<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
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 ss. 240.14a-11(c) or ss. 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)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
---------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
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4) Proposed maximum aggregate value of transaction:
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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:
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4) Date Filed:
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<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 12, 1998, at 1:00 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 or ratify (i) the issuance of certain shares
of the Company's common stock pursuant to the Amended and Restated Securities
Purchase Agreement dated as of July 8, 1998 among the Company and the buyers
signatory thereto, (ii) the Queen Sand Resources, Inc. Directors' Nonqualified
Stock Option Plan and (iii) the appointment of Ernst & Young LLP as the
Company's independent auditors for the fiscal year ending June 30, 1999. The
Board of Directors has unanimously approved each of the proposals set forth
above and urges you to vote in favor of each of the proposals. 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, 1998. 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, Chief
Executive Officer and Director
October 23, 1998
<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 12, 1998
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 Thursday, November 12, 1998 at
1:00 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 ratify the
issuance of certain shares of the Company's common stock pursuant to
the terms of that certain Amended and Restated Securities Purchase
Agreement dated as of July 8, 1998 among the Company and the buyers
signatory thereto;
(3) To consider and act upon a proposal to approve the
Queen Sand Resources, Inc. Directors' Nonqualified Stock Option Plan;
(4) 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, 1999; and
(5) 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 21, 1998 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 21, 1998 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, 39,933,660 shares of voting capital
stock, comprised of 30,333,660 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 23, 1998 /s/ EDWARD J. MUNDEN
------------------------------------
EDWARD J. MUNDEN
Chairman of the Board, President, Chief
Executive Officer and Director
<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 12, 1998
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 Thursday, November 12, 1998 at 1:00 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 ratify the
issuance of certain shares of the Company's Common Stock pursuant to
the terms of that certain Amended and Restated Securities Purchase
Agreement dated as of July 8, 1998 among the Company and the buyers
signatory thereto (the "Purchase Agreement");
(3) considering and acting upon a proposal to approve the
Queen Sand Resources, Inc. Directors' Nonqualified Stock Option Plan;
(4) 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, 1999; and
(5) 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 23, 1998.
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 ratification of the issuance of Common Stock
pursuant to the Purchase Agreement, for the approval of the Directors'
Nonqualified Stock Option Plan, and to approve the appointment of Ernst & Young
LLP as independent auditors, all as recommended by the Board of Directors.
<PAGE> 5
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.
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 proxy given pursuant to this solicitation may be revoked at any time
before it is voted. Proxies may be revoked (i) by filing with the Company (at
the address indicated above) at or before the Annual Meeting a written notice of
revocation bearing a later date than the proxy, (ii) by duly executing a
subsequent proxy bearing a later date than the proxy relating to the same shares
of Voting Stock or (iii) by attending the Annual Meeting and voting in person
(although attendance at the meeting will not in itself constitute such
revocation).
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.
Representatives of the Company's principal accountants Ernst & Young
LLP are expected to be present at the Annual Meeting and are expected to be
available to respond to appropriate questions from stockholders.
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. As of August 31, 1998, the Company's
directors and executive officers, and their affiliates, had a beneficial
interest in an aggregate of 8,158,286 shares of Common Stock, representing
approximately 20.4% of the Voting Stock outstanding at the close of business on
October 21, 1998 (the "Record Date") and entitled to vote on all proposals to be
presented at the Annual Meeting.
On the Record Date, there were outstanding 39,933,660 shares of Voting
Stock, comprised of 30,333,660 shares of Common Stock and 9,600,000 shares of
Series A Preferred Stock. Only holders of record of Voting Stock (the
"Stockholders") 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 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
2
<PAGE> 6
voting rights with respect to the election of directors. See "Certain
Relationships and Related Transactions -- JEDI Transaction -- Description of
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.
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.
For purposes of the quorum and the discussion below regarding the votes
necessary to take stockholder action, Stockholders of record who are present at
the meeting in person or by proxy and who abstain, including brokers holding
customers' shares of record who cause abstentions to be recorded at the meeting,
are considered Stockholders who are present and entitled to vote and they count
toward the quorum.
Brokers holding shares of record for customers generally are not
entitled to vote on certain matters unless they receive voting instructions from
their customers. As used herein, "uninstructed shares" means shares held by a
broker who has not received instructions from its customers on such matters and
the broker has so notified the Company on a proxy form in accordance with
industry practice or has otherwise advised the Company that it lacks voting
authority. As used herein, "broker non-votes" means the votes that could have
been cast on the matter in question by brokers with respect to uninstructed
shares if the brokers had received their customers' instructions.
Election of Directors. Directors are elected by a plurality vote and
the five nominees who receive the most votes will be elected. In the election of
Directors, votes may be cast in favor of or withheld with respect to each
nominee. Abstentions and broker non-votes will not be taken into account in
determining the outcome of the election.
Ratification of Share Issuance. To be adopted, the ratification of the
issuance of shares under the Purchase Agreement must receive the affirmative
vote of the majority of the shares present in person or by proxy at the Annual
Meeting and entitled to vote. Uninstructed shares are not entitled to vote on
this matter, and therefore broker non-votes do not affect the outcome.
Abstentions have the effect of negative votes.
Approval of the Directors' Nonqualified Stock Option Plan. To be
adopted, the approval of the Plan must receive the affirmative vote of the
majority of the shares present in person or by proxy at the Annual Meeting and
entitled to vote. Uninstructed shares are not entitled to vote on this matter,
and therefore broker non-votes do not affect the outcome. Abstentions have the
effect of negative votes.
Approval of Auditors. To be approved, this matter must receive the
affirmative vote of the majority of the shares present or by proxy at the Annual
Meeting and entitled to vote. Uninstructed shares are entitled to vote on this
matter. Therefore, abstentions and broker non-votes have the effect of negative
votes.
3
<PAGE> 7
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the number
of shares of Common Stock and Voting Stock beneficially owned as of August 31,
1998, by (1) all holders of shares of Common Stock and Voting Stock 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 executive officers of the
Company as a group.
<TABLE>
<CAPTION>
APPROXIMATE APPROXIMATE
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENTAGE OF PERCENTAGE OF
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP COMMON STOCK VOTING STOCK
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Officers and Directors:
- -----------------------
Edward J. Munden(1) 6,618,500(2)(3) 21.8% 16.6%
30 Metcalfe Street, Suite 620
Ottawa, Canada
K1P 5L4
Bruce I. Benn(1) 6,618,500(2)(3) 21.8% 16.6%
30 Metcalfe Street, Suite 620
Ottawa, Canada
K1P 5L4
Robert P. Lindsay(1) 6,632,786(2)(3)(4) 21.9% 16.7%
3500 Oak Lawn Drive
Suite 380, L.B. #31
Dallas, Texas 75219
Ronald I. Benn(1) 6,618,500(2)(3) 21.8% 16.6%
30 Metcalfe Street, Suite 620
Ottawa, Canada
K1P 5L4
Eli Rebich(1) 472,500(2) 1.6% 1.2%
318 West Rusk
Tyler, Texas 75701
Ted Collins, Jr.(1)(5) 1,002,500(2) 3.3% 2.5%
303 West Wall, Suite 1200
Midland, Texas 79701-5076
All executive officers and directors 8,158,286(2)(3) 26.8% 20.4%
as a group (7 persons)
Five Percent Stockholders
- -------------------------
Joint Energy Development Investments 14,009,599(6) 33.6% 33.6%
Limited Partnership
1400 Smith St.
Houston, Texas 77002-7361
EIBOC Investments Ltd. 6,600,000(3) 21.8% 16.5%
Charlton House
White Park Road
Bridgetown, Barbados W.I.
</TABLE>
4
<PAGE> 8
- --------------------------
(1) Executive Officer and/or Director.
(2) Includes options exercisable within 60 days. In addition, the options
granted to Mr. Collins and Mr. Rebich are subject to Stockholder approval
of the Plan as described herein.
(3) 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 executive officers and Directors as a group.
(4) Mr. Lindsay acquired 14,286 shares of Common Stock in the name of his
children and disclaims any beneficial interest in these shares.
(5) These shares are owned of record by Collins and Ware, Inc. Mr. Collins is
the President and a controlling shareholder of Collins and Ware, Inc. but
disclaims beneficial ownership of such shares.
(6) Includes 9,600,000 shares of Common Stock issuable upon conversion of the
9,600,000 shares of Series A Preferred Stock, 2,634,952 shares of Common
Stock and 1,774,648 shares of Common Stock issuable upon exercise of
certain warrants. 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. Upon the occurrence of certain
Events of Default (as defined in the Company's Restated Certificate of
Incorporation), JEDI, the holder of the Series A Preferred Stock, has the
right to require the Company to repurchase the Series A Preferred Stock.
Upon the occurrence of certain Events of Default (as defined in the
Company's Restated Certificate of Incorporation, the holder of the Series A
Preferred Stock has (i) the right to require the Company to repurchase the
Series A Preferred Stock and (ii) 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. See "Certain
Relationships and Related Transactions -- JEDI Transaction -- Description of
Series A Preferred Stock -- Events of Default."
5
<PAGE> 9
PROPOSAL ONE
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. 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, 47, 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, 56, joined the Company in 1994 and became Executive
Vice President in September 1995 and Chief Operating Officer in May 1996. From
1973 until 1995 Mr. Lindsay was Chief Executive Officer of Lin-mour Drilling
Company. Mr. Lindsay joined Helmrich & Payne, an oil and natural gas drilling
and exploration company headquartered in Tulsa, Oklahoma, in 1965 and held
increasingly senior positions with that company until 1973. Mr. Lindsay holds a
Bachelor of Arts degree in Accounting (1965) from the University of Texas.
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<PAGE> 10
Bruce I. Benn, 44, 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. From 1985 to 1993, he was Vice President and
Director of Corporation House Ltd., where he acted as an investment banker and a
financial advisor to resource development, manufacturing and construction 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., 60, 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 natural 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 with Pan American Petroleum Corp. (now Amoco Production Co.). From
1986 to 1988, Mr. Collins was President of Enron Oil & Gas Company and from 1985
to 1986 he was President of HNG/InterNorth Exploration Company. From 1982 to
1985, Mr. Collins served as President of HNG Oil Company, and from 1969 to 1982
he was Executive Vice President and Director of American Quasar Petroleum Co.
From 1963 to 1969, Mr. Collins served as an independent oil operator, and from
1960 to 1963, he was a petroleum engineer. Mr. Collins holds a Bachelor of
Science in Geological Engineering (1960) from the University of Oklahoma. Mr.
Collins is also a director of Hanover Compression Company.
Eli Rebich, 47, 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.
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, 1998, the entire Board of
Directors met 4 times and acted 16 times by written consent. No Director
attended fewer than 75% of the meetings of the Board of Directors or of the
committees of the Board of Directors on which they served. The Board of
Directors has established three standing committees to assist it in the
discharge of its responsibilities.
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, 1998, the Audit
Committee acted 1 time by written consent.
7
<PAGE> 11
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, 1998, the
Compensation Committee acted 2 times by written consent.
SECURITIES TRADING POLICY COMMITTEE
Pursuant to the Company's Bylaws, effective November 20, 1997 the Board
of Directors has established a standing Securities Trading Policy Committee. The
Securities Trading Policy Committee oversees the implementation of the Company's
Securities Trading Policy which is designed to provide employees and directors
with an understanding of the limitations placed on them by regulatory bodies.
The Securities Trading Policy Committee consists of Bruce I. Benn and Edward J.
Munden. For the fiscal year ended June 30, 1998, there were no meetings of the
Securities Trading Policy Committee.
8
<PAGE> 12
OFFICERS
The following table sets forth the officers of the Company.
