<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec. 240.14a-11(c) or sec. 240.14a-12
QUEEN SAND RESOURCES, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
QUEEN SAND RESOURCES, INC.
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(l) and
0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
- --------------------------------------------------------------------------------
(3) Filing Party:
- --------------------------------------------------------------------------------
(4) Date Filed:
- --------------------------------------------------------------------------------
<PAGE> 2
QUEEN SAND RESOURCES, INC.
3500 Oak Lawn, Suite 380
Dallas, Texas 75219-4398
Telephone: (214) 521-9959
Telecopier: (214) 521-9960
Dear Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders
of Queen Sand Resources, Inc. on Thursday, November 20, 1997, at 3:30 p.m.,
Dallas time. The meeting will be held at The Petroleum Club, 2200 Ross Avenue,
39th Floor, Dallas, Texas 75201. Your Board of Directors and management look
forward to greeting those stockholders able to attend in person.
At the meeting, you will be asked to consider and elect five directors
to serve until the next Annual Meeting of Stockholders. Your Board of
Directors has unanimously nominated these persons for election as directors.
You are also being asked to consider and approve the Queen Sand Resources, Inc.
1997 Incentive Equity Plan and to approve the appointment of Ernst & Young LLP
as the Company's independent auditors for the fiscal year ending June 30, 1998.
Information about the business to be conducted at the meeting is set forth in
the accompanying proxy statement, which you are urged to read carefully.
During the meeting, I will review with you the affairs and progress of the
Company during the fiscal year ended June 30, 1997. Officers of the Company
will be present to respond to questions from stockholders.
The vote of every stockholder is important. The Board of Directors
appreciates and encourages stockholder participation in the Company's affairs.
Whether or not you plan to attend the meeting, please sign, date and return the
enclosed proxy promptly in the envelope provided. Your shares will then be
presented at the meeting, and the Company will be able to avoid the expense of
further solicitation. If you attend the meeting, you may, at your discretion,
withdraw the proxy and vote in person.
On behalf of the Board of Directors, thank you for your cooperation
and continued support.
Sincerely,
/s/ Edward J. Munden
------------------------------------------
EDWARD J. MUNDEN
Chairman of the Board, President and Chief
Executive Officer
October 28, 1997
<PAGE> 3
QUEEN SAND RESOURCES, INC.
3500 Oak Lawn, Suite 380
Dallas, Texas 75219-4398
Telephone: (214) 521-9959
Telecopier: (214) 521-9960
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD NOVEMBER 20, 1997
The Annual Meeting of Stockholders of Queen Sand Resources, Inc., a
Delaware corporation (the "Company"), will be held at The Petroleum Club, 2200
Ross Avenue, 39th Floor, Dallas, Texas 75201, on November 20, 1997 at 3:30
p.m., Dallas time, for the following purposes:
(1) To elect five directors to hold office until the next
Annual Meeting of Stockholders or until their successors have been
duly qualified and elected;
(2) To consider and act upon a proposal to approve the
Queen Sand Resources, Inc. 1997 Incentive Equity Plan;
(3) To consider and act upon a proposal to approve the
appointment of Ernst & Young LLP as the independent auditors of the
Company to audit the accounts of the Company for the fiscal year
ending June 30, 1998; and
(4) To transact such other business as may properly come
before the meeting or any adjournments thereof.
Only holders of the Company's common stock, par value $0.0015 per
share (the "Common Stock"), of record on October 17, 1997 and holders of the
Company's Series A Participating Convertible Preferred Stock, par value $0.01
per share (the "Series A Preferred Stock"), of record on October 17, 1997 are
entitled to notice of, and to vote at, the meeting or any adjournment or
adjournments thereof. At the record date for determination of stockholders
entitled to vote at the meeting or any adjournments thereof, 32,975,552 shares
of voting capital stock, comprised of 23,375,552 shares of Common Stock and
9,600,000 shares of Series A Preferred Stock, were issued and outstanding.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON, YOU ARE URGED
TO FILL OUT, SIGN AND MAIL PROMPTLY THE ENCLOSED PROXY IN THE ACCOMPANYING
ENVELOPE. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES. PROXIES
FORWARDED BY OR FOR BROKERS OR FIDUCIARIES SHOULD BE RETURNED AS REQUESTED BY
THEM. THE PROMPT RETURN OF PROXIES WILL SAVE THE EXPENSE INVOLVED IN FURTHER
COMMUNICATION.
By Order of the Board of Directors,
Dallas, Texas
October 28, 1997 /s/ Edward J. Munden
-------------------------------------------
EDWARD J. MUNDEN
Chairman of the Board, President and Chief
Executive Officer
<PAGE> 4
QUEEN SAND RESOURCES, INC.
3500 Oak Lawn, Suite 380
Dallas, Texas 75219-4398
Telephone (214) 521-9959
Telecopier: (214) 521-9960
PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD NOVEMBER 20, 1997
This Proxy Statement is furnished to holders of the Company's common
stock, par value $0.0015 per share (the "Common Stock"), and holders of the
Company's Series A Participating Convertible Preferred Stock, par value $0.01
per share (the "Series A Preferred Stock" and, together with the Common Stock,
the "Voting Stock"), in connection with the solicitation of proxies by the
Board of Directors of Queen Sand Resources, Inc., a Delaware corporation (the
"Company"), for use at the Annual Meeting of Stockholders of the Company to be
held at The Petroleum Club, 2200 Ross Avenue, 39th Floor, Dallas, Texas 75201,
on November 20, 1997 at 3:30 p.m., Dallas time, and at any and all
postponements or adjournments thereof (the "Annual Meeting") for the purposes
of:
(1) electing five directors to hold office until the next
Annual Meeting of Stockholders or until their successors have been
duly qualified and elected;
(2) considering and acting upon a proposal to approve
the Queen Sand Resources, Inc. 1997 Incentive Equity Plan;
(3) considering and acting upon a proposal to approve the
appointment of Ernst & Young LLP as the independent auditors of the
Company to audit the accounts of the Company for the fiscal year
ending June 30, 1998; and
(4) transacting such other business as may properly come
before the meeting or any adjournments or postponements thereof.
The approximate date on which this Proxy Statement and accompanying proxy card
are first being sent or given to stockholders is October 31, 1997.
Shares of Voting Stock represented by each proxy, if properly executed
and returned to the Company prior to the Annual Meeting, will be voted as
directed, but if not otherwise specified, will be voted for the election of the
five nominees for director, for the approval of the Queen Sand Resources, Inc.
1997 Incentive Equity Plan, and to approve the appointment of Ernst & Young LLP
as independent auditors, all as recommended by the Board of Directors.
If the Annual Meeting is postponed or adjourned for any reason, at any
subsequent reconvening of the Annual Meeting all proxies will be voted in the
same manner as such proxies would have been voted at the original convening of
the Annual Meeting (except for proxies which have theretofore effectively been
revoked or withdrawn), notwithstanding that they may have been effectively
voted on the same or any other matter at a previous meeting.
<PAGE> 5
The Board of Directors knows of no other business to be presented at
the Annual Meeting. If any other business is properly presented, the persons
named in the enclosed proxy have authority to vote on such matters in
accordance with such persons' discretion. A stockholder executing the proxy
may revoke it at any time before it is voted by giving written notice to the
Secretary of the Company.
The solicitation of proxies in the enclosed form is made on behalf of
the Company's Board of Directors. The entire cost of soliciting these proxies,
including the costs of preparing, printing and mailing this Proxy Statement and
accompanying materials to stockholders, will be borne by the Company. In
addition to use of the mails, proxies may be solicited personally or by
telephone or otherwise by officers, directors and employees of the Company, who
will receive no additional compensation for such activities. Arrangements will
also be made with brokerage houses and other custodians, nominees and
fiduciaries to forward solicitation materials to the beneficial owners of
shares held of record by such brokerage houses, custodians, nominees and
fiduciaries. Such parties will be reimbursed for their reasonable expenses
incurred in forwarding the proxy materials.
VOTE REQUIRED FOR APPROVAL;
SHARES ENTITLED TO VOTE; RECORD DATE
The affirmative vote of the holders of a plurality of the outstanding
shares of Voting Stock present or represented by proxy and entitled to vote at
the Annual Meeting at which a quorum is present is required to elect each of
the five directors nominated for reelection to the Company's Board of
Directors. All other matters properly brought before the Annual Meeting will
be decided by a majority of the votes cast on the matter, unless otherwise
required by law. As of October 17, 1997, the Company's directors and executive
officers, and their affiliates, had a beneficial interest in an aggregate of
8,084,286 shares of Common Stock, representing approximately 24.5% of the
Voting Stock outstanding on October 17, 1997 (the "Record Date") and entitled
to vote on all proposals to be presented at the Annual Meeting. The presence
at the Annual Meeting, whether in person or by proxy, of the holders of at
least a majority of the outstanding shares of Voting Stock entitled to vote
thereat constitutes a quorum for the transaction of business.
On the Record Date, there were outstanding 32,975,552 shares of Voting
Stock, comprised of 23,375,552 shares of Common Stock and 9,600,000 shares of
Series A Preferred Stock. Only holders of record of Voting Stock at the close
of business on the Record Date will be entitled to notice of, and to vote at,
the Annual Meeting. Each share of the Voting Stock is entitled to one vote for
each director to be elected and upon all other matters to be brought to a vote
by the Stockholders at the forthcoming Annual Meeting. In addition, the
holders of Series A Preferred Stock have certain additional voting rights with
respect to the election of directors. See "Certain Relationships and Related
Transactions -- JEDI Transaction Agreements -- Series A Preferred Stock --
Election of Directors." As of the date of this Proxy Statement, the Company
has not received notification from the sole holder of the Series A Preferred
Stock that it intends to exercise its additional voting rights.
In the election of directors, votes may be cast in favor of or
withheld with respect to each nominee. Votes that are withheld and broker
non-votes with respect to the election of directors will be excluded entirely
from the vote and will have no effect. Abstentions may be specified on all
proposals, except for the election of directors. Abstentions and broker
non-votes will be counted as present for purposes of determining the existence
of a quorum. Abstentions on the proposals to approve the Queen Sand Resources,
Inc. 1997 Incentive Equity Plan and the appointment of Ernst & Young LLP will
have the effect of a negative vote because approval of each requires the
affirmative vote of the majority of the shares of Voting Stock present or
represented at the Annual Meeting.
3
<PAGE> 6
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the number
of shares of Voting Stock beneficially owned as of October 17, 1997, by (1) all
holders of shares of Voting Stock (the "Stockholders") known by the Company to
own beneficially more than 5% of the outstanding shares of any class of the
Voting Stock, (2) the executive officers of the Company named in the table
under "Executive Compensation -- Compensation of Executive Officers," (3) each
director of the Company and (4) all directors and officers of the Company as a
group.
<TABLE>
<CAPTION>
Name and Address Amount and Nature of Approximate Percentage of Voting
of Beneficial Owner Beneficial Ownership Stock
----------------------------------------------------------------------------------------------------------------------
Officers and Directors:
----------------------
<S> <C> <C>
Edward J. Munden(1) 6,600,000(2) 20.0%
60 Queen Street
Ottawa, Canada
K1P547
6,600,000(2) 20.0%
Bruce I. Benn(1)
60 Queen Street
Ottawa, Canada
K1P547
6,614,286(2, 3) 20.1%
Robert P. Lindsay(1)
3500 Oak Lawn Drive
Suite 380, L.B. #31
Dallas, Texas 75219
6,600,000(2) 20.0%
Ronald I. Benn(1)
60 Queen Street
Ottawa, Canada
K1P547
0 0%
V. Ed Butler(1)
3500 Oak Lawn Drive
Suite 380, L.B. #31
Dallas, Texas 75219
470,000 1.4%
Eli Rebich(1)
318 West Rusk
Tyler, Texas 75701
Ted Collins, Jr.(1, 6) 1,000,000 3.0%
303 West Wall, Suite 1200
Midland, Texas 79701-5076
</TABLE>
4
<PAGE> 7
<TABLE>
<CAPTION>
Name and Address Amount and Nature of Approximate Percentage of Voting
of Beneficial Owner Beneficial Ownership Stock
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
All officers and directors as 8,084,286(2) 24.5%
a group (7 persons)
Five Percent Stockholders
-------------------------
Joint Energy Development Investments Limited 10,589,439(4) 31.2%
Partnership
1400 Smith St.
Houston, Texas 77002-7361
EIBOC Investments Ltd. 6,600,000(5) 20.0%
Charlton House
White Park Road
Bridgetown, Barbados W.I.
</TABLE>
- -----------------
(1) Executive Officer and/or Director.
(2) Edward J. Munden, Ronald I. Benn and Bruce I. Benn have a
beneficial interest in the shares of Common Stock owned by EIBOC Investments
Ltd. ("EIBOC"). In addition, EIBOC has granted an irrevocable proxy to Messrs.
Munden, Benn, Benn and Lindsay to vote 6,600,000 shares owned of record by
EIBOC. Accordingly, the 6,600,000 shares owned of record by EIBOC have been
included as beneficially owned by each of the foregoing individuals, and by all
Officers and Directors as a group.
(3) Mr. Lindsay acquired 14,286 shares of Common Stock in the name of
his children and disclaims any beneficial interest in these shares.
(4) Includes 9,600,000 shares of Common Stock issuable upon conversion
of the 9,600,000 shares of Series A Preferred Stock, 409,839 shares of Common
Stock issuable upon exercise of certain warrants and 579,600 shares of Common
Stock issuable upon exercise of warrants that JEDI (defined below) is entitled
to receive from the Company. Joint Energy Development Investments Limited
Partnership ("JEDI") is a limited partnership, the general partner of which is
Enron Capital Management Limited Partnership, which is an indirect wholly-owned
subsidiary of Enron Corp.
(5) Messrs. Munden, Benn and Benn have a beneficial interest in the
shares of Common Stock held by EIBOC. In addition, EIBOC has granted an
irrevocable proxy to Messrs. Munden, Benn, Benn and Lindsay to vote 6,600,000
shares owned of record by EIBOC.
(6) These shares are owned of record by Collins and Ware, Inc. Mr.
Collins is a controlling shareholder of Collins and Ware, Inc. but disclaims
beneficial ownership of such shares.
Upon the occurrence of certain Events of Default (as defined in the
Certificate of Designation for the Series A Preferred Stock), the holder of the
Series A Preferred Stock has the right to require the Company to repurchase the
Series A Preferred Stock, which as of October 17, 1997 constitutes
approximately 30% of the Voting Stock. See "Certain Relationships and Related
Transactions -- JEDI/Forseti Transactions -- JEDI Transaction Agreements --
Series A Preferred Stock -- Events of Default."
5
<PAGE> 8
ELECTION OF DIRECTORS
GENERAL
Pursuant to the Amended and Restated Bylaws of the Company (the
"Bylaws"), five directors are to be elected at the Annual Meeting (which number
shall constitute the entire Board of Directors of the Company). Unless
otherwise instructed, the proxy holders intend to vote the proxies received by
them FOR the five nominees below.
EDWARD J. MUNDEN
BRUCE I. BENN
ROBERT P. LINDSAY
TED COLLINS, JR.
ELI REBICH
All nominees listed above are currently members of the Board of
Directors and were previously elected directors by the stockholders, except for
Ted Collins, Jr. and Eli Rebich. Effective October 23, 1997, the Board of
Directors, pursuant to Article III, Section 2 of the Bylaws, increased the size
of the Board of Directors from three to five and subsequently filled the two
newly created vacancies in the Board of Directors by appointing Messrs. Collins
and Rebich to the Board of Directors.
Each nominee has consented to being named in this Proxy Statement and
to serve if elected. If any nominee becomes unavailable for any reason or if a
vacancy should occur before the election, the shares represented by the proxies
will be voted for such person, if any, as may be designated by the Board of
Directors. However, management of the Company has no reason to believe that any
nominee will be unavailable or that any vacancy on the Board of Directors will
occur. The five nominees will serve until the next Annual Meeting of
Stockholders and until their successors are elected.
DIRECTORS AND NOMINEES FOR ELECTION TO THE BOARD OF DIRECTORS
Set forth below is a description of the backgrounds of each of the
directors and nominees of the Company.
Edward J. Munden, 46, has been the President and a Director of the
Company since March 6, 1995. He was appointed as Chief Executive Officer in
May 1996 and was appointed Chairman of the Board in October 1997. Since 1989,
he has been a director and co-founder of Capital House A Finance and Investment
Company ("CHC"), which is a Canadian venture capital firm located in Ottawa,
Canada. From 1994 to 1996, he was a director of Capital House International
Ltd. ("CHIL"). CHIL became the original stockholder of Queen Sand Resources,
Inc., a Nevada corporation and wholly- owned subsidiary of the Company
("QSRN"), and was previously a majority stockholder of the Company. Mr. Munden
has held positions in the mining industry with Eldorado Nuclear Limited (1980
to 1989), the manufacturing industry with Proctor and Gamble Company of Canada
(1978 to 1980) and the oil and gas industry with Union Oil of Canada Limited
(1974 to 1976). Mr. Munden is a professional geological engineer and holds a
Bachelor of Science degree in Engineering (1974) and a Masters of Business
Administration (1978) from Queens University in Kingston, Canada.
