<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 13, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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QUEEN SAND RESOURCES, INC.
QUEEN SAND RESOURCES, INC.
NORTHLAND OPERATING CO.
CORRIDA RESOURCES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 1311 75-2615565
NEVADA 1311 75-2564071
NEVADA 1311 75-2593510
NEVADA 1311 75-2691594
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Numbers) Identification Nos.)
</TABLE>
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3500 OAK LAWN, SUITE 380
DALLAS, TEXAS 75219-4398
(214) 521-9959
(214) 521-9960 (FAX)
(Address, including zip code, and telephone number, including area
code, of Registrants' principal executive offices)
----------------------------
ROBERT P. LINDSAY
CHIEF OPERATING OFFICER AND EXECUTIVE VICE PRESIDENT
QUEEN SAND RESOURCES, INC.
3500 OAK LAWN, SUITE 380
DALLAS, TEXAS 75219-4398
(214) 521-9959
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
----------------------------
Copies to:
WILLIAM L. BOEING
HAYNES AND BOONE, L.L.P.
901 MAIN STREET
SUITE 3100
DALLAS, TEXAS 75202
(214) 651-5000
(214) 651-5940 (FAX)
----------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are being offered
in connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) 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 this Form is a post-effective amendment filed pursuant to Rule 462(d)
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. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
=================================================================================================================================
PROPOSED PROPOSED
AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED REGISTERED PER NOTE (1) OFFERING PRICE (1) REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
12 1/2% Senior Notes due 2008......................... $125,000,000 100% $125,000,000 $36,875
=================================================================================================================================
Guarantees of 12 1/2% Senior Notes due 2008........... $125,000,000 (2) (2) (2)
=================================================================================================================================
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee
pursuant to Rule 457.
(2) No further fee is required pursuant to Rule 457(n).
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED AUGUST 13, 1998
PROSPECTUS , 1998
OFFER TO EXCHANGE
12 1/2% SENIOR NOTES DUE 2008
FOR ALL OUTSTANDING 12 1/2% SENIOR NOTES DUE 2008
OF
QUEEN SAND RESOURCES, INC.
--------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON , 1998 UNLESS EXTENDED.
Queen Sand Resources, Inc., a Delaware corporation ("Queen Sand
Resources" and, together with its subsidiaries, the "Company") is offering upon
the terms and subject to the conditions set forth in this Prospectus and the
accompanying letter of transmittal (the "Letter of Transmittal") (which together
constitute the "Exchange Offer") to exchange $1,000 principal amount of its new
12 1/2% Senior Notes due 2008 (the "New Notes") for each $1,000 principal amount
of its outstanding 12 1/2% Senior Notes due 2008 (the "Old Notes") in the
aggregate principal amount of $125 million. The form and terms of the New Notes
are identical to the form and terms of the Old Notes, except that the Old Notes
were offered and sold in reliance upon certain exemptions from registration
under the Securities Act of 1933, as amended (the "Securities Act"), while the
offering and sale of the New Notes in exchange for the Old Notes has been
registered under the Securities Act, with the result that the New Notes will not
bear any legends restricting their transfer. The New Notes will evidence the
same indebtedness as the Old Notes and will be issued pursuant to, and entitled
to the benefits of, the indenture among the Company, certain direct and indirect
wholly owned subsidiaries of the Company and the Trustee (defined herein)
thereunder, dated as of July 1, 1998 (the "Indenture"), governing the Old Notes.
The Exchange Offer is being made in order to satisfy certain contractual
obligations of the Company. See "The Exchange Offer" and "Description of Notes."
The New Notes and the Old Notes are sometimes collectively referred to herein as
the "Notes."
The New Notes will bear interest from the date of issuance of the Old
Notes at a rate per annum of 12 1/2%. Interest on the New Notes will be payable
in cash, semiannually on each January 1 and July 1, commencing January 1, 1999.
No interest will be paid on Old Notes which are exchanged for New Notes, and
holders of Old Notes which are exchanged for New Notes will be deemed to have
waived the right to receive interest accrued thereon to the date of exchange.
The Notes are redeemable at the option of the Company, in whole or in
part, at any time on or after July 1, 2003, at the redemption prices set forth
herein, plus accrued and unpaid interest and Liquidated Damages (defined
herein), if any, to the date of redemption. Furthermore, prior to July 1, 2001,
up to 20% of the aggregate principal amount of the Notes originally issued may
be redeemed from time to time at the option of the Company, in whole or in part,
at 112.5% of the principal amount thereof, plus accrued and unpaid interest and
Liquidated Damages, if any, to the date of redemption with the net cash proceeds
of one or more Equity Offerings (defined herein); provided that at least 80% of
the aggregate principal amount of the Notes originally issued remains
outstanding immediately after each such redemption. Upon the occurrence of a
Change of Control (defined herein), the Company will be required to make an
offer to purchase the Notes at a purchase price equal to 101% of the principal
amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any,
to the date of purchase. See "Description of Notes."
The New Notes will be senior unsecured obligations of the Company. The
New Notes will rank pari passu with any existing and future unsubordinated
indebtedness of the Company, but will be effectively subordinated to the rights
of holders of secured unsubordinated indebtedness of the Company to the extent
of the value of the collateral securing such indebtedness. The New Notes will
rank senior to all unsecured subordinated indebtedness of the Company. The New
Notes will be jointly, severally and unconditionally guaranteed (the "Subsidiary
Guarantees") by each of the existing and future Restricted Subsidiaries (defined
herein) of the Company (the "Subsidiary Guarantors"). The Subsidiary Guarantees
will be senior unsecured obligations of the Subsidiary Guarantors and will rank
pari passu with any existing and future unsubordinated indebtedness of the
Subsidiary Guarantors, but will be effectively subordinated to the rights of
holders of secured unsubordinated indebtedness of the Subsidiary Guarantors to
the extent of the value of the collateral securing such indebtedness. As of June
30, 1998, on a pro forma basis after giving effect to the Offerings (defined
herein) and the application of the net proceeds therefrom, there would have been
approximately $ million of unsubordinated indebtedness for money borrowed
by the Company and the Subsidiary Guarantors, all of which was secured
indebtedness, and approximately $ million of general unsecured trade
indebtedness and other liabilities of the Company and the Subsidiary Guarantors
excluding approximately $ million of available borrowings and letters of
credit under the Company's credit facilities). The Indenture governing the Notes
will limit the ability of the Company and the Subsidiary Guarantors to incur
additional Indebtedness. See "Use of Proceeds," "Capitalization," "Description
of Other Indebtedness" and "Description of Notes."
The Company and the Subsidiary Guarantors have agreed to file by
September 5, 1998, and cause to become effective by November 4, 1998, the
Registration Statement of which this Prospectus is a part relating to an
exchange offer for the Notes, or, in lieu thereof, to file and cause to become
effective a resale shelf registration statement for the Notes. If such exchange
offer or shelf registration statement is not filed or is not declared effective,
or if such exchange offer is not consummated, within the time periods set forth
herein, Liquidated Damages will accrue and be payable on the Notes until such
registration or consummation. See "Exchange Offer; Registration Rights."
The Company will accept for exchange any and all validly tendered Old
Notes on or before 5:00 p.m., New York City time, on , 1998,
unless extended (the "Expiration Date"). Tenders of Old Notes may be withdrawn
at any time before 5:00 p.m., New York City time, on the Expiration Date, but
after that time are irrevocable. Harris Trust and Savings Bank will act as
Exchange Agent in connection with the Exchange Offer. The Exchange Offer is not
conditioned on any minimum principal amount of Old Notes being tendered for
exchange, but is otherwise subject to certain customary conditions.
SEE "RISK FACTORS," BEGINNING ON PAGE 18, FOR A DISCUSSION OF CERTAIN
FACTORS THAT HOLDERS SHOULD CONSIDER IN CONNECTION WITH THE EXCHANGE OFFER AND
AN INVESTMENT IN THE EXCHANGE NOTES.
---------------------
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.
---------------------
<PAGE> 3
The Old Notes were sold by the Company on July 8, 1998, to Nesbitt Burns
Securities Inc., CIBC Oppenheimer Corp. and Societe Generale Securities
Corporation (the "Placement Agents") in a transaction not registered under the
Securities Act in reliance on the exemptions under the Securities Act. The
Placement Agents subsequently placed the Old Notes with qualified institutional
buyers in reliance on Rule 144A under the Securities Act and to certain
institutional accredited investors. Accordingly, the Old Notes may not be
reoffered, resold or otherwise transferred in the United States unless
registered or unless an applicable exemption from the registration requirements
of the Securities Act is available. The New Notes are being offered hereunder in
order to satisfy the obligations of the Company under a Registration Rights
Agreement entered into among the Company, the Subsidiary Guarantors of the Notes
and the Placement Agents (the "Registration Rights Agreement"). See "The
Exchange Offer."
Based on an interpretation by the staff of the Securities and Exchange
Commission (the "Commission" or the "SEC") set forth in no-action letters issued
to third parties unrelated to the Company, the Company believes that the New
Notes issued pursuant to this Exchange Offer may be offered for resale, resold
and otherwise transferred by a holder thereof who is not an "affiliate" of the
Company or any Guarantor within the meaning of Rule 405 under the Securities
Act, without compliance with the registration and prospectus delivery provisions
of the Securities Act, provided that the holder is acquiring the New Notes in
the ordinary course of its business and is not participating in and has no
arrangement or understanding with any person to participate in the distribution
(within the meaning of the Securities Act) of the New Notes. Persons wishing to
exchange Old Notes in the Exchange Offer must represent to the Company that
these conditions have been met.
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with resales of New Notes
received in exchange for Old Notes where such New Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities. The Company has agreed that, starting on the Expiration Date
(defined herein) and ending on the close of business on the first anniversary of
the Expiration Date, it will make this Prospectus available to any broker-dealer
for use in connection with any such resale. See "Plan of Distribution."
The Old Notes are currently eligible for trading in the Private Offerings,
Resales and Trading through Automated Linkages (PORTAL) market. The Company
expects the New Notes will be eligible for trading in the Private Offerings,
Resales and Trading through Automated Linkages (PORTAL) market upon issuance.
The Company does not intend to list the New Notes on any national securities
exchange or to seek the admission thereof to trading in the National Association
of Securities Dealers Automated Quotation System. [The Placement Agents have
advised the Company that they intend to make a market in the New Notes;]
however, they are not obligated to do so and any market-making may be
discontinued at any time without notice. Accordingly, no assurance can be given
that an active public or other market will develop for the New Notes or as to
the liquidity of or the trading market for the New Notes.
Any Old Notes not tendered and accepted in the Exchange Offer will remain
outstanding. To the extent that any Old Notes are tendered and accepted in the
Exchange Offer, a holder's ability to sell untendered Old Notes could be
adversely affected. Following consummation of the Exchange Offer, the holders of
Old Notes will continue to be subject to the existing restrictions on transfer
thereof.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF PRIVATE NOTES IN ANY JURISDICTION IN
WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
NO PERSON IS AUTHORIZED IN CONNECTION WITH THE EXCHANGE OFFER TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS OR
THE ACCOMPANYING LETTER OF TRANSMITTAL, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. NEITHER THE DELIVERY OF THIS PROSPECTUS OR THE ACCOMPANYING LETTER OF
TRANSMITTAL, NOR ANY EXCHANGE MADE
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HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.
The Company expects that the New Notes issued pursuant to this Exchange
Offer will be issued in the form of one or more permanent global notes (the
"Global New Notes"), which will be deposited with, or on behalf of, The
Depository Trust Company ("DTC") and registered in its name or in the name of
its nominee. Beneficial interests in the Global New Notes representing the New
Notes will be shown on, and transfers thereof will be effected through, records
maintained by DTC and its participants. After the initial issuance of the Global
New Notes, New Notes in certificated form will be issued in exchange for the
Global New Notes on the terms set forth in the Indenture. See "Description of
Notes--Book Entry; Delivery and Form."
3
<PAGE> 5
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 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, par value $0.0015 per share (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.
Pursuant to the Indenture, the Company has agreed that, to the extent such
filings are accepted by the Commission and whether or not it has a class of
securities registered under the Exchange Act, it will file the annual reports,
quarterly reports and other documents that the Company would be required to file
if it were subject to Section 13 or 15 of the Exchange Act, in each case on or
before the dates on which such reports and other documents would have been
required to have been filed with the Commission if the Company had been subject
to Section 13 or 15 of the Exchange Act. The Company will also be required (i)
to file with the Trustee (with exhibits), and to provide to each holder of Notes
(without exhibits), without cost to such holder, copies of such reports and
documents within 15 days after the date on which the Company files such report
and documents with the Commission or the date on which the Company would be
required to file such reports and documents if the Company were so required and
(ii) if filing such reports and documents with the Commission is not accepted by
the Commission or is prohibited under the Exchange Act, to supply at its cost
copies of such reports and documents (including any exhibits thereto) to any
holder of Notes promptly upon written request.
This Prospectus contains summaries believed to be accurate with respect to
certain terms of certain documents, but reference is made to the actual
documents, including the Indenture governing the Notes and the Registration
Rights Agreement (copies of which will be made available by the Company to
holders upon request), for complete information with respect thereto, and all
such summaries are qualified in their entirety by such reference.
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 filed 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) Quarterly
Report on Form 10-QSB for the quarter ended March 31, 1998, (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 filed April 27, 1998 and Current Report
on Form 8-K/A-2 filed June 8, 1998, (xi) Current Report on Form 8-K dated May 1,
1998, and (xii) Current Report on Form 8-K dated July 8, 1998.
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 Exchange Offer 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
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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) or described herein. 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 William W. Lesikar, Vice President-Finance, of the
Company, at (214) 521-9959.
FORWARD-LOOKING STATEMENTS
This Prospectus includes "forward-looking statements" within the meaning
of Section 27A of the Securities Act and Section 21E of the Exchange Act, which
can be identified by the use of forward-looking terminology such as, "may,"
"believe," "expect," "intend," "plan," "seek," "anticipate," "estimate" or
"continue" or the negative thereof or other variations thereon or comparable
terminology. All statements other than statements of historical fact included in
this Prospectus, including without limitation, the statements under "Business"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and located elsewhere herein regarding the financial position and
liquidity of the Company, the volume or discounted present value of its oil and
natural gas reserves, its ability to service its indebtedness, its strategic
plans including its ability to locate and complete acquisitions of, and to
develop, oil and natural gas assets and other matters, are forward-looking
statements. Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable, it can give no assurance that
such expectations will prove to have been correct. Important factors with
respect to any such forward-looking statements, including certain risks and
uncertainties that could cause actual results to differ materially from the
Company's expectations ("Cautionary Statements") are disclosed in this
Prospectus, including, without limitation, in conjunction with the
forward-looking statements included in this Prospectus. Important factors that
could cause actual results to differ materially from those in the
forward-looking statements herein include, but are not limited to, the timing
and extent of changes in commodity prices for oil and natural gas, the need to
develop and replace reserves, environmental risks, drilling and operating risks,
risks related to exploitation and development, uncertainties about the estimates
of reserves, competition, government regulation and the ability of the Company
to meet its stated business goals. All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by the Cautionary Statements.
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<PAGE> 7
SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements (including the notes thereto) and pro forma
condensed consolidated financial information appearing elsewhere in this
Prospectus. This Exchange Offer is being conducted pursuant to contractual
obligations of the Company to the Placement Agents arising from the offering of
the Old Notes (the "Old Note Offering"), which was consummated on July 8, 1998.
The Company also completed a private placement of Common Stock by the Company
with gross proceeds to the Company of $32.5 million (the "Private Equity
Placement" and, together with the Note Offering, the "Offerings"). Except as
otherwise indicated, each reference herein to "pro forma" or "pro forma basis"
shall mean that the results for the stated period or other data have been
adjusted to reflect (i) the Morgan Property Acquisition (defined herein),(ii)
the NASGAS Property Acquisition (defined herein), (iii) the Collins and Ware
Property Acquisition (defined herein) (together with the Morgan Property
Acquisition and the NASGAS Property Acquisition, the "Property Acquisitions"),
(iv) the Offerings and the application of the estimated net proceeds therefrom,
and (iv) the termination of $125.0 million of a LIBOR interest rate swap
agreement at a cost to the Company of approximately $3.5 million. Certain oil
and natural gas terms used in this Prospectus are defined in the "Glossary"
included herein. Certain terms used in connection with the Notes are defined
under the caption "Description of Notes--Certain Definitions."
THE COMPANY
Queen Sand Resources is an independent energy company which emphasizes
growth in oil and natural gas reserves and production volumes through the
acquisition, exploitation and development of on-shore oil and natural gas
properties located in the United States. Since August 1994 through the date of
this Prospectus, the Company has grown primarily through 19 acquisitions of oil
and natural gas properties for aggregate consideration of approximately $160.0
million. As a result of the Company's activities to date, it has assembled a
geographically and geologically diverse property base, characterized by
long-lived production and multiple opportunities for further development,
exploitation and exploration. For the nine months ended March 31, 1998, on a pro
forma basis, the Company had revenues of $28.7 million and EBITDA of $23.3
million. As of July 31, 1998, the officers and directors of the Company
collectively had a beneficial interest in approximately 26.6% of the Company's
voting capital stock, and Joint Energy Development Investments Limited
Partnership ("JEDI"), an affiliate of Enron Corp. ("Enron"), holds approximately
30.3% of the Company's voting capital stock.
The Company's objective is to increase its reserves, production,
earnings, cash flow and net asset value through a growth strategy that seeks to
maintain a diversified portfolio of oil and natural gas reserves with stable
production and operating characteristics. The Company seeks to achieve this
objective through a balanced mix of oil and natural gas property acquisitions
coupled with the development and exploitation of its reserve base. The Company
evaluates potential acquisition properties based on their particular impact upon
the Company's portfolio of reserves. The Company focuses on low reserve
replacement costs, long reserve life, an inventory of attractive development and
exploitation projects, and the potential for reserve and production growth. For
instance, in the April 1998 Morgan Property Acquisition, the Company acquired
certain oil and natural gas property interests representing proved reserves of
149.5 Bcfe, of which 76% was classified as proved developed producing. This
acquisition provided the Company with stable, long-lived production and cash
flow to develop and exploit its inventory of non-producing reserves. In the
March 1998 NASGAS Property Acquisition, the Company acquired certain natural gas
properties with attractive development potential and approximately 36.8 Bcfe of
proved reserves, of which 91% was classified as non-producing. The Company
intends to fully develop these reserves by drilling primarily low-risk
development wells. In aggregate, the Company has currently identified over 234
potential development and exploitation drilling locations on its properties. The
Company currently plans to spend approximately $26.2 million through June 30,
1999 to further develop and exploit its existing properties.
At December 31, 1997, on a pro forma basis, the Company had interests in
999 wells (inclusive of 67 service wells), proved reserves of 181.7 Bcf of
natural gas and 10.7 MMBbls of oil (aggregating approximately 245.6 Bcfe) with a
SEC PV-10 of $174.6 million, and a Reserve Life Index of 13.3 years.
Approximately 53% of the Company's reserves was classified as proved developed
producing and approximately 74% of the Company's total proved reserves was
natural gas. The Company's average daily net production was 49.1 MMcfe, on a pro
forma basis for
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the month of December 1997. For the month of March 1998, the Company's average
daily net production, on a pro forma basis, increased to 52.2 MMcfe.
The Company's properties are diversified across 114 producing fields which
are located principally in the southwestern United States. The Company's
interests in the Gilmer Field in East Texas, the J.C. Martin and the
Lopeno/Volpe Fields in South Texas, and the Caprock Field in New Mexico
represent approximately 58% of its pro forma proved reserves (on a SEC PV-10
basis). In addition, the Company has substantial operations in Oklahoma,
Kentucky and Louisiana. At December 31, 1997, on a pro forma basis, the Company
held interests in leases covering approximately 259,000 gross (121,000 net)
acres.
BUSINESS STRATEGY
The Company's strategy is to increase its reserves, production, earnings,
cash flow and net asset value by (i) acquiring strategic oil and natural gas
properties in a disciplined manner, (ii) developing, exploiting and exploring
its properties, (iii) achieving low operating costs and (iv) maintaining
financial flexibility.
o Strategic Acquisitions. The Company has a successful track record
of increasing its reserves through acquisitions, having added an
estimated 257.4 Bcfe of proved reserves from 19 acquisitions for
aggregate consideration of $160.0 million or $0.62 per Mcfe since
commencing operations in August 1994 through the date of this
Prospectus. The Company seeks to expand its diversified,
long-lived portfolio of oil and natural gas properties by
acquiring producing properties with (i) identified development and
exploitation potential, (ii) controlled-risk exploration
potential, (iii) historically low operating expenses, or the
opportunity to reduce operating expenses, and (iv) geological,
geophysical and other technical and operating characteristics with
which management of the Company has expertise. The Company applies
strict economic and reserve risk criteria in evaluating
acquisitions of oil and natural gas properties.
o Development, Exploitation and Exploration. The Company seeks to
maximize the value and cash flow of its oil and natural gas
properties through development drilling, workovers, recompletions,
enhanced recovery techniques and reductions in operating costs.
The Company has identified over 234 potential development and
exploitation locations on its existing portfolio of properties.
The Company currently plans to spend approximately $21.4 million
to drill or participate in the drilling of approximately 160 wells
through June 30, 1999. The Company also continually evaluates and
pursues exploitation opportunities, including workover and
recompletion projects. The Company expects to spend approximately
$4.8 million on these exploitation projects through June 30, 1999.
Although the Company could increase its exploration drilling
activity in the future, its current strategy includes only limited
investments in exploratory projects.
o Low Operating Costs. The Company's goal is to achieve a lower
operating expense on a per unit (Mcfe) basis than that of its
peers. The Company is pursuing this objective by emphasizing cost
controls in its field operating expenses and acquiring properties
with low operating costs while increasing existing production
through development drilling and effective workover and well
maintenance programs. Through these efforts, the Company has
reduced lease operating expenses to $0.57 per Mcfe for the nine
months ended March 31, 1998 on a pro forma basis.
o Financial Flexibility. The Company is committed to maintaining
financial flexibility, which management believes is important for
the successful implementation of its growth strategy. In
implementing this strategy, the Company intends to continue using
a mixture of debt and equity. Consistent with this financial
strategy, the Company raised an aggregate of approximately $65.2
million in equity capital from August 9, 1994 through June 30,
1998. On July 8, 1998 and July 20, 1998 the Company issued an
aggregate of 3,428,574 shares of Common Stock for $24 million cash
and two holders of warrants exercised their warrants and certain
maintenance rights to purchase an aggregate of 3,074,236 shares of
stock for an aggregate exercise and purchase price of $8.5
million. As of July 31, 1998, the Company had approximately $14.7
million available under its Amended and Restated Credit Agreement
(the "Credit Agreement") and $10.0 million available under its
revolving credit facility (the "ECT Revolving Credit Agreement")
with Enron Capital & Trade Resources Corp. ("ECT"). See
"Description of Other Indebtedness." In general, the Company
strives to maintain a balanced asset/liability management program
by matching long-lived reserves
7
<PAGE> 9
with extended maturity liabilities. Furthermore, the Company seeks to
mitigate the effect of decreases in commodity prices by utilizing hedging
instruments. The Company has also entered into, and may in the future
utilize, interest rate hedges.
RECENT PROPERTY ACQUISITIONS
Morgan Property Acquisition
On April 20, 1998, the Company acquired certain non-operated, net profits
interests ("NPIs") and royalty interests revenues ("RIs"; together with the
NPIs, the "Morgan Properties") for gross cash consideration of $150.0 million
(net consideration is currently estimated to be approximately $133.3 million
after adjustments for net profits interests and royalty interests revenues and
capital expenditures since October 1, 1997, the effective date of the purchase)
from pension funds managed by J.P. Morgan Investments (the "Morgan Property
Acquisition"). The Morgan Property Acquisition was financed with borrowings
under the Credit Agreement and two subordinated bridge credit facilities (the
"Debt Bridge Facility" and the "Equity Bridge Facility" and collectively, the
"Bridge Facilities") arranged by Bank of Montreal. The oil and natural gas
properties burdened by the Morgan Properties (collectively, the "Underlying
Properties") are primarily located in East Texas, South Texas and the
mid-continent region of the United States. According to Ryder Scott Company
("Ryder Scott"), independent petroleum engineers, as of December 31, 1997, the
Morgan Properties contained proved reserves of 124.1 Bcf of natural gas and 3.6
MMBbls of oil (aggregating 145.6 Bcfe), of which approximately 76% was
classified as proved developed producing. The Morgan Properties had a SEC PV-10
of $127.5 million as of December 31, 1997. The Company estimates that as of the
effective date of the Morgan Property Acquisition, the proved reserves
attributed to the Morgan Properties were 149.5 Bcfe.
The Company believes that the Morgan Property Acquisition provides it with
certain benefits, including (i) the enhancement of the Company's portfolio of
high quality reserves with long production histories and low operating costs,
(ii) additional cash flow to fund development and exploitation projects, (iii)
the enhancement of its operational base to grow through further acquisitions,
(iv) significant additional development and exploitation opportunities and (v)
additional geographic core concentration of the Company's existing properties
and operational capabilities. Although the Company did not acquire direct
working interests in the wells located on the Underlying Properties, the Company
believes that its significant interests in certain key Underlying Properties
will enable the Company to influence the timing and manner of development and
exploitation of such key properties.
NASGAS Property Acquisition
On March 9, 1998 (with an effective date of January 1, 1998), the Company
purchased certain operated natural gas properties in western Kentucky for net
cash consideration of $450,000 and 337,500 shares of the Company's Common Stock
(the "NASGAS Property Acquisition"). The acquired properties are comprised of
interests in 21 gross wells (12.6 net) and 61,421 gross acres (36,858 net) (the
"NASGAS Properties"). According to H.J. Gruy and Associates, Inc. ("H.J. Gruy"),
independent petroleum engineers, the proved reserves attributed to the NASGAS
Properties as of December 31, 1997, were 36.8 Bcf, 100% of which was natural
gas, and 9% proved developed producing, with a SEC PV-10 of $7.4 million. The
Company believes the NASGAS Property Acquisition provides it with certain
benefits, including a large inventory of low-cost, low-risk development drilling
opportunities.
Collins and Ware Property Acquisition
On August 1, 1997, the Company purchased certain operated oil and natural
gas properties for cash consideration (net of production subsequent to the
February 1, 1997 effective date) of approximately $6.0 million and 1,000,000
shares of the Company's Common Stock (the "Collins and Ware Property
Acquisition"). The acquired properties were comprised of interests in 77 gross
(12.4 net) wells located in New Mexico, Texas and Oklahoma (the "Collins and
Ware Properties"). According to H.J. Gruy, the proved reserves attributed to the
Collins and Ware Properties as of December 31, 1997, were 6.6 Bcfe, 21% of which
was natural gas, and 73% proved developed producing, with a SEC PV-10 of $7.0
million. The Company estimates that as of February 1, 1997, the proved reserves
attributed to the Collins and Ware Properties were 7.3 Bcfe.
8
<PAGE> 10
THE OLD NOTE OFFERING
<TABLE>
<S> <C>
THE OLD NOTES.......................... The Old Notes were sold by the Company on July 8,
1998 to the Placement Agents pursuant to a Purchase
Agreement. The Placement Agents resold the Old Notes
to qualified institutional buyers pursuant to Rule
144A under the Securities Act and to certain
institutional accredited investors.
REGISTRATION RIGHTS AGREEMENT.......... In connection with the Old Note Offering, the
Company entered into a Registration Rights Agreement
with the Placement Agents which grants the holders
of the Old Notes certain registration rights. The
Exchange Offer is intended to satisfy such rights,
which terminate upon consummation of the Exchange
Offer. If applicable law or applicable
interpretations of the staff of the Commission do
not permit the Company to effect the Exchange Offer,
or in certain other circumstances, the Company has
agreed to file a shelf registration statement
covering resales of Registrable Securities (as
defined in the Registration Rights Agreement).
</TABLE>
THE EXCHANGE OFFER
The Exchange Offer applies to the entire $125 million aggregate principal
amount of the Old Notes. The form and terms of the New Notes are identical to
the form and terms of the Old Notes, except that the Old Notes were offered and
sold in reliance upon certain exemptions from registration under the Securities
Act, while the offering and sale of the New Notes in exchange for the Old Notes
has been registered under the Securities Act, with the result that the New Notes
will not bear any legends restricting their transfer. See "Description of
Notes."
<TABLE>
<S> <C>
THE EXCHANGE OFFER..................... The Company is hereby offering to exchange $1,000
principal amount of New Notes for each $1,000
principal amount of Old Notes that are properly
tendered and accepted. As of the date hereof, Old
Notes representing an aggregate principal amount of
$125 million are outstanding. Based on an
interpretation by the Commission's staff set forth
in no-action letters issued to third parties
unrelated to the Company, the Company believes that
the New Notes issued pursuant to this Exchange Offer
may be offered for resale, resold and otherwise
transferred by a holder thereof who is not an
"affiliate" of the Company or any Guarantor within
the meaning of Rule 405 under the Securities Act,
without compliance with the registration and
prospectus delivery provisions of the Securities
Act, provided that the holder is acquiring the New
Notes in the ordinary course of its business and is
not participating in and has no arrangement or
understanding with any person to participate in the
distribution (within the meaning of the Securities
Act) of the New Notes. Persons wishing to exchange
Old Notes in the Exchange Offer must represent to
the Company that these conditions have been met. The
Company has not sought, and does not intend to seek,
its own no-action letter, and there can be no
assurance that the Commission's staff would make a
similar determination with respect to this Exchange
Offer. Each broker-dealer that receives New Notes
for its own account in exchange for Old Notes, where
the Old Notes were acquired by that broker-dealer as
a result of its market-making activities or other
trading activities, must acknowledge that it will
deliver a prospectus in connection with any resale
of such New Notes. See "The Exchange Offer--Purpose
and Effect" and "Plan of Distribution."
</TABLE>
9
<PAGE> 11
<TABLE>
<S> <C>
EXPIRATION DATE........................ The Exchange Offer will expire at 5:00 p.m., New
York City time, on , 1998, unless the Exchange Offer
is extended by the Company in its sole discretion,
in which case, the term "Expiration Date" shall mean
the latest date and time to which the Exchange Offer
is extended.
WITHDRAWAL RIGHTS...................... The tender of Old Notes pursuant to the Exchange Offer may
be withdrawn at any time prior to 5:00 p.m., New York City
time, on the Expiration Date. Any Old Notes not accepted
for exchange for any reason will be returned without
expense to the tendering holder thereof as promptly as
practicable after the expiration or termination of the
Exchange Offer.
INTEREST ON THE NEW NOTES AND
OLD NOTES........................... Interest on each New Note will accrue from the date of
issuance of the Old Note for which the New Note is
exchanged. No interest will be paid on Old Notes which are
exchanged for New Notes, and holders of Old Notes which are
exchanged for New Notes will be deemed to have waived the
right to receive interest accrued thereon to the date of
exchange.
CONDITIONS TO THE EXCHANGE OFFER...... The Exchange Offer is subject to certain customary
conditions, certain of which may be waived by the Company.
See "The Exchange Offer--Conditions." The Exchange Offer
is not conditioned upon any minimum aggregate principal
amount of Old Notes being tendered for exchange.
PROCEDURES FOR TENDERING OLD NOTES.... Each holder of Old Notes wishing to accept the Exchange
Offer must complete, sign and date the Letter of
Transmittal, or a copy thereof, in accordance with the
instructions contained herein and therein, and mail or
otherwise deliver the Letter of Transmittal, or a copy
thereof, together with the Old Notes and any other required
documentation, to the Exchange Agent at the address set
forth herein. Persons holding Old Notes through DTC and
wishing to accept the Exchange Offer must do so pursuant to
DTC's Automated Tender Offer Program, by which each
tendering Participant (defined herein) will agree to be
bound by the Letter of Transmittal. By executing or
agreeing to be bound by the Letter of Transmittal, each
holder will represent to the Company that, among other
things, (i) the New Notes to be acquired by such holder of
Old Notes in connection with the Exchange Offer are being
acquired by such holder in the ordinary course of its
business, (ii) if such holder is not a broker dealer, such
holder is not currently participating in, does not intend
to participate in, and has no arrangement or understanding
with any person to participate in a distribution of the New
Notes, (iii) if such holder is a broker-dealer registered
under the Exchange Act or is participating in the Exchange
Offer for the purposes of distributing the New Notes, such
holder will comply with the registration and prospectus
delivery requirements of the Securities Act in connection
with a secondary resale transaction of the New Notes
acquired by such person and cannot rely on the position of
the staff of the Commission set forth in no-action letters
(see "The Exchange Offer--Resale of Exchange Notes"), (iv)
such holder understands that a secondary resale transaction
described in clause (iii) above and any resales of New
Notes obtained by such holder in exchange for Old Notes
acquired by such holder directly from the Company should be
covered by an effective registration statement containing
the information required by Item 507 or Item 508, as
applicable, of Regulation S-K of the Commission and (v)
such holder is not an "affiliate," as defined in
</TABLE>
10
<PAGE> 12
<TABLE>
<S> <C>
Rule 405 under the Securities Act, of the Company. If the
holder is a broker-dealer that will receive New Notes for
its own account in exchange for Old Notes that were
acquired as a result of market-making activities or other
trading activities, such holder will be required to
acknowledge in the Letter of Transmittal that such holder
will deliver a prospectus in connection with any resale of
such New Notes; however, by so acknowledging and by
delivering a prospectus, such holder will not be deemed to
admit that it is an "underwriter" within the meaning of the
Securities Act. See "The Exchange Offer--Procedures for
Tendering."
Pursuant to the Registration Rights Agreement, the Company
is required to file a registration statement for a
continuous offering pursuant to Rule 415 under the
Securities Act in respect of the Old Notes if applicable
law or SEC staff interpretations otherwise prevent
registration of the New Notes pursuant to the Exchange
Offer. See "The Exchange Offer--Purpose and Effect."
SPECIAL PROCEDURES FOR BENEFICIAL
OWNERS............................... Any beneficial owner whose Old Notes are registered in the
name of a broker, dealer, commercial bank, trust company or
other nominee and who wishes to tender such Old Notes in
the Exchange Offer should contact such registered holder
promptly and instruct such registered holder to tender on
such beneficial owner's behalf. If such beneficial owner
wishes to tender on such owner's own behalf, such owner
must, prior to completing and executing the Letter of
Transmittal and delivering such owner's Old Notes, either
make appropriate arrangements to register ownership of the
Old Notes in such owner's name or obtain a properly
completed bond power from the registered holder. The
transfer of registered ownership may take considerable time
and may not be able to be completed prior to the Expiration
Date. See "The Exchange Offer--Procedures for Tendering."
GUARANTEED DELIVERY PROCEDURES......... Holders of Old Notes who wish to tender their Old Notes and
whose Old Notes are not immediately available or who cannot
deliver their Old Notes, the Letter of Transmittal or any
other documentation required by the Letter of Transmittal
to the Exchange Agent prior to the Expiration Date may
tender their Old Notes according to the guaranteed delivery
procedures set forth under "The Exchange Offer--Guaranteed
Delivery Procedures."
ACCEPTANCE OF OLD NOTES AND DELIVERY
OF NEW NOTES......................... Subject to the satisfaction or waiver of the conditions to
the Exchange Offer, the Company will accept for exchange
any and all Old Notes which are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York City time, on
the Expiration Date. The New Notes issued pursuant to the
Exchange Offer will be delivered at the earliest
practicable date following the Expiration Date. See "The
Exchange Offer--Terms of the Exchange Offer."
EXCHANGE AGENT......................... Harris Trust and Savings Bank is serving as Exchange Agent
in connection with the Exchange Offer and is also serving
as Trustee under the Indenture.
FEDERAL INCOME TAX CONSIDERATIONS...... The exchange pursuant to the Exchange Offer will not be a
taxable event for federal income tax purposes. See "Certain
U.S. Federal Income Tax Considerations."
</TABLE>
11
<PAGE> 13
<TABLE>
<S> <C>
EFFECT OF NOT TENDERING................ Old Notes that are eligible for exchange in the Exchange
Offer, but are not tendered or are tendered but not
accepted will, following the completion of the Exchange
Offer, continue to be subject to the existing restrictions
upon transfer thereof. The Company will have no further
obligation to provide for the registration under the
Securities Act of such Old Notes.
GLOBAL NOTE............................ The New Notes will be issued in fully registered form and
are expected to initially be represented by one or more
Global New Notes, registered in the name of DTC or its
nominee and deposited with DTC. Holders of beneficial
interests in the Global New Notes will not be considered
the owners or holders of any New Notes under the Global New
Notes or the Indenture for any purpose. Holders of
beneficial interests in the Global New Notes may be unable
to transfer or pledge their interest in the Global New
Notes if physical delivery is required. Payments by DTC
Participants (defined herein) and DTC Indirect Participants
(defined herein) to the beneficial owners of New Notes will
be governed by standing instructions and customary practice
and will be the responsibility of the DTC Participants or
DTC Indirect Participants and not the Company or the
Trustee. See "Exchange Offer--Book Entry Transfer."
</TABLE>
TERMS OF THE NEW NOTES
<TABLE>
<S> <C>
SECURITIES OFFERED..................... $125 million principal amount of 12 1/2% Senior Notes Due
2008, issued by the Company.
RANKING................................ The New Notes will be senior unsecured obligations of the
Company. The New Notes will rank pari passu with any
existing and future unsubordinated indebtedness of the
Company, but will be effectively subordinated to the rights
of holders of secured unsubordinated indebtedness of the
Company to the extent of the value of the collateral
securing such indebtedness. The New Notes will rank senior
to all unsecured subordinated indebtedness of the Company.
As of June 30, 1998, on a pro forma basis after giving
effect to the Offerings and the application of the net
proceeds therefrom, there would have been approximately
$3.1 million of unsubordinated indebtedness for money
borrowed by the Company and the Subsidiary Guarantors, all
of which was secured indebtedness, and approximately $4.5
million of general unsecured trade indebtedness and other
liabilities of the Company and the Subsidiary Guarantors
(excluding approximately $31.9 million of available
borrowings and letters of credit under the Company's credit
facilities). See "Description of Notes--General" and
"--Subsidiary Guarantees."
MATURITY DATE.......................... July 1, 2008.
INTEREST PAYMENT DATES................. January 1 and July 1 of each year, commencing January 1, 1999.
SUBSIDIARY GUARANTORS.................. The New Notes will be jointly, severally and unconditionally
guaranteed by each of the existing and future Restricted
Subsidiaries of the Company. The Subsidiary Guarantees will
be senior unsecured obligations of the Subsidiary
Guarantors and will rank pari passu with any existing and
future unsubordinated indebtedness of the Subsidiary
Guarantors, but will be effectively subordinated to the
rights of holders of secured unsubordinated indebtedness of
the Subsidiary Guarantors to the extent of the value of the
collateral securing such indebtedness. See "Description of
Notes--Subsidiary Guarantees."
</TABLE>
12
<PAGE> 14
<TABLE>
<S> <C>
OPTIONAL REDEMPTION.................... The New Notes will be redeemable at the option of the
Company, in whole or in part, at any time on and after July 1,
2003, at the redemption prices set forth herein, plus
accrued and unpaid interest and Liquidated Damages, if any,
to the date of redemption. Furthermore, prior to July 1,
2001, up to 20% of the aggregate principal amount of the
New Notes originally issued may be redeemed from time to
time at the option of the Company, in whole or in part, at
112.5% of the principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages, if any, to the date
of redemption, with the net cash proceeds of one or more
Equity Offerings, provided that at least 80% of the
aggregate principal amount of the New Notes originally
issued remains outstanding immediately after each such
redemption. See "Description of Notes--Optional
Redemption."
CHANGE OF CONTROL...................... Upon the occurrence of a Change of Control the Company will
be required to make an offer to purchase the New Notes at a
purchase price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest and Liquidated
Damages, if any, to the date of purchase. There can be no
assurance, however, that the Company will have sufficient
funds with which to purchase the New Notes at that time,
and certain provisions of the Company's other debt
agreements may further limit the Company's ability to make
such purchases. See "Risk Factors--Limitation on Purchase
of Notes Upon the Occurrence of a Change of Control" and
"Description of Notes--Purchase at the Option of Holders
upon a Change of Control."
CERTAIN COVENANTS...................... The Indenture contains certain covenants that, among other
things, limit the ability of the Company and its Restricted
Subsidiaries to (i) incur additional Indebtedness, (ii) pay
dividends or make other distributions with respect to
Capital Stock or Redeemable Stock or purchase, redeem or
retire Capital Stock or Redeemable Stock or make other
Restricted Payments, (iii) enter into certain transactions
with Affiliates, (iv) create certain Liens, (v) enter into
certain consolidations, mergers and transfers of assets,
(vi) issue any Capital Stock of a Restricted Subsidiary or
permit any Person other than the Company or a Wholly Owned
Restricted Subsidiary to own such stock, (vii) permit any
Restricted Subsidiaries to suffer to exist certain types of
restrictions on the ability of Restricted Subsidiaries to
pay dividends and make other transfers of assets to the
Company and other Restricted Subsidiaries and (viii)
dispose of the proceeds of certain Asset Sales.
BOOK-ENTRY; DELIVERY AND FORM.......... The New Notes will initially be represented by one or more
Global New Notes registered in the name of a nominee of
DTC. Beneficial interests in the Global New Notes will be
shown on, and transfers thereof will be effected only
through, records maintained in book-entry Form by DTC with
respect to its participants. See "Description of
Notes--Book-Entry; Delivery and Form."
</TABLE>
RISK FACTORS
For a discussion of certain factors that should be considered by holders
in connection with the Exchange Offer and the New Notes, see "Risk Factors."
13
<PAGE> 15
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth for the periods indicated certain summary
historical and pro forma consolidated financial information of the Company. The
summary historical consolidated financial information for the period from August
9, 1994 (inception) to June 30, 1995 and each of the years in the two years
ended June 30, 1997 have been derived from the audited consolidated financial
statements of the Company. The summary historical financial information as of
and for the nine months ended March 31, 1997 and 1998 have been derived from the
unaudited financial statements of the Company and, in the opinion of management,
include all adjustments, consisting solely of normal recurring accruals,
necessary for a fair presentation of the information presented. The Company
completed material acquisitions of producing properties in each of the periods
presented which affects the comparability of the historical financial and
operating data for all periods presented. The summary historical and pro forma
information below should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations," the Consolidated
Financial Statements of the Company and the notes thereto, as well as the
"Unaudited Pro Forma Condensed Consolidated Financial Statements" and the notes
thereto included elsewhere in this Prospectus. Neither the historical results
nor the pro forma results are necessarily indicative of the Company's future
operations or financial results.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, NINE MONTHS ENDED MARCH 31,
------------------------------------------------ -------------------------------------
PRO FORMA PRO FORMA
HISTORICAL AS ADJUSTED HISTORICAL AS ADJUSTED
---------------------------------- ----------- ----------------------- -----------
1995(1) 1996 1997 1997(2) 1997 1998 1998(2)
-------- --------- --------- ----------- --------- ---------- -----------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Oil and natural gas sales ......... $ 435 $ 2,079 $ 4,381 $ 7,164 $ 3,118 $ 4,849 $ 5,170
Net Profits Interests and
Royalty Interests(3) .............. -- -- -- 31,953 -- -- 23,460
Interest and other ................ 10 72 300 300 201 80 80
-------- --------- --------- --------- --------- ---------- ----------
Total revenues .................. 445 2,151 4,681 39,417 3,319 4,929 28,710
-------- --------- --------- --------- --------- ---------- ----------
Expenses:
Production expenses ............... 280 1,176 2,507 3,251 1,632 3,183 3,261
Depreciation, depletion and
amortization .................... 132 630 982 14,120 747 1,340 11,330
General and administrative ........ 294 1,113 1,452 2,152 911 1,645 2,171
Interest and financing costs(4) ... 25 421 878 17,975 656 899 13,481
Reverse acquisition costs ......... 401 -- -- -- -- -- --
-------- --------- --------- --------- --------- ---------- ----------
Total expenses .................. 1,132 3,340 5,819 37,498 3,946 7,067 30,243
-------- --------- --------- --------- --------- ---------- ----------
Income (loss) before extraordinary
item and income taxes ............. (687) (1,189) (1,138) 1,919 (627) (2,138) (1,533)
Extraordinary item(5) ............... -- -- 171 -- -- --
Income taxes ........................ -- -- -- (672) -- -- --
-------- --------- --------- --------- --------- ---------- ----------
Net income (loss) ................... $ (687) $ (1,189) $ (1,309) $ 1,247 $ (627) $ (2,138) $ (1,533)
======== ========= ========= ========= ========= ========== ==========
OTHER FINANCIAL DATA:
EBITDA(6) ........................... $ (530) $ (138) $ 722 $ 34,014 $ 776 $ 101 $ 23,278
Capital expenditures(7) ............. 3,924 6,235 7,382 151,895 6,910 30,619 148,869
Ratio of EBITDA to interest
expense(4)(6)(8) .................. NM NM NM 2.0x 1.2x NM 1.9x
Ratio of earnings to fixed
charges(9) ........................ NM NM NM 1.1x NM NM NM
</TABLE>
14
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<TABLE>
<CAPTION>
AT MARCH 31, 1998
--------------------------------
PRO
HISTORICAL FORMA(2)
------------- -------------
(IN THOUSANDS, EXCEPT RATIO DATA)
BALANCE SHEET DATA:
<S> <C> <C>
Cash and cash equivalents ............. $ 1,137 $ 16,787
Working capital (deficit) ............. (58) 15,592
Net property and equipment ............ 30,466 142,716
Total assets .......................... 48,323 172,323
Total debt ............................ 23,429 137,529
Stockholders' equity .................. 22,403 32,303
ACNTA(10) ............................. 54,395 188,992
</TABLE>
(1) On March 6, 1995, Queen Sand Resources acquired Queen Sand Resources,
Inc., a Nevada corporation ("QSRn"). For accounting purposes, the
acquisition has been treated as a recapitalization of QSRn with QSRn as
the acquiror (reverse acquisition). The Consolidated Financial Statements
of the Company prior to March 6, 1995 are those of QSRn. QSRn was formed
on August 9, 1994. The statement of operations data for the period
denoted 1995 reflects the results of operations and other financial data
for the period August 9, 1994 to June 30, 1995.
(2) Reflects the pro forma effect of (i) the Note Offering and the Private
Equity Placement, the application of the net proceeds thereof and the
concurrent unwinding of at least $115.0 million of the Company's forward
LIBOR interest rate swap agreement and (ii) the Property Acquisitions.
See "Unaudited Pro Forma Condensed Consolidated Financial Statements,"
included elsewhere in this Prospectus, for a discussion of the
preparation of these data. Pro forma net cash provided by operating
activities was obtained by adjusting the historical amount for the pro
forma changes in oil and natural gas sales, oil and natural gas
production expenses, general and administrative expenses and interest
expense (except for the amortization of debt costs). See also "Use of
Proceeds" and "Capitalization."
(3) Presented below are the oil and natural gas sales and associated
production expenses from which the NPI and RI revenues are derived:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
JUNE 30, 1998 MARCH 31, 1998
------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Oil and natural gas sales .............................. $ 43,243 $ 30,747
Production expenses .................................... 11,290 7,287
Net profits interests and royalty interests revenues ... $ 31,953 $ 23,460
</TABLE>
(4) For purposes of computing the ratio of EBITDA to interest expense,
interest expense excludes the amortization of debt issuance costs of
$1.2 million for the pro forma year ended June 30, 1997, $15,000 for the
nine months ended March 31, 1998 and $930,000 for the pro forma nine
months ended March 31, 1998.
(5) During the fiscal year ended June 30, 1997, the Company modified the
terms of indebtedness related to certain acquired properties and
recognized an extraordinary loss of $171,381.
(6) EBITDA represents earnings before interest expense, income taxes and
depreciation, depletion and amortization expense, and extraordinary
items. EBITDA is not a measure of income or cash flows in accordance with
generally accepted accounting principles, but is presented as a
supplemental financial indicator as to the Company's ability to service
or incur debt. EBITDA is not presented as an indicator of cash available
for discretionary spending or as a measure of liquidity. EBITDA may not
be comparable to other similarly titled measures of other companies. The
Credit Agreement requires the maintenance of certain EBITDA ratios.