<TABLE>
<CAPTION>
NAME AGE CURRENT POSITION
---- --- ----------------
<S> <C> <C>
Edward J. Munden............... 47 Chairman of the Board, Chief Executive Officer,
President
Bruce I. Benn.................. 44 Executive Vice President
Robert P. Lindsay.............. 56 Chief Operating Officer, Executive Vice President
Ronald I. Benn................. 43 Chief Financial Officer
V. Ed Butler................... 42 Vice President, Asset Management
Steven M. Emshoff.............. 46 Vice President, Business Development
Kenoth H. Flournoy............. 50 Vice President, Operations
Ronald Idom.................... 44 Vice President, Acquisitions
William W. Lesikar............. 45 Vice President, Finance
William A. Williamson.......... 42 Vice President, Land
</TABLE>
The following is a brief description of the business backgrounds of
each of the 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 "Directors and Nominees for Election to the Board of 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 co-founder of
CHC. From 1994 to 1996, Mr. Benn was a director of CHIL. From 1980 to 1985, Mr.
Benn, a Chartered Accountant, held positions in the auditing division, in
management consulting as a turnaround specialist, and the insolvency division of
the accounting firm of Clarkson Gordon Chartered Accountants (now known as Ernst
& Young Chartered Accountants). From 1985 to 1986 he also had experience in the
commercial banking industry and as senior financial officer to certain 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.
V. Ed Butler joined the Company in June 1996 as Vice President,
Operations. He has 20 years of experience in oil field engineering and
operations. From 1993 to 1995, he was Executive Vice President for Echo
Production, Inc. From 1982 to 1993 he held the position of Operations Manager
for Triad Energy Corporation. He has also been a staff engineer for Blocker
Exploration Company from 1980 to 1982 and an area production engineer for Texas
Oil and Gas Corporation from 1978 to 1980. 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.
9
<PAGE> 13
Steven M. Emshoff joined the Company in July 1998 as Vice President,
Business Development. He has over 25 years of experience in banking and
investment banking, with 17 years in the oil and gas industry. From 1994 to
1998, Mr. Emshoff was a Director of Enron Finance Corporation providing and
structuring financial products and services to independent oil and natural gas
producers in the Southwest United States. From 1993 to 1994 he was a Senior Vice
President and Corporate Lending Officer for Charter Bancshares, Inc.
supervising, negotiating and structuring energy loans. From 1982 to 1993 he was
Vice President and Regional Manager of Texas Commerce Bancshares and its
subsidiary, also providing energy loans. From 1973 to 1982, Mr. Emshoff was a
National Bank Examiner with the U.S. Treasury. Mr. Emshoff holds a Bachelor of
Commerce (1973) and a Bachelor of Science (1973) from Rice University.
Kenoth H. Flournoy joined the Company in January 1998 and became Vice
President, Operations in July 1998. Mr. Flournoy has over 28 years of experience
in the oil and gas industry. From 1997 to 1998, Mr. Flournoy provided
engineering consulting services to the oil and gas industry. From 1983 to 1997
he was Vice President of Production for Maguire Oil Company and Maguire Energy
Company where he was responsible for the property management, drilling,
production and engineering for overall operations and joint venture operations.
He was also Vice President of Production and Production Manager for Evergreen
Oil Corporation from 1980 to 1983, assistant to the Vice President of Operations
for Canus Petroleum, Inc. from 1979 to 1980, District Engineer for Champlin
Petroleum Co. from 1977 to 1979 and held various engineering positions with
Texaco, Inc. from 1970 to 1977. Mr. Flournoy holds a Bachelor of Science in
Chemistry and Business (1970) from Texas A&M University at Commerce, Texas.
Ronald Idom joined the Company in January 1998 as Vice President,
Acquisitions. He has over 22 years of experience in reservoir engineering and
management. From 1991 to 1997, he was Manager Gas Supply for Delhi Gas Pipeline
Corporation and Manager Engineering/Project Development from 1988 to 1991. From
1985 to 1988 he held the position of Chief Reservoir Engineer for TXO Production
Corp. (both Delhi Gas Pipeline and TXO Production Corp. were subsidiaries of
USX/Texas Oil & Gas Corporation). He also served as acquisition engineer for NRM
Petroleum from 1983 to 1985; a self-employed petroleum consultant from 1980 to
1983 and held various engineering positions with Texas Oil and Gas Corporation
from 1976 to 1980. Mr. Idom graduated from Texas A&M University in 1976 with a
Bachelor of Science in Petroleum Engineering.
William W. Lesikar joined the Company in June 1998 as Vice President,
Finance. Mr. Lesikar, a Certified Public Accountant, has 22 years of experience
in finance and accounting with nearly 17 years in the oil and gas industry. From
1981 to 1998, Mr. Lesikar held increasing positions of authority with Lyco
Energy Corporation of Dallas, Texas including Controller from 1981 to 1983, and
Chief Financial Officer and Executive Vice President from 1988 to 1998. From
1978 to 1981, Mr. Lesikar was an audit manager and senior auditor with Arthur
Young & Company (now known as Ernst & Young LLP). From 1976 to 1978, Mr. Lesikar
was an auditor with Haskins & Sells (now known as Deloitte & Touche LLP). Mr.
Lesikar holds a Masters of Business Administration (1988) from Southern
Methodist University and a Bachelor of Business Administration (1975) from
University of Texas at Austin.
William A. Williamson joined the Company in March 1998 as Vice
President, Land. He has over 17 years of experience in petroleum land
management. From 1989 to 1998, he served as President of BAW Energy, Inc. BAW
Energy, Inc. was formed primarily to provide oil and gas asset management from a
land and legal perspective to independent oil and gas companies. Clients of BAW
Energy, Inc. included INCO Oil Corporation, Janex Oil Co., Inc., Walter
Exploration, Inc. and the Company. From 1979 to 1989, he was self-employed as an
independent Petroleum Landman. Mr. Williamson holds a Bachelor of Business
Administration in Finance (1978) from Texas A&M University.
10
<PAGE> 14
EXECUTIVE COMPENSATION
COMPENSATION OF OFFICERS
The following table sets forth a summary of the compensation of the
Chief Executive Officer and the four other most highly compensated officers of
the Company for the fiscal years ended June 30, 1998, 1997 and 1996. No
compensation information is given for any person for any fiscal year in which
that person was not an officer of the Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------- -------------------
FISCAL YEAR OTHER NUMBER OF
ENDED ANNUAL SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION JUNE 30, SALARY BONUS COMP. UNDERLYING OPTIONS COMPENSATION
- ------------------------------- ----------- --------------- ---------- ---------- ------------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Edward J. Munden 1998 $ 130,000 $ 100,000 -0- 37,000 -0-
Chief Executive Officer, 1997 88,200 30,000 -0- -0- -0-
President and Chairman 1996(1) 65,000 -0- -0- -0- -0-
of the Board
Robert P. Lindsay 1998 132,000 $ 98,000 -0- 37,000 -0-
Chief Operating Officer and 1997 120,000 30,500 -0- -0- -0-
Executive Vice President 1996(1) 108,000 -0- -0- -0- -0-
Bruce I. Benn 1998 130,000 $ 100,000 -0- 37,000 -0-
Executive Vice President 1997 88,200 30,000 -0- -0- -0-
and Secretary 1996(1) 65,000 -0- -0- -0- -0-
Ronald I. Benn 1998 130,000 $ 100,000 -0- 37,000 -0-
Chief Financial Officer 1997 88,200 30,000 -0- -0- -0-
1996(1) 65,000 -0- -0- -0- -0-
V. Ed Butler 1998 112,000 $ 40,500 -0- 22,000 -0-
Vice President 1997 100,000 25,500 -0- -0- -0-
1996 -0- -0- -0- -0- -0-
</TABLE>
- --------------------
(1) Became an officer of the Company effective March 6, 1996.
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 each of the Chief Executive Officer and
the other named officers for such period in all capacities in which he served.
Total cash compensation paid to all five officers as a group during the fiscal
year ended June 30, 1998 was $1,069,500.
Prior to May 1996, Messrs. Munden, Benn and Benn were paid by CHC
pursuant to a Management Services Agreement dated July 1, 1996 between the
Company and CHC (the "Management Agreement"). Effective May 6, 1997, the
Management Agreement was terminated, and since then the Company has paid
compensation to Messrs. Munden, Benn and Benn for their services as employees of
the Company.
11
<PAGE> 15
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/ SARS
UNDERLYING GRANTED TO
OPTIONS/ SARS EMPLOYEES IN EXERCISE OR BASE
NAME GRANTED (#) FISCAL YEAR PRICE ($/SH) EXPIRATION DATE
- --------------------------------------------- ------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Edward J. Munden 37,000(1) 21.4% $5.25 11/20/2007
Chief Executive Officer, President and
Chairman of the Board
Robert P. Lindsay 37,000(1) 21.4% $5.25 11/20/2007
Chief Operating Officer and
Executive Vice President
Bruce I. Benn 37,000(1) 21.4% $5.25 11/20/2007
Executive Vice President and Secretary
Ronald I. Benn 37,000(1) 21.4% $5.25 11/20/2007
Chief Financial Officer
V. Ed Butler 22,000(1) 12.7% $5.25 11/20/2007
Vice President
</TABLE>
- -------------------
(1) Options vest as follows: (i) 50% vest on the first anniversary of the
grant; (ii) 25% vest on the second anniversary of the grant date and (iii)
25% vest on the third anniversary of the grant date.
COMPENSATION OF DIRECTORS
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 is soliciting Stockholder approval
of the adoption of the Directors' Nonqualified Stock Option Plan for its
nonemployee Directors.
EMPLOYMENT AGREEMENTS
Edward J. Munden. In December 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, for the year ending June 30, 1999, Mr. Munden will receive a
base salary of $160,000 per annum. He also received a bonus of $100,000 for the
fiscal year ended June 30, 1998, which was based on the Company's performance.
The Munden Agreement includes non-competition and confidentiality provisions.
The Munden Agreement terminates on June 30, 2002.
Bruce I. Benn. In December 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, for the year ending June 30, 1999, Mr. Benn will receive a base
salary of $160,000 per annum. He also received a bonus of $100,000 for the
fiscal year ended June 30, 1998, which was based on the Company's performance.
The Bruce Benn Agreement
12
<PAGE> 16
includes non-competition and confidentiality provisions. The Bruce Benn
Agreement terminates on June 30, 2002.
Ronald I. Benn. In December 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, for the fiscal year ending June 30, 1999, Mr. Benn will receive a
base salary of $160,000 per annum. He also received a bonus of $100,000 for the
fiscal year ended June 30, 1998, which was based on the Company's performance.
The Ronald Benn Agreement includes non-competition and confidentiality
provisions. The Ronald Benn Agreement terminates on June 30, 2002.
Robert P. Lindsay. In December 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, for the fiscal year ending June 30, 1999, Mr. Lindsay will receive a
base salary of $160,000 per annum. He also received a bonus of $98,000 for the
fiscal year ended June 30, 1998, which was based on the Company's performance.
The Lindsay Agreement includes non-competition and confidentiality provisions.
The Lindsay Agreement terminates on June 30, 2002.
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, 1998, all of the Company's executive 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") other than reports required to be filed by each of Edward J. Munden, Bruce
I. Benn, Ronald I. Benn and Robert P. Lindsay reporting the grants of options to
purchase Common Stock and other than JEDI's report on Form 4 for the month of
June 1998 which was filed August 10, 1998.