Robert P. Lindsay, 54, joined the Company in 1994 as a part of the
Company's acquisition and expansion strategy, and became Executive Vice
President in September 1995 and Chief Operating Officer in May 1996. After
graduating from the University of Texas in 1965 with a Bachelor of Arts degree
in
6
<PAGE> 9
accounting, Mr. Lindsay joined Helmrich & Payne, an oil and gas drilling and
exploration company headquartered in Tulsa, Oklahoma. He held increasingly
senior positions with that company until 1973 when he joined the family-owned
Lin-mour Drilling Co. as its Chief Executive Officer. With over 300 employees,
Lin-mour was one of the largest and oldest drilling companies in Wichita Falls.
Bruce I. Benn, 43, has been an Executive Vice President and a Director
of the Company since March 1995. In 1989, he, together with Ronald I. Benn and
Edward J. Munden, founded CHC and has been a director since then. From 1994 to
1996, he was a director of CHIL. Mr. Benn is a specialist in merchant banking
and project finance. From 1985 to 1993, he was Vice President and Director of
Corporation House Ltd., where he acted as a financial consultant to
manufacturing, construction, and resource development firms around the world.
He is an attorney and holds a Masters of Law degree (LL.M 1979) from the
University of London, England, a Baccalaureate of Laws (LL.B, 1978) from the
University of Ottawa, Canada, and a Bachelor of Arts in Economics (1975) from
Carleton University in Ottawa, Canada. Ronald I. Benn, the Chief Financial
Officer of the Company, is the brother of Bruce I. Benn.
Ted Collins, Jr., 59, has been a Director of the Company since October
1997. Since January 1988 he has been President of Collins and Ware, Inc., a
private oil and gas exploration and production company headquartered in
Midland, Texas. He is also Chairman of Mid Louisiana Gas Corp., an interstate
pipeline serving industrial and residential customers in Louisiana and
Mississippi. After graduating from the University of Oklahoma in 1960 with a
Bachelor of Science in Geological Engineering he has been a petroleum engineer
with Pan American Petroleum Corp. (now Amoco Production Co.) from 1960 to 1963;
an independent oil operator from 1963 to 1969; Executive Vice President and
Director of American Quasar Petroleum Co. from 1969 to 1982; President of HNG
Oil Company from 1982 to 1985; President of HNG/InterNorth Exploration Company
from 1985 to 1986 and President of Enron Oil & Gas Company from 1986 to 1988.
Mr. Collins is also a director of Hanover Compression Company.
Eli Rebich, 46, has been a Director of the Company since October 1997.
He is an independent oil and gas producer with over 22 years industry
experience, including evaluation, acquisition, title work and operation of oil
and gas properties. Since 1978, he has acquired producing properties in Texas,
Louisiana, Mississippi, Oklahoma and Colorado. He is President and Director of
Big Run Production Company which operates properties in several states. He is
an active member of the AAPL, ETAPL, TIPRO and the IPAA.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF THE
NOMINEES FOR DIRECTOR NAMED ABOVE.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
BOARD OF DIRECTOR MEETINGS
During the fiscal year ended June 30, 1997, the entire Board of
Directors met one time for a special meeting. The Board of Directors also
acted 22 times by written consent. All directors attended at least 75% or more
of the aggregate of the meetings of the Board of Directors of the Company and
of the committees of the Board of Directors on which they served.
7
<PAGE> 10
AUDIT COMMITTEE
Pursuant to the Company's Bylaws, effective October 23, 1997 the Board
of Directors has established a standing Audit Committee. The Audit Committee
recommends the independent public accountants that the Company considers to
perform the annual audit, reviews financial statements, and reviews the
observations of independent public accountants concerning their annual audit.
The Audit Committee consists of Ted Collins, Jr., Eli Rebich and Edward J.
Munden. During the fiscal year ended June 30, 1997, there were no meetings of
the Audit Committee.
COMPENSATION COMMITTEE
Pursuant to the Company's Bylaws, effective October 23, 1997 the Board
of Directors has established a standing Compensation Committee. The
Compensation Committee reviews and makes recommendations regarding executive
compensation and oversees the Company's incentive compensation plans as they
may exist from time to time. The Compensation Committee consists of Ted
Collins, Jr. and Eli Rebich. For the fiscal year ended June 30, 1997, there
were no meetings of the Compensation Committee.
EXECUTIVE OFFICERS
The following table sets forth the executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE CURRENT POSITION
---- --- ----------------
<S> <C> <C>
Edward J. Munden . . . . . . 46 Chairman of the Board, Chief Executive Officer and President
Bruce I. Benn . . . . . . . 43 Executive Vice President
Robert P. Lindsay . . . . . 54 Chief Operating Officer
Ronald I. Benn . . . . . . . 42 Chief Financial Officer
V. Ed Butler . . . . . . . . 41 Vice President
</TABLE>
The following is a brief description of the business backgrounds of
each of the executive officers who are not also nominees for directors. For a
narrative description of the business background of Messrs. Munden, Bruce I.
Benn and Lindsay see "Nominees for Directors."
Ronald I. Benn was appointed Chief Financial Officer of QSRN in 1994
and assumed the same position with the Company when it acquired QSRN in March
1995. Since 1989, he has been a senior executive, director and cofounder of
CHC. From 1994 to 1996, Mr. Benn was a director of CHIL. Mr. Benn is a
Chartered Accountant. From 1980 to 1985, he held positions in the auditing and
insolvency divisions of the accounting firm of Clarkson Gordon Chartered
Accountants (now known as Ernst & Young Chartered Accountants). He also has
experience in the commercial banking industry and as a financial consultant to
many start-up companies. Mr. Benn holds a Bachelor of Science degree (1977)
from Carleton University in Ottawa, Canada and a Bachelor of Commerce (Honours)
(1980) from the University of Windsor, Canada. Ronald I. Benn is the brother
of Bruce I. Benn.
8
<PAGE> 11
V. Ed Butler joined the Company in June 1996 as Vice President. He has
over 18 years' experience in oil field engineering and operations in Texas,
including two years as Executive Vice President of Echo Production, Inc. and
ten years as operations manager with Triad Energy Corporation. Prior to
joining Triad in 1983, Mr. Butler held engineering positions with Blocker
Exploration Company and Texas Oil and Gas Corporation. Mr. Butler holds an
M.B.A. (1988) from the University of Texas, and a Bachelor of Science in
Petroleum Engineering (1978) from Texas A&M University.
EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth a summary of the compensation of the
Chief Executive Officer and the four other most highly compensated executive
officers of the Company for the fiscal years ended June 30, 1997, 1996 and
1995. No compensation information is given for any person for any fiscal year
in which that person was not an executive officer of the Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------ ------------
Number of
Other Securities
Name and Fiscal Year Annual Underlying All Other
Principal Position End June 30, Salary Bonus Comp. Options Compensation
- ------------------ ----------- -------- ------- --------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Edward J. Munden 1997 88,200 30,000 -0- -0- -0-
President and 1996 65,000 -0- -0- -0- -0-
Chief Executive Officer 1995(1) 50,000 -0- -0- -0- -0-
Robert P. Lindsay 1997 120,000 30,500 -0- -0- -0-
Chief Operating Officer 1996 108,000 -0- -0- -0- -0-
1995(1) 48,000 -0- -0- -0- -0-
Bruce I. Benn 1997 88,200 30,000 -0- -0- -0-
Executive Vice President 1996 65,000 -0- -0- -0- -0-
1995(1) 50,000 -0- -0- -0- -0-
Ronald I. Benn 1997 88,200 30,000 -0- -0- -0-
Chief Financial Officer 1996 65,000 -0- -0- -0- -0-
1995(1) 50,000 -0- -0- -0- -0-
V. Ed Butler 1997 100,000 25,500 -0- -0- -0-
Vice President 1996 -0- -0- -0- -0- -0-
1995 -0- -0- -0- -0- -0-
</TABLE>
- -------------------
(1) Became an officer of the Company effective March 6, 1997.
The preceding table shows all the cash compensation paid or to be paid
by the Company, as well as certain other non-cash compensation paid or accrued,
during the fiscal years indicated, to the Chief Executive Officer for such
period in all capacities in which he served. During the fiscal year ended
9
<PAGE> 12
June 30, 1997, Robert P. Lindsay, Edward J. Munden, Bruce I. Benn, Ronald I.
Benn, and Ed Butler each received a total annual salary and bonus in excess of
$100,000. Total compensation paid to all five executive officers as a group
during the fiscal year ended June 30, 1997 was $630,600.
Although the Board of Directors approved, subject to stockholder
approval, an Incentive Stock Option Plan in 1996 (the "1996 Plan"), there have
been no awards or options under the 1996 Plan to any of the executive officers
of the Company. The Board of Directors terminated the 1996 Plan effective
October 17, 1997.
Prior to May 1996, Messrs. Munden, Benn and Benn were paid by CHC
pursuant to a Management Services Agreement dated July 1, 1996 between the
Company and CHC (the "Management Agreement"). See "Certain Relationships and
Related Transactions -- Management Services Agreement."
COMPENSATION OF DIRECTORS
In respect of the year ended June 30, 1997, the Directors received no
compensation for their services as Directors of the Company. Effective October
17, 1997, however, the Board of Directors has adopted a policy whereby each
non-employee Director is paid an annual retainer fee of $12,000 plus meeting
fees of $750 for each Board of Directors and committee meeting (other than
telephonic meetings) attended by that Director. The Company also reimburses
its Directors for travel, lodging and related expenses they may incur attending
Board of Directors and committee meetings. In addition, the Company currently
is contemplating the adoption of a stock option plan for its nonemployee
Directors.
EMPLOYMENT AGREEMENTS
Edward J. Munden. In May 1997, the Company entered into an employment
agreement with Mr. Munden (the "Munden Agreement"), pursuant to which the
Company employed him as President and Chief Executive Officer. Under the
Munden Agreement, Mr. Munden receives a base salary of $120,000 per annum. He
also received a bonus of $30,000 for the fiscal year ended June 30, 1997, which
was based on the Company's performance. The Munden Agreement includes
non-competition and confidentiality provisions. The Munden Agreement
terminates on November 5, 1997. Currently, the Company is negotiating the
terms and provisions of an employment agreement to be entered into following
the expiration of the term of the Munden Agreement.
Bruce I. Benn. In May 1997, the Company entered into an employment
agreement with Mr. Benn (the "Bruce Benn Agreement"), pursuant to which the
Company employed him as Executive Vice President. Under the Bruce Benn
Agreement, Mr. Benn receives a base salary of $120,000 per annum. He also
received a bonus of $30,000 for the fiscal year ended June 30, 1997, which was
based on the Company's performance. The Bruce Benn Agreement includes
non-competition and confidentiality provisions. The Bruce Benn Agreement
terminates on November 5, 1997. Currently, the Company is negotiating the
terms and provisions of an employment agreement to be entered into following
the expiration of the term of the Bruce Benn Agreement.
Ronald I. Benn. In May 1997, the Company entered into an employment
agreement with Mr. Benn (the "Ronald Benn Agreement"), pursuant to which the
Company employed him as Chief Financial Officer. Under the Ronald Benn
Agreement, Mr. Benn receives a base salary of $120,000 per annum. He also
received a bonus of $30,000 for the fiscal year ended June 30, 1997, which was
based on the Company's performance. The Ronald Benn Agreement includes
non-competition and confidentiality provisions. The Ronald Benn Agreement
terminates on November 5, 1997. Currently, the Company is
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negotiating the terms and provisions of an employment agreement to be entered
into following the expiration of the term of the Ronald Benn Agreement.
Robert P. Lindsay. In July 1997, the Company entered into an
employment agreement with Mr. Lindsay (the "Lindsay Agreement"), pursuant to
which the Company employed him as Chief Operating Officer. Under the Lindsay
Agreement, Mr. Lindsay receives a base salary of $120,000 per annum. He also
received a bonus of $30,500 for the fiscal year ended June 30, 1997, which was
based on the Company's performance. The Lindsay Agreement includes
non-competition and confidentiality provisions. The Lindsay Agreement
terminates on November 5, 1997. Currently, the Company is negotiating the
terms and provisions of an employment agreement to be entered into following
the expiration of the term of the Lindsay Agreement.
V. Ed Butler. In June 1997, the Company entered into an employment
agreement with Mr. Butler (the "Butler Agreement"), pursuant to which the
Company employed him as a Vice President. Under the Butler Agreement, Mr.
Lindsay receives a base salary of $110,000 per annum. He also received a bonus
of $25,500 for the fiscal year ended June 30, 1997, which was based on the
Company's performance. The Butler Agreement includes non-competition and
confidentiality provisions. The Butler Agreement terminates on November 5,
1997. Currently, the Company is negotiating the terms and provisions of an
employment agreement to be entered into following the expiration of the term of
the Butler Agreement.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
To the Company's knowledge, based solely on a review of the copies of
reports furnished to the Company and, in certain instances, written
representations that no additional reports were required, during the fiscal
year ended June 30, 1997, all of the Company's officers, directors and holders
of more than 10% of its Common Stock timely filed all reports required by
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "1934
Act").
PROPOSAL TO APPROVE THE QUEEN SAND RESOURCES, INC.
1997 INCENTIVE EQUITY PLAN
GENERAL
The Board of Directors adopted, subject to stockholder approval, the
Queen Sand Resources, Inc. 1997 Incentive Equity Plan (the "1997 Plan")
effective as of July 1, 1997. Under the 1997 Plan, certain employees and
officers may receive incentive compensation based on the achievement of
predetermined objective performance goals.
The 1997 Plan is being submitted for Stockholder approval at the
Annual Meeting for three reasons. First, under Section 162(m) of the Internal
Revenue Code of 1986, as amended (the "Code"), Stockholder approval is
necessary in order for performance payments under the 1997 Plan to certain
executive officers to be deductible by the Company for federal income tax
purposes. Section 162(m) imposes a $1,000,000 limit on the deductibility of
compensation paid to certain executive officers. Stockholder approval of the
1997 Plan will enable awards made under the 1997 Plan to be excluded in
calculating the $1,000,000 limit. Second, Stockholder approval of the 1997
Plan is required to permit certain transactions under the 1997 Plan to be
exempt from the Securities and Exchange Commission regulations on short- swing
trading under Section 16 of the 1934 Act. Third, Stockholder approval of the
1997 Plan is required to award incentive stock options under the requirements
of Section 422 of the Code.
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The provisions of the 1997 Plan are summarized below. All such
statements are qualified in their entirety by reference to the full text of the
1997 Plan, which is attached hereto as Appendix A.
The 1997 Plan is not subject to the provisions of the Employee
Retirement Income Security Act of 1974 ("ERISA"). The 1997 Plan is not a
"qualified plan" within the meaning of Section 401 of the Code. The 1997 Plan
will terminate on July 1, 2007, and thereafter no incentive stock options,
non-qualified stock options or stock appreciation rights ("awards") may be
granted thereunder. The Board of Directors may amend or discontinue the 1997
Plan without the approval of the stockholders, subject to certain limitations.
See "Amendment of the 1997 Plan" below.
Nothing in the 1997 Plan or in any award granted pursuant to the 1997
Plan confers upon any employee any right to continue in the employ of the
Company or to interfere in any way with the right of the Company to terminate
the employment of any person at any time.
The proceeds from the sale of Common Stock pursuant to the exercise of
or payment for awards under the 1997 Plan will be added to the general funds
of the Company and used for general corporate purposes. The holder of an award
granted pursuant to the 1997 Plan does not have any of the rights or privileges
of a Stockholder, except with respect to shares that have been actually issued.
PURPOSE AND ELIGIBILITY
The purposes of the 1997 Plan are to attract and retain key management
employees and to encourage performance by providing such persons with a
proprietary interest in the Company through the granting of incentive stock
options, non-qualified stock options and stock appreciation rights or any of
the foregoing in combination or in tandem. The 1997 Plan is designed to help
achieve those purposes through the use of compensation strategies that will
attract and retain those employees who are important to the long-term success
of the Company.
Any employee of the Company or its subsidiary corporations or
partnerships (including officers or directors who are employees) is eligible to
receive awards under the 1997 Plan at the discretion of the Compensation
Committee. See "Administration of the 1997 Plan" below. Non-employee
directors shall not be eligible to participate in the 1997 Plan.
The Company had approximately 21 employees at the date of this Proxy
Statement, all of whom are eligible to participate in the 1997 Plan.
ADMINISTRATION OF THE 1997 PLAN
The 1997 Plan is administered by the Compensation Committee appointed
by the Company's Board of Directors. The current members of the Compensation
Committee are Ted Collins, Jr. and Eli Rebich. Members of the Compensation
Committee serve at the will of the Board of Directors and may be removed, with
or without cause, from the Compensation Committee at any time at the Board of
Directors' discretion.
The Compensation Committee has full discretion to grant awards under
the 1997 Plan, to interpret the 1997 Plan, to make such rules as it deems
advisable in the administration of the 1997 Plan and to take all other actions
advisable to administer the 1997 Plan. The Compensation Committee shall
determine the eligible persons to whom awards will be granted and will set
forth the terms of the awards in award agreements, so long as those terms are
not inconsistent with the 1997 Plan.
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AWARDS
The Compensation Committee may grant or award incentive stock options,
non-qualified stock options and stock appreciation rights or any of the
foregoing in combination or in tandem. A tandem award dictates that the
exercise of one type of award terminates the award granted in tandem with the
other award. For example, in the event a stock appreciation right is granted
in tandem with a stock option, the exercise of the stock appreciation right
will result in the termination of the related stock option and vice versa.
