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As filed with the Securities and Exchange Commission on April 27, 1998
Registration No. 333-47577
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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PRE-EFFECTIVE AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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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. [ ]
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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 Certificate of Designation
of Series C Convertible Preferred Stock (the "Series C Certificate of
Designation"), through the 180 day period (ending June 22, 1998) following the
issuance of the Series C Preferred Stock, the Series C Preferred Stock is
convertible into Common Stock at a fixed conversion price. Accordingly, as of
the date of this Prospectus, 1,700,683 shares of Common Stock are issuable upon
conversion of the Series C Preferred Stock and exercise of the Warrants held by
the Selling Stockholders. Following June 22, 1998, the Series C Preferred Stock
is convertible into Common Stock at a floating conversion price. In light of
this floating conversion price, the Registration Rights Agreement among the
Company and the Selling Stockholders requires the Company to register for
resale at least 200% of the shares issuable on conversion of the Series C
Preferred Stock and exercise of the Warrants held by the Selling Stockholders.
The number of shares covered by this Prospectus represents approximately 200%
of the shares currently issuable. See "Description of Capital Stock --
Description of Series C Preferred Stock."
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 9 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 April 27, 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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Page
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Available Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Incorporation of Certain Documents by Reference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Recent Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Selling Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Description of Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Disclosure of Commission Position on Indemnification for Securities Act Liabilities . . . . . . . . . . . . . . . . . 28
Certain Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
</TABLE>
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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
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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
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, as amended by Form 10-KSB/A-1 filed on April 23, 1998, (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 February 20, 1997, as amended by Current Report
on Form 8-K/A-1 dated March 26, 1997, (v) Current Report on Form 8-K dated July
21, 1997, (vi) Current Report on Form 8-K dated August 14, 1997, (vii) Current
Report on Form 8-K dated September 11, 1997, (viii) Current Report on Form 8-K
dated December 24, 1997, (ix) Current Report on Form 8-K dated March 3, 1998,
(x) Current Report on Form 8-K dated March 19, 1998, as amended by Current
Report on Form 8-K/A-1 filed April 27, 1998 and (xi) 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
the 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 producing oil
and natural gas properties with identified development and exploitation
potential, or controlled-risk exploration potential, obtaining operational
control of its significant properties where feasible, developing the properties
to maximize production and reserve recovery, achieving a low operating cost per
barrel of oil and/or Mcf of natural gas and maintaining financial flexibility.
Through this strategy the Company strives to increase reserves, production and
cash flow from operations.
EXPLOITATION AND DEVELOPMENT ACTIVITIES
The Company concentrates on acquiring, developing and 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 constitute one development strategy.
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 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.
The Company makes only limited investments in exploratory drilling.
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.,
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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, uncertainties about
estimates of reserves, the impact of present or future environmental
legislation and compliance with environmental laws, the ongoing need for
capital improvements, the ability of the Company to meet its stated business
goals, drilling risks, reserves, operational and production risks, regulatory
risks and counterparty risks, and other factors referenced in this Prospectus,
any Prospectus Supplement and filings incorporated by reference herein. 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.
SERIES C PREFERRED STOCK
Designation . . . . . . . . . . . . 10,400 shares of Series C Preferred Stock
are authorized and outstanding.
Conversion . . . . . . . . . . . . Convertible, in whole or in part, at the
option of the holder, into Common Stock at
a conversion rate equivalent to the
aggregate stated value of the shares to be
converted ($1,000 per share) divided by (i)
a fixed conversion price of $7.35 if the
conversion takes place on or before June
22, 1998 or (ii) a floating conversion
price that is the lesser of $7.35 or a
number determined by either (A) averaging
the lowest closing bid prices of the Common
Stock or (B) using the lowest closing bid
price of the Common Stock, over a certain
number of trading days depending on the
average daily trading volume (on an
aggregate dollar basis) of the Common Stock
during the month of the conversion, if the
conversion takes place on or after June 23,
1998 (the "Floating Rate Date"). On
December 24, 2001, all shares of Series C
Preferred Stock that are then outstanding
shall be automatically converted into the
number of shares of Common Stock at the
applicable conversion rate.
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As of April 16, 1998, there were
outstanding 23,572,153 shares of Common
Stock. By way of example only, if the date
of conversion was as of the date of this
Prospectus, the Series C Preferred Stock
would be convertible into 1,424,966 shares
of Common Stock (assuming all outstanding
shares of Series C Preferred Stock are
converted). If the date of conversion is
on or after the Floating Rate Date and
assuming the applicable conversion price is
$6.00, the Series C Convertible Preferred
Stock would be convertible into 1,733,333
shares of Common Stock (assuming all
outstanding shares of Series C Preferred
Stock are converted). If the date of
conversion is on or after the Floating Rate
Date and assuming the applicable conversion
price is $4.00, the Series C Convertible
Preferred Stock would be convertible into
2,600,000 shares of Common Stock (assuming
all outstanding shares of Series C
Preferred Stock are converted). See
"Description of Capital Stock --
Description of Series C Preferred Stock --
Conversion."
Voting Rights . . . . . . . . . . . Holders are not entitled to vote with the
holders of Common Stock except as required
by law or under certain limited
circumstances set forth in the Series C
Certificate of Designation. See
"Description of Capital Stock --
Description of Series C Preferred Stock --
Voting."
Dividends . . . . . . . . . . . . . Dividends accrue from December 24, 1997 at
an annual rate of 5% of the stated value
($1,000 per share) of Series C Preferred
Stock, payable only upon conversion,
redemption or maturity of the Series C
Preferred Stock. Dividends are payable in
shares of Common Stock. See "Description of
Capital Stock -- Description of Series C
Preferred Stock -- Dividends."
Liquidation . . . . . . . . . . . . Holders would receive an amount equal to
the stated value ($1,000 per share) of the
shares (subject to ratable adjustment in
the event of reclassification or other
similar event) plus any accrued and unpaid
dividends. See "Description of Capital
Stock -- Description of Series C Preferred
Stock -- Liquidation."
