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As filed with the Securities and Exchange Commission on March 9, 1998
Registration No.-333-_____
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
QUEEN SAND RESOURCES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2615565
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3500 OAK LAWN
SUITE 380
DALLAS, TEXAS 75219-4398
(214) 521-9959
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
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ROBERT P. LINDSAY
CHIEF OPERATING OFFICER
3500 OAK LAWN
SUITE 380
DALLAS, TEXAS 75219-4398
TELEPHONE: (214) 521-9959
FAX: (214) 521-9960
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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COPY TO:
WILLIAM L. BOEING
HAYNES AND BOONE, LLP
SUITE 3100
901 MAIN STREET
DALLAS, TEXAS 75202-3789
TELEPHONE: (214) 651-5000
FAX: (214) 651-5940
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [x]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
OF SECURITIES TO BE REGISTERED REGISTERED (1) SHARE (2) PRICE (2) FEE
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Common Stock, par value $0.0015
per share . . . . . . . . . . . 3,401,366 shares $7.30 $24,829,971 $7,324
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(1) Pursuant to Rule 416, the Registration Statement also covers such
indeterminate additional shares of Common Stock as may become issuable (i)
to prevent dilution resulting from stock splits, stock dividends or similar
events, or (ii) by reason of changes in the conversion price of shares of
the Series C Convertible Preferred Stock, par value $0.01 per share, or the
exercise price of certain warrants in accordance with the terms thereof.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) based on the average of the high and low prices reported on
the Nasdaq SmallCap Market on March 5, 1998.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION DATED MARCH 9, 1998
QUEEN SAND RESOURCES, INC.
3,401,366 SHARES OF COMMON STOCK
This Prospectus relates to 3,401,366 shares of Common Stock, par value
$0.0015 per share (the "Common Stock"), of Queen Sand Resources, Inc. (the
"Company") to be sold by certain stockholders of the Company (each a "Selling
Stockholder" and collectively, the "Selling Stockholders") from time to time.
See "Selling Stockholders." In addition, pursuant to Rule 416 of the
Securities Act of 1933, as amended (the "Securities Act"), this Prospectus also
relates to such additional number of shares of Common Stock as may become
issuable upon conversion of the Company's Series C Preferred Stock, par value
$0.01 per share (the "Series C Preferred Stock"), or exercise of the warrants
to purchase shares of Common Stock (the "Warrants") issued in connection with
the sale of the Series C Preferred Stock as a result of, among other events,
stock splits, stock dividends and anti-dilution adjustment provisions
(including by reason of any change in the conversion price mechanism of the
Series C Preferred Stock). Under the terms of the Registration Rights
Agreement among the Company and the Selling Stockholders, the Company is
required to register for resale at least 200% of the number of shares issuable
on conversion of the Series C Preferred Stock and exercise of the Warrants.
The number of shares covered by this Prospectus represents approximately 200%
of the shares currently issuable. All of the shares covered hereby will be
sold only by the Selling Stockholders. This Prospectus does not purport to
cover the initial issuance by the Company of the shares of Common Stock upon
conversion of the Series C Preferred Stock or exercise of the Warrants, but
only the reoffer and resale of such shares by the Selling Stockholders
following the conversion, if ever, of shares of Series C Preferred Stock to
Common Stock or the exercise, if ever, of Warrants to purchase shares of Common
Stock. The Company will not receive any of the proceeds from the sale of the
shares of Common Stock by the Selling Stockholders (other than the exercise
price payable upon exercise of any Warrants).
The Selling Stockholders may from time to time sell the shares of
Common Stock covered by this Prospectus to or through one or more underwriters,
and may also sell shares of Common Stock directly to other purchasers or
through agents, on the Nasdaq SmallCap Market in ordinary brokerage
transactions, in negotiated transactions, or otherwise, at market prices
prevailing at the time of sale, at prices related to the then prevailing market
price or at negotiated prices. See "Plan of Distribution."
The Company's Common Stock is traded on the Nasdaq SmallCap Market
under the symbol "QSRI."
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK
OFFERED HEREBY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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The date of this Prospectus is , 1998
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR ANY OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT ITS DATE.
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TABLE OF CONTENTS
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Available Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Incorporation of Certain Documents by Reference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Selling Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Disclosure of Commission Position on Indemnification for Securities Act Liabilities . . . . . . . . . . . . . . . . . 17
Certain Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). In accordance
with the Exchange Act, the Company files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). The
reports, proxy statements and other information can be inspected and copied at
the public reference facilities that the Commission maintains at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional
offices located at 7 World Trade Center, 13th Floor, New York, New York 10048,
and Suite 1400, 500 West Madison Street, Chicago, Illinois 60661. Copies of
these materials can be obtained at prescribed rates from the Public Reference
Section of the Commission at the principal offices of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549. The Commission also maintains a Web site
at http: / / www.sec.gov containing reports, proxy and information statements
and other information regarding registrants, including the Company, that file
electronically with the Commission. In addition, the Common Stock of the
Company is traded on the Nasdaq SmallCap Market under the symbol "QSRI" and
reports, proxy statements and other information concerning the Company can be
inspected and copied at the offices of the National Association of Securities
Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission a registration statement on
Form S-3 (the "Registration Statement") under the Securities Act, with respect
to the Common Stock. This Prospectus, which constitutes a part of the
Registration Statement, does not contain all the information set forth in the
Registration Statement, certain items of which are contained in schedules and
exhibits to the Registration Statement as permitted by the rules and
regulations of the Commission. Statements made in the Prospectus concerning the
contents of any documents referred to herein are not necessarily complete. With
respect to each such document filed with the Commission as an exhibit to the
Registration Statement, reference is made to the exhibit for a more complete
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description, and each such statement shall be deemed qualified in its entirety
by such reference. The Registration Statement, including exhibits thereto, can
be inspected and copied at the Commission's public reference facilities and
regional offices and at the offices of the National Association of Securities
Dealers, Inc. referred to above in Washington, D.C., at prescribed rates.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed by the Company with the
Commission pursuant to the Exchange Act, are hereby incorporated by reference
in this Prospectus: (i) Annual Report on Form 10-KSB for the fiscal year ended
June 30, 1997, (ii) Quarterly Report on Form 10-QSB for the quarter ended
September 30, 1997, (iii) Quarterly Report on Form 10-QSB for the quarter ended
December 31, 1997, (iv) Current Report on Form 8-K dated December 24, 1997, and
(v) the description of the Common Stock contained in the Company's Registration
Statement on Form 10-SB/ A, filed January 23, 1997, including any amendments or
reports filed hereafter for the purpose of updating such description.
All documents filed by the Company pursuant to Sections 13(a), 13(c),
14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and
prior to the termination of the offering of shares of Common Stock made hereby
shall be deemed to be incorporated by reference herein. Any statement contained
in a document incorporated or deemed to be incorporated by reference herein
shall be deemed superseded or modified for purposes of this Prospectus to the
extent that a statement contained herein (or in any other subsequently filed
document which also is incorporated by reference herein) modifies or supersedes
such statement. Any such statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, on the written or oral
request of any such person, a copy of any or all of the documents incorporated
by reference (other than exhibits to such documents which are not specifically
incorporated by reference in such documents). Written requests for such copies
should be directed to the Company, 3500 Oak Lawn, Suite 380, Dallas, Texas
75219-4398, Attention: Corporate Secretary. Telephone requests may be directed
to Robert P. Lindsay, Chief Operating Officer of the Company, at (214)
521-9959.
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THE COMPANY
The Company is an independent energy company engaged in the
acquisition, development, exploitation and operation of crude oil and natural
gas producing properties in traditional on-shore oil and natural gas regions of
southwestern United States using conventional operating techniques. This niche
focus is complemented by undertaking further development activity to increase
reserves and production and by making operational improvements to enhance
productivity and cash flow. The Company's growth-by-acquisition strategy
emphasizes: a geographic concentration in the southwestern United States;
existing production and cash flow; a mix of proved and undeveloped reserves;
conventional recovery techniques in onshore locations; improved operating
results through workovers and remedial work; and comprehensive recompletion and
drilling programs to achieve full development of recoverable reserves.
The Company is a Delaware corporation. The Company's principal
executive offices and mailing address are 3500 Oak Lawn, Suite 380, Dallas,
Texas 75219-4398 and its telephone number at that address is (214) 521-9959.
BUSINESS STRATEGY
The Company's strategy for growth involves: acquiring oil and natural
gas properties with significant exploitation, development and/or exploration
potential, obtaining operational control of its significant properties,
developing the properties to maximize production and reserve recovery and
achieving a low operating cost per barrel of oil and/or Mcf of natural gas.
Through this strategy the Company strives to increase reserves, production and
cash flow from operations.
EXPLOITATION AND DEVELOPMENT ACTIVITIES
The Company concentrates on exploiting proved producing properties,
including those with development potential, through workovers, behind the pipe
recompletions, secondary recovery operations, the drilling of development wells
or infill wells and other exploitation techniques. The Company has conducted or
intends to conduct significant secondary recovery/infill drilling programs on
many of the properties it has acquired.
Secondary recovery projects have represented the Company's primary
development focus over the past three years. Generally, "secondary recovery"
refers to methods of oil extraction in which fluid or gas (usually water,
natural gas or CO(2)) is injected into a formation through input (injector)
wells, and oil is removed from surrounding wells. "Waterflooding" is one
proven method of secondary recovery in which water is injected into an oil
reservoir for the purpose of forcing the oil out of the reservoir rock and
into the bore of a producing well. Waterflood projects are engineered to suit
the type of reservoir, depth and condition of the field. The Company has
considerable experience with and actively employs waterflood techniques in many
of its fields in order to stimulate production.
The Company also seeks to exploit its properties through cost
reduction measures, including the reduction of labor, electrical and materials
costs. It seeks to take advantage of volume discounts in the purchase of
equipment and supplies and more effectively utilize field facilities and
equipment by virtue of its geographical concentration. The Company attempts to
negotiate more favorable marketing agreements upon completion of an
acquisition, particularly for oil production. Certain oil purchasers have paid
in the past and are currently paying a premium over posted prices and have
eliminated certain quality and marketing deductions for a portion of the
Company's oil production due to the Company's control over a significant volume
of oil production in its core geographic areas.
The Company makes only limited investments in exploratory drilling.
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COMPANY HISTORY
The Company was incorporated under the laws of the state of Delaware
on May 11, 1989 under the name "Park Avenue Capital Corp." Prior to March 1995,
the Company had no substantive operations other than raising initial capital
and searching for a business to acquire. The Company operates its business
through three subsidiaries, Queen Sand Resources, Inc., a Nevada corporation
("QSRn"), Northland Operating Co., a Nevada corporation ("Northland"), and
Corrida Resources, Inc., a Nevada corporation ("Corrida"). Unless the context
requires otherwise, the term "the Company" refers to and includes QSRn,
Northland, Corrida and all other subsidiaries and partnerships of which the
Company owns a greater than 50% interest.
On March 6, 1995, the Company acquired all of the outstanding common
stock of QSRn in exchange for 19,200,000 shares of Common Stock of the Company.
For accounting purposes, the acquisition has been treated as a recapitalization
of QSRn with QSRn as the acquirer. The historical financial statements of the
Company prior to March 6, 1995 are those of QSRn. QSRn and Corrida own the
material assets of the Company.
FORWARD-LOOKING STATEMENTS
This Prospectus and any Prospectus Supplement may contain or
incorporate by reference certain forward-looking statements, including, without
limitation, statements containing the words "believes", "anticipates,"
"expects" and words of similar import. Such forward-looking statements involve
known and unknown risks, uncertainties and other factors which may cause the
actual results, financial condition, performance or achievements of the
Company, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
adverse changes in the oil and gas industry conditions, changing oil and
natural gas price risks, environmental risks, competition, the impact of
present or future environmental legislation and compliance with environmental
laws, the ongoing need for capital improvements, drilling risks, reserves,
operational and production risks, regulatory risks and counterparty risks, and
other factors referenced in this Prospectus. Certain of these factors are
discussed in more detail under "Risk Factors." Given these uncertainties,
readers are cautioned not to place undue reliance on such forward-looking
statements. The Company disclaims any obligation to update any such
forward-looking statements to reflect future events or developments.
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RISK FACTORS
Prospective investors should carefully consider, among other things,
the following factors in evaluating the Company and its business before
purchasing shares of the Common Stock offered hereby.
ACQUISITION RISK
The Company's current strategy is to increase oil and natural gas
reserves by selectively acquiring and exploiting producing oil and natural gas
properties, rather than engaging in exploratory drilling. The Company's
business strategy assumes that other oil and natural gas companies will
continue to divest of many of their United States oil and natural gas
properties. There can be no assurance, however, that such divestitures will
continue or that the Company will be able to acquire such properties at
acceptable prices or develop additional reserves in the future. If such
acquisition opportunities should significantly decline, the Company may be
required to change its business strategy. Even if the Company identifies oil
and natural gas reserves for possible acquisition, the completion of any
transaction would be dependent on obtaining required funding. Further, there is
no assurance that any such acquisition, if completed, would result in ongoing
revenues to the Company in excess of related operating and financing costs. See
"- - Acquisition Financing."