13
<PAGE> 17
PROPOSAL TWO
PROPOSAL TO RATIFY ISSUANCE OF COMMON STOCK
GENERAL
The Company raised $25 million of equity on July 8, 1998 and an
additional $7.5 million on July 20, 1998 (collectively, the "Private Equity
Placement") through various issuances of Common Stock. Pursuant to the Amended
and Restated Securities Purchase Agreement, dated as of July 8, 1998, among the
Company and the buyers signatory thereto (the "Buyers") (the "Purchase
Agreement"), the Company issued (i) 2,357,144 shares of the Company's Common
Stock on July 8, 1998 and issued an additional 1,071,430 shares of the Company's
Common Stock on July 20, 1998 to the Buyers (the "Common Shares"), (ii) certain
repricing rights (the "Repricing Rights") to acquire additional shares of Common
Stock (the "Repricing Common Shares") and (iii) warrants (the "Buyer Warrants")
to purchase an aggregate of up to 605,000 shares of Common Stock (the "Warrant
Common Shares"). The aggregate gross consideration for the issuances was $24
million. The Company also agreed to register for resale the Common Shares,
Repricing Common Shares and Warrant Common Shares pursuant to the terms of a
registration rights agreement (the "Registration Rights Agreement"). Initially
capitalized terms used but not defined in this section "Proposal Two -- Proposal
to Ratify Issuance of Common Stock" have the meanings ascribed to such terms in
the Purchase Agreement filed as an exhibit to the Company's Current Report on
Form 8-K dated July 8, 1998, as amended.
The issuance of Common Shares, Repricing Common Shares and Warrant
Common Shares pursuant to the Purchase Agreement is being submitted for
ratification by the Stockholders at the Annual Meeting because the rules of the
Nasdaq SmallCap Market, upon which market the Company's outstanding Common Stock
is qualified for trading, require stockholder approval or ratification of the
issuance, other than in a public offering, of common stock or securities
convertible into common stock at a price less than the greater of book or market
value if such common stock has or would have upon issuance voting power equal to
or in excess of 20% of the voting power outstanding before such issuance.
Because, as described more fully below, the total number of shares issuable
under the Purchase Agreement is not fixed and may exceed 20% of the voting power
outstanding and may be issued at a price less than the greater of book or market
value, the Company is seeking Stockholder ratification of the issuance of Common
Stock under the Purchase Agreement.
On July 8, 1998, JEDI exercised certain warrants to acquire an
aggregate of 980,935 shares of Common Stock for an aggregate exercise price of
approximately $3.3 million and exercised certain antidilution rights to purchase
693,301 shares of the Company's Common Stock for an aggregate purchase price of
$1.67 million. A second holder of warrants exercised warrants on July 8, 1998 to
acquire an aggregate of 1,400,000 shares of Common Stock. The Company received
approximately $3.5 million for the exercise of these warrants. Stockholder
approval is not being sought with respect to these issuances.
The net proceeds received by the Company from the Private Equity
Placement were used to repay indebtedness outstanding under the Company's
Amended and Restated Credit Agreement, dated as of April 17, 1998, as amended
(the "Credit Agreement"), with Bank of Montreal, as Agent, and certain lenders
thereunder and to repay indebtedness outstanding under the Variable Rate Senior
Subordinated Debt Bridge Note Purchase Agreements and the Variable Rate
Subordinated Equity Bridge Note Purchase Agreements, each dated as of April 17,
1998. Substantially all of this indebtedness (the "Bridge Indebtedness") was
incurred to fund the Company's acquisition of net revenue interests and royalty
interests in producing oil and natural gas properties from certain trusts
managed by J.P. Morgan
14
<PAGE> 18
Investments. Immediately following such repayments, the amount of indebtedness
outstanding under the Credit Agreement was $10.3 million.
The Private Equity Placement was completed in conjunction with the
Company's private placement of $125 million aggregate principal amount of 12
1/2% Senior Notes due 2008. The proceeds of both of these placements were used
to repay and refinance the Bridge Indebtedness. The issuance of Common Stock
under the Private Equity Placement did and will dilute the percentage ownership
of existing Stockholders. In addition, the Purchase Agreement affords certain
contractual put and other rights (as more fully described below) to the holders
of Common Shares, Repricing Common Shares and Warrant Common Shares that are not
afforded to holders of Common Stock as a class.
REPRICING RIGHTS
Pursuant to the Purchase Agreement, each of the Buyers (or their
permitted assignees or successors) may exercise its Repricing Rights and acquire
shares of Common Stock in accordance with the following formula (the "Repricing
Rate"):
(Repricing Price -- Market Price)
--------------------------------------------------------------
Market Price
The "Repricing Price" means, (i) during the period beginning on and
including the date which is 121 days after the Closing Date and ending on and
including the date which is 150 days after the Closing Date, 124% of the
Purchase Price, (ii) during the period beginning on and including the date which
is 151 days after the Closing Date and ending on and including the date which is
180 days after the Closing Date, 125% of the Purchase Price, (iii) during the
period beginning on and including the date which is 181 days after the Closing
Date and ending on and including the date which is 210 days after the Closing
Date, 126% of the Purchase Price, (iv) during the period beginning on and
including the date which is 211 days after the Closing Date and ending on and
including the date which is 240 days after the Closing Date, 127% of the
Purchase Price and (v) after the date which is 240 days after the Closing Date,
128% of the Purchase Price.
The "Market Price" means, as of any date of determination, the lowest
closing bid price during the fifteen consecutive trading days immediately
preceding such date of determination.
The Repricing Rate is multiplied by the number of Common Shares the
Buyer has chosen to reprice in order to determine the number of shares to be
issued to the Buyer.
If the Company fails to issue a stock certificate for the number of
shares of Common Stock to which the holder is entitled or to credit the holder's
balance account with The Depository Trust Company for such number of shares of
Common Stock to which the holder is entitled upon such holder's exercise of the
Repricing Rights within three trading days after the Company's or the transfer
agent's receipt of the exercise notice, the Company shall pay damages to such
holder on each day after the third trading day that such exercise is not
effected. The amount of damages shall equal 0.5% of the product of (i) the sum
of the number of shares of Common Stock not issued to the holder on a timely
basis and (ii) the closing bid price of the Common Stock on the last possible
date which the Company could have issued such Common Stock without violating its
delivery requirements. In addition, if the Buyer to whom the Company has failed
to timely deliver the shares is forced to purchase other outstanding shares of
Common Stock of the Company in order to cover a sale order by such Buyer (a
"Buy-In"), then the Company will be required to pay to such Buyer the positive
difference between the price at which the Buyer bought its covering shares and
the sale price in respect of the shares sold by it.
15
<PAGE> 19
The right of a holder of Repricing Rights to exercise such Repricing
Rights is limited as set forth below.
(i) Without the prior written consent of the Company, a holder
of Repricing Rights shall not be entitled to exercise an aggregate
number of Repricing Rights in excess of the number of Repricing Rights
which when divided by the number of Repricing Rights purchased by such
holder would exceed (A) 0.00 for the period beginning on July 8, 1998
and ending on and including the 120th day thereafter, (B) 0.25 for the
period beginning on the 121st day after July 8, 1998 and ending on and
including the 150th day after July 8, 1998, (C) 0.50 for the period
beginning on and including the 151st day after July 8, 1998 and ending
on and including the 180th day after July 8, 1998, (D) 0.75 for the
period beginning on the 181st day after July 8, 1998 and ending on and
including the 210th day after July 8, 1998, and (E) 1.00 for the period
beginning on and including the 211th day after July 8, 1998. This
exercise restriction shall cease to apply if a Major Transaction (as
defined below) or Triggering Event (as defined below) shall have
occurred or been publicly announced or if a registration statement
meeting the requirements of the Registration Rights Agreement shall not
have been declared effective by the 120th day after July 8, 1998.
(ii) As more fully described in the Purchase Agreement, a
holder of Repricing Rights shall not be entitled to exercise Repricing
Rights in excess of that number of Repricing Rights which, upon giving
effect to such exercise, would cause the aggregate number of shares of
Common Stock beneficially owned by the holder and its affiliates to
exceed 4.99% of the outstanding number of shares of the Common Stock
following such exercise. Such restriction is waivable by a holder upon
at least 61 days notice. In addition, as more fully described in the
Purchase Agreement, a holder of Repricing Rights shall not be entitled
to exercise Repricing Rights in excess of that number of Repricing
Rights which, upon giving effect to such exercise, would cause the
aggregate number of shares of Common Stock beneficially owned by the
holder and its affiliates to exceed 9.99% of the outstanding number of
shares of the Common Stock following such exercise. Such restriction is
waivable by a holder upon at least 61 days notice.
In addition to the exercise restrictions, a Buyer's right to exercise
its Repricing Right terminates automatically on the earlier of (i) if the
Initial Common Share with respect to which such Repricing Right was acquired is
sold prior to the date which is 121 days after the date on which such Repricing
Right was acquired, (ii) if the Initial Common Share with respect to which such
Repricing Right was acquired is sold on or after the date which is 121 days
after the Closing Date on which such Repricing Right was acquired at a price
equal to or greater than the Repricing Price in effect on the date of such sale,
(iii) on the date immediately following the date which is one year after the
date of the sale of the Initial Common Share with respect to which such
Repricing Right was acquired and (iv) if the Buyer elects to terminate the
Repricing Right in lieu of the Company repurchasing such Buyer's related Initial
Common Share.
COMPANY REPURCHASE RIGHTS
Pursuant to the Purchase Agreement, the Company may elect to repurchase
Repricing Rights exercised in lieu of issuing Repricing Common Shares upon such
exercise if the average closing bid price of the Common Stock for the five day
trading period immediately preceding the exercise date of the Repricing Rights
is not greater than $5.30. The repurchase price per Repricing Right shall be
equal to the product of (i) the Repricing Rate of the Repricing Right on the
exercise date and (ii) the last reported sale price of the Common Stock on the
exercise date.
16
<PAGE> 20
The Company may also elect to repurchase any or all of the Common
Shares issued to the Buyers and the Repricing Rights associated with such Common
Shares at any time after the Closing Date on which a Repricing Right is
acquired. The repurchase price per Repricing Right shall be an amount per Common
Share and associated Repricing Right equal to (i) 119% of the Purchase Price, if
the repurchase date is prior to the date which is 120 days after the Closing
Date and (ii) 128% of the Purchase Price, if the repurchase date is on or after
the date which is 120 days after the Closing Date.
HOLDER PUT RIGHTS
Pursuant to the Purchase Agreement, each holder of Common Shares or
Repricing Rights, has the right to require the Company to repurchase all or a
portion of such holder's Common Shares or Repricing Rights upon the occurrence
of a Major Transaction or a Triggering Event. The repurchase price is equal to
(i) for each Common Share with an associated Repricing Right, the greater of (A)
130% of the Purchase Price and (B) the sum of (i) the Purchase Price and (ii)
the product of (x) the Repricing Rate of the Repricing Right on the date of such
holder's delivery of a notice of repurchase and (y) the last reported sale price
of the Common Stock on the delivery date of a notice of repurchase, (ii) for
each Repricing Right without the associated Common Share, the product of (A) the
Repricing Rate of the Repricing Right on the date such holder's delivery of a
notice of repurchase and (B) the last reported sale price of the Common Stock on
the date of such holder's delivery of notice of repurchase and (iii) for each
Common Share without an associated Repricing Right, 130% of the Purchase Price.
