on Form 10-KSB. Certain of
these factors are discussed in more detail elsewhere in this Annual Report on
Form 10-KSB, including, without limitation, "Description of Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Given these uncertainties, readers are cautioned not to place undue
reliance on such forward-looking statements. The Company disclaims any
obligation to update any such forward-looking statements to reflect future
events or developments.
RISK FACTORS
In addition to the substantial risks inherent in any business venture,
readers should consider the following risk factors which may specifically affect
the Company's performance and its ability to carry on business.
ACQUISITION RISK
The Company's current strategy is to increase oil and natural gas
reserves by selectively acquiring and exploiting producing oil and natural gas
properties, rather than engaging in exploratory drilling. The Company's business
strategy assumes that other oil and natural gas companies will continue to
divest of many of their United States oil and natural gas properties. There can
be no assurance, however, that such divestitures will continue or that the
Company will be able to acquire such properties at acceptable prices or develop
additional reserves in the future. If such acquisition opportunities should
significantly decline, the Company may be required to change its business
strategy. Even if the Company identifies oil and natural gas reserves for
possible acquisition, the completion of any transaction would be dependent on
obtaining required funding. Further, there is no assurance that any such
acquisition, if completed, would result in ongoing revenues to the Company in
excess of related operating and financing costs. See "Acquisition Financing" and
"Description of Business -- Business Strategy".
Although the Company performs a review of acquired properties that it
believes is consistent with industry practices, such reviews are inherently
incomplete. Acquisitions will continue to be investigated and pursued on the
assumption that it is generally not feasible to review in-depth every aspect of
each individual property or well involved in an acquisition and that even an
in-depth review of all properties and records may not necessarily reveal all or
any existing or potential problems, nor will it permit the Company to become
sufficiently familiar with the properties to assess fully their deficiencies and
capabilities. In addition, inspections may not always be performed on every well
prior to acquisition and some problems, including downhole conditions, latent
equipment defects, groundwater contamination and certain environmental problems,
are not necessarily observable even on inspection. Ordinarily, therefore, the
Company's review and due diligence has been and will continue to be focused on
higher value properties with a sample review of the remainder. Reliance will
continue to be made on information provided by the vendors of the properties
with or without independent verification.
3
<PAGE> 6
ACQUISITION FINANCING
The Company's strategy of acquiring and exploiting producing oil and
natural gas properties is dependent on its ability to obtain financing for any
such acquisitions. The Company does not have sufficient liquidity or capital to
undertake all of the acquisition prospects that it generates or to fully fund
the development of any prospect. Therefore, the Company will continue to be
dependent on raising substantial amounts of additional capital through any one
or a combination of institutional or bank debt financing, equity offerings, debt
offerings and internally generated cash flow, or by forming sharing arrangements
with industry participants. Although the Company has been able to obtain such
financings and to enter into such sharing arrangements in certain of its
projects to date, there can be no assurance that additional financings or
sharing arrangements can be obtained, notwithstanding the Company's need for
substantial amounts of additional capital. If the Company is unable to obtain
capital that may be necessary or desired for its acquisition, development or
exploitation activities, it may be forced to defer or abandon specific projects,
reduce substantially its overall efforts, dilute its interest in existing
sharing arrangements for specific projects, attempt to sell all or a portion of
specific prospects or leasehold positions, or otherwise severely curtail its
acquisition, development and exploitation activities. See "Indebtedness" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources".
INDEBTEDNESS
On August 1, 1997 the Company arranged a revolving loan facility of $75
million with the Bank of Montreal, to, among other things, refinance the
indebtedness outstanding under the Company's prior credit facility, fund working
capital and make additional acquisitions as and if appropriate opportunities are
identified. The Company has received approval from the Bank of Montreal to
borrow up to $17 million under this revolving loan facility. As of September 24,
1997 the Company had borrowed $12 million thereunder. In addition, the Bank of
Montreal has issued two letters of credit on behalf of the Company totaling $2
million. These letters of credit are secured under this loan facility. The
outstanding balances under the loan facility are secured by pledges on assets of
the Company representing approximately 80% of the total assets of the Company.
The loan facility is due on July 31, 2003. For the period August 1, 1997
to July 31, 1999 the loan facility will be of a revolving nature. For the period
August 1, 1999 to July 31, 2003 the loan facility will be repaid in 48 equal
monthly installments, based on the principal outstanding on July 31, 1999.
If the Bank of Montreal does not renew the loan or if the Bank of
Montreal indebtedness is not repaid when due, the Bank of Montreal would have
the right to obtain possession of and sell the pledged properties, including any
equipment, new wells, or other improvements placed on the properties by the
Company. In the event of a default on the bank indebtedness, not subsequently
waived by the bank, it is unlikely that the Company would be able to continue
its business. In addition, the Company is subject to certain financial and
operating covenants that are usual and customary for transactions of this
nature, including, but not limited to, requirements to provide annual audited
and unaudited interim financial information, prohibitions on additional debt,
restrictions on certain payments and distributions to affiliates and others,
restrictions on changes in the nature of the business, and maintenance of
minimum cash flow and operating ratios. The loan agreement also contains usual
and customary events of default and provides remedies to the Bank of Montreal in
the event of default. Although the Company believes that its cash flows and
available sources of financing will be sufficient to satisfy the interest
payments on its debt at currently prevailing interest rates and oil and gas
prices, the Company's level of debt may adversely affect the Company's ability:
(i) to obtain additional financing for working capital, capital expenditures or
other purposes, should it need to do so; or (ii) to acquire additional oil and
natural gas properties or to make acquisitions utilizing new borrowings. There
can be no assurances that the Company will be able to obtain additional
financing, if required, or that such financing, if obtained, will be on terms
favorable to the Company. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources".
In addition, as of June 30, 1997, the Company had outstanding
approximately $2.1 million (DEM 3.65 million) of indebtedness as a result of the
sale of Deutschemark denominated 12% Promissory Notes
4
<PAGE> 7
(the "Bonds") (as of September 24, 1997 $2.2 million, DEM 3.9 million). The
Bonds are unsecured, general obligations of the Company and are subordinated in
right of payment to all existing and future secured indebtedness of the Company.
The Company's ability to make scheduled payments of principal of, or to
pay interest on, or to refinance its indebtedness depends on its future
performance, which, to a certain extent, is subject to general economic,
financial, competitive, legislative, regulatory and other factors beyond its
control, as well as to the prevailing market prices for oil and natural gas.
There can be no assurance that the Company's business will generate sufficient
cash flow from operations or that future bank credit will be available in an
amount sufficient to enable the Company to service its indebtedness or make
necessary capital expenditures. In addition, the Company anticipates that it is
likely to find it necessary to refinance a portion of the principal amount of
its indebtedness at or prior to their maturity. However, there can be no
assurance that the Company will be able to obtain financing to complete a
refinancing of its indebtedness. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources".
The degree to which the Company's assets will be leveraged could have
important consequences to stockholders, including, but not limited to, the
following: (i) a substantial portion of the Company's cash flow from operations
will be required to be dedicated to debt service and will not be available for
other purposes; (ii) the Company's ability to obtain additional financing in the
future could be limited; (iii) certain of the Company's borrowings are at
variable rates of interest, which could result in higher interest expense in the
event of increases in interest rates; and (iv) the Company will be subject to a
variety of restrictive covenants and the failure of the Company to comply with
such covenants could result in events of default which, if not cured or waived,
could have a material adverse effect on the Company and its ability to make
payments of principal of, and interest on its indebtedness.
CURRENCY RISK
The Bonds are denominated in Deutschemarks ("DEM"). The Company has the
obligation to make periodic interest payments (January 15 and July 15 of each
year) and to repay the principal when it comes due on July 15, 2000 in DEM. The
funds generated by the Company from operations, which form the primary source of
funds to pay the interest, are denominated U.S. dollars ($US). The source of
funds required to repay the principal outstanding on the Bonds has not yet been
identified, since the Bonds do not mature until July 15, 2000. The Company is
exposed to the risk that, upon repayment, the exchange rate between DEM and $US
may be less favorable than that which existed at the time that the Bonds were
issued. This would result in the Company having to repay a larger number of $US
than it received initially. Changes in the $US equivalent of the DEM Bonds
arising from changes to the DEM:$US exchange rate are recognized monthly. During
the year ended June 1997 the Company had recorded unrealized exchange rate gains
of approximately $300,000. However, there are no assurances that the Company
will continue to realize gains related to favorable changes in the DEM:$US
exchange rates in the future. Unfavorable changes to the DEM:$US exchange rate
will result in the Company recording unrealized exchange rate losses related to
the changes as they occur. The Company believes it has the opportunity to enter
into arrangements to manage its DEM:$US exchange rate risk. At this time, the
Company has not entered into any such arrangements.
RESERVE REPLACEMENT
The Company's future success depends on its ability to find, develop or
acquire additional oil and gas reserves that are economically producing or
recoverable. The proved reserves of the Company will generally decline with
production, except to the extent that the Company conducts successful
exploration or development activities or acquires properties containing proved
reserves, or both. Therefore, in order to increase reserves and production, the
Company must continue its acquisition, development drilling and recompletion
programs or undertake other replacement activities. The Company's current
strategy is to maintain its focus on low-cost operations while increasing its
reserve base, production and cash flow through (i) acquisition of producing oil
and gas properties with undeveloped reserves; (ii) investing in other oil and
gas properties with unexploited reserves; and (iii) using available cash flows
to continue to exploit its existing properties. There can be no assurance,
however, that the Company's planned development
5
<PAGE> 8
projects and acquisition activities will result in significant additional
reserves or that the Company will have success drilling productive wells at low
finding and development costs. Furthermore, if prevailing oil and gas prices
were to increase significantly, the Company's finding costs to add reserves
could increase.
COMPETITION
The exploration for and the development and production of oil and
natural gas is highly competitive. Major and independent oil and gas companies
and individuals actively bid for desirable oil and gas properties and compete
for the equipment, services, and labor required to develop and operate such
properties. The Company competes with numerous firms and other individuals in
its activities, including major oil firms and independent exploration and
producing firms, many of which have substantially greater financial resources,
management and technical staffs and facilities than those of the Company.
Accordingly, many of the Company's competitors may be better positioned to
acquire and exploit prospects, obtain funding, hire personnel and market oil and
natural gas production. In addition, the producing, processing and marketing of
crude oil and natural gas is affected by a number of factors which are beyond
the control of the Company, the effect of which cannot be accurately predicted.
Many of the Company's larger competitors may be able to respond better to
factors that affect the demand for oil and natural gas production such as
changes in worldwide oil and natural gas prices and levels of production, the
cost and availability of alternate fuels and the application of government
regulations.
PRICE FLUCTUATIONS
The Company's revenues are dependent upon prevailing prices for oil and
natural gas. Historically, oil and natural gas prices have been and are likely
to continue to be extremely volatile. Prices for oil and natural gas are subject
to wide fluctuations in response to: (i) relatively minor changes in the supply
of and demand for oil and natural gas; (ii) market uncertainty; and (iii) a
variety of additional factors, all of which are beyond the Company's control.
These factors include domestic and foreign political conditions, the price and
availability of domestic and imported oil and natural gas, the level of consumer
and industrial demand, weather, domestic and foreign government relations, the
price and availability of alternative fuels and overall economic conditions. If
oil or natural gas prices were to decrease significantly, certain of the
Company's wells could become uneconomic, thereby adversely affecting: (i) the
level of proved reserves attributable to the Company's properties; (ii) the
Company's ability to increase its reserves and production; (iii) the borrowing
base under any financing agreement; and (iv) cash flow from operations, revenues
and operating income.
MARKETABILITY OF PRODUCTION
The marketability of the Company's production depends upon the
availability and capacity of oil and natural gas gathering systems and
pipelines, the effect of federal and state regulations and general economic
conditions. Further, the Company sells a large percentage of its oil and natural
gas production to a few large purchasers. Although the Company does not believe
that the loss of one or all of these customers would have a material adverse
effect in the long term, it could adversely affect cash flows until other
marketing arrangements were made. See "Description of Business -- Risk Factors
- -- Indebtedness" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources".
GOVERNMENT LAWS AND REGULATIONS
The Company's operations are affected from time to time in varying
degrees by political developments and federal and state laws and regulations. In
particular, oil and natural gas production, operations and economics are or have
been affected by price controls, taxes and other laws relating to the oil and
natural gas industry, by changes in such laws and by change in administrative
regulations. The Company cannot predict how existing laws and regulations may be
interpreted by enforcement agencies or court rulings, whether additional lows
and regulations will be adopted, of the effect such changes may have on its
business or financial condition. See "Government Regulations".
6
<PAGE> 9
ENVIRONMENTAL REGULATIONS
The Company's operations are subject to complex and constantly changing
environmental laws and regulations adopted by federal, state and local
governmental authorities. The Company believes that compliance with such laws
had no material adverse effect on the Company's operations to date, and that the
cost of such compliance has not been material. Nevertheless, the discharge of
oil, natural gas or other pollutants into the air, soil or water may give rise
to liabilities on the part of the Company to the government and third parties
and may require the Company to incur costs of remediation. Additionally, since a
portion of the Company's reserves are dependent on waterflood operations, any
change in produced water disposal requirements or injection well permitting
could have a material adverse effect on the financial condition and operations
of the Company. Moreover, from time to time the Company has agreed to indemnify
both sellers of producing properties from whom the Company acquires reserves and
purchasers of properties from the Company against certain liabilities for
environmental claims associated with the properties being purchased or sold by
the Company. No assurance can be given that existing environmental laws or
regulations, as currently interpreted or reinterpreted in the future, or future
laws or regulations, will not materially adversely affect the Company's
operations and financial condition or that material indemnity claims will not
arise against the Company with respect to properties acquired or sold by the
Company. See "Government Regulations".
USE AND RISKS OF HEDGING TRANSACTIONS
The Company has in the past and may in the future enter into oil and
natural gas hedging transactions. While intended to reduce the effects of
volatility of the price of oil and natural gas, such transactions may limit
potential gains by the Company if oil and natural gas prices were to rise
substantially over the price established by the hedge.
SIGNIFICANT NUMBER OF AUTHORIZED BUT UNISSUED SHARES
The Board of Directors has total discretion in the issuance of any
shares of Common Stock which may be issued in the future. The Company is
authorized to issue 100,000,000 shares of its Common Stock (22,375,552 shares
were issued and outstanding as at September 24, 1997). The Company is authorized
to issue 50,000,000 shares of its Preferred Stock (9,600,000 shares of preferred
stock were issued and outstanding as at September 24, 1997).
CONTROL BY CERTAIN STOCKHOLDERS AND MANAGEMENT
EIBOC owns 6,600,000 shares of the Company's outstanding Common Stock
(as of September 24, 1997: 29.5% of the outstanding Common Stock; 20.6% of the
undiluted, voting stock; and 18.4% of the fully diluted voting stock). Edward
Munden and Bruce Benn, Executive Officers and Directors of the Company and
Ronald Benn, Executive Officer of the Company have beneficial interests in
EIBOC. JEDI owns 9,600,000 shares of the Company's Series A Participating
Convertible Preferred Stock, which shares entitle the holder thereof to vote
generally with holders of the Company's Common Stock (as of September 24, 1997:
100% of the outstanding Preferred Stock; 30.0% of the undiluted voting stock;
and 29.4% of the fully diluted voting stock).
There is no common ownership, officers or directors between EIBOC and
JEDI. These two stockholders and management are in a position to elect all of
the Company's directors, appoint its officers, and control the Company's affairs
and operations. The Company's Certificate of Incorporation does not provide for
cumulative voting.
RESERVES ESTIMATES AND FUTURE NET REVENUE
There are numerous uncertainties in estimating quantities of proved
reserves and in projecting future rates of production and the timing of
development expenditures, including many factors beyond the control of the
Company. The reserve data set forth in this Annual Report on Form 10-KSB are
only estimates. Reserve estimates are imprecise and may be expected to change as
additional information becomes available. Furthermore, estimates of oil and gas
reserves, of necessity, are projections based on
7
<PAGE> 10
engineering data, and there are uncertainties inherent in the interpretation of
such data as well as the projection of future rates of production and the timing
of development expenditures. Reserve engineering is a subjective process of
estimating underground accumulations of oil and natural gas that cannot be
exactly measured, and the accuracy of any reserve estimate is a function of the
quality of available data and of engineering and geological interpretation and
judgment. Accordingly, estimates of the economically recoverable quantities of
oil and natural gas attributable to any particular group of properties,
classifications of such reserves based on risk of recovery and estimates of the
future net cash flows expected therefrom prepared by different engineers or by
the same engineers at different times may vary substantially. There also can be
no assurance that the reserves set forth herein will ultimately be produced or
that the proved undeveloped reserves will be developed within the periods
anticipated. It is likely that variances from the estimates will be material. In
addition, the estimates of future net revenues from proved reserves of the
Company and the present value thereof are based on certain assumptions about
future production levels, prices and costs that may not be correct. The Company
emphasizes with respect to the estimates prepared by independent petroleum
engineers that the discounted future net cash flows should not be construed as
representative of the fair market value of the proved oil and natural gas
properties belonging to the Company, since discounted future net cash flows are
based on projected cash flows which do not provide for changes in oil and
natural gas prices or for escalation of expenses and capital costs. The
meaningfulness of such estimates is highly dependent on the accuracy of the
assumptions on which they are based. Actual results are likely to differ
materially from the results estimated. Readers are cautioned not to place undue
reliance on the reserve data included in this Annual Report on Form 10-KSB. See
"Description of Property - Reserve Information".
DEPENDENCE ON KEY OFFICERS AND EMPLOYEES
The Company is dependent upon Edward J. Munden, President and Chief
Executive Officer, Robert P. Lindsay, Chief Operating Officer, Ronald I. Benn,
Chief Financial Officer and Treasurer, Bruce I. Benn, Executive Vice-President,
and other key personnel, for its various activities, the loss of any one of whom
for any reason may adversely affect the Company. The Company holds key man
insurance of CDN $200,000 (approximately U.S. $144,000) on the lives of each of
Edward J. Munden, Bruce I. Benn and Ronald I. Benn.
OPERATIONAL HAZARDS AND INSURABILITY
The Company's oil and natural gas business is also subject to all of the
operating risks associated with the drilling for and production and secondary
recovery of oil and natural gas, including, but not limited to, uncontrollable
flows of oil, natural gas, brine or well fluids (including fluids used in
waterflood activities) into the environment (including groundwater
contamination), fires, explosions, pollution and other risks, any of which could
result in substantial losses to the Company. The natural gas gathering and
processing business is also subject to certain of these risks, including fires,
explosions and environmental contamination. Although the Company carries
insurance at levels it believes are consistent with industry practices, it is
not fully insured against all risks. Losses and liabilities arising from
uninsured and underinsured events could have a material adverse effect on the
financial condition and operations of the Company. See "Exploitation and
Development Activities".
There are certain risks associated with secondary recovery operations,
especially the use of waterflooding techniques, and drilling activities in
general. Waterflooding involves significant capital expenditures and uncertainty
as to the total amount of secondary reserves that can be recovered. In
waterflood operations, there is generally a delay between the initiation of
water injection into a formation containing hydrocarbons and any increase in
production that may result. The unit production costs per BOE of waterflood
projects are generally higher during the initial phases of such projects due to
the purchase of injection water and related costs, as well as during the later
stages of the life of the project. The degree of success, if any, of any
secondary recovery program depends on a large number of factors, including the
porosity of the formation, the technique used and the location of the injector
wells. Drilling activities carry the risk that no commercial production will be
obtained. The cost of drilling, completing and operating wells is often
uncertain, and drilling operations may be curtailed, delayed or canceled as a
result of many factors.
8
<PAGE> 11
PREFERRED STOCK; ANTI-TAKEOVER PROVISIONS
The Common Stock is subordinate to all outstanding classes of Preferred
Stock of the Company in the payment of dividends and other distributions made
with respect to the stock, including distributions upon liquidation or
dissolution of the Company. The Board of Directors of the Company is authorized
to issue up to 30,800,000 additional shares of Preferred Stock (excluding shares
currently outstanding or reserved for issuance) without first obtaining
stockholder approval except in limited circumstances. The designation and
issuance of other series of Preferred Stock will create additional securities
that will have dividend and liquidation preferences over the Common Stock or, in
the case of convertible preferred stock, may have the effect of diluting the
current stockholders' interest in the Company upon conversion.
The Company's Certificate of Incorporation and Bylaws include certain
provisions that may have the effect of encouraging persons considering
unsolicited tender offers or other unilateral takeover proposals to negotiate
with the Board of Directors rather than pursue non-negotiated takeover attempts.
These provisions include authorized "blank check" Preferred Stock, and the
availability of authorized but unissued Common Stock. The issuance of Preferred
Stock may have the effect of delaying or preventing a change in control of the
Company without further stockholder action and may adversely affect the rights
and powers, including voting rights, of the holders of Common Stock. In certain
circumstances the issuance of Preferred Stock could depress the market price of
the Common Stock.
EXPLOITATION AND DEVELOPMENT ACTIVITIES
The Company concentrates on exploiting proved producing properties,
including those with development potential, through workovers, behind the pipe
recompletions, secondary recovery operations, the drilling of development wells
or infill wells and other exploitation techniques. The Company has conducted or
intends to conduct significant secondary recovery/infill drilling programs on
many of the properties it has acquired.
Secondary recovery projects have represented the Company's primary
development focus over the past four years. Generally, "secondary recovery"
refers to methods of oil extraction in which fluid or gas (usually water,
natural gas or CO(2)) is injected into a formation through input (injector)
wells, and oil is removed from surrounding wells. "Waterflooding" is one proven
method of secondary recovery in which water is injected into an oil reservoir
for the purpose of forcing the oil out of the reservoir rock and into the bore
of a producing well. Waterflood projects are engineered to suit the type of
reservoir, depth and condition of the field. The Company has considerable
experience with and actively employs waterflood techniques in many of its fields
in order to stimulate production.
The Company also seeks to exploit its properties through cost reduction
measures, including the reduction of labor, electrical and materials costs. It
seeks to take advantage of volume discounts in the purchase of equipment and
supplies and more effectively utilize field facilities and equipment by virtue
of its geographical concentration. The Company attempts to negotiate more
favorable marketing agreements upon completion of an acquisition, particularly
for oil production. Certain oil purchasers have paid in the past and are
currently paying a premium over posted prices and have eliminated certain
quality and marketing deductions for a portion of the Company's oil production
due to the Company's control over a significant volume of oil production in its
core geographic areas.
The Company makes only limited investments in exploratory drilling.
MARKETING
The Company does not refine or process any of the oil and natural gas it
produces. The Company's oil and natural gas production is sold to various
purchasers typically in the areas where the oil or natural gas is produced. The
Company is currently able to sell, under contract or in the spot market, all of
the oil and most of the natural gas it is capable of producing at current market
prices. Substantially all of the Company's oil and natural gas is sold under
short term contracts or contracts providing for periodic adjustments or in the
spot market; therefore, its revenue streams are highly sensitive to changes in
current
9
<PAGE> 12
market prices. Certain of the Company's oil purchasers have paid in the past and
are currently paying a premium over posted prices and have eliminated certain
quality and marketing deductions for a portion of the Company's oil production
due to the Company's control over a significant volume of oil production in its
core geographic areas. The Company's principal market for natural gas is
pipeline companies as opposed to end users.
During the year ended June 30, 1997, sales of oil and natural gas to Big
Run Production and EOTT Energy accounted for 32% and 17% respectively, of the
Company's consolidated revenues. Management believes that in the event these
purchasers were to discontinue their purchases, the Company could quickly locate
other buyers and, therefore, the loss of these purchasers would not have a
material impact on the Company's financial condition or results of operations.
However, short term disruptions could occur while the Company sought alternative
buyers.
GOVERNMENT REGULATIONS
The following discussion of government regulation is necessarily brief
and is not intended to constitute a comprehensive discussion of the various
statutes, rules, regulations, and governmental orders, policies, and practices
which may affect the operations of the Company.
General: The oil and gas industry is subject to comprehensive federal,
state, and local laws, regulations and policies which control the exploration,
production, marketing and taxation of oil and gas. Numerous departments and
agencies, at federal, state and local levels, have issued rules and regulations,
some or all of which have imposed or may impose additional expenditures,
restrictions, and delays on the Company's business activities and profitability.
For example, such regulations can render drilling in certain locations more
expensive or uneconomical due to increased surface owner compensation and
bonding requirements or environmental regulatory constraints.
Matters subject to regulation include discharge permits for drilling
operations, drilling bonds, reports concerning operations, the spacing of wells,
unitization and pooling of properties, taxation and environmental protection.
From time to time, regulatory agencies have imposed price controls and
limitations on production by restricting the rate of flow of oil and gas wells
below actual production capacity in order to conserve supplies of oil and gas.
Because the regulatory environment within which it operates is always changing,
the Company is unable to predict the future cost or impact of continued
regulatory compliance.
Various jurisdictions have laws regarding unitization or forced pooling
which require the working interest owners of a well to participate in the cost
and revenues associated with neighboring wells or require neighboring owners to
participate in their own wells. If acreage included within a lease becomes
subject of a unitization or forced pooling order, drilling operations may have
to be undertaken at a time or with other parties not of the Company's choosing
or which may not be in the Company's best interest.
In an attempt to promote competition, the Federal Energy Regulatory
Commission ("FERC") has issued a series of orders which have restructured the
interstate natural gas transportation and marketing system. To date, the Company
has not experienced any adverse effect as a result of these FERC orders.
However, there can be no assurance that the Company's production of natural gas
will not be subject to federal regulation in the future and it is not possible
to predict what effect such regulations may have on its future gas marketing.
State and Local Regulation of Drilling and Production: State regulatory
authorities have established rules and regulations requiring permits for
drilling, drilling bonds and reports concerning drilling and producing
activities. Such regulations also cover the location of wells, the method of
drilling and casing wells, the surface use and restoration of well locations,
the plugging and abandoning of wells, the density of wells (well spacing) within
a given area and other matters. The states in which the Company operates also
have statutes and regulations governing a number of environmental and
conservation matters, including the unitization and pooling of oil and gas
properties and establishment of maximum rates of production from oil and gas
wells. Local authorities may also chose to exercise regulatory control.
10
<PAGE> 13
Environmental Regulations: The Company's activities are subject to
numerous laws and regulations concerning the storage, use and discharge of
materials into the environment, the remediation of environmental impacts, and
other matters relating to environmental protection, all of which may adversely
affect the Company's operations and the costs of doing business. It is likely
that state and federal environmental laws and regulations will become more
stringent in the future. Current legislative initiatives are focussed on the
disposal of "hazardous" or other waste material associated with oil and gas
exploration and production.
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"), the Company may become fully liable for the cleanup
costs associated with the release of "hazardous substances" into the air, water
or ground even though the discharge may have been caused in whole or in part by
a previous owner or third party. Many states have similar provisions. The
imposition of liability under CERLA and similar laws would likely have a serious
adverse effect on the ability of the Company to continue its business.
Violation of environmental laws and regulations may also result in the
imposition of an order requiring the removal, remediation or abatement of the
conditions which gave rise to the violation.
The costs of comprehensive environmental investigation or audits prior
to the acquisition of a property can be expensive and there is no guarantee that
all deficiencies or sources of liability will be identified by such audits. In
connection with the acquisition of producing properties in Texas, New Mexico and
Louisiana, the Company performed limited environmental inquiries and found no
material environmental noncompliance or cleanup liabilities. The Company does
not currently believe that it will be required in the near future to expend
material amounts due to environmental laws and regulations.
Safety and Health Regulations: The Company must also conduct its
operations in accordance with various laws and regulations concerning
occupational safety and health. Currently, the Company does not foresee
expending material amounts to comply with these occupational safety and health
laws and regulations. However, since such laws and regulations are frequently
changed and amended, the Company is unable to predict the future effect of these
laws and regulations.
TITLE TO PROPERTIES
All of the Company's working interests are held under leases from third
parties. The Company evaluates title in a manner which it believes to be
consistent with industry practice. Depending on the history of the property and
the investment required to acquire the interest under consideration, the Company
may or may not obtain third party title opinions prior to acquisition or rely on
the title opinions in the possession of the vendor or such other third party
review as it may deem relevant to verify the occupation or interest of the
vendor. The Company is of the opinion that it has satisfactory title to all such
properties sufficient to meet standards generally accepted in the oil and gas
industry. The Company's properties are mortgaged under the loan agreement with
the Bank of Montreal. They are also subject to common burdens, including
customary royalty interests and liens for current taxes, but the Company has
concluded that such burdens do not materially interfere with the use of such
properties. Further, the Company believes that the economic effect of such
common burdens have been appropriately reflected in the Company's acquisition
costs of such properties.
EMPLOYEES AND CONSULTANTS
The Company currently has 21 full-time employees consisting of four
executive officers and 17 support staff. Four of the employees are in Ottawa,
Canada, seven of the employees are located in the Dallas office and 10 are on
site in New Mexico. In addition, the Company regularly engages technical
consultants and independent contractors to provide specific advice or to perform
certain administrative or technical functions.
11
<PAGE> 14
From August 9, 1994 (inception) to May 6, 1997 the executive services of
Edward Munden, Ronald Benn and Bruce Benn were provided to the Company under a
management contract with Capital House A Finance and Investment Corporation
("CHC"), a Canadian venture capital company. Bruce Benn, Edward Munden and
Ronald Benn are directors and shareholders of CHC. Since May 6, 1997 Edward
Munden, Bruce Benn and Ronald Benn have been employees of the Company. Edward
Munden and Bruce Benn are officers and directors of the Company. Ronald Benn is
an officer of the Company.
ITEM 2. DESCRIPTION OF PROPERTY
OIL AND GAS RESERVES
For certain additional information concerning the Company's oil
and gas reserves and estimates of future net revenues attributable thereto, see
Note 9 of the Notes to Consolidated Financial Statements which comprise a part
of this Annual Report on Form 10-KSB.
GENERAL
The following tables summarize certain information regarding the
estimated proved oil and gas reserves as of June 30, 1995, 1996, and 1997. Such
estimates and future net revenues, as set forth herein and in Note 9 of Notes to
Consolidated Financial Statements which accompany this report, as of June 30,
1997 are based upon a report prepared by H.J. Gruy and Associates, Inc.,
independent consulting petroleum engineers. All such reserves are located in the
United States. Such estimated reserves and future net revenues, as set forth
herein and in Note 9 of Notes to Consolidated Financial Statements which
accompany this report, as of June 30, 1996 and June 30, 1995 are based upon
reports prepared by Harper and Associates, Inc., independent consulting
petroleum engineers.
Reserve estimates are imprecise and may be expected to change as
additional information becomes available. Furthermore, estimates of oil and gas
reserves, of necessity, are projections based on engineering data, and there are
uncertainties inherent in the interpretation of such data as well as the
projection of future rates of production and the timing of development
expenditures. Reserve engineering is a subjective process of estimating
underground accumulations of oil and gas that cannot be measured in an exact
way, and the accuracy of any reserve estimate is a function of the quality of
available data and of engineering and geological interpretation and judgement.
Accordingly, there can be no assurance that the reserves set forth herein will
ultimately be produced nor can there be assurance that the proved undeveloped
reserves will be developed within the periods anticipated. The Company
emphasizes with respect to the estimates prepared by independent petroleum
engineers that the discounted future net cash inflows should not be construed as
representative of the fair market value of the proved oil and gas properties
belonging to the Company, since discounted future net cash inflows are based
upon projected cash inflows which do not provide for changes in oil and gas
prices nor for escalation of expenses and capital costs. The meaningfulness of
such estimates is highly dependent upon the accuracy of the assumptions upon
which they were based. For further information, see Note 9 of Notes to
Consolidated Financial Statements. See also " Risk Factors--Reserve Estimates
and Future Net Revenue".
PROVED OIL AND NATURAL GAS RESERVES
The following table sets forth proved reserves considered to be
economically recoverable under normal operating methods and existing conditions,
at prices and operating costs prevailing at the dates indicated below.
12
<PAGE> 15
Proved Oil and Natural Gas Reserves
(000's omitted)
at June 30
<TABLE>
<CAPTION>
----------------------------------------------------
1997 1996 1995
---- ---- ----
Oil Gas Oil Gas Oil Gas
(MBbls) (MMcf) (MBbls) (MMcf) (MBbls) (MMcf)
------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Proved Developed Reserves 2,188 12,412 2,265 9,374 1,817 312
Proved Undeveloped Reserves 4,521 8,561 4,667 3,610 4,399 113
----- ------ ----- ------ ----- ---
Total Proved Reserves 6,709 20,973 6,932 12,984 6,216 425
===== ====== ===== ====== ===== ===
</TABLE>
Proved Oil and Natural Gas Reserves
Pro-forma with Collins & Ware Properties Acquisition
(000's omitted)
at June 30
<TABLE>
<CAPTION>
1997
----
Oil Gas
(MBbls) (MMcf)
------- ------
<S> <C> <C>
Proved Developed Reserves 2,820 13,640
Proved Undeveloped 4,739 8,808
------ ------
Reserves Total Proved Reserves 7,559 22,449
====== ======
</TABLE>
No major discovery or other favorable or adverse event is believed to
have caused a significant change in these estimates of the Company's proved
reserves since July 1, 1997.
Except for Form EIA 23, "Annual Survey of Domestic Oil and Gas
Reserves", filed with the United States Department of Energy, no other estimates
of total proven net oil and gas reserves have been filed by the Company with, or
included in any report to, any United States authority or agency pertaining to
the Company's individual reserves since the beginning of the Company's last
fiscal year. Reserves reports in Form EIA 23 are comparable to the reserves
reported by the Company herein.
OIL AND GAS OPERATIONS DATA
The following table sets forth the total gross and net productive wells
in which the Company owned an interest as of June 30, 1997.
<TABLE>
<CAPTION>
Gross Net
---------------------------------------------
Oil Gas Service Oil Gas Service
--- --- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C>
Texas 87 33 15 49.8 28.6 6.9
New Mexico 69 -- 45 68.4 -- 44.5
Louisiana 13 5 5 4.1 0.7 1.6
Mississippi 22 -- 2 17.6 -- 2.0
Oklahoma -- -- -- -- -- --
--- --- ----- ----- ----- -----
Colorado -- 1 -- -- 0.2 --
--- --- ----- ----- ----- -----
Totals 191 39 67 139.9 29.5 55.0
=== === ===== ----- ----- -----
</TABLE>
13
<PAGE> 16
Pro forma at August 1, 1997
after Collins & Ware Properties Acquisition
<TABLE>
<CAPTION>
Gross Net
----- ---
Oil Gas Service Oil Gas Service
--- --- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C>
Texas 146 87 18 56.8 34.5 7.3
New Mexico 70 2 68 68.5 0.6 51.4
Louisiana 13 5 5 4.1 0.7 1.6
Mississippi 22 -- 2 17.6 -- 2.0
Oklahoma 11 16 1 1.6 2.0 0.2
Colorado -- 1 0 -- 0.2 0.0
--- --- --- ----- ----- -----
Totals 262 111 94 148.6 38.0 62.5
--- === === ===== ===== =====
</TABLE>
CRUDE OIL, AND NATURAL GAS PRODUCTION AND SALES PRICES
The following table presents (i) the net crude oil, net natural gas
liquids and net natural gas production for the Company, (ii) the average sales
price per Bbl of crude oil and natural gas liquids and per Mcf of natural gas
produced and (iii) the average cost of production per BOE of production sold,
for the year ended June 30, 1997, June 30, 1996 and the period from August 9,
1994 (inception) to June 30, 1995. Production and sales information relating to
properties acquired or disposed of is reflected in this table since or up to the
closing date of their respective acquisition or sale and may affect the
comparability of the data between the periods presented.
Oil and Gas Production and Prices
<TABLE>
<CAPTION>
Period from
August 9, 1994
Year Ended Year Ended (inception) to
June 30, 1997 June 30, 1996 June 30, 1995
------------- ------------- --------------
<S> <C> <C> <C>
PRODUCTION DATA:
Gas (Mcf) 546,282 153,833 4,678
Oil (bbls) 150,546 102,536 25,839
BOE 241,593 128,175 26,619
AVERAGE SALES PRICE1:
Gas ($/Mcf) $ 2.31 $ 2.43 $ 1.65
Oil ($/Bbl) 20.73 18.26 16.52
BOE ($/BOE) 18.13 16.22 16.32
AVERAGE COST ($/BOE) DATA:
Production and operating costs $ 9.12 $ 9.17 $ 10.51
Production and severance taxes 1.25 1.34 1.29
Depreciation, depletion and 4.07 4.92 4.96
amortization
</TABLE>
1. Before deduction of production and severance taxes.
14
<PAGE> 17
DRILLING ACTIVITIES
The following table sets forth the Company's gross and net working
interests in exploratory, development, and service wells drilled during the
indicated periods. At July 1, 1997 the Company was in the process of drilling
four wells.
Drilling Activities
<TABLE>
<CAPTION>
Period from August 9,
Year Ended Year Ended 1994 (inception) to
June 30, 1997 June 30, 1996 June 30, 1995
------------- ------------- -------------
Gross Net Gross Net Gross Net
Wells Wells Wells Wells Wells Wells
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Exploratory
Productive
Crude Oil 1 0.5 4 2 0 0
Natural Gas 0 0.0 0 0 0 0
Dry Holes 0 0.0 2 1 0 0
--- --- --- --- --- ---
Total 1 0.5 6 3 0 0
=== === === === === ===
Development
Productive
Crude Oil 0 0 0 0 1 0.2
Natural Gas 0 0 0 0 0 0.0
Service 0 0 0 0 0 0.0
Dry Holes 0 0 0 0 0 0.0
--- --- --- --- --- ---
Total 0 0 0 0 1 0.2
=== === === === === ===
</TABLE>
DEVELOPED AND UNDEVELOPED ACREAGE
The following table sets forth the approximate gross and net acres of
productive properties in which the Company owned a leasehold interest as of June
30, 1997. At June 30, 1997, the Company had no significant amount of undeveloped
acreage.
Developed
<TABLE>
<CAPTION>
Gross Net
<S> <C> <C>
Texas 25,004 20,124
New Mexico 14,200 14,116
Louisiana 2,365 584
Mississippi 1,633 1,323
Oklahoma -- --
Colorado 320 80
------ ------
TOTAL 43,522 36,227
====== ======
</TABLE>
at August 1, 1997
after Collins & Ware Properties Acquisition
<TABLE>
<CAPTION>
Gross Net
<S> <C> <C>
Texas 28,211 20,641
New Mexico 14,440 14,170
Louisiana 2,365 584
Mississippi 1,633 1,323
Oklahoma 4,960 708
Colorado 320 80
------ ------
TOTAL 51,929 37,506
====== ======
</TABLE>
15
<PAGE> 18
Essentially all of the Company's oil and gas interests are leasehold
working interests or overriding royalty interests under standard on-shore oil
and gas leases, rather than mineral or fee interests.
ITEM 3. LEGAL PROCEEDINGS
The Company is not presently a party to any material litigation not in
the regular course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted for a vote to stockholders during the fourth
quarter of the fiscal year.
Through written consents effective May 5, 1997 the holders of a majority
of the outstanding shares of the Company's Common Stock approved an amendment to
the Company's Certificate of Incorporation. See "Description of Business --
Recent Developments".
16
<PAGE> 19
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKETING INFORMATION
The preferred shares of the Company are not publicly traded. The Common
Stock of the Company is principally traded on the Nasdaq SmallCap market
(Symbol: "QSRI").
The following table sets forth the range of high and low closing bid
prices for the Company's Common Stock on a quarterly basis since September 30,
1995 (first available quotation) as reported by the National Quotation Bureau,
Inc. (which reflect inter-dealer prices, without retail mark-up, mark-down, or
commission and may not necessarily represent actual transactions). The Common
Stock commenced trading on the Nasdaq SmallCap market on May 22, 1997. Prior to
May 22, 1997 the Common Stock traded in the over the counter market and was
quoted on the Nasdaq Electronic Bulletin Board (Symbol: QSRI). As of September
24, 1997 the closing bid for the Company's Common Stock was $5.25 per share.
<TABLE>
<CAPTION>
Bid Prices
-------------------------
Quarter Ended High ($) Low ($)
------------- -------- -------
<S> <C> <C>
September 30, 1995 $2.000 $2.000
December 31, 1995 2.000 1.500
March 31, 1996 2.125 2.000
June 30, 1996 2.250 2.125
September 30, 1996 2.125 2.125
December 31, 1996 3.375 2.125
March 31, 1997 3.500 3.000
June 30, 1997 4.250 3.500
</TABLE>
TRANSFER AGENT
The Transfer Agent for the Company's Common Stock is Continental Stock
Transfer & Trust Company, 2 Broadway, New York, NY 10004.
HOLDERS
The approximate number of record holders of the Company's Common Stock
as of September 24, 1997 was 1,225, inclusive of those brokerage firms and/or
clearing houses holding the Company's Common Stock for their clientele (with
each such brokerage house and/or clearing house being considered as one holder).
DIVIDENDS
The Company has not declared or paid any cash dividends on its Common
Stock since March, 1995 and has no present intention of paying any cash
dividends on its Common Stock in the foreseeable future. Pursuant to the Loan
Agreement between the Company and the Bank of Montreal, the payment of cash
dividends may only be made with the consent of the Bank of Montreal.
Furthermore, dividends on the Common Stock are limited by the terms of the
Company's Series A Participating Convertible Preferred Stock, par value $0.01
per share, which prohibits cash dividends on Common Stock unless all accrued and
unpaid dividends on the Preferred Stock have been paid.
17
<PAGE> 20
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
On March 6, 1995, the Company acquired all of the outstanding common
stock of QSRn, in exchange for 19,200,000 common shares of the Company. For
accounting purposes, the acquisition has been treated as a recapitalization of
QSRn with QSRn as the acquirer (reverse acquisition). The historical financial
statements of the Company prior to March 6, 1995 are those of QSRn, which have
been retroactively restated for the equivalent number of shares received in the
reverse acquisition. QSRn was formed on August 9, 1994.
The primary focus of the following discussion is on the business of
QSRn. Prior to the March 6, 1995 acquisition of QSRn, the Company had no
material operations.
SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the Company.
The financial data was derived from the consolidated financial statements of the
Company and should be read in conjunction with the Consolidated Financial
Statements and related Notes thereto included herein.
<TABLE>
<CAPTION>
Period from
August 9, 1994
Year Ended Year Ended (inception) to
June 30, 1997 June 30, 1996 June 30, 1995
------------- ------------- --------------
<S> <C> <C> <C>
OPERATIONS DATA:
Oil and gas sales $ 4,381,035 $ 2,079,413 $ 434,513
Oil and gas production expenses 2,506,759 1,175,639 279,825
Net oil and gas revenues 1,874,276 903,774 154,688
Depreciation, depletion and amortization 982,000 630,000 132,000
General and administration 1,452,402 1,113,146 293,658
Interest and financing costs 877,967 420,790 25,144
Reverse acquisition expenses -- -- 401,120
Interest and other income 300,271 71,629 10,041
Loss before extraordinary item (1,137,822) (1,188,533) (687,193)
Extraordinary item (1) 171,381 -- --
Net loss (1,309,203) (1,188,533) (687,193)
Loss before extraordinary item per common (.04) (0.05) (.06)
share
Net loss per common share (0.05) (0.05) (0.06)
Dividends per common share 0.00 0.00 0.00
CASH FLOWS DATA:
Net cash from (used) in operating 262,870 (619,879) (303,210)
activities
Net cash used in investing activities (4,305,063) (5,502,460) (3,129,952)
Net cash provided by financing activities 3,752,267 6,559,985 3,532,609
Net increase (decrease) in cash (289,926) 500,174 99,447
BALANCE SHEET DATA (AT END OF PERIOD):
Total current assets 1,065,787 $ 1,532,813 $ 806,924
Property and equipment, net 16,187,209 9,662,251 4,042,952
Total assets 17,252,996 11,282,813 4,849,876
Total current liabilities 3,669,565 1,449,727 770,706
Long-term obligations, net of current 7,151,881 6,670,441 875,592
portion
Total stockholders' equity 6,431,550 3,162,645 3,203,578
</TABLE>
1 The extraordinary item results from the modification of acquisition debt (see
Note 3 of the Consolidated Financial Statements).
18
<PAGE> 21
The Company's financial condition and results of operations have been
significantly impacted by acquisitions.
The following table sets forth certain operating information of the
Company for the periods presented.
<TABLE>
<CAPTION>
Period from August
Year Ended Year Ended 9, 1994 (inception)
June 30, 1997 June 30, 1996 to June 30, 1995
------------- ------------- ----------------
<S> <C> <C> <C>
PRODUCTION DATA:
Gas (MMcf) 546,282 153,833 4,678
Oil (Mbbls) 150,546 102,536 25,839
MBOE 241,593 128,175 26,619
AVERAGE SALES PRICE:
Gas ($/Mcf) $ 2.31 $ 2.43 $ 1.65
Oil ($/Bbl) 20.73 18.26 16.52
BOE ($/BOE) 18.13 16.22 16.32
AVERAGE COST ($/BOE) DATA:
Production and operating costs $ 9.12 $ 9.17 $ 10.51
Production and severance taxes 1.25 1.34 1.29
Depreciation, depletion and amortization 4.07 4.92 4.96
</TABLE>
The following discussion of the results of operations and financial
condition should be read in conjunction with the Consolidated Financial
Statements and related Notes thereto included herein.
THE YEAR ENDED JUNE 30, 1997 COMPARED TO THE YEAR ENDED JUNE 30, 1996
RESULTS OF OPERATIONS
REVENUES: During the year ended June 30, 1997 operating revenue from
crude oil and natural gas was $4.4 million. This consisted of 150,546 barrels of
crude oil, at an average price per barrel of $20.73 and 546,282 McF of natural
gas, at an average price per McF of $2.31. During the year ended June 30, 1996
the Company generated operating revenue of $2.1 million from crude oil and
natural gas. This consisted of 102,536 barrels of crude oil, at an average price
per barrel of $18.26, and 153,833 McF of natural gas, at an average price per
McF of $2.43.
The two periods are not readily comparable because of the significant
growth that the Company has experienced since inception. During the year ended
June 30, 1996 the Company owned certain properties that it acquired on April 10,
1996 in East Texas (the "East Texas Properties") for only 81 days compared to a
full 12 months during the year ended June 30, 1997. During the year ended June
30, 1997 the Company produced 20,009 barrels of crude oil and 347,656 McF of
natural gas from these East Texas properties, compared to only 4,966 barrels of
crude oil and 85,457 McF of natural gas during the 81 days of the year ended
June 30, 1996 that it owned these East Texas properties. During the year ended
June 30, 1997 the Company produced 46,569 barrels of crude oil and 139,231 McF
of natural gas from properties that it acquired during the year ended June 30,
1997. There is no comparable production from these properties for the year ended
June 30, 1996. During the year ended June 30, 1997 the Company produced 83,968
barrels of crude oil and 59,395 McF of natural gas from properties that it also
owned throughout the year ended June 30, 1996. The production from these
comparable properties during the year ended June 30, 1996 was 97,570 barrels of
crude oil and 68,376 McF of natural gas. This decrease in production of 13,602
barrels (14%) of crude oil and 8,981 Mcf (13%) of natural gas is consistent with
the annual rate of depletion of the reservoirs associated with these properties.
19
<PAGE> 22
COSTS AND EXPENSES: Operating costs and expenses for the year ended June
30, 1997 were $5,519,000. Of this total, LOE's were $2,204,000 ($9.12 per BOE)
and depletion, depreciation and amortization costs were $982,000 ($4.07 per
BOE). General and administrative costs for the year ended June 30, 1997 were
$1,452,000 ($5.69 per BOE), interest charges were $878,000 ($3.44 per BOE) and
the Company recorded gains on changes in foreign exchange rates of $300,000.
Additionally, the Company incurred an extraordinary loss of $171,000 when it
renegotiated the terms of two notes payable pursuant to the arrangement of the
Bank of Montreal loan facility. Operating costs and expenses for the year ended
June 30, 1996 were $3,340,000. Of this total, lease operating costs were
$1,176,000 ($9.17 per BOE) and depletion, depreciation and amortization costs
were $630,000 ($4.92). General and administrative expenses for the year were
$1,113,000 ($8.68 per BOE). Interest and financing charges during the year were
$421,000 ($3.28 per BOE). The Company generated a further $10,000 in interest
income and $62,000 in unrealized gains in foreign exchange.
The increase in LOE's is a result of the increase in production over the
comparative periods. When LOE's are compared on a cost per BOE basis, the cost
of producing a BOE decreased by $0.05 per BOE (0.6%). The decrease per BOE is
the result of lower LOE's per BOE for properties acquired during the year offset
by higher LOE's per BOE arising from the significant workover expenses on
properties acquired during the period from August 9, 1994 (inception) to June
30, 1995 and the reduced production related to the depletion of some of those
properties. The increase in depletion, depreciation and amortization costs is a
result of the increased volume of crude oil and natural gas produced by the
Company. On a cost per BOE of reserves the depletion, depreciation and
amortization costs declined by $0.85 per BOE (17. %). This decrease in
depletion, depreciation and amortization is primarily a result of a revision to
the Company's proposed future development program for its crude oil producing
properties in New Mexico.. The increase of $339,000 of general and
administrative expenses are a result of the increased management support
requirements of the Company, particularly in light of the amount of time and
effort expended in closing the JEDI transaction. As a function of BOE produced,
the general and administrative expenses for the year ended June 30, 1997
decreased by $2.99 per BOE (34%). This decline in general and administrative
expenses as a function of the BOE's produced is consistent with expectations.
The Company believes that its general and administrative infrastructure is
capable of servicing a significantly larger revenue base than that which was in
place at June 30, 1997.
NET LOSS: The Company has incurred losses since its inception, including
$$1,309,000 ($0.05 per voting share) for the year ended June 30, 1997, compared
to $1,189,000 ($0.05 per share) for the year ended June 30, 1996. These losses
are a reflection of the start-up nature of the Company's crude oil and natural
gas production activities. The Company believes, but cannot assure, that as a
result of the acquisitions it has made during the year ended June 30, 1997 and
the acquisition of certain crude oil and natural gas producing properties on
August 1, 1997 that its revenues from crude oil and natural gas are sufficient
to cover its production costs and operating expenses, subject to prevailing
prices for crude oil and natural gas and the volumes thereof produced by the
Company. The Company entered the 1998 fiscal year (July 1, 1997 to June 30,
1998) with a plan to improve production from the properties it had acquired
through June 1997 and to acquire additional oil and natural gas producing
properties to provide the revenue base required to generate additional positive
cash flow from operations. The Company's revenues, profitability and future rate
of growth are substantially dependent upon prevailing prices for crude oil and
natural gas and the volumes of crude oil and natural gas produced by the
Company. In addition, the Company's proved reserves will decline as crude oil
and natural gas are produced unless the Company is successful in acquiring
properties containing proved reserves or conducts successful exploration and
development activities.
CASH FLOW DATA
FROM OPERATIONS: During the year ended June 30, 1997 the Company
generated $263,000 from operations. The growth in the accounts receivable of
$317,000 (a net consumption of cash from operations) is indicative of the growth
of the Company and the related increase in demand for working capital.
Similarly, the growth of $949,000 in accounts payable (a net source of cash from
operations) is also an indicator of the growth of the Company as it incurred
higher expenses and had to temporarily
20
<PAGE> 23
extend its typical payment terms with its vendors from typically 45 days to 60
days. Since entering into the loan agreement with the Bank of Montreal on August
1, 1997 the Company has brought its accounts payable back to between 30 and 45
days. In comparison, during the year ended June 30, 1996 the Company used
$620,000 from operations.
INVESTING ACTIVITIES:During the year ended June 30, 1997 the Company
invested $4.2 million in acquiring additional crude oil and natural gas
producing properties and developing existing properties. Of this amount, a total
of $2,975,000 was expended in four acquisition transactions. The remaining
$1,205,000 was spent on developing existing properties. A further $125,000 was
invested in operating equipment and office equipment during the year. During the
year ended June 30, 1996 the Company invested a net $5.4 million in acquiring
additional oil and gas producing properties, with $4.25 million being used to
acquire certain properties in East Texas and $900,000 to develop existing
properties.
FINANCING ACTIVITIES: During the year ended June 30, 1997 the Company
raised $802,000 of debt while repaying short-term notes payable of $1,408,000
and $58,000 on its capital lease obligation, for a net decrease in debt of
$663,000. On August 1, 1997 the Company entered into a loan agreement with the
Bank of Montreal. The Company drew down $12 million in loans, using $6 million
to acquire certain crude oil and natural gas producing properties in New Mexico,
Texas and Oklahoma. A further $4,858,000 was used to retire the loans with
Comerica Bank Texas. The remaining $1,142,000 was retained for working capital
purposes, with some of the funds used to reduce the accounts payable. During the
year ended June 30, 1997 the Company raised $5 million in preferred share equity
and $4,059,000 in common stock equity. Additionally, the Company collected
$500,000 for a stock subscription receivable that was outstanding on June 30,
1996. (See Note 5 of the Notes to the Consolidated Financial Statements). The
Company used $5,143,000 of the cash equity raised to repurchase 9.6 million
common shares, for a net increase in cash equity of $4,416,000. The Company has
raised an additional $1,591,000 of common stock equity between July 1 and
September 24, 1997.
During the year ended June 30, 1996, the Company raised $7.5 million
while repaying $918,000, thus netting $6.6 million of incremental cash from
financing activities. The major components were $4.6 million of senior secured
debt with Comerica Bank, $1.9 million of unsecured, subordinated Bonds (DEM 2.9
million) and $1 million from the issuance of 400,000 common shares. The Company
repaid a $262,000 (DEM 300,000) revolving line of credit, a $600,000 short-term
note payable that arose from the acquisition of an oil producing property and
$56,000 of a capital lease.
BALANCE SHEET DATA
TOTAL ASSETS: At June 30, 1997 the Company had assets of $17.3 million,
comprised of current assets of $1,065,000, investments in oil and gas producing
properties, net of accumulated depletion, depreciation and amortization, of
$15.9 million and oil field and office equipment, net of accumulated
depreciation, of $239,000. At June 30, 1996, the Company had assets of $11.3
million, comprised of current assets of $1.5 million, investments in oil and gas
producing properties, net of accumulated depletion, depreciation and
amortization, of $9.5 million, and oil field and other equipment, net of
accumulated depreciation, of $210,000.
STOCKHOLDERS' EQUITY:At June 30, 1997 the Company had total
Stockholders' Equity of $6.4 million. During the year ended June 30, 1997 the
Company privately placed and issued 1,560,000 common shares for $2.50 per share,
less 10% in commissions, ($3,510,000) and 200,000 common shares for $3.05 per
share, less 10% in commissions, ($549,000). Between July 1 and September 24,
1997 the Company issued 250,000 common shares for $3.05 per share, less 10% in
commissions ($686,250) and 200,000 common shares for $3.50 per share, less 10%
in commissions ($630,000). Additionally, during the year ended June 30, 1997 the
Company issued 192,000 common shares pursuant to acquisitions which it valued at
$0.18 per share ($34,560) for purposes of those transactions, and 1,237,500
common shares pursuant to acquisitions which it valued at $0.50 per share
($618,750) for purposes of those transactions. Additionally, the Company issued
116,000 common shares in partial settlement of obligations which it valued at
$0.18 per share ($20,880) for purposes of those transactions.
21
<PAGE> 24
THE YEAR ENDED JUNE 30, 1996 COMPARED TO THE PERIOD FROM AUGUST 9, 1994
(INCEPTION) TO JUNE 30, 1995
RESULTS OF OPERATIONS
REVENUES: During the year ended June 30, 1996 operating revenue from
crude oil and natural gas was $2.1 million. This consisted of 102,536 barrels of
crude oil, at an average price per barrel of $18.26, and 153,833 McF of natural
gas, at an average price per McF of $2.43. During the period from August 9, 1994
(inception) to June 30, 1995 the Company generated operating revenue of $435,000
from crude oil and natural gas. This consisted of 25,839 barrels of crude oil,
at an average price per barrel of $16.52, and 4,678 McF of natural gas, at an
average price per McF of $1.65.
The two periods are not readily comparable because of the significant
growth that the Company has experienced since inception. During the period from
August 9, 1994 (inception) to June 30, 1995 the Company held significant
production interests effectively only for the last quarter (April, May and June
1995). Thus, virtually all of the 25,839 barrels of crude oil and 4,678 McF of
natural gas produced by the Company during the year ended June 30, 1995 were
generated over a three month period. During the year ended June 30, 1996 these
same properties produced 97,570 barrels of crude oil and 68,376 McF of natural
gas. In addition, the Company acquired the properties comprising the East Texas
Purchase on April 10, 1996. During the period April 10 to June 30, 1996 these
properties produced 4,966 barrels of crude oil and 85,457 McF of natural gas.
Since these East Texas properties were not owned by the Company during the
period August 9, 1994 (inception) to June 30, 1995 there is no comparable
production for that period.
COSTS AND EXPENSES: Operating costs and expenses for the year ended June
30, 1996 were $3,340,000. Of this total, lease operating costs were $1,176,000
($9.17 per BOE) and depletion, depreciation and amortization costs were
$630,000. General and administrative expenses for the year were $1,113,000.
Interest and financing charges during the year were $421,000. The Company
generated a further $10,000 in interest income and $62,000 in unrealized gains
in foreign exchange. Operating costs and expenses for the period from August 9,
1994 (inception) to June 30, 1995 were $1,132,000. Of this total, lease
operating costs were $280,000 ($10.51 per BOE) and depletion, depreciation and
amortization costs were $132,000. General and administrative expenses for the
year were $294,000, with a further $401,000 associated with the March 6, 1995
reverse acquisition of the Company. Interest charges during the year were
$25,000.
Since inception the Company has directed its efforts at acquiring and
developing oil and natural gas producing properties. This type of activity
requires a general and administrative infrastructure that is more extensive and
more expensive than that required by an organization that is not as
growth-oriented as the Company. At the same time, the Company believes that its
general and administrative infrastructure is capable of servicing a
significantly larger revenue base than that which was in place at June 30, 1996.
NET LOSS: The Company has incurred losses since its inception, including
$1,189,000 ($0.05/share) for the year ended June 30, 1996 and $687,000
($0.06/share) for the period from August 9, 1994 (inception) to June 30, 1995.
These losses are a reflection of the start-up nature of the Company's oil and
natural gas production activities. The Company entered the 1997 fiscal year
(July 1, 1996 to June 30, 1997) with a plan to improve production from the
properties it had acquired through June 1996 and to acquire additional oil and
natural gas producing properties to provide the revenue base required to
generate additional positive cash flow from operations. The Company's revenues,
profitability and future rate of growth are substantially dependent upon
prevailing prices for crude oil and natural gas and the volumes of crude oil and
natural gas produced by the Company. In addition, the Company's proved reserves
will decline as crude oil and natural gas are produced unless the Company is
successful in acquiring properties containing proved reserves or conducts
successful exploration and development activities.
CASH FLOW DATA
FROM OPERATIONS: During the year ended June 30, 1996 the Company used
$620,000 from operations. Of this, $258,000 represents an increase in accounts
receivable (a net consumption of cash from operations) while accounts payable
only rose by $188,000 (a net source of cash from operations). The
22
<PAGE> 25
difference, $70,000, is indicative of the growth of the Company and the related
increase in demand for working capital. In comparison, during the period from
August 9, 1994 (inception) to June 30, 1995 the Company consumed $303,000 of
cash from operations.
INVESTING ACTIVITIES:During the year ended June 30, 1996, the Company
invested a net $5.4 million in acquiring additional oil and gas producing
properties and developing existing properties. Of this amount, $4.25 million in
cash was expended on the East Texas Purchase. The remaining $900,000 was
expended on developing existing properties in Louisiana, New Mexico and Texas.
An additional $88,000 has been expended in relation to an oil producing property
(the Trigg Federal) that the Company acquired in December 1996. During the
period August 9, 1994 (inception) to June 30, 1995 the Company invested
$3,130,000 to acquire and develop properties.
FINANCING ACTIVITIES:During the year ended June 30, 1996, the Company
raised $7.5 million while repaying $918,000, thus netting $6.6 million of
incremental cash from financing activities. The major components were $4.6
million of senior secured debt with Comerica Bank Texas, $1.9 million of
unsecured, subordinated bonds (DEM 2.9 million) and $1 million from the issuance
of 400,000 shares of Common Stock. The Company repaid a $262,000 (DEM 300,000)
revolving line of credit, a $600,000 short-term note payable that arose from the
acquisition of an oil producing property and $56,000 of a capital lease. During
the period from August 9, 1994 (inception) to June 30, 1995 the Company raised
$3.3 million from the issuance of Common Stock. Additionally, the Company
received proceeds of $263,000 (DEM 300,000) from a revolving line of credit. The
Company also issued a note payable of $600,000 to the vendor of an oil producing
property. Finally the Company also entered into a capital lease with an original
balance of $350,000, in connection with the acquisition of its working interests
in the Caprock Field in New Mexico. The lease expires on March 31, 2000.
BALANCE SHEET DATA
TOTAL ASSETS: At June 30, 1996, the Company had assets of $11.3 million,
comprised of current assets of $1.5 million, investments in oil and gas
producing properties, net of accumulated depletion, depreciation and
amortization, of $9.5 million, and oil field and other equipment, net of
accumulated depreciation, of $210,000. At June 30, 1995, the Company had assets
of $4.85 million, comprised of current assets of $807,000, investments in oil
and gas producing properties (net of accumulated depletion, depreciation and
amortization charges) of $3,802,000 and oil field and other equipment (net of
accumulated depreciation) of $241,000. The increase in total assets is primarily
attributable to the acquisition of the East Texas properties and the development
of existing properties.
STOCKHOLDERS' EQUITY: At June 30, 1996 the Company had total
stockholders' equity of $3.2 million. During the year ended June 30, 1996 the
Company issued 470,000 restricted common shares pursuant to the East Texas
Purchase, which it valued at $0.18/share ($84,000) for purposes of that
transaction. Additionally, the Company entered into a subscription agreement for
400,000 restricted common shares at $2.50 per share, for a total cash
consideration of $1,000,000. Of this amount $500,000 was collected prior to June
30, 1996, with the remainder collected subsequent to the year end but before
September 30, 1996. At June 30, 1995 the Company had total stockholders' equity
of $3.2 million.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL: The Company's general financial strategy is to use cash from
operations to service interest on the Company's indebtedness, to pay ongoing
operating expenses, and to contribute limited amounts toward further development
of the Company's existing proved reserves as well as additional acquisitions.
There can be no assurance that cash from operations will be sufficient in the
future to cover all of those purposes.
The Company has planned development and exploitation activities for all
of its major operating areas. The Company has budgeted capital spending of
approximately $3 million for the year ended June 30, 1998, but is not
contractually obligated to expend these funds. In addition, the Company is
continuing to evaluate oil and natural gas properties for future acquisition.