EBITDA should not be considered in isolation or as a substitute for net
income, operating cash flow or any other measure of financial performance
prepared in accordance with generally accepted accounting principles or
as a measure of the Company's profitability or liquidity.
(7) Capital expenditures for the nine months ended March 31, 1998, include
the costs of acquiring the Collins and Ware and the NASGAS Properties.
Pro forma capital expenditures for the year ended June 30, 1997 include
the costs of acquiring the Collins and Ware, NASGAS and Morgan
Properties. Pro forma capital expenditures for the nine months ended
March 31, 1998 include the costs of acquiring the Morgan Properties.
(8) EBITDA was insufficient to cover interest expense by $550,000, $559,000,
$156,000 and $798,000 for the fiscal years ended June 30, 1995, 1996 and
1997 and the nine months ended March 31, 1998, respectively.
(9) For purposes of computing the ratio of earnings to fixed charges, fixed
charges consist of interest expense. Earnings consist of earnings before
extraordinary items and income taxes plus fixed charges. Earnings were
insufficient to cover fixed charges by $687,000, $1.2 million,
$1.2 million, $627,000, $2.1 million and $1.5 million for the fiscal
years ended June 30, 1995, 1996 and 1997, the nine months ended March 31,
1997 and 1998, and the pro forma nine months ended March 31, 1998,
respectively.
(10) Adjusted Consolidated Net Tangible Assets ("ACNTA") is generally defined
as (a) the sum (without duplication) of (i) SEC PV-10, plus (ii)
capitalized costs attributable to oil and natural gas properties to which
no proved oil and natural gas reserves are attributable, plus (iii) net
working capital, plus (iv) the net book value of each other tangible
asset, minus (b) minority interests and, to the extent not otherwise
taken into account, natural gas balancing liabilities. Pro forma ACNTA of
$189.0 million includes $173.4 million of adjusted SEC PV-10 and
$15.6 million of working capital.
15
<PAGE> 17
SUMMARY OPERATING AND RESERVE DATA
The following table sets forth summary operating and reserve data at the
dates and for the periods indicated. Estimates of proved reserves and future net
revenues from which SEC PV-10 is derived are based on period-end prices of oil
and natural gas held constant (except to the extent a contract specifically
provides otherwise) in accordance with regulations of the Commission. For
additional information regarding the effect of prices on proved reserves and
estimated future net revenues, see "Risk Factors--Volatility of Oil and Natural
Gas Prices," "--Uncertainty of Estimates of Proved Reserves and Future Net
Revenues," and "Business--Oil and Natural Gas Reserves."
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, NINE MONTHS ENDED MARCH 31,
----------------------------------------- ------------------------------------------
HISTORICAL PRO FORMA(1) HISTORICAL PRO FORMA(1)
----------------------------------------- ------------ --------------------------
FOR THE PERIOD
FROM AUGUST 9,
1994 TO JUNE 30,
1995 1996 1997 1997 1998 1998
---------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Production volumes:
Natural gas (MMcf) ................. 5 154 546 14,039 736 10,500
Oil (MBbl) ......................... 26 103 151 696 185 562
Total (MMcfe) ................... 160 769 1,430 18,215 1,843 13,872
Average sales price(2):
Natural gas (per Mcf) .............. $ 1.65 $ 2.43 $ 2.31 $ 2.49 $ 2.28 $ 2.49
Oil (per Bbl) ...................... 16.52 18.26 20.73 21.53 17.19 17.25
Natural gas equivalent (per Mcfe)... 2.72 2.70 3.02 2.75 2.63 2.59
Selected expenses (per Mcfe)(3):
Lease operating expense ............ $ 1.53 $ 1.31 $ 1.52 $ 0.61 $ 1.56 $ 0.57
Production taxes ................... 0.22 0.22 0.21 0.18 0.17 0.18
General and administrative ......... 1.84 1.45 1.00 0.10 0.89 0.16
Depreciation, depletion and
amortization(4) .................. 0.83 0.82 0.68 0.98 0.73 0.82
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF DECEMBER 31,
------------------------------------------------------- --------------------------
HISTORICAL PRO FORMA(1) HISTORICAL PRO FORMA(1)
-------------------------------------- ------------ --------------------------
1995 1996 1997 1997 1998 1998
-------- -------- -------- ------------ ---------- --------
<S> <C> <C> <C> <C> <C> <C>
PROVED RESERVE DATA (END OF
PERIOD)(5):
Proved reserves:
Natural gas (MMcf)................... 420 12,984 20,973 178,943 20,743 181,656
Oil(MBbl) ........................... 6,190 6,932 6,709 11,150 7,085 10,664
Total(MMcfe) ........................ 37,560 54,574 61,224 245,842 63,255 245,639
Percent proved developed reserves ...... 29.9% 42.1% 41.7% 70.2% 41.8% 64.1%
Percent natural gas reserves ........... 1.1% 23.8% 34.3% 72.8% 32.8% 74.0%
Reserve Life Index (years) ............. NM 71.0 42.8 13.5 25.7 13.3
Estimated future net cash flows before
income taxes (thousands) ............. $ 36,175 $ 72,756 $ 80,596 $365,807 $ 80,345 $340,888
SEC PV-10 (thousands) .................. 14,444 31,453 41,218 190,969 39,651 174,603
</TABLE>
- ----------
(1) Reflects the pro forma effect of the Property Acquisitions. See
"Unaudited Pro Forma Condensed Consolidated Financial Statements,"
included elsewhere in this Prospectus, for a discussion of the
preparation of these data.
(2) Pro forma average sales price information for the year ended June 30,
1997 and the nine months ended March 31, 1998 include oil revenues of
$10.3 million and $6.4 million, respectively, and natural gas revenues of
$32.9 million and $24.4 million, respectively, attributable to the Morgan
Properties, which are presented net of lease operating expenses and
production taxes for financial statement presentation.
(3) Pro forma lease operating expenses and production taxes per Mcfe for the
year ended June 30, 1997 and the nine months ended March 31, 1998 include
lease operating expenses of $8.4 million and $5.2 million, respectively,
and production taxes of $2.9 million and $2.1 million, respectively,
attributable to the Morgan Properties, which are netted against the NPI
and RI revenues for financial statement presentation.
(4) Represents depreciation, depletion and amortization of oil and natural
gas properties only.
16
<PAGE> 18
(5) The summary pro forma information relating to proved reserves, estimated
future net revenues and SEC PV-10 with respect to the Morgan Properties
is derived from estimates prepared by Ryder Scott. The summary
information relating to the Company's proved reserves, estimated future
net revenues and SEC PV-10 at June 30, 1997 (other than with respect to
Property Acquisitions) and December 31, 1997 (other than with respect to
the Morgan Properties) is derived from estimates prepared by H.J. Gruy.
The summary information relating to the Company's proved reserves,
estimated future net revenues and SEC PV-10 at June 30, 1995 and 1996 and
the summary pro forma information relating to the NASGAS Property
Acquisition at June 30, 1997 is derived from estimates prepared by Harper
and Associates, Inc. ("Harper and Associates"), independent petroleum
engineers. The summary pro forma information relating to proved reserves,
estimated future net revenues and SEC PV-10 with respect to the Collins
and Ware Property Acquisition at June 30, 1997 is derived from estimates
prepared by Joe C. Neal & Associates ("Joe C. Neal & Associates"). For
limitations on the accuracy and reliability of reserves and future net
cash flow estimates, see "Risk Factors--Uncertainty of Estimates of
Reserves and Future Net Cash Flows." For reserve pricing information, see
"Business--Oil and Natural Gas Reserves."
17
<PAGE> 19
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be considered carefully in evaluating the Exchange
Offer and an investment in the New Notes offered hereby. This Prospectus
contains forward-looking statements of the Company which involve risks and
uncertainties.
ADVERSE CONSEQUENCES OF FAILURE TO EXCHANGE
The Old Notes were sold pursuant to an exemption from the registration
requirements of the Securities Act and their transfer is subject to certain
restrictions under the Securities Act. In general, Old Notes may not be offered
or sold unless registered under the Securities Act, except pursuant to an
exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. Holders of Old Notes who do not exchange their
Old Notes for New Notes pursuant to the Exchange Offer will continue to be
subject to such transfer restrictions on the Old Notes. The Company currently
does not anticipate that it will register the Old Notes under the Securities
Act. To the extent that Old Notes are tendered and accepted in the Exchange
Offer, the trading market for untendered and tendered but unaccepted Old Notes
could be adversely affected. See "The Exchange Offer--Consequences of Failure
to Exchange."
RISKS ASSOCIATED WITH EXCHANGE OFFER PROCEDURES
The New Notes will be issued in exchange for Old Notes only after timely
receipt by the Exchange Agent of such Old Notes, a properly completed and duly
executed Letter of Transmittal and all other required documentation. Therefore,
holders of Old Notes desiring to tender such Old Notes in exchange for New Notes
should allow sufficient time to ensure timely delivery. Neither the Exchange
Agent nor the Company is under any duty to give notification of defects or
irregularities with respect to tenders of Old Notes for exchange. Old Notes that
are not tendered or are tendered but not accepted will, following consummation
of the Exchange Offer, continue to be subject to the existing restrictions upon
transfer thereof. In addition, any holder of Old Notes who tenders in the
Exchange Offer for the purpose of participating in a distribution of the New
Notes will be required to comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
Each broker-dealer that receives New Notes for its own account in exchange for
Old Notes, where the Old Notes were acquired by the broker-dealer as a result of
market-making or any other trading activities, must acknowledge that it will
deliver a prospectus in connection with any resale of such New Notes. See "Plan
of Distribution."
EFFECTS OF LEVERAGE
On a pro forma basis (which also reflects a non-cash full cost ceiling
writedown of $21.0 million) giving effect to the Offerings, at March 31, 1998,
the Company's ratio of total indebtedness to total capitalization would have
been 84%. On a pro forma basis for the nine months ended March 31, 1998, giving
effect to the Offerings and the Property Acquisitions, the Company's
consolidated total interest coverage ratio would have been 1.7:1.0. The Company
intends to incur additional indebtedness in the future as it executes its
acquisition and exploitation strategy. See "--Substantial Capital
Requirements," "Capitalization" and the "Unaudited Pro Forma Condensed
Consolidated Financial Statements" and the notes thereto included elsewhere
herein.
The Company's ability to meet its debt service obligations will be
dependent upon the Company's future performance, which will be subject to oil
and natural gas prices, the Company's level of production, general economic
conditions and to financial, business and other factors affecting the operations
of the Company, many of which are beyond its control. There can be no assurance
that the Company's future performance will not be adversely affected by some or
all of these factors. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
The Company's level of indebtedness will have several important effects
on its future operations, including (i) a substantial portion of the Company's
cash flow from operations must be dedicated to the payment of interest on its
indebtedness and will not be available for other purposes, (ii) covenants
contained in the Company's debt obligations will require the Company to meet
certain financial tests, and other restrictions will limit its ability to borrow
additional funds or to dispose of assets and may affect the Company's
flexibility in planning for, and reacting to,
18
<PAGE> 20
changes in its businesses, including possible acquisition activities and (iii)
the Company's ability to obtain additional financing in the future may be
impaired. The Company has experienced financial covenant defaults under the
Credit Agreement, which defaults were waived by its lender. While the Credit
Agreement reflects revised financial covenant terms which the Company believes
it can meet for the foreseeable future, there can be no assurance that the
Company will not default on its financial covenants under the Credit Agreement
or the ECT Revolving Credit Agreement or that the lenders will waive any such
defaults. A default under the Credit Agreement or the ECT Revolving Credit
Agreement 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. See "Description of Notes" and "Description of Other
Indebtedness."
HOLDING COMPANY STRUCTURE
Queen Sand Resources is a holding company, the principal assets of which
consist of equity interests in its subsidiaries. The New Notes will be a direct
unsecured, unsubordinated obligation of Queen Sand Resources, which derives all
of its revenues from the operations of its subsidiaries. As a result, Queen Sand
Resources will be dependent on the earnings and cash flow of, and dividends and
distributions or advances from, its subsidiaries to provide the funds necessary
to meet its debt service obligations, including the payment of principal of and
interest on the New Notes. The payment of dividends from the subsidiaries to
Queen Sand Resources and the payment of any interest on or the repayment of any
principal of any loans or advances made by Queen Sand Resources to any of its
subsidiaries may be subject to statutory restrictions and are contingent upon
the earnings of such subsidiaries.
The New Notes will be senior unsecured obligations of Queen Sand
Resources. The New Notes will rank pari passu with any existing and future
unsubordinated indebtedness of Queen Sand Resources, but will be effectively
subordinated to the rights of holders of secured unsubordinated indebtedness of
Queen Sand Resources to the extent of the value of the collateral securing such
indebtedness. The New Notes will rank senior to all unsecured subordinated
indebtedness of Queen Sand Resources. The New Notes will be jointly, severally
and unconditionally guaranteed by each of the existing and future Restricted
Subsidiaries of the Company. The Subsidiary Guarantees will be senior unsecured
obligations of the Subsidiary Guarantors and will rank pari passu with any
existing and future unsubordinated indebtedness of the Subsidiary Guarantors,
but will be effectively subordinated to the rights of holders of secured
unsubordinated indebtedness of the Subsidiary Guarantors to the extent of the
value of the collateral securing such indebtedness. As of June 30, 1998, on a
pro forma basis after giving effect to the Offerings and the application of the
net proceeds therefrom, there would have been approximately $3.1 million of
unsubordinated indebtedness for money borrowed by Queen Sand Resources and the
Subsidiary Guarantors, all of which was secured indebtedness, and approximately
$4.5 million of general unsecured trade indebtedness and other liabilities of
Queen Sand Resources and the Subsidiary Guarantors (excluding approximately
$31.9 million of available borrowings and letters of credit under the Company's
credit facilities). The Indenture governing the Notes limits the ability of
Queen Sand Resources and the Subsidiary Guarantors to incur additional
Indebtedness. The Company intends to incur additional indebtedness, including
secured indebtedness, in the future as it executes its business strategy. In the
event of a liquidation, dissolution, reorganization, bankruptcy or any similar
proceeding regarding the Company, or upon acceleration of the Notes due to an
Event of Default (defined herein), the assets of Queen Sand Resources will be
available to pay obligations of the Notes only after all secured indebtedness of
Queen Sand Resources has been paid in full in cash, and the assets of each
Subsidiary Guarantor will be available to pay its Subsidiary Guaranty only after
all secured indebtedness of such Subsidiary Guarantor has been paid in full in
cash. Accordingly, there may not be sufficient assets remaining to pay amounts
due on all or any of the Notes. See "Description of Notes--General."
The New Notes and the Subsidiary Guarantees are unsecured and will be
effectively subordinated to any secured indebtedness of Queen Sand Resources or
the appropriate Subsidiary Guarantor, as applicable. The ability of Queen Sand
Resources to comply with the provisions of the Credit Agreement and the ECT
Revolving Credit Agreement or any other secured indebtedness may be affected by
events beyond Queen Sand Resource's control. The breach of any such provisions
could result in a default under the Credit Agreement and the ECT Revolving
Credit Agreement or any other secured indebtedness, in which case, depending on
the actions taken by the lenders thereunder, or their successors or assignees,
such lenders could elect to declare all amounts borrowed under the Credit
Agreement and the ECT Revolving Credit Agreement or any other secured
indebtedness, together with accrued interest, to be due and payable. Such
lenders could then proceed to foreclose against any collateral securing the
19
<PAGE> 21
payment of such indebtedness, which collateral would constitute a significant
portion or all of the Company's assets. See "Description of Other Indebtedness"
and "Description of Notes."
VOLATILITY OF OIL AND NATURAL GAS PRICES
The Company's financial condition, operating results and future growth are
substantially dependent upon commodity prices and demand for oil and natural
gas. Historically, the markets for oil and natural gas have been volatile and
are likely to continue to be volatile in the future. Prices for oil and natural
gas are subject to wide fluctuation in response to market uncertainty, changes
in supply and demand and a variety of additional factors, all of which are
beyond the control of the Company. These factors include domestic and foreign
political conditions, the overall supply of, and demand for, oil and natural
gas, the price of imports of oil and natural gas, weather conditions, the price
and availability of alternative fuels and overall economic conditions. The
Company's future financial condition and results of operations will be
dependent, in part, upon the prices received for the Company's oil and natural
gas production, as well as the costs of acquiring, finding, developing and
producing reserves. In order to reduce its exposure to price risks in the sale
of its oil and natural gas, the Company has entered into and may in the future
enter into hedging contracts. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Changes in Prices and Hedging
Activities" and "--Risks of Hedging Activities." Furthermore, the prices paid
for the Company's share of oil and natural gas production depends in part upon
the availability, proximity and capacity of gathering systems. The Company's
current production is predominantly weighted toward natural gas, making earnings
and cash flow more sensitive to natural gas price fluctuations. On a pro forma
basis giving effect to the Property Acquisitions for fiscal 1997, the Company
has estimated that a $0.10 per Mcf change in natural gas prices would have
resulted in a $1.4 million difference in the Company's EBITDA, and a $1.00 per
Bbl change in oil prices would have resulted in a $690,000 difference in the
Company's EBITDA. The Company's ability to repay outstanding amounts under the
Credit Agreement, the ECT Revolving Credit Agreement and the Notes, as well as
the Company's ability to maintain or increase its borrowing capacity and to
obtain additional capital on attractive terms, are also substantially dependent
upon oil and natural gas prices. See "--Substantial Capital Requirements" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
REPLACEMENT AND EXPANSION OF RESERVES
The Company's financial condition and results of operations depend
substantially upon its ability to acquire or find and successfully develop
additional oil and natural gas reserves. The proved reserves of the Company will
generally decline as its reserves are produced, except to the extent that the
Company acquires properties containing proved reserves or conducts successful
development, exploitation or exploration activities. The decline rate varies
depending upon reservoir characteristics and other factors. Without reserve
additions in excess of production through acquisition or exploitation and
development activities, the Company's reserves and production will decline over
time. There can be no assurance that the Company will be able to economically
find and develop or acquire additional reserves to replace its current and
future production.
ACQUISITION RISKS
The Company expects to continue to evaluate and pursue acquisition
opportunities, primarily in the mid-continent and southwest regions of the
United States. The successful acquisition of producing properties requires an
assessment of recoverable reserves, future oil and natural gas prices, operating
costs, potential environmental and other liabilities and other factors beyond
the Company's control. This assessment is necessarily inexact and its accuracy
is inherently uncertain. In connection with such an assessment, the Company
performs a review it believes to be generally consistent with industry
practices. This review, however, will not reveal all existing or potential
problems, nor will it permit the Company to become sufficiently familiar with
the properties to fully assess their deficiencies and capabilities. Inspections
generally are not performed on every well, and structural and environmental
problems are not necessarily observable even when an inspection is undertaken.
Even when problems are identified, the seller may not be willing or financially
able to give contractual protection against such problems, and the Company may
decide to assume environmental and other liabilities in connection with acquired
properties. There can be no assurance that the Company's acquisitions will be
successful. Any unsuccessful acquisition could have a material adverse effect on
the Company's financial condition and results of operations.
20
<PAGE> 22
The Morgan Property Acquisition represents the largest acquisition
undertaken by the Company to date and 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 that the future operations of the Company can be
effectively managed to realize the goals anticipated of the Property
Acquisitions. 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.
DRILLING AND OPERATING RISKS
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. Drilling activities are subject to
many risks, including the risk that no commercially productive oil or natural
gas reservoirs will be encountered. The Company anticipates drilling or
participating in the drilling of a substantially greater number of wells over
the next 12 to 18 months than it has in the past. There can be no assurance that
new wells drilled or participated in by the Company will be productive or that
the Company will recover all or any portion of its investment. Drilling for oil
and natural gas may involve unprofitable efforts, not only from dry wells, but
from wells that are productive but do not produce sufficient net revenues to
return a profit after drilling, operating and other costs. The cost of drilling,
completing and operating wells is often uncertain. The Company's drilling
operations may be curtailed, delayed or canceled as a result of a variety of
factors, many of which are beyond its control, including economic conditions,
mechanical problems, pressure or irregularities in formations, title problems,
weather conditions, compliance with governmental requirements and shortages in
or delays in the delivery of equipment and services. The Company's future
drilling activities may not be successful. Lack of drilling success could have a
material adverse effect on the Company's financial conditions and results of
operations.
In addition to the substantial risk that wells drilled will not be
productive, hazards such as unusual or unexpected geologic formations,
pressures, downhole fires, mechanical failures, blowouts, cratering, explosions,
uncontrollable flows of oil, natural gas or wells fluids, pollution and other
environmental risks are inherent in oil and natural gas development,
exploitation, exploration, production and gathering. These hazards could result
in substantial losses to the Company due to injury and loss of life, severe
damage to and destruction of property and equipment, pollution and other
environmental damage and suspension of operations. The Company carries insurance
that it believes is in accordance with customary industry practices, but, as is
common in the oil and natural gas industry, the Company does not fully insure
against all risks associated with its business either because such insurance is
not available or because the cost thereof is considered prohibitive. The
occurrence of an event that is not covered, or not fully covered by insurance,
could have a material adverse effect on the Company's financial condition and
results of operations.
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 barrel 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 and permeability of the formation, the technique used and the location
of injection wells.
21
<PAGE> 23
SUBSTANTIAL CAPITAL REQUIREMENTS
The Company's strategy of acquiring, developing and exploiting oil and
natural gas properties is dependent upon its ability to obtain financing for any
such expenditures. The Company expects to utilize its Credit Agreement and the
ECT Revolving Credit Agreement to borrow a significant portion of the funds
required. The Credit Agreement limits the amounts the Company may borrow
thereunder to amounts, determined by the lenders in their sole discretion, based
upon projected net revenues from the Company's oil and natural gas properties
and restricts the amounts the Company may borrow under other credit facilities.
As of June 30, 1998, after giving effect to the Offerings and the application of
the net proceeds thereof, the Company believes it would be able to borrow up to
approximately $25.0 million (of which approximately $3.1 million was outstanding
on a pro forma basis) under the Credit Agreement. The lenders can adjust the
borrowings permitted to be outstanding under the Credit Agreement and under the
ECT Revolving Credit Agreement semi-annually. The lenders require that
outstanding borrowings in excess of the borrowing limit be repaid ratably over a
period no longer than six months. No assurances can be given that the Company
will be able to make any such mandatory principal payments required by the
lenders. The Company could, under certain circumstances, borrow under the ECT
Revolving Credit Agreement up to the lesser of $10.0 million or 40% of the
borrowing base established under the Credit Agreement. See "Description of Other
Indebtedness."
Any future acquisition by the Company requiring financing in excess of the
amount then available under the Credit Agreement or the ECT Revolving Credit
Agreement will depend upon the lenders' evaluations of the properties proposed
to be acquired. For a description of the Credit Agreement and the ECT Revolving
Credit Agreement and their principal terms and conditions, see "Description of
Other Indebtedness."
UNCERTAINTY OF ESTIMATES OF PROVED RESERVES AND FUTURE NET REVENUES
There are numerous uncertainties in estimating quantities of proved
reserves and in projecting future rates of production and the timing of
development expenditures, including many factors beyond the control of the
Company. The reserve data set forth in this Prospectus are only estimates.
Although the Company believes such estimates to be reasonable, reserve estimates
are imprecise and may be expected to change as additional information becomes
available. 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. Reservoir engineering is
a subjective process of estimating underground accumulations of oil and natural
gas that cannot be exactly measured. Therefore, 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 such estimate is a function of the quality of available data and of
engineering and geological interpretation and judgment and 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. Actual production, revenues and expenditures with respect to the
Company's reserves will likely vary from estimates, and such variances may be
material. In addition, the estimates of future net revenues from proved reserves
of the Company and the present value thereof are based upon 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 SEC PV-10 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 upon projected cash
flows which do not provide for changes in oil and natural gas prices or for
escalation of expenses and capital costs. The meaningfulness of such estimates
is highly dependent upon the accuracy of the assumptions upon which they are
based. Actual future prices and costs may differ materially from those
estimated. Prospective purchasers of New Notes are cautioned not to place undue
reliance on the reserve data included in this Prospectus.
NATURE OF THE NET PROFITS INTERESTS AND ROYALTY INTERESTS
General. 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 NPIs and RIs. The NPIs were conveyed by various assignors (collectively, the
"Assignors") to the Company from such Assignor's net revenue interest
(generally, a leasehold working interest
22
<PAGE> 24
less lease burdens) in the Underlying Properties. These various conveyances
(collectively, the "Conveyances") were designed to be conveyances of interests
in real property. As the owner of NPIs, the Company does not have the direct
right to drill or operate wells or to cause third parties to propose or drill
wells on the Underlying Properties. If an Assignor or any other working interest
owner proposes to drill a well on the Underlying Properties, then each
respective Assignor is obligated to give the Company notice of such proposal.
Under the applicable ancillary agreements pertaining to each Conveyance of a NPI
(the "Ancillary Agreements"), the Company will then 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 a NPI 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 various Assignors,
and to a lesser extent the financial strength and the competence of other
parties owning working interests in the Underlying Properties, may have an
effect on when and whether wells get drilled on the Underlying Properties, and
on whether operations are conducted in a prudent and competent manner. Finally,
the NPIs were created subsequent and subject to the various operating agreements
that cover and govern operations on the properties. Possible consequences of the
NPIs 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 NPI) will be relinquished to the
consenting parties under the "non-consent penalty" provisions of the standard
Form operating agreements that govern operations on most of the Underlying
Properties 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 NPIs) will be encumbered by the operator's lien. Because the NPI may not
burden every well covered by an operating agreement, the NPI could arguably be
encumbered by the operator's lien securing obligations incurred by an Assignor
on wells in which the Company does not own a NPI. See "Business -- Recent
Property Acquisitions."
In the past, 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.
The RIs are comprised largely of term royalty interests, the duration of
which is the same as the oil and natural gas lease to which it pertains. A
smaller group of RIs are perpetual royalty interests which entitle the owner
thereof to a share of production from the Underlying Properties under both the
current oil and gas lease and any replacement or successor oil and natural gas
lease. In all cases, the RIs are non-operating interests, have little or no
influence over oil and natural gas development or operation on the lands they
burden and should be free of costs or liabilities arising from operations by the
working interest owners.
Sale and Abandonment of Underlying Properties. An Assignor (and any
subsequent transferee of an Assignor) has the right to abandon any well or
working interest included in the Underlying Properties if, in its opinion, such
well or property ceases to produce or is not capable of producing in
commercially paying quantities. The Company may not control the timing of
plugging and abandoning wells. The Conveyances provide that Assignor's working
interest share of the costs of plugging and abandoning uneconomic wells will be
deducted in calculating net cash flow from the property.
The Assignor may sell the Underlying Properties, subject to and burdened
by the RIs, without the consent of the Company. Accordingly, there exists the
risk that the Underlying Properties could be transferred to a party with a
weaker financial profile.
Litigation. The landowner royalty on the J.C. Martin Field is currently
subject to a lawsuit that may create uncertainty regarding the Company's title
to its royalty interest. The Company believes the suit is without merit and a
favorable order of summary judgment has been rendered in favor of the pension
funds managed by J.P. Morgan Investments. However, that order may be appealed.
The purchase agreement for the purchase of the Morgan Properties provides for
the escrow of $8.0 million of the purchase price. In the event the summary
judgment is later
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overturned and a judgment is later entered against the pension funds managed by
J.P. Morgan Investments (or the Company as successor owner) rescinding the
original transaction whereby the pension funds managed by J.P. Morgan
Investments acquired their interest, the escrowed monies would be returned to
the Company and the Company would convey its property interest to the plaintiff.
Certain Bankruptcy Issues. Although the matter is not entirely free from
doubt, the Company believes that the Morgan Properties should constitute real
property interests under applicable state law. Consistent therewith, the
Conveyances state that the NPIs constitute real property interests and were
recorded in the appropriate real property records of the states in which the
Underlying Properties are located. If, during the term of the NPIs, an Assignor
becomes involved as a debtor in bankruptcy proceedings, it is not entirely clear
that all of the NPIs would be treated as real property interests under the laws
of such states. If in such a proceeding a determination were made that the NPIs
constitute real property interests, the NPIs should be unaffected in any
material respect by such bankruptcy proceeding. If in such a proceeding a
determination were made that the NPIs constitute an executory contract (a term
used, but not defined, in the United States Bankruptcy Code to refer to a
contract under which the obligations of both the debtor and the other party to
such contract are so unsatisfied that the failure of either to complete
performance would constitute a material breach excusing performance by the
other) and not a real property interest under applicable state law, and if such
contract were not to be assumed in a bankruptcy proceeding involving an
Assignor, the Company would be treated as an unsecured creditor of such Assignor
with respect to such NPI in the pending bankruptcy.
FINANCIAL REPORTING IMPACT OF FULL COST METHOD OF ACCOUNTING
The Company uses the full cost method of accounting for its investment in
oil and natural gas properties. Under the full cost method of accounting, all
costs of acquisition, exploration and development of oil and natural gas
reserves are capitalized into a "full cost pool" as incurred, and properties in
the pool are depleted and charged to operations using the unit-of-production
method based on the ratio of current production to total proved oil and natural
gas reserves. To the extent that such capitalized costs (net of accumulated
depreciation, depletion and amortization) less deferred taxes exceed the SEC
PV-10 of estimated future net cash flow from proved reserves of oil and natural
gas, and the lower of cost or fair value of unproved properties after income tax
effects, such excess costs are charged to operations. Once incurred, a
write-down of oil and natural gas properties is not reversible at a later date
even if oil or natural gas prices increase. Significant downward revisions of
quantity estimates or declines in oil and natural gas prices from those in
effect on December 31, 1997 which are not offset by other facts could result in
a write-down for impairment of oil and natural gas properties.
On a pro forma basis at March 31, 1998, the Company's oil and natural gas
properties had a carrying value, net of accumulated depreciation, depletion and
amortization charges of approximately $163.7 million. The pro forma Standardized
Measure of oil and natural gas properties at March 31, 1998 was approximately
$142.7 million. This would have caused the Company to take a pro forma provision
for non-cash impairment of value at March 31, 1998 of approximately $21.0
million. The amount of the writedown, if any, which will be recorded will be
largely dependent upon the prevailing market prices of oil and natural gas at
June 30, 1998.
COMPETITION
The Company encounters substantial competition in acquiring properties,
marketing oil and natural gas, securing equipment and personnel, and operating
its properties. The competitors in acquisitions, development, exploration and
production include major oil companies, numerous independent oil and natural gas
companies, individual proprietors and others. Many of these competitors have
financial and other resources which substantially exceed those of the Company
and have been engaged in the energy business for a much longer time than the
Company. Therefore, competitors may be able to pay more for desirable leases and
to evaluate, bid for and purchase a greater number of properties or prospects
than the financial or personnel resources of the Company will permit. See
"Business--Markets and Competition."
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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 changes in administrative
regulations. The Company cannot predict how existing laws and regulations may be
interpreted by enforcement agencies or court rulings, whether additional laws
and regulations will be adopted, or the effect such changes may have on its
business or financial condition. See "Business--Regulation."
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
has had no material adverse effect upon 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, 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
"Business--Regulation--Environmental Regulation."
RISKS OF HEDGING ACTIVITIES
In order to reduce its exposure to price risks in the sale of its oil and
natural gas, the Company has entered into and may in the future enter into
hedging contracts. The Company's hedging contracts apply to only a portion of
its production and provide only limited price protection against fluctuations in
the oil and natural gas markets. If the Company's reserves are not produced at
rates equivalent to the hedged position, the Company would be required to
satisfy its obligations under its hedging contracts on potentially unfavorable
terms without the ability to hedge that risk through sales of comparable
quantities of its own production. Further, the terms under which the Company
enters into hedging contracts are based on assumptions and estimates of numerous
factors such as cost of production and pipeline and other transportation costs
to delivery points. Substantial variations between the assumptions and estimates
used by the Company and actual results experienced could materially adversely
affect the Company's anticipated profit margins and its ability to manage the
risks associated with fluctuations in oil and natural gas prices. See
"--Uncertainty of Estimates of Proved Reserves and Future Net Revenues."
Additionally, to the extent that the Company enters into hedging contracts, it
may be prevented from realizing the benefits of price increases above the level
of the hedges. Such hedging contracts are also subject to the risk that the
other party may prove unable or unwilling to perform its obligations under such
contracts. Any significant nonperformance could have a material adverse effect
on the Company's financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Comparison of the Nine Month Periods Ended March 31, 1998 and
1997" and "--Changes in Prices and Hedging Activities."
POTENTIAL CONFLICTS OF INTEREST
JEDI, an affiliate of Enron, owns 9,600,000 shares of the Company's Series
A Participating Convertible Preferred Stock, par value $0.01 per share (the
"Series A Preferred Stock"), warrants to acquire an aggregate of 1,725,947
shares of the Company's Common Stock and 2,634,951 shares of Common Stock (as of
July 31, 1998: 8.6% of the outstanding Common Stock; 30.3% of the undiluted,
voting power; and 33.1% of the fully diluted voting stock). In addition, upon
the occurrence of certain defaults under the Certificate of Designation
governing the Series A Preferred Stock, JEDI would have the right to appoint a
majority of the Company's Board of Directors. As the holder of a significant
portion of the Company's voting stock, JEDI, as well as its affiliates
(including Enron), may have the ability to exercise significant influence over
the management of the Company. Enron and certain of its subsidiaries and other
affiliates collectively participate in nearly all phases of the oil and natural
gas industry and are, therefore, competitors of the Company. Effective December
29, 1997, the Company entered into the ECT Revolving Credit Agreement with ECT,
a wholly-owned subsidiary of Enron. See "Description of Other Indebtedness--ECT
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Revolving Credit Agreement." In addition, Enron and certain of its affiliates
have provided, or assisted in providing, and may in the future provide or assist
in arranging, financing to or for non-affiliated participants in the oil and
natural gas industry who are or may become competitors of the Company.
The Indenture will not prohibit the Company from conducting business with
Enron and its subsidiaries and affiliates, but will generally require that such
transactions be conducted on an arms-length basis and provide that certain
requirements must be satisfied in order for the Company to transact such
business. See "Description of Notes--Certain Covenants."
CONTROL BY CERTAIN STOCKHOLDERS
As of July 31, 1998, after giving effect to the Private Equity Placement,
the current officers and directors of the Company as a group will have a
beneficial interest in or hold a proxy for approximately 26.6% of the
undiluted voting power, and JEDI will possess approximately 30.3% of the
undiluted voting power, of the Company's voting equity. Consequently, these
stockholders, should they determine to act together, may be in a position to
effectively control the affairs of the Company, including the election of all of
the Company's directors and the approval or prevention of certain corporate
transactions which require majority stockholder approval.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent upon Edward J. Munden, Chairman of the Board,
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, including V. Ed Butler, Vice President, Operations and Ronald
Idom, Vice President, Acquisitions, for its various activities, and the loss of
any one of these individuals for any reason may adversely affect the Company.
The Company holds key man insurance on the lives of each of Edward J. Munden,
Robert P. Lindsay, Bruce I. Benn and Ronald I. Benn. The Company also has
employment agreements with each of these officers (other than Mr. Idom) through
2002.
LIMITATION ON PURCHASE OF NOTES UPON THE OCCURRENCE OF A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the Company will be required
to make an offer to purchase the Notes at a purchase price equal to 101% of the
principal amount thereof, plus accrued and unpaid interest and Liquidated
Damages, if any, to the date of purchase. If a Change of Control were to occur,
there can be no assurance that the Company and the Subsidiary Guarantors would
have sufficient financial resources, or would be able to arrange financing, to
pay the purchase price for all Notes tendered by the holders thereof. As of the
date of original issuance of the Notes, the Credit Agreement and the ECT
Revolving Credit Agreement will, and any future credit agreements or other
agreements relating to indebtedness to which the Company or a Subsidiary
Guarantor becomes a party may, contain restrictions on the purchase of Notes. If
a Change of Control occurs at a time when the Company and the Subsidiary
Guarantors are unable to purchase the Notes (due to insufficient financial
resources, contractual prohibition or otherwise), such failure to purchase
tendered Notes would constitute an Event of Default under the Indenture, which
would, in turn, constitute a default under the Credit Agreement and the ECT
Revolving Credit Agreement and may constitute a default under the terms of any
other indebtedness of the Company or the Subsidiary Guarantors then outstanding.
See "Description of Notes--Purchase at the Option of Holders Upon a Change of
Control." The definition of "Change of Control" in the Indenture includes a
sale, lease, conveyance or transfer of "all or substantially all" of the assets
of the Company and certain of its Restricted Subsidiaries, taken as a whole, to
a person or group of persons. There is little case law interpreting the phrase
"all or substantially all" in the context of an indenture. Because there is no
precise established definition of this phrase, the ability of a holder of the
Notes to require the Company to purchase such Notes as a result of a sale,
lease, conveyance or transfer of all or substantially all of the Company's
assets to a person or group of persons may be uncertain.
REPURCHASE OBLIGATIONS IN CONNECTION WITH PRIVATE EQUITY PLACEMENT
In connection with the Private Equity Placement, the Company granted to
those purchasers acquiring shares pursuant to the Purchase Agreement (defined
herein) (the "Buyers") the right to require the Company to repurchase such
Buyer's shares of Common Stock and rights to acquire additional shares of Common
Stock after the occurrence
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of certain major transactions or triggering events, including, without
limitation, certain consolidations or mergers, the sale or transfer of all or
substantially all of the Company's assets, a tender offer for more than 40% of
the outstanding shares of Common Stock, and certain defaults by the Company
under its covenants to the Buyers. The Company would be required to obtain the
consent of the lenders under the Credit Agreement and the ECT Revolving Credit
Agreement and the consent of the holders of the Notes before repurchasing such
shares and rights. If the Company could not obtain such consents, the Company
would be in default under its agreement with the Buyers, and such default could
trigger cross defaults under the Credit Agreement or the ECT Revolving Credit
Agreement. In addition, if the Company fails to repurchase the shares of Common
Stock and repricing rights as required, the Company could be liable to the
Buyers for damages. See "Recent Developments--Private Equity Placement."
FRAUDULENT CONVEYANCE
If a court in a lawsuit brought by an unpaid creditor or representative of
creditors, such as a trustee in bankruptcy, or the Company as a
debtor-in-possession, were to determine under relevant federal or state
fraudulent conveyance statutes that the Company did not receive fair
consideration or reasonably equivalent value for incurring indebtedness,
including the Notes, and that, at the time of such incurrence, the Company (i)
was insolvent, (ii) was rendered insolvent by reason of such incurrence, (iii)
was engaged in a business or transaction for which the assets remaining with the
Company constitute unreasonably small capital or (iv) intended to incur, or
believed that it would incur, debts beyond its ability to pay such debts as they
matured, then such court, subject to applicable statutes of limitation, could
void the Company's obligations under the Notes, subordinate the Notes to other
indebtedness of the Company or take other action detrimental to the holders of
the Notes.
The measure of insolvency for these purposes will depend upon the
governing law of the relevant jurisdiction. Generally, however, a company will
be considered insolvent for these purposes if the sum of that company's debts is
greater than the fair value or the fair saleable value of all of that company's
property or if the present fair saleable value of that company's assets is less
than the amount that will be required to pay its probable liability on its
existing debts as they become absolute and mature. Moreover, regardless of
solvency, a court could void an incurrence of indebtedness, including the Notes,
if it determined that such transaction was made with the intent to hinder, delay
or defraud creditors. In addition, a court could subordinate indebtedness,
including the Notes, to the claims of all existing and future creditors on
similar grounds. The Company believes that, after giving effect to the Note
Offering, the Company will be (i) neither insolvent nor rendered insolvent by
the incurrence of indebtedness in connection with the Note Offering, (ii) in
possession of sufficient capital to run its business effectively and (iii)
incurring debts within its ability to pay as the same mature or become due.
In addition, the Subsidiary Guarantees may be subject to review under
relevant federal and state fraudulent conveyance and similar statutes in a
bankruptcy or reorganization case or a lawsuit brought by or on behalf of
creditors of the Subsidiary Guarantors. In such a case, the analysis set forth
above would generally apply, except that the Subsidiary Guarantees could also be
subject to the claim that, since the Subsidiary Guarantees were incurred for the
benefit of the Company (and only indirectly for the benefit of the Subsidiary
Guarantors), the obligations of the Subsidiary Guarantors thereunder were
incurred for less than the fair consideration or reasonably equivalent value. A
court could void the Subsidiary Guarantors' obligations under the Subsidiary
Guarantees, subordinate the Subsidiary Guarantees to other indebtedness of the
Subsidiary Guarantors or take other action detrimental to the holders of the
Notes. See "Description of Other Indebtedness" and "Description of Notes."
LACK OF PUBLIC MARKET FOR THE NOTES
The Old Notes are, and the Company expects the New Notes will be upon
issuance, designated for trading in the Private Offerings, Resales and Trading
through Automatic Linkages (PORTAL) market. There is no established trading
market for the New Notes and the Company does not currently intend to list the
New Notes on any securities exchange or to seek approval for quotation through
any automated quotation system. Accordingly, there can be no assurance regarding
the future development of any market for the Notes, the liquidity of any market
that may develop for the Notes or the ability of holders of the Notes to sell
their Notes or the price at which such holders may be able to sell their Notes.
If such a market were to develop, no assurance can be given as to the trading
prices of the Notes, which may be higher or lower than the initial offering
price of the Old Notes depending on many factors, including, among other things,
prevailing interest rates, the Company's operating results and prospects and the
market for similar securities. The liquidity of, and trading market for, the
Notes may be adversely affected by general declines in the market for
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similar securities. Such a decline may adversely affect liquidity and trading
markets independent of the financial performance of, and prospects for, the
Company.
RECENT DEVELOPMENTS
PRIVATE EQUITY PLACEMENT
General. The Company raised $25 million of equity on July 8, 1998 and an
additional $7.5 million on July 20, 1998 (collectively, the "Private Equity
Placement"). Pursuant to the Securities Purchase Agreement, dated as of June 25,
1998, among the Company and the buyers signatory thereto (the "Buyers"), as
amended and restated pursuant to the Amended and Restated Securities Purchase
Agreement dated as of July 8, 1998 (as amended and restated, the "Purchase
Agreement"), the Company issued (i) 2,357,144 shares of the Company's Common
Stock on July 8, 1998 and issued an additional 1,071,430 shares of the Company's
Common Stock on July 20, 1998 to the Buyers (the "Common Shares"), (ii) certain
repricing rights (the "Repricing Rights") to acquire additional shares of Common
Stock (the "Repricing Common Shares") and (iii) warrants (the "Buyer Warrants")
to purchase an aggregate of up to 605,000 shares of Common Stock (the "Warrant
Common Shares"). The aggregate gross consideration for the issuances was $24
million, $16.5 million of which was received by the Company on July 8, 1998 and
$7.5 million of which was received by the Company on July 20, 1998. The Company
also agreed to register for resale the Common Shares, Repricing Common Shares
and Warrant Common Shares pursuant to the terms of a registration rights
agreement (the "Registration Rights Agreement"). Initially capitalized terms
used but not defined in this section "Private Equity Placement" have the
meanings ascribed to such terms in the Purchase Agreement filed as an exhibit to
this Registration Statement on Form S-4.
On July 8, 1998, JEDI exercised certain warrants to acquire an aggregate
of 980,935 shares of Common Stock for an aggregate exercise price of
approximately $3.3 million and exercised certain antidilution rights to purchase
693,301 shares of the Company's Common Stock for an aggregate purchase price of
$1.67 million. A second holder of warrants exercised warrants on July 8, 1998 to
acquire an aggregate of 1,400,000 shares of Common Stock. The Company received
approximately $3.5 million for the exercise of these warrants.
Repricing Rights. Pursuant to the Purchase Agreement, each of the Buyers (or
their permitted assignees or successors) may exercise its Repricing Rights and
acquire shares of Common Stock in accordance with the following formula (the
"Repricing Rate"):
(Repricing Price - Market Price)
--------------------------------
Market Price
The "Repricing Price" means, (i) during the period beginning on and
including the date which is 121 days after the Closing Date and ending on and
including the date which is 150 days after the Closing Date, 124% of the
Purchase Price, (ii) during the period beginning on and including the date which
is 151 days after the Closing Date and ending on and including the date which is
180 days after the Closing Date, 125% of the Purchase Price, (iii) during the
period beginning on and including the date which is 181 days after the Closing
Date and ending on and including the date which is 210 days after the Closing
Date, 126% of the Purchase Price, (iv) during the period beginning on and
including the date which is 211 days after the Closing Date and ending on and
including the date which is 240 days after the Closing Date, 127% of the
Purchase Price and (v) after the date which is 240 days after the Closing Date,
128% of the Purchase Price.
The "Market Price" means, as of any date of determination, the lowest
closing bid price during the fifteen consecutive trading days immediately
preceding such date of determination.
The Repricing Rate is multiplied by the number of Common Shares the Buyer
has chosen to reprice in order to determine the number of shares to be issued to
the Buyer.
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If the Company fails to issue a stock certificate for the number of
shares of Common Stock to which the holder is entitled or to credit the holder's
balance account with The Depository Trust Company for such number of shares of
Common Stock to which the holder is entitled upon such holder's exercise of the
Repricing Rights within three trading days after the Company's or the transfer
agent's receipt of the exercise notice, the Company shall pay damages to such
holder on each day after the third trading day that such exercise is not
effected. The amount of damages shall equal 0.5% of the product of (i) the sum
of the number of shares of Common Stock not issued to the holder on a timely
basis and (ii) the closing bid price of the Common Stock on the last possible
date which the Company could have issued such Common Stock without violating its
delivery requirements. In addition, if the Buyer to whom the Company has failed
to timely deliver the shares is forced to purchase other outstanding shares of
Common Stock of the Company in order to cover a sale order by such Buyer (a
"Buy-In"), then the Company will be required to pay to such Buyer the positive
difference between the price at which the Buyer bought its covering shares and
the sale price in respect of the shares sold by it.
The right of a holder of Repricing Rights to exercise such Repricing
Rights is limited as set forth below.
(i) Without the prior written consent of the Company, a holder of
Repricing Rights shall not be entitled to exercise an aggregate number of
Repricing Rights in excess of the number of Repricing Rights which when
divided by the number of Repricing Rights purchased by such holder would
exceed (A) 0.00 for the period beginning on July 8, 1998 and ending on
and including the 120th day thereafter, (B) 0.25 for the period beginning
on the 121st day after July 8, 1998 and ending on and including the 150th
day after July 8, 1998, (C) 0.50 for the period beginning on and
including the 151st day after July 8, 1998 and ending on and including
the 180th day after July 8, 1998, (D) 0.75 for the period beginning on
the 181st day after July 8, 1998 and ending on and including the 210th
day after July 8, 1998, and (E) 1.00 for the period beginning on and
including the 211th day after July 8, 1998. This exercise restriction
shall cease to apply if a Major Transaction (as defined below) or
Triggering Event (as defined below) shall have occurred or been publicly
announced or if a registration statement meeting the requirements of the
Registration Rights Agreement shall not have been declared effective by
the 120th day after July 8, 1998.
(ii) As more fully described in the Purchase Agreement, a holder
of Repricing Rights shall not be entitled to exercise Repricing Rights in
excess of that number of Repricing Rights which, upon giving effect to
such exercise, would cause the aggregate number of shares of Common Stock
beneficially owned by the holder and its affiliates to exceed 4.99% of
the outstanding number of shares of the Common Stock following such
exercise. Such restriction is waivable by a holder upon at least 61 days
notice. In addition, as more fully described in the Purchase Agreement, a
holder of Repricing Rights shall not be entitled to exercise Repricing
Rights in excess of that number of Repricing Rights which, upon giving
effect to such exercise, would cause the aggregate number of shares of
Common Stock beneficially owned by the holder and its affiliates to
exceed 9.99% of the outstanding number of shares of the Common Stock
following such exercise. Such restriction is waivable by a holder upon at
least 61 days notice.