A "Major Transaction" is deemed to have occurred at such time as any of
the following events:
(i) the consolidation, merger or other business combination of
the Company with or into another person (other than (A) a
consolidation, merger or other business combination in which holders of
the Company's voting power immediately prior to the transaction
continue after the transaction to hold, directly or indirectly, the
voting power of the surviving entity or entities necessary to elect a
majority of the members of the board of directors (or their equivalent
if other than a corporation) of such surviving entity or entities, or
(B) pursuant to a migratory merger effected solely for the purpose of
changing the jurisdiction of incorporation of the Company);
(ii) the sale or transfer of all or substantially all of the
Company's assets; or
(iii) a purchase, tender or exchange offer made to and
accepted by the holders of more than 40% of the outstanding shares of
Common Stock.
A "Triggering Event" is deemed to have occurred at such time as any of
the following events:
(i) a registration statement in respect of the resale of the
Common Shares, Repricing Common Shares and Warrant Common Shares (the
"Resale Registration Statement") has not been deemed effective by the
Commission on or prior to the 210th day after the Closing Date;
(ii) the effectiveness of the Resale Registration Statement
lapses for any reason or is unavailable for sale of the Registrable
Securities (as defined in the Registration Rights Agreement) in
accordance with the terms of the Registration Rights Agreement, and
such lapse or unavailability continues for a period of ten trading days
in aggregate (excluding any "blackout" periods permitted by the terms
of the Registration Rights Agreement);
(iii) the Common Stock is suspended from listing or is
delisted from The Nasdaq SmallCap Market or on any subsequent market
for a period of five consecutive days, unless such
17
<PAGE> 21
delisting is due to the Company having the Common Stock relisted on a
subsequent market within such five day period;
(iv) the Company notifies any holder of Repricing Rights,
including by way of public announcement, at any time, of its intention
not to comply or inability to comply with proper requests for exercise
of any Repricing Rights into shares of Common Stock;
(v) the Company fails to deliver shares of Common Stock
pursuant to the exercise of Repricing Rights within ten days of an
exercise date or to pay the amount due in respect of a Buy-In within
ten days after notice of such Buy-In is delivered to the Company;
(vi) the Company is not required to issue any Repricing Common
Shares pursuant to the exercise of Repricing Rights due to certain
restrictions imposed under the rules and regulations of The Nasdaq
Stock Market or the Company is otherwise unable to issue shares of
Common Stock upon delivery of an exercise notice for any reason;
(vii) if stockholder approval of the issuance of the
securities is required, the Company's stockholders fail to approve the
issuance of the shares of Common Stock upon the exercise of Repricing
Rights within 135 days of a Proxy Statement Trigger Date (as defined in
the Purchase Agreement);
(viii) the Company breaches any representation, warranty,
covenant or other material term or condition of the Purchase Agreement,
the Warrants, the Registration Rights Agreement or the irrevocable
transfer agent instructions or any other agreement, document,
certificate or other instrument delivered in connection with the
transactions contemplated thereby or hereby, and such breach, if
curable, continues for a period of at least ten days after written
notice thereof to the Company; or
(ix) a voluntary or involuntary case or proceeding is
commenced by or against the Company or a subsidiary under any
applicable federal or state bankruptcy, insolvency, reorganization or
other similar proceeding (excluding any involuntary proceeding that is
dismissed within thirty days of the filing thereof).
At any time after receipt of a notice from the Company that a Major
Transaction is to occur (or, in the event a notice is not delivered at least ten
days prior to a Major Transaction), any holder of Common Shares, Repricing
Common Shares or Repricing Rights then outstanding may require the Company to
repurchase all or a portion of the holder's Common Shares, Repricing Common
Shares or Repricing Rights. At any time after the earlier of a holder's receipt
of a notice from the Company that a Triggering Event has occurred and such
holder becoming aware of a Triggering Event, but in no event later than fifteen
business days after a holder's receipt of such notice, any holder of Common
Shares, Repricing Common Shares or Repricing Rights then outstanding may require
the Company to repurchase all or a portion of the holder's Common Shares,
Repricing Common Shares or Repricing Rights. The repurchase price upon the
occurrence of a Major Transaction or a Triggering Event is equal to (i) for each
Common Share with an associated Repricing Right, the greater of (A) 130% of the
Purchase Price and (B) the sum of (I) the Purchase Price and (II) the product of
(x) the Repricing Rate of the Repricing Right on the date of such holder's
delivery of notice of repurchase and (y) the last reported sale price of the
Common Stock on the date of such holder's delivery of a notice of repurchase,
(ii) for each Repricing Right without the associated Common Share, the product
of (x) the Repricing Rate of the Repricing Right on the date of such holder's
delivery of a notice to repurchase and (y) the last reported sale price of the
18
<PAGE> 22
Common Stock on the date of such holder's delivery of notice of repurchase and
(iii) for each Common Share without an associated Repricing Right, 130% of the
Purchase Price.
The Company shall deliver the applicable repurchase price, in the case
of a repurchase pursuant to the occurrence of a Triggering Event, to such holder
within five business days after the Company's receipt of a notice of repurchase
from the holder and, in the case of a repurchase pursuant to the occurrence of a
Major Transaction, the Company shall deliver the applicable repurchase price
immediately prior to the consummation of the Major Transaction; provided that if
Common Shares are being repurchased, the holder's stock certificates shall have
been delivered to the Company; provided further that if the Company is unable to
repurchase all of the Common Shares or the Repricing Rights to be repurchased,
the Company shall repurchase an amount from each holder on a pro rata basis.
OTHER TERMS OF THE PURCHASE AGREEMENT
The Purchase Agreement contains customary representations and
warranties of the Company for transactions of this type.
Pursuant to the Purchase Agreement, the Company has agreed, among other
things, to abide by certain limitations on the Company's ability to raise equity
(the "Capital Raising Limitation"). The Capital Raising Limitation prohibits the
Company and its subsidiaries from negotiating with any party for any equity
financing or issue any equity securities of the Company or any subsidiary or
securities convertible or exchangeable into or for equity securities of the
Company or any subsidiary during the period beginning on July 8, 1998 and ending
on and including the 365th day after the Closing Date unless it first delivers a
written notice of the future offering to each Buyer and provides each Buyer an
option to purchase up to its pro rata portion of the shares to be offered in the
future offering.
In addition, on or before November 4, 1998, the Company must provide
stockholders of the Company with a proxy statement relating to the next meeting
of stockholders of the Company, which meeting shall be not later than 60 days
after November 4, 1998, which proxy statement solicits the affirmative vote of
the stockholders for approval of the Company's issuance of all of the Securities
described in the Purchase Agreement (including the approval of issuances as may
be required by the Rules of the Nasdaq Stock Market, Inc.). The Company is
providing this Proxy Statement to Stockholders in compliance with this provision
of the Purchase Agreement. Certain holders of capital stock having voting power
aggregating over 50% of the total current outstanding voting capital stock have
executed a letter agreement agreeing to vote in favor of the issuance. If the
Company fails to hold the meeting by the deadline described above, then the
Company shall pay to each Buyer an amount in cash equal to the product of (i)
the aggregate Purchase Price paid by such Buyer multiplied by (ii) .025;
multiplied by (iii) the quotient of (x) the number of days after the deadline
that a meeting is not held, divided by (y) 30.
WARRANTS
Pursuant to the Purchase Agreement, on July 8, 1998 the Company issued
the Buyer Warrants to the Buyers and the Placement Agents (defined below). The
Buyer Warrants are exercisable for three years commencing July 8, 1998. The
Buyer Warrants are exercisable for an aggregate of up to 925,000 shares of
Common Stock at an exercise price equal to 110% of the Purchase Price. The Buyer
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 Buyer
Warrants also include customary provisions with respect to, among other things,
transfer of the Buyer Warrants, mutilated or lost warrant certificates, and
notices to holder(s) of the Buyer Warrants.
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REGISTRATION RIGHTS AGREEMENT
At the time of sale, none of the Common Shares, the Repricing Common
Shares or the Warrant Common Shares will be registered under the Securities Act
and therefore, will be, when issued, "restricted securities." Effective July 8,
1998, the Company entered into a Registration Rights Agreement with the Buyers
pursuant to which the Buyers are entitled to certain rights with respect to the
registration under the Securities Act of the Common Shares, the Repricing Common
Shares and the Warrant Common Shares (the "Registrable Securities").
Pursuant to the Registration Rights Agreement, the Company agreed to
file a registration statement on Form S-3 on or before September 5, 1998,
covering the resale of all of the Registrable Securities. The Company is
required to use its best efforts to cause such registration statement to become
effective as soon as practicable following the filing thereof; but in no event
later than the earlier of (i) November 4, 1998 and (ii) the fifth day after the
Company learns that the Commission will not review the registration statement or
that the Commission has no further comments on the registration statement. If
the registration statement does not become effective by this date, then the
Company is required to make cash payments to the holders of the Registrable
Securities equal to 2.0% of the aggregate Purchase Price paid by each holder on
the first day of each month during the default. The Company filed such a
registration statement with the Commission on August 13, 1998. On September 22,
1998, the registration statement was declared effective by the Commission. The
Registration Rights Agreement also provides for unlimited piggyback registration
rights prior to the expiration of the registration period for the Registrable
Securities. The Company generally bears the expense of any registration
statement, while selling holders generally bear selling expenses such as
underwriting fees and discounts. The Registration Rights Agreement also includes
customary indemnification provisions. In addition, under the Purchase Agreement,
the Company cannot file a registration statement (other than a registration
statement filed pursuant to the Registration Rights Agreement, a registration
statement filed pursuant to a demand registration right or a registration
statement on Form S-8) covering the sale or resale of shares of Common Stock
with the Commission beginning on July 8, 1998 and ending on the 60th trading day
after the date that the registration statement filed on behalf of the holders
has been declared effective by the Commission.
PLACEMENT AGENTS
The Company paid $1.8 million cash and issued warrants to purchase
480,000 shares of the Company's Common Stock in consideration for Jesup & Lamont
Securities Corp., Phillip Louis Trading Co., Inc. and Laidlaw & Co.
(collectively, the "Placement Agents") acting as the placement agents in
connection with the Private Equity Placement to the Buyers.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL TO RATIFY THE
ISSUANCE OF COMMON STOCK UNDER THE PURCHASE AGREEMENT.
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PROPOSAL THREE
PROPOSAL TO APPROVE THE QUEEN SAND RESOURCES, INC. DIRECTORS'
NONQUALIFIED STOCK OPTION PLAN
GENERAL
The Board of Directors adopted, subject to Stockholder approval, the
Queen Sand Resources, Inc. Directors' Nonqualified Stock Option Plan (the
"Plan") effective as of November 20, 1997. Under the Plan, the Directors may
receive grants of nonqualified stock options based on their contribution to the
successful performance of the Company.
The Plan is being submitted for Stockholder approval at the Annual
Meeting to permit certain transactions under the Plan to be exempt from the
Securities and Exchange Commission regulations on short-swing trading under
Section 16 of the 1934 Act.
The provisions of the Plan are summarized below. All such statements
are qualified in their entirety by reference to the full text of the Plan, which
is attached hereto as Appendix A.
The Plan is not subject to the provisions of the Employee Retirement
Income Security Act of 1974 ("ERISA"). The Plan is not a "qualified plan" within
the meaning of Section 401 of the Internal Revenue Code of 1986, as amended (the
"Code"). The Plan will terminate on November 19, 2007, and thereafter no
non-qualified stock options ("awards") may be granted thereunder. The Board of
Directors may amend or discontinue the Plan without the approval of the
Stockholders, subject to certain limitations. See "Amendment of the Plan" below.
Nothing in the Plan or in any stock option granted pursuant to the Plan
creates an employer-employee relationship between the Company and a director of
the Company to whom a stock option is granted under the Plan (a "Participant").