Optional Redemption . . . . . . . . Redeemable at the option of the Company at
a redemption price equal to the liquidation
preference of the Series C Preferred Stock
then held by the holder divided by 80%,
provided that (i) the Company has
sufficient cash available, (ii) the Company
provides written notice at least 30 days
prior to the redemption, and (iii) the
Common Stock is traded on the Nasdaq Stock
Market (which by definition includes the
Nasdaq SmallCap Market), the New York Stock
Exchange or the American Stock Exchange.
See "Description of Capital Stock --
Description of Series C Preferred Stock --
Optional Redemption."
Mandatory Redemption . . . . . . . Redeemable, in whole or in part, at the
option of the holder upon the occurrence of
a mandatory redemption event at a
redemption price equal to the greater of
(i) the liquidation preference of the
Series C Preferred Stock being redeemed
multiplied by 125% and (ii) an amount
determined by dividing
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the liquidation preference by the
conversion price in effect on the mandatory
redemption date and multiplying the
resulting quotient by the average closing
bid price for the Common Stock on the 5
trading days prior to the mandatory
redemption date, provided that the holder
gives prior written notice to the Company,
and if the mandatory redemption price is
not paid within 5 business days of the
mandatory redemption date, the holder is
entitled to interest thereon, and if the
mandatory redemption price is not paid
within 10 business days of the mandatory
redemption date, the holder may demand
shares of Common Stock of the Company in
lieu of the mandatory redemption price. The
mandatory redemption events include events
such as a material breach of a covenant or
agreement contained in the transaction
documents in respect of the issuance of the
Series C Preferred Stock or the Common
Stock is not quoted on the Nasdaq Stock
Market (which by definition included the
Nasdaq SmallCap Market). See "Description
of Capital Stock -- Description of Series C
Preferred Stock -- Mandatory Redemption."
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RECENT DEVELOPMENT
On April 20, 1998, the Company consummated the acquisition of certain
non-operated royalty and net profits overriding royalty interests (the "Morgan
Properties") from two commingled pension trust funds for which Morgan Guaranty
Trust Company of New York serves as trustee (the "Morgan Property Acquisition").
The gross purchase price was $150 million in cash subject to standard closing
adjustments for net production revenues since October 1, 1997 and capital
expenditures incurred since that date (the net purchase price after adjustments
is anticipated to be approximately $130 million). The effective date of the
transaction is October 1, 1997. Bank of Montreal, Enron Capital & Trade
Resources Corp. ("Enron") and an affiliate of Enron provided $156 million in
financing to fund this acquisition. The Company funded the Morgan Property
Acquisition with a combination of three debt facilities arranged through the
Bank of Montreal. First, the Company amended and restated its existing senior
secured revolving credit facility (the "Revolver"). The Revolver now provides
for a maximum borrowing amount of $96 million, subject to borrowing base
limitations. This facility is now a 364 day revolver and converts to a four year
amortizing term facility thereafter. An aggregate of $72 million was drawn under
the Revolver to finance the Morgan Property Acquisition resulting in an
aggregate of $92 million now outstanding under the Revolver. The Company also
arranged a $30 million senior subordinated secured single draw term loan (the
"Debt Bridge Facility") and a $30 million subordinated unsecured single draw
bullet term loan (the "Equity Bridge Facility"), both of which were fully drawn
to fund the Morgan Property Acquisition. Both facilities are due six months
after closing although if not then repaid, the Debt Bridge Facility can be
converted to a five year term bullet loan and the equity Bridge Facility can be
converted to a six year term facility. The Company is currently engaged in
arranging both debt and equity financing to permanently replace the bridge
facilities and to repay a substantial portion of the indebtedness outstanding
under the Revolver. In connection with arrangement of the Equity Bridge
Facility, the Company granted contingent warrants to the lenders. The warrants
provide that if any portion of the Equity Bridge Facility is outstanding on (i)
July 20, 1998, the lenders would have a vested right to purchase at $.0015 per
share Common Stock in an amount equal to an aggregate of 2% of the
then-outstanding shares of Common Stock on a fully diluted basis ("fully diluted
basis" meaning all then-outstanding shares of Common Stock plus shares of Common
Stock issuable upon exercise of outstanding options or rights, whether or not
vested) multiplied by a fraction the numerator of which is the Equity Bridge
Facility principal amount then-outstanding and the denominator of which is $30
million, (ii) August 20, 1998, the lenders would have a vested right to purchase
an additional 2% of the fully diluted outstanding Common Stock on the same terms
as described in clause (i) above and (iii) October 21, 1998, the lenders would
have a fully vested right to purchase an additional 10% of the fully diluted
Common Stock on the same terms as described in clause (i) above. The warrants
expire on April 20, 2001.
The acquisition encompasses interests in over 600 wells in
approximately 40 different fields located primarily in East Texas, South Texas
and the Mid-continent area. The Company's independent engineers, Ryder Scott
Company, estimate that as of December 31, 1997, total proved reserves aggregated
approximately 124.1 billion cubic feet of natural gas and 3.6 million Bbls of
oil. The reserves are estimated to be approximately 85% natural gas, having an
estimated reserve-to-production ratio of over 10 years, and 76% are classified
by Ryder Scott Company as proved developed producing. The non-operated royalty
and net profits overriding royalty interests in the various properties range
from 2% to 80%.
The Company has implemented a comprehensive hedging strategy for its
natural gas production from the Morgan Properties over the next five years. The
Company has placed 25% of its expected proved developed producing natural gas
reserves ("PDP") into a swap with Enron at $2.40 per Mcf. Ten percent of the
Company's expected PDP was hedged in a contract with Enron with a floor of $1.90
per Mcf. The Company also hedged 40% of its expected PDP with a series of
non-participating collars with ceilings that escalate from $2.70 per Mcf to
$2.90 per Mcf over time. The Company has not yet hedged its oil production from
the Morgan Properties due to current unattractive prices but anticipates it will
enter into such hedging arrangements in the future if and when the prices are
more attractive.