Historically, the Company has used the proceeds from the sale of its securities
in the private equity market and borrowings under its credit facilities
23
<PAGE> 26
to raise cash to fund acquisitions or repay indebtedness incurred for
acquisitions and the Company has also used its securities as a medium of
exchange for other companies' assets in connection with acquisitions. However,
there can be no assurance that such funds will be available to the Company to
meet its budgeted capital spending. Furthermore, the Company's ability to borrow
other than under the credit facility with the Bank of Montreal is subject to
restrictions imposed by such credit agreement. If the Company cannot secure
additional funds for its planned development and exploitation activities, then
the Company will be required to delay or reduce substantially both of such
activities.
INDEBTEDNESS: On August 1, 1997 the Company arranged a revolving loan
facility of $75 million with Bank of Montreal to, among other things, refinance
the indebtedness outstanding under the Company's prior credit facility, fund
working capital and make additional acquisitions as and if appropriate
opportunities are identified. The Company has received approval from the Bank of
Montreal to borrow up to $17 million under this revolving loan facility. As of
September 24, 1997 the Company had borrowed $12 million. In addition, the Bank
of Montreal has issued two letters of credit on behalf of the Company totaling
$2 million. These letters of credit are secured under this loan facility. The
outstanding balances under the loan facility are secured by pledges on assets of
the Company representing approximately 80% of the total assets of the Company.
The Bank of Montreal credit facility is subject to payment of interest
calculated on a floating rate basis. The Company has the option of borrowing
funds based on London InterBank Offering Rate ("LIBOR") or the Bank of Montreal
base lending rate. The Company is charged a premium over each of these bases,
depending on the percent utilization of the approved borrowing base. The Company
is currently being charged interest based on the Bank of Montreal base lending
rate.
The loan facility is due on July 31, 2003. For the period August 1, 1997
to July 31, 1999 the loan facility will be of a revolving nature. For the period
August 1, 1999 to July 31, 2003 the loan facility will be repaid in 48 equal
monthly installments, based on the principal outstanding on July 31, 1999.
If the Bank of Montreal does not renew the loan or if the Bank of
Montreal indebtedness is not repaid when due, the Bank of Montreal would have
the right to obtain possession of and sell the pledged properties, including any
equipment, new wells, or other improvements placed on the properties by the
Company. In the event of a default on the bank indebtedness, not subsequently
waived by the bank, it is unlikely that the Company would be able to continue
its business. In addition, the Company is subject to certain financial and
operating covenants that are usual and customary for transactions of this
nature, including, but not limited to, requirements to provide annual audited
and unaudited interim financial information, prohibitions on additional debt,
restrictions on certain payments and distributions to affiliates and others,
restrictions on changes in the nature of the business, and maintenance of
minimum cash flow and operating ratios. The loan agreement also contains usual
and customary events of default and provides remedies to the Bank of Montreal in
the event of default. Although the Company believes that its cash flows and
available sources of financing will be sufficient to satisfy the interest
payments on its debt at currently prevailing interest rates and oil and gas
prices, the Company's level of debt may adversely affect the Company's ability:
(i) to obtain additional financing for working capital, capital expenditures or
other purposes, should it need to so do; or (ii) to acquire additional oil and
gas properties or to make acquisitions utilizing new borrowings. There can be no
assurances that the Company will be able to obtain additional financing, if
required, or that such financing, if obtained, will be on terms favorable to the
Company.
Until August 1, 1997 the Company had a revolving loan facility of $15
million with Comerica Bank-Texas ("Comerica Bank") to, among other things, fund
working capital and make additional acquisitions as and if appropriate
opportunities are identified. This loan was repaid in full on August 1, 1997
from a portion of the proceeds of the Bank of Montreal loan facility. A letter
of credit in the amount of $54,000 is currently secured by a cash deposit with
Comerica Bank.
UNSECURED BONDS: At June 30, 1997 the Company had outstanding
approximately $2.1 million (DEM 3.65 million) of indebtedness as a result of the
sale of Deutschemark denominated 12% Promissory Notes (as of September 24, 1997
$2.2 million, DEM 3.9 million The Bonds are unsecured,
24
<PAGE> 27
general obligations of the Company and are subordinated in right of payment to
all existing and future secured indebtedness of the Company.
The Bonds are denominated in Deutschemarks ("DEM"). The Company has the
obligation to make periodic interest payments (January 15 and July 15 of each
year) and to repay the principal when it comes due on July 15, 2000 in DEM. The
funds generated by the Company from operations, which form the primary source of
funds to pay the interest, are denominated in $US. The source of funds required
to repay the principal outstanding on the Bonds has not yet been identified,
since the Bonds do not mature until July 15, 2000. The Company is exposed to the
risk that, upon repayment, the exchange rate between DEM and $US may be less
favorable than that which existed at the time that the Bonds were issued. This
would result in the Company having to repay a larger number of $US than it
received initially. Changes in the $US equivalent of the DEM bonds arising from
changes to the DEM:$US exchange rate are recognized monthly. During the year
ended of June 1997 the Company had recorded unrealized exchange rate gains of
approximately $300,000 . However, there are no assurances that the Company will
continue to realize gains related to favorable changes in the DEM:$US exchange
rates in the future. Unfavorable changes to the DEM:$US exchange rate will
result in the Company recording unrealized exchange rate losses related to the
changes as they occur. The Company believes it has the opportunity to enter into
arrangements to manage its DEM:$US exchange rate risk. At this time, the Company
has not entered into any such arrangements.
SUBORDINATED NOTES TO VENDORS: Pursuant to the acquisition of certain
crude oil and natural gas producing properties in east Texas on April 10, 1996,
the Company issued three notes, each bearing interest at 9% per annum and in the
amount of $250,000, payable 90, 180 and 270 days after closing. The Company
retired all three notes plus accrued interest on July 10, October 7, 1996, and
January 5, 1997 in accordance with its obligations under those notes. The funds
to retire the first two notes were raised from a portion of the proceeds of
Regulation S Bonds issued by the Company and from a portion of the proceeds of
the Regulation D Shares issued by the Company for cash. The Company used a
portion of the proceeds from the Regulation S Shares issued by the Company for
cash on December 26, 1996 to retire the third note and related interest.
Pursuant to the acquisition of certain crude oil and natural gas
producing properties primarily located in west Texas on November 6, 1996 (the
"Frymire Acquisition") the Company issued three notes to the vendor. The first
note was in the amount of $100,000, payable 90 days from closing (February 4,
1997). The second note was in the amount of $100,000, payable 180 days from
closing (May 4, 1997). Both notes bore interest at 9% and were retired on their
respective maturity dates from a portion of the proceeds of Regulation S Share
issuances. The third note was in the amount of $227,500, payable monthly with
principal and interest amortized over two years, bearing interest at 10%. This
note is fully subordinated to the Bank of Montreal loan facility. The funds to
service the monthly payments of $10,497 on the third note have come from
operations. The Company believes it will be able to continue to service this
note with funds generated from operations.
REGULATION D SHARES From time to time the Company privately issues
restricted shares of its Common Stock in connection with the acquisition of
properties. Typically these issuances are priced at a discount to the then
existing trading price of the Common Stock in the U.S. to reflect the
restrictions on resale pursuant to the regulations under which they are issued.
The Company issued 100,000 restricted common shares pursuant to Regulation D in
November 1996, as partial consideration for the Frymire Acquisition, which it
valued at $0.18 per share ($18,000) for purposes of this transaction, and 92,000
restricted common shares pursuant to Regulation D in December 1996, which it
valued at $0.18 per share ($16,560) for purposes of this transaction, as partial
consideration for the acquisition of certain crude oil producing properties in
New Mexico. The Company issued 1,237,500 restricted common shares pursuant to
Regulation D in February and March 1997, which it valued at $0.50 per share
($618,750) for purposes of this transaction, as partial consideration for the
acquisition of certain crude oil and natural gas producing properties in
Mississippi, Louisiana and Texas. The Company issued 1,000,000 restricted common
shares in August 1997, which it valued at $3.125 per share ($3,125,000) for
purposes of this transaction, as partial consideration for the acquisition of
certain crude oil and natural gas producing properties in New Mexico, Texas and
Oklahoma.
25
<PAGE> 28
Additionally, the Company issued 16,000 restricted common shares in
October 1996, which it valued at $0.18 per share ($2,880) for purposes of this
transaction, in partial settlement of an outstanding account payable. The
Company issued 100,000 restricted common shares pursuant to Regulation D in
October 1996, which it valued at $0.18 per share ($18,000) as partial
consideration on the termination of a former officer of the Company.
REGULATION S SHARES: The Company has engaged in a series of placements
of its Common Stock in overseas markets to raise equity capital. Typically these
issuances are priced at a discount to the then existing trading price of the
Common Stock in the U.S. to reflect the restrictions on resale back into the
U.S. and the lack of an established trading market for the Company's Common
Stock overseas. The Company issued 100,000 restricted shares of Common Stock
pursuant to Regulation S in November 1996 for $2.50 per share ($250,000). The
Company issued 400,000 restricted shares of Common Stock pursuant to Regulation
S on December 26, 1996 for $2.50 per share ($1,000,000). The Company issued
660,000 restricted shares of Common Stock pursuant to Regulation S in January
1997 for $2.50 per share ($1,650,000). The Company issued 400,000 restricted
shares of Common Stock pursuant to Regulation S in February 1997 for $2.50 per
share ($1,000,000). The Company issued 100,000 restricted shares of Common Stock
pursuant to Regulation S in May 1997 for $3.05 per share ($305,000). The Company
issued 100,000 restricted shares of Common Stock pursuant to Regulation S in
June 1997 for $3.05 per share ($305,000). The Company issued 100,000 restricted
shares of Common Stock pursuant to Regulation S in July 1997 for $3.05 per share
($305,000). The Company issued 250,000 restricted shares of Common Stock
pursuant to Regulation S in September 1997 for $3.05 per share ($762,500). The
Company issued 200,000 restricted shares of Common Stock pursuant to Regulation
S in September 1997 for $3.50 per share ($700,000). The Company paid a
commission of ten percent (10%), including third party costs, on each of these
transactions.
The Company is continuing its efforts to raise an additional $3.26
million of equity through the issue of restricted common shares pursuant to
Regulation S by December 31, 1997 to meet its covenants to JEDI and its
covenants to the Bank of Montreal, pursuant to the loan agreement of August 1,
1997. However, there are no assurances that the Company can raise these funds
and therefore meet its obligations to JEDI and the Bank of Montreal by December
31, 1997. If the Company fails to raise the funds it most likely would have a
materially adverse effect on the Company's liquidity and would cause the Company
to be in breach of its covenants to the Bank of Montreal.
OTHER SOURCES: The Company does not have sufficient liquidity or capital
to undertake all potential acquisition prospects or to fund fully the
development of any prospect. Therefore, the Company will continue to be
dependent on raising substantial amounts of additional capital through any one
or a combination of institutional or bank debt financing, equity offerings, debt
offerings and internally generated cash flow, or by forming sharing arrangements
with industry participants. Although the Company has been able to obtain such
financings and to enter into such sharing arrangements regarding certain of its
projects to date, there can be no assurance that it will continue to be able to
do so. Alternatively, as it has done in the past, the Company may consider
issuing additional securities in exchange for producing properties. There can be
no assurance that any such financings or sharing arrangement can be obtained.
Therefore, notwithstanding the Company's need for substantial amounts of
additional capital, there can be no assurance that it can be obtained.
Further acquisitions and development activities in addition to those for
which the Company is contractually obligated are discretionary and depend
exclusively on the availability of cash from outside sources such as bank debt
or the sale of securities or properties. During the period July 1, 1997 and
September 24, 1997 the Company has raised $1.6 million in equity. These funds
were arranged by the private placement of 550,000 shares of Common Stock
pursuant to Regulation S. The Company believes that this additional equity, in
addition to the $3 million of unutilized borrowing capacity available under the
Bank of Montreal loan facility, provides the Company with the funds required to
undertake a significant capital expenditure program on its existing properties.
This capital expenditure program is expected to significantly increase
production and improve the reserves of the Company.
26
<PAGE> 29
SERIES A PARTICIPATING CONVERTIBLE PREFERRED STOCK: Upon the occurrence
of an Event of Default (as defined in the Company's Certificate of
Incorporation) resulting from the failure to comply with certain covenants, each
holder of shares of Series A Participating Convertible Preferred Stock will have
the right, by written notice to the Company, to require the Company to
repurchase, out of funds legally available therefor, such holder's shares of
Series A Participating Convertible Preferred Stock for an amount in cash equal
to (i) an amount per share equal to the lesser of (A) $1.50 and (B) the sum of
(x) $0.521 and (v) the quotient obtained by dividing (1) the aggregate amount of
all payments made, as of the date of the liquidation, dissolution or winding up,
to the Company by JEDI pursuant to the Earn Up Agreement dated May 6, 1997
between the Company and JEDI by (2) 9,600,000, plus (ii) all accrued and unpaid
dividends thereon.
ITEM 7. FINANCIAL STATEMENTS
For the Financial Statements required by Item 7 see the Consolidated
Financial Statements included elsewhere in this Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On March 13, 1997, the Company dismissed KPMG Peat Marwick LLP ("KPMG")
as its certifying accountant and on March 13, 1997, the Company retained Ernst &
Young LLP ("E&Y") as its certifying accountant. KPMG's reports on the Company's
consolidated financial statements for the fiscal years ended June 30, 1996 and
1995 did not contain an adverse opinion or disclaimer of opinion, nor were they
modified as to uncertainty, audit scope or accounting principles. The decision
to engage E&Y as set forth above and to dismiss KPMG was approved by the Board
of Directors of the Company. In connection with the audits of the consolidated
financial statements of the Company for the fiscal year ended June 30, 1996 and
for the period from August 9, 1994 (inception) through June 30, 1995, and during
the period commencing July 1, 1996 through March 12, 1997, there were no
disagreements with KPMG on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures, which
disagreements, if not resolved to the satisfaction of KPMG, would have caused
them to make reference to the subject matter of the disagreement in connection
with its report. See the Company's Current Report on Form 8-K, dated March 19,
1997.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
PERSONS, COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information required by this Item 9 is set forth in the section
entitled "Election of Directors" in the Company's definitive proxy statement for
its 1997 Annual Meeting of Stockholders (the "Proxy Statement"), and is
incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this Item 10 is set forth in the section
entitled Executive Compensation" in the Proxy Statement for fiscal 1997, and is
incorporated herein by reference.
27
<PAGE> 30
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information required by this Item 11 is set forth in the section
entitled "Security Ownership of Certain Beneficial Owners and Management" in the
Proxy Statement for fiscal 1997, and is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 12 is set forth in the section
entitled "Certain Relationships and Related Transactions" in the Proxy Statement
for fiscal 1997, and is incorporated herein by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
---------
3.1 Certificate of Incorporation of Queen Sand Resources, Inc., a
Delaware corporation.(1)
3.2 Certificate of Amendment of Certificate of Incorporation of
Queen Sand Resources, Inc., a Delaware corporation.(2)
3.3 Certificate of Designation of Series A Participating Convertible
Preferred Stock of Queen Sand Resources, Inc., a Delaware
corporation.(2)
3.4 Certificate of Designation of Series B Participating Convertible
Preferred Stock of Queen Sand Resources, Inc., a Delaware
corporation.(2)
3.5 Amended and Restated Bylaws of Queen Sand Resources, Inc., a
Delaware corporation.(2)
4.1 Form of 12% Notes due July 15, 2001.(1)
10.1 Purchase and Sale Agreement between Eli Rebich and Southern
Exploration Company, a Texas corporation, and Queen Sand
Resources, Inc., a Nevada corporation, dated April 10, 1996.(1)
10.2 Incentive Stock Option Plan (Incentive and Non-Qualified) of
Queen Sand Resources, Inc., a Delaware corporation.(1)
10.3 Equipment Rental and Lease Agreement between Circle Ridge
Equipment Company, Inc., a Texas corporation, and Queen Sand
Resources, Inc., a Nevada corporation, dated March 30, 1995.(1)
10.4 Purchase and Sale Agreement between Enexco, Inc., a Texas
corporation, N&R Resources, Inc., C. Noell Rather, Ralph E.
Rather, Michael Rather, Jane E. Rather, and C. David Rather
(collectively, the "Sellers" and Queen Sand Resources, Inc., a
Nevada corporation, dated November 6, 1996.(3)
10.5 Purchase and Sale Agreement between Maljamar No. 1 Joint
Venture, a Georgia joint venture, and Queen Sand Resources,
Inc., a Nevada corporation, dated November 29, 1996.(3)
10.6 Agreement regarding Termination of Employment among Mitch C.
Green, Queen Sand Resources, Inc., a Nevada corporation,
Northland Operating Co., a Nevada corporation, and Queen Sand
Resources, Inc., a Delaware corporation, dated July 10, 1997.(7)
28
<PAGE> 31
10.7 Purchase and Sale Agreement between D&R Petroleum, Inc., a
Louisiana corporation, Black Gold Production Services, Inc., a
Louisiana corporation, and David Robertson and Corrida
Resources, Inc., a Nevada corporation, dated February 5,
1997.(4)
10.8 Purchase and Sale Agreement between Robertson's Oil & Gas, Inc.,
a Louisiana corporation, Pelican Oil Field Services, Inc., a
Louisiana corporation, and Allen K. Robertson and Corrida
Resources, Inc., a Nevada corporation, dated February 5,
1997.(4)
10.9 Purchase and Sale Agreement between D&R Petroleum, Inc., a
Louisiana corporation, and Queen Sand Resources, Inc., a Nevada
corporation, dated March 13, 1997.(5)
10.10 Purchase and Sale Agreement between James P. Robertson and wife,
Francis Leonard Robertson and Queen Sand Resources, Inc., a
Nevada corporation, dated March 13, 1997.(5)
10.11 Securities Purchase Agreement, dated as of March 27, 1997,
between Joint Energy Development Investments Limited
Partnership, a Delaware limited partnership, and Queen Sand
Resources, Inc., a Delaware corporation.(6)
10.12 Securities Purchase Agreement, dated as of March 27, 1997,
between Forseti Investments Ltd., a Barbados corporation, and
Queen Sand Resources, Inc., a Delaware corporation.(6)
10.13 Earn Up Agreement by and between Joint Energy Development
Investments Limited Partnership, a Delaware limited partnership,
and Queen Sand Resources, Inc., a Delaware corporation, dated
May 6, 1997.(2)
10.14 Common Stock Purchase Warrant Representing Right to Purchase
Shares of Common Stock of Queen Sand Resources, Inc., a Delaware
corporation, issued to Joint Energy Development Investments
Limited Partnership, a Delaware limited partnership, on May 6,
1997.(2)
10.15 Common Stock Purchase Warrant Representing Right To Purchase
409,839 Shares of Common Stock of Queen Sand Resources, Inc., a
Delaware corporation, issued to Joint Energy Development
Investments Limited Partnership, a Delaware limited partnership,
on May 6, 1997.(2)
10.16 Registration Rights Agreement by and between Queen Sand
Resources, Inc., a Delaware corporation, and Joint Energy
Development Investments Limited Partnership, a Delaware limited
partnership, dated May 6, 1997.(2)
10.17 Letter Agreement by and between Queen Sand Resources, Inc., a
Delaware corporation, and ECT Securities Corp., a Delaware
corporation, dated May 6, 1997.(2)
10.18 Earn Up Agreement between Queen Sand Resources, Inc., a Delaware
corporation, and Forseti Investments Ltd., a Barbados
corporation, dated May 6, 1997.(2)
10.19 Class A Common Stock Purchase Warrant Representing Right To
Purchase Shares of Common Stock of Queen Sand Resources, Inc., a
Delaware corporation, issued to Forseti Investments Ltd., a
Barbados corporation, on May 6, 1997.(2)
10.20 Class B Common Stock Purchase Warrant Representing Right To
Purchase Shares of Common Stock of Queen Sand Resources, Inc., a
Delaware corporation, issued to Forseti Investments Ltd., a
Barbados corporation, on May 6, 1997.(2)
29
<PAGE> 32
10.21 Stockholders Agreement by and among Edward J. Munden, Ronald I.
Benn, Bruce I. Benn, Robert P. Lindsay, EIBOC Investments Ltd.,
a Barbados corporation, Queen Sand Resources, Inc., a Delaware
corporation, and Joint Energy Development Investments Limited
Partnership, a Delaware limited partnership, dated May 6,
1997.(2)
10.22 Executive Employment Agreement between Queen Sand Resources,
Inc., a Delaware corporation, and Ronald I. Benn, dated May 6,
1997.(2)*
10.23 Executive Employment Agreement between Queen Sand Resources,
Inc., a Delaware corporation, and Bruce I. Benn, dated May 6,
1997.(2)*
10.24 Executive Employment Agreement between Queen Sand Resources,
Inc., a Delaware corporation, and Edward J. Munden, dated May 6,
1997.(2)*
10.25 Executive Employment Agreement between Queen Sand Resources,
Inc., a Delaware corporation, and Robert P. Lindsay, dated July
1, 1997.(7)*
10.26 Executive Employment Agreement between Queen Sand Resources,
Inc., a Delaware corporation, and V. Ed Butler, dated June 1,
1997.(7)*
10.27 Credit Agreement, dated as of August 1, 1997, among Queen Sand
Resources, Inc., a Nevada corporation, Bank of Montreal and the
Lenders signatory thereto.(8)
10.28 Guaranty Agreement executed by Queen Sand Resources, Inc., a
Delaware corporation, in favor of Bank of Montreal, as agent,
dated as of August 1, 1997.(7)
10.29 Guaranty Agreement executed by Northland Operating Co. in favor
of the Bank of Montreal, as agent, dated as of August 1,
1997.(7)
10.30 Promissory Note in the original principal amount of $75,000,000
dated as of August 1, 1997 payable to the Bank of Montreal, as
agent.(8)
10.31 Guaranty Agreement dated as of August 1, 1997 executed by
Corrida Resources, Inc., a Nevada corporation, in favor of Bank
of Montreal, as agent.(7)
10.32 Security Agreement dated as of August 1, 1997 executed by Queen
Sand Resources, Inc., a Nevada corporation, in favor of the Bank
of Montreal, as agent.(7)
10.33 Mortgage, Deed of Trust, Assignment of Production, Security
Agreement, Fixture Filing and Financing Statement dated as of
August 1, 1997 executed by Queen Sand Resources, Inc., a Nevada
corporation.(7)
10.34 Mortgage, Deed of Trust, Assignment of Production, Security
Agreement, Fixture Filing and Financing Statement dated as of
August 1, 1997 executed by Corrida Resources, Inc., a Nevada
corporation.(7)
10.35 Purchase and Sale Agreement among Queen Sand Resources, Inc., a
Delaware corporation, Queen Sand Resources, Inc., a Nevada
corporation, and Collins & Ware, Inc. dated June 20, 1997.(8)
16.1 Letter Regarding Change in Certifying Accountant.(9)
21.1 List of Subsidiaries.(7)
30
<PAGE> 33
* Management contract.
/1 Incorporated by reference from the Company's Registration Statement on
Form 10-SB, filed with the Securities and Exhibits Commission on August
12, 1996.
/2 Incorporated by reference to the Current Report on Form 8-K, filed with
the Securities and Exchange Commission on May 6, 1997.
/3 Incorporated by reference to the Registration Statement on Form 10-SB
(Amendment No. 1), filed with the Securities and Exchange Commission on
January 23, 1997.
/4 Incorporated by reference to the Current Report on Form 8-K,, filed with
the Securities and Exchange Commission on February 20, 1997.
/5 Incorporated by reference to the Current Report on Form 8-K, filed with
the Securities and Exchange Commission on March 26, 1997.
/6 Incorporated by reference to the Current Report on Form 8-K, filed with
the Securities and Exchange Commission on March 27, 1997.
/7 Filed herewith.
/8 Incorporated by reference to the Current Report on Form 8-K, filed with
the Securities and Exchange Commission on August 1, 1997.
/9 Incorporated by reference to the Current Report on Form 8-K, filed with
the Securities and Exchange Commission on March 19, 1997.
(b) Reports on Form 8-K.
1. Current Report on Form 8-K, dated April 2, 1997, disclosing
certain matters under Item 5.
2. Current Report on Form 8-K, dated May 6, 1997, disclosing
certain matters under Items 5 and 9.
3. Current Report on Form 8-K, dated June 11, 1997, disclosing
certain matters under Item 9.
4. Current Report on Form 8-K, dated July 21, 1997, disclosing
certain matters under Item 9.
5. Current Report on Form 8-K, dated August 8, 1997, disclosing
certain matters under Item 9.
6. Current Report on Form 8-K, dated September 11, 1997, disclosing
certain matters under Item 9.
31
<PAGE> 34
GLOSSARY
Wherever used herein, the following terms shall have the meanings specified.
"Bbl" One stock tank barrel, or 42 US gallons liquid volume, used herein
in reference to crude oil or other liquid hydrocarbons.
"Bcf" One billion cubic feet.
"Bcfe" One billion cubic feet of natural gas equivalent.
"Behind the Pipe" Hydrocarbons in a potentially producing horizon
penetrated by a well bore the production of which has been postponed
pending the production of hydrocarbons from another formation penetrated
by the well bore. The hydrocarbons are classified as proved but
non-producing reserves.
"BOE" Barrels of oil equivalent (converting six Mcf of natural gas to
one Bbf of oil).
"Developed Acreage" Acres which are allocated or assignable to producing
wells or wells capable of production.
"Development Well" A well drilled within the proved boundaries of an oil
and natural gas reservoir to the depth of a stratigraphic horizon known
to be productive.
"Dry Well" A development or exploratory well found to be incapable of
producing either oil or natural gas in sufficient quantities to justify
completion as an oil or natural gas well.
"Exploratory Well" A well drilled to find and produce oil or natural gas
in an unproved area, to find a new reservoir in a field previously found
to be productive of oil or natural gas in another reservoir, or to
extend a known reservoir.
"Gross Acres" or "Gross Wells" The total acres or wells, as the case may
be, in which a working interest is owned.
"LOE" Lease operating expenses are those expense directly associated
with crude oil and/or natural gas producing or service, wells
"Mbbl" One thousand Bbl.
"Mmbbl" One million Bbl.
"MBOE" One thousand barrels of oil equivalent.
"Mcf" One thousand cubic feet.
"Mcfe" One thousand cubic feet of natural gas equivalent, using the
ratio of one Bbl of crude oil to six Mcf of natural gas.
"Mmcf" One million cubic feet of natural gas equivalent.
"Net Acres or Net Wells" The sum of the fractional working interests
owned in gross acres or gross wells.
32
<PAGE> 35
"Oil and Natural Gas Lease" An instrument by which a mineral fee owner
grants to a lessee the right for a specific period of time to explore
for oil and natural gas underlying the lands covered by the lease and
the right to produce any oil and gas so discovered generally for so long
as there is production in economic quantities from such lands.
Productive Well" A well that is producing oil or natural gas or that is
capable of production.
"Proved Developed Reserves" Reserves that can be expected to be
recovered through existing wells with existing equipment and operating
conditions.
"Proved Reserves" The estimated quantities of crude oil, natural gas and
natural gas liquids which geological and engineering data demonstrate
with reasonable certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions.
"Proved Undeveloped Reserves" or "PUD" Reserves that are expected to be
recovered from new wells or undrilled acreage, or from existing wells
where a relatively major expenditure is required for completion.
"PV 10%" The discounted future net cash flows for proved oil and natural
gas reserves computed on the same basis as the Standardized Measure, but
without deducting income taxes, which is not in accordance with
generally accepted accounting principles. PV 10% is an important
financial measure for evaluating the relative significance of oil and
natural gas properties and acquisitions, but should not be construed as
an alternative to the Standardized Measure (as determined in accordance
with generally accepted accounting principles).]
"Royalty Interest" An interest in an oil and natural gas property
entitling the owner to a share of oil and natural gas production, free
of costs of production.
"Secondary Recovery" A method of oil and natural gas extraction in which
energy sources extrinsic to the reservoir are utilized.
"Service Well" A well used for water injection in secondary recovery
projects or for the disposal of produced water.
"Standardized Measure" The estimated future net cash flows from proved
oil and natural gas reserves computed using prices and costs, at the
date indicated, after income taxes and discounted at 10%.
"Undeveloped Acreage" Lease acreage on which wells have not been drilled
or completed to a point that would permit the production of commercial
quantities of oil and natural gas regardless of whether such acreage
contains proved reserves.
"Working Interest" The operating interest which gives the owner the
right to drill, produce and conduct operating activities on the property
and a share of production, subject to all royalties, overriding
royalties and other burdens and to all costs of exploration, development
and operations and all risks in connection therewith.
33
<PAGE> 36
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 hereunto duly authorized.
QUEEN SAND RESOURCES, INC.
Date: September 29, 1997 By: /s/ Edward J. Munden
-- -----------------------------------------
Name: Edward J. Munden
Title: President and Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Date: September 29, 1997 By: /s/ Edward J. Munden
-- -----------------------------------------
Edward J. Munden, President, Chief
Executive Officer, Director and principal
executive officer
Date: September 29, 1997 By: /s/ Bruce I. Benn
-- -----------------------------------------
Bruce I. Benn, Executive Vice President
and Director
Date: September 29, 1997 By: /s/ Ronald I. Benn
-- -----------------------------------------
Ronald I. Benn, Chief Financial Officer,
principal financial and accounting officer
Date: September 29, 1997 By: /s/ Robert P. Lindsay
-- -----------------------------------------
Robert P. Lindsay, Chief Operating
Officer and Director
34
<PAGE> 37
Queen Sand Resources and Subsidiaries
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors................................ F-2
Independent Auditors' Report..................................................... F-3
Consolidated Financial Statements:
Consolidated Balance Sheets as of June 30, 1997 and 1996....................... F-4
Consolidated Statements of Operations for the
Years ended June 30, 1997 and 1996........................................... F-5
Consolidated Statements of Stockholders' Equity for the
Years ended June 30, 1997 and 1996........................................... F-6
Consolidated Statements of Cash Flows for the
Years ended June 30, 1997 and 1996........................................... F-7
Notes to Consolidated Financial Statements..................................... F-8
Pro Forma Combined Condensed Financial Statements (unaudited):
Pro Forma Combined Condensed Balance Sheet at June 30, 1997.................. F-27
Pro Forma Combined Condensed Statement of Operations for the
Year ended June 30, 1997................................................. F-28
Notes to Unaudited Pro Forma Combined Condensed Financial Statements......... F-29
Financial Statements of Business Acquired:
Collins & Ware Properties:
Report of Ernst & Young LLP, Independent Auditors........................ F-32
Statements of Operating Revenues and Direct Operating Expenses for the
Years ended June 30, 1997 and 1996.................................... F-33
Notes to Statements of Operating Revenues and Direct Operating Expenses.. F-34
</TABLE>
F-1
<PAGE> 38
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders
Queen Sand Resources, Inc.
We have audited the accompanying consolidated balance sheet of Queen Sand
Resources, Inc. and subsidiaries as of June 30, 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Queen Sand
Resources, Inc. and subsidiaries as of June 30, 1997, and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
Ernst & Young LLP
Dallas, Texas
September 18, 1997
F-2
<PAGE> 39
Independent Auditors' Report
The Board of Directors
Queen Sand Resources, Inc.
We have audited the accompanying consolidated balance sheet of Queen Sand
Resources, Inc. and subsidiaries as of June 30, 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Queen Sand
Resources, Inc. and subsidiaries as of June 30, 1996, and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Dallas, Texas
August 30, 1996, except as to the sixth paragraph of
Note 3, which is as of September 30, 1996, the fourth paragraph of Note 2,
which is as of November 6, 1996, the first paragraph of Note 5, which is as
of November 12, 1996, and the second paragraph of Note 3, which is as of
November 14, 1996
F-3
<PAGE> 40
Queen Sand Resources, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 309,695 $ 599,621
Accounts receivable:
Oil and gas sales 579,639 428,259
Joint interest 165,284 --
Stockholder -- 500,000
Other 11,169 4,933
------------ ------------
Total current assets 1,065,787 1,532,813
------------ ------------
Property and equipment, at cost (Notes 1, 2, 3, 4 and 9):
Oil and gas properties, based on full cost accounting method 17,540,805 10,158,954
Other equipment 390,404 265,297
------------ ------------
17,931,209 10,424,251
Less accumulated depreciation, depletion, and amortization 1,744,000 762,000
------------ ------------
Net property and equipment 16,187,209 9,662,251
Other assets -- 87,749
============ ============
$ 17,252,996 $ 11,282,813
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade $ 1,125,160 $ 431,321
Revenue and other 103,350 --
Accrued liabilities 360,158 208,396
Notes payable -- 750,000
Current portion of debt and capitalized lease obligation (Notes 3 and 4) 2,080,897 60,010
------------ ------------
Total current liabilities 3,669,565 1,449,727
Long-term obligations, net of current portion (Notes 3 and 4) 7,151,881 6,670,441
------------ ------------
Total liabilities 10,821,446 8,120,168
------------ ------------
Commitments (Notes 4 and 5)
Stockholders' equity (Notes 2 and 5): Preferred stock, $.01 par value:
Authorized shares - 50,000,000 at June 30, 1997
Issued and outstanding shares - 9,600,000 at June 30, 1997 96,000 --
Aggregate liquidation preference - $5,000,000
Common stock, $.0015 par value:
Authorized shares - 100,000,000 and 40,000,000 at June 30, 1997 and 1996,
respectively
Issued and outstanding shares - 20,825,552 and 27,020,000
at June 30, 1997 and 1996, respectively 45,635 40,530
Additional paid-in capital 14,474,844 4,997,841
Accumulated deficit (3,184,929) (1,875,726)
Treasury stock, 9,600,000 shares of common stock, at cost (5,000,000) --
------------ ------------
Total stockholders' equity 6,431,550 3,162,645
============ ============
Total liabilities and stockholders' equity $ 17,252,996 $ 11,282,813
============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE> 41
Queen Sand Resources, Inc. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Revenues:
Oil and gas sales $ 4,381,035 $ 2,079,413
Interest and other (Note 1) 300,271 71,629
------------ ------------
4,681,306 2,151,042
Expenses:
Oil and gas production expenses 2,506,759 1,175,639
Depreciation, depletion, and amortization (Note 1) 982,000 630,000
General and administrative (Notes 1 and 7) 1,452,402 1,113,146
Interest and financing costs 877,967 420,790
------------ ------------
Loss before extraordinary item (1,137,822) (1,188,533)
Extraordinary item (Note 3) 171,381 --
------------ ------------
Net loss $ (1,309,203) $ (1,188,533)
============ ============
Loss before extraordinary item per common share $ (.04) $ (.05)
============ ============
Net loss per common share $ (.05) $ (.05)
============ ============
Weighted average common shares outstanding 26,964,334 26,003,479
============ ============
</TABLE>
See accompanying notes.
F-5
<PAGE> 42
Queen Sand Resources, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Years ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL
------------------- ---------------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL TREASURY DEFICIT EQUITY
--------- ------- ----------- ------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1995 -- $ -- 25,800,000 $38,700 $ 3,852,071 $ $ (687,193) $ 3,203,578
Issuance of
common stock -- -- 350,000 525 62,475 -- -- 63,000
for services
Issuance of
common stock
for oil and -- -- 470,000 705 83,895 -- -- 84,600
gas
properties
(Note 2)
Issuance of
common stock -- -- 400,000 600 999,400 -- -- 1,000,000
for cash
Net loss -- -- -- -- -- -- (1,188,533) (1,188,533)
------- ------- --------- ------- ----------- ----------- ---------- ----------
Balance at June 30, -- -- 27,020,000 40,530 4,997,841 -- (1,875,726) 3,162,645
1996
Issuance of
common stock -- -- 116,052 171 20,709 -- -- 20,880
for services
Issuance of
common stock
for oil and -- -- 1,529,500 2,294 638,852 -- -- 641,146
gas
properties
(Note 2)
Issuance of
common stock
for cash -- -- 1,760,000 2,640 4,056,360 -- -- 4,059,000
(Note 5)
Issuance of
convertible
preferred
stock and
warrants to 9,600,000 96,000 -- -- 4,904,000 -- -- 5,000,000
purchase
common stock
for cash
(Note 5)
Repurchase of
common stock -- -- (9,600,000) -- (142,918) (5,000,000) -- (5,142,918)
(Note 5)
Net loss -- -- -- -- -- -- (1,309,203) (1,309,203)
--------- ------- ----------- ------- ------------ ------------ ----------- -----------
Balance at June 30,1997 9,600,000 $96,000 20,825,552 $45,635 $ 14,474,844 $ (5,000,000) $(3,184,929) $ 6,431,550
========= ======= =========== ======= ============ ============ =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 43
Queen Sand Resources, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------
1997 1996
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(1,309,203) $(1,188,533)
Adjustments to reconcile net loss to net cash used in operating
activities:
Extraordinary item 171,381 --
Depreciation, depletion, and amortization 982,000 630,000
Foreign currency translation gains (300,271) (62,528)
Issuance of common stock for services 20,880 63,000
Accretion of debt discount 72,032 --
Changes in operating assets and liabilities:
Accounts receivable (316,664) (257,666)
Other assets (6,236) 7,951
Accounts payable and accrued liabilities 948,951 187,897
----------- -----------
Net cash used in operating activities 262,870 (619,879)
INVESTING ACTIVITIES
Additions to oil and gas properties (4,179,956) (5,414,711)
Additions to other property and equipment (125,107) --
Additions to other assets -- (87,749)
----------- -----------
Net cash provided by (used in) investing activities (4,305,063) (5,502,460)
FINANCING ACTIVITIES
Proceeds from revolving credit facility 275,982 --
Payments made on revolving credit facility -- (262,610)
Proceeds from revolving line of credit -- 4,582,011
Proceeds from private debt offerings 526,072 1,935,388
Payments made on notes payable (1,407,923) (600,000)
Collection of stock subscription 500,000 --
Proceeds from sale of convertible preferred stock and warrants to
purchase common stock 5,000,000 --
Proceeds from the sales of common stock 4,059,000 1,024,000
Repurchase of common stock (5,142,918) --
Payments made on capital lease obligation (57,946) (56,276)
----------- -----------
Net cash provided by financing activities 3,752,267 6,622,513
Net increase (decrease) in cash (289,926) 500,174
Cash at beginning of year 599,621 99,447
----------- -----------
Cash at end of year $ 309,695 $ 599,621
=========== ===========
Supplemental cash from information:
Interest paid in cash $ 765,181 $ 168,870
=========== ===========
</TABLE>
See accompanying notes.
F-7
<PAGE> 44
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
Queen Sand Resources, Inc. (QSRI or the Company) was formed on August 9, 1994
under the laws of the State of Delaware. At June 30, 1997, EIBOC Investments
Ltd. (EIBOC) held approximately 6,600,000 shares of the Company's common stock,
par value $.0015 (Common Stock), representing approximately 30% of the Company's
outstanding shares of common stock on a fully diluted basis. Certain officers of
the Company have beneficial interests in EIBOC. See Note 5.
The Company is engaged in one industry segment, the acquisition, exploration,
development, production, and sale of crude oil and natural gas. The Company's
business activities are carried out primarily in Texas, New Mexico, Mississippi
and Louisiana.
LIQUIDITY
A majority of the Company's proved oil and gas reserves are undeveloped which,
based on June 30, 1997 reserve reports, are expected to require approximately
$23.5 million (unaudited) of development costs over the next 10 years.
Accordingly, the Company will need to obtain substantial amounts of funds in the
future to finance development of these undeveloped reserves. The Company plans
to fund these obligations using cash anticipated to be provided from future
operations and future equity offerings and debt financings. However, there is no
assurance funds will be available when needed. Failure to fund these capital
expenditures would substantially diminish the value of the Company's oil and gas
reserves.
The Company had negative cash flows from operations for the year ended June 30,
1996. In the event of future cash flow deficiencies, management believes that
sufficient liquidity will be provided through a combination of common stock
sales, private debt offerings, and acquisitions of oil and gas properties with
positive cash flows.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
PROPERTY AND EQUIPMENT
The Company follows the full cost method of accounting for its oil and gas
activities under which all costs, including direct general and administrative
expenses associated with property acquisition, exploration, and development
activities, are capitalized. Capitalized general and administrative expenses
directly associated with acquisitions, exploration, and development of oil and
gas properties were $316,070 and $231,750 for the years ended June 30, 1997 and
1996, respectively. Capitalized costs are depleted by the unit-of-production
method using independent engineer estimates of unrecovered proved oil and gas
reserves. The costs of unproved properties are excluded from depletion until the
properties are evaluated. Depreciation, depletion, and amortization of oil and
gas properties was $3.78 and $4.60 per equivalent barrel of oil and gas produced
for the years ended June 30, 1997 and 1996, respectively. Sales of oil and gas
properties are accounted for as adjustments to the capitalized cost center
unless such sales significantly alter the relationship between capitalized costs
and proved reserves of oil and gas attributable to the cost center, in which
case a gain or loss is recognized.
F-8
<PAGE> 45
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company limits the capitalized costs of oil and gas properties, net of
accumulated depreciation, depletion, and amortization, to the estimated future
net revenues from proved oil and gas reserves less estimated future development
and production expenditures discounted at 10%, plus the lower of cost or
estimated fair value of unproved properties as adjusted for related tax effects.
If capitalized costs exceed this limit, the excess is charged to depreciation,
depletion, and amortization expense. The Company has not recorded any
write-downs of capitalized costs as a result of this limitation.
Depreciation, depletion, and amortization expense and limits to capitalized
costs are based on estimates of oil and gas reserves which are inherently
imprecise. Accordingly, it is reasonably possible that such estimates could
differ materially in the near term from amounts currently estimated.
Depreciation and amortization of other property and equipment is provided
principally by the straight-line method over the estimated service lives of the
related assets. Equipment under capital lease is recorded at the lower of fair
value or the present value of future minimum lease payments and are depreciated
over the lease term.
Costs incurred to operate, repair, and maintain wells and equipment are expensed
as incurred.
The Company's exploration and development activities are conducted jointly with
others and, accordingly, the financial statements reflect only the Company's
proportionate interest in such activities.
The Company does not expect future costs for site restoration, dismantlement and
abandonment, postclosure and other exit costs which may occur in the sale,
disposal, or abandonment of a property to be material.
REVENUE RECOGNITION
The Company uses the sales method of accounting for oil and gas revenues. Under
the sales method, revenues are recognized based on actual volumes of oil and gas
sold to purchasers.
ENVIRONMENTAL MATTERS
The Company is subject to extensive federal, state, and local environmental laws
and regulations. These laws, which are constantly changing, regulate the
discharge of materials into the environment and may require the Company to
remove or mitigate the environmental effects of the disposal or release of
petroleum or chemical substances at various sites. Environmental expenditures
are expensed or capitalized depending on their future economic benefit.
Expenditures that relate to an existing condition caused by past operations and
that have no future economic benefits are expensed. Liabilities for expenditures
of a noncapital nature are recorded when environmental assessment and/or
remediation is probable, and the costs can be reasonably estimated.
INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates. The effect on
F-9
<PAGE> 46
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. The measurement of
deferred tax assets is adjusted by a valuation allowance, if necessary, to
recognize the extent to which based on available evidence, the future tax
benefits more likely than not will be realized.
STATEMENT OF CASH FLOWS
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
In 1995, in connection with the sale of 3,200,000 shares of common stock, the
Company recorded a receivable in the amount of $544,000, $20,000 of which was
received by June 30, 1995, and the remainder in fiscal 1996.
In 1996, in connection with certain promotional services rendered by an
unrelated party, the Company issued 350,000 shares of Common Stock valued at
$63,000.
In 1996, in connection with the acquisition of certain interests in oil and gas
properties, the Company issued notes payable to the seller for $750,000 and
issued 470,000 shares of Common Stock valued at $84,600. See Notes 2 and 3.
In 1996, in connection with the sale of 400,000 shares of Common Stock for
$1,000,000, the Company recorded accounts receivable from stockholders in the
amount of $500,000. The receivables were collected in September 1996.
During 1997, in connection with the acquisitions of interests in oil and gas
properties, the Company issued an aggregate of 1,529,500 shares of Common Stock
valued at $641,146 and issued notes payable to the sellers which were recorded
at $2,473,000 net of issuance discount of $354,000. (See Notes 2 and 3).
LOSS PER COMMON SHARE
Earnings (loss) per common and common equivalent share data is computed by
dividing net income (loss) by the weighted average number of common and common
equivalent shares outstanding during each period. Shares issuable upon exercise
of warrants and upon conversion of the Company's convertible preferred stock are
included in the computation of earnings per common and common equivalent share
for periods subsequent to their issuance to the extent they are dilutive.
Because the Company incurred net losses during each of the years ended June 30,
1997 and 1996, the loss per common share data is based on the weighted average
common shares outstanding.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share," ("SFAS 128") which
is required to be adopted on June 30, 1998. At that time, the Company will be
required to change the method currently used to compute earnings per share and
to restate all prior periods. Under the new requirements for calculating primary
earnings per share, the dilutive effect of warrants and the convertible
preferred stock, will be excluded. Adoption of SFAS 128 will not impact primary
earnings per share for the years ended June 30, 1997 and 1996 because either no
dilutive securities were outstanding or the effect of outstanding warrants and
convertible preferred stock was antidilutive. The impact of SFAS 128 on the
calculation of fully diluted earnings per share is not expected to be
significant.
F-10
<PAGE> 47
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATIONS OF CREDIT RISK
For the year ended June 30, 1997, five oil and gas companies including an
affiliate of one of the Company's stockholders, accounted for 32%, 14%, 17%,
10%, and 9%, respectively, of the Company's oil and gas sales. During the year
ended June 30, 1996, five oil and gas companies accounted for 15%, 15%, 17%,
21%, and 24%, respectively, of the Company's oil and gas sales. Because oil and
gas sales are made to large, well-established companies, the Company does not
believe that this concentration of sales and credit risks represents a material
risk of loss with respect to its financial position as of June 30, 1997 and
1996. The Company's receivables are generally unsecured.
FOREIGN CURRENCY
Foreign currency transactions are translated to U.S. dollars at the rate of
exchange on the date of the transaction. Amounts payable and receivable in
foreign currency are translated at the exchange rate at the balance sheet date.
Translation gains of $300,271 and $62,528 were recognized during the years ended
June 30, 1997 and 1996, respectively, and are included in interest and other
income in the accompanying consolidated statements of operations.
USE OF 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 revenue and expenses during the reporting period.
Because of the use of estimates inherent in the financial reporting process,
actual results could differ from those estimates.
2. ACQUISITIONS
The consolidated financial statements include the results of operations of the
acquired interests in oil and gas properties from their respective acquisition
dates.
In April 1996, the Company purchased interests in oil and gas properties located
in East Texas (the East Texas Properties) for $4,250,000 in cash, $750,000 in
notes payable to the seller and 470,000 shares of Common Stock valued at
$84,600.
The following unaudited pro forma summary of the Company's consolidated results
of operations for the year ended June 30, 1996, was prepared as if the
acquisition of the East Texas Properties had occurred on July 1, 1995. The
unaudited pro forma data is based on numerous assumptions and is not necessarily
indicative of future operations or of results which would actually have occurred
if the acquisitions had been made on July 1, 1995.
<TABLE>
<CAPTION>
1996
----------------
<S> <C>
Revenues $ 3,288,420
================
Net loss $ (1,194,848)
================
Loss per common share $ (.05)
================
</TABLE>
F-11
<PAGE> 48
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
On November 6, 1996, the Company acquired eight gross productive wells (three
net productive wells), all located in various counties in Texas (the Frymire
Purchase). In consideration for these properties the Company paid approximately
$650,000 in cash, issued notes for $427,000 and issued 100,000 shares of Common
Stock valued at $18,000.
On December 16, 1996, the Company acquired 15 gross productive wells (15 net
productive wells), all located in New Mexico (the Trigg Federal Purchase). In
consideration, the Company paid $100,000 in cash and issued 92,000 shares of
Common Stock valued at $16,560.
On February 5, 1997, the Company acquired 60 gross productive wells (48.4 net
productive wells) and two developmental properties located in Mississippi,
Louisiana and Texas (the Core Properties). The adjusted purchase price consisted
of cash of approximately $1,700,000, four notes payable totaling $2,400,000, and
659,000 shares of Common Stock valued at $329,500. On March 13, 1997, the
Company acquired one gross productive well (0.3375 net productive wells) located
in Louisiana (the Intercoastal Property). The purchase price consisted of cash
of $562,500 and 578,500 shares of Common Stock valued at $289,250. The cash
portion of these acquisitions was funded through sales of 1,060,000 shares of
Common Stock pursuant to Regulation S, resulting in net proceeds to the Company
of $2,385,000 (the Equity Private Placements).
The following unaudited pro forma summary of the Company's consolidated results
of operations for the years ended June 30, 1997 and 1996, was prepared as if the
acquisitions of the Core Properties, the Intercoastal Property, and the Equity
Private Placements had occurred on July 1, 1995. The historical results of the
Frymire Purchase and the Trigg Federal Purchase were not significant. The
unaudited pro forma data is based on numerous assumptions and is not necessarily
indicative of future operations or of results which would actually have occurred
if the acquisitions and the Equity Private Placements had been made on July 1,
1995.
<TABLE>
<CAPTION>
1997 1996
--------------- -----------
<S> <C> <C>
Revenues $ 6,318,362 $ 4,318,405
=============== ===========
Net loss $ (505,846) $ (822,537)
=============== ===========
Loss per common share $ (.02) $ (.03)
=============== ===========
</TABLE>
On August 1, 1997, the Company acquired 77 productive wells (12.35 net
productive wells) located in New Mexico, Oklahoma, and Texas (the "Collins &
Ware" Properties). In consideration for these properties, the Company paid
$6,000,000 in cash and issued 1,000,000 shares of Common Stock valued at
$3,125,000. The cash portion of these acquisitions was funded with borrowings
under the Company's new credit facility with the Bank of Montreal. See Note 3
F-12
<PAGE> 49
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. CURRENT AND LONG-TERM DEBT
A summary of current and long-term debt follows:
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
Prime plus 1.5% Revolving Credit Note $4,857,993 $4,582,011
12% unsecured DEM notes, due in July 2000 2,093,275 1,872,860
9% Acquisition Notes 2,063,876 --
9% notes to seller, due in July and October 1996 and
January 1997 -- 750,000
Capital lease obligations (Note 4) 217,634 275,580
---------- ----------
9,232,778 7,480,451
Less current portion of debt and capitalized lease obligation 2,080,897 810,010
========== ==========
Total long-term obligations $7,151,881 $6,670,441
========== ==========
</TABLE>
On December 1, 1995, the Company entered into a revolving credit note agreement
(Revolving Credit Note) with Comerica Bank ("Comerica") to provide a revolving
line of credit up to $10,000,000. On November 14, 1996, the Revolving Credit
Note was amended to increase the line of credit to $15,000,000, increase the
borrowing base to $5,325,000 and extend the due date to December 1, 1997. At
June 30, 1997, borrowings were secured by substantially all of the Company's
interests in oil and gas properties.
Effective August 1, 1997, the Company terminated the existing credit agreement
with Comerica and entered into a new credit agreement ("Credit Agreement") with
Bank of Montreal. The new agreement provides for an initial borrowing base of
$17,000,000 to be redetermined from time to time by Bank of Montreal based on
engineering reports of oil and gas reserves. The Company must pay a commitment
fee annually of .35% of the unused portion of the borrowing base. In addition,
the Credit Agreement commits Bank of Montreal to provide standby letters of
credit for the Company totaling $5,000,000.
The Credit Agreement provides a revolving credit period terminating on August 1,
1999, with principal amounts outstanding on that date converting to a term loan
maturing on August 1, 2003. If Bank of Montreal does not renew the loan or if
Bank of Montreal indebtedness is not repaid when due, Bank of Montreal would
have the right to obtain possession of and sell the pledged properties. Interest
on borrowings under the credit agreement is based on, at the Company's option at
the date of borrowing, either (a) the higher of the federal funds rate plus 1/2
of 1% or the bank's prime rate or (b) the eurodollar rate, increased by up to
2.25% dependent upon the percentage of the available borrowing base used by the
Company. Interest is payable quarterly, beginning September 30, 1997. Bank of
Montreal is secured by a first lien on substantially all of the Company's oil
and gas properties. The loan agreement contains usual and customary defined
events of default and provides remedies to Bank of Montreal.
Subsequent to June 30, 1997, the Company has borrowed approximately $12,000,000
under the Credit Agreement. Approximately $4,900,000 was used to pay off the
Revolving Credit Note, $6,000,000 was used to fund the cash portion of the
Collins & Ware Properties acquisition (Note 2), and the remainder was used for
working capital.
In July 1995, the Company initiated a private debt offering whereby it may issue
up to a maximum of 5,000,000 Deutschmark (DEM) denominated 12% notes due on July
15, 2000, of which DEM 2,850,000 was outstanding at June 30, 1996. The Company
issued additional notes aggregating DEM 200,000, DEM 50,000 and DEM 450,000 in
July, August and September 1996, respectively.
F-13
<PAGE> 50
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. CURRENT AND LONG-TERM DEBT (CONTINUED)
In addition to issuances described in the preceding paragraph, the Company has
issued additional notes aggregating DEM 100,000 during the remainder of 1997.
Subsequent to June 30, 1997, the Company issued an additional DEM 250,000. The
notes may be redeemed at the option of the Company, in whole or in part, at any
time prior to maturity date on or after December 15, 1997, at 101% of the
principal amount, plus accrued interest to the redemption date. The notes are
unsecured, general obligations of the Company, subordinated in right of payment
to any senior and secured indebtedness of the Company including all other
existing indebtedness. The note agreement contains covenants which place
limitations on dividends and liens.
In April 1996, in connection with the acquisition of East Texas Properties (Note
2), the Company issued three notes payable to the sellers of $250,000 each.
In February 1997, in connection with the acquisition of the Core Properties
(Note 2), the Company issued four notes totaling $2,400,000 (the Acquisition
Notes) secured by a first lien on the Core Properties. Two of these notes,
totaling $400,000, bore no interest and were retired prior to June 30, 1997. The
remaining two notes, totaling $2,000,000, were originally payable no later than
February 4, 2000, and bore no interest for the first two years and 9% for the
final year, payable in Common Stock of the Company. The terms of the remaining
two notes were renegotiated, with the seller surrendering the first lien on the
Core Properties in exchange for a note requiring a payment of $2,000,000 on
January 31, 1998. The note is secured by $2,000,000 of letters of credit
obtained by the Company under the credit agreement with Bank of Montreal. As a
result of the modification of the debt terms, in 1997 the Company recognized an
extraordinary loss on modification of $171,381, the difference between the
carrying value of the original notes (including accreted discount totaling
$72,032) and the present value of the new note.
The aggregate maturities of long-term debt subsequent to June 30, 1998,
reflecting the refinancing of the Revolving Credit Note and the modification of
the Acquisition Notes, are as follows: 1999 - $51,287, 2000 - $1,113,288, 2001 -
$3,307,771, 2002 - $1,214,496, 2003 and thereafter - $1,315,713.
4. LEASE OBLIGATIONS
In 1995, in connection with the purchase of interests in certain oil and gas
properties, the Company entered into a capital lease with the seller for oil
field service equipment. The excess ($145,000) of the present value of future
lease rentals ($345,000) over the fair value of the equipment has been treated
as part of the acquisition cost of oil and gas properties. The cost and related
accumulated depreciation of the capital equipment at June 30, 1997 is $200,000
and $102,000, respectively. At June 30, 1997, minimum lease payments required
under the capital lease are as follows:
<TABLE>
<S> <C>
1998 $ 90,000
1999 90,000
2000 67,500
------------
Total minimum lease payments 247,500
Less amount representing interest (29,866)
------------
Present value of minimum lease payments 217,634
Less current installments of obligation under capital lease 68,308
============
Obligation under capital lease, excluding current installments $149,326
============
</TABLE>
F-14
<PAGE> 51
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY
GENERAL
On November 12, 1996, the Company entered into an agreement to sell 100,000
shares of common stock to an unrelated party for $2.50 per share.
During 1997, the Company's Certificate of Incorporation was amended to (i)
authorize the issuance of 50,000,000 shares of preferred stock of the Company,
par value $.01 per share, (the Preferred Stock), of which 9,600,000 shares have
been designated as Series A Preferred Stock and 9,600,000 shares have been
designated as Series B Preferred Stock, and (ii) increase the number of
authorized shares of Common stock from 40,000,000 shares to 100,000,000 shares.
Any authorized but unissued or unreserved Common Stock and undesignated
Preferred Stock is available for issuance at any time, on such terms and for
such purposes as the Board of Directors may deem advisable in the future without
further action by stockholders of the Company, except as may be required by law
or the Series A Certificate of Designation. The Board of Directors of the
Company has the authority to fix the rights, powers, designations, and
preferences of the undesignated Preferred Stock and to provide for one or more
series of undesignated Preferred Stock. The authority will include, but not be
limited to, determination of the number of shares to be included in the series,
dividend rates and rights, voting rights, if any, conversion privileges and
terms, redemption conditions, redemption values, sinking funds and rights upon
involuntary or voluntary liquidation.
CAPITAL STOCK PURCHASE AGREEMENTS
In March 1997, the Company entered into a Securities Purchase Agreement (the
JEDI Purchase Agreement), with Joint Energy Development Investments Limited
Partnership, (JEDI), an affiliate of Enron Finance Corp. (EFC), and a Securities
Purchase Agreement (the Forseti Purchase Agreement), with Forseti Investments
Ltd.
Pursuant to the JEDI Purchase Agreement, in May 1997 at the closing under such
agreement, JEDI acquired 9,600,000 shares of Series A Participating Convertible
Preferred Stock, par value $0.01 per share, of the Company (the Series A
Preferred Stock), certain warrants to purchase Common Stock (the JEDI Warrants)
and warrants to purchase 409,839 shares of Common Stock (the Robertson
Warrants). The Robertson Warrants were granted to JEDI as a form of maintenance
right on the part of JEDI to acquire Common Stock in the future and maintain
JEDI's proportionate ownership in the Company in relation to shares of Common
Stock issued. The aggregate consideration (excluding the exercise price in
respect of the JEDI Warrants and the Robertson Warrants) cannot exceed
$14,400,000 and consists of (i) $5,000,000 ($0.521 per share) cash plus (ii)
contingent cash payment obligations (up to an aggregate of $9,400,000) to the
Company under the JEDI Earn Up Agreement, as described below. All of such funds
would be used by the Company to fund the obligations under the Forseti
transaction agreements.
In connection with the issuance of the Series A Preferred Stock, the JEDI
Warrants, and the Robertson Warrants, the Company granted JEDI certain
maintenance rights and certain demand and piggyback registration rights with
respect to the shares of Common Stock issuable upon conversion of the Series A
Preferred Stock and the shares of Common Stock issuable upon exercise of the
JEDI Warrants and the Robertson Warrants. Pursuant to the terms of the Series A
Preferred Stock, JEDI may designate a number of directors to the Company's Board
of Directors, such that the percentage of the number of directors that JEDI may
designate approximates the percentage voting power JEDI has with respect to the
Company's Common Stock. In addition, upon certain events of default (as defined
in the Series A Certificate of Designation), JEDI will have the right to elect a
majority of the directors of the Company and an option to sell the Series A
Preferred Stock to the Company.
F-15
<PAGE> 52
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
Pursuant to the Forseti Purchase Agreement, in May 1997 at the closing under
such agreement, the Company repurchased 9,600,000 shares of Common Stock owned
by Forseti in exchange for (i) $5,000,000 ($0.521 per share) cash, (ii) the
issuance by the Company of Class A Common Stock Purchase Warrants to purchase
1,000,000 shares of Common Stock at an initial exercise price of $2.50 per share
(the Class A Warrants), and Class B Common Stock Purchase Warrants to purchase
2,000,000 shares of Common Stock at an initial exercise price of $2.50 per share
(the Class B Warrants, and together with the Class A Warrants, the Forseti
Warrants), and (iii) contingent obligations (up to an aggregate of $9,400,000)
to Forseti under the Forseti Earn Up Agreement, as described below. However,
pursuant to the terms of the Forseti Earn Up Agreement, Forseti is not able to
both sell or exercise the Forseti Warrants and receive full payment under the
Forseti Earn Up Agreement. Instead, Forseti has the option of either selling or
exercising the Forseti Warrants or receiving any payments due under the Forseti
Earn Up Agreement. The aggregate consideration paid or payable by the Company to
Forseti in respect of the repurchase of the Common Stock owned by Forseti cannot
exceed $14,400,000. This consideration will be funded only through proceeds
received by the Company under the JEDI Purchase Agreement and the JEDI Earn Up
Agreement.
Pursuant to the JEDI Purchase Agreement, the Company and JEDI entered into an
Earn Up Agreement (the "JEDI Earn Up Agreement"). On or prior to October 15,
1998, subject to the limitations in the JEDI Earn Up Agreement and against
delivery by Forseti to the Company of the Forseti Warrants and a statutory
declaration as to certain matters, JEDI shall pay the Company the Earn Up
Amount. The Earn Up Amount cannot exceed the amount defined as the "Earn Up
Amount" under the Forseti Earn Up Agreement. Pursuant to the Forseti Purchase
Agreement, the Company and Forseti entered the Forseti Earn Up Agreement.
Pursuant to the Forseti Earn Up Agreement, on the later of September 30, 1998 or
the date that is 14 days after the date that the Company notifies Forseti to
request his election (the Election Date), Forseti will elect whether to (i)
accept payment of the Earn Up Amount (in which event Forseti may not exercise or
transfer the Forseti Warrants that have not been previously exercised or
transferred) or (ii) retain the Forseti Warrants that have not been previously
exercised or transferred (in which event the Company is not obligated to pay
Forseti the Earn Up Amount and the Company's obligations under the Forseti Earn
Up Agreement terminate). If Forseti elects to accept payment of the Earn Up
Amount, then subject to limitations in the Forseti Earn Up Agreement and against
delivery by Forseti of the Forseti Warrants and a statutory declaration as to
certain matters, the Company shall pay Forseti the Earn Up Amount on or before
the later of October 15, 1998 or the date that is 15 days after the date Forseti
makes its election (the Payment Date). The maximum amount payable under the Earn
Up Agreement is $9,400,000. The Earn Up Amount is computed using formulas set
forth in the Forseti Earn Up Agreement which are based on the price of the
Common Stock. The Company is obligated to pay Forseti under the Forseti Earn Up
Agreement only to the extent that the Company has received a like amount in cash
from JEDI under the JEDI Earn Up Agreement.
The JEDI Purchase Agreement contains certain positive and negative covenants.