The proceeds from the sale of Common Stock pursuant to the stock
options granted under the Plan will be added to the general funds of the Company
and used for general corporate purposes. The holder of a stock option granted
pursuant to the Plan does not have any of the rights or privileges of a
Stockholder of the Company, except with respect to shares that have been
actually issued.
As of November 20, 1997, the Company had granted, subject to the
approval of the Stockholders of the Plan, Ted Collins, Jr. options to purchase
5,000 shares under the Plan and Eli Rebich options to purchase 5,000 shares
under the Plan. The options granted are exercisable at $5.25 per share. One-half
of the options granted will become exercisable on November 20, 1998 and one
quarter of the options will vest in equal annual installments in each of the
years 1999 and 2000. The options will expire on November 20, 2007.
PURPOSE AND ELIGIBILITY
The purposes of the Plan are to attract and retain Directors and to
provide such persons with a proprietary interest in the Company through the
granting of non-qualified stock options that will increase the interest of such
persons in the Company's welfare, furnish an incentive to such persons to
continue their services for the Company and provide a means through which the
Company may attract able persons as Directors.
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Any Director of the Company, including each of the nominees for
Director named herein, is eligible to receive awards under the Plan at the
discretion of the Compensation Committee. See "Administration of the Plan"
below.
The Company had 5 directors at the date of this Proxy Statement, all of
whom are eligible to participate in the Plan.
ADMINISTRATION OF THE PLAN
The 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 stock options
under the Plan, to interpret the Plan, to make such rules as it deems advisable
in the administration of the Plan and to take all other actions advisable to
administer the Plan. The Compensation Committee shall determine the eligible
persons to whom stock options will be granted and will set forth the terms of
the stock options in stock option agreements, so long as those terms are not
inconsistent with the Plan.
STOCK OPTIONS
Under the Plan, the Compensation Committee shall grant options to
purchase 5,000 shares of Common Stock to each outside Director of the Company
each year on the date of the election or re-election of such Director to the
Company's Board of Directors. The maximum number of shares of Common Stock
presently authorized for issuance under the Plan is 500,000, 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
stock options that have expired or been canceled may be reissued under the Plan.
STOCK OPTION AGREEMENTS
Each stock option granted under the Plan is required to be evidenced by
a stock option agreement that sets forth the number of shares subject to the
stock option, the option price, the maximum term of the stock option, 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 stock option. 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.
Stock options granted pursuant to the Plan must be granted within ten
years from the date of the adoption of the Plan. The exercise period for a
non-qualified stock option may not extend longer than ten years from the date
the option is granted.
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EXERCISE OF STOCK OPTIONS
The exercise price for a 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.
On the date that the Participant desires to exercise a stock option
(the "Exercise Date"), the Participant shall deliver to the Company
consideration with a value equal to the total exercise 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 telecopy) 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 Compensation Committee in its sole discretion. 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 award may be terminated by the Company.
RESTRICTIONS
Under the 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 option period. The
Compensation Committee may, in its discretion and in accordance with the terms
of the Plan, accelerate any vesting schedule or otherwise remove any
restrictions or conditions applicable to an award.
A Participant who is an insider cannot exercise a stock option until at
least six months have expired from the date of grant of the award. Stock options
that have not yet vested or are subject to forfeiture are transferable and
assignable to the extent described in the Plan.
The Company is not required to sell or issue shares of Common Stock
under any stock option 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 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 as a Director,
a stock option may be exercised only as follows: (i) in the event of a
Participant's death while serving as a Director, the option may be exercised for
a period of 6 months after the Participant's death; (ii) upon the termination of
service as a Director by reason of disability, the option may be exercised for a
period of 6 months following the termination of service as a Director and (iii)
upon the termination of service as a Director for any other reason, the option
may be exercised for a period of 30 days after termination of service as a
Director.
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ADJUSTMENTS
The Plan provides that the maximum number of shares issuable under the
Plan as a whole and to each Participant individually, the number of shares
issuable upon exercise of outstanding stock options, and the exercise prices of
such stock options 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 a stock option 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 stock option immediately prior to such event.
Notwithstanding these adjustment provisions, all stock options granted under the
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 stock option as to the shares of
Common Stock covered by that stock option for a period of 30 days immediately
preceding the effective date of such event.
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.
Stock options may also be granted under the Plan in substitution for
stock options held by directors of a corporation who become or are about to
become outside Directors of the Company or a subsidiary as a result of a merger,
consolidation or stock acquisition.
AMENDMENT OF THE PLAN
The Plan provides that the Board of Directors may from time to time
discontinue or amend the Plan without the consent of the Stockholders unless
such discontinuance or amendment (i) materially increases the benefits accruing
to Participants under the Plan, (ii) materially increases the number of
securities that may be issued under the Plan or (iii) materially modifies the
requirements as to eligibility for participation in the Plan. In addition, if an
amendment would adversely affect an outstanding stock option, the consent of the
Participant holding that stock option must be obtained unless the Board of
Directors determines that the application to outstanding stock options of an
accounting standard in compliance with any statement issued by the Financial
Accounting Standards Board concerning the treatment of stock options would have
a significant, adverse effect on the Company's financial statements. The Board
of Directors may cancel and revoke all outstanding stock options that are deemed
to cause such adverse effect, and the holders of these stock options will not
have any further rights to the stock options.
CERTAIN FEDERAL INCOME TAX ASPECTS
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 stock options granted pursuant to the Plan. A Participant must pay
such taxes to the Company in cash or Common Stock prior to the receipt of any
Common Stock certificate.
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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%.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL TO APPROVE
THE QUEEN SAND RESOURCES, INC. DIRECTORS' NONQUALIFIED STOCK OPTION PLAN.
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PROPOSAL FOUR
PROPOSAL TO RATIFY 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, 1999. 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 are 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, 1999.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
JEDI TRANSACTION
General
On May 6, 1997, the transactions contemplated under the Securities
Purchase Agreement, dated March 27, 1997 between the Company and JEDI (the "JEDI
Purchase Agreement") were consummated. Pursuant to the transaction, JEDI became
a significant stockholder of the Company.
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 and Warrants. Pursuant to
the JEDI Purchase Agreement, JEDI purchased 9,600,000 shares of Series A
Preferred Stock from the Company, certain warrants to purchase Common Stock (the
"Warrants") (all of which have expired or been exercised) in
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exchange for (i) the payment by JEDI to the Company of $5,000,000 cash; and (ii)
the execution and delivery by JEDI of an Earn Up Agreement (which has since been
terminated). See "JEDI Transaction -- Description of the Series A Preferred
Stock."
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 Warrants and the shares of Common
Stock issuable upon conversion of the Series A Preferred Stock and the exercise
of the 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 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 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) maintain its corporate existence and cause its
subsidiaries to maintain their corporate existence; (ii) comply with applicable
laws and cause its subsidiaries to do the same; (iii) maintain its properties
and cause its subsidiaries to maintain their properties; (iv) not materially
change its accounting methods or permit its subsidiaries to change their
accounting methods; (v) allow JEDI the right to have notice of, and attendees
at, the Company's Board of Directors' meetings; (vi) furnish to JEDI certain
reports and accounts furnished to the Company's Board of Directors; (vii)
deliver an officer's certificate to JEDI annually regarding compliance with the
covenants; (viii) provide JEDI with certain financial statements and reserve
reports; (ix) 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 Warrants, to be listed on The NASDAQ National
Market no later than March 15, 2003; (x) approve customary stock option and
other benefit plans; and (xi) not to amend the Securities Purchase Agreement
dated as of March 27, 1997 between the Company and Forseti Investments Ltd. or
related documents without the prior written consent of JEDI.
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
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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 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 -- 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
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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. As of
September 30, 1998, JEDI held outstanding warrants issued pursuant to its
maintenance rights for the purchase of an aggregate of 1,774,648 shares of the
Company's Common Stock.
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 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.
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:
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<PAGE> 33
(i) the amendment of any provision of the Company's
Certificate of Incorporation or the bylaws;
(ii) the creation, authorization or issuance, or the
increase in the authorized amount of, any class or series of
shares ranking on a parity with or prior to the Series A
Preferred Stock either as to dividends or upon liquidation,
dissolution or winding up;
(iii) the merger or consolidation of the Company with
or into any other corporation or other entity or the sale of
all or substantially all of the Company's assets; or
(iv) the reorganization, recapitalization, or
restructuring or similar transaction that requires the
approval of the stockholders of the Company.
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 --
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
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<PAGE> 34
also have the right to certain dividends upon and during the continuance of an
event of default. See "JEDI Transaction -- 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 $0.521 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 --
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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<PAGE> 35
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) 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 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
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<PAGE> 36
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.
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 will not be, and the
Common Stock issued upon exercise of the Warrants was not, 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 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
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<PAGE> 37
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 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.
HEDGING AGREEMENTS
On April 25, 1998 the Company entered into a series of natural gas
futures contracts with Bank of Montreal and with an affiliate of Enron. JEDI, an
affiliate of Enron, is a principal stockholder of the Company. The Company's
execution of these futures contracts is designed to provide a degree of
protection of negative shifts in natural gas prices (Henry Hub Nymex Index) on
approximately 75% of its expected natural gas production from reserves currently
classified as proved developed producing during the fiscal year ending June 30,
1999. At the same time, the Company is able to participate completely in upward
movements in the Henry Hub Nymex Index to the extent of approximately 50% of its
expected natural gas production for the fiscal year ending June 30, 1999, and up
to $2.75 per MMBtu on approximately 25% of its expected natural gas production
for the fiscal year ended June 30, 1999.
Effective October 1998, the Company entered into a swap agreement with
an affiliate of Enron for 12,500 barrels of oil per month at a fixed price of
$17.00 per barrel. This swap agreement will terminate on December 31, 1998
unless the affiliate of Enron elects to extend the contract to June 30, 1999
under the same terms.
In addition to the natural gas contracts entered into on April 25,
1998, the Company was under contract with an affiliate of Enron for 10,000 Bbls
of oil per month with a floor of $18.00 per Bbl and a ceiling of $20.40 per Bbl
with the Company participating on 50% of the price of WTI Nymex over $20.40. The
Company also had a contract for 50,000 MMBtu of natural gas per month with an
affiliate of Enron, with a floor price of $1.90 per MMBtu and a ceiling price of
$2.66 per MMBtu, with the Company participating on 50% of the price of Henry Hub
Nymex Index over $2.66 per MMBtu.
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<PAGE> 38
The table below sets out volume of natural gas hedged with a floor
price of $1.90 per MMBtu with Enron. The volumes presented in this table are
divided equally over the months during the period:
<TABLE>
<CAPTION>
VOLUME
PERIOD BEGINNING PERIOD ENDING (MMBTU)
- -------------------------------------- ------------------- -------------
<S> <C> <C>
May 1, 1998.......................... December 31, 1998 885,000
January 1, 1999...................... December 31, 1999 1,080,000
January 1, 2000...................... December 31, 2000 880,000
January 1, 2001...................... December 31, 2001 740,000
January 1, 2002...................... December 31, 2002 640,000
January 1, 2003...................... December 31, 2003 560,000
</TABLE>
The table below sets out volume of natural gas hedged with a swap at
$2.40 per MMBtu with Enron. The volumes presented in this table are divided
equally over the months during the period:
<TABLE>
<CAPTION>
VOLUME
PERIOD BEGINNING PERIOD ENDING (MMBTU)
- -------------------------------------- ------------------- -------------
<S> <C> <C>
May 1, 1998.......................... December 31, 1998 2,210,000
January 1, 1999...................... December 31, 1999 2,710,000
January 1, 2000...................... December 31, 2000 2,200,000
January 1, 2001...................... December 31, 2001 1,850,000
January 1, 2002...................... December 31, 2002 1,600,000
January 1, 2003...................... December 31, 2003 1,400,000
</TABLE>
The Company believes that the terms of these hedging arrangements with
the affiliates of Enron are on terms no less favorable then those that would
have been obtained from unaffiliated third parties.