Stock options which are intended to qualify for special tax treatment
under particular provisions of the Code, are considered "Incentive Stock
Options," and options which are not intended to so qualify are considered
"Non-qualified Stock Options." See "Certain Federal Income Tax Aspects" below.
Stock appreciation rights ("SARs") entitle the holder to receive cash
or Common Stock having a value equal to the appreciation in the market price of
the Common Stock underlying the SAR from the date of grant to the date of
exercise.
The maximum number of shares of Common Stock presently authorized for
issuance under the 1997 Plan is 3,000,000, subject to adjustment for stock
splits and similar events. Shares to be issued may be made available from
either authorized but unissued Common Stock or Common Stock held by the Company
in its treasury. Shares of Common Stock previously subject to awards that are
expired, terminated, forfeited, settled in cash in lieu of Common Stock or
exchanged for awards that do not involve Common Stock are available for further
grants of awards under the 1997 Plan.
AWARD AGREEMENTS
Each award granted under the 1997 Plan is required to be evidenced by
an award agreement, which designates the type of award (or combination or
tandem of awards) being granted and sets forth the number of shares or the
total cash amount subject to each award (if applicable), the award or exercise
price (if applicable), the maximum term of the award, any rules related to
forfeiture, the vesting or restriction schedule or criteria (if applicable),
the date of grant, and any other terms, provisions, limitations and performance
requirements of the award. The Compensation Committee may require that each
participant irrevocably grant to the Company a power of attorney to transfer to
the Company any shares forfeited under the award and that the stock
certificates evidencing shares of restricted stock be held in custody by the
Company until the restrictions have lapsed.
The exercise period for an award may not extend longer than ten years
from the date the award is granted and, in the case of incentive stock options,
is limited to five years from the date of grant for certain employees owning
more than 10% of the outstanding shares of Voting Stock.
EXERCISE OF AWARDS
The exercise price for an Incentive Stock Option and the SAR price for
any share of Common Stock subject to an SAR will be at least 100% (or at least
110% in the case of incentive stock options granted to certain employees owning
more than 10% of the outstanding shares of Common Stock) of the fair market
value of the Common Stock on the date of grant. The exercise price for a
Non-qualified Stock Option shall be determined by the Compensation Committee
and may be less than the fair market value of the Common Stock on the date of
grant.
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On the date that the participant desires to exercise a stock option
(the "Exercise Date"), the participant must pay the total exercise price of the
shares to be purchased by delivering to the Company cash, check, bank draft,
money order in the amount of the exercise price or Common Stock having a fair
market value equal to the exercise price, by delivery of an executed
irrevocable option exercise form to sell certain shares of Common Stock
purchased upon exercise of the option or to pledge such shares as collateral
for a loan and promptly deliver the amount of loan proceeds to pay the purchase
price, or any other form of payment which is acceptable to the Compensation
Committee. If the participant fails to pay the exercise price on the Exercise
Date or fails to accept delivery of the Common Stock to be issued upon
exercise, the participant's option may be terminated by the Company.
On the date that the participant desires to exercise an SAR (the "SAR
Exercise Date"), the participant will receive from the Company cash in an
amount equal to the appreciation in the market price of the Common Stock
attributable to the portion of the SAR being exercised from the date of grant
to the SAR Exercise Date.
The exercise of SARs and receipt of cash by a director, executive
officer or 10% or greater stockholder of the Company as determined under
Section 16 of the 1934 Act and the rules promulgated thereunder (an "insider")
will be subject to certain restrictions, including the requirement that the
insider must exercise the SAR during the quarterly "SAR window period"
beginning on the third business day following the issuance by the Company for
publication of its quarterly earnings release and ending on the twelfth
business day following the issuance of the earnings release.
RESTRICTIONS
Under the 1997 Plan, the Compensation Committee determines the vesting
schedule, restrictions or conditions, if any, applicable to any award granted.
Once vested, awards may be exercised at any time during the award period. The
Compensation Committee may, in its discretion and in accordance with the terms
of the 1997 Plan, accelerate any vesting schedule or otherwise remove any
restrictions or conditions applicable to an award.
No participant may receive during any fiscal year awards covering an
aggregate of more than 100,000 shares of Common Stock under the 1997 Plan.
The grant of incentive stock options to each participant is subject to
a $100,000 calendar year limit. This limitation prohibits the grant of an
incentive stock option that would entitle the recipient to purchase, thereunder
and together with other incentive options, securities worth more than $100,000
(based upon the aggregate fair market value of the securities underlying such
options on the date of grant) in the year in which such options first become
exercisable. See "Certain Federal Income Tax Aspects" for additional
limitations on incentive stock options.
A participant who is an insider cannot exercise a stock option or SAR
until at least six months have expired from the date of grant of the award.
Stock options and SARs, and other awards that have not yet vested or are
subject to forfeiture, are not transferable or assignable other than by will or
by the laws of descent and distribution or pursuant to the terms of a qualified
domestic relations order as defined in the Code.
The Company is not required to sell or issue shares of Common Stock
under any award if the issuance of Common Stock would violate any provisions of
any law or regulation of any governmental authority or any national securities
exchange or other forum on which shares of Common Stock are traded (including
Section 16 of the 1934 Act). As a condition of any sale or issuance of shares
of Common
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Stock under an award, the Compensation Committee may require such agreements or
undertakings, if any, as it may deem necessary or advisable to ensure
compliance with any such law or regulation.
TERMINATION AND FORFEITURE
In the event of termination of service of a participant, an Incentive
may only be exercised as determined by the Compensation Committee and provided
in the Award Agreement.
ADJUSTMENTS
The 1997 Plan provides that the maximum number of shares issuable
under the 1997 Plan as a whole and to each participant individually, the number
of shares issuable upon exercise of outstanding stock options and SARs, and the
exercise prices of such awards are subject to such adjustments as are
appropriate to reflect any stock dividend, stock split, share combination,
exchange of shares, recapitalization or increase or decrease in shares of
Common Stock without receipt of consideration of or by the Company.
If the Company merges or consolidates, transfers all or substantially
all of its assets to another entity or dissolves or liquidates, then under
certain circumstances a holder of an award will be entitled to purchase the
equivalent number of shares of stock, other securities, cash or property that
the award holder would have been entitled to receive had he or she exercised
his or her award immediately prior to such event. Notwithstanding these
adjustment provisions, all awards granted under the 1997 Plan may be canceled
by the Company upon a merger or consolidation of the Company in which the
Company is not the surviving or resulting corporation, or the reorganization,
dissolution or liquidation of the Company, subject to each participant's right
to exercise his or her award as to the shares of Common Stock covered by that
award for a period of 30 days immediately preceding the effective date of such
event.
The 1997 Plan provides that in the event of a "Change of Control" of
the Company, all unmatured installments of awards will become fully accelerated
and exercisable in full. "Change of Control" is defined as the occurrence of
the following events: (i) a consolidation or merger in which the Company does
not survive or in which shares of Common Stock would be converted into cash,
securities or other property, unless the Company's stockholders retain the same
proportionate common stock ownership in the surviving company after the merger,
(ii) a sale, lease, exchange or other transfer of all or substantially all of
the Company's assets, (iii) the approval by the Company's stockholders of a
plan to dissolve or liquidate the Company, (iv) the termination of control of
the Company by directors in office as of July 1, 1997 and their successors
approved in accordance with the terms of the 1997 Plan, by virtue of their
ceasing to constitute a majority of the entire Board of Directors, (v) the
acquisition of beneficial ownership of 20% of the voting power of the Company's
outstanding voting securities by any person or group who beneficially owned
less than 15% of such voting power on July 1, 1997 or the acquisition of
beneficial ownership of an additional 5% of the voting power of the Company's
outstanding voting securities by any person or group who beneficially owned at
least 5% of such voting power on July 1, 1997, in each case subject to certain
exceptions or (vi) the appointment of a trustee in a bankruptcy proceeding
involving the Company.
If the Company makes a partial distribution of its assets in the
nature of a partial liquidation (except for certain cash dividends) then the
prices then in effect with respect to each outstanding award will be reduced in
proportion to the percentage reduction in the tangible book value of the shares
of the Company's Common Stock as a result of such distribution.
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Stock options and SARs may also be granted under the 1997 Plan in
substitution for stock options and SARs held by employees of a corporation who
become management employees of the Company or a subsidiary as a result of a
merger, consolidation or stock acquisition.
AMENDMENT OF THE 1997 PLAN
The 1997 Plan provides that the Board of Directors may from time to
time discontinue or amend the 1997 Plan without the consent of the stockholders
unless such discontinuance or amendment (i) materially increases the benefits
accruing to participants under the 1997 Plan, (ii) materially increases the
number of securities that may be issued under the 1997 Plan or (iii) materially
modifies the requirements as to eligibility for participation in the 1997 Plan.
In addition, if an amendment would adversely affect an outstanding award, the
consent of the participant holding that award must be obtained unless the Board
of Directors determines that the application to outstanding awards of an
accounting standard in compliance with any statement issued by the Financial
Accounting Standards Board concerning the treatment of awards would have a
significant, adverse effect on the Company's financial statements. The Board
of Directors may cancel and revoke all outstanding awards that are deemed to
cause such adverse effect, and the holders of these awards will not have any
further rights to the awards.
CERTAIN FEDERAL INCOME TAX ASPECTS
Withholding. Withholding of federal taxes at applicable rates will be
required in connection with any ordinary income realized by a participant by
reason of the exercise of awards granted pursuant to the 1997 Plan. A
participant must pay such taxes to the Company in cash or Common Stock prior to
the receipt of any Common Stock certificate. If an insider (as defined in
"Exercise of Awards" above) desires to have Common Stock withheld upon exercise
of an award to pay withholding taxes, the conditions in "Exercise of Awards"
governing the exercise of SARs must be satisfied.
Nonqualified Stock Options. The granting of a non-qualified stock
option will not result in federal income tax consequences to either the Company
or the optionee. Upon exercise of a non-qualified stock option, the optionee
will recognize ordinary income in an amount equal to the difference between the
fair market value of the shares on the date of exercise and the exercise price,
and the Company will be entitled to a corresponding deduction.
For purposes of determining gain or loss realized upon a subsequent
sale or exchange of such shares, the optionee's tax basis will be the sum of
the exercise price paid and the amount of ordinary income, if any, recognized
by the optionee upon exercise of the option. Any gain or loss realized by an
optionee on disposition of such shares generally will be a long-term capital
gain or loss (if the shares are held as a capital asset for at least one year)
and will not result in any tax deduction to the Company. Long-term capital
gains are currently taxed at a maximum rate of 28% if the shares are held
between one year and 18 months after the date of exercise and 20% if held for
18 months or longer after the date of exercise and short-term capital gains are
currently taxed as ordinary income. Ordinary income is currently taxed at five
rates, depending upon a taxpayer's income level: 15%, 28%, 31%, 36% and 39.6%.
Incentive Stock Options. In general, no income will be recognized by
an optionee and no deduction will be allowed to the Company at the time of the
grant or exercise of an incentive stock option granted under the 1997 Plan.
When the stock received on exercise of the option is sold, provided that the
stock is held for more than two years from the date of grant of the option and
more than one year from the date of exercise, the optionee will recognize
long-term capital gain or loss equal to the difference between the amount
realized and the exercise price of the option related to such stock. Long-term
capital gains are currently taxed at a maximum rate of 28% if the shares are
held between one year and 18
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months after the date of exercise and 20% if held for 18 months or longer after
the date of exercise and short-term capital gains are currently taxed as
ordinary income. If these holding period requirements under the Code are not
satisfied, the sale of stock received upon exercise of an incentive stock
option is treated as a "disqualifying disposition", and the optionee must
notify the Company in writing of the date and terms of the disqualifying
disposition.
In general, the optionee will recognize at the time of a disqualifying
disposition ordinary income in an amount equal to the amount by which the
lesser of (i) the fair market value of the Common Stock on the date the
incentive stock option is exercised or (ii) the amount realized on such
disqualifying disposition, exceeds the exercise price. The optionee will also
recognize capital gain to the extent of any excess of the amount realized on
such disqualifying disposition over the fair market value of the Common Stock
on the date the incentive stock option is exercised (or capital loss to the
extent of any excess of the exercise price over the amount realized on
disposition). Any capital gain or loss recognized by the optionee will be
long-term or short-term depending upon the holding period for the stock sold.
Long-term capital gains are currently taxed at a maximum rate of 28% if the
shares are held between one year and 18 months after the date of exercise and
20% if held for 18 months or longer after the date of exercise and short-term
capital gains are currently taxed as ordinary income. Ordinary income is
currently taxed at five rates, depending upon a taxpayer's income level: 15%,
28%, 31%, 36% and 39.6%. The Company may claim a deduction at the time of the
disqualifying disposition equal to the amount of the ordinary income the
optionee recognizes.
Although an optionee will not realize ordinary income upon the
exercise of an incentive stock option, the excess of the fair market value of
the shares acquired at the time of exercise over the option price is included
in "alternative minimum taxable income" for purposes of calculating the
optionee's alternative minimum tax, if any, pursuant to Section 55 of the Code.
Stock Appreciation Rights. A participant who is granted a stock
appreciation right will not recognize any taxable income for Federal income tax
purposes upon receipt of the award. At the time of exercise, however, the
participant will recognize compensation income equal to any cash received and
the fair market value on the date of exercise of any Common Stock received. If
a stock appreciation right is paid in whole or in part in shares of Common
Stock and the participant is subject to Section 16(b) of the 1934 Act on the
date of receipt of such shares, the participant generally will not recognize
compensation income until the expiration of six months from the date of
receipt, unless the participant makes an election under Section 83(b) of the
Code to recognize compensation income on the date of receipt. The Company or
one of its subsidiaries generally will be entitled to a compensation deduction
for the amount of compensation income the participant recognizes.
Other Tax Matters. If unmatured installments of awards are
accelerated as a result of a Change of Control (see "Adjustments" above), any
amounts received from the exercise by a participant of a stock option may be
included in determining whether or not a participant has received an "excess
parachute payment under Section 280G of the Code, which could result in (i) the
imposition of a 20% Federal excise tax (in addition to Federal income tax)
payable by the participant on the cash resulting from such exercise and (ii)
the loss by the Company of a compensation deduction.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL TO APPROVE
THE QUEEN SAND RESOURCES, INC. 1997 INCENTIVE EQUITY PLAN.
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RATIFICATION OF APPOINTMENT OF AUDITORS
The Board of Directors, upon the recommendation of its Audit
Committee, has appointed Ernst & Young LLP ("E&Y") as the independent auditors
of the Company for the fiscal year ending June 30, 1998. Stockholders are being
asked to ratify this appointment. The Company has been informed that neither
E&Y nor any of its partners have any direct financial interest or any material
indirect financial interest in the Company nor have had any connection during
the past three years with the Company in the capacity of promoter, underwriter,
voting trustee, director, officer or employee.
On March 13, 1997, the Company dismissed KPMG Peat Marwick LLP
("KPMG") as its certifying accountant and on March 13, 1997, the Company
retained 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.
Representatives of E&Y expected to be present at the meeting with the
opportunity to make a statement if they so desire and to be available to
respond to appropriate questions.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL TO RATIFY
THE APPOINTMENT OF ERNST & YOUNG LLP AS INDEPENDENT ACCOUNTANTS FOR THE COMPANY
FOR THE FISCAL YEAR ENDING JUNE 30, 1998.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MANAGEMENT SERVICES AGREEMENT
On July 1, 1996, the Company entered into the Management Agreement
with CHC. CHC is a venture capital firm based in Ottawa, Canada. CHC was
founded by Messrs. Munden, Benn and Benn and Messrs. Munden, Benn and Benn are
stockholders, directors and officers of CHC. Pursuant to the Management
Agreement, CHC provided certain management services to the Company in exchange
for a management services fee equal to, at CHC's option, either $40,000 per
month plus applicable taxes or $250.00 per hour than any employee performed
services for the Company pursuant to the Management Agreement, plus applicable
taxes. This Management Agreement was terminated in all respects by the Company
and CHC effective as of May 6, 1997 as a condition to the JEDI/Forseti
transactions discussed below. For the fiscal year ended June 30, 1997, the
Company paid CHC approximately $440,000 in fees in the aggregate under the
Management Agreement.
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JEDI/FORSETI TRANSACTIONS
General
On May 6, 1997, the transactions contemplated under (i) the Securities
Purchase Agreement, dated March 27, 1997 between the Company and JEDI (the
"JEDI Purchase Agreement") and (ii) the Securities Purchase Agreement (the
"Forseti Purchase Agreement"), dated March 27, 1997 between the Company and
Forseti Investments Ltd., a company organized under the laws of Barbados
("Forseti"), were consummated. Pursuant to the transactions, (i) JEDI became a
significant stockholder of the Company and (ii) the Company repurchased shares
of Common Stock owned by Forseti and issued certain warrants and an option to
Forseti.
To facilitate the consummation of the transactions, on May 5, 1997,
the Company amended its Certificate of Incorporation to increase the number of
authorized shares of 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 (the "Charter Amendment") was approved by Forseti and EIBOC, as the
collective holders of approximately 54% of the Common Stock, by written consent
in lieu of a meeting of stockholders dated March 27, 1997 and effective May 5,
1997 and was approved unanimously by the Board of Directors.
Background
Forseti was the record and beneficial owner of 9,600,000 shares (the
"Forseti Stock") of Common Stock (which constituted approximately 33% of the
Company's issued and outstanding Common Stock as of May 6, 1997). Forseti's
assets also include its 45% stock ownership interest in CHIL.