The Company was in compliance with all of the applicable covenants at June 30,
1997. Pursuant to the JEDI Purchase Agreement, the Company agreed to raise at
least $5.4 million in net proceeds from the issuance of Common Stock by December
31, 1997. Through June 30, 1997, the Company has sold 200,000 shares of Common
Stock pursuant to Regulation S, at $2.50 per share, raising $549,000 towards
this requirement. Subsequent to June 30, 1997, the Company sold an additional
550,000 shares of Common Stock pursuant to Regulation S, resulting in net
proceeds of approximately $1,590,750.
F-16
<PAGE> 53
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
Pursuant to the JEDI Purchase Agreement, the Company granted JEDI the right to
purchase its proportionate share of capital stock of the Company at the same
price and on the same terms as the capital stock to be sold by the Company. From
the date of the JEDI Purchase Agreement until December 31, 1998, if JEDI is
entitled to exercise its maintenance rights, the Company shall issue to JEDI a
warrant for the purchase of the capital stock that JEDI is entitled, but does
not elect, to purchase (a Maintenance Warrant). The exercise price of the
Maintenance Warrant will be the value of the capital stock as of the date of the
issuance of the Maintenance Warrant, and any Maintenance Warrant will be
exercisable for a period of one year. JEDI will not have maintenance rights with
respect to capital stock issued by the Company (i) pursuant to certain employee
and director stock plans; (ii) in connection with a stock split or dividend on
the Common Stock to all holders of Common Stock or (iii) pursuant to an offering
pursuant to a registration statement filed with, and declared effective by, the
Securities and Exchange Commission (SEC). Subject to certain exceptions, JEDI
will not have maintenance rights with respect to the issuance of any rights,
warrants or options to purchase shares of the Company's capital stock or other
securities convertible into or exercisable or exchangeable for shares of the
Company's capital stock but will have maintenance rights if and when capital
stock is issued upon the conversion, exercise or exchange of such securities.
JEDI's maintenance rights will terminate upon the earlier to occur of: (i) the
date on which JEDI and its affiliates beneficially own less than 10 percent of
the voting power of the outstanding voting capital stock of the Company; (ii)
the date on which the Company completes an underwritten public offering of
Common Stock that generates net proceeds to the Company of at least $25,000,000;
and (iii) the date on which all shares of Series A Preferred Stock have been
converted to Common Stock or otherwise are no longer outstanding.
Pursuant to the JEDI Purchase Agreement, JEDI, EIBOC and certain officers of the
Company (Management Stockholders) entered into a Stockholders Agreement whereby
JEDI, EIBOC and the Management Stockholders agreed to certain restrictions on
the transfer of shares of Common Stock held by EIBOC and the transfer of shares
of Common Stock or securities convertible, exercisable or exchangeable for
shares of Common Stock held by JEDI. The Stockholders Agreement will terminate
on the earlier of (i) the fifth anniversary of the date of the Stockholders
Agreement or (ii) the date on which JEDI and its affiliates beneficially own in
the aggregate less than 10% of the voting power of the Company's capital stock.
SERIES A PREFERRED STOCK
The holders of shares of Series A Preferred Stock are generally entitled to vote
(on an as-converted basis) as a single class with the holders of the Common
Stock, together with all other classes and series of stock of the Company that
are entitled to vote as a single class with the Common Stock, on all matters
coming before the Company's stockholders. In any vote with respect to which the
Series A Preferred Stock shall vote with the holders of Common Stock as a single
class, each share of Series A Preferred Stock entitles the holder thereof to
cast the number of votes equal to the number which could be cast in such vote by
a holder of the number of shares of Common Stock into which such shares of
Series A Preferred Stock is convertible on the date of such vote.
With respect to any matter for which class voting is required by law or the
Company's Certificate of Incorporation, except as otherwise described herein,
the holders of the Series A Preferred Stock vote as a class and each holder is
entitled to one vote for each share held.
For so long as 960,000 shares of Series A Preferred Stock are outstanding, the
following matters require the approval of the holders of shares of Series A
Preferred Stock, voting together as a separate class:
F-17
<PAGE> 54
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
(i) the amendment of any provision of the Company's Certificate of
Incorporation or the bylaws;
(ii) the creation, authorization or issuance, or the increase in the
authorized amount of, any class or series of shares ranking on a
parity with or prior to the Series A Preferred Stock either as to
dividends or upon liquidation, dissolution or winding up;
(iii) the merger or consolidation of the Company with or into any other
corporation or other entity or the sale of all or substantially all
of the Company's assets; or
(iv) the reorganization, recapitalization, or restructuring or similar
transaction that requires the approval of the stockholders of the
Company.
The holders of shares of Series A Preferred Stock have the right, acting
separately as a class, to elect a number of members to the Company's Board of
Directors. The number shall be a number such that the quotient obtained by
dividing such number by the maximum authorized number of directors is as close
as possible to being equal to the percentage of the outstanding voting power of
the Company entitled to vote generally in the election of directors represented
by the outstanding shares of Series A Preferred Stock at the relevant time.
A holder of shares of Series A Preferred Stock has the right, at the holder's
option, to convert all or a portion of its shares into shares of Common Stock at
any time at an initial rate of one share of Series A Preferred Stock for one
share of Common Stock.
The Series A Certificate of Designation provides for customary adjustments to
the number of shares issuable upon conversion in the event of certain dividends
and distributions to holders of Common Stock, certain reclassifications of the
Common Stock, stock splits, and combinations and mergers and similar
transactions.
Immediately following such conversion, the rights of the holders of Series A
Preferred Stock shall cease and the persons entitled to receive Common Stock
upon the conversion of Series A Preferred Stock shall be treated as the owners
of such Common Stock. The Company is required to maintain a reserve of
authorized but unissued shares of Common Stock to permit the conversion of the
Series A Preferred Stock in full.
Concurrently with the transfer of any shares of Series A Preferred Stock to any
person (other than a direct or indirect affiliate of JEDI or other entity
managed by Enron Corp. or any of its affiliates), the shares of Series A
Preferred Stock so transferred will automatically convert into a like number of
shares of Series B Preferred Stock.
The holders of the shares of Series A Preferred Stock are entitled to receive
dividends, when, and as if declared by the Board of Directors, out of funds
legally available therefor, any dividend (other than a dividend or distribution
paid in shares of, or warrants, rights or options exercisable for or convertible
into or exchangeable for, Common Stock) payable on the Common Stock, as and when
paid, in an amount equal to the amount each such holder would have received if
such holder's shares of Series A Preferred Stock had been converted into Common
Stock immediately prior to the record date, or if there is no record date, the
date of payment thereof. The holders of Series A Preferred Stock will also have
the right to certain dividends upon and during the continuance of an Event of
Default.
F-18
<PAGE> 55
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
Upon the liquidation, dissolution or winding up of the Company, the holders of
the shares of Series A Preferred Stock, before any distribution to the holders
of Common Stock, are entitled to receive (i) an amount per share equal to the
lesser of (A) $1.50 and (B) the sum of (x) $0.521 and (v) the quotient obtained
by dividing (1) the aggregate amount of all payments made, as of the date of the
liquidation, dissolution or winding up, to the Company by JEDI pursuant to the
JEDI Earn Up Agreement by (2) $9,600,000, plus (ii) all accrued and unpaid
dividends thereon (Liquidation Preference). The holders of the shares of Series
A Preferred Stock will not be entitled to participate further in the
distribution of the assets of the Company.
The Series A Certificate of Designation will provide that an Event of Default
will be deemed to have occurred if the Company fails to comply with any of its
covenants in the JEDI Purchase Agreement; provided, that the Company will have a
30-day cure period with respect to the non-compliance with certain covenants.
Upon the occurrence but only during the continuance of an Event of Default, the
holders of Series A Preferred Stock are entitled to receive, in addition to
other dividends payable to holders of Series A Preferred Stock, when, as, and if
declared by the Board of Directors, out of funds legally available therefor,
cumulative preferential cash dividends accruing from the date of the Event of
Default in an amount per share per annum equal to 6% of the Liquidation
Preference in effect at the time of accrual of such dividends, payable quarterly
in arrears on or before the 15th day after the last day of each calendar quarter
during which such dividends are payable. Unless full cumulative dividends
accrued on shares of Series A Preferred Stock have been or contemporaneously are
declared and paid, no dividend may be declared or paid or set aside for payment
on the Common Stock or any other junior securities (other than a dividend or
distribution paid in shares of, or warrants, rights or options exercisable for
or convertible into or exchangeable for, Common Stock or any other junior
securities), nor shall any Common Stock nor any other junior securities be
redeemed, purchased or otherwise acquired for any consideration nor may any
monies be paid to or made available for a sinking fund for the redemption of any
shares of any such securities.
Upon the occurrence and during the continuance of an Event of Default resulting
from the failure to comply with certain covenants, the holders of shares of
Series A Preferred Stock have the right, acting separately as a class, to elect
a number of persons to the Board of Directors of the Company, that along with
any members of the Board of Directors who are serving at the time of such
action, will constitute a majority of the Board of Directors.
Upon the occurrence of an Event of Default resulting from the failure to comply
with certain covenants, each holder of shares of Series A Preferred Stock has
the right, by written notice to the Company, to require the Company to
repurchase, out of funds legally available therefor, such holder's shares of
Series A Preferred Stock for an amount in cash equal to the Liquidation
Preference in effect at the time of the Event of Default.
SERIES B PREFERRED STOCK
The Series B Certificate of Designation authorizes the issuance of up to
9,600,000 shares of Series B Preferred Stock. The terms of the Series B
Preferred Stock are substantially similar to those of the Series A Preferred
Stock, except that the holders of Series B Preferred Stock will not (i) have
class voting rights except as required under Delaware corporate law, (ii) be
entitled to any remedies upon an event of default or (iii) be entitled to elect
any directors of the Company, voting separately as a class.
F-19
<PAGE> 56
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
WARRANTS
Pursuant to the JEDI Purchase Agreement, the Company issued the JEDI Warrants
for the purchase of Common Stock of the Company. The JEDI Warrants will be
exercisable commencing on October 1, 1998 and ending on December 31, 1998. At
the time of exercisability, the JEDI Warrants shall be exercisable for the
number of shares of Common Stock (or amount of other property) equal to the
number of shares of Common Stock (or amount of other property), as adjusted from
time to time pursuant to the JEDI Warrants, which would have been received upon
the exercise on the Election Date (as defined in the Forseti Earn Up Agreement)
of the Forseti Warrants that are deliverable by Forseti to the Company pursuant
to the Forseti Earn Up Agreement. The JEDI Warrants may be exercised in full or
in part by means of payment of the exercise price (initially $2.50 per share of
Common Stock in cash). The JEDI Warrants provide for customary adjustments to
the exercise price and number of shares to be issued in the event of certain
dividends and distributions to holders of Common Stock, stock splits,
combinations and mergers.
Pursuant to the JEDI Purchase Agreement, the Company also issued the Robertson
Warrants for the purchase of 409,839 shares of Common Stock. The Robertson
Warrants are exercisable for a period of one year, commencing on the date of
issuance. The Robertson Warrants may be exercised in full or in part by means of
payment of the exercise price (initially $1.85 per share of Common Stock in
cash). The Robertson Warrants provide for customary adjustments to the exercise
price and number of shares to be issued in the event of certain dividends and
distributions to holders of Common Stock, stock splits, combinations and
mergers.
Pursuant to the Forseti Purchase Agreement, the Company issued the Forseti
Warrants to Forseti, consisting of the Class A Warrants (exercisable for an
aggregate of 1,000,000 shares of Common Stock) and the Class B Warrants
(exercisable for 2,200,000 shares of Common Stock). The Forseti Warrants are
exercisable from their date of issuance and expire December 31, 1998; provided,
that any of the Forseti Warrants held by Forseti on the Election Date will
expire on the Election Date (as defined in the Forseti Earn Up Agreement) unless
Forseti elects to retain the Forseti Warrants under the Forseti Earn Up
Agreement. The Forseti Warrants may be exercised in full or in part by means of
payment of the exercise price (initially $2.50 per share of Common Stock) in
cash. If the Forseti Warrants are exercised only in part, they must be exercised
for the purchase of at least 100,000 shares of Common Stock. The Forseti
Warrants provide for customary adjustments to the exercise price and/or number
of shares to be issued in the event of certain dividends and distributions to
holders of Common Stock, stock splits or combinations and reclassifications. The
Forseti Warrants also make provision for warrant holders to receive certain
items in exchange for the Class A Warrants in the event of certain combinations,
mergers, consolidations, substantial asset sales and similar transactions.
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company defines the fair value of a financial instrument as the amount at
which the instrument could be exchanged in a current transaction between willing
parties. The carrying value of cash, accounts receivable, accounts payable and
accrued liabilities approximates fair value because of the short maturity of
those instruments. The estimated fair value of the Company's long-term
obligations is estimated based on the current rates offered to the Company for
similar maturities. At June 30, 1997 and 1996, the carrying value of long-term
obligations approximates their fair values.
F-20
<PAGE> 57
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. RELATED PARTY TRANSACTIONS
The Company is charged a monthly fee by Capital House A Finance and Investment
Corporation (Capital House) (owned by certain officers of the Company) for
general and administrative costs. Such fee covers the services provided to the
Company by certain employees of Capital House and amounted to $440,000 and
$480,000 for the years ended June 30, 1997 and 1996, respectively. The Company
also reimburses Capital House for certain direct general and administrative
costs incurred by Capital House on behalf of the Company. The Company reimbursed
Capital House $128,880 and $163,772 for such costs for the years ended June 30,
1997 and 1996, respectively. The Company capitalized $120,000 and $128,717 of
the management fees and general and administrative costs paid to Capital House
which were directly associated with oil and gas property acquisitions,
exploration, and development for the years ended June 30, 1997 and 1996,
respectively. The agreement with Capital House was terminated effective May 31,
1997.
8. INCOME TAXES
The Company's effective tax rate differs from the U.S. statutory rate due to
losses without tax benefit. The tax effects of the primary temporary differences
giving rise to the deferred federal income tax assets and liabilities as
determined under Statement of Accounting Standards No. 109, "Accounting for
Income Taxes," at June 30, 1997 and 1996, follow:
<TABLE>
<CAPTION>
1997 1996
----------- ---------
<S> <C> <C>
Deferred income tax assets (liabilities):
Reverse acquisition costs $ 87,967 $ 127,343
Net operating loss carryforwards 1,160,646 457,985
Statutory depletion carryforward 125,983 11,412
Oil and gas properties, principally due to differences in depreciation, depletion,
and amortization (273,789) 40,499
Other (20,774) --
----------- ---------
1,080,033 637,239
Less valuation allowance (1,080,033) (637,239)
----------- ---------
Net deferred income tax asset $ -- $ --
=========== =========
</TABLE>
The net changes in the total valuation allowance for the years ended June 30,
1997 and 1996, were increases of $442,794 and $402,233, respectively. The
Company's net operating loss carryforwards begin expiring in 2010.
9. SUPPLEMENTARY OIL AND GAS DATA (UNAUDITED)
The following tables set forth supplementary disclosures for oil and gas
producing activities in accordance with Statement of Financial Accounting
Standards No. 69.
F-21
<PAGE> 58
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SUPPLEMENTARY OIL AND GAS DATA (UNAUDITED) (CONTINUED)
RESULTS OF OPERATIONS FOR PRODUCING ACTIVITIES
The following sets forth certain information with respect to results of
operations from oil and gas producing activities for the years ended June 30,
1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Oil and gas sales $ 4,381,035 $ 2,079,413
Production expenses (2,506,759) (1,175,639)
Depreciation, depletion, and amortization (915,000) (590,000)
----------- -----------
Results of operations (excludes corporate overhead and
interest expense) $ 959,276 $ 313,774
=========== ===========
</TABLE>
CAPITALIZED COSTS
The following table summarizes capitalized costs relating to oil and gas
producing activities and related amounts of accumulated depreciation, depletion,
and amortization at June 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Oil and gas properties - proved $ 17,540,805 $ 10,158,954
Accumulated depreciation, depletion, and amortization
(1,627,000) (712,000)
------------ ------------
Net capitalized costs $ 15,913,805 $ 9,446,954
============ ============
</TABLE>
COSTS INCURRED
The following sets forth certain information with respect to costs incurred,
whether expensed or capitalized, in oil and gas activities for the years ended
June 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Property acquisition costs $7,381,851 $5,057,292
========== ==========
Development costs $1,237,832 $1,177,807
========== ==========
</TABLE>
RESERVE QUANTITY INFORMATION
The following table presents the Company's estimate of its proved oil and gas
reserves, all of which are located in the United States. 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. The estimates have been prepared by independent petroleum reservoir
engineers.
F-22
<PAGE> 59
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SUPPLEMENTARY OIL AND GAS DATA (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
OIL (BBLS) GAS (MCF)
---------- -----------
<S> <C> <C>
Proved reserves:
Balance at June 30, 1995 6,189,896 419,855
Purchase of reserves in place 787,531 12,781,385
Revisions in previous estimates and other 56,909 (63,741)
Production (102,536) (153,833)
---------- -----------
Balance at June 30, l996 6,931,800 12,983,666
Purchases of reserves in place 916,000 7,730,000
Revisions of previous estimates and other (988,683) 805,156
Production (150,546) (546,282)
---------- -----------
Balance at June 30, 1997 6,708,571 20,972,540
========== ===========
Proved developed reserves:
Balance at June 30, 1996 2,264,962 9,373,888
========== ===========
Balance at June 30, 1997 2,187,576 12,412,008
========== ===========
</TABLE>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL
AND GAS RESERVES (UNAUDITED)
The Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Oil and Gas Reserves (Standardized Measure) is a disclosure requirement under
Statement of Financial Accounting Standards No. 69.
The Standardized Measure of discounted future net cash flows does not purport to
be, nor should it be interpreted to present, the fair value of the Company's oil
and gas reserves. An estimate of fair value would also take into account, among
other things, the recovery of reserves not presently classified as proved, the
value of unproved properties, and consideration of expected future economic and
operating conditions.
Under the Standardized Measure, future cash flows are estimated by applying
year-end prices, adjusted for fixed and determinable escalations, to the
estimated future production of year-end proved reserves. Future cash inflows are
reduced by estimated future production and development costs based on period-end
costs to determine pretax cash inflows. Future income taxes are computed by
applying the statutory tax rate to the excess of pretax cash inflows over the
Company's tax basis in the associated properties. Tax credits, net operating
loss carryforwards, and permanent differences are also considered in the future
tax calculation. Future net cash inflows after income taxes are discounted using
a 10% annual discount rate to arrive at the Standardized Measure.
The Standardized Measure of discounted future net cash flows relating to proved
oil and gas reserves as of June 30, 1997 and 1996, are as follows:
F-23
<PAGE> 60
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SUPPLEMENTARY OIL AND GAS DATA (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Future cash inflows $ 164,119,700 $ 167,229,130
Future costs and expenses:
Production expenses (59,954,366) (62,264,762)
Development costs (23,569,020) (32,208,222)
Future income taxes (21,649,362) (21,525,125)
------------- -------------
Future net cash flows 58,946,952 51,231,021
10% annual discount for estimated timing of cash flows
(28,800,643) (27,260,416)
------------- -------------
Standardized measure of discounted future net cash flows
$ 30,146,309 $ 23,970,605
============= =============
</TABLE>
The weighted average price of oil and gas at June 30, 1997 were $17.43 per
barrel and $2.25 per MCF, respectively.
Changes in the Standardized Measure of discounted future net cash flows relating
to proved oil and gas reserves for the years ended June 30, 1997 and 1996, are
as follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Beginning balance $ 23,970,605 $ 10,875,671
Purchases of minerals in place 14,530,677 12,247,552
Developed during the period 1,237,832 232,685
Net change in prices and costs 5,055,460 9,356,834
Revisions of previous estimates (13,404,571) (5,369,349)
Accretion of discount 2,397,061 1,444,413
Net change in income taxes (1,766,479) (3,913,427)
Sales of oil and gas produced, net of production expenses
(1,874,276) (903,774)
------------ ------------
Balance at June 30, 1997 and 1996 $ 30,146,309 $ 23,970,605
============ ============
</TABLE>
The future cash flows shown above include amounts attributable to proved
undeveloped reserves requiring approximately $21,300,000 of future development
costs. If these reserves are not developed, the standardized measure of
discounted future net cash flows as of June 30, 1997, shown above would be
reduced by approximately $7,243,000.
Estimates of economically recoverable gas and oil reserves and of future net
revenues are based upon a number of variable factors and assumptions, all of
which are to some degree speculative and may vary considerably from actual
results. Therefore, actual production, revenues, taxes, development, and
operating expenditures may not occur as estimated. The reserve data are
estimates only, are subject to many uncertainties, and are based on data gained
from production histories and on assumptions as to geologic formations and other
matters. Actual quantities of gas and oil may differ materially from the amounts
estimated.
F-24
<PAGE> 61
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. HEDGING ACTIVITIES
Subsequent to June 30, 1997, the Company entered into agreements with an
affiliate of JEDI to hedge 50,000 MMBtu of natural gas production and 10,000
barrels of oil production monthly. The agreements, which are effective September
1, 1997, and terminate August 31, 1998, call for a gas and oil ceiling and floor
price of $2.66 and $1.90 per MMBtu and $20.40 and $18.00 per barrel,
respectively. If the average market price of oil and gas per month, as defined
in the agreements, exceeds the ceiling price, the Company must pay the
counterparty an amount equal to one-half of the amount of the hedged quantities
multiplied by the difference between the ceiling price and the market price. If
the average market price, as defined, falls below the floor price, the
counterparty will pay the Company an amount equal to the amount of the hedged
quantities multiplied by the difference in the floor price and the market price.
F-25
<PAGE> 62
Queen Sand Resources, Inc. And Subsidiaries
Pro Forma Combined Condensed Financial Statements
(Unaudited)
On August 1, 1997 Queen Sand Resources, Inc. ("the Company") acquired from an
unaffiliated entity 77 gross productive wells (12.35 net productive wells) and 8
developmental properties located in New Mexico, Oklahoma, and Texas (the
"Collins & Ware Properties"). The adjusted purchase price consisted of cash of
approximately $6,000,000 and 1,000,000 shares of restricted common stock of the
Company ("Common Stock").
The cash portion of this acquisition was funded through borrowings made under
the Company's credit facility with the Bank of Montreal ("the Borrowings").
The accompanying pro forma combined condensed financial statements are based on
the historical financial statements of the Company dated June 30, 1997 included
elsewhere herein. The pro forma combined condensed financial statements are also
based, in part, on the historical statements of operating revenues and direct
operating expenses of the Collins and Ware Properties. Such statements of
operating revenues and direct operating expenses are included elsewhere herein.
The Pro Forma Combined Condensed Balance Sheet as of June 30, 1997 assumes the
acquisition of the Collins & Ware Properties and the Borrowings had been
consummated on that date. The Pro Forma Combined Condensed Statement of
Operations for the year ended June 30, 1997 has been prepared assuming the
acquisition of the Collins and Ware Properties and the Borrowings had been
consummated on July 1, 1996.
The pro forma adjustments are based upon available information and assumptions
that management of the Company believes are reasonable. The pro forma combined
condensed financial statements do not purport to represent the financial
position or results of operations of the Company which would have occurred had
such transactions been consummated on the dates indicated or the Company's
financial position or results of operations for any future date or period. These
pro forma combined condensed financial statements and notes thereto should be
read in conjunction with the historical financial statements and notes thereto
described above.
F-26
<PAGE> 63
Queen Sand Resources, Inc. And Subsidiaries
Pro Forma Combined Condensed Balance Sheet
June 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
COMPANY PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS COMBINED
------------ ----------- ------------
ASSETS
<S> <C> <C> <C>
Current assets:
Cash $ 309,695 $ 6,000,000(1) $ 309,695
(6,000,000)(2)
Accounts receivable and other assets 756,092 -- 756,092
------------ ----------- ------------
Total current assets 1,065,787 -- 1,065,787
Net property and equipment 16,187,209 9,125,000(2) 25,312,209
------------ ----------- ------------
$ 17,252,996 $ 9,125,000 $ 26,377,996
============ =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 1,588,668 $ -- $ 1,588,668
Current portion of debt and capitalized lease
obligation 183,784 -- 183,784
------------ ----------- ------------
Total current liabilities 1,772,452 -- 1,772,452
Long-term obligations, net of current portion 9,048,994 6,000,000(1) 15,048,994
------------ ----------- ------------
Total liabilities 10,821,446 6,000,000 16,821,446
------------ ----------- ------------
Stockholders' equity:
Preferred Stock, $.01 par value 96,000 -- 96,000
Common Stock, $.0015 par value 45,635 1,500(2) 47,135
Additional paid-in capital 14,474,844 3,123,500(2) 17,598,344
Accumulated deficit (3,184,929) -- (3,184,929)
Treasury Stock (5,000,000) -- (5,000,000)
------------ ----------- ------------
Total stockholders' equity 6,431,550 3,125,000 9,556,550
------------ ----------- ------------
$ 17,252,996 $ 9,125,000 $ 26,377,996
============ =========== ============
Shares of Common Stock outstanding 20,825,552 1,000,000(2) 21,825,552
============ =========== ============
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
statements.
F-27
<PAGE> 64
Queen Sand Resources, Inc. And Subsidiaries
Pro Forma Combined Condensed Statement Of Operations
Year Ended June 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
COLLINS AND
WARE
COMPANY PROPERTIES PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
--------------- --------------- ------------ -------------
<S> <C> <C> <C> <C>
Revenues:
Oil and gas sales $ 4,381,035 $ 2,635,277 $ $ 7,016,312
-
Interest and other 300,271 - - 300,271
--------------- --------------- ------------ -------------
4,681,306 2,635,277 - 7,316,583
Expenses:
Oil and gas production expenses 2,506,759 686,164 - 3,192,923
Depreciation, depletion and amortization 982,000 - 1,169,000 (3) 2,151,000
General and administrative 1,452,402 - - 1,452,402
Interest and financing expense 877,967 - 495,000 (4) 1,372,967
--------------- --------------- ------------ -------------
Income (loss) before extraordinary item $ (1,137,822) $ 1,949,113 $ (1,664,000) $ (852,709)
=============== =============== ============ =============
Loss before extraordinary item per common (5)
share $ (0.05) $ (0.03)
=============== =============
Weighted average number of common and shares
outstanding 26,964,334 1,000,000 (5) 27,964,334
=============== ============ =============
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
statements.
F-28
<PAGE> 65
Queen Sand Resources, Inc. And Subsidiaries
Notes to Unaudited Pro Forma Combined Condensed
Financial Statements
A. PRO FORMA ADJUSTMENTS FOR THE ACQUISITION OF THE COLLINS AND WARE PROPERTIES
The accompanying Pro Forma Combined Condensed Balance Sheet has been prepared as
if the acquisition of the Collins & Ware Properties and the Borrowings had been
consummated on June 30, 1997 and reflects the following adjustments:
(1) To record the Company's borrowing of $6,000,000 under the Bank of
Montreal credit facility.
(2) To record the acquisition of the Collins and Ware Properties in
exchange for aggregate consideration of approximately $6,000,000 in
cash and 1,000,000 shares of Common Stock.
The accompanying Pro Forma Combined Condensed Statement of Operations has been
prepared as if the acquisition of the Collins and Ware Properties and the
Borrowings had been consummated on July 1, 1996 and reflects the following
adjustments:
(3) To record incremental depletion expense as a result of the acquisition
of the Collins and Ware Properties.
(4) To record interest expense on the Borrowings, based on a 8.25% interest
rate. An increase of 1/8 of 1% in the interest rate would increase
annual interest expense on the borrowings by $7,500.
(5) To adjust the weighted average number of common shares outstanding as a
result of the issuance of 1,000,000 shares of Common Stock in the
acquisition of the Collins and Ware Properties. The pro forma income
per common share data is computed by dividing the pro forma net income
by the pro forma weighted average number of common shares outstanding.
F-29
<PAGE> 66
Queen Sand Resources, Inc. And Subsidiaries
Notes to Unaudited Pro Forma Combined Condensed
Financial Statements (continued)
Queen Sand Resources, Inc. And Subsidiaries
Notes to Unaudited Pro Forma Combined Condensed
Financial Statements (continued)
B. PRO FORMA COMBINED SUPPLEMENTAL OIL AND GAS RESERVE AND STANDARDIZED
MEASURE INFORMATION
RESERVE QUANTITY INFORMATION
The following table presents the Company's estimate of the pro forma combined
proved oil and gas reserves of the Company after giving effect to the
acquisition of the Collins and Ware Properties, as of June 30, 1997. All
reserves are located in the United States. 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. The
estimates have been prepared by independent petroleum engineers and by the
Company's in-house petroleum reservoir engineers based on reports prepared by
independent petroleum reservoir engineers.
<TABLE>
<CAPTION>
Oil Gas
(Bbls) (Mcf)
-------------- ----------------
<S> <C> <C>
Proved reserves 7,559,376 22,448,679
============== ================
Proved developed reserves 2,820,401 13,640,491
============== ================
</TABLE>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL
AND GAS RESERVES
The Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Oil and Gas Reserves ("Standardized Measure") is a disclosure requirement under
Statement of Financial Accounting Standards No. 69.
The Standardized Measure does not purport to be, nor should it be interpreted to
present, the fair value of the Company's oil and gas reserves. An estimate of
fair value would also take into account, among other things, the recovery of
reserves not presently classified as proved, the value of unproved properties,
and consideration of expected future economic and operating conditions.
Under the Standardized Measure, future cash flows are estimated by applying
year-end prices, adjusted for fixed and determinable escalations, to the
estimated future production of year-end proved reserves. Future cash inflows are
reduced by estimated future production costs, based on period-end costs, and
projected future development costs to determine pre-tax cash inflows. Future
income taxes are computed by applying the statutory rate (based on the current
tax law adjusted for permanent differences and tax credits) to the excess of
pre-tax net cash flows over the Company's income tax basis of its oil and gas
properties. Future net cash flows are discounted using a 10% annual discount
rate to arrive at the Standardized Measure.
F-30
<PAGE> 67
Queen Sand Resources, Inc. And Subsidiaries
Notes to Unaudited Pro Forma Combined Condensed
Financial Statements (continued)
B. PRO FORMA COMBINED SUPPLEMENTAL OIL AND GAS RESERVE AND STANDARDIZED
MEASURE INFORMATION (CONTINUED)
The pro forma Standardized Measure of discounted future net cash flows relating
to the Company's proved oil and gas reserves at June 30, 1997 follows:
<TABLE>
<S> <C>
Future cash inflows $ 183,048,790
Future production and development costs (89,554,441)
Future income taxes (22,932,194)
--------------
Future net cash flows 70,562,155
10% annual discount for estimated timing of cash flows (34,223,182)
--------------
Pro forma Standardized Measure $ 36,338,973
==============
</TABLE>
The future cash flows shown above include amounts attributable to proved
undeveloped reserves requiring approximately $21,884,000 of future development
costs. If these reserves are not developed, the standardized measure of
discounted future net cash flows as of June 30, 1997 shown above would be
reduced significantly.
Estimates of economically recoverable oil and gas reserves and of future net
revenues are based upon a number of variable factors and assumptions, all of
which are to some degree speculative and may vary considerably from actual
results. Therefore, actual production, revenues, taxes, development and
operating expenditures may not occur as estimated. The reserve data are
estimates only, are subject to many uncertainties and are based on data gained
from production histories and on assumptions as to geologic formations and other
matters. Actual quantities of oil and gas may differ materially from the amounts
estimated.
The weighted average prices of oil and gas at June 30, 1997 used in the
calculation of the pro forma Standardized Measure were $17.63 per barrel and
$2.22 per Mcf, respectively.
F-31
<PAGE> 68
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors
Queen Sand Resources, Inc.
We have audited the accompanying statements of operating revenues and direct
operating expenses of the Collins and Ware Properties (as defined in Note 1 to
the accompanying statements) for the years ended June 30, 1997 and 1996. These
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 audits to obtain
reasonable assurance about whether the statements of operating revenues and
direct operating expenses are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the statements of operating revenues and direct operating expenses. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
The accompanying statements of operating revenues and direct operating expenses
were prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission and are not intended to be a complete
presentation of revenues and expenses of the Collins and Ware Properties.
In our opinion, the statements of operating revenues and direct operating
expenses referred to above present fairly, in all material respects, the
operating revenues and direct operating expenses of the Collins and Ware
Properties for the years ended June 30, 1997 and 1996 in conformity with
generally accepted accounting principles.
Ernst & Young LLP
Dallas, Texas
September 16, 1997
F-32
<PAGE> 69
Collins and Ware Properties
Statements of Operating Revenues and Direct Operating Expenses
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
Oil and gas sales $2,635,277 $2,740,442
Direct operating expenses 686,164 732,883
---------- ----------
Excess of revenues over direct operating expenses $1,949,113 $2,007,559
========== ==========
</TABLE>
See accompanying notes to statements of operating revenues and direct operating
expenses.
F-33
<PAGE> 70
Collins and Ware Properties
Notes to Statements of Operating Revenues
and Direct Operating Expenses (continued)
1. BASIS OF PRESENTATION
On August 1, 1997 Queen Sand Resources, Inc. ("the Company") acquired from an
unaffiliated entity 77 gross productive wells (12.35 net productive wells) and 8
developmental properties located in New Mexico, Oklahoma, and Texas (the
"Collins and Ware Properties"). The purchase price consisted of cash of
approximately $6,000,000 and 1,000,000 shares of restricted common stock of the
Company, valued at $3.125 per share.
The cash portion of this acquisition was funded through borrowings made under
the Company's credit facility with the Bank of Montreal.
The accompanying financial statements present the operating revenues and direct
operating expenses of the Collins and Ware Properties. The operating revenues
and direct operating expenses presented herein relate only to the interests in
the producing oil and gas properties acquired and do not represent all of the
oil and gas operations of the sellers. Direct operating expenses include the
actual costs of maintaining the producing properties and their production, but
do not include charges for depletion, depreciation, and amortization; federal
and state income taxes; interest; or general and administrative expenses.
Presentation of complete historical financial statements for the years ended
June 30, 1997 and 1996 is not practicable because the Collins and Ware
Properties were not accounted for as a separate entity; and therefore, such
statements are not available. The operating revenues and direct operating
expenses for the periods presented may not be representative of future
operations.
Revenues in the accompanying statements of operating revenues and direct
operating expenses are recognized on the sales method. Direct operating expenses
are recognized on an accrual basis.
2. SUPPLEMENTAL OIL AND GAS RESERVE AND STANDARDIZED MEASURE INFORMATION
(UNAUDITED)
RESERVE QUANTITY INFORMATION
The following table presents the Company's estimate of the proved oil and gas
reserves of the Collins and Ware Properties, all of which are located in the
United States, as of June 30, 1997. 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. The
estimates have been prepared by independent petroleum reservoir engineers.
<TABLE>
<CAPTION>
Oil Gas
(Bbls) (Mcf)
------- ---------
<S> <C> <C>
Proved reserves 850,805 1,476,139
======= =========
Proved developed reserves 632,825 1,228,483
======= =========
</TABLE>
F-34
<PAGE> 71
Collins and Ware Properties
Notes to Statements of Operating Revenues
and Direct Operating Expenses (continued)
2. SUPPLEMENTAL OIL AND GAS RESERVE AND STANDARDIZED MEASURE INFORMATION
(UNAUDITED) (CONTINUED)
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL
AND GAS RESERVES
The Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Oil and Gas Reserves ("Standardized Measure") is a disclosure requirement under
Statement of Financial Accounting Standards No. 69.
The Standardized Measure does not purport to be, nor should it be interpreted to
present, the fair value of the oil and gas reserves of the Collins and Ware
Properties. An estimate of fair value would also take into account, among other
things, the recovery of reserves not presently classified as proved, the value
of unproved properties, and consideration of expected future economic and
operating conditions.
Under the Standardized Measure, future cash flows are estimated by applying
year-end prices, adjusted for fixed and determinable escalations, to the
estimated future production of year-end proved reserves. Future cash flows are
reduced by estimated future production costs, based on period-end costs, and
projected future development costs to determine net cash inflows. The Collins
and Ware Properties are not a separate tax paying entity. Accordingly, the
Standardized Measure for the Collins and Ware Properties is presented before
deduction of income taxes. Future net cash flows are discounted using a 10%
annual discount rate to arrive at the Standardized Measure.
The Standardized Measure of discounted future net cash flows relating to proved
oil and gas reserves of the Collins and Ware Properties at June 30, 1997
follows:
<TABLE>
<S> <C>
Future cash inflows $ 18,929,090
Future production and development 6,031,055
---------------
Future net cash flows 12,898,035
10% annual discount for estimated timing of cash flows
4,932,053
---------------
Standardized Measure $ 7,965,982
===============
</TABLE>
Estimates of economically recoverable oil and gas reserves and of future net
revenues are based upon a number of variable factors and assumptions, all of
which are to some degree speculative and may vary considerably from actual
results. Therefore, actual production, revenues, taxes, development and
operating expenditures may not occur as estimated. The reserve data are
estimates only, are subject to many uncertainties and are based on data gained
from production histories and on assumptions as to geologic formations and other
matters. Actual quantities of gas and oil may differ materially from the amounts
estimated.
The weighted average prices of oil and gas at June 30, 1997 used in the
calculation of the Standardized Measure were $19.24 per barrel and $1.74 per
Mcf, respectively.
F-35
<PAGE> 72
EXHIBIT INDEX
---------
3.1 Certificate of Incorporation of Queen Sand Resources, Inc., a
Delaware corporation.(1)
3.2 Certificate of Amendment of Certificate of Incorporation of
Queen Sand Resources, Inc., a Delaware corporation.(2)
3.3 Certificate of Designation of Series A Participating Convertible
Preferred Stock of Queen Sand Resources, Inc., a Delaware
corporation.(2)
3.4 Certificate of Designation of Series B Participating Convertible
Preferred Stock of Queen Sand Resources, Inc., a Delaware
corporation.(2)
3.5 Amended and Restated Bylaws of Queen Sand Resources, Inc., a
Delaware corporation.(2)
4.1 Form of 12% Notes due July 15, 2001.(1)
10.1 Purchase and Sale Agreement between Eli Rebich and Southern
Exploration Company, a Texas corporation, and Queen Sand
Resources, Inc., a Nevada corporation, dated April 10, 1996.(1)
10.2 Incentive Stock Option Plan (Incentive and Non-Qualified) of
Queen Sand Resources, Inc., a Delaware corporation.(1)
10.3 Equipment Rental and Lease Agreement between Circle Ridge
Equipment Company, Inc., a Texas corporation, and Queen Sand
Resources, Inc., a Nevada corporation, dated March 30, 1995.(1)
10.4 Purchase and Sale Agreement between Enexco, Inc., a Texas
corporation, N&R Resources, Inc., C. Noell Rather, Ralph E.
Rather, Michael Rather, Jane E. Rather, and C. David Rather
(collectively, the "Sellers" and Queen Sand Resources, Inc., a
Nevada corporation, dated November 6, 1996.(3)
10.5 Purchase and Sale Agreement between Maljamar No. 1 Joint
Venture, a Georgia joint venture, and Queen Sand Resources,
Inc., a Nevada corporation, dated November 29, 1996.(3)
10.6 Agreement regarding Termination of Employment among Mitch C.
Green, Queen Sand Resources, Inc., a Nevada corporation,
Northland Operating Co., a Nevada corporation, and Queen Sand
Resources, Inc., a Delaware corporation, dated July 10, 1997.(7)
<PAGE> 73
10.7 Purchase and Sale Agreement between D&R Petroleum, Inc., a
Louisiana corporation, Black Gold Production Services, Inc., a
Louisiana corporation, and David Robertson and Corrida
Resources, Inc., a Nevada corporation, dated February 5,
1997.(4)
10.8 Purchase and Sale Agreement between Robertson's Oil & Gas, Inc.,
a Louisiana corporation, Pelican Oil Field Services, Inc., a
Louisiana corporation, and Allen K. Robertson and Corrida
Resources, Inc., a Nevada corporation, dated February 5,
1997.(4)
10.9 Purchase and Sale Agreement between D&R Petroleum, Inc., a
Louisiana corporation, and Queen Sand Resources, Inc., a Nevada
corporation, dated March 13, 1997.(5)
10.10 Purchase and Sale Agreement between James P. Robertson and wife,
Francis Leonard Robertson and Queen Sand Resources, Inc., a
Nevada corporation, dated March 13, 1997.(5)
10.11 Securities Purchase Agreement, dated as of March 27, 1997,
between Joint Energy Development Investments Limited
Partnership, a Delaware limited partnership, and Queen Sand
Resources, Inc., a Delaware corporation.(6)
10.12 Securities Purchase Agreement, dated as of March 27, 1997,
between Forseti Investments Ltd., a Barbados corporation, and
Queen Sand Resources, Inc., a Delaware corporation.(6)
10.13 Earn Up Agreement by and between Joint Energy Development
Investments Limited Partnership, a Delaware limited partnership,
and Queen Sand Resources, Inc., a Delaware corporation, dated
May 6, 1997.(2)
10.14 Common Stock Purchase Warrant Representing Right to Purchase
Shares of Common Stock of Queen Sand Resources, Inc., a Delaware
corporation, issued to Joint Energy Development Investments
Limited Partnership, a Delaware limited partnership, on May 6,
1997.(2)
10.15 Common Stock Purchase Warrant Representing Right To Purchase
409,839 Shares of Common Stock of Queen Sand Resources, Inc., a
Delaware corporation, issued to Joint Energy Development
Investments Limited Partnership, a Delaware limited partnership,
on May 6, 1997.(2)
10.16 Registration Rights Agreement by and between Queen Sand
Resources, Inc., a Delaware corporation, and Joint Energy
Development Investments Limited Partnership, a Delaware limited
partnership, dated May 6, 1997.(2)
10.17 Letter Agreement by and between Queen Sand Resources, Inc., a
Delaware corporation, and ECT Securities Corp., a Delaware
corporation, dated May 6, 1997.(2)
10.18 Earn Up Agreement between Queen Sand Resources, Inc., a Delaware
corporation, and Forseti Investments Ltd., a Barbados
corporation, dated May 6, 1997.(2)
10.19 Class A Common Stock Purchase Warrant Representing Right To
Purchase Shares of Common Stock of Queen Sand Resources, Inc., a
Delaware corporation, issued to Forseti Investments Ltd., a
Barbados corporation, on May 6, 1997.(2)
10.20 Class B Common Stock Purchase Warrant Representing Right To
Purchase Shares of Common Stock of Queen Sand Resources, Inc., a
Delaware corporation, issued to Forseti Investments Ltd., a
Barbados corporation, on May 6, 1997.(2)
<PAGE> 74
10.21 Stockholders Agreement by and among Edward J. Munden, Ronald I.
Benn, Bruce I. Benn, Robert P. Lindsay, EIBOC Investments Ltd.,
a Barbados corporation, Queen Sand Resources, Inc., a Delaware
corporation, and Joint Energy Development Investments Limited
Partnership, a Delaware limited partnership, dated May 6,
1997.(2)
10.22 Executive Employment Agreement between Queen Sand Resources,
Inc., a Delaware corporation, and Ronald I. Benn, dated May 6,
1997.(2)*
10.23 Executive Employment Agreement between Queen Sand Resources,
Inc., a Delaware corporation, and Bruce I. Benn, dated May 6,
1997.(2)*
10.24 Executive Employment Agreement between Queen Sand Resources,
Inc., a Delaware corporation, and Edward J. Munden, dated May 6,
1997.(2)*
10.25 Executive Employment Agreement between Queen Sand Resources,
Inc., a Delaware corporation, and Robert P. Lindsay, dated July
1, 1997.(7)*
10.26 Executive Employment Agreement between Queen Sand Resources,
Inc., a Delaware corporation, and V. Ed Butler, dated June 1,
1997.(7)*
10.27 Credit Agreement, dated as of August 1, 1997, among Queen Sand
Resources, Inc., a Nevada corporation, Bank of Montreal and the
Lenders signatory thereto.(8)
10.28 Guaranty Agreement executed by Queen Sand Resources, Inc., a
Delaware corporation, in favor of Bank of Montreal, as agent,
dated as of August 1, 1997.(7)
10.29 Guaranty Agreement executed by Northland Operating Co. in favor
of the Bank of Montreal, as agent, dated as of August 1,
1997.(7)
10.30 Promissory Note in the original principal amount of $75,000,000
dated as of August 1, 1997 payable to the Bank of Montreal, as
agent.(8)
10.31 Guaranty Agreement dated as of August 1, 1997 executed by
Corrida Resources, Inc., a Nevada corporation, in favor of Bank
of Montreal, as agent.(7)
10.32 Security Agreement dated as of August 1, 1997 executed by Queen
Sand Resources, Inc., a Nevada corporation, in favor of the Bank
of Montreal, as agent.(7)
10.33 Mortgage, Deed of Trust, Assignment of Production, Security
Agreement, Fixture Filing and Financing Statement dated as of
August 1, 1997 executed by Queen Sand Resources, Inc., a Nevada
corporation.(7)
10.34 Mortgage, Deed of Trust, Assignment of Production, Security
Agreement, Fixture Filing and Financing Statement dated as of
August 1, 1997 executed by Corrida Resources, Inc., a Nevada
corporation.(7)
10.35 Purchase and Sale Agreement among Queen Sand Resources, Inc., a
Delaware corporation, Queen Sand Resources, Inc., a Nevada
corporation, and Collins & Ware, Inc. dated June 20, 1997.(8)
16.1 Letter Regarding Change in Certifying Accountant.(9)
21.1 List of Subsidiaries.(7)
<PAGE> 75
* Management contract.
/1 Incorporated by reference from the Company's Registration Statement on
Form 10-SB, filed with the Securities and Exhibits Commission on August
12, 1996.
/2 Incorporated by reference to the Current Report on Form 8-K, filed with
the Securities and Exchange Commission on May 6, 1997.
/3 Incorporated by reference to the Registration Statement on Form 10-SB
(Amendment No. 1), filed with the Securities and Exchange Commission on
January 23, 1997.
/4 Incorporated by reference to the Current Report on Form 8-K,, filed with
the Securities and Exchange Commission on February 20, 1997.
/5 Incorporated by reference to the Current Report on Form 8-K, filed with
the Securities and Exchange Commission on March 26, 1997.
/6 Incorporated by reference to the Current Report on Form 8-K, filed with
the Securities and Exchange Commission on March 27, 1997.
/7 Filed herewith.
/8 Incorporated by reference to the Current Report on Form 8-K, filed with
the Securities and Exchange Commission on August 1, 1997.
/9 Incorporated by reference to the Current Report on Form 8-K, filed with
the Securities and Exchange Commission on March 19, 1997.
<PAGE> 1
Exhibit 10.6
[LOGO]
July 10, 1996
Mr. Mitch C. Green
132 Rustic Meadow
Coppell, TX 75019
Dear Mitch:
Re: Agreement Regarding Termination of Employment
This letter is intended to reflect the agreement between you and
Queen Sand Resources, Inc. a Nevada corporation ("QSR"), Northland Operating Co.
("Northland"), and Queen Sand Resources, Inc., a Delaware corporation ("QSRD").
Such corporations are hereinafter collectively referred to as the "Companies".
By mutual decision, it is agreed that you have resigned and
terminated, effective immediately, your employment with QSR and Northland, and
all positions held by you as an officer and/or director of QSR and Northland.
By way of severance, and to reflect the Companies appreciation for
your services, the Companies have offered, and you have accepted, the following:
1. Three months salary, being the sum of $21,000, which shall be paid
promptly upon the joint execution of this agreement. There shall be
deducted from such payment withholdings required under the rules and
regulations of the Internal Revenue Service.
2. One Hundred Thousand Shares (100,000) of the common stock of QSRD.
Such stock shall be issued and delivered to you within ninety days
from the date of this agreement. It is acknowledged and understood
that the issuance of such shares is a private sale of such
securities, that such securities shall not be registered, and that,
therefore, such shares are accordingly restricted under and according
to the rules of the Securities and Exchange Commission, and that such
shares shall contain a legend reflecting that such shares are not
registered.
For the consideration hereinabove recited, Mitch Green, for himself,
and for his administrators, his agents, assigns, executors, heirs, and any one
claiming through him, does hereby release, waive, relinquish, and discharge any
and all claims, demands, debts, actions, or causes of action or suits whatsoever
for damages or relief of any kind that he may have, or which he has or could
have asserted, against the Companies, their officers, directors, attorneys,
agents, employees, servants and successors, based in any way upon any and all
facts, matters, undertakings, statements, etc. occurring at or prior to the
execution of this agreement, whether known or unknown to the parties, or arising
out of or resulting from or in any way connected with or related to (i) any and
all communications, dealings, contacts, contracts, and transactions of every
kind and character that Mitch Green may have with the Companies, and (ii) any
and all
<PAGE> 2
communications, dealings, contacts, etc. relating to the termination of
the employment of Mitch Green with QSR and Northland, and the termination of the
offices held by Mitch Green with QSR and Northland.
This letter reflects the entire agreement between you and the
Companies. There are no other statements and/or representations, relied upon by
the parties, which are not set forth herein.
By your execution of this agreement in the space provided below, this
agreement shall be binding and effective between you and the Companies,
according to its terms.
Yours truly,
Queen Sand Resources, Inc.,
A Nevada corporation
By: /s/ Robert Lindsay
----------------------------------------
Robert Lindsay, Chief Operating Officer
Queen Sand Resources, Inc.,
A Delaware corporation
By: /s/ Robert Lindsay
----------------------------------------
Robert Lindsay, Chief Operating Officer
Northland Operating Co.
By: /s/ Robert Lindsay
----------------------------------------
Robert Lindsay, Vice President
Agreed and Accepted this
10th day of July, 1996.
/s/ Mitch C. Green
- -------------------
Mitch C. Green
[LOGO]
<PAGE> 1
EXHIBIT 10.25
EXECUTIVE EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement"), including Exhibit A hereto, is
entered into between Queen Sand Resources, Inc., a Delaware corporation having
offices at 3500 Oak Lawn, Suite 380, Dallas, Texas 75219 ("Employer"), and
Robert P. Lindsay, an individual whose address is __________________________
("Employee"), to be effective as of July 1, 1997 (the "Effective Date").
WITNESSETH:
WHEREAS, Employer is desirous of employing Employee pursuant to the
terms and conditions and for the consideration set forth in this Agreement, and
Employee is desirous of entering the employ of Employer pursuant to such terms
and conditions and for such consideration.
NOW, THEREFORE, for and in consideration of the mutual promises,
covenants, and obligations contained herein, Employer and Employee agree as
follows:
ARTICLE 1: EMPLOYMENT AND DUTIES.
1.1 Employer agrees to employ Employee, and Employee agrees to be
employed by Employer, beginning as of the Effective Date and continuing until
the date set forth in Exhibit A to this Agreement (the "Term") subject to the
terms and conditions of this Agreement.
1.2 Employee initially shall be employed in the position set forth in
Exhibit A to this Agreement. Employer may subsequently assign Employee to a
different position or modify Employee's duties and responsibilities consistent
with the Employee's existing duties, responsibilities and level of authority.
Employer may assign this Agreement and Employee's employment to any of its
affiliates. Employee agrees to serve in the assigned position and to perform
diligently and to the best of Employee's abilities the duties and services
appertaining to such position as determined by Employer, as well as such
additional or different duties and services appropriate to such position which
Employee from time to time may be reasonably directed to perform by Employer.
Employee shall at all times comply with and be subject to such policies and
procedures as Employer may establish from time to time.
1.3 Employee shall, during the period of Employee's employment by
Employer, devote Employee's full business time, energy, and best efforts to the
business and affairs of Employer. Employee may not engage, directly or
indirectly, in any other business, investment, or activity that interferes with
Employee's performance of Employee's duties hereunder, is contrary to the
interests of Employer, or requires any significant portion of Employee's
business time.
1.4 In connection with Employee's employment by Employer, Employer
shall endeavor to provide Employee access to such confidential information
pertaining to the business and services of Employer as is appropriate for
Employee's employment responsibilities. Employer also shall endeavor to provide
to Employee the opportunity to
<PAGE> 2
develop business relationships with those of Employer's clients and potential
clients that are appropriate for Employee's employment responsibilities.
1.5 Employee acknowledges and agrees that Employee owes a fiduciary
duty of loyalty, fidelity and allegiance to act at all times in the best
interests of the Employer and to do no act which would injure Employer's
business, its interests, or its reputation. It is agreed that any direct or
indirect interest in, connection with, or benefit from any outside activities,
particularly commercial activities, which interest might in any way adversely
affect Employer or any of its affiliates, involves a possible conflict of
interest. In keeping with Employee's fiduciary duties to Employer, Employee
agrees that Employee shall not knowingly become involved in a conflict of
interest with Employer or its affiliates, or upon discovery thereof, allow such
a conflict to continue. Moreover, Employee agrees that Employee shall disclose
to Employer's Board of Directors any facts which might involve such a conflict
of interest.
1.6 Employer and Employee recognize that it is impossible to provide an
exhaustive list of actions or interests that constitute a conflict of interest.
Moreover, Employer and Employee recognize there are many borderline situations.
In some instances, full disclosure of facts by the Employee to Employer's Board
of Directors may be all that is necessary to enable Employer or its affiliates
to protect their interests. In others, if no improper motivation appears to
exist and the interests of Employer or its affiliates have not suffered, prompt
elimination of the outside interest will suffice. In still others, it may be
necessary for Employer to terminate the employment relationship. Employer and
Employee agree that Employer's determination as to whether a conflict of
interest exists shall be conclusive. Employer reserves the right to take such
action as, in its judgment, will end the conflict.
ARTICLE 2: COMPENSATION AND BENEFITS.
2.1 The Employee shall be entitled to receive the salary set forth in
Exhibit A to this Agreement and to participate in any other compensation and
benefit plans referred to on Exhibit A to this Agreement, which benefit plans
are implemented by the Company after the date hereof, in each case to the extent
determined by the Board (or a Compensation Committee thereof).
2.2 While employed by Employer (both during the Term and thereafter),
Employee shall be allowed to participate, on the same basis generally as other
employees of Employer, in all general employee benefit plans and programs,
including improvements or modifications of the same, which on the Effective Date
or thereafter are made available by Employer to all or substantially all of
Employer's employees. Such benefits, plans, and programs may, but are not
required to, include, without limitation, medical, health, and dental care, life
insurance, disability protection, pension plans, relocation, automobile
allowance and directors liability insurance. Nothing in this Agreement is to be
construed or interpreted to provide greater rights, participation, coverage, or
benefits under such benefit plans or programs than provided to similarly
situated employees pursuant to the terms and conditions of such benefit plans
and programs. Employee shall have the right to participate in an incentive
compensation plan for similarly situated employees to be adopted by Employer
(the "Plan"). The Plan shall provide for at least annual awards of cash,
performance shares or units, or other performance-or incentive-based
compensation, or any combination thereof, upon meeting the Employer's targeted
performance objectives for the award year.
- 2 -
<PAGE> 3
2.3 Employer shall not by reason of this Article 2 be obligated to
institute, maintain, or refrain from changing, amending, or discontinuing, any
such incentive compensation or employee benefit program or plan, so long as such
actions are similarly applicable to covered employees generally. Moreover,
unless specifically provided for in a written plan document adopted by the Board
of Directors of Employer, none of the benefits or arrangements described in this
Article 2 shall be secured or funded in any way, and each shall instead
constitute an unfunded and unsecured promise to pay money in the future
exclusively from the general assets of Employer.
2.4 Employer may withhold from any compensation, benefits, or amounts
payable under this Agreement all federal, state, city, or other taxes as may be
required pursuant to any law or governmental regulation or ruling.
2.5 The Employer shall reimburse the Employee for all reasonable,
ordinary and necessary expenses incurred by him in connection with his duties
upon production of receipts and an itemized account; provided, that, the
Employee shall obtain the prior approval of the Board for any expense greater
than $10,000.
ARTICLE 3: TERMINATION PRIOR TO EXPIRATION OF TERM.
3.1 Notwithstanding any other provisions herein to the contrary,
Employer shall have the right to terminate Employee's employment under this
Agreement at any time prior to the expiration of the Term for any of the
following reasons:
(i) For cause upon the good faith determination by the
Employer's Board of Directors that cause exists for the termination of
the employment relationship. As used in this Section 3.1(i), the term
"cause" shall mean (a) Employee has willfully refused without proper
legal reason to perform a duty or responsibility required of Employee
under this Agreement which remains uncorrected for fifteen (15) days
following written notice to Employee by Employer of such breach; (b)
Employee has been convicted of a felony (which, through lapse of time
or otherwise, is not subject to appeal); (c) Employee's involvement in
a conflict of interest as referenced in Sections 1.5 and 1.6 for which
Employer makes a determination to terminate the employment of Employee;
(d) Employee has willfully engaged in conduct that Employee knows or
should know is materially injurious to Employer or any of its
affiliates; or (e) Employee's material breach of any material provision
of this Agreement or corporate code or policy which remains uncorrected
for thirty (30) days following written notice to Employee by Employer
of such breach. It is expressly acknowledged and agreed that the
decision as to whether cause exists for termination of the employment
relationship by Employer is delegated to the Board of Directors of
Employer for determination;
(ii) upon Employee's death; or
(iii) upon Employee's becoming incapacitated by accident,
sickness, or other circumstance which renders him mentally or
physically incapable of performing the duties and services required of
Employee for a period of 120 consecutive days, or for a period of 180
days, regardless of whether or not such days are consecutive, within a
12-month period.
- 3 -
<PAGE> 4
The termination of Employee's employment by Employer prior to the expiration of
the Term shall constitute a "Termination for Cause" if made pursuant to Section
3.1(i); the effect of such termination is specified in Section 3.4. The effect
of the employment relationship being terminated pursuant to Section 3.1(ii) as a
result of Employee's death is specified in Section 3.5. The effect of the
employment relationship being terminated pursuant to Section 3.1(iii) as a
result of the Employee becoming incapacitated is specified in Section 3.6.
3.2 Notwithstanding any other provisions of this Agreement except
Section 6.5, Employee shall have the right to terminate the employment
relationship under this Agreement at any time prior to the expiration of the
Term of employment for any other reason whatsoever, in the sole discretion of
Employee. The termination of Employee's employment by Employee prior to the
expiration of the Term shall constitute a "Voluntary Termination" if made
pursuant to Section 3.2; the effect of such termination is specified in Section
3.3.
3.3 Upon a Voluntary Termination, all future compensation to which
Employee is entitled and all future benefits for which Employee is eligible
shall cease and terminate as of the date of termination. Employee shall be
entitled to pro rata salary through the date of such termination and Employee
shall be entitled to any individual bonuses or individual incentive compensation
earned but not yet paid at the date of such termination. Employee's rights under
this Section are Employee's sole and exclusive rights against Employer or its
affiliates, and Employer's sole and exclusive liability to Employee under this
Agreement, in contract, tort, or otherwise, for any Voluntary Termination.
Employee covenants not to sue or lodge any claim, demand or cause of action
against Employer for any sums for Voluntary Termination other than those sums
specified in this Section.
3.4 Upon a Termination for Cause, all future compensation to which
Employee is entitled and all future benefits for which Employee is eligible
shall cease and terminate as of the date of termination. Employee shall be
entitled to pro rata salary through the date of such termination and Employee
shall be entitled to any individual bonuses or individual incentive compensation
earned but not yet paid at the date of such termination. Employee's rights under
this Section are Employee's sole and exclusive rights against Employer or its
affiliates, and Employer's sole and exclusive liability to Employee under this
Agreement, in contract, tort, or otherwise, for any Termination for Cause.
Employee covenants not to sue or lodge any claim, demand or cause of action
against Employer for any sums for Termination for Cause other than those sums
specified in this Section.
3.5 Upon termination of the employment relationship as a result of
Employee's death, Employee's heirs, administrators, or legatees shall be
entitled to Employee's pro rata salary through the date of such termination and
Employee's heirs, administrators, or legatees shall be entitled to any
individual bonuses or individual incentive compensation earned but not yet paid
to Employee at the date of such termination. The rights of Employee or his
heirs, administrators, or legatees under this Section are the sole and exclusive
rights of Employee, his heirs, administrators, and legatees against Employer or
its affiliates, and Employer's sole and exclusive liability to Employee under
this Agreement, in contract, tort, or otherwise, with respect to such
termination of the employment relationship.
3.6 Upon termination of the employment relationship as a result of
Employee's becoming incapacitated in the manner specified in Section 3.1(iii),
Employee shall be entitled to his pro rata salary through the date of such
termination and Employee shall be entitled to any individual bonuses or
individual incentive compensation earned but not yet paid to
- 4 -
<PAGE> 5
Employee at the date of such termination. The rights of Employee or his heirs,
administrators, or legatees under this Section are the sole and exclusive rights
of Employee, his heirs, administrators, and legatees against Employer or its
affiliates, and Employer's sole and exclusive liability to Employee under this
Agreement, in contract, tort, or otherwise, with respect to such termination of
the employment relationship.
3.7 Termination of the employment relationship does not terminate those
obligations imposed by this Agreement which are continuing obligations,
including, without limitation, Employee's obligations under Articles 4 and 5.
ARTICLE 4: OWNERSHIP AND PROTECTION OF INFORMATION; COPYRIGHTS.
4.1 All information, ideas, concepts, improvements, discoveries, and
inventions, whether patentable or not, which are conceived, made, developed or
acquired by Employee, individually or in conjunction with others, during
Employee's employment by Employer (whether during business hours or otherwise
and whether on Employer's premises or otherwise) which relate to Employer's
business, products or services (including, without limitation, all such
information relating to corporate opportunities, research, financial and sales
data, pricing and trading terms, evaluations, opinions, interpretations,
acquisition prospects, the identity of customers or their requirements, the
identity of key contacts within the customer's organizations or within the
organization of acquisition prospects, or marketing and merchandising
techniques, prospective names, and marks) shall be disclosed to Employer and are
and shall be the sole and exclusive property of Employer. Moreover, all
drawings, memoranda, notes, records, files, correspondence, drawings, manuals,
models, specifications, computer programs, maps and all other writings or
materials of any type embodying any of such information, ideas, concepts,
improvements, discoveries, and inventions are and shall be the sole and
exclusive property of Employer.
4.2 Employee acknowledges that the business of Employer and its
affiliates is highly competitive and that their strategies, methods, books,
records, and documents, their technical information concerning their products,
equipment, services, and processes, procurement procedures and pricing
techniques, the names of and other information (such as credit and financial
data) concerning their customers and business affiliates, all comprise
confidential business information and trade secrets which are valuable, special,
and unique assets which Employer or its affiliates use in their business to
obtain a competitive advantage over their competitors. Employee further
acknowledges that protection of such confidential business information and trade
secrets against unauthorized disclosure and use is of critical importance to
Employer and its affiliates in maintaining their competitive position. Employee
hereby agrees that Employee will not, at any time during or after his employment
by Employer, make any unauthorized disclosure of any confidential business
information or trade secrets of Employer or its affiliates, or make any use
thereof, except in the carrying out of his or her employment responsibilities
hereunder. As a result of Employee's employment by Employer, Employee may also
from time to time have access to, or knowledge of, confidential business
information or trade secrets of third parties, such as customers, suppliers,
partners, joint venturers, and the like, of Employer and its affiliates.