Although the Company performs a review of acquired properties that it
believes is consistent with industry practices, such reviews are inherently
incomplete. Acquisitions will continue to be investigated and pursued on the
assumption that it is generally not feasible to review in-depth every aspect of
each individual property or well involved in an acquisition and that even an
in-depth review of all properties and records may not necessarily reveal all or
any existing or potential problems, nor will it permit the Company to become
sufficiently familiar with the properties to assess fully their deficiencies
and capabilities. In addition, inspections may not always be performed on every
well prior to acquisition and some problems, including downhole conditions,
latent equipment defects, groundwater contamination and certain environmental
problems, are not necessarily observable even on inspection. Ordinarily,
therefore, the Company's review and due diligence has been and will continue to
be focused on higher value properties with a sample review of the remainder.
Reliance will continue to be made on information provided by the vendors of the
properties with or without independent verification.
ACQUISITION FINANCING
The Company's strategy of acquiring and exploiting producing oil and
natural gas properties is dependent on its ability to obtain financing for any
such acquisitions. The Company does not have sufficient liquidity or capital to
undertake all of the acquisition prospects that it generates or to fully fund
the development of any prospect. Therefore, the Company will continue to be
dependent on raising substantial amounts of additional capital through any one
or a combination of institutional or bank debt financing, equity offerings,
debt offerings and internally generated cash flow, or by forming sharing
arrangements with industry participants. Although the Company has been able to
obtain such financing and to enter into such sharing arrangements in certain of
its projects to date, there can be no assurance that additional financings or
sharing arrangements can be obtained, notwithstanding the Company's need for
substantial amounts of additional capital. If the Company is unable to obtain
capital that may be necessary or desired for its acquisition, development or
exploitation activities, it may be forced to defer or abandon specific
projects, reduce substantially its overall efforts, dilute its interest in
existing sharing arrangements for specific projects, attempt to sell all or a
portion of specific prospects or leasehold positions, or otherwise severely
curtail its acquisition, development and exploitation activities. See "--
Indebtedness."
INDEBTEDNESS
On August 1, 1997 the Company arranged a revolving senior secured loan
facility of $75 million with the Bank of Montreal, acting as agent for the
lenders, to, among other things, refinance
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the indebtedness outstanding under the Company's prior credit facility, fund
working capital and make additional acquisitions as and if appropriate
opportunities are identified. The Company established a subordinated revolving
loan facility of $10 million with Enron Capital & Trade Resources Corp.
("Enron"), acting as agent for the lenders, dated effective December 29, 1997
to pay for capital costs incurred with future development projects and to fund
further acquisitions. The loan is subordinate to the loan agreement between
the Company and the Bank of Montreal executed as of August 1, 1997.
In the case of each loan facility, if the agent does not renew its
loan or if the indebtedness is not repaid when due, the agent would have the
right to obtain possession of and sell the pledged properties, including any
equipment, new wells, or other improvements placed on the properties by the
Company, with the Bank of Montreal having priority over Enron under the terms
of the subordination agreement. In the event of a default on either credit
facility, not subsequently waived by the respective agent, it is unlikely,
particularly with the Bank of Montreal loan, that the Company would be able to
continue its business. In addition, with each loan facility, the Company is
subject to certain financial and operating covenants that are usual and
customary for transactions of this nature, including, but not limited to,
requirements to provide annual audited and unaudited interim financial
information, prohibitions on additional debt, restrictions on certain payments
and distributions to affiliates and others, restrictions on changes in the
nature of the business, and maintenance of minimum cash flow and operating
ratios. The loan agreements also contain usual and customary events of default
and provides remedies to the Bank of Montreal and Enron in the event of
default. Although the Company believes that its cash flows and available
sources of financing will be sufficient to satisfy the interest payments on
these debts at currently prevailing interest rates and oil and natural gas
prices, the Company's level of indebtedness may adversely affect the Company's
ability: (i) to obtain additional financing for working capital, capital
expenditures or other purposes, should it need to do so; or (ii) to acquire
additional oil and natural gas properties or to make acquisitions utilizing new
borrowings. There can be no assurances that the Company will be able to obtain
additional financing, if required, or that such financing, if obtained, will be
on terms favorable to the Company.
In addition, as of February 13, 1998, the Company had outstanding
approximately $2.2 million (DEM 3.95 million) of indebtedness as a result of
the sale of Deutschemark denominated 12% Bonds (the "Bonds"). The Bonds are
unsecured, general obligations of the Company and are subordinated in right of
payment to all existing and future secured indebtedness of the Company.
The Company's ability to make scheduled payments of principal of, or
to pay interest on, or to refinance its indebtedness depends on its future
performance, which, to a certain extent, is subject to general economic,
financial, competitive, legislative, regulatory and other factors beyond its
control, as well as to the prevailing market prices for oil and natural gas.
There can be no assurance that the Company's business will generate sufficient
cash flow from operations or that future bank credit will be available in an
amount sufficient to enable the Company to service its indebtedness or make
necessary capital expenditures. In addition, the Company anticipates that it is
likely to find it necessary to refinance a portion of the principal amount of
its indebtedness at or prior to their maturity. However, there can be no
assurance that the Company will be able to obtain financing to complete a
refinancing of its indebtedness.
The degree to which the Company's assets will be leveraged could have
important consequences to stockholders, including, but not limited to, the
following: (i) a substantial portion of the Company's cash flow from operations
will be required to be dedicated to debt service and will not be available for
other purposes; (ii) the Company's ability to obtain additional financing in
the future could be limited; (iii) certain of the Company's borrowings are at
variable rates of interest, which could result in higher interest expense in
the event of increases in interest rates; and (iv) the Company will be subject
to a variety of restrictive covenants and the failure of the Company to comply
with such covenants could result in events of default which, if not cured or
waived, could have a material adverse effect on the Company and its ability to
make payments of principal of, and interest on its indebtedness.
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CURRENCY RISK
The Bonds are denominated in Deutschemarks ("DEM"). The Company has
the obligation to make periodic interest payments (January 15 and July 15 of
each year) and to repay the principal when it comes due on July 15, 2000 in
DEM. The funds generated by the Company from operations, which form the primary
source of funds to pay the interest, are denominated U.S. dollars ($US). The
source of funds required to repay the principal outstanding on the Bonds has
not yet been identified, since the Bonds do not mature until July 15, 2000. The
Company is exposed to the risk that, upon repayment, the exchange rate between
DEM and $US may be less favorable than that which existed at the time that the
Bonds were issued. This would result in the Company having to repay a larger
number of $US than it received initially. Changes in the $US equivalent of the
DEM Bonds arising from changes to the DEM:$US exchange rate are recognized
monthly. While the Company has recorded unrealized exchange rate gains in the
past, there are no assurances that the Company will continue to realize gains
related to favorable changes in the DEM:$US exchange rates in the future.
Unfavorable changes to the DEM:$US exchange rate will result in the Company
recording unrealized exchange rate losses related to the changes as they occur.
RESERVE REPLACEMENT
The Company's future success depends on its ability to find, develop
or acquire additional oil and gas reserves that are economically producing or
recoverable. The proved reserves of the Company will generally decline with
production, except to the extent that the Company conducts successful
exploration or development activities or acquires properties containing proved
reserves, or both. Therefore, in order to increase reserves and production, the
Company must continue its acquisition, development drilling and recompletion
programs or undertake other replacement activities. The Company's current
strategy is to maintain its focus on low-cost operations while increasing its
reserve base, production and cash flow through (i) acquisition of producing oil
and natural gas properties with undeveloped reserves; (ii) investing in other
oil and gas properties with unexploited reserves; and (iii) using available
cash flows to continue to exploit its existing properties. There can be no
assurance, however, that the Company's planned development projects and
acquisition activities will result in significant additional reserves or that
the Company will have success drilling productive wells at low finding and
development costs. Furthermore, if prevailing oil and natural gas prices were
to increase significantly, the Company's finding costs to add reserves could
increase.
COMPETITION
The exploration for and the development and production of oil and
natural gas is highly competitive. Major and independent oil and gas companies
and individuals actively bid for desirable oil and natural gas properties and
compete for the equipment, services, and labor required to develop and operate
such properties. The Company competes with numerous firms and other individuals
in its activities, including major oil firms and independent exploration and
producing firms, many of which have substantially greater financial resources,
management and technical staffs and facilities than those of the Company.
Accordingly, many of the Company's competitors may be better positioned to
acquire and exploit prospects, obtain funding, hire personnel and market oil
and natural gas production. In addition, the producing, processing and
marketing of crude oil and natural gas is affected by a number of factors which
are beyond the control of the Company, the effect of which cannot be accurately
predicted. Many of the Company's larger competitors may be more able to respond
to factors that affect the demand for oil and natural gas production such as
changes in worldwide oil and natural gas prices and levels of production, the
cost and availability of alternate fuels and the application of government
regulations.
PRICE FLUCTUATIONS
The Company's revenues are dependent upon prevailing prices for oil
and natural gas. Historically, oil and natural gas prices have been and are
likely to continue to be extremely volatile.
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<PAGE> 10
Prices for oil and natural gas are subject to wide fluctuations in response to:
(i) relatively minor changes in the supply of and demand for oil and natural
gas; (ii) market uncertainty; and (iii) a variety of additional factors, all of
which are beyond the Company's control. These factors include domestic and
foreign political conditions, the price and availability of domestic and
imported oil and natural gas, the level of consumer and industrial demand,
weather, domestic and foreign government relations, the price and availability
of alternative fuels and overall economic conditions. If oil or natural gas
prices were to decrease significantly, certain of the Company's wells could
become uneconomic, thereby adversely affecting: (i) the level of proved
reserves attributable to the Company's properties; (ii) the Company's ability
to increase its reserves and production; (iii) the borrowing base under any
financing agreement; and (iv) cash flow from operations, revenues and operating
income.
MARKETABILITY OF PRODUCTION
The marketability of the Company's production depends upon the
availability and capacity of oil and natural gas gathering systems and
pipelines, the effect of federal and state regulations and general economic
conditions. Further, the Company sells a large percentage of its oil and
natural gas production to a few large purchasers. Although the Company does not
believe that the loss of one or all of these customers would have a material
adverse effect in the long term, it could adversely affect cash flows until
other marketing arrangements were made. See "-- Indebtedness."
GOVERNMENT LAWS AND REGULATIONS
The Company's operations are affected from time to time in varying
degrees by political developments and federal and state laws and regulations.
In particular, oil and natural gas production, operations and economics are or
have been affected by price controls, taxes and other laws relating to the oil
and natural gas industry, by changes in such laws and by change in
administrative regulations. The Company cannot predict how existing laws and
regulations may be interpreted by enforcement agencies or court rulings,
whether additional lows and regulations will be adopted, of the effect such
changes may have on its business or financial condition. See "-- Government
Regulations."
ENVIRONMENTAL REGULATIONS
The Company's operations are subject to complex and constantly
changing environmental laws and regulations adopted by federal, state and local
governmental authorities. The Company believes that compliance with such laws
had no material adverse effect on the Company's operations to date, and that
the cost of such compliance has not been material. Nevertheless, the discharge
of oil, natural gas or other pollutants into the air, soil or water may give
rise to liabilities on the part of the Company to the government and third
parties and may require the Company to incur costs of remediation.
Additionally, since a portion of the Company's reserves are dependent on
waterflood operations, any change in produced water disposal requirements or
injection well permitting could have a material adverse effect on the financial
condition and operations of the Company. Moreover, from time to time the
Company has agreed to indemnify both sellers of producing properties from whom
the Company acquires reserves and purchasers of properties from the Company
against certain liabilities for environmental claims associated with the
properties being purchased or sold by the Company. No assurance can be given
that existing environmental laws or regulations, as currently interpreted or
reinterpreted in the future, or future laws or regulations, will not materially
adversely affect the Company's operations and financial condition or that
material indemnity claims will not arise against the Company with respect to
properties acquired or sold by the Company. See "-- Government Regulations."
USE AND RISKS OF HEDGING TRANSACTIONS
The Company has in the past and may in the future enter into oil and
natural gas hedging transactions. While intended to reduce the effects of
volatility of the price of oil and natural gas, such
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<PAGE> 11
transactions may limit potential gains by the Company if oil and natural gas
prices were to rise substantially over the price established by the hedge.
SIGNIFICANT NUMBER OF AUTHORIZED BUT UNISSUED SHARES
The Board of Directors has total discretion in the issuance of any
shares of Common Stock and Preferred Stock which may be issued in the future.
The Company is authorized to issue 100,000,000 shares of its Common Stock
(22,725,502 shares were issued and outstanding as at February 13, 1998). The
Company is authorized to issue 50,000,000 shares of its Preferred Stock
(9,610,400 shares of preferred stock were issued and outstanding as at February
13, 1998).
CONTROL BY CERTAIN STOCKHOLDERS AND MANAGEMENT
EIBOC Investments Ltd. ("EIBOC") owns 6,600,000 shares of the
Company's outstanding Common Stock (as of February 13, 1998: approximately 29%
of the outstanding Common Stock and approximately 20% of the undiluted, voting
stock). Edward Munden and Bruce Benn, executive officers and directors of the
Company and Ronald Benn, executive officer of the Company have beneficial
interests in EIBOC. Joint Energy Development Investments Limited Partnership
("JEDI") owns 9,600,000 shares of the Company's Series A Participating
Convertible Preferred Stock, which shares entitle the holder thereof to vote
generally with holders of the Company's Common Stock (as of February 13, 1998:
100% of the outstanding Series A Preferred Stock and approximately 30% of the
undiluted voting stock). At February 13, 1998, JEDI also holds warrants to
purchase an additional 1,514,973 shares of Common Stock at varying prices
ranging from $1.85 to $3.50.