In addition to the exercise restrictions, a Buyer's right to exercise its
Repricing Right terminates automatically on the earlier of (i) if the Initial
Common Share with respect to which such Repricing Right was acquired is sold
prior to the date which is 121 days after the date on which such Repricing Right
was acquired, (ii) if the Initial Common Share with respect to which such
Repricing Right was acquired is sold on or after the date which is 121 days
after the Closing Date on which such Repricing Right was acquired at a price
equal to or greater than the Repricing Price in effect on the date of such sale,
(iii) on the date immediately following the date which is one year after the
date of the sale of the Initial Common Share with respect to which such
Repricing Right was acquired and (iv) if the Buyer elects to terminate the
Repricing Right in lieu of the Company repurchasing such Buyer's related Initial
Common Share.
Company Repurchase Rights. Pursuant to the Purchase Agreement, the Company may
elect to repurchase Repricing Rights exercised in lieu of issuing Repricing
Common Shares upon such exercise if the average closing bid price of the Common
Stock for the five day trading period immediately preceding the exercise date of
the Repricing Rights is not greater than $5.30. The repurchase price per
Repricing Right shall be equal to the product of (i) the Repricing Rate of the
Repricing Right on the exercise date and (ii) the last reported sale price of
the Common Stock on the exercise date.
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The Company may also elect to repurchase any or all of the Common Shares
issued to the Buyers and the Repricing Rights associated with such Common Shares
at any time prior to the Repricing Rights being exercised. The repurchase price
per Repricing Right shall be an amount per Common Share and associated Repricing
Right equal to (i) 119% of the Purchase Price, if the repurchase date is prior
to the date which is 120 days after the Closing Date and (ii) 128% of the
Purchase Price, if the repurchase date is on or after the date which is 120 days
after the Closing Date.
Holder Put Rights. Pursuant to the Purchase Agreement, each holder of Common
Shares or Repricing Rights, has the right to require the Company to repurchase
all or a portion of such holder's Common Shares or Repricing Rights upon the
occurrence of a Major Transaction or a Triggering Event. The repurchase price is
equal to (i) for each Common Share with an associated Repricing Right, the
greater of (A) 130% of the Purchase Price and (B) the sum of (i) the Purchase
Price and (ii) the product of (x) the Repricing Rate of the Repricing Right on
the date of such holder's delivery of a notice of repurchase and (y) the last
reported sale price of the Common Stock on the delivery date of a notice of
repurchase, (ii) for each Repricing Right without the associated Common Share,
the product of (A) the Repricing Rate of the Repricing Right on the date such
holder's delivery of a notice of repurchase and (B) the last reported sale price
of the Common Stock on the date of such holder's delivery of notice of
repurchase and (iii) for each Common Share without an associated Repricing
Right, 130% of the Purchase Price.
A "Major Transaction" is deemed to have occurred at such time as any of
the following events:
(i) the consolidation, merger or other business combination of the
Company with or into another person (other than (A) a consolidation,
merger or other business combination in which holders of the Company's
voting power immediately prior to the transaction continue after the
transaction to hold, directly or indirectly, the voting power of the
surviving entity or entities necessary to elect a majority of the members
of the board of directors (or their equivalent if other than a
corporation) of such surviving entity or entities, or (B) pursuant to a
migratory merger effected solely for the purpose of changing the
jurisdiction of incorporation of the Company);
(ii) the sale or transfer of all or substantially all of the
Company's assets; or
(iii) a purchase, tender or exchange offer made to and accepted by
the holders of more than 40% of the outstanding shares of Common Stock.
A "Triggering Event" is deemed to have occurred at such time as any of
the following events:
(i) a registration statement in respect of the resale of the
Common Shares, Repricing Common Shares and Warrant Common Shares (the
"Resale Registration Statement") has not been deemed effective by the
Commission on or prior to the 210th day after the Closing Date;
(ii) the effectiveness of the Resale Registration Statement lapses
for any reason or is unavailable for sale of the Registrable Securities
(as defined in the Registration Rights Agreement) in accordance with the
terms of the Registration Rights Agreement, and such lapse or
unavailability continues for a period of ten trading days in aggregate
(excluding any "blackout" periods permitted by the terms of the
Registration Rights Agreement);
(iii) the Common Stock is suspended from listing or is delisted
from The Nasdaq SmallCap Market or on any subsequent market for a period
of five consecutive days, unless such delisting is due to the Company
having the Common Stock relisted on a subsequent market within such five
day period;
(iv) the Company notifies any holder of Repricing Rights,
including by way of public announcement, at any time, of its intention
not to comply or inability to comply with proper requests for exercise of
any Repricing Rights into shares of Common Stock;
(v) the Company fails to deliver shares of Common Stock pursuant
to the exercise of Repricing Rights within ten days of an exercise date
or to pay the amount due in respect of a Buy-In within ten days after
notice of such Buy-In is delivered to the Company;
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(vi) the Company is not required to issue any Repricing Common
Shares pursuant to the exercise of Repricing Rights due to certain
restrictions imposed under the rules and regulations of The Nasdaq Stock
Market or the Company is otherwise unable to issue shares of Common Stock
upon delivery of an exercise notice for any reason;
(vii) if stockholder approval of the issuance of the securities is
required, the Company's stockholders fail to approve the issuance of the
shares of Common Stock upon the exercise of Repricing Rights within 135
days of a Proxy Statement Trigger Date (as defined in the Purchase
Agreement);
(viii) the Company breaches any representation, warranty, covenant
or other material term or condition of the Purchase Agreement, the
Warrants, the Registration Rights Agreement or the irrevocable transfer
agent instructions or any other agreement, document, certificate or other
instrument delivered in connection with the transactions contemplated
thereby or hereby, and such breach, if curable, continues for a period of
at least ten days after written notice thereof to the Company; or
(ix) a voluntary or involuntary case or proceeding is commenced by
or against the Company or a subsidiary under any applicable federal or
state bankruptcy, insolvency, reorganization or other similar proceeding
(excluding any involuntary proceeding that is dismissed within thirty
days of the filing thereof).
At any time after receipt of a notice from the Company that a Major
Transaction is to occur (or, in the event a notice is not delivered at least ten
days prior to a Major Transaction), any holder of Common Shares, Repricing
Common Shares or Repricing Rights then outstanding may require the Company to
repurchase all or a portion of the holder's Common Shares, Repricing Common
Shares or Repricing Rights. At any time after the earlier of a holder's receipt
of a notice from the Company that a Triggering Event has occurred and such
holder becoming aware of a Triggering Event, but in no event later than fifteen
business days after a holder's receipt of such notice, any holder of Common
Shares, Repricing Common Shares or Repricing Rights then outstanding may require
the Company to repurchase all or a portion of the holder's Common Shares,
Repricing Common Shares or Repricing Rights. The repurchase price upon the
occurrence of a Major Transaction or a Triggering Event is equal to (i) for each
Common Share with an associated Repricing Right, the greater of (A) 130% of the
Purchase Price and (B) the sum of (I) the Purchase Price and (II) the product of
(x) the Repricing Rate of the Repricing Right on the date of such holder's
delivery of notice of repurchase and (y) the last reported sale price of the
Common Stock on the date of such holder's delivery of a notice of repurchase,
(ii) for each Repricing Right without the associated Common Share, the product
of (x) the Repricing Rate of the Repricing Right on the date of such holder's
delivery of a notice to repurchase and (y) the last reported sale price of the
Common Stock on the date of such holder's delivery of notice of repurchase and
(iii) for each Common Share without an associated Repricing Right, 130% of the
Purchase Price.
The Company shall deliver the applicable repurchase price, in the case of
a repurchase pursuant to the occurrence of a Triggering Event, to such holder
within five business days after the Company's receipt of a notice of repurchase
from the holder and, in the case of a repurchase pursuant to the occurrence of a
Major Transaction, the Company shall deliver the applicable repurchase price
immediately prior to the consummation of the Major Transaction; provided that if
Common Shares are being repurchased, the holder's stock certificates shall have
been delivered to the Company; provided further that if the Company is unable to
repurchase all of the Common Shares or the Repricing Rights to be repurchased,
the Company shall repurchase an amount from each holder on a pro rata basis.
Other Terms of the Purchase Agreement. The Purchase Agreement contains customary
representations and warranties of the Company for transactions of this type.
Pursuant to the Purchase Agreement, the Company has agreed, among other
things, to abide by certain limitations on the Company's ability to raise equity
(the "Capital Raising Limitation"). The Capital Raising Limitation prohibits the
Company and its subsidiaries from negotiating with any party for any equity
financing or issue any equity securities of the Company or any subsidiary or
securities convertible or exchangeable into or for equity securities of the
Company or any subsidiary during the period beginning on July 8, 1998 and ending
on and including the 365th day after the Closing Date unless it first delivers a
written notice of the future offering to each
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Buyer and provides each Buyer an option to purchase up to its pro rata portion
of the shares to be offered in the future offering.
In addition, on or before November 4, 1998, the Company must provide
stockholders of the Company with a proxy statement relating to the next meeting
of stockholders of the Company, which meeting shall be not later than 60 days
after November 4, 1998, which proxy statement solicits the affirmative vote of
the stockholders for approval of the Company's issuance of all of the Securities
described in the Purchase Agreement (including the approval of issuances as may
be required by the Rules of the Nasdaq Stock Market, Inc.). Certain holders of
capital stock having voting power aggregating over 50% of the total current
outstanding voting capital stock have executed a letter agreement agreeing to
vote in favor of the issuance. If the Company fails to hold the meeting by the
deadline described above, then the Company shall pay to each Buyer an amount in
cash equal to the product of (i) the aggregate Purchase Price paid by such Buyer
multiplied by (ii) .025; multiplied by (iii) the quotient of (x) the number of
days after the deadline that a meeting is not held, divided by (y) 30.
Warrants. Pursuant to the Purchase Agreement, on July 8, 1998 the Company issued
the Buyer Warrants to the Buyers. The Buyer Warrants are exercisable for three
years commencing July 8, 1998. The Buyer Warrants are exercisable for an
aggregate of up to 925,000 shares of Common Stock at an exercise price equal to
110% of the Purchase Price. The Buyer Warrants provide for customary adjustments
to the exercise price and number of shares to be issued in the event of certain
dividends and distributions to holders of Common Stock, stock splits,
combinations and mergers. The Buyer Warrants also include customary provisions
with respect to, among other things, transfer of the Buyer Warrants, mutilated
or lost warrant certificates, and notices to holder(s) of the Buyer Warrants.
Registration Rights Agreement. At the time of sale, none of the Common Shares,
the Repricing Common Shares or the Warrant Common Shares will be registered
under the Securities Act and therefore, will be, when issued, "restricted
securities." Effective July 8, 1998, the Company entered into a Registration
Rights Agreement with the Buyers pursuant to which the Buyers are entitled to
certain rights with respect to the registration under the Securities Act of the
Common Shares, the Repricing Common Shares and the Warrant Common Shares (the
"Registrable Securities").
Pursuant to the Registration Rights Agreement, the Company agreed to file
a registration statement on Form S-3 on or before September 5, 1998, covering
the resale of all of the Registrable Securities. The Company is required to use
its best efforts to cause such registration statement to become effective as
soon as practicable following the filing thereof; but in no event later than the
earlier of (i) November 4, 1998 and (ii) the fifth business day after the
Company learns that the Commission will not review the registration statement or
that the Commission has no further comments on the registration statement. If
the registration statement does not become effective by this date, then the
Company is required to make cash payments to the holders of the Registrable
Securities equal to 2.0% of the aggregate Purchase Price paid by each holder on
the first day of each month during the default. The Registration Rights
Agreement also provides for unlimited piggyback registration rights prior to the
expiration of the registration period for the Registrable Securities. The
Company generally bears the expense of any registration statement, while selling
holders generally bear selling expenses such as underwriting fees and discounts.
The Registration Rights Agreement also includes customary indemnification
provisions. In addition, under the Purchase Agreement, the Company cannot file a
registration statement (other than a registration statement filed pursuant to
the Registration Rights Agreement, a registration statement filed pursuant to a
demand registration right or a registration statement on Form S-8) covering the
sale or resale of shares of Common Stock with the Securities and Exchange
Commission beginning on July 8, 1998 and ending on the 60th trading day after
the date that the registration statement filed on behalf of the holders has been
declared effective by the Securities and Exchange Commission.
Placement Agents. The Company paid $1.8 million cash and issued warrants to
purchase 480,000 shares of the Company's Common Stock in consideration for Jesup
& Lamont Securities Corp., Phillip Louis Trading Co., Inc. and Laidlaw & Co.
acting as the placement agents in connection with the Private Equity Placements
to the Buyers.
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THE EXCHANGE OFFER; REGISTRATION RIGHTS
PURPOSE AND EFFECT
The Company, the Subsidiary Guarantors and the Initial Purchasers have
entered into a Registration Rights Agreement (the "Registration Rights
Agreement") pursuant to which the Company and the Subsidiary Guarantors have
agreed, for the benefit of the holders of the Notes, (i) to file with the
Commission, on or before September 5, 1998, a Registration Statement (the
"Exchange Offer Registration Statement") under the Securities Act relating to
the Exchange Offer pursuant to which New Notes would be offered in exchange for
the then outstanding Old Notes tendered at the option of the holders thereof and
(ii) to use its reasonable best efforts to cause the Exchange Offer Registration
Statement to become effective as soon as practicable thereafter, but in no event
later than November 4, 1998. The Company has further agreed to commence the
Exchange Offer promptly after the Exchange Offer Registration Statement has
become effective, hold the offer open for at least 20 business days, and
exchange the New Notes for all Old Notes validly tendered and not withdrawn
before the expiration of the Exchange Offer.
Under existing Commission interpretations set forth in no-action letters
issued to third parties, the New Notes would in general be freely transferable
after the Exchange Offer without further registration under the Securities Act,
except that broker-dealers ("Participating Broker-Dealers") receiving New Notes
in the Exchange Offer will be subject to a prospectus delivery requirement with
respect to resales of New Notes. The Commission has taken the position that
Participating Broker-Dealers may fulfill their prospectus delivery requirements
with respect to the New Notes (other than a resale of an unsold allotment from
the original sale of the Old Notes) by delivery of the prospectus contained in
the Exchange Offer Registration Statement. Under the Registration Rights
Agreement, the Company and the Subsidiary Guarantors are required to allow
Participating Broker-Dealers and other persons, if any, subject to similar
prospectus delivery requirements to use the prospectus contained in the Exchange
Offer Registration Statement in connection with the resale of such New Notes.
The Exchange Offer Registration Statement will be kept effective for a period of
up to 90 days after the Exchange Offer has been consummated in order to permit
resales of New Notes acquired by broker-dealers in after-market transactions.
Each holder of Notes (other than certain specified holders) who wishes to
exchange such Notes for New Notes in the Exchange Offer will be required to
represent that any New Notes to be received by it will be acquired in the
ordinary course of its business, that at the time of the commencement of the
Exchange Offer it is not participating, does not intend to participate and has
no arrangement or understanding with any person to participate in, the
distribution (within the meaning of the Securities Act) of the New Notes and
that it is not an Affiliate of the Company.
However, if (i) on or before the date of consummation of the Exchange
Offer, the existing Commission interpretations are changed such that the New
Notes would not in general be freely transferable in such manner on such date or
(ii) the Exchange Offer has not been consummated within the 175 days following
the Closing, the Company will, in lieu of effecting the registration of the New
Notes, use its reasonable best efforts to cause a registration statement under
the Securities Act relating to a shelf registration of the Old Notes for resale
by holders (the "Resale Registration") to become effective and to remain
effective for a period of up to two years after the effective date of such
registration statement. The Company will, in the event of the Resale
Registration, provide to the holders of the Old Notes copies of the prospectus
that is a part of the registration statement filed in connection with the Resale
Registration, notify such holders when the Resale Registration for the Old Notes
has become effective and take certain other actions as are required to permit
unrestricted resales of the Old Notes. A holder of Old Notes that sells such
Notes pursuant to the Resale Registration generally would be required to be
named as a selling securityholder in the related prospectus and to deliver a
prospectus to purchasers, will be subject to certain of the civil liability
provisions under the Securities Act in connection with such sales and will be
bound by the provisions of the Registration Rights Agreement that are applicable
to such a holder (including certain indemnification obligations).
Although the Company intends to file the registration statement previously
described, there can be no assurance that the registration statement will be
filed, or if filed, that it will become effective. In the event that (i) the
Company has not filed the registration statement relating to the Exchange Offer
within 60 days following the Closing, (ii) such registration statement has not
become effective within 120 days following the Closing, (iii) the Exchange Offer
has not been consummated within 30 business days after the effectiveness
deadline for the Exchange Offer Registration Statement, (iv) the Company has not
filed the resale registration statement within 30 days of the date on which the
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obligation to file such resale registration statement arose, (v) the resale
registration statement has not been declared effective within 105 days of the
date on which the obligation to file such resale registration statement arose or
(vi) any registration statement required by the Registration Rights Agreement is
filed and declared effective but shall thereafter cease to be effective (except
as specifically permitted therein) without being succeeded within 30 days by an
additional registration statement filed and declared effective (any such event
referred to in clauses (i) through (vi), the "Registration Default"), interest
("Liquidated Damages") will accrue on the Old Notes and the New Notes (in
addition to the stated interest on the Old Notes and the New Notes) from and
including the date on which any such Registration Default shall occur to but
excluding the date on which all Registration Defaults have been cured.
Liquidated Damages will accrue at a rate of 0.5% per annum during the 90-day
period immediately following the occurrence of any Registration Default and
shall increase by 0.25% per annum at the end of each subsequent 90-day period,
but in no event shall such rate exceed 1.50% per annum.
All accrued Liquidated Damages shall be paid to Holders in the same manner
in which payments of other interest are made pursuant to the Indenture. See
"Description of Notes--General."
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the Registration Rights
Agreement, a copy of which will be available upon request to the Company.
The Old Notes and the New Notes will be considered collectively to be a
single class for all purposes under the Indenture, including, without
limitation, waivers, amendments, redemptions and Offers to Purchase, and for
purposes of the Description of Notes (except under this "Exchange Offer;
Registration Rights") all references herein to the "Notes" shall be deemed to
refer collectively to the Old Notes and any New Notes, unless the context
otherwise requires.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Old Notes are, and the Company expects the New Notes to be upon
issuance, designated for trading in the PORTAL market. To the extent Old Notes
are tendered and accepted in the Exchange Offer, the principal amount of
outstanding Old Notes will decrease with a resulting decrease in the liquidity
in the market therefor. Following the consummation of the Exchange Offer,
holders of Old Notes who were eligible to participate in the Exchange Offer but
who did not tender their Old Notes will not be entitled to certain rights under
the Registration Rights Agreement, and such Old Notes will continue to be
subject to certain restrictions on transfer. In general, Old Notes may not be
offered or sold, unless registered under the Securities Act and applicable state
securities laws, except pursuant to an exemption from, or in a transaction not
subject to, the Securities Act and applicable state securities laws. The Company
does not intend to register the Old Notes under the Securities Act and, after
consummation of the Exchange Offer, will not be obligated to do so.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Old Notes
validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on
the Expiration Date. As soon as practicable after the Expiration Date, the
Company will issue a principal amount of New Notes in exchange for each like
principal amount of outstanding Old Notes accepted in the Exchange Offer.
Holders may tender some or all of their Old Notes pursuant to the Exchange
Offer. However, Old Notes may be tendered only in integral multiples of $1,000
in principal amount.
The form and terms of the New Notes are identical to the form and terms of
the Old Notes, except that the Old Notes were offered and sold in reliance upon
certain exemptions from registration under the Securities Act, while the
offering and sale of the New Notes in exchange for the Old Notes have been
registered under the Securities Act, with the result that the New Notes will not
bear any legends restricting their transfer. Also, holders of the New Notes will
not be entitled to certain rights under the Registration Rights Agreement. The
New Notes will evidence the same debt as the Old Notes and will be issued
pursuant to, and entitled to the benefits of, the Indenture.
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As of the date of this Prospectus, $125 million aggregate principal amount
of the Old Notes was outstanding and registered in the name of Cede & Co., as
nominee for DTC. The Company has fixed the close of business on , 1998,
as the record date for the Exchange Offer for purposes of determining the
persons to whom this Prospectus, together with the Letter of Transmittal, will
initially be sent. Holders of Old Notes do not have any appraisal or dissenters'
rights under the General Corporation Law of the State of Delaware or the
Indenture in connection with the Exchange Offer. The Company intends to conduct
the Exchange Offer in accordance with the applicable requirements of the
Exchange Act and the rules and regulations of the Commission promulgated
thereunder, including Rule 14e-1 thereunder.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as, and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
for the purpose of receiving the New Notes from the Company. If any tendered Old
Notes are not accepted for exchange because of an invalid tender, the occurrence
of certain other events set forth herein or otherwise, the certificates for such
unaccepted Old Notes will be returned, without expense, to the tendering holder
thereof as promptly as practicable after the Expiration Date.
Holders who tender Old Notes in the Exchange Offer will be required to pay
any brokerage commissions or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. See "The Exchange Offer--Solicitation of
Tenders; Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time,
on , 1998, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended. In order to extend the
Exchange Offer, the Company will notify the Exchange Agent of any extension by
oral or written notice prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date. The Company
reserves the right, in its sole discretion, (i) to delay accepting any Old
Notes, to extend the Exchange Offer or, if any of the conditions set forth under
"The Exchange Offer--Conditions" shall not have been satisfied, to terminate
the Exchange Offer, by giving oral or written notice of such delay, extension or
termination to the Exchange Agent, or (ii) to amend the terms of the Exchange
Offer in any manner. If the Exchange Offer is amended in a manner determined by
the Company to constitute a material change, the Company will promptly disclose
such amendment in a manner reasonably calculated to inform the holders of the
Old Notes of such amendment. Without limiting the manner in which the Company
may choose to make public announcements of any delay in acceptance, extension,
termination or amendment of the Exchange Offer, the Company shall have no
obligation to publish, advertise, or otherwise communicate any such public
announcement, other than by making a timely release to the Dow Jones News
Service.
INTEREST ON THE NEW NOTES
The New Notes will bear interest from the date of issuance of the Old
Notes that are tendered for exchange for the New Notes. Accordingly, holders of
Old Notes accepted for exchange will not receive interest that is accrued but
unpaid on the Old Notes at the time of tender, but such interest will be payable
on the first interest payment date after the consummation of the Exchange Offer.
Holders of Old Notes accepted for exchange in the Exchange Offer will be deemed
to have waived the right to receive interest accrued but unpaid thereon as of
the date of exchange. Interest on the New Notes will be payable semi-annually on
January 1 and July 1 of each year, commencing January 1, 1999.
PROCEDURES FOR TENDERING
Only a registered holder of Old Notes may tender Old Notes in the Exchange
Offer. Except as set forth under "The Exchange Offer--Book Entry Transfer," to
tender in the Exchange Offer a holder must complete, sign and date the Letter of
Transmittal, or a copy thereof, have the signatures thereon guaranteed if
required by the Letter of Transmittal, and mail or otherwise deliver the Letter
of Transmittal or copy to the Exchange Agent for receipt prior to 5:00 p.m. on
the Expiration Date. In addition, either (i) certificates for such Old Notes
must be received by the Exchange Agent along with the Letter of Transmittal,
(ii) a timely confirmation of a book-entry transfer (a
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"Book-Entry Confirmation") of such Old Notes into the Exchange Agent's account
at DTC (the "Book-Entry Transfer Facility") pursuant to the procedure for
book-entry transfer described below, must be received by the Exchange Agent
prior to the Expiration Date, or (iii) the holder must comply with the
guaranteed delivery procedures described below. To be tendered effectively, the
Old Notes, Letter of Transmittal and other required documents must be received
by the Exchange Agent at the address set forth under "The Exchange
Offer--Exchange Agent" prior to 5:00 p.m. on the Expiration Date.
The tender by a holder that is not withdrawn before the Expiration Date
will constitute an agreement between that holder and the Company in accordance
with the terms and subject to the conditions set forth herein and in the Letter
of Transmittal.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF
THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN
OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE 5:00 P.M. ON THE
EXPIRATION DATE AND PROPER INSURANCE SHOULD BE OBTAINED. NO LETTER OF
TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY REQUEST
THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES, OR
NOMINEES TO EFFECT THESE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Old Notes are registered in the name of a
broker, dealer, commercial bank, trust company, or other nominee and who wishes
to tender should contact the registered holder promptly and instruct the
registered holder to tender on the beneficial owner's behalf. If the beneficial
owner wishes to tender on its own behalf, such beneficial owner must, prior to
completing and executing the Letter of Transmittal and delivering such
beneficial owner's Old Notes, either make appropriate arrangements to register
ownership of the Old Notes in the beneficial owner's name or obtain a properly
completed bond power from the registered holder. The transfer of registered
ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (defined herein)
unless the Old Notes tendered pursuant thereto are tendered (i) by a registered
holder who has not completed the box titled "Special Registration Instructions"
or "Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution. If signatures on a Letter of Transmittal or
a notice of withdrawal, as the case may be, are required to be guaranteed, the
guarantee must be by any eligible guarantor institution that is a member of or
participant in the Securities Transfer Agents Medallion Program, the New York
Stock Exchange Medallion Signature Program or the Stock Exchange Medallion
Program (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered holder of any Old Notes listed therein, such Old Notes must be
endorsed or accompanied by a properly completed bond power, signed by the
registered holder as that registered holder's name appears on the Old Notes with
the signature thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations, or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and evidence satisfactory to the
Company of their authority to so act must be submitted with the Letter of
Transmittal, unless waived by the Company.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Old Notes will be determined by
the Company in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all Old Notes
not properly tendered or any Old Notes the Company's acceptance of which would,
in the opinion of counsel for the Company, be unlawful. The Company also
reserves the right to waive any defects, irregularities or conditions of tender
as to particular Old Notes. The Company's interpretation of the terms and
conditions of the Exchange Offer (including the instructions in the Letter of
Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in
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connection with tenders of Old Notes must be cured within such time as the
Company shall determine. Although the Company intends to notify holders of
defects or irregularities with respect to tenders of Old Notes, neither the
Company, the Exchange Agent nor any other person shall incur any liability for
failure to give such notification. Tenders of Old Notes will not be deemed to
have been made until such defects or irregularities have been cured or waived.
Any Old Notes received by the Exchange Agent that the Company determines are not
properly tendered and as to which the defects or irregularities have not been
cured or waived will be returned by the Exchange Agent to the tendering holders,
unless otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
In addition, subject to the Company's contractual obligations, the Company
reserves the right in its sole discretion to purchase or make offers for any Old
Notes that remain outstanding after the Expiration Date or, as set forth under
"The Exchange Offer--Conditions," to terminate the Exchange Offer and, to the
extent permitted by applicable law, purchase Old Notes in the open market, in
privately negotiated transactions or otherwise. The terms of any such purchases
or offers could differ from the terms of the Exchange Offer.
By tendering, each holder will represent to the Company that, among other
things, (i) New Notes to be acquired by such holder of Old Notes in connection
with the Exchange Offer are being acquired by such holder in the ordinary course
of business of such holder, (ii) such holder has no arrangement or understanding
with any person to participate in the distribution of the New Notes, (iii) such
holder acknowledges and agrees that any person who is a broker-dealer registered
under the Exchange Act or is participating in the Exchange Offer for the
purposes of distributing the New Notes must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction of the New Notes acquired by such person and cannot
rely on the position of the staff of the Commission set forth in certain
no-action letters, (iv) such holder understands that a secondary resale
transaction described in clause (iii) above and any resales of New Notes
obtained by such holder in exchange for Old Notes acquired by such holder
directly from the Company should be covered by an effective registration
statement containing the selling security holder information required by Item
507 or Item 508, as applicable, of Regulation S-K of the Commission and (v) such
holder is not an "affiliate," as defined in Rule 405 under the Securities Act,
of the Company. If the holder is a broker-dealer that will receive New Notes for
such holder's own account in exchange for Old Notes that were acquired as a
result of market-making activities or other trading activities, such holder will
be required to acknowledge in the Letter of Transmittal that such holder will
deliver a prospectus in connection with any resale of such New Notes; however,
by so acknowledging and by delivering a prospectus, such holder will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act. See "Plan of Distribution."
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of certificates for such Old Notes or a timely Book-Entry
Confirmation of such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility, a properly completed and duly executed Letter of
Transmittal (or, with respect to DTC and its participants, electronic
instructions in which the tendering holder acknowledges its receipt of and
agreement to be bound by the Letter of Transmittal), and all other required
documents. If any tendered Old Notes are submitted for a greater principal
amount than the holder desires to exchange, such unaccepted or non-exchanged Old
Notes will be returned without expense to the tendering holder thereof (or, in
the case of Old Notes tendered by book-entry transfer into the Exchange Agent's
account at the Book-Entry Transfer Facility pursuant to the book-entry transfer
procedures described below, such non-exchanged Old Notes will be credited to an
account maintained with such Book-Entry Transfer Facility) as promptly as
practicable after the expiration of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with
respect to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus, and
any financial institution that is a participant in the Book-Entry Transfer
Facility system may make book-entry delivery of Old Notes being tendered by
causing the Book-Entry Transfer Facility to transfer such Old Notes into the
Exchange Agent's account at the Book-Entry Transfer Facility in accordance with
such Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Old Notes may be effected through book-entry transfer at the
Book-Entry Transfer Facility, the Letter of Transmittal or copy thereof, with
any required signature
37
<PAGE> 39
guarantees and any other required documents, must, in any case other than as set
forth in the following paragraph, be transmitted to and received by the Exchange
Agent at the address set forth under "The Exchange Offer--Exchange Agent" on
or prior to the Expiration Date or the guaranteed delivery procedures described
below must be complied with.
DTC's Automated Tender Offer Program ("ATOP") is the only method of
processing exchange offers through DTC. To accept the Exchange Offer through
ATOP, participants in DTC must send electronic instructions to DTC through DTC's
communication system in lieu of sending a signed, hard copy Letter of
Transmittal. DTC is obligated to communicate those electronic instructions to
the Exchange Agent. To tender Old Notes through ATOP, the electronic
instructions sent to DTC and transmitted by DTC to the Exchange Agent must
contain the character by which the participant acknowledges its receipt of and
agrees to be bound by the Letter of Transmittal.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the Old Notes desires to tender such Old Notes
and the Old Notes are not immediately available, or time will not permit such
holder's Old Notes or other required documents to reach the Exchange Agent
before the Expiration Date, or the procedure for book-entry transfer cannot be
completed on a timely basis, a tender may be effected if (i) the tender is made
through an Eligible Institution, (ii) prior to the Expiration Date, the Exchange
Agent received from such Eligible Institution a properly completed and duly
executed Letter of Transmittal (or a facsimile thereof) and Notice of Guaranteed
Delivery, substantially in the Form provided by the Company (by telegram, telex,
facsimile transmission, mail or hand delivery), setting forth the name and
address of the holder of Old Notes and the amount of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that within three New
York Stock Exchange ("NYSE") trading days after the date of execution of the
Notice of Guaranteed Delivery, the certificates for all physically tendered Old
Notes, in proper Form for transfer, or a Book-Entry Confirmation, as the case
may be, and any other documents required by the Letter of Transmittal will be
deposited by the Eligible Institution with the Exchange Agent, and (iii) the
certificates for all physically tendered Old Notes, in proper Form for transfer,
or a Book-Entry Confirmation, as the case may be, and all other documents
required by the Letter of Transmittal, are received by the Exchange Agent within
three NYSE trading days after the date of execution of the Notice of Guaranteed
Delivery.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New
York City time, on the Expiration Date.
For a withdrawal of a tender of Old Notes to be effective, a written or
(for DTC participants only) electronic ATOP transmission notice of withdrawal
must be received by the Exchange Agent at its address set forth herein prior to
5:00 p.m., New York City time, on the Expiration Date. Any such notice of
withdrawal must (i) specify the name of the person having deposited the Old
Notes to be withdrawn (the "Depositor"), (ii) identify the Old Notes to be
withdrawn (including the certificate number or numbers and principal amount of
such Old Notes), (iii) be signed by the holder in the same manner as the
original signature on the Letter of Transmittal by which such Old Notes were
tendered (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the Trustee with respect to the Old
Notes register the transfer of such Old Notes into the name of the person
withdrawing the tender and (iv) specify the name in which any such Old Notes are
to be registered, if different from that of the Depositor. All questions as to
the validity, Form and eligibility (including time of receipt) of such notices
will be determined by the Company, in its sole discretion, whose determination
shall be final and binding on all parties. Any Old Notes so withdrawn will be
deemed not to have been validly tendered for exchange for purposes of the
Exchange Offer. Any Old Notes which have been tendered for exchange but which
are not exchanged for any reason will be returned to the holder thereof without
cost to such holder as soon as practicable after withdrawal, rejection of tender
or termination of the Exchange Offer. Properly withdrawn Old Notes may be
retendered by following one of the procedures described under "The Exchange
Offer--Procedures for Tendering" at any time on or prior to the Expiration
Date.
38
<PAGE> 40
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall
not be required to accept for exchange, or exchange New Notes for, any Old
Notes, and may terminate the Exchange Offer as provided herein before the
acceptance of such Old Notes, if (i) the Exchange Offer shall violate applicable
law or any applicable interpretation of the staff of the Commission, (ii) any
action or proceeding is instituted or threatened in any court or by any
governmental agency that might materially impair the ability of the Company to
proceed with the Exchange Offer or any material adverse development has occurred
in any existing action or proceeding with respect to the Company, or (iii) any
governmental approval has not been obtained, which approval the Company shall
deem necessary for the consummation of the Exchange Offer. If the Company
determines in its sole discretion that any of the conditions are not satisfied,
the Company may (i) refuse to accept any Old Notes and return all tendered Old
Notes to the tendering holders (or, in the case of Old Notes tendered by
book-entry transfer into the Exchange Agent's account at the Book-Entry Transfer
Facility pursuant to the book-entry transfer procedures described above, such
Old Notes will be credited to an account maintained with such Book-Entry
Transfer Facility), (ii) extend the Exchange Offer and retain all Old Notes
tendered prior to the expiration of the Exchange Offer, subject, however, to the
rights of holders to withdraw such Old Notes (see "--Withdrawal Rights") or
(iii) waive such unsatisfied conditions with respect to the Exchange Offer and
accept all properly tendered Old Notes which have not been withdrawn. If such
waiver constitutes a material change to the Exchange Offer, the Company will
promptly disclose such waiver by means of a prospectus supplement that will be
distributed to the registered holders, and the Company will extend the Exchange
Offer for a period of five to ten business days, depending upon the significance
of the waiver and the manner of disclosure to the registered holders, if the
Exchange Offer would otherwise expire during such five-to-ten-business-day
period.
EXCHANGE AGENT
All executed Letters of Transmittal should be directed to the Exchange
Agent. Harris Trust and Savings Bank has been appointed as Exchange Agent for
the Exchange Offer. Questions, requests for assistance and requests for
additional copies of this Prospectus or of the Letter of Transmittal should be
directed to the Exchange Agent addressed as follows:
BY REGISTERED OR CERTIFIED MAIL:
-----------------------------------
-----------------------------------
-----------------------------------
BY OVERNIGHT MAIL OR HAND DELIVERY:
-----------------------------------
-----------------------------------
-----------------------------------
BY FACSIMILE:
-----------------------------------
-----------------------------------
CONFIRM BY TELEPHONE:
-----------------------------------
SOLICITATIONS OF TENDERS; FEES AND EXPENSES
The expenses of soliciting acceptances to the Exchange Offer will be borne
by the Company. The principal solicitation is being made by mail; however,
additional solicitations may be made in person or by telephone by officers and
employees of the Company. The Company has not retained any dealer-manager or
similar agent in connection with the Exchange Offer and will not make any
payments to brokers, dealers or others soliciting
39
<PAGE> 41
acceptances of the Exchange Offer. The Company, however, will pay the Exchange
Agent reasonable and customary fees for its services and will reimburse it for
its reasonable out-of-pocket expenses in connection therewith. Other cash
expenses to be incurred in connection with the Exchange Offer and to be paid by
the Company include registration, accounting and legal fees and printing costs,
among others.
ACCOUNTING TREATMENT
For accounting purposes, the Company will recognize no gain or loss as a
result of the Exchange Offer. The expenses of the Exchange Offer will be
amortized over the term of the New Notes.
The Company will pay all transfer taxes, if any, applicable to the
exchange of Old Notes pursuant to the Exchange Offer. If, however, a transfer
tax is imposed for any reason other than the exchange of the Old Notes pursuant
to the Exchange Offer, then the amount of any such transfer taxes (whether
imposed on the registered holder or other persons) will be payable by the
tendering holder. If satisfactory evidence of payment of such taxes or exemption
therefrom is not submitted with the Letter of Transmittal, the amount of such
taxes will be billed directly to such tendering holder.
TRANSFER TAXES
Holders who tender their Old Notes for exchange will not be obligated to
pay any transfer taxes in connection therewith, except that holders who instruct
the Company to register New Notes in the name of, or request that Old Notes not
tendered or not accepted in the Exchange Offer be returned to, a person other
than the registered tendering holder will be responsible for the payment of any
applicable transfer tax thereon.
40
<PAGE> 42
USE OF PROCEEDS
There will be no cash proceeds to the Company from the Exchange Offer.
The net proceeds from the Old Note Offering and the Private Equity
Placement, after deducting underwriting discounts, placement fees and offering
expenses, were approximately $151.4 million. The sources and uses of net
proceeds to the Company from the Old Note Offering and the Private Equity
Placement are summarized as follows (dollars in millions):
<TABLE>
<CAPTION>
SOURCES:
<S> <C>
Old Note Offering, net of underwriting discounts and expenses ........ $120,000,000
------------
Private Equity Placement, net of expenses ............................ 30,900,000
------------
Total ................................................................ $151,400,000
============
USES:
Repayment of indebtedness ............................................ $151,400,000
------------
Total ................................................................ $151,400,000
============
</TABLE>
The net proceeds received by the Company from the Offerings completed on
July 8, 1998 of approximately $144.5 million and on July 20, 1998 of
approximately $6.9 million were used to repay indebtedness outstanding under the
Company's Credit Agreement and to repay indebtedness outstanding under the
Variable Rate Senior Subordinated Debt Bridge Note Purchase Agreements and the
Variable Rate Subordinated Equity Bridge Note Purchase Agreements, each dated as
of April 17, 1998 (collectively, the "Bridge Facilities"). Substantially all of
this indebtedness was incurred to fund the Company's acquisition of net revenue
interests and royalty interests in producing oil and natural gas properties from
certain trusts managed by J.P. Morgan Investments. Immediately following such
repayments, the amount of indebtedness outstanding under the Credit Agreement
was $10.3 million.
The indebtedness under the Credit Agreement was incurred to fund the
Property Acquisitions and general corporate working capital needs. The proceeds
from the Bridge Facilities were used to partially fund the Morgan Property
Acquisition. Indebtedness outstanding under the Credit Agreement bears interest
at a rate determined under certain Federal Funds, Prime Rate or LIBOR rate
options and currently bears interest at 8.125% per annum. Indebtedness
outstanding under the Debt Bridge Facility bore interest at a rate of LIBOR plus
4% per annum (currently 9.625% per annum). Indebtedness outstanding under the
Equity Bridge Facility bore interest at a rate of LIBOR plus 6% per annum
(currently 11.625% per annum). As of July 31, 1998, there is approximately $14.7
million available for reborrowing under the Credit Agreement to be used for
general corporate purposes, which may include acquiring oil and natural gas
properties or companies owning the same. The Company intends to reborrow amounts
under the Credit Agreement to fund the exploitation and development, potential
acquisition and exploration of oil and natural gas properties and other general
corporate purposes. See "Description of Other Indebtedness" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources" for a description of these facilities.
41
<PAGE> 43
CAPITALIZATION
The following table sets forth the capitalization of Queen Sand Resources
at March 31, 1998 to give effect to the consummation of (i) the Old Note
Offering and exchange of the Old Notes for New Notes, (ii) the Private Equity
Placement and (iii) the application of the net proceeds received by the Company
from the Old Note Offering and the Private Equity Placement as described in "Use
of Proceeds."
<TABLE>
<CAPTION>
MARCH 31, 1998
------------------------------------------------
PRO FORMA FOR
THE MORGAN PRO FORMA
PROPERTY ADJUSTED FOR
HISTORICAL ACQUISITION OFFERINGS
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Total long-term indebtedness (including current portion) (1):
Credit Agreement ................................................ $ 20,000 $ 92,000 $ 10,100
Bridge Facilities ............................................... -- 60,000 --
ECT Revolving Credit Agreement .................................. 1,000 -- --
12 1/2% Senior Notes due 2008 offered hereby .................... -- -- 125,000
Other ........................................................... 2,429 2,429 2,429
------------ ------------ ------------
Total long-term indebtedness ................................. 23,429 154,429 137,529
Stockholders' equity:
Preferred Stock:
Series A Participating Convertible Preferred Stock,
$0.01 par value; 9,600,000 shares authorized;
9,600,000 shares issued and outstanding .................... 96 96 96
Series B Participating Convertible Preferred Stock,
$0.01 par value; 9,600,000 shares authorized;
no shares issued or outstanding ............................ -- -- --
Series C Convertible Preferred Stock, $0.01 par value;
10,400 shares authorized; 10,400 shares issued and
outstanding ................................................ -- -- --
Common Stock, $0.0015 par value; 100,000,000 shares
authorized; 30,826,527 shares issued and outstanding .......... 50 50 57
Additional paid-in capital ...................................... 32,580 32,580 63,473
Retained earnings (accumulated deficit) ......................... (5,323) (26,323) (26,323)
Treasury stock, 9,600,000 shares, at cost ....................... (5,000) (5,000) (5,000)
------------ ------------ ------------
Total stockholders' equity ................................. 22,403 1,403 32,303
------------ ------------ ------------
Total capitalization .............................................. $ 45,832 $ 155,832 $ 169,832
============ ============ ============
</TABLE>
- ----------
(1) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources," "Description
of Other Indebtedness" and Note 3 to the Company's Consolidated Financial
Statements included elsewhere in this Prospectus for additional
information concerning the Company's indebtedness.
42
<PAGE> 44
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth for the periods indicated certain summary
historical and pro forma consolidated financial information of the Company. The
summary historical consolidated financial information for the period from August
9, 1994 (inception) to June 30, 1995 and each of the years in the two years
ended June 30, 1997 have been derived from the audited consolidated financial
statements of the Company. The summary historical financial information as of
and for the nine months ended March 31, 1997 and 1998 have been derived from the
unaudited financial statements of the Company and, in the opinion of management,
include all adjustments, consisting solely of normal recurring accruals,
necessary for a fair presentation of the information presented. The Company
completed material acquisitions of producing properties in each of the periods
presented which affects the comparability of the historical financial and
operating data for all periods presented. The summary historical and pro forma
information below should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations," the Consolidated
Financial Statements of the Company and the notes thereto, as well as the
"Unaudited Pro Forma Condensed Consolidated Financial Statements" and the notes
thereto included elsewhere in this Prospectus. Neither the historical results
nor the pro forma results are necessarily indicative of the Company's future
operations or financial results.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, NINE MONTHS ENDED MARCH 31,
------------------------------------------- ----------------------------------
PRO FORMA PRO FORMA
HISTORICAL AS ADJUSTED HISTORICAL AS ADJUSTED
----------------------------- ----------- ------------------- -----------
1995(1) 1996 1997 1997(2) 1997 1998 1998(2)
------- ------- ------- ----------- ------- -------- -----------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Oil and natural gas sales .......... $ 435 $ 2,079 $ 4,381 $ 7,164 $ 3,118 $ 4,849 $ 5,170
Net Profits Interests and
Royalty Interests(3) ............... -- -- -- 31,953 -- -- 23,460
Interest and other ................. 10 72 300 300 201 80 80
Total revenues ......................... 445 2,151 4,681 39,417 3,319 4,929 28,710
Expenses:
Production expenses ................ 280 1,176 2,507 3,251 1,632 3,183 3,261
Depreciation, depletion and
amortization ..................... 132 630 982 14,120 747 1,340 11,330
General and administrative ......... 294 1,113 1,452 2,152 911 1,645 2,171
Interest and financing costs(4) .... 25 421 878 17,975 656 899 13,481
Reverse acquisition costs .......... 401 -- -- -- -- -- --
Total expenses ......................... 1,132 3,340 5,819 37,498 3,946 7,067 30,243
Income (loss) before extraordinary
item and income taxes .............. (687) (1,189) (1,138) 1,919 (627) (2,138) (1,533)
Extraordinary item(5) ................ -- -- 171 -- -- --
Income taxes ......................... -- -- -- (672) -- -- --
Net income (loss) .................... $ (687) $(1,189) $(1,309) $ 1,247 $ (627) $ (2,138) $ (1,533)
OTHER FINANCIAL DATA:
EBITDA(6) ............................ $ (530) $ (138) $ 722 $ 34,014 $ 776 $ 101 $ 23,278
Capital expenditures(7) .............. 3,924 6,235 7,382 151,895 6,910 30,619 148,869
Ratio of EBITDA to interest
expense(4)(6)(8) ................... NM NM NM 2.0x 1.2x NM 1.9x
Ratio of earnings to fixed
charges(9) ......................... NM NM NM 1.1x NM NM NM
</TABLE>
43
<PAGE> 45
<TABLE>
<CAPTION>
AT MARCH 31, 1998
---------------------------------
HISTORICAL PRO FORMA(2)
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents .............. $ 1,137 $ 16,787
Working capital (deficit) .............. (58) 15,592
Net property and equipment ............. 30,466 142,716
Total assets ........................... 48,323 172,323
Total debt ............................. 23,429 137,529
Stockholders' equity ................... 22,403 32,303
ACNTA(10) .............................. 54,395 188,992
</TABLE>
(1) On March 6, 1995, Queen Sand Resources acquired QSRn. For accounting
purposes, the acquisition has been treated as a recapitalization of QSRn
with QSRn as the acquiror (reverse acquisition). The Consolidated
Financial Statements of the Company prior to March 6, 1995 are those of
QSRn. QSRn was formed on August 9, 1994. The statement of operations data
for the period denoted 1995 reflects the results of operations and other
financial data for the period August 9, 1994 to June 30, 1995.
(2) Reflects the pro forma effect of (i) the Note Offering and the Private
Equity Placement and the application of the net proceeds thereof and the
concurrent unwinding of at least $115.0 million of the Company's forward
LIBOR interest rate swap agreement and (ii) the Property Acquisitions.
See "Unaudited Pro Forma Condensed Consolidated Financial Statements,"
included elsewhere in this Prospectus, for a discussion of the
preparation of these data. Pro forma net cash provided by operating
activities was obtained by adjusting the historical amount for the pro
forma changes in oil and natural gas sales, oil and natural gas
production expenses, general and administrative expenses and interest
expense (except for the amortization of debt costs). See also "Use of
Proceeds" and "Capitalization."
(3) Presented below are the oil and natural gas sales and associated
production expenses from which the NPI and RI revenues are derived:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
JUNE 30, 1997 MARCH 31, 1998
------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Oil and natural gas sales ............................... $ 43,243 $ 30,747
Production expenses ..................................... 11,290 7,287
Net profits interests and royalty interests revenues .... $ 31,953 $ 23,460
</TABLE>
(4) For purposes of computing the ratio of EBITDA to interest expense,
interest expense excludes the amortization of debt issuance costs of $1.2
million for the pro forma year ended June 30, 1997, $15,000 for the nine
months ended March 31, 1998 and $930,000 for the pro forma nine months
ended March 31, 1998.
(5) During the fiscal year ended June 30, 1997, the Company modified the
terms of indebtedness related to certain acquired properties and
recognized an extraordinary loss of $171,381.
(6) EBITDA represents earnings before interest expense, income taxes and
depreciation, depletion and amortization expense, and extraordinary
items. EBITDA is not a measure of income or cash flows in accordance with
generally accepted accounting principles, but is presented as a
supplemental financial indicator as to the Company's ability to service
or incur debt. EBITDA is not presented as an indicator of cash available
for discretionary spending or as a measure of liquidity. EBITDA may not
be comparable to other similarly titled measures of other companies. The
Credit Agreement requires the maintenance of certain EBITDA ratios.