Forseti's original investment in the Company was arranged by CHC in
1989. CHC is a venture capital firm based in Ottawa, Ontario, Canada. CHC was
founded by Messrs. Edward J. Munden, Ronald I. Benn and Bruce I. Benn. CHC has
been active in arranging debt and equity capital in the European capital
markets for the Company since 1995. Mr. Munden is Chairman of the Board, Chief
Executive Officer and President of the Company. Mr. Ronald Benn is the Chief
Financial Officer of the Company and Mr. Bruce Benn is Executive Vice President
and a director of the Company.
In 1996, Forseti approached CHC about selling Forseti's entire
interest in the Company due to tax planning and investment considerations of
Forseti's indirect sole stockholder, a German investor. As fiduciaries of the
Company, Messrs. Munden, Benn and Benn were desirous of accomplishing Forseti's
intent to divest its entire equity interest in the Company in an orderly
fashion with a dual goal of achieving Forseti's intentions, but in a manner
that would benefit the Company. On June 15, 1996, Forseti, Forseti's sole
direct stockholder and CHC entered into an Agency Agreement (the "Agency
Agreement") to facilitate the arrangement of a sale of the Forseti Stock to a
third party. Pursuant to the Agency Agreement, CHC was granted broad powers to
arrange a sale of the Forseti Stock. The Agency Agreement provided for certain
compensation to CHC if such a sale was completed and the repayment of certain
indebtedness owed by CHIL to a bank under a loan arranged by Forseti's sole
stockholder (this loan was repaid in February 1997). Effective March 25, 1997,
the Agency Agreement was terminated without any consideration paid or payable,
directly or indirectly, to CHC or to Messrs. Munden, Benn or Benn, or to any
partnership, corporation or other entity in which any of them has a financial
interest.
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Commencing in the summer of 1996, CHC approached a number of possible
buyers for the Forseti Stock. Ultimately discussions focused on Enron Finance
Corp., a Delaware corporation ("EFC"). EFC provides, among other services,
financing in the energy industry. JEDI is a limited partnership between the
California Public Employees' Retirement System and an affiliate of EFC. The
purpose of the partnership is to invest in a diversified portfolio of energy
related assets. CHC and Company management believed that having JEDI as a
major stockholder in the Company would provide significant benefits to the
Company. Among the significant benefits was management's belief that the
Company's credibility and standing in the oil and gas industry would be
enhanced by JEDI's investment in the Company. Further, the Company believed
that, while JEDI would have no obligation to the Company in this regard, the
relationship would provide the Company's other stockholders with the
opportunity to benefit from EFC's experience, expertise, financial resources
and innovative thinking as a sophisticated provider of financing in the energy
industry. Most importantly, the Company's management believed that JEDI's
interest would be closely aligned with the interests of the Company's other
stockholders.
Since December 1996 extensive negotiations took place concerning the
pricing and a transaction structure. Enron Capital & Trade Resources, Corp., a
Delaware corporation and an affiliate of EFC ("ECT"), and the Company entered
into a letter of intent dated as of February 4, 1997, setting forth certain
proposed terms of the transaction. The letter of intent was non-binding,
except for a mutually binding confidentiality provision and the agreement of
the Company to reimburse ECT all of its legal fees, professional fees and other
transaction costs incurred in the evaluation and negotiation of the proposed
transaction and related agreements, whether or not the transaction closed. The
letter of intent expired on February 14, 1997, other than as to the binding
terms described in the preceding sentence.
Prior to completion of the negotiations, it was determined the
investment would be made through JEDI. The final transaction structure
provided the desired liquidity for Forseti for all of its shares of Common
Stock with an opportunity to be paid additional consideration in the future if
the Company achieves certain negotiated financial benchmarks. At the same time
JEDI could achieve a significant equity investment in the Company. The Company
facilitated the transaction by itself acquiring the Forseti Stock with funds
invested in the Company by JEDI in exchange for the issuance of the Company's
Series A Preferred Stock to JEDI.
EIBOC holds of record 6,600,000 shares of Common Stock. Messrs.
Munden, Benn and Benn have the sole beneficial interest in such shares. EIBOC
received its shares of Common Stock from Norden Investments, Ltd. ("Norden") on
March 27, 1997. Messrs. Munden, Benn and Benn had a beneficial interest in
such shares when they were held by Norden. Norden retained 3,000,000 shares of
Common Stock and a 45% stock ownership interest in CHIL. Prior to October
1996, the 9,600,000 shares of Common Stock held by Norden and the 9,600,000
shares of Common Stock owned by Forseti were held of record by CHIL.
The Charter Amendment. Effective May 5, 1997, the Certificate of
Incorporation of the Company was amended to authorize a class of preferred
stock and to authorize additional shares of Common Stock. The Charter
Amendment was approved by Forseti and EIBOC, as the collective holders of
approximately 54% of the Common Stock outstanding on March 27, 1997, by written
consent in lieu of a meeting of stockholders dated March 27, 1997 and effective
May 5, 1997.
The Charter Amendment (i) authorizes the issuance of an aggregate of
50,000,000 shares of Preferred Stock, of which, following the closing of the
JEDI Purchase Agreement, 9,600,000 shares are issued and outstanding shares of
Series A Preferred Stock, 9,600,000 shares are authorized but unissued shares
of Series B Participating Convertible Preferred Stock, par value $0.01 per
share (the "Series B Preferred Stock"), and 30,800,000 shares are undesignated
preferred stock (the "Undesignated Preferred
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<PAGE> 23
Stock") available for issuance by the Company in the future and (ii) authorizes
an additional 60,000,000 shares of Common Stock (in addition to the 40,000,000
shares previously authorized under the Certificate of Incorporation). See
"JEDI Transaction Agreements -- Description of Series A Preferred Stock and
Description of Series B Preferred Stock." 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 will have
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.
Effective May 5, 1997, the Company has filed with the Secretary of
State of the State of Delaware a Certificate of Designation to establish the
rights, powers, designations and preferences of the Series A Preferred Stock
(the "Series A Certificate of Designation"). In addition, effective May 5,
1997, the Company has filed a Certificate of Designation to establish the
rights, powers, designations and preferences of the Series B Preferred Stock
(the "Series B Certificate of Designation").
JEDI Transaction Agreements
Description of the JEDI Purchase Agreement. The following
summary of the material provisions of the JEDI Purchase Agreement is not
intended to be complete and is subject to, and qualified in its entirety by
reference to, all of the provisions of such agreement, a copy of which is filed
as an exhibit to the Company's Current Report on Form 8-K dated March 27, 1997.
Purchase of Series A Preferred Stock, JEDI Warrants
and Robertson Warrants. Pursuant to the JEDI Purchase Agreement, JEDI
purchased 9,600,000 shares of Series A Preferred Stock from the Company, the
JEDI Warrants (defined below) and the Robertson Warrants (defined below) in
exchange for (i) the payment by JEDI to the Company of $5,000,000 cash; and
(ii) the execution and delivery by JEDI of the JEDI Earn Up Agreement (defined
below). See "JEDI Transaction Agreements -- Description of the Series A
Preferred Stock, Description of the JEDI Warrants, Description of the Robertson
Warrants and Description of the JEDI Earn Up Agreement."
Certain Representations and Warranties. Under the
JEDI Purchase Agreement, the Company has made certain representations and
warranties to JEDI regarding the Company and its business, including (i) due
corporate organization of the Company and its subsidiaries; (ii) the due
authorization and issuance of the Series A Preferred Stock, the JEDI Warrants
and the Robertson Warrants and the shares of Common Stock issuable upon
conversion of the Series A Preferred Stock and the exercise of the JEDI
Warrants and the Robertson Warrants; (iii) the due authorization, execution,
delivery and performance by the Company of the JEDI Purchase Agreement and
related agreements and their enforceability; (iv) no conflict with or violation
of the Company's Certificate of Incorporation or bylaws, any of the Company's
agreements and applicable law; (v) required consents from governmental
authorities or other third parties; (vi) the capital structure of the Company
and its subsidiaries; (vii) employee benefit matters; (viii) the accuracy of
reports and other documents filed by the Company with the Securities and
Exchange Commission ("SEC"); (ix) the absence of certain changes to the
Company's or its subsidiaries' business, financial condition, properties,
liabilities, assets, results of operations or future business prospects; (x)
compliance with laws; (xi) disclosure of pending and threatened litigation;
(xii) payment of taxes; (xiii) environmental matters; (xiv) adequacy of
insurance; (xv) title to assets; (xvi) accuracy of
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<PAGE> 24
books and records; (xvii) certain regulatory matters; (xviii) accuracy of
financial statements and certain reserve reports; (xix) adequacy of permits and
licenses; (xx) title to intellectual property; (xxi) title to properties;
(xxii) no undisclosed interested director transaction; (xxiii) no payments owed
to brokers and finders; and (xxiv) no material misstatements in any disclosures
to JEDI.
Under the JEDI Purchase Agreement, JEDI has made certain
representations and warranties to the Company, including (i) due organization;
(ii) the due authorization, execution, delivery and performance by JEDI of the
JEDI Purchase Agreement and related agreements and their enforceability; (v) no
conflict with or violation of the JEDI's organizational documents, any of
JEDI's agreements and applicable law; (vi) required consents from governmental
authorities or other third parties; (vii) pending and threatened litigation;
and (viii) certain investment representations.
Covenants. Pursuant to the JEDI Purchase Agreement,
the Company has covenanted to: (i) use the entire cash proceeds received under
the JEDI Purchase Agreement to repurchase the Common Stock owned by Forseti
under the Forseti Purchase Agreement; (ii) maintain its corporate existence and
cause its subsidiaries to maintain their corporate existence; (iii) comply with
applicable laws and cause its subsidiaries to do the same; (iv) maintain its
properties and cause its subsidiaries to maintain their properties; (v) not
materially change its accounting methods or permit its subsidiaries to change
their accounting methods; (vi) allow JEDI the right to have notice of, and
attendees at, the Company's Board of Directors' meetings; (vii) furnish to JEDI
certain reports and accounts furnished to the Company's Board of Directors;
(viii) effect the placement of Common Stock with net proceeds to the Company of
at least $5,400,000 commencing March 15, 1997 through December 31, 1997; (ix)
deliver an officer's certificate to JEDI annually regarding compliance with the
covenants; (x) provide JEDI with certain financial statements and reserve
reports; (xi) use its best efforts to cause the Common Stock to be listed on
THE NASDAQ Small Cap Market; (xii) use reasonable commercial efforts to cause
the Common Stock, including the Common Stock issuable upon conversion of the
Series A Preferred Stock and upon exercise of the JEDI Warrants and the
Robertson Warrants, to be listed on THE NASDAQ National Market no later than
March 15, 2003; (xiii) approve customary stock option and other benefit plans;
(xiv) no later than June 30, 1997, enter into an employment agreement with V.
Ed Butler or a person with comparable qualifications reasonably acceptable to
JEDI; (xv) not to amend the Forseti Purchase Agreement or related documents
without the prior written consent of JEDI; and (xvi) use its best efforts to
obtain the consent of Comerica Bank-Texas to the transactions contemplated by
the agreement.
In addition, the Company has covenanted not, and not permit
any of its subsidiaries, to engage in asset sales not in the ordinary course of
business unless the asset sale is for not less than the fair market value of
the assets sold and the consideration received by the Company or its subsidiary
is at least 85% cash; provided, that the following are deemed to be cash for
purposes of the covenant: (i) the amount of liabilities of the Company or a
subsidiary assumed by the transferee; (ii) the amount of any notes or other
obligations received by the Company or a subsidiary from such transferee
converted into cash within 90 days of the closing of the sale and (iii) the
fair market value of certain oil and gas properties and permitted business
investments received by the Company or its subsidiaries from such transferee.
Further, if the Company engages in an asset sale that is not in the ordinary
course of business, then the Company shall repay indebtedness, if required, and
if not so required, then within 60 days after the receipt of proceeds from such
sale, the Company may apply the proceeds to reduce indebtedness, acquire a
controlling interest in another oil and gas business or permitted business
investment, make certain capital expenditures, purchase assets useful to the
oil and gas business or retain cash for working capital.
The Company has covenanted not, and not permit any of its
subsidiaries, to directly or indirectly enter into any transaction or series of
related transactions involving aggregate consideration
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equal to or greater than $60,000 with any affiliate of the Company unless (i)
the terms of the transaction are no less favorable to the Company than those
that could have been obtained in a transaction with an unaffiliated party or an
arms-length basis and (ii) the transaction is approved by a majority of
disinterested directors of the Company; provided, that this covenant will not
apply to customary compensation to officers, directors, and employees in the
ordinary course of business, intercompany transactions, dividend payments, or
the transactions contemplated by the Letter Agreement. See "JEDI Transaction
Agreements -- Description of the Letter Agreement."
The Company has also covenanted to comply with substantially
all of the provisions of Rule 4460 of the National Association of Securities
Dealers, Inc.'s Bylaws. Pursuant to this covenant, the Company is required to
(i) distribute to its stockholders annual reports containing audited financial
statements and quarterly reports containing statements of operating results,
(ii) maintain a minimum of two independent directors of the Company's Board of
Directors, (iii) maintain an audit committee, a majority of the members of
which are independent directors, (iv) hold an annual meeting of stockholders,
(v) solicit proxies and provide proxy statements for all meetings of
stockholders, (vi) conduct an appropriate review of related party transactions
on an ongoing basis, (vii) require stockholder approval prior to the adoption
of certain stock option plans and prior to the issuance of designated
securities that will result in a change of control of the Company or certain
other issuances in connection with the acquisition of the stock or assets of
another company or in connection with a transaction other than a public
offering involving a significant amount of the Company's securities and (viii)
not take any action that will have the effect of nullifying, restricting or
disparately reducing the voting rights of the holders of the Company's Common
Stock.
Maintenance Rights. Pursuant to the JEDI Purchase
Agreement, the Company has 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
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% 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.
Indemnification. The JEDI Purchase Agreement
provides that the Company will indemnify, defend and hold harmless JEDI to the
fullest extent lawful from and against all losses, expenses, damages,
deficiencies, liabilities, payments, penalties, litigation, demands, defenses,
judgments, proceedings, costs, obligations, settlement costs, and attorneys',
accountants' and other professional advisors' fees (including costs of
investigation or preparation) ("Losses") arising out of or resulting from
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<PAGE> 26
the breach of any representation, warranty, convent or agreement of the Company
contained in the JEDI Purchase Agreement.
The JEDI Purchase Agreement provides that JEDI will indemnify,
defend and hold harmless the Company to the fullest extent lawful from and
against all Losses arising out of or resulting from the breach of any
representation, warranty, covenant, obligation or agreement of JEDI contained
in the JEDI Purchase Agreement.
Dispute Resolution. The JEDI Purchase Agreement
provides that all disputes shall be submitted to non-binding mediation upon the
request of the Company or JEDI. If the non-binding mediation does not resolve
the disputes in question within 30 days after appointment of a mediator, the
dispute shall be resolved by arbitration governed by the Commercial Arbitration
Rules of the American Arbitration Association.
Expenses. The Company paid its own expenses of
approximately $317,662 and the out-of-pocket third party expenses reasonably
incurred by JEDI of approximately $156,512 in connection with the transactions
contemplated by the JEDI Purchase Agreement. The Company was reimbursed by
Forseti for $450,000 expenses paid by the Company in connection with the
transaction.
Description of the Series A Preferred Stock. The Series A
Certificate of Designation authorizes the issuance of up to 9,600,000 shares of
Series A Preferred Stock. The following description of the rights, preferences
and limitations of the Series A Preferred Stock is a summary only and is
qualified in its entirety by reference to the entire text of the Series A
Certificate of Designation which is an exhibit to the JEDI Purchase Agreement.
Voting. 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 shall entitle 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 will vote as a
class and each holder shall be 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 will require the approval of the holders of
shares of Series A Preferred Stock, voting together as a separate class:
(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;
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(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.
Election of Directors. 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. As of the date hereof, JEDI has
not elected to exercise its right to elect directors to the Company's Board of
Directors.
Conversion. 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. See "JEDI
Transaction Agreements -- Description of the Series B Preferred Stock."
Dividends. 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. See "JEDI
Transaction Agreements -- Description of the Series A Preferred Stock -- Events
of Default; Remedies."
Liquidation. 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, will be
entitled to receive (i) an amount per share equal to the lesser of (A) $1.50
and (B) the sum of
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(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.
Events of Default; Remedies. The Series A
Certificate of Designation provides 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. See "JEDI
Transaction Agreements -- Description of JEDI Purchase Agreement -- Covenants."
JEDI may waive any Event of Default.
Upon the occurrence but only during the continuance of an
Event of Default, the holders of Series A Preferred Stock will be 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 fifteenth 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 will 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 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 Preferred Stock for an amount in cash equal to
the Liquidation Preference in effect at the time of the Event of Default.
Description of the 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 following description of the rights, preferences
and limitations of the Series B Preferred Stock is a summary only and is
qualified in its entirety by reference to the entire text of the Series B
Certificate of Designation which is an exhibit to the JEDI Purchase Agreement.
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.
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Description of the JEDI Warrants. Pursuant to the JEDI
Purchase Agreement, on May 6, 1997, the Company issued to JEDI certain warrants
(the "JEDI Warrants") for the purchase of Common Stock of the Company. The
JEDI Warrants are exercisable commencing on October 1, 1998 and ending on
December 31, 1998. At the time of exercisability, the JEDI Warrants will 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 (defined below)) of the Forseti Warrants (defined
below) 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. The JEDI Warrants also include customary provisions
with respect to, among other things, reservation of shares of Common Stock for
issuance upon exercise of the JEDI Warrants, mutilated or lost warrant
certificates, and notices to holder(s) of the JEDI Warrants.