There is no common ownership, officers or directors between EIBOC and
JEDI. These two stockholders and management are in a position to elect all of
the Company's directors, appoint its officers, and control the Company's
affairs and operations. The Company's Restated Certificate of Incorporation
does not provide for cumulative voting.
RESERVE ESTIMATES AND FUTURE NET REVENUE
There are numerous uncertainties in estimating quantities of proved
reserves and in projecting future rates of production and the timing of
development expenditures, including many factors beyond the control of the
Company. The reserve data incorporated by reference in this Prospectus from the
Annual Report on Form 10-KSB are only estimates. Reserve estimates are
imprecise and may be expected to change as additional information becomes
available. Furthermore, estimates of oil and natural gas reserves, of
necessity, are projections based on engineering data, and there are
uncertainties inherent in the interpretation of such data as well as the
projection of future rates of production and the timing of development
expenditures. Reserve engineering is a subjective process of estimating
underground accumulations of oil and natural gas that cannot be exactly
measured, and the accuracy of any reserve estimate is a function of the quality
of available data and of engineering and geological interpretation and
judgment. Accordingly, estimates of the economically recoverable quantities of
oil and natural gas attributable to any particular group of properties,
classifications of such reserves based on risk of recovery and estimates of the
future net cash flows expected therefrom prepared by different engineers or by
the same engineers at different times may vary substantially. There also can
be no assurance that the reserves set forth herein will ultimately be produced
or that the proved undeveloped reserves will be developed within the periods
anticipated. It is likely that variances from the estimates will be material.
In addition, the estimates of future net revenues from proved reserves of the
Company and the present value thereof are based on certain assumptions about
future production levels, prices and costs that may not be correct. The
Company emphasizes with respect to the estimates prepared by independent
petroleum engineers that the discounted future net cash flows should not be
construed as representative of the fair market value of the proved oil and
natural gas properties belonging to the Company, since discounted future net
cash flows are based on projected cash flows which do not provide for changes
in oil and natural gas prices or for escalation of expenses and capital costs.
The meaningfulness of such estimates is highly dependent on the
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<PAGE> 12
accuracy of the assumptions on which they are based. Actual results are likely
to differ materially from the results estimated. Readers are cautioned not to
place undue reliance on the reserve data from the Annual Report on Form 10-KSB
incorporated by reference in this Prospectus.
DEPENDENCE ON KEY OFFICERS AND EMPLOYEES
The Company is dependent upon Edward J. Munden, President and Chief
Executive Officer, Robert P. Lindsay, Chief Operating Officer and Executive
Vice-President, Ronald I. Benn, Chief Financial Officer and Treasurer, Bruce I.
Benn, Executive Vice-President and Secretary, and other key personnel, for its
various activities, the loss of any one of whom for any reason may adversely
affect the Company. The Company holds key man insurance of CDN $200,000
(approximately U.S. $144,000) on the lives of each of Edward J. Munden, Bruce
I. Benn and Ronald I. Benn.
OPERATIONAL HAZARDS AND INSURABILITY
The Company's oil and natural gas business is also subject to all of
the operating risks associated with the drilling for and production and
secondary recovery of oil and natural gas, including, but not limited to,
uncontrollable flows of oil, natural gas, brine or well fluids (including
fluids used in waterflood activities) into the environment (including
groundwater contamination), fires, explosions, pollution and other risks, any
of which could result in substantial losses to the Company. The natural gas
gathering and processing business is also subject to certain of these risks,
including fires, explosions and environmental contamination. Although the
Company carries insurance at levels it believes are consistent with industry
practices, it is not fully insured against all risks. Losses and liabilities
arising from uninsured and underinsured events could have a material adverse
effect on the financial condition and operations of the Company. See "--
Exploitation and Development Activities."
There are certain risks associated with secondary recovery operations,
especially the use of waterflooding techniques, and drilling activities in
general. Waterflooding involves significant capital expenditures and
uncertainty as to the total amount of secondary reserves that can be recovered.
In waterflood operations, there is generally a delay between the initiation of
water injection into a formation containing hydrocarbons and any increase in
production that may result. The unit production costs per BOE of waterflood
projects are generally higher during the initial phases of such projects due to
the purchase of injection water and related costs, as well as during the later
stages of the life of the project. The degree of success, if any, of any
secondary recovery program depends on a large number of factors, including the
porosity of the formation, the technique used and the location of the injector
wells. Drilling activities carry the risk that no commercial production will be
obtained. The cost of drilling, completing and operating wells is often
uncertain, and drilling operations may be curtailed, delayed or canceled as a
result of many factors.
PREFERRED STOCK; ANTI-TAKEOVER PROVISIONS
The Common Stock is subordinate to all outstanding classes of
Preferred Stock of the Company in the payment of dividends and other
distributions made with respect to the stock, including distributions upon
liquidation or dissolution of the Company. The Board of Directors of the
Company is authorized to issue up to 30,789,600 additional shares of Preferred
Stock (excluding 9,610,400 shares currently outstanding and 9,600,000 reserved
for issuance in exchange for shares of Series A Participating Convertible
Preferred Stock) without first obtaining stockholder approval except in limited
circumstances. The designation and issuance of other series of Preferred Stock
will create additional securities that will have dividend and liquidation
preferences over the Common Stock or, in the case of convertible preferred
stock, may have the effect of diluting the current stockholders' interest in
the Company upon conversion.
The Company's Restated Certificate of Incorporation and Amended and
Restated Bylaws include certain provisions that may have the effect of
encouraging persons considering unsolicited tender offers or other unilateral
takeover proposals to negotiate with the Board of Directors rather
11
<PAGE> 13
than pursue non-negotiated takeover attempts. These provisions include
authorized "blank check" Preferred Stock, and the availability of authorized
but unissued Common Stock. The issuance of Preferred Stock may have the effect
of delaying or preventing a change in control of the Company without further
stockholder action and may adversely affect the rights and powers, including
voting rights, of the holders of Common Stock. In certain circumstances the
issuance of Preferred Stock could depress the market price of the Common Stock.
MARKETING
The Company does not refine or process any of the oil and natural gas
it produces. The Company's oil and natural gas production is sold to various
purchasers typically in the areas where the oil or natural gas is produced.
The Company is currently able to sell, under contract or in the spot market,
all of the oil and most of the natural gas it is capable of producing at
current market prices. Substantially all of the Company's oil and natural gas
is sold under short term contracts or contracts providing for periodic
adjustments or in the spot market; therefore, its revenue streams are highly
sensitive to changes in current market prices. Certain of the Company's oil
purchasers have paid in the past and are currently paying a premium over posted
prices and have eliminated certain quality and marketing deductions for a
portion of the Company's oil production due to the Company's control over a
significant volume of oil production in its core geographic areas. The
Company's principal market for natural gas is pipeline companies as opposed to
end users.
During the year ended June 30, 1997, sales of oil and natural gas to
Big Run Production and EOTT Energy accounted for 32% and 17% respectively, of
the Company's consolidated revenues. Management believes that in the event
these purchasers were to discontinue their purchases, the Company could quickly
locate other buyers and, therefore, the loss of these purchasers would not have
a material impact on the Company's financial condition or results of
operations. However, short term disruptions could occur while the Company
sought alternative buyers.
GOVERNMENT REGULATIONS
The following discussion of government regulation is necessarily brief
and is not intended to constitute a comprehensive discussion of the various
statutes, rules, regulations, and governmental orders, policies, and practices
which may affect the operations of the Company.
General. The oil and gas industry is subject to comprehensive
federal, state, and local laws, regulations and policies which control the
exploration, production, marketing and taxation of oil and natural gas.
Numerous departments and agencies, at federal, state and local levels, have
issued rules and regulations, some or all of which have imposed or may impose
additional expenditures, restrictions, and delays on the Company's business
activities and profitability. For example, such regulations can render
drilling in certain locations more expensive or uneconomical due to increased
surface owner compensation and bonding requirements or environmental regulatory
constraints.
Matters subject to regulation include discharge permits for drilling
operations, drilling bonds, reports concerning operations, the spacing of
wells, unitization and pooling of properties, taxation and environmental
protection. From time to time, regulatory agencies have imposed price controls
and limitations on production by restricting the rate of flow of oil and
natural gas wells below actual production capacity in order to conserve
supplies of oil and natural gas. Because the regulatory environment within
which it operates is always changing, the Company is unable to predict the
future cost or impact of continued regulatory compliance.
Various jurisdictions have laws regarding unitization or forced
pooling which require the working interest owners of a well to participate in
the cost and revenues associated with neighboring wells or require neighboring
owners to participate in their own wells. If acreage included within a lease
becomes subject of a unitization or forced pooling order, drilling operations
may have to be
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<PAGE> 14
undertaken at a time or with other parties not of the Company's choosing or
which may not be in the Company's best interest.
In an attempt to promote competition, the Federal Energy Regulatory
Commission ("FERC") has issued a series of orders which have restructured the
interstate natural gas transportation and marketing system. To date, the
Company has not experienced any adverse effect as a result of these FERC
orders. However, there can be no assurance that the Company's production of
natural gas will not be subject to federal regulation in the future and it is
not possible to predict what effect such regulations may have on its future gas
marketing.
State and Local Regulation of Drilling and Production. State
regulatory authorities have established rules and regulations requiring permits
for drilling, drilling bonds and reports concerning drilling and producing
activities. Such regulations also cover the location of wells, the method of
drilling and casing wells, the surface use and restoration of well locations,
the plugging and abandoning of wells, the density of wells (well spacing)
within a given area and other matters. The states in which the Company operates
also have statutes and regulations governing a number of environmental and
conservation matters, including the unitization and pooling of oil and natural
gas properties and establishment of maximum rates of production from oil and
natural gas wells. Local authorities may also chose to exercise regulatory
control.
Environmental Regulations. The Company's activities are subject to
numerous laws and regulations concerning the storage, use and discharge of
materials into the environment, the remediation of environmental impacts, and
other matters relating to environmental protection, all of which may adversely
affect the Company's operations and the costs of doing business. It is likely
that state and federal environmental laws and regulations will become more
stringent in the future. Current legislative initiatives are focussed on the
disposal of "hazardous" or other waste material associated with oil and natural
gas exploration and production.
Under the federal Comprehensive Environmental Response, Compensation
and Liability Act ("CERCLA"), the Company may become fully liable for the
cleanup costs associated with the release of "hazardous substances" into the
air, water or ground even though the discharge may have been caused in whole or
in part by a previous owner or third party. Many states have similar
provisions. The imposition of liability under CERLA and similar laws would
likely have a serious adverse effect on the ability of the Company to continue
its business.
Violation of environmental laws and regulations may also result in the
imposition of an order requiring the removal, remediation or abatement of the
conditions which gave rise to the violation.
The costs of comprehensive environmental investigation or audits prior
to the acquisition of a property can be expensive and there is no guarantee
that all deficiencies or sources of liability will be identified by such
audits. In connection with the acquisition of producing properties in Texas,
New Mexico and Louisiana, the Company performed limited environmental inquiries
and found no material environmental noncompliance or cleanup liabilities. The
Company does not currently believe that it will be required in the near future
to expend material amounts due to environmental laws and regulations.
Safety and Health Regulations. The Company must also conduct its
operations in accordance with various laws and regulations concerning
occupational safety and health. Currently, the Company does not foresee
expending material amounts to comply with these occupational safety and health
laws and regulations. However, since such laws and regulations are frequently
changed and amended, the Company is unable to predict the future effect of
these laws and regulations.
13
<PAGE> 15
TITLE TO PROPERTIES
All of the Company's working interests are held under leases from
third parties. The Company evaluates title in a manner which it believes to be
consistent with industry practice. Depending on the history of the property and
the investment required to acquire the interest under consideration, the
Company may or may not obtain third party title opinions prior to acquisition
or rely on the title opinions in the possession of the vendor or such other
third party review as it may deem relevant to verify the occupation or interest
of the vendor. The Company is of the opinion that it has satisfactory title to
all such properties sufficient to meet standards generally accepted in the oil
and gas industry. The Company's properties are currently mortgaged under the
loan agreements with the Bank of Montreal and Enron. They are also subject to
common burdens, including customary royalty interests and liens for current
taxes, but the Company has concluded that such burdens do not materially
interfere with the use of such properties. Further, the Company believes that
the economic effect of such common burdens have been appropriately reflected in
the Company's acquisition costs of such properties.
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<PAGE> 16
USE OF PROCEEDS
The Company will not receive any proceeds from any sale of shares of
Common Stock by a Selling Stockholder (other than the exercise price payable
upon exercise of any Warrants).
SELLING STOCKHOLDERS
This Prospectus covers offers and sales from time to time by each
Selling Stockholder (after such person becomes a holder of Common Stock) of the
Common Stock to be owned by such person. The Selling Stockholders will hold
shares of Common Stock issued or issuable upon the conversion of the Series C
Preferred Stock and the Warrants. Pursuant to Rule 416 of the Securities Act,
the Selling Stockholders may also offer and sell shares of Common Stock issued
as a result of, among other events, stock splits, stock dividends and
anti-dilution adjustment provisions (including by reason of any change in the
conversion price mechanism of the Series C Preferred Stock). In addition, the
Selling Stockholders may also offer and sell shares of Common Stock issued as
payment of liquidated damages upon certain events of default. The registration
of the shares of Common Stock offered for resale hereby is pursuant to a
Registration Rights Agreement dated December 24, 1997, entered into in
connection with the original issuance of the Series C Preferred Stock and the
Warrants (the "Registration Rights Agreement").