EBITDA should not be considered in isolation or as a substitute for net
income, operating cash flow or any other measure of financial performance
prepared in accordance with generally accepted accounting principles or
as a measure of the Company's profitability or liquidity.
(7) Capital expenditures for the nine months ended March 31, 1998, include
the costs of acquiring the Collins and Ware and the NASGAS Properties.
Pro forma capital expenditures for the year ended June 30, 1997 include
the costs of acquiring the Collins and Ware, NASGAS and Morgan
Properties. Pro forma capital expenditures for the nine months ended
March 31, 1998 includes the costs of acquiring the Morgan Properties.
(8) EBITDA was insufficient to cover interest expense by $550,000, $559,000,
$156,000 and $798,000 for the fiscal years ended June 30, 1995, 1996 and
1997 and the nine months ended March 31, 1998, respectively.
(9) For purposes of computing the ratio of earnings to fixed charges, fixed
charges consist of interest expense. Earnings consist of earnings before
extraordinary items and income taxes plus fixed charges. Earnings were
insufficient to cover fixed charges by $687,000, $1.2 million, $1.2
million, $627,000, $2.1 million and $1.5 million for the fiscal years
ended June 30, 1995, 1996 and 1997, the nine months ended March 31, 1997
and 1998, and the pro forma nine months ended March 31, 1998,
respectively.
(10) Adjusted Consolidated Net Tangible Assets ("ACNTA") is generally defined
as (a) the sum (without duplication) of (i) SEC PV-10, plus (ii)
capitalized costs attributable to oil and natural gas properties to which
no proved oil and natural gas reserves are attributable, plus (iii) net
working capital, plus (iv) the net book value of each other tangible
asset, minus (b) minority interests and, to the extent not otherwise
taken into account, natural gas balancing liabilities. Pro forma ACNTA of
$189.0 million includes $173.4 million of adjusted SEC PV-10 and $15.6
million of working capital.
44
<PAGE> 46
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The accompanying Unaudited Pro Forma Condensed Consolidated Financial
Statements reflect the historical financial position and results of operations
of the Company, adjusted to give effect to (i) the Morgan Property Acquisition
(including the incurrence of indebtedness under the Credit Agreement and the
Bridge Facilities and the application of the net proceeds therefrom), (ii) the
NASGAS Property Acquisition, (iii) the Collins and Ware Property Acquisition,
(iv) the Private Equity Placement and the application of the net proceeds
therefrom and (v) the Note Offering and the application of the net proceeds
therefrom. The Unaudited Pro Forma Condensed Consolidated Financial Statements
are based on the historical financial statements of the Company and, in part,
the statements of (a) net profits interests and royalty interests revenues of
the Morgan Properties and (b) operating revenues and direct operating expenses
of the Collins and Ware Properties included elsewhere in this Prospectus.
The Unaudited Pro Forma Condensed Consolidated Balance Sheet as of March
31, 1998 assumes the acquisition of the Morgan Properties had been completed and
the Offerings had been consummated on that date. The Unaudited Pro Forma
Condensed Consolidated Statements of Operations for the nine months ended March
31, 1998 and the year ended June 30, 1997 have been prepared assuming the
acquisitions of the Morgan, NASGAS and Collins and Ware Properties had been
completed and the Offerings had been consummated on July 1, 1996.
The pro forma adjustments are based upon available information and
assumptions that management of the Company believes are reasonable. The
Unaudited Pro Forma Condensed Consolidated Financial Statements do not purport
to represent the financial position or results of operations which would have
occurred had such transactions been consummated on the dates indicated or the
Company's financial position or results of operations for any future date or
period. These Unaudited Pro Forma Condensed Consolidated Financial Statements
and notes thereto should be read in conjunction with the Company's historical
financial statements and the notes thereto, and the statements of (i) net
profits interests and royalty interests revenues of the Morgan Properties and
(ii) operating revenues and direct operating expenses of the Collins and Ware
Properties and the notes thereto, included elsewhere in this Prospectus.
45
<PAGE> 47
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS PRO FORMA
FOR THE FOR THE PRO FORMA PRO FORMA
MORGAN MORGAN ADJUSTMENTS AS ADJUSTED
COMPANY PROPERTY PROPERTY FOR THE FOR THE
HISTORICAL ACQUISITION ACQUISITION OFFERINGS OFFERINGS
---------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Current assets .......................... $ 2,553 $ 127,500 (1) $ 11,803 $ 30,900 (3) $ 18,203
(118,250) 120,500 (4)
(141,900) (5)
(3,100) (6)
Deposit on oil and natural gas
properties ............................ 15,000 (15,000) -- --
133,250
Net property and equipment .............. 30,466 (21,000) 142,716 142,716
Other assets and deferred 4,500 (4)
charges ............................... 304 3,500 (1) 3,804 3,100 (6) 11,404
---------- ---------- ---------- ---------- ----------
Total assets ............................ $ 48,323 $ 110,000 $ 158,323 $ 14,000 $ 172,323
========== ========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities ..................... $ 2,491 $ -- $ 2,491 $ -- $ 2,491
Long-term obligations:
Credit Agreement ...................... 20,000 72,000 (1) 92,000 (81,900) (5) 10,100
Bridge Facilities ..................... -- 60,000 (1) 60,000 (60,000) (5) --
ECT Revolving Credit Agreement ........ 1,000 (1,000) (1) -- -- --
12 1/2% Senior Notes due 2008 ......... -- -- -- 125,000 (4) 125,000
Other, including current portion
of $120 ............................. 2,429 -- 2,429 -- 2,429
---------- ---------- ---------- ---------- ----------
Total liabilities ....................... 25,920 131,000 156,920 (16,900) 140,020
Stockholders' equity:
Preferred stock, $.01 par value ....... 96 96 96
Common stock, $.0015 par value ........ 50 50 7 (3) 57
Additional paid-in capital ............ 32,580 32,580 30,893 63,973 (3)
Accumulated deficit ................... (5,323) (21,000) (2) (26,323) (26,323)
Treasury stock ........................ (5,000) (5,000) (5,000)
---------- ---------- ---------- ---------- ----------
Total stockholders' equity .............. 22,403 (21,000) 1,403 30,900 32,303
Total liabilities and
stockholders' equity .................. $ 48,323 $ 110,000 $ 158,323 $ 14,000 $ 172,323
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to the unaudited pro forma
condensed consolidated financial statements.
46
<PAGE> 48
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COLLINS
AND WARE
COLLINS
COMPANY AND WARE NASGAS MORGAN
HISTORICAL HISTORICAL HISTORICAL HISTORICAL
---------- ---------- ---------- -----------
(12 MONTHS) (12 MONTHS) (12 MONTHS) (12 MONTHS)
<S> <C> <C> <C> <C>
Revenues:
Oil and natural gas
sales ................................ $ 4,381 $ 2,635 $ 148 $ --
Net profits interests
and royalty interests ................ -- -- -- 31,953
Interest and other ..................... 300 -- -- --
-------- -------- -------- --------
Total revenues ......................... 4,681 2,635 148 31,953
Expenses:
Production expenses ................... 2,507 686 58 --
Depreciation, depletion
and amortization ..................... 982 -- -- --
General and administrative ............. 1,452 -- -- --
Interest and financing
costs ................................ 878 -- -- --
-------- -------- -------- --------
Total expenses ......................... 5,819 686 58 --
Net income (loss) before
extraordinary item and
income taxes ......................... (1,138) 1,949 90 31,953
Income taxes ........................... -- -- -- --
-------- -------- -------- --------
Net income (loss) before
extraordinary item ................... $ (1,138) $ 1,949 $ 90 $ 31,953
======== ======== ======== ========
Basic.................................. $ (0.04)
========
Diluted................................ N/A
Shares used in computing
net income (loss) per
common share:
Basic.................................. 26,964
========
Diluted N/A
PRO FORMA
PRO FORMA PRO FORMA PRO FORMA
FOR THE FOR THE FOR THE
PROPERTY PROPERTY PROPERTY
ACQUISITIONS ACQUISITIONS OFFERINGS OFFERINGS
------------ ------------ -------- ---------
<S> <C> <C> <C> <C>
Revenues:
Oil and natural gas
sales ................................ $ -- $ 7,164 $ -- $ 7,164
Net profits interests
and royalty interests ................ -- 31,953 -- 31,953
Interest and other ..................... -- 300 -- 300
-------- -------- -------- --------
Total revenues ......................... -- 39,417 -- 39,417
Expenses:
Production expenses ................... -- 3,251 -- 3,251
Depreciation, depletion
and amortization ..................... 13,138(7) 14,120 -- 14,120
General and administrative ............. 700(8) 2,152 -- 2,152
495(9) (14,098)(13)
13,835(10) 15,625(14)
Interest and financing
costs ................................ 480(11) 15,688 760(15) 17,975
-------- -------- -------- --------
Total expenses ......................... 28,648 35,211 2,287 37,498
Net income (loss) before
extraordinary item and
income taxes ......................... (28,648) 4,206 (2,287) 1,919
Income taxes ........................... 1,472(12) 1,472 (800)(16) 672
-------- -------- -------- --------
Net income (loss) before
extraordinary item ................... $(30,120) $ 2,734 $ (1,487) $ 1,247
======== ======== ======== ========
Net income (loss) before
extraordinary item per
common share:
Basic.................................. $ (0.04) $ 0.04
======== ========
Diluted................................ N/A $ 0.04
========
Shares used in computing
net income (loss) per
common share:
Basic.................................. 26,964 33,467
======== ========
Diluted N/A 34,228
========
</TABLE>
See accompanying notes to the unaudited pro forma
condensed consolidated financial statements.
47
<PAGE> 49
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COLLINS
COMPANY AND WARE NASGAS MORGAN
HISTORICAL HISTORICAL HISTORICAL HISTORICAL
---------- ---------- ---------- -----------
(9 MONTHS) (9 MONTHS) (9 MONTHS) (9 MONTHS)
<S> <C> <C> <C> <C>
Revenues:
Oil and natural gas sales ............ $ 4,849 $ 207 $ 114 $ --
Net profits interests and
royalty interests .................. -- -- -- 23,460
Interest and other ................... 80 -- -- --
----------- ----------- ----------- -----------
Total revenues .................... 4,929 207 114 23,460
Expenses:
Production expenses .................. 3,183 54 24 --
Depreciation, depletion and
amortization ....................... 1,340 -- -- --
General and administrative ........... 1,646 -- -- --
Interest and financing
costs .............................. 898 -- -- --
----------- ----------- ----------- -----------
Total expenses ....................... 7,067 54 24 --
Net income (loss) before
income taxes ......................... (2,138) 153 90 23,460
Income taxes ........................... -- -- -- --
----------- ----------- ----------- -----------
Net income (loss) ...................... $ (2,138) $ 153 $ 90 $ 23,460
=========== =========== =========== ===========
Net income (loss)
per common share: Basic............... $ (0.09)
===========
Shares used in computing
net income (loss) per
common share: Basic................... 23,611
===========
PRO FORMA
PRO FORMA PRO FORMA PRO FORMA
FOR THE FOR THE FOR THE
PROPERTY PROPERTY PROPERTY
ACQUISITIONS ACQUISITIONS OFFERINGS OFFERINGS
------------ ------------ -------- ---------
Oil and natural gas sales ......... $ -- $ 5,170 $ -- $ 5,170
Net profits interests and
royalty interests ............... -- 23,460 -- 23,460
Interest and other ................ -- 80 -- 80
-------- -------- -------- --------
Total revenues .................... -- 28,710 -- 28,710
Expenses:
Production expenses ............... -- 3,261 -- 3,261
Depreciation, depletion and
amortization .................... 9,990(7) 11,330 -- 11,330
General and administrative ........ 525(8) 2,171 -- 2,171
41(9) (10,483)(13)
Interest and financing 10,376(10) 11,719(14)
costs ........................... 360(11) 11,675 570(15) 13,481
-------- -------- -------- --------
Total expenses .................... 21,292 28,437 1,806 30,243
Net income (loss) before
income taxes .................. (21,292) 273 (1,806) (1,533)
Income taxes ...................... 96(12) 96 (96)(16) --
-------- -------- -------- --------
Net income (loss) ................. $(21,388) $ 177 $ (1,710) $ (1,533)
======== ======== ======== ========
Net income (loss)
per common share: Basic.......... $ (0.05)
========
Shares used in computing
net income (loss) per
common share: Basic.............. 30,113
========
</TABLE>
See accompanying notes to the unaudited pro forma
condensed consolidated financial statements.
48
<PAGE> 50
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE A -- GENERAL
On August 1, 1997, (with an effective date of February 1, 1997) the
Company acquired the Collins and Ware Properties. The adjusted purchase price
consisted of cash of approximately $6.0 million and 1,000,000 shares of the
Company's Common Stock. The cash portion of this acquisition was funded through
borrowings made under the Credit Agreement with Bank of Montreal.
On March 9, 1998 (with an effective date of January 1, 1998), the Company
purchased the NASGAS Properties for net cash consideration of $450,000 and
337,500 shares of the Company's Common Stock.
On April 20, 1998, the Company acquired the Morgan Properties for gross
cash consideration of approximately $150.0 million (approximately $133.3 million
after adjustments for net profits interests and royalty interest revenues and
capital expenditures since October 1, 1997, the effective date of the purchase).
The acquisition was financed with borrowings under the Credit Agreement of
approximately $92.0 million and two $30.0 million Bridge Facilities arranged by
Bank of Montreal.
The Company is currently completing the sale of shares of its Common
Stock to certain institutional purchasers for aggregate net proceeds of
approximately $24.0 million.
NOTE B -- UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
The accompanying Unaudited Pro Forma Condensed Consolidated Balance Sheet
has been prepared as if the acquisition of the Morgan Properties and the related
borrowings, the Private Equity Placement and the issuance of the Notes were
consummated on March 31, 1998 and reflects the following adjustments:
(1) To record the acquisition of the Morgan Properties for net consideration
of approximately $133.3 million after adjustments for net profits
interests and royalty interests revenues and capital expenditures since
October 1, 1997, the effective date of the purchase, and the related
borrowings of $152.0 million, including costs of issuance of
approximately $3.5 million, under the Credit Agreement and the Bridge
Facilities. A portion of the borrowings was also used for repayments of
borrowings under the ECT Revolving Credit Agreement.
(2) To adjust the carrying value of proved oil and natural gas properties
pursuant to the full cost method of accounting. Under the full cost
method of accounting, the carrying value of oil and natural gas
properties (net of related deferred taxes) is generally not permitted to
exceed the sum of the present value (10% discount rate) of estimated
future net cash flows from proved reserves, based on current prices and
costs, plus the lower of cost or estimated fair value of unproved
properties (the "full cost ceiling"). Based upon the pro forma combined
supplemental oil and gas reserve and standardized measure information
(See Note E--Unaudited Pro Forma Combined Supplemental Oil and Natural
Gas Reserve and Standardized Measure Information) and the net purchase
price of the Morgan Properties of $133.3 million, the amount of the full
cost pool would be in excess of the full cost ceiling by approximately
$21.0 million, which would require a writedown that would be included in
the results of operations in the period in which the acquisition is
completed. The amount of the writedown, if any, which will be recorded
will be largely dependent upon the prevailing market prices of oil and
natural gas at June 30, 1998.
(3) To record the issuance of approximately 3,428,000 shares of Common Stock
at $7.00 per share, net of costs of issuance and the issuance of
3,074,236 shares of Common Stock pursuant to exercise of warrants and
rights for net proceeds of approximately $6.9 million.
(4) To record the Note Offering, including estimated costs of issuance of
approximately $4.5 million.
(5) To record repayment of borrowings under the Credit Agreement and the
retirement of the Bridge Facilities.
49
<PAGE> 51
(6) To record the unwinding of at least $115.0 million of the Company's
$125.0 million forward LIBOR interest rate swap agreement.
NOTE C -- UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying Unaudited Pro Forma Condensed Consolidated Statements of
Operations have been prepared as if the acquisition of the Collins and Ware,
NASGAS and Morgan Properties, the Private Equity Placement and the Note Offering
were consummated on July 1, 1996.
The results of operations of the NASGAS and Collins and Ware Properties
have been included in the historical results of operations of the Company for
periods subsequent to their respective dates of acquisition.
The unaudited pro forma condensed consolidated statements of operations
reflect the following adjustments:
(7) To record incremental depletion expense of approximately $1.2 million,
$15,000 and $12.0 million, for a total of $13.2 million, for the year
ended June 30, 1997 and $51,000, $9.9 million and $12,000, for a total of
$10.0 million, for the nine months ended March 31, 1998 for the Collins
and Ware, NASGAS and Morgan Properties, respectively.
(8) To record estimated incremental general and administrative expenses
relating to administration of the Morgan Properties. The pro forma
adjustment for the nine months ended March 31, 1998 represents 75% of the
estimated annual incremental expenses of $700,000.
(9) To record interest expense of $495,000 for the twelve months ended June
30, 1997 and $41,000 for the one month ended July 31, 1997 on the
borrowing by the Company of $6.0 million under the Credit Agreement to
finance the acquisition of the Collins and Ware Properties, based on a
8.25% interest rate.
(10) To record interest expense relating to the borrowings by the Company of
$152.0 million under the Credit Agreement and the Bridge Facilities.
Interest on borrowings under the Credit Agreement and the Bridge
Facilities is based on estimated interest rates of 8.125%, 9.6% and
11.6%, respectively. Interest expense on these borrowings will fluctuate
based on changes in LIBOR. The effect of a 1/8th of a percentage point
change in the LIBOR rate would change interest expense by approximately
$190,000 per year.
(11) To record amortization, calculated on a straight line basis, of the
issuance costs of the borrowings under the Credit Agreement and the
Bridge Facilities.
(12) To record a provision for income taxes for the changes in financial
taxable income as a result of the acquisitions and the effects of entries
(7), (8), (9), (10) and (11). This does not consider the effects of
existing net operating loss carryforwards or tax credits available to the
Company.
(13) To adjust interest expense to reflect the repayment of borrowings under
the Company's existing Credit Agreement and the retirement of the Bridge
Facilities used to finance the acquisition of the Morgan Properties.
(14) To record interest expense for Notes issued in the Note Offering, based
on a 12.5% interest rate.
(15) To record amortization, calculated on a straight line basis, of the
issuance costs of the Note Offering and the costs of unwinding the LIBOR
swap agreement.
(16) To record a provision for income taxes for the changes in financial
taxable income as a result of entries (13), (14), and (15). This does not
consider the effects of existing net operating loss carryforwards or tax
credits available to the Company.
50
<PAGE> 52
NOTE D -- UNAUDITED PRO FORMA NET INCOME (LOSS) PER COMMON SHARE
The unaudited pro forma basic net income (loss) per common share is
computed by dividing pro forma net income by the weighted average number of
common shares of the Company outstanding during the period adjusted for the
number of common shares issued in the Private Equity Placement and the Collins
and Ware and NASGAS Property Acquisitions, as if such shares were outstanding
during the entire period. Unaudited pro forma diluted net income (loss) per
common share is computed by dividing pro forma net income by the number of
shares used in the basic calculation, as adjusted for the dilutive effect of
stock options and warrants of the Company outstanding during the period.
NOTE E -- UNAUDITED PRO FORMA COMBINED SUPPLEMENTAL OIL AND NATURAL GAS RESERVE
AND STANDARDIZED MEASURE INFORMATION
RESERVE QUANTITY INFORMATION
The following table presents the Company's pro forma estimate of proved
oil and natural gas reserves at March 31, 1998. The Company emphasizes that
reserve estimates are inherently imprecise and that estimates of new discoveries
are more imprecise than those of producing oil and natural gas properties.
Accordingly, the estimates are expected to change as future information becomes
available. The data have been derived from estimates prepared by independent
petroleum reservoir engineers.
<TABLE>
<CAPTION>
OIL NATURAL
(BBLS) GAS(MCF)
------ --------
(IN THOUSANDS)
<S> <C> <C>
Proved reserves 10,481 177,979
Proved developed reserves 5,342 120,749
</TABLE>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL
AND NATURAL GAS RESERVES
The Standardized Measure of Discounted Future Net Cash Flows Relating to
Proved Oil and Gas Reserves ("Standardized Measure") is a disclosure requirement
under Statement of Financial Accounting Standards No. 69.
The pro forma Standardized Measure does not purport to be, nor should it
be interpreted to present, the pro forma fair value of the oil and natural gas
reserves of the Company. An estimate of fair value would also take into account,
among other things, the recovery of reserves not presently classified as proved,
the value of unproved properties, and consideration of expected future economic
and operating conditions.
Under the Standardized Measure, future cash flows are estimated by
applying period-end prices, adjusted for fixed and determinable escalations, to
the estimated future production of year-end proved reserves. Future cash flows
are reduced by estimated future production costs, based on period-end costs,
projected future development costs and projected future income taxes to
determine net cash inflows. Future net cash flows are discounted using a 10%
annual discount rate to arrive at the Standardized Measure.
The pro forma Standardized Measure of discounted future net cash flows
relating to proved oil and natural gas reserves of the Morgan Properties at
March 31, 1998 follows:
<TABLE>
(THOUSANDS)
<S> <C>
Future cash inflows ........................... $ 576,301
Future costs and expenses:
Production expenses ......................... (202,087)
Development expenses ........................ (39,531)
Income taxes ................................ (59,101)
------------
Future net cash flows ......................... 275,582
10% annual discount ........................... (132,866)
------------
Standardized Measure .......................... $ 142,716
============
</TABLE>
51
<PAGE> 53
Estimates of economically recoverable oil and natural gas reserves and of
future net revenues are based upon a number of variable factors and assumptions,
all of which are to some degree speculative and may vary considerably from
actual results. Therefore, actual production, revenues, taxes, development and
operating expenditures may not occur as estimated. The reserve data are
estimates only, are subject to many uncertainties and are based on data gained
from production histories and on assumptions as to geologic formations and other
matters. Actual quantities of natural gas and oil may differ materially from the
amounts estimated.
52
<PAGE> 54
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is an independent energy company which emphasizes growth in
oil and natural gas reserves and production volumes through the acquisition,
exploitation and development of on-shore oil and natural gas properties located
in the United States.
The Company's strategy is to increase its reserves, production, earnings,
cash flow and net asset value by (i) acquiring strategic oil and natural gas
properties in a disciplined manner, (ii) developing, exploiting and exploring
its properties, (iii) achieving low operating costs and (iv) maintaining
financial flexibility.
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 acquiror (reverse acquisition). The historical financial
statements of the Company prior to March 6, 1995 are those of QSRn, which have
been retroactively restated for the equivalent number of shares received in the
reverse acquisition. QSRn was formed on August 9, 1994. Prior to the March 6,
1995 acquisition of QSRn, the Company had no material operations.
The Company uses the full cost method of accounting for its investment in
oil and natural gas properties. Under the full cost method of accounting, all
costs of acquisition, exploration and development of oil and natural gas
reserves are capitalized into a "full cost pool" as incurred, and properties in
the pool are depleted and charged to operations using the unit-of-production
method based on the ratio of current production to total proved oil and natural
gas reserves. To the extent that such capitalized costs (net of accumulated
depreciation, depletion and amortization) less deferred taxes exceed the SEC
PV-10 of estimated future net cash flow from proved reserves of oil and natural
gas, and the lower of cost or fair value of unproved properties after income tax
effects, such excess costs are charged to operations. Once incurred, a
write-down of oil and natural gas properties is not reversible at a later date
even if oil or natural gas prices increase. Significant downward revisions of
quantity estimates or declines in oil and natural gas prices from those in
effect on December 31, 1997 which are not offset by other facts could result in
a write-down for impairment of oil and natural gas properties. See "Risk Factors
- -- Financial Reporting Impact of Full Cost Method of Accounting."
The Company has experienced significant growth in reserves, production,
revenue and cash flow since commencing operations. "Management's Discussion and
Analysis of Financial Condition and Results of Operations" should be read in
conjunction with the Consolidated Financial Statements of the Company and the
notes thereto, as well as the "Unaudited Pro Forma Condensed Consolidated
Financial Statements" and the notes thereto, included elsewhere in this
Prospectus. Neither the historical results nor the pro forma results are
necessarily indicative of the Company's future operations or financial results.
RESULTS OF OPERATIONS
Comparison of the Nine Month Periods Ended March 31, 1998 and 1997
Revenues. The Company's total revenues rose by $1.8 million (56%) to $4.9
million for the nine months ended March 31, 1998, from $3.1 million for the
comparable period in 1997. This increase is a result of an increase in
production offset by a decrease in selling prices.
The Company produced 184,562 barrels of oil during the nine months ended
March 31, 1998, an increase of 83,951 Bbls (83%) over the 100,611 Bbls produced
during the comparable period in 1997. This increase was comprised of a decrease
of 13,150 Bbls (17%) from the properties that the Company owned during both
periods and an increase of 97,101 Bbls from the properties acquired during the
period from April 1, 1997 to March 31, 1998. The decrease in production of oil
from the properties owned during the comparative nine months is primarily a
reflection of natural depletion of the oil producing reservoirs, and the
temporary loss of production from certain properties due to workovers during the
nine months ended March 31, 1998.
53
<PAGE> 55
The Company produced 736,058 Mcf of natural gas during the nine months
ended March 31, 1998, an increase of 369,876 Mcf (101%) over the 366,182 Mcf
produced during the comparable period in 1997. This increase was comprised of an
increase of 53,569 Mcf (18%) from the properties the Company owned during both
periods and an increase of 316,307 Mcf from the properties acquired during the
period from April 1, 1997 to March 31, 1998. The increase in production from the
properties owned during the comparative nine months is a result of the
successful drilling of four wells and the workover of certain producing and
non-producing wells, offset by the natural depletion of the natural gas
producing reservoirs.
The average selling price of oil was $17.19 per Bbl for the nine months
ended March 31, 1998, compared to $21.91 per Bbl in the comparable period in
1997. This decrease of $4.72 per Bbl (22%) is a result of general decreases in
oil prices. The average selling price of natural gas was $2.28 per Mcf for the
nine months ended March 31, 1998, compared to $2.49 per Mcf in the comparable
period in 1997. This decrease of $0.21 per Mcf (9%) is a result of general
decreases in natural gas prices during the nine months ended March 31, 1998.
Production Expenses. The Company's LOEs rose to $2.9 million for the nine
months ended March 31, 1998, an increase of $1.4 million (100%) from the
comparable period in 1997. The increase is a combination of the 90% increase in
production and an increase in the LOE per Mcfe. The average LOE per Mcfe was
$1.56 during the nine months ended March 31, 1998, an increase of $0.04 (2%)
over the average LOE per Mcfe of $1.52 for the comparable period in 1997.
Recurring LOEs, those costs incurred in the normal operations of the Company,
were $2.4 million during the nine months ended March 31, 1998, or $1.31 per
Mcfe, as compared to $1.6 million, or $1.65 per Mcfe, during the comparable
period in 1997. This represents a $0.34 per Mcfe (21%) improvement. The Company
believes that this improvement is a result of improved efficiencies at an
operating level and the acquisition of properties with lower average operating
costs per Mcfe than those the Company has owned during the preceding years.
Non-recurring LOEs, which are workover costs incurred to increase production
from existing producing reservoirs and thus are arguably more capital in nature,
but must be treated as expenses under the Commission accounting rules, were
$763,000 ($0.41 per Mcfe) during the nine months ended March 31, 1998, as
compared to only $30,000 ($0.03 per Mcfe) during the comparable period in 1997.
This $733,000 increase in non-recurring LOE's is consistent with the Company's
strategy of redeveloping its properties to increase production, the objective of
which is to increase production and reduce the LOE per Mcfe. The Company
believes that this program will have the desired effect on production and LOEs
over the long term.
Depreciation, Depletion and Amortization Expense. Depreciation, depletion,
and amortization ("DD&A") costs were $1.3 million for the nine months ended
March 31, 1998, an increase of $593,000 (79%) over the $747,000 recognized
during the comparable period in 1997. This increase relates primarily to the 90%
increase in Mcfe produced. The DD&A cost per Mcfe was $0.73 during the nine
months ended March 31, 1998, a decrease of $0.04 per Mcfe (5%) over the $0.77
per Mcfe for the comparable period in 1997. Depletion expense for the nine
months ended March 31, 1998 was $0.68 per Mcfe as compared to $0.70 per Mcfe for
the comparable period in 1997. This decrease of $0.02 per Mcfe (3%) in depletion
expense per Mcfe is primarily the result of a reduction in the expected future
capital costs required to bring the Company's reserves into production. The
depreciation and amortization expense for the nine months ended March 31, 1998
was $0.05 per Mcfe, compared to $0.02 per Mcfe for the comparable period in
1997. This increase is related to the depreciation on the additional office
equipment required to support the increase in operations and the amortization of
the deferred financing costs associated with the ECT Revolving Credit Agreement.
General and Administrative Costs. The general and administrative costs of
the Company were $1.7 million during the nine months ended March 31, 1998, as
compared to $911,000 for the comparable period in 1997. This increase of
$735,000 (81%) consists of an unusually high, one-time expense of $300,000 for
financial public relations services. The Company issued 150,000 shares of its
Common Stock in consideration of these services. After adjusting for this item,
general and administrative expenses rose by $435,000 (48%). On a cost per Mcfe
produced basis, general and administrative expenses were $0.89 per Mcfe, a
decrease of $0.05 per Mcfe (5%) from the $0.94 per Mcfe for the comparable
period in 1996. After adjusting for the unusual Item described above, general
and administrative expenses were only $0.73 per Mcfe.
Interest Expense. The Company incurred interest charges of $899,000 during
the nine months ended March 31, 1998 compared to $656,000 for the comparable
period in 1997. This increase of $243,000 (37%) is a reflection of
54
<PAGE> 56
the increase in the average interest bearing debt of the Company, from $7.0
million for the nine months ended March 31, 1997 to $13.5 million during the
nine months ended March 31, 1998. This increase in the average interest bearing
debt of $6.5 million was used primarily to finance the acquisition of more than
$9.0 million of oil and natural gas producing properties and to fund a $15.0
million deposit for the Morgan Property Acquisition that closed on April 20,
1998.
Comparison of the Years Ended June 30, 1997 and 1996
During the year ended June 30, 1997 operating revenue from oil and natural
gas was $4.4 million. This consisted of 150,546 Bbls of oil, at an average price
per Bbl of $20.73 and 546,282 Mcf of natural gas, at an average price per Mcf of
$2.31. During the year ended June 30, 1996 the Company generated operating
revenue of $2.1 million from oil and natural gas sales. This consisted of
102,536 Bbls of oil, at an average price per barrel of $18.26, and 153,833 Mcf
of natural gas, at an average price per Mcf of $2.43.
The two periods are not readily comparable because of the significant
growth that the Company has experienced since inception. During the year ended
June 30, 1996 the Company owned certain properties that it acquired on April 10,
1996 in East Texas (the "East Texas Properties") for only 81 days compared to a
full 12 months during the year ended June 30, 1997. During the year ended June
30, 1997 the Company produced 20,009 Bbls of oil and 347,656 Mcf of natural gas
from the East Texas Properties, compared to only 4,966 Bbls of oil and 85,457
Mcf of natural gas during the 81 days of the year ended June 30, 1996 that it
owned the East Texas Properties. During the year ended June 30, 1997 the Company
produced 46,569 Bbls of oil and 139,231 Mcf of natural gas from properties that
it acquired during the year ended June 30, 1997. There is no comparable
production from these properties for the year ended June 30, 1996. During the
year ended June 30, 1997 the Company produced 83,968 Bbls of oil and 59,395 Mcf
of natural gas from properties that it also owned throughout the year ended June
30, 1996. The production from these comparable properties during the year ended
June 30, 1996 was 97,570 Bbls of oil and 68,376 Mcf of natural gas. This
decrease in production of 13,602 Bbls (14%) of oil and 8,981 Mcf (13%) of
natural gas is consistent with the annual rate of depletion of the reservoirs
associated with these properties.
Operating costs and expenses for the year ended June 30, 1997 were $5.5
million. Of this total, LOEs were $2.2 million ($1.52 per Mcfe) and DD&A costs
were $982,000 ($0.68 per Mcfe). General and administrative costs for the year
ended June 30, 1997 were $1.5 million ($0.95 per Mcfe), interest charges were
$878,000 ($0.57 per Mcfe) and the Company recorded gains on changes in foreign
exchange rates of $300,000. Additionally, the Company incurred an extraordinary
loss of $171,000 when it renegotiated the terms of two notes payable pursuant to
the Credit Agreement. Operating costs and expenses for the year ended June 30,
1996 were $3.3 million. Of this total, LOEs were $1.2 million ($1.53 per Mcfe)
and DD&A costs were $630,000 ($0.82 per Mcfe). General and administrative
expenses for the year were $1.1 million ($1.45 per Mcfe). Interest and financing
charges during the year were $421,000 ($0.55 per Mcfe). The Company generated
$10,000 in interest income and $62,000 in unrealized gains in foreign exchange.
The increase in LOEs is a result of the increase in production over the
comparative periods. When LOEs are compared on a cost per Mcfe basis, the cost
of producing a Mcfe decreased by $0.01 per Mcfe (0.6%). The decrease per Mcfe is
the result of lower LOEs per Mcfe for properties acquired during the year offset
by higher LOEs per Mcfe arising from the significant workover expenses on
properties acquired during the period from August 9, 1994 (inception) to June
30, 1995 and the reduced production related to the depletion of some of those
properties. The increase in depletion, depreciation and amortization costs is a
result of the increased volume of crude oil and natural gas produced by the
Company. On a cost per Mcfe of reserves, the DD&A costs declined by $0.14 per
Mcfe (17%). This decrease in DD&A is primarily a result of a revision to the
Company's proposed future development program for its crude oil producing
properties in New Mexico. The increase of $339,000 of general and administrative
expenses is a result of the increased management support requirements of the
Company, particularly in light of the amount of time and effort expended in
closing the JEDI transaction. As a function of Mcfe produced, the general and
administrative expenses for the year ended June 30, 1997 decreased by $0.50 per
Mcfe (34%). This decline in general and administrative expenses as a function of
the Mcfe produced is consistent with expectations. The Company believes that its
general and administrative infrastructure is capable of servicing a
significantly larger revenue base than that which was in place at June 30, 1997.
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Comparison of the Year Ended June 30, 1996 to the period from August 9, 1994
(Inception) to June 30, 1995
During the year ended June 30, 1996 operating revenue from oil and natural
gas was $2.1 million. This consisted of 102,536 Bbls of oil, at an average price
per Bbl of $18.26, and 153,833 Mcf of natural gas, at an average price per Mcf
of $2.43. During the period from August 9, 1994 (inception) to June 30, 1995 the
Company generated operating revenue of $435,000 from oil and natural gas. This
consisted of 25,839 Bbls of oil, at an average price per Bbl of $16.52, and
4,678 Mcf of natural gas, at an average price per Mcf of $1.65.
The two periods are not readily comparable because of the significant
growth that the Company has experienced since inception. During the period from
August 9, 1994 (inception) to June 30, 1995 the Company held significant
production interests effectively only for the last quarter (April, May and June
1995). Thus, virtually all of the 25,839 Bbls of oil and 4,678 Mcf of natural
gas produced by the Company during the year ended June 30, 1995 were generated
over a three month period. During the year ended June 30, 1996 these same
properties produced 97,570 Bbls of oil and 68,376 Mcf of natural gas. In
addition, the Company acquired the properties comprising the purchase of the
East Texas Properties on April 10, 1996. During the period April 10 to June 30,
1996 these properties produced 4,966 Bbls of oil and 85,457 Mcf of natural gas.
Since these East Texas Properties were not owned by the Company during the
period August 9, 1994 (inception) to June 30, 1995 there is no comparable
production for that period.
Operating costs and expenses for the year ended June 30, 1996 were $3.3
million. Of this total, lease operating costs were $1.1 million ($1.53 per Mcfe)
and depletion, depreciation and amortization costs were $630,000. General and
administrative expenses for the year were $1.1 million. Interest and financing
charges during the year were $421,000. The Company generated a further $10,000
in interest income and $62,000 in unrealized gains in foreign exchange.
Operating costs and expenses for the period from August 9, 1994 (inception) to
June 30, 1995 were $1.1 million. Of this total, lease operating costs were
$280,000 ($1.75 per Mcfe) and DD&A costs were $132,000. General and
administrative expenses for the year were $294,000, with a further $401,000
associated with the March 6, 1995 reverse acquisition of the Company. Interest
charges during the year were $25,000.
Since inception the Company has directed its efforts at acquiring and
developing oil and natural gas producing properties. This type of activity
requires a general and administrative infrastructure that is more extensive and
more expensive than that required by an organization that is not as
growth-oriented as the Company. At the same time, the Company believes that its
general and administrative infrastructure is capable of servicing a
significantly larger revenue base than that which was in place at June 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
General
Consistent with the Company's strategy of acquiring and developing
reserves, the Company has an objective of maintaining as much financing
flexibility as is practicable. Since the Company commenced its oil and natural
gas operations, the Company has utilized a variety of sources of capital to fund
its acquisitions and development and exploitation programs, and to fund its
operations.
The Company's general financial strategy is to use cash flow from
operations, debt financings and the issuance of equity securities to service
interest on the Company's indebtedness, to pay ongoing operating expenses, and
to contribute limited amounts toward further development of the Company's
existing proved reserves as well as additional acquisitions. There can be no
assurance that cash from operations will be sufficient in the future to cover
all such purposes.
The Company has planned development and exploitation activities for all of
its major operating areas. In addition, the Company is continuing to evaluate
oil and natural gas properties for future acquisition. Historically, the Company
has used the proceeds from the sale of its securities in the private equity
market and borrowings under its credit facilities to raise cash to fund
acquisitions or repay indebtedness incurred for acquisitions, and the Company
has also used its securities as a medium of exchange for other companies' assets
in connection with acquisitions. However, there can be no assurance that such
funds will be available to the Company to meet its budgeted capital
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spending. Furthermore, the Company's ability to borrow other than under the
Credit Agreement is subject to restrictions imposed by such Credit Agreement. If
the Company cannot secure additional funds for its planned development and
exploitation activities, then the Company will be required to delay or reduce
substantially both of such activities.
Sources of Capital
The Company's principal sources of capital for funding its business
activities have been cash flow from operations, debt financings and the issuance
of equity securities.
The Company's sources of funds from debt financings include funds
available under the Credit Agreement, the ECT Revolving Credit Agreement,
certain bonds issued to certain European investors and a capital lease. The
Credit Agreement provides for borrowings up to $125.0 million, subject to
borrowing base limitations (currently $96.0 million), to among other things,
fund development and exploitation expenditures, acquisitions and general working
capital. As of July 31, 1998, the Company believes it would be able to borrow up
to approximately $25.0 million (of which approximately $10.3 million is
outstanding) under the Credit Agreement. Effective December 29, 1997, the
Company established the ECT Revolving Credit Agreement with ECT, as a lender and
as agent for the lenders thereto, to fund up to $10.0 million for capital costs
incurred with future development projects and to fund further acquisitions. The
ECT Revolving Credit Agreement is subordinate to the Credit Agreement. See
"Description of Other Indebtedness."
In April 1998, the Company entered into certain debt and equity bridge
facilities (the "Bridge Facilities") with Bank of Montreal, Enron and an
affiliate of Enron (collectively, the "Bridge Purchasers") to provide financing
to complete the Morgan Acquisition. Pursuant to the Bridge Facilities, the
Company issued notes and warrants (the "Bridge Warrants") to purchase shares of
Common Stock. The Company used the proceeds of the Offerings and borrowings
under the Credit Agreement to repay all indebtedness outstanding under the
Bridge Facilities, whereupon the Bridge Facilities were retired and the Bridge
Warrants terminated. See "Use of Proceeds."
As of July 31, 1998 the Company had issued to investors in Europe
Deutschemark denominated (DEM) 12% Bonds (the "12% Bonds") totaling DEM 1.6
million ($.9 million). Under Regulation S of the Securities Act, the Company is
prohibited from selling these Bonds to U.S. persons (as defined in Regulation
S). In January 1998 the Company discontinued its efforts to sell any additional
12% Bonds. The Company is obligated 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. All interest payments have been paid in full at the time
they came due. The funds generated by the Company from operations, which Form
the primary source of funds to pay the interest, are denominated in $US. 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
amount 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. At July 31, 1998 the Company had recorded unrealized exchange rate
gains of approximately $141,000 (at June 30, 1997 $300,000). However, there are
no assurances that the Company will continue to realize gains related to
favorable changes in the DEM:$US exchange rates in the future. Unfavorable
changes to the DEM:$US exchange rate will result in the Company recording
unrealized exchange rate losses related to the changes as they occur. The
Company believes it has the opportunity to enter into arrangements to manage its
DEM:$US exchange rate risk. At this time, the Company has not entered into any
such arrangements.
The Company has issued both preferred stock and Common Stock for cash to
raise equity to finance the working capital of the Company, to repay existing
indebtedness and to fund acquisitions. In December 1997 the Company raised $10.0
million of gross proceeds through a private institutional placement of preferred
stock. Since July 1, 1997 the Company has also received approximately $_____
million of cash proceeds from the exercise of previously issued warrants and the
exercise of certain anti-dilution rights of JEDI. In addition, the Company has
also issued Common Stock as partial consideration when acquiring oil and natural
gas producing properties.
The Company does not have sufficient liquidity or capital to undertake
significant potential acquisition prospects. Therefore, the Company will
continue to be dependent on raising substantial amounts of additional capital
through
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any one or a combination of institutional or bank debt financing, equity
offerings, debt offerings and internally generated cash flow, or by forming
sharing arrangements with industry participants. Although the Company has been
able to obtain such financings and to enter into such sharing arrangements in
certain of its projects to date, there can be no assurance that it will continue
to be able to do so. Alternatively, the Company may consider issuing additional
securities in exchange for producing properties. There can be no assurance that
any such financings or sharing arrangement can be obtained. Therefore,
notwithstanding the Company's need for substantial amounts of additional
capital, there can be no assurance that it can be obtained.
Further acquisitions and development activities in addition to those for
which the Company is contractually obligated are discretionary and depend
exclusively on cash availability from outside sources such as bank debt and the
sale of securities or properties.
Uses of Capital
Since commencing its oil and natural gas operations in August 1994 the
Company has completed 19 acquisitions of oil and natural gas producing
properties. Through May 31, 1998, the Company had expended a total of $173.5
million in acquiring, developing and exploiting oil and natural gas producing
properties. Initially, the operations of the Company represented a net use of
funds. As demonstrated in the pro forma operating results for the nine months
ended March 31, 1998 and the year ended June 30, 1997, the Company generates a
positive cash flow from operations. The Company expects to spend $26.2 million
on capital expenditures through June 1999 for exploitation and development
projects.
INFLATION
During the past several years, the Company has experienced some inflation
in oil and natural gas prices with moderate increases in property acquisition
and development costs. During 1997, the Company received somewhat higher
commodity prices for the natural resources produced from its properties. The
results of operations and cash flow of the Company have been, and will continue
to be, affected to a certain extent by the volatility in oil and natural gas
prices. Should the Company experience a significant increase in oil and natural
gas prices that is sustained over a prolonged period, it would expect that there
would also be a corresponding increase in oil and natural gas finding costs,
lease acquisition costs, and operating expenses.
CHANGES IN PRICES AND HEDGING ACTIVITIES
Annual average oil and natural gas prices have fluctuated significantly
over the past three years. The Company's weighted average price per Bbl and the
weighted average price per Mcf during the fiscal year ended June 30, 1997 was
$20.73. For the year ended June 30, 1997, the Company averaged $1.56 per Bbl
less and $0.14 per Mcf less for its oil and natural gas sales, respectively,
than the average NYMEX prices for the same period. The Company's weighted
average price per Bbl during the fiscal year ended June 30, 1996 and at June 30,
1996, was $18.26 and $2.43, respectively. For the year ended June 30, 1996, the
Company averaged $1.00 per Bbl less for its oil and $0.04 per Mcf for its
natural gas sales than the average NYMEX prices for the same period.
The Company has a commodity price risk management (hedging) strategy that
is designed to provide protection from low commodity prices while providing some
opportunity to enjoy the benefits of higher commodity prices. On April 25, 1998
the Company entered into a series of natural gas futures contracts with Bank of
Montreal and with an affiliate of Enron. This strategy is designed to provide a
degree of protection of negative shifts in natural gas prices (Henry Hub Nymex
Index) on approximately 75% of its expected natural gas production from reserves
currently classified as proved developed producing during the fiscal year ending
June 30, 1999. At the same time, the Company is able to participate completely
in upward movements in the Henry Hub Nymex Index to the extent of approximately
50% of its expected natural gas production for the fiscal year ending June 30,
1999, and up to $2.75 per MMBtu on approximately 25% of its expected natural gas
production for the fiscal year ended June 30, 1999. The Company did not enter
into any hedging contracts related to crude oil prices. At such time as the
price of WTI Nymex increases the Company will consider entering into futures
agreements that will accomplish the same objectives as that of the natural gas
hedging strategy.
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In addition to the natural gas contracts entered into on April 25, 1998,
the Company is under contract with an affiliate of Enron for 10,000 Bbls of oil
per month with a floor of $18.00 per Bbl and a ceiling of $20.40 per Bbl with
the Company participating on 50% of the price of WTI Nymex over $20.40. The
Company also has a contract for 50,000 MMBtu of natural gas per month with an
affiliate of Enron, with a floor price of $1.90 per MMBtu and a ceiling price of
$2.66 per MMBtu, with the Company participating on 50% of the price of Henry Hub
Nymex Index over $2.66 per MMBtu.
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 the expected natural gas production from its PDPs into
a swap at $2.40 per MMBtu. Ten percent of the Company's expected PDP was hedged
in a contract with a floor of $1.90 per MMBtu. The Company also hedged 40% of
its expected PDP with a series of non-participating collars with ceilings that
escalate from $2.70 per MMBtu to $2.90 per MMBtu 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.
The table below sets out volume of natural gas hedged with a floor price
of $1.90 per MMBtu with Enron. The volumes presented in this table are divided
equally over the months during the period:
<TABLE>
<CAPTION>
VOLUME
PERIOD BEGINNING PERIOD ENDING (MMBTU)
- ---------------------------------------- ----------------- ---------
<S> <C> <C>
May 1, 1998 ............................ December 31, 1998 885,000
January 1, 1999 ........................ December 31, 1999 1,080,000
January 1, 2000 ........................ December 31, 2000 880,000
January 1, 2001 ........................ December 31, 2001 740,000
January 1, 2002 ........................ December 31, 2002 640,000
January 1, 2003 ........................ December 31, 2003 560,000
</TABLE>
The table below sets out volume of natural gas hedged with a swap at $2.40
per MMBtu with Enron. The volumes presented in this table are divided equally
over the months during the period:
<TABLE>
<CAPTION>
VOLUME
PERIOD BEGINNING PERIOD ENDING (MMBTU)
- ---------------------------------------- ----------------- ---------
<S> <C> <C>
May 1, 1998 ............................ December 31, 1998 2,210,000
January 1, 1999 ........................ December 31, 1999 2,710,000
January 1, 2000 ........................ December 31, 2000 2,200,000
January 1, 2001 ........................ December 31, 2001 1,850,000
January 1, 2002 ........................ December 31, 2002 1,600,000
January 1, 2003 ........................ December 31, 2003 1,400,000
</TABLE>
Effective May 1, 1998 through December 31, 2003 the Company has a contract
involving the hedging of a portion of its future natural gas production
involving floor and ceiling prices as set out in the table below. The volumes
presented in this table are divided equally over the months during the period.
<TABLE>
<CAPTION>
VOLUME FLOOR CEILING
PERIOD BEGINNING PERIOD ENDING (MMBTU) PRICE PRICE
- ---------------------------------------- ----------------- --------- ------- ---------
<S> <C> <C> <C> <C>
May 1, 1998 ............................ December 31, 1998 3,540,000 $ 2.00 $ 2.70
January 1, 1999 ........................ December 31, 1999 4,330,000 2.00 2.70
January 1, 2000 ........................ December 31, 2000 3,520,000 2.00 2.70
January 1, 2001 ........................ April 30, 2001 990,000 2.00 2.70
May 1, 2001 ............................ December 31, 2001 1,980,000 2.00 2.80
January 1, 2002 ........................ April 30, 2002 850,000 2.00 2.80
May 1, 2002 ............................ December 31, 2002 1,700,000 2.00 2.90
January 1, 2003 ........................ December 31, 2003 2,250,000 2.00 2.90
</TABLE>
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INTEREST RATE HEDGING
The Company entered into a forward LIBOR interest rate swap effective for
the period June 30, 1998 through June 29, 2009 at a rate of 6.30% on $125.0
million. This financial instrument can be unwound at any time at the option of
the Company. On July 9, 1998, the Company unwound this swap concurrent with the
closing of these Offerings at an estimated cost to the Company of approximately
$3.5 million with borrowings drawn under the Credit Agreement.