CREDIT AGREEMENT
On April 17, 1998, the Company amended and restated its Credit
Agreement with Bank of Montreal, as agent for the lenders party thereto. Each of
JEDI and Enron Capital & Trade Resources Corp. ("ECT"), an affiliate of JEDI, is
currently a lender under the Credit Agreement. JEDI is a principal stockholder
of the Company. The Credit Agreement provides for borrowings up to $125.0
million (subject to borrowing base limitations) from such lenders to, among
other things, fund development and exploitation expenditures, acquisitions and
general working capital. The proceeds under the Credit Agreement were used to
fund certain property acquisitions in part. As of July 31, 1998, the Company was
able to borrow up to $25.0 million under the Credit Agreement, of which $10.3
million was outstanding as of July 31, 1998. The loan under the Credit Agreement
matures on April 17, 2003. In the event of a default on the indebtedness under
the Credit Agreement, not subsequently waived by the lenders, it is unlikely
that the Company would be able to continue its business.
Indebtedness incurred under the Credit Agreement generally bears
interest under various interest rate pricing options based upon a Federal Funds
rate (plus .5%), Prime Rate or LIBOR rate options. LIBOR rate loans bear an
applicable margin over the LIBOR rate of (i) 2.25%, if greater than 90% of the
available Borrowing Base has been drawn, (ii) 2%, if greater than 75% and not
more than 90% of the available Borrowing Base has been drawn, (iii) 1.5%, if
greater than 40% but not more than 75% of the available Borrowing Base has been
drawn, and (iv) 1%, if not more than 40% of the available Borrowing Base has
been drawn. There is no margin applicable for base rate pricing options.
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<PAGE> 39
The loan under the Credit Agreement is secured by a first lien on the
oil and natural gas properties of QSRN and the stock of two subsidiaries of
QSRN. In addition, the Company and its operating subsidiaries (other than QSRN
which is the borrower) entered into guaranty agreements guaranteeing the
repayment of the indebtedness under the Credit Agreement.
Pursuant to the Credit Agreement, the Company is subject to certain
affirmative and negative financial and operating covenants that are usual and
customary for transactions of this nature. The affirmative covenants include,
but are not limited to, covenants to (i) provide annual audited and unaudited
interim financial information, (ii) provide notices of the occurrence of certain
material events affecting the Company, (iii) promptly provide notice of all
legal or arbital proceedings affecting the Company or its subsidiaries which
could reasonably be expected to have a material adverse effect, (iv) maintain
and preserve its existence and oil and gas properties and other material
properties, (v) implement and comply with certain environmental procedures, (vi)
perform its obligations under the Credit Agreement, (vii) provide reserve
reports, (viii) deliver certain title information, (ix) grant a security
interest in oil and gas properties that are not currently subject to a lien
under the Credit Agreement such that the mortgaged property includes at least
85% (with an obligation to use reasonable efforts to maintain 95%) of the SEC
PV-10 of the Company's total proved reserves, and (x) deliver certain
information relating to compliance with ERISA laws and regulations. The negative
covenants include, but are not limited to, covenants (i) not to incur any
indebtedness except as expressly permitted under the Credit Agreement, (ii) not
to incur any lien on any of its properties except as expressly permitted under
the Credit Agreement, (iii) not to make any loans or advances to or investments
in any person except as expressly permitted under the Credit Agreement, (iv)
(with respect to the Company) not to declare or pay any dividends or redeem or
otherwise acquire for value any capital stock of the Company except for stock
dividends and certain permitted repurchases of Series C Preferred Stock (defined
herein), (v) not to enter into sale and leaseback transactions, (vi) not to
materially change the character of its business as an independent oil and
natural gas exploration and production company, (vii) not to enter into lease
agreements except as expressly permitted under the Credit Agreement, (viii) not
to merge with or sell all or substantially all of its property or assets to any
other person; (ix) not to permit the borrowed proceeds under the Credit
Agreement to be used for any purpose except as expressly permitted under the
Credit Agreement, (x) not to violate ERISA laws and regulations, (xi) not to
discount or sell any notes or accounts receivable, (xii) not to maintain a
working capital ratio of less than 1.0 to 1.0, (xiii) not to maintain a tangible
net worth of less than $18.5 million plus the amount equal to 75% of the net
proceeds of any equity offering, (xiv) to pay its trade accounts payable when
due, (xv) not maintain a fixed charge coverage ratio of less than 1.5 to 1.0,
(xvi) not to sell, assign or otherwise transfer any interest in any oil or
natural gas properties except as expressly permitted under the Credit Agreement,
(xvii) not to violate environmental laws and regulations, (xviii) not to enter
into transactions with affiliates other than those entered into in the ordinary
course of business on fair and reasonable terms, (xix) not to create any
additional subsidiaries unless such subsidiaries guarantee the obligations of
QSRN under the Credit Agreement or issue stock of any subsidiaries to third
parties, (xx) not to enter into negative pledge agreements, (xxi) not to enter
into any contracts which warrant production of oil and natural gas and not allow
gas imbalances, take-or-pay or other prepayments which would require the
delivery of oil or natural gas at some future time without receiving full
payment therefor to exceed 5% of the current aggregate monthly gas production
from the mortgaged oil and natural gas properties, (xxii) not to amend or modify
any material agreements, (xxiii) not to repay other indebtedness except as
expressly permitted under the Credit Agreement and (xxiv) not make or pay
capital expenditures more than specified amounts.
The Credit Agreement also contains usual and customary events of
default and provides remedies to the lenders in the event of default. The events
of default include (i) default in payment when due of any principal of or
interest on indebtedness under the Credit Agreement, (ii) default in payment
when due of any principal of or interest on any other indebtedness aggregating
$500,000 or more or an event shall
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<PAGE> 40
occur which requires the Company to mandatorily redeem any of its existing
preferred stock, (iii) breach of a representation and warranty under the Credit
Agreement, (iv) default in performance of obligations under the Credit
Agreement, (v) the Company shall admit in writing its inability to pay debts as
they become due, (vi) voluntary or involuntary bankruptcy, (vii) a judgment in
excess of $100,000 shall be entered and not vacated within 30 days, (viii) the
security agreements under the Credit Agreement shall cease to be in full force
and effect and (ix) the Company discontinues its usual business or any person or
group of persons (other than JEDI, Enron or its affiliates) shall have acquired
beneficial ownership of 30% or more of the outstanding shares of voting stock of
the Company or individuals who constitute the Board of Directors of the Company
cease to constitute a majority of the then-current Board of Directors of the
Company. Although the Company believes that its cash flows and available sources
of financing will be sufficient to satisfy the interest payments on its debt at
currently prevailing interest rates and oil and natural gas prices, the
Company's level of debt may adversely affect the Company's ability: (i) to
obtain additional financing for working capital, capital expenditures or other
purposes, should it need to so do; or (ii) to acquire additional oil and natural
gas properties or to make acquisitions utilizing new borrowings. There can be no
assurances that the Company will be able to obtain additional financing, if
required, or that such financing, if obtained, will be on terms favorable to the
Company.
On September 30, 1997 and December 31, 1997 the Company was not in
compliance with its interest coverage ratio. Bank of Montreal waived the
September 30, 1997 covenant violation solely with respect to these specific
defaults. On February 10, 1998, Bank of Montreal waived the Company's December
31, 1997 noncompliance with the interest coverage ratio. On the same date, the
Credit Agreement was amended to reduce the interest coverage ratio to 1.75:1 for
the quarter ending March 31, 1998 and 3.0:1 thereafter. In addition, the Company
and its subsidiaries agreed that during calendar 1998, they would not incur,
without the prior written consent of Bank of Montreal, in the aggregate, capital
expenditures in excess of those disclosed to Bank of Montreal in the Company's
operating forecast ($2.6 million). The Company believes, but cannot assure, that
it will be able to comply with all restrictive covenants in the future or obtain
waivers from the bank with respect to noncompliance.
From time to time in the future, the Company may submit information to
the lenders in accordance with the procedures provided in the Credit Agreement
to support the Company's request to increase the maximum borrowing base as the
Company believes appropriate. All such applications will be subject to bank
approval. If available, these funds would be allocated toward future development
and acquisition programs.
BRIDGE INDEBTEDNESS
On April 17, 1998, the Company incurred the Bridge Indebtedness to
provide bridge financing for the acquisition of certain oil and natural gas
interests from two pension funds managed by J.P. Morgan Investments. The Bridge
Indebtedness was comprised of a debt bridge component (the "Debt Bridge
Indebtedness") and an equity bridge component (the "Equity Bridge
Indebtedness"). The Company borrowed two-thirds of the Bridge Indebtedness from
ECT and JEDI. JEDI is a principal stockholder of the Company, and ECT is an
affiliate of JEDI.
In connection with the Debt Bridge Indebtedness, on April 17, 1998, the
Company entered into two Note Purchase Agreements (Variable Rate Senior Second
Secured Notes due 2003) with each of ECT and JEDI and borrowed an aggregate of
$10 million ($5 million from ECT and $5 million from JEDI). The Debt Bridge
Indebtedness bore interest at a rate of LIBOR plus 4% per annum. Upon
consummation of the placement of the Company's 12 1/2% Senior Notes due 2008,
the Company repaid in full the Debt Bridge Indebtedness and retired this bridge
facility.
37
<PAGE> 41
In connection with the Equity Bridge Indebtedness, on April 17, 1998,
the Company entered into two Note Purchase Agreements (Variable Rate Senior
Third Secured Notes due 2003) with each of ECT and JEDI and borrowed an
aggregate of $10 million ($5 million from ECT and $5 million from JEDI). The
Equity Bridge Indebtedness bore interest at the rate of LIBOR plus 6% per annum.
Upon consummation of the placement of the Company 12 1/2% Senior Notes due 2008,
the Company repaid in full the Equity Bridge Indebtedness and retired this
bridge facility. In connection with the Equity Bridge Indebtedness, on April 17,
1998, the Company granted warrants to each of ECT and JEDI in connection with
the equity bridge financing described above. These warrants have expired in
accordance with their terms upon the repayment in full of the Equity Bridge
Indebtedness.
ECT REVOLVING CREDIT FACILITY
Effective December 29, 1997, the Company entered into the Subordinated
Revolving Credit Loan Agreement (the "ECT Revolving Credit Agreement") with ECT,
as a lender and as agent for the lenders thereto, to fund on a revolving basis
capital costs incurred with future development projects and to fund further
acquisitions. The ECT Revolving Credit Agreement is subordinate to the Credit
Agreement. The ECT Revolving Credit Agreement provides for borrowings up to
$10.0 million, on a revolving basis and subject to borrowing base limitations,
which has been initially set at an amount equal to 40% of the borrowing base
established from time to time under the Credit Agreement. This facility is
designed to provide bridge financing for development projects and acquisitions
to be completed on relatively short notice or until the affected assets are
eligible to be included in the borrowing base for the Credit Agreement or
financed with longer-term indebtedness or equity capital; provided, that the
availability for acquisitions under the facility is limited to the lesser of
$5.0 million or 50% of the borrowing base as in effect from time to time. There
is no indebtedness outstanding under this facility as of the date of this Proxy
Statement. Borrowings in excess of certain amounts under the ECT Revolving
Credit Agreement will reduce the available borrowing base under the Credit
Agreement. The loan is secured by a second priority lien and security interest
(behind the first lien position of the Credit Agreement) in approximately 95% of
the oil and natural gas properties of the Company.