The Series C Preferred Stock and the Warrants were issued to the
Selling Stockholders pursuant to a Securities Purchase Agreement dated December
22, 1997 among the Company and the Selling Stockholders (the "Purchase
Agreement"). In exchange for aggregate cash consideration of $10 million the
Company issued an aggregate of 10,000 shares of Series C Preferred Stock to the
Selling Stockholders and Warrants to purchase an aggregate of 340,138 shares of
Common Stock.
The following table lists the name of each Selling Stockholder, the
number of shares of Common Stock owned by each Selling Stockholder before this
Offering, the number of shares of Common Stock that may be offered by each
Selling Stockholder pursuant to this Prospectus and the number of shares of
Common Stock to be owned by each Selling Stockholder upon completion of the
Offering if all shares registered hereby are sold. None of the Selling
Stockholders has held any position or office or had any other material
relationship with the Company or any of its predecessors or affiliates in the
last three years. The information below is as of the date of this Prospectus
and has been furnished by the respective Selling Stockholders. Under the terms
of the Registration Rights Agreement the Company is required to register for
resale at least 200% of the number of shares issuable upon conversion of the
Series C Preferred Stock and exercise of the Warrants. The number of shares
covered by this Prospectus represents 200% of the shares currently issuable.
<TABLE>
<CAPTION>
NUMBER OF SHARES NUMBER OF SHARES NUMBER OF SHARES
NAME OF OWNED BEFORE BEING REGISTERED OWNED AFTER
SELLING STOCKHOLDER THIS OFFERING(1) FOR RESALE(1) THIS OFFERING(2)
------------------- ---------------- ------------- ------------------
<S> <C> <C> <C>
Montrose Investments L.P.......................... 673,470 673,470 -0-
Proprietary Convertible Investment Group, Inc..... 1,156,464 1,156,464 -0-
Shepherd Investments International, Ltd........... 561,226 561,226 -0-
Stark International............................... 561,226 561,226 -0-
Westover Investments L.P.......................... 448,980 448,980 -0-
------- ------- -----------
TOTAL 3,401,366 3,401,366 -0-
========= ========= ===========
</TABLE>
15
- ------------------
(1) Represents 200% of the shares currently issuable to such holder upon
conversion of shares of Series C Preferred Stock or exercise of Warrants
held by such holder.
(2) Assumes all shares held by such Selling Stockholder acquired upon
conversion of the Series C Preferred Stock and exercise of the Warrants
will be offered and sold.
<PAGE> 17
PLAN OF DISTRIBUTION
The shares of Common Stock covered hereby may be offered and sold from
time to time by the Selling Stockholders. The Selling Stockholders will act
independently of the Company in making decisions with respect to the timing,
manner and size of each sale. Such sales may be made in the Nasdaq SmallCap
Market (or other market on which the Common Stock is listed or otherwise
qualified for trading), at market prices prevailing at the time of the sale, at
prices related to the then prevailing market price or in negotiated
transactions, including pursuant to an underwritten offering or pursuant to one
or more of the following methods: (i) purchases by a broker-dealer as principal
and resale by such broker or dealer for its account pursuant to this
Prospectus; (ii) ordinary brokerage transactions and transactions in which a
broker solicits purchasers; and (iii) block trades in which a broker-dealer so
engaged will attempt to sell the shares as agent but may take a position and
resell a portion of the block as principal to facilitate the transaction. In
effecting sales, broker-dealers engaged by the Selling Stockholders may arrange
for other broker- dealers to participate. Broker-dealers may receive
commissions or discounts from the Selling Stockholders in amounts to be
negotiated immediately prior to the sale.
In connection with the sale of shares of Common Stock covered hereby,
underwriters or agents may receive compensation from the Selling Stockholders
or from purchasers of the shares of Common Stock covered hereby for whom they
may act as agents, in the form of discounts, concessions or commissions.
Underwriters may sell shares of Common Stock to or through dealers and such
dealers may receive compensation in the form of discounts, concessions or
commissions from the underwriters and/or commissions from the purchasers for
whom they act as agents. Underwriters, dealers and agents that participate in
the distribution of shares of Common Stock covered hereby may be deemed to be
underwriters, and any discounts or commissions received by them from the
Selling Stockholders and any profit on the resale of shares of Common Stock by
them may be deemed to be underwriting discounts and commissions under the
Securities Act. Neither the Company nor any Selling Stockholder can presently
estimate the amount of such compensation. The Company knows of no existing
arrangements between any Selling Stockholder, any other stockholder, broker,
dealer, underwriter or agent relating to the sale or distribution of the
Shares.
To the extent required, the Company will file, during any period in
which offers or sales are being made, a supplement to this Prospectus which
sets forth, with respect to a particular offering, the specific number of
shares to be sold, the name of the Selling Stockholder, the sales price, the
name of any participating broker, dealer, underwriter or agent, any applicable
commission or discount and any other material information with respect to the
plan of distribution not previously disclosed.
The Registration Rights Agreement provides that the Company will pay
substantially all of the expenses incident to the registration, offering and
sale of the shares to the public other than underwriting discounts, commissions
and expenses of counsel to each Selling Stockholder. The Registration Rights
Agreement also provides that the Company will indemnify the Selling
Stockholders against certain liabilities, including liabilities under the
Securities Act.
In order to comply with certain states' securities laws, if
applicable, the shares will be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
Common Stock may not be sold unless the Common Stock has been registered or
qualified for sale in such state or an exemption from registration or
qualification is available and is satisfied.
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<PAGE> 18
This Offering will terminate on the earlier of (i) the date on which
all shares offered hereby have been sold by the Selling Stockholders and (ii)
the date on which all of the remaining shares (in the reasonable opinion of
counsel to the Selling Stockholder) may be immediately sold to the public
without registration and without regard to the amount of shares which may be
sold by a holder thereof at a given time.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be
passed upon for the Company by its counsel, Haynes and Boone, LLP, Dallas,
Texas.
EXPERTS
The consolidated balance sheet of the Company as of June 30, 1997, and
the related statements of operations, stockholders' equity and cash flows for
the year ended June 30, 1997 incorporated in this Prospectus by reference from
the Company's Annual Report on Form 10-KSB for the year ended June 30, 1997 have
been audited by Ernst & Young LLP, independent auditors, as stated in their
report incorporated by reference herein and are included in reliance upon such
report given the authority of such firm as experts in accounting and auditing.
The consolidated balance sheet of the Company as of June 30, 1996, and
the related consolidated statements of operations, stockholders' equity and
cash flows for the year ended June 30, 1996 have been incorporated by reference
herein and in the registration statement in reliance upon the report of KPMG
Peat Marwick LLP, independent certified public accountants, incorporated by
reference and upon the authority of said firm as experts in accounting and
auditing.
The statements of operating revenues and direct operating expenses of
Collins and Ware Properties for the years ended June 30, 1996 and 1997
incorporated in this Prospectus by reference from the Company's Annual Report on
Form 10-KSB for the year ended June 30, 1997, have been audited by Ernst & Young
LLP, independent auditors, as stated in their report incorporated by reference
herein and are included in reliance upon such report given the authority of such
firm as experts in accounting and auditing.
The estimates as of June 30, 1997 relating to the Company's proved oil
and natural gas reserves and future net revenues of oil and natural gas
reserves incorporated in this prospectus by reference from the Company's Annual
Report on Form 10-KSB for the year ended June 30, 1997, are based upon
estimates of such reserves prepared by H.J. Gruy and Associates, Inc.,
independent consulting petroleum engineers, in reliance upon its reports and
upon the authority of this firm as experts in petroleum engineering.
The estimates relating to the Company's proved oil and natural gas
reserves and future net revenues of oil and natural gas reserves as of June 30,
1995 and 1996 incorporated in this prospectus by reference from the Company's
Annual Report on Form 10-KSB for the year ended June 30, 1997, are based upon
estimates of such reserves prepared by Harper and Associates, Inc., independent
consulting petroleum engineers, in reliance upon its reports and upon the
authority of this firm as experts in petroleum engineering.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES
Pursuant to the Registration Rights Agreement between the Company and
the Selling Stockholders, the Company has agreed to indemnify each Selling
Stockholder and its officers, directors, employees, agents and representatives
and any person who controls such Selling Stockholder against
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<PAGE> 19
any losses, claims, damages, liabilities or reasonable out-of-pocket expenses
arising out of or based upon (i) any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement, including
any amendments or supplements thereto, or (ii) the omission or alleged omission
to state therein a material fact required to be stated therein, or necessary to
make the statements therein not misleading, except, among other things, to the
extent that such liabilities arise out of or are based upon and in conformity
with any information furnished in writing to the Company by each respective
Selling Stockholder expressly for use in the Registration Statement or an
amendment or supplement thereto. In addition, each Selling Stockholder,
acting severally and not jointly, under the Registration Rights Agreement has
agreed to indemnify the Company and its officers, directors, employees, agents
and representatives and any person who controls the Company against any losses,
claims, damages, liabilities or reasonable out-of-pocket expenses arising out
of or based upon and in conformity with written information furnished by such
Selling Stockholder expressly for use in the Registration Statement or an
amendment or supplement thereto. However, the foregoing indemnity shall not
apply to amounts paid in settlement of any such liability if the settlement is
effected without the consent of such Selling Stockholder.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of
the Commission such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable.
18
<PAGE> 20
CERTAIN DEFINITIONS
The following are certain defined terms used in this Prospectus:
"Bbl" One stock tank barrel, or 42 US gallons liquid volume, used herein in
reference to crude oil or other liquid hydrocarbons.
"BEHIND THE PIPE" Hydrocarbons in a potentially producing horizon penetrated by
a well bore the production of which has been postponed pending the
production of hydrocarbons from another formation penetrated by the
well bore. The hydrocarbons are classified as proved but non-producing
reserves.
"BOE" Barrels of oil equivalent (converting six Mcf of natural gas to one Bbf
of oil).
"DEVELOPMENT WELL" A well drilled within the proved boundaries of an oil and
natural gas reservoir to the depth of a stratigraphic horizon known to
be productive.
"Mbbl" One thousand Bbl.
"Mmbbl" One million Bbl.
"Mcf" One thousand cubic feet.
"Mmcf" One million cubic feet of natural gas equivalent.
"PRODUCTIVE WELL" A well that is producing oil or natural gas or that is
capable of production.
"PROVED RESERVES" The estimated quantities of crude oil, natural gas and
natural gas liquids which geological and engineering data demonstrate
with reasonable certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions."
"PROVED UNDEVELOPED RESERVES" or "PUD" Reserves that are expected to be
recovered from new wells or undrilled acreage, or from existing wells
where a relatively major expenditure is required for completion.
"ROYALTY INTEREST" An interest in an oil and natural gas property entitling the
owner to a share of oil and natural gas production, free of costs of
production.
"SECONDARY RECOVERY" A method of oil and natural gas extraction in which energy
sources extrinsic to the reservoir are utilized.
"WORKING INTEREST" The operating interest which gives the owner the right to
drill, produce and conduct operating activities on the property and a
share of production, subject to all royalties, overriding royalties
and other burdens and to all costs of exploration, development and
operations and all risks in connection therewith.
19
<PAGE> 21
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<CAPTION>
<S> <C>
Securities and Exchange Commission Registration Fee . . . . . . . . . . . . . . . . . . . . . . . $7,324
Nasdaq SmallCap Market Listing Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,500
Printing Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Accounting Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
Legal Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000
Engineer Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000
Blue Sky Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500
Miscellaneous Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 626
-------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $35,000
=======
</TABLE>
All of the above expenses except the Securities and Exchange
Commission registration fee and the Nasdaq SmallCap Market listing fee are
estimated. All of such expenses will be borne by the Company.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
In accordance with Section 145 of the DGCL, Article IX of the
Company's Restated Certificate of Incorporation (the "Certificate") provides
that the Company shall indemnify, to the full extent permitted by law, any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the corporation) by reason of the fact that he is or was a director or
officer of the corporation or is or was serving at the request of the
corporation, in any capacity, another corporation, partnership, joint venture,
trust or other enterprise, against expenses (including attorney's fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in, or not opposed
to, the best interests of the corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful.
Section 145 and the Certificate further provide that indemnification
provided for thereby shall not be deemed exclusive of any other rights to which
the indemnified party may be entitled, and that the corporation is empowered to
purchase and maintain insurance on behalf of a director or officer of the
corporation against any liability asserted against him and incurred by him in
any such capacity, or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against such liabilities
under Section 145. The Certificate and Section 145 also allow for the
indemnification provisions to continue as to a person who has ceased to be a
director, officer, employee or agent of the Company and to inure to the benefit
of the heirs, executors and administrators of such a person.
Pursuant to Section 145, the Certificate and the Company's Amended and
Restated Bylaws (the "Bylaws") provide that the expenses (including attorney's
fees) incurred by an officer or director in defending any civil, criminal,
administrative or investigative action, suit or proceeding may be paid by the
Company in advance of the final disposition of the action, suit or proceeding,
as authorized by the Board of Directors upon receipt of an undertaking by or on
behalf of such director or officer to repay such amount if it is determined
that he is not entitled to such indemnification.