YEAR 2000 COMPUTER ISSUE
The Company's management has conducted a review of its information systems
and related data-processing activities to assess its exposure to the Year 2000
issue.
The Company currently uses Year 2000 compliant accounting software and
engineering evaluation software for acquisition analysis, as well as internal
engineering applications. The Company's spreadsheet and word processing software
is also Year 2000 compliant.
The Company has potential Year 2000 exposure with regard to its third
party relationships and services including its bank and bank accounts and other
vendor and/or service providers who utilize computers. Though the Company has no
control over Year 2000 compliance implementation by these parties, the Company
has inquired and been advised that all of the Company's material service
providers are currently or will be Year 2000 compliant.
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BUSINESS
GENERAL
Queen Sand Resources is an independent energy company which emphasizes
growth in oil and natural gas reserves and production volumes through the
acquisition, exploitation and development of on-shore oil and natural gas
properties located in the United States. Since August 1994, the Company has
grown primarily through 19 acquisitions of oil and natural gas properties for
aggregate consideration of approximately $160.0 million. As a result of the
Company's activities to date, it has assembled a geographically and geologically
diverse property base, characterized by long-lived production and multiple
opportunities for further development, exploitation and exploration. For the
nine months ended March 31, 1998, on a pro forma basis, the Company had revenues
of $28.7 million and EBITDA of $23.3 million. As of July 31, 1998, the officers
and directors of the Company collectively owned or had a proxy for approximately
26.6% of the Company's undiluted voting capital stock, and JEDI, an affiliate
of Enron, held approximately 30.3% of the Company's undiluted voting capital
stock.
The Company's objective is to increase its reserves, production, earnings,
cash flow and net asset value through a growth strategy that seeks to maintain a
diversified portfolio of oil and natural gas reserves with stable production and
operating characteristics. The Company seeks to achieve this objective through a
balanced mix of oil and natural gas property acquisitions coupled with the
development and exploitation of its reserve base. The Company evaluates
potential acquisition properties based on their particular impact upon the
Company's portfolio of reserves. The Company focuses on low reserve replacement
costs, long reserve life, an inventory of attractive development and
exploitation projects, and the potential for reserve and production growth. For
instance, in the April 1998 Morgan Property Acquisition, the Company acquired
certain oil and natural gas property interests representing proved reserves of
149.5 Bcfe, of which 76% was classified as proved developed producing. This
acquisition provided the Company with stable, long-lived production and cash
flow to develop and exploit its inventory of non-producing reserves. In the
March 1998 NASGAS Property Acquisition, the Company acquired certain natural gas
properties with attractive development potential and approximately 36.8 Bcfe of
proved reserves, of which 91% was classified as non-producing. The Company
intends to fully develop these reserves by drilling primarily low-risk
development wells. In aggregate, the Company has currently identified over [234]
potential development and exploitation drilling locations on its properties. The
Company currently plans to spend approximately $26.2 million through June 30,
1999 to further develop and exploit its existing properties.
At December 31, 1997, on a pro forma basis, the Company had interests in
999 wells (inclusive of 67 service wells), proved reserves of 181.7 Bcf of
natural gas and 10.7 MMBbls of oil (aggregating approximately 245.6 Bcfe) with a
SEC PV-10 of $174.6 million, and a Reserve Life Index of 13.3 years.
Approximately 53% of the Company's reserves was classified as proved developed
producing and approximately 74% of the Company's total proved reserves was
natural gas. The Company's average daily net production was 49.1 MMcfe on a pro
forma basis for the month of December 1997. For the month of March 1998, the
Company's average daily net production, on a pro forma basis, increased to 52.2
MMcfe.
The Company's properties are diversified across 114 producing fields which
are located principally in the southwestern United States. The Company's
interests in the Gilmer Field in East Texas, the J.C. Martin and the
Lopeno/Volpe Fields in South Texas, and the Caprock Field in New Mexico
represent approximately 58% of its pro forma proved reserves (on a SEC PV-10
basis). In addition, the Company has substantial operations in Oklahoma,
Kentucky and Louisiana. At December 31, 1997, on a pro forma basis, the Company
held interests in leases covering approximately 259,000 gross (121,000 net)
acres.
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. The Company operates its business through
three subsidiaries, QSRn, Northland Operating Co., a Nevada corporation
("Northland"), and Corrida Resources, Inc., a Nevada corporation ("Corrida").
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
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a recapitalization of QSRn with QSRn as the acquiror (reverse acquisition). 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.
BUSINESS STRATEGY
The Company's strategy is to increase its reserves, production, earnings,
cash flow and net asset value by (i) acquiring strategic oil and natural gas
properties in a disciplined manner, (ii) developing, exploiting and exploring
its properties, (iii) achieving low operating costs and (iv) maintaining
financial flexibility.
o Strategic Acquisitions. The Company has a successful track record
of increasing its reserves through acquisitions, having added an
estimated 257.4 Bcfe of proved reserves from 19 acquisitions for
aggregate consideration of $160.0 million or $0.62 per Mcfe since
commencing operations in August 1994 through the date of this
Prospectus. The Company seeks to expand its diversified,
long-lived portfolio of oil and natural gas properties by
acquiring producing properties with (i) identified development and
exploitation potential, (ii) controlled-risk exploration
potential, (iii) historically low operating expenses, or the
opportunity to reduce operating expenses, and (iv) geological,
geophysical and other technical and operating characteristics with
which management of the Company has expertise. The Company applies
strict economic and reserve risk criteria in evaluating
acquisitions of oil and natural gas properties.
o Development, Exploitation and Exploration. The Company seeks to
maximize the value and cash flow of its oil and natural gas
properties through development drilling, workovers, recompletions,
enhanced recovery techniques and reductions in operating costs.
The Company has identified over 234 potential development and
exploitation locations on its existing portfolio of properties.
The Company currently plans to spend approximately $21.4 million
to drill or participate in the drilling of approximately 160 wells
through June 30, 1999. The Company also continually evaluates and
pursues exploitation opportunities, including workover and
recompletion projects. The Company expects to spend approximately
$4.8 million on these exploitation projects through June 30, 1999.
Although the Company could increase its exploration drilling
activity in the future, its current strategy includes only limited
investments in exploratory projects.
o Low Operating Costs. The Company's goal is to achieve a lower
operating expense on a per unit (Mcfe) basis than that of its
peers. The Company is pursuing this objective by emphasizing cost
controls in its field operating expenses and acquiring properties
with low operating costs while increasing existing production
through development drilling and effective workover and well
maintenance programs. Through these efforts, the Company has
reduced lease operating expenses to $0.57 per Mcfe for the nine
months ending March 31, 1998 on a pro forma basis.
o Financial Flexibility. The Company is committed to maintaining
financial flexibility, which management believes is important for
the successful implementation of its growth strategy. In
implementing this strategy, the Company intends to continue using
a mixture of debt and equity. Consistent with this financial
strategy, the Company raised an aggregate of approximately $65.2
million in equity capital from August 9, 1994 through June 30,
1998. On July 8, 1998 and July 20, 1998 the Company issued an
aggregate of 3,428,574 shares of Common Stock for $24 million cash
and two holders of warrants exercised their warrants and certain
maintenance rights to purchase an aggregate of 3,074,236 shares of
stock for an aggregate exercise and purchase price of $8.5
million. As of July 31, 1998, the Company had approximately $14.7
million available under its Credit Agreement and $10.0 million
available under the ECT Revolving Credit Agreement with ECT. See
"Description of Other Indebtedness." In general, the Company
strives to maintain a balanced asset/liability management program
by matching long-lived reserves with extended maturity
liabilities. Furthermore, the Company seeks to mitigate the effect
of decreases in commodity prices by utilizing hedging instruments.
The Company has also entered into, and may in the future utilize,
interest rate hedges.
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RECENT PROPERTY ACQUISITIONS
Morgan Property Acquisition
General. On April 20, 1998, the Company acquired various non-operated NPIs
and RIs for gross cash consideration of $150.0 million (net consideration is
currently estimated to be approximately $133.3 million after adjustment for net
profits interests and royalty interests revenues and capital expenditures since
October 1, 1997, the effective date of the purchase) in the Morgan Property
Acquisition from pension funds managed by J.P. Morgan Investments. The Morgan
Property Acquisition was financed with borrowings under the Credit Agreement and
the Bridge Facilities. The Underlying Properties are primarily located in East
Texas, South Texas and the mid-continent region of the United States. According
to Ryder Scott, as of December 31, 1997, the Morgan Properties contained proved
reserves of 124.1 Bcf of natural gas and 3.6 MMBbls of oil (aggregating 145.6
Bcfe), of which approximately 76% was classified as proved developed producing.
The Morgan Properties had a SEC PV-10 of $127.5 million as of December 31, 1997.
The Company estimates that as of the effective date of the Morgan Property
Acquisition, the proved reserves attributed to the Morgan Properties were 149.5
Bcfe.
The Company believes that the Morgan Property Acquisition provides it with
certain benefits, including (i) the enhancement of the Company's portfolio of
high quality reserves with long production histories and low operating costs,
(ii) additional cash flow to fund development and exploitation projects, (iii)
the enhancement of its operational base to grow through further acquisitions,
(iv) significant additional development and exploitation opportunities and (v)
additional geographic core concentration of the Company's existing properties
and operational capabilities. Although the Company did not directly acquire
working interests in the wells located on the Underlying Properties, the Company
believes that its significant interests in certain key Underlying Properties
will enable the Company to influence the timing and manner of development and
exploitation of such key properties. Such influence results from the relatively
large size of the Applicable Percentage in a number of Morgan Properties, and
the desire of the Assignor and/or the operators of particular Underlying
Properties to have the Company pay the Applicable Percentage of the costs of
drilling, completing and equipping new wells or other significant capital
assets; if the Company does not agree to pay such amounts according to the terms
of the Ancillary Agreements, then the Assignor, the operator and/or the other
working interest owners must pay the Applicable Percentage of such costs.
Accordingly, the ability of the Company to select those operations it will
choose to fund gives it significant influence over the development of certain
key Underlying Properties. See "Risk Factors--Nature of the Net Profits
Interests and Royalty Interests."
Form of Property Ownership. The Morgan Properties burden the Underlying
Properties. The Morgan Properties were conveyed to the Company by means of
various Conveyances. Each Conveyance burdens a working interest in a field or
group of fields. Since tax exempt investors such as the pension funds managed by
J.P. Morgan Investments could not own working interests without incurring income
taxes, the NPIs were structured to yield many of the same economic benefits and
burdens as a working interest owner without the liabilities associated with
leasehold ownership. An NPI is an ownership in the gross production of oil,
natural gas or other minerals attributable to the burdened working interest.
Each NPI is created in a particular Conveyance; each Conveyance contains a
description of the procedure for calculating the monthly payments to the
Company. These Conveyances were intended to convey the Morgan Properties as real
property interests under applicable law. See "Risk Factors--Nature of the Net
Profits Interests and Royalty Interests."
The various Assignors of NPIs own the Underlying Properties subject to and
burdened by the NPIs conveyed to the Company. Each Assignor receives all
payments relating to the Underlying Properties and is required to pay to the
Company the portion thereof attributable to the NPI. Under each Conveyance, the
amounts payable with respect to the Morgan Properties are computed and paid
monthly. Each Assignor is entitled to retain any amounts attributable to the
Underlying Properties which are not required to be paid to the Company with
respect to the Morgan Properties.
Similarly, the RIs generally entitle the Company to receive a certain
percentage of all of the proceeds of production sold from the particular
Underlying Property, free and clear of all costs of development and operations,
but subject, in certain situations, to its proportionate share of certain
processing and transportation costs. The RI is calculated and paid to the
Company by either the applicable Assignor, the operator or, in some cases, the
purchaser of production from the applicable Underlying Property.
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In general, the NPIs provide that the monthly cash amount paid for lease
operating expenses, severance and ad valorem taxes, workover costs, overhead per
well, and other identified expenses be subtracted from the production revenue
received by the burdened working interest (the "net profit" or "Net Cash Flow").
While the Company has audit rights with respect to the proper calculation of Net
Cash Flow, the calculation of Net Cash Flow and payment of the NPI is dependent
upon the financial integrity and competence of the Assignors. Each Assignor is
then required to pay a specified percentage of the Net Cash Flow to the Company
along with a summary of the monthly accounting. Should the Net Cash Flow for a
particular month be negative, the working interest owner recoups any deficit
from future Net Cash Flow before resuming payments to the Company. The Company
elects whether or not to participate in new wells, recompletions and other
capital items proposed by the working interest owners. A related document, the
Ancillary Agreement, provides a procedure allowing such elections. If the
Company elects to participate, it pays a percentage of the capital cost to
drill, complete, and equip new wells for production. These capital costs are
invoiced directly to the Company. The NPIs require that Assignor provide all
geologic and economic data necessary to assess new well elections. With this
data, the Company's engineering personnel can develop the technical and
operational understanding of the properties that is necessary to make
suggestions and to influence on-going development activities.
The NPIs are interests in minerals only. The Company does not own any of
the equipment on the leases or the Underlying Properties. Investments in new
wells drilled on the Underlying Properties will likely have to be fully
capitalized and depleted, i.e., there may be no current deductions for
intangible drilling or completion costs.
The owner of the Morgan Properties should not be personally liable for
costs and expenses, losses or damages arising from the extraction of minerals
from the Underlying Properties. In addition, each Conveyance contains a
provision that the owner of the NPI will not be liable for expenses or
liabilities incurred in connection with the operations and provides an indemnity
by the Assignor to the NPI owner against any such cost or liabilities. Although
the NPI owner is not liable for payment of costs, losses or damages described
above, certain of such costs, losses or damages may qualify as a deduction in
calculating Net Cash Flow. However, unlike non-operated working interests, the
NPI owner is not personally liable for these costs, losses or damages. As an
extra measure of protection, the NPI requires that the working interest owner
maintain specified types of insurance and the NPI owner be an additional named
insured on those policies. See also "--Title to Oil and Natural Gas Properties"
and "--Litigation."
NASGAS Property Acquisition
On March 9, 1998 (with an effective date of January 1, 1998), the Company
purchased certain operated natural gas properties in western Kentucky for net
cash consideration of $450,000 and 337,500 shares of the Company's Common Stock.
The acquired properties are comprised of interests in 21 gross wells (12.6 net)
and 61,421 gross acres (36,858 net). According to H.J. Gruy, the proved reserves
attributed to the NASGAS Properties as of December 31, 1997, were 36.8 Bcf, 100%
of which was natural gas, and 9% proved developed producing, with a SEC PV-10 of
$7.4 million. The Company believes the NASGAS Property Acquisition provides it
with certain benefits, including a large inventory of low-cost, low-risk
development drilling opportunities.
Collins and Ware Property Acquisition
On August 1, 1997, the Company purchased certain operated oil and natural
gas properties for cash consideration (net of production subsequent to the
February 1, 1997 effective date) of approximately $6.0 million and 1,000,000
shares of the Company's Common Stock. The acquired properties were comprised of
interests in 77 gross (12.4 net) wells located in New Mexico, Texas and
Oklahoma. According to H.J. Gruy, the proved reserves attributed to the Collins
and Ware Properties as of December 31, 1997, were 6.6 Bcfe, 21% of which was
natural gas, and 73% proved developed producing, with a SEC PV-10 of $7.0
million. The Company estimates that as of February 1, 1997 the proved reserves
attributed to the Collins and Ware Properties were 7.3 Bcfe.
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<PAGE> 66
PRINCIPAL OIL AND NATURAL GAS PROPERTIES
The following table summarizes certain information with respect to each of
the Company's principal areas of operation at December 31, 1997, on a pro forma
basis.
<TABLE>
<CAPTION>
PROVED RESERVES (1)
-----------------------------------------------------------------
TOTAL TOTAL PERCENT
GROSS OIL NATURAL PROVED OF TOTAL SEC PERCENT
AND GAS OIL GAS RESERVES PROVED PV-10 OF TOTAL
WELLS (MBBLS) (MMCF) (BCFE) RESERVES (000S) SEC PV-10
--------- ------ ------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
EAST TEXAS
Gilmer Field ........................ 41 554 63,397 66.7 27.2% $ 54,019 30.9%
Segno Field ......................... 41 701 1,177 5.4 2.2 7,688 4.4
Other ............................... 108 413 17,968 20.4 8.3 16,612 9.6
--- ------ ------- ----- ----- -------- -----
Total East Texas ................. 190 1,668 82,542 92.5 37.7 78,319 44.9
SOUTH TEXAS
J.C. Martin Field ................... 70 0 19,747 19.7 8.1 22,029 12.6
Lopeno and Volpe Fields ............. 13 0 19,816 19.8 8.1 14,292 8.2
Other ............................... 136 171 2,214 3.3 1.2 2,903 1.7
--- ------ ------- ----- ----- -------- -----
Total South Texas ................ 219 171 41,777 42.8 17.4 39,224 22.5
NEW MEXICO
Caprock (Queen) Field ............... 74 5,108 0 30.6 12.5 10,198 5.8
Other ............................... 7 1 4 0.1 0.0 3 0.0
--- ------ ------- ----- ----- -------- -----
Total New Mexico ................. 81 5,109 4 30.7 12.5 10,201 5.8
KENTUCKY (APPALACHIAN BASIN)
Meade Field ......................... 21 0 36,768 36.8 15.0 7,423 4.3
--- ------ ------- ----- ----- -------- -----
OTHER .................................. 421 3,716 2,566 42.8 17.4 39,436 22.5
--- ------ ------- ----- ----- -------- -----
TOTAL .................................. 932 10,664 181,656 245.6 100.0% $174,603 100.0%
=== ====== ======= ===== ===== ======== =====
</TABLE>
- ----------
(1) The proved reserves and SEC PV-10 with respect to the Morgan Properties
were estimated by Ryder Scott. The estimated reserves with respect to the
NASGAS Properties and the Company's historical proved reserves were
estimated by H.J. Gruy.
The following is an overview of the major fields of the Company, by area.
East Texas
Gilmer Field. The Gilmer Field was part of the Morgan Property Acquisition
and consists of 41 natural gas wells that cover approximately 13,000 gross acres
in Upshur County, in East Texas. The wells produce from the Cotton Valley Lime
formation at a depth of approximately 11,500 feet to 12,000 feet.
The Gilmer Field is located on the northwestern flank of the Sabine
Uplift. The initial well in the field was drilled in 1966 and the field was
delineated over the following ten years, eventually expanding to 21 gas units.
The reservoirs are characterized by low permeability, depletion drive mechanisms
and require stimulation.
The Morgan Properties in the Gilmer Field were initially conveyed in 1991
in conjunction with Goldston Oil Corporation and its related entities
("Goldston") and two industry participants. The Company's interest is a 47.5%
NPI in Goldston's working interest in 13 gas units in the heart of the Gilmer
Field. Goldston has an 80% working interest and is operator of the units. Well
spacing is currently four wells per 640 acre block for most of the units in the
field.
At December 31, 1997, the Gilmer Field contained 66.7 Bcfe of proved
reserves, which represented approximately 27% of the Company's total proved
reserves and 31% of the Company's SEC PV-10. The Company's average daily net
production from the Gilmer Field in March 1998 was approximately 14.2 MMcf of
natural gas and 172 Bbls, aggregating 15.3 MMcfe.
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<PAGE> 67
Goldston drilled and completed an infill well in January 1998 which tested
4,000 Mcf/d of natural gas and 40 Bbls/d of oil. Another well was spudded in
March 1998 and was completed in July 1998, testing 2,750 Mcf/d and 81 Bbls/d.
One additional proved undeveloped location remains to be drilled this year which
management believes will fully develop the field on 160 acre spacing.
Fieldwide central compression is scheduled to be installed and operating
in September 1998. Management believes that development of the three wells
discussed above along with central compression will lower gathering system
pressure and will allow the field to sustain a higher production rate through
1998.
Segno Field. The Segno Field consists of 41 producing oil and natural gas
wells that cover approximately 5,000 gross acres in Polk County, Texas and
produce from Yegua and Wilcox sands ranging in depth from 5,200 feet to 8,500
feet. This field was part of the Morgan Property Acquisition and was initially
discovered by Gulf Oil Corporation in 1936. The field was neglected until Lobo
Resources (whose interest was later acquired by Prime Energy) acquired an
interest in 1992 at which time active redevelopment efforts commenced. The
Company's interest is an 80% NPI in Prime Energy's working interest.
Prime Energy has a 100% working interest and operates the field.
At December 31, 1997, the Segno Field had proved reserves of 700.5 MBbls
and an estimated 1.2 Bcf of natural gas (aggregating 5.4 Bcfe), which represents
2.2% of the Company's total proved reserves and 4.4% of the Company's SEC PV-10.
The Company's average daily net production from the Segno Field in March 1998
was approximately 278 Bbls of oil and 272 Mcf of natural gas for a total of 1.9
MMcfe.
Management believes that additional reserve potential exists in new
locations that will be drilled to the Wilcox D, E, F and G sands. Each of these
sands has proven productive in recently drilled wells and could hold large
reserves if this success continues across the field. Recently evaluated 2-D
seismic has also generated several significant opportunities. The Company is
currently participating in leasing activity to develop these opportunities.
South Texas
J.C. Martin Field. The J.C. Martin Field consists of 59 producing natural
gas wells that cover approximately 8,300 gross acres in Zapata County, Texas on
the Mexican border. The field primarily produces from the Lobo 1, 3 and 6 series
of sands in the Wilcox formation at depths of approximately 8,000 feet to 10,000
feet and was part of the Morgan Property Acquisition. The Company's interests
consist of (i) a 13.33% perpetual, non-participating mineral royalty covering
the Mecom family ranch and (ii) an 80% NPI in Devon Energy Corporation's
("Devon's") 20% working interest in the ranch. Coastal Oil Corporation
("Coastal") operates all of the wells. The reservoirs are low permeability,
producing through pressure depletion and requiring fracture stimulations. The
Company's RI in this property is the subject of litigation involving the
predecessor owner. See "--Litigation."
At December 31, 1997, the J.C. Martin Field contained 19.7 Bcfe of proved
reserves, which represented approximately 8% of the Company's total proved
reserves and approximately 12.6% of the Company's SEC PV-10. The Company's
average daily net production from the J.C. Martin Field in March 1998 was 9.5
MMcfe.
During 1997, Coastal drilled nine wells in this field. From January 1,
1998 through June 30, 1998 Coastal drilled an additional seven wells, three of
which have been completed and are on production and four of which are being
completed.
The first well drilled during 1998 in this field tested natural gas from a
deeper Cretaceous zone. The well is currently on production and is commingled
with the Lobo formation and is producing in excess of 3.7 MMcf/d. This zone
previously had not produced on the lease but has produced significant volumes to
the north. Management believes that there may be additional potential on the
west end of the Mecom Ranch for this zone as only a few wells have actually
penetrated the Cretaceous zone. A second completion in the Cretaceous zone
tested 5.1 MMcf/d. Management also believes that potential exists for reserves
in the Middle Wilcox zones at approximately 5,000 feet to 6,000 feet.
Lopeno and Volpe Fields. The Lopeno and Volpe Fields are located in Zapata
County, Texas and were also part of the Morgan Property Acquisition. These
fields consist of 13 wells with 16 separate completions. All of the
66
<PAGE> 68
wells produce from multiple reservoirs in the Upper Wilcox formation. The Morgan
Properties in these fields were initially conveyed in 1995 in association with
Mustang Oil & Gas Corporation, a subsidiary of Gulf Resources Corporation ("Gulf
Resources"). In April 1998, Choctaw II Oil & Gas Ltd. ("Choctaw") acquired Gulf
Resources' working interests in these fields and is now the operator of 10 of
the 13 wells with Pioneer Resources Corporation operating the remainder.
The Company's interest in these fields consists of a 66.66% NPI in
Choctaw's working interests. Choctaw's working interests vary from 15.7% to 75%.
The Lopeno Field covers over 6,000 acres and is an extension of a field
originally discovered in 1952. Over 20 sands have produced in the field at
depths ranging from 6,500 feet to 12,000 feet. Typical of the numerous Upper
Wilcox fields along the Texas Gulf Coast, Lopeno Field is highly faulted and
overpressured. The Volpe Field is also a Wilcox field located 8 miles north of
Lopeno, Texas. A well was drilled directionally along the trapping fault and is
producing from the Middle Wilcox formation. Multiple Upper Wilcox zones are
classified behind-the-pipe. Three proved undeveloped locations have been
identified in this field.
At December 31, 1997, the Lopeno and Volpe Fields contained an estimated
19.8 Bcf of proved reserves, which represented approximately 8.1% of the
Company's total proved reserves and approximately 8.2% of the Company's SEC
PV-10. The Company's average daily net production from the fields in March 1998
was 3,300 Mcf/d of natural gas.
Management believes that the production in these fields can be enhanced
through workovers and accelerated drilling for the shallow, behind-the-pipe
reserves.
New Mexico
Caprock (Queen) Field. The Caprock (Queen) Field was the Company's first
acquisition and consists of 74 oil wells, 39 water injection wells, 30 shut-in
wells and 77 temporarily abandoned wells on approximately 14,200 gross acres
located in Lea and Chaves Counties, New Mexico. The Caprock Field produces from
the "Artesia Red Sand" or Queen sandstone of Permian age in the Seven Rivers and
Grayburg formations at a depth of approximately 3,000 feet. Discovery wells were
drilled from 1940 through 1949. Development wells were drilled between 1954 and
1956 within the productive limits of the field which is approximately twenty
miles long and three miles wide. Primary production was established on 40-acre
spacing. Initial waterflood operations began in 1959 through 1960.
The Company has a 100% working interest and an 82.6% revenue interest in
two operating units (the Drickey Queen Sand Unit and the Westcap Unit), a 98.3%
working interest and a 79.3% revenue interest in a third operating unit (the
Rock Queen Unit), and a 100% working interest and a 90% revenue interest in the
Trigg and Federal V leases. These five properties comprise the central 14,200
acres of the approximately 26,000 productive acres that contain nine contiguous
development units.
At December 31, 1997, the Caprock Field contained an estimated 5,108 MBbls
(30.6 Bcfe) of net proved reserves, which represented approximately 12.5% of the
Company's total proved reserves and 5.8% of the Company's SEC PV-10. The
Company's average daily net production from the Caprock Field in December 1997
was 97 Bbls of oil. For the month of March 1998 the Company's average daily net
production increased to 147 Bbls of oil.
The Company has recently focused its efforts to improve the reservoir
management of the field. Recent capital expenditures have included replacing
flowlines and injection lines, replacing rod strings and downhole production
equipment, repairing pumping units, major overhauls of injection lines,
installing test headers and equipment, installing injection meters and returning
out of service wells to injection and production status. As a result of these
efforts, production has increased substantially from last year.
A pilot program, as the initial step toward redeveloping the waterflood
pattern, has been designed and the Company anticipates the program will be
implemented in the first half of fiscal year 1999. The Company is the operator.
67
<PAGE> 69
Kentucky
Meade Field. The Company has a 60% working interest in approximately
61,421 gross acres in Meade, Hardin and Breckinridge Counties, Kentucky. There
are currently 20 gross producing and 1 gross shut-in natural gas wells located
on the Company's leases in Meade County. Four of the wells were drilled in 1995,
14 in 1996 and the remainder in 1997. These wells produce from the New Albany
Shale formation between the depths of approximately 720 feet and 850 feet. The
shale zone has two porosity members and averages 80 feet in thickness. In
addition to the natural gas wells, the Company also owns an interest in one
salt-water disposal well and a related natural gas gathering system.
At December 31, 1997, these properties contained 36.8 Bcfe of net proved
reserves, which represents approximately 15% of the Company's total proved
reserves and approximately 4.3% of the Company's SEC PV-10. The Company acquired
these properties because management believes they have significant low risk
development potential from relatively shallow formations. Natural gas reserves
are long-lived reserves (generally, over 40 years) characterized by an increase
in production rates with dewatering and then a gradual decline. The Company's
average daily net production from the Meade Field in March 1998 was 168 Mcf.
DEVELOPMENT, EXPLOITATION AND EXPLORATION ACTIVITIES
The Company's development drilling program is generated largely through
the Company's internal technical evaluation efforts and as a result of the
Company's obtaining undeveloped acreage in connection with producing property
acquisitions. In addition, there are numerous opportunities for infill drilling
on Company leases currently producing oil and natural gas. The Company intends
to continue to pursue development drilling opportunities which offer potentially
significant returns to the Company. The exploitation activities of the Company
consist of the evaluation of additional reserves through workovers, behind the
pipe recompletions and secondary recovery operations.
The objective of the Company's overall development and exploitation
strategy is to achieve a balance between low risk workover and recompletion
activities and moderate risk infill and extensional development wells. This
exploitation/development strategy is intended to increase reserves while
minimizing the risk of uneconomic projects. The Company currently intends only
limited investments in exploratory drilling projects.
From August 1994 to June 1998 the Company participated in drilling 28
gross (11.3 net) wells, of which approximately 72% gross (80% net) were
productive. However, there can be no assurance that this past rate of drilling
success will continue in the future. The Company is currently pursuing
development drilling projects in 17 different fields and anticipates continued
growth in its drilling activities.
At March 31, 1998, the Company had identified approximately 234
development and exploitation locations on its acreage. The Company expects to
spend approximately $21.4 million on development drilling projects through June
30, 1999.
The following is a brief discussion of the primary areas of development
and exploitation activity for the Company:
East Texas
Segno Field. The Company intends to continue participating with the
operator (Prime Energy) in the development of the Segno field. Recent activity
includes the deepening of several wells to test lower producing horizons, the
Wilcox "D", "E", "F" and "G" and the drilling of a number of new wells targeting
reserves not yet produced from the Yegua and Wilcox. The operator continues to
return wells that are off production back to service and to improve the field's
facilities infrastructure. Projects planned through June 30, 1999 include
drilling two proved undeveloped locations and six workovers/deepenings at a
total cost to the Company of approximately $500,000. In addition, several
significant new prospects have been identified utilizing 2-D seismic data. The
Company is participating in leasing of the acreage covering these prospects,
identified as "Segno West."
68
<PAGE> 70
South Texas
J.C. Martin Field. A 3-D seismic survey, shot in 1996, has been the
catalyst for the most recent drilling in the J.C. Martin Field. Coastal Oil
Corporation, the operator, has been very active in this area and continues to
propose new wells to be drilled. The Company anticipates at least ten additional
locations will be drilled this year to develop untested or undrained fault
blocks in the Lobo 1, 3 and 6 series of Wilcox sands at a total cost to the
Company of approximately $1.7 million. In addition, the Company participated in
a state lease sale with the operator on acreage offsetting its current acreage
and was the successful bidder on the tract. The Company also expects to propose
a Middle Wilcox test be drilled later this year to test this unproven shallower
zone.
Lopeno/Volpe Fields. The Company believes significant potential exists in
the Lopeno/Volpe Fields to increase production. Several workovers have been
identified in the Lopeno Field to reopen zones which were completed and
stimulated, but due to lack of funds from the previous operator are not
producing. Over twenty sands have produced in the Lopeno Field and most wells
have multiple behind-the-pipe zones. Accelerated drilling for some of the
shallower zones may be justified, improving their present value. Three proved
undeveloped locations have been identified in the Volpe Field that would develop
Upper Wilcox sands. The new operator, Choctaw, has indicated to the Company that
it intends to pursue the necessary workovers and additional drilling. The
Company anticipates its share of capital expenditures in the Lopeno/Volpe fields
will be approximately $1.4 million through June 1999.
Kentucky
Meade Field. The Company believes that the Meade Field presents
opportunities for low cost developmental drilling at depths of less than 1,000
feet. The Company expects that the field will be developed in five phases. Phase
1, consisting of 20 wells, was completed in 1996. A delineation well, the Gohl
No. 2, was drilled in late 1997 and extended the proven limits of the field four
miles to the southwest. Phases 2 through 5 are scheduled to occur between August
1998 and October 1999 with 10 wells drilled per month every other month for a
total of 101 wells at an average cost to the Company of $54,000 per well. The
total capital expenditures for the project are estimated at $5.4 million
New Mexico
Caprock (Queen) Field. Exploitation efforts at the Caprock (Queen) Field
include a coordinated program of workovers, waterflood redevelopment and infill
drilling. The Company, with the assistance of independent engineering
consultants, has evaluated several alternate development options. The Company
intends to redevelop the Rock Queen Unit with the drilling of infill development
wells establishing a modified seven spot pattern. It is anticipated that a total
of 55 producing wells and 14 water injection wells will be drilled, 59 wells
will be worked over, 24 wells will be returned to production and 19 wells will
be returned to injection. The Company plans to redevelop the Drickey
Queen/Westcap Units using a line drive waterflood pattern. A total of five dual
lateral horizontal producers will be drilled and 14 single lateral horizontal
injection wells are slated to be drilled. A pilot program has been designed
which consists of four horizontal water injection wells and one dual lateral
horizontal producer with an associated water injection plant and production
facility. The pilot will fully develop one 640 acre section of the Drickey Queen
Unit. The Company anticipates the pilot program will be implemented in the first
half of fiscal 1999 and will cost $2.1 million.
MARKETING
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
does not refine or process any of the oil and natural gas it produces. The
Company is currently able to sell, under contract or in the spot market, all of
the oil and 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. The Company's market for natural gas is pipeline companies as opposed to
end users. See "Risk Factors--Volatility of Oil and Natural Gas Prices" for a
discussion of the risks of commodity price fluctuations.
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<PAGE> 71
In an effort to reduce the effects of the volatility of the price of
crude oil and natural gas on the Company's operations and cash flow, management
has adopted a policy of hedging oil and natural gas prices whenever market
prices are in excess of the prices anticipated in the Company's operating budget
and financial plan through the use of commodity futures, options and swap
agreements. The Company does not engage in speculative hedging. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Changes in Prices and Hedging Activities."
For the year ended June 30, 1997, Big Run Production, Navajo Refining,
EOTT Energy, Texaco and Conoco accounted for 32%, 14%, 17%, 10% and 9%,
respectively, of the Company's oil and natural gas sales. During the year ended
June 30, 1996, Texaco, Big Run Production, Phillips, Navajo Refining and Conoco
accounted for 15%, 15%, 17%, 21% and 24%, respectively, of the Company's oil and
natural gas sales. The Company does not believe that the loss of any of these
buyers would have a material effect on the Company's business or results of
operations as it believes it could readily locate other buyers. However, short
term disruptions could occur while the Company sought alternative buyers or
while lines were being connected to other pipelines.
The market for oil and natural gas produced by the Company depends on
factors beyond its control, including the extent of domestic production and
imports of oil and natural gas, the proximity and capacity of natural gas
pipelines and other transportation facilities, weather, demand for oil and
natural gas, the marketing of competitive fuels and the effects of state and
federal regulation. The oil and natural gas industry also competes with other
industries in supplying the energy and fuel requirements of industrial,
commercial and individual consumers.
OIL AND NATURAL GAS RESERVES
The following tables summarize certain information regarding the
Company's estimated proved oil and natural gas reserves as of June 30, 1995,
1996, and 1997 and December 31, 1997. The estimates relating to the Company's
proved oil and natural gas reserves and future net revenues of oil and natural
gas reserves at December 31, 1997 with respect to the Morgan Properties included
in this Prospectus are based upon reports prepared by Ryder Scott. Such
estimates at June 30, 1997 and at December 31, 1997 as to the historical company
reserves and the estimated reserves attributed to the NASGAS Properties included
in this Prospectus and, as to the historical reserves only, in Note 9 of Notes
to Consolidated Financial Statements which accompany this Prospectus are based
upon reports prepared by H.J. Gruy. The estimated reserves and future net
revenues as set forth herein and in Note 9 of Notes to Consolidated Financial
Statements which accompany this Prospectus, as of June 30, 1996 and June 30,
1995, are based upon reports prepared by Harper and Associates. All such
reserves are located in the United States. In accordance with Commission
guidelines, the estimates of future net cash flows from proved reserves and
their SEC PV-10 are made using oil and natural gas sales prices in effect as of
the dates of such estimates and are held constant throughout the life of the
properties. The Company's estimates of proved reserves, future net cash flows
and SEC PV-10 were estimated using the following weighted average prices, before
deduction of production taxes:
<TABLE>
<CAPTION>
PRO FORMA
JUNE 30, DECEMBER 31,
-------------------------------------- ------------
1995 1996 1997 1997(1)
------ ------ ------ ------------
<S> <C> <C> <C> <C>
Natural gas (per Mcf) $ 1.41 $ 2.39 $ 2.25 $ 2.30
Oil (per Bbl) 16.41 19.65 17.43 15.97
</TABLE>
- ----------
(1) Gives effect to the Morgan Property Acquisition and the NASGAS Property
Acquisition as if they had occurred on December 31, 1997.
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. Reservoir engineering is a subjective process of estimating
underground accumulations of oil and natural gas that cannot be measured in an
exact way, and the accuracy of any reserve estimate is a function of the quality
of available data and of engineering and geological interpretation and
judgement. Reserve reports of other engineers might differ from the reports
contained herein. Results of drilling, testing, and
70
<PAGE> 72
production subsequent to the date of the estimate may justify revision of such
estimate. Future prices received for the sale of oil and natural gas may be
different from those used in preparing these reports. The amounts and timing of
future operating and development costs may also differ from those used.
Accordingly, there can be no assurance that the reserves set forth herein will
ultimately be produced nor can there be assurance that the proved undeveloped
reserves will be developed within the periods anticipated. The Company
emphasizes with respect to the estimates prepared by independent petroleum
engineers that the discounted future net cash inflows should not be construed as
representative of the fair market value of the proved oil and natural gas
properties belonging to the Company, since discounted future net cash inflows
are based upon projected cash inflows which do not provide for changes in oil
and natural gas prices nor for escalation of expenses and capital costs. The
meaningfulness of such estimates is highly dependent upon the accuracy of the
assumptions upon which they were based.
All reserves are evaluated at contract temperature and pressure which can
affect the measurement of natural gas reserves. Operating costs, development
costs and certain production-related and ad valorem taxes were deducted in
arriving at the estimated future net cash flows. No provision was made for
income operating methods and existing conditions at the prices and operating
costs prevailing at the dates indicated above. The estimates of the SEC PV-10
from future net cash flows differ from the Standardized Measure set forth in the
notes to the Consolidated Financial Statements of the Company, which is
calculated after provision for future income taxes. There can be no assurance
that these estimates are accurate predictions of future net cash flows from oil
and natural gas reserves or their present value.
For certain additional information concerning the Company's oil and
natural gas reserves and estimates of future net revenues attributable thereto,
see Note 9 of the Notes to Consolidated Financial Statements.
Company Reserves
The following tables set forth the proved reserves of oil and natural gas
of the Company and the SEC PV-10 thereof on (i) an actual basis for each year in
the three-year period ended June 30, 1997 and (ii) a pro forma basis at December
31, 1997 giving effect to the Morgan and NASGAS Property Acquisitions.
PROVED OIL AND NATURAL GAS RESERVES(1)
<TABLE>
<CAPTION>
PRO FORMA
JUNE 30, DECEMBER 31,
-------------------------------------- ------------
1995 1996 1997 1997(2)
------ ------ ------ ------------
<S> <C> <C> <C> <C>
NATURAL GAS RESERVES (MMcf):
Proved Developed Producing Reserves ................ 86 4,712 8,627 108,475
Proved Developed Non-Producing Reserves ............ 227 4,662 3,785 15,950
Proved Undeveloped Reserves ........................ 107 3,610 8,561 57,231
------ ------ ------ -------
Total Proved Reserves of natural gas ............ 420 12,984 20,973 181,656
====== ====== ====== =======
OIL RESERVES (MBbl):
Proved Developed Producing Reserves ................ 525 751 1,181 3,756
Proved Developed Non-Producing Reserves ............ 1,292 1,514 1,007 1,769
Proved Undeveloped Reserves ........................ 4,373 4,667 4,521 5,139
------ ------ ------ -------
Total Proved Reserves of oil .................... 6,190 6,932 6,709 10,664
------ ------ ------ -------
TOTAL PROVED RESERVES (MMcfe) ......................... 37,560 54,574 61,224 245,639
====== ====== ====== =======
</TABLE>
71
<PAGE> 73
SEC PV-10 OF PROVED RESERVES(1)
<TABLE>
<CAPTION>
PRO FORMA
JUNE 30, DECEMBER 31,
------------------------------------------- ------------
1995 1996 1997 1997(2)
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
SEC PV-10 (THOUSANDS)(3):
Proved Developed Producing Reserves ........... $ 2,808 $ 9,002 $ 13,810 $ 120,727
Proved Developed Non-Producing Reserves ....... 3,499 8,144 7,850 18,808
Proved Undeveloped Reserves ................... 8,137 14,307 19,558 35,068
----------- ----------- ----------- -----------
TOTAL SEC PV-10 ........................ $ 14,444 $ 31,453 $ 41,218 $ 174,603
=========== =========== =========== ===========
</TABLE>
- ----------
(1) The historical data at June 30, 1995 and 1996, is based upon reserve
reports prepared by Harper and Associates. The data shown at June 30,
1997 and December 31, 1997 (excluding data with respect to the Morgan
Properties at December 31, 1997) is based upon reports prepared by H.J.
Gruy. The data included with respect to the Morgan Properties at December
31, 1997 is based upon reserve reports prepared by Ryder Scott.
(2) Gives effect to the Morgan Property Acquisition and the NASGAS Property
Acquisition as if they had occurred on December 31, 1997.
(3) SEC PV-10 differs from the Standardized Measure set forth in the notes to
the Consolidated Financial Statements of the Company, which is calculated
after provision for future income taxes.
Except for the effect of changes in oil and natural gas prices, no major
discovery or other favorable or adverse event is believed to have caused a
significant change in these estimates of the Company's proved reserves since
December 31, 1997.
Except for Form EIA 23, "Annual Survey of Domestic Oil and Gas
Reserves", filed with the United States Department of Energy, no other estimates
of total proven net oil and natural gas reserves have been filed by the Company
with, or included in any report to, any United States authority or agency
pertaining to the Company's individual reserves since the beginning of the
Company's last fiscal year. Reserves reported on Form EIA 23 are comparable to
the reserves reported by the Company herein.
OPERATIONS DATA
Productive Wells
The following table sets forth the number of total gross and net
productive wells in which the Company owned an interest as of December 31, 1997
on a pro forma basis giving effect to the Morgan and NASGAS Property
Acquisitions.
<TABLE>
<CAPTION>
GROSS NET
------------------------ ---------------------------
OIL GAS TOTAL OIL GAS TOTAL
----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C>
Texas................... 322 213 535 128.9 77.4 206.3
New Mexico.............. 75 6 81 73.5 1.1 74.6
Louisiana............... 58 2 60 28.1 0.8 28.9
Mississippi............. 20 0 20 15.0 0.0 15.0
Oklahoma................ 28 150 178 4.2 17.5 21.7
Kentucky................ 0 21 21 0.0 12.6 12.6
Other(1)................ 3 34 37 0.3 7.7 8.0
--- --- --- ----- ----- -----
Total........... 506 426 932 250.0 117.1 367.1
=== === === ===== ===== =====
</TABLE>
- ----------
(1) Represents wells located in Colorado, Kansas, Alabama and Wyoming.
As of June 30, 1997, on a historical basis the Company had an interest
in 230 gross (169.4 net) productive oil and natural gas wells.
72
<PAGE> 74
Production Economics
The following table sets forth certain operating information of the
Company for the periods presented.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, NINE MONTHS ENDED MARCH 31,
---------------------------------------------------------- ---------------------------
HISTORICAL MARCH 31,
------------------------------------------ ---------------------------
FOR THE PERIOD
FROM AUGUST 9,
1994 TO JUNE 30, PRO FORMA(1) HISTORICAL PRO FORMA(1)
---------------- ------------ ---------- -----------
1995 1996 1997 1997 1998 1998
---------------- --------- --------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Production volumes:
Natural gas (MMcf) ................ 5 154 546 14,039 736 10,500
Oil (MBbl) ........................ 26 103 151 696 185 562
Total (MMcfe) ................ 160 769 1,430 18,215 1,843 13,872
Average sales price(2):
Natural gas (per Mcf) ............. $ 1.65 $ 2.43 $ 2.31 $ 2.49 $ 2.28 $ 2.49
Oil (per Bbl) ..................... 16.52 18.26 20.73 21.53 17.19 17.25
Natural gas equivalent (per
Mcfe) ........................... 2.72 2.70 3.02 2.75 2.63 2.59
Selected expenses (per Mcfe):
Production taxes .................. $ 0.22 $ 0.22 $ 0.21 $ 0.18 $ 0.17 $ 0.18
Lease operating expense(3) ........ 1.53 1.31 1.52 0.61 1.56 0.57
General and administrative ........ 1.84 1.45 1.00 0.10 0.89 0.16
Depreciation, depletion and
amortization(4) ................. 0.83 0.82 0.68 0.98 0.73 0.82
</TABLE>
- ----------
(1) Reflects the pro forma effect of the Property Acquisitions. See
"Unaudited Pro Forma Condensed Consolidated Financial Statements,"
included elsewhere in this Prospectus, for a discussion of the
preparation of these data.
(2) Pro forma average sales price information for the year ended June 30,
1997 and the nine months ended March 31, 1998 include oil revenues of
$10.3 million and $6.4 million, respectively, and natural gas revenues
of $32.9 million and $24.4 million, respectively, attributable to the
Morgan Properties, which are netted against lease operating expenses and
production taxes for financial statement presentation.
(3) Pro forma lease operating expenses and production taxes per Mcfe for the
year ended June 30, 1997 and the nine months ended March 31, 1998
include lease operating expenses of $8.4 million and $5.2 million,
respectively, and production taxes of $2.9 million and $2.1 million,
respectively, attributable to the Morgan Properties, which are netted
against the NPI and RI revenues for financial statement presentation.
(4) Represents depreciation, depletion and amortization of oil and natural
gas properties only.
Drilling Activity
The following table sets forth the Company's gross and net working
interests in exploratory and development wells (but excluding injection or
service wells) drilled during the indicated periods.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FOR THE YEAR ENDED JUNE 30, MARCH 31,
------------------------------------------------------------------ ------------------
1995 1996 1997 1998
------------------ ------------------ ------------------ ------------------
GROSS NET GROSS NET GROSS NET GROSS NET
----- --- ----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
EXPLORATORY:
Oil ............... 0 0.0 4 2.0 1 0.5 0 0.0
Gas ............... 0 0.0 0 0.0 0 0.0 0 0.0
---- ---- ---- ----
Dry ............... 0 0.0 2 1.0 0 0.0 2 0.8
==== ==== ==== ====
Total ........ 0 0.0 6 3.0 1 0.5 2 0.8
DEVELOPMENT:
Oil ............... 1 0.2 0 0.0 0 0.0 1 0.1
Gas ............... 0 0.0 0 0.0 0 0.0 3 3.0
Dry ............... 0 0.0 0 0.0 0 0.0 1 0.5
---- ---- ---- ----
Total ........ 1 0.2 0 0.0 0 0.0 5 3.6
==== ==== ==== ====
TOTAL:
Oil ............... 1 0.2 4 2.0 1 0.5 1 0.1
Gas ............... 0 0.0 0 0.0 0 0.0 3 3.0
Dry ............... 0 0.0 2 1.0 0 0.0 3 .3
---- ---- ---- ----
Total ........ 1 0.2 6 3.0 1 0.5 7 4.4
==== ==== ==== ====
</TABLE>
73
<PAGE> 75
DEVELOPED AND UNDEVELOPED ACREAGE
The following table sets forth the approximate gross and net acres in
which the Company owned an interest as of December 31, 1997, on a pro forma
basis to reflect the NASGAS and Morgan Property Acquisitions.