Employee also agrees to preserve and protect the confidentiality of such third
party confidential information and trade secrets to the same extent, and on the
same basis, as Employer's confidential business information and trade secrets.
Employee acknowledges that money damages would not be sufficient remedy for any
breach of this Article 4 by Employee, and Employer shall be entitled to enforce
the provisions of this Article 4 by terminating any
- 5 -
<PAGE> 6
payments then owing to Employee under this Agreement and/or to specific
performance and injunctive relief as remedies for such breach or any threatened
breach. Such remedies shall not be deemed the exclusive remedies for a breach of
this Article 4, but shall be in addition to all remedies available at law or in
equity to Employer, including the recovery of damages from Employee and his
agents involved in such breach.
4.3 All written materials, records, and other documents made by, or
coming into the possession of, Employee during the period of Employee's
employment by Employer which contain or disclose confidential business
information or trade secrets of Employer or its affiliates shall be and remain
the property of Employer or its affiliates, as the case may be. Upon termination
of Employee's employment by Employer, for any reason, Employee promptly shall
deliver the same, and all copies thereof, to Employer.
4.4 If, during Employee's employment by Employer, Employee creates any
original work of authorship fixed in any tangible medium of expression which is
the subject matter of copyright (such as videotapes, written presentations on
acquisitions, computer programs, drawings, maps, architectural renditions,
models, manuals, brochures, or the like) relating to Employer's business,
products, or services, whether such work is created solely by Employee or
jointly with others (whether during business hours or otherwise and whether on
Employer's premises or otherwise), Employee shall disclose such work to
Employer. Employer shall be deemed the author of such work if the work is
prepared by Employee in the scope of his employment; or, if the work is not
prepared by Employee within the scope of his employment but is specially ordered
by Employer as a contribution to a collective work, as a part of a motion
picture or other audiovisual work, as a translation, as a supplementary work, as
a compilation, or as an instructional text, then the work shall be considered to
be work made for hire and Employer shall be the author of the work. If such work
is neither prepared by the Employee within the scope of his employment nor a
work specially ordered and is deemed to be a work made for hire, then Employee
hereby agrees to assign, and by these presents does assign, to Employer all of
Employee's worldwide right, title, and interest in and to such work and all
rights of copyright therein.
4.5 Both during the period of Employee's employment by Employer and
thereafter, Employee shall assist Employer and its nominee, at any time, in the
protection of Employer's worldwide right, title, and interest in and to
information, ideas, concepts, improvements, discoveries, and inventions, and its
copyrighted works, including without limitation, the execution of all formal
assignment documents requested by Employer or its nominee and the execution of
all lawful oaths and applications for applications for patents and registration
of copyright in the United States and foreign countries.
ARTICLE 5: POST-EMPLOYMENT NON-COMPETITION OBLIGATIONS.
5.1 As part of the consideration for the compensation and benefits to
be paid to Employee hereunder, in keeping with Employee's duties as a fiduciary
and in order to protect Employer's interests in the confidential information of
Employer and the business relationships developed by Employee with the clients
and potential clients of Employer, and as an additional incentive for Employer
to enter into this Agreement, Employer and Employee agree to the non-competition
provisions of this Article 5. Employee agrees that during the period of
Employee's non-competition obligations hereunder, Employee will not, directly or
indirectly for Employee or for others, in any geographic area or market where
Employer or any of its affiliated companies are conducting any business as of
the date of
- 6 -
<PAGE> 7
termination of the employment relationship or have during the previous twelve
months conducted any business:
(i) engage in any business competitive with the business
conducted by Employer;
(ii) render advice or services to, or otherwise assist, any
other person, association, or entity who is engaged, directly or
indirectly, in any business competitive with the business conducted by
Employer;
(iii) induce any employee of Employer or any of its
affiliates to terminate his or her employment with Employer or its
affiliates, or hire or assist in the hiring of any such employee by
person, association, or entity not affiliated with Employer.
These non-competition obligations shall be pursuant to the Termination and
Severance Provisions of Exhibit A.
5.2 Employee understands that the foregoing restrictions may limit his
ability to engage in certain businesses anywhere in the world during the period
provided for above, but acknowledges that Employee will receive sufficiently
high remuneration and other benefits under this Agreement to justify such
restriction. Employee acknowledges that money damages would not be sufficient
remedy for any breach of this Article 5 by Employee, and Employer shall be
entitled to enforce the provisions of this Article 5 by terminating any payments
then owing to Employee under this Agreement and/or to specific performance and
injunctive relief as remedies for such breach or any threatened breach. Such
remedies shall not be deemed the exclusive remedies for a breach of this Article
5, but shall be in addition to all remedies available at law or in equity to
Employer, including, without limitation, the recovery of damages from Employee
and his agents involved in such breach.
5.3 It is expressly understood and agreed that Employer and Employee
consider the restrictions contained in this Article 5 to be reasonable and
necessary to protect the proprietary information of Employer. Nevertheless, if
any of the aforesaid restrictions are found by a court having jurisdiction to be
unreasonable, or overly broad as to geographic area or time, or otherwise
unenforceable, the parties intend for the restrictions therein set forth to be
modified by such courts so as to be reasonable and enforceable and, as so
modified by the court, to be fully enforced.
ARTICLE 6: MISCELLANEOUS.
6.1 For purposes of this Agreement the terms "affiliates" or
"affiliated" means an entity who directly, or indirectly through one or more
intermediaries, controls, is controlled by, or is under common control with
Employer.
6.2 Unless otherwise specified, whenever this Agreement requires or
permits any consent, approval, notice, request, or demand from one party to
another, that communication must be in writing (which may be by telecopy) to be
effective and is deemed to have been given (a) if by telecopy, when transmitted
to the appropriate telecopy number (and all communications sent by telecopy must
be confirmed promptly by telephone; but any requirement in this parenthetical
does not affect the date when the telecopy is deemed to have been delivered), or
(b) if by any other means, including by internationally acceptable
- 7 -
<PAGE> 8
courier or hand delivery, when actually delivered. Until changed by notice
pursuant to this Agreement, the addresses (and telecopy numbers) are:
If to Employer: Queen Sand Resources, Inc.
60 Queen Street, Suite 1400
Ottawa, Canada K1P 5Y7
Attn: Edward J. Munden
Facsimile: (613) 230-6055
With copies to: Haynes and Boone, LLP
901 Main Street, Suite 3100
Dallas, Texas 75202
Attn: William L. Boeing, Esq.
Facsimile: (214) 651-5940
If to Employee, to the address shown on the first page hereof.
Either Employer or Employee may furnish a change of address to the other in
writing in accordance herewith, except that notices of changes of address shall
be effective only upon receipt.
6.3 This Agreement shall be governed in all respects by the laws of the
State of Texas, excluding any conflict-of-law rule or principle that might refer
the construction of the Agreement to the laws of another State or country.
6.4 No failure by either party hereto at any time to give notice of any
breach by the other party of, or to require compliance with, any condition or
provision of this Agreement shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same or at any prior or subsequent time.
6.5 If a dispute arises out of or related to this Agreement, other than
a dispute regarding Employee's obligations under Article 4 or Article 5, and if
the dispute cannot be settled through direct discussions, then Employer and
Employee agree to first endeavor to settle the dispute in an amicable manner by
mediation, before having recourse to any other proceeding or forum. Thereafter,
if either party to this Agreement brings legal action to enforce the terms of
this Agreement, the party who prevails in such legal action, whether plaintiff
or defendant, in addition to the remedy or relief obtained in such legal action
shall be entitled to recover its, his, or her expenses incurred in connection
with such legal action, including, without limitation, costs of Court and
attorneys fees.
6.6 It is a desire and intent of the parties that the terms,
provisions, covenants, and remedies contained in this Agreement shall be
enforceable to the fullest extent permitted by law. If any such term, provision,
covenant, or remedy of this Agreement or the application thereof to any person,
association, or entity or circumstances shall, to any extent, be construed to be
invalid or unenforceable in whole or in part, then such term, provision,
covenant, or remedy shall be construed in a manner so as to permit its
enforceability under the applicable law to the fullest extent permitted by law.
In any case, the remaining provisions of this Agreement or the application
thereof to any person, association, or entity or circumstances other than those
to which they have been held invalid or unenforceable, shall remain in full
force and effect.
- 8 -
<PAGE> 9
6.7 This Agreement shall be binding upon and inure to the benefit of
Employer and any other person, association, or entity which may hereafter
acquire or succeed to all or substantially all of the business or assets of
Employer by any means whether direct or indirect, by purchase, merger,
consolidation, or otherwise. Employee's rights and obligations under Agreement
hereof are personal and such rights, benefits, and obligations of Employee shall
not be voluntarily or involuntarily assigned, alienated, or transferred, whether
by operation of law or otherwise, without the prior written consent of Employer.
6.8 There exist other agreements between Employer and Employee relating
to the employment relationship between them, e.g., the agreement with respect to
Employer's policies booklet and agreements with respect to benefit plans. This
Agreement replaces and merges previous agreements and discussions pertaining to
the following subject matters covered herein: the nature of Employee's
employment relationship with Employer and the term and termination of such
relationship. This Agreement constitutes the entire agreement of the parties
with regard to such subject matters, and contains all of the covenants,
promises, representations, warranties, and agreements between the parties with
respect such subject matters. Each party to this Agreement acknowledges that no
representation, inducement, promise, or agreement, oral or written, has been
made by either party with respect to such subject matters, which is not embodied
herein, and that no agreement, statement, or promise relating to the employment
of Employee by Employer that is not contained in this Agreement shall be valid
or binding. Any modification of this Agreement will be effective only if it is
in writing and signed by each party whose rights hereunder are affected thereby,
provided that any such modification must be authorized or approved by the Board
of Directors of Employer.
* * * * *
- 9 -
<PAGE> 10
IN WITNESS WHEREOF, Employer and Employee have duly executed this
Agreement in multiple originals to be effective on the date first stated above.
QUEEN SAND RESOURCES, INC.
By: /s/ Edward J. Munden
-------------------------------------
Name: Edward J. Munden
Title: President and Chief
Executive Officer
/s/ Robert P. Lindsay
-------------------------------------
Robert P. Lindsay
- 10 -
<PAGE> 11
EXHIBIT A
TO
EMPLOYMENT AGREEMENT
The Employer and Employee agree that the Employee will be employed for
the term, title and initial salary amount as specified below. The Employee will
be entitled to other compensation and employee benefit plans and programs
implemented by the Company after the date hereof, which plans and programs may,
but are not required to, include those enumerated in the list immediately below.
I. TERM - Commencing on July 1, 1997 and ending on November 5, 1997
TITLE - Chief Operating Officer
INITIAL SALARY AMOUNT - $10,000 per month
REMUNERATION AND BENEFITS
- Bonuses
- Expense allowance
- Automobile
- Pension
- Key man and other life insurance
- Directors Liability Insurance
- Other (D&O liability insurance)
- Re-negotiation
- Relocation expenses
TERMINATION
SEVERANCE
- 11 -
<PAGE> 1
EXHIBIT 10.26
EXECUTIVE EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement"), including Exhibit A hereto, is
entered into between Queen Sand Resources, Inc., a Delaware corporation having
offices at 3500 Oak Lawn, Suite 380, Dallas, Texas 75219 ("Employer"), and V. Ed
Butler, an individual whose address is 912 Austin, Graham, Texas 76450
("Employee"), to be effective as of June 1, 1997 (the "Effective Date").
WITNESSETH:
WHEREAS, Employer is desirous of employing Employee pursuant to the
terms and conditions and for the consideration set forth in this Agreement, and
Employee is desirous of entering the employ of Employer pursuant to such terms
and conditions and for such consideration.
NOW, THEREFORE, for and in consideration of the mutual promises,
covenants, and obligations contained herein, Employer and Employee agree as
follows:
ARTICLE 1: EMPLOYMENT AND DUTIES.
1.1 Employer agrees to employ Employee, and Employee agrees to be
employed by Employer, beginning as of the Effective Date and continuing until
the date set forth in Exhibit A to this Agreement (the "Term") subject to the
terms and conditions of this Agreement.
1.2 Employee initially shall be employed in the position set forth in
Exhibit A to this Agreement. Employer may subsequently assign Employee to a
different position or modify Employee's duties and responsibilities consistent
with the Employee's existing duties, responsibilities and level of authority.
Employer may assign this Agreement and Employee's employment to any of its
affiliates. Employee agrees to serve in the assigned position and to perform
diligently and to the best of Employee's abilities the duties and services
appertaining to such position as determined by Employer, as well as such
additional or different duties and services appropriate to such position which
Employee from time to time may be reasonably directed to perform by Employer.
Employee shall at all times comply with and be subject to such policies and
procedures as Employer may establish from time to time.
1.3 Employee shall, during the period of Employee's employment by
Employer, devote Employee's full business time, energy, and best efforts to the
business and affairs of Employer. Employee may not engage, directly or
indirectly, in any other business, investment, or activity that interferes with
Employee's performance of Employee's duties hereunder, is contrary to the
interests of Employer, or requires any significant portion of Employee's
business time.
1.4 In connection with Employee's employment by Employer, Employer
shall endeavor to provide Employee access to such confidential information
pertaining to the business and services of Employer as is appropriate for
Employee's employment responsibilities. Employer also shall endeavor to provide
to Employee the opportunity to
<PAGE> 2
develop business relationships with those of Employer's clients and potential
clients that are appropriate for Employee's employment responsibilities.
1.5 Employee acknowledges and agrees that Employee owes a fiduciary
duty of loyalty, fidelity and allegiance to act at all times in the best
interests of the Employer and to do no act which would injure Employer's
business, its interests, or its reputation. It is agreed that any direct or
indirect interest in, connection with, or benefit from any outside activities,
particularly commercial activities, which interest might in any way adversely
affect Employer or any of its affiliates, involves a possible conflict of
interest. In keeping with Employee's fiduciary duties to Employer, Employee
agrees that Employee shall not knowingly become involved in a conflict of
interest with Employer or its affiliates, or upon discovery thereof, allow such
a conflict to continue. Moreover, Employee agrees that Employee shall disclose
to Employer's Board of Directors any facts which might involve such a conflict
of interest.
1.6 Employer and Employee recognize that it is impossible to provide an
exhaustive list of actions or interests that constitute a conflict of interest.
Moreover, Employer and Employee recognize there are many borderline situations.
In some instances, full disclosure of facts by the Employee to Employer's Board
of Directors may be all that is necessary to enable Employer or its affiliates
to protect their interests. In others, if no improper motivation appears to
exist and the interests of Employer or its affiliates have not suffered, prompt
elimination of the outside interest will suffice. In still others, it may be
necessary for Employer to terminate the employment relationship. Employer and
Employee agree that Employer's determination as to whether a conflict of
interest exists shall be conclusive. Employer reserves the right to take such
action as, in its judgment, will end the conflict.
ARTICLE 2: COMPENSATION AND BENEFITS.
2.1 The Employee shall be entitled to receive the salary set forth in
Exhibit A to this Agreement and to participate in any other compensation and
benefit plans referred to on Exhibit A to this Agreement, which benefit plans
are implemented by the Company after the date hereof, in each case to the extent
determined by the Board (or a Compensation Committee thereof).
2.2 While employed by Employer (both during the Term and thereafter),
Employee shall be allowed to participate, on the same basis generally as other
employees of Employer, in all general employee benefit plans and programs,
including improvements or modifications of the same, which on the Effective Date
or thereafter are made available by Employer to all or substantially all of
Employer's employees. Such benefits, plans, and programs may, but are not
required to, include, without limitation, medical, health, and dental care, life
insurance, disability protection, pension plans, relocation, automobile
allowance and directors liability insurance. Nothing in this Agreement is to be
construed or interpreted to provide greater rights, participation, coverage, or
benefits under such benefit plans or programs than provided to similarly
situated employees pursuant to the terms and conditions of such benefit plans
and programs. Employee shall have the right to participate in an incentive
compensation plan for similarly situated employees to be adopted by Employer
(the "Plan"). The Plan shall provide for at least annual awards of cash,
performance shares or units, or other performance- or incentive-based
compensation, or any combination thereof, upon meeting the Employer's targeted
performance objectives for the award year.
- 2 -
<PAGE> 3
2.3 Employer shall not by reason of this Article 2 be obligated to
institute, maintain, or refrain from changing, amending, or discontinuing, any
such incentive compensation or employee benefit program or plan, so long as such
actions are similarly applicable to covered employees generally. Moreover,
unless specifically provided for in a written plan document adopted by the Board
of Directors of Employer, none of the benefits or arrangements described in this
Article 2 shall be secured or funded in any way, and each shall instead
constitute an unfunded and unsecured promise to pay money in the future
exclusively from the general assets of Employer.
2.4 Employer may withhold from any compensation, benefits, or amounts
payable under this Agreement all federal, state, city, or other taxes as may be
required pursuant to any law or governmental regulation or ruling.
2.5 The Employer shall reimburse the Employee for all reasonable,
ordinary and necessary expenses incurred by him in connection with his duties
upon production of receipts and an itemized account; provided, that, the
Employee shall obtain the prior approval of the Board for any expense greater
than $10,000.
ARTICLE 3: TERMINATION PRIOR TO EXPIRATION OF TERM.
3.1 Notwithstanding any other provisions herein to the contrary,
Employer shall have the right to terminate Employee's employment under this
Agreement at any time prior to the expiration of the Term for any of the
following reasons:
(i) For cause upon the good faith determination by the
Employer's Board of Directors that cause exists for the termination of
the employment relationship. As used in this Section 3.1(i), the term
"cause" shall mean (a) Employee has willfully refused without proper
legal reason to perform a duty or responsibility required of Employee
under this Agreement which remains uncorrected for fifteen (15) days
following written notice to Employee by Employer of such breach; (b)
Employee has been convicted of a felony (which, through lapse of time
or otherwise, is not subject to appeal); (c) Employee's involvement in
a conflict of interest as referenced in Sections 1.5 and 1.6 for which
Employer makes a determination to terminate the employment of Employee;
(d) Employee has willfully engaged in conduct that Employee knows or
should know is materially injurious to Employer or any of its
affiliates; or (e) Employee's material breach of any material provision
of this Agreement or corporate code or policy which remains uncorrected
for thirty (30) days following written notice to Employee by Employer
of such breach. It is expressly acknowledged and agreed that the
decision as to whether cause exists for termination of the employment
relationship by Employer is delegated to the Board of Directors of
Employer for determination;
(ii) upon Employee's death; or
(iii) upon Employee's becoming incapacitated by accident,
sickness, or other circumstance which renders him mentally or
physically incapable of performing the duties and services required of
Employee for a period of 120 consecutive days, or for a period of 180
days, regardless of whether or not such days are consecutive, within a
12-month period.
- 3 -
<PAGE> 4
The termination of Employee's employment by Employer prior to the expiration of
the Term shall constitute a "Termination for Cause" if made pursuant to Section
3.1(i); the effect of such termination is specified in Section 3.4. The effect
of the employment relationship being terminated pursuant to Section 3.1(ii) as a
result of Employee's death is specified in Section 3.5. The effect of the
employment relationship being terminated pursuant to Section 3.1(iii) as a
result of the Employee becoming incapacitated is specified in Section 3.6.
3.2 Notwithstanding any other provisions of this Agreement except
Section 6.5, Employee shall have the right to terminate the employment
relationship under this Agreement at any time prior to the expiration of the
Term of employment for any other reason whatsoever, in the sole discretion of
Employee. The termination of Employee's employment by Employee prior to the
expiration of the Term shall constitute a "Voluntary Termination" if made
pursuant to Section 3.2; the effect of such termination is specified in Section
3.3.
3.3 Upon a Voluntary Termination, all future compensation to which
Employee is entitled and all future benefits for which Employee is eligible
shall cease and terminate as of the date of termination. Employee shall be
entitled to pro rata salary through the date of such termination and Employee
shall be entitled to any individual bonuses or individual incentive compensation
earned but not yet paid at the date of such termination. Employee's rights under
this Section are Employee's sole and exclusive rights against Employer or its
affiliates, and Employer's sole and exclusive liability to Employee under this
Agreement, in contract, tort, or otherwise, for any Voluntary Termination.
Employee covenants not to sue or lodge any claim, demand or cause of action
against Employer for any sums for Voluntary Termination other than those sums
specified in this Section.
3.4 Upon a Termination for Cause, all future compensation to which
Employee is entitled and all future benefits for which Employee is eligible
shall cease and terminate as of the date of termination. Employee shall be
entitled to pro rata salary through the date of such termination and Employee
shall be entitled to any individual bonuses or individual incentive compensation
earned but not yet paid at the date of such termination. Employee's rights under
this Section are Employee's sole and exclusive rights against Employer or its
affiliates, and Employer's sole and exclusive liability to Employee under this
Agreement, in contract, tort, or otherwise, for any Termination for Cause.
Employee covenants not to sue or lodge any claim, demand or cause of action
against Employer for any sums for Termination for Cause other than those sums
specified in this Section.
3.5 Upon termination of the employment relationship as a result of
Employee's death, Employee's heirs, administrators, or legatees shall be
entitled to Employee's pro rata salary through the date of such termination and
Employee's heirs, administrators, or legatees shall be entitled to any
individual bonuses or individual incentive compensation earned but not yet paid
to Employee at the date of such termination. The rights of Employee or his
heirs, administrators, or legatees under this Section are the sole and exclusive
rights of Employee, his heirs, administrators, and legatees against Employer or
its affiliates, and Employer's sole and exclusive liability to Employee under
this Agreement, in contract, tort, or otherwise, with respect to such
termination of the employment relationship.
3.6 Upon termination of the employment relationship as a result of
Employee's becoming incapacitated in the manner specified in Section 3.1(iii),
Employee shall be entitled to his pro rata salary through the date of such
termination and Employee shall be entitled to any individual bonuses or
individual incentive compensation earned but not yet paid to
- 4 -
<PAGE> 5
Employee at the date of such termination. The rights of Employee or his heirs,
administrators, or legatees under this Section are the sole and exclusive rights
of Employee, his heirs, administrators, and legatees against Employer or its
affiliates, and Employer's sole and exclusive liability to Employee under this
Agreement, in contract, tort, or otherwise, with respect to such termination of
the employment relationship.
3.7 Termination of the employment relationship does not terminate those
obligations imposed by this Agreement which are continuing obligations,
including, without limitation, Employee's obligations under Articles 4 and 5.
ARTICLE 4: OWNERSHIP AND PROTECTION OF INFORMATION; COPYRIGHTS.
4.1 All information, ideas, concepts, improvements, discoveries, and
inventions, whether patentable or not, which are conceived, made, developed or
acquired by Employee, individually or in conjunction with others, during
Employee's employment by Employer (whether during business hours or otherwise
and whether on Employer's premises or otherwise) which relate to Employer's
business, products or services (including, without limitation, all such
information relating to corporate opportunities, research, financial and sales
data, pricing and trading terms, evaluations, opinions, interpretations,
acquisition prospects, the identity of customers or their requirements, the
identity of key contacts within the customer's organizations or within the
organization of acquisition prospects, or marketing and merchandising
techniques, prospective names, and marks) shall be disclosed to Employer and are
and shall be the sole and exclusive property of Employer. Moreover, all
drawings, memoranda, notes, records, files, correspondence, drawings, manuals,
models, specifications, computer programs, maps and all other writings or
materials of any type embodying any of such information, ideas, concepts,
improvements, discoveries, and inventions are and shall be the sole and
exclusive property of Employer.
4.2 Employee acknowledges that the business of Employer and its
affiliates is highly competitive and that their strategies, methods, books,
records, and documents, their technical information concerning their products,
equipment, services, and processes, procurement procedures and pricing
techniques, the names of and other information (such as credit and financial
data) concerning their customers and business affiliates, all comprise
confidential business information and trade secrets which are valuable, special,
and unique assets which Employer or its affiliates use in their business to
obtain a competitive advantage over their competitors. Employee further
acknowledges that protection of such confidential business information and trade
secrets against unauthorized disclosure and use is of critical importance to
Employer and its affiliates in maintaining their competitive position. Employee
hereby agrees that Employee will not, at any time during or after his employment
by Employer, make any unauthorized disclosure of any confidential business
information or trade secrets of Employer or its affiliates, or make any use
thereof, except in the carrying out of his or her employment responsibilities
hereunder. As a result of Employee's employment by Employer, Employee may also
from time to time have access to, or knowledge of, confidential business
information or trade secrets of third parties, such as customers, suppliers,
partners, joint venturers, and the like, of Employer and its affiliates.
Employee also agrees to preserve and protect the confidentiality of such third
party confidential information and trade secrets to the same extent, and on the
same basis, as Employer's confidential business information and trade secrets.
Employee acknowledges that money damages would not be sufficient remedy for any
breach of this Article 4 by Employee, and Employer shall be entitled to enforce
the provisions of this Article 4 by terminating any
- 5 -
<PAGE> 6
payments then owing to Employee under this Agreement and/or to specific
performance and injunctive relief as remedies for such breach or any threatened
breach. Such remedies shall not be deemed the exclusive remedies for a breach of
this Article 4, but shall be in addition to all remedies available at law or in
equity to Employer, including the recovery of damages from Employee and his
agents involved in such breach.
4.3 All written materials, records, and other documents made by, or
coming into the possession of, Employee during the period of Employee's
employment by Employer which contain or disclose confidential business
information or trade secrets of Employer or its affiliates shall be and remain
the property of Employer or its affiliates, as the case may be. Upon termination
of Employee's employment by Employer, for any reason, Employee promptly shall
deliver the same, and all copies thereof, to Employer.
4.4 If, during Employee's employment by Employer, Employee creates any
original work of authorship fixed in any tangible medium of expression which is
the subject matter of copyright (such as videotapes, written presentations on
acquisitions, computer programs, drawings, maps, architectural renditions,
models, manuals, brochures, or the like) relating to Employer's business,
products, or services, whether such work is created solely by Employee or
jointly with others (whether during business hours or otherwise and whether on
Employer's premises or otherwise), Employee shall disclose such work to
Employer. Employer shall be deemed the author of such work if the work is
prepared by Employee in the scope of his employment; or, if the work is not
prepared by Employee within the scope of his employment but is specially ordered
by Employer as a contribution to a collective work, as a part of a motion
picture or other audiovisual work, as a translation, as a supplementary work, as
a compilation, or as an instructional text, then the work shall be considered to
be work made for hire and Employer shall be the author of the work. If such work
is neither prepared by the Employee within the scope of his employment nor a
work specially ordered and is deemed to be a work made for hire, then Employee
hereby agrees to assign, and by these presents does assign, to Employer all of
Employee's worldwide right, title, and interest in and to such work and all
rights of copyright therein.
4.5 Both during the period of Employee's employment by Employer and
thereafter, Employee shall assist Employer and its nominee, at any time, in the
protection of Employer's worldwide right, title, and interest in and to
information, ideas, concepts, improvements, discoveries, and inventions, and its
copyrighted works, including without limitation, the execution of all formal
assignment documents requested by Employer or its nominee and the execution of
all lawful oaths and applications for applications for patents and registration
of copyright in the United States and foreign countries.
ARTICLE 5: POST-EMPLOYMENT NON-COMPETITION OBLIGATIONS.
5.1 As part of the consideration for the compensation and benefits to
be paid to Employee hereunder, in keeping with Employee's duties as a fiduciary
and in order to protect Employer's interests in the confidential information of
Employer and the business relationships developed by Employee with the clients
and potential clients of Employer, and as an additional incentive for Employer
to enter into this Agreement, Employer and Employee agree to the non-competition
provisions of this Article 5. Employee agrees that during the period of
Employee's non-competition obligations hereunder, Employee will not, directly or
indirectly for Employee or for others, in any geographic area or market where
Employer or any of its affiliated companies are conducting any business as of
the date of
- 6 -
<PAGE> 7
termination of the employment relationship or have during the previous twelve
months conducted any business:
(i) engage in any business competitive with the business
conducted by Employer;
(ii) render advice or services to, or otherwise assist, any
other person, association, or entity who is engaged, directly or
indirectly, in any business competitive with the business conducted by
Employer;
(iii) induce any employee of Employer or any of its
affiliates to terminate his or her employment with Employer or its
affiliates, or hire or assist in the hiring of any such employee by
person, association, or entity not affiliated with Employer.
These non-competition obligations shall be pursuant to the Termination and
Severance Provisions of Exhibit A.
5.2 Employee understands that the foregoing restrictions may limit his
ability to engage in certain businesses anywhere in the world during the period
provided for above, but acknowledges that Employee will receive sufficiently
high remuneration and other benefits under this Agreement to justify such
restriction. Employee acknowledges that money damages would not be sufficient
remedy for any breach of this Article 5 by Employee, and Employer shall be
entitled to enforce the provisions of this Article 5 by terminating any payments
then owing to Employee under this Agreement and/or to specific performance and
injunctive relief as remedies for such breach or any threatened breach. Such
remedies shall not be deemed the exclusive remedies for a breach of this Article
5, but shall be in addition to all remedies available at law or in equity to
Employer, including, without limitation, the recovery of damages from Employee
and his agents involved in such breach.
5.3 It is expressly understood and agreed that Employer and Employee
consider the restrictions contained in this Article 5 to be reasonable and
necessary to protect the proprietary information of Employer. Nevertheless, if
any of the aforesaid restrictions are found by a court having jurisdiction to be
unreasonable, or overly broad as to geographic area or time, or otherwise
unenforceable, the parties intend for the restrictions therein set forth to be
modified by such courts so as to be reasonable and enforceable and, as so
modified by the court, to be fully enforced.
ARTICLE 6: MISCELLANEOUS.
6.1 For purposes of this Agreement the terms "affiliates" or
"affiliated" means an entity who directly, or indirectly through one or more
intermediaries, controls, is controlled by, or is under common control with
Employer.
6.2 Unless otherwise specified, whenever this Agreement requires or
permits any consent, approval, notice, request, or demand from one party to
another, that communication must be in writing (which may be by telecopy) to be
effective and is deemed to have been given (a) if by telecopy, when transmitted
to the appropriate telecopy number (and all communications sent by telecopy must
be confirmed promptly by telephone; but any requirement in this parenthetical
does not affect the date when the telecopy is deemed to have been delivered), or
(b) if by any other means, including by internationally acceptable
- 7 -
<PAGE> 8
courier or hand delivery, when actually delivered. Until changed by notice
pursuant to this Agreement, the addresses (and telecopy numbers) are:
If to Employer: Queen Sand Resources, Inc.
3500 Oak Lawn, Suite 380, L.B.#31
Dallas, Texas 75219-4398
Attn: Robert P. Lindsay
Facsimile: (214) 521-9960
With copies to: Queen Sand Resources, Inc.
60 Queen Street, Suite 1400
Ottawa, Canada K1P 5Y7
Attn: Edward J. Munden
Facsimile: (613) 230-6055
Haynes and Boone, LLP
901 Main Street, Suite 3100
Dallas, Texas 75202
Attn: William L. Boeing, Esq.
Facsimile: (214) 651-5940
If to Employee, to the address shown on the first page hereof.
Either Employer or Employee may furnish a change of address to the other in
writing in accordance herewith, except that notices of changes of address shall
be effective only upon receipt.
6.3 This Agreement shall be governed in all respects by the laws of the
State of Texas, excluding any conflict-of-law rule or principle that might refer
the construction of the Agreement to the laws of another State or country.
6.4 No failure by either party hereto at any time to give notice of any
breach by the other party of, or to require compliance with, any condition or
provision of this Agreement shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same or at any prior or subsequent time.
6.5 If a dispute arises out of or related to this Agreement, other than
a dispute regarding Employee's obligations under Article 4 or Article 5, and if
the dispute cannot be settled through direct discussions, then Employer and
Employee agree to first endeavor to settle the dispute in an amicable manner by
mediation, before having recourse to any other proceeding or forum. Thereafter,
if either party to this Agreement brings legal action to enforce the terms of
this Agreement, the party who prevails in such legal action, whether plaintiff
or defendant, in addition to the remedy or relief obtained in such legal action
shall be entitled to recover its, his, or her expenses incurred in connection
with such legal action, including, without limitation, costs of Court and
attorneys fees.
6.6 It is a desire and intent of the parties that the terms,
provisions, covenants, and remedies contained in this Agreement shall be
enforceable to the fullest extent permitted by law. If any such term, provision,
covenant, or remedy of this Agreement or the application thereof to any person,
association, or entity or circumstances shall, to any extent, be construed to be
invalid or unenforceable in whole or in part, then such term, provision,
- 8 -
<PAGE> 9
covenant, or remedy shall be construed in a manner so as to permit its
enforceability under the applicable law to the fullest extent permitted by law.
In any case, the remaining provisions of this Agreement or the application
thereof to any person, association, or entity or circumstances other than those
to which they have been held invalid or unenforceable, shall remain in full
force and effect.
6.7 This Agreement shall be binding upon and inure to the benefit of
Employer and any other person, association, or entity which may hereafter
acquire or succeed to all or substantially all of the business or assets of
Employer by any means whether direct or indirect, by purchase, merger,
consolidation, or otherwise. Employee's rights and obligations under Agreement
hereof are personal and such rights, benefits, and obligations of Employee shall
not be voluntarily or involuntarily assigned, alienated, or transferred, whether
by operation of law or otherwise, without the prior written consent of Employer.
6.8 There exist other agreements between Employer and Employee relating
to the employment relationship between them, e.g., the agreement with respect to
Employer's policies booklet and agreements with respect to benefit plans. This
Agreement replaces and merges previous agreements and discussions pertaining to
the following subject matters covered herein: the nature of Employee's
employment relationship with Employer and the term and termination of such
relationship. This Agreement constitutes the entire agreement of the parties
with regard to such subject matters, and contains all of the covenants,
promises, representations, warranties, and agreements between the parties with
respect such subject matters. Each party to this Agreement acknowledges that no
representation, inducement, promise, or agreement, oral or written, has been
made by either party with respect to such subject matters, which is not embodied
herein, and that no agreement, statement, or promise relating to the employment
of Employee by Employer that is not contained in this Agreement shall be valid
or binding. Any modification of this Agreement will be effective only if it is
in writing and signed by each party whose rights hereunder are affected thereby,
provided that any such modification must be authorized or approved by the Board
of Directors of Employer.
* * * * *
- 9 -
<PAGE> 10
IN WITNESS WHEREOF, Employer and Employee have duly executed this
Agreement in multiple originals to be effective on the date first stated above.
QUEEN SAND RESOURCES, INC.
By: /s/ Robert P. Lindsay
----------------------------------
Name: Robert P. Lindsay
Title: Chief Operating Officer
/s/ V. Ed Butler
----------------------------------
V. Ed Butler
- 10 -
<PAGE> 11
EXHIBIT A
TO
EMPLOYMENT AGREEMENT
The Employer and Employee agree that the Employee will be employed for
the term, title and initial salary amount as specified below. The Employee will
be entitled to other compensation and employee benefit plans and programs
implemented by the Company after the date hereof, which plans and programs may,
but are not required to, include those enumerated in the list immediately below.
I. TERM - Commencing on June 1, 1997 and ending on November 5, 1997
TITLE - Vice President, Engineering
INITIAL SALARY AMOUNT - $9,166.66 per month
REMUNERATION AND BENEFITS
- Bonuses
- Expense allowance
- Automobile
- Pension
- Key man and other life insurance
- Directors Liability Insurance
- Other (D&O liability insurance)
- Re-negotiation
- Relocation expenses
TERMINATION
SEVERANCE
- 11 -
<PAGE> 1
EXHIBIT 10.28
GUARANTY AGREEMENT
Dated as of August 1, 1997
By
QUEEN SAND RESOURCES, INC.,
as the Guarantor,
in favor of
BANK OF MONTREAL,
as Agent,
and
THE LENDERS NOW OR HEREAFTER SIGNATORY TO THE CREDIT AGREEMENT
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I
Definitions and Accounting Matters
Section 1.01 Terms Defined Above...................................................... 1
Section 1.02 Certain Definitions...................................................... 1
Section 1.03 Credit Agreement Definitions............................................. 2
ARTICLE II
The Guaranty
Section 2.01 Obligations Guaranteed................................................... 2
Section 2.02 Nature of Guaranty....................................................... 2
Section 2.03 Lenders' Rights.......................................................... 2
Section 2.04 Guarantor's Waivers...................................................... 3
Section 2.05 Maturity of Obligations; Payment......................................... 3
Section 2.06 Lenders' Expenses........................................................ 3
Section 2.07 Obligation............................................................... 3
Section 2.08 Events and Circumstances Not Reducing or Discharging the Guarantor's
Obligations.............................................................. 3
Section 2.09 Subrogation.............................................................. 5
ARTICLE III
Representations and Warranties; Covenants
Section 3.01 Representations and Warranties........................................... 5
Section 3.02 Covenants................................................................ 7
ARTICLE IV
Subordination of Indebtedness
Section 4.01 Subordination of All Guarantor Claims.................................... 8
Section 4.02 Claims in Bankruptcy..................................................... 9
Section 4.03 Payments Held in Trust................................................... 9
Section 4.04 Liens Subordinate........................................................ 9
Section 4.05 Notation of Records...................................................... 9
ARTICLE V
Miscellaneous
Section 5.01 Successors and Assigns................................................... 10
Section 5.02 Notices.................................................................. 10
Section 5.03 Authority of Agent....................................................... 10
Section 5.04 Governing Law; Submission to Jurisdiction................................ 10
Section 5.05 Entire Agreement......................................................... 11
Section 5.06 Survival of Obligations.................................................. 11
Section 5.07 Designated Senior Indebtedness........................................... 11
</TABLE>
i
<PAGE> 3
GUARANTY AGREEMENT
This GUARANTY AGREEMENT dated as of August 1, 1997 is by QUEEN
SAND RESOURCES, INC., a corporation duly organized and validly existing under
the laws of the state of Delaware ("Guarantor"), in favor of each of the
following: each of the financial institutions that is now or hereafter a
signatory to the Credit Agreement (as defined below) (individually, a "Lender"
and, collectively, the "Lenders"); and BANK OF MONTREAL, AS AGENT for the
Lenders (in such capacity, the "Agent").
RECITALS
A. QUEEN SAND RESOURCES, INC., a corporation duly organized and validly
existing under the laws of the state of Nevada (the "Borrower"), the Agent and
the Lenders have executed that certain Credit Agreement of even date herewith
(such credit agreement, as amended, the "Credit Agreement").
B. One of the terms and conditions stated in the Credit Agreement for
the making of the loans and extensions of credit described in the Credit
Agreement is the execution and delivery to the Agent and the Lenders of this
Guaranty Agreement.
C. NOW, THEREFORE, (i) in order to comply with the terms and conditions
of the Credit Agreement, (ii) to induce the Lenders, at any time or from time to
time, to loan monies, with or without security to or for the account of the
Borrower in accordance with the terms of the Credit Agreement, and (iii) for
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the Guarantor hereby agrees as follows:
ARTICLE I
DEFINITIONS AND ACCOUNTING MATTERS
SECTION 1.01 TERMS DEFINED ABOVE. As used in This Guaranty Agreement,
the terms "Agent", "Borrower", "Credit Agreement", "Guarantor", "Lender" and
"Lenders" shall have the meanings indicated above.
SECTION 1.02 CERTAIN DEFINITIONS. As used in this Guaranty Agreement,
the following terms shall have the following meanings, unless the context
otherwise requires:
"Guarantor Claims" shall have the meaning indicated in Section 4.01.
"Guaranty Agreement" shall mean this Guaranty Agreement, as the same
may from time to time be amended or supplemented.
"Obligations" shall mean (a) the payment and performance of all present
and future indebtedness, obligations and liabilities of the Borrower and/or the
Guarantor to the Agent and the Lenders under the Credit Agreement, including but
not limited to, (i) the full and punctual payment of the Notes issued
thereunder, and any and all promissory notes given in substitution for such
Notes or in modification, renewal, extension or rearrangement thereof in whole
or in part, and (ii) the reimbursement and other obligations of the Borrower
under and with respect to Letters of Credit and Letter of Credit Agreements now
outstanding or hereafter issued under the Credit Agreement; (b) all obligations
of the Guarantor under this Guaranty Agreement; and (c) all interest (whether
pre or post petition), charges, expenses,
1
<PAGE> 4
reasonable attorneys' or other fees and any other sums payable to or incurred by
the Agent and, to the extent provided in the Credit Agreement, the Lenders in
connection with the execution or enforcement of any of their rights and remedies
hereunder or any other Security Instrument.
SECTION 1.03 CREDIT AGREEMENT DEFINITIONS. Unless otherwise defined
herein, all terms beginning with a capital letter which are defined in the
Credit Agreement shall have the same meanings herein as therein.
ARTICLE II
THE GUARANTY
SECTION 2.01 OBLIGATIONS GUARANTEED. The Guarantor hereby irrevocably
and unconditionally guarantees the prompt payment at maturity of the
Obligations.
SECTION 2.02 NATURE OF GUARANTY. This guaranty is an absolute,
irrevocable, completed and continuing guaranty of payment and not a guaranty of
collection, and no notice of the Obligations or any extension of credit already
or hereafter contracted by or extended to the Borrower need be given to the
Guarantor. The guaranty evidenced hereby is joint and several with all other
guarantees of the Obligations. This guaranty may not be revoked by the Guarantor
and shall continue to be effective with respect to debt under the Obligations
arising or created after any attempted revocation by the Guarantor and shall
remain in full force and effect until the Obligations are paid in full and the
Aggregate Commitments are terminated, notwithstanding that from time to time
prior thereto no Obligations may be outstanding. The Borrower, the Agent and the
Lenders may modify, alter, rearrange, extend for any period and/or renew from
time to time, the Obligations and the Agent and the Lenders may waive any
Default or Events of Default without notice to the Guarantor and in such event
the Guarantor will remain fully bound hereunder on the Obligations. This
Guaranty Agreement may be enforced by the Agent and/or the Lenders and any
subsequent holder of the Obligations and shall not be discharged by the
assignment or negotiation of all or part of the Obligations. The Guarantor
hereby expressly waives presentment, demand, notice of non-payment, protest and
notice of protest and dishonor, notice of Event of Default, notice of intent to
accelerate the maturity and notice of acceleration of the maturity and any other
notice in connection with the Obligations, and also notice of acceptance of this
Guaranty Agreement, acceptance on the part of the Agent and the Lenders being
conclusively presumed by their request for this Guaranty Agreement and delivery
of the same to the Agent.
SECTION 2.03 LENDERS' RIGHTS. Subject to the terms of the Credit
Agreement, the Guarantor authorizes the Lenders (or the Agent on behalf of the
Lenders), without notice or demand and without affecting the Guarantor's
obligation hereunder, to take and hold security for the payment of the
Obligations, and exchange, enforce, waive and release any such security; and to
apply such security and direct the order or manner of sale thereof as the Agent
and the Lenders in their discretion may determine; and to obtain a guaranty of
the Obligations from any one or more Persons and at any time or times to
enforce, waive, rear range, modify, limit or release any of such other Persons
from their obligations under such guaranties.
2
<PAGE> 5
SECTION 2.04 GUARANTOR'S WAIVERS. The Guarantor waives any right to
require the Agent and the Lenders to (a) proceed against the Borrower or any
other Person liable on the Obligations, (b) enforce their rights against any
other guarantor of the Obligations, (c) proceed or enforce their rights against
or exhaust any security given to secure the Obligations, (d) have the Borrower
joined with the Guarantor in any suit arising out of this Guaranty Agreement
and/or the Obligations, or (e) pursue any other remedy whatsoever. Neither the
Agent nor the Lenders shall be required to mitigate damages or take any action
to reduce, collect or enforce the Obligations. The Guarantor waives any defense
arising by reason of any disability, lack of corporate authority or power, or
other defense of the Borrower or any other guarantor of the Obligations, and
shall remain liable hereon regardless of whether the Borrower or any other
guarantor be found not liable thereon for any reason.
SECTION 2.05 MATURITY OF OBLIGATIONS; PAYMENT. The Guarantor agrees
that if the maturity of the Obligations is accelerated by bankruptcy or
otherwise, such maturity shall also be deemed accelerated for the purpose of
this Guaranty Agreement without demand or notice to the Guarantor. The Guarantor
will, forthwith upon notice from the Agent of the Borrower's failure to pay the
Obligations at maturity, pay to the Agent for the benefit of the Agent and the
Lenders at the Agent's Principal Office, the amount due and unpaid by the
Borrower and guaranteed hereby. The failure of the Agent to give this notice
shall not in any way release the Guarantor hereunder.
SECTION 2.06 LENDERS' EXPENSES. If the Guarantor fails to pay the
Obligations after notice from the Agent of the Borrower's failure to pay any
Obligations at maturity (whether by acceleration or otherwise), and if
thereafter the Agent or the Lenders obtain the services of an attorney for
collection of amounts owing by the Guarantor hereunder or if suit is filed to
enforce this Guaranty Agreement, or if proceedings are had in any bankruptcy,
receivership or other judicial proceedings for the establishment or collection
of any amount owing by the Guarantor hereunder, or if any amount owing by the
Guarantor hereunder is collected through such proceedings, the Guarantor agrees
to pay to the Agent at its Principal Office, the reasonable attorneys' fees of
the Agent and the Lenders.
SECTION 2.07 OBLIGATION. It is expressly agreed that the obligation of
the Guarantor for the payment of the Obligations guaranteed hereby shall be
primary and not secondary.
SECTION 2.08 EVENTS AND CIRCUMSTANCES NOT REDUCING OR DISCHARGING THE
GUARANTOR'S OBLIGATIONS. The Guarantor hereby consents and agrees to each of the
following to the fullest extent permitted by law, agrees its obligations under
this Guaranty Agreement shall not be released, diminished, impaired, reduced or
adversely affected by any of the following, and waives any rights (including
without limitation rights to notice) which it might otherwise have as a result
of or in connection with any of the following:
(a) Modifications, etc. Any renewal, extension, modification, or
increase in the amount of the Aggregate Commitments as in effect on the
Effective Date, decrease, alteration or rearrangement of all or any part of the
Obligations, any Security Instrument or any instrument executed in connection
therewith, or any contract or understanding between the Borrower, any Agent
and/or the Lenders, or any other Person, pertaining to the Obligations;
3
<PAGE> 6
(b) Adjustment, etc. Any adjustment, indulgence, forbearance or
compromise that might be granted or given by the Agent or the Lenders to the
Borrower or the Guarantor or any Person liable on the Obligations;
(c) Condition of the Borrower or the Guarantor. The insolvency,
bankruptcy arrangement, reorganization, adjustment, composition, liquidation,
disability, dissolution or lack of power of the Borrower or the Guarantor or any
other Person at any time liable for the payment of all or part of the
Obligations; or any sale, lease or transfer of any or all of the assets of the
Borrower or the Guarantor, or any changes in the shareholders of the Borrower or
the Guarantor;
(d) Invalidity of Obligations. The invalidity, illegality or
unenforceability of all or any part of the Obligations or any Security
Instrument, including the Notes, for any reason whatsoever, including without
limitation the fact that the Obligations, or any part thereof, exceed the amount
permitted by law, the act of creating the Obligations or any part thereof is
ultra vires, the officers or representatives executing any Security Instrument
acted in excess of their authority, the Obligations violate applicable usury
laws, the Borrower has valid defenses, claims or offsets (whether at law, in
equity or by agreement) which render the Obligations wholly or partially
uncollectible from the Borrower, the creation, performance or repayment of the
Obligations (or the execution, delivery and performance of any Security
Instrument) is illegal, uncollectible, legally impossible or unenforceable, or
the Credit Agreement, the Notes or other Security Instruments have been forged
or otherwise are irregular or not genuine or authentic;
(e) Release of Obligors. Any full or partial release of the obligation
of the Borrower on the Obligations or any part thereof, of any co-guarantors, or
any other Person now or hereafter liable, whether directly or indirectly,
jointly, severally, or jointly and severally, to pay, perform, guarantee or
assure the payment of the Obligations or any part thereof, it being recognized,
acknowledged and agreed by the Guarantor that the Guarantor may be required to
pay the Obligations in full without assistance or support of any other Person,
and the Guarantor has not been induced to enter into this Guaranty Agreement on
the basis of a contemplation, belief, understanding or agreement that other
parties other than the Borrower will be liable to perform the Obligations, or
that the Agent and Lenders will look to other parties to perform the
Obligations;
(f) Other Security. The taking or accepting of any other security,
collateral or guaranty, or other assurance of payment, for all or any part of
the Obligations;
(g) Release of Collateral, etc. Any release, surrender, exchange,
subordination, deterioration, waste, loss or impairment (including without
limitation negligent, willful, unreasonable or unjustifiable impairment) of any
collateral, Property or security, at any time existing in connection with, or
assuring or securing payment of, all or any part of the Obligations;
(h) Care and Diligence. The failure of any Agent or Lender or any other
Person to exercise diligence or reasonable care in the preservation, protection,
enforcement, sale or other handling or treatment of all or any part of such
collateral, Property or security;
4
<PAGE> 7
(i) Status of Liens. The fact that any collateral, security or Lien
contemplated or intended to be given, created or granted as security for the
repayment of the Obligations shall not be properly perfected or created, or
shall prove to be unenforceable or subordinate to any other Lien, it being
recognized and agreed by the Guarantor that the Guarantor is not entering into
this Guaranty Agreement in reliance on, or in contemplation of the benefits of,
the validity, enforceability, collectability or value of any of the collateral
for the Obligations;
(j) Payments Rescinded. Any payment by the Borrower to any Agent or
Lender is held to constitute a preference under the bankruptcy laws, or for any
reason an Agent or Lender is required to refund such payment or pay such amount
to the Borrower or someone else; or
(k) Other Actions Taken or Omitted. Any other action taken or omitted
to be taken with respect to the Credit Agreement or the other Security
Instruments, the Obligations, or the security and collateral therefor, whether
or not such action or omission prejudices the Guarantor or increases the
likelihood that the Guarantor will be required to pay the Obligations pursuant
to the terms hereof; it being the unambiguous and unequivocal intention of the
Guarantor that the Guarantor shall be obligated to pay the Obligations when due,
notwithstanding any occurrence, circumstance, event, action, or omission
whatsoever, whether contemplated or uncontemplated, and whether or not otherwise
or particularly described herein, except for the full and final payment and
satisfaction of the Obligations.
SECTION 2.09 SUBROGATION. The Guarantor shall not exercise any rights
which it may acquire by way of subrogation, reimbursement, exoneration,
indemnification or participation, by any payment made under this Guaranty
Agreement, under any other Security Instrument or otherwise until the
Obligations have been paid in full and the Aggregate Commitments are terminated;
provided that, notwithstanding the foregoing, the Guarantor reserves its rights
of contribution and reimbursement, if any, from its co-guarantors and other
Persons liable on the Obligations or otherwise. Except as described in this
Section 2.10, the Guarantor further waives any benefit of any right to
participate in any security now or hereafter held by the Agent and/or the
Lenders.
ARTICLE III
REPRESENTATIONS AND WARRANTIES; COVENANTS
SECTION 3.01 REPRESENTATIONS AND WARRANTIES. In order to induce the
Agent and the Lenders to accept this Guaranty Agreement, the Guarantor
represents and warrants to the Agent and the Lenders (which representations and
warranties will survive the creation of the Obligations and any extension of
credit thereunder) that:
(a) Benefit to the Guarantor. The Borrower is a wholly-owned Subsidiary
of the Guarantor and the Guarantor's guaranty pursuant to this Guaranty
Agreement reasonably may be expected to benefit, directly or indirectly, the
Guarantor; and the Guarantor has determined that this Guaranty Agreement is
necessary and convenient to the conduct, promotion and attainment of the
business of the Guarantor and the Borrower.
5
<PAGE> 8
(b) Corporate Existence; Subsidiaries. The Guarantor: (i) is duly
organized and validly existing under the laws of the jurisdiction of its
formation; (ii) has all requisite power, and has all material governmental
licenses, authorizations, consents and approvals necessary to own its assets and
carry on its business as now being conducted; and (iii) is qualified to do
business in all jurisdictions in which the nature of the business conducted by
it makes such qualification necessary and where failure so to qualify would have
a Material Adverse Effect. Schedule I attached hereto is a true and complete
list of all Subsidiaries of the Guarantor as of the Closing Date.
(c) No Breach. The execution and delivery by the Guarantor of this
Guaranty Agreement and the other Security Instruments to which it is a party,
the consummation of the transactions herein or therein contemplated, and the
compliance with the terms and provisions hereof will not (i) conflict with or
result in a breach of, or require any consent under (A) the respective charter
or by-laws of the Guarantor, or (B) any applicable law or regulation, or any
order, writ, injunction or decree of any court or other Governmental Authority,
or any material agreement or instrument to which the Guarantor is a party or by
which it is bound or to which it is subject in each case in such manner as could
reasonably be expected to have a Material Adverse Effect; or (ii) constitute a
default under any such agreement or instrument, or result in the creation or
imposition of any Lien upon any of the revenues or Property of the Guarantor in
each case in such manner as could reasonably be expected to have a Material
Adverse Effect.
(d) Corporate Action. The Guarantor has all necessary corporate power
and authority to execute, deliver and perform its obligations under this
Guaranty Agreement and the Security Instruments to which it is a party; and the
execution, delivery and performance by the Guarantor of this Guaranty Agreement
and the other Security Instruments to which such Person is a party have been
duly authorized by all necessary corporate action on its part. This Guaranty
Agreement and the Security Instruments to which the Guarantor is a party
constitute the legal, valid and binding obligation of the Guarantor, enforceable
against the Guarantor in accordance with their terms, except as may be limited
by applicable bankruptcy, insolvency, reorganization or other similar laws
affecting creditors' rights and general principals of equity.
(e) Approvals. Other than consents heretofore obtained or described in
the Credit Agreement, no authorizations, approvals or consents of, and no
filings or registrations with, any Governmental Authority are necessary for the
execution, delivery or performance by the Guarantor of this Guaranty Agreement
or the Security Instruments to which it is a party or for the validity or
enforceability thereof. It is understood that continued performance by the
Guarantor of this Guaranty Agreement and the other Security Instruments to which
it is a party will require various filings, such as filings related to
environmental matters, ERISA matters, Taxes and intellectual property, filings
required to maintain corporate and similar standing and existence, filings
pursuant to the Uniform Commercial Code and other security filings and
recordings and filings required by the SEC, routine filings in the ordinary
course of business, and filings required in connection with the exercise by the
Lenders and the Agent of remedies in connection with the Security Instruments.
6
<PAGE> 9
(f) Solvency. The Guarantor (i) is not insolvent as of the date hereof
and will not be rendered insolvent as a result of this Guaranty Agreement, (ii)
is not engaged in business or a transaction, or about to engage in a business or
a transaction, for which any Property or assets remaining with the Guarantor is
unreasonably small capital, and (iii) does not intend to incur, or believe it
will incur, debts that will be beyond its ability to pay as such debts mature.
(g) No Representation by Agent or Lenders. Neither any Agent, any
Lender nor any other Person has made any representation, warranty or statement
to the Guarantor in order to induce the Guarantor to execute this Guaranty
Agreement.
SECTION 3.02 COVENANTS. The Guarantor covenants and agrees that, so
long as any of the Commitments are in effect and until payment in full of all
Loans thereunder, all interest thereon and all other amounts payable by the
Borrower under the Credit Agreement:
(a) Maintenance. The Guarantor shall preserve and maintain its
corporate existence and all of its material rights, privileges and franchises;
keep books of record and account in which full, true and correct entries will be
made of all dealings or transactions in relation to its business and activities
in accordance with GAAP; comply with all Governmental Requirements if failure to
comply with such requirements will have a Material Adverse Effect; pay and
discharge all taxes, assessments and governmental charges or levies imposed on
it or on its income or profits or on any of its Property prior to the date on
which penalties attach thereto, except for any such tax, assessment, charge or
levy the payment of which is being contested in good faith and by proper
proceedings and against which adequate reserves are being maintained; upon
reasonable notice, permit representatives of the Agent or any Lender, during
normal business hours, to examine, copy and make extracts from its books and
records, to inspect its Properties, and to discuss its business and affairs with
its officers, all to the extent reasonably requested by such Lender or the Agent
(as the case may be); and keep, or cause to be kept, insured by financially
sound and reputable insurers all Property of a character usually insured by
Persons engaged in the same or similar business similarly situated against loss
or damage of the kinds and in the amounts customarily insured against by such
Persons and carry such other insurance as is usually carried by such Persons
including, without limitation, environmental risk insurance to the extent
reasonably available.
(b) Debt. The Guarantor will not incur, create, assume or suffer to
exist any Debt, except for Debt of the types and in the amounts which the
Borrower could incur under Section 9.01 of the Credit Agreement with the term
"Borrower" appearing therein being deemed to refer to the Guarantor.
(c) Liens. The Guarantor will not create, incur, assume or permit to
exist any Lien on any of its Properties (now owned or hereafter acquired),
except for Liens of the types and in the amounts which the Borrower could incur
under Section 9.02 of the Credit Agreement with the term "Borrower" appearing
therein being deemed to refer to the Guarantor.
7
<PAGE> 10
(d) Further Assurances. The Guarantor will cure promptly any defects in
the execution and delivery of the Loan Documents to which it is party and will,
at its expense, promptly execute and deliver to the Agent all such other
documents, agreements and instruments reasonably requested by it to comply with
or accomplish the covenants and agreements of the Guarantor in this Guaranty
Agreement or to correct any omissions herein or to state more fully the
obligations set out herein.
(e) Subsidiaries. The Guarantor shall not create, acquire or otherwise
suffer to exist any Subsidiaries other than the Borrower and Queen Sand
Resources (Canada), Inc. which are not also Subsidiaries of the Borrower;
provided that the Guarantor may create Non-Recourse Subsidiaries which are not
also Subsidiaries of the Borrower. The Guarantor will not invest, loan or
advance at any one time an aggregate amount of more than $100,000 to or in Queen
Sand Resources (Canada) Inc. or any of its Non-Recourse Subsidiaries.
(f) Dividends, Distributions and Redemptions. The Guarantor shall not
declare or pay any dividend, purchase, redeem or otherwise acquire for value any
of its capital stock now or hereafter outstanding, return any capital to its
stockholders or make any distribution of its assets to its stockholders, except
(i) for dividends and distributions in accordance with the terms and provisions
of the Earn Up Agreement dated May 6, 1997 between the Parent Company and Joint
Energy Development Investments Limited Partnership and the Earn Up Agreement
dated May 6, 1997 between the Guarantor and Forseti Investments Ltd.; provided
that as a result of any dividends, redemptions or distributions pursuant to any
transaction contemplated thereby, no net change in the Guarantor's cash balance
shall result (except to the extent of related out-of-pocket transaction costs
associated therewith); and (ii) dividends or distributions payable solely in
capital stock of the Guarantor.
(g) Mergers. The Guarantor will not merge into or with or consolidate
with any other Person, or sell, lease or otherwise dispose of (whether in one
transaction or in a series of transactions) all or substantially all of its
Property or assets to any other Person; provided that the Guarantor may merge
with any of its Subsidiaries (other than a Non-Recourse Subsidiary) so long as
the Guarantor is the surviving entity.
(h) DEM Subordinated Debt. The Guarantor will not, in any material
respect, amend, supplement or modify or prepay the DEM Subordinated Debt without
the prior written consent of the Majority Lenders.
ARTICLE IV
SUBORDINATION OF INDEBTEDNESS
SECTION 4.01 SUBORDINATION OF ALL GUARANTOR CLAIMS. As used herein, the
term "Guarantor Claims" shall mean all debts and obligations of the Borrower to
the Guarantor, whether such debts and obligations now exist or are hereafter
incurred or arise, or whether the obligation of the Borrower thereon be direct,
contingent, primary, secondary, several, joint and several, or otherwise, and
irrespective of whether such debts or obligations be evidenced by note,
contract, open account, or otherwise, and irrespective of the Person or Persons
in whose favor such debts or obligations may, at their inception, have been, or
may hereafter be created, or the manner in which they have been or may hereafter
be acquired by. Except
8
<PAGE> 11
for payments permitted by the Credit Agreement, until the Obligations shall be
paid and satisfied in full, the Aggregate Commitments are terminated and the
Guarantor shall have performed all of its obligations hereunder and under the
other Security Instruments to which it is a party, the Guarantor shall not
receive or collect, directly or indirectly, from the Borrower any amount upon
the Guarantor Claims.
SECTION 4.02 CLAIMS IN BANKRUPTCY. In the event of receivership,
bankruptcy, reorganization, arrangement, debtor's relief, or other insolvency
proceedings involving the Borrower, the Agent on behalf of the Agent and the
Lenders shall have the right to prove their claim in any proceeding, so as to
establish their rights hereunder and receive directly from the receiver, trustee
or other court custodian, dividends and payments which would otherwise be
payable upon Guarantor Claims. The Guarantor hereby assigns such dividends and
payments to the Agent for the benefit of the Agent and the Lenders. Should any
Agent or Lender receive, for application upon the Obligations, any such dividend
or payment which is otherwise payable to the Guarantor, and which, as between
the Borrower and the Guarantor, shall constitute a credit upon the Guarantor
Claims, then upon payment in full of the Obligations, the Guarantor shall become
subrogated to the rights of the Agent and the Lenders to the extent that such
payments to the Agent and the Lenders on the Guarantor Claims have contributed
toward the liquidation of the Obligations, and such subrogation shall be with
respect to that proportion of the Obligations which would have been unpaid if
the Agent and the Lenders had not received dividends or payments upon the
Guarantor Claims.
SECTION 4.03 PAYMENTS HELD IN TRUST. In the event that notwithstanding
Sections 4.01 and 4.02, the Guarantor should receive any funds, payments, claims
or distributions which is prohibited by such Sections, the Guarantor agrees: (a)
to hold in trust for the Agent and the Lenders an amount equal to the amount of
all funds, payments, claims or distributions so received, and (b) that it shall
have absolutely no dominion over the amount of such funds, payments, claims or
distributions except to pay them promptly to the Agent, for the benefit of the
Agent and the Lenders; and the Guarantor covenants promptly to pay the same to
the Agent.
SECTION 4.04 LIENS SUBORDINATE. The Guarantor agrees that, until the
Obligations are paid in full and the Aggregate Commitments terminated, any Liens
upon the Borrower's assets securing payment of the Guarantor Claims shall be and
remain inferior and subordinate to any Liens upon the Borrower's assets
securing payment of the Obligations, regardless of whether such encumbrances in
favor of the Guarantor, any Agent or Lender presently exist or are hereafter
created or attach. Without the prior written consent of the Agent, the
Guarantor, during the period in which any of the Obligations are outstanding or
the Aggregate Commitments are in effect, shall not (a) exercise or enforce any
creditor's right it may have against the Borrower, or (b) foreclose, repossess,
sequester or otherwise take steps or institute any action or proceeding
(judicial or otherwise, including without limitation the commencement of or
joinder in any liquidation, bankruptcy, rearrangement, debtor's relief or
insolvency proceeding) to enforce any Lien on assets of the Borrower held by the
Guarantor.