The Bylaws further provide that no director of the Company shall be
personally liable to the Company or its stockholders for monetary damages for
breach of fiduciary duty as a director, except
II-1
<PAGE> 22
for liability (i) for any breach of the director's duty of loyalty to the
Company or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL or (iv) for any transaction from which the director
derived an improper personal benefit. Any repeal or modification of this
provision related to director's liability shall not adversely affect any right
or protection of a director of the Company existing immediately prior to such
repeal or modification. Further, if the DGCL shall be repealed or modified, the
elimination of liability of a director provided in. the Bylaws shall be to the
fullest extent permitted by the DGCL as so amended.
Pursuant to Registration Rights Agreements with certain stockholders
of the Company, the Company has agreed to indemnify such stockholders
(including the Selling Stockholders) against certain liabilities, including
liabilities under the Securities Act or otherwise. For the undertaking with
respect to indemnification, see Item 17 herein.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
----------- -------
<S> <C>
4.1 Certificate of Designation of Series C Convertible Preferred Stock, filed as Exhibit 1.1 to
the Company's Form 8-K dated December 24, 1997, which exhibit is incorporated herein by
reference.
4.2 Securities Purchase Agreement, filed as Exhibit 1.2 to the Company's Form 8-K dated
December 24, 1997, which exhibit is incorporated herein by reference.
4.3 Registration Rights Agreement, filed as Exhibit 1.3 to the Company's Form 8-K dated
December 24, 1997, which exhibit is incorporated herein by reference.
4.4 Form of Common Stock Purchase Warrant, filed as Exhibit 1.4 to the Company's Form 8-K dated
December 24, 1997, which exhibit is incorporated herein by reference.
4.5 Restated Certificate of Incorporation.
4.6 Amended and Restated Bylaws, filed as an Exhibit to the Company's Form 8-K dated May 6,
1997, which exhibit is incorporated herein by reference.
5.1 Opinion of Haynes and Boone, LLP.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of KPMG Peat Marwick LLP.
23.3 Consent of Haynes and Boone, LLP, contained in the opinion filed as Exhibit 5.1.
23.4 Consent of H.J. Gruy and Associates, Inc.
23.5 Consent of Harper and Associates, Inc.
25.1 Power of Attorney, included as part of signature page of this Registration Statement.
</TABLE>
- -------------------
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective
amendment
II-2
<PAGE> 23
thereof) which, individually or in the aggregate,
represent a fundamental change in the information set
forth in the Registration Statement. Notwithstanding
the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of
securities offered would not exceed that which was
registered) and any deviation from the low or high
end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent
no more than a 20 percent change in the maximum
aggregate offering price set forth in the
"Calculation of Registration Fee" table in the
effective Registration Statement;
(iii) to include any material information with respect to
the plan of distribution not previously disclosed in
the Registration Statement or any material change to
such information in the registration statement;
provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if
the information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the Registrant pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in this Registration Statement.
(2) that, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof; and
(3) to remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event a claim for indemnification against such liabilities (other than the
payment by the small business issuer of expenses incurred or paid by a
director, officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of Prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in a
form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form of
Prospectus shall be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 24
SIGNATURES AND POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Dallas, State of Texas, on the 6th day of
March, 1998.
QUEEN SAND RESOURCES, INC.
By: /s/ Edward J. Munden
------------------------------
Name: Edward J. Munden
Title: Chairman of the Board, President and Chief
Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints each of Robert P. Lindsay and Bruce I.
Benn, his or her true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution, for him or her and in his or her name,
place and stead, in any and all capacities, to sign, execute and file with the
Securities and Exchange Commission and any state securities regulatory board or
commission any documents relating to the proposed issuance and registration of
the securities offered pursuant to this Registration Statement on Form S-3
under the Securities Act of 1933, including any amendment or amendments
relating thereto, with all exhibits and any and all documents required to be
filed with respect thereto with any regulatory authority, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises in order to effectuate the same as fully to all intents
and purposes as he or she might or could do if personally present, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or either
of them, or their or his substitute or substitutes, may lawfully do or cause to
be done.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-3 has been signed by the following persons on
behalf of the Registrant in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Edward J. Munden Chairman of the Board, President March 6, 1998
- ---------------------------------- Chief Executive Officer, Director
Edward J. Munden (principal executive officer)
/s/ Bruce I Benn Executive Vice President, Secretary March 6, 1998
- ---------------------------------- and Director
Bruce I. Benn
/s/ Ronald I. Benn Chief Financial Officer (principal March 6, 1998
- ---------------------------------- financial officer and accounting officer)
Ronald I. Benn
/s/ Robert P. Lindsay Chief Operating Officer, Executive Vice March 6, 1998
- ---------------------------------- President and Director
Robert P. Lindsay
/s/ Ted Collins, Jr. Director March 3, 1998
- ----------------------------------
Ted Collins, Jr.
/s/ Eli Rebich Director March 4, 1998
- ----------------------------------
Eli Rebich
</TABLE>
II-4
<PAGE> 25
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Numbered
Exhibit No. Page
----------- --------------
<S> <C>
4.1 Certificate of Designation of Series C Convertible Preferred Stock, filed as
Exhibit 1.1 to the Company's Form 8-K dated December 24, 1997, which exhibit
is incorporated herein by reference.
4.2 Securities Purchase Agreement, filed as Exhibit 1.2 to the Company's Form
8-K dated December 24, 1997, which exhibit is incorporated herein by
reference.
4.3 Registration Rights Agreement, filed as Exhibit 1.3 to the Company's Form
8-K dated December 24, 1997, which exhibit is incorporated herein by
reference.
4.4 Form of Common Stock Purchase Warrant, filed as Exhibit 1.4 to the Company's
Form 8-K dated December 24, 1997, which exhibit is incorporated herein by
reference.
4.5 Restated Certificate of Incorporation.
4.6 Amended and Restated Bylaws filed as an exhibit to the Company's Form 8-K
dated May 24, 1997, which exhibit is incorporated herein by reference.
5.1 Opinion of Haynes and Boone, LLP.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of KPMG Peat Marwick LLP.
23.3 Consent of Haynes and Boone, LLP, contained in the opinion filed as Exhibit 5.1.
23.4 Consent of H.J. Gruy and Associates, Inc.
23.5 Consent of Harper and Associates, Inc.
24.1 Power of Attorney , included as part of signature page of this Registration
Statement.
</TABLE>
- -------------------------
<PAGE> 1
EXHIBIT 4.5
RESTATED CERTIFICATE OF INCORPORATION
OF
QUEEN SAND RESOURCES, INC.
(ORIGINALLY NAMED PARK AVENUE CAPITAL, INC.)
(ORIGINALLY INCORPORATED ON MAY 11, 1989)
FIRST: Name. The name of the corporation is QUEEN SAND RESOURCES, INC.
SECOND: Registered Office. The registered office of the Corporation is
Corporation Trust Centre, 1209 Orange Street, City of Wilmington, County of New
Castle, Delaware. The name of the Corporation's registered agent is The
Corporation Trust Company.
THIRD: Purpose. The purpose of the corporation is to purchase, own
and sell the stock, securities and/or assets of various businesses, and to
engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of Delaware.
FOURTH: Power. The corporation shall have every power which a
corporation now or hereafter organized under the General Corporation Law or
successor statutes of Delaware may have.
FIFTH: Description and Authorization of Stock.
(a) Stock Authorization. The total number of shares of capital
stock that the Corporation shall have the authority to issue is one hundred
fifty million (150,000,000) shares, which shall consist of (i) one hundred
million (100,000,000) shares of Common Stock, par value ($0.0015) per share
(the "Common Stock") and (ii) fifty million (50,000,000) shares of Preferred
Stock, par value ($0.01) per share (the "Preferred Stock").
(b) Common Stock.
(i) Voting Rights. The holders of Common Stock will be
entitled to one vote per share on all matters to be voted on by the
stockholders of the Corporation, including the election of directors. The
holders of Common Stock shall not have cumulative voting rights.
(ii) Dividends. Subject to the prior rights of any
Preferred Stock issued by the Corporation, as and if dividends are declared
thereon by the Board of Directors of the Corporation out of funds legally
available therefor, whether payable in cash, property or securities of the
Corporation, the holders of Common Stock will be entitled to share equally, on
a share-for-share basis, in all such dividends.
(iii) Liquidation. Upon any liquidation, dissolution or
winding up of the Corporation, after all amounts due and owing to the holders
of any Preferred Stock of the Corporation have been paid or the payment has
been fully provided for, the holders of Common Stock shall be entitled to
receive all of the remaining assets of the Corporation available for
distribution to holders of Common Stock and will be entitled to share equally,
on a share-for- share basis, in such distribution. Neither the merger or
consolidation of the Corporation with or
<PAGE> 2
into another corporation or corporations, nor the sale or transfer by the
Corporation of all or part of its assets, nor the reduction of its capital
stock, will be deemed to be a liquidation, dissolution or winding up of the
Corporation within the meaning of this paragraph.
(c) Preferred Stock.
(i) Issuance. The Preferred Stock may be issued from
time to time in one or more series, the shares of each series to have such
voting powers, full or limited, or no voting powers, and such designations,
preferences and relative, participating, optional, dividend or other special
rights, and qualifications, limitations, restrictions or other characteristics
thereof as are stated and expressed herein and in the resolution or resolutions
providing for the issuance of such series adopted by the Board of Directors of
the Corporation as hereafter prescribed. The shares of each series of the
Preferred Stock may vary from the shares of any other class or series in any
respect.
The resolution or resolutions providing for the issuance of any such
series may provide, without limitation:
(A) whether or not shares of a series shall have
voting rights, full, special or limited, or shall have no voting rights, and
whether or not the holders of such shares are to be entitled to vote as a
separate class or series either alone or together with the holders of one or
more other classes or series of stock; provided, however, that if the
resolutions authorize the holders of Preferred Stock to elect Directors upon
certain events, those Directors elected by the holders of Preferred Stock shall
be in addition to those directors authorized from time to time pursuant to the
Bylaws of the Corporation;
(B) the number of shares to constitute the series
and the designations thereof;
(C) the preferences and relative, participating,
optional or other special rights, if any, and the qualifications, limitations
or restrictions thereof, if any, with respect to any series;
(D) whether or not the shares of any series shall
be redeemable at the option of the Corporation or the holders thereof or upon
the happening of any specified event, and, if redeemable, the redemption price
or prices (which may be payable in the form of cash, notes, securities, or
other property), and the time or times at which, and the terms and conditions
upon which, such shares shall be redeemable and the manner of redemption;
(E) whether or not the shares of a series shall
be subject to the operation of retirement or sinking funds to be applied to the
purchase or redemption of such shares for retirement, and, if such retirement
or sinking fund or funds are to be established, the annual amount thereof, and
the terms and provisions relative to the operation thereof;
2
<PAGE> 3
(F) the dividend rate, if any, whether dividend
rates are payable in cash, stock of the Corporation, or other property, the
conditions upon which and the times when such dividends are payable, the
preference to or the relation to the payment of dividends payable on any other
class or classes or series of stock, whether or not such dividends shall be
cumulative or noncumulative, and the date or dates from which such dividends
shall accumulate;
(G) the preferences, if any, and the amounts
thereof which the holders of shares of any series shall be entitled to receive
upon the voluntary or involuntary dissolution of, or upon any distribution of
the assets of, the Corporation;
(H) whether or not the shares of any series shall
be entitled to the benefit of conditions and restrictions upon the creation of
indebtedness of the Corporation or any subsidiary of the Corporation, upon the
issue of any additional stock (including, without limitation, additional shares
of such series or of any other class or series) and upon the payment of
dividends or the making of other distributions on, and the purchase, redemption
or other acquisition by the Corporation or any subsidiary of the Corporation
of, any outstanding stock of the Corporation;
(I) whether or not the shares of any series, at
the option of the Corporation or the holders thereof or upon the happening of
any specified event, shall be convertible into or exchangeable for the shares
of any other class or classes or of any other series of the same or any other
class or classes of stock, securities, or other property of the Corporation and
the conversion price or prices or ratio or ratios or the rate or rates at which
such exchange may be made, with such adjustments, if any, as shall be stated
and expressed or provided for in such resolution or resolutions; and
(J) such other voting powers, designations,
preferences, rights, qualifications, limitations or restrictions with respect
to any series as the Board of Directors of the Corporation may deem advisable.
(ii) Increases and Decreases in Series. The Board of
Directors of the Corporation may increase the number of shares (but not above
the total number of authorized shares of the class) of the Preferred Stock
designated for any existing series by a resolution adding to such series
authorized and unissued shares of the Preferred Stock not designated for any
other series. The Board of Directors of the Corporation may decrease the
number of shares of the Preferred Stock (but not below the number of shares
thereof then outstanding) designated for any existing series by a resolution,
subtracting from such series unissued shares of the Preferred Stock designated
for such series, and the shares so subtracted shall become authorized,
unissued, and undesignated shares of the Preferred Stock.
(d) Series A Preferred Stock
Section 1. Designation. The distinctive serial designation of
said series shall be "Series A Participating Convertible Preferred Stock"
(hereinafter called "Series A Preferred Stock"). Each share of Series A
Preferred Stock shall be identical in all respects with all other shares of
Series A Preferred Stock.