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED
--------------------- ---------------------
GROSS NET GROSS NET
------ ------ ------ ------
<S> <C> <C> <C> <C>
Texas .................................. 73,074 38,027 39,833 17,273
New Mexico ............................. 14,440 14,170 0 0
Louisiana .............................. 5,865 2,334 0 0
Mississippi ............................ 1,633 1,323 0 0
Oklahoma ............................... 42,240 5,954 0 0
Kentucky ............................... 424 260 60,997 36,598
Other(1) ............................... 20,510 5,190 0 0
Total .......................... 158,186 67,258 100,830 53,871
</TABLE>
(1) Represents acreage located in Colorado, Kansas, Alabama and Wyoming.
As of June 30, 1997, the Company held interests in 43,522 gross (36,227
net) developed acres. At June 30, 1997, the Company had no significant amount of
undeveloped acreage.
MARKETS AND COMPETITION
The oil and natural gas industry is highly competitive. Competitors
include major oil companies, other independent oil and natural gas concerns and
individual producers and operators, many of which have financial resources,
staffs and facilities substantially greater than those of the Company. In
addition, the Company encounters substantial competition in acquiring oil and
natural gas properties, marketing oil and natural gas and securing trained
personnel. When possible, the Company tries to avoid open competitive bidding
for acquisition opportunities. The principal means of competition with respect
to the sale of oil and natural gas production are product availability and
price. While it is not possible for the Company to state accurately its position
in the oil and natural gas industry, the Company believes that it represents a
minor competitive factor.
The market for oil and natural gas produced by the Company depends on
factors beyond its control, including domestic and foreign political conditions,
the overall level of supply of and demand for oil and natural gas, the price of
imports of oil and natural gas, gas pipelines and other transportation
facilities and overall economic conditions. The oil and natural gas industry as
a whole also competes with other industries in supplying the energy and fuel
requirements of industrial, commercial and individual consumers. See "Risk
Factors--Volatility of Oil and Natural Gas Prices."
TITLE TO OIL AND NATURAL GAS PROPERTIES
The Company has acquired interests in producing and non-producing
acreage in the Form of working interests, RIs, overriding royalty interests and
NPIs. Substantially all of the Company's property interests, and the Assignors'
interests in the Underlying Properties, are held pursuant to leases from third
parties. The leases grant the lessee the right to explore for and extract oil
and natural gas from specified areas. Consideration for a lease usually consists
of a lump sum payment (i.e., bonus) and a fixed annual charge (i.e., delay
rental) prior to production (unless the lease is paid up) and, once production
has been established, a royalty based generally upon the proceeds from the sale
of oil and natural gas. Once wells are drilled, a lease generally continues so
long as production of oil and natural gas continues. In some cases, leases may
be acquired in exchange for a commitment to drill or finance the drilling of a
specified number of wells to predetermined depths. Some of the Company's
non-producing acreage is held under leases from mineral owners or a government
entity which expire at varying dates. The Company is obligated to pay annual
delay rentals to the lessors of certain properties in order to prevent the
leases from terminating. Title to leasehold properties is subject to royalty,
overriding royalty, carried, net profits and other similar interests and
74
<PAGE> 76
contractual arrangements customary in the oil and natural gas industry, and to
liens incident to operating agreements, liens relating to amounts owed to the
operator, liens for current taxes not yet due and other encumbrances.
As is customary in the industry, the Company generally acquires oil and
natural gas acreage without any warranty of title except as to claims made by,
through or under the transferor. Although the Company has title examined prior
to acquisition of developed acreage in those cases in which the economic
significance of the acreage justifies the cost, there can be no assurance that
losses will not result from title defects or from defects in the assignment of
leasehold rights. In many instances, title opinions may not be obtained if in
the Company's judgment it would be uneconomical or impractical to do so.
The Underlying Properties are typically subject, in one degree or
another, to one or more of the following: (i) royalties and other burdens and
obligations, expressed and implied, under oil and gas leases; (ii) overriding
royalties and other burdens created by Assignor or its predecessors in title;
(iii) a variety of contractual obligations (including, in some cases,
development obligations) arising under operating agreements, farmout agreements,
production sales contracts and other agreements that may affect the properties
or their titles; (iv) liens that arise in the normal course of operations, such
as those for unpaid taxes, statutory liens securing unpaid suppliers and
contractors and contractual liens under operating agreements; (v) pooling,
unitization and communitization agreements, declarations and orders; and (vi)
easements, restrictions, rights-of-way and other matters that commonly affect
property. To the extent that such burdens and obligations affect Assignor's
rights to production and the value of production from the Underlying Properties,
they have been taken into account in calculating the Company's interests and in
estimating the size and value of the reserves attributable to the Morgan
Properties.
REGULATION
General Federal and State Regulation
The Company's oil and natural gas exploration, production and related
operations are subject to extensive rules and regulations promulgated by federal
and state agencies. Failure to comply with such rules and regulations can result
in substantial penalties. The regulatory burden on the oil and natural gas
industry increases the Company's cost of doing business and affects its
profitability. Because such rules and regulations are frequently amended or
reinterpreted, the Company is unable to predict the future cost or impact of
complying with such laws.
The State of Texas and many other states require permits for drilling
operations, drilling bonds and reports concerning operations and impose other
requirements relating to the exploration and production of oil and natural gas.
Such states also have statutes or regulations addressing conservation matters,
including provisions for the unitization or pooling of oil and natural gas
properties, the establishment of maximum rates of production from wells, and the
regulation of spacing, plugging and abandonment of such wells. Many states
restrict production to the market demand for oil and natural gas. Some states
have enacted statutes prescribing ceiling prices for natural gas sold within
their states.
FERC regulates interstate natural gas transportation rates and service
conditions, which affect the revenues received by the Company for sales of its
production. Since the mid-1980s, FERC has issued a series of orders, culminating
in Order Nos. 636, 636-A and 636-B ("Order 636"), that have significantly
altered the marketing and transportation of natural gas. Order 636 mandates a
fundamental restructuring of interstate pipeline sales and transportation
service, including the unbundling by interstate pipelines of the sale,
transportation, storage and other components of the city-gate sales services
such pipelines previously performed. One of FERC's purposes in issuing the
orders is to increase competition within all phases of the natural gas industry.
Order 636 and subsequent FERC orders on rehearing have been appealed and are
pending judicial review. Because these orders may be modified as a result of the
appeals, it is difficult to predict the ultimate impact of the orders on the
Company. Generally, Order 636 has eliminated or substantially reduced the
interstate pipelines' traditional role as wholesalers of natural gas, and has
substantially increased competition and volatility in natural gas markets.
The price the Company receives from the sale of oil and natural gas
liquids is affected by the cost of transporting products to market. Effective
January 1, 1995, FERC implemented regulations establishing an indexing system
for transportation rates for oil pipelines, which, generally, would index such
rates to inflation, subject to
75
<PAGE> 77
certain conditions and limitations. The Railroad Commission of the State of
Texas is considering adopting rules to prevent discriminatory transportation
practices by intrastate gas gatherers and transporters by requiring the
disclosure of rate information under varying conditions of service. The Company
is not able to predict with certainty the effects, if any, of these regulations
on its operations. However, the regulations may increase transportation costs or
reduce wellhead prices for oil and natural gas liquids.
Finally, 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 natural production capacity in order to conserve
supplies of oil and natural gas. See "Risk Factors--Government Laws and
Regulations."
Environmental Regulation
The Company's exploration, development and production of oil and natural
gas, including its operation of saltwater injection and disposal wells, are
subject to various federal, state and local environmental laws and regulations.
Such laws and regulations can increase the costs of planning, designing,
installing and operating oil and natural gas wells. The Company's domestic
activities are subject to a variety of environmental laws and regulations,
including but not limited to, the Oil Pollution Act of 1990 ("OPA"), the Clean
Water Act ("CWA"), the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"), the Resource Conservation and Recovery Act ("RCRA"),
the Clean Air Act ("CAA"), and the Safe Drinking Water Act ("SDWA"), as well as
state regulations promulgated under comparable state statutes. The Company also
is subject to regulations governing the handling, transportation, storage and
disposal of naturally occurring radioactive materials that are found in its oil
and natural gas operations. Civil and criminal fines and penalties may be
imposed for non-compliance with these environmental laws and regulations.
Additionally, these laws and regulations require the acquisition of permits or
other governmental authorizations before undertaking certain activities, limit
or prohibit other activities because of protected areas or species, and impose
substantial liabilities for cleanup of pollution.
Under the OPA, a release of oil into water or other areas designated by
the statute could result in the Company being held responsible for the costs of
remediating such a release, certain OPA specified damages, and natural resource
damages. The extent of that liability could be extensive, as set forth in the
statute, depending on the nature of the release. A release of oil in harmful
quantities or other materials into water or other specified areas could also
result in the Company being held responsible under the CWA for the costs of
remediation, and civil and criminal fines and penalties.
CERCLA and comparable state statutes, also known as "Superfund" laws,
can impose joint and several retroactive liability, without regard to fault or
the legality of the original conduct, on certain classes of persons for the
release of a "hazardous substance" into the environment. In practice, cleanup
costs are usually allocated among various responsible parties. Potentially
liable parties include site owners or operators, past owners or operators under
certain conditions, and entities that arrange for the disposal or treatment of,
or transport hazardous substances found at the site. Although CERCLA, as
amended, currently exempts petroleum, including but not limited to, crude oil,
natural gas and natural gas liquids from the definition of hazardous substance,
the Company's operations may involve the use or handling of other materials that
may be classified as hazardous substances under CERCLA. Furthermore, there can
be no assurance that the exemption will be preserved in future amendments of the
act, if any.
RCRA and comparable state and local requirements impose standards for
the management, including treatment, storage, and disposal of both hazardous and
nonhazardous solid wastes. The Company generates hazardous and nonhazardous
solid waste in connection with its routine operations. From time to time,
proposals have been made that would reclassify certain oil and natural gas
wastes, including wastes generated during pipeline, drilling, and production
operations, as "hazardous wastes" under RCRA which would make such solid wastes
subject to much more stringent handling, transportation, storage, disposal, and
clean-up requirements. This development could have a significant impact on the
Company's operating costs. While state laws vary on this issue, state
initiatives to further regulate oil and natural gas wastes could have a similar
impact.
Because oil and natural gas exploration and production, and possibly
other activities, have been conducted at some of the Company's properties by
previous owners and operators, materials from these operations remain on some of
the properties and in some instances require remediation. In addition, the
Company has agreed to indemnify sellers
76
<PAGE> 78
of producing properties from whom the Company has acquired reserves against
certain liabilities for environmental claims associated with such properties.
While the Company does not believe that costs to be incurred by the Company for
compliance and remediating previously or currently owned or operated properties
will be material, there can be no guarantee that such costs will not result in
material expenditures.
Additionally, in the course of the Company's routine oil and natural gas
operations, surface spills and leaks, including casing leaks, of oil or other
materials occur, and the Company incurs costs for waste handling and
environmental compliance. Moreover, the Company is able to control directly the
operations of only those wells for which it acts as the operator.
Notwithstanding the Company's lack of control over wells owned by the Company
but operated by others, the failure of the operator to comply with the
applicable environmental regulations may, in certain circumstances, be
attributable to the Company.
Is it not anticipated that the Company will be required in the near
future to expend amounts that are material in relation to its total capital
expenditures program by reason of environmental laws and regulations, but
inasmuch as such laws and regulations are frequently changed, the Company is
unable to predict the ultimate cost of compliance. There can be no assurance
that more stringent laws and regulations protecting the environment will not be
adopted or that the Company will not otherwise incur material expenses in
connection with environmental laws and regulations in the future. See "Risk
Factors--Government Laws and Regulations."
EMPLOYEES
As of August 10, 1998, the Company had 22 full-time employees consisting
of 10 officers and 12 support staff. Four of the employees are in Ottawa,
Canada, 13 of the employees are located in the Dallas office, 3 are on site in
New Mexico, one is on site in Kentucky and 1 is on site in East Texas. In
addition, the Company regularly engages technical consultants and independent
contractors to provide specific advice or to perform certain administrative or
technical functions.
From August 9, 1994 (inception) to May 6, 1997 the executive services of
Edward J. Munden, Ronald I. Benn and Bruce I. Benn were provided to the Company
under a management contract with Capital House A Finance and Investment
Corporation ("CHC"), a Canadian venture capital company. Bruce I. Benn, Edward
J. Munden and Ronald I. Benn are directors and shareholders of CHC. Since May 6,
1997, Edward J. Munden, Bruce I. Benn and Ronald I. Benn have been employees of
the Company. Edward Munden and Bruce Benn are officers and directors of the
Company. Ronald Benn is an officer of the Company.
FACILITIES
The Company occupies approximately 3,475 square feet of office space at
3500 Oak Lawn Avenue, Suite 380, Dallas, Texas, under a lease that expires in
November 1999. The Company is in the process of locating additional space to
lease in Dallas. The Company also leases approximately 1,250 square feet of
space in Ottawa, Ontario for offices for certain of its executive officers
located there. The Company leases property for a rig yard in New Mexico.
LEGAL PROCEEDINGS
Litigation. The landowner royalty on the J.C. Martin Field is currently
subject to a lawsuit that may create uncertainty regarding the Company's title
to its interest in the J.C. Martin Field. See "Risk Factors--Nature of the Net
Profits Interests and Royalty Interests--Litigation."
No other legal proceedings are pending other than ordinary routine
litigation incidental to the Company business, the outcome of which management
believes will not have a material adverse effect on the Company.
77
<PAGE> 79
MANAGEMENT
The officers and Directors of the Company are listed below, together
with a description of their experience and certain other information. Each of
the Directors serves for a one year term. Executive officers are appointed by
the Board of Directors.
<TABLE>
<CAPTION>
NAME AGE CURRENT POSITION WITH COMPANY
- ------------------------------ ----- --------------------------------------
<S> <C> <C>
Edward J. Munden ............. 47 Chairman of the Board, Chief Executive
Officer, President and Director
Bruce I. Benn ................ 44 Executive Vice President and Director
Robert P. Lindsay ............ 55 Chief Operating Officer, Executive
Vice President and Director
Ronald I. Benn ............... 43 Chief Financial Officer
V. Ed Butler ................. 42 Vice President, Asset Management
Ronald Idom .................. 43 Vice President, Acquisitions
William W. Lesikar ........... 45 Vice President, Finance
Kenoth H. Flournoy ........... 50 Vice President, Operations
William A. Williamson ........ 42 Vice President, Land
Steven M. Emshoff ............ 46 Vice President, Business Development
Ted Collins, Jr .............. 59 Director
Eli Rebich ................... 46 Director
</TABLE>
Edward J. Munden has been the President and a Director of the Company
since March 6, 1995. He was appointed Chief Executive Officer in May 1996 and
was appointed Chairman of the Board in October 1997. Since 1989, he has been a
director and co-founder of CHC, which is a Canadian venture capital firm located
in Ottawa, Canada. From 1994 to 1996, he was a director of Capital House
International Ltd. ("CHIL"). CHIL became the original stockholder of QSRn and
was previously a majority stockholder of the Company. Mr. Munden has held
positions in the mining industry with Eldorado Nuclear Limited (1980 to 1989),
the manufacturing industry with Proctor and Gamble Company of Canada (1978 to
1980) and the oil and natural gas industry with Union Oil of Canada Limited
(1974 to 1976). Mr. Munden is a professional geological engineer and holds a
Bachelor of Science degree in Engineering (1974) and a Masters of Business
Administration (1978) from Queens University in Kingston, Canada.
Bruce I. Benn has been an Executive Vice President and a Director of the
Company since March 1995. In 1989, he, together with Ronald I. Benn and Edward
J. Munden, founded CHC and has been a director since then. From 1994 to 1996, he
was a director of CHIL. From 1985 to 1993, he was Vice President and Director of
Corporation House Ltd., where he acted as an investment banker and a financial
advisor to resource development, manufacturing and construction firms around the
world. He is an attorney and holds a Masters of Law degree (LL.M, 1979) from the
University of London, England, a Baccalaureate of Laws (LL.B, 1978) from the
University of Ottawa, Canada, and a Bachelor of Arts in Economics (1975) from
Carleton University in Ottawa, Canada. Ronald I. Benn, the Chief Financial
Officer of the Company, is the brother of Bruce I. Benn.
Robert P. Lindsay joined the Company in 1994 and became Executive Vice
President in September 1995 and Chief Operating Officer in May 1996. From 1973
until 1995 Mr. Lindsay was Chief Executive Officer of Lin-mour Drilling Company.
Mr. Lindsay joined Helmrich & Payne, an oil and natural gas drilling and
exploration company headquartered in Tulsa, Oklahoma, in 1965 and held
increasingly senior positions with that company until 1973. Mr. Lindsay holds a
Bachelor of Arts degree in Accounting (1965) from the University of Texas.
Ronald I. Benn was appointed Chief Financial Officer of QSRn in 1994 and
assumed the same position with the Company when it acquired QSRn in March 1995.
Since 1989, he has been a senior executive, director and co-founder of CHC. From
1994 to 1996, Mr. Benn was a director of CHIL. From 1980 to 1985, Mr. Benn, a
Chartered Accountant, held positions in the auditing division, in management
consulting as a turnaround specialist,
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<PAGE> 80
and the insolvency division of the accounting firm of Clarkson Gordon Chartered
Accountants (now known as Ernst & Young Chartered Accountants). From 1985 to
1986 he also had experience in the commercial banking industry and as senior
financial officer to certain start-up companies. Mr. Benn holds a Bachelor of
Science degree (1977) from Carleton University in Ottawa, Canada and a Bachelor
of Commerce (Honours) (1980) from the University of Windsor, Canada. Ronald I.
Benn is the brother of Bruce I. Benn.
V. Ed Butler joined the Company in June 1996 as Vice President,
Operations. He has 20 years of experience in oil field engineering and
operations. From 1993 to 1995, he was Executive Vice President for Echo
Production, Inc. From 1982 to 1993 he held the position of Operations Manager
for Triad Energy Corporation. He has also been a staff engineer for Blocker
Exploration Company from 1980 to 1982 and an area production engineer for Texas
Oil and Gas Corporation from 1978 to 1980. Mr. Butler holds an M.B.A. (1988)
from the University of Texas, and a Bachelor of Science in Petroleum Engineering
(1978) from Texas A&M University.
Ronald Idom joined the Company in January 1998 as Vice President,
Acquisitions. He has over 22 years of experience in reservoir engineering and
management. From 1991 to 1997, he was Manager Gas Supply for Delhi Gas Pipeline
Corporation and Manager Engineering/Project Development from 1988 to 1991. From
1985 to 1988 he held the position of Chief Reservoir Engineer for TXO Production
Corp. (both Delhi Gas Pipeline and TXO Production Corp. were subsidiaries of
USX/Texas Oil & Gas Corporation). He also served as acquisition engineer for NRM
Petroleum from 1983 to 1985; a self-employed petroleum consultant from 1980 to
1983 and held various engineering positions with Texas Oil and Gas Corporation
from 1976 to 1980. Mr. Idom graduated from Texas A&M University in 1976 with a
Bachelor of Science in Petroleum Engineering.
William W. Lesikar joined the Company in June 1998 as Vice President,
Finance. Mr. Lesikar, a Certified Public Accountant, has 22 years of experience
in finance and accounting with nearly 17 years in the oil and gas industry. From
1981 to 1998, Mr. Lesikar held increasing positions of authority with Lyco
Energy Corporation of Dallas, Texas including Controller from 1981 to 1983, and
Chief Financial Officer and Executive Vice President from 1988 to 1998. From
1978 to 1981, Mr. Lesikar was an audit manager and senior auditor with Arthur
Young & Company (now known as Ernst & Young LLP). From 1976 to 1978, Mr. Lesikar
was an auditor with Haskins & Sells (now known as Deloitte Touche LLP). Mr.
Lesikar holds a Masters of Business Administration (1988) from Southern
Methodist University and a Bachelor of Business Administration (1975) from
University of Texas.
William A. Williamson joined the Company in March 1998 as Vice President,
Land. He has over 17 years of experience in petroleum land management. From 1989
to 1998, he served as President of BAW Energy, Inc. BAW Energy, Inc. was formed
primarily to provide oil and gas asset management from a land and legal
perspective to independent oil and gas companies. Clients of BAW Energy, Inc.
included INCO Oil Corporation, Janex Oil Co., Inc., Walter Exploration, Inc. and
the Company. From 1979 to 1989, he was self-employed as an independent Petroleum
Landman. Mr. Williamson holds a Bachelor of Business Administration in Finance
(1978) from Texas A&M University.
Steven M. Emshoff joined the Company in July 1998 as Vice President,
Business Development. He has over 25 years of experience in banking and
investment banking, with 17 years in the oil and gas industry. From 1994 to
1998, Mr. Emshoff was a Director of Enron Finance Corporation providing and
structuring financial products and services to independent oil and natural gas
producers in the Southwest United States. From 1993 to 1994 he was a Senior Vice
President and Corporate Lending Officer for Charter Bancshares, Inc.
supervising, negotiating and structuring energy loans. From 1982 to 1993 he was
Vice President of Texas Commerce Bancshares and its subsidiary, also providing
energy loans. From 1973 to 1982, Mr. Emshoff was a National Bank Examiner with
the U.S. Treasury. Mr. Emshoff holds a Bachelor of Commerce (1973) and a
Bachelor of Science (1973) from Rice University.
Kenoth H. Flournoy joined the Company in January 1998 and became Vice
President, Operations in July 1998. Mr. Flournoy has over 26 years of experience
in the oil and gas industry. From 1997 to 1998, Mr. Flournoy provided
engineering consulting services to the oil and gas industry. From 1983 to 1997
he was Vice President of Production for Maguire Oil Company and Maguire Energy
Company where he was responsible for the property management, drilling,
production and engineering for overall operations and joint venture operations.
He was also Vice President of Operations for Canus Petroleum, Inc. from 1979 to
1980, District Engineer for Champlin Petroleum
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<PAGE> 81
Co. from 1977 to 1979 and held various engineering positions with Texaco, Inc.
from 1970 to 1977. Mr. Flournoy holds a Bachelor of Science in Chemistry and
Commerce (1970) from Texas A&M University.
Ted Collins, Jr. has been a Director of the Company since October 1997.
Since January 1988 he has been President of Collins and Ware, Inc., a private
oil and natural gas exploration and production company headquartered in Midland,
Texas. He is also Chairman of Mid Louisiana Gas Corp., an interstate pipeline
serving industrial and residential customers in Louisiana and Mississippi with
Pan American Petroleum Corp. (now Amoco Production Co.). From 1986 to 1988, Mr.
Collins was President of Enron Oil & Gas Company and from 1985 to 1986 he was
President of HNG/InterNorth Exploration Company. From 1982 to 1985, Mr. Collins
served as President of HNG Oil Company, and from 1969 to 1982 he was Executive
Vice President and Director of American Quasar Petroleum Co. From 1963 to 1969,
Mr. Collins served as an independent oil operator, and from 1960 to 1963, he was
a petroleum engineer. Mr. Collins holds a Bachelor of Science in Geological
Engineering (1960) from the University of Oklahoma. Mr. Collins is also a
director of Hanover Compression Company.
Eli Rebich has been a Director of the Company since October 1997. He is
an independent oil and natural gas producer with over 22 years of industry
experience, including evaluation, acquisition, title work and operation of oil
and natural gas properties. Since 1978, he has acquired producing properties in
Texas, Louisiana, Mississippi, Oklahoma and Colorado. He is President and
Director of Big Run Production Company which operates properties in several
states.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the number of
shares of the Company's Common Stock beneficially owned as of July 31, 1998 by
(i) all holders (the "Stockholders") of shares of the Common Stock known by the
Company to own beneficially more than 5% of the outstanding shares of the Common
Stock, (ii) the executive officers of the Company, (iii) each Director of the
Company and (iv) all Directors and officers of the Company as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF APPROXIMATE PERCENTAGE
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF COMMON STOCK
- ------------------------------------------------------------ -------------------- ---------------
<S> <C> <C>
Officers and Directors:
Edward J. Munden ........................................... 6,637,000(1)(2) 21.5%
Bruce I. Benn .............................................. 6,637,000(1)(2) 21.5%
Robert P. Lindsay .......................................... 6,651,286(1)(2) 21%
Ronald I. Benn ............................................. 6,637,000(1)(2) 21.5%
Ted Collins, Jr.(4) ........................................ 1,000,000 3.2%
Eli Rebich ................................................. 470,000 1.5%
All executive officers and directors as a group
(6 persons) .............................................. 8,232,286(1)(2) 26.6%
Five Percent Stockholders:
Joint Energy Development Investments Limited
Partnership c/o Enron Corp. .............................. 13,690,898(5) 33.1%
EIBOC Investments Ltd. ..................................... 6,600,000(1) 21.4%
</TABLE>
- ----------
(1) Edward J. Munden, Ronald I. Benn and Bruce I. Benn have a beneficial
interest in the shares of Common Stock owned by EIBOC Investments Ltd.
("EIBOC"). In addition, EIBOC has granted an irrevocable proxy to
Messrs. Munden, Benn, Benn and
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<PAGE> 82
Lindsay to vote 6,600,000 shares owned of record by EIBOC. Accordingly,
the 6,600,000 shares owned of record by EIBOC have been included as
beneficially owned by each of the foregoing individuals, and by all
officers and Directors as a group.
(2) Includes options exercisable within 60 days.
(3) Mr. Lindsay acquired 14,286 shares of Common Stock in the name of his
children and disclaims any beneficial interest in these shares.
(4) Represents shares that are owned of record by Collins and Ware, Inc. Mr.
Collins is a controlling shareholder, executive officer and director of
Collins and Ware, Inc., but disclaims beneficial ownership of such
shares.
(5) Includes 9,600,000 shares of Common Stock issuable upon conversion of
the 9,600,000 shares of Series A Preferred Stock, 2,634,951 shares of
Common Stock and 1,725,947 shares of Common Stock issuable upon exercise
of certain warrants. JEDI is a limited partnership, the general partner
of which is Enron Capital Management Limited Partnership, which is an
indirect wholly-owned subsidiary of Enron. Upon the occurrence of
certain Events of Default (as defined in the Company's Restated
Certificate of Incorporation), JEDI, the holder of the Series A
Preferred Stock, has the right to require the Company to repurchase the
Series A Preferred Stock.
Pursuant to the Stockholders Agreement dated May 6, 1997 among Bruce I.
Benn, Ronald I. Benn, Edward J. Munden and Robert P. Lindsay (collectively, the
"Management Stockholders"), EIBOC and JEDI, each of the Management Stockholders
covenanted not to transfer, nor to authorize transfer of, any of the 6,600,000
shares of Common Stock in which they have or may acquire a beneficial interest
except by will or the laws of descent and distribution or otherwise by operation
of law or judicial decree or as permitted by the Stockholders Agreement.
The Stockholders Agreement permits EIBOC and the Management Stockholders
to make the following transfers of shares of Common Stock: (i) EIBOC and the
Management Stockholders in the aggregate may transfer shares of Common Stock
provided that the number of shares of Common Stock to be transferred together
with all shares of Common Stock transferred by EIBOC and the Management
Stockholders during the preceding 12 months does not exceed the lesser of (x) 4%
of the outstanding shares of Common Stock, (y) four times the average weekly
reported volume of trading, excluding any trades made by EIBOC or a Management
Stockholder on all national securities exchanges and/or reported through the
automated quotation system of a registered securities association during the
four calendar weeks preceding the date of transfer or (z) four times the average
weekly volume of trading, excluding any trades made by EIBOC or a Management
Stockholder, in Common Stock reported through the consolidated transaction
reporting system, contemplated by Rule 11Aa3-1 under the Exchange Act during the
four week period specified in clause (y), and (ii) EIBOC and the Management
Stockholders may transfer shares of Common Stock in a registered underwritten
public offering of Common Stock; provided, that neither EIBOC nor any Management
Stockholder may transfer shares of Common Stock if after the transfer EIBOC and
the Management Stockholders would beneficially own less than 4,950,000 shares of
Common Stock in the aggregate, subject to certain adjustments for stock splits,
combinations, and stock dividends. In addition, the Stockholders Agreement
permits EIBOC and the Management Stockholders to transfer Common Stock to
certain family members and related entities and to make certain transfers of
Common Stock upon the death or disability of a Management Stockholder.
Pursuant to the Stockholders Agreement, JEDI agreed that until the
second anniversary of the date of the Stockholders Agreement, and except
pursuant to its registration rights under the Registration Rights Agreement
between the Company and JEDI, JEDI will not transfer any shares of Common Stock
or securities convertible into or exercisable or exchangeable for shares of
Common Stock (a "Common Stock Equivalent") to any person that is not an
affiliate of JEDI except in blocks of at least 600,000 shares of Common Stock or
blocks of Common Stock Equivalents that are convertible into or exchangeable or
exercisable for at least 600,000 shares of Common Stock.
Pursuant to the Stockholders Agreement, JEDI agreed that until the
second anniversary of the date of the Stockholders Agreement and except pursuant
to its registration rights under the Registration Rights Agreement between the
Company and JEDI, JEDI will not transfer any shares of Common Stock or Common
Stock Equivalents at the proposed sale price. Pursuant to the right of first
refusal, the Company will have the first right, which must be exercised within
30 days after receipt of notice of the proposed transfer, to purchase the shares
of Common Stock or Common Stock Equivalents to be transferred. If the Company
does not elect to acquire the shares of Common Stock or Common Stock Equivalents
to be transferred, the Management Stockholders (if the Management Stockholders
own in the aggregate more than 10% of the voting power of the Company's capital
stock) will have the right to purchase such securities if the Management
Stockholders notify JEDI of such election within 30 days after the Company's
receipt of notice of the proposed transfer.
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<PAGE> 83
DESCRIPTION OF NOTES
The Old Notes were, and the New Notes will be, issued under an
Indenture, dated as of July 1, 1998, among the Company, as issuer, each
Subsidiary Guarantor, and Harris Trust and Savings Bank, as Trustee (the
"Trustee"). The New Notes will be issued under the same Indenture, and the New
Notes and the Notes will constitute a single series of debt securities under the
Indenture. In the event that the Exchange Offer is consummated, any Old Notes
that remain outstanding after consummation of the Exchange Offer and the New
Notes issued in the Exchange Offer will vote together as a single class for
purposes of determining whether holders of the requisite percentage in
outstanding principal amount of Notes have taken certain actions or exercised
certain rights under the Indenture. The Indenture is filed as an exhibit to the
Registration Statement.
The terms of the Notes will include those stated in the Indenture and
those made part of the Indenture by reference to the Trust Indenture Act of
1939, as amended (the "Trust Indenture Act"). The following summary of certain
terms and provisions of the Notes and the Indenture does not purport to be
complete and is qualified in its entirety by reference to the Trust Indenture
Act, the Notes and the Indenture. A copy of the Indenture (which includes the
forms of Notes) is available upon request to the Company at the address set
forth under "Available Information."
The definitions of certain capitalized terms used in the following
summary are set forth below under "Certain Definitions." Capitalized terms used
in this summary and not otherwise defined below have the meanings assigned to
them in the Indenture. For purposes of this "Description of Notes," references
to the "Company" shall mean Queen Sand Resources, excluding its subsidiaries.
As of the date of the Indenture, each of the Company's operating
Subsidiaries is a Restricted Subsidiary. However, under certain circumstances,
the Company will be able to designate current or future Subsidiaries as
Unrestricted Subsidiaries. Unrestricted Subsidiaries will not be subject to many
of the restrictive covenants set forth in the Indenture.
GENERAL
The Old Notes and the New Notes will mature on July 1, 2008, and will be
limited to an aggregate principal amount of $125,000,000. The Old Notes bore
interest at 12 1/2% per annum from July 8, 1998, the date of issuance of the Old
Notes. Interest on the New Notes will accrue at the rate of 12 1/2% per annum
from the date of issuance of the New Note for which an Old Note is exchanged.
Interest on the New Notes will be payable semiannually on January 1 and July 1
of each year, beginning on January 1, 1999, to the person in whose name the New
Note (or any predecessor Note) is registered at the close of business on the
immediately preceding December 15 or June 15, as the case may be. Interest will
be computed on the basis of a 360-day year comprised of twelve 30-day months.
Subject to the covenants described below under "--Certain Covenants"
and applicable law, the Company may issue additional Notes under the Indenture.
The New Notes offered hereby and any additional Notes subsequently issued would
be treated as a single class for all purposes under the Indenture.
Principal of, premium and Liquidated Damages, if any, and interest on
the New Notes will be payable, and the New Notes will be exchangeable and
transferable, at an office or agency of the Company, one of which will be
maintained for such purpose in The City of New York (which will be an office or
agency of the Trustee) or such other office or agency permitted under the
Indenture. At the option of the Company, payment of interest may be made by
check mailed to the person entitled thereto as shown on the Security Register.
The Old Notes were, and the New Notes will be, senior unsecured
obligations of the Company. The payment of the principal of, premium, if any,
and interest on the New Notes will be pari passu with all existing and future
unsecured and unsubordinated indebtedness of the Company, but will be
effectively subordinated to the rights of holders of secured unsubordinated
indebtedness of the Company to the extent of the value of the collateral
securing such indebtedness. The Old Notes ranked, and the New Notes will rank,
senior to all unsecured subordinated indebtedness of the Company. Although the
Indenture contains limitations on the amount of additional Indebtedness
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<PAGE> 84
that the Company and its Restricted Subsidiaries may incur, the amounts of such
Indebtedness could be substantial. See "--Certain Covenants--Limitation on
Indebtedness."
The obligations of the Company under the Old Notes were, and under the
New Notes will be, jointly, severally and unconditionally guaranteed by the
Subsidiary Guarantors. See "--Subsidiary Guarantees."
SUBSIDIARY GUARANTEES
Under the circumstances described below, the Company's payment
obligations under the Old Notes was, and under the New Notes will be, jointly,
severally and unconditionally guaranteed by the Subsidiary Guarantors. Each
Subsidiary Guaranty is a senior unsecured obligation of the applicable
Subsidiary Guarantor and will rank pari passu with any existing and future
unsubordinated indebtedness of such Subsidiary Guarantor, but will be
effectively subordinated to the rights of holders of secured unsubordinated
indebtedness of such Subsidiary Guarantor to the extent of the value of the
collateral securing such indebtedness. As of the date of this Prospectus, the
only Subsidiary Guarantors were the Initial Subsidiary Guarantors.
The Indenture requires the Company to cause any Restricted Subsidiary
(and any Subsidiary that was previously an Unrestricted Subsidiary and becomes a
Restricted Subsidiary) after the Issue Date to execute and deliver to the
Trustee a supplemental indenture pursuant to which such Subsidiary will become a
Subsidiary Guarantor. Certain mergers, consolidations and dispositions of
Property may result in additional Subsidiary Guarantors or the release of
Subsidiary Guarantors. See "--Certain Covenants--Merger, Consolidation and
Sale of Substantially All Assets." Any Subsidiary Guarantor that is designated
an Unrestricted Subsidiary in accordance with the terms of the Indenture shall
be released from and relieved of its obligations under its Subsidiary Guaranty
upon execution and delivery of a supplemental indenture satisfactory to the
Trustee.
Each current and future Subsidiary Guarantor guarantees the Company's
obligations with respect to the Notes, as provided above. Holders of the Notes
will be direct creditors of each Subsidiary Guarantor by virtue of its
Subsidiary Guarantee. Nonetheless, in the event of the bankruptcy or financial
difficulty of a Subsidiary Guarantor, such Subsidiary Guarantor's obligations
under its Subsidiary Guarantee may be subject to review and avoidance under
state and federal fraudulent transfer laws. Among other things, such obligations
may be avoided if a court concludes that such obligations were incurred for less
than reasonably equivalent value or fair consideration at a time when the
Subsidiary Guarantor was insolvent, was rendered insolvent, or was left with
inadequate capital to conduct its business. A court would likely conclude that a
Subsidiary Guarantor did not receive reasonably equivalent value or fair
consideration to the extent that the aggregate amount of its liability on its
Subsidiary Guarantee exceeds the economic benefits it receives in the Old Note
Offering or the Exchange Offer. The obligations of each Subsidiary Guarantor
under its Subsidiary Guarantee will be limited in a manner intended to cause it
not to be a fraudulent conveyance under applicable law, although no assurance
can be given that a court would give the Holder the benefit of such provision.
See "Risk Factors--Fraudulent Conveyance."
If the obligations of a Subsidiary Guarantor under its Subsidiary
Guarantee were avoided, Holders of New Notes would have to look to the assets of
any remaining Subsidiary Guarantors and the Company for payment. There can be no
assurance in that event that such assets would suffice to pay the outstanding
principal and interest on the New Notes.
Each Subsidiary Guarantor may merge or consolidate with or dispose of
its assets to the Company or a Wholly Owned Restricted Subsidiary that is a
Subsidiary Guarantor. In addition, each Subsidiary Guarantor may merge or
consolidate with or dispose of its assets to any Person (other than the Company
or a Wholly Owned Restricted Subsidiary that is a Subsidiary Guarantor),
regardless of whether such Person is an Affiliate of such Subsidiary Guarantor,
if (i) immediately after such transaction, and giving effect thereto, no Default
or Event of Default has occurred and is continuing; (ii) such transaction was
subject to, and consummated in compliance with, as appropriate, either the
provisions of the Indenture described under "--Certain Covenants--Limitation
on Asset Sales" or those described under "--Certain Covenants--Merger,
Consolidation and Sale of Substantially All Assets;" and (iii) the Company shall
have delivered to the Trustee an Officer's Certificate and an Opinion of
Counsel, each stating that such transaction complies with the above provisions
and that all conditions precedent relating to such transaction have been
complied with.
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<PAGE> 85
OPTIONAL REDEMPTION
At any time on or after July 1, 2003, the Old Notes are, and the New
Notes will be, redeemable at the option of the Company, in whole or in part
(equal to $1,000 in principal amount or an integral multiple thereof), on not
less than 30 nor more than 60 days' prior notice, at the following redemption
prices (expressed as percentages of principal amount), plus accrued and unpaid
interest and Liquidated Damages, if any, to the date of redemption (subject to
the right of holders of record on the relevant record date to receive interest
due on the relevant interest date), if redeemed during the 12-month period
commencing on July 1 of the years indicated below.
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- ---------------------------------------- -----------------
<S> <C>
2003.................................... 106.2500%
2004.................................... 104.6875%
2005.................................... 103.1250%
2006.................................... 101.5625%
2007.................................... 100.0000%
</TABLE>
Notwithstanding the foregoing, prior to July 1, 2001, the Company may,
at any time or from time to time, redeem up to 20% of the aggregate principal
amount of any Notes originally outstanding at a redemption price of 112.5% of
the principal amount thereof, plus accrued and unpaid interest and Liquidated
Damages, if any, to the date of redemption, with the net cash proceeds of one or
more Equity Offerings of the Company, provided that at least 80% of the
aggregate principal amount of the Notes originally issued remains outstanding
immediately after the occurrence of such redemption and provided, further, that
such redemption shall occur not later than 75 days after the date of the closing
of any such Equity Offering. The redemption shall be made in accordance with
procedures set forth in the Indenture.
If less than all of the Notes are to be redeemed at any time, selection
of Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
Notes are listed, or, if the Notes are not so listed, on a pro rata basis, by
lot or by such method as the Trustee shall deem fair and appropriate.
SINKING FUND
There is no mandatory sinking fund payments for the Old Notes, and there
will be no mandatory sinking fund payments for the New Notes.
PURCHASE AT THE OPTION OF HOLDERS UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of Notes shall
have the right to require the Company to repurchase all or any part (equal to
$1,000 in principal amount or an integral multiple thereof) of such Holder's
Notes pursuant to the offer described below (the "Change of Control Offer") at a
purchase price in cash equal to 101% of the principal amount thereof, plus
accrued and unpaid interest and Liquidated Damages, if any, to the date of
purchase (the "Change of Control Payment").
Within 30 days following any Change of Control, the Company shall mail a
notice to each Holder stating, among other things: (i) that a Change of Control
has occurred and a Change of Control Offer is being made pursuant to the
Indenture and that all Notes (or portions thereof) properly tendered will be
accepted for payment; (ii) the purchase price and the purchase date, which shall
be, subject to any contrary requirements of applicable law, no fewer than 30
days nor more than 60 days from the date the Company notifies the Holders of the
occurrence of the Change of Control (the "Change of Control Payment Date");
(iii) that any Note (or portion thereof) accepted for payment (and duly paid on
the Change of Control Payment Date) pursuant to the Change of Control Offer
shall cease to accrue interest on the Change of Control Payment Date; (iv) that
any Notes (or portions thereof) not properly tendered will continue to accrue
interest; (v) a description of the transaction or transactions constituting the
Change of Control; (vi) the procedures that Holders of Notes must follow in
order to tender their Notes (or portions
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<PAGE> 86
thereof) for payment and the procedures that Holders of Notes must follow in
order to withdraw an election to tender Notes (or portions thereof) for payment;
and (vii) all other instructions and materials necessary to enable Holders to
tender Notes pursuant to the Change of Control Offer.
The Company will comply, to the extent applicable, with the requirements
of Rules 13e-4 and 14e-1 under the Exchange Act, and any other securities laws
and regulations thereunder to the extent such laws and regulations are
applicable in connection with the purchase of Notes in connection with a Change
of Control. To the extent that the provisions of any securities laws or
regulations conflict with the provisions relating to the Change of Control
Offer, the Company will comply with the applicable securities laws and
regulations and will not be deemed to have breached its obligations described
above.
If a Change of Control were to occur, there can be no assurance that the
Company and the Subsidiary Guarantors would have sufficient financial resources,
or would be able to arrange financing, to pay the purchase price for all Notes
tendered by the Holders thereof. In addition, the Credit Agreement and the ECT
Revolving Credit Agreement contain, and any future credit agreements or other
agreements relating to indebtedness to which the Company or a Subsidiary
Guarantor becomes a party may contain, restrictions on the purchase of Notes. If
a Change of Control occurs at a time when the Company and the Subsidiary
Guarantors are unable to purchase the Notes (due to insufficient financial
resources, contractual prohibition or otherwise), such failure to purchase
tendered Notes would constitute an Event of Default under the Indenture, which
would, in turn, constitute a default under the Credit Agreement and the ECT
Revolving Credit Agreement and may constitute a default under the terms of any
other Indebtedness of the Company or the Subsidiary Guarantors then outstanding.
The Company will not be required to make a Change of Control Offer upon
a Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Company and
purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
A "Change of Control" shall be deemed to occur if (i) any "person" or
"group" (within the meaning of Sections 13(d)(3) and 14(d)(2) of the Exchange
Act or any successor provision to either of the foregoing, including any group
acting for the purpose of acquiring, holding or disposing of securities within
the meaning of Rule 13d-5(b)(1) under the Exchange Act), becomes the "beneficial
owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act) of 50% or
more of the total voting power of all classes of the Voting Stock of the Company
or warrants or options to acquire such Voting Stock, calculated on a fully
diluted basis, (ii) the sale, lease, conveyance or transfer of all or
substantially all of the assets of the Company and its Restricted Subsidiaries
taken as a whole (other than to any Wholly Owned Restricted Subsidiary) shall
have occurred, (iii) the stockholders of the Company shall have approved any
plan of liquidation or dissolution of the Company, (iv) the Company consolidates
with or merges into another Person or any Person merges into the Company in any
such event pursuant to a transaction in which the outstanding Voting Stock of
the Company is reclassified into or exchanged for cash, securities or other
property, other than any such transaction where (a) the outstanding Voting Stock
of the Company is reclassified into or exchanged for Voting Stock of the
surviving corporation that is Capital Stock and (b) the holders of the Voting
Stock of the Company immediately prior to such transaction own, directly or
indirectly, not less than a majority of the Voting Stock of the surviving
corporation immediately after such transaction in substantially the same
proportion as before the transaction or (v) during any period of two consecutive
years, individuals who at the beginning of such period constituted the Company's
Board of Directors (together with any new directors whose election or
appointment by such board or whose nomination for election by the stockholders
of the Company was approved by a vote of a majority of the directors then still
in office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved) cease for any
reason to constitute a majority of the Company's Board of Directors then in
office, excluding directors elected by JEDI or its affiliates.
The definition of Change of Control includes a phrase relating to the
sale, lease, conveyance or transfer of "all or substantially all" of the
Company's assets. The Indenture is governed by New York law, and there is no
established quantitative definition under New York law of "substantially all" of
the assets of a corporation. Accordingly, if the Company and its Restricted
Subsidiaries were to engage in a transaction in which they disposed of less than
all of the assets of the Company and its Restricted Subsidiaries taken as a
whole, a question of interpretation could arise as to whether such disposition
was of "substantially all" of their assets and whether the Company was required
to make a Change of Control Offer.
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<PAGE> 87
Except as described above with respect to a Change of Control, the
Indenture does not contain any other provisions that permit the Holders of the
Notes to require that the Company repurchase or redeem the Notes in the event of
a takeover, recapitalization or similar restructuring.
BOOK-ENTRY SYSTEM
Except as set forth below, the Old Notes were issued in registered,
global form in minimum denominations of $1,000 and integral multiples of $1,000
in excess thereof.
Old Notes sold in reliance on Rule 144A were represented by, and the New
Notes initially will be represented by, one or more Notes in registered global
form without interest coupons (each a "Rule 144A Global Note"). The Rule 144A
Global Notes will be deposited upon issuance with the Trustee as custodian for
The Depository Trust Company ("DTC"), in New York, New York and registered in
the name of DTC or its nominee, in each case for credit to an account of a
direct or indirect participant in DTC as described below.
Regulation S Notes initially will be represented by one or more
temporary Notes in registered global Form without interest coupons
(collectively, the "Regulation S Temporary Global Note"). The Regulation S
Temporary Global Note will be deposited on behalf of the subscribers thereof
with a custodian for DTC. The Regulation S Temporary Global Note will be
registered in the name of a nominee of DTC for credit to the subscribers'
respective accounts at Euroclear System ("Euroclear") and Cedel Bank, S.A.
("CEDEL"). Beneficial interests in the Regulation S Temporary Global Note may be
held only through Euroclear or CEDEL.
Within a reasonable period of time after the expiration of the "40-day
restricted period" (within the meaning of Rule 903(c)(3) of Regulation S under
the Securities Act) (the "40-day restricted period"), the Regulation S Temporary
Global Note will be exchanged for one or more permanent Notes in registered
global Form without interest coupons (the "Regulation S Permanent Global Notes"
and, together with the Regulation S Temporary Global Note, the "Regulation S
Global Note") (the Regulation S Global Note and the Rule 144A Global Note,
collectively, being the "Global Notes") upon delivery to the Trustee of
certification as provided in the Indenture. During the 40-day restricted period,
beneficial interests in the Regulation S Temporary Global Note may be held only
through Euroclear or CEDEL (as indirect participants in DTC), and, pursuant to
DTC's procedures, beneficial interests in the Regulation S Temporary Global Note
may not be transferred to a person that takes delivery thereof in the Form of an
interest in the Rule 144A Global Note. After the 40-day restricted period, (i)
beneficial interests in the Regulation S Permanent Global Notes may be
transferred to a person that takes delivery in the Form of an interest in the
Rule 144A Global Note and (ii) beneficial interests in the Rule 144A Global Note
may be transferred to person that takes delivery in the Form of an interest in
the Regulation S Permanent Global Notes, provided, that the certification
requirements described below are complied with.
Except as set forth below, the Global Notes may be transferred, in whole
and not in part, only to another nominee of DTC or to a successor of DTC or its
nominee. Beneficial interests in the Global Notes may not be exchanged for Notes
in certificated Form except in the limited circumstances described below. See
"--Exchange of Book-Entry Notes for Certificated Notes." Except in the limited
circumstances described below, owners of beneficial interests in the Global
Notes are entitled to receive physical delivery of Certificated Notes (as
defined below).
Rule 144A Notes (including beneficial interests in the Rule 144A Global
Note) will be subject to certain restrictions on transfer and will bear a
restrictive legend as described under "Notice to Investors." Regulation S Notes
will also bear the legend described under "Notice to Investors." In addition,
transfer of beneficial interests in the Global Notes will be subject to the
applicable rules and procedures of DTC and its direct or indirect participants
(including, if applicable, those of Euroclear and CEDEL), which may change from
time to time.