SECTION 4.05 NOTATION OF RECORDS. All promissory notes and, upon the
request of the Agent, all accounts receivable ledgers or other evidence of the
Guarantor Claims accepted
9
<PAGE> 12
by or held by the Guarantor shall contain a specific written notice thereon that
the indebtedness evidenced thereby is subordinated under the terms of this
Guaranty Agreement.
ARTICLE V
MISCELLANEOUS
SECTION 5.01 SUCCESSORS AND ASSIGNS. This Guaranty Agreement is and
shall be in every particular available to the successors and assigns of the
Agent and Lenders and is and shall always be fully binding upon the legal
representatives, successors and assigns of the Guarantor, notwithstanding that
some or all of the monies, the repayment of which this Guaranty Agreement
applies, may be actually advanced after any bankruptcy, receivership,
reorganization or other event affecting either the Borrower or the Guarantor.
SECTION 5.02 NOTICES. Any notice or demand to the Guarantor under or in
connection with this Guaranty Agreement may be given and shall conclusively be
deemed and considered to have been given and received in the manner and to the
address of the Guarantor set forth on the signature page hereto as provided for
in Section 12.02 of the Credit Agreement.
SECTION 5.03 AUTHORITY OF AGENT. The Guarantor acknowledges that the
rights and responsibilities of the Agent under this Guaranty Agreement with
respect to any action taken by the Agent or the exercise or non-exercise by the
Agent of any option, right, request, judgment or other right or remedy provided
for herein or resulting or arising out of this Guaranty Agreement shall, as
between the Agent and the Lenders, be governed by the Credit Agreement and by
such other agreements with respect thereto as may exist from time to time among
them, but, as between the Agent and the Guarantor, the Agent shall be
conclusively presumed to be acting as agent for the Lenders with full and valid
authority so to act or refrain from acting; and the Guarantor shall not be under
any obligation, or entitlement, to make any inquiry respecting such authority.
SECTION 5.04 GOVERNING LAW; SUBMISSION TO JURISDICTION.
(a) THIS GUARANTY AGREEMENT (INCLUDING, BUT NOT LIMITED TO, THE
VALIDITY AND ENFORCEABILITY HEREOF) SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS.
(b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS GUARANTY
AGREEMENT OR THE OTHER SECURITY INSTRUMENTS TO WHICH THE GUARANTOR IS A PARTY
MAY BE BROUGHT IN THE COURTS OF THE STATE OF TEXAS OR OF THE UNITED STATES OF
AMERICA FOR THE SOUTHERN DISTRICT OF TEXAS, HOUSTON DIVISION, AND, BY EXECUTION
AND DELIVERY OF THIS GUARANTY AGREEMENT, THE GUARANTOR HEREBY ACCEPTS FOR ITSELF
AND (TO THE EXTENT PERMITTED BY LAW) IN RESPECT OF ITS PROPERTY, GENERALLY AND
UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS. THE GUARANTOR HEREBY
IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING, WITHOUT LIMITATION, ANY OBJECTION
TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT
MAY NOW OR HEREAFTER HAVE TO THE
10
<PAGE> 13
BRINGING OF ANY SUCH ACTION OR PROCEEDING IN SUCH RESPECTIVE JURISDICTIONS. THIS
SUBMISSION TO JURISDICTION IS NONEXCLUSIVE AND DOES NOT PRECLUDE THE AGENT OR
ANY LENDER FROM OBTAINING JURISDICTION OVER THE GUARANTOR IN ANY COURT OTHERWISE
HAVING JURISDICTION.
(c) THE GUARANTOR IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OF ANY
OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF
COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO IT, AS THE
CASE MAY BE, AT ITS SAID ADDRESS, SUCH SERVICE TO BECOME EFFECTIVE 30 DAYS AFTER
SUCH MAILING.
(d) NOTHING HEREIN SHALL AFFECT THE RIGHT OF ANY AGENT OR ANY LENDER OR
ANY HOLDER OF A NOTE TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO
COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE GUARANTOR IN ANY
OTHER JURISDICTION.
SECTION 5.05 ENTIRE AGREEMENT. This Guaranty Agreement and the other
Security Instruments embody the entire agreement and understanding between the
Lenders, the Agent and the Guarantor and supersede all prior agreements and
understandings between such parties relating to the subject matter hereof and
thereof. There are no unwritten oral agreements between the parties.
SECTION 5.06 SURVIVAL OF OBLIGATIONS. To the extent that any payments
on the Obligations or proceeds of any collateral are subsequently invalidated,
declared to be fraudulent or preferential, set aside or required to be repaid to
a trustee, debtor in possession, receiver or other Person under any bankruptcy
law, common law or equitable cause, then to such extent, the Obligations so
satisfied shall be revived and continue as if such payment or proceeds had not
been received and the Agent' and the Lenders' Liens, rights, powers and remedies
under this Guaranty Agreement and each Security Instrument to which the
Guarantor is a party shall continue in full force and effect. In such event,
each Security Instrument shall be automatically reinstated and the Guarantor
shall take such action as may be reasonably requested by the Agent and the
Lenders to effect such reinstatement.
SECTION 5.07 DESIGNATED SENIOR INDEBTEDNESS. The Guarantor hereby
designates all Obligations outstanding under this Guaranty Agreement, the Note
and the other Loan Documents to be "Designated Senior Indebtedness" for purposes
of the DEM Subordinated Debt.
11
<PAGE> 14
WITNESS THE EXECUTION HEREOF, effective as of the date first written
above.
QUEEN SAND RESOURCES, INC., a
Delaware corporation
By: /s/ Robert P. Lindsay
------------------------------------
Robert P. Lindsay
Chief Operating Officer
By: /s/ Ronald Benn
------------------------------------
Ronald Benn
Chief Financial Officer
Address for Notices:
Queen Sand Resources, Inc.
3500 Oak Lawn Drive, Suite 380
Dallas, Texas 75219
Attention: Robert P. Lindsay
Telephone: (214) 521-9959
Facsimile: (214) 521-9960
with copy to:
Queen Sand Resources, Inc.
60 Queen Street, Suite 1400
Ottawa, Canada KIP 5Y7
Attention: Mr. Ronald Benn
Telephone: (613) 230-7211
Facsimile: (613) 230-6055
and
Haynes & Boone LLP
901 Main Street, Suite 3100
Dallas, Texas 75202-3789
Attention: Mr. William L. Boeing
Telephone: (214) 651-5553
Facsimile: (214) 651-5940
12
<PAGE> 15
Schedule I
Subsidiaries of Guarantor
Queen Sand Resources, Inc., a Nevada corporation (100% owned by the Guarantor)
Corrida Resources, Inc., a Nevada corporation (100% owned by the Borrower)
Northland Operating Co., a Nevada corporation, (100% owned by the Borrower)
Queen Sand Resources (Canada) Inc., an Ontario corporation (100% owned by the
Guarantor)
13
<PAGE> 1
EXHIBIT 10.29
GUARANTY AGREEMENT
Dated as of August 1, 1997
By
NORTHLAND OPERATING CO.,
as the Guarantor,
in favor of
BANK OF MONTREAL,
as Agent,
and
THE LENDERS NOW OR HEREAFTER SIGNATORY TO THE CREDIT AGREEMENT
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I
Definitions and Accounting Matters
Section 1.01 Terms Defined Above........................................................ 1
Section 1.02 Certain Definitions........................................................ 1
Section 1.03 Credit Agreement Definitions............................................... 2
ARTICLE II
The Guaranty
Section 2.01 Obligations Guaranteed..................................................... 2
Section 2.02 Nature of Guaranty......................................................... 2
Section 2.03 Lenders' Rights............................................................ 2
Section 2.04 Guarantor's Waivers........................................................ 3
Section 2.05 Maturity of Obligations; Payment........................................... 3
Section 2.06 Lenders' Expenses.......................................................... 3
Section 2.07 Obligation................................................................. 3
Section 2.08 Events and Circumstances Not Reducing or Discharging the Guarantor's
Obligations................................................................ 3
Section 2.09 Limitations on Obligation of the Guarantor Hereunder....................... 5
Section 2.10 Subrogation................................................................ 5
ARTICLE III
Representations and Warranties
Section 3.01 By the Guarantor........................................................... 6
ARTICLE IV
Subordination of Indebtedness
Section 4.01 Subordination of All Guarantor Claims...................................... 7
Section 4.02 Claims in Bankruptcy....................................................... 7
Section 4.03 Payments Held in Trust..................................................... 8
Section 4.04 Liens Subordinate.......................................................... 8
Section 4.05 Notation of Records........................................................ 8
ARTICLE V
Miscellaneous
Section 5.01 Successors and Assigns..................................................... 8
Section 5.02 Notices.................................................................... 9
Section 5.03 Authority of Agent......................................................... 9
Section 5.04 Governing Law; Submission to Jurisdiction.................................. 9
Section 5.05 Entire Agreement........................................................... 10
Section 5.06 Survival of Obligations.................................................... 10
</TABLE>
i
<PAGE> 3
GUARANTY AGREEMENT
This GUARANTY AGREEMENT dated as of August 1, 1997 is by
NORTHLAND OPERATING CO., a corporation duly organized and validly existing under
the laws of the state of Nevada ("Guarantor"), in favor of each of the
following: each of the financial institutions that is now or hereafter a
signatory to the Credit Agreement (as defined below) (individually, a "Lender"
and, collectively, the "Lenders"); and BANK OF MONTREAL, AS AGENT for the
Lenders (in such capacity, the "Agent").
RECITALS
A. QUEEN SAND RESOURCES, INC., a corporation duly organized and validly
existing under the laws of the state of Nevada (the "Borrower"), the Agent and
the Lenders have executed that certain Credit Agreement of even date herewith
(such credit agreement, as amended, the "Credit Agreement").
B. One of the terms and conditions stated in the Credit Agreement for
the making of the loans and extensions of credit described in the Credit
Agreement is the execution and delivery to the Agent and the Lenders of this
Guaranty Agreement.
C. NOW, THEREFORE, (i) in order to comply with the terms and conditions
of the Credit Agreement, (ii) to induce the Lenders, at any time or from time to
time, to loan monies, with or without security to or for the account of the
Borrower in accordance with the terms of the Credit Agreement, and (iii) for
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the Guarantor hereby agrees as follows:
ARTICLE I
DEFINITIONS AND ACCOUNTING MATTERS
SECTION 1.01 TERMS DEFINED ABOVE. As used in This Guaranty Agreement,
the terms "Agent", "Borrower", "Credit Agreement", "Guarantor", "Lender" and
"Lenders" shall have the meanings indicated above.
SECTION 1.02 CERTAIN DEFINITIONS. As used in this Guaranty Agreement,
the following terms shall have the following meanings, unless the context
otherwise requires:
"Guarantor Claims" shall have the meaning indicated in Section 4.01.
"Guaranty Agreement" shall mean this Guaranty Agreement, as the same
may from time to time be amended or supplemented.
"Obligations" shall mean (a) the payment and performance of all present
and future indebtedness, obligations and liabilities of the Borrower and/or the
Guarantor to the Agent and the Lenders under the Credit Agreement, including but
not limited to, (i) the full and punctual payment of the Notes issued
thereunder, and any and all promissory notes given in substitution for such
Notes or in modification, renewal, extension or rearrangement thereof in whole
or in part, and (ii) the reimbursement and other obligations of the Borrower
under and with respect to Letters of Credit and Letter of Credit Agreements now
outstanding or hereafter issued under the Credit Agreement; (b) all obligations
of the Guarantor under this
1
<PAGE> 4
Guaranty Agreement; and (c) all interest (whether pre or post petition),
charges, expenses, reasonable attorneys' or other fees and any other sums
payable to or incurred by the Agent and, to the extent provided in the Credit
Agreement, the Lenders in connection with the execution or enforcement of any of
their rights and remedies hereunder or any other Security Instrument.
SECTION 1.03 CREDIT AGREEMENT DEFINITIONS. Unless otherwise defined
herein, all terms beginning with a capital letter which are defined in the
Credit Agreement shall have the same meanings herein as therein.
ARTICLE II
THE GUARANTY
SECTION 2.01 OBLIGATIONS GUARANTEED. The Guarantor hereby irrevocably
and unconditionally guarantees the prompt payment at maturity of the
Obligations.
SECTION 2.02 NATURE OF GUARANTY. This guaranty is an absolute,
irrevocable, completed and continuing guaranty of payment and not a guaranty of
collection, and no notice of the Obligations or any extension of credit already
or hereafter contracted by or extended to the Borrower need be given to the
Guarantor. The guaranty evidenced hereby is joint and several with all other
guarantees of the Obligations. This guaranty may not be revoked by the Guarantor
and shall continue to be effective with respect to debt under the Obligations
arising or created after any attempted revocation by the Guarantor and shall
remain in full force and effect until the Obligations are paid in full and the
Aggregate Commitments are terminated, notwithstanding that from time to time
prior thereto no Obligations may be outstanding. The Borrower, the Agent and the
Lenders may modify, alter, rearrange, extend for any period and/or renew from
time to time, the Obligations and the Agent and the Lenders may waive any
Default or Events of Default without notice to the Guarantor and in such event
the Guarantor will remain fully bound hereunder on the Obligations. This
Guaranty Agreement may be enforced by the Agent and/or the Lenders and any
subsequent holder of the Obligations and shall not be discharged by the
assignment or negotiation of all or part of the Obligations. The Guarantor
hereby expressly waives presentment, demand, notice of non-payment, protest and
notice of protest and dishonor, notice of Event of Default, notice of intent to
accelerate the maturity and notice of acceleration of the maturity and any other
notice in connection with the Obligations, and also notice of acceptance of this
Guaranty Agreement, acceptance on the part of the Agent and the Lenders being
conclusively presumed by their request for this Guaranty Agreement and delivery
of the same to the Agent.
SECTION 2.03 LENDERS' RIGHTS. Subject to the terms of the Credit
Agreement, the Guarantor authorizes the Lenders (or the Agent on behalf of the
Lenders), without notice or demand and without affecting the Guarantor's
obligation hereunder, to take and hold security for the payment of the
Obligations, and exchange, enforce, waive and release any such security; and to
apply such security and direct the order or manner of sale thereof as the Agent
and the Lenders in their discretion may determine; and to obtain a guaranty of
the Obligations from any one or more Persons and at any time or times to
enforce, waive, rear-
2
<PAGE> 5
range, modify, limit or release any of such other Persons from their obligations
under such guaranties.
SECTION 2.04 GUARANTOR'S WAIVERS. The Guarantor waives any right to
require the Agent and the Lenders to (a) proceed against the Borrower or any
other Person liable on the Obligations, (b) enforce their rights against any
other guarantor of the Obligations, (c) proceed or enforce their rights against
or exhaust any security given to secure the Obligations, (d) have the Borrower
joined with the Guarantor in any suit arising out of this Guaranty Agreement
and/or the Obligations, or (e) pursue any other remedy whatsoever. Neither the
Agent nor the Lenders shall be required to mitigate damages or take any action
to reduce, collect or enforce the Obligations. The Guarantor waives any defense
arising by reason of any disability, lack of corporate authority or power, or
other defense of the Borrower or any other guarantor of the Obligations, and
shall remain liable hereon regardless of whether the Borrower or any other
guarantor be found not liable thereon for any reason.
SECTION 2.05 MATURITY OF OBLIGATIONS; PAYMENT. The Guarantor agrees
that if the maturity of the Obligations is accelerated by bankruptcy or
otherwise, such maturity shall also be deemed accelerated for the purpose of
this Guaranty Agreement without demand or notice to the Guarantor. The Guarantor
will, forthwith upon notice from the Agent of the Borrower's failure to pay the
Obligations at maturity, pay to the Agent for the benefit of the Agent and the
Lenders at the Agent's Principal Office, the amount due and unpaid by the
Borrower and guaranteed hereby. The failure of the Agent to give this notice
shall not in any way release the Guarantor hereunder.
SECTION 2.06 LENDERS' EXPENSES. If the Guarantor fails to pay the
Obligations after notice from the Agent of the Borrower's failure to pay any
Obligations at maturity (whether by acceleration or otherwise), and if
thereafter the Agent or the Lenders obtain the services of an attorney for
collection of amounts owing by the Guarantor hereunder or if suit is filed to
enforce this Guaranty Agreement, or if proceedings are had in any bankruptcy,
receivership or other judicial proceedings for the establishment or collection
of any amount owing by the Guarantor hereunder, or if any amount owing by the
Guarantor hereunder is collected through such proceedings, the Guarantor agrees
to pay to the Agent at its Principal Office, the reasonable attorneys' fees of
the Agent and the Lenders.
SECTION 2.07 OBLIGATION. It is expressly agreed that the obligation of
the Guarantor for the payment of the Obligations guaranteed hereby shall be
primary and not secondary.
SECTION 2.08 EVENTS AND CIRCUMSTANCES NOT REDUCING OR DISCHARGING THE
GUARANTOR'S OBLIGATIONS. The Guarantor hereby consents and agrees to each of the
following to the fullest extent permitted by law, agrees its obligations under
this Guaranty Agreement shall not be released, diminished, impaired, reduced or
adversely affected by any of the following, and waives any rights (including
without limitation rights to notice) which it might otherwise have as a result
of or in connection with any of the following:
(a) Modifications, etc. Any renewal, extension, modification, or
increase in the amount of the Aggregate Commitments as in effect on the
Effective Date, decrease, alteration or rearrangement of all or any part of the
Obligations, any Security Instrument or any
3
<PAGE> 6
instrument executed in connection therewith, or any contract or understanding
between the Borrower, any Agent and/or the Lenders, or any other Person,
pertaining to the Obligations;
(b) Adjustment, etc. Any adjustment, indulgence, forbearance or
compromise that might be granted or given by the Agent or the Lenders to the
Borrower or the Guarantor or any Person liable on the Obligations;
(c) Condition of the Borrower or the Guarantor. The insolvency,
bankruptcy arrangement, reorganization, adjustment, composition, liquidation,
disability, dissolution or lack of power of the Borrower or the Guarantor or any
other Person at any time liable for the payment of all or part of the
Obligations; or any sale, lease or transfer of any or all of the assets of the
Borrower or the Guarantor, or any changes in the shareholders of the Borrower or
the Guarantor;
(d) Invalidity of Obligations. The invalidity, illegality or
unenforceability of all or any part of the Obligations or any Security
Instrument, including the Notes, for any reason whatsoever, including without
limitation the fact that the Obligations, or any part thereof, exceed the amount
permitted by law, the act of creating the Obligations or any part thereof is
ultra vires, the officers or representatives executing any Security Instrument
acted in excess of their authority, the Obligations violate applicable usury
laws, the Borrower has valid defenses, claims or offsets (whether at law, in
equity or by agreement) which render the Obligations wholly or partially
uncollectible from the Borrower, the creation, performance or repayment of the
Obligations (or the execution, delivery and performance of any Security
Instrument) is illegal, uncollectible, legally impossible or unenforceable, or
the Credit Agreement, the Notes or other Security Instruments have been forged
or otherwise are irregular or not genuine or authentic;
(e) Release of Obligors. Any full or partial release of the obligation
of the Borrower on the Obligations or any part thereof, of any co-guarantors, or
any other Person now or hereafter liable, whether directly or indirectly,
jointly, severally, or jointly and severally, to pay, perform, guarantee or
assure the payment of the Obligations or any part thereof, it being recognized,
acknowledged and agreed by the Guarantor that the Guarantor may be required to
pay the Obligations in full without assistance or support of any other Person,
and the Guarantor has not been induced to enter into this Guaranty Agreement on
the basis of a contemplation, belief, understanding or agreement that other
parties other than the Borrower will be liable to perform the Obligations, or
that the Agent and Lenders will look to other parties to perform the
Obligations;
(f) Other Security. The taking or accepting of any other security,
collateral or guaranty, or other assurance of payment, for all or any part of
the Obligations;
(g) Release of Collateral, etc. Any release, surrender, exchange,
subordination, deterioration, waste, loss or impairment (including without
limitation negligent, willful, unreasonable or unjustifiable impairment) of any
collateral, Property or security, at any time existing in connection with, or
assuring or securing payment of, all or any part of the Obligations;
4
<PAGE> 7
(h) Care and Diligence. The failure of any Agent or Lender or any other
Person to exercise diligence or reasonable care in the preservation, protection,
enforcement, sale or other handling or treatment of all or any part of such
collateral, Property or security;
(i) Status of Liens. The fact that any collateral, security or Lien
contemplated or intended to be given, created or granted as security for the
repayment of the Obligations shall not be properly perfected or created, or
shall prove to be unenforceable or subordinate to any other Lien, it being
recognized and agreed by the Guarantor that the Guarantor is not entering into
this Guaranty Agreement in reliance on, or in contemplation of the benefits of,
the validity, enforceability, collectability or value of any of the collateral
for the Obligations;
(j) Payments Rescinded. Any payment by the Borrower to any Agent or
Lender is held to constitute a preference under the bankruptcy laws, or for any
reason an Agent or Lender is required to refund such payment or pay such amount
to the Borrower or someone else; or
(k) Other Actions Taken or Omitted. Any other action taken or omitted
to be taken with respect to the Credit Agreement or the other Security
Instruments, the Obligations, or the security and collateral therefor, whether
or not such action or omission prejudices the Guarantor or increases the
likelihood that the Guarantor will be required to pay the Obligations pursuant
to the terms hereof; it being the unambiguous and unequivocal intention of the
Guarantor that the Guarantor shall be obligated to pay the Obligations when due,
notwithstanding any occurrence, circumstance, event, action, or omission
whatsoever, whether contemplated or uncontemplated, and whether or not otherwise
or particularly described herein, except for the full and final payment and
satisfaction of the Obligations.
SECTION 2.09 LIMITATIONS ON OBLIGATION OF THE GUARANTOR HEREUNDER. The
parties hereto (i) intend that the obligation of the Guarantor hereunder be
limited to the maximum amount that would not result in the obligation created
hereby being avoidable under Section 548 of the Federal Bankruptcy Code (11
U.S.C. Section 548; hereinafter "Section 548") or other applicable state
fraudulent conveyance or transfer law and (ii) agree that this Guaranty
Agreement shall be so construed. Accordingly, the obligation of the Guarantor
hereunder is limited to an amount that is the greater of (x) the "reasonably
equivalent value" or "fair consideration" received by the Guarantor in exchange
for the obligation incurred hereunder, within the meaning of Section 548, as
amended, or any applicable state fraudulent conveyance or transfer law, as
amended; or (y) the lesser of (1) the maximum amount that will not render the
Guarantor insolvent or (2) the maximum amount that will not leave the Guarantor
with any Property deemed an unreasonably small capital. Clauses (1) and (2) are
and shall be determined pursuant to Section 548, as amended, or other applicable
state fraudulent conveyance or transfer law, as amended.
SECTION 2.10 SUBROGATION. The Guarantor shall not exercise any rights
which it may acquire by way of subrogation, reimbursement, exoneration,
indemnification or participation, by any payment made under this Guaranty
Agreement, under any other Security Instrument or otherwise until the
Obligations have been paid in full and the Aggregate Commitments are terminated;
provided that, notwithstanding the foregoing, the Guarantor reserves its rights
of contribution and reimbursement, if any, from its co-
5
<PAGE> 8
guarantors and other Persons liable on the Obligations or otherwise. Except as
described in this Section 2.10, the Guarantor further waives any benefit of any
right to participate in any security now or hereafter held by the Agent and/or
the Lenders.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.01 BY THE GUARANTOR. In order to induce the Agent and the
Lenders to accept this Guaranty Agreement, the Guarantor represents and warrants
to the Agent and the Lenders (which representations and warranties will survive
the creation of the Obligations and any extension of credit thereunder) that:
(a) Benefit to the Guarantor. The Guarantor is a wholly-owned
Subsidiary of the Borrower and the Guarantor's guaranty pursuant to this
Guaranty Agreement reasonably may be expected to benefit, directly or
indirectly, the Guarantor; and the Guarantor has determined that this Guaranty
Agreement is necessary and convenient to the conduct, promotion and attainment
of the business of the Guarantor and the Borrower.
(b) Corporate Existence. The Guarantor: (i) is duly organized and
validly existing under the laws of the jurisdiction of its formation; (ii) has
all requisite power, and has all material governmental licenses, authorizations,
consents and approvals necessary to own its assets and carry on its business as
now being conducted; and (iii) is qualified to do business in all jurisdictions
in which the nature of the business conducted by it makes such qualification
necessary and where failure so to qualify would have a Material Adverse Effect.
(c) No Breach. The execution and delivery by the Guarantor of this
Guaranty Agreement and the other Security Instruments to which it is a party,
the consummation of the transactions herein or therein contemplated, and the
compliance with the terms and provisions hereof will not (i) conflict with or
result in a breach of, or require any consent under (A) the respective charter
or by-laws of the Guarantor, or (B) any applicable law or regulation, or any
order, writ, injunction or decree of any court or other Governmental Authority,
or any material agreement or instrument to which the Guarantor is a party or by
which it is bound or to which it is subject in each case in such manner as could
reasonably be expected to have a Material Adverse Effect; or (ii) constitute a
default under any such agreement or instrument, or result in the creation or
imposition of any Lien upon any of the revenues or Property of the Guarantor in
each case in such manner as could reasonably be expected to have a Material
Adverse Effect.
(d) Corporate Action. The Guarantor has all necessary corporate power
and authority to execute, deliver and perform its obligations under this
Guaranty Agreement and the Security Instruments to which it is a party; and the
execution, delivery and performance by the Guarantor of this Guaranty Agreement
and the other Security Instruments to which such Person is a party have been
duly authorized by all necessary corporate action on its part. This Guaranty
Agreement and the Security Instruments to which the Guarantor is a party
constitute the legal, valid and binding obligation of the Guarantor, enforceable
against the Guarantor in accordance with their terms, except as may be limited
by applicable
6
<PAGE> 9
bankruptcy, insolvency, reorganization or other similar laws affecting
creditors' rights and general principals of equity.
(e) Approvals. Other than consents heretofore obtained or described in
the Credit Agreement, no authorizations, approvals or consents of, and no
filings or registrations with, any Governmental Authority are necessary for the
execution, delivery or performance by the Guarantor of this Guaranty Agreement
or the Security Instruments to which it is a party or for the validity or
enforceability thereof. It is understood that continued performance by the
Guarantor of this Guaranty Agreement and the other Security Instruments to which
it is a party will require various filings, such as filings related to
environmental matters, ERISA matters, Taxes and intellectual property, filings
required to maintain corporate and similar standing and existence, filings
pursuant to the Uniform Commercial Code and other security filings and
recordings and filings required by the SEC, routine filings in the ordinary
course of business, and filings required in connection with the exercise by the
Lenders and the Agent of remedies in connection with the Security Instruments.
(f) Solvency. The Guarantor (i) is not insolvent as of the date hereof
and will not be rendered insolvent as a result of this Guaranty Agreement, (ii)
is not engaged in business or a transaction, or about to engage in a business or
a transaction, for which any Property or assets remaining with the Guarantor is
unreasonably small capital, and (iii) does not intend to incur, or believe it
will incur, debts that will be beyond its ability to pay as such debts mature.
(g) No Representation by Agent or Lenders. Neither any Agent, any
Lender nor any other Person has made any representation, warranty or statement
to the Guarantor in order to induce the Guarantor to execute this Guaranty
Agreement.
ARTICLE IV
SUBORDINATION OF INDEBTEDNESS
SECTION 4.01 SUBORDINATION OF ALL GUARANTOR CLAIMS. As used herein, the
term "Guarantor Claims" shall mean all debts and obligations of the Borrower to
the Guarantor, whether such debts and obligations now exist or are hereafter
incurred or arise, or whether the obligation of the Borrower thereon be direct,
contingent, primary, secondary, several, joint and several, or otherwise, and
irrespective of whether such debts or obligations be evidenced by note,
contract, open account, or otherwise, and irrespective of the Person or Persons
in whose favor such debts or obligations may, at their inception, have been, or
may hereafter be created, or the manner in which they have been or may hereafter
be acquired by. Except for payments permitted by the Credit Agreement, until the
Obligations shall be paid and satisfied in full, the Aggregate Commitments are
terminated and the Guarantor shall have performed all of its obligations
hereunder and under the other Security Instruments to which it is a party, the
Guarantor shall not receive or collect, directly or indirectly, from the
Borrower any amount upon the Guarantor Claims.
SECTION 4.02 CLAIMS IN BANKRUPTCY. In the event of receivership,
bankruptcy, reorganization, arrangement, debtor's relief, or other insolvency
proceedings involving the Borrower, the Agent on behalf of the Agent and the
Lenders shall have the right to prove
7
<PAGE> 10
their claim in any proceeding, so as to establish their rights hereunder and
receive directly from the receiver, trustee or other court custodian, dividends
and payments which would otherwise be payable upon Guarantor Claims. The
Guarantor hereby assigns such dividends and payments to the Agent for the
benefit of the Agent and the Lenders. Should any Agent or Lender receive, for
application upon the Obligations, any such dividend or payment which is
otherwise payable to the Guarantor, and which, as between the Borrower and the
Guarantor, shall constitute a credit upon the Guarantor Claims, then upon
payment in full of the Obligations, the Guarantor shall become subrogated to the
rights of the Agent and the Lenders to the extent that such payments to the
Agent and the Lenders on the Guarantor Claims have contributed toward the
liquidation of the Obligations, and such subrogation shall be with respect to
that proportion of the Obligations which would have been unpaid if the Agent and
the Lenders had not received dividends or payments upon the Guarantor Claims.
SECTION 4.03 PAYMENTS HELD IN TRUST. In the event that notwithstanding
Sections 4.01 and 4.02, the Guarantor should receive any funds, payments, claims
or distributions which is prohibited by such Sections, the Guarantor agrees: (a)
to hold in trust for the Agent and the Lenders an amount equal to the amount of
all funds, payments, claims or distributions so received, and (b) that it shall
have absolutely no dominion over the amount of such funds, payments, claims or
distributions except to pay them promptly to the Agent, for the benefit of the
Agent and the Lenders; and the Guarantor covenants promptly to pay the same to
the Agent.
SECTION 4.04 LIENS SUBORDINATE. The Guarantor agrees that, until the
Obligations are paid in full and the Aggregate Commitments terminated, any Liens
upon the Borrower's assets securing payment of the Guarantor Claims shall be and
remain inferior and subordinate to any Liens upon the Borrower's assets
securing payment of the Obligations, regardless of whether such encumbrances in
favor of the Guarantor, any Agent or Lender presently exist or are hereafter
created or attach. Without the prior written consent of the Agent, the
Guarantor, during the period in which any of the Obligations are outstanding or
the Aggregate Commitments are in effect, shall not (a) exercise or enforce any
creditor's right it may have against the Borrower, or (b) foreclose, repossess,
sequester or otherwise take steps or institute any action or proceeding
(judicial or otherwise, including without limitation the commencement of or
joinder in any liquidation, bankruptcy, rearrangement, debtor's relief or
insolvency proceeding) to enforce any Lien on assets of the Borrower held by the
Guarantor.
SECTION 4.05 NOTATION OF RECORDS. All promissory notes and, upon the
request of the Agent, all accounts receivable ledgers or other evidence of the
Guarantor Claims accepted by or held by the Guarantor shall contain a specific
written notice thereon that the indebtedness evidenced thereby is subordinated
under the terms of this Guaranty Agreement.
ARTICLE V
MISCELLANEOUS
SECTION 5.01 SUCCESSORS AND ASSIGNS. This Guaranty Agreement is and
shall be in every particular available to the successors and assigns of the
Agent and Lenders and is and shall always be fully binding upon the legal
representatives, successors and assigns of
8
<PAGE> 11
the Guarantor, notwithstanding that some or all of the monies, the repayment of
which this Guaranty Agreement applies, may be actually advanced after any
bankruptcy, receivership, reorganization or other event affecting either the
Borrower or the Guarantor.
SECTION 5.02 NOTICES. Any notice or demand to the Guarantor under or in
connection with this Guaranty Agreement may be given and shall conclusively be
deemed and considered to have been given and received in the manner and to the
address of the Guarantor set forth on the signature page hereto as provided for
in Section 12.02 of the Credit Agreement.
SECTION 5.03 AUTHORITY OF AGENT. The Guarantor acknowledges that the
rights and responsibilities of the Agent under this Guaranty Agreement with
respect to any action taken by the Agent or the exercise or non-exercise by the
Agent of any option, right, request, judgment or other right or remedy provided
for herein or resulting or arising out of this Guaranty Agreement shall, as
between the Agent and the Lenders, be governed by the Credit Agreement and by
such other agreements with respect thereto as may exist from time to time among
them, but, as between the Agent and the Guarantor, the Agent shall be
conclusively presumed to be acting as agent for the Lenders with full and valid
authority so to act or refrain from acting; and the Guarantor shall not be under
any obligation, or entitlement, to make any inquiry respecting such authority.
SECTION 5.04 GOVERNING LAW; SUBMISSION TO JURISDICTION.
(a) THIS GUARANTY AGREEMENT (INCLUDING, BUT NOT LIMITED TO, THE
VALIDITY AND ENFORCEABILITY HEREOF) SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS.
(b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS GUARANTY
AGREEMENT OR THE OTHER SECURITY INSTRUMENTS TO WHICH THE GUARANTOR IS A PARTY
MAY BE BROUGHT IN THE COURTS OF THE STATE OF TEXAS OR OF THE UNITED STATES OF
AMERICA FOR THE SOUTHERN DISTRICT OF TEXAS, HOUSTON DIVISION, AND, BY EXECUTION
AND DELIVERY OF THIS GUARANTY AGREEMENT, THE GUARANTOR HEREBY ACCEPTS FOR ITSELF
AND (TO THE EXTENT PERMITTED BY LAW) IN RESPECT OF ITS PROPERTY, GENERALLY AND
UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS. THE GUARANTOR HEREBY
IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING, WITHOUT LIMITATION, ANY OBJECTION
TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT
MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY SUCH ACTION OR PROCEEDING IN
SUCH RESPECTIVE JURISDICTIONS. THIS SUBMISSION TO JURISDICTION IS NONEXCLUSIVE
AND DOES NOT PRECLUDE THE AGENT OR ANY LENDER FROM OBTAINING JURISDICTION OVER
THE GUARANTOR IN ANY COURT OTHERWISE HAVING JURISDICTION.
9
<PAGE> 12
(c) THE GUARANTOR IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OF ANY
OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF
COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO IT, AS THE
CASE MAY BE, AT ITS SAID ADDRESS, SUCH SERVICE TO BECOME EFFECTIVE 30 DAYS AFTER
SUCH MAILING.
(d) NOTHING HEREIN SHALL AFFECT THE RIGHT OF ANY AGENT OR ANY LENDER OR
ANY HOLDER OF A NOTE TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO
COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE GUARANTOR IN ANY
OTHER JURISDICTION.
SECTION 5.05 ENTIRE AGREEMENT. This Guaranty Agreement and the other
Security Instruments embody the entire agreement and understanding between the
Lenders, the Agent and the Guarantor and supersede all prior agreements and
understandings between such parties relating to the subject matter hereof and
thereof. There are no unwritten oral agreements between the parties.
SECTION 5.06 SURVIVAL OF OBLIGATIONS. To the extent that any payments
on the Obligations or proceeds of any collateral are subsequently invalidated,
declared to be fraudulent or preferential, set aside or required to be repaid to
a trustee, debtor in possession, receiver or other Person under any bankruptcy
law, common law or equitable cause, then to such extent, the Obligations so
satisfied shall be revived and continue as if such payment or proceeds had not
been received and the Agent' and the Lenders' Liens, rights, powers and remedies
under this Guaranty Agreement and each Security Instrument to which the
Guarantor is a party shall continue in full force and effect. In such event,
each Security Instrument shall be automatically reinstated and the Guarantor
shall take such action as may be reasonably requested by the Agent and the
Lenders to effect such reinstatement.
10
<PAGE> 13
WITNESS THE EXECUTION HEREOF, effective as of the date first written
above.
NORTHLAND OPERATING CO.
By: /s/ Robert P. Lindsay
----------------------------------------
Robert P. Lindsay
Vice President
By: /s/ Ronald Benn
----------------------------------------
Ronald Benn
Vice President and Treasurer
Address for Notices:
Northland Operating Co.
c/o Queen Sand Resources, Inc.
3500 Oak Lawn Drive, Suite 380
Dallas, Texas 75219
Attention: Robert P. Lindsay
Telephone: (214) 521-9959
Facsimile: (214) 521-9960
with copy to:
Queen Sand Resources, Inc.
60 Queen Street, Suite 1400
Ottawa, Canada KIP 5Y7
Attention: Mr. Ronald Benn
Telephone: (613) 230-7211
Facsimile: (613) 230-6055
and
Haynes & Boone LLP
901 Main Street, Suite 3100
Dallas, Texas 75202-3789
Attention: Mr. William L. Boeing
Telephone: (214) 651-5553
Facsimile: (214) 651-5940
11
<PAGE> 1
EXHIBIT 10.31
GUARANTY AGREEMENT
Dated as of August 1, 1997
By
CORRIDA RESOURCES, INC.,
as the Guarantor,
in favor of
BANK OF MONTREAL,
as Agent,
and
THE LENDERS NOW OR HEREAFTER SIGNATORY TO THE CREDIT AGREEMENT
<PAGE> 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
ARTICLE I
Definitions and Accounting Matters
<S> <C>
Section 1.01 Terms Defined Above........................................................................1
Section 1.02 Certain Definitions........................................................................1
Section 1.03 Credit Agreement Definitions...............................................................2
ARTICLE II
The Guaranty
Section 2.01 Obligations Guaranteed.....................................................................2
Section 2.02 Nature of Guaranty.........................................................................2
Section 2.03 Lenders' Rights............................................................................2
Section 2.04 Guarantor's Waivers........................................................................2
Section 2.05 Maturity of Obligations; Payment...........................................................3
Section 2.06 Lenders' Expenses..........................................................................3
Section 2.07 Obligation.................................................................................3
Section 2.08 Events and Circumstances Not Reducing or Discharging the Guarantor's Obligations...........3
Section 2.09 Limitations on Obligation of the Guarantor Hereunder.......................................5
Section 2.10 Subrogation................................................................................5
ARTICLE III
Representations and Warranties
Section 3.01 By the Guarantor...........................................................................6
ARTICLE IV
Subordination of Indebtedness
Section 4.01 Subordination of All Guarantor Claims......................................................7
Section 4.02 Claims in Bankruptcy.......................................................................7
Section 4.03 Payments Held in Trust.....................................................................8
Section 4.04 Liens Subordinate..........................................................................8
Section 4.05 Notation of Records........................................................................8
ARTICLE V
Miscellaneous
Section 5.01 Successors and Assigns.....................................................................8
Section 5.02 Notices....................................................................................9
Section 5.03 Authority of Agent.........................................................................9
Section 5.04 Governing Law; Submission to Jurisdiction..................................................9
Section 5.05 Entire Agreement..........................................................................10
Section 5.06 Survival of Obligations...................................................................10
</TABLE>
i
<PAGE> 3
GUARANTY AGREEMENT
This GUARANTY AGREEMENT dated as of August 1, 1997 is by
CORRIDA RESOURCES, INC., a corporation duly organized and validly existing under
the laws of the state of Nevada ("Guarantor"), in favor of each of the
following: each of the financial institutions that is now or hereafter a
signatory to the Credit Agreement (as defined below) (individually, a "Lender"
and, collectively, the "Lenders"); and BANK OF MONTREAL, AS AGENT for the
Lenders (in such capacity, the "Agent").
RECITALS
A. QUEEN SAND RESOURCES, INC., a corporation duly organized and validly
existing under the laws of the state of Nevada (the "Borrower"), the Agent and
the Lenders have executed that certain Credit Agreement of even date herewith
(such credit agreement, as amended, the "Credit Agreement").
B. One of the terms and conditions stated in the Credit Agreement for
the making of the loans and extensions of credit described in the Credit
Agreement is the execution and delivery to the Agent and the Lenders of this
Guaranty Agreement.
C. NOW, THEREFORE, (i) in order to comply with the terms and conditions
of the Credit Agreement, (ii) to induce the Lenders, at any time or from time to
time, to loan monies, with or without security to or for the account of the
Borrower in accordance with the terms of the Credit Agreement, and (iii) for
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the Guarantor hereby agrees as follows:
ARTICLE I
DEFINITIONS AND ACCOUNTING MATTERS
SECTION 1.01 TERMS DEFINED ABOVE. As used in This Guaranty Agreement,
the terms "Agent", "Borrower", "Credit Agreement", "Guarantor", "Lender" and
"Lenders" shall have the meanings indicated above.
SECTION 1.02 CERTAIN DEFINITIONS. As used in this Guaranty Agreement,
the following terms shall have the following meanings, unless the context
otherwise requires:
"Guarantor Claims" shall have the meaning indicated in Section 4.01.
"Guaranty Agreement" shall mean this Guaranty Agreement, as the same
may from time to time be amended or supplemented.
"Obligations" shall mean (a) the payment and performance of all present
and future indebtedness, obligations and liabilities of the Borrower and/or the
Guarantor to the Agent and the Lenders under the Credit Agreement, including but
not limited to, (i) the full and punctual payment of the Notes issued
thereunder, and any and all promissory notes given in substitution for such
Notes or in modification, renewal, extension or rearrangement thereof in whole
or in part, and (ii) the reimbursement and other obligations of the Borrower
under and with respect to Letters of Credit and Letter of Credit Agreements now
outstanding or hereafter issued under the Credit Agreement; (b) all obligations
of the Guarantor under this Guaranty Agreement; and (c) all interest (whether
pre or post petition), charges, expenses,
1
<PAGE> 4
reasonable attorneys' or other fees and any other sums payable to or incurred by
the Agent and, to the extent provided in the Credit Agreement, the Lenders in
connection with the execution or enforcement of any of their rights and remedies
hereunder or any other Security Instrument.
SECTION 1.03 CREDIT AGREEMENT DEFINITIONS. Unless otherwise defined
herein, all terms beginning with a capital letter which are defined in the
Credit Agreement shall have the same meanings herein as therein.
ARTICLE II
THE GUARANTY
SECTION 2.01 OBLIGATIONS GUARANTEED. The Guarantor hereby irrevocably
and unconditionally guarantees the prompt payment at maturity of the
Obligations.
SECTION 2.02 NATURE OF GUARANTY. This guaranty is an absolute,
irrevocable, completed and continuing guaranty of payment and not a guaranty of
collection, and no notice of the Obligations or any extension of credit already
or hereafter contracted by or extended to the Borrower need be given to the
Guarantor. The guaranty evidenced hereby is joint and several with all other
guarantees of the Obligations. This guaranty may not be revoked by the Guarantor
and shall continue to be effective with respect to debt under the Obligations
arising or created after any attempted revocation by the Guarantor and shall
remain in full force and effect until the Obligations are paid in full and the
Aggregate Commitments are terminated, notwithstanding that from time to time
prior thereto no Obligations may be outstanding. The Borrower, the Agent and the
Lenders may modify, alter, rearrange, extend for any period and/or renew from
time to time, the Obligations and the Agent and the Lenders may waive any
Default or Events of Default without notice to the Guarantor and in such event
the Guarantor will remain fully bound hereunder on the Obligations. This
Guaranty Agreement may be enforced by the Agent and/or the Lenders and any
subsequent holder of the Obligations and shall not be discharged by the
assignment or negotiation of all or part of the Obligations. The Guarantor
hereby expressly waives presentment, demand, notice of non-payment, protest and
notice of protest and dishonor, notice of Event of Default, notice of intent to
accelerate the maturity and notice of acceleration of the maturity and any other
notice in connection with the Obligations, and also notice of acceptance of this
Guaranty Agreement, acceptance on the part of the Agent and the Lenders being
conclusively presumed by their request for this Guaranty Agreement and delivery
of the same to the Agent.
SECTION 2.03 LENDERS' RIGHTS. Subject to the terms of the Credit
Agreement, the Guarantor authorizes the Lenders (or the Agent on behalf of the
Lenders), without notice or demand and without affecting the Guarantor's
obligation hereunder, to take and hold security for the payment of the
Obligations, and exchange, enforce, waive and release any such security; and to
apply such security and direct the order or manner of sale thereof as the Agent
and the Lenders in their discretion may determine; and to obtain a guaranty of
the Obligations from any one or more Persons and at any time or times to
enforce, waive, rearrange, modify, limit or release any of such other Persons
from their obligations under such guaranties.
2
<PAGE> 5
SECTION 2.04 GUARANTOR'S WAIVERS. The Guarantor waives any right to
require the Agent and the Lenders to (a) proceed against the Borrower or any
other Person liable on the Obligations, (b) enforce their rights against any
other guarantor of the Obligations, (c) proceed or enforce their rights against
or exhaust any security given to secure the Obligations, (d) have the Borrower
joined with the Guarantor in any suit arising out of this Guaranty Agreement
and/or the Obligations, or (e) pursue any other remedy whatsoever. Neither the
Agent nor the Lenders shall be required to mitigate damages or take any action
to reduce, collect or enforce the Obligations. The Guarantor waives any defense
arising by reason of any disability, lack of corporate authority or power, or
other defense of the Borrower or any other guarantor of the Obligations, and
shall remain liable hereon regardless of whether the Borrower or any other
guarantor be found not liable thereon for any reason.
SECTION 2.05 MATURITY OF OBLIGATIONS; PAYMENT. The Guarantor agrees
that if the maturity of the Obligations is accelerated by bankruptcy or
otherwise, such maturity shall also be deemed accelerated for the purpose of
this Guaranty Agreement without demand or notice to the Guarantor. The Guarantor
will, forthwith upon notice from the Agent of the Borrower's failure to pay the
Obligations at maturity, pay to the Agent for the benefit of the Agent and the
Lenders at the Agent's Principal Office, the amount due and unpaid by the
Borrower and guaranteed hereby. The failure of the Agent to give this notice
shall not in any way release the Guarantor hereunder.
SECTION 2.06 LENDERS' EXPENSES. If the Guarantor fails to pay the
Obligations after notice from the Agent of the Borrower's failure to pay any
Obligations at maturity (whether by acceleration or otherwise), and if
thereafter the Agent or the Lenders obtain the services of an attorney for
collection of amounts owing by the Guarantor hereunder or if suit is filed to
enforce this Guaranty Agreement, or if proceedings are had in any bankruptcy,
receivership or other judicial proceedings for the establishment or collection
of any amount owing by the Guarantor hereunder, or if any amount owing by the
Guarantor hereunder is collected through such proceedings, the Guarantor agrees
to pay to the Agent at its Principal Office, the reasonable attorneys' fees of
the Agent and the Lenders.
SECTION 2.07 OBLIGATION. It is expressly agreed that the obligation of
the Guarantor for the payment of the Obligations guaranteed hereby shall be
primary and not secondary.
SECTION 2.08 EVENTS AND CIRCUMSTANCES NOT REDUCING OR DISCHARGING THE
GUARANTOR'S OBLIGATIONS. The Guarantor hereby consents and agrees to each of the
following to the fullest extent permitted by law, agrees its obligations under
this Guaranty Agreement shall not be released, diminished, impaired, reduced or
adversely affected by any of the following, and waives any rights (including
without limitation rights to notice) which it might otherwise have as a result
of or in connection with any of the following:
(a) Modifications, etc. Any renewal, extension, modification, or
increase in the amount of the Aggregate Commitments as in effect on the
Effective Date, decrease, alteration or rearrangement of all or any part of the
Obligations, any Security Instrument or any instrument executed in connection
therewith, or any contract or understanding between the Borrower, any Agent
and/or the Lenders, or any other Person, pertaining to the Obligations;
3
<PAGE> 6
(b) Adjustment, etc. Any adjustment, indulgence, forbearance or
compromise that might be granted or given by the Agent or the Lenders to the
Borrower or the Guarantor or any Person liable on the Obligations;
(c) Condition of the Borrower or the Guarantor. The insolvency,
bankruptcy arrangement, reorganization, adjustment, composition, liquidation,
disability, dissolution or lack of power of the Borrower or the Guarantor or any
other Person at any time liable for the payment of all or part of the
Obligations; or any sale, lease or transfer of any or all of the assets of the
Borrower or the Guarantor, or any changes in the shareholders of the Borrower or
the Guarantor;
(d) Invalidity of Obligations. The invalidity, illegality or
unenforceability of all or any part of the Obligations or any Security
Instrument, including the Notes, for any reason whatsoever, including without
limitation the fact that the Obligations, or any part thereof, exceed the amount
permitted by law, the act of creating the Obligations or any part thereof is
ultra vires, the officers or representatives executing any Security Instrument
acted in excess of their authority, the Obligations violate applicable usury
laws, the Borrower has valid defenses, claims or offsets (whether at law, in
equity or by agreement) which render the Obligations wholly or partially
uncollectible from the Borrower, the creation, performance or repayment of the
Obligations (or the execution, delivery and performance of any Security
Instrument) is illegal, uncollectible, legally impossible or unenforceable, or
the Credit Agreement, the Notes or other Security Instruments have been forged
or otherwise are irregular or not genuine or authentic;
(e) Release of Obligors. Any full or partial release of the obligation
of the Borrower on the Obligations or any part thereof, of any co-guarantors, or
any other Person now or hereafter liable, whether directly or indirectly,
jointly, severally, or jointly and severally, to pay, perform, guarantee or
assure the payment of the Obligations or any part thereof, it being recognized,
acknowledged and agreed by the Guarantor that the Guarantor may be required to
pay the Obligations in full without assistance or support of any other Person,
and the Guarantor has not been induced to enter into this Guaranty Agreement on
the basis of a contemplation, belief, understanding or agreement that other
parties other than the Borrower will be liable to perform the Obligations, or
that the Agent and Lenders will look to other parties to perform the
Obligations;
(f) Other Security. The taking or accepting of any other security,
collateral or guaranty, or other assurance of payment, for all or any part of
the Obligations;
(g) Release of Collateral, etc. Any release, surrender, exchange,
subordination, deterioration, waste, loss or impairment (including without
limitation negligent, willful, unreasonable or unjustifiable impairment) of any
collateral, Property or security, at any time existing in connection with, or
assuring or securing payment of, all or any part of the Obligations;
(h) Care and Diligence. The failure of any Agent or Lender or any other
Person to exercise diligence or reasonable care in the preservation, protection,
enforcement, sale or other handling or treatment of all or any part of such
collateral, Property or security;
4
<PAGE> 7
(i) Status of Liens. The fact that any collateral, security or Lien
contemplated or intended to be given, created or granted as security for the
repayment of the Obligations shall not be properly perfected or created, or
shall prove to be unenforceable or subordinate to any other Lien, it being
recognized and agreed by the Guarantor that the Guarantor is not entering into
this Guaranty Agreement in reliance on, or in contemplation of the benefits of,
the validity, enforceability, collectability or value of any of the collateral
for the Obligations;
(j) Payments Rescinded. Any payment by the Borrower to any Agent or
Lender is held to constitute a preference under the bankruptcy laws, or for any
reason an Agent or Lender is required to refund such payment or pay such amount
to the Borrower or someone else; or
(k) Other Actions Taken or Omitted. Any other action taken or omitted
to be taken with respect to the Credit Agreement or the other Security
Instruments, the Obligations, or the security and collateral therefor, whether
or not such action or omission prejudices the Guarantor or increases the
likelihood that the Guarantor will be required to pay the Obligations pursuant
to the terms hereof; it being the unambiguous and unequivocal intention of the
Guarantor that the Guarantor shall be obligated to pay the Obligations when due,
notwithstanding any occurrence, circumstance, event, action, or omission
whatsoever, whether contemplated or uncontemplated, and whether or not otherwise
or particularly described herein, except for the full and final payment and
satisfaction of the Obligations.
SECTION 2.09 LIMITATIONS ON OBLIGATION OF THE GUARANTOR HEREUNDER. The
parties hereto (i) intend that the obligation of the Guarantor hereunder be
limited to the maximum amount that would not result in the obligation created
hereby being avoidable under Section 548 of the Federal Bankruptcy Code (11
U.S.C. Section 548; hereinafter "Section 548") or other applicable state
fraudulent conveyance or transfer law and (ii) agree that this Guaranty
Agreement shall be so construed. Accordingly, the obligation of the Guarantor
hereunder is limited to an amount that is the greater of (x) the "reasonably
equivalent value" or "fair consideration" received by the Guarantor in exchange
for the obligation incurred hereunder, within the meaning of Section 548, as
amended, or any applicable state fraudulent conveyance or transfer law, as
amended; or (y) the lesser of (1) the maximum amount that will not render the
Guarantor insolvent or (2) the maximum amount that will not leave the Guarantor
with any Property deemed an unreasonably small capital. Clauses (1) and (2) are
and shall be determined pursuant to Section 548, as amended, or other applicable
state fraudulent conveyance or transfer law, as amended.
SECTION 2.10 SUBROGATION. The Guarantor shall not exercise any rights
which it may acquire by way of subrogation, reimbursement, exoneration,
indemnification or participation, by any payment made under this Guaranty
Agreement, under any other Security Instrument or otherwise until the
Obligations have been paid in full and the Aggregate Commitments are terminated;
provided that, notwithstanding the foregoing, the Guarantor reserves its rights
of contribution and reimbursement, if any, from its co-guarantors and other
Persons liable on the Obligations or otherwise. Except as described in this
Section 2.10, the Guarantor further waives any benefit of any right to
participate in any security now or hereafter held by the Agent and/or the
Lenders.
5
<PAGE> 8
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.01 BY THE GUARANTOR. In order to induce the Agent and the
Lenders to accept this Guaranty Agreement, the Guarantor represents and warrants
to the Agent and the Lenders (which representations and warranties will survive
the creation of the Obligations and any extension of credit thereunder) that:
(a) Benefit to the Guarantor. The Guarantor is a wholly-owned
Subsidiary of the Borrower and the Guarantor's guaranty pursuant to this
Guaranty Agreement reasonably may be expected to benefit, directly or
indirectly, the Guarantor; and the Guarantor has determined that this Guaranty
Agreement is necessary and convenient to the conduct, promotion and attainment
of the business of the Guarantor and the Borrower.
(b) Corporate Existence. The Guarantor: (i) is duly organized and
validly existing under the laws of the jurisdiction of its formation; (ii) has
all requisite power, and has all material governmental licenses, authorizations,
consents and approvals necessary to own its assets and carry on its business as
now being conducted; and (iii) is qualified to do business in all jurisdictions
in which the nature of the business conducted by it makes such qualification
necessary and where failure so to qualify would have a Material Adverse Effect.
(c) No Breach. The execution and delivery by the Guarantor of this
Guaranty Agreement and the other Security Instruments to which it is a party,
the consummation of the transactions herein or therein contemplated, and the
compliance with the terms and provisions hereof will not (i) conflict with or
result in a breach of, or require any consent under (A) the respective charter
or by-laws of the Guarantor, or (B) any applicable law or regulation, or any
order, writ, injunction or decree of any court or other Governmental Authority,
or any material agreement or instrument to which the Guarantor is a party or by
which it is bound or to which it is subject in each case in such manner as could
reasonably be expected to have a Material Adverse Effect; or (ii) constitute a
default under any such agreement or instrument, or result in the creation or
imposition of any Lien upon any of the revenues or Property of the Guarantor in
each case in such manner as could reasonably be expected to have a Material
Adverse Effect.
(d) Corporate Action. The Guarantor has all necessary corporate power
and authority to execute, deliver and perform its obligations under this
Guaranty Agreement and the Security Instruments to which it is a party; and the
execution, delivery and performance by the Guarantor of this Guaranty Agreement
and the other Security Instruments to which such Person is a party have been
duly authorized by all necessary corporate action on its part. This Guaranty
Agreement and the Security Instruments to which the Guarantor is a party
constitute the legal, valid and binding obligation of the Guarantor, enforceable
against the Guarantor in accordance with their terms, except as may be limited
by applicable bankruptcy, insolvency, reorganization or other similar laws
affecting creditors' rights and general principals of equity.
(e) Approvals. Other than consents heretofore obtained or described in
the Credit Agreement, no authorizations, approvals or consents of, and no
filings or registrations with,
6
<PAGE> 9
any Governmental Authority are necessary for the execution, delivery or
performance by the Guarantor of this Guaranty Agreement or the Security
Instruments to which it is a party or for the validity or enforceability
thereof. It is understood that continued performance by the Guarantor of this
Guaranty Agreement and the other Security Instruments to which it is a party
will require various filings, such as filings related to environmental matters,
ERISA matters, Taxes and intellectual property, filings required to maintain
corporate and similar standing and existence, filings pursuant to the Uniform
Commercial Code and other security filings and recordings and filings required
by the SEC, routine filings in the ordinary course of business, and filings
required in connection with the exercise by the Lenders and the Agent of
remedies in connection with the Security Instruments.
(f) Solvency. The Guarantor (i) is not insolvent as of the date hereof
and will not be rendered insolvent as a result of this Guaranty Agreement, (ii)
is not engaged in business or a transaction, or about to engage in a business or
a transaction, for which any Property or assets remaining with the Guarantor is
unreasonably small capital, and (iii) does not intend to incur, or believe it
will incur, debts that will be beyond its ability to pay as such debts mature.
(g) No Representation by Agent or Lenders. Neither any Agent, any
Lender nor any other Person has made any representation, warranty or statement
to the Guarantor in order to induce the Guarantor to execute this Guaranty
Agreement.
ARTICLE IV
SUBORDINATION OF INDEBTEDNESS
SECTION 4.01 SUBORDINATION OF ALL GUARANTOR CLAIMS. As used herein, the
term "Guarantor Claims" shall mean all debts and obligations of the Borrower to
the Guarantor, whether such debts and obligations now exist or are hereafter
incurred or arise, or whether the obligation of the Borrower thereon be direct,
contingent, primary, secondary, several, joint and several, or otherwise, and
irrespective of whether such debts or obligations be evidenced by note,
contract, open account, or otherwise, and irrespective of the Person or Persons
in whose favor such debts or obligations may, at their inception, have been, or
may hereafter be created, or the manner in which they have been or may hereafter
be acquired by. Except for payments permitted by the Credit Agreement, until the
Obligations shall be paid and satisfied in full, the Aggregate Commitments are
terminated and the Guarantor shall have performed all of its obligations
hereunder and under the other Security Instruments to which it is a party, the
Guarantor shall not receive or collect, directly or indirectly, from the
Borrower any amount upon the Guarantor Claims.
SECTION 4.02 CLAIMS IN BANKRUPTCY. In the event of receivership,
bankruptcy, reorganization, arrangement, debtor's relief, or other insolvency
proceedings involving the Borrower, the Agent on behalf of the Agent and the
Lenders shall have the right to prove their claim in any proceeding, so as to
establish their rights hereunder and receive directly from the receiver, trustee
or other court custodian, dividends and payments which would otherwise be
payable upon Guarantor Claims. The Guarantor hereby assigns such dividends and
payments to the Agent for the benefit of the Agent and the Lenders. Should any
Agent or Lender receive, for application upon the Obligations, any such dividend
or payment which
7
<PAGE> 10
is otherwise payable to the Guarantor, and which, as between the Borrower and
the Guarantor, shall constitute a credit upon the Guarantor Claims, then upon
payment in full of the Obligations, the Guarantor shall become subrogated to the
rights of the Agent and the Lenders to the extent that such payments to the
Agent and the Lenders on the Guarantor Claims have contributed toward the
liquidation of the Obligations, and such subrogation shall be with respect to
that proportion of the Obligations which would have been unpaid if the Agent and
the Lenders had not received dividends or payments upon the Guarantor Claims.
SECTION 4.03 PAYMENTS HELD IN TRUST. In the event that notwithstanding
Sections 4.01 and 4.02, the Guarantor should receive any funds, payments, claims
or distributions which is prohibited by such Sections, the Guarantor agrees: (a)
to hold in trust for the Agent and the Lenders an amount equal to the amount of
all funds, payments, claims or distributions so received, and (b) that it shall
have absolutely no dominion over the amount of such funds, payments, claims or
distributions except to pay them promptly to the Agent, for the benefit of the
Agent and the Lenders; and the Guarantor covenants promptly to pay the same to
the Agent.
SECTION 4.04 LIENS SUBORDINATE. The Guarantor agrees that, until the
Obligations are paid in full and the Aggregate Commitments terminated, any Liens
upon the Borrower's assets securing payment of the Guarantor Claims shall be and
remain inferior and subordinate to any Liens upon the Borrower's assets securing
payment of the Obligations, regardless of whether such encumbrances in favor of
the Guarantor, any Agent or Lender presently exist or are hereafter created or
attach. Without the prior written consent of the Agent, the Guarantor, during
the period in which any of the Obligations are outstanding or the Aggregate
Commitments are in effect, shall not (a) exercise or enforce any creditor's
right it may have against the Borrower, or (b) foreclose, repossess, sequester
or otherwise take steps or institute any action or proceeding (judicial or
otherwise, including without limitation the commencement of or joinder in any
liquidation, bankruptcy, rearrangement, debtor's relief or insolvency
proceeding) to enforce any Lien on assets of the Borrower held by the Guarantor.
SECTION 4.05 NOTATION OF RECORDS. All promissory notes and, upon the
request of the Agent, all accounts receivable ledgers or other evidence of the
Guarantor Claims accepted by or held by the Guarantor shall contain a specific
written notice thereon that the indebtedness evidenced thereby is subordinated
under the terms of this Guaranty Agreement.
ARTICLE V
MISCELLANEOUS
SECTION 5.01 SUCCESSORS AND ASSIGNS. This Guaranty Agreement is and
shall be in every particular available to the successors and assigns of the
Agent and Lenders and is and shall always be fully binding upon the legal
representatives, successors and assigns of the Guarantor, notwithstanding that
some or all of the monies, the repayment of which this Guaranty Agreement
applies, may be actually advanced after any bankruptcy, receivership,
reorganization or other event affecting either the Borrower or the Guarantor.
8
<PAGE> 11
SECTION 5.02 NOTICES. Any notice or demand to the Guarantor under or in
connection with this Guaranty Agreement may be given and shall conclusively be
deemed and considered to have been given and received in the manner and to the
address of the Guarantor set forth on the signature page hereto as provided for
in Section 12.02 of the Credit Agreement.