3
<PAGE> 4
Section 2. Number of Shares. The number of shares of Series A
Preferred Stock shall be 9,600,000. Shares of Series A Preferred Stock that
are redeemed, purchased or otherwise acquired by the Corporation or converted
into Common Stock shall be canceled, and the Company shall take all such
actions as are necessary to cause such shares to revert to the status of
authorized but unissued shares of Preferred Stock undesignated as to series.
Section 3. Definitions. As used herein with respect to Series A
Preferred Stock, the following terms shall have the following meanings:
(a) The term "Junior Securities" shall mean the Common
Stock, par value $.0015 per share (the "Common Stock"), of the Corporation and
any other class or series of stock of the Corporation hereafter authorized over
which the Series A Preferred Stock has preference or priority in the payment of
dividends, when used with respect to the payment of dividends, or in the
distribution of assets on any liquidation, dissolution or winding up of the
Corporation, when used with respect to the distribution of assets on any
liquidation, dissolution or winding up of the Corporation.
(b) The term "Parity Securities" shall mean any other
class or series of stock of the Corporation hereafter authorized which ranks on
a parity with the Series A Preferred Stock in the payment of dividends, when
used with respect to the payment of dividends, or the distribution of assets on
any liquidation, dissolution or winding up of the Corporation, when used with
respect to the distribution of assets on any liquidation, dissolution or
winding up of the Corporation.
(c) The term "Business Day" shall mean a day that is not
a Saturday, a Sunday or a day on which banking institutions in Houston, Texas
are not required to be open for business.
Section 4. Dividends. The holders of record, as of the record
date therefor or, if there is no such record date, as of the date of payment
thereof, of shares of Series A Preferred Stock shall be entitled to receive,
when, as and if declared by the Board of Directors, out of funds legally
available therefor, any dividends (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 such
record date, on the date of payment thereof. Such right to receive dividends
shall be in addition to the right to receive any dividends payable pursuant to
paragraph (b) of Section 9.
Section 5. Liquidation Preference.
(a) In the event of any liquidation, dissolution or
winding up of the Corporation, either voluntary or involuntary, before any of
the assets of the Corporation shall be distributed among or paid over to the
holders of any Junior Securities, the holders of shares of Series A Preferred
Stock shall be entitled to receive (i) an amount per share (the "Liquidation
Preference") equal to the lesser of (A) $1.50 and (B) the sum of (x) $0.521 and
(y) the quotient
4
<PAGE> 5
obtained by dividing (I) the aggregate amount of all payments made, as of the
date of such liquidation, dissolution or winding up, to the Corporation by
Joint Energy Development Investments Limited Partnership ("JEDI") or its
assignee pursuant to the Earn Up Agreement dated as of May 6, 1997 between the
Corporation and JEDI by (II) 9,600,000 and (ii) any and all accrued but unpaid
dividends thereon, and shall not be entitled to any other or additional
distribution.
(b) If upon such liquidation, dissolution or winding up,
whether voluntary or involuntary, the assets available for distribution among
the holders of shares of Series A Preferred Stock and holders of Parity
Securities shall be insufficient to permit the payment to such holders of the
full preferential amounts to which they are entitled, then the assets of the
Corporation available for distribution among the holders of Series A Preferred
Stock and holders of Parity Securities shall be distributed ratably among such
holders so that the amounts distributed in respect of the Series A Preferred
Stock and the Parity Securities shall bear to each other the same ratio that
the full amounts payable on liquidation, dissolution or winding up of the
Corporation to the holders of shares of Series A Preferred Stock and the Parity
Securities bear to each other.
(c) A consolidation or merger of the Corporation with or
into any other corporation or other entity, or a sale of all or substantially
all of the assets of the Corporation that does not involve a distribution by
the Corporation of cash or other property to the holders of shares of the
Common Stock, shall not be deemed to be a liquidation, dissolution or winding
up within the meaning of this Section 5.
Section 6. Conversion Rights. Each holder of shares of Series A
Preferred Stock shall have the right, at such holder's option, to convert such
shares into shares of Common Stock of the Corporation at any time and from time
to time on and subject to the following terms and conditions:
(a) The shares of Series A Preferred Stock shall be
convertible at the principal office of the Corporation and at such other office
or offices, if any, as the Board of Directors may designate, into fully paid
and non-assessable shares (calculated as to each conversion to the nearest
1/100th of a share) of Common Stock, at the Conversion Rate, as hereinafter
defined, subject to adjustment as provided herein. The "Conversion Rate,"
which represents the number of shares of Common Stock into which each share of
Series A Preferred Stock is convertible, shall initially be one.
(b) In order to convert shares of Series A Preferred
Stock into Common Stock the holder thereof shall surrender at the office or
offices hereinabove mentioned the certificate or certificates therefor, duly
endorsed or assigned to the Corporation or in blank, and give written notice to
the Corporation at said office or offices that such holder elects to convert
such shares. Shares of Series A Preferred Stock shall be deemed to have been
converted immediately prior to the close of business on the day of the
surrender of the certificates for such shares for conversion in accordance with
the foregoing provisions, and the person or persons entitled to receive the
Common Stock issuable upon such conversion shall be treated for all purposes as
the record holder or holders of such Common Stock at such time. As promptly as
practicable on or after the conversion date, the Corporation shall issue and
shall deliver at such office a certificate
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or certificates for the number of full shares of Common Stock issuable upon
such conversion, together with payment in lieu of any fraction of a share, as
hereinafter provided, to the person or persons entitled to receive the same.
Preferential dividends pursuant to Section 4(a) on converted shares of Series A
Preferred Stock shall cease to accrue on the date of conversion, and all such
dividends that have accrued as of the date of conversion but have not been paid
shall be payable on the date such dividends would have been payable if such
conversion had not occurred.
(c) No fractional shares of Common Stock shall be issued
upon conversion of shares of Series A Preferred Stock, but, instead of any
fraction of a share which would otherwise be issuable, the Corporation shall
pay cash in respect of such fraction in an amount equal to such fraction of the
fair market value (as determined by the Board of Directors of the Corporation)
of a share of Common Stock on the date on which the certificate or certificates
for such shares were duly surrendered for conversion.
(d) The number and kind of securities issuable upon the
conversion of the Series A Preferred Stock shall be subject to adjustment from
time to time upon the happening of certain events occurring on or after the
Issuance Date of the shares of the Series A Preferred Stock as follows:
(i) In case of any reclassification or change of
outstanding securities issuable upon exercise of the conversion rights
(other than a change in par value, or from par value to no par value,
or from no par value to par value or as a result of a subdivision or
combination), or in case of any consolidation or merger of the
Corporation with or into another corporation or other entity (other
than a merger with another corporation or other entity in which the
Corporation is the surviving corporation and which does not result in
any reclassification or change -- other than a change in par value, or
from par value to no par value, or from no par value to par value, or
as a result of a subdivision or combination -- of outstanding
securities issuable upon conversion of the Series A Preferred Stock),
the holders of the Series A Preferred Stock shall have, and the
Corporation, or such successor corporation or other entity, shall
covenant in the constituent documents effecting any of the foregoing
transactions that the holders of the Series A Preferred Stock do have,
the right to obtain upon conversion of the Series A Preferred Stock,
in lieu of each share of Common Stock theretofore issuable upon
conversion of the Series A Preferred Stock, the kind and amount of
shares of stock, other securities, money and property receivable upon
such reclassification, change, consolidation or merger by a holder of
one share of Common Stock issuable upon conversion of the Series A
Preferred Stock as if the conversion had occurred immediately prior to
such reclassification, change, consolidation or merger. The
constituent documents effecting any reclassification, change,
consolidation or merger shall provide for any adjustments which shall
be as nearly equivalent as may be practicable to the adjustments
provided in this subparagraph (d)(i). The provisions of this
subparagraph (d)(i) shall similarly apply to successive
reclassifications, changes, consolidations or mergers.
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<PAGE> 7
(ii) If the Corporation at any time while any of
the Series A Preferred Stock is outstanding, shall subdivide or
combine its Common Stock, the Conversion Rate shall be proportionately
adjusted at the effective date of such subdivision or combination, or
if the Corporation shall take a record of its Common Stock for the
purpose of so subdividing or combining, at such record date, whichever
is earlier.
(iii) If the Corporation at any time while any of
the Series A Preferred Stock is outstanding shall pay a dividend
payable in, or make any other distribution of, Common Stock, the
Conversion Rate shall be adjusted, at the date the Corporation shall
take a record of the holders of its Common Stock for the purpose of
receiving such dividend or other distribution (or if no such record is
taken, at the date of such payment or other distribution), to that
rate determined by multiplying the Conversion Rate in effect
immediately prior to such record date (or if no such record is taken,
then immediately prior to such payment or other distribution) by a
fraction (1) the numerator of which shall be the total number of
shares of Common Stock outstanding immediately after such dividend or
distribution plus, in the event that the Corporation paid cash for
fractional shares, the number of additional shares which would have
been outstanding had the Corporation issued fractional shares in
connection with said dividend and (2) the denominator of which shall
be the total number of shares of Common Stock outstanding immediately
prior to such dividend or distribution. For purposes hereof, the
number of shares of Common Stock at any time outstanding shall not
include any shares thereof then directly or indirectly owned or held
by or for the account of the Corporation or its subsidiaries.
(e) Whenever the Conversion Rate is adjusted as herein
provided, the Corporation shall compute the adjusted Conversion Rate in
accordance with this Section 6 and shall cause to be prepared a certificate
signed by the Corporation's treasurer setting forth the adjusted Conversion
Rate and showing in reasonable detail the facts upon which such adjustment is
based, and such certificate shall forthwith be mailed to the holders of record
of outstanding shares of the Series A Preferred Stock.
(f) The Corporation shall at all times reserve and keep
available, free from preemptive rights, out of its authorized but unissued
Common Stock, for the purpose of issuance upon conversion of shares of Series A
Preferred Stock, the full number of shares of Common Stock then deliverable
upon the conversion of all shares of Series A Preferred Stock then outstanding.
(g) The Corporation will pay any and all taxes that may
be payable in respect of the issuance or delivery of shares of Common Stock on
conversion of shares of Series A Preferred Stock pursuant hereto. The
Corporation shall not, however, be required to pay any tax which may be payable
in respect of any transfer involved in the issuance and delivery of shares of
Common Stock in a name other than that in which the shares of Series A
Preferred Stock so converted were registered, and no such issuance or delivery
shall be made unless and until the person requesting such issuance has paid to
the Corporation the amount of any such tax or has established to the
satisfaction of the Corporation that such tax has been paid.
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<PAGE> 8
(h) Concurrently with the transfer of any shares of
Series A Preferred Stock to any person (other than any direct or indirect
affiliate of JEDI or any other entity managed by Enron Corp. or any of its
affiliates or for which Enron Corp. or one of its affiliates acts as
administrative agent) (each a "Designated Holder"), the shares of Series A
Preferred Stock so transferred shall automatically be converted into a like
number of shares of Series B Participating Convertible Preferred Stock of the
Corporation, $.01 par value per share (the "Series B Preferred Stock"). Upon
registration of any transfer of shares of Series A Preferred Stock to any
person other than a Designated Holder, the Corporation or its transfer agent
shall issue to the transferee a certificate representing number of Series B
Preferred Stock which is equal to the number of shares of Series A Preferred
Stock surrendered for transfer.
Section 7. Voting Rights.
(a) Except as provided in paragraph (b) of this Section
7, the holders of Series A Preferred Stock shall vote together with the holders
of Common Stock (and of any other class or series which may similarly be
entitled to vote with the holders of Common Stock) as a single class on all
matters on which holders of Common Stock are entitled to vote, and the number
of votes that each share of Series A Preferred Stock shall entitle to the
holder thereof to cast shall be the number of shares of Common Stock into which
such share of Series A Preferred Stock is convertible as of the record date for
such vote or, if there is no record date for the vote, at the time of the vote.
(b) So long as at least 960,000 shares of Series A
Preferred Stock are outstanding, in addition to any other vote or consent of
stockholders required by law or by the certificate of incorporation, the
approval of the holders of the shares of Series A Preferred Stock, acting as a
single class, shall be necessary for effecting or validating:
(i) Any amendment, alteration or repeal of any of
the provisions of the certificate of incorporation or the bylaws of
the Corporation;
(ii) The authorization, creation or issuance of,
or the increase in the authorized amount of, any Parity Securities or
any shares of any class or series or any security convertible into
shares of any class or series of any security ranking prior to the
shares of Series A Preferred Stock in the payment of dividends or in
the distribution of assets on any liquidation, dissolution, or winding
up of the Corporation;
(iii) The merger or consolidation of the
Corporation with or into any other corporation or other entity or the
sale of all or substantially all of the Corporation's assets; or
(iv) Any reorganization, restructuring,
recapitalization or other similar transaction that requires the
approval of the stockholders of the Corporation.
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<PAGE> 9
(c) With respect to any matter that requires the approval
of holders of Series A Preferred Stock acting separately as a class or any
action that may be taken by the holders of Series A Preferred Stock, such
approval shall be deemed to be given or such action taken by the affirmative
vote of the holders of a majority of the outstanding shares of Series A
Preferred Stock, given in person or by proxy, by written consent or at the
annual meeting of the Corporation's stockholders, or a special meeting in lieu
thereof, or at a special meeting of the holders of shares of Series A Preferred
Stock called for the purpose of voting on such matter or action. Upon receipt
of the written request of the holders of 25% or more of the outstanding shares
of Series A Preferred Stock, the Secretary of the Corporation shall call and
give notice of a special meeting of the holders of the Series A Preferred Stock
for the purpose specified in such request, which meeting shall be held within
30 days after delivery of such request to the Corporation; provided that the
Secretary shall not be required to call such a special meeting in the case of
any such request received less than 30 days before the date fixed for an annual
meeting of the Company's stockholders.