Initially, the Trustee will act as Paying Agent and Registrar. The Notes
may be presented for registration of transfer and exchange at the offices of the
Registrar.
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DEPOSITARY PROCEDURES
The following description of the operations and procedures of DTC,
Euroclear and CEDEL are provided solely as a matter of convenience. These
operations and procedures are solely within the control of the respective
settlement systems and are subject to changes by them from time to time. The
Company takes no responsibility for these operations and procedures and urges
investors to contact the system or their participants directly to discuss these
matters.
DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between Participants through electronic
book-entry changes in accounts of its Participants. The Participants include
securities brokers and dealers (including the Initial Purchasers), banks, trust
companies, clearing corporations and certain other organizations. Access to
DTC's system is also available to other entities such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship with
a Participant, either directly or indirectly (collectively, the "Indirect
Participants"). Persons who are not Participants may beneficially own securities
held by or on behalf of DTC only through the Participants or the Indirect
Participants. The ownership interests and transfer of ownership interests of
each actual purchaser of each security held by or on behalf of DTC are recorded
on the records of the Participants and Indirect Participants.
DTC has also advised the Company that, pursuant to procedures
established by it, (i) upon deposit of the Global Notes, DTC will credit the
accounts of Participants designated by the Initial Purchasers with portions of
the principal amount of the Global Notes and (ii) ownership of such interests in
the Global Notes will be maintained by DTC (with respect to the Participants) or
by the Participants and the Indirect Participants (with respect to other owners
of beneficial interests in the Global Notes).
Investors in the Rule 144A Global Note may hold their interests therein
directly through DTC, if they are Participants in such system, or indirectly
through organizations (including Euroclear and CEDEL) which are Participants in
such system. Investors in the Regulation S Global Note must initially hold their
interests therein through Euroclear or CEDEL, if they are participants in such
systems, or indirectly through organizations that are participants in such
systems ("Member Organizations"). After the expiration of the 40-day restricted
period (but not earlier), investors may also hold interests in the Regulation S
Global Note through organizations other than Euroclear and CEDEL that are
Participants or Indirect Participants. Euroclear and CEDEL will hold interests
in the Regulation S Global Note on behalf of their participants through
customers' securities accounts in their respective names on the books of their
respective depositaries, which are Morgan Guaranty Trust Company of New York,
Brussels office, as operator of Euroclear, and Citibank, N.A., as operator of
CEDEL. The depositaries, in turn, will hold such interests in the Regulation S
Global Note in customers' securities accounts in the depositaries' names on the
books of DTC. All interests in a Global Note, including those held through
Euroclear or CEDEL, may be subject to the procedures and requirements of DTC.
Those interests held through Euroclear or CEDEL may also be subject to the
procedures and requirements of such systems. The laws of some states require
that certain persons take physical delivery in definitive form of securities
that they own. consequently, the ability to transfer beneficial interest in a
Global Note to such person will be limited to that extent. Because DTC can act
only on behalf of Participants, which in turn act on behalf of Indirect
Participants and certain banks, the ability of a person having beneficial
interests in Global Note to pledge such interests to persons or entities that do
not participate in the DTC system, or otherwise take actions in respect of such
interests, may be affected by the lack of a physical certificate evidencing such
interests. For certain other restrictions on the transferability of the Notes,
see "--Exchange of Book-Entry Notes for Certificated Notes," and "--Exchanges
between Regulation S Notes and Rule 144A Notes."
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE GLOBAL NOTES WILL
NOT HAVE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF
NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR
HOLDERS THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Payments in respect of the principal of and premium, if any, and
interest and Liquidated Damages, if any, on Global Notes registered in the name
of DTC or its nominee will be payable by the Trustee to DTC in its capacity as
the registered Holder under the Indenture. Under the terms of the Indenture, the
Company and the Trustee will treat the persons in whose names the Notes,
including the Global Notes, are registered as the owners thereof for the
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purpose of receiving such payments and for any and all other purposes
whatsoever. Consequently, neither the Company, the Trustee nor any agent of the
Company or the Trustee has or will have any responsibility or liability for (i)
any aspect of DTC's records or any Participant's or Indirect Participant's
records relating to or payments made on account of beneficial ownership
interests in the Global Notes, or for maintaining, supervising or reviewing any
of DTC's records or any Participant's or Indirect Participant's records relating
to the beneficial ownership interests in the Global Notes or (ii) any other
matter relating to the actions and practices of DTC or any of its Participants
or Indirect Participants. DTC has advised the Company that its current practice,
upon receipt of any payment in respect of securities such as the Notes
(including principal and interest), is to credit the accounts of the relevant
Participants with the payment on the payment date, in amounts proportionate to
their respective holdings in the principal amount of beneficial interests in the
relevant security as shown on the records of DTC unless DTC has reason to
believe it will not receive payment on such payment date. Payments by the
Participants and the Indirect Participants to the beneficial owners of Notes
will be governed by standing instructions and customary practices and will be
the responsibility of the Participants or the Indirect Participants and will not
be the responsibility of DTC, the Trustee or the Company. Neither the Company
nor the Trustee will be liable for any delay by DTC or any of its Participants
in identifying the beneficial owners of the Notes, and the Company and the
Trustee may conclusively rely on and will be protected in relying on
instructions from DTC or its nominee for all purposes.
Except for trades involving only Euroclear and CEDEL participants,
interests in the Global Notes are expected to be eligible to trade in DTC's
Same-Day Funds Settlement System and secondary market trading activity in such
interests will therefore settle in immediately available funds, subject in all
cases to the rules and procedures of DTC and its Participants.
Subject to the transfer restrictions set forth under "Notice to
Investors," transfers between Participants in DTC will be effected in accordance
with DTC's procedures, and will be settled in same-day funds, and transfers
between participants in Euroclear and CEDEL will be effected in the ordinary way
in accordance with their respective rules and operating procedures.
Subject to compliance with the transfer restrictions applicable to the
Notes described herein, cross-market transfers between the Participants in DTC,
on the one hand, and Euroclear or CEDEL participants, on the other hand, will be
effected through DTC in accordance with DTC's rules on behalf of Euroclear or
CEDEL, as the case may be, by its respective depositaries; however, such
cross-market transactions will require delivery of instructions to Euroclear or
CEDEL, as the case may be, by the counterparty in such system in accordance with
the rules and procedures and within the established deadlines (Brussels time) of
such system. Euroclear or CEDEL, as the case may be, will, if the transaction
meets its settlement requirements, deliver instructions to its respective
depositaries to take action to effect final settlement on its behalf by
delivering or receiving interests in the relevant Global Note in DTC, and making
or receiving payment in accordance with normal procedures for same-day funds
settlement applicable to DTC. Euroclear participants and CEDEL participants may
not deliver instructions directly to the depositaries for Euroclear or CEDEL.
Because of time zone differences, the securities account of a Euroclear
or CEDEL participant purchasing an interest in a Global Note from a Participant
in DTC will be credited, and any such crediting will be reported to the relevant
Euroclear or CEDEL participant, during the securities settlement processing day,
(which must be a business day for Euroclear and CEDEL) immediately following the
settlement date of DTC. DTC has advised the Company that cash received in
Euroclear or CEDEL as a result of sales of interests in a Global Note by or
through a Euroclear or CEDEL participant to a Participant in DTC will be
received with value on the settlement date of DTC but will be available in the
relevant Euroclear or CEDEL cash account only as of the business day for
Euroclear or CEDEL following DTC's settlement date.
DTC has advised the Company that it will take any action permitted to be
taken by a Holder of Notes only at the direction of one or more Participants to
whose account with DTC interests in the Global Notes are credited and only in
respect of such portion of the aggregate principal amount of the Notes as to
which such Participant or Participants has or have given such direction.
However, if there is an Event of Default under the Notes, DTC reserves the right
to exchange the Global Notes for legended Notes in certificated form, and to
distribute such Notes to its Participants.
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The information in this section concerning DTC, Euroclear and CEDEL and
their book-entry systems has been obtained from sources that the Company
believes to be reliable, but the Company takes no responsibility for the
accuracy thereof.
Although DTC, Euroclear and CEDEL have agreed to the foregoing
procedures to facilitate transfers of interests in the Regulation S Global Note
and in the Rule 144A Global Note among participants in DTC, Euroclear and CEDEL,
they are under no obligation to perform or to continue to perform such
procedures, and such procedures may be discontinued at any time. Neither the
Company nor the Trustee will have any responsibility for the performance by DTC,
Euroclear or CEDEL or their respective participants or indirect participants of
their respective obligations under the rules and procedures governing their
operations.
TRANSFER OF NOTES HELD THROUGH DTC
The Trustee and DTC have confirmed that the Exchange Offer is eligible
for the DTC Automated Tender Offer Program ("ATOP"). DTC has authorized DTC
participants that hold Notes on behalf of beneficial owners of Notes through DTC
to tender their Notes as if they were Holders. To effect a tender, DTC
participants should transmit their acceptance to DTC through ATOP by causing DTC
to transfer Notes to the Trustee for such Notes in accordance with ATOP's
procedures for transfer. DTC will then send an Agent's Message (as defined
below) to the Trustee. Delivery of tendered Notes by a DTC participant must be
made to the Trustee pursuant to the procedure for book-entry transfer set forth
below or the tendering DTC participant must comply with the guaranteed delivery
procedures set forth below.
Except as provided below, unless the Notes being tendered are deposited
with the Trustee for such Notes, prior to 5:00 p.m., New York City time, on the
Expiration Date (accompanied by a properly completed and duly executed Letter of
Transmittal or a properly transmitted Agent's Message relating to such Notes),
IMPAC may, at its option, treat such tender as defective.
BOOK-ENTRY DELIVERY PROCEDURES
The Trustee has established or will establish within two Business Days
(as defined below) after the date of this Prospectus an account at DTC under the
ATOP program with respect to the Notes, as the case may be, for purposes of the
Exchange Offer in respect of such Notes, and any financial institution that is a
participant in DTC may make book-entry delivery of the Notes, as the case may
be, by causing DTC to transfer such Notes to the DTC for such Notes in
accordance with DTC's procedures for such transfer. A "Business Day" includes
any day which is not a Saturday, Sunday or federal holiday. However, although
delivery of Notes may be effected through book-entry transfer to the Trustee
through DTC, an Agent's Message in connection with a book-entry transfer or, if
Letter of Transmittal is utilized, the applicable Letter of Transmittal (or
facsimile thereof) with any required signature guarantees, the certificates
representing the Notes and any other documents required signature guarantees,
the certificates representing the Notes and any other documents required by the
applicable Letter of Transmittal is utilized, the applicable Letter of
Transmittal (or a facsimile thereof) with any required signature guarantees, the
certificates representing the Notes and any other documents required by the
applicable Letter of Transmittal, must, in any case, be transmitted to and
received by the Trustee at its address set forth herein prior to 5:00 p.m., New
York City time, on the Expiration Date, or, to be validly tendered prior to 5:00
p.m., New York City time, on the Expiration Date, the guaranteed delivery
procedures described below must be complied with. Delivery of documents to DTC
does not constitute delivery to the Trustee. The confirmation of a book-entry
transfer to the Trustee through DTC via DTC's ATOP procedures as described above
in referred to herein as "Book-Entry Confirmation."
The term "Agent's Message" means a message transmitted by DTC to, and
received by, the Trustee and forming a part of the Book-Entry Conformation,
which states that DTC has received an express acknowledgment from each
participant in DTC tendering the Notes that such participant has received the
applicable Letter of Transmittal and agrees to be bound by the terms of such
Letter of Transmittal and that IMPAC may enforce such agreement against such
participants.
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EXCHANGE OF BOOK-ENTRY NOTES FOR CERTIFICATED NOTES
A Global Note is exchangeable for definitive New Notes in registered
certificated form if (i) DTC (x) notifies the Company that it is unwilling or
unable to continue as depositary for the Global Note and the Company thereupon
fails to appoint a successor depositary or (y) has ceased to be a clearing
agency registered under the Exchange Act, (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of the New
Notes in certificated Form or (iii) there shall have occurred and be continuing
an Event of Default or any event which after notice or lapse of time or both
would be an Event of Default with respect to the New Notes. In addition, subject
to certain limitations, beneficial interests in a Global Note are exchangeable
for definitive New Notes upon the request of the beneficial holder to the
Trustee through the applicable procedures of DTC. In all cases, certificated New
Notes delivered in exchange for any Global Note or beneficial interests therein
will be registered in the names, and issued in any approved denominations,
requested by or on behalf of the depositary (in accordance with its customary
procedures) and will bear the applicable restrictive legend referred to in
"Notice to Investors," unless the Company determines otherwise in compliance
with applicable law.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
Limitation on Indebtedness
The Indenture provides that the Company will not, and it will not permit
any of its Restricted Subsidiaries to, directly or indirectly, Incur any
Indebtedness (other than Permitted Indebtedness) unless, after giving pro forma
effect to the incurrence of such Indebtedness and the receipt and application of
the proceeds thereof, (i) no Default or Event of Default would occur as a
consequence of, or be continuing following, such Incurrence and application and
(ii) the Consolidated Interest Coverage Ratio would exceed (i) 2.25 to 1.0 if
such Incurrence is between the Issue Date and July 1, 1999 and (ii) 2.50 to 1.0
if such Incurrence is thereafter.
"Permitted Indebtedness" means any and all of the following: (i)
Indebtedness arising under the Indenture, including without limitation the Notes
and the Subsidiary Guarantees; (ii) Indebtedness under the Senior Credit
Facilities, to the extent that the aggregate principal amount of all
Indebtedness under the Senior Credit Facilities, together with all Indebtedness
Incurred pursuant to clause (ix) of this paragraph in respect of Indebtedness
previously Incurred pursuant to this clause (ii), at any one time outstanding
does not exceed the greater of (a) $35.0 million and (b) $8.0 million, plus 15%
of Adjusted Consolidated Net Tangible Assets determined as of the date of the
Incurrence of such Indebtedness; provided, however, that the maximum amount
available to be outstanding under the Senior Credit Facilities as Permitted
Indebtedness pursuant to this clause (ii) shall be permanently reduced by the
amount of Net Available Cash from Asset Sales used to permanently repay
Indebtedness under the Senior Credit Facilities (with a permanent reduction of
the related commitment to lend or the amount available to be refinanced in the
case of a revolving credit facility) and not subsequently reinvested in
Additional Assets or used to permanently reduce other Indebtedness to the extent
permitted pursuant to the provisions of the Indenture described under
"--Limitation on Asset Sales"; provided, however, that the application of any
such Net Available Cash from Asset Sales shall not permanently reduce the amount
of Permitted Indebtedness under this clause (ii) below $10.0 million in
principal amount plus related accrued interest and costs; (iii) Indebtedness to
the Company or any of its Wholly Owned Restricted Subsidiaries by any of its
Restricted Subsidiaries or Indebtedness of the Company to any of its Wholly
Owned Restricted Subsidiaries (but only so long as such Indebtedness is held by
the Company or a Wholly Owned Restricted Subsidiary); (iv) Indebtedness in
respect of bid, performance or surety obligations issued by or for the account
of the Company or any Restricted Subsidiary in the ordinary course of business,
including guarantees and letters of credit functioning as or supporting such
bid, performance or surety obligations (in each case other than for an
obligation for money borrowed); (v) Indebtedness under Permitted Hedging
Agreements; (vi) obligations relating to oil or gas balancing positions arising
in the ordinary course of business that are customary in the Oil and Gas
Business; (vii) Indebtedness outstanding on the Issue Date (which is not repaid
with the proceeds of the Note Offering) not otherwise permitted in clauses (i)
through (vi) above; (viii) Indebtedness not otherwise permitted to be Incurred
pursuant to this paragraph (excluding any Indebtedness Incurred pursuant to the
provisions of the Indenture described in the immediately preceding paragraph),
provided that the aggregate principal amount of all Indebtedness Incurred
pursuant to this clause (viii), together with all Indebtedness Incurred pursuant
to clause
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(ix) of this paragraph in respect of Indebtedness previously Incurred pursuant
to this clause (viii), at any one time outstanding does not exceed $15.0
million; (ix) Indebtedness Incurred in exchange for, or the proceeds of which
are used to refinance, (a) Indebtedness referred to in clauses (i) through
(viii) of this paragraph (including Indebtedness previously Incurred pursuant to
this clause (ix)) and (b) Indebtedness Incurred pursuant to the provisions of
the Indenture described in the immediately preceding paragraph, provided that
such Indebtedness is Permitted Refinancing Indebtedness; and (x) Indebtedness
consisting of obligations in respect of purchase price adjustments, indemnities
or Guarantees in connection with the acquisition or disposition of assets.
Limitation on Liens
The Indenture provides that the Company will not, and will not permit
any Restricted Subsidiary to, directly or indirectly, enter into, create, incur,
assume or suffer to exist any Lien (other than Permitted Liens) on or with
respect to any Property of the Company or such Restricted Subsidiary, whether
owned on the Issue Date or acquired after the Issue Date, or any interest
therein or any income or profits therefrom, unless the Notes (and, in the case
of a Restricted Subsidiary which is a Subsidiary Guarantor, the Subsidiary
Guaranty of such Subsidiary) are secured equally and ratably with (or prior to)
any and all other obligations secured by such Lien.
"Permitted Liens" means any and all of the following: (i) Liens existing
as of the Issue Date; (ii) Liens securing the Notes, the Subsidiary Guarantees
and other obligations arising under the Indenture; (iii) any Lien existing on
any Property (including future improvements thereon, accessions thereto and
proceeds thereof) of a Person at the time such Person is merged or consolidated
with or into the Company or a Subsidiary Guarantor or becomes a Restricted
Subsidiary that is a Subsidiary Guarantor (and not incurred in anticipation of
or in connection with such transaction), provided that such Liens are not
extended to other Property of the Company or the Subsidiary Guarantors; (iv) any
Lien existing on any Property (including future improvements thereon, accessions
thereto and proceeds thereof) at the time of the acquisition thereof (and not
incurred in anticipation of or in connection with such transaction), provided
that such Liens are not extended to other Property of the Company or the
Subsidiary Guarantors; (v) any Lien incurred in the ordinary course of business
incidental to the conduct of the business of the Company or the Subsidiary
Guarantors or the ownership of their Property (including, without limitation,
(a) easements, rights of way and similar encumbrances, (b) rights or title of
lessors under leases (other than Capital Lease Obligations), (c) rights of
collecting banks having rights of setoff, revocation, refund or chargeback with
respect to money or instruments of the Company or the Subsidiary Guarantors or
on deposit with or in the possession of such banks, (d) Liens imposed by law,
including without limitation, Liens under workers' compensation or similar
legislation and mechanics', carriers', warehousemen's, materialmen's, suppliers'
and vendors' Liens, (e) Liens incurred to secure performance of obligations with
respect to statutory or regulatory requirements, performance or return-of-money
bonds, surety bonds or other obligations of a like nature and incurred in a
manner consistent with industry practice and (f) Liens on deposits made in the
ordinary course of business), in each case which are not incurred in connection
with the borrowing of money, the obtaining of advances or the payment of the
deferred purchase price of Property (other than Trade Accounts Payable) and
which do not in the aggregate impair in any material respect the use of Property
in the operation of the business of the Company and its Restricted Subsidiaries
taken as a whole; (vi) Liens for taxes, assessments and governmental charges not
yet due or the validity of which are being contested in good faith by
appropriate proceedings, promptly instituted and diligently conducted, and for
which adequate reserves have been established to the extent required by GAAP;
(vii) Liens incurred to secure appeal bonds and judgment and attachment Liens,
in each case in connection with litigation or legal proceedings that are being
contested in good faith by appropriate proceedings so long as reserves have been
established to the extent required by GAAP as in effect at such time and so long
as such Liens do not encumber assets by an amount in excess of $5.0 million;
(viii) Liens securing Permitted Hedging Agreements of the Company and its
Restricted Subsidiaries; (ix) Oil and Gas Liens Incurred in the ordinary course
of the business of the Company and its Restricted Subsidiaries; (x) purchase
money security interests (including, without limitation, Capital Lease
Obligations) granted in connection with the acquisition of fixed assets in the
ordinary course of business of the Company and its Restricted Subsidiaries,
provided, that (a) such Liens attach only to the Property (including future
improvements thereon, accessions thereto and proceeds thereof) so acquired with
the purchase money Indebtedness secured thereby and (b) the Indebtedness secured
by such Liens is not in excess of the purchase price of such Property; (xi)
Liens resulting from the deposit of funds or evidences of Indebtedness in trust
for the purpose of decreasing or defeasing Indebtedness of the Company or any of
its Subsidiaries so long as such deposit of funds is permitted by the provisions
of the Indenture described under "--Limitation on Restricted Payments;" (xii)
Liens resulting from a pledge of Capital Stock of a Person that is not
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a Restricted Subsidiary; (xiii) Liens, including liens resulting from the pledge
of Capital Stock of Restricted Subsidiaries, to secure obligations arising from
time to time under the Senior Credit Facilities; (xiv) Liens to secure any
permitted extension, renewal, refinancing, refunding or exchange (or successive
extensions, renewals, refinancings, refundings or exchanges), in whole or in
part, of or for any Indebtedness secured by Liens referred to in clauses (i),
(ii), (iii), (iv), (x) and (xiii) above; provided, however, that (a) such new
Lien shall be limited to all or part of the same Property (including future
improvements thereon, accessions thereto and proceeds thereof) that secured the
original Lien and (b) the Indebtedness secured by such Lien at such time is not
increased to any amount greater than the sum of (1) the outstanding principal
amount or, if greater, the committed amount of the Indebtedness secured by such
original Lien immediately prior to such extension, renewal, refinancing,
refunding or exchange and (2) an amount necessary to pay any fees and expenses,
including premiums, related to such refinancing, refunding, extension, renewal
or replacement; (xv) Liens encumbering property or assets under construction
arising from progress or partial payments by a customer of the Company or its
Restricted Subsidiaries relating to such property or assets; and (xvi) Liens in
favor of the Company or a Subsidiary Guarantor. Notwithstanding anything in this
paragraph to the contrary, the term "Permitted Liens" does not include Liens
resulting from the creation, incurrence, issuance, assumption or Guarantee of
any Production Payment and Reserve Sale other than (a) Production Payments and
Reserve Sales in connection with the acquisition of Properties after the Issue
Date, provided that any such Liens created in connection therewith are created,
incurred, issued, assumed or guaranteed in connection with the financing of, and
within 90 days after the acquisition of, the Property that is subject thereto,
(b) Production Payments and Reserve Sales, other than those described in clause
(a) of this sentence, to the extent such Production Payments and Reserve Sales
constitute Asset Sales made pursuant to and in compliance with the provisions of
the Indenture described under "--Limitation on Asset Sales," or (c) Oil and Gas
Liens that are not Dollar-Denominated Production Payments or Volumetric
Production Payments, that are incurred in the ordinary course of business of the
Company and its Restricted Subsidiaries, and that may be deemed under the
definition of Production Payments and Reserve Sales to constitute Production
Payments and Reserve Sales.
Limitation on Restricted Payments
(a) The Indenture provides that the Company will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly, make any
Restricted Payment if, at the time of and after giving effect to the proposed
Restricted Payment, (i) any Default or Event of Default would have occurred and
be continuing, (ii) the Company could not incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) pursuant to the provisions of
the Indenture described under "--Limitation on Indebtedness" or (iii) the
aggregate amount expended or declared for all Restricted Payments from the Issue
Date would exceed the sum (without duplication) of the following:
(i) 50% of the aggregate Consolidated Net Income of the Company
accrued on a cumulative basis commencing on the last day of the fiscal
quarter immediately preceding the Issue Date, and ending on the last day
of the fiscal quarter ending on or immediately preceding the date of
such proposed Restricted Payment (or, if such aggregate Consolidated Net
Income shall be a loss, minus 100% of such loss), plus
(ii) the aggregate net cash proceeds, or the Fair Market Value of
Property other than cash, received by the Company on or after the Issue
Date from the issuance or sale (other than to a Subsidiary of the
Company) of Capital Stock of the Company or any options, warrants or
rights to purchase Capital Stock of the Company, plus
(iii) the aggregate net cash proceeds or the Fair Market Value of
Property other than cash received by the Company as capital
contributions to the Company (other than from a Subsidiary of the
Company) on or after the Issue Date, plus
(iv) the aggregate net cash proceeds received by the Company upon
the exercise of any options, warrants or rights to purchase shares of
Capital Stock of the Company (other than from a Subsidiary of the
Company) on or after the Issue Date, plus
(v) the aggregate net cash proceeds received on or after the
Issue Date by the Company from the issuance or sale (other than to any
Subsidiary of the Company) of convertible debt or convertible Redeemable
Stock that
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has been converted into or exchanged for Capital Stock of the Company,
together with the aggregate cash received by the Company at the time of
such conversion or exchange, plus
(vi) to the extent not otherwise included in the Company's
Consolidated Net Income, an amount equal to the net reduction in
Investments made by the Company and its Restricted Subsidiaries
subsequent to the Issue Date in any Person resulting from (1) payments
of interest on debt, dividends, repayments of loans or advances or other
transfers or distributions of Property, in each case to the Company or
any Restricted Subsidiary from any Person other than the Company or a
Restricted Subsidiary, and in an amount not to exceed the book value of
such Investments previously made in such Person that were treated as
Restricted Payments, or (2) the designation of any Unrestricted
Subsidiary as a Restricted Subsidiary, and in an amount not to exceed
the lesser of (x) the book value of all Investments previously made in
such Unrestricted Subsidiary that were treated as a Restricted Payments
and (y) the Fair Market Value of such Unrestricted Subsidiary.
(b) The limitations set forth in paragraph (a) above will not prevent
the Company or any Restricted Subsidiary from making the following Restricted
Payments so long as, at the time thereof, no Default or Event of Default shall
have occurred and be continuing (except in the case of clause (i) below under
which the payment of a dividend is permitted, so long as the declaration of such
dividend was made in compliance with the provisions under "--Limitation on
Restricted Payments"):
(i) the payment of any dividend on Capital Stock of the Company
or any Restricted Subsidiary within 60 days after the declaration
thereof, if at such declaration date such dividend could have been paid
in compliance with paragraph (a) above;
(ii) the purchase, redemption or other acquisition or retirement
for value of any Capital Stock of the Company or any Restricted
Subsidiary, in exchange for, or out of the aggregate net cash proceeds
of, a substantially concurrent issuance and sale (other than to a
Subsidiary of the Company) of Capital Stock of the Company;
(iii) the making of any principal payment on or the repurchase,
redemption, defeasance or other acquisition or retirement for value,
prior to any scheduled principal payment, scheduled sinking fund payment
or maturity, of any Indebtedness (other than Redeemable Stock) in
exchange for, or out of the aggregate net cash proceeds of, a
substantially concurrent issuance and sale (other than to a Subsidiary
of the Company) of Capital Stock of the Company;
(iv) the making of any principal payment on or the repurchase,
redemption, defeasance or other acquisition or retirement for value of
Indebtedness in exchange for, or out of the aggregate net cash proceeds
of, a substantially concurrent Incurrence (other than a sale to a
Subsidiary of the Company) of Indebtedness so long as such new
Indebtedness is Permitted Refinancing Indebtedness and such new
Indebtedness (a) has an Average Life to Stated Maturity that is longer
than the Average Life to Stated Maturity of the Notes and (b) has a
Stated Maturity for its final scheduled principal payment that is at
least 91 days later than the Stated Maturity of the final scheduled
principal payment of the Notes;
(v) loans made to officers, directors or employees of the Company
or any Restricted Subsidiary approved by the Board of Directors (or a
duly authorized officer), the proceeds of which are used solely (a) to
purchase common stock of the Company in connection with a restricted
stock or employee stock purchase plan, or to exercise stock options
received pursuant to an employee or director stock option plan or other
incentive plan, in a principal amount not to exceed the exercise price
of such stock options or (b) to refinance loans, together with accrued
interest thereon, made pursuant to Item (a) of this clause (v); and
(vi) the repurchase, redemption or other acquisition or
retirement for value of the Company's 12% Bonds outstanding on the date
hereof.
The actions described in clauses (i), (ii), (iii) and (v) of this
paragraph (b) shall be Restricted Payments that shall be permitted to be taken
in accordance with this paragraph (b) but shall reduce the amount that would
otherwise be available for Restricted Payments under paragraph (a) (provided
that any dividend paid pursuant to clause (i) of this
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paragraph (b) shall reduce the amount that would otherwise be available under
paragraph (a) when declared, but not also when subsequently paid pursuant to
such clause (i)), and the actions described in clause (iv) of this paragraph (b)
shall be Restricted Payments that shall be permitted to be taken in accordance
with this paragraph (b) but shall not reduce the amount that would otherwise be
available for Restricted Payments under paragraph (a).
Limitation on Issuance and Sale of Capital Stock of Restricted Subsidiaries
The Indenture provides that the Company will not (i) permit any
Restricted Subsidiary to sell or otherwise issue any Capital Stock other than to
the Company or one of its Wholly Owned Restricted Subsidiaries or (ii) permit
any Person other than the Company or a Wholly Owned Restricted Subsidiary to own
any Capital Stock of any other Restricted Subsidiary, except, in each case, for
(a) directors' qualifying shares, (b) the Capital Stock of a Restricted
Subsidiary owned by a Person at the time such Restricted Subsidiary became a
Restricted Subsidiary or acquired by such Person in connection with the
formation of the Restricted Subsidiary, or transfers thereof or (c) a sale of
all of the Capital Stock of a Restricted Subsidiary owned by the Company or its
Subsidiaries effected in accordance with the provisions of the Indenture
described under "--Limitation on Asset Sales."
Limitation on Asset Sales
The Indenture provides that the Company will not, and will not permit
any Restricted Subsidiary to, consummate any Asset Sale unless (i) the Company
or such Restricted Subsidiary, as the case may be, receives consideration at the
time of such Asset Sale at least equal to the Fair Market Value of the shares
and assets subject to such Asset Sale and (ii) at least 75% of the consideration
paid to the Company or such Restricted Subsidiary in connection with such Asset
Sale is in the Form of cash or Cash Equivalents or Exchanged Properties
("Permitted Consideration").
The Net Available Cash from Asset Sales by the Company or a Restricted
Subsidiary may be applied by the Company or such Restricted Subsidiary, to the
extent the Company or such Restricted Subsidiary elects (or is required by the
terms of any Indebtedness of the Company or such Restricted Subsidiary), to (i)
prepay, repay or purchase Indebtedness of the Company or a Subsidiary Guarantor
or Indebtedness of such Restricted Subsidiary (in each case excluding
Indebtedness owed to the Company or an Affiliate of the Company (other than
pursuant to a Senior Credit Facility) and Indebtedness of the Company or a
Subsidiary Guarantor which is subordinated to the Notes or the applicable
Subsidiary Guaranty), (ii) to reinvest in Additional Assets (including by means
of an Investment in Additional Assets by a Restricted Subsidiary with Net
Available Cash received by the Company or another Restricted Subsidiary) or
(iii) purchase Notes (excluding Notes owned by the Company or an Affiliate of
the Company, other than pursuant to an offer made to all holders of the Notes).
Any Net Available Cash from an Asset Sale not applied in accordance with
the preceding paragraph within 365 days from the date of such Asset Sale shall
constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds
exceeds $10.0 million, the Company will be required to make an offer to purchase
Notes having an aggregate principal amount equal to the aggregate amount of
Excess Proceeds (the "Prepayment Offer") at a purchase price equal to 100% of
the principal amount of such Notes plus accrued and unpaid interest and
Liquidated Damages, if any, to the Purchase Date (as defined) in accordance with
the procedures (including prorating in the event of oversubscription) set forth
in the Indenture, but, if the terms of any Indebtedness (other than Indebtedness
which is subordinated to the Notes or a Subsidiary Guaranty) require that an
offer to purchase such Indebtedness be made contemporaneously with the
Prepayment Offer, then the Excess Proceeds shall be prorated between the
Prepayment Offer and such other Offer in accordance with the aggregate
outstanding principal amounts of the Notes and such other Indebtedness, and the
aggregate principal amount of Notes for which the Prepayment Offer is made shall
be reduced accordingly. If the aggregate principal amount of Notes tendered by
Holders thereof exceeds the amount of available Excess Proceeds, then such
Excess Proceeds will be allocated pro rata according to the principal amount of
the Notes tendered and the Trustee will select the Notes to be purchased in
accordance with the Indenture. To the extent that any portion of the amount of
Excess Proceeds remains after compliance with the second sentence of this
paragraph and provided that all Holders of Notes have been given the opportunity
to tender their Notes for purchase as described in the following paragraph in
accordance with the Indenture, the Company or such Restricted Subsidiary may use
such remaining amount for general corporate purposes and the amount of Excess
Proceeds will be reset to zero.
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Within five days after the 365th day following the date of an Asset
Sale, the Company shall, if it is obligated to make an offer to purchase the
Notes pursuant to the preceding paragraph, send a written Prepayment Offer
notice, by first-class mail, to the Holders of the Notes (the "Prepayment Offer
Notice"), accompanied by such information regarding the Company and its
Subsidiaries as the Company in good faith believes will enable such Holders of
the Notes to make an informed decision with respect to the Prepayment Offer. The
Prepayment Offer Notice will state, among other things, (i) that the Company is
offering to purchase Notes pursuant to the provisions of the Indenture, (ii)
that any Note (or any portion thereof) accepted for payment (and duly paid on
the Purchase Date) pursuant to the Prepayment Offer shall cease to accrue
interest on the Purchase Date, (iii) that any Securities (or portions thereof)
not properly tendered will continue to accrue interest, (iv) the purchase price
and purchase date, which shall be, subject to any contrary requirements of
applicable law, no less than 30 days nor more than 60 days after the date the
Prepayment Offer Notice is mailed (the "Purchase Date"), (v) the aggregate
principal amount of Notes to be purchased, (vi) a description of the procedure
which Holders of Notes must follow in order to tender their Notes and the
procedures that Holders of Notes must follow in order to withdraw an election to
tender their Notes for payment, and (vii) all other instructions and materials
necessary to enable Holders to tender Notes pursuant to the Prepayment Offer.
The Company will comply, to the extent applicable, with the requirements
of Rules 13e-4 and 14e-1 under the Exchange Act and any other securities laws or
regulations thereunder to the extent such laws and regulations are applicable in
connection with the purchase of Notes as described above. To the extent that the
provisions of any securities laws or regulations conflict with the provisions
relating to the Prepayment Offer, the Company will comply with the applicable
securities laws and regulations and will not be deemed to have breached its
obligations described above.
There can be no assurance that the Company and the Subsidiary Guarantors
will be able to fund any Prepayment Offer. The Credit Agreement and the ECT
Revolving Credit Agreement contain, and any future credit agreements or other
agreements relating to indebtedness to which the Company or a Subsidiary
Guarantor becomes a party may contain, restrictions on the repurchase of Notes.
If a Prepayment Offer is required to be made at a time when such restrictions
are in effect, such failure to purchase tendered Notes would constitute an Event
of Default under the Indenture, which would, in turn, constitute a default under
the Credit Agreement and the ECT Revolving Credit Agreement and may constitute a
default under the terms of any other Indebtedness of the Company or the
Subsidiary Guarantors then outstanding.
Limitation on Transactions with Affiliates
The Indenture provides that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, conduct any
business or enter into any transaction or series of transactions (including, but
not limited to, but excluding transactions under certain agreements in existence
on the Issue Date, the sale, transfer, disposition, purchase, exchange or lease
of Property, the making of any Investment, the giving of any Guarantee or the
rendering of any service) with or for the benefit of any Affiliate of the
Company (other than the Company or a Wholly Owned Restricted Subsidiary), unless
(i) such transaction or series of transactions is on terms no less favorable to
the Company or such Restricted Subsidiary than those that could be obtained in a
comparable arm's-length transaction with a Person that is not an Affiliate of
the Company or such Restricted Subsidiary, and (ii) with respect to a
transaction or series of transactions involving aggregate payments by or to the
Company or such Restricted Subsidiary having a Fair Market Value equal to or in
excess of (a) $1.0 million but less than $5.0 million, the Board of Directors of
the Company (including a majority of the disinterested members of the Board of
Directors of the Company) approves such transaction or series of transactions
and, in its good faith judgment, believes that such transaction or series of
transactions complies with clause (i) of this paragraph, as evidenced by a
certified resolution delivered to the Trustee or (b) $5.0 million, (1) the
Company receives from an independent, nationally recognized investment banking
firm or appraisal firm, in either case specializing or having a specialty in the
type and subject matter of the transaction (or series of transactions) at issue,
a written opinion that such transaction (or series of transactions) is fair,
from a financial point of view, to the Company or such Restricted Subsidiary and
(2) the Board of Directors of the Company (including a majority of the
disinterested members of the Board of Directors of the Company) approves such
transaction or series of transactions and, in its good faith judgment, believes
that such transaction or series of transactions complies with clause (i) of this
paragraph, as evidenced by a certified resolution delivered to the Trustee.
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The limitations of the preceding paragraph do not apply to (i) the
payment of reasonable and customary compensation (including pursuant to stock
option and stock purchase plans) to directors of the Company or any of its
Restricted Subsidiaries who are not employees of the Company or any of its
Restricted Subsidiaries, (ii) indemnities of officers and directors of the
Company or any Subsidiary consistent with such Person's bylaws and applicable
statutory provisions, (iii) the Company's and its Restricted Subsidiaries'
employee compensation and other benefit arrangements or (iv) Investments in
Unrestricted Subsidiaries which are deemed to be Restricted Payments under the
provisions under "--Limitation on Restricted Payments."
Restrictions on Distributions from Restricted Subsidiaries
The Indenture provides that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, create, assume or
otherwise cause or suffer to exist or become effective, or enter into any
agreement with any Person that would cause to become effective, any consensual
encumbrance or restriction on the legal right of any Restricted Subsidiary to
(i) pay dividends, in cash or otherwise, or make any other distributions on or
in respect of its Capital Stock or Redeemable Stock held by the Company or a
Subsidiary Guarantor, (ii) pay any Indebtedness or other obligation owed to the
Company or any Subsidiary Guarantor, (iii) make any Investments in the Company
or any Subsidiary Guarantor, or (iv) transfer any of its property or assets to
the Company or any Subsidiary Guarantor. Such limitation will not apply (a) with
respect to clauses (iii) and (iv) only, to encumbrances and restrictions (1) in
existence under or by reason of any agreements in effect on the Issue Date, (2)
required under Senior Credit Facilities that are not more restrictive than those
in effect under the Senior Credit Facilities on the Issue Date, (3) in existence
with respect to a Restricted Subsidiary at the time it became a Restricted
Subsidiary if (a) such encumbrance or restriction was not created in
anticipation of or in connection with the transactions pursuant to which the
Restricted Subsidiary became a Restricted Subsidiary and (b) immediately
following such transaction, on a pro forma basis, the Company could incur at
least $1.00 of additional Indebtedness (other than Permitted Indebtedness)
pursuant to the provisions of the Indenture described under "--Limitation on
Indebtedness" or (4) which result from the renewal, refinancing, extension or
amendment of an agreement referred to in the immediately preceding clauses (1),
(2) and (3), provided, such replacement or encumbrance or restriction is no more
restrictive to the Company or Restricted Subsidiary and is not materially less
favorable to the Holders of Notes than those under or pursuant to the agreement
evidencing the Indebtedness so extended, renewed, refinanced or replaced, and
(b) with respect to clause (iv) only, to (1) any restriction on the sale,
transfer or other disposition of assets or Property as a result of a Lien
permitted under the provisions of the Indenture described under "--Limitation on
Liens," (2) any encumbrance or restriction arising in connection with an
acquisition of Property, so long as such encumbrance or restriction relates
solely to the Property so acquired (including future improvements thereon,
accessions thereto and proceeds thereof) and was not created in anticipation of
or in connection with such acquisition, (3) customary provisions restricting
subletting or assignment of leases and customary provisions in other agreements
that restrict assignment of such agreements or rights thereunder, (4) any
encumbrance or restriction due to applicable law, (5) customary restrictions
contained in asset sale agreements limiting the transfer of such assets pending
the closing of such sale and (6) restrictions contained in purchase money
obligations for Property acquired in the ordinary course of business with
respect to transfers of such Property.
Restricted and Unrestricted Subsidiaries
Unless defined or designated as an Unrestricted Subsidiary, any Person
that becomes a Subsidiary of the Company or any of its Restricted Subsidiaries
shall be classified as a Restricted Subsidiary subject to the provisions of the
next paragraph. The Company may designate a Subsidiary (including a newly formed
or newly acquired Subsidiary) of the Company or any of its Restricted
Subsidiaries as an Unrestricted Subsidiary if (i) such Subsidiary does not at
such time own any Capital Stock, Redeemable Stock or Indebtedness of, or own or
hold any Lien on any property of, the Company or any other Restricted
Subsidiary, (ii) such Subsidiary does not at such time have any Indebtedness or
other obligations which, if in default, would result (with the passage of time
or notice or otherwise) in a default on any Indebtedness of the Company or any
Restricted Subsidiary and (iii)(a) such designation is effective immediately
upon such Subsidiary becoming a Subsidiary of the Company or of a Restricted
Subsidiary, (b) the Subsidiary to be so designated has total assets of $1,000 or
less or (c) if such Subsidiary has total assets greater than $1,000, then such
redesignation as an Unrestricted Subsidiary is deemed to constitute a Restricted
Payment in an amount equal to the Fair Market Value of the Company's direct and
indirect ownership interest in such Subsidiary, and such Restricted Payment
would be permitted to be made at the time of such designation under
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the provisions of the Indenture described under "--Limitation on Restricted
Payments." Except as provided in clauses (iii)(b) and (c) of this paragraph, no
Restricted Subsidiary may be redesignated as an Unrestricted Subsidiary. The
designation of an Unrestricted Subsidiary or removal of such designation shall
be made by the Board of Directors of the Company or a committee thereof pursuant
to a certified resolution delivered to the Trustee and shall be effective as of
the date specified in the applicable certified resolution, which shall not be
prior to the date such certified resolution is delivered to the Trustee.
The Company will not, and will not permit any of its Restricted
Subsidiaries to, take any action or enter into any transaction or series of
transactions that would result in a Person becoming a Restricted Subsidiary
(whether through an acquisition or otherwise, but excluding the creation by the
Company of a new Wholly Owned Restricted Subsidiary) unless, after giving effect
to such action, transaction or series of transactions, on a pro forma basis, (i)
the Company could Incur at least $1.00 of additional Indebtedness (other than
Permitted Indebtedness) pursuant to the provisions of the Indenture described
under "--Limitation on Indebtedness" and (ii) no Default or Event of Default
would occur or be continuing.
Merger, Consolidation and Sale of Substantially All Assets
The Indenture provides that (i) the Company will not merge or
consolidate with or into any other Person (whether or not the Company is the
surviving entity), and (ii) the Company will not and will not permit its
Restricted Subsidiaries to, directly or indirectly, sell, transfer, assign,
lease, convey or otherwise dispose of all or substantially all of the Property
of the Company and its Restricted Subsidiaries taken as a whole to any Person in
any one transaction or a series of transactions (including, without limitation,
dispositions pursuant to mergers, consolidations, Investments and Production
Payments and Reserve Sales), in each case unless: (a) the Surviving Entity (as
defined) shall be a corporation organized and existing under the laws of the
United States of America or a State thereof or the District of Columbia; (b) in
the case of a transaction described in clause (ii) above, such Property shall
have been transferred as an entirety or virtually as an entirety to one Person;
(c) immediately before and immediately after giving effect to such transaction
or series of transactions on a pro forma basis, no Default or Event of Default
shall have occurred and be continuing; (d) except in the case of a merger of the
Company with a Restricted Subsidiary, immediately after giving effect to such
transaction or series of transactions on a pro forma basis, the Surviving Entity
would be able to incur at least $1.00 of additional Indebtedness (other than
Permitted Indebtedness) under the provisions of the Indenture described under
"--Limitation on Indebtedness;" (e) except in the case of a merger of the
Company with a Restricted Subsidiary, immediately after giving effect to such
transaction or series of transactions on a pro forma basis, the Surviving Entity
shall have a Consolidated Net Worth equal to or greater than the Consolidated
Net Worth of the Company immediately prior to the transaction or series of
transactions; (f) if the Company is not the Surviving Entity, then (1) the
Surviving Entity shall have executed and delivered to the Trustee a supplemental
indenture satisfactory to the Trustee pursuant to which the Surviving Entity
assumes the obligations of the Company under the Indenture and the Notes, (2)
each Subsidiary Guarantor (unless it is the Surviving Entity) shall have
executed and delivered to the Trustee a supplemental indenture satisfactory to
the Trustee confirming that such Subsidiary Guarantor's Subsidiary Guaranty
remains in full force and effect and guarantees the Surviving Entity's
obligations under the Indenture and the Notes, and (3) in the case of a
transaction described in clause (ii) above in which the transferee assumes all
of the obligations of the Company under the Indenture and the Notes, the Company
shall be released and shall no longer be considered an obligor under the
Indenture and the Notes; and (g) the Company, and if the Company is not the
Surviving Entity the Surviving Entity, shall have delivered to the Trustee an
Officer's Certificate (attaching the calculations to demonstrate compliance with
(d) and (e) above) and an Opinion of Counsel, each stating that such merger,
consolidation or disposition and any such supplemental indentures comply with
the terms of the Indenture. The Term "Surviving Entity" shall mean the Person
referred to in clauses (i) and (ii) above (1) formed by or surviving any such
merger or consolidation involving the Company or (2) to which any sale,
transfer, assignment, lease, conveyance or other disposition is made.
With respect to each transaction or series of transactions described
above, giving effect to such transaction or series of transactions on a pro
forma basis shall include, without limitation, (i) treating any Indebtedness not
previously the obligation of the Company or any of its Restricted Subsidiaries
which becomes an obligation of the Company or any of its Restricted Subsidiaries
in connection with or as a result of such transaction or series of transactions
as having been incurred at the time of the transaction or series of transactions
and (ii) giving effect to any Indebtedness incurred or anticipated to be
incurred in connection with such transaction or series of transactions.
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Reports
The Indenture provides that, whether or not required by the rules and
regulations of the SEC, so long as any Notes are outstanding, the Company will
file with the SEC and furnish to the Holders of Notes all quarterly and annual
financial information required to be contained in a filing with the SEC on Forms
10-QSB and 10-KSB, including a "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and, with respect to the annual
consolidated financial statements only, a report thereon by the Company's
independent auditors.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other capitalized terms used herein for which no
definition is provided.
"Additional Assets" means (i) any Property (other than cash, Permitted
Short-Term Investments or securities) used in the Oil and Gas Business or any
business ancillary thereto, (ii) Investments in any other Person engaged in the
Oil and Gas Business or any business ancillary thereto (including the
acquisition from third parties of Capital Stock of such Person) made in
compliance with the provisions of the Indenture described under "--Certain
Covenants--Limitation on Restricted Payments" and as a result of which such
other Person becomes a Restricted Subsidiary in compliance with the provisions
of the Indenture described under "--Certain Covenants--Restricted and
Unrestricted Subsidiaries," (iii) the acquisition from third parties of Capital
Stock of a Restricted Subsidiary, (iv) the costs of acquiring, exploiting,
developing and exploring in respect of oil and gas properties or (v) Permitted
Business Investments.