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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.
The Company believes that the Morgan Property Acquisition represents a
major step in the Company's growth strategy. However, the increased size of
the Company and its scope of operations will present significant challenges to
the Company due to the increased time and resources required in the management
effort. Accordingly, there can be no assurance the operations of the
post-Morgan Property Acquisition Company can be effectively managed to realize
the goals anticipated of the Morgan Property Acquisition. In addition, the
management of the existing asset base and the continued growth and expansion of
the Company will depend, among other factors, on the Company's ability to
recruit and retain skilled and experienced management and technical personnel.
There can be no assurance that the Company will be successful in such efforts.
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
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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 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,
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 connection with the
Morgan Property Acquisition, the Company has amended the terms of its Bank of
Montreal credit facility and arranged additional bridge financing. See "Recent
Development."
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
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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. The Company
has experienced financial covenant defaults under the Bank of Montreal credit
facility, which defaults were waived by its lender. There can be no assurance
that the Company will not default on its financial covenants under the Credit
facility or that the lenders will waive any such defaults. A default under the
credit facility would permit the lenders to accelerate repayments of their
loans and to foreclose on the collateral securing the loans, including the
Company's oil and natural gas properties.
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.
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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. 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.
FINANCIAL REPORTING IMPACT OF FULL COST METHOD OF ACCOUNTING
The Company follows the full cost method of accounting for oil and
natural gas properties. Under such method, the net book value of such
properties, less related deferred income taxes, may not exceed a calculated
"ceiling." The ceiling is the estimated after-tax future net revenues from
proved reserves, discounted at 10% per year. In calculating future net
revenues, prices and costs in effect at the time of the calculation are held
constant indefinitely, except for changes which are fixed and determinable by
existing contracts. The net book value above the ceiling is required to be
written off as a non-cash expense.
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."
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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 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
(23,572,153 shares were issued and outstanding as at April 16, 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 April
16, 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 April 16, 1998: approximately 28%
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. EIBOC has granted an irrevocable proxy to Edward Munden,
Bruce Benn, Ronald Benn and Robert Lindsay to vote all of its shares of the
Company. 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
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<PAGE> 15
with holders of the Company's Common Stock (as of April 16, 1998: 100% of
the outstanding Series A Preferred Stock and approximately 29% of the undiluted
voting stock). At April 16, 1998, JEDI also holds warrants to purchase an
additional 1,554,974 shares of Common Stock at varying prices ranging from
$1.85 to $3.50.
EIBOC is organized in Barbados, West Indies and its principal business
address is Charlton House, White Park Road, Bridgetown, Barbados, West Indies.
Its principal business is finance. EIBOC has had no criminal convictions in
the last five years, nor has it been a party to a civil proceeding of a
judicial or administrative body in the last five years.
Edward Munden is President and Chief Executive Officer of the Company,
Bruce Benn is Executive Vice-President and Secretary of the Company, Ronald
Benn is Chief Financial Officer and Treasurer of the Company and Robert P.
Lindsay is Chief Operating Officer and Executive Vice-President of the Company.
Messrs. Munden, Benn and Benn all work in the Company's office at 60 Queen
Street, 14th Floor, Ottawa, Canada, K1P 5Y7. Robert Lindsay works in the
Company's office at 3500 Oak Lawn, Suite 380, Dallas, Texas 75219-4398.
Messrs. Munden, Benn and Benn are all Canadian citizens and Robert Lindsay is a
U.S. citizen. None of Messrs. Munden, Benn, Benn and Lindsay have had a
criminal conviction in the last five years, nor have any of them been a party
to a civil proceeding or a judicial or administrative body in the last five
years.
Along with the irrevocable proxies granted by EIBOC, Edward Munden,
Bruce Benn, Ronald Benn and Robert Lindsay all have employment agreements with
the Company and are all parties to a stockholders agreement with JEDI and
EIBOC. See the Company's Proxy Statement for its 1997 Annual Meeting of
Stockholders for further information.
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
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of expenses and capital costs. The meaningfulness of such estimates is highly
dependent on the accuracy of the assumptions on which they are based. Actual
results are likely to differ materially from the results estimated. Readers are
cautioned not to place undue reliance on the reserve data 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, Robert
P. Lindsay, 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.
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
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tender offers or other unilateral takeover proposals to negotiate with the
Board of Directors rather than pursue non-negotiated takeover attempts. These
provisions include authorized "blank check" Preferred Stock, and the
availability of authorized but unissued Common Stock. The issuance of Preferred
Stock may have the effect of delaying or preventing a change in control of the
Company without further stockholder action and may adversely affect the rights
and powers, including voting rights, of the holders of Common Stock. In certain
circumstances the issuance of Preferred Stock could depress the market price of
the Common Stock.
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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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 CERCLA 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.
17
<PAGE> 19
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.