Section 8. Election of Directors. The holders of shares of
Series A Preferred Stock shall have the right, exercisable at any time and
acting separately as a class, to elect a number of members of the board of
directors such that the quotient obtained by dividing such number by the
maximum authorized number of directors (as increased to include such additional
directors elected pursuant to this Section 8) is as close as possible to being
equal to the percentage of the outstanding voting power of the Corporation
entitled to vote generally in the election of directors that is represented by
the outstanding shares of Series A Preferred Stock at such time. Upon the
taking of any such action by the holders of Series A Preferred Stock to elect
directors of the Corporation, the maximum authorized number of members of the
Board of Directors shall automatically be increased by one or two, as
appropriate. A director elected by the holders of Series A Preferred Stock
pursuant to this Section 8 shall serve until his successor is duly elected and
qualified or until his removal. Such a director may be removed without cause
at any time by action, and only by such action, of the holders of shares of
Series A Preferred Stock. If the office of a director elected pursuant to this
Section 8 becomes vacant by reason of death, resignation, retirement,
disqualification, removal from office or otherwise, such vacancy may be filled
by the action, and only by such action, of the holders of shares of Series A
Preferred Stock.
Section 9. Event of Default.
(a) For purposes hereof, an "Event of Default" shall be
deemed to have occurred if the Corporation shall fail to comply with any of the
covenants contained in Article VI of the Securities Purchase Agreement dated
March 27, 1997 between the Corporation and JEDI (the "Securities Purchase
Agreement"), provided that, in the case of the covenants contained in Sections
6.02, 6.03, 6.04, 6.10. 6.11 or 6.13(b) of the Securities Purchase Agreement,
failure to comply shall not be considered an Event of Default if such failure
is cured or compliance is waived in writing by JEDI within 30 days after the
date on which the failure to comply first occurs.
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<PAGE> 10
Upon the failure of the Corporation to comply with any of the
covenants contained in Article VI of the Securities Purchase Agreement, the
Corporation shall provide written notice of such event, including the date on
which such event first occurred, to all of the holders of record of shares of
Series A Preferred Stock within 10 days after the occurrence of such event.
Failure to provide such notice shall be deemed an Event of Default. Any Event
of Default may be waived in writing by JEDI at any time, in which case
paragraphs (b) - (d) of this Section 9 shall not apply with respect to such
Event of Default; provided, however, that no such waiver of an Event of Default
shall be deemed to be a waiver of any other Event of Default.
(b) Upon the occurrence and during the continuance of an
Event of Default, the holders of outstanding shares of Series A Preferred Stock
shall be entitled to receive, in addition to all other dividends payable
hereunder to holders of shares of Series A Preferred Stock and when, as and if
declared by the Board of Directors, out of funds legally available for the
payment of dividends, cumulative preferential cash dividends accruing from the
date of the Event of Default (the "Default Date") in an amount per share per
annum equal to 6% of the Liquidation Preference in effect at the time of
accrual of such dividends, payable quarterly in arrears on or before the 15th
day (the "Dividend Payment Date") after the last day of each calendar quarter
during which such dividends are payable (each a "Dividend Period"). If any
Dividend Payment Date occurs on a day that is not a Business Day, the dividend
shall be payable on the next succeeding Business Day. Each such dividend will
be payable to holders of record as they appear on the stock transfer records of
the Corporation on such record dates, not less than 10 nor more than 60 days
preceding the payment dates thereof, as shall be fixed by the Board of
Directors. Dividends on the Series A Preferred Stock shall accrue (whether or
not declared) on a daily basis and shall be cumulative (whether or not in any
Dividend Period there shall be funds of the Corporation legally available for
the payment of such dividends). The first dividend shall accrue from the
Default Date through the end of the first calendar quarter to end after the
Default Date, and subsequent dividends shall accrue on a daily basis during the
Dividend Period for which they are payable. Accrued and unpaid dividends on
the Series A Preferred Stock shall not bear interest. Unless full cumulative
dividends accrued on all outstanding shares of the Series A Preferred Stock
have been or contemporaneously are declared and paid for all Dividend Periods
ending on or prior to the date of payment thereof, no dividend shall be
declared or paid or set aside for payment or other distribution declared or
made on the Common Stock or on 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
(other than by conversion into or exchange or exercise for other Junior
Securities), nor may any moneys be paid to or made available for a sinking fund
for the redemption of any shares of any such securities, by the Corporation or
any of its subsidiaries, except by conversion into or exchange for Junior
Securities.
(c) Upon the occurrence and during the continuance of an
Event of Default resulting from the failure of the Corporation to comply with
any of the covenants contained in Sections 6.01, 6.06, 6.07, 6.08, 6.09, 6.10,
6.12, 6.13, 6.14, or 6.16 of the Securities Purchase Agreement, the holders of
shares of Series A Preferred Stock shall have the right, acting separately as a
class, to elect a number of persons to the Board of Directors of the
Corporation that, along with any members of the Board of Directors who are
serving at the time of such
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action and were elected pursuant to Section 8, will constitute a majority of
the Board of Directors. Upon the taking of such action, the maximum authorized
number of members of the Board of Directors shall automatically increase by the
number of directors so elected, and the vacancies so created shall be filled by
the persons elected pursuant to this subparagraph (ii). In the event that upon
the election of directors under this paragraph (c), the Corporation is required
under Rule 14f-1 under the Securities Exchange Act of 1934, as amended, to file
with the Securities and Exchange Commission and transmit to its stockholders
certain information, the Corporation shall take such action as promptly as
practicable, and the term of office of the directors so elected shall begin
upon the termination of the 10 day period prescribed by such Rule. A director
elected by the holders of Series A Preferred Stock pursuant to this Section
9(c) shall serve until his successor is duly elected and qualified, until his
removal or until his term terminates as provided below. Such a director may be
removed without cause at any time by action, and only by such action, of the
holders of shares of Series A Preferred Stock. If the office of a director
elected pursuant to this Section 9(c) becomes vacant by reason of death,
resignation, retirement, disqualification, removal from office or otherwise,
such vacancy may be filled by the action, and only by such action, of the
holders of shares of Series A Preferred Stock. At such time as the Event of
Default giving rise to this right to elect directors has been cured, such right
shall terminate, the terms of any directors elected pursuant to this
subparagraph (ii) shall terminate and the maximum number of authorized members
of the Board of Directors shall decrease automatically to the maximum number of
authorized members of the Board of Directors in effect immediately before any
action was taken pursuant hereto.
(d) Upon the occurrence of an Event of Default resulting
from the failure of the Company to comply with any of the covenants contained
in Sections 6.01, 6.08, 6.09, 6.10, 6.13(b), 6.14, or 6.16 of the Securities
Purchase Agreement, each holder of shares of Series A Preferred Stock shall
have the right, by written notice to the Corporation (the "Repurchase Notice")
within 90 days after the occurrence of the Event of Default, to require that
the Corporation repurchase, out of funds legally available therefor, such
holder's shares of Series A Preferred Stock for an amount in cash equal to the
amount such holder would receive in respect of the shares to be repurchased if
the Corporation were liquidated, dissolved or wound up on the date of the
holder's Repurchase Notice. Any Repurchase Notice shall be accompanied by duly
endorsed certificates representing the shares of Series A Preferred Stock to be
repurchased. Upon receipt of a Repurchase Notice, the Corporation shall make
payment in cash of the appropriate amount to the holder requiring repurchase
with five Business Days of the date such Repurchase Notice is received, unless
the Corporation receives within 90 days after the occurrence of the Event of
Default written notice from such holder prior to such payment that such holder
is withdrawing its requirement of the repurchase of its shares of Series A
Preferred Stock.
(e) Series B Preferred Stock
Section 1. Designation. The distinctive serial designation of
said series shall be "Series B Participating Convertible Preferred Stock"
(hereinafter called "Series B Preferred Stock"). Each share of Series B
Preferred Stock shall be identical in all respects with all other shares of
Series B Preferred Stock. Shares of Series B Preferred Stock shall not be
issuable except upon the conversion of shares of the Corporation's Series A
Participating Convertible
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Preferred Stock in accordance with the terms of the Certificate of Designation
relating to such stock.
Section 2. Number of Shares. The number of shares of Series B
Preferred Stock shall be 9,600,000. Shares of Series B Preferred Stock that
are redeemed, purchased or otherwise acquired by the Corporation or converted
into Common Stock shall be canceled, and the Corporation shall take all such
actions as are necessary to cause such shares to revert to the status of
authorized but unissued shares of Preferred Stock undesignated as to series.
Section 3. Definitions. As used herein with respect to Series B
Preferred Stock, the following terms shall have the following meanings:
(a) The term "Junior Securities" shall mean the Common
Stock, par value $.0015 per share (the "Common Stock"), of the Corporation and
any other class or series of stock of the Corporation hereafter authorized over
which the Series B Preferred Stock has preference or priority in the payment of
dividends, when used with respect to the payment of dividends, or in the
distribution of assets on any liquidation, dissolution or winding up of the
Corporation, when used with respect to the distribution of assets on any
liquidation, dissolution or winding up of the Corporation.
(b) The term "Parity Securities" shall mean any other
class or series of stock of the Corporation hereafter authorized which ranks on
a parity with the Series B Preferred Stock in the payment of dividends, when
used with respect to the payment of dividends, or the distribution of assets on
any liquidation, dissolution or winding up of the Corporation, when used with
respect to the distribution of assets on any liquidation, dissolution or
winding up of the Corporation.
(c) The term "Business Day" shall mean a day that is not
a Saturday, a Sunday or a day on which banking institutions in Houston, Texas
are not required to be open for business.
Section 4. Dividends. The holders of record, as of the record
date therefor or, if there is no such record date, as of the date of payment
thereof, of shares of Series B Preferred Stock shall be entitled to receive,
when, as and if declared by the Board of Directors, out of funds legally
available therefor, any dividends (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 B Preferred Stock had been converted
into Common Stock immediately prior to the record date or, if there is no such
record date, on the date of payment thereof.
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Section 5. Liquidation Preference.
(a) In the event of any liquidation, dissolution or
winding up of the Corporation, either voluntary or involuntary, before any of
the assets of the Corporation shall be distributed among or paid over to the
holders of any Junior Securities, the holders of shares of Series B Preferred
Stock shall be entitled to receive (i) an amount per share equal to the lesser
of (A) $1.50 and (B) the sum of (x) $0.521 and (y) the quotient obtained by
dividing (I) the aggregate amount of all payments made, as of the date of such
liquidation, dissolution or winding up, to the Corporation by Joint Energy
Development Investments Limited Partnership ("JEDI") or its assignee pursuant
to the Earn Up Agreement dated as of May 6, 1997 between the Corporation and
JEDI by (II) 9,600,000 and (ii) any and all accrued but unpaid dividends
thereon, and shall not be entitled to any other or additional distribution.
(b) If upon such liquidation, dissolution or winding up,
whether voluntary or involuntary, the assets available for distribution among
the holders of shares of Series B Preferred Stock and holders of Parity
Securities shall be insufficient to permit the payment to such holders of the
full preferential amounts to which they are entitled, then the assets of the
Corporation available for distribution among the holders of Series B Preferred
Stock and holders of Parity Securities shall be distributed ratably among such
holders so that the amounts distributed in respect of the Series B Preferred
Stock and the Parity Securities shall bear to each other the same ratio that
the full amounts payable on liquidation, dissolution or winding up of the
Corporation to the holders of shares of Series B Preferred Stock and the Parity
Securities bear to each other.
(c) A consolidation or merger of the Corporation with or
into any other corporation or other entity, or a sale of all or substantially
all of the assets of the Corporation that does not involve a distribution by
the Corporation of cash or other property to the holders of shares of the
Common Stock, shall not be deemed to be a liquidation, dissolution or winding
up within the meaning of this Section 5.
Section 6. Conversion Rights. Each holder of shares of Series B
Preferred Stock shall have the right, at such holder's option, to convert such
shares into shares of Common Stock of the Corporation at any time and from time
to time on and subject to the following terms and conditions:
(a) The shares of Series B Preferred Stock shall be
convertible at the principal office of the Corporation and at such other office
or offices, if any, as the Board of Directors may designate, into fully paid
and non-assessable shares (calculated as to each conversion to the nearest
1/100th of a share) of Common Stock, at the Conversion Rate, as hereinafter
defined, subject to adjustment as provided herein. The "Conversion Rate,"
which represents the number of shares of Common Stock into which each share of
Series B Preferred Stock is convertible, shall initially be one.
(b) In order to convert shares of Series B Preferred
Stock into Common Stock the holder thereof shall surrender at the office or
offices hereinabove mentioned the certificate or certificates therefor, duly
endorsed or assigned to the Corporation or in blank, and give written notice to
the Corporation at said office or offices that such holder elects to convert
such shares.