Description of the Robertson Warrants. Pursuant to the JEDI
Purchase Agreement, on May 6, 1997, the Company issued to JEDI warrants for the
purchase of 409,839 shares of Common Stock (the "Robertson Warrants"). 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. The Robertson Warrants also include customary
provisions with respect to, among other things, reservation of shares of Common
Stock for issuance upon exercise of the Robertson Warrants, mutilated or lost
warrant certificates, and notices to holder(s) of the Robertson Warrants.
Description of the Stockholders Agreement. Pursuant to the
JEDI Purchase Agreement, on May 6, 1997, EIBOC, Bruce I. Benn, Ronald I. Benn,
Edward J. Munden, Robert P. Lindsay and JEDI entered into the Stockholders
Agreement. Bruce I. Benn and Edward J. Munden are directors and officers of
the Company and have a material beneficial interest in the shares of EIBOC.
Robert P. Lindsay is a director and officer of the Company. Ronald I. Benn is
an officer of the Company and has a material beneficial interest in the shares
of EIBOC. Pursuant to the Stockholders Agreement, each of EIBOC, Bruce I.
Benn, Ronald I. Benn, Edward J. Munden and Robert P. Lindsay agreed to certain
restrictions on the transfer of shares of the 6,600,000 shares of Common Stock
held by EIBOC, and JEDI agreed to certain restrictions on the transfer of
shares of Common Stock or securities convertible into or exercisable or
exchangeable for shares of Common Stock (including the Series A Preferred
Stock, the JEDI Warrants and the Robertson Warrants) held by JEDI.
Pursuant to the Stockholders Agreement, each of EIBOC and
Bruce I. Benn, Ronald I. Benn, Edward J. Munden and Robert P. Lindsay
(collectively, the "Management Stockholders") covenanted not to transfer, nor
to authorize transfer of, any of the 6,600,000 shares of Common Stock in which
they have or may acquire a beneficial interest except by will or the laws of
descent and distribution or otherwise by operation of law or judicial decree or
as permitted by the Stockholders Agreement.
The Stockholders Agreement permits EIBOC and the Management
Stockholders to make the following transfers of shares of Common Stock: (i)
EIBOC and the Management Stockholders in the aggregate may transfer shares of
Common Stock provided that the number of shares of Common Stock to be
transferred together with all shares of Common Stock transferred by EIBOC and
the Management Stockholders during the preceding 12 months does not exceed the
lesser of (x) 4% of the outstanding
27
<PAGE> 30
shares of Common Stock, (y) four times the average weekly reported volume of
trading, excluding any trades made by EIBOC or a Management Stockholder on all
national securities exchanges and/or reported through the automated quotation
system of a registered securities association during the four calendar weeks
preceding the date of transfer or (z) four times the average weekly volume of
trading, excluding any trades made by EIBOC or a Management Stockholder, in
Common Stock reported through the consolidated transaction reporting system,
contemplated by Rule 11Aa3-1 under the 1934 Act during the four week period
specified in clause (y); and (ii) EIBOC and the Management Stockholders may
transfer shares of Common Stock in a registered underwritten public offering of
Common Stock; provided, that neither EIBOC nor any Management Stockholder may
transfer shares of Common Stock if after the transfer EIBOC and the Management
Stockholders would beneficially own less than 4,950,000 shares of Common Stock
in the aggregate, subject to certain adjustments for stock splits,
combinations, and stock dividends. In addition, the Stockholders Agreement
permits EIBOC and the Management Stockholders to transfer Common Stock to
certain family members and related entities and to make certain transfers of
Common Stock upon the death or disability of a Management Stockholder.
Pursuant to the Stockholders Agreement, JEDI agreed that until
the second anniversary of the date of the Stockholders Agreement, and except
pursuant to its registration rights under the Registration Rights Agreement
(defined below), JEDI will not transfer any shares of Common Stock or
securities convertible into or exercisable or exchangeable for shares of Common
Stock (a "Common Stock Equivalent") to any person that is not an affiliate of
JEDI except in blocks of at least 600,000 shares of Common Stock or blocks of
Common Stock Equivalents that are convertible into or exchangeable or
exercisable for at least 600,000 shares of Common Stock.
Pursuant to the Stockholders Agreement, JEDI agreed that until
the second anniversary of the date of the Stockholders Agreement and except
pursuant to its registration rights under the Registration Rights Agreement
(defined below), JEDI will not transfer any shares of Common Stock or Common
Stock Equivalents to a person that is not an affiliate of JEDI without first
giving the Company and the Management Stockholders a right of first refusal to
purchase the shares of Common Stock or Common Stock Equivalents at the proposed
sale price. Pursuant to the right of first refusal, the Company will have the
first right, which must be exercised within 30 days after receipt of notice of
the proposed transfer, to purchase the shares of Common Stock or Common Stock
Equivalents to be transferred. If the Company does not elect to acquire the
shares of Common Stock or Common Stock Equivalents to be transferred, the
Management Stockholders (if the Management Stockholders own in the aggregate
more than 10% of the voting power of the Company's capital stock) will have the
right to purchase such securities if the Management Stockholders notify JEDI of
such election within 30 days after the Company's receipt of notice of the
proposed transfer.
Pursuant to the Stockholders Agreement, EIBOC and the
Management Stockholders made certain representations and warranties to JEDI,
and EIBOC covenanted not to issue any capital stock, permit its capital stock
to be transferred or enter into any agreement relating to the issuance of its
capital stock or engage in any business or activity other than the ownership of
6,600,000 shares of Common Stock.
Pursuant to the Stockholders Agreement, the 6,600,000 shares
of Common Stock owned by EIBOC and all of the outstanding shares of capital
stock of EIBOC (i) were deposited in escrow pursuant to escrow agreements
mutually acceptable to EIBOC, the Management Stockholders and JEDI, and (ii)
will be held in escrow until the earlier of the transfer of the 6,600,000
shares of Common Stock owned by EIBOC in accordance with the Stockholders
Agreement to a person other than a Management Stockholder or related party and
the termination of the Stockholders Agreement.
28
<PAGE> 31
Pursuant to the Stockholders Agreement, EIBOC granted to the
Management Stockholders an irrevocable proxy to vote the 6,600,000 shares of
Common Stock owned by EIBOC.
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.
Description of the Registration Rights Agreement. The Common
Stock issuable upon conversion of the Series A Preferred Stock or upon exercise
of the JEDI Warrants or the Robertson Warrants will not be registered with the
SEC and therefore, will be, when issued, restricted securities. Pursuant to
the JEDI Purchase Agreement, on May 6, 1997, the Company entered into a
Registration Rights Agreement with JEDI (the "Registration Rights Agreement")
pursuant to which JEDI will be entitled to certain rights with respect to the
registration under the Securities Act of 1933, as amended (the "Securities
Act"), of shares of Common Stock issuable upon conversion of Series A Preferred
Stock or upon exercise of the JEDI Warrants, the Robertson Warrants or the
Maintenance Warrants (the "Registrable Securities").
The Registration Rights Agreement provides for demand and
piggyback registration rights. A holder of Registrable Securities (a "Holder")
or Holders who hold at least a majority of the Registrable Securities may
demand registration up to 3 times; provided that the proposed aggregate
offering proceeds from the sale of such Holder or Holders portion of
Registrable Securities is at least $1,000,000. Generally, the Company bears
the expense of the demand registration statements, while the selling Holders
bear selling expenses such as underwriting fees and discounts. The
Registration Rights Agreement also provides for unlimited priority piggyback
registration rights. That is, in the event that the Company proposes to
register the sale for cash of any of its securities under the Securities Act
for its own account, or for the account of any other person, the holders will
be entitled to include Registrable Securities in any such registration, subject
to the limited right of the managing underwriter of any such offering under
certain circumstances to exclude some or all of such Registrable Securities
from such registration. The Company generally bears the expense of any
piggyback registration statement, while selling holders generally bear selling
expenses such as underwriting fees and discounts. The Registration Rights
Agreement also includes customary indemnification and contribution provisions,
and with regard to demand registration rights, a provision allowing the Company
to postpone filing or the declaration of effectiveness of an applicable
registration statement for up to an aggregate of 90 days if at the relevant
time the Company is engaged in a firm commitment underwritten public offering
in which Registrable Securities may be included or for up to an aggregate of 60
days if there exists information the disclosure of which would be materially
harmful to the Company. The Company will no longer be obligated to register
the Registrable Securities upon disposition pursuant to Rule 144 under the
Securities Act, the eligibility of disposal under Rule 144(k) under the
Securities Act or a registration statement covering such Registrable Security
has been declared effective by the SEC and such Registrable Security has been
issued, sold or disposed of pursuant to such effective registration statement.
JEDI may transfer its registration rights (including demand registration rights
that JEDI has not exercised) to a third party but may not transfer more than
one demand registration right.
Description of the JEDI Earn Up Agreement. Pursuant to the
JEDI Purchase Agreement, on May 6, 1997, 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.
29
<PAGE> 32
The "Earn Up Amount" is a dollar amount equal to the amount,
if any, by which (i) the sum of the Class A Amount and the Class B Amount
exceeds (ii) the Warrant Transfer Amount; provided, that in no event shall the
Earn Up Amount exceed $9,400,000.
The "Class A Amount" is a dollar amount equal to the product
of (i) the Value (not to exceed $1.50) less $1.25, multiplied by (ii)
9,600,000; provided, that in no event shall the Class A Amount be greater than
$2,400,000; and if the Class A Amount is zero or a negative number, the Class A
Amount shall be deemed to be zero.
The "Class B Amount" is a dollar amount equal to the product
of (i) the Value (not to exceed $1.25) less $0.521, multiplied by (ii)
9,600,000; provided, that in no event shall the Class B Amount be greater than
$7,000,000; and if the Class B Amount is zero or a negative number, the Class B
Amount shall be deemed to be zero.
The "Warrant Transfer Amount" is a dollar amount equal to the
greatest of (i) the product of (x) $3.50 multiplied by (y) the aggregate number
of Forseti Warrants transferred by Forseti before October 15, 1998; (ii) the
aggregate gross proceeds that Forseti has received or is entitled to receive
from the transfer of all of the Forseti Warrants transferred by Forseti before
October 15, 1998; and (iii) the difference between the average bid price of the
Company's shares of Common Stock for the 21-day period ending on September 30,
1998 less $2.50, multiplied by the number of Forseti Warrants transferred by
Forseti before October 15, 1998.
"Value" means the product of the Price, multiplied by 0.60;
provided, that if (i) the Common Stock is quoted on The Nasdaq National Market
at the Election Date and (ii) the average daily trading volume of the Common
Stock for the 21-day period ending on September 30, 1998 is at least 50,000
shares per day (excluding trading of shares in any accounts controlled by the
Company or Forseti or their respective affiliates, and provided, that if on any
of the 21 days the trading volume is greater than 300,000 shares, then only
300,000 shares on such days may be used in calculating the average), then Value
means the product of the Price, multiplied by 0.75.
<TABLE>
<S> <C>
"Price" means, if:
[Price(1) - Price(2)]
< or = 0.1, then (Price(1) + Price(2))/2;
----------------------
Greater of Pric1 or Price2
provided, that if: [Price(1) - Price(2)]
> 0.1, then the Company and JEDI
----------------------
Greater of Price(1) or Price(2)
</TABLE>
shall negotiate the Price; provided, further, that if the Price has not been
negotiated within 5 business days after the determination of Price1 and Price2,
then the determination of the Price shall be submitted to nonbinding mediation
and arbitration in accordance with the JEDI Earn Up Agreement. Notwithstanding
anything to the contrary in the JEDI Earn Up Agreement, under no circumstances
can the Price be higher than the higher of Price1 and Price2 or be less than
the lower of Price1 and Price2.
30
<PAGE> 33
<TABLE>
<S> <C> <C>
(1.1 * SEC PV(10)) - Indebtedness + Consolidated Working Capital
"Price(1)" =
-----------------------------------------------------------------------------------
Outstanding Shares
(6.0 * EBITDA) - Indebtedness + Consolidated Working Capital
"Price(2)" =
---------------------------------------------------------------------------------
Outstanding Shares
</TABLE>
Terms used but not defined in the above definitions of Price(1)
and Price(2) are defined in the JEDI Earn Up Agreement.
The parties must first attempt to resolve disputes under the
JEDI Earn Up Agreement pursuant to non-binding mediation. Disputes that are
not resolved pursuant to non-binding mediation shall be settled by arbitration
in accordance with the Commercial Arbitration Rules of the American Arbitration
Association.
The JEDI Earn Up Agreement will terminate upon the earlier of
(i) in the event the "Election Date" under the Forseti Earn Up Agreement is
after September 30, 1998 or the "Payment Date" under the Forseti Earn Up
Agreement is after October 15, 1998, (ii) a transfer of any Forseti Warrants in
violation of the restrictions on transfer in the Forseti Purchase Agreement,
(iii) the election by Forseti to retain the Forseti Warrants pursuant to the
Forseti Earn Up Agreement, (iv) the transfer of all of the Forseti Warrants,
(v) upon the transfer of any ownership interest in Forseti or any entity
controlling Forseti where the purpose of the transfer is to realize or receive
cash, securities or any other property as consideration for the Forseti
Warrants without transferring the Forseti Warrants or (vi) as of September 30,
1998 or October 15, 1998, the individual, who as of the date of the Forseti
Earn Up Agreement owned directly or indirectly all of the ownership interests
of Forseti and each entity controlling Forseti does not own, directly or
indirectly, all of the ownership interests of Forseti and each entity
controlling Forseti.
Description of the Letter Agreement. Pursuant to the JEDI
Purchase Agreement, on May 6, 1997, the Company and ECT Securities Corp., a
Delaware corporation and an affiliate of the general partner of JEDI ("ECT
Securities Corp."), entered into a letter agreement (the "Letter Agreement").
Pursuant to the Letter Agreement, the Company retained ECT Securities Corp. to
act as the Company's advisor and provide consultation, assistance and advice to
the Company with respect to certain of its operations and properties. In
consideration for such services, the Company paid ECT Securities Corp. $100,000
at the closing of the transactions under the JEDI Purchase Agreement and will
pay an annual fee, payable quarterly in arrears, of $100,000 during the term of
the Letter Agreement. The term of the Letter Agreement is five years, subject
to earlier termination if JEDI's ownership of voting capital stock of the
Company should decrease to less than 10% of the Company's voting capital stock.
ECT Securities Corp. may terminate the Letter Agreement effective as of the end
of any calendar quarter of the Company upon written notice not less than 30
days before the date on which such termination is to be effective. The Letter
Agreement includes customary provisions for indemnification of ECT Securities
Corp.
Description of the Employment Agreements. As a condition to
JEDI's obligation to close under the JEDI Purchase Agreement, the Company
entered into an employment agreement satisfactory to JEDI with each of Edward
J. Munden, Bruce I. Benn and Ronald I. Benn. Messrs. Bruce Benn and Munden are
directors and officers of the Company (and have a material beneficial interest
in the Company) and Ronald Benn is an officer of the Company and has a material
beneficial interest in the Company.
31
<PAGE> 34
Forseti Transaction Agreements
Description of the Forseti Purchase Agreement. The following
summary of the material provisions of the Forseti Purchase Agreement is not
intended to be complete and is subject to, and qualified in its entirety by
reference to, all of the provisions of such agreement, a copy of which is filed
as an exhibit to the Company's Current Report on Form 8-K dated March 27, 1997.
Repurchase of Common Stock; Issuance of Forseti
Warrants. Pursuant to the Forseti Purchase Agreement, on May 6, 1997, the
Company repurchased from Forseti 9,600,000 shares of the Company's Common Stock
owned by Forseti in exchange for (i) the payment by the Company to Forseti of
$5,000,000 cash; (ii) the issuance by the Company to Forseti of the Forseti
Warrants (defined below); and (iii) the execution and delivery by the Company
of the Forseti Earn Up Agreement (defined below). See "Forseti Transaction
Agreements -- Description of the Forseti Warrants and Description of the
Forseti Earn Up Agreement."
Certain Representations and Warranties. Under the
Forseti Purchase Agreement, the Company made certain representations and
warranties to Forseti, including (i) due corporate organization; (ii) the due
authorization, issuance and enforceability of the Forseti Warrants and the
shares of Common Stock issuable upon exercise of the Forseti Warrants; (iii)
the due authorization, execution, delivery and performance by the Company of
the Forseti Purchase Agreement and related agreements and their enforceability;
(iv) no conflict with or violation of the Company's Certificate of
Incorporation or bylaws, any of the Company's agreements or applicable law; and
(v) required consents from governmental authorities or other third parties.
Under the Forseti Purchase Agreement, Forseti made certain
representations and warranties to the Company, including (i) due corporate
organization; (ii) title to the 9,600,000 shares of Common Stock; (iii) the due
authorization, execution, delivery and performance by Forseti of the Forseti
Purchase Agreement and related agreements and their enforceability; (iv) no
conflict with or violation of Forseti's organizational documents, any of
Forseti's agreements or applicable law or alternative dispute resolution; (v)
required consents from governmental authorities or other third parties; (vi) no
litigation; (vii) absence of brokers or finders; (viii) no interested director
transactions; and (ix) certain investment representations, including that
Forseti is not a U.S. person within the meaning of Regulation S, promulgated
under the Securities Act.