NATURE OF THE NET PROFITS OVERRIDING ROYALTY INTERESTS
As a result of the Morgan Property Acquisition, a substantial portion
of the Company's oil and natural gas property interests are in the form of net
profits overriding royalty interests ("ORIs"). As the owner of ORIs, the
Company is not able to propose the drilling of wells or cause third parties to
propose or drill wells on the properties subject to the ORIs. If an ORI
assignor proposes to drill a well, then each of the assignors is obligated to
give the Company notice of any well proposed by the assignor or by any other
working interest owner, and under the applicable ancillary agreements (the
"Ancillary Agreements"), the Company will have the option to pay the Applicable
Percentage (as defined in the Ancillary Agreement) of the respective assignor's
working interest share of the expenses of any well that is proposed, and
thereby become entitled to an ORI equal to the Applicable Percentage multiplied
by the assignor's net revenue interest in that well. However, if an assignor
elects not to participate in the drilling of a well, the Company will be denied
the opportunity to participate in that well. Moreover, if an assignor owns
less than a 100% working interest in a proposed well, and the other owners of
working interests with respect to such well elect not to participate in the
well, the well will not be drilled unless a means of funding the costs
allocable to the working interest owners who do not elect to participate in the
well is effectuated. The financial strength and the competence of the
assignors, and to a lesser extent the financial strength and the competence of
other parties owning working interests in the properties, may have an effect on
when and whether wells get drilled on the properties subject to the ORIs, and
on whether operations are conducted in a prudent and competent manner. Certain
of the operators and/or assignors on the Morgan Properties have experienced
financial difficulties, including bankruptcy. Further, in at least one
instance an operator has claimed a right to setoff against the Company's
revenue stream from certain properties for unpaid bills arising from the
nonpayment by a bankrupt assignor. Finally, the ORIs were created subsequent
and subject to the various operating agreements that cover and govern
operations on the properties. Possible consequences of the ORIs being subject
to the applicable operating agreements include: (i) if an assignor elects not
to participate in a major operation, the entire original interest of the
assignor (including the ORI) will be relinquished to the consenting parties
under the "non-consent penalty" provisions of the standard form operating
agreement; and (ii) if an assignor fails to pay its share of costs arising
under an operating agreement, the entire original interest of the assignor
(including the ORI) will be encumbered by the operator's lien. Because the ORI
may not burden every well covered by an operating agreement, the ORI could
theoretically be encumbered by the Operator's Lien securing obligations
incurred by an assignor on wells in which the Company does not own an ORI. See
"Recent Development."
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<PAGE> 20
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
(there are currently 1,360,545 shares of Common Stock issuable upon conversion
of the 10,000 shares of Series C Preferred Stock held by the Selling
Stockholders and 340,138 shares of Common Stock issuable upon exercise of the
Warrants held by the Selling Stockholders).
<TABLE>
<CAPTION>
NUMBER OF SHARES NUMBER OF SHARES NUMBER OF SHARES
NAME OF OWNED BEFORE THIS BEING REGISTERED OWNED AFTER
SELLING STOCKHOLDER 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>
19
<PAGE> 21
- --------------------
(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.
DESCRIPTION OF CAPITAL STOCK
The authorized capital of the Company consists of (i) 100,000,000
shares of Common Stock, par value $0.0015 per share (the "Common Stock"), and
50,000,000 shares of Preferred Stock. At April 16, 1998, the Company had (i)
23,572,153 shares of Common Stock outstanding, (ii) 9,600,000 shares of Series
A Preferred Stock outstanding, (iii) no shares of Series B Participating
Convertible Preferred Stock (the "Series B Preferred Stock") and (iv) 10,400
shares of Series C Preferred Stock outstanding.
COMMON STOCK
The holders of shares of Common Stock possess full voting power for
the election of directors and for all other purposes, each holder of Common
Stock being entitled to one vote for each share of Common Stock held of record
by such holder. The shares of Common Stock do not have cumulative voting
rights.
As described below, the holders of Series A Preferred Stock are
generally entitled to vote (on an as-converted basis) as a single class with
the holders of the Common Stock, together with all other classes and series of
stock of the Company that are entitled to vote as a single class with the
Common Stock, on all matters coming before the Company's stockholders. Holders
of a majority of the shares of Common Stock and Series A Preferred Stock
represented at a meeting may approve most actions submitted to the stockholders
except for certain corporate actions (e.g. mergers, sale of assets and charter
amendments) which require the approval of holders of a majority of the total
outstanding shares of Common Stock and the Series A Preferred Stock or other
matters that require a class vote of the Preferred Stock.
Subject to the right of holders of any outstanding shares of Preferred
Stock, dividends may be paid on the Common Stock as and when declared by the
Company's Board of Directors out of any funds of the Company legally available
for the payment thereof. Holders of Common Stock have no subscription,
redemption, sinking fund, conversion or preemptive rights. The outstanding
shares of Common Stock are fully paid and nonassessable. After payment is made
in full to the holders of any outstanding shares of Preferred Stock in the
event of any liquidation, dissolution or winding up of the affairs of the
Company, the remaining assets and funds of the Company will be distributed to
the holders of Common Stock according to their respective shares.
PREFERRED STOCK
General
The Board of Directors may, without further action by the Company's
stockholders (subject to the terms of the Series A Preferred Stock and the
Series C Preferred Stock described below), from time to time, direct the
issuance of fully authorized shares of Preferred Stock, in classes or series
and may, at the time of issuance, determine the powers, rights, preferences and
limitations of each class or series. Satisfaction of any dividend preferences
on outstanding shares of Preferred Stock would reduce the amount of funds
available for the payment of dividends on Common Stock. Also, holders of
preferred Stock would be entitled to receive a preference payment in the event
of any liquidation, dissolution or winding up of the Company before any payment
is made to the holders of Common Stock. Under certain circumstances, the
issuance of such Preferred Stock may render more difficult
20
<PAGE> 22
or tend to discourage a merger, tender offer or proxy contest, the assumption
of control by a holder of a large block of the Company's securities or the
removal of incumbent management.
DESCRIPTION OF SERIES A PREFERRED STOCK
General. The Certificate of Designation of the Series A Preferred
Stock authorizes the issuance of up to 9,600,000 shares of Series A Preferred
Stock.