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Shares of Series B Preferred Stock shall be deemed to have been converted
immediately prior to the close of business on the day of the surrender of the
certificates for such shares for conversion in accordance with the foregoing
provisions, and the person or persons entitled to receive the Common Stock
issuable upon such conversion shall be treated for all purposes as the record
holder or holders of such Common Stock at such time. As promptly as
practicable on or after the conversion date, the Corporation shall issue and
shall deliver at such office a certificate or certificates for the number of
full shares of Common Stock issuable upon such conversion, together with
payment in lieu of any fraction of a share, as hereinafter provided, to the
person or persons entitled to receive the same. Preferential dividends pursuant
to Section 4(a) on converted shares of Series B Preferred Stock shall cease to
accrue on the date of conversion, and all such dividends that have accrued as
of the date of conversion but have not been paid shall be payable on the date
such dividends would have been payable if such conversion had not occurred.
(c) No fractional shares of Common Stock shall be issued
upon conversion of shares of Series B Preferred Stock, but, instead of any
fraction of a share which would otherwise be issuable, the Corporation shall
pay cash in respect of such fraction in an amount equal to such fraction of the
fair market value (as determined by the Board of Directors of the Corporation)
of a share of Common Stock on the date on which the certificate or certificates
for such shares were duly surrendered for conversion.
(d) The number and kind of securities issuable upon the
conversion of the Series B Preferred Stock shall be subject to adjustment from
time to time upon the happening of certain events occurring on or after the
Issuance Date of the shares of the Series B Preferred Stock as follows:
(i) In case of any reclassification or change of
outstanding securities issuable upon exercise of the conversion rights
(other than a change in par value, or from par value to no par value,
or from no par value to par value or as a result of a subdivision or
combination), or in case of any consolidation or merger of the
Corporation with or into another corporation or other entity (other
than a merger with another corporation or other entity in which the
Corporation is the surviving corporation and which does not result in
any reclassification or change -- other than a change in par value, or
from par value to no par value, or from no par value to par value, or
as a result of a subdivision or combination -- of outstanding
securities issuable upon conversion of the Series B Preferred Stock),
the holders of the Series B Preferred Stock shall have, and the
Corporation, or such successor corporation or other entity, shall
covenant in the constituent documents effecting any of the foregoing
transactions that the holders of the Series B Preferred Stock do have,
the right to obtain upon conversion of the Series B Preferred Stock,
in lieu of each share of Common Stock theretofore issuable upon
conversion of the Series B Preferred Stock, the kind and amount of
shares of stock, other securities, money and property receivable upon
such reclassification, change, consolidation or merger by a holder of
one share of Common Stock issuable upon conversion of the Series B
Preferred Stock as if the conversion had occurred immediately prior to
such reclassification, change, consolidation or merger. The
constituent documents effecting any reclassification, change,
consolidation or merger shall provide for any adjustments which
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shall be as nearly equivalent as may be practicable to the adjustments
provided in this subparagraph (d)(i). The provisions of this
subparagraph (d)(i) shall similarly apply to successive
reclassifications, changes, consolidations or mergers.
(ii) If the Corporation at any time while any of
the Series B Preferred Stock is outstanding, shall subdivide or
combine its Common Stock, the Conversion Rate shall be proportionately
adjusted at the effective date of such subdivision or combination, or
if the Corporation shall take a record of its Common Stock for the
purpose of so subdividing or combining, at such record date, whichever
is earlier.
(iii) If the Corporation at any time while any of
the Series B Preferred Stock is outstanding shall pay a dividend
payable in, or make any other distribution of, Common Stock, the
Conversion Rate shall be adjusted, at the date the Corporation shall
take a record of the holders of its Common Stock for the purpose of
receiving such dividend or other distribution (or if no such record is
taken, at the date of such payment or other distribution), to that
rate determined by multiplying the Conversion Rate in effect
immediately prior to such record date (or if no such record is taken,
then immediately prior to such payment or other distribution) by a
fraction (1) the numerator of which shall be the total number of
shares of Common Stock outstanding immediately after such dividend or
distribution plus, in the event that the Corporation paid cash for
fractional shares, the number of additional shares which would have
been outstanding had the Corporation issued fractional shares in
connection with said dividend and (2) the denominator of which shall
be the total number of shares of Common Stock outstanding immediately
prior to such dividend or distribution. For purposes hereof, the
number of shares of Common Stock at any time outstanding shall not
include any shares thereof then directly or indirectly owned or held
by or for the account of the Corporation or its subsidiaries.
(e) Whenever the Conversion Rate is adjusted as herein
provided, the Corporation shall compute the adjusted Conversion Rate in
accordance with this Section 6 and shall cause to be prepared a certificate
signed by the Corporation's treasurer setting forth the adjusted Conversion
Rate and showing in reasonable detail the facts upon which such adjustment is
based, and such certificate shall forthwith be mailed to the holders of record
of outstanding shares of the Series B Preferred Stock.
(f) The Corporation shall at all times reserve and keep
available, free from preemptive rights, out of its authorized but unissued
Common Stock, for the purpose of issuance upon conversion of shares of Series B
Preferred Stock, the full number of shares of Common Stock then deliverable
upon the conversion of all shares of Series B Preferred Stock then outstanding.
(g) The Corporation will pay any and all taxes that may
be payable in respect of the issuance or delivery of shares of Common Stock on
conversion of shares of Series B Preferred Stock pursuant hereto. The
Corporation shall not, however, be required to pay any tax which may be payable
in respect of any transfer involved in the issuance and delivery of shares
of Common Stock in a name other than that in which the shares of Series B
Preferred Stock so
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converted were registered, and no such issuance or delivery shall be made
unless and until the person requesting such issuance has paid to the
Corporation the amount of any such tax or has established to the satisfaction
of the Corporation that such tax has been paid.
Section 7. Voting Rights.
In addition to any other voting rights required by applicable
law, the holders of Series B Preferred Stock shall vote together with the
holders of Common Stock (and of any other class or series which may similarly
be entitled to vote with the holders of Common Stock) as a single class on all
matters on which holders of Common Stock are entitled to vote, and the number
of votes that each share of Series B Preferred Stock shall entitle to the
holder thereof to cast shall be the number of shares of Common Stock into which
such share of Series B Preferred Stock is convertible as of the record date for
such vote or, if there is no record date for the vote, at the time of the vote.
SIXTH: By-Laws.
(a) Adoption and Amendment of By-Laws. The board of directors and
stockholders of the corporation shall have the authority to adopt, amend, or
repeal the by-laws of the corporation. The by-laws of the corporation may
contain provisions relating to the adoption, amendment, and repeal of the
by-laws.
(b) Ballot in Elections. Election of directors need not be by
ballot unless the by-laws so provide.
SEVEN: Compromise. Whenever a compromise or arrangement is proposed
between this corporation and its creditors or any class of them and/or between
this corporation and its stockholders or any class of them, any court of
equitable jurisdiction within the State of Delaware may, on the application in
a summary way of this corporation or of any creditor or stockholder thereof or
on the application of any receiver or receivers appointed for this corporation
under the provisions of section 291 of Title 8 of the Delaware Code or on the
application or trustees in dissolution or of any receiver or receivers
appointed for this corporation under the provisions of section 279 of Title 8
of the Delaware Code order a meeting of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of this corporation, as the
case may be, to be summoned in such manner as the said court directs. If a
majority in number representing three fourths in value of the creditors or
class of creditors, and/or of the stockholders or class of stockholders of this
corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this corporation as consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of this corporation, as the case may be,
and also on this corporation.
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EIGHT: Limitation of Director Liability. No director of the
corporation shall have any personal liability to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director
except for acts or omissions for which such liability may not be eliminated
under subsection (7) of Section 102 of Title 8 of the Delaware Code.
NINE: Advancement of Litigation Expenses. The corporation shall pay
in advance of final disposition all expenses incurred by any officer or
director in defending any civil or criminal action suit or proceeding, to the
full extent permitted by and subject to the conditions specified in subsection
(e) of section 145 of Title 8 of the Delaware Code.
TEN: Amendment of Certificate. The corporation reserves the right
to amend, alter, change or repeal any provision contained in this Certificate
of Incorporation, in the manner now or hereafter prescribed by statute, and all
rights conferred upon stockholders herein are granted subject to this
reservation.
* * * * * * *
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IN WITNESS WHEREOF, Queen Sand Resources, Inc. has duly adopted this
Restated Certificate of Incorporation, which only restates and integrates and
does not further amend the existing provisions of the Certificate of
Incorporation of the Corporation, as theretofore amended or supplemented, and
contains no discrepancy between those provisions and the provisions of this
Restated Certificate of Incorporation of the Corporation, in accordance with
Section 245 of the General Corporation Law of Delaware, and has caused this
certificate to be executed by its duly authorized officer.
/s/ EDWARD J. MUNDEN
----------------------------
Edward J. Munden, President
and Chief Executive Officer
18
<PAGE> 1
[HAYNES AND BOONE, LLP LETTERHEAD]
EXHIBIT 5.1
March 6, 1998
Queen Sand Resources, Inc.
3500 Oak Lawn, Suite 380
Dallas, TX 75219
Re: Registration Statement on Form S-3 of 3,401,366
shares of Common Stock, par value $.0015 per share,
of Queen Sand Resources, Inc. ("Common Stock")
Gentlemen:
We are securities counsel to Queen Sand Resources, Inc., a Delaware corporation
(the "Company"), in connection with the registration and issuance of up to
3,401,366 shares of Common Stock (the "Shares"), plus an indeterminate number
of additional shares of Common Stock issuable (i) to prevent dilution resulting
from stock splits, stock dividends or similar events, or (ii) by reason of
changes in the conversion price in respect of the Series C Preferred Stock
(defined below) or the exercise price of the Warrants (defined below) to be
sold by the Selling Stockholders named in the Prospectus constituting a part of
this Registration Statement (the "Selling Stockholders") following conversion
of the Company's Series C Convertible Preferred Stock, par value $.01 per share
(the "Series C Preferred Stock") or warrants to purchase shares of Common Stock
(the "Warrants") described in the Prospectus.
We have examined such documents, records and matters of law as we have deemed
necessary for purposes of this opinion. Based on the foregoing, we are of the
opinion that the Shares are duly authorized and, when issued to the Selling
Stockholders upon conversion of the Series C Preferred Stock or exercise of the
Warrants in accordance with their respective terms and as described in the
Prospectus contained in the Company's Registration Statement on Form S-3 to
which this opinion is an exhibit, will be validly issued, fully paid and
nonassessable.
In rendering the foregoing opinion, we have relied as to certain factual
matters upon certificates of officers of the Company, the Selling Stockholders
and public officials, and we have not independently checked or verified the
accuracy of the statements contained therein.
We hereby consent to the filing of this opinion as Exhibit 5.1 to this
Registration Statement on Form S-3 filed by the Company to effect registration
of the Shares under the Securities Act of 1933, as amended, and to the
reference to us under the caption "Legal Matters" in the Prospectus
constituting a part of such Registration Statement.
Very truly yours
/s/ Haynes and Boone, LLP
Haynes and Boone, LLP
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-3, No. 333-_________) and related Prospectus of
Queen Sand Resources, Inc. for the registration of 3,401,366 shares of its
Common Stock and to the incorporation by reference therein of our reports dated
September 18, 1997 and September 16, 1997, respectively, with respect to the
financial statements of Queen Sand Resources, Inc. included in its Annual Report
(Form 10-KSB) for the year ended June 30, 1997 and the statements of operating
revenues and direct operating expenses of the Collins and Ware Properties for
the years ended June 30, 1997 and 1996, filed with the Securities and Exchange
Commission.
/s/ Ernst & Young LLP
Ernst & Young LLP
March 3, 1998
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Queen Sand Resources, Inc.
We consent to the use of our report incorporated hereby by reference and to the
reference to our firm under the heading "Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
Dallas, Texas KPMG Peat Marwick LLP
March 3, 1998
<PAGE> 1
EXHIBIT 23.4
[H.J. GRUY AND ASSOCIATES, INC. LETTERHEAD]
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
We hereby consent to (i) the incorporation by reference in the
Prospectus (the "Prospectus") constituting a part of the Registration Statement
on Form S-3 filed by Queen Sand Resources, Inc., a Delaware corporation (the
"Company"), under the Securities Act of 1933, of information contained in our
reserve report relating to the oil and gas reserves and revenue, as of July 1,
1997 of certain interests of the Company incorporated from the Company's Annual
Report on Form 10-KSB for the fiscal year ended June 30, 1997 and all references
to such report letters and/or to this firm in such Prospectus and (ii) further
consent to our being named as an expert therein in the section title "Experts."
Dated this 5th day of March, 1998
H.J. GRUY AND ASSOCIATES, INC.
By:/s/ Robert J. Naas
---------------------------
Printed Name: Robert Naas
-----------------
Title: Senior Vice President
-----------------------
<PAGE> 1
EXHIBIT 23.5
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
We hereby consent to (i) the incorporation by reference in the
Prospectus (the "Prospectus") constituting a part of the Registration Statement
on Form S-3 filed by Queen Sand Resources, Inc., a Delaware corporation (the
"Company"), under the Securities Act of 1933, of information contained in our
reserve report relating to the oil and gas reserves and revenue, as of June 30,
1996 of certain interests of the Company incorporated from the Company's Annual
Report on Form 10-KSB for the fiscal year ended June 30, 1997 and all references
to such report letters and/or to this firm in such Prospectus and (ii) further
consent to our being named as an expert therein in the section title "Experts."
HARPER & ASSOCIATES INC.
/s/ G. Michael Harper
---------------------------