The ECT Revolving Credit Agreement is subject to payment of interest at
a fluctuating rate per annum equal to (i) the rate of 1% above the then highest
rate of interest being paid on any portion of the indebtedness owed under the
Credit Agreement or (ii) the rate of 15%, depending upon whether there is any
indebtedness owed under the Credit Agreement outstanding or whether there has
been a certain amount of indebtedness owed under the ECT Revolving Credit
Agreement for certain time periods.
The maturity date for the ECT Revolving Credit Agreement is the earlier
of December 30, 2002 or the date that is 60 days after the Company receives
written notice that the lenders and their affiliates beneficially own in the
aggregate less than 10% of the capital stock of the Company entitled to vote in
the election of directors. From March 31, 1998 through the maturity date, the
Company will pay interest on the outstanding loans at quarterly intervals, on
the last business day of every March, June, September and December. In addition,
the ECT Revolving Credit Agreement provides for certain voluntary prepayments
and certain mandatory prepayments of amounts borrowed under the facility.
The Company paid an affiliate of ECT a fee of $200,000 in connection
with the arrangement of the ECT Revolving Credit Agreement. In addition,
commencing March 31, 1998, and on each payment date thereafter, the Company is
obligated to pay ECT, for the account of each lender under the ECT Revolving
Credit Agreement, a fee of 3/8% per annum on the daily average of the unadvanced
portion of the facility for the period since January 12, 1998 or the previous
payment date to such payment date, except that payment of this fee was waived
for the period from April 12, 1998 until the date on which the Bridge
Indebtedness was fully repaid.
38
<PAGE> 42
The Company is subject to various covenants under the ECT Revolving
Credit Agreement, which covenants are substantially similar to the covenants
described above with respect to the Credit Agreement. In addition to the
covenants, the ECT Revolving Credit Agreement contains representations,
warranties, covenants and default provisions customary for a facility of this
type.
PURCHASE AND SALE AGREEMENTS
On August 1, 1997, the Company purchased certain operated oil and
natural gas properties from Collins and Ware, Inc. for cash consideration (net
of production subsequent to the February 1, 1997 effective date) of
approximately $6.0 million and 1,000,000 shares of the Company's Common Stock.
Ted Collins, Jr., a Director of the Company, is the controlling shareholder of
Collins and Ware, Inc. This transaction was negotiated and closed prior to Mr.
Collins becoming a Director of the Company. The consummation of the acquisition
was not conditioned upon Mr. Collins becoming a Director of the Company. In
connection with this purchase, the Company entered into a Registration Rights
Agreement with Collins and Ware, Inc. granting piggyback registration rights
with respect to the resale of the Common Stock issued to Collins and Ware, Inc.
On April 10, 1996, the Company purchased certain operated oil and
natural gas properties for cash consideration of approximately $5 million and
470,000 shares of the Company's Common Stock from Eli Rebich and Southern
Exploration Company. Eli Rebich, a Director of the Company, is the controlling
shareholder of Southern Exploration Company. This transaction was negotiated and
closed prior to Mr. Rebich becoming a Director of the Company. The consummation
of the acquisition was not a condition to Mr. Rebich becoming a Director of the
Company. As part of the Purchase Agreement, the Company granted Mr. Rebich
piggyback registration rights with respect to register the resale of the Common
Stock issued to him.
EMPLOYMENT AGREEMENTS
Each of Edward J. Munden, Bruce I. Benn, Ronald I. Benn and Robert P.
Lindsay has entered into an employment agreement with the Company. See
"Executive Compensation -- Employment Agreements."
39
<PAGE> 43
GENERAL; 1999 ANNUAL MEETING
The Annual Report to Stockholders (which includes the Company's Annual
Report on Form 10-KSB) for the fiscal year ended June 30, 1998 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 1999 Annual Meeting
must be received by the Company at its principal executive offices no later than
June 25, 1999 to be included in the Company's proxy statement for that meeting.
At the 1999 Annual Meeting, management proxies will have discretionary authority
to vote on stockholder proposals that are not submitted for inclusion in the
Company's proxy statement unless received by the Company before September 8,
1999.
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/ BRUCE I. BENN
BRUCE I. BENN
Secretary and Executive Vice President
October 23, 1998
40
<PAGE> 44
APPENDIX A
QUEEN SAND RESOURCES, INC. DIRECTORS'
NONQUALIFIED STOCK OPTION PLAN
<PAGE> 45
QUEEN SAND RESOURCES, INC.
DIRECTORS' NONQUALIFIED STOCK OPTION PLAN
<PAGE> 46
QUEEN SAND RESOURCES, INC.
DIRECTORS' NONQUALIFIED STOCK OPTION PLAN
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
ARTICLE 1 PURPOSE................................................................................1
ARTICLE 2 DEFINITIONS............................................................................1
ARTICLE 3 ADMINISTRATION.........................................................................2
ARTICLE 4 ELIGIBILITY............................................................................3
ARTICLE 5 SHARES SUBJECT TO PLAN.................................................................3
ARTICLE 6 GRANT OF OPTIONS.......................................................................3
ARTICLE 7 OPTION PRICE...........................................................................3
ARTICLE 8 OPTION PERIOD; FORFEITURE..............................................................4
8.1 Option Period..........................................................................4
8.2 Forfeiture.............................................................................4
ARTICLE 9 TERMINATION OF SERVICE AS A DIRECTOR...................................................4
9.1 Death..................................................................................4
9.2 Disability or Retirement...............................................................4
9.3 Other Termination......................................................................4
ARTICLE 10 EXERCISE OF OPTION.....................................................................5
ARTICLE 11 AMENDMENT OR DISCONTINUANCE............................................................6
ARTICLE 12 TERM...................................................................................6
ARTICLE 13 CAPITAL ADJUSTMENTS....................................................................6
ARTICLE 14 RECAPITALIZATION, MERGER AND CONSOLIDATION.............................................7
ARTICLE 15 LIQUIDATION OR DISSOLUTION.............................................................8
ARTICLE 16 OPTIONS IN SUBSTITUTION FOR STOCK OPTIONS GRANTED BY OTHER CORPORATIONS................8
</TABLE>
i
<PAGE> 47
<TABLE>
<S> <C> <C>
ARTICLE 17 MISCELLANEOUS PROVISIONS...............................................................8
17.1 Investment Intent......................................................................8
17.2 No Employment Relationship.............................................................8
17.3 Indemnification of Board and Committee.................................................8
17.4 Effect of the Plan.....................................................................9
17.5 Compliance With Other Laws and Regulations.............................................9
17.6 Tax Requirements.......................................................................9
17.7 Assignability..........................................................................9
17.8 Use of Proceeds.......................................................................10
17.9 Legend................................................................................10
</TABLE>
ii
<PAGE> 48
QUEEN SAND RESOURCES, INC.
DIRECTORS' NONQUALIFIED STOCK OPTION PLAN
The name of the plan is the QUEEN SAND RESOURCES, INC. DIRECTORS'
NONQUALIFIED STOCK OPTION PLAN (the "PLAN") was adopted by the Board of
Directors of Queen Sand Resources, Inc., a Delaware corporation (hereinafter
called the "COMPANY"), effective as of November 20, 1997.
ARTICLE 1
PURPOSE
The purpose of the Plan is to attract and retain directors of the
Company and to provide such persons with a proprietary interest in the Company
through the granting of Nonqualified Stock Options that will
(a) increase the interest of such persons in the Company's
welfare;
(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 directors.
ARTICLE 2
DEFINITIONS
For the purpose of the Plan, unless the context requires otherwise, the
following terms shall have the meanings indicated:
2.1 "Board" means the board of directors of the Company.
2.2 "Code" means the Internal Revenue Code of 1986, as
amended.
2.3 "Committee" means the committee appointed or designated
by the Board to administer the Plan in accordance with ARTICLE 3 of
this Plan.
2.4 "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.
2.5 "Company" means Queen Sand Resources, Inc., a Delaware
corporation.
2.6 "Date of Grant" means the effective date on which a
Stock Option is awarded to director as set forth in the applicable
Stock Option Agreement.
2.7 "Option Period" means the period during which a Stock
Option may be exercised.
2.8 "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.
QUEEN SAND RESOURCES, INC.
DIRECTORS' NONQUALIFIED STOCK OPTION PLAN Page 1
<PAGE> 49
2.9 "Participant" shall mean a director of the Company to
whom a Stock Option is granted under this Plan.
2.10 "Plan" means this Queen Sand Resources, Inc. Directors'
Nonqualified Stock Option Plan, as amended from time to time.
2.11 "Stock Option" means a Nonqualified option to purchase
Common Stock of the Company granted under this Plan.
2.12 "Stock Option Agreement" means a written agreement
between a Participant and the Company which sets out the terms of the
grant of a Stock Option.
2.13 "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 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.
2.14 "Termination of Service as a Director" occurs when a
Participant who is director of the Company or any Subsidiary shall
cease to serve as a director of the Company and its Subsidiaries, for
any reason.
2.15 "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.
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.
The Committee shall select one of its members to act as its Chairman
and shall make such rules and regulations for its operation as it deems
appropriate. 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, 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
QUEEN SAND RESOURCES, INC.
DIRECTORS' NONQUALIFIED STOCK OPTION PLAN Page 2
<PAGE> 50
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.
ARTICLE 4
ELIGIBILITY
Any director of the Company 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. The Committee, upon its own
action, may grant, but shall not be required to grant, a Stock Option to any
director of the Company or any Subsidiary. Except as required by this Plan,
Stock Options granted at different times need not contain similar provisions.
The Committee's determinations under the Plan need not be uniform and may be
made by it selectively among directors who receive, or are eligible to receive,
Stock Options under the Plan.
ARTICLE 5
SHARES SUBJECT TO PLAN
The Committee may not grant Stock Options under the Plan for more than
500,000 shares of Common Stock of the Company (as may be adjusted in accordance
with ARTICLES 13 and 14 hereof), all of which are designated as Nonqualified
stock options. Shares to be optioned and sold may be made available from either
authorized but unissued Common Stock or Common Stock held by the Company in its
treasury. Shares previously subject to Stock Options which have expired or been
canceled may be reissued under the Plan.
The Company during the term of this Plan will at all times reserve and
keep available the number of shares of Stock that shall be sufficient to satisfy
the requirements of this Plan.
ARTICLE 6
GRANT OF OPTIONS
The Compensation Committee shall grant options to purchase 5,000 shares
of Common Stock, subject to adjustment as provided herein, to each outside
director of the Company each year on the date of the election or the re-election
of such director to the Company's Board of Directors. The grant of a Stock
Option shall be evidenced by a Stock Option Agreement setting forth the total
number of shares subject to the Stock Option, the Option Price, the maximum term
of the Stock Option, the Date of Grant, and such other terms and provisions as
are approved by the Committee, but not inconsistent with the Plan. The Company
shall execute a Stock Option Agreement with a Participant after the issuance of
a Stock Option. Any Stock Option 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 shareholders for approval; however, the Committee may
grant Stock Options under the Plan prior to the time of shareholder approval.
QUEEN SAND RESOURCES, INC.
DIRECTORS' NONQUALIFIED STOCK OPTION PLAN Page 3
<PAGE> 51
ARTICLE 7
OPTION PRICE
The Option Price for any share of Common Stock which may be purchased
under a Stock Option shall be such price as determined by the Committee.
ARTICLE 8
OPTION PERIOD; FORFEITURE
8.1 OPTION PERIOD. A Stock Option may be exercised in whole or in
part at any time during its term. The Option Period for a Stock Option may be
reduced or terminated upon Termination of Service as a Director in accordance
with ARTICLE 9. No Stock Option granted under the Plan may be exercised at any
time after the end of its Option Period.