Voting. The holders of shares of Series A Preferred Stock are
generally entitled to vote (on an as-converted basis) as a single class with
the holders of the Common Stock, together with all other classes and series of
stock of the Company that are entitled to vote as a single class with the
Common Stock, on all matters coming before the Company's stockholders. In any
vote with respect to which the Series A Preferred Stock shall vote with the
holders of Common Stock as a single class, each share of Series A Preferred
Stock shall entitle the holder thereof to cast the number of votes equal to the
number which could be cast in such vote by a holder of the number of shares of
Common Stock into which such shares of Series A Preferred Stock is convertible
on the date of such vote. With respect to any matter for which class voting is
required by law or the Company's Restated Certificate of Incorporation, except
as otherwise described herein, the holders of the Series A Preferred Stock will
vote as a class and each holder shall be entitled to one vote for each share
held. For so long as 960,000 shares of Series A Preferred Stock are
outstanding, the following matters will require the approval of the holders of
shares of Series A Preferred Stock, voting together as a separate class:
(i) the amendment of any provision of the Company's Restated
Certificate of Incorporation or the bylaws;
(ii) the creation, authorization or issuance, or the increase in the
authorized amount of, any class or series of shares ranking on a parity
with or prior to the Series A Preferred Stock either as to dividends or
upon liquidation, dissolution or winding up;
(iii) the merger or consolidation of the Company with or into any
other corporation or other entity or the sale of all or substantially all
of the Company's assets; or
(iv) the reorganization, recapitalization, or restructuring or
similar transaction that requires the approval of the stockholders of the
Company.
Election of Directors. The holders of shares of Series A Preferred Stock
have the right, acting separately as a class, to elect a number of members to
the Company's Board of Directors. As of the date hereof, JEDI has not elected
to exercise its right to elect directors to the Company's Board of Directors.
Conversion. A holder of shares of Series A Preferred Stock has the right,
at the holder's option, to convert all or a portion of its shares into shares
of Common Stock at any time at an initial rate of one share of Series A
Preferred Stock for one share of Common Stock.
Concurrently with the transfer of any shares of Series A Preferred Stock to
any person (other than a direct or indirect affiliate of JEDI or other entity
managed by Enron Corp. or any of its affiliates), the shares of Series A
Preferred Stock so transferred will automatically convert into a like number of
shares of Series B Preferred Stock.
Dividends. The holders of the shares of Series A Preferred Stock are
entitled to receive dividends, when, and as if declared by the Board of
Directors, out of funds legally available therefor, any dividend (other than a
dividend or distribution paid in shares of, or warrants, rights or options
exercisable for or convertible into or exchangeable for, Common Stock) payable
on the Common Stock, as and when paid, in an amount equal to the amount each
such holder would have received if such holder's shares of Series A Preferred
Stock had been converted into Common Stock immediately prior to the record
21
<PAGE> 23
date, or if there is no record date, the date of payment thereof. The holders
of Series A Preferred Stock will also have the right to certain dividends upon
and during the continuance of an event of default.
Liquidation. Upon the liquidation, dissolution or winding up of the
Company, the holders of the shares of Series A Preferred Stock, before any
distribution to the holders of Common Stock, will be entitled to receive (i)
an amount per share equal to the lesser of (A) $1.50 and (B) the sum of (x)
$0.521 and (y) the quotient obtained by dividing (1) the aggregate amount of
all payments made, as of the date of the liquidation, dissolution or winding
up, to the Company by JEDI pursuant to the JEDI Earn Up Agreement by (2)
9,600,000, plus (ii) all accrued and unpaid dividends thereon ("Series A
Liquidation Preference"). The holders of the shares of Series A Preferred
Stock will not be entitled to participate further in the distribution of the
assets of the Company.
Events of Default; Remedies. The Series A Certificate of Designation
provides that an Event of Default will be deemed to have occurred if the
Company fails to comply with any of its covenants in the Securities Purchase
Agreement dated as of March 27, 1997 between the Company and JEDI; provided,
that the Company will have a 30-day cure period with respect to the
non-compliance with certain covenants.
Upon the occurrence but only during the continuance of an Event of Default,
the holders of Series A Preferred Stock will be entitled to receive, in
addition to other dividends payable to holders of Series A Preferred Stock,
when, as, and if declared by the Board of Directors, out of funds legally
available therefor, cumulative preferential cash dividends accruing from the
date of the Event of Default in an amount per share per annum equal to 6% of
the Series A Liquidation Preference in effect at the time of accrual of such
dividends, payable quarterly in arrears on or before the 15th day after the
last day of each calendar quarter during which such dividends are payable.
Unless full cumulative dividends accrued on shares of Series A Preferred Stock
have been or contemporaneously are declared and paid, no dividend may be
declared or paid or set aside for payment on the Common Stock or any other
junior securities (other than a dividend or distribution paid in shares of, or
warrants, rights or options exercisable for or convertible into or exchangeable
for, Common Stock or any other junior securities), nor shall any Common Stock
nor any other junior securities be redeemed, purchased or otherwise acquired
for any consideration nor may any monies be paid to or made available for a
sinking fund for the redemption of any shares of any such securities.
Upon the occurrence and during the continuance of an Event of Default
resulting from the failure to comply with certain covenants, the holders of
shares of Series A Preferred Stock will have the right, acting separately as a
class, to elect a number of persons to the Board of Directors of the Company,
that along with any members of the Board of Directors who are serving at the
time of such action, will constitute a majority of the Board of Directors.
Upon the occurrence of an Event of Default resulting from the failure to
comply with certain covenants, each holder of shares of Series A Preferred
Stock will have the right, by written notice to the Company, to require the
Company to repurchase, out of funds legally available therefor, such holder's
shares of Series A Preferred Stock for an amount in cash equal to the Series A
Liquidation Preference in effect at the time of the Event of Default.
DESCRIPTION OF SERIES B PREFERRED STOCK
The Series B Certificate of Designation authorizes the issuance of up to
9,600,000 shares of Series B Preferred Stock. The terms of the Series B
Preferred Stock are substantially similar to those of the Series A Preferred
Stock except that the holders of Series B Preferred Stock will not (i) have
class voting rights except as required under Delaware corporate law, (ii) be
entitled to any remedies upon an event of default or (iii) be entitled to elect
any directors of the Company, voting separately as a class.
22
<PAGE> 24
DESCRIPTION OF SERIES C PREFERRED STOCK
General. The Series C Certificate of Designation authorizes the issuance
of up to 10,400 shares of Series C Preferred Stock.