Restrictions on Transfer of the Forseti Warrants and
Warrant Shares. The Forseti Purchase Agreement provides that the holder of the
Forseti Warrants or the shares of Common Stock issuable upon the exercise of
the Forseti Warrants (the "Warrant Shares") may not transfer or exercise the
Forseti Warrants or Warrant Shares except in accordance with the Forseti
Purchase Agreement and the Forseti Warrants.
The agreement permits a transfer of the Forseti Warrants or
Warrant Shares (i) with the Company's prior written consent or (ii) the
transfer occurs after the first anniversary of the closing under the Forseti
Purchase Agreement, provided, that, in either case certain conditions are met,
including, without limitation, that (a) the transfer is in compliance with
Regulation S promulgated under the Securities Act, (b) Forseti delivers certain
notices to the Company, and (c) any transfer of the Forseti Warrants must
involve at least 100,000 warrants. To ensure compliance with the transfer
restrictions, at the closing under the Forseti Purchase Agreement, the Forseti
Warrants will be deposited in escrow pursuant to the Escrow Agreement among the
Company, Forseti, and an escrow agent acceptable to the Company and Forseti
(the "Escrow Agreement"). See "Forseti Transaction Agreements -- Description
of the Escrow Agreement." The Company and Forseti shall send a notice to the
escrow agent to release the
32
<PAGE> 35
Forseti Warrants if the Company and Forseti determine that the proposed
transfer is in compliance with the Forseti Purchase Agreement.
If at any time on or before September 30, 1998 the Company
identifies a proposed transferee of the Forseti Warrants who is willing to
purchase for cash at least 100,000 of the Forseti Warrants at a price of at
least $2.40 per Class A Warrant and $3.50 per Class B Warrant and the Company
determines that the proposed transfer would be in compliance with the transfer
restrictions in the Forseti Purchase Agreement, then Forseti will be required
to transfer the Forseti Warrants to the transferee identified by the Company
upon notice by the Company.
Indemnification. The Forseti Purchase Agreement
provides that the Company will indemnify, defend and hold harmless Forseti and
certain related parties to the fullest extent lawful from and against all
Losses arising out of or resulting from the breach of any representation,
warranty, covenant or agreement of the Company contained in the Forseti
Purchase Agreement or related documents.
The Forseti Purchase Agreement provides that Forseti will
indemnify, defend and hold harmless the Company and certain related parties to
the fullest extent lawful from and against all Losses arising out of or
resulting from the breach of any representation, warranty, covenant or
agreement of Forseti contained in the Forseti Purchase Agreement or related
documents.
Dispute Resolution. The Forseti Purchase Agreement
provides that all disputes shall first be subject to non-binding mediation, and
if such disputes are not resolved by non-binding mediation, such disputes shall
be governed by arbitration governed by the Commercial Arbitration Rules of the
American Arbitration Association.
Expenses. Forseti will pay its own expenses and the
reasonable expenses of the Company in connection with the transactions
contemplated by the Forseti Purchase Agreement.
Description of the Forseti Warrants. Pursuant to the Forseti
Purchase Agreement, on May 6, 1997, the Company issued certain warrants (the
"Forseti Warrants") to Forseti. The Class A Common Stock Purchase Warrants
(the "Class A Warrants") are exercisable for an aggregate of 1,000,000 shares
of Common Stock. The Class A Warrants are exercisable from their date of
issuance (subject to Regulation S and the Forseti Purchase Agreement) and will
expire December 31, 1998; provided, that any of the Class A 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 Class A
Warrants under the Forseti Earn Up Agreement. The Class A 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 "Class A Warrant
Shares"). If the Class A Warrants are exercised only in part, they must be
exercised for the purchase of at least 100,000 shares of Common Stock. The
Class A 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 Class A 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. The Class A Warrants also include customary
provisions with respect to, among other things, reservation of Class A Warrant
Shares, mutilated or lost warrant certificates, and notices to holder(s) of the
Class A Warrants. The Class A Warrants will be subject to transfer
restrictions as described above under "Forseti Transaction Agreements --
Forseti Purchase Agreement -- Restrictions on Transfer."
The Class B Common Stock Purchase Warrants (the "Class B
Warrants") are exercisable for an aggregate of 2,000,000 shares of Common
Stock. The Class B Warrants are exercisable from their
33
<PAGE> 36
date of issuance (subject to Regulation S and the Forseti Purchase Agreement)
and shall expire on December 31, 1998; provided, that any Class B Warrants held
by Forseti on the Election Date (as defined in the Forseti Earn Up Agreement)
will expire on the Election Date unless Forseti elects to retain the Class B
Warrants under the Forseti Earn Up Agreement. The Class B 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 "Class B Warrant
Shares"). If the Class B Warrants are exercised only in part, they must be
exercised for the purchase of at least 100,000 shares of Common Stock. The
Class B 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 Class B Warrants also make provision for warrant
holders to receive certain items in exchange for their Class B Warrants in the
event of certain combinations, mergers, consolidations, substantial asset sales
and similar transactions. The Class B Warrants also includes customary
provisions with respect to, among other things, reservation of Class B Warrant
Shares, mutilated or lost warrant certificates, and notices to holder(s) of the
Class B Warrants. The Class B Warrants will be subject to transfer
restrictions as described above under "Forseti Transaction Agreements --
Forseti Purchase Agreement -- Restrictions on Transfer."
Description of the Forseti Earn Up Agreement. Pursuant to the
Forseti Purchase Agreement, on May 6, 1997, the Company and Forseti entered
into an Earn Up Agreement (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 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.
If the sum of (i) $5,000,000 and (ii) the aggregate amount
received by Forseti from the transfer of Warrants, exceeds the sum of (x)
$14,400,000 plus (y) a dollar amount equal to the sum of the expenses of the
Company paid by Forseti pursuant to the Forseti Purchase Agreement, the
reasonable out-of-pocket expenses up to a maximum of $50,000 incurred by
Forseti in connection with the Forseti Purchase Agreement, and the escrow agent
fees incurred by Forseti under the Escrow Agreement (the sum of subclauses (x)
and (y) being referred to as the "Net Proceeds"), then within 10 days of the
date (the "Excess Determination Date") the aggregate amount received by Forseti
exceeds the Net Proceeds, (x) Forseti shall deliver to the Company an amount in
cash or by wire transfer of immediately available funds equal to 75% of such
amount received by Forseti in excess of the Net Proceeds, and (y) Forseti shall
spend the remaining 25% of such excess amount to purchase from the Company,
subject to applicable securities laws, Common Stock at a price equal to the
average of the Nasdaq bid price over 21 trading days ending on the Excess
Determination Date.
Pursuant to the Forseti Earn Up Agreement, the Company granted
to Forseti an option to purchase from the Company a number of shares of Common
Stock equal to the quotient of (x) the amount
34
<PAGE> 37
by which the Earn Up Amount exceeds $7,000,000 and (y) $2.50, at a price equal
to $2.50. The option will be exercisable in full or in part only from the date
that the Earn Up Amount is paid by the Company to Forseti through the fifth
business day after the date of payment of the Earn Up Amount. The Forseti Earn
Up Agreement will provide for customary adjustments to the exercise price and
the number of shares to be issued in the event of certain dividends and
distributions to holders of Common Stock, stock splits or combinations or
reclassifications.
The parties must first attempt to resolve disputes under the
Forseti Earn Up Agreement pursuant to non-binding mediation. Disputes that are
not resolved pursuant to non-binding mediation shall be settled by arbitration
in accordance with the Commercial Arbitration Rules of the American Arbitration
Association.
The Forseti Earn Up Agreement will terminate upon the earlier
of (i) a transfer of any Forseti Warrants in violation of the restrictions on
transfer in the Forseti Purchase Agreement, (ii) the election by Forseti to
retain the Forseti Warrants pursuant to the Forseti Earn Up Agreement, (iii)
the transfer of all of the Forseti Warrants, (iv) upon the transfer of any
ownership interest in Forseti or any entity controlling Forseti where the
purpose of the transfer is to realize or receive cash, securities or any other
property as consideration for the Forseti Warrants without transferring the
Forseti Warrants and (v) as of the Election Date or the Payment Date, the
individual, who as of the date of the Forseti Earn Up Agreement owned, directly
or indirectly, all of the ownership interests of Forseti and each entity
controlling Forseti does not own, directly or indirectly, all of the ownership
interests of Forseti and each entity controlling Forseti.
Description of the Escrow Agreement. Pursuant to the Forseti
Purchase Agreement, on May 6, 1997, the Company, Forseti and Comerica
Bank-Texas, as escrow agent, entered into an Escrow Agreement. The Escrow
Agreement governs the deposit into escrow of the Forseti Warrants and the
consideration for the transfer of Warrants. The escrow agent may deliver the
Forseti Warrants and the consideration for the transfer of the Forseti Warrants
to Forseti only upon receipt of notice from the Company and Forseti to release
the Forseti Warrants and the consideration for the transfer of the Forseti
Warrants. The Escrow Agreement contains customary provisions regarding
indemnification of the escrow agent. Forseti will pay the fees of the escrow
agent for its services under the Escrow Agreement.
GENERAL
The Annual Report to Stockholders (which includes the Company's Annual
Report on Form 10-KSB) for the fiscal year ended June 30, 1997 is enclosed
herewith. The Annual Report does not form any part of the material for the
solicitation of proxies.
Pursuant to the rules of the Securities and Exchange Commission, a
proposal to be presented by a Stockholder at the Company's 1998 Annual Meeting
must be received by the Company at its principal executive offices no later
than July 3, 1998 to be included in the Company's proxy statement for that
meeting.
35
<PAGE> 38
OTHER BUSINESS
Management knows of no other matter that will come before the meeting.
However, if other matters do come before the meeting, the proxy holders will
vote in accordance with their best judgment.
By Order of the Board of Directors,
/s/ Edward J. Munden
-------------------------------------------
EDWARD J. MUNDEN
Chairman of the Board, President and Chief
Executive Officer
October 28, 1997
36
<PAGE> 39
APPENDIX A
1997 INCENTIVE EQUITY PLAN
<PAGE> 40
QUEEN SAND RESOURCES, INC.
1997 INCENTIVE EQUITY PLAN
38
<PAGE> 41
QUEEN SAND RESOURCES, INC.
1997 INCENTIVE EQUITY PLAN
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE 1 PURPOSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE 2 DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE 3 ADMINISTRATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
ARTICLE 4 ELIGIBILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
ARTICLE 5 SHARES SUBJECT TO PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
ARTICLE 6 GRANT OF AWARDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
6.1 In General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
6.2 Maximum ISO Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
6.3 SAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
6.4 Maximum Individual Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
6.5 Tandem Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
ARTICLE 7 OPTION PRICE; SAR PRICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
ARTICLE 8 AWARD PERIOD; VESTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
8.1 Award Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
8.2 Vesting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
ARTICLE 9 TERMINATION OF SERVICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
ARTICLE 10 EXERCISE OF INCENTIVE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
10.1 In General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
(a) Stock Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
(b) SARs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
10.2 Disqualifying Disposition of ISO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
ARTICLE 11 AMENDMENT OR DISCONTINUANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
ARTICLE 12 TERM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
ARTICLE 13 CAPITAL ADJUSTMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
</TABLE>
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<PAGE> 42
<TABLE>
<S> <C> <C>
ARTICLE 14 RECAPITALIZATION, MERGER AND CONSOLIDATION; CHANGE IN CONTROL . . . . . . . . . . . . . . . . . 10
ARTICLE 15 LIQUIDATION OR DISSOLUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
ARTICLE 16 INCENTIVES IN SUBSTITUTION FOR INCENTIVES GRANTED BY OTHER CORPORATIONS . . . . . . . . . . . . 12
ARTICLE 17 MISCELLANEOUS PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
17.1 Investment Intent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
17.2 No Right to Continued Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
17.3 Indemnification of Board and Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
17.4 Effect of the Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
17.5 Compliance With Other Laws and Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . 12
17.6 Tax Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
17.7 Assignability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
17.8 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
</TABLE>
- ii -
<PAGE> 43
QUEEN SAND RESOURCES, INC.
1997 INCENTIVE EQUITY PLAN
The name of the plan is the QUEEN SAND RESOURCES, INC. 1997 INCENTIVE
EQUITY PLAN (the "PLAN"). The Plan was adopted by the Board of Directors of
QUEEN SAND RESOURCES, INC., a Delaware corporation (the "COMPANY"), effective
as of July 1, 1997, and was approved by the Company's stockholders on
_____________ ___, 1997.
ARTICLE 1
PURPOSE
The purpose of the Plan is to attract and retain the services of key
management employees of the Company and its Subsidiaries and to provide such
persons with a proprietary interest in the Company through the granting of
incentive stock options, non-qualified stock options, stock appreciation
rights, or whether granted singly, or in combination, or in tandem, that will
(a) increase the interest of such persons in the
Company's welfare and success;
(b) furnish an incentive to such persons to continue
their services for the Company; and
(c) provide a means through which the Company may attract
able persons as employees.
With respect to Reporting Participants, the Plan and all transactions
under the Plan are intended to comply with all applicable conditions of Rule
16b-3 promulgated under the Securities Exchange Act of 1934 (the "1934 ACT").
To the extent any provision of the Plan or action by the Committee fails to so
comply, it shall be deemed null and void ab initio, to the extent permitted by
law and deemed advisable by the Committee.
ARTICLE 2
DEFINITIONS
Unless the context requires otherwise, the following terms shall have
the meanings indicated:
2.1 "AWARD" means the grant of any Incentive Stock Option,
Non-qualified Stock Option, or SAR whether granted singly, in combination or in
tandem (each individually referred to herein as an "INCENTIVE").
2.2 "AWARD AGREEMENT" means a written agreement between a
Participant and the Company which sets out the terms of the grant of an Award.
2.3 "AWARD PERIOD" means the period during which one or more
Incentives granted under an Award may be exercised.
2.4 "BOARD" means the board of directors of the Company.
<PAGE> 44
2.5 "CHANGE OF CONTROL" means any of the following: (i) any
consolidation, merger or share exchange of the Company in which the Company is
not the continuing or surviving corporation or pursuant to which shares of the
Company's Common Stock would be converted into cash, securities or other
property of another entity, other than a consolidation, merger or share exchange
of the Company in which the holders of the Company's Common Stock immediately
prior to such transaction have the same proportionate ownership of Common Stock
of the surviving entity immediately after such transaction; (ii) any sale,
lease, exchange or other transfer (excluding transfer by way of pledge or
hypothecation) in one transaction or a series of related transactions, of all or
substantially all of the assets of the Company; (iii) the stockholders of the
Company approve any plan or proposal for the liquidation or dissolution of the
Company; (iv) the cessation of control (by virtue of their not constituting a
majority of directors) of the Board by the individuals (the "CONTINUING
DIRECTORS") who (x) at the date of this Plan were directors or (y) become
directors after the date of this Plan and whose election or nomination for
election by the Company's stockholders was approved by a vote of at least
two-thirds of the directors (1) then in office who were directors at the date of
this Plan or (2) whose election or nomination for election was previously so
approved; (v) the acquisition of beneficial ownership (within the meaning of
Rule 13d-3 under the 1934 Act) of an aggregate of twenty percent (20%) of the
voting power of the Company's outstanding voting securities by any person or
group (as such term is used in Rule 13d-5 under the 1934 Act) who beneficially
owned less than fifteen percent (15%) of the voting power of the Company's
outstanding voting securities on the date of this Plan, or the acquisition of
beneficial ownership of an additional five percent (5%) of the voting power of
the Company's outstanding voting securities by any person or group who
beneficially owned at least fifteen percent (15%) of the voting power of the
Company's outstanding voting securities on the date of this Plan, provided,
however, that notwithstanding the foregoing, an acquisition shall not constitute
a Change of Control hereunder if the acquiror is (x) a trustee or other
fiduciary holding securities under an employee benefit plan of the Company and
acting in such capacity, (y) a Subsidiary of the Company or a corporation owned,
directly or indirectly, by the stockholders of the Company in substantially the
same proportions as their ownership of voting securities of the Company or (z)
any other person whose acquisition of shares of voting securities is approved in
advance by a majority of the Continuing Directors; or (vi) in a Title 11
bankruptcy proceeding, the appointment of a trustee or the conversion of a case
involving the Company to a case under Chapter 7.
2.6 "CODE" means the Internal Revenue Code of 1986, as amended, or
any successor legislation.
2.7 "COMMITTEE" means the committee appointed or designated by the
Board to serve as the Compensation and Stock Option Committee (or a similarly
named Committee generally intended to administer and oversee employee
compensation plans such as the Plan) of the Board to administer the Plan in
accordance with ARTICLE 3 of this Plan.
2.8 "COMMON STOCK" means the common stock, par value $0.0015 per
share, which the Company is currently authorized to issue or may in the future
be authorized to issue.
2.9 "COMPANY" means QUEEN SAND RESOURCES, INC., a Delaware
corporation, and any successor entity.
2.10 "DATE OF GRANT" means the effective date on which an Award is
made to a Participant as set forth in the applicable Award Agreement; provided,
however, that solely for purposes of Section 16 of the 1934 Act and the rules
and regulations promulgated thereunder, the Date of Grant of an Award shall be
the date of stockholder approval of the Plan if such date is later than the
effective date of such Award as set forth in the Award Agreement.