Each Stock Option will terminate at the first of the following to
occur:
(a) 5 p.m. on the tenth anniversary of the Date of Grant;
(b) 5 p.m. on the date which is six (6) months following the
Participant's Termination of Service as a Director due to death or
Total and Permanent Disability; or
(c) 5 p.m. on the 30th day after the date of any other
Termination of Service as a Director, except as provided in Section 9.3
below.
8.2 FORFEITURE. In the event of a Participant's Termination of
Service as a Director other than as a result of death or Total and Permanent
Disability, the unexercised portion of the Stock Option previously granted to
such Participant shall terminate and be forfeited as of 5 p.m. on the 30th day
after the day of the termination.
ARTICLE 9
TERMINATION OF SERVICE AS A DIRECTOR
In the event of Termination of Service as a Director of a Participant,
the Option Period for any Stock Option of the Participant shall be amended in
accordance with this ARTICLE 9 and such Stock Option may only be exercised as
follows:
9.1 DEATH. In the event of the Participant's death while serving
as a non-employee director, his Stock Option may be exercised for a period of
six (6) months after the Participant's death; such Stock Option may be exercised
by the Participant's estate or personal representative, or by the person who
acquired the right to exercise the Stock Option by bequest or inheritance or by
reason of the Participant's death.
9.2 DISABILITY OR RETIREMENT. Upon the Termination of the
Participant's Service as a Director by reason of Total and Permanent Disability,
the Participant or his guardian may exercise such Participant's Stock Option
within six (6) months after the date of such Termination of Service as a
Director.
9.3 OTHER TERMINATION. Upon the Termination of the Participant's
Service as a Director for any reason other than as a result of death, or Total
and Permanent Disability, the Participant may, before 5 p.m. on the 30th day
after the day of such Termination of Service as a Director, exercise any Stock
QUEEN SAND RESOURCES, INC.
DIRECTORS' NONQUALIFIED STOCK OPTION PLAN Page 4
<PAGE> 52
Options to the extent such Stock Options were exercisable at the date of such
Termination of Service as a Director.
ARTICLE 10
EXERCISE OF OPTION
Stock Options may be exercised during the Option Period, subject to
limitations and restrictions set forth in ARTICLE 9. Stock Options may be
exercised at such times and in such amounts as provided in this Plan and the
applicable Stock Option Agreements, subject to the terms, conditions, and
restrictions of the Plan.
In no event may a Stock Option be exercised or shares be issued
pursuant to a Stock Option if a necessary listing of the shares on a stock
exchange or any registration under state or federal securities laws required
under the circumstances has not been accomplished. No Stock Option may be
exercised for a fractional share of Stock. The granting of a Stock Option shall
impose no obligation upon the Participant to exercise that Stock Option.
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 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 to
the Participant (or the person exercising the Participant's Stock Option in the
event of his death) at its principal business office within ten (10) business
days after the Exercise Date. The obligation of the Company to deliver shares
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 being purchased upon any
securities exchange 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 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.
QUEEN SAND RESOURCES, INC.
DIRECTORS' NONQUALIFIED STOCK OPTION PLAN Page 5
<PAGE> 53
ARTICLE 11
AMENDMENT OR DISCONTINUANCE
The Plan may be amended or discontinued by the Board without the
approval of the shareholders of the Company unless shareholder approval is
required by any stock exchange on which the shares to be issued upon exercise of
the Stock Options are listed. Any amendment to the Plan shall be approved by
shareholders if the amendment would:
(a) materially increase the benefits accruing to
Participants under the Plan;
(b) materially increase the number of securities which may
be issued under the Plan; or
(c) materially modify the requirements as to eligibility for
participation in the Plan.
In addition, no amendment may adversely affect an outstanding Stock Option
without the consent of the 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 November 19, 2007, but Stock Options granted before the effective
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 unexercised Stock Options
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 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, to the end that the same proportion of the Company's issued
and outstanding shares of Common Stock shall continue to be subject to
being so awarded; and
(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.
QUEEN SAND RESOURCES, INC.
DIRECTORS' NONQUALIFIED STOCK OPTION PLAN Page 6
<PAGE> 54
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, the number of or Option Price of shares of Common Stock
then subject to outstanding Stock Options granted under the Plan.
Upon the occurrence of each event requiring an adjustment of the Option
Price or the number of shares purchasable pursuant to Stock Options granted
pursuant to the terms of this Plan, the Company shall mail to each Participant
its computation of such adjustment which shall be conclusive and shall be
binding upon each such Participant.
ARTICLE 14
RECAPITALIZATION, MERGER AND CONSOLIDATION
(a) The existence of this Plan and Stock Options granted
hereunder shall not affect in any way the right or power of the Company
or its shareholders 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 shareholders, if the
Company shall be the surviving or resulting corporation in any merger
or consolidation, any Stock Option 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 Stock Option would have been entitled.
(c) In the event of any merger or consolidation 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 Stock Options, that number of
shares of each class of stock or other securities or that amount of
cash, property, or assets of the surviving or consolidated company
which were distributed or distributable to the shareholders of the
Company in respect to each share of Common Stock held by them, such
outstanding Stock Options to be thereafter exercisable for such stock,
securities, cash, or property in accordance with their terms.
Notwithstanding the foregoing, however, all such Stock Options may be
canceled by the Company as of the effective date of any such
reorganization, merger, consolidation, or any dissolution or
liquidation of the Company 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 subject to such outstanding Stock
Options.
(d) Upon the occurrence of each event requiring an adjustment
of the Option Price or the number of shares purchasable pursuant to
Stock Options granted pursuant to the terms of
QUEEN SAND RESOURCES, INC.
DIRECTORS' NONQUALIFIED STOCK OPTION PLAN Page 7
<PAGE> 55
this Plan, the Company shall mail to each Participant its computation
of such adjustment which shall be conclusive and shall be binding upon
each such Participant.
ARTICLE 15
LIQUIDATION OR DISSOLUTION
In case the Company shall, at any time while any Stock Option 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 may thereafter receive upon exercise hereof (in lieu of each
share of Common Stock of the Company which such Participant would have been
entitled to receive) 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 Stock
Option, 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 prices then in effect with respect to each Stock Option 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
OPTIONS IN SUBSTITUTION FOR
STOCK OPTIONS GRANTED BY OTHER CORPORATIONS
Stock Options may be granted under the Plan from time to time in
substitution for such options held by directors of a corporation who become or
are about to become outside Directors 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 options 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 options in substitution for which they are granted.
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 options 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 EMPLOYMENT RELATIONSHIP. The Participant is not an employee
of the Company or any Subsidiary. Nothing herein shall be construed to create an
employer-employee relationship between the Company and the Participant.
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
QUEEN SAND RESOURCES, INC.
DIRECTORS' NONQUALIFIED STOCK OPTION PLAN Page 8
<PAGE> 56
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 a Stock Option to purchase Common Stock of the Company or
any other rights except as may be evidenced by a Stock Option 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 Stock Option 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 other forum in which shares of Common Stock are
traded (including Section 16 of the Securities Exchange Act of 1934); and, as a
condition of any sale or issuance of shares of Common Stock under a Stock
Option, 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 Stock Options 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 issued upon exercise of any Stock Option 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. 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 or by
check.
17.7 ASSIGNABILITY. Unless the Committee provides otherwise, all or
a portion of a Stock Option to be granted to a Participant may be transferred 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 one or more Immediate Family Members, or (iii) a partnership in which one or
more 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, and (y) subsequent
transfers of previously transferred Stock Options 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
Stock Option 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, 14, 15, 16 AND 17 hereof the term "PARTICIPANT" shall be
deemed to include the transferee. The events of Termination of Service and any
vesting of the Stock Options shall continue to be applied with respect to the
original Participant, following which the Stock Options shall be exercisable by
the transferee only to the extent and for the periods and installments specified
in the Award Agreement. The Committee and the Company shall have no obligation
to inform any transferee of a Stock Option of any expiration, termination, lapse
or acceleration of such Option. The Company shall have no obligation
QUEEN SAND RESOURCES, INC.
DIRECTORS' NONQUALIFIED STOCK OPTION PLAN Page 9
<PAGE> 57
to register with any federal or state securities commission or agency any Common
Stock issuable or issued under a Stock Option that has been transferred by a
Participant under this Section 17.7. If the Participant attempts to alienate,
assign, pledge, hypothecate, or otherwise dispose of this Stock Option or any
right thereunder, except as provided for in this Plan or the Stock Option
Agreement, the Committee may terminate the Participant's Stock Option by notice
to him, and it shall thereupon become null and void.
17.8 USE OF PROCEEDS. Proceeds from the sale of shares pursuant to
Stock Options granted under this Plan shall constitute general funds of the
Company.
17.9 LEGEND. Each certificate representing shares of Common Stock
issued to a Participant upon exercise of a Stock Option shall bear the following
legend, or a similar legend deemed by the Company to constitute an appropriate
notice of the provisions hereof and the applicable security laws (any such
certificate not having such legend shall be surrendered upon demand by the
Company and so endorsed):
On the face of the certificate:
"Transfer of this stock is restricted in accordance
with conditions printed on the reverse of this
certificate."
On the reverse:
"The shares of stock evidenced by this certificate
are subject to and transferrable only in accordance
with that certain Queen Sand Resources, Inc. Director
Nonqualified Stock Option Plan, dated as of November
20, 1997, as amended from time to time, a copy of
which is on file at the principal office of the
Company in Dallas, Texas. No transfer or pledge of
the shares evidenced hereby may be made except in
accordance with and subject to the provisions of said
Plan. By acceptance of this certificate, any holder,
transferee or pledge hereof agrees to be bound by all
of the provisions of said Plan."
Insert the following legend on the certificate if the shares
were not issued in a transaction registered under the
applicable federal and state securities laws:
"Shares of stock represented by this certificate have
been acquired by the holder for investment and not
for resale, transfer or distribution, have been
issued pursuant to exemptions from the registration
requirements of applicable state and federal
securities laws, and may not be offered for sale,
sold or transferred other than pursuant to effective
registration under such laws, or in transactions
otherwise in compliance with such laws, and upon
evidence satisfactory to the Company of compliance
with such laws, as to which the Company may rely upon
an opinion of counsel satisfactory to the Company."
A copy of this Plan shall be kept on file in the principal office of
the Company in Dallas, Texas or any successor location of the Company's
principal executive offices.
QUEEN SAND RESOURCES, INC.
DIRECTORS' NONQUALIFIED STOCK OPTION PLAN Page 10
<PAGE> 58
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:
----------------------------
Attest:
- ----------------------------------
Secretary
QUEEN SAND RESOURCES, INC.
DIRECTORS' NONQUALIFIED STOCK OPTION PLAN Page 11
<PAGE> 59
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 21, 1998 at the annual meeting
of stockholders to be held at The Petroleum Club, 2200 Ross Avenue, 39th Floor,
Dallas, Texas 75201, on November 12, 1998 at 1:00 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 4.
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.
<TABLE>
<S> <C>
[ ] 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 ratify the issuance of Common Stock pursuant to the terms of that certain Amended and Restated
Securities Purchase Agreement dated as of July 8, 1998 among the Company and the buyers signatory thereto.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. Proposal to approve the Queen Sand Resources, Inc. Directors' Nonqualified Stock Option Plan.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. 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, 1999.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
</TABLE>
The Proxies are authorized to vote, in their discretion, upon such other
business as may properly come before the meeting.
<PAGE> 60
-----------------------------------
Signature
Dated: , 1998
------------- ----
-----------------------------------
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