Voting. The holders of shares of Series C Preferred Stock are not entitled
to vote with the holders of the Common Stock except as required by law or as
set forth below. For so long as any shares of Series C Preferred Stock are
outstanding, the following matters will require the approval of the holders of
at least two-thirds of the then outstanding shares of Series C Preferred Stock,
voting together as a separate class:
(i) alter or change the rights, preferences or privileges of the
Series C Preferred Stock or any other capital stock of the Company so as to
affect adversely the Series C Preferred Stock;
(ii) create any new class or series of capital stock having a
preference over or ranking pari passu with the Series C Preferred Stock as
to redemption, the payment of dividends or distribution of assets upon a
Liquidation Event (as defined in the Series C Certificate of Designation)
or any other liquidation, dissolution or winding up of the Company;
(iii) increase the authorized number of shares of Preferred Stock of
the Company;
(iv) re-issue any shares of Series C Preferred Stock which have been
converted in accordance with the terms hereof;
(v) issue any Senior Securities (other than the Company's Series B
Preferred Stock pursuant to the terms of the Company's Series A Preferred
Stock) or Pari Passu Securities (each, as defined in the Series C
Certificate of Designation); or
(vi) declare, pay or make any provision for any dividend or
distribution with respect to the Common Stock or any other capital stock of
the Company ranking junior to the Series C Preferred Stock as to dividends
or as to the distribution of assets upon liquidation, dissolution or
winding up of the Company.
In the event that the holders of at least two-thirds of the
then-outstanding shares of Series C Preferred Stock agree to allow the Company
to alter or change the rights, preferences or privileges of the shares of
Series C Preferred Stock pursuant to the terms hereof, or to waive any rights
of the holders hereunder, then the Company will deliver notice of such approved
change to the holders of the Series C Preferred Stock that did not agree to
such alteration or change (the "Dissenting Holders") and the Dissenting Holders
shall have the right for a period of 30 days following such delivery to convert
their Series C Preferred Stock pursuant to the terms hereof as they existed
prior to such alteration or change, or to continue to hold such shares. No
such change shall be effective to the extent that, by its terms, it applies to
less than all of the holders of Series C Preferred Stock then outstanding.
Conversion. Subject to certain limitations set forth in the Series C
Certificate of Designation, a holder of shares of Series C Preferred Stock has
the right, at the holder's option, to convert all or a portion of its shares
into shares of Common Stock at any time. The number of shares of Common Stock
into which a share of Series C Preferred Stock may be converted will be
determined as of the conversion date according to a formula set forth in the
Series C Certificate of Designation. Generally, if the conversion date is on or
before June 22, 1998, the conversion rate is equal to the aggregate stated value
of the shares to be converted (the stated value is $1,000 per share) divided by
a fixed conversion price of $7.35 (or approximately 136 shares of Common Stock
for each share of Series C Preferred Stock). If the conversion date is after
June 22, 1998, the conversion rate is equal to the aggregate stated value of the
shares to be converted divided by a floating conversion price that is the lesser
of (i) $7.35 and (ii) (A) the average of the three lowest closing bid prices for
the Common Stock during the 10 trading days prior to the conversion date if the
average daily trading volume for the
23
<PAGE> 25
Common Stock on the Nasdaq SmallCap Market during the calender month of the
conversion date is equal to or greater than $540,000, or (B) the three lowest
closing bid prices for the Common Stock during the 20 days trading days prior to
the conversion date if the average daily trading volume for the Common Stock on
the Nasdaq SmallCap Market during the calender month of the conversion date is
equal to or greater than $360,000 but less than $540,000, or (C) the lowest
closing bid price for the Common Stock during the 15 trading days prior to the
conversion date if the average daily trading volume for the Common Stock on the
Nasdaq SmallCap Market during the calender month of the conversion date is less
than $360,000. By way of example only, if the effective conversion price was
$6.00 per share, each share of Series C Preferred Stock would be convertible
into approximately 167 shares of Common Stock (or 1,733,333 shares if all
outstanding shares of Series C Convertible Preferred Stock were converted). If
the effective conversion price was $4.00 per share, each share of Series C
Preferred Stock would be convertible into approximately 250 shares of Common
Stock (or 2,600,000 shares if all outstanding shares of Series C Preferred Stock
were converted). If the Company fails to deliver shares of Common Stock to a
holder following a conversion in accordance with the Series C Certificate of
Designation, then the Company will be liable to the holder for certain cash
default payments set forth in the Series C Certificate of Designation.
On December 24, 2001, all shares of Series C Preferred Stock that are then
outstanding shall be automatically converted into the number of shares of
Common Stock determined in accordance with the formula set forth in the Series
C Certificate of Designation.
The Series C Certificate of Designation provides for customary adjustments
to the number of shares issuable upon conversion in the event of certain
dividends and distributions to holders of Common Stock, certain
reclassifications of the Common Stock, stock splits, combinations and mergers
and similar transactions and certain changes of control.
Dividends. The holders of the shares of Series C Preferred Stock are
entitled to receive dividends, when, and as if declared by the Board of
Directors, out of funds legally available therefor, subject to the prior
payment of any accumulated and unpaid dividends to holders of Senior
Securities, but before payment of dividends to holders of Junior Securities (as
defined in the Series C Certificate of Designation), cumulative dividends on
each of the Series C Preferred Stock shares in an amount equal to the stated
value ($1,000) of such share multiplied by 5%. Dividends accrue from the date
of original issuance of the Series C Preferred Stock (December 24, 1997)
through the earlier to occur of (a) the Maturity Date (as defined below) and
(b) the redemption or conversion of the Series C Preferred Stock. Such
dividends are payable in shares of Common Stock. The number of shares of
Common Stock so issuable is equal to the amount of the dividend to which a
holder is entitled with respect to all of such holder's Series C Preferred
Stock and the applicable conversion price on the dividend payment date.
"Maturity Date" means December 24, 2001.