SECTION 5.03 AUTHORITY OF AGENT. The Guarantor acknowledges that the
rights and responsibilities of the Agent under this Guaranty Agreement with
respect to any action taken by the Agent or the exercise or non-exercise by the
Agent of any option, right, request, judgment or other right or remedy provided
for herein or resulting or arising out of this Guaranty Agreement shall, as
between the Agent and the Lenders, be governed by the Credit Agreement and by
such other agreements with respect thereto as may exist from time to time among
them, but, as between the Agent and the Guarantor, the Agent shall be
conclusively presumed to be acting as agent for the Lenders with full and valid
authority so to act or refrain from acting; and the Guarantor shall not be under
any obligation, or entitlement, to make any inquiry respecting such authority.
SECTION 5.04 GOVERNING LAW; SUBMISSION TO JURISDICTION.
(a) THIS GUARANTY AGREEMENT (INCLUDING, BUT NOT LIMITED TO, THE
VALIDITY AND ENFORCEABILITY HEREOF) SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS.
(b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS GUARANTY
AGREEMENT OR THE OTHER SECURITY INSTRUMENTS TO WHICH THE GUARANTOR IS A PARTY
MAY BE BROUGHT IN THE COURTS OF THE STATE OF TEXAS OR OF THE UNITED STATES OF
AMERICA FOR THE SOUTHERN DISTRICT OF TEXAS, HOUSTON DIVISION, AND, BY EXECUTION
AND DELIVERY OF THIS GUARANTY AGREEMENT, THE GUARANTOR HEREBY ACCEPTS FOR ITSELF
AND (TO THE EXTENT PERMITTED BY LAW) IN RESPECT OF ITS PROPERTY, GENERALLY AND
UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS. THE GUARANTOR HEREBY
IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING, WITHOUT LIMITATION, ANY OBJECTION
TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT
MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY SUCH ACTION OR PROCEEDING IN
SUCH RESPECTIVE JURISDICTIONS. THIS SUBMISSION TO JURISDICTION IS NONEXCLUSIVE
AND DOES NOT PRECLUDE THE AGENT OR ANY LENDER FROM OBTAINING JURISDICTION OVER
THE GUARANTOR IN ANY COURT OTHERWISE HAVING JURISDICTION.
(c) THE GUARANTOR IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OF ANY
OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF
COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO IT, AS THE
CASE MAY BE, AT ITS SAID ADDRESS, SUCH SERVICE TO BECOME EFFECTIVE 30 DAYS AFTER
SUCH MAILING.
9
<PAGE> 12
(d) NOTHING HEREIN SHALL AFFECT THE RIGHT OF ANY AGENT OR ANY LENDER OR
ANY HOLDER OF A NOTE TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO
COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE GUARANTOR IN ANY
OTHER JURISDICTION.
SECTION 5.05 ENTIRE AGREEMENT. This Guaranty Agreement and the other
Security Instruments embody the entire agreement and understanding between the
Lenders, the Agent and the Guarantor and supersede all prior agreements and
understandings between such parties relating to the subject matter hereof and
thereof. There are no unwritten oral agreements between the parties.
SECTION 5.06 SURVIVAL OF OBLIGATIONS. To the extent that any payments
on the Obligations or proceeds of any collateral are subsequently invalidated,
declared to be fraudulent or preferential, set aside or required to be repaid to
a trustee, debtor in possession, receiver or other Person under any bankruptcy
law, common law or equitable cause, then to such extent, the Obligations so
satisfied shall be revived and continue as if such payment or proceeds had not
been received and the Agent' and the Lenders' Liens, rights, powers and remedies
under this Guaranty Agreement and each Security Instrument to which the
Guarantor is a party shall continue in full force and effect. In such event,
each Security Instrument shall be automatically reinstated and the Guarantor
shall take such action as may be reasonably requested by the Agent and the
Lenders to effect such reinstatement.
10
<PAGE> 13
WITNESS THE EXECUTION HEREOF, effective as of the date first written
above.
CORRIDA RESOURCES, INC.
By: /s/ Robert P. Lindsay
-----------------------------
Robert P. Lindsay
Vice President
By: /s/ Ronald Benn
-----------------------------
Ronald Benn
Treasurer
Address for Notices:
Corrida Resources, Inc.
c/o Queen Sand Resources, Inc.
3500 Oak Lawn Drive, Suite 380
Dallas, Texas 75219
Attention: Robert P. Lindsay
Telephone: (214) 521-9959
Facsimile: (214) 521-9960
with copy to:
Queen Sand Resources, Inc.
60 Queen Street, Suite 1400
Ottawa, Canada KIP 5Y7
Attention: Mr. Ronald Benn
Telephone: (613) 230-7211
Facsimile: (613) 230-6055
and
Haynes & Boone LLP
901 Main Street, Suite 3100
Dallas, Texas 75202-3789
Attention: Mr. William L. Boeing
Telephone: (214) 651-5553
Facsimile: (214) 651-5940
11
<PAGE> 1
EXHIBIT 10.32
SECURITY AGREEMENT
(Stock, Bonds and Other Securities)
by
QUEEN SAND RESOURCES, INC.
in favor of
BANK OF MONTREAL,
as Agent
as of August 1, 1997
<PAGE> 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
ARTICLE I
Definitions
<S> <C>
Section 1.01 Terms Defined Above or in the Credit Agreement..............................................1
Section 1.02 Certain Definitions.........................................................................1
ARTICLE II
Security Interest
Section 2.01 Pledge......................................................................................2
Section 2.02 Transfer of Collateral......................................................................2
ARTICLE III
Representations and Warranties
Section 3.01 Ownership of Collateral; Encumbrances.......................................................3
Section 3.02 No Required Consent.........................................................................3
Section 3.03 Pledged Securities..........................................................................3
Section 3.04 First Priority Security Interest............................................................3
ARTICLE IV
Covenants and Agreements
Section 4.01 Sale, Disposition or Encumbrance of Collateral..............................................3
Section 4.02 Dividends or Distributions..................................................................4
Section 4.03 Stock Powers................................................................................4
Section 4.04 Voting and Other Consensual Rights..........................................................4
Section 4.05 Pledged Securities Percentage...............................................................4
ARTICLE V
Rights, Duties and Powers of Secured Party
Section 5.01 Discharge Encumbrances......................................................................4
Section 5.02 Transfer of Collateral......................................................................4
Section 5.03 Cumulative and Other Rights.................................................................5
Section 5.04 Disclaimer of Certain Duties................................................................5
Section 5.05 Modification of Obligations; Other Security.................................................5
Section 5.06 Waiver of Notice; Demand and Presentment....................................................6
Section 5.07 Custody and Preservation of the Collateral..................................................6
ARTICLE VI
Events of Default
Section 6.01 Events......................................................................................6
Section 6.02 Remedies....................................................................................6
Section 6.03 Attorney-in-Fact............................................................................7
Section 6.04 Liability for Deficiency....................................................................7
Section 6.05 Reasonable Notice...........................................................................8
Section 6.06 Pledged Securities..........................................................................8
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
Section 6.07 Non-judicial Enforcement....................................................................9
Section 6.08 Private Sale of Collateral..................................................................9
ARTICLE VII
Miscellaneous
Section 7.01 Notices.....................................................................................9
Section 7.02 Amendments and Waivers......................................................................9
Section 7.03 Copy as Financing Statement.................................................................9
Section 7.04 Possession of Collateral...................................................................10
Section 7.05 Redelivery of Collateral...................................................................10
Section 7.06 GOVERNING LAW..............................................................................10
Section 7.07 Effectiveness..............................................................................10
Section 7.08 Continuing Security Agreement..............................................................10
Section 7.09 Termination................................................................................10
</TABLE>
ii
<PAGE> 4
SECURITY AGREEMENT
(Stock, Bonds and Other Securities)
This Security Agreement (this "Agreement") is made as of August 1, 1997
by QUEEN SAND RESOURCES, INC., a Nevada corporation ("Pledgor"), in favor of
BANK OF MONTREAL, as Agent (together with any successor agent, the "Secured
Party") for the Lenders.
RECITALS
A. Pledgor, each of the financial institutions that is now or hereafter
a signatory thereto (collectively, the "Lenders"); and Secured Party, as agent
for the Lenders (in such capacity, the "Agent"), have entered into that certain
Credit Agreement dated of even date herewith (as amended from time to time, the
"Credit Agreement").
B. One of the terms and conditions stated in the Credit Agreement for
the Lenders becoming signatories to the Credit Agreement thereto and agreeing to
make extensions of credit to or on behalf of the Pledgor thereunder is the
execution and delivery to Secured Party of this Security Agreement.
C. NOW, THEREFORE, (i) in order to comply with the terms and conditions
of the Credit Agreement, (ii) to induce the Lenders, at any time or from time to
time, to loan monies, with or without security to or for the account of the
Pledgor in accordance with the terms of the Credit Agreement, and (iii) for
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, Pledgor hereby agrees as follows:
ARTICLE I
Definitions
Section 1.01 Terms Defined Above or in the Credit Agreement. As used in
this Security Agreement, the terms defined above shall have the meanings
respectively assigned to them. Other capitalized terms which are defined in the
Credit Agreement but which are not defined herein shall have the same meanings
as defined in the Credit Agreement.
Section 1.02 Certain Definitions. As used in this Security Agreement,
the following terms shall have the following meanings, unless the context
otherwise requires:
"Code" shall mean the Uniform Commercial Code as presently in effect in
the State of Texas. Unless otherwise indicated by the context herein, all
uncapitalized terms which are defined in the Code shall have their respective
meanings as used in Articles 8 and 9 of the Code.
"Collateral" shall mean any of the following types or items of
Property:
(a) the securities described or referred to in Exhibit A
attached hereto and made a part hereof; and
(b) (i) the certificates or instruments, if any, representing
such securities, (ii) all dividends (cash, stock or otherwise), cash,
instruments, rights to subscribe, purchase or sell and all other rights
and property from time to time received, receivable or otherwise
distributed in respect of or in exchange for any or all of such
1
<PAGE> 5
securities, (iii) all replacements, additions to and substitutions for
any of the property referred to in this definition, including, without
limitation, claims against third parties, (iv) the proceeds, interest,
profits and other income of or on any of the property referred to in
this definition and (v) all books and records relating to any of the
property referred to in this definition.
(c) Additional securities or other Property may from time to
time be pledged, assigned or granted to Secured Party as additional
security for the Obligations and the term "Collateral" as used herein
shall be deemed for all purposes to include all such additional
securities and Property, together with all other Property of the types
described above related thereto.
"Obligations" shall mean (a) the payment and performance of all present
and future indebtedness, obligations and liabilities of Pledgor to the Agent and
the Lenders under the Credit Agreement or any other Security Instrument,
including but not limited to, (i) the full and punctual payment of the Notes
issued thereunder, and any and all promissory notes given in substitution for
such Notes or in modification, renewal, extension or rearrangement thereof in
whole or in part, and (ii) the reimbursement and other obligations of the
Pledgor under and with respect to Letters of Credit and Letter of Credit
Agreements now outstanding or hereafter issued under the Credit Agreement; (b)
all obligations of Pledgor under this Security Agreement; and (c) all interest
(whether pre or post petition), charges, expenses, reasonable attorneys' or
other fees and any other sums payable to or incurred by any Lender in connection
with the enforcement of their rights and remedies hereunder or any other
Security Instrument.
"Pledged Securities" shall mean all of the securities and other
property (whether or not the same constitutes a "security" under the Code)
referred to in the definition of "Collateral" and all additional securities (as
that term is defined in the Code), if any, constituting Collateral under this
Security Agreement.
"Security Agreement" shall mean this Security Agreement, as the same
may from time to time be amended or supplemented.
ARTICLE II
Security Interest
Section 2.01 Pledge. Pledgor hereby pledges, assigns and grants to
Secured Party, for the benefit of the Lenders, a security interest in and right
of set-off against the Collateral to secure the prompt payment and performance
of the Obligations.
Section 2.02 Transfer of Collateral. All certificates or instruments
representing or evidencing the Pledged Securities shall be delivered to and held
pursuant hereto by Secured Party or a Person designated by Secured Party and
shall be in suitable form for transfer by delivery, or shall be accompanied by
duly executed instruments of transfer or assignment in blank, and accompanied by
any required transfer tax stamps to effect the pledge of the Pledged Securities
to Secured Party. Notwithstanding the preceding sentence, at Secured Party's
discretion, all Pledged Securities must be delivered or transferred in such
manner as to permit Secured Party to be a "protected purchaser" to the extent of
its security interest as provided in Section 8.303 of the Code (if Secured Party
otherwise qualifies as a protected purchaser). During the continuance of an
Event of Default, Secured Party shall have the
2
<PAGE> 6
right, at any time in its discretion and without notice to Pledgor, to transfer
to or to register in the name of Secured Party or any of its nominees any or all
of the Pledged Securities, subject only to the revocable rights specified in
Section 6.06. In addition, during the continuance of an Event of Default,
Secured Party shall have the right at any time to exchange certificates or
instruments representing or evidencing Pledged Securities for certificates or
instruments of smaller or larger denominations.
ARTICLE III
Representations and Warranties
In order to induce Secured Party to accept this Security Agreement on
behalf of the Lenders, Pledgor represents and warrants to Secured Party (which
representations and warranties will survive the creation and payment of the
Obligations) that:
Section 3.01 Ownership of Collateral; Encumbrances. Pledgor is the
legal and beneficial owner of the Collateral free and clear of any adverse
claim, lien, security interest, option or other charge or encumbrance except for
the security interest created by this Security Agreement. Pledgor has full
right, power and authority to pledge, assign and grant a security interest in
the Collateral to Secured Party.
Section 3.02 No Required Consent. No authorization, consent, approval
or other action by, and no notice to or filing with, any Person is required for
(a) the due execution, delivery and performance by Pledgor of this Security
Agreement, (b) the grant by Pledgor of the security interest granted by this
Security Agreement, (c) the perfection of such security interest or (d) the
exercise by Secured Party of its rights and remedies under this Security
Agreement, including the transfer of the Collateral upon foreclosure.
Section 3.03 Pledged Securities. The Pledged Securities have been duly
authorized and validly issued, and are fully paid and non-assessable. The
Pledged Securities constitute 100% of the capital stock of the issuer thereof
outstanding together with the number of shares subject to issuance pursuant to
any warrants, options or other stock rights.
Section 3.04 First Priority Security Interest. The pledge of Pledged
Securities pursuant to this Security Agreement creates a valid and perfected
first priority security interest in the Collateral, enforceable against Pledgor
and all third parties and securing payment of the Obligations.
ARTICLE IV
Covenants and Agreements
Pledgor will at all times comply with the covenants and agreements
contained in this Article IV, from the date hereof and for so long as any part
of the Obligations are outstanding.
Section 4.01 Sale, Disposition or Encumbrance of Collateral. Pledgor
will not in any way encumber any of the Collateral (or permit or suffer any of
the Collateral to be encumbered) or sell, pledge, assign, lend or otherwise
dispose of or transfer any of the Collateral to or in favor of any Person other
than Secured Party.
3
<PAGE> 7
Section 4.02 Dividends or Distributions. So long as no Event of Default
shall have occurred and be continuing: Pledgor shall be entitled to receive and
retain any and all dividends and interest paid in respect of the Collateral,
provided, however, that any and all (a) dividends and interest paid or payable
other than in cash in respect of, and instruments and other property received,
receivable or otherwise distributed in respect of, or in exchange for
(including, without limitation, any certificate or share purchased or exchanged
in connection with a tender offer or merger agreement), any Collateral, (b)
dividends and other distributions paid or payable in cash in respect of any
Collateral in connection with a partial or total liquidation or dissolution or
in connection with a reduction of capital, capital surplus or paid-in surplus,
or reclassification, and (c) cash paid, payable or otherwise distributed in
respect of principal of, or in redemption of, or in exchange for, any
Collateral, shall be, and shall be forthwith delivered to Secured Party to hold
as, Collateral and shall, if received by Pledgor, be received in trust for the
benefit of Secured Party, be segregated from the other property or funds of
Pledgor, and be forthwith delivered to Secured Party as Collateral in the same
form as so received (with any necessary indorsement).
Section 4.03 Stock Powers. Pledgor shall furnish to Secured Party such
stock powers and other instruments as may be required by Secured Party to assure
the transferability of the Collateral when and as often as may be reasonably
requested by Secured Party.
Section 4.04 Voting and Other Consensual Rights. Except to the extent
otherwise provided in subsection 6.06(d), Pledgor shall be entitled to exercise
any and all voting and other consensual rights pertaining to the Collateral or
any part thereof for any purpose not inconsistent with the terms of this
Security Agreement; provided however, that Pledgor shall not exercise or refrain
from exercising any such right if such action would have a Material Adverse
Effect.
Section 4.05 Pledged Securities Percentage. The Pledged Securities will
at all times constitute not less than 100% of the capital stock of the issuer
thereof outstanding, together with the number of shares subject to issuance
pursuant to any warrants, options or other stock rights. Pledgor will not permit
any issuer of any of the Pledged Securities to issue any new shares of any class
of capital stock of such issuer without the prior written consent of Secured
Party.
ARTICLE V
Rights, Duties and Powers of Secured Party
The following rights, duties and powers of Secured Party are applicable
irrespective of whether an Event of Default occurs and is continuing:
Section 5.01 Discharge Encumbrances. Secured Party may, at its option,
discharge any taxes or Liens at any time levied or placed on the Collateral and
not paid by the Pledgor when due, except for those items being contested in good
faith, by appropriate proceedings, diligently pursued and for which adequate
reserves have been provided in accordance with GAAP. Pledgor agrees to reimburse
Secured Party upon demand for any payment so made, plus interest thereon from
the date of Secured Party's demand at the Post-Default Rate.
Section 5.02 Transfer of Collateral. To the extent permitted and in the
manner required by the Credit Agreement, Secured Party may transfer any or all
of the Obligations, and upon any such transfer Secured Party may transfer its
interest in any or all of the
4
<PAGE> 8
Collateral and shall be fully discharged thereafter from all liability therefor.
Any transferee of the Collateral shall be vested with all rights, powers and
remedies of Secured Party hereunder.
Section 5.03 Cumulative and Other Rights. The rights, powers and
remedies of Secured Party hereunder are in addition to all rights, powers and
remedies given by law or in equity. The exercise by Secured Party of any one or
more of the rights, powers and remedies herein shall not be construed as a
waiver of any other rights, powers and remedies, including, without limitation,
any other rights of set-off. If any of the Obligations are given in renewal,
extension for any period or rearrangement, or applied toward the payment of debt
secured by any lien, Secured Party shall be, and is hereby, subrogated to all
the rights, titles, interests and liens securing the debt so renewed, extended,
rearranged or paid.
Section 5.04 Disclaimer of Certain Duties.
(a) The powers conferred upon Secured Party by this Security Agreement
are to protect its interest in the Collateral and shall not impose any duty upon
Secured Party or any Lender to exercise any such powers. Pledgor hereby agrees
that Secured Party shall not be liable for, nor shall the indebtedness evidenced
by the Obligations be diminished by, Secured Party's delay or failure to collect
upon, foreclose, sell, take possession of or otherwise obtain value for the
Collateral (other than for acts or omissions that constitute gross negligence or
wilful misconduct).
(b) To the fullest extent permitted by applicable law, Secured Party
shall be under no duty whatsoever to make or give any presentment, notice of
dishonor, protest, demand for performance, notice of non-performance, notice of
intent to accelerate, notice of acceleration, or other notice or demand in
connection with any Collateral or the Obligations, or to take any steps
necessary to preserve any rights against any Guarantor or other Person. Pledgor
waives any right of marshaling in respect of any and all Collateral, and waives
any right to require Secured Party or any Lender to proceed against any
Guarantor or other Person, exhaust any Collateral or enforce any other remedy
which Secured Party or any Lender now has or may hereafter have against the
Pledgor, any Guarantor or other Person.
Section 5.05 Modification of Obligations; Other Security. Pledgor
waives: (a) any and all notice of acceptance, creation, modification,
rearrangement, renewal or extension for any period of any instrument executed by
the Pledgor, any Guarantor or any other Person in connection with the
Obligations and (b) any defense of the Pledgor, any Guarantor or any such Person
by reason of disability, lack of authorization, cessation of the liability of
the Pledgor, any Guarantor or any such Person or for any other reason. Pledgor
authorizes Secured Party, without notice or demand and without any reservation
of rights against Pledgor and without affecting Pledgor's liability hereunder or
on the Obligations, from time to time to (i) take and hold other property, other
than the Collateral, as security for the Obligations, and exchange, enforce,
waive and release any or all of the Collateral, (ii) apply the Collateral in the
manner permitted by this Security Agreement and (iii) renew, extend for any
period, accelerate, amend or modify, supplement, enforce, compromise, settle,
waive or release the obligations of the Pledgor, any Guarantor or any other
Person or any instrument or Agreement of such other Person with respect to any
or all of the Obligations or Collateral.
5
<PAGE> 9
Section 5.06 Waiver of Notice; Demand and Presentment. Except as may be
expressly required in the Credit Agreement, this Security Agreement or the Code,
Pledgor hereby waives any demand, notice of default, notice of acceleration of
the maturity of the Obligations, notice of intention to accelerate the maturity
of the Obligations, presentment, protest and notice of dishonor as to any action
taken by Secured Party or any Lender in connection with this Security Agreement,
or any instrument or document.
Section 5.07 Custody and Preservation of the Collateral. Secured Party
shall be deemed to have exercised reasonable care in the custody and
preservation of the Collateral in its possession if the Collateral is accorded
treatment substantially equal to that which comparable secured parties accord
comparable collateral, it being understood and agreed, however, that neither
Secured Party nor any Lender shall have responsibility for (a) ascertaining or
taking action with respect to calls, conversions, exchanges, maturities, tenders
or other matters relative to any Collateral, whether or not such Person has or
is deemed to have knowledge of such matters, or (b) taking any necessary steps
to preserve rights against Persons or entities with respect to any Collateral.
ARTICLE VI
Events of Default
Section 6.01 Events. The occurrence of any Event of Default under the
Credit Agreement shall constitute an Event of Default under this Security
Agreement.
Section 6.02 Remedies. During the continuance of any Event of Default,
Secured Party may take any or all of the following actions without notice
(except where expressly required below or in the Credit Agreement) or demand to
Pledgor:
(a) Sell, in one or more sales and in one or more parcels, or otherwise
dispose of any or all of the Collateral in any commercially reasonable manner as
Secured Party may elect, in a public or private transaction, at any location as
deemed reasonable by Secured Party either for cash or credit or for future
delivery at such price as Secured Party may deem fair, and (unless prohibited by
the Code, as adopted in any applicable jurisdiction) Secured Party or any Lender
may be the purchaser of any or all Collateral so sold and may apply upon the
purchase price therefor any Obligations secured hereby. Any such sale or
transfer by Secured Party either to itself or to any other Person shall be
absolutely free from any claim of right by Pledgor, including any equity or
right of redemption, stay or appraisal which Pledgor has or may have under any
rule of law, regulation or statute now existing or hereafter adopted. Upon any
such sale or transfer, Secured Party shall have the right to deliver, assign and
transfer to the purchaser or transferee thereof the Collateral so sold or
transferred. If Secured Party deems it advisable to do so, it may restrict the
bidders or purchasers of any such sale or transfer to Persons or entities who
will represent and agree that they are purchasing the Collateral for their own
account and not with the view to the distribution or resale of any of the
Collateral. Secured Party may, at its discretion, provide for a public sale, and
any such public sale shall be held at such time or times within ordinary
business hours and at such place or places as Secured Party may fix in the
notice of such sale. Secured Party shall not be obligated to make any sale
pursuant to any such notice. Secured Party may, without notice or publication,
adjourn any public or private sale by announcement at any time and place fixed
for such sale, and such sale may be made at any time or place to which the same
may be so adjourned. In the event any sale or transfer hereunder is not
completed or is defective in the opinion of Secured Party, such sale or
6
<PAGE> 10
transfer shall not exhaust the rights of Secured Party hereunder, and Secured
Party shall have the right to cause one or more subsequent sales or transfers to
be made hereunder. If only part of the Collateral is sold or transferred such
that the Obligations remain outstanding (in whole or in part), Secured Party's
rights and remedies hereunder shall not be exhausted, waived or modified, and
Secured Party is specifically empowered to make one or more successive sales or
transfers until all the Collateral shall be sold or transferred and all the
Obligations are paid. In the event that Secured Party elects not to sell the
Collateral, Secured Party retains its rights to dispose of or utilize the
Collateral or any part or parts thereof in any manner authorized or permitted by
law or in equity, and to apply the proceeds of the same towards payment of the
Obligations. Each and every method of disposition of the Collateral described in
this Section 6.02(a) or in Section 6.02(d) shall constitute disposition in a
commercially reasonable manner.
(b) Apply proceeds of the disposition of the Collateral to the
Obligations in any manner elected by Secured Party and permitted by the Credit
Agreement, the Code or otherwise permitted by law or in equity. Such application
may include, without limitation, the reasonable attorneys' fees and legal
expenses incurred by Secured Party and the Lenders.
(c) Appoint any Person as agent to perform any act or acts necessary or
incident to any sale or transfer by Secured Party of the Collateral.
(d) Apply and set-off (i) any deposits of Pledgor now or hereafter held
by Secured Party or any Lender; (ii) all claims of Pledgor against Secured Party
or any Lender, now or hereafter existing; (iii) any other property, rights or
interests of Pledgor which comes into the possession or custody or under the
control of Secured Party or any Lender; and (iv) the proceeds of any of the
foregoing as if the same were included in the Collateral. Secured Party agrees
to notify Pledgor promptly after any such set-off or application (or after
learning thereof in the case of such action by a Lender); provided, however, the
failure of Secured Party to give any notice shall not affect the validity of
such set-off or application.
(e) Execute, assign and endorse negotiable and other instruments for
the payment of money, documents of title or other evidences of payment, shipment
or storage for any form of Collateral on behalf of and in the name of Pledgor.
(f) Exercise all other rights and remedies permitted by law or in
equity.
Section 6.03 Attorney-in-Fact. Pledgor hereby irrevocably appoints
Secured Party as Pledgor's attorney-in-fact, with full authority in the place
and stead of Pledgor and in the name of Pledgor or otherwise, from time to time
in Secured Party's discretion during the continuance of an Event of Default, but
at Pledgor's cost and expense and without notice to Pledgor, to take any action
and to execute any assignment, certificate, financing statement, stock power,
notification, document or instrument which Secured Party may deem necessary or
advisable to accomplish the purposes of this Security Agreement, including,
without limitation, to receive, endorse and collect all instruments made payable
to Pledgor representing any dividend, interest payment or other distribution in
respect of the Collateral or any part thereof and to give full discharge for the
same.
Section 6.04 Liability for Deficiency. If any sale or other disposition
of Collateral by Secured Party or any other action of Secured Party or any
Lender hereunder or under any other Security Instrument results in reduction of
the Obligations, such action will not release
7
<PAGE> 11
Pledgor from its liability to Secured Party and the Lenders for any unpaid
Obligations, including costs, charges and expenses incurred in the liquidation
of Collateral, together with interest thereon, and the same shall be immediately
due and payable to Agent at its Principal Office for the benefit of the Lenders.
Section 6.05 Reasonable Notice. If any applicable provision of any law
requires Secured Party or any Lender to give reasonable notice of any sale or
disposition or other action, Pledgor hereby agrees that 10 days' prior written
notice shall constitute reasonable notice thereof. Such notice, in the case of
public sale, shall state the time and place fixed for such sale and, in the case
of private sale, the time after which such sale is to be made.
Section 6.06 Pledged Securities. During the continuance of an Event of
Default:
(a) All rights of Pledgor to receive the dividends and interest
payments which it would otherwise be authorized to receive and retain pursuant
to Section 4.02 shall cease, and all such rights shall thereupon become vested
in Secured Party who shall thereupon have the sole right to receive and hold as
Collateral such dividends and interest payments, but Secured Party shall have no
duty to receive and hold such dividends and interest payments and shall not be
responsible for any failure to do so or delay in so doing.
(b) All dividends and interest payments which are received by Pledgor
contrary to the provisions of this Section 6.06 shall be received in trust for
the benefit of Secured Party (on behalf of the Lenders), shall be segregated
from other funds of Pledgor and shall be forthwith paid over to Secured Party as
Collateral in the same form as so received (with any necessary indorsement).
(c) Secured Party may exercise any and all rights of conversion,
exchange, subscription or any other rights, privileges or options pertaining to
any of the Pledged Securities as if it were the absolute owner thereof,
including, without limitation, the right to exchange at its discretion, any and
all of the Pledged Securities upon the merger, consolidation, reorganization,
recapitalization or other readjustment of any issuer of such Pledged Securities
or upon the exercise by any such issuer or Secured Party of any right, privilege
or option pertaining to any of the Pledged Securities, and in connection
therewith, to deposit and deliver any and all of the Pledged Securities with any
committee, depository, transfer agent, registrar or other designated agency upon
such terms and conditions as it may determine, all without liability except to
account for property actually received by it, but Secured Party shall have no
duty to exercise any of the aforesaid rights, privileges or options and shall
not be responsible for any failure to do so or delay in so doing.
(d) If the issuer of any Pledged Securities is the subject of
bankruptcy, insolvency, receivership, custodianship or other proceedings under
the supervision of any Governmental Authority, then all rights of Pledgor to
exercise the voting and other consensual rights which Pledgor would otherwise be
entitled to exercise pursuant to Section 4.04 with respect to the Pledged
Securities issued by such issuer shall cease, and all such rights shall
thereupon become vested in Secured Party who shall thereupon have the sole right
to exercise such voting and other consensual rights, but Secured Party shall
have no duty to exercise any such voting or other consensual rights and shall
not be responsible for any failure to do so or delay in so doing.
8
<PAGE> 12
Section 6.07 Non-judicial Enforcement. Secured Party may enforce its
rights hereunder without prior judicial process or judicial hearing, and to the
extent permitted by law, Pledgor expressly waives any and all legal rights which
might otherwise require Secured Party to enforce its rights by judicial process.
Section 6.08 Private sale of Collateral. Pledgor recognizes that
Secured Party may deem it impracticable to effect a public sale of all or any
part of the Collateral and that Secured Party may, therefore, determine to make
one or more private sales of any such Collateral to a restricted group of
purchasers who will be obligated to agree, among other things, to acquire such
Collateral for their own account, for investment and not with a view to the
distribution or resale thereof. Pledgor acknowledges that any such private sale
may be at prices and on terms less favorable to the seller than the prices and
other terms which might have been obtained at a public sale and, notwithstanding
the foregoing, agrees that such private sale shall be deemed to have been made
in a commercially reasonably manner and that Secured Party shall have no
obligation to delay sale of any such securities for the period of time necessary
to permit Pledgor to register such Collateral for public sale under the
Securities Act of 1933, as amended (the "Securities Act"). Pledgor further
acknowledges and agrees that any offer to sell such Collateral which has been
(i) publicly advertised on a bona fide basis in a newspaper or other publication
of general circulation in the financial community of Houston, Texas (to the
extent that such an offer may be so advertised without prior registration under
the securities act), or (ii) made privately in the manner described above to not
less than fifteen (15) bona fide offerees shall be deemed to involve a "public
sale" for the purposes of Section 9-504(c) of the code (or any successor or
similar, applicable statutory provision) as then in effect in the state of
texas, notwithstanding that such sale may not constitute a "public offering"
under the Securities Act and that Secured Party or any lender may, in such
event, bid for the purchase of such Collateral.
ARTICLE VII
Miscellaneous
Section 7.01 Notices. Any notice required or permitted to be given
under or in connection with this Security Agreement shall be in writing and
shall be given as provided in the Credit Agreement at the address set forth
therein.
Section 7.02 Amendments and Waivers. The acceptance of partial or
delinquent payments by any Lender or any forbearance, failure or delay by them
in exercising any right, power or remedy under any Security Instrument shall not
be deemed a waiver of any obligation of Pledgor or of any of their rights,
powers or remedies; and no partial exercise of any right, power or remedy shall
preclude any other or further exercise thereof. The Lenders may remedy any Event
of Default hereunder or in connection with the Obligations without waiving the
Event of Default so remedied. Pledgor hereby agrees that if the Lenders agrees
to a waiver of any provision hereunder, or an exchange of or release of the
Collateral, or the addition or release of any other Person, any such action
shall not constitute a waiver of any of Secured Party's other rights or of
Pledgor's obligations hereunder. This Agreement may be amended only by an
instrument in writing as set forth in Section 12.04 of the Credit Agreement.
Section 7.03 Copy as Financing Statement. A photocopy or other
reproduction of this Security Agreement may be delivered by Pledgor or Secured
Party to any financial intermediary or other third party for the purpose of
transferring or perfecting any or all of the Pledged Securities to Secured Party
or its designee or assignee.
9
<PAGE> 13
Section 7.04 Possession of Collateral. Secured Party shall be deemed to
have possession of any Collateral in transit to it or set apart for it (or, in
either case, any of its agents, affiliates or correspondents).
Section 7.05 Redelivery of Collateral. If any sale or transfer of
Collateral by Secured Party results in full satisfaction of the Obligations, and
after such sale or transfer and discharge there remains a surplus of proceeds,
Secured Party will deliver to Pledgor such excess proceeds in a commercially
reasonable time; provided, however, that neither Secured Party nor any Lender
shall have any liability for any interest, cost or expense in connection with
any reasonable delay in delivering such proceeds to Pledgor.
SECTION 7.06 GOVERNING LAW. THIS SECURITY AGREEMENT (INCLUDING, BUT NOT
LIMITED TO, THE VALIDITY AND ENFORCEABILITY HEREOF) SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS.
Section 7.07 Effectiveness. This Security Agreement becomes effective
upon the execution hereof by Pledgor and delivery of the same to Secured Party;
and it is not necessary for Secured Party or any Lender to execute any
acceptance hereof or otherwise signify or express its acceptance hereof.
Section 7.08 Continuing Security Agreement.
(a) Except as may be expressly applicable pursuant to Section 9-505 of
the Code, no action taken or omission to act by Secured Party or the Lenders
hereunder, including, without limitation, any exercise of voting or consensual
rights pursuant to Section 4.04 or any other action taken or inaction pursuant
to Section 6.02, shall be deemed to constitute a retention of the Collateral in
satisfaction of the Obligations or otherwise to be in full satisfaction of the
Obligations, and the Obligations shall remain in full force and effect, until
Secured Party and the Lenders shall have applied payments (including, without
limitation, collections from Collateral) towards the Obligations in the full
amount then outstanding or until such subsequent time as is hereinafter provided
in Section 7.09.
(b) To the extent that any payments on the Obligations or proceeds of
the Collateral are subsequently invalidated, declared to be fraudulent or
preferential, set aside or required to be repaid to a trustee, debtor in
possession, receiver or other Person under any bankruptcy law, common law or
equitable cause, then to such extent the Obligations so satisfied shall be
revived and continue as if such payment or proceeds had not been received by
Secured Party or the Lenders; and their respective security interests, rights,
powers and remedies hereunder and under the other Security Instruments shall
continue in full force and effect. In such event, this Security Agreement shall
be automatically reinstated if it shall theretofore have been terminated
pursuant to Section 7.09.
Section 7.09 Termination. The grant of a security interest hereunder
and all of rights, powers and remedies in connection herewith shall remain in
full force and effect until Secured Party has (a) retransferred and delivered
all Collateral in its possession to Pledgor, (b) executed a registration of
release with respect to all Pledged Securities, if any, as to which Secured
Party held a registered pledge; and (c) executed a written release or
termination statement and reassigned to Pledgor without recourse or warranty any
remaining Collateral and all rights conveyed hereby. Upon the complete payment
of the Obligations and the compliance by Pledgor with all covenants and
agreements hereof, Secured Party, at the
10
<PAGE> 14
written request and expense of Pledgor, will release, reassign and transfer the
Collateral to Pledgor and declare this Security Agreement to be of no further
force or effect. Notwithstanding the foregoing, the provisions of subsection
7.08(b) shall survive the termination of this Security Agreement unless such
provisions are specifically terminated by a written release thereof.
11
<PAGE> 15
PLEDGOR: QUEEN SAND RESOURCES, INC., a
Nevada corporation
By: /s/ Robert P. Lindsay
-------------------------------
Robert P. Lindsay
Vice President
By: /s/ Ronald Benn
-------------------------------
Ronald Benn
Vice President and Treasurer
12
<PAGE> 16
EXHIBIT A
PLEDGED SECURITIES
Corrida Resources, Inc., a Nevada corporation
One hundred thousand shares (100,000) of the capital stock, par value
$0.01 per share, of Corrida Resources, Inc., standing in the name of
the Pledgor and being evidenced by Certificate No. 001.
Northland Operating Co., a Nevada corporation
One thousand shares (1000) of the capital stock, par value $0.01 per
share, of Northland Operating Co., standing in the name of the Pledgor
and being evidenced by Certificate No. 001.
13
<PAGE> 1
EXHIBIT 10.33
PREPARED BY AND
WHEN RECORDED RETURN TO:
VINSON & ELKINS L.L.P.
First City Tower, Suite 3562
1001 Fannin Street
Houston, TX 77002-6760
Attn: Linda Daugherty
MORTGAGE, DEED OF TRUST, ASSIGNMENT OF PRODUCTION,
SECURITY AGREEMENT AND FINANCING STATEMENT
FROM
QUEEN SAND RESOURCES, INC.
TO
JAMES A. WHITMORE, AS TRUSTEE
AND
BANK OF MONTREAL,
AS AGENT,
FOR THE BENEFIT OF
FOR THE LENDERS AS HEREAFTER DEFINED
A CARBON, PHOTOGRAPHIC, OR OTHER REPRODUCTION OF THIS INSTRUMENT IS SUFFICIENT
AS A FINANCING STATEMENT.
A POWER OF SALE HAS BEEN GRANTED IN THIS INSTRUMENT. IN CERTAIN STATES, A POWER
OF SALE MAY ALLOW THE TRUSTEE OR THE AGENT TO TAKE THE MORTGAGED PROPERTY AND
SELL IT WITHOUT GOING TO COURT IN A FORECLOSURE ACTION UPON DEFAULT BY THE
MORTGAGOR UNDER THIS INSTRUMENT.
THIS INSTRUMENT CONTAINS AFTER-ACQUIRED PROPERTY PROVISIONS.
THIS INSTRUMENT SECURES PAYMENT OF FUTURE ADVANCES.
THIS INSTRUMENT COVERS PROCEEDS OF MORTGAGED PROPERTY.
<PAGE> 2
THIS INSTRUMENT COVERS MINERALS AND OTHER SUBSTANCES OF VALUE WHICH MAY BE
EXTRACTED FROM THE EARTH (INCLUDING WITHOUT LIMITATION OIL AND GAS) AND WHICH
WILL BE FINANCED AT THE WELLHEADS OF THE WELL OR WELLS LOCATED ON THE PROPERTIES
DESCRIBED IN EXHIBIT A HERETO. THIS FINANCING STATEMENT IS TO BE FILED OR FILED
FOR RECORD, AMONG OTHER PLACES, IN THE REAL ESTATE RECORDS OR SIMILAR RECORDS OF
THE COUNTY RECORDERS OF THE COUNTIES LISTED ON EXHIBIT A HERETO AND WITH A CLERK
OF COURT (OR, AS TO ORLEANS PARISH, THE RECORDER OF MORTGAGES) IN ANY PARISH IN
THE STATE OF LOUISIANA. THE MORTGAGOR HAS AN INTEREST OF RECORD IN THE REAL
ESTATE CONCERNED, WHICH INTEREST IS DESCRIBED IN EXHIBIT A ATTACHED HERETO.
PORTIONS OF THE MORTGAGED PROPERTY ARE GOODS WHICH ARE OR ARE TO BECOME AFFIXED
TO OR FIXTURES ON THE LAND DESCRIBED IN OR REFERRED TO IN EXHIBIT A HERETO. THIS
FINANCING STATEMENT IS TO BE FILED FOR RECORD OR RECORDED, AMONG OTHER PLACES,
IN THE REAL ESTATE RECORDS OR SIMILAR RECORDS OF EACH COUNTY IN WHICH SAID LAND
OR ANY PORTION THEREOF IS LOCATED AND WITH A CLERK OF COURT (OR, AS TO ORLEANS
PARISH, THE RECORDER OF MORTGAGES) IN ANY PARISH IN THE STATE OF LOUISIANA. THE
MORTGAGOR IS THE OWNER OF RECORD INTEREST IN THE REAL ESTATE CONCERNED. THIS
INSTRUMENT IS ALSO TO BE INDEXED IN THE INDEX OF FINANCING STATEMENTS.
THIS IS DEEMED TO BE A LINE OF CREDIT MORTGAGE UNDER THE PROVISIONS OF SECTION
48-7- 4 N.M.S.A.
-2-
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I
Grant of Lien and Indebtedness Secured
Section 1.01 Grant of Liens.......................................... 1
Section 1.02 Grant of Security Interest.............................. 4
Section 1.03 Indebtedness Secured.................................... 4
Section 1.04 Fixture Filing, Etc..................................... 5
Section 1.05 Pro Rata Benefit........................................ 5
Section 1.06 Defined Terms........................................... 6
ARTICLE II
Assignment of Production
Section 2.01 Assignment.............................................. 6
Section 2.02 Rights Under Certain Lien Statutes...................... 6
Section 2.03 No Modification of Payment Indebtedness................. 7
Section 2.04 Payments to Mortgagor................................... 7
ARTICLE III
Representations, Warranties and Covenants
Section 3.01 Title................................................... 7
Section 3.02 Defend Title............................................ 7
Section 3.03 Not a Foreign Person.................................... 8
Section 3.04 Power to Create Lien and Security....................... 8
Section 3.05 Revenue and Cost Bearing Interest....................... 8
Section 3.06 Rentals Paid; Leases in Effect.......................... 8
Section 3.07 Operation By Third Parties.............................. 8
Section 3.08 Abandon, Sales.......................................... 8
Section 3.09 Failure to Perform...................................... 8
Section 3.10 Operation of Mortgaged Property, Etc.................... 9
ARTICLE IV
Rights and Remedies
Section 4.01 Event of Default........................................ 10
Section 4.02 Foreclosure and Sale.................................... 10
Section 4.03 Substitute Trustees and Agents.......................... 11
Section 4.04 Judicial Foreclosure; Receivership...................... 11
Section 4.05 Foreclosure for Installments............................ 11
Section 4.06 Separate Sales.......................................... 12
Section 4.07 Possession of Mortgaged Property........................ 12
Section 4.08 Occupancy After Foreclosure............................. 12
Section 4.09 Remedies Cumulative, Concurrent and Nonexclusive........ 12
</TABLE>
-i-
<PAGE> 4
<TABLE>
<S> <C>
Section 4.10 No Release of Indebtedness.................................... 13
Section 4.11 Release of and Resort to Mortgaged Property................... 13
Section 4.12 Waiver of Redemption, Notice and Marshalling of Assets, Etc... 13
Section 4.13 Discontinuance of Proceedings................................. 14
Section 4.14 Application of Proceeds....................................... 14
Section 4.15 Resignation of Operator....................................... 14
Section 4.16 INDEMNITY..................................................... 14
Section 4.17 Power of Sale in Oklahoma..................................... 15
ARTICLE V
The Trustee
Section 5.01 Duties, Rights, and Powers of Trustee......................... 15
Section 5.02 Successor Trustee............................................. 15
Section 5.03 Retention of Moneys........................................... 16
ARTICLE VI
Miscellaneous
Section 6.01 Instrument Construed as Mortgage, Etc......................... 16
Section 6.02 Release of Lien............................................... 16
Section 6.03 Severability.................................................. 16
Section 6.04 Successors and Assigns of Parties............................. 17
Section 6.05 Satisfaction of Prior Encumbrance............................. 17
Section 6.06 Subrogation of Trustee........................................ 17
Section 6.07 Nature of Covenants........................................... 17
Section 6.08 Notices....................................................... 17
Section 6.09 Counterparts.................................................. 17
SECTION 6.10 GOVERNING LAW................................................. 17
Section 6.11 Financing Statement; Fixture Filing........................... 18
SECTION 6.12 EXCULPATION PROVISIONS........................................ 19
Section 6.13 No Paraph..................................................... 19
ARTICLE VII
Special Louisiana Provisions
Section 7.01 Maximum Amount................................................ 19
Section 7.02 Keeper........................................................ 19
Section 7.03 Confession of Judgment........................................ 19
Section 7.04 Waivers....................................................... 20
ARTICLE VIII
Special Mississippi Provisions
Section 8.01 Mortgaged Property............................................ 20
Exhibit A - Mortgaged Property
</TABLE>
-ii-
<PAGE> 5
MORTGAGE, DEED OF TRUST, ASSIGNMENT OF PRODUCTION,
SECURITY AGREEMENT AND FINANCING STATEMENT
THIS MORTGAGE, DEED OF TRUST, ASSIGNMENT OF PRODUCTION, SECURITY
AGREEMENT AND FINANCING STATEMENT (this "Mortgage") is entered into as of the
effective time and date hereinafter stated (the "Effective Date") by QUEEN SAND
RESOURCES, INC., a Nevada corporation with principal offices at 3500 Oak Lawn
Drive, Suite 380, Dallas, Texas 75219 ("Mortgagor"), for the benefit of BANK OF
MONTREAL, as Agent, with offices at 700 Louisiana, Suite 4400, Houston, Texas
77002, (together with any successor agents, "Agent") for the Lenders
(hereinafter defined), and for the benefit of the Lenders.
R E C I T A L S:
A. On even date herewith, Mortgagor, the lenders signatory to the
Credit Agreement (as hereinafter defined) (together with any lenders that become
a party under the terms of the Credit Agreement collectively, the "Lenders"),
and the Agent have entered into that certain Credit Agreement (as the same may
be amended, modified, supplemented or restated from time to time, the "Credit
Agreement") pursuant to which the Lenders have made or agreed to make certain
advances to and on behalf of the Mortgagor.
B. The Lenders have conditioned their obligations under the Credit
Agreement upon the execution and delivery by Mortgagor of this Mortgage, and
Mortgagor has agreed to enter into this Mortgage.
C. Therefore, in order to comply with the terms and conditions of the
Credit Agreement and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Mortgagor hereby agrees as
follows:
ARTICLE I
Grant of Lien and Indebtedness Secured
Section 1.01 Grant of Liens. To secure payment of the Indebtedness (as
hereinafter defined) and the performance of the covenants and obligations of
Mortgagor under the Loan Documents, Mortgagor does by these presents hereby (i)
GRANT, BARGAIN, SELL, ASSIGN, SET OVER, TRANSFER and CONVEY unto JAMES A.
WHITMORE, as Trustee, whose address for notice hereunder is 700 Louisiana, Suite
4400, Houston, Texas 77002 ("Trustee") and the Trustee's successors and
substitutes in trust hereunder with power of sale, for the use and benefit of
Agent and the Lenders, all of the following described real and personal
property, rights, titles, interests and estates which are located in (or cover
properties located in) the State of Texas or which are located within (or cover
properties located within) the offshore area over which the United States of
America asserts jurisdiction and to which the laws of any such state are
applicable with respect to this Mortgage and/or the liens or security interests
created hereby (the "Deed of Trust Mortgaged Property") and (ii) GRANT,
MORTGAGE, PLEDGE, HYPOTHECATE AND A GRANT A POWER OF SALE to Agent, for its
benefit and the benefit of the Lenders, with respect to, all of the following
described real and personal property, rights, titles, interests and estates
which were not granted to Trustee in clause (i) above (the "Other Mortgaged
Property"):
(a) All rights, titles, interests and estates now owned or hereafter
acquired by Mortgagor in and to the oil and gas leases and/or oil, gas and other
mineral leases, operating rights, and other interests and estates and the lands
and premises covered or affected thereby
<PAGE> 6
which are described on Exhibit A hereto (collectively, the "Hydrocarbon
Property"), and specifically, but without limitation, the undivided interests of
Mortgagor which are more particularly described on attached Exhibit A, even
though the interest of the Mortgagor in such Hydrocarbon Property may be
incorrectly described in Exhibit A hereto.
(b) All rights, titles, interests and estates now owned or hereafter
acquired by Mortgagor in and to (i) the properties now or hereafter pooled or
unitized with the Hydrocarbon Property; (ii) all presently existing or future
unitization, communitization, pooling agreements and declarations of pooled
units and the units created thereby (including, without limitation, all units
created under orders, regulations, rules or other official acts of any Federal,
State or other governmental body or agency having jurisdiction and any units
created solely among working interest owners pursuant to operating agreements or
otherwise) which may affect all or any portion of the Hydrocarbon Property
including, without limitation, those units which may be described or referred to
on attached Exhibit A; (iii) all operating agreements, production sales or other
contracts, farmout agreements, farm-in agreements, area of mutual interest
agreements, equipment leases and other agreements described or referred to in
this Mortgage or which relate to any of the Hydrocarbon Property or interests in
the Hydrocarbon Property described or referred to herein or on attached Exhibit
A or to the production, sale, purchase, exchange, processing, handling, storage,
transporting or marketing of the Hydrocarbons (as hereinafter defined) from or
attributable to such Hydrocarbon Property or interests; (iv) all geological,
geophysical, engineering, accounting, title, legal, and other technical or
business data concerning the Mortgaged Property (as hereinafter defined), the
Hydrocarbons, or any other item of Property which are in the possession of
Mortgagor or in which Mortgagor can otherwise grant a security interest, and all
books, files, records, magnetic media, computer records, and other forms of
recording or obtaining access to such data; and (v) the Hydrocarbon Property
described on attached Exhibit A and covered by this Mortgage even though
Mortgagor's interests therein be incorrectly described or a description of a
part or all of such Hydrocarbon Property or Mortgagor's interests therein be
omitted; it being intended by Mortgagor and Agent herein to cover and affect
hereby all interests which Mortgagor may now own or may hereafter acquire in and
to the Hydrocarbon Property notwithstanding that the interests as specified on
Exhibit A may be limited to particular lands, specified depths or particular
types of property interests.
(c) All rights, titles, interests and estates now owned or hereafter
acquired by Mortgagor in and to all oil, gas, casinghead gas, condensate,
distillate, liquid hydrocarbons, gaseous hydrocarbons and all products refined
therefrom and all other minerals (collectively, the "Hydrocarbons") in and under
and which may be produced and saved from or attributable to the Hydrocarbon
Property, the lands pooled or unitized therewith and Mortgagor's interests
therein, including all oil in tanks and all rents, issues, profits, proceeds,
products, revenues and other income from or attributable to the Hydrocarbon
Property, the lands pooled or unitized therewith and Mortgagor's interests
therein which are subjected or required to be subjected to the Liens and
security interests of this Mortgage.
(d) All tenements, hereditaments, appurtenances and properties in
anywise appertaining, belonging, affixed or incidental to the Hydrocarbon
Property, rights, titles, interests and estates described or referred to in
paragraphs (a) and (b) above, which are now owned or which may hereafter be
acquired by Mortgagor, including, without limitation, any and all property, real
or personal, now owned or hereafter acquired and situated upon, used, held for
use, or useful in connection with the operating, working or development of any
of such Hydrocarbon Property or the lands pooled or unitized therewith
(excluding drilling rigs,
-2-
<PAGE> 7
trucks, automotive equipment or other personal property which may be taken to
the premises for the purpose of drilling a well or for other similar temporary
uses) and including any and all oil wells, gas wells, injection wells or other
wells, buildings, structures, platforms, risers, templates, pipelines, field
separators, liquid extraction plants, plant compressors, pumps, pumping units,
pipelines, sales and flow lines, gathering systems, field gathering systems,
salt water disposal facilities, tanks and tank batteries, yard inventory,
fixtures, valves, fittings, machinery and parts, engines, boilers, meters,
apparatus, equipment, appliances, tools, implements, cables, wires, towers,
casing, tubing and rods, surface leases, rights-of-way, easements, servitudes,
licenses and other surface and subsurface rights together with all additions,
substitutions, replacements, accessions and attachments to any and all of the
foregoing properties.
(e) Any property that may from time to time hereafter, by delivery or
by writing of any kind, be subjected to the Lien and security interest hereof by
Mortgagor or by anyone on Mortgagor's behalf; and the Trustee is hereby
authorized to receive the same at any time as additional security hereunder.
(f) All of the rights, titles and interests of every nature whatsoever
now owned or hereafter acquired by Mortgagor in and to the Hydrocarbon Property
rights, titles, interests and estates and every part and parcel thereof,
including, without limitation, the Hydrocarbon Property rights, titles,
interests and estates as the same may be enlarged by the discharge of any
payments out of production or by the removal of any charges or Permitted
Encumbrances (as hereinafter defined in Section 3.01) to which any of the
Hydrocarbon Property rights, titles, interests or estates are subject, or
otherwise; all rights of Mortgagor to Liens and security interests securing
payment of proceeds from the sale of production from the Mortgaged Property,
including, but not limited to, those Liens and security interests provided in
Tex. Bus. & Com. Code Ann. Section 9.319 (Tex. UCC) (Vernon Supp. 1989), as
amended from time to time, or similar statute of any states in which the
Mortgaged Property is located; together with any and all renewals and extensions
of any of the Hydrocarbon Property rights, titles, interests or estates; all
contracts and agreements supplemental to or amendatory of or in substitution for
the contracts and agreements described or mentioned above; and any and all
additional interests of any kind hereafter acquired by Mortgagor in and to the
Hydrocarbon Property rights, titles, interests or estates.
(g) All accounts, contract rights, inventory, general intangibles,
insurance contracts and insurance proceeds constituting a part of, relating to
or arising out of those portions of the Mortgaged Property which are described
in paragraphs (a) through (f) above and all proceeds and products of all such
portions of the Mortgaged Property and payments in lieu of production (such as
"take or pay" payments), whether such proceeds or payments are goods, money,
documents, instruments, chattel paper, securities, accounts, general
intangibles, fixtures, real property, or other assets.
Any fractions or percentages specified on attached Exhibit A in
referring to Mortgagor's interests are solely for purposes of the warranties
made by Mortgagor pursuant to Sections 3.01 and 3.05 hereof and shall in no
manner limit the quantum of interest affected by this Section 1.01 with respect
to any Hydrocarbon Property or with respect to any unit or well identified on
said Exhibit A.
TO HAVE AND TO HOLD (i) the Deed of Trust Mortgaged Property unto the
Trustee and to his successors and assigns forever and (ii) the Other Mortgaged
Property unto Agent, and Agent's successors and assigns to secure the payment of
the Indebtedness (hereinafter
-3-
<PAGE> 8
defined) and to secure the performance of the covenants, agreements, and
obligations of the Mortgagor contained herein and in the other Security
Instruments, subject only to Permitted Encumbrances as hereinafter defined. The
Deed of Trust Mortgaged Property and the Other Mortgaged Property being herein
sometimes collectively called the "Mortgaged Property."
Section 1.02 Grant of Security Interest. To further secure the
Indebtedness, Mortgagor hereby grants to Agent, for its benefit and the benefit
of the Lenders, a security interest in and to the Mortgaged Property (whether
now or hereafter acquired by operation of law or otherwise) insofar as the
Mortgaged Property consists of equipment, accounts, contract rights, general
intangibles, insurance contracts, insurance proceeds, inventory, Hydrocarbons,
fixtures and any and all other personal or movable property of any kind or
character defined in and subject to the Uniform Commercial Code presently in
effect in the jurisdiction in which the Mortgaged Property is situated
("Applicable UCC"), including all replacements and substitutions for the
Mortgaged Property and all accessions thereto and the proceeds and products from
any and all of such personal property (the "Collateral"). Upon the occurrence
and continuation of any Event of Default, Agent is and shall be entitled to all
of the rights, powers and remedies afforded a secured party by the Applicable
UCC with reference to the personal property and fixtures in which Agent has been
granted a security interest herein, or the Trustee or Agent may proceed as to
both the real and personal property covered hereby in accordance with the rights
and remedies granted under this Mortgage in respect of the real property covered
hereby. Such rights, powers and remedies shall be cumulative and in addition to
those granted to the Trustee or Agent under any other provision of this Mortgage
or under any other Security Instrument. Written notice mailed to Mortgagor as
provided herein at least ten (10) days prior to the date of public sale of any
part of the Mortgaged Property which is personal property subject to the
provisions of the Applicable UCC, or prior to the date after which private sale
of any such part of the Mortgaged Property will be made, shall constitute
reasonable notice.
Section 1.03 Indebtedness Secured. This Mortgage is executed and
delivered by Mortgagor to secure and enforce the following (the "Indebtedness"):
(a) (i) Payment of and performance of any and all indebtedness,
obligations and liabilities of the Mortgagor pursuant to the Credit Agreement,
whether now existing or hereafter arising, including without limitation, the
promissory notes executed by the Mortgagor payable to the order of the Lenders
and being in the aggregate principal amount of $75,000,000 with final maturity
on or before August 1, 2003, and all other notes given in substitution therefor
or in modification, renewal or extension thereof, in whole or in part and (ii)
all reimbursement obligations under any Letters of Credit issued under the
Credit Agreement.
(b) Any sums which may be advanced or paid by Agent and/or the Lenders
under the terms hereof or of the Credit Agreement on account of the failure of
the Mortgagor to comply with the covenants contained herein or in the Credit
Agreement; and all other indebtedness of Mortgagor arising pursuant to the
provisions of this Mortgage.
(c) Any additional loans made by Agent and/or the Lenders to the
Mortgagor. It is contemplated that Agent and/or the Lenders may lend additional
sums to the Mortgagor from time to time, but shall not be obligated to do so,
and Mortgagor agrees that any such additional loans shall be secured by this
Mortgage.
-4-
<PAGE> 9
(d) Payment of and performance of any and all present or future
obligations of the Mortgagor according to the terms of any present or future
interest rate or currency swap, rate cap, rate floor, rate collar, forward rate
agreement or other exchange or rate protection agreements or any option with
respect to any such transaction now existing or hereafter entered into between
the Mortgagor and any Lender or an Affiliate of such Lender.
(e) Payment of and performance of any and all present or future
obligations of the Mortgagor according to the terms of any present or future
swap agreements, cap, floor, collar, forward agreement or other exchange or
protection agreements relating to crude oil, natural gas or other hydrocarbons
or any option with respect to any such transaction now existing or hereafter
entered into between the Mortgagor and any Lender or an Affiliate of such
Lender.
(f) Payment of and performance of any and all other indebtedness,
obligations and liabilities of any kind of Mortgagor to the Agent and/or the
Lenders, now or hereafter existing, arising directly between the Mortgagor, the
Agent and/or the Lenders or acquired outright, as a participation, conditionally
or as collateral security from another by the Lenders, absolute or contingent,
joint and/or several, secured or unsecured, due or not due, arising by operation
of law or otherwise, or direct or indirect, including indebtedness, obligations
and liabilities to the Lenders of the Mortgagor as a member of any partnership,
syndicate, association or other group, and whether incurred by the Mortgagor as
principal, surety, endorser, guarantor, accommodation party or otherwise.
(g) Payment and performance of any and all judgements, decrees, awards
and orders arising from or relating to any of the foregoing Sections 1.03(a)
through (f).
(h) Indebtedness shall not exceed at any one time the sum of
$75,000,000, which shall constitute the maximum amount at any time secured
hereby.
Section 1.04 Fixture Filing, Etc. Without in any manner limiting the
generality of any of the other provisions of this Mortgage: (i) some portions of
the goods described or to which reference is made herein are or are to become
fixtures on the land described or to which reference is made herein or on
attached Exhibit A; (ii) the security interests created hereby under applicable
provisions of the Applicable UCC will attach to Hydrocarbons (minerals including
oil and gas) or the accounts resulting from the sale thereof at the wellhead or
minehead located on the land described or to which reference is made herein;
(iii) this Mortgage is to be filed or filed of record in the real estate records
as a financing statement, and (iv) Mortgagor is the record owner of the real
estate or interests in the real estate comprised of the Mortgaged Property.
Section 1.05 Pro Rata Benefit. This Mortgage is executed and granted
for the pro rata benefit and security of the Agent, and the Lenders, and any and
all future holders of an interest in the Indebtedness and the interest thereon
for whatever period; it being understood and agreed that possession of any Note
(or any replacements of said Note) at any time by Mortgagor shall not in any
manner extinguish the Indebtedness, such Note or this Mortgage securing payment
thereof, and the Mortgagor shall have the right to issue and reissue any of the
Notes from time to time as its interest or as convenience may require, without
in any manner extinguishing or affecting the Indebtedness, the obligations under
any of the Notes, or the security of this Mortgage.
-5-
<PAGE> 10
Section 1.06 Defined Terms. Any capitalized term used in this Mortgage
and not defined in this Mortgage shall have the meaning assigned to such term in
the Credit Agreement.
ARTICLE II
Assignment of Production
Section 2.01 Assignment. Mortgagor has absolutely and unconditionally
assigned, transferred, and conveyed, and does hereby absolutely and
unconditionally assign, transfer and convey unto Agent, for its benefit and the
benefit of the Lenders and their successors and assigns, all of the Hydrocarbons
and all products obtained or processed therefrom, and the revenues and proceeds
now and hereafter attributable to the Hydrocarbons and said products and all
payments in lieu of the Hydrocarbons such as "take or pay" payments or
settlements. The Hydrocarbons and products are to be delivered into pipe lines
connected with the Mortgaged Property, or to the purchaser thereof, to the
credit of Agent, free and clear of all taxes, charges, costs, and expenses; and
all such revenues and proceeds shall be paid directly to Agent, for its benefit
and the benefit of the Lenders, with no duty or obligation of any party paying
the same to inquire into the rights of Agent, for its benefit and the benefit of
the Lenders, to receive the same, what application is made thereof, or as to any
other matter. Mortgagor agrees to perform all such acts, and to execute all such
further assignments, transfers and division orders, and other instruments as may
be required or desired by Agent or any party in order to have said proceeds and
revenues so paid to Agent. Agent is fully authorized to receive and receipt for
said revenues and proceeds; to endorse and cash any and all checks and drafts
payable to the order of Mortgagor received from or in connection with said
revenues or proceeds and to hold the proceeds thereof in a bank account as
additional collateral securing the Indebtedness; and to execute transfer and
division orders in the name of Mortgagor, or otherwise, with warranties binding
Mortgagor. All proceeds received by the Agent pursuant to this assignment shall
be applied as provided in the other Loan Documents. The Agent shall not be
liable for any delay, neglect, or failure to effect collection of any proceeds
or to take any other action in connection therewith or hereunder; but the Agent
shall have the right, at its election, in the name of Mortgagor or otherwise, to
prosecute and defend any and all actions or legal proceedings deemed advisable
by Agent in order to collect such funds and to protect the interests of Agent,
the Lenders and/or Mortgagor, with all costs, expenses and attorneys' fees
incurred in connection therewith being paid by Mortgagor. Mortgagor hereby
appoints Agent as its attorney-in-fact to pursue any and all rights of Mortgagor
to Liens on and security interests in the Hydrocarbons securing payment of
proceeds of runs attributable to the Hydrocarbons. In addition to the rights
granted to Trustee and/or Agent in Section 1.01 (f) of this Mortgage, Mortgagor
hereby further transfers and assigns to Agent, for its benefit and the benefit
of the Lenders, any and all such Liens, security interests, financing statements
or similar interests of Mortgagor attributable to its interest in the
Hydrocarbons and proceeds of runs therefrom arising under or created by said
statutory provision, judicial decision or otherwise. The power of attorney
granted to Agent in this Section 2.01, being coupled with an interest, shall be
irrevocable so long as the Indebtedness or any part thereof remains unpaid.