2
<PAGE> 45
2.11 "EMPLOYEE" means common law employee (as defined in accordance
with the Regulations and Revenue Rulings then applicable under Section 3401(c)
of the Code) of the Company or any Subsidiary of the Company.
2.12 "FAIR MARKET VALUE" of a share of Common Stock is (i) the mean
of the highest and lowest prices per share on any exchange or stock quotation
system that reports daily high and low sales prices, (ii) the mean of the bid
and sale prices on any other stock quotation system, or (iii) if the common
stock is not then-traded on any organized system, the fair market value of a
share of Common Stock as determined in good faith by the Board, on the
appropriate date, or in the absence of reported sales on such day, the most
recent previous day for which sales were reported.
2.13 "INCENTIVE STOCK OPTION" or "ISO" means an incentive stock
option within the meaning of Section 422 of the Code, granted pursuant to this
Plan.
2.14 "NON-EMPLOYEE DIRECTOR" means a member of the Board who is not
an Employee and who satisfies the requirements of Rule 16b-3(b)(3) promulgated
under the 1934 Act or any successor provision.
2.15 "NON-QUALIFIED STOCK OPTION" or "NQSO" means a non-qualified
stock option, granted pursuant to this Plan.
2.16 "OPTION PRICE" means the price which must be paid by a
Participant upon exercise of a Stock Option to purchase a share of Common
Stock.
2.17 "PARTICIPANT" shall mean an Employee of the Company or a
Subsidiary to whom an Award is granted under this Plan.
2.18 "PLAN" means this QUEEN SAND RESOURCES, INC. 1997 INCENTIVE
EQUITY PLAN, as amended from time to time.
2.19 "REPORTING PARTICIPANT" means a Participant who is subject to
the reporting requirements of Section 16 of the 1934 Act.
2.20 "RETIREMENT" means any Termination of Service solely due to
retirement upon attainment of age 62, or permitted early retirement as
determined by the Committee.
2.21 "SAR" means the right to receive a payment, in cash and/or
Common Stock, equal to the excess of the Fair Market Value of a specified
number of shares of Common Stock on the date the SAR is exercised over the SAR
Price for such shares.
2.22 "SAR PRICE" means the Fair Market Value of each share of
Common Stock covered by an SAR, determined on the Date of Grant of the SAR.
2.23 "STOCK OPTION" means a Non-qualified Stock Option or an
Incentive Stock Option.
2.24 "SUBSIDIARY" means (i) any corporation in an unbroken chain of
corporations beginning with the Company, if each of the corporations other than
the last corporation in the unbroken chain owns stock possessing a majority of
the total combined voting power of all classes of stock in one of the other
corporations in the chain, (ii) any limited partnership, if the Company or any
corporation described in item (i) above owns a majority of the general
partnership interest and a majority of the limited partnership interests
entitled to vote on the removal and replacement of the general partner, and
(iii) any partnership
3
<PAGE> 46
or limited liability company, if the partners or members thereof are composed
only of the Company, any corporation listed in item (i) above or any limited
partnership listed in item (ii) above. "SUBSIDIARIES" means more than one of
any such corporations, limited partnerships, partnerships or limited liability
companies.
2.25 "TERMINATION OF SERVICE" occurs when a Participant who is an
Employee of the Company or any Subsidiary shall cease to serve as an Employee
of the Company and its Subsidiaries, for any reason.
2.26 "TOTAL AND PERMANENT DISABILITY" means a Participant is
qualified for long-term disability benefits under the Company's disability plan
or insurance policy; or, if no such plan or policy is then in existence, that
the Participant, because of ill health, physical or mental disability or any
other reason beyond his or her control, is unable to perform his or her duties
of employment for a period of six (6) continuous months, as determined in good
faith by the Committee; provided that, with respect to any Incentive Stock
Option, Total and Permanent Disability shall have the meaning given it under
the rules governing Incentive Stock Options under the Code.
ARTICLE 3
ADMINISTRATION
The Plan shall be administered by a committee appointed by the Board
(the "Committee"). The Committee shall consist of not fewer than two persons.
Any member of the Committee may be removed at any time, with or without cause,
by resolution of the Board. Any vacancy occurring in the membership of the
Committee may be filled by appointment by the Board.
Membership on the Committee shall be limited to those members of the
Board who are Non-employee Directors and who are "OUTSIDE DIRECTORS" under
Section 162(m) of the Code. The Committee shall select one of its members to
act as its Chairman. A majority of the Committee shall constitute a quorum,
and the act of a majority of the members of the Committee present at a meeting
at which a quorum is present shall be the act of the Committee.
The Committee shall determine and designate from time to time the
eligible persons to whom Awards will be granted and shall set forth in each
related Award Agreement the Award Period, the Date of Grant, and such other
terms, provisions, limitations, and performance requirements, as are approved
by the Committee, but not inconsistent with the Plan. The Committee shall
determine whether an Award shall include one type of Incentive, two or more
Incentives granted in combination, or two or more Incentives granted in tandem
(that is, a joint grant where exercise of one Incentive results in cancellation
of all or a portion of the other Incentive).
The Committee, in its discretion, shall (i) interpret the Plan, (ii)
prescribe, amend, and rescind any rules and regulations necessary or
appropriate for the administration of the Plan, and (iii) make such other
determinations and take such other action as it deems necessary or advisable in
the administration of the Plan. Any interpretation, determination, or other
action made or taken by the Committee shall be final, binding, and conclusive
on all interested parties.
With respect to restrictions in the Plan that are based on the
requirements of Rule 16b-3 promulgated under the 1934 Act, Section 422 of the
Code, Section 162(m) of the Code, the rules of any exchange or inter-dealer
quotation system upon which the Company's securities are listed or quoted, or
any other applicable law, rule or restriction (collectively, "APPLICABLE LAW"),
to the extent that any such restrictions are no longer required by applicable
law, the Committee shall have the sole discretion and
4
<PAGE> 47
authority to grant Awards that are not subject to such mandated restrictions
and/or to waive any such mandated restrictions with respect to outstanding
Awards.
ARTICLE 4
ELIGIBILITY
Any Employee (including an Employee who is also a director or an
officer) whose judgment, initiative, and efforts contributed or may be expected
to contribute to the successful performance of the Company is eligible to
participate in the Plan; provided that only Employees shall be eligible to
receive Incentive Stock Options. The Committee, upon its own action, may
grant, but shall not be required to grant, an Award to any Employee of the
Company or any Subsidiary. Awards may be granted by the Committee at any time
and from time to time to new Participants, or to then Participants, or to a
greater or lesser number of Participants, and may include or exclude previous
Participants, as the Committee shall determine. Except as required by this
Plan, Awards granted at different times need not contain similar provisions.
The Committee's determinations under the Plan (including without limitation
determinations of which Employees, if any, are to receive Awards, the form,
amount and timing of such Awards, the terms and provisions of such Awards and
the agreements evidencing same) need not be uniform and may be made by it
selectively among Employees who receive, or are eligible to receive, Awards
under the Plan.
ARTICLE 5
SHARES SUBJECT TO PLAN
Subject to adjustment as provided in ARTICLES 13 and 14, the maximum
number of shares of Common Stock that may be delivered pursuant to Awards
granted under the Plan is (a) three million (3,000,000) shares; plus (b) shares
of Common Stock previously subject to Awards which are forfeited, terminated,
settled in cash in lieu of Common Stock, or exchanged for Awards that do not
involve Common Stock, or expired unexercised; plus (c) without duplication for
shares counted under the immediately preceding clause, a number of shares of
Common Stock equal to the number of shares repurchased by the Company in the
open market or otherwise and having an aggregate repurchase price no greater
than the amount of cash proceeds received by the Company from the sale of
shares of Common Stock under the Plan; plus (d) any shares of Common Stock
surrendered to the Company in payment of the exercise price of options issued
under the Plan.
Shares to be issued may be made available from authorized but unissued
Common Stock, Common Stock held by the Company in its treasury, or Common Stock
purchased by the Company on the open market or otherwise. During the term of
this Plan, the Company will at all times reserve and keep available the number
of shares of Common Stock that shall be sufficient to satisfy the requirements
of this Plan.
ARTICLE 6
GRANT OF AWARDS
6.1 IN GENERAL. The grant of an Award shall be authorized by the
Committee and shall be evidenced by an Award Agreement setting forth the
Incentive or Incentives being granted, the total number of shares of Common
Stock subject to the Incentive(s), the Option Price (if applicable), the Award
Period, the Date of Grant, and such other terms, provisions, limitations, and
performance objectives, as are
5
<PAGE> 48
approved by the Committee, but not inconsistent with the Plan. The Company
shall execute an Award Agreement with a Participant after the Committee
approves the issuance of an Award. Any Award granted pursuant to this Plan
must be granted within ten (10) years of the date of adoption of this Plan. The
Plan shall be submitted to the Company's stockholders for approval; however,
the Committee may grant Awards under the Plan prior to the time of stockholder
approval. Any such Award granted prior to such stockholder approval shall be
made subject to such stockholder approval. The grant of an Award to a
Participant shall not be deemed either to entitle the Participant to, or to
disqualify the Participant from, receipt of any other Award under the Plan.
6.2 MAXIMUM ISO GRANTS. The Committee may not grant Incentive
Stock Options under the Plan to any Employee which would permit the aggregate
Fair Market Value (determined on the Date of Grant) of the Common Stock with
respect to which Incentive Stock Options (under this and any other plan of the
Company and its Subsidiaries) are exercisable for the first time by such
Employee during any calendar year to exceed $100,000. To the extent any Stock
Option granted under this Plan which is designated as an Incentive Stock Option
exceeds this limit or otherwise fails to qualify as an Incentive Stock Option,
such Stock Option shall be a Non-qualified Stock Option.
6.3 SAR. An SAR shall entitle the Participant at his election to
surrender to the Company the SAR, or portion thereof, as the Participant shall
choose, and to receive from the Company in exchange therefor cash in an amount
equal to the excess (if any) of the Fair Market Value (as of the date of the
exercise of the SAR) per share over the SAR Price per share specified in such
SAR, multiplied by the total number of shares of the SAR being surrendered. In
the discretion of the Committee, the Company may satisfy its obligation upon
exercise of an SAR by the distribution of that number of shares of Common Stock
having an aggregate Fair Market Value (as of the date of the exercise of the
SAR) equal to the amount of cash otherwise payable to the Participant, with a
cash settlement to be made for any fractional share interests, or the Company
may settle such obligation in part with shares of Common Stock and in part with
cash.
6.4 MAXIMUM INDIVIDUAL GRANTS. No participant may receive during
any calendar year of the Company Awards covering an aggregate of more than one
hundred thousand (100,000) shares of Common Stock.
6.5 TANDEM AWARDS. The Committee may grant two or more Incentives
in one Award in the form of a "TANDEM AWARD," so that the right of the
Participant to exercise one Incentive shall be canceled if, and to the extent,
the other Incentive is exercised. For example, if a Stock Option and an SAR
are issued in a tandem Award, and the Participant exercises the SAR with
respect to one hundred (100) shares of Common Stock, the right of the
Participant to exercise the related Stock Option shall be canceled to the
extent of one hundred (100) shares of Common Stock.
ARTICLE 7
OPTION PRICE; SAR PRICE
The Option Price for a Non-qualified Stock Option shall be such price
as determined by the Committee; provided, however, such Option Price shall not
be less than the par value per share of the Common Stock. The Option Price for
an Incentive Stock Option and the SAR Price for any share of Common Stock
subject to an SAR shall be at least one hundred percent (100%) of the Fair
Market Value of the share on the Date of Grant. If an Incentive Stock Option
is granted to an Employee who owns or is deemed to own (by reason of the
attribution rules of Section 424(d) of the Code) more than ten percent (10%) of
the combined voting power of all classes of stock of the Company (or any parent
or Subsidiary),
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<PAGE> 49
the Option Price shall be at least one hundred and ten percent (110%) of the
Fair Market Value of the Common Stock on the Date of Grant.
ARTICLE 8
AWARD PERIOD; VESTING
8.1 AWARD PERIOD. Subject to the other provisions of this Plan,
the Committee may, in its discretion, provide that an Incentive may not be
exercised in whole or in part for any period or periods of time or beyond any
date specified in the Award Agreement. Except as provided in the Award
Agreement, an Incentive may be exercised in whole or in part at any time during
its term. The Award Period for an Incentive shall be reduced or terminated
upon Termination of Service in accordance with this ARTICLE 8 and ARTICLE 9.
No Incentive granted under the Plan may be exercised at any time after the end
of its Award Period. No portion of any Incentive may be exercised after the
expiration of ten (10) years from its Date of Grant. However, if an Employee
owns or is deemed to own (by reason of the attribution rules of Section 424(d)
of the Code) more than ten percent (10%) of the combined voting power of all
classes of stock of the Company (or any parent or Subsidiary) and an Incentive
Stock Option is granted to such Employee, the term of such Incentive Stock
Option (to the extent required by the Code at the time of grant) shall be no
more than five (5) years from the Date of Grant.
8.2 VESTING. The Committee, in its sole discretion, may determine
that an Incentive will be immediately exercisable, in whole or in part, or that
all or any portion may not be exercised until a date, or dates, subsequent to
its Date of Grant, or until the occurrence of one or more specified events,
subject in any case to the terms of the Plan. If the Committee imposes
conditions upon exercise, then subsequent to the Date of Grant, the Committee
may, in its sole discretion, accelerate the date on which all or any portion of
the Incentive may be exercised.
ARTICLE 9
TERMINATION OF SERVICE
In the event of Termination of Service of a Participant, an Incentive
may only be exercised as determined by the Committee and provided in the Award
Agreement.
ARTICLE 10
EXERCISE OF INCENTIVE
10.1 IN GENERAL. A vested Incentive may be exercised during its
Award Period, subject to limitations and restrictions set forth therein and in
ARTICLE 9. A vested Incentive may be exercised at such times and in such
amounts as provided in this Plan and the applicable Award Agreement, subject to
the terms, conditions, and restrictions of the Plan.
In no event may an Incentive be exercised or shares of Common Stock be
issued pursuant to an Award if a necessary listing or quotation of the shares
of Common Stock on a stock exchange or inter-dealer quotation system or any
registration under state or federal securities laws required under the
circumstances has not been accomplished. No Incentive may be exercised for a
fractional share of Common Stock. The granting of an Incentive shall impose no
obligation upon the Participant to exercise that Incentive.
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<PAGE> 50
(a) STOCK OPTIONS. Subject to such administrative regulations as
the Committee may from time to time adopt, a Stock Option may be exercised by
the delivery of written notice to the Committee setting forth the number of
shares of Common Stock with respect to which the Stock Option is to be
exercised and the date of exercise thereof (the "EXERCISE DATE") which shall be
at least three (3) days after giving such notice unless an earlier time shall
have been mutually agreed upon. On the Exercise Date, the Participant shall
deliver to the Company consideration with a value equal to the total Option
Price of the shares to be purchased, payable as follows: (a) cash, check, bank
draft, or money order payable to the order of the Company, (b) Common Stock
owned by the Participant on the Exercise Date, valued at its Fair Market Value
on the Exercise Date, (c) by delivery (including by FAX) to the Company or its
designated agent of an executed irrevocable option exercise form together with
irrevocable instructions from the Participant to a broker or dealer, reasonably
acceptable to the Company, to sell certain of the shares of Common Stock
purchased upon exercise of the Stock Option or to pledge such shares as
collateral for a loan and promptly deliver to the Company the amount of sale or
loan proceeds necessary to pay such purchase price, and/or (d) in any other
form of valid consideration that is acceptable to the Committee in its sole
discretion.
Upon payment of all amounts due from the Participant, the Company
shall cause certificates for the Common Stock then being purchased to be
delivered as directed by the Participant (or the person exercising the
Participant's Stock Option in the event of his death) at its principal business
office promptly after the Exercise Date; provided that if the Participant has
exercised an Incentive Stock Option, the Company may at its option retain
physical possession of the certificate evidencing the shares acquired upon
exercise until the expiration of the holding periods described in Section
422(a)(1) of the Code. The obligation of the Company to deliver shares of
Common Stock shall, however, be subject to the condition that if at any time
the Committee shall determine in its discretion that the listing, registration,
or qualification of the Stock Option or the Common Stock upon any securities
exchange or inter-dealer quotation system or under any state or federal law, or
the consent or approval of any governmental regulatory body, is necessary or
desirable as a condition of, or in connection with, the Stock Option or the
issuance or purchase of shares of Common Stock thereunder, the Stock Option may
not be exercised in whole or in part unless such listing, registration,
qualification, consent, or approval shall have been effected or obtained free
of any conditions not acceptable to the Committee.
If the Participant fails to pay for any of the Common Stock specified
in such notice or fails to accept delivery thereof, the Participant's right to
purchase such Common Stock may be terminated by the Company.
(b) SARS. Subject to the conditions of this Section 10.1(b) and
such administrative regulations as the Committee may from time to time adopt,
an SAR may be exercised by the delivery (including by FAX) of written notice to
the Committee setting forth the number of shares of Common Stock with respect
to which the SAR is to be exercised and the date of exercise thereof (the
"EXERCISE DATE") which shall be at least three (3) days after giving such
notice unless an earlier time shall have been mutually agreed upon. On the
Exercise Date, the Participant shall receive from the Company in exchange
therefor cash in an amount equal to the excess (if any) of the Fair Market
Value (as of the date of the exercise of the SAR) per share of Common Stock
over the SAR Price per share specified in such SAR, multiplied by the total
number of shares of Common Stock of the SAR being surrendered. In the
discretion of the Committee, the Company may satisfy its obligation upon
exercise of an SAR by the distribution of that number of shares of Common Stock
having an aggregate Fair Market Value (as of the date of the exercise of the
SAR) equal to the amount of cash otherwise payable to the Participant, with a
cash settlement to be made for any fractional share interests, or the Company
may settle such obligation in part with shares of Common Stock and in part with
cash.