Liquidation. Upon the liquidation, dissolution or winding up of the
Company, the holders of the shares of Series C Preferred Stock, before any
distribution to the holders of Junior Securities, and after payment to holders
of Senior Securities, will be entitled to receive an amount equal to the stated
value of the Series C Preferred Stock (subject to ratable adjustment in the
event of reclassification of the Series C Preferred Stock or other similar
event) plus any accrued and unpaid dividends thereon.
Optional Redemption. The Company has the right to redeem all of the
outstanding Series C Preferred Stock at a price equal to the Liquidation
Preference of the Series C Preferred Stock then held by the holder divided by
80% ("Optional Redemption Price"), to the extent permitted by law and so long
as (i) the Company has sufficient cash available at the time; (ii) the Company
delivers prior written notice at least thirty trading days' prior to the
redemption, specifying both the date of the redemption and the amount payable
to the holder; and (iii) the Common Stock is actively traded on the Nasdaq
Stock Market (which is defined to include the Nasdaq SmallCap Market), the New
York Stock Exchange or the American Stock Exchange.
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<PAGE> 26
Mandatory Redemption. The Series C Certificate of Designation provides for
mandatory redemption by the Company when a Mandatory Redemption Event occurs
(as defined in the Series C Preferred Stock Certificate of Designation).
Upon the occurrence of a Mandatory Redemption Event, each holder of Series
C Preferred Stock will have the right to require the Company to redeem its
Series C Preferred Stock at a redemption price equal to the greater of (i) the
Liquidation Preference of the Series C Preferred Stock being redeemed
multiplied by 125% and (ii) an amount determined by dividing the Liquidation
Preference of the Series C Preferred Stock being redeemed by the conversion
price in effect on the mandatory redemption dated and multiplying the resulting
quotient by the average closing bid price for the Common Stock on the 5 trading
days preceding the mandatory redemption date ("Mandatory Redemption Price").
If the Mandatory Redemption Price is not paid within five business days of
the redemption date and the holder has tendered its Series C Preferred Stock to
the Company, the holder is entitled to interest thereon, from the redemption
date until the Mandatory Redemption Price has been paid in full.
If the Mandatory Redemption Price is not paid within ten business days of
the redemption date, each holder of shares of Series C Preferred Stock will
have the right, by written notice to the Company, to require the Company to
issue, in lieu of the Mandatory Redemption Price, the number of shares of
Common Stock of the Company equal to the Mandatory Redemption Price divided by
the conversion price in effect on such conversion date as specified by the
holder, with the conversion price to be reduced by 1% for each day beyond the
10th business day in which the Company fails to pay the Mandatory Redemption
Price, but with the maximum reduction of the conversion price to be 50%.
A "Mandatory Redemption Event" includes (i) a failure by the Company to
issue shares of Common Stock as and when required upon conversion of any shares
of Series C Preferred Stock, (ii) a breach in any material respect of any
covenant or other material term or condition of the Series C Certificate of
Designation, the Securities Purchase Agreement executed in connection with the
issuance of the Series C Preferred Stock, the Registration Rights Agreement or
the Warrant, (iii) any material representation or warranty made by the Company
in any of the above-referenced agreements is inaccurate or misleading in any
material respect, (iv) the Registration Statement (of which this Prospectus is
a part) is not declared effective within 120 days following December 24, 1997,
(v) the Common Stock is not quoted on the Nasdaq Stock Market (which as defined
to include the Nasdaq SmallCap Market) listed on the New York Stock Exchange or
the American Stock Exchange, or (vi) there occurs a change of control in the
transaction including any sale, conveyance or disposition of substantially all
of the assets of the Company or the effectuation of a transaction in which more
than 50% of the voting power of the Company is disposed of, or any merger or
other business combination of the Company.
WARRANTS
As of April 16, 1998, JEDI held warrants to purchase an aggregate of
1,554,974 shares of Common Stock at prices ranging from $1.85 to $3.50. The
warrants held by JEDI expire at various times from May 6, 1998 to December 31,
1998. In addition, certain institutional investors hold warrants to purchase
an aggregate of 2,840,138 shares of Common Stock at prices ranging from $$2.50
to $7.35. The warrants held by the institutional investors expire at various
times from December 31, 1998 to December 24, 2001. The Company has also issued
certain contingent floating conversion rate warrants in connection with the
bridge financing arranged to fund the Morgan Property Acquisition. See "Recent
Development." All of these warrants were issued in private placements not
registered under the Securities Act, and the shares of Common Stock underlying
such warrants have not been registered under the Securities Act.
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<PAGE> 27
PLAN OF DISTRIBUTION
The shares of Common Stock covered hereby may be offered and sold from time
to time by the Selling Stockholders or their respective pledgees. 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. Such shares may also be used to cover short sales
or in connection with options or other derivative transactions. 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.
In the event that a Selling Stockholder elects to sell any of its shares of
Common Stock pursuant to an underwritten offering in accordance with the terms
of the Registration Rights Agreement, the Company would thereupon prepare a
post- effective amendment to the Registration Statement containing all required
information, including names of underwriters, underwriting terms and so forth.
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.
26
<PAGE> 28
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 revenues and direct operating expenses in respect of oil
and natural gas properties (the "Core Properties") acquired from various
sellers in February and March 1997 for the year ended June 30, 1996
incorporated in this Prospectus by reference from the Company's Current Report
on Form 8-K/A-1 dated March 26, 1997/February 20, 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 statements of operating revenues and direct operating expenses of oil
and natural gas properties acquired from Collins & Ware, Inc. in August 1997
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 reports incorporated by reference herein and are included in
reliance upon such reports 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
27
<PAGE> 29
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 proved oil and natural gas reserves of the
Company at December 31, 1997 acquired in the Morgan Property Acquisition
referred to under "Recent Development" and in the Company's Current Report on
Form 8-K dated March 19, 1998, as amended by Current Report on Form 8-K/A-1
filed April 27, 1998, incorporated by reference in this Prospectus, are based
upon estimates of such reserves prepared by Ryder Scott Company, independent
petroleum engineers, in reliance upon its reports and upon 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 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.