Section 2.02 Rights Under Certain Lien Statutes. Mortgagor hereby
grants, sells, assigns, sets over and mortgages unto Agent, for its benefit and
the benefit of the Lenders, during the term hereof, all of Mortgagor's rights
and interests pursuant to the provisions of Section 9.319 of the Texas UCC, and
of the Oil and Gas Owners Lien Act, 52 O.S. Section 548.2 hereby
-6-
<PAGE> 11
vesting in Agent all of Mortgagor's rights as an interest owner to the
continuing security interest in and Lien upon the Mortgaged Property.
Section 2.03 No Modification of Payment Indebtedness. Nothing herein
contained shall modify or otherwise alter the obligation of Mortgagor to make
prompt payment of all principal and interest owing on the Indebtedness when and
as the same become due regardless of whether the proceeds of the Hydrocarbons
are sufficient to pay the same; and the rights provided in accordance with the
foregoing assignment provision shall be cumulative of all other security of any
and every character now or hereafter existing to secure payment of the
Indebtedness.
Section 2.04 Payments to Mortgagor. Until such time as written demand
has been made upon them by the Trustee or Agent that payment of the proceeds of
runs be made directly to the Trustee or Agent, the purchasers or other persons
obligated to make such payment shall continue to make payment to Mortgagor.
Failure to notify shall not in any way waive the right of the Trustee or Agent
to receive any payments not theretofore paid over to Mortgagor before the giving
of written notice. In this regard, in the event payments are made directly to
the Trustee, and then, at the request of the Trustee or Agent payments are, for
a period or periods of time, paid to Mortgagor, the Trustee shall nevertheless
have the right, effective upon written notice, to require that future payments
be again made to it.
ARTICLE III
Representations, Warranties and Covenants
Mortgagor hereby represents, warrants and covenants as follows:
Section 3.01 Title. To the extent of the undivided interests specified
on attached Exhibit A, Mortgagor has good and marketable title to and is
possessed of the Mortgaged Property. The Mortgaged Property is free of any and
all Liens except Liens allowed by Section 9.02 of the Credit Agreement (the
"Permitted Encumbrances").
Section 3.02 Defend Title. This Mortgage is, and always will be kept, a
direct first Lien and security interest upon the Mortgaged Property subject only
to the Permitted Encumbrances. Mortgagor will not create or suffer to be created
or permit to exist any Lien, security interest or charge prior or junior to or
on a parity with the Lien and security interest of this Mortgage upon the
Mortgaged Property or any part thereof or upon the rents, issues, revenues,
profits and other income therefrom other than Permitted Encumbrances. Mortgagor
will warrant and defend the title to the Mortgaged Property against the claims
and demands of all other Persons whomsoever and will maintain and preserve the
Lien created hereby so long as any of the Indebtedness hereby remains unpaid.
Should an adverse claim be made against or a cloud develop upon the title to any
part of the Mortgaged Property which could reasonably be expected to have a
Material Adverse Effect, Mortgagor agrees it will promptly defend against such
adverse claim or take appropriate action to remove such cloud at Mortgagor's
cost and expense, and Mortgagor further agrees that the Trustee and/or Agent may
take such other action as they deem advisable to protect and preserve their
interests and the interests of the Lenders in such Mortgaged Property, AND IN
SUCH EVENT MORTGAGOR WILL INDEMNIFY THE TRUSTEE AND AGENT AGAINST ANY AND ALL
COST, ATTORNEY'S FEES AND OTHER EXPENSES WHICH THEY MAY INCUR IN DEFENDING
AGAINST ANY SUCH ADVERSE CLAIM OR TAKING ACTION TO REMOVE ANY SUCH CLOUD.
-7-
<PAGE> 12
Section 3.03 Not a Foreign Person. Mortgagor is not a "foreign person"
within the meaning of the Internal Revenue Code of 1986, as amended (hereinafter
called the "Code"), Sections 1445 and 7701 (i.e. Mortgagor is not a non-resident
alien, foreign corporation, foreign partnership, foreign trust or foreign estate
as those terms are defined in the Code and any regulations promulgated
thereunder).
Section 3.04 Power to Create Lien and Security. The Mortgagor has full
power and lawful authority to grant, bargain, sell, assign, transfer, mortgage,
and convey a security interest in all of the Mortgaged Property in the manner
and form herein provided. No authorization, approval, consent or waiver of any
lessor, sublessor, Governmental Authority or other party or parties whomsoever
is required in connection with the execution and delivery by Mortgagor of this
Mortgage except to the extent the approval or consent of the Louisiana State
Mineral Board or the Department of the Interior, United States of America or
similar Governmental Authority, as the case may be, is required by applicable
law or regulation to the transfer or assignment of an interest in any of the
Mortgaged Property.
Section 3.05 Revenue and Cost Bearing Interest. Mortgagor's ownership
of the Hydrocarbon Property and the undivided interests therein as specified on
attached Exhibit A will, after giving full effect to all Permitted Encumbrances,
afford Mortgagor not less than those net interests (expressed as a fraction,
percentage or decimal) in the production from or which is allocated to such
Hydrocarbon Property specified on attached Exhibit A and will cause Mortgagor to
bear not more than that portion (expressed as a fraction, percentage or
decimal), specified on attached Exhibit A, of the costs of drilling, developing
and operating the wells identified on Exhibit A.
Section 3.06 Rentals Paid; Leases in Effect. Except as otherwise
permitted by the Credit Agreement, all rentals and royalties due and payable in
accordance with the terms of any leases or subleases comprising a part of the
Hydrocarbon Property have been duly paid or provided for and all leases or
subleases comprising a part of the Hydrocarbon Property are in full force and
effect.
Section 3.07 Operation By Third Parties. In the event that all or any
portions of the Mortgaged Property is comprised of interests in the Hydrocarbon
Property which are not working interests or which are operated by a party or
parties other than Mortgagor, then, with respect to such interests and
properties, Mortgagor's covenants as expressed in this Article III are modified
to require that Mortgagor use reasonable efforts consistent with usual and
customary industry practice to obtain compliance with such covenants by the
working interest owners or the operator or operators of such leases or
properties.
Section 3.08 Abandon, Sales. The Mortgagor will not sell, lease,
assign, transfer or otherwise dispose or abandon any of the Mortgaged Property
except as permitted by the Credit Agreement.
Section 3.09 Failure to Perform. The Mortgagor agrees that if the
Mortgagor fails to perform any act or to take any action which the Mortgagor is
required to perform or take hereunder or pay any money which the Mortgagor is
required to pay hereunder, each of the Agent and the Trustee in the Mortgagor's
name or its or their own name may, but shall not be obligated to, perform or
cause to perform such act or take such action or pay such money, and any
expenses so incurred by either of them and any money so paid by either of them
shall be a demand obligation owing by the Mortgagor to the Agent or the Trustee,
as the case may be, and each of the Agent and the Trustee, upon making such
payment, shall be
-8-
<PAGE> 13
subrogated to all of the rights of the Person receiving such payment. Each
amount due and owing by Mortgagor to each of the Agent and the Trustee pursuant
to this Mortgage shall bear interest from the date of such expenditure or
payment or other occurrence which gives rise to such amount being owed to such
Person until paid at a rate per annum equal to the lesser of (x) the Highest
Lawful Rate applicable to the Lender making such Loan and (y) the Post-Default
Rate, and all such amounts together with such interest thereon shall be a part
of the Indebtedness described in Section 1.03 hereof.
Section 3.10 Operation of Mortgaged Property, Etc. Except as otherwise
permitted by the Credit Agreement, Mortgagor will promptly pay and discharge all
rentals, delay rentals, royalties and indebtedness accruing under, and perform
or cause to be performed each and every act, matter or thing required by, each
and all of the assignments, deeds, leases, sub-leases, contracts and agreements
described or referred to herein or affecting Mortgagor's interests in the
Mortgaged Property, and will do all other things necessary to keep unimpaired
Mortgagor's rights with respect thereto and prevent any forfeiture thereof or
default thereunder. Except as otherwise permitted by the Credit Agreement, the
Mortgaged Property (and properties unitized therewith) has been maintained,
operated and developed in a good and workmanlike manner and in conformity with
all applicable laws and all rules, regulations and orders of all duly
constituted authorities having jurisdiction and in conformity with the
provisions of all leases, subleases or other contracts comprising a part of the
Hydrocarbon Property and other contracts and agreements forming a part of the
Mortgaged Property; specifically in this connection, (i) after the Effective
Date no Mortgaged Property is subject to having allowable production reduced
below the full and regular allowable (including the maximum permissible
tolerance) because of any overproduction (whether or not the same was
permissible at the time) prior to the Effective Date and (ii) none of the wells
comprising a part of the Mortgaged Property (or properties unitized therewith)
are deviated from the vertical more than the maximum permitted by applicable
laws, regulations, rules and orders, and such wells are, in fact, bottomed under
and are producing from, and the well bores are wholly within, the Mortgaged
Property (or, in the case of wells located on properties unitized therewith,
such unitized properties). Except as otherwise permitted by the Credit
Agreement, Mortgagor will operate the Mortgaged Property in a careful and
efficient manner in accordance with the practices of the industry and in
material compliance with all applicable contracts and agreements and in
compliance with all applicable proration and conservation laws of the
jurisdiction in which the Mortgaged Property is situated, and all applicable
laws, rules and regulations of every other agency and authority from time to
time constituted to regulate the development and operation of the Mortgaged
Property and the production and sale of Hydrocarbons and other minerals there-
from. Except as otherwise permitted by the Credit Agreement, Mortgagor will do
or cause to be done such development work as may be reasonably necessary to the
prudent and economical operation of the Mortgaged Property in accordance with
the usual and customary practices of operators in the industry, including all to
be done that may be appropriate to protect from diminution the productive
capacity of the Mortgaged Property and each producing well thereon including,
without limitation, cleaning out and reconditioning each well from time to time,
plugging and completing at a different level each such well, drilling a
substitute well to conform to changed spacing regulations and to protect the
Mortgaged Property against drainage whenever and as often as is necessary.
-9-
<PAGE> 14
ARTICLE IV
Rights and Remedies
Section 4.01 Event of Default. An "Event of Default" under the Credit
Agreement shall be an Event of Default under this Mortgage.
Section 4.02 Foreclosure and Sale. (a) If an Event of Default shall
occur and be continuing, Agent shall have the right and option to proceed with
foreclosure by directing the Trustee, or his successors or substitutes in trust,
to proceed with foreclosure and to sell, to the extent permitted by law, all or
any portion of the Deed of Trust Mortgaged Property at one or more sales, as an
entirety or in parcels, at such place or places in otherwise such manner and
upon such notice as may be required by law, or, in the absence of any such
requirement, as the Agent may deem appropriate, and to make conveyance to the
purchaser or purchasers. Where the Deed of Trust Mortgaged Property is situated
in more than one county, notice as above provided shall be posted and filed in
all such jurisdictions (if such notices are required by law), and all such Deed
of Trust Mortgaged Property may be sold in any such jurisdiction and any such
notice shall designate the jurisdiction where such Deed of Trust Mortgaged
Property is to be sold. Nothing contained in this Section 4.02 shall be
construed so as to limit in any way the Trustee's rights to sell the Deed of
Trust Mortgaged Property, or any portion thereof, by private sale if, and to the
extent that, such private sale is permitted under the laws of the applicable
jurisdiction or by public or private sale after entry of a judgment by any court
of competent jurisdiction so ordering. After the occurrence and continuation of
an Event of Default, Mortgagor hereby irrevocably appoints the Trustee to be the
attorney of Mortgagor and in the name and on behalf of Mortgagor to execute and
deliver any deeds, transfers, conveyances, assignments, assurances and notices
which Mortgagor ought to execute and deliver and do and perform any and all such
acts and things which Mortgagor ought to do and perform under the covenants
herein contained and generally, to use the name of Mortgagor in the exercise of
all or any of the powers hereby conferred on the Trustee. At any such sale: (i)
whether made under the power herein contained or any other legal enactment, or
by virtue of any judicial proceedings or any other legal right, remedy or
recourse, it shall not be necessary for Trustee to have physically present, or
to have constructive possession of, the Deed of Trust Mortgaged Property
(Mortgagor hereby covenanting and agreeing to deliver to Trustee any portion of
the Deed of Trust Mortgaged Property not actually or constructively possessed by
Trustee immediately upon demand by Trustee) and the title to and right of
possession of any such property shall pass to the purchaser thereof as
completely as if the same had been actually present and delivered to purchaser
at such sale, (ii) each instrument of conveyance executed by Trustee may, at the
election of the Trustee, contain a general warranty of title, binding upon
Mortgagor and its successors and assigns, (iii) each and every recital contained
in any instrument of conveyance made by Trustee shall conclusively establish the
truth and accuracy of the matters recited therein, including, without
limitation, nonpayment of the Indebtedness, advertisement and conduct of such
sale in the manner provided herein and otherwise by law and appointment of any
successor Trustee hereunder, (iv) any and all prerequisites to the validity
thereof shall be conclusively presumed to have been performed, (v) the receipt
of Trustee or of such other party or officer making the sale shall be a
sufficient discharge to the purchaser or purchasers for its purchase money and
no such purchaser or purchasers, or its assigns or personal representatives,
shall thereafter be obligated to see to the application of such purchase money,
or be in any way answerable for any loss, misapplication or nonapplication
thereof, (vi) to the fullest extent permitted by law, Mortgagor shall be
completely and irrevocably divested of all of its right, title, interest, claim
and demand whatsoever, either
-10-
<PAGE> 15
at law or in equity, in and to the property sold and such sale shall be a
perpetual bar both at law and in equity against Mortgagor, and against any and
all other Persons claiming or to claim the property sold or any part thereof,
by, through or under Mortgagor, and (vii) to the extent and under such
circumstances as are permitted by law, Agent may be a purchaser at any such
sale, and shall have the right, after paying or accounting for all costs of said
sale or sales, to credit the amount of the bid upon the amount of the
Indebtedness (in the order of priority set forth in Section 4.14 hereof) in lieu
of cash payment.
(b) If an Event of Default shall occur and be continuing, this Mortgage
may be foreclosed as to the Other Mortgaged Properties, or any part thereof, in
any manner permitted by applicable law. Cumulative of the foregoing and the
other provisions of this Section 4.02, as to any portion of the Other Mortgaged
Properties located in the State of Louisiana (or within the offshore area over
which the United States of America asserts jurisdiction and to which the laws of
such state are applicable with respect to this Mortgage and/or the liens or
security interests created hereby), Agent may foreclose this Mortgage by
executory process subject to, and on the terms and conditions required or
permitted by, applicable law, and shall have the right to appoint a keeper of
such Other Mortgaged Properties.
Section 4.03 Substitute Trustees and Agents. The Trustee or his
successor or substitute may appoint or delegate any one or more Persons as agent
to perform any act or acts necessary or incident to any sale held by Trustee,
including the posting of notices and the conduct of sale, but in the name and on
behalf of Trustee, his successor or substitute. If Trustee or his successor or
substitute shall have given notice of sale hereunder, any successor or
substitute trustee thereafter appointed may complete the sale and the conveyance
of the property pursuant thereto as if such notice had been given by the
successor or substitute trustee conducting the sale.
Section 4.04 Judicial Foreclosure; Receivership. If the Indebtedness
shall become due and payable and shall not be promptly paid, the Trustee or
Agent shall have the right and power to proceed by a suit or suits in equity or
at law, whether for the specific performance of any covenant or agreement herein
contained or in aid of the execution of any power herein granted, or for any
foreclosure hereunder or for the sale of the Mortgaged Property under the
judgment or decree of any court or courts of competent jurisdiction, or for the
appointment of a receiver pending any foreclosure hereunder or the sale of the
Mortgaged Property under the order of a court or courts of competent
jurisdiction or under executory or other legal process, or for the enforcement
of any other appropriate legal or equitable remedy. Any money advanced by the
Trustee and/or Agent in connection with any such receivership shall be a demand
obligation (which obligation Mortgagor hereby expressly promises to pay) owing
by Mortgagor to the Trustee and/or Agent and shall bear interest from the date
of making such advance by the Trustee and/or Agent until paid at the
Post-Default Rate.
Section 4.05 Foreclosure for Installments. The Agent shall also have
the option to proceed with foreclosure in satisfaction of any installments of
the Indebtedness which have not been paid when due either through the courts or
by directing the Trustee or his successors in trust to proceed with foreclosure
in satisfaction of the matured but unpaid portion of the Indebtedness as if
under a full foreclosure, conducting the sale as herein provided and without
declaring the entire principal balance and accrued interest due; such sale may
be made subject to the unmatured portion of the Indebtedness, and any such sale
shall not in any manner affect the unmatured portion of the Indebtedness, but as
to such unmatured portion of the Indebtedness this Mortgage shall remain in full
force and effect just
-11-
<PAGE> 16
as though no sale had been made hereunder. It is further agreed that several
sales may be made hereunder without exhausting the right of sale for any
unmatured part of the Indebtedness, it being the purpose hereof to provide for a
foreclosure and sale of the security for any matured portion of the Indebtedness
without exhausting the power to foreclose and sell the Mortgaged Property for
any subsequently maturing portion of the Indebtedness.
Section 4.06 Separate Sales The Mortgaged Property may be sold in one
or more parcels and in such manner and order as Agent and the Lenders, in their
sole discretion, may elect, it being expressly understood and agreed that the
right of sale arising out of any Event of Default shall not be exhausted by any
one or more sales.
Section 4.07 Possession of Mortgaged Property. Mortgagor agrees to the
full extent that it lawfully may, that, upon the occurrence and continuation of
any Event of Default, then, the Trustee or Agent shall have the right and power
to enter into and upon and take possession of all or any part of the Mortgaged
Property in the possession of Mortgagor, its successors or assigns, or its or
their agents or servants, and may exclude Mortgagor, its successors or assigns,
and all Persons claiming under Mortgagor, and its or their agents or servants
wholly or partly therefrom; and, holding the same, the Trustee may use,
administer, manage, operate and control the Mortgaged Property and conduct the
business thereof to the same extent as Mortgagor, its successors or assigns,
might at the time do and may exercise all rights and powers of Mortgagor, in the
name, place and stead of Mortgagor, or otherwise as the Trustee shall deem best.
All costs, expenses and liabilities of every character incurred by the Trustee
and/or Agent in administering, managing, operating, and controlling the
Mortgaged Property shall constitute a demand obligation (which obligation
Mortgagor hereby expressly promises to pay) owing by Mortgagor to the Trustee
and/or Agent and shall bear interest from date of expenditure until paid at the
Post-Default Rate, all of which shall constitute a portion of the Indebtedness
and shall be secured by this Mortgage and all other Security Instruments.
Section 4.08 Occupancy After Foreclosure. In the event there is a
foreclosure sale hereunder and at the time of such sale Mortgagor or Mortgagor's
heirs, devisees, representatives, successors or assigns or any other Person
claiming any interest in the Mortgaged Property by, through or under Mortgagor,
are occupying or using the Mortgaged Property or any part thereof, each and all
shall immediately become the tenant of the purchaser at such sale, which tenancy
shall be a tenancy from day to day, terminable at the will of either the
landlord or tenant, at a reasonable rental per day based upon the value of the
property occupied, such rental to be due daily to the purchaser; to the extent
permitted by applicable law, the purchaser at such sale shall, notwithstanding
any language herein apparently to the contrary, have the sole option to demand
immediate possession following the sale or to permit the occupants to remain as
tenants at will. In the event the tenant fails to surrender possession of said
property upon demand, the purchaser shall be entitled to institute and maintain
a summary action for possession of the Mortgaged Property (such as an action for
forcible entry and detainer) in any court having jurisdiction.
Section 4.09 Remedies Cumulative, Concurrent and Nonexclusive. Every
right, power and remedy herein given to the Trustee or Agent shall be cumulative
and in addition to every other right, power and remedy herein specifically given
or now or hereafter existing in equity, at law or by statute (including
specifically those granted by the Applicable UCC and applicable to the Mortgaged
Property or any portion thereof) each and every right, power and remedy whether
specifically herein given or otherwise existing may be exercised from time to
time and so often and in such order as may be deemed expedient by the Trustee,
the Agent
-12-
<PAGE> 17
and/or the Lenders, and the exercise, or the beginning of the exercise, of any
such right, power or remedy shall not be deemed a waiver of the right to
exercise, at the same time or thereafter any other right, power or remedy. No
delay or omission by the Trustee, the Agent and/or the Lenders in the exercise
of any right, power or remedy shall impair any such right, power or remedy or
operate as a waiver thereof or of any other right, power or remedy then or
thereafter existing.
Section 4.10 No Release of Indebtedness. Neither Mortgagor, any
guarantor nor any other Person hereafter obligated for payment of all or any
part of the Indebtedness shall be relieved of such obligation by reason of (a)
the failure of Trustee to comply with any request of Mortgagor, or any guarantor
or any other Person so obligated to foreclose the Lien of this Mortgage or to
enforce any provision hereunder or under the Credit Agreement; (b) the release,
regardless of consideration, of the Mortgaged Property or any portion thereof or
interest therein or the addition of any other property to the Mortgaged Property
or the release of any other property given by any Person to secure the
Indebtedness; (c) any agreement or stipulation between any subsequent owner of
the Mortgaged Property and Agent extending, renewing, rearranging or in any
other way modifying the terms of this Mortgage without first having obtained the
consent of, given notice to or paid any consideration to Mortgagor, any
guarantor or such other Person, and in such event Mortgagor, guarantor and all
such other Persons shall continue to be liable to make payment according to the
terms of any such extension or modification agreement unless expressly released
and discharged in writing by Agent; or (d) by any other act or occurrence save
and except the complete payment of the Indebtedness and the complete fulfillment
of all obligations hereunder or under the Credit Agreement.
Section 4.11 Release of and Resort to Mortgaged Property. Agent may
release, regardless of consideration, any part of the Mortgaged Property
without, as to the remainder, in any way impairing, affecting, subordinating or
releasing the Lien or security interest created in or evidenced by this Mortgage
or its stature as a first and prior Lien and security interest in and to the
Mortgaged Property, and without in any way releasing or diminishing the
liability of any Person liable for the repayment of the Indebtedness. For
payment of the Indebtedness, Agent and the Lenders may resort to any other
security therefor held by Agent or Trustee in such order and manner as they may
elect.
Section 4.12 Waiver of Redemption, Notice and Marshalling of Assets,
Etc. To the fullest extent permitted by applicable law, Mortgagor hereby
irrevocably and unconditionally waives and releases: (a) all benefits that might
accrue to Mortgagor by virtue of any present or future moratorium law or other
law exempting the Mortgaged Property from attachment, levy or sale on execution
or providing for any appraisement, valuation, stay of execution, exemption from
civil process, redemption or extension of time for payment; (b) presentment,
demand, notice of non-payment, protest and notice of protest and dishonor,
notice of Event of Default, notice of intent to accelerate the maturity and
notice of acceleration of the maturity and any other notice in connection with
the Indebtedness or of Trustee's election to exercise or his actual exercise of
any right, remedy or recourse provided for hereunder or under the Credit
Agreement except as otherwise required by the Security Instruments; and (c) any
right to a marshalling of assets or a sale in inverse order of alienation. If
any law referred to in this Mortgage and now in force, of which Mortgagor or its
successor or successors might take advantage despite the provisions hereof,
shall hereafter be repealed or cease to be in force, such law shall thereafter
be deemed not to constitute any part of the contract herein contained or to
preclude the operation or application of the provisions hereof. Provided,
however, that if the laws of any state do not permit the redemption period to be
-13-
<PAGE> 18
waived, the redemption period is specifically reduced to the minimum amount of
time allowable by statute, and specifically for any property located in the
State of New Mexico, the redemption period hereunder shall be reduced to one
month.
Section 4.13 Discontinuance of Proceedings In case Agent and the
Lenders shall have proceeded to invoke any right, remedy or recourse permitted
hereunder or under the Credit Agreement and shall thereafter elect to
discontinue or abandon same for any reason, the Agent and the Lenders shall have
the unqualified right so to do and, in such an event, Mortgagor, the Agent and
the Lenders shall be restored to their former positions with respect to the
Indebtedness, this Mortgage, the Credit Agreement, the Mortgaged Property and
otherwise, and the rights, remedies, recourses and powers of Agent and the
Lenders shall continue as if same had never been invoked.
Section 4.14 Application of Proceeds. The proceeds of any sale of the
Mortgaged Property or any part thereof and all other monies received by the
Trustee or Agent in any proceedings for the enforcement hereof or otherwise,
whose application has not elsewhere herein been specifically provided for, shall
be applied as specified in the Credit Agreement.
Section 4.15 Resignation of Operator. In addition to all rights and
remedies under this Mortgage, at law and in equity, if the Trustee or the Agent
shall exercise any remedies under this Mortgage with respect to any portion of
the Mortgaged Property (or Mortgagor shall transfer any Mortgaged Property "in
lieu of" foreclosure), the Agent or the Trustee shall have the right to request
that any operator of any Mortgaged Property which is either Mortgagor or any
Affiliate of Mortgagor resign as operator under the joint operating agreement
applicable thereto, and no later than 60 days after receipt by Mortgagor of any
such request (or the first day that resignation is permitted under the
applicable operating agreement, if longer), Mortgagor shall resign (or cause
such other party to resign) as operator of such Mortgaged Property.
Section 4.16 INDEMNITY. IN CONNECTION WITH ANY ACTION TAKEN BY THE
TRUSTEE, THE AGENT AND/OR THE LENDERS PURSUANT TO THIS MORTGAGE, THE TRUSTEE,
THE AGENT, THE LENDERS AND THEIR OFFICERS, DIRECTORS, EMPLOYEES,
REPRESENTATIVES, AGENTS, ATTORNEYS, ACCOUNTANTS AND EXPERTS ("INDEMNIFIED
PARTIES") SHALL NOT BE LIABLE FOR ANY DAMAGE SUSTAINED BY MORTGAGOR RESULTING
FROM AN ASSERTION THAT ANY SUCH INDEMNIFIED PARTY HAS RECEIVED FUNDS FROM THE
PRODUCTION OF HYDROCARBONS CLAIMED BY THIRD PERSONS OR ANY ACT OR OMISSION OF
ANY INDEMNIFIED PARTY IN ADMINISTERING, MANAGING, OPERATING OR CONTROLLING THE
MORTGAGED PROPERTY INCLUDING SUCH DAMAGE WHICH MAY RESULT FROM THE ORDINARY
NEGLIGENCE OF AN INDEMNIFIED PARTY UNLESS SUCH DAMAGE IS CAUSED BY THE GROSS
NEGLIGENCE, WILLFUL MISCONDUCT OR BAD FAITH OF AN INDEMNIFIED PARTY, NOR SHALL
THE TRUSTEE, THE AGENT OR ANY LENDER BE OBLIGATED TO PERFORM OR DISCHARGE ANY
OBLIGATION, DUTY OR LIABILITY OF MORTGAGOR. MORTGAGOR SHALL AND DOES HEREBY
AGREE TO INDEMNIFY EACH INDEMNIFIED PARTY FOR, AND TO HOLD EACH INDEMNIFIED
PARTY HARMLESS FROM, ANY AND ALL LIABILITY OR DAMAGE WHICH MAY OR MIGHT BE
INCURRED BY ANY INDEMNIFIED PARTY BY REASON OF THIS MORTGAGE OR THE EXERCISE OF
RIGHTS OR REMEDIES HEREUNDER UNLESS SUCH DAMAGE IS CAUSED BY THE GROSS
NEGLIGENCE, WILLFUL MISCONDUCT OR BAD FAITH OF AN INDEMNIFIED PARTY; PROVIDED,
HOWEVER, NO INDEMNITY SHALL BE AFFORDED UNDER THIS SECTION 4.16 IN RESPECT OF
ANY PROPERTY FOR ANY OCCURRENCE ARISING FROM THE ACTS OR OMISSIONS OF ANY
INDEMNIFIED PARTY DURING THE PERIOD AFTER WHICH SUCH PERSON, ITS SUCCESSORS OR
ASSIGNS SHALL HAVE OBTAINED POSSESSION OF SUCH PROPERTY (WHETHER BY FORECLOSURE
OR DEED IN LIEU
-14-
<PAGE> 19
OF FORECLOSURE, AS MORTGAGEE-IN-POSSESSION OR OTHERWISE). Should the Trustee,
the Agent and/or the Lenders make any expenditure on account of any such
liability or damage, the amount thereof, including costs, expenses and
reasonable attorneys' fees, shall be a demand obligation (which obligation
Mortgagor hereby expressly promises to pay) owing by Mortgagor to such Person
and shall bear interest from the date expended until paid at the Post-Default
Rate, shall be a part of the Indebtedness and shall be secured by this Mortgage
and any other Security Instrument. Mortgagor hereby assents to, ratifies and
confirms any and all actions of the Trustee, the Agent and/or the Lenders with
respect to the Mortgaged Property taken under this Mortgage. The liabilities of
the Mortgagor as set forth in this Section 4.16 shall survive the termination of
this Mortgage.
Section 4.17 Power of Sale in Oklahoma. Any sale of any part of the
Mortgaged Property located in the State of Oklahoma shall be made in conformity
to the laws thereof, and it is agreed that the appraisement of any such
properties is expressly waived or not waived at the option of the Agent, and any
such option may be exercised prior to the time judgment is rendered in any
foreclosure hereon. A POWER OF SALE HAS BEEN GRANTED IN THIS MORTGAGE. A POWER
OF SALE MAY ALLOW THE AGENT TO TAKE THE MORTGAGED PROPERTY AND SELL IT WITHOUT
GOING TO COURT IN A FORECLOSURE ACTION UPON DEFAULT BY MORTGAGOR UNDER THIS
MORTGAGE. The parties hereto are cognizant of and acknowledge the Oklahoma Power
of Sale Mortgage Foreclosure Act which went into effect November 1, 1986.
Notwithstanding any provision Article IV to the contrary, it is the intent of
the parties that the provisions herein relating to the power of sale which are
applicable to the Mortgaged Property located in the State of Oklahoma are
subject to the provisions of the Oklahoma Power of Sale Mortgage Foreclosure
Act. In addition, it is the intent of the parties that the power of sale granted
herein may be exercised by the Agent pursuant to the terms and provisions of the
Oklahoma Power of Sale Mortgage Foreclosure Act.
ARTICLE V
The Trustee
Section 5.01 Duties, Rights, and Powers of Trustee. It shall be no part
of the duty of the Trustee to see to any recording, filing or registration of
this Mortgage or any other instrument in addition or supplemental thereto, or to
give any notice thereof, or to see to the payment of or be under any duty in
respect of any tax or assessment or other governmental charge which may be
levied or assessed on the Mortgaged Property, or any part thereof, or against
Mortgagor, or to see to the performance or observance by Mortgagor of any of the
covenants and agreements contained herein. The Trustee shall not be responsible
for the execution, acknowledgment or validity of this Mortgage or of any
instrument in addition or supplemental hereto or for the sufficiency of the
security purported to be created hereby, and makes no representation in respect
thereof or in respect of the rights of Agent and/or the Lenders. The Trustee
shall have the right to advise with counsel upon any matters arising hereunder
and shall be fully protected in relying as to legal matters on the advice of
counsel. The Trustee shall not incur any personal liability hereunder except for
Trustee's own willful misconduct or bad faith; and the Trustee shall have the
right to rely on any instrument, document or signature authorizing or supporting
any action taken or proposed to be taken by him hereunder, believed by him in
good faith to be genuine.
Section 5.02 Successor Trustee. The Trustee may resign by written
notice addressed to Agent or be removed at any time with or without cause by an
instrument in writing duly
-15-
<PAGE> 20
executed on behalf of Agent. In case of the death, resignation or removal of the
Trustee, a successor trustee may be appointed by Agent by instrument of
substitution complying with any applicable requirements of law, or, in the
absence of any such requirement, without other formality than appointment and
designation in writing. Written notice of such appointment and designation shall
be given by Agent to Mortgagor, but the validity of any such appointment shall
not be impaired or affected by failure to give such notice or by any defect
therein. Such appointment and designation shall be full evidence of the right
and authority to make the same and of all the facts therein recited, and, upon
the making of any such appointment and designation, this Mortgage shall vest in
the successor trustee all the estate and title in and to all of the Mortgaged
Property, and the successor trustee shall thereupon succeed to all of the
rights, powers, privileges, immunities and duties hereby conferred upon the
Trustee named herein, and one such appointment and designation shall not exhaust
the right to appoint and designate a successor trustee hereunder but such right
may be exercised repeatedly as long as any Indebtedness remains unpaid
hereunder. To facilitate the administration of the duties hereunder, Agent may
appoint multiple trustees to serve in such capacity or in such jurisdictions as
Agent may designate.
Section 5.03 Retention of Moneys. All moneys received by Trustee shall,
until used or applied as herein provided, be held in trust for the purposes for
which they were received, but need not be segregated in any manner from any
other moneys (except to the extent required by law), and Trustee shall be under
no liability for interest on any moneys received by him hereunder.
ARTICLE VI
Miscellaneous
Section 6.01 Instrument Construed as Mortgage, Etc. With respect to any
portions of the Mortgaged Property located in any state or other jurisdiction
the laws of which do not provide for the use or enforcement of a deed of trust
or the office, rights and authority of the Trustee as herein provided, the
general language of conveyance hereof to the Trustee is intended and the same
shall be construed as words of mortgage unto and in favor of Agent and the
rights and authority granted to the Trustee herein may be enforced and asserted
by Agent in accordance with the laws of the jurisdiction in which such portion
of the Mortgaged Property is located and the same may be foreclosed at the
option of Agent as to any or all such portions of the Mortgaged Property in any
manner permitted by the laws of the jurisdiction in which such portions of the
Mortgaged Property is situated. This Mortgage may be construed as a mortgage,
deed of trust, chattel mortgage, conveyance, assignment, security agreement,
pledge, financing statement, hypothecation or contract, or any one or more of
them, in order fully to effectuate the Lien hereof and the purposes and
agreements herein set forth.
Section 6.02 Release of Lien. If all Indebtedness secured hereby shall
be paid and the Credit Agreement terminated, Agent shall forthwith cause
satisfaction and discharge of this Mortgage to be entered upon the record at the
expense of Mortgagor and shall execute and deliver or cause to be executed and
delivered such instruments of satisfaction and reassignment as may be
appropriate. Otherwise, this Mortgage shall remain and continue in full force
and effect.
Section 6.03 Severability. If any provision hereof is invalid or
unenforceable in any jurisdiction, the other provisions hereof shall remain in
full force and effect in such
-16-
<PAGE> 21
jurisdiction and the remaining provisions hereof shall be liberally construed in
favor of the Trustee, the Agent and the Lenders in order to effectuate the
provisions hereof, and the invalidity or unenforceability of any provision
hereof in any jurisdiction shall not affect the validity or enforceability of
any such provision in any other jurisdiction.
Section 6.04 Successors and Assigns of Parties. The term "Lender" as
used herein shall mean and include any legal owner, holder, assignee or pledgee
of any of the Indebtedness secured hereby. The terms used to designate Trustee,
Agent and Mortgagor shall be deemed to include the respective heirs, legal
representatives, successors and assigns of such parties.
Section 6.05 Satisfaction of Prior Encumbrance. To the extent that
proceeds of the Credit Agreement are used to pay indebtedness secured by any
outstanding Lien, security interest, charge or prior encumbrance against the
Mortgaged Property, such proceeds have been advanced at Mortgagor's request, and
the Lenders shall be subrogated to any and all rights, security interests and
Liens owned by any owner or holder of such outstanding Liens, security
interests, charges or encumbrances, irrespective of whether said Liens, security
interests, charges or encumbrances are released, and it is expressly understood
that, in consideration of the payment of such other indebtedness by the Lenders,
Mortgagor hereby waives and releases all demands and causes of action for
offsets and payments to, upon and in connection with the said indebtedness.
Section 6.06 Subrogation of Trustee. This Mortgage is made with full
substitution and subrogation of the Trustee and his successors in this trust and
his and their assigns in and to all covenants and warranties by others
heretofore given or made in respect of the Mortgaged Property or any part
thereof.
Section 6.07 Nature of Covenants. The covenants and agreements herein
contained shall constitute covenants running with the land and interests covered
or affected hereby and shall be binding upon the heirs, legal representatives,
successors and assigns of the parties hereto.
Section 6.08 Notices. All notices, requests, consents, demands and
other communications required or permitted hereunder shall be given in
accordance with the terms of the Credit Agreement or as required by applicable
Governmental Requirement. Mortgagor hereby requests a copy of any notice of
default or notice of sale under this Mortgage be provided to it in the manner
provided by this Section 6.08.
Section 6.09 Counterparts. This Mortgage is being executed in several
counterparts, all of which are identical, except that to facilitate recordation,
if the Mortgaged Property is situated in more than one jurisdiction,
descriptions of only those portions of the Mortgaged Property located in the
jurisdiction in which a particular counterpart is recorded shall be attached as
Exhibit A thereto. An Exhibit A containing a description of all Mortgaged
Property wheresoever situated will be attached to that certain counterpart to be
attached to a Financing Statement and filed with the Secretary of State of Texas
in the Uniform Commercial Code Records. Each of such counterparts shall for all
purposes be deemed to be an original and all such counterparts shall together
constitute but one and the same instrument.
SECTION 6.10 GOVERNING LAW. INSOFAR AS PERMITTED BY OTHERWISE
APPLICABLE LAW, THIS MORTGAGE AND THE INDEBTEDNESS SHALL BE CONSTRUED UNDER AND
GOVERNED
-17-
<PAGE> 22
BY THE LAWS OF THE STATE OF TEXAS (EXCLUDING CHOICE OF LAW AND CONFLICT OF LAW
RULES); PROVIDED, HOWEVER, THAT, WITH RESPECT TO ANY PORTION OF THE MORTGAGED
PROPERTY LOCATED OUTSIDE OF THE STATE OF TEXAS, THE LAWS OF THE PLACE IN WHICH
SUCH PROPERTY IS LOCATED IN, OR OFFSHORE ADJACENT TO (AND STATE LAW MADE
APPLICABLE AS A MATTER OF FEDERAL LAW), SHALL APPLY TO THE EXTENT OF PROCEDURAL
AND SUBSTANTIVE MATTERS RELATING ONLY TO THE CREATION, PERFECTION, FORECLOSURE
OF LIENS AND ENFORCEMENT OF RIGHTS AND REMEDIES AGAINST THE MORTGAGED PROPERTY.
THE MORTGAGOR HEREBY IRREVOCABLY SUBMITS ITSELF TO THE NONEXCLUSIVE JURISDICTION
OF THE STATE AND FEDERAL COURTS OF THE STATE OF TEXAS AND EACH OTHER STATE WHERE
THE MORTGAGED PROPERTY IS LOCATED AND AGREES AND CONSENTS THAT SERVICE OF
PROCESS MAY BE MADE UPON IT IN ANY LEGAL PROCEEDING RELATING TO THIS MORTGAGE,
THE LOAN DOCUMENTS OR THE INDEBTEDNESS IN THE CASE OF A PROCEEDING IN ANY OF
SUCH STATES, BY SERVING THE SECRETARY OF STATE OF SUCH STATE IN ACCORDANCE WITH
ANY APPLICABLE PROVISIONS OF SUCH STATE'S LAW GOVERNING SERVICE OR PROCESS UPON
FOREIGN CORPORATIONS OR ENTITIES.
Section 6.11 Financing Statement; Fixture Filing. This Mortgage shall
be effective as a financing statement filed as a fixture filing with respect to
all fixtures included within the Mortgaged Property and is to be filed or filed
for record in the real estate records of each jurisdiction where any part of the
Mortgaged Property (including said fixtures) are situated. This Mortgage shall
also be effective as a financing statement covering minerals or the like
(including oil and gas and all other substances of value which may be extracted
from the ground) and accounts financed at the wellhead or minehead of wells or
mines located on the properties subject to the Applicable UCC and is to be filed
for record in the real estate records of each jurisdiction where any part of the
Mortgaged Property is situated. In addition, the Mortgagor shall execute and
deliver to the Agent, upon the Agent's request, any financing statements or
amendments thereof or continuation statements thereto that the Agent may require
to perfect a security interest in said items or types of property. The Mortgagor
shall pay all costs of filing such instruments. In that regard, the following
information is provided:
Name of Debtor: Queen Sand Resources, Inc.
Address of Debtor and 3500 Oak Lawn Drive, Suite 380
County of Residence Dallas, Texas 75219
(chief executive Attention: Mr. Robert P. Lindsay
offices): Facsimile: (214) 521-9960
Telephone: (214) 521-9959
Principal Place of
Business of Debtor: Same as above.
Tax I.D. Number of
Debtor: 75-256-4071
Name of Secured Party: Bank of Montreal, as Agent
Address of Secured 700 Louisiana, Suite 4400
Party: Houston, Texas 77002
Tax I.D. Number of
Secured Party: 13-494-1092
-18-
<PAGE> 23
Owner of Record of
Real Property: Debtor
SECTION 6.12 EXCULPATION PROVISIONS. EACH OF THE PARTIES HERETO
SPECIFICALLY AGREES THAT IT HAS A DUTY TO READ THIS MORTGAGE; AND AGREES THAT IT
IS CHARGED WITH NOTICE AND KNOWLEDGE OF THE TERMS OF THIS MORTGAGE; THAT IT HAS
IN FACT READ THIS MORTGAGE AND IS FULLY INFORMED AND HAS FULL NOTICE AND
KNOWLEDGE OF THE TERMS, CONDITIONS AND EFFECTS OF THIS MORTGAGE; THAT IT HAS
BEEN REPRESENTED BY INDEPENDENT LEGAL COUNSEL OF ITS CHOICE THROUGHOUT THE
NEGOTIATIONS PRECEDING ITS EXECUTION OF THIS MORTGAGE AND HAS RECEIVED THE
ADVICE OF ITS ATTORNEY IN ENTERING INTO THIS MORTGAGE; AND THAT IT RECOGNIZES
THAT CERTAIN OF THE TERMS OF THIS MORTGAGE RESULT IN ONE PARTY ASSUMING THE
LIABILITY INHERENT IN SOME ASPECTS OF THE TRANSACTION AND RELIEVING THE OTHER
PARTY OF ITS RESPONSIBILITY FOR SUCH LIABILITY. EACH PARTY HERETO AGREES AND
COVENANTS THAT IT WILL NOT CONTEST THE VALIDITY OR ENFORCEABILITY OF ANY
EXCULPATORY PROVISION OF THIS MORTGAGE ON THE BASIS THAT THE PARTY HAD NO NOTICE
OR KNOWLEDGE OF SUCH PROVISION OR THAT THE PROVISION IS NOT "CONSPICUOUS."
Section 6.13 No Paraph. Mortgagor acknowledges that no promissory note
or other instrument has been presented to the undersigned Notary Public(s) to be
paraphed for identification herewith.
ARTICLE VII
Special Louisiana Provisions
Section 7.01 Maximum Amount. Insofar as any portion of the Mortgaged
Property situated in or offshore the State of Louisiana is concerned, or as to
which the laws of the State of Louisiana would be applicable, the maximum amount
of the Indebtedness that may be outstanding at any time and from time to time
that this Mortgage secures is fixed at $75,000,000.00.
Section 7.02 Keeper. The Agent shall have the right to appoint a keeper
of the Mortgaged Property pursuant to the terms and provisions of La. R.S.
9:5131 et seq. and 9:5136 et seq.
Section 7.03 Confession of Judgment. For purposes of executory process
the Mortgagor acknowledges the Indebtedness secured hereby, whether now existing
or to arise hereafter, and confesses judgment thereon if not paid when due. Upon
the occurrence of an Event of Default and any time thereafter so long as the
same shall be continuing, and in addition to all other rights and remedies
granted the Agent hereunder, it shall be lawful for and the Mortgagor hereby
authorizes the Agent without making a demand or putting the Mortgagor in
default, a putting in default being expressly waived, to cause all and singular
the Mortgaged Property to be seized and sold after due process of law, the
Mortgagor waiving the benefit of any and all laws or parts of laws relative to
appraisement of Mortgaged Property seized and sold under executory process or
other legal process, and consenting that the Mortgaged Property be sold without
appraisement, either in its entirety or in lots or parcels, as the Agent may
determine, to the highest bidder for cash or on such other terms as the
plaintiff in such proceedings may direct. The Agent shall be granted all rights
and
-19-
<PAGE> 24
remedies granted it hereunder as well as all rights and remedies granted to
Agent under Louisiana law including the Uniform Commercial Code then in effect
in Louisiana.
Section 7.04 Waivers. The Mortgagor hereby waives:
(a) The benefit of appraisement provided for in
articles 2332, 2336, 2723 and 2724 of the
Louisiana Code of Civil Procedure and all
other laws conferring the same;
(b) The demand and three (3) days notice of
demand as provided in articles 2629 and 2721
of the Louisiana Code of Civil Procedure;
(c) The notice of seizure provided by articles
2293 and 2721 of the Louisiana Code of Civil
Procedure; and
(d) The three (3) days delay provided for in
articles 2331 and 2722 of the Louisiana Code
of Civil Procedure.
ARTICLE VIII
Special Mississippi Provisions
Section 8.01 Mortgaged Property. Any sale of any part of the Mortgaged
Property located in the State of Mississippi shall be made after having
published notice of the day, time, place and terms of sale in a newspaper
published in the county in which the Mortgaged Property is situated for three
consecutive weeks preceding the date of sale; and by posting one notice of such
sale at the courthouse of the county in which the Mortgaged property is situated
for said period of time. The Trustee shall have the power to select the county
or judicial district in which the sale shall be made, newspaper advertisement
published, and notice of sale posted in the event the Mortgaged Property is
located in more than one county or in two judicial districts in the same county.
The Trustee in said trust shall have the full power to fix the day, time, place
and terms of sale and may appoint or delegate any one or more persons as agent
to perform any act or acts necessary or incident to any sale held by the
Trustee, including the posting of notices in the conduct of the sale but in the
name of and on behalf of the Trustee, his substitute or successor. In connection
with the foregoing, Mortgagor waives the provisions of Section 89-1-55 of the
Mississippi Code of 1972, recompiled and laws amendatory thereto, if any, as far
as said section restricts the right of the Trustee to offer at sale more than
160 acres at one time and the Trustee may, in his discretion, offer the
Mortgaged Property as a whole or in such part or parts as he may deem desirable
regardless of the manner in which it may be described. Any sale made by the
Trustee hereunder may be adjourned by announcement at the time and place
appointed for such sale without further notice except as may be required by law.
Mortgagor also waives the provisions of Section 89-1-59 of the Mississippi Code
of 1972, recompiled and laws amendatory thereto, insofar as said section allows
the Mortgagor to reinstate an accelerated debt.
-20-
<PAGE> 25
THUS DONE AND PASSED, this 31st day of July, 1997, to be effective as
of the 1st day of August, 1997 (the "Effective Date") before the undersigned
Notary Public and witnesses.
Mortgagor: QUEEN SAND RESOURCES, INC.
By: /s/ Robert P. Lindsay
-----------------------------------
Robert P. Lindsay
Vice President
By: /s/ Ronald Benn
-----------------------------------
Ronald Benn
Vice President and Treasurer
WITNESSES:
- ------------------------------
Name:
- ------------------------------
Name:
--------------------------------
Notary Public
-21-
<PAGE> 26
THE STATE OF TEXAS )
)
COUNTY OF HARRIS )
MISSISSIPPI
Personally appeared before me, the undersigned authority in and for
said county and state, on this 31st day of July, 1997, within my jurisdiction,
the within named Robert P. Lindsay and Ronald Benn who acknowledged that they
are the "Vice President" and "Vice President and Treasurer" of QUEEN SAND
RESOURCES, INC., a Nevada corporation, and that for and on behalf of said
corporation, and as its act and deed, he executed the above and foregoing
instrument, after first having been duly authorized by said corporation so to
do.
NEW MEXICO
The foregoing instrument was acknowledged before me on July 31, 1997 by
Robert P. Lindsay, Vice President, and Ronald Benn, Vice President and
Treasurer, of QUEEN SAND RESOURCES, INC., a Nevada corporation, on behalf of
such corporation.
OKLAHOMA
This instrument was acknowledged before me on July 31, 1997 by Robert
P. Lindsay, Vice President, and Ronald Benn, Vice President and Treasurer, of
QUEEN SAND RESOURCES, INC., a Nevada corporation.
TEXAS
This instrument was acknowledged before me on July 31, 1997 by Robert
P. Lindsay, Vice President, and Ronald Benn, Vice President and Treasurer, of
QUEEN SAND RESOURCES, INC., a Nevada corporation, on behalf of such corporation.
________________________________
Notary Public in and for the
State of Texas
[SEAL] My commission expires:__________
-22-
<PAGE> 1
PREPARED BY AND EXHIBIT 10.34
WHEN RECORDED RETURN TO:
VINSON & ELKINS L.L.P.
First City Tower, Suite 3562
1001 Fannin Street
Houston, TX 77002-6760
Attn: Linda Daugherty
MORTGAGE, DEED OF TRUST, ASSIGNMENT OF PRODUCTION,
SECURITY AGREEMENT AND FINANCING STATEMENT
FROM
CORRIDA RESOURCES, INC.
TO
JAMES A. WHITMORE, AS TRUSTEE
AND
BANK OF MONTREAL,
AS AGENT,
FOR THE BENEFIT OF
FOR THE LENDERS AS HEREAFTER DEFINED
A CARBON, PHOTOGRAPHIC, OR OTHER REPRODUCTION OF THIS INSTRUMENT IS SUFFICIENT
AS A FINANCING STATEMENT.
A POWER OF SALE HAS BEEN GRANTED IN THIS INSTRUMENT. IN CERTAIN STATES, A POWER
OF SALE MAY ALLOW THE TRUSTEE OR THE AGENT TO TAKE THE MORTGAGED PROPERTY AND
SELL IT WITHOUT GOING TO COURT IN A FORECLOSURE ACTION UPON DEFAULT BY THE
MORTGAGOR UNDER THIS INSTRUMENT.
THIS INSTRUMENT CONTAINS AFTER-ACQUIRED PROPERTY PROVISIONS.
THIS INSTRUMENT SECURES PAYMENT OF FUTURE ADVANCES.
THIS INSTRUMENT COVERS PROCEEDS OF MORTGAGED PROPERTY.
THIS INSTRUMENT COVERS MINERALS AND OTHER SUBSTANCES OF VALUE WHICH MAY BE
EXTRACTED FROM THE EARTH (INCLUDING WITHOUT LIMITATION OIL AND GAS) AND WHICH
WILL BE FINANCED AT THE WELLHEADS OF THE WELL OR WELLS LOCATED ON THE PROPERTIES
DESCRIBED IN EXHIBIT A HERETO. THIS FINANCING STATEMENT IS TO BE FILED
<PAGE> 2
OR FILED FOR RECORD, AMONG OTHER PLACES, IN THE REAL ESTATE RECORDS OR SIMILAR
RECORDS OF THE COUNTY RECORDERS OF THE COUNTIES LISTED ON EXHIBIT A HERETO AND
WITH A CLERK OF COURT (OR, AS TO ORLEANS PARISH, THE RECORDER OF MORTGAGES) IN
ANY PARISH IN THE STATE OF LOUISIANA. THE MORTGAGOR HAS AN INTEREST OF RECORD IN
THE REAL ESTATE CONCERNED, WHICH INTEREST IS DESCRIBED IN EXHIBIT A ATTACHED
HERETO.
PORTIONS OF THE MORTGAGED PROPERTY ARE GOODS WHICH ARE OR ARE TO BECOME AFFIXED
TO OR FIXTURES ON THE LAND DESCRIBED IN OR REFERRED TO IN EXHIBIT A HERETO. THIS
FINANCING STATEMENT IS TO BE FILED FOR RECORD OR RECORDED, AMONG OTHER PLACES,
IN THE REAL ESTATE RECORDS OR SIMILAR RECORDS OF EACH COUNTY IN WHICH SAID LAND
OR ANY PORTION THEREOF IS LOCATED AND WITH A CLERK OF COURT (OR, AS TO ORLEANS
PARISH, THE RECORDER OF MORTGAGES) IN ANY PARISH IN THE STATE OF LOUISIANA. THE
MORTGAGOR IS THE OWNER OF RECORD INTEREST IN THE REAL ESTATE CONCERNED. THIS
INSTRUMENT IS ALSO TO BE INDEXED IN THE INDEX OF FINANCING STATEMENTS.
THIS IS DEEMED TO BE A LINE OF CREDIT MORTGAGE UNDER THE PROVISIONS OF SECTION
48-7-4 N.M.S.A.
-2-
<PAGE> 3
<TABLE>
<CAPTION>
TABLE OF CONTENTS
ARTICLE I
Grant of Lien and Indebtedness Secured
<S> <C> <C>
Section 1.01 Grant of Liens.........................................................................1
Section 1.02 Grant of Security Interest.............................................................4
Section 1.03 Indebtedness Secured...................................................................4
Section 1.04 Fixture Filing, Etc....................................................................5
Section 1.05 Pro Rata Benefit.......................................................................5
Section 1.06 Defined Terms..........................................................................6
ARTICLE II
Assignment of Production
Section 2.01 Assignment.............................................................................6
Section 2.02 Rights Under Certain Lien Statutes.....................................................6
Section 2.03 No Modification of Payment Indebtedness................................................7
Section 2.04 Payments to Mortgagor..................................................................7
ARTICLE III
Representations, Warranties and Covenants
Section 3.01 Title..................................................................................7
Section 3.02 Defend Title...........................................................................7
Section 3.03 Not a Foreign Person...................................................................8
Section 3.04 Power to Create Lien and Security......................................................8
Section 3.05 Revenue and Cost Bearing Interest......................................................8
Section 3.06 Rentals Paid; Leases in Effect.........................................................8
Section 3.07 Operation By Third Parties.............................................................8
Section 3.08 Abandon, Sales.........................................................................8
Section 3.09 Failure to Perform.....................................................................8
Section 3.10 Operation of Mortgaged Property, Etc...................................................9
ARTICLE IV
Rights and Remedies
Section 4.01 Event of Default......................................................................10
Section 4.02 Foreclosure and Sale..................................................................10
Section 4.03 Substitute Trustees and Agents........................................................11
Section 4.04 Judicial Foreclosure; Receivership....................................................11
Section 4.05 Foreclosure for Installments..........................................................12
Section 4.06 Separate Sales........................................................................12
Section 4.07 Possession of Mortgaged Property......................................................12
Section 4.08 Occupancy After Foreclosure...........................................................12
Section 4.09 Remedies Cumulative, Concurrent and Nonexclusive......................................12
Section 4.10 No Release of Indebtedness............................................................13
-i-
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
<S> <C> <C>
Section 4.11 Release of and Resort to Mortgaged Property...........................................13
Section 4.12 Waiver of Redemption, Notice and Marshalling of Assets, Etc...........................13
Section 4.13 Discontinuance of Proceedings.........................................................14
Section 4.14 Application of Proceeds...............................................................14
Section 4.15 Resignation of Operator...............................................................14
Section 4.16 INDEMNITY.............................................................................14
Section 4.17 Power of Sale in Oklahoma.............................................................15
ARTICLE V
The Trustee
Section 5.01 Duties, Rights, and Powers of Trustee.................................................15
Section 5.02 Successor Trustee.....................................................................15
Section 5.03 Retention of Moneys...................................................................16
ARTICLE VI
Miscellaneous
Section 6.01 Instrument Construed as Mortgage, Etc.................................................16
Section 6.02 Release of Lien.......................................................................16
Section 6.03 Severability..........................................................................16
Section 6.04 Successors and Assigns of Parties.....................................................17
Section 6.05 Satisfaction of Prior Encumbrance.....................................................17
Section 6.06 Subrogation of Trustee................................................................17
Section 6.07 Nature of Covenants...................................................................17
Section 6.08 Notices...............................................................................17
Section 6.09 Counterparts..........................................................................17
SECTION 6.10 GOVERNING LAW.........................................................................17
Section 6.11 Financing Statement; Fixture Filing...................................................18
SECTION 6.12 EXCULPATION PROVISIONS................................................................19
Section 6.13 No Paraph.............................................................................19
ARTICLE VII
Special Louisiana Provisions
Section 7.01 Maximum Amount........................................................................19
Section 7.02 Keeper................................................................................19
Section 7.03 Confession of Judgment................................................................19
Section 7.04 Waivers...............................................................................20
ARTICLE VIII
Special Mississippi Provisions
Section 8.01 Mortgaged Property....................................................................20
Exhibit A - Mortgaged Property
-ii-
</TABLE>
<PAGE> 5
MORTGAGE, DEED OF TRUST, ASSIGNMENT OF PRODUCTION,
SECURITY AGREEMENT AND FINANCING STATEMENT
THIS MORTGAGE, DEED OF TRUST, ASSIGNMENT OF PRODUCTION, SECURITY
AGREEMENT AND FINANCING STATEMENT (this "Mortgage") is entered into as of the
effective time and date hereinafter stated (the "Effective Date") by CORRIDA
RESOURCES, INC., a Nevada corporation with principal offices at 3500 Oak Lawn
Drive, Suite 380, Dallas, Texas 75219 ("Mortgagor"), for the benefit of BANK OF
MONTREAL, as Agent, with offices at 700 Louisiana, Suite 4400, Houston, Texas
77002, (together with any successor agents, "Agent") for the Lenders
(hereinafter defined), and for the benefit of the Lenders.
R E C I T A L S:
A. On even date herewith, Queen Sand Resources, Inc., a Nevada
corporation (the "Borrower"), the lenders signatory to the Credit Agreement (as
hereinafter defined) (together with any lenders that become a party under the
terms of the Credit Agreement collectively, the "Lenders"), and the Agent have
entered into that certain Credit Agreement (as the same may be amended,
modified, supplemented or restated from time to time, the "Credit Agreement")
pursuant to which the Lenders have made or agreed to make certain advances to
and on behalf of the Borrower.
B. The Lenders have conditioned their obligations under the Credit
Agreement upon the execution and delivery by Mortgagor of this Mortgage, and
Mortgagor has agreed to enter into this Mortgage.
C. Therefore, in order to comply with the terms and conditions of the
Credit Agreement and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Mortgagor hereby agrees as
follows:
ARTICLE I
Grant of Lien and Indebtedness Secured
Section 1.01 Grant of Liens. To secure payment of the Indebtedness (as
hereinafter defined) and the performance of the covenants and obligations of
Mortgagor under the Loan Documents, Mortgagor does by these presents hereby (i)
GRANT, BARGAIN, SELL, ASSIGN, SET OVER, TRANSFER and CONVEY unto JAMES A.
WHITMORE, as Trustee, whose address for notice hereunder is 700 Louisiana, Suite
4400, Houston, Texas 77002 ("Trustee") and the Trustee's successors and
substitutes in trust hereunder with power of sale, for the use and benefit of
Agent and the Lenders, all of the following described real and personal
property, rights, titles, interests and estates which are located in (or cover
properties located in) the State of Texas or which are located within (or cover
properties located within) the offshore area over which the United States of
America asserts jurisdiction and to which the laws of any such state are
applicable with respect to this Mortgage and/or the liens or security interests
created hereby (the "Deed of Trust Mortgaged Property") and (ii) GRANT,
MORTGAGE, PLEDGE, HYPOTHECATE AND A GRANT A POWER OF SALE to Agent, for its
benefit and the benefit of the Lenders, with respect to, all of the following
described real and personal property, rights, titles, interests and estates
which were not granted to Trustee in clause (i) above (the "Other Mortgaged
Property"):
(a) All rights, titles, interests and estates now owned or hereafter
acquired by Mortgagor in and to the oil and gas leases and/or oil, gas and other
mineral leases, operating
<PAGE> 6
rights, and other interests and estates and the lands and premises covered or
affected thereby which are described on Exhibit A hereto (collectively, the
"Hydrocarbon Property"), and specifically, but without limitation, the undivided
interests of Mortgagor which are more particularly described on attached Exhibit
A, even though the interest of the Mortgagor in such Hydrocarbon Property may be
incorrectly described in Exhibit A hereto.
(b) All rights, titles, interests and estates now owned or hereafter
acquired by Mortgagor in and to (i) the properties now or hereafter pooled or
unitized with the Hydrocarbon Property; (ii) all presently existing or future
unitization, communitization, pooling agreements and declarations of pooled
units and the units created thereby (including, without limitation, all units
created under orders, regulations, rules or other official acts of any Federal,
State or other governmental body or agency having jurisdiction and any units
created solely among working interest owners pursuant to operating agreements or
otherwise) which may affect all or any portion of the Hydrocarbon Property
including, without limitation, those units which may be described or referred to
on attached Exhibit A; (iii) all operating agreements, production sales or other
contracts, farmout agreements, farm-in agreements, area of mutual interest
agreements, equipment leases and other agreements described or referred to in
this Mortgage or which relate to any of the Hydrocarbon Property or interests in
the Hydrocarbon Property described or referred to herein or on attached Exhibit
A or to the production, sale, purchase, exchange, processing, handling, storage,
transporting or marketing of the Hydrocarbons (as hereinafter defined) from or
attributable to such Hydrocarbon Property or interests; (iv) all geological,
geophysical, engineering, accounting, title, legal, and other technical or
business data concerning the Mortgaged Property (as hereinafter defined), the
Hydrocarbons, or any other item of Property which are in the possession of
Mortgagor or in which Mortgagor can otherwise grant a security interest, and all
books, files, records, magnetic media, computer records, and other forms of
recording or obtaining access to such data; and (v) the Hydrocarbon Property
described on attached Exhibit A and covered by this Mortgage even though
Mortgagor's interests therein be incorrectly described or a description of a
part or all of such Hydrocarbon Property or Mortgagor's interests therein be
omitted; it being intended by Mortgagor and Agent herein to cover and affect
hereby all interests which Mortgagor may now own or may hereafter acquire in and
to the Hydrocarbon Property notwithstanding that the interests as specified on
Exhibit A may be limited to particular lands, specified depths or particular
types of property interests.
(c) All rights, titles, interests and estates now owned or hereafter
acquired by Mortgagor in and to all oil, gas, casinghead gas, condensate,
distillate, liquid hydrocarbons, gaseous hydrocarbons and all products refined
therefrom and all other minerals (collectively, the "Hydrocarbons") in and under
and which may be produced and saved from or attributable to the Hydrocarbon
Property, the lands pooled or unitized therewith and Mortgagor's interests
therein, including all oil in tanks and all rents, issues, profits, proceeds,
products, revenues and other income from or attributable to the Hydrocarbon
Property, the lands pooled or unitized therewith and Mortgagor's interests
therein which are subjected or required to be subjected to the Liens and
security interests of this Mortgage.