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10.2 DISQUALIFYING DISPOSITION OF ISO. If shares of Common Stock
acquired upon exercise of an Incentive Stock Option are disposed of by a
Participant prior to the expiration of either two (2) years from the Date of
Grant of such Stock Option or one (1) year from the transfer of shares of
Common Stock to the Participant pursuant to the exercise of such Stock Option,
or in any other disqualifying disposition within the meaning of Section 422 of
the Code, such Participant shall notify the Company in writing of the date and
terms of such disposition. A disqualifying disposition by a Participant shall
not affect the status of any other Stock Option granted under the Plan as an
Incentive Stock Option within the meaning of Section 422 of the Code.
ARTICLE 11
AMENDMENT OR DISCONTINUANCE
Subject to the limitations set forth in this ARTICLE 11, the Board may
at any time and from time to time, without the consent of the Participants,
alter, amend, revise, suspend, or discontinue the Plan in whole or in part;
provided, however, that no amendment which requires stockholder approval in
order for the Plan and Incentives awarded under the Plan to continue to comply
with Section 162(m) of the Code, including any successors to such Section,
shall be effective unless such amendment shall be approved by the requisite
vote of the stockholders of the Company entitled to vote thereon. Any such
amendment shall, to the extent deemed necessary or advisable by the committee,
be applicable to any outstanding Incentives theretofore granted under the Plan,
notwithstanding any contrary provisions contained in any stock option
agreement. In the event of any such amendment to the Plan, the holder of any
Incentive outstanding under the Plan shall, upon request of the Committee and
as a condition to the exercisability thereof, execute a conforming amendment in
the form prescribed by the Committee to any Award Agreement relating thereto.
Notwithstanding anything contained in this Plan to the contrary, unless
required by law, no action contemplated or permitted by this ARTICLE 11 shall
adversely affect any rights of Participants or obligations of the Company to
Participants with respect to any Incentive theretofore granted under the Plan
without the consent of the affected Participant.
ARTICLE 12
TERM
The Plan shall be effective from the date that this Plan is approved
by the Board. Unless sooner terminated by action of the Board, the Plan will
terminate on July 1, 2007, but Incentives granted before that date will
continue to be effective in accordance with their terms and conditions.
ARTICLE 13
CAPITAL ADJUSTMENTS
If at any time while the Plan is in effect, or Incentives are
outstanding, there shall be any increase or decrease in the number of issued
and outstanding shares of Common Stock resulting from (1) the declaration or
payment of a stock dividend, (2) any recapitalization resulting in a stock
split-up, combination, or exchange of shares of Common Stock, or (3) other
increase or decrease in such shares of Common Stock effected without receipt of
consideration by the Company, then and in such event:
(i) An appropriate adjustment shall be made in the
maximum number of shares of Common Stock then subject to being awarded
under the Plan and in the maximum number of shares of Common Stock
that may be awarded to a Participant to the end that the same
proportion
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of the Company's issued and outstanding shares of Common Stock shall
continue to be subject to being so awarded.
(ii) Appropriate adjustments shall be made in the number
of shares of Common Stock and the Option Price thereof then subject to
purchase pursuant to each such Stock Option previously granted and
unexercised, to the end that the same proportion of the Company's
issued and outstanding shares of Common Stock in each such instance
shall remain subject to purchase at the same aggregate Option Price.
(iii) Appropriate adjustments shall be made in the number
of SARs and the SAR Price thereof then subject to exercise pursuant to
each such SAR previously granted and unexercised, to the end that the
same proportion of the Company's issued and outstanding shares of
Common Stock in each instance shall remain subject to exercise at the
same aggregate SAR Price.
Except as otherwise expressly provided herein, the issuance by the
Company of shares of its capital stock of any class, or securities convertible
into shares of capital stock of any class, either in connection with direct
sale or upon the exercise of rights or warrants to subscribe therefor, or upon
conversion of shares or obligations of the Company convertible into such shares
or other securities, shall not affect, and no adjustment by reason thereof
shall be made with respect to (i) the number of or Option Price of shares of
Common Stock then subject to outstanding Stock Options granted under the Plan,
or (ii) the number of or SAR Price or SARs then subject to outstanding SARs
granted under the Plan.
Upon the occurrence of each event requiring an adjustment with respect
to any Incentive, the Company shall mail to each affected Participant its
computation of such adjustment which shall be conclusive and shall be binding
upon each such Participant.
ARTICLE 14
RECAPITALIZATION, MERGER AND
CONSOLIDATION; CHANGE IN CONTROL
(a) The existence of this Plan and Incentives granted
hereunder shall not affect in any way the right or power of the
Company or its stockholders to make or authorize any or all
adjustments, recapitalizations, reorganizations, or other changes in
the Company's capital structure and its business, or any merger or
consolidation of the Company, or any issue of bonds, debentures,
preferred or preference stocks ranking prior to or otherwise affecting
the Common Stock or the rights thereof (or any rights, options, or
warrants to purchase same), or the dissolution or liquidation of the
Company, or any sale or transfer of all or any part of its assets or
business, or any other corporate act or proceeding, whether of a
similar character or otherwise.
(b) Subject to any required action by the stockholders,
if the Company shall be the surviving or resulting corporation in any
reorganization, merger, consolidation or share exchange, any Incentive
granted hereunder shall pertain to and apply to the securities or
rights (including cash, property, or assets) to which a holder of the
number of shares of Common Stock subject to the Incentive would have
been entitled. Notwithstanding the foregoing, however, all such
Incentives may be canceled by the Company as of the effective date of
any such reorganization, merger, consolidation or share exchange by
giving notice to each holder thereof or his personal representative of
its intention to do so and by permitting the purchase during the
thirty (30) day period next preceding such effective date of all of
the shares of Common Stock subject to such outstanding Incentives.
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(c) In the event of any reorganization, merger,
consolidation or share exchange pursuant to which the Company is not
the surviving or resulting corporation, there shall be substituted for
each share of Common Stock subject to the unexercised portions of such
outstanding Incentives, that number of shares of each class of stock
or other securities or that amount of cash, property, or assets of the
surviving, resulting or consolidated company which were distributed or
distributable to the stockholders of the Company in respect to each
share of Common Stock held by them, such outstanding Incentives to be
thereafter exercisable for such stock, securities, cash, or property
in accordance with their terms.
(d) In the event of a Change of Control, then,
notwithstanding any other provision in this Plan to the contrary, all
unmatured installments of Incentives outstanding shall thereupon
automatically be accelerated and exercisable in full. The
determination of the Committee that any of the foregoing conditions
has been met shall be binding and conclusive on all parties.
ARTICLE 15
LIQUIDATION OR DISSOLUTION
In case the Company shall, at any time while any Incentive under this
Plan shall be in force and remain unexpired, (i) sell all or substantially all
of its property, or (ii) dissolve, liquidate, or wind up its affairs, then each
Participant shall be thereafter entitled to receive, in lieu of each share of
Common Stock of the Company which such Participant would have been entitled to
receive under the Incentive, the same kind and amount of any securities or
assets as may be issuable, distributable, or payable upon any such sale,
dissolution, liquidation, or winding up with respect to each share of Common
Stock of the Company. If the Company shall, at any time prior to the
expiration of any Incentive, make any partial distribution of its assets, in
the nature of a partial liquidation, whether payable in cash or in kind (but
excluding the distribution of a cash dividend payable out of earned surplus and
designated as such) then in such event the Option Prices or SAR Prices then in
effect with respect to each Stock Option or SAR shall be reduced, on the
payment date of such distribution, in proportion to the percentage reduction in
the tangible book value of the shares of the Company's Common Stock (determined
in accordance with generally accepted accounting principles) resulting by
reason of such distribution.
ARTICLE 16
INCENTIVES IN SUBSTITUTION FOR
INCENTIVES GRANTED BY OTHER CORPORATIONS
Incentives may be granted under the Plan from time to time in
substitution for similar instruments held by employees of a corporation who
become or are about to become management Employees of the Company or any
Subsidiary as a result of a merger or consolidation of the employing
corporation with the Company or the acquisition by the Company of stock of the
employing corporation. The terms and conditions of the substitute Incentives
so granted may vary from the terms and conditions set forth in this Plan to
such extent as the Board at the time of grant may deem appropriate to conform,
in whole or in part, to the provisions of the Incentives in substitution for
which they are granted.
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ARTICLE 17
MISCELLANEOUS PROVISIONS
17.1 INVESTMENT INTENT. The Company may require that there be
presented to and filed with it by any Participant under the Plan, such evidence
as it may deem necessary to establish that the Incentives granted or the shares
of Common Stock to be purchased or transferred are being acquired for
investment and not with a view to their distribution.
17.2 NO RIGHT TO CONTINUED EMPLOYMENT. Neither the Plan nor any
Incentive granted under the Plan shall confer upon any Participant any right
with respect to continuance of employment by the Company or any Subsidiary.
17.3 INDEMNIFICATION OF BOARD AND COMMITTEE. No member of the
Board or the Committee, nor any officer or Employee of the Company acting on
behalf of the Board or the Committee, shall be personally liable for any
action, determination, or interpretation taken or made in good faith with
respect to the Plan, and all members of the Board or the Committee and each and
any officer or employee of the Company acting on their behalf shall, to the
extent permitted by law, be fully indemnified and protected by the Company in
respect of any such action, determination, or interpretation.
17.4 EFFECT OF THE PLAN. Neither the adoption of this Plan nor any
action of the Board or the Committee shall be deemed to give any person any
right to be granted an Award or any other rights except as may be evidenced by
an Award Agreement, or any amendment thereto, duly authorized by the Committee
and executed on behalf of the Company, and then only to the extent and upon the
terms and conditions expressly set forth therein.
17.5 COMPLIANCE WITH OTHER LAWS AND REGULATIONS. Notwithstanding
anything contained herein to the contrary, the Company shall not be required to
sell or issue shares of Common Stock under any Incentive if the issuance
thereof would constitute a violation by the Participant or the Company of any
provisions of any law or regulation of any governmental authority or any
national securities exchange or inter-dealer quotation system or other forum in
which shares of Common Stock are quoted or traded (including without limitation
Section 16 of the 1934 Act and Section 162(m) of the Code); and, as a condition
of any sale or issuance of shares of Common Stock under an Incentive, the
Committee may require such agreements or undertakings, if any, as the Committee
may deem necessary or advisable to assure compliance with any such law or
regulation. The Plan, the grant and exercise of Incentives hereunder, and the
obligation of the Company to sell and deliver shares of Common Stock, shall be
subject to all applicable federal and state laws, rules and regulations and to
such approvals by any government or regulatory agency as may be required.
17.6 TAX REQUIREMENTS. The Company shall have the right to deduct
from all amounts hereunder paid in cash or other form, any Federal, state, or
local taxes required by law to be withheld with respect to such payments. The
Participant receiving shares of Common Stock issued under the Plan shall be
required to pay the Company the amount of any taxes which the Company is
required to withhold with respect to such shares of Common Stock.
Notwithstanding the foregoing, in the event of an assignment of a Non-qualified
Stock Option or SAR pursuant to Section 17.7, the Participant who assigns the
Non-qualified Stock Option or SAR shall remain subject to withholding taxes
upon exercise of the Non-qualified Stock Option or SAR by the transferee to the
extent required by the Code or the rules and regulations promulgated
thereunder. Such payments shall be required to be made prior to the delivery
of any certificate representing such shares of Common Stock. Such payment may
be made in cash, by check,
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<PAGE> 55
or through the delivery of shares of Common Stock owned by the Participant
(which may be effected by the actual delivery of shares of Common Stock by the
Participant or by the Company's withholding a number of shares to be issued
upon the exercise of a Stock Option, if applicable), which shares have an
aggregate Fair Market Value equal to the required minimum withholding payment,
or any combination thereof.
17.7 ASSIGNABILITY. Incentive Stock Options may not be transferred
or assigned other than by will or the laws of descent and distribution and may
be exercised during the lifetime of the Participant only by the Participant or
the Participant's legally authorized representative, and each Award Agreement
in respect of an Incentive Stock Option shall so provide. The designation by a
Participant of a beneficiary will not constitute a transfer of the Stock
Option. The Committee may waive or modify any limitation contained in the
preceding sentences of this Section 17.7 that is not required for compliance
with Section 422 of the Code. The Committee may, in its discretion, authorize
all or a portion of a Non-qualified Stock Option or SAR to be granted to a
Participant to be on terms which permit transfer by such Participant to (i) the
spouse, children or grandchildren of the Participant ("IMMEDIATE FAMILY
MEMBERS"), (ii) a trust or trusts for the exclusive benefit of such Immediate
Family Members, or (iii) a partnership in which such Immediate Family Members
are the only partners, (iv) an entity exempt from federal income tax pursuant
to Section 501(c)(3) of the Code or any successor provision, or (v) a split
interest trust or pooled income fund described in Section 2522(c)(2) of the
Code or any successor provision, provided that (x) there shall be no
consideration for any such transfer, (y) the Award Agreement pursuant to which
such Non-qualified Stock Option or SAR is granted must be approved by the
Committee and must expressly provided for transferability in a manner
consistent with this Section, and (z) subsequent transfers of transferred
Non-qualified Stock Options or SARs shall be prohibited except those by will or
the laws of descent and distribution or pursuant to a qualified domestic
relations order as defined in the Code or Title I of the Employee Retirement
Income Security Act of 1974, as amended. Following transfer, any such
Non-qualified Stock Option and SAR shall continue to be subject to the same
terms and conditions as were applicable immediately prior to transfer, provided
that for purposes of ARTICLES 10, 11, 13, 15 and 17 hereof the term
"PARTICIPANT" shall be deemed to include the transferee. The events of
Termination of Service shall continue to be applied with respect to the
original Participant, following which the Non-qualified Stock Options and SARs
shall be exercisable by the transferee only to the extent and for the periods
specified in the Award Agreement. The Committee and the Company shall have no
obligation to inform any transferee of a Non-qualified Stock Option or SAR of
any expiration, termination, lapse or acceleration of such Option. The Company
shall have no obligation to register with any federal or state securities
commission or agency any Common Stock issuable or issued under a Non-qualified
Stock Option or SAR that has been transferred by a Participant under this
Section 17.7.
17.8 USE OF PROCEEDS. Proceeds from the sale of shares of Common
Stock pursuant to Incentives granted under this Plan shall constitute general
funds of the Company.
A copy of this Plan shall be kept on file in the office of the Company
in Dallas, Texas or any successor location of the Company's principal executive
offices.
* * * * * * * * * * * * * * *
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IN WITNESS WHEREOF, the Company has caused this instrument to be
executed by its duly authorized representative pursuant to prior action taken
by the Board.
QUEEN SAND RESOURCES, INC.
By:
-----------------------------------
Name:
------------------------------
Title:
-----------------------------
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APPENDIX B
PROXY
QUEEN SAND RESOURCES, INC.
3500 Oak Lawn, Suite 380
Dallas, Texas 75219-4398
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned hereby appoints Edward J. Munden and Bruce I. Benn as Proxies,
each with the power to appoint his or her substitute, and hereby authorizes
them to represent and to vote, as designated below, all the shares of Common
Stock and Series A Participating Convertible Preferred Stock of Queen Sand
Resources, Inc. held of record by the undersigned on October 17, 1997 at the
annual meeting of stockholders to be held at The Petroleum Club, 2200 Ross
Avenue, 39th Floor, Dallas, Texas 75201, on November 20, 1997 at 3:30 p.m.,
Dallas time, or any adjournment or postponement thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR PROPOSALS 1 THROUGH 3.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR EACH OF THE
PROPOSALS. PLEASE REVIEW CAREFULLY THE PROXY STATEMENT DELIVERED WITH THIS
PROXY.
1. Proposal to elect EDWARD J. MUNDEN, BRUCE I. BENN, ROBERT P. LINDSAY,
TED COLLINS, JR. AND ELI REBICH as directors until the next Annual
Meeting or until their successors have been duly qualified and
elected.
[ ] FOR all nominees listed above [ ] WITHHOLD AUTHORITY
(except as marked to the contrary below) to vote for all nominees
listed above
----------------------------------------------------------------------
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE
WRITE THAT NOMINEE'S NAME IN THE SPACE PROVIDED ABOVE)
2. Proposal to approve the Queen Sand Resources, Inc. 1997 Incentive
Equity Plan.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. Proposal to approve the appointment of Ernst & Young LLP as the
independent auditors of the Company to audit the accounts of the
Company for the fiscal year ending June 30, 1998.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
<PAGE> 58
The Proxies are authorized to vote, in their discretion, upon such other
business as may properly come before the meeting.
---------------------------------------
Signature
Dated: , 1997
------------ --- --------------------------------------
Signature, if held jointly
Please sign exactly as name appears below. When shares are held by joint
tenants, both should sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such. If a corporation, please
sign in full corporate name by the President or other authorized officer. If a
partnership, please sign in partnership name by an authorized person.
2