28
<PAGE> 30
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).
"BTU" British Thermal Unit, the quantity of heat required to raise one pound of
water by one degree Fahrenheit.
"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.
"MMBTU" One million Btu.
"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 DEVELOPED RESERVES" Proved developed reserves are oil and gas reserves
that can be expected to be recovered through existing wells with existing
equipment and operating methods. Additional oil and gas expected to be
obtained through the application of fluid injection or other improved
recovery techniques for supplementing the natural forces and mechanisms of
primary recovery should be included as "proved developed reserves" only
after testing by a pilot project or after the operation of an installed
program has confirmed through production response that increased recovery
will be achieved.
"PROVED UNDEVELOPED RESERVES" or "PUD" Reserves are oil and gas reserves that
are expected to be recovered from new wells on undrilled acreage, or from
existing wells where a relatively major expenditure is required for
recompletion. Reserves on undrilled acreage shall be limited to those
drilling units offsetting productive units that are reasonably certain of
production when drilled. Proved reserves for other undrilled units can be
claimed only where it can be demonstrated with certainty that there is
continuity of production from the existing productive formation. Under no
circumstances should estimates for proved undeveloped reserves be
attributable to any acreage for which an application of fluid injection or
other improved recovery techniques is contemplated, unless such techniques
have been proved effective by actual tests in the area and in the same
reservoir.
"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.
29
<PAGE> 31
"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.
30
<PAGE> 32
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<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> 33
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>
2.1 Purchase and Sale Agreement, among the Company, Morgan Guaranty Trust Company of New York,
as Trustee, Investment Royalty Corporation and Milam Royalty Corporation, dated March 19,
1998, filed as Exhibit 10.1 to the Company's Form 8-K dated March 19, 1998, which exhibit is
incorporated herein by reference.
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.
**23.6 Consent of Ryder Scott Company.
*24.1 Power of Attorney, included as part of signature page of this Registration Statement.
</TABLE>
- --------------------
* Previously filed.
** Filed herewith.
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:
II-2
<PAGE> 34
(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 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.
II-3
<PAGE> 35
(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-4
<PAGE> 36
SIGNATURES
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
Pre-Effective Amendment No. 2 to its Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Dallas,
State of Texas, on the 27th day of April, 1998.
QUEEN SAND RESOURCES, INC.
By: /s/ Robert P. Lindsay
-------------------------------
Name: Robert P. Lindsay
Title: Chief Operating Officer and
Executive Vice President
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment No. 2 to its Registration Statement has been signed by
the following persons on behalf of the Registrant in the capacities on April
27, 1998:
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
Edward J. Munden* Chairman of the Board, President
- ----------------------------- Chief Executive Officer and Director
Edward J. Munden (principal executive officer)
Bruce I Benn* Executive Vice President, Secretary and
- ----------------------------- Director
Bruce I. Benn
Ronald I. Benn* Chief Financial Officer (principal
- ----------------------------- financial officer and accounting officer)
Ronald I. Benn
/s/ Robert P. Lindsay Chief Operating Officer, Executive Vice
- ----------------------------- President and Director
Robert P. Lindsay
Ted Collins, Jr.* Director
- -----------------------------
Ted Collins, Jr.
Eli Rebich* Director
- -----------------------------
Eli Rebich
</TABLE>
II-5
<PAGE> 37
Robert P. Lindsay, by signing his name hereto, does sign and execute
this Pre-Effective Amendment No. 2 to its Registration Statement on behalf of
each of the above-named officers and directors of the Registrant on this 27th
day of April, 1998, pursuant to powers of attorneys executed on behalf of each
of such officers and directors, and previously filed with the Securities and
Exchange Commission.
*By: /S/ ROBERT P. LINDSAY
-----------------------------------
Robert P. Lindsay
Attorney-in-Fact
II-6
<PAGE> 38
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO.
-----------
<S> <C>
2.1 Purchase and Sale Agreement, among the Company, Morgan Guaranty Trust Company of
New York, as Trustee, Investment Royalty Corporation and Milam Royalty Corporation,
dated March 19, 1998, filed as Exhibit 10.1 to the Company's Form 8-K dated
March 19, 1998, which exhibit is incorporated herein by reference.
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.
**23.6 Consent of Ryder Scott Company.
*24.1 Power of Attorney, included as part of signature page of this Registration
Statement.
</TABLE>
- --------------------
* Previously filed.
** Filed herewith.
<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. 333-47577) 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 (a)
April 15, 1997, with respect to the statement of revenues and direct operating
expenses of the Core Properties for the year ended June 30, 1996 included in its
Current Report on Form 8-K/A-1 dated March 26, 1997/February 20, 1997 and (b)
September 18, 1997 and September 16, 1997, respectively, with respect to the
financial statements of Queen Sand Resources, Inc. 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
included in its Annual Report (Form 10-KSB), both filed with the Securities and
Exchange Commission, and Form 10-KSB/A filed April 23, 1998.
/s/ Ernst & Young LLP
---------------------------
Ernst & Young LLP
April 22, 1998
<PAGE> 1
EXHIBIT 23.6
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
We hereby consent to (i) the incorporation by reference in the Prospectus
(the "Prospectus") constituting a part of the Pre-Effective Amendment No. 2 to
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 proved oil and gas
reserves of the Company at December 31, 1997 acquired in the Morgan Property
Acquisition and in the Company's Current Report on Form 8-K dated March 19,
1998, as amended by Current Report on Form 8-K/A-1 filed April 27, 1998, and all
references to such report letters and/or this firm in such Prospectus and (ii)
further consent to out being named as an expert therein in the section title
"Experts"
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
/s/ Ryder Scott Company
-------------------------------
Petroleum Engineers
-------------------------------
April 27, 1998