(d) All tenements, hereditaments, appurtenances and properties in
anywise appertaining, belonging, affixed or incidental to the Hydrocarbon
Property, rights, titles, interests and estates described or referred to in
paragraphs (a) and (b) above, which are now owned or which may hereafter be
acquired by Mortgagor, including, without limitation, any and all property, real
or personal, now owned or hereafter acquired and situated upon, used, held for
use, or useful in connection with the operating, working or development of any
of
-2-
<PAGE> 7
such Hydrocarbon Property or the lands pooled or unitized therewith (excluding
drilling rigs, trucks, automotive equipment or other personal property which may
be taken to the premises for the purpose of drilling a well or for other similar
temporary uses) and including any and all oil wells, gas wells, injection wells
or other wells, buildings, structures, platforms, risers, templates, pipelines,
field separators, liquid extraction plants, plant compressors, pumps, pumping
units, pipelines, sales and flow lines, gathering systems, field gathering
systems, salt water disposal facilities, tanks and tank batteries, yard
inventory, fixtures, valves, fittings, machinery and parts, engines, boilers,
meters, apparatus, equipment, appliances, tools, implements, cables, wires,
towers, casing, tubing and rods, surface leases, rights-of-way, easements,
servitudes, licenses and other surface and subsurface rights together with all
additions, substitutions, replacements, accessions and attachments to any and
all of the foregoing properties.
(e) Any property that may from time to time hereafter, by delivery or
by writing of any kind, be subjected to the Lien and security interest hereof by
Mortgagor or by anyone on Mortgagor's behalf; and the Trustee is hereby
authorized to receive the same at any time as additional security hereunder.
(f) All of the rights, titles and interests of every nature whatsoever
now owned or hereafter acquired by Mortgagor in and to the Hydrocarbon Property
rights, titles, interests and estates and every part and parcel thereof,
including, without limitation, the Hydrocarbon Property rights, titles,
interests and estates as the same may be enlarged by the discharge of any
payments out of production or by the removal of any charges or Permitted
Encumbrances (as hereinafter defined in Section 3.01) to which any of the
Hydrocarbon Property rights, titles, interests or estates are subject, or
otherwise; all rights of Mortgagor to Liens and security interests securing
payment of proceeds from the sale of production from the Mortgaged Property,
including, but not limited to, those Liens and security interests provided in
Tex. Bus. & Com. Code Ann. Section 9.319 (Tex. UCC) (Vernon Supp. 1989), as
amended from time to time, or similar statute of any states in which the
Mortgaged Property is located; together with any and all renewals and extensions
of any of the Hydrocarbon Property rights, titles, interests or estates; all
contracts and agreements supplemental to or amendatory of or in substitution for
the contracts and agreements described or mentioned above; and any and all
additional interests of any kind hereafter acquired by Mortgagor in and to the
Hydrocarbon Property rights, titles, interests or estates.
(g) All accounts, contract rights, inventory, general intangibles,
insurance contracts and insurance proceeds constituting a part of, relating to
or arising out of those portions of the Mortgaged Property which are described
in paragraphs (a) through (f) above and all proceeds and products of all such
portions of the Mortgaged Property and payments in lieu of production (such as
"take or pay" payments), whether such proceeds or payments are goods, money,
documents, instruments, chattel paper, securities, accounts, general
intangibles, fixtures, real property, or other assets.
Any fractions or percentages specified on attached Exhibit A in
referring to Mortgagor's interests are solely for purposes of the warranties
made by Mortgagor pursuant to Sections 3.01 and 3.05 hereof and shall in no
manner limit the quantum of interest affected by this Section 1.01 with respect
to any Hydrocarbon Property or with respect to any unit or well identified on
said Exhibit A.
TO HAVE AND TO HOLD (i) the Deed of Trust Mortgaged Property unto the
Trustee and to his successors and assigns forever and (ii) the Other Mortgaged
Property unto Agent,
-3-
<PAGE> 8
and Agent's successors and assigns to secure the payment of the Indebtedness
(hereinafter defined) and to secure the performance of the covenants,
agreements, and obligations of the Mortgagor contained herein and in the other
Security Instruments, subject only to Permitted Encumbrances as hereinafter
defined. The Deed of Trust Mortgaged Property and the Other Mortgaged Property
being herein sometimes collectively called the "Mortgaged Property."
Section 1.02 Grant of Security Interest. To further secure the
Indebtedness, Mortgagor hereby grants to Agent, for its benefit and the benefit
of the Lenders, a security interest in and to the Mortgaged Property (whether
now or hereafter acquired by operation of law or otherwise) insofar as the
Mortgaged Property consists of equipment, accounts, contract rights, general
intangibles, insurance contracts, insurance proceeds, inventory, Hydrocarbons,
fixtures and any and all other personal or movable property of any kind or
character defined in and subject to the Uniform Commercial Code presently in
effect in the jurisdiction in which the Mortgaged Property is situated
("Applicable UCC"), including all replacements and substitutions for the
Mortgaged Property and all accessions thereto and the proceeds and products from
any and all of such personal property (the "Collateral"). Upon the occurrence
and continuation of any Event of Default, Agent is and shall be entitled to all
of the rights, powers and remedies afforded a secured party by the Applicable
UCC with reference to the personal property and fixtures in which Agent has been
granted a security interest herein, or the Trustee or Agent may proceed as to
both the real and personal property covered hereby in accordance with the rights
and remedies granted under this Mortgage in respect of the real property covered
hereby. Such rights, powers and remedies shall be cumulative and in addition to
those granted to the Trustee or Agent under any other provision of this Mortgage
or under any other Security Instrument. Written notice mailed to Mortgagor as
provided herein at least ten (10) days prior to the date of public sale of any
part of the Mortgaged Property which is personal property subject to the
provisions of the Applicable UCC, or prior to the date after which private sale
of any such part of the Mortgaged Property will be made, shall constitute
reasonable notice.
Section 1.03 Indebtedness Secured. This Mortgage is executed and
delivered by Mortgagor to secure and enforce the following (the "Indebtedness"):
(a) (i) Payment of and performance of any and all indebtedness,
obligations and liabilities of the Borrower pursuant to the Credit Agreement,
whether now existing or hereafter arising, including without limitation, the
promissory notes executed by the Borrower payable to the order of the Lenders
and being in the aggregate principal amount of $75,000,000 with final maturity
on or before August 1, 2003, and all other notes given in substitution therefor
or in modification, renewal or extension thereof, in whole or in part, (ii) all
reimbursement obligations under any Letters of Credit issued under the Credit
Agreement, and (iii) the obligations of the Mortgagor under that certain
Guaranty Agreement dated as of even date herewith by Mortgagor in favor of the
Agent and the Lenders.
(b) Any sums which may be advanced or paid by Agent and/or the Lenders
under the terms hereof or of the Credit Agreement on account of the failure of
the Mortgagor to comply with the covenants contained herein or in the Credit
Agreement; and all other indebtedness of Mortgagor arising pursuant to the
provisions of this Mortgage.
(c) Any additional loans made by Agent and/or the Lenders to the
Borrower or the Mortgagor. It is contemplated that Agent and/or the Lenders may
lend additional sums to
-4-
<PAGE> 9
the Borrower and/or the Mortgagor from time to time, but shall not be obligated
to do so, and Mortgagor agrees that any such additional loans shall be secured
by this Mortgage.
(d) Payment of and performance of any and all present or future
obligations of the Borrower according to the terms of any present or future
interest rate or currency swap, rate cap, rate floor, rate collar, forward rate
agreement or other exchange or rate protection agreements or any option with
respect to any such transaction now existing or hereafter entered into between
the Borrower and any Lender or an Affiliate of such Lender.
(e) Payment of and performance of any and all present or future
obligations of the Borrower according to the terms of any present or future swap
agreements, cap, floor, collar, forward agreement or other exchange or
protection agreements relating to crude oil, natural gas or other hydrocarbons
or any option with respect to any such transaction now existing or hereafter
entered into between the Borrower and any Lender or an Affiliate of such Lender.
(f) Payment of and performance of any and all other indebtedness,
obligations and liabilities of any kind of Borrower to the Agent and/or the
Lenders, now or hereafter existing, arising directly between the Borrower, the
Agent and/or the Lenders or acquired outright, as a participation, conditionally
or as collateral security from another by the Lenders, absolute or contingent,
joint and/or several, secured or unsecured, due or not due, arising by operation
of law or otherwise, or direct or indirect, including indebtedness, obligations
and liabilities to the Lenders of the Borrower as a member of any partnership,
syndicate, association or other group, and whether incurred by the Borrower as
principal, surety, endorser, guarantor, accommodation party or otherwise.
(g) Payment and performance of any and all judgements, decrees, awards
and orders arising from or relating to any of the foregoing Sections 1.03(a)
through (f).
(h) Indebtedness shall not exceed at any one time the sum of
$75,000,000, which shall constitute the maximum amount at any time secured
hereby.
Section 1.04 Fixture Filing, Etc. Without in any manner limiting the
generality of any of the other provisions of this Mortgage: (i) some portions of
the goods described or to which reference is made herein are or are to become
fixtures on the land described or to which reference is made herein or on
attached Exhibit A; (ii) the security interests created hereby under applicable
provisions of the Applicable UCC will attach to Hydrocarbons (minerals including
oil and gas) or the accounts resulting from the sale thereof at the wellhead or
minehead located on the land described or to which reference is made herein;
(iii) this Mortgage is to be filed or filed of record in the real estate records
as a financing statement, and (iv) Mortgagor is the record owner of the real
estate or interests in the real estate comprised of the Mortgaged Property.
Section 1.05 Pro Rata Benefit. This Mortgage is executed and granted
for the pro rata benefit and security of the Agent, and the Lenders, and any and
all future holders of an interest in the Indebtedness and the interest thereon
for whatever period; it being understood and agreed that possession of any Note
(or any replacements of said Note) at any time by Mortgagor shall not in any
manner extinguish the Indebtedness, such Note or this Mortgage securing payment
thereof, and the Mortgagor shall have the right to issue and reissue any of the
Notes from time to time as its interest or as convenience may require, without
in any
-5-
<PAGE> 10
manner extinguishing or affecting the Indebtedness, the obligations under any of
the Notes, or the security of this Mortgage.
Section 1.06 Defined Terms. Any capitalized term used in this Mortgage
and not defined in this Mortgage shall have the meaning assigned to such term in
the Credit Agreement.
ARTICLE II
Assignment of Production
Section 2.01 Assignment. Mortgagor has absolutely and unconditionally
assigned, transferred, and conveyed, and does hereby absolutely and
unconditionally assign, transfer and convey unto Agent, for its benefit and the
benefit of the Lenders and their successors and assigns, all of the Hydrocarbons
and all products obtained or processed therefrom, and the revenues and proceeds
now and hereafter attributable to the Hydrocarbons and said products and all
payments in lieu of the Hydrocarbons such as "take or pay" payments or
settlements. The Hydrocarbons and products are to be delivered into pipe lines
connected with the Mortgaged Property, or to the purchaser thereof, to the
credit of Agent, free and clear of all taxes, charges, costs, and expenses; and
all such revenues and proceeds shall be paid directly to Agent, for its benefit
and the benefit of the Lenders, with no duty or obligation of any party paying
the same to inquire into the rights of Agent, for its benefit and the benefit of
the Lenders, to receive the same, what application is made thereof, or as to any
other matter. Mortgagor agrees to perform all such acts, and to execute all such
further assignments, transfers and division orders, and other instruments as may
be required or desired by Agent or any party in order to have said proceeds and
revenues so paid to Agent. Agent is fully authorized to receive and receipt for
said revenues and proceeds; to endorse and cash any and all checks and drafts
payable to the order of Mortgagor received from or in connection with said
revenues or proceeds and to hold the proceeds thereof in a bank account as
additional collateral securing the Indebtedness; and to execute transfer and
division orders in the name of Mortgagor, or otherwise, with warranties binding
Mortgagor. All proceeds received by the Agent pursuant to this assignment shall
be applied as provided in the other Loan Documents. The Agent shall not be
liable for any delay, neglect, or failure to effect collection of any proceeds
or to take any other action in connection therewith or hereunder; but the Agent
shall have the right, at its election, in the name of Mortgagor or otherwise, to
prosecute and defend any and all actions or legal proceedings deemed advisable
by Agent in order to collect such funds and to protect the interests of Agent,
the Lenders and/or Mortgagor, with all costs, expenses and attorneys' fees
incurred in connection therewith being paid by Mortgagor. Mortgagor hereby
appoints Agent as its attorney-in-fact to pursue any and all rights of Mortgagor
to Liens on and security interests in the Hydrocarbons securing payment of
proceeds of runs attributable to the Hydrocarbons. In addition to the rights
granted to Trustee and/or Agent in Section 1.01 (f) of this Mortgage, Mortgagor
hereby further transfers and assigns to Agent, for its benefit and the benefit
of the Lenders, any and all such Liens, security interests, financing statements
or similar interests of Mortgagor attributable to its interest in the
Hydrocarbons and proceeds of runs therefrom arising under or created by said
statutory provision, judicial decision or otherwise. The power of attorney
granted to Agent in this Section 2.01, being coupled with an interest, shall be
irrevocable so long as the Indebtedness or any part thereof remains unpaid.
Section 2.02 Rights Under Certain Lien Statutes. Mortgagor hereby
grants, sells, assigns, sets over and mortgages unto Agent, for its benefit and
the benefit of the Lenders,
-6-
<PAGE> 11
during the term hereof, all of Mortgagor's rights and interests pursuant to the
provisions of Section 9.319 of the Texas UCC, and of the Oil and Gas Owners Lien
Act, 52 O.S. Section 548.2 hereby vesting in Agent all of Mortgagor's rights as
an interest owner to the continuing security interest in and Lien upon the
Mortgaged Property.
Section 2.03 No Modification of Payment Indebtedness. Nothing herein
contained shall modify or otherwise alter the obligation of Mortgagor to make
prompt payment of all principal and interest owing on the Indebtedness when and
as the same become due regardless of whether the proceeds of the Hydrocarbons
are sufficient to pay the same; and the rights provided in accordance with the
foregoing assignment provision shall be cumulative of all other security of any
and every character now or hereafter existing to secure payment of the
Indebtedness.
Section 2.04 Payments to Mortgagor. Until such time as written demand
has been made upon them by the Trustee or Agent that payment of the proceeds of
runs be made directly to the Trustee or Agent, the purchasers or other persons
obligated to make such payment shall continue to make payment to Mortgagor.
Failure to notify shall not in any way waive the right of the Trustee or Agent
to receive any payments not theretofore paid over to Mortgagor before the giving
of written notice. In this regard, in the event payments are made directly to
the Trustee, and then, at the request of the Trustee or Agent payments are, for
a period or periods of time, paid to Mortgagor, the Trustee shall nevertheless
have the right, effective upon written notice, to require that future payments
be again made to it.
ARTICLE III
Representations, Warranties and Covenants
Mortgagor hereby represents, warrants and covenants as follows:
Section 3.01 Title. To the extent of the undivided interests specified
on attached Exhibit A, Mortgagor has good and marketable title to and is
possessed of the Mortgaged Property. The Mortgaged Property is free of any and
all Liens except Liens allowed by Section 9.02 of the Credit Agreement (the
"Permitted Encumbrances").
Section 3.02 Defend Title. This Mortgage is, and always will be kept, a
direct first Lien and security interest upon the Mortgaged Property subject only
to the Permitted Encumbrances. Mortgagor will not create or suffer to be created
or permit to exist any Lien, security interest or charge prior or junior to or
on a parity with the Lien and security interest of this Mortgage upon the
Mortgaged Property or any part thereof or upon the rents, issues, revenues,
profits and other income therefrom other than Permitted Encumbrances. Mortgagor
will warrant and defend the title to the Mortgaged Property against the claims
and demands of all other Persons whomsoever and will maintain and preserve the
Lien created hereby so long as any of the Indebtedness hereby remains unpaid.
Should an adverse claim be made against or a cloud develop upon the title to any
part of the Mortgaged Property which could reasonably be expected to have a
Material Adverse Effect, Mortgagor agrees it will promptly defend against such
adverse claim or take appropriate action to remove such cloud at Mortgagor's
cost and expense, and Mortgagor further agrees that the Trustee and/or Agent may
take such other action as they deem advisable to protect and preserve their
interests and the interests of the Lenders in such Mortgaged Property, AND IN
SUCH EVENT MORTGAGOR WILL INDEMNIFY THE TRUSTEE AND AGENT AGAINST ANY AND
-7-
<PAGE> 12
ALL COST, ATTORNEY'S FEES AND OTHER EXPENSES WHICH THEY MAY INCUR IN DEFENDING
AGAINST ANY SUCH ADVERSE CLAIM OR TAKING ACTION TO REMOVE ANY SUCH CLOUD.
Section 3.03 Not a Foreign Person. Mortgagor is not a "foreign person"
within the meaning of the Internal Revenue Code of 1986, as amended (hereinafter
called the "Code"), Sections 1445 and 7701 (i.e. Mortgagor is not a non-resident
alien, foreign corporation, foreign partnership, foreign trust or foreign estate
as those terms are defined in the Code and any regulations promulgated
thereunder).
Section 3.04 Power to Create Lien and Security. The Mortgagor has full
power and lawful authority to grant, bargain, sell, assign, transfer, mortgage,
and convey a security interest in all of the Mortgaged Property in the manner
and form herein provided. No authorization, approval, consent or waiver of any
lessor, sublessor, Governmental Authority or other party or parties whomsoever
is required in connection with the execution and delivery by Mortgagor of this
Mortgage except to the extent the approval or consent of the Louisiana State
Mineral Board or the Department of the Interior, United States of America or
similar Governmental Authority, as the case may be, is required by applicable
law or regulation to the transfer or assignment of an interest in any of the
Mortgaged Property.
Section 3.05 Revenue and Cost Bearing Interest. Mortgagor's ownership
of the Hydrocarbon Property and the undivided interests therein as specified on
attached Exhibit A will, after giving full effect to all Permitted Encumbrances,
afford Mortgagor not less than those net interests (expressed as a fraction,
percentage or decimal) in the production from or which is allocated to such
Hydrocarbon Property specified on attached Exhibit A and will cause Mortgagor to
bear not more than that portion (expressed as a fraction, percentage or
decimal), specified on attached Exhibit A, of the costs of drilling, developing
and operating the wells identified on Exhibit A.
Section 3.06 Rentals Paid; Leases in Effect. Except as otherwise
permitted by the Credit Agreement, all rentals and royalties due and payable in
accordance with the terms of any leases or subleases comprising a part of the
Hydrocarbon Property have been duly paid or provided for and all leases or
subleases comprising a part of the Hydrocarbon Property are in full force and
effect.
Section 3.07 Operation By Third Parties. In the event that all or any
portions of the Mortgaged Property is comprised of interests in the Hydrocarbon
Property which are not working interests or which are operated by a party or
parties other than Mortgagor, then, with respect to such interests and
properties, Mortgagor's covenants as expressed in this Article III are modified
to require that Mortgagor use reasonable efforts consistent with usual and
customary industry practice to obtain compliance with such covenants by the
working interest owners or the operator or operators of such leases or
properties.
Section 3.08 Abandon, Sales. The Mortgagor will not sell, lease,
assign, transfer or otherwise dispose or abandon any of the Mortgaged Property
except as permitted by the Credit Agreement.
Section 3.09 Failure to Perform. The Mortgagor agrees that if the
Mortgagor fails to perform any act or to take any action which the Mortgagor is
required to perform or take hereunder or pay any money which the Mortgagor is
required to pay hereunder, each of the Agent and the Trustee in the Mortgagor's
name or its or their own name may, but shall not be obligated to, perform or
cause to perform such act or take such action or pay such money,
-8-
<PAGE> 13
and any expenses so incurred by either of them and any money so paid by either
of them shall be a demand obligation owing by the Mortgagor to the Agent or the
Trustee, as the case may be, and each of the Agent and the Trustee, upon making
such payment, shall be subrogated to all of the rights of the Person receiving
such payment. Each amount due and owing by Mortgagor to each of the Agent and
the Trustee pursuant to this Mortgage shall bear interest from the date of such
expenditure or payment or other occurrence which gives rise to such amount being
owed to such Person until paid at a rate per annum equal to the lesser of (x)
the Highest Lawful Rate applicable to the Lender making such Loan and (y) the
Post-Default Rate, and all such amounts together with such interest thereon
shall be a part of the Indebtedness described in Section 1.03 hereof.
Section 3.10 Operation of Mortgaged Property, Etc. Except as otherwise
permitted by the Credit Agreement, Mortgagor will promptly pay and discharge all
rentals, delay rentals, royalties and indebtedness accruing under, and perform
or cause to be performed each and every act, matter or thing required by, each
and all of the assignments, deeds, leases, sub-leases, contracts and agreements
described or referred to herein or affecting Mortgagor's interests in the
Mortgaged Property, and will do all other things necessary to keep unimpaired
Mortgagor's rights with respect thereto and prevent any forfeiture thereof or
default thereunder. Except as otherwise permitted by the Credit Agreement, the
Mortgaged Property (and properties unitized therewith) has been maintained,
operated and developed in a good and workmanlike manner and in conformity with
all applicable laws and all rules, regulations and orders of all duly
constituted authorities having jurisdiction and in conformity with the
provisions of all leases, subleases or other contracts comprising a part of the
Hydrocarbon Property and other contracts and agreements forming a part of the
Mortgaged Property; specifically in this connection, (i) after the Effective
Date no Mortgaged Property is subject to having allowable production reduced
below the full and regular allowable (including the maximum permissible
tolerance) because of any overproduction (whether or not the same was
permissible at the time) prior to the Effective Date and (ii) none of the wells
comprising a part of the Mortgaged Property (or properties unitized therewith)
are deviated from the vertical more than the maximum permitted by applicable
laws, regulations, rules and orders, and such wells are, in fact, bottomed under
and are producing from, and the well bores are wholly within, the Mortgaged
Property (or, in the case of wells located on properties unitized therewith,
such unitized properties). Except as otherwise permitted by the Credit
Agreement, Mortgagor will operate the Mortgaged Property in a careful and
efficient manner in accordance with the practices of the industry and in
material compliance with all applicable contracts and agreements and in
compliance with all applicable proration and conservation laws of the
jurisdiction in which the Mortgaged Property is situated, and all applicable
laws, rules and regulations of every other agency and authority from time to
time constituted to regulate the development and operation of the Mortgaged
Property and the production and sale of Hydrocarbons and other minerals there
from. Except as otherwise permitted by the Credit Agreement, Mortgagor will do
or cause to be done such development work as may be reasonably necessary to the
prudent and economical operation of the Mortgaged Property in accordance with
the usual and customary practices of operators in the industry, including all to
be done that may be appropriate to protect from diminution the productive
capacity of the Mortgaged Property and each producing well thereon including,
without limitation, cleaning out and reconditioning each well from time to time,
plugging and completing at a different level each such well, drilling a
substitute well to conform to changed spacing regulations and to protect the
Mortgaged Property against drainage whenever and as often as is necessary.
-9-
<PAGE> 14
ARTICLE IV
Rights and Remedies
Section 4.01 Event of Default. An "Event of Default" under the Credit
Agreement shall be an Event of Default under this Mortgage.
Section 4.02 Foreclosure and Sale. (a) If an Event of Default shall
occur and be continuing, Agent shall have the right and option to proceed with
foreclosure by directing the Trustee, or his successors or substitutes in trust,
to proceed with foreclosure and to sell, to the extent permitted by law, all or
any portion of the Deed of Trust Mortgaged Property at one or more sales, as an
entirety or in parcels, at such place or places in otherwise such manner and
upon such notice as may be required by law, or, in the absence of any such
requirement, as the Agent may deem appropriate, and to make conveyance to the
purchaser or purchasers. Where the Deed of Trust Mortgaged Property is situated
in more than one county, notice as above provided shall be posted and filed in
all such jurisdictions (if such notices are required by law), and all such Deed
of Trust Mortgaged Property may be sold in any such jurisdiction and any such
notice shall designate the jurisdiction where such Deed of Trust Mortgaged
Property is to be sold. Nothing contained in this Section 4.02 shall be
construed so as to limit in any way the Trustee's rights to sell the Deed of
Trust Mortgaged Property, or any portion thereof, by private sale if, and to the
extent that, such private sale is permitted under the laws of the applicable
jurisdiction or by public or private sale after entry of a judgment by any court
of competent jurisdiction so ordering. After the occurrence and continuation of
an Event of Default, Mortgagor hereby irrevocably appoints the Trustee to be the
attorney of Mortgagor and in the name and on behalf of Mortgagor to execute and
deliver any deeds, transfers, conveyances, assignments, assurances and notices
which Mortgagor ought to execute and deliver and do and perform any and all such
acts and things which Mortgagor ought to do and perform under the covenants
herein contained and generally, to use the name of Mortgagor in the exercise of
all or any of the powers hereby conferred on the Trustee. At any such sale: (i)
whether made under the power herein contained or any other legal enactment, or
by virtue of any judicial proceedings or any other legal right, remedy or
recourse, it shall not be necessary for Trustee to have physically present, or
to have constructive possession of, the Deed of Trust Mortgaged Property
(Mortgagor hereby covenanting and agreeing to deliver to Trustee any portion of
the Deed of Trust Mortgaged Property not actually or constructively possessed by
Trustee immediately upon demand by Trustee) and the title to and right of
possession of any such property shall pass to the purchaser thereof as
completely as if the same had been actually present and delivered to purchaser
at such sale, (ii) each instrument of conveyance executed by Trustee may, at the
election of the Trustee, contain a general warranty of title, binding upon
Mortgagor and its successors and assigns, (iii) each and every recital contained
in any instrument of conveyance made by Trustee shall conclusively establish the
truth and accuracy of the matters recited therein, including, without
limitation, nonpayment of the Indebtedness, advertisement and conduct of such
sale in the manner provided herein and otherwise by law and appointment of any
successor Trustee hereunder, (iv) any and all prerequisites to the validity
thereof shall be conclusively presumed to have been performed, (v) the receipt
of Trustee or of such other party or officer making the sale shall be a
sufficient discharge to the purchaser or purchasers for its purchase money and
no such purchaser or purchasers, or its assigns or personal representatives,
shall thereafter be obligated to see to the application of such purchase money,
or be in any way answerable for any loss, misapplication or nonapplication
thereof, (vi) to the fullest extent permitted by law, Mortgagor shall be
completely and irrevocably divested of all of its right, title, interest, claim
and demand whatsoever, either
-10-
<PAGE> 15
at law or in equity, in and to the property sold and such sale shall be a
perpetual bar both at law and in equity against Mortgagor, and against any and
all other Persons claiming or to claim the property sold or any part thereof,
by, through or under Mortgagor, and (vii) to the extent and under such
circumstances as are permitted by law, Agent may be a purchaser at any such
sale, and shall have the right, after paying or accounting for all costs of said
sale or sales, to credit the amount of the bid upon the amount of the
Indebtedness (in the order of priority set forth in Section 4.14 hereof) in lieu
of cash payment.
(b) If an Event of Default shall occur and be continuing, this Mortgage
may be foreclosed as to the Other Mortgaged Properties, or any part thereof, in
any manner permitted by applicable law. Cumulative of the foregoing and the
other provisions of this Section 4.02, as to any portion of the Other Mortgaged
Properties located in the State of Louisiana (or within the offshore area over
which the United States of America asserts jurisdiction and to which the laws of
such state are applicable with respect to this Mortgage and/or the liens or
security interests created hereby), Agent may foreclose this Mortgage by
executory process subject to, and on the terms and conditions required or
permitted by, applicable law, and shall have the right to appoint a keeper of
such Other Mortgaged Properties.
Section 4.03 Substitute Trustees and Agents. The Trustee or his
successor or substitute may appoint or delegate any one or more Persons as agent
to perform any act or acts necessary or incident to any sale held by Trustee,
including the posting of notices and the conduct of sale, but in the name and on
behalf of Trustee, his successor or substitute. If Trustee or his successor or
substitute shall have given notice of sale hereunder, any successor or
substitute trustee thereafter appointed may complete the sale and the conveyance
of the property pursuant thereto as if such notice had been given by the
successor or substitute trustee conducting the sale.
Section 4.04 Judicial Foreclosure; Receivership. If the Indebtedness
shall become due and payable and shall not be promptly paid, the Trustee or
Agent shall have the right and power to proceed by a suit or suits in equity or
at law, whether for the specific performance of any covenant or agreement herein
contained or in aid of the execution of any power herein granted, or for any
foreclosure hereunder or for the sale of the Mortgaged Property under the
judgment or decree of any court or courts of competent jurisdiction, or for the
appointment of a receiver pending any foreclosure hereunder or the sale of the
Mortgaged Property under the order of a court or courts of competent
jurisdiction or under executory or other legal process, or for the enforcement
of any other appropriate legal or equitable remedy. Any money advanced by the
Trustee and/or Agent in connection with any such receivership shall be a demand
obligation (which obligation Mortgagor hereby expressly promises to pay) owing
by Mortgagor to the Trustee and/or Agent and shall bear interest from the date
of making such advance by the Trustee and/or Agent until paid at the
Post-Default Rate.
Section 4.05 Foreclosure for Installments. The Agent shall also have
the option to proceed with foreclosure in satisfaction of any installments of
the Indebtedness which have not been paid when due either through the courts or
by directing the Trustee or his successors in trust to proceed with foreclosure
in satisfaction of the matured but unpaid portion of the Indebtedness as if
under a full foreclosure, conducting the sale as herein provided and without
declaring the entire principal balance and accrued interest due; such sale may
be made subject to the unmatured portion of the Indebtedness, and any such sale
shall not in any manner affect the unmatured portion of the Indebtedness, but as
to such unmatured portion of the Indebtedness this Mortgage shall remain in full
force and effect just
-11-
<PAGE> 16
as though no sale had been made hereunder. It is further agreed that several
sales may be made hereunder without exhausting the right of sale for any
unmatured part of the Indebtedness, it being the purpose hereof to provide for a
foreclosure and sale of the security for any matured portion of the Indebtedness
without exhausting the power to foreclose and sell the Mortgaged Property for
any subsequently maturing portion of the Indebtedness.
Section 4.06 Separate Sales The Mortgaged Property may be sold in one
or more parcels and in such manner and order as Agent and the Lenders, in their
sole discretion, may elect, it being expressly understood and agreed that the
right of sale arising out of any Event of Default shall not be exhausted by any
one or more sales.
Section 4.07 Possession of Mortgaged Property. Mortgagor agrees to the
full extent that it lawfully may, that, upon the occurrence and continuation of
any Event of Default, then, the Trustee or Agent shall have the right and power
to enter into and upon and take possession of all or any part of the Mortgaged
Property in the possession of Mortgagor, its successors or assigns, or its or
their agents or servants, and may exclude Mortgagor, its successors or assigns,
and all Persons claiming under Mortgagor, and its or their agents or servants
wholly or partly therefrom; and, holding the same, the Trustee may use,
administer, manage, operate and control the Mortgaged Property and conduct the
business thereof to the same extent as Mortgagor, its successors or assigns,
might at the time do and may exercise all rights and powers of Mortgagor, in the
name, place and stead of Mortgagor, or otherwise as the Trustee shall deem best.
All costs, expenses and liabilities of every character incurred by the Trustee
and/or Agent in administering, managing, operating, and controlling the
Mortgaged Property shall constitute a demand obligation (which obligation
Mortgagor hereby expressly promises to pay) owing by Mortgagor to the Trustee
and/or Agent and shall bear interest from date of expenditure until paid at the
Post-Default Rate, all of which shall constitute a portion of the Indebtedness
and shall be secured by this Mortgage and all other Security Instruments.
Section 4.08 Occupancy After Foreclosure. In the event there is a
foreclosure sale hereunder and at the time of such sale Mortgagor or Mortgagor's
heirs, devisees, representatives, successors or assigns or any other Person
claiming any interest in the Mortgaged Property by, through or under Mortgagor,
are occupying or using the Mortgaged Property or any part thereof, each and all
shall immediately become the tenant of the purchaser at such sale, which tenancy
shall be a tenancy from day to day, terminable at the will of either the
landlord or tenant, at a reasonable rental per day based upon the value of the
property occupied, such rental to be due daily to the purchaser; to the extent
permitted by applicable law, the purchaser at such sale shall, notwithstanding
any language herein apparently to the contrary, have the sole option to demand
immediate possession following the sale or to permit the occupants to remain as
tenants at will. In the event the tenant fails to surrender possession of said
property upon demand, the purchaser shall be entitled to institute and maintain
a summary action for possession of the Mortgaged Property (such as an action for
forcible entry and detainer) in any court having jurisdiction.
Section 4.09 Remedies Cumulative, Concurrent and Nonexclusive. Every
right, power and remedy herein given to the Trustee or Agent shall be cumulative
and in addition to every other right, power and remedy herein specifically given
or now or hereafter existing in equity, at law or by statute (including
specifically those granted by the Applicable UCC and applicable to the Mortgaged
Property or any portion thereof) each and every right, power and remedy whether
specifically herein given or otherwise existing may be exercised from time to
time and so often and in such order as may be deemed expedient by the Trustee,
the Agent
-12-
<PAGE> 17
and/or the Lenders, and the exercise, or the beginning of the exercise, of any
such right, power or remedy shall not be deemed a waiver of the right to
exercise, at the same time or thereafter any other right, power or remedy. No
delay or omission by the Trustee, the Agent and/or the Lenders in the exercise
of any right, power or remedy shall impair any such right, power or remedy or
operate as a waiver thereof or of any other right, power or remedy then or
thereafter existing.
Section 4.10 No Release of Indebtedness. Neither Mortgagor, any
guarantor nor any other Person hereafter obligated for payment of all or any
part of the Indebtedness shall be relieved of such obligation by reason of (a)
the failure of Trustee to comply with any request of Mortgagor, or any guarantor
or any other Person so obligated to foreclose the Lien of this Mortgage or to
enforce any provision hereunder or under the Credit Agreement; (b) the release,
regardless of consideration, of the Mortgaged Property or any portion thereof or
interest therein or the addition of any other property to the Mortgaged Property
or the release of any other property given by any Person to secure the
Indebtedness; (c) any agreement or stipulation between any subsequent owner of
the Mortgaged Property and Agent extending, renewing, rearranging or in any
other way modifying the terms of this Mortgage without first having obtained the
consent of, given notice to or paid any consideration to Mortgagor, any
guarantor or such other Person, and in such event Mortgagor, guarantor and all
such other Persons shall continue to be liable to make payment according to the
terms of any such extension or modification agreement unless expressly re leased
and discharged in writing by Agent; or (d) by any other act or occurrence save
and except the complete payment of the Indebtedness and the complete fulfillment
of all obligations hereunder or under the Credit Agreement.
Section 4.11 Release of and Resort to Mortgaged Property. Agent may
release, regardless of consideration, any part of the Mortgaged Property
without, as to the remainder, in any way impairing, affecting, subordinating or
releasing the Lien or security interest created in or evidenced by this Mortgage
or its stature as a first and prior Lien and security interest in and to the
Mortgaged Property, and without in any way releasing or diminishing the
liability of any Person liable for the repayment of the Indebtedness. For
payment of the Indebtedness, Agent and the Lenders may resort to any other
security therefor held by Agent or Trustee in such order and manner as they may
elect.
Section 4.12 Waiver of Redemption, Notice and Marshalling of Assets,
Etc. To the fullest extent permitted by applicable law, Mortgagor hereby
irrevocably and unconditionally waives and releases: (a) all benefits that might
accrue to Mortgagor by virtue of any present or future moratorium law or other
law exempting the Mortgaged Property from attachment, levy or sale on execution
or providing for any appraisement, valuation, stay of execution, exemption from
civil process, redemption or extension of time for payment; (b) presentment,
demand, notice of non-payment, protest and notice of protest and dishonor,
notice of Event of Default, notice of intent to accelerate the maturity and
notice of acceleration of the maturity and any other notice in connection with
the Indebtedness or of Trustee's election to exercise or his actual exercise of
any right, remedy or recourse provided for hereunder or under the Credit
Agreement except as otherwise required by the Security Instruments; and (c) any
right to a marshalling of assets or a sale in inverse order of alienation. If
any law referred to in this Mortgage and now in force, of which Mortgagor or its
successor or successors might take advantage despite the provisions hereof,
shall hereafter be repealed or cease to be in force, such law shall thereafter
be deemed not to constitute any part of the contract herein contained or to
preclude the operation or application of the provisions hereof. Provided,
however, that if the laws of any state do not permit the redemption period to be
-13-
<PAGE> 18
waived, the redemption period is specifically reduced to the minimum amount of
time allowable by statute, and specifically for any property located in the
State of New Mexico, the redemption period hereunder shall be reduced to one
month.
Section 4.13 Discontinuance of Proceedings In case Agent and the
Lenders shall have proceeded to invoke any right, remedy or recourse permitted
hereunder or under the Credit Agreement and shall thereafter elect to
discontinue or abandon same for any reason, the Agent and the Lenders shall have
the unqualified right so to do and, in such an event, Mortgagor, the Agent and
the Lenders shall be restored to their former positions with respect to the
Indebtedness, this Mortgage, the Credit Agreement, the Mortgaged Property and
otherwise, and the rights, remedies, recourses and powers of Agent and the
Lenders shall continue as if same had never been invoked.
Section 4.14 Application of Proceeds. The proceeds of any sale of the
Mortgaged Property or any part thereof and all other monies received by the
Trustee or Agent in any proceedings for the enforcement hereof or otherwise,
whose application has not elsewhere herein been specifically provided for, shall
be applied as specified in the Credit Agreement.
Section 4.15 Resignation of Operator. In addition to all rights and
remedies under this Mortgage, at law and in equity, if the Trustee or the Agent
shall exercise any remedies under this Mortgage with respect to any portion of
the Mortgaged Property (or Mortgagor shall transfer any Mortgaged Property "in
lieu of" foreclosure), the Agent or the Trustee shall have the right to request
that any operator of any Mortgaged Property which is either Mortgagor or any
Affiliate of Mortgagor resign as operator under the joint operating agreement
applicable thereto, and no later than 60 days after receipt by Mortgagor of any
such request (or the first day that resignation is permitted under the
applicable operating agreement, if longer), Mortgagor shall resign (or cause
such other party to resign) as operator of such Mortgaged Property.
Section 4.16 INDEMNITY. IN CONNECTION WITH ANY ACTION TAKEN BY THE
TRUSTEE, THE AGENT AND/OR THE LENDERS PURSUANT TO THIS MORTGAGE, THE TRUSTEE,
THE AGENT, THE LENDERS AND THEIR OFFICERS, DIRECTORS, EMPLOYEES,
REPRESENTATIVES, AGENTS, ATTORNEYS, ACCOUNTANTS AND EXPERTS ("INDEMNIFIED
PARTIES") SHALL NOT BE LIABLE FOR ANY DAMAGE SUSTAINED BY MORTGAGOR RESULTING
FROM AN ASSERTION THAT ANY SUCH INDEMNIFIED PARTY HAS RECEIVED FUNDS FROM THE
PRODUCTION OF HYDROCARBONS CLAIMED BY THIRD PERSONS OR ANY ACT OR OMISSION OF
ANY INDEMNIFIED PARTY IN ADMINISTERING, MANAGING, OPERATING OR CONTROLLING THE
MORTGAGED PROPERTY INCLUDING SUCH DAMAGE WHICH MAY RESULT FROM THE ORDINARY
NEGLIGENCE OF AN INDEMNIFIED PARTY UNLESS SUCH DAMAGE IS CAUSED BY THE GROSS
NEGLIGENCE, WILLFUL MISCONDUCT OR BAD FAITH OF AN INDEMNIFIED PARTY, NOR SHALL
THE TRUSTEE, THE AGENT OR ANY LENDER BE OBLIGATED TO PERFORM OR DISCHARGE ANY
OBLIGATION, DUTY OR LIABILITY OF MORTGAGOR. MORTGAGOR SHALL AND DOES HEREBY
AGREE TO INDEMNIFY EACH INDEMNIFIED PARTY FOR, AND TO HOLD EACH INDEMNIFIED
PARTY HARMLESS FROM, ANY AND ALL LIABILITY OR DAMAGE WHICH MAY OR MIGHT BE
INCURRED BY ANY INDEMNIFIED PARTY BY REASON OF THIS MORTGAGE OR THE EXERCISE OF
RIGHTS OR REMEDIES HEREUNDER UNLESS SUCH DAMAGE IS CAUSED BY THE GROSS
NEGLIGENCE, WILLFUL MISCONDUCT OR BAD FAITH OF AN INDEMNIFIED PARTY; PROVIDED,
HOWEVER, NO INDEMNITY SHALL BE AFFORDED UNDER THIS SECTION 4.16 IN RESPECT OF
ANY PROPERTY FOR ANY OCCURRENCE ARISING FROM THE ACTS OR OMISSIONS OF ANY
INDEMNIFIED PARTY DURING THE PERIOD AFTER WHICH SUCH PERSON, ITS SUCCESSORS OR
ASSIGNS SHALL HAVE OBTAINED POSSESSION OF SUCH PROPERTY (WHETHER BY FORECLOSURE
OR DEED IN LIEU
-14-
<PAGE> 19
OF FORECLOSURE, AS MORTGAGEE-IN-POSSESSION OR OTHERWISE). Should the Trustee,
the Agent and/or the Lenders make any expenditure on account of any such
liability or damage, the amount thereof, including costs, expenses and
reasonable attorneys' fees, shall be a demand obligation (which obligation
Mortgagor hereby expressly promises to pay) owing by Mortgagor to such Person
and shall bear interest from the date expended until paid at the Post-Default
Rate, shall be a part of the Indebtedness and shall be secured by this Mortgage
and any other Security Instrument. Mortgagor hereby assents to, ratifies and
confirms any and all actions of the Trustee, the Agent and/or the Lenders with
respect to the Mortgaged Property taken under this Mortgage. The liabilities of
the Mortgagor as set forth in this Section 4.16 shall survive the termination of
this Mortgage.
Section 4.17 Power of Sale in Oklahoma. Any sale of any part of the
Mortgaged Property located in the State of Oklahoma shall be made in conformity
to the laws thereof, and it is agreed that the appraisement of any such
properties is expressly waived or not waived at the option of the Agent, and any
such option may be exercised prior to the time judgment is rendered in any
foreclosure hereon. A POWER OF SALE HAS BEEN GRANTED IN THIS MORTGAGE. A POWER
OF SALE MAY ALLOW THE AGENT TO TAKE THE MORTGAGED PROPERTY AND SELL IT WITHOUT
GOING TO COURT IN A FORECLOSURE ACTION UPON DEFAULT BY MORTGAGOR UNDER THIS
MORTGAGE. The parties hereto are cognizant of and acknowledge the Oklahoma Power
of Sale Mortgage Foreclosure Act which went into effect November 1, 1986.
Notwithstanding any provision Article IV to the contrary, it is the intent of
the parties that the provisions herein relating to the power of sale which are
applicable to the Mortgaged Property located in the State of Oklahoma are
subject to the provisions of the Oklahoma Power of Sale Mortgage Foreclosure
Act. In addition, it is the intent of the parties that the power of sale granted
herein may be exercised by the Agent pursuant to the terms and provisions of the
Oklahoma Power of Sale Mortgage Foreclosure Act.
ARTICLE V
The Trustee
Section 5.01 Duties, Rights, and Powers of Trustee. It shall be no part
of the duty of the Trustee to see to any recording, filing or registration of
this Mortgage or any other instrument in addition or supplemental thereto, or to
give any notice thereof, or to see to the payment of or be under any duty in
respect of any tax or assessment or other governmental charge which may be
levied or assessed on the Mortgaged Property, or any part thereof, or against
Mortgagor, or to see to the performance or observance by Mortgagor of any of the
covenants and agreements contained herein. The Trustee shall not be responsible
for the execution, acknowledgment or validity of this Mortgage or of any
instrument in addition or supplemental hereto or for the sufficiency of the
security purported to be created hereby, and makes no representation in respect
thereof or in respect of the rights of Agent and/or the Lenders. The Trustee
shall have the right to advise with counsel upon any matters arising hereunder
and shall be fully protected in relying as to legal matters on the advice of
counsel. The Trustee shall not incur any personal liability hereunder except for
Trustee's own willful misconduct or bad faith; and the Trustee shall have the
right to rely on any instrument, document or signature authorizing or supporting
any action taken or proposed to be taken by him hereunder, believed by him in
good faith to be genuine.
Section 5.02 Successor Trustee. The Trustee may resign by written
notice addressed to Agent or be removed at any time with or without cause by an
instrument in writing duly
-15-
<PAGE> 20
executed on behalf of Agent. In case of the death, resignation or removal of the
Trustee, a successor trustee may be appointed by Agent by instrument of
substitution complying with any applicable requirements of law, or, in the
absence of any such requirement, without other formality than appointment and
designation in writing. Written notice of such appointment and designation shall
be given by Agent to Mortgagor, but the validity of any such appointment shall
not be impaired or affected by failure to give such notice or by any defect
therein. Such appointment and designation shall be full evidence of the right
and authority to make the same and of all the facts therein recited, and, upon
the making of any such appointment and designation, this Mortgage shall vest in
the successor trustee all the estate and title in and to all of the Mortgaged
Property, and the successor trustee shall thereupon succeed to all of the
rights, powers, privileges, immunities and duties hereby conferred upon the
Trustee named herein, and one such appointment and designation shall not exhaust
the right to appoint and designate a successor trustee hereunder but such right
may be exercised repeatedly as long as any Indebtedness remains unpaid
hereunder. To facilitate the administration of the duties hereunder, Agent may
appoint multiple trustees to serve in such capacity or in such jurisdictions as
Agent may designate.
Section 5.03 Retention of Moneys. All moneys received by Trustee shall,
until used or applied as herein provided, be held in trust for the purposes for
which they were received, but need not be segregated in any manner from any
other moneys (except to the extent required by law), and Trustee shall be under
no liability for interest on any moneys received by him hereunder.
ARTICLE VI
Miscellaneous
Section 6.01 Instrument Construed as Mortgage, Etc. With respect to any
portions of the Mortgaged Property located in any state or other jurisdiction
the laws of which do not provide for the use or enforcement of a deed of trust
or the office, rights and authority of the Trustee as herein provided, the
general language of conveyance hereof to the Trustee is intended and the same
shall be construed as words of mortgage unto and in favor of Agent and the
rights and authority granted to the Trustee herein may be enforced and asserted
by Agent in accordance with the laws of the jurisdiction in which such portion
of the Mortgaged Property is located and the same may be foreclosed at the
option of Agent as to any or all such portions of the Mortgaged Property in any
manner permitted by the laws of the jurisdiction in which such portions of the
Mortgaged Property is situated. This Mortgage may be construed as a mortgage,
deed of trust, chattel mortgage, conveyance, assignment, security agreement,
pledge, financing statement, hypothecation or contract, or any one or more of
them, in order fully to effectuate the Lien hereof and the purposes and
agreements herein set forth.
Section 6.02 Release of Lien. If all Indebtedness secured hereby shall
be paid and the Credit Agreement terminated, Agent shall forthwith cause
satisfaction and discharge of this Mortgage to be entered upon the record at the
expense of Mortgagor and shall execute and deliver or cause to be executed and
delivered such instruments of satisfaction and reassignment as may be
appropriate. Otherwise, this Mortgage shall remain and continue in full force
and effect.
Section 6.03 Severability. If any provision hereof is invalid or
unenforceable in any jurisdiction, the other provisions hereof shall remain in
full force and effect in such
-16-
<PAGE> 21
jurisdiction and the remaining provisions hereof shall be liberally construed in
favor of the Trustee, the Agent and the Lenders in order to effectuate the
provisions hereof, and the invalidity or unenforceability of any provision
hereof in any jurisdiction shall not affect the validity or enforceability of
any such provision in any other jurisdiction.
Section 6.04 Successors and Assigns of Parties. The term "Lender" as
used herein shall mean and include any legal owner, holder, assignee or pledgee
of any of the Indebtedness secured hereby. The terms used to designate Trustee,
Agent and Mortgagor shall be deemed to include the respective heirs, legal
representatives, successors and assigns of such parties.
Section 6.05 Satisfaction of Prior Encumbrance. To the extent that
proceeds of the Credit Agreement are used to pay indebtedness secured by any
outstanding Lien, security interest, charge or prior encumbrance against the
Mortgaged Property, such proceeds have been advanced at Mortgagor's request, and
the Lenders shall be subrogated to any and all rights, security interests and
Liens owned by any owner or holder of such outstanding Liens, security
interests, charges or encumbrances, irrespective of whether said Liens, security
interests, charges or encumbrances are released, and it is expressly understood
that, in consideration of the payment of such other indebtedness by the Lenders,
Mortgagor hereby waives and releases all demands and causes of action for
offsets and payments to, upon and in connection with the said indebtedness.
Section 6.06 Subrogation of Trustee. This Mortgage is made with full
substitution and subrogation of the Trustee and his successors in this trust and
his and their assigns in and to all covenants and warranties by others
heretofore given or made in respect of the Mortgaged Property or any part
thereof.
Section 6.07 Nature of Covenants. The covenants and agreements herein
contained shall constitute covenants running with the land and interests covered
or affected hereby and shall be binding upon the heirs, legal representatives,
successors and assigns of the parties hereto.
Section 6.08 Notices. All notices, requests, consents, demands and
other communications required or permitted hereunder shall be given in
accordance with the terms of the Credit Agreement or as required by applicable
Governmental Requirement. Mortgagor hereby requests a copy of any notice of
default or notice of sale under this Mortgage be provided to it in the manner
provided by this Section 6.08.
Section 6.09 Counterparts. This Mortgage is being executed in several
counterparts, all of which are identical, except that to facilitate recordation,
if the Mortgaged Property is situated in more than one jurisdiction,
descriptions of only those portions of the Mortgaged Property located in the
jurisdiction in which a particular counterpart is recorded shall be attached as
Exhibit A thereto. An Exhibit A containing a description of all Mortgaged
Property wheresoever situated will be attached to that certain counterpart to be
attached to a Financing Statement and filed with the Secretary of State of Texas
in the Uniform Commercial Code Records. Each of such counterparts shall for all
purposes be deemed to be an original and all such counterparts shall together
constitute but one and the same instrument.
SECTION 6.10 GOVERNING LAW. INSOFAR AS PERMITTED BY OTHERWISE
APPLICABLE LAW, THIS MORTGAGE AND THE INDEBTEDNESS SHALL BE CONSTRUED UNDER AND
GOVERNED
-17-
<PAGE> 22
BY THE LAWS OF THE STATE OF TEXAS (EXCLUDING CHOICE OF LAW AND CONFLICT OF LAW
RULES); PROVIDED, HOWEVER, THAT, WITH RESPECT TO ANY PORTION OF THE MORTGAGED
PROPERTY LOCATED OUTSIDE OF THE STATE OF TEXAS, THE LAWS OF THE PLACE IN WHICH
SUCH PROPERTY IS LOCATED IN, OR OFFSHORE ADJACENT TO (AND STATE LAW MADE
APPLICABLE AS A MATTER OF FEDERAL LAW), SHALL APPLY TO THE EXTENT OF PROCEDURAL
AND SUBSTANTIVE MATTERS RELATING ONLY TO THE CREATION, PERFECTION, FORECLOSURE
OF LIENS AND ENFORCEMENT OF RIGHTS AND REMEDIES AGAINST THE MORTGAGED PROPERTY.
THE MORTGAGOR HEREBY IRREVOCABLY SUBMITS ITSELF TO THE NONEXCLUSIVE JURISDICTION
OF THE STATE AND FEDERAL COURTS OF THE STATE OF TEXAS AND EACH OTHER STATE WHERE
THE MORTGAGED PROPERTY IS LOCATED AND AGREES AND CONSENTS THAT SERVICE OF
PROCESS MAY BE MADE UPON IT IN ANY LEGAL PROCEEDING RELATING TO THIS MORTGAGE,
THE LOAN DOCUMENTS OR THE INDEBTEDNESS IN THE CASE OF A PROCEEDING IN ANY OF
SUCH STATES, BY SERVING THE SECRETARY OF STATE OF SUCH STATE IN ACCORDANCE WITH
ANY APPLICABLE PROVISIONS OF SUCH STATE'S LAW GOVERNING SERVICE OR PROCESS UPON
FOREIGN CORPORATIONS OR ENTITIES.
Section 6.11 Financing Statement; Fixture Filing. This Mortgage shall
be effective as a financing statement filed as a fixture filing with respect to
all fixtures included within the Mortgaged Property and is to be filed or filed
for record in the real estate records of each jurisdiction where any part of the
Mortgaged Property (including said fixtures) are situated. This Mortgage shall
also be effective as a financing statement covering minerals or the like
(including oil and gas and all other substances of value which may be extracted
from the ground) and accounts financed at the wellhead or minehead of wells or
mines located on the properties subject to the Applicable UCC and is to be filed
for record in the real estate records of each jurisdiction where any part of the
Mortgaged Property is situated. In addition, the Mortgagor shall execute and
deliver to the Agent, upon the Agent's request, any financing statements or
amendments thereof or continuation statements thereto that the Agent may require
to perfect a security interest in said items or types of property. The Mortgagor
shall pay all costs of filing such instruments. In that regard, the following
information is provided:
Name of Debtor: Corrida Resources, Inc.
Address of Debtor and 3500 Oak Lawn Drive, Suite 380
County of Residence Dallas, Texas 75219
(chief executive Attention: Robert P. Lindsay
offices): Facsimile: (214) 521-9960
Telephone: (214) 521-9959
Principal Place of
Business of Debtor: Same as above.
Tax I.D. Number of
Debtor: 75-269-1594
Name of Secured Party: Bank of Montreal, as Agent
Address of Secured 700 Louisiana, Suite 4400
Party: Houston, Texas 77002
Tax I.D. Number of
Secured Party: 13-494-1092
-18-
<PAGE> 23
Owner of Record of
Real Property: Debtor
SECTION 6.12 EXCULPATION PROVISIONS. EACH OF THE PARTIES HERETO
SPECIFICALLY AGREES THAT IT HAS A DUTY TO READ THIS MORTGAGE; AND AGREES THAT IT
IS CHARGED WITH NOTICE AND KNOWLEDGE OF THE TERMS OF THIS MORTGAGE; THAT IT HAS
IN FACT READ THIS MORTGAGE AND IS FULLY INFORMED AND HAS FULL NOTICE AND
KNOWLEDGE OF THE TERMS, CONDITIONS AND EFFECTS OF THIS MORTGAGE; THAT IT HAS
BEEN REPRESENTED BY INDEPENDENT LEGAL COUNSEL OF ITS CHOICE THROUGHOUT THE
NEGOTIATIONS PRECEDING ITS EXECUTION OF THIS MORTGAGE AND HAS RECEIVED THE
ADVICE OF ITS ATTORNEY IN ENTERING INTO THIS MORTGAGE; AND THAT IT RECOGNIZES
THAT CERTAIN OF THE TERMS OF THIS MORTGAGE RESULT IN ONE PARTY ASSUMING THE
LIABILITY INHERENT IN SOME ASPECTS OF THE TRANSACTION AND RELIEVING THE OTHER
PARTY OF ITS RESPONSIBILITY FOR SUCH LIABILITY. EACH PARTY HERETO AGREES AND
COVENANTS THAT IT WILL NOT CONTEST THE VALIDITY OR ENFORCEABILITY OF ANY
EXCULPATORY PROVISION OF THIS MORTGAGE ON THE BASIS THAT THE PARTY HAD NO NOTICE
OR KNOWLEDGE OF SUCH PROVISION OR THAT THE PROVISION IS NOT "CONSPICUOUS."
Section 6.13 No Paraph. Mortgagor acknowledges that no promissory note
or other instrument has been presented to the undersigned Notary Public(s) to be
paraphed for identification herewith.
ARTICLE VII
Special Louisiana Provisions
Section 7.01 Maximum Amount. Insofar as any portion of the Mortgaged
Property situated in or offshore the State of Louisiana is concerned, or as to
which the laws of the State of Louisiana would be applicable, the maximum amount
of the Indebtedness that may be outstanding at any time and from time to time
that this Mortgage secures is fixed at $75,000,000.00.
Section 7.02 Keeper. The Agent shall have the right to appoint a keeper
of the Mortgaged Property pursuant to the terms and provisions of La. R.S.
9:5131 et seq. and 9:5136 et seq.
Section 7.03 Confession of Judgment. For purposes of executory process
the Mortgagor acknowledges the Indebtedness secured hereby, whether now existing
or to arise hereafter, and confesses judgment thereon if not paid when due. Upon
the occurrence of an Event of Default and any time thereafter so long as the
same shall be continuing, and in addition to all other rights and remedies
granted the Agent hereunder, it shall be lawful for and the Mortgagor hereby
authorizes the Agent without making a demand or putting the Mortgagor in
default, a putting in default being expressly waived, to cause all and singular
the Mortgaged Property to be seized and sold after due process of law, the
Mortgagor waiving the benefit of any and all laws or parts of laws relative to
appraisement of Mortgaged Property seized and sold under executory process or
other legal process, and consenting that the Mortgaged Property be sold without
appraisement, either in its entirety or in lots or parcels, as the Agent may
determine, to the highest bidder for cash or on such other terms as the
plaintiff in such proceedings may direct. The Agent shall be granted all rights
and
-19-
<PAGE> 24
remedies granted it hereunder as well as all rights and remedies granted to
Agent under Louisiana law including the Uniform Commercial Code then in effect
in Louisiana.
Section 7.04 Waivers. The Mortgagor hereby waives:
(a) The benefit of appraisement provided for in
articles 2332, 2336, 2723 and 2724 of the
Louisiana Code of Civil Procedure and all
other laws conferring the same;
(b) The demand and three (3) days notice of
demand as provided in articles 2629 and 2721
of the Louisiana Code of Civil Procedure;
(c) The notice of seizure provided by articles
2293 and 2721 of the Louisiana Code of Civil
Procedure; and
(d) The three (3) days delay provided for in
articles 2331 and 2722 of the Louisiana Code
of Civil Procedure.
ARTICLE VIII
Special Mississippi Provisions
Section 8.01 Mortgaged Property. Any sale of any part of the Mortgaged
Property located in the State of Mississippi shall be made after having
published notice of the day, time, place and terms of sale in a newspaper
published in the county in which the Mortgaged Property is situated for three
consecutive weeks preceding the date of sale; and by posting one notice of such
sale at the courthouse of the county in which the Mortgaged property is situated
for said period of time. The Trustee shall have the power to select the county
or judicial district in which the sale shall be made, newspaper advertisement
published, and notice of sale posted in the event the Mortgaged Property is
located in more than one county or in two judicial districts in the same county.
The Trustee in said trust shall have the full power to fix the day, time, place
and terms of sale and may appoint or delegate any one or more persons as agent
to perform any act or acts necessary or incident to any sale held by the
Trustee, including the posting of notices in the conduct of the sale but in the
name of and on behalf of the Trustee, his substitute or successor. In connection
with the foregoing, Mortgagor waives the provisions of Section 89-1-55 of the
Mississippi Code of 1972, recompiled and laws amendatory thereto, if any, as far
as said section restricts the right of the Trustee to offer at sale more than
160 acres at one time and the Trustee may, in his discretion, offer the
Mortgaged Property as a whole or in such part or parts as he may deem desirable
regardless of the manner in which it may be described. Any sale made by the
Trustee hereunder may be adjourned by announcement at the time and place
appointed for such sale without further notice except as may be required by law.
Mortgagor also waives the provisions of Section 89-1-59 of the Mississippi Code
of 1972, recompiled and laws amendatory thereto, insofar as said section allows
the Mortgagor to reinstate an accelerated debt.
-20-
<PAGE> 25
THUS DONE AND PASSED, this 31st day of July, 1997, to be effective as
of the 1st day of August, 1997 (the "Effective Date") before the undersigned
Notary Public and witnesses.
Mortgagor: CORRIDA RESOURCES, INC.
By: /s/ Robert P. Lindsay
------------------------
Robert P. Lindsay
Vice President
By: /s/ Ronald Benn
------------------------
Ronald Benn
Treasurer
WITNESSES:
- ------------------------------
Name:
- ------------------------------
Name:
--------------------------------
Notary Public
-21-
<PAGE> 26
THE STATE OF TEXAS Section
Section
COUNTY OF HARRIS Section
MISSISSIPPI
Personally appeared before me, the undersigned authority in and for
said county and state, on this 31st day of July, 1997, within my jurisdiction,
the within named Robert P. Lindsay and Ronald Benn who acknowledged that they
are the Vice President and Treasurer of CORRIDA RESOURCES, INC., a Nevada
corporation, and that for and on behalf of said corporation, and as its act and
deed, he executed the above and foregoing instrument, after first having been
duly authorized by said corporation so to do.
NEW MEXICO
The foregoing instrument was acknowledged before me on July 31, 1997 by
Robert P. Lindsay, Vice President, and Ronald Benn, Treasurer, of CORRIDA
RESOURCES, INC., a Nevada corporation, on behalf of such corporation.
OKLAHOMA
This instrument was acknowledged before me on July 31, 1997 by Robert
P. Lindsay, Vice President, and Ronald Benn, Treasurer, of CORRIDA RESOURCES,
INC., a Nevada corporation.
TEXAS
This instrument was acknowledged before me on July 31, 1997 by Robert
P. Lindsay, Vice President, and Ronald Benn, Treasurer, of CORRIDA RESOURCES,
INC., a Nevada corporation, on behalf of such corporation.
_________________________________
Notary Public in and for the
State of Texas
[SEAL] My commission expires:___________
-22-
<PAGE> 1
EXHIBIT 21.1
LIST OF SUBSIDIARIES
Queen Sand Resources, Inc., a Nevada corporation
Northland Operating Co., a Nevada corporation
Corrida Resources, Inc., a Nevada corporation
Queen Sand Resources (Canada) Inc., a corporation formed under the laws of
Ontario.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1996
<CASH> 309,695
<SECURITIES> 0
<RECEIVABLES> 579,639
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 17,931,209
<DEPRECIATION> 1,744,000
<TOTAL-ASSETS> 17,252,996
<CURRENT-LIABILITIES> 3,669,565
<BONDS> 7,151,881
0
96,000
<COMMON> 45,635
<OTHER-SE> 6,289,915
<TOTAL-LIABILITY-AND-EQUITY> 17,252,996
<SALES> 4,381,035
<TOTAL-REVENUES> 4,681,306
<CGS> 2,506,759
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 877,967
<INCOME-PRETAX> (1,137,822)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,137,822)
<DISCONTINUED> 0
<EXTRAORDINARY> (171,301)
<CHANGES> 0
<NET-INCOME> (1,309,203)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> 0
</TABLE>