"Adjusted Consolidated Net Tangible Assets" means (without duplication),
as of the date of determination, the remainder of: (i) the sum of (a) discounted
future net revenues from proved oil and gas reserves of the Company and its
Restricted Subsidiaries calculated in accordance with Commission guidelines
before any state, federal or foreign income taxes, as estimated by the Company
and confirmed by a nationally recognized firm of independent petroleum engineers
in a reserve report prepared as of the end of the Company's most recently
completed fiscal year for which audited financial statements are available, as
increased by, as of the date of determination, the estimated discounted future
net revenues from (1) estimated proved oil and gas reserves acquired since such
year-end, which reserves were not reflected in such year-end reserve report, and
(2) estimated oil and gas reserves attributable to upward revisions of estimates
of proved oil and gas reserves since such year-end due to exploration,
development or exploitation activities, in each case calculated in accordance
with SEC guidelines (utilizing the prices utilized in such year-end reserve
report), and decreased by, as of the date of determination, the estimated
discounted future net revenues from (3) estimated proved oil and gas reserves
produced or disposed of since such year-end and (4) estimated oil and gas
reserves attributable to downward revisions of estimates of proved oil and gas
reserves since such year-end due to changes in geological conditions or other
factors which would, in accordance with standard industry practice, cause such
revisions, in each case calculated in accordance with SEC guidelines (utilizing
the prices utilized in such year-end reserve report); provided that, in the case
of each of the determinations made pursuant to clauses (1) through (4), such
increases and decreases shall be as estimated by the Company's petroleum
engineers, unless there is a Material Change as a result of such acquisitions,
dispositions or revisions, in which event the discounted future net revenues
utilized for purposes of this clause (i)(a) shall be confirmed in writing by a
nationally recognized firm of independent petroleum engineers, (b) the
capitalized costs that are attributable to oil and gas properties of the Company
and its Restricted Subsidiaries to which no proved oil and gas reserves are
attributable, based on the Company's books and records as of a date no earlier
than the date of the Company's latest annual or quarterly financial statements,
(c) the Net Working Capital on a date no earlier than the date of the Company's
latest annual or quarterly financial statements and (d) the greater of (1) the
net book value on a date no earlier than the date of the Company's latest annual
or quarterly financial statements and (2) the appraised value, as estimated by
independent appraisers, of other tangible assets (including, without
duplication, Investments in unconsolidated Restricted Subsidiaries) of the
Company and its Restricted Subsidiaries, as of the date no earlier than the date
of the Company's latest audited financial statements, minus (ii) the sum of (a)
minority interests, (b) any net gas balancing liabilities of the Company and its
Restricted Subsidiaries reflected in the Company's latest audited financial
statements, (c) to the extent included in (i)(a) above, the discounted future
net revenues, calculated in accordance with Commission guidelines (utilizing the
prices utilized in the Company's year-end reserve report), attributable to
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reserves which are required to be delivered to third parties to fully satisfy
the obligations of the Company and its Restricted Subsidiaries with respect to
Volumetric Production Payments (determined, if applicable, using the schedules
specified with respect thereto) and (d) the discounted future net revenues,
calculated in accordance with Commission guidelines, attributable to reserves
subject to Dollar-Denominated Production Payments which, based on the estimates
of production and price assumptions included in determining the discounted
future net revenues specified in (i)(a) above, would be necessary to fully
satisfy the payment obligations of the Company and its Restricted Subsidiaries
with respect to Dollar-Denominated Production Payments (determined, if
applicable, using the schedules specified with respect thereto).
"Adjusted Net Assets" of a Subsidiary Guarantor at any date shall mean
the amount by which the fair value of the Property of such Subsidiary Guarantor
exceeds the total amount of liabilities, including, without limitation,
contingent liabilities (after giving effect to all other fixed and contingent
liabilities incurred or assumed on such date), but excluding liabilities under
the Subsidiary Guaranty, of such Subsidiary Guarantor at such date.
"Affiliate" of any specified Person means any other Person (i) which
directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such specified Person or (ii)
which beneficially owns or holds directly or indirectly 10% or more of the
Voting Stock of such specified Person or of any Subsidiary of such specified
Person. For the purposes of this definition, "control," when used with respect
to any specified Person, means the power to direct the management and policies
of such Person directly or indirectly, whether through the ownership of Voting
Stock, by contract or otherwise; and the terms "controlling" and "controlled"
have meanings correlative to the foregoing.
"Asset Sale" means, with respect to any Person, any transfer,
conveyance, sale, lease or other disposition (collectively, "dispositions," and
including, without limitation, dispositions pursuant to any consolidation or
merger) by such Person or any of its Restricted Subsidiaries in any single
transaction or series of transactions of (i) shares of Capital Stock or other
ownership interests of another Person (including Capital Stock of Restricted
Subsidiaries and Unrestricted Subsidiaries) or (ii) any other Property of such
Person or any of its Restricted Subsidiaries; provided, however, that the term
"Asset Sale" shall not include: (a) the disposition of Permitted Short-Term
Investments, inventory, accounts receivable or other Property (excluding the
disposition of oil and gas in place and other interests in real property unless
made in connection with a Permitted Business Investment) in the ordinary course
of business; (b) the disposition of Property received in settlement of debts
owing to the Company or any Restricted Subsidiary as a result of foreclosure,
perfection or enforcement of any Lien or debt, which debts were owing to the
Company or any Restricted Subsidiary in the ordinary course of business of the
Company or such Restricted Subsidiary; (c) any disposition that constitutes a
Restricted Payment made in compliance with the provisions of the Indenture
described under "--Certain Covenants --Limitation on Restricted Payments;" (d)
when used with respect to the Company, any disposition of all or substantially
all of the Property of the Company permitted pursuant to the provisions of the
Indenture described under "--Certain Covenants --Merger, Consolidation and
Sale of Substantially All Assets;" (e) the disposition of any Property by the
Company or a Restricted Subsidiary to the Company or a Wholly Owned Restricted
Subsidiary; (f) the disposition of any asset with a Fair Market Value of less
than $5.0 million; or (g) any Production Payment and Reserve Sale created,
incurred, issued, assumed or guaranteed in connection with the financing of, and
within 90 days after the acquisition of, the Property that is subject thereto.
"Assigned Restricted Subsidiary Indebtedness" means Indebtedness of a
Restricted Subsidiary to the Company that the Company has assigned to the
lenders under any Senior Credit Facility, as collateral securing Indebtedness of
the Company under such Senior Credit Facility.
"Attributable Indebtedness"' means the total net amount of rent required
to be paid during the remaining primary term of any particular lease under which
any person is at the time liable, discounted at the rate per annum equal to the
weighted average interest rate borne by the Notes.
"Average Life" means, with respect to any Indebtedness, at any date of
determination, the quotient obtained by dividing (i) the sum of the products of
(a) the number of years (and any portion thereof) from the date of determination
to the date or dates of each successive scheduled principal payment (including,
without limitation, any
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sinking fund or mandatory redemption payment requirements) of such Indebtedness
multiplied by (b) the amount of each such principal payment by (ii) the sum of
all such principal payments.
"Capital Lease Obligation" means any obligation which is required to be
classified and accounted for as a capital lease obligation in accordance with
GAAP, and the amount of Indebtedness represented by such obligation shall be the
capitalized amount of such obligation determined in accordance with GAAP, and
the Stated Maturity thereof shall be the date of the last payment date of rent
or any other amount due in respect of such obligation. For purposes of the
provisions of the Indenture described under "--Certain Covenants -- Limitation
on Liens," a Capital Lease Obligation shall be deemed to be secured by a Lien on
the Property being leased.
"Capital Stock" in any Person means any and all shares, interests,
participations or other equivalents in the equity interest (however designated)
in such Person and any rights (other than debt securities convertible into an
equity interest), warrants or options to subscribe for or to acquire an equity
interest in such Person; provided, however, that "Capital Stock" shall not
include Redeemable Stock.
"Cash Equivalents" means (i) United States dollars, (ii) securities
issued or directly and fully guaranteed or insured by the United States
government or any agency or instrumentality thereof, (iii) certificates of
deposit and eurodollar time deposits with maturities of six months or less from
the date of acquisition, bankers' acceptances with maturities not exceeding six
months and overnight bank deposits, in each case with any domestic commercial
bank having capital and surplus in excess of $500 million and a Keefe Bank Watch
Rating of "B" or better, (iv) repurchase obligations with a term of not more
than seven days for underlying securities of the types described in clauses (ii)
and (iii) entered into with any financial institution meeting the qualifications
specified in clause (iii) above and (v) commercial paper having the highest
rating obtainable from Moody's or S&P and, in each case, maturing within six
months after the date of acquisition.
"Consolidated Interest Coverage Ratio" means, as of the date of the
transaction giving rise to the need to calculate the Consolidated Interest
Coverage Ratio (the "Transaction Date"), the ratio of (i) the aggregate amount
of EBITDA of the Company and its consolidated Restricted Subsidiaries for the
four full fiscal quarters immediately prior to the Transaction Date for which
financial statements are available to (ii) the aggregate Consolidated Interest
Expense of the Company and its Restricted Subsidiaries that is anticipated to
accrue during a period consisting of the fiscal quarter in which the Transaction
Date occurs and the three fiscal quarters immediately subsequent thereto (based
upon the pro forma amount and maturity of, and interest payments in respect of,
Indebtedness of the Company and its Restricted Subsidiaries expected by the
Company to be outstanding on the Transaction Date), assuming for the purposes of
this measurement the continuation of market interest rates prevailing on the
Transaction Date and base interest rates in respect of floating interest rate
obligations equal to the base interest rates on such obligations in effect as of
the Transaction Date; provided, that if the Company or any of its Restricted
Subsidiaries is a party to any Interest Rate Protection Agreement which would
have the effect of changing the interest rate on any Indebtedness of the Company
or any of its Restricted Subsidiaries for such four quarter period (or a portion
thereof), the resulting rate shall be used for such four quarter period or
portion thereof; provided further that any Consolidated Interest Expense with
respect to Indebtedness Incurred or retired by the Company or any of its
Restricted Subsidiaries during the fiscal quarter in which the Transaction Date
occurs shall be calculated as if such Indebtedness was so Incurred or retired on
the first day of the fiscal quarter in which the Transaction Date occurs. In
addition, if since the beginning of the four full fiscal quarter period
preceding the Transaction Date, (a) the Company or any of its Restricted
Subsidiaries shall have engaged in any Asset Sale, EBITDA for such period shall
be reduced by an amount equal to the EBITDA (if positive), or increased by an
amount equal to the EBITDA (if negative), directly attributable to the assets
which are the subject of such Asset Sale for such period calculated on a pro
forma basis as if such Asset Sale and any related retirement of Indebtedness had
occurred on the first day of such period or (b) the Company or any of its
Restricted Subsidiaries shall have acquired any material assets, EBITDA shall be
calculated on a pro forma basis as if such asset acquisitions had occurred on
the first day of such four fiscal quarter period.
"Consolidated Interest Expense" means, with respect to any Person for
any period, without duplication, (i) the sum of (a) the aggregate amount of cash
and noncash interest expense (including capitalized interest) of such Person and
its Restricted Subsidiaries for such period as determined on a consolidated
basis in accordance with GAAP in respect of Indebtedness (including, without
limitation, (1) any amortization of debt discount, (2) net costs associated with
Interest Rate Protection Agreements (including any amortization of discounts),
(3) the interest portion of any
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deferred payment obligation, (4) all accrued interest and (5) all commissions,
discounts, commitment fees, origination fees and other similar fees and charges
owed with respect to the Senior Credit Facilities and other Indebtedness) paid,
accrued or scheduled to be paid or accrued during such period; (b) Redeemable
Stock dividends of such Person (and of its Restricted Subsidiaries if paid to a
Person other than such Person or its Restricted Subsidiaries) declared and
payable other than in kind; (c) the portion of any rental obligation of such
Person or its Restricted Subsidiaries in respect of any Capital Lease Obligation
allocable to interest expense in accordance with GAAP; (d) the portion of any
rental obligation of such Person or its Restricted Subsidiaries in respect of
any Sale and Leaseback Transaction that is Indebtedness allocable to interest
expense (determined as if such obligation were treated as a Capital Lease
Obligation); and (e) to the extent any Indebtedness of any other Person (other
than Restricted Subsidiaries) is Guaranteed by such Person or any of its
Restricted Subsidiaries, the aggregate amount of interest paid, accrued or
scheduled to be paid or accrued by such other Person during such period
attributable to any such Indebtedness; less (ii) to the extent included in (i)
above, amortization or write-off of deferred financing costs of such Person and
its Restricted Subsidiaries during such period; in the case of both (i) and (ii)
above, after elimination of intercompany accounts among such Person and its
Restricted Subsidiaries and as determined in accordance with GAAP.
"Consolidated Net Income" of any Person means, for any period, the
aggregate net income (or net loss, as the case may be) of such Person and its
Restricted Subsidiaries for such period on a consolidated basis, determined in
accordance with GAAP; provided that there shall be excluded therefrom, without
duplication, (i) the amount of non-cash writedowns attributable to any period
ending on or before January 1, 1999 if in compliance with GAAP or Commission
guidelines, and plus or minus, as appropriate, foreign currency translation
adjustments, all determined on a consolidated basis; (ii) items classified as
extraordinary gains or losses net of tax (less all fees and expenses relating
thereto); (iii) any gain or loss, net of taxes, on the sale or other disposition
of assets (less all fees and expenses relating thereto and including the Capital
Stock of any other Person) (but in no event shall this clause (iv) apply to the
sale in the ordinary course of business of oil, gas or other hydrocarbons
produced or manufactured or other personal property other than oil and gas in
place); (v) the net income of any Subsidiary of such specified Person to the
extent the transfer to that Person of that income is restricted by contract or
otherwise, except for any cash dividends or cash distributions actually paid by
such Subsidiary to such Person during such period; (vi) the net income (or loss)
of any other Person in which such specified Person or any of its Restricted
Subsidiaries has an interest (which interest does not cause the net income of
such other Person to be consolidated with the net income of such specified
Person in accordance with GAAP or is an interest in a consolidated Unrestricted
Subsidiary), except to the extent of the amount of cash dividends or other cash
distributions actually paid to such Person or its Restricted Subsidiaries by
such other Person during such period; (vii) the net income of any Person
acquired by such specified Person or any of its Restricted Subsidiaries in a
pooling-of-interests transaction for any period prior to the date of such
acquisition; (viii) any gain or loss, net of taxes, realized on the termination
of any employee pension benefit plan; (ix) any adjustments of a deferred tax
liability or asset pursuant to Statement of Financial Accounting Standards No.
109 which result from changes in enacted tax laws or rates; and (x) the
cumulative effect of a change in accounting principles.
"Consolidated Net Tangible Assets" means (without duplication), as of
the date of determination, the sum of (a) discounted future net revenues from
proved oil and gas reserves of the Company and its Restricted Subsidiaries
calculated in accordance with Commission guidelines before any state, federal or
foreign income taxes, as estimated by the Company and confirmed by a nationally
recognized firm of independent petroleum engineers in a reserve report prepared
as of the end of the Company's most recently completed fiscal year for which
audited financial statements are available, as increased by, as of the date of
determination, the estimated discounted future net revenues from (1) estimated
proved oil and gas reserves acquired since such year-end, which reserves were
not reflected in such year-end reserve report, and (2) estimated oil and gas
reserves attributable to upward revisions of estimates of proved oil and gas
reserves since such year-end due to exploration, development or exploitation
activities, in each case calculated in accordance with SEC guidelines (utilizing
the prices utilized in such year-end reserve report), and decreased by, as of
the date of determination, the estimated discounted future net revenues from (3)
estimated proved oil and gas reserves produced or disposed of since such
year-end and (4) estimated oil and gas reserves attributable to downward
revisions of estimates of proved oil and gas reserves since such year-end due to
changes in geological conditions or other factors which would, in accordance
with standard industry practice, cause such revisions, in each case calculated
in accordance with Commission guidelines (utilizing the prices utilized in such
year-end reserve report); provided that, in the case of each of the
determinations made pursuant to clauses (1) through (4), such increases and
decreases shall be as estimated by the Company's petroleum engineers, unless
there is a Material
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Change as a result of such acquisitions, dispositions or revisions, in which
event the discounted future net revenues utilized for purposes of this clause
(i)(a) shall be confirmed in writing by a nationally recognized firm of
independent petroleum engineers, (b) the capitalized costs that are attributable
to oil and gas properties of the Company and its Restricted Subsidiaries to
which no proved oil and gas reserves are attributable, based on the Company's
books and records as of a date no earlier than the date of the Company's latest
annual or quarterly financial statements, (c) the Net Working Capital on a date
no earlier than the date of the Company's latest annual or quarterly financial
statements and (d) the greater of (1) the net book value on a date no earlier
than the date of the Company's latest annual or quarterly financial statements
and (2) the appraised value, as estimated by independent appraisers, of other
tangible assets (including, without duplication, Investments in unconsolidated
Restricted Subsidiaries) of the Company and its Restricted Subsidiaries, as of
the date no earlier than the date of the Company's latest audited financial
statements.
"Consolidated Net Worth" of any Person means the stockholders' equity of
such Person and its Restricted Subsidiaries, as determined on a consolidated
basis in accordance with GAAP, less (to the extent included in stockholders'
equity) amounts attributable to Redeemable Stock of such Person or its
Restricted Subsidiaries.
"Credit Agreement" means the Amended and Restated Credit Agreement,
dated as of April 17, 1998, by and among the Company, QSRn, Bank of Montreal,
Enron Capital & Trade Resources Corp., Joint Energy Development Investments II
Limited Partnership and each of the lenders now or hereafter signatories thereto
and Bank of Montreal, as agent for such lenders, as the same may be amended,
modified, extended, renewed, refunded, replaced or refinanced from time to time.
"Default" means any event, act or condition the occurrence of which is,
or after notice or the passage of time or both would be, an Event of Default.
"Dollar-Denominated Production Payments" means production payment
obligations recorded as liabilities in accordance with GAAP, together with all
undertakings and obligations in connection therewith.
"EBITDA" means with respect to any Person for any period, the
Consolidated Net Income of such Person for such period, plus (i) the sum of, to
the extent reflected in the consolidated income statement of such Person and its
Restricted Subsidiaries for such period from which Consolidated Net Income is
determined and deducted in the determination of such Consolidated Net Income,
without duplication, (a) income tax expense (but excluding income tax expense
relating to sales or other disposition of assets (including the Capital Stock of
any other Person) the gains and losses from which are excluded in the
determination of such Consolidated Net Income), (b) Consolidated Interest
Expense, (c) depreciation and depletion expense, (d) amortization expense, (e)
exploration expense, and (f) any other noncash charges including, without
limitation, unrealized foreign exchange losses; less (ii) the sum of, to the
extent reflected in the consolidated income statement of such Person and its
Restricted Subsidiaries for such period from which Consolidated Net Income is
determined and added in the determination of such Consolidated Net Income,
without duplication (a) income tax recovery (but excluding income tax recovery
relating to sales or other dispositions of assets (excluding the Capital Stock
of any other Person) the gains and losses from which are included in the
determination of such Consolidated Net Income) and (b) unrealized foreign
exchange gains.
"ECT Credit Agreement" means that certain Subordinated Revolving Credit
Loan Agreement, dated as of December 29, 1997, by and among QSRn and Enron
Capital & Trade Resources Corp., as agent for itself and the other lenders now
or hereafter party thereto, as the same may be amended, modified, extended,
renewed, refunded, replaced or refinanced from time to time.
"Equity Offering" means any public or private sale of Capital Stock
(including options, warrants or rights with respect thereto) of the Company.
"Event of Default" has the meaning set forth under the caption
"--Events of Default and Notice."
"Exchanged Properties" means properties used or useful in the Oil and
Gas Business received by the Company or a Restricted Subsidiary in trade or as a
portion of the total consideration for other such properties.
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"Fair Market Value" means, with respect to any assets to be transferred
pursuant to any Asset Sale or Sale and Leaseback Transaction or any non-cash
consideration or property transferred or received by any Person, the fair market
value of such consideration or property as determined in good faith by the Board
of Directors of the Company as evidenced by a certified resolution delivered to
the Trustee; provided that if such resolution indicates that such fair market
value is equal to or in excess of $5.0 million and such transaction involves any
Affiliate of the Company (other than a Restricted Subsidiary), such resolution
shall be accompanied by the written opinion of an independent, nationally
recognized investment banking firm or appraisal firm, in either case
specializing or having a specialty in the type and subject matter of the
transaction (or series of transactions) at issue, to the effect that such
consideration or property is fair, from a financial point of view, to such
Person.
"GAAP" means United States generally accepted accounting principles as
in effect on the date of the Indenture, unless stated otherwise.
"Guarantee" by any Person means any obligation, contingent or otherwise,
of such Person guaranteeing or having the economic effect of guaranteeing any
Indebtedness of any other Person (the "primary obligor") in any manner, whether
directly or indirectly, and including, without limitation, any Lien on the
assets of such Person securing obligations to pay Indebtedness of the primary
obligor and any obligation of such Person (i) to purchase or pay (or advance or
supply funds for the purchase or payment of) such Indebtedness or to purchase
(or to advance or supply funds for the purchase or payment of) any security for
the payment of such Indebtedness, (ii) to purchase Property, securities or
services for the purpose of assuring the holder of such Indebtedness of the
payment of such Indebtedness, or (iii) to maintain working capital, equity
capital or other financial statement condition or liquidity of the primary
obligor so as to enable the primary obligor to pay such Indebtedness (and
"Guaranteed", "Guaranteeing" and "Guarantor" shall have meanings correlative to
the foregoing); provided, however, that a Guarantee by any Person shall not
include (a) endorsements by such Person for collection or deposit, in either
case, in the ordinary course of business or (b) a contractual commitment by one
Person to invest in another Person for so long as such Investment is reasonably
expected to constitute a Permitted Investment under clause (ii) of the
definition of Permitted Investments.
"Holder" means the Person in whose name a Note is registered on the
Securities Register.
"Incur" means, with respect to any Indebtedness or other obligation of
any Person, to create, issue, incur (by conversion, exchange or otherwise),
assume, Guarantee or become liable in respect of such Indebtedness or other
obligation or the recording, as required pursuant to GAAP or otherwise, of any
such Indebtedness or obligation on the balance sheet of such Person (and
"Incurrence", "Incurred", "Incurrable" and "Incurring" shall have meanings
correlative to the foregoing); provided, however, that a change in GAAP that
results in an obligation of such Person that exists at such time, and is not
theretofore classified as Indebtedness, becoming Indebtedness shall not be
deemed an Incurrence of such Indebtedness. For purposes of this definition,
Indebtedness of the Company or a Restricted Subsidiary held by a Wholly Owned
Subsidiary shall be deemed to be Incurred by the Company or such Restricted
Subsidiary in the event such Wholly Owned Subsidiary ceases to be a Wholly Owned
Subsidiary or in the event such Indebtedness is transferred to a Person other
than the Company or a Wholly Owned Subsidiary. For purposes of this definition,
any non-interest bearing or other discount Indebtedness shall be deemed to have
been incurred only on the date of original issue thereof.
"Indebtedness" means at any time (without duplication), with respect to
any Person, whether recourse is to all or a portion of the assets of such
Person, and whether or not contingent, (i) any Obligation of such Person for
borrowed money, (ii) any Obligation of such Person evidenced by bonds,
debentures, notes, Guarantees or other similar instruments, including, without
limitation, any such Obligations Incurred in connection with the acquisition of
Property, assets or businesses, (iii) any reimbursement obligation of such
Person with respect to letters of credit, bankers' acceptances or similar
facilities issued for the account of such Person, (iv) any Obligation of such
Person issued or assumed as the deferred purchase price of Property or services
(other than Trade Accounts Payable and other accrued current liabilities
incurred in the ordinary course of business), (v) any Capital Lease Obligation
of such Person, (vi) the maximum fixed redemption or repurchase price of
Redeemable Stock of such Person at the time of determination, (vii) any payment
obligation of such Person under Interest Rate Protection Agreements or Oil and
Gas Hedging Contracts at the time of determination, (viii) any obligation to pay
rent or other payment amounts of such Person with respect to any Sale and
Leaseback Transaction to which such Person is a party and (ix) any obligation
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of the type referred to in clauses (i) through (viii) of this paragraph of
another Person and all dividends of another Person the payment of which, in
either case, such Person has Guaranteed or is responsible or liable, directly or
indirectly, as obligor, Guarantor or otherwise; provided that Indebtedness shall
not include Production Payments and Reserve Sales. For purposes of this
definition, the maximum fixed repurchase price of any Redeemable Stock that does
not have a fixed repurchase price shall be calculated in accordance with the
terms of such Redeemable Stock as if such Redeemable Stock were repurchased on
any date on which Indebtedness shall be required to be determined pursuant to
the Indenture; provided, however, that if such Redeemable Stock is not then
permitted to be repurchased, the repurchase price shall be the book value of
such Redeemable Stock. The amount of Indebtedness of any Person at any date
shall be the outstanding balance at such date of all unconditional Obligations
as described above and the maximum liability at such date in respect of any
contingent Obligations described above.
"Independent Investment Banker" means Nesbitt Burns Securities Inc. and
its successor or, if such firm is unwilling or unable to select the applicable
Comparable Treasury Issue, an independent investment banking institution of
national standing appointed by the Trustee.
"Initial Subsidiary Guarantors" means Queen Sand Resources, Inc., a
Nevada corporation, Northland Operating Co., a Nevada corporation, and Corrida
Resources, Inc., a Nevada corporation.
"Interest Rate Protection Agreement" means, with respect to any Person,
any interest rate swap agreement, forward rate agreement, interest rate cap or
collar agreement or other financial agreement or arrangement entered into for
the purpose of limiting or managing interest rate risks, to or under which such
Person is a party or otherwise obligated.
"Investment" means, with respect to any Person (i) any amount paid by
such Person, directly or indirectly, to any other Person for Capital Stock or
other Property of, or as a capital contribution to, any other Person or (ii) any
direct or indirect loan or advance to any other Person (other than accounts
receivable of such Person arising in the ordinary course of business); provided,
however, that Investments shall not include extensions of trade credit on
commercially reasonable terms in accordance with normal trade practices and any
increase in the equity ownership in any Person resulting from retained earnings
of such Person.
"Issue Date" means the date on which the Notes first were issued under
the Indenture.
"Lien" means, with respect to any Property, any mortgage or deed of
trust, pledge, hypothecation, assignment, deposit arrangement, security
interest, lien (statutory or other), charge, easement, encumbrance, preference,
priority or other security or similar agreement or preferential arrangement of
any kind or nature whatsoever on or with respect to such Property (including,
without limitation, any conditional sale or other title retention agreement
having substantially the same economic effect as any of the foregoing). For
purposes of the provisions of the Indenture described under "--Certain
Covenants--Limitation on Liens," a Capital Lease Obligation shall be deemed to
be secured by a Lien on the Property being leased.
"Liquid Securities" means securities (i) of an issuer that is not an
Affiliate of the Company, (ii) that are publicly traded on the New York Stock
Exchange, the American Stock Exchange or the Nasdaq National Market and (iii) as
to which the Company is not subject to any restrictions on sale or transfer
(including any volume restrictions under Rule 144 under the Securities Act or
any other restrictions imposed by the Securities Act) or as to which a
registration statement under the Securities Act covering the resale thereof is
in effect for as long as the securities are held; provided, that securities
meeting the requirements of clauses (i), (ii) and (iii) above shall be treated
as Liquid Securities from the date of receipt thereof until and only until the
earlier of (x) the date on which such securities are sold or exchanged for cash
or Permitted Short-Term Investments and (y) 180 days following the date of
receipt of such securities. If such securities are not sold or exchanged for
cash or Permitted Short-Term Investments within 180 days of receipt thereof, for
purposes of determining whether the transaction pursuant to which the Company or
a Restricted Subsidiary received the securities was in compliance with the
provisions of the Indenture described under "--Certain Covenants--Limitation
on Asset Sales," such securities shall be deemed not to have been Liquid
Securities at any time.
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"Material Change" means an increase or decrease (except to the extent
resulting from changes in prices) of more than 30% during a fiscal quarter in
the estimated discounted future net revenues from proved oil and gas reserves of
the Company and its Restricted Subsidiaries, calculated in accordance with
clause (i)(a) of the definition of Adjusted Consolidated Net Tangible Assets;
provided, however, that the following will be excluded from the calculation of
Material Change: (i) any acquisitions during the quarter of oil and gas reserves
with respect to which the Company's estimate of the discounted future net
revenues from proved oil and gas reserves has been confirmed by independent
petroleum engineers and (ii) any dispositions of Properties during such quarter
that were disposed of in compliance with the provisions of the Indenture
described under "--Certain Covenants--Limitation on Asset Sales."
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Available Cash" from an Asset Sale means cash proceeds received
therefrom (including (i) any cash proceeds received by way of deferred payment
of principal pursuant to a note or installment receivable or otherwise, but only
as and when received and (ii) the Fair Market Value of Liquid Securities and
Permitted Short-Term Investments, and excluding (i) any other consideration
received in the Form of assumption by the acquiring Person of Indebtedness or
other obligations relating to such properties or assets and (ii) except to the
extent subsequently converted to cash, Liquid Securities or Permitted Short-Term
Investments within 240 days after such Asset Sale, consideration constituting
Exchanged Properties or consideration other than Permitted Consideration), in
each case net of (a) all legal, title and recording expenses, commissions and
other fees and expenses incurred, and all federal, state, foreign and local
taxes required to be paid or accrued as a liability under GAAP as a consequence
of such Asset Sale, (b) all payments (which payments are made in a manner that
results in the permanent reduction in the balance of such Indebtedness and, if
applicable, a permanent reduction in any outstanding commitment for future
incurrences of Indebtedness thereunder) made on any Indebtedness (but
specifically excluding Indebtedness of the Company and its Restricted
Subsidiaries assumed in connection with or in anticipation of such Asset Sale)
which is secured by any assets subject to such Asset Sale, in accordance with
the terms of any Lien upon such assets, or which must by its terms, or in order
to obtain a necessary consent to such Asset Sale or by applicable law, be repaid
out of the proceeds from such Asset Sale, (c) all distributions and other
payments required to be made to minority interest holders in Subsidiaries or
joint ventures as a result of such Asset Sale and (d) the deduction of
appropriate amounts to be provided by the seller as a reserve, in accordance
with GAAP, against any liabilities associated with the assets disposed of in
such Asset Sale and retained by the Company or any Restricted Subsidiary after
such Asset Sale (to the extent such reserves are not subsequently reversed
within 365 days after such Asset Sale); provided, however, that if any
consideration for an Asset Sale (which would otherwise constitute Net Available
Cash) is required to be held in escrow pending determination of whether a
purchase price adjustment will be made, such consideration (or any portion
thereof) shall become Net Available Cash only at such time as it is released to
such Person or its Restricted Subsidiaries from escrow; and provided, further,
however, that any Exchanged Properties and any consideration other than
Permitted Consideration received in connection with an Asset Sale which is
subsequently converted to cash, Liquid Securities or Permitted Short-Term
Investments within 240 days after such Asset Sale shall be deemed to be Net
Available Cash at such time and shall thereafter be applied in accordance with
the provisions of the Indenture described under "--Certain Covenants
- --Limitation on Asset Sales."
"Net Working Capital" means (i) all current assets of the Company and
its Restricted Subsidiaries, less (ii) all current liabilities of the Company
and its Restricted Subsidiaries, except current liabilities included in
Indebtedness, in each case as set forth in financial statements of the Company
prepared in accordance with GAAP.
"Obligation" means any principal, interest, premium, penalty, fee and
any other liability payable under the documentation governing any Indebtedness.
"Oil and Gas Business" means the business of exploiting, exploring for,
developing, acquiring and producing hydrocarbons and other related energy
businesses.
"Oil and Gas Hedging Contract" means, with respect to any Person, any
agreement or arrangement, or any combination thereof, financially tied to oil
and gas or other hydrocarbon prices, transportation or basis costs or
differentials, or similar factors, that is customary in the Oil and Gas Business
and is entered into for the purpose of limiting or managing risks associated
with fluctuations in such prices, costs, differentials or similar factors.
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"Oil and Gas Liens" means (i) Liens on any specific property or any
interest therein, construction thereon or improvement thereto to secure all or
any part of the costs incurred for surveying, exploration, drilling, extraction,
development, operation, production, construction, alteration, repair or
improvement of, in, under or on such property and the plugging and abandonment
of wells located thereon (it being understood that, in the case of oil and gas
producing properties, or any interest therein, costs incurred for "development"
shall include costs incurred for all facilities relating to such properties or
to projects, ventures or other arrangements of which such properties Form a part
or which relate to such properties or interests); (ii) Liens on an oil or gas
producing property to secure obligations Incurred or guarantees of obligations
Incurred in connection with or necessarily incidental to commitments for the
purchase or sale of, or the transportation or distribution of, the products
derived from such property; (iii) Liens arising under partnership agreements,
oil and gas leases, overriding royalty agreements, net profits agreements,
production payment agreements, royalty trust agreements, master limited
partnership agreements, farm-out agreements, division orders, contracts for the
sale, purchase, exchange, transportation, gathering or processing of oil, gas or
other hydrocarbons, unitizations and pooling designations, declarations, orders
and agreements, development agreements, operating agreements, production sales
contracts, area of mutual interest agreements, gas balancing or deferred
production agreements, injection, repressuring and recycling agreements, salt
water or other disposal agreements, seismic or geophysical permits or
agreements, and other agreements which are customary in the Oil and Gas
Business, provided in all instances that such Liens are limited to the assets
that are the subject of the relevant agreement; (iv) Liens arising in
connection with Production Payments and Reserve Sales; and (v) Liens on
pipelines or pipeline facilities that arise by operation of law.
"Permitted Business Investments" means Investments and expenditures made
in the ordinary course of, and of a nature that is or shall have become
customary in, the Oil and Gas Business as a means of actively engaging therein
through agreements, transactions, interests or arrangements which permit one to
share risks or costs, comply with regulatory requirements regarding local
ownership or satisfy other objectives customarily achieved through the conduct
of Oil and Gas Business jointly with third parties, including, without
limitation, (i) ownership interests in oil and gas properties or gathering,
transportation, processing, storage or related systems and (ii) Investments and
expenditures in the Form of or pursuant to operating agreements, processing
agreements, farm-in agreements, farm-out agreements, development agreements,
area of mutual interest agreements, unitization agreements, pooling
arrangements, joint bidding agreements, service contracts, joint venture
agreements, partnership agreements (whether general or limited), subscription
agreements, stock purchase agreements and other similar agreements with third
parties (including Unrestricted Subsidiaries).
"Permitted Hedging Agreements" means (i) Oil and Gas Hedging Contracts
to the extent entered into to limit or manage risks incurred in the ordinary
course of business and (ii) Interest Rate Protection Agreements but only to the
extent that the stated aggregate notional amount thereunder does not exceed 100%
of the aggregate principal amount of the Indebtedness of the Company or a
Restricted Subsidiary covered by such Interest Rate Protection Agreements at the
time such agreements were entered into.
"Permitted Investments" means any and all of the following: (i)
Permitted Short-Term Investments; (ii) Investments in property, plant and
equipment used in the ordinary course of business and Permitted Business
Investments; (iii) Investments by any Restricted Subsidiary in the Company; (iv)
Investments by the Company or any Restricted Subsidiary in any Restricted
Subsidiary; (v) Investments by the Company or any Restricted Subsidiary in a
Person where that Person becomes a Restricted Subsidiary or transfers or assigns
all of its assets to the Company (including the acquisition from a third party
of the Capital Stock of a Restricted Subsidiary or any other Person) if such
Person or a Subsidiary of such Person will, as a result of the making of such
Investment and all other contemporaneous related transactions, become a
Restricted Subsidiary or be merged or consolidated with or transfer or convey
all or substantially all of its assets to the Company or a Restricted
Subsidiary; (vi) Investments in the Form of securities received from Asset
Sales, provided that such Asset Sales are made in compliance with the provisions
of the Indenture described under "--Certain Covenants--Limitation on Asset
Sales;" (vii) Investments in negotiable instruments held for collection, lease,
utility and other similar deposits, and stock, obligations or other securities
received in settlement of debts (including, without limitation, under any
bankruptcy or other similar proceeding) owing to the Company or any of its
Restricted Subsidiaries as a result of foreclosure, perfection or enforcement of
any Liens or Indebtedness, in each of the foregoing cases in the ordinary course
of business of the Company or such Restricted Subsidiary; (viii) Investments in
the Form of Permitted Hedging Agreements of the Company and its Restricted
Subsidiaries; and (ix) Investments pursuant to any agreement or obligation of
the
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Company or any of its Restricted Subsidiaries as in effect on the Issue Date
(other than Investments described in clauses (i) through (viii) above).
"Permitted Refinancing Indebtedness" means Indebtedness ("new
Indebtedness") Incurred in exchange for, or proceeds of which are used to
refinance, other Indebtedness ("old Indebtedness"), provided, however, that (i)
such new Indebtedness is in an aggregate principal amount not in excess of the
sum of (a) the aggregate principal amount then outstanding of the old
Indebtedness (or, if such old Indebtedness provides for an amount less than the
principal amount thereof to be due and payable upon a declaration of
acceleration thereof, such lesser amount as of the date of determination), and
(b) an amount necessary to pay any fees and expenses, including premiums related
to such exchange or refinancing, (ii) such new Indebtedness has a Stated
Maturity no earlier than the Stated Maturity of the old Indebtedness, (iii) such
new Indebtedness has an Average Life to Stated Maturity at the time such new
Indebtedness is Incurred that is equal to or greater than the Average Life to
Stated Maturity of the old Indebtedness at such time and (iv) such new
Indebtedness shall only be permitted if (a) in the case of any refinancing or
refunding of Indebtedness that is pari passu with the Notes the refinancing or
refunding Indebtedness is made pari passu with the Notes or subordinated to the
Notes, (b) in the case of any refinancing or refunding of Indebtedness that is
subordinated to the Notes the refinancing or refunding of Indebtedness is made
subordinated to the Notes at least to the same extent as the Indebtedness being
refinanced or refunded was subordinated to the Notes and (c) in the case of the
refinancing or refunding of Indebtedness that is subordinated to the Notes, the
refinancing or refunding Indebtedness by its terms, or by the terms of any
agreement or instrument pursuant to which such Indebtedness is issued, (x) does
not provide for payments of principal of such Indebtedness at the stated
maturity thereof or by way of a sinking fund applicable thereto or by way of any
mandatory redemption, defeasance, retirement or repurchase thereof by the
Company or such Restricted Subsidiary (including any redemption, retirement or
repurchase which is contingent upon events or circumstances, but excluding any
retirement required by virtue of acceleration of such Indebtedness upon an event
of default thereunder), in each case prior to the final stated maturity of the
Indebtedness being refinanced or refunded and (y) does not permit redemption or
other retirement (including pursuant to an offer to purchase made by the Company
or such Restricted Subsidiary) of such Indebtedness at the option of the holder
thereof prior to the final stated maturity of the Indebtedness being refinanced
or refunded, other than a redemption or other retirement at the option of the
holder of such Indebtedness (including pursuant to an offer to purchase made by
the Company or such Restricted Subsidiary), which is conditioned upon the change
of control of the Company or such Restricted Subsidiary)
"Permitted Short-Term Investments" means (i) Investments in U.S.
Government Obligations maturing within one year of the date of acquisition
thereof, (ii) Investments in demand accounts, time deposit accounts,
certificates of deposit, bankers acceptances and money market deposits maturing
within one year of the date of acquisition thereof issued by a bank or trust
company which is organized under the laws of the United States of America or any
State thereof or the District of Columbia that is a member of the Federal
Reserve System having capital, surplus and undivided profits aggregating in
excess of $500.0 million and whose long-term indebtedness is rated "A" (or
higher) according to Moody's, (iii) Investments in demand accounts, time deposit
accounts, certificates of deposit, bankers acceptances and money market deposits
maturing within one year of the date of acquisition thereof issued by a Canadian
bank to which the Bank Act (Canada) applies having capital, surplus and
undivided profits aggregating in excess of U.S. $500.0 million, (iv) Investments
in deposits available for withdrawal on demand with any commercial bank that is
organized under the laws of any country in which the Company or any Restricted
Subsidiary maintains an office or is engaged in the Oil and Gas Business,
provided that (a) all such deposits have been made in such accounts in the
ordinary course of business and (b) such deposits do not at any one time exceed
$20.0 million in the aggregate, (v) repurchase and reverse repurchase
obligations with a term of not more than seven days for underlying securities of
the types described in clause (i) entered into with a bank meeting the
qualifications described in either clause (ii) or (iii), (vi) Investments in
commercial paper, maturing not more than one year after the date of acquisition,
issued by a corporation (other than an Affiliate of the Company) organized and
in existence under the laws of the United States of America or any State thereof
or the District of Columbia with a rating at the time as of which any Investment
therein is made of "P-1" (or higher) according to Moody's or "A-1" (or higher)
according to S&P and (vii) Investments in any money market mutual fund having
assets in excess of $250.0 million substantially all of which consist of other
obligations of the types described in clauses (i), (ii), (v) and (vi) hereof.
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"Person" means any individual, corporation, partnership, joint venture,
limited liability company, unlimited liability company, trust, estate,
unincorporated organization or government or any agency or political subdivision
thereof.
"Preferred Stock" of any Person means Capital Stock of such Person of
any class or classes (however designated) that ranks prior, as to the payment of
dividends or as to the distribution of assets upon any voluntary or involuntary
liquidation, dissolution or winding up of such Person, to shares of Capital
Stock of any other class of such Person; provided, however, that "Preferred
Stock" shall not include Redeemable Stock.
"principal" of any Indebtedness (including the Notes) means the
principal amount of such Indebtedness plus the premium, if any, on such
Indebtedness.
"Principal Property" means any oil and gas properties and oil and gas
gathering assets or related group of such assets of the Company having a fair
market value in excess of $10.0 million.
"Production Payments and Reserve Sales" means the grant or transfer by
the Company or a Restricted Subsidiary to any Person of a royalty, overriding
royalty, net profits interest, production payment (whether volumetric or dollar
denominated), partnership or other interest in oil and gas properties, reserves
or the right to receive all or a portion of the production or the proceeds from
the sale of production attributable to such properties where the holder of such
interest has recourse solely to such production or proceeds of production,
subject to the obligation of the grantor or transferor to operate and maintain,
or cause the subject interests to be operated and maintained, in a reasonably
prudent manner or other customary standard or subject to the obligation of the
grantor or transferor to indemnify for environmental, title or other matters
customary in the Oil and Gas Business.
"Property" means, with respect to any Person, any interest of such
Person in any kind of property or asset, whether real, personal or mixed, or
tangible or intangible, including, without limitation, Capital Stock and other
securities issued by any other Person (but excluding Capital Stock or other
securities issued by such first mentioned Person).
"Redeemable Stock" of any Person means any equity security of such
Person that by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or otherwise (including on the
happening of an event), is or could become required to be redeemed for cash or
other Property or is or could become redeemable for cash or other Property at
the option of the holder thereof, in whole or in part, on or prior to the first
anniversary of the Stated Maturity of the Notes; or is or could become
exchangeable at the option of the holder thereof for Indebtedness at any time in
whole or in part, on or prior to the first anniversary of the Stated Maturity of
the Notes; provided, however, that Redeemable Stock shall not include the Series
A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock or
any security by virtue of the fact that it may be exchanged or converted at the
option of the holder for Capital Stock of the Company having no preference as to
dividends or liquidation over any other Capital Stock of the Company.
"Restricted Payment" means (i) a dividend or other distribution declared
or paid on the Capital Stock or Redeemable Stock of the Company or to the
Company's stockholders (other than dividends, distributions or payments made
solely in Capital Stock of the Company or in options, warrants or other rights
to purchase or acquire Capital Stock or Redeemable Stock), or declared and paid
to any Person other than the Company or any of its Restricted Subsidiaries on
the Capital Stock or Redeemable Stock of any Restricted Subsidiary, (ii) a
payment made by the Company or any of its Restricted Subsidiaries (other than to
the Company or any Restricted Subsidiary) to purchase, redeem, acquire or retire
any Capital Stock or Redeemable Stock or any options, warrants or other rights
to acquire such Capital Stock or Redeemable Stock of the Company or of a
Restricted Subsidiary, (iii) a payment made by the Company or any of its
Restricted Subsidiaries to redeem, repurchase, defease or otherwise acquire or
retire for value (including pursuant to mandatory repurchase covenants), prior
to any scheduled maturity, scheduled sinking fund or scheduled mandatory
redemption, any Subordinated Indebtedness of the Company except (a) to the
extent such Indebtedness may be purchased out of Net Available Cash in
compliance with the provisions of the Indenture described under "--Certain
Covenants--Limitation on Asset Sales," (b) to the extent such Indebtedness may
be purchased out of the net cash proceeds of one or more Equity Offerings as
described under "--Optional Redemption," (c) out of Net Available Cash and to
the extent required by the indenture or other agreement or
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instrument pursuant to which any other Indebtedness was issued, an offer to
purchase such Indebtedness upon a disposition of assets, (d) to the extent of
Excess Proceeds remaining after compliance with the provisions of the Indenture
described under "--Certain Covenants--Limitation on Asset Sales," and to the
extent required by the indenture or other agreement or instrument pursuant to
which any Indebtedness was issued, an offer to purchase such Indebtedness upon a
disposition of assets, and (e) upon a "Change of Control" (even if such event is
not a Change of Control under the Indenture) to the extent required by the
indenture or other agreement or instrument pursuant to which any Indebtedness
was issued provided the Company is then in compliance with the provisions of the
Indenture described under "--Purchase at the Option of Holders Upon a Change of
Control," (iv) an Investment (other than a Permitted Investment) by the Company
or a Restricted Subsidiary in any Person other than the Company or a Restricted
Subsidiary, or (v) the sale or issuance of Capital Stock of a Restricted
Subsidiary to a Person other than the Company or another Restricted Subsidiary
if the result thereof is that such Restricted Subsidiary shall cease to be a
Restricted Subsidiary, in which event the amount of such "Restricted Payment"
shall be the Fair Market Value of the remaining interest, if any, in such former
Restricted Subsidiary held by the Company and its other Restricted Subsidiaries.
"Restricted Subsidiary" means any Subsidiary of the Company that has not
been designated an Unrestricted Subsidiary in the manner provided in the
covenant described under "--Certain Covenants--Restricted and Unrestricted
Subsidiaries."
"S&P" means Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc., and its successors.
"Sale and Leaseback Transaction" means, with respect to any Person, any
direct or indirect arrangement (excluding, however, any such arrangement between
such Person and a Wholly Owned Restricted Subsidiary of such Person or between
one or more Wholly Owned Restricted Subsidiaries of such Person) pursuant to
which Property is sold or transferred by such Person or a Restricted Subsidiary
of such Person and is thereafter leased back from the purchaser or transferee
thereof by such Person or one of its Restricted Subsidiaries.
"Senior Credit Facilities" means collectively, one or more senior credit
facilities or commercial paper facilities with banks or other institutional
lenders (including, without limitation, the credit facility pursuant to the
Credit Agreement and the ECT Revolving Credit Agreement), together with any
guarantees, security and related documents, as all such credit facilities and
documents may be amended, supplemented, extended, increased, refinanced or
replaced from time to time.
"Significant Subsidiary" means, at any date of determination, any
Subsidiary of a Person that, together with its Subsidiaries, (i) for the most
recent fiscal year of such Person, accounted for more than 5% of the
consolidated revenues of such Person and its Subsidiaries or (ii) as of the end
of such fiscal year, was the owner of more than 5% of the consolidated assets of
such Person and its Subsidiaries.
"Stated Maturity," when used with respect to any security or any
installment of principal thereof or interest thereon, means the date specified
in such security as the fixed date on which the principal of such security or
such installment of principal or interest is due and payable, including pursuant
to any mandatory redemption provision (but excluding any provision providing for
the repurchase of such security at the option of the holder thereof upon the
happening of any contingency unless such contingency has occurred).
"Subordinated Indebtedness" means any Indebtedness of the Company or a
Subsidiary Guarantor (whether outstanding on the Issue Date or thereafter
Incurred) which is subordinate or junior in right of payment to the Notes or the
relevant Subsidiary Guarantor pursuant to a written agreement to that effect.
"Subsidiary" of a Person means (i) another Person which is a corporation
a majority of whose Voting Stock is at the time, directly or indirectly, owned
or controlled by (a) the first Person, (b) the first Person and one or more of
its Subsidiaries or (c) one or more of the first Person's Subsidiaries or (ii)
another Person which is not a corporation (x) at least 50% of the ownership
interest of which and (y) the power to elect or direct the election of a
majority of the directors or other governing body of which are controlled by
Persons referred to in clause (a), (b) or (c) above.
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"Subsidiary Guarantors" means (i) as of the Issue Date, the Initial
Subsidiary Guarantors, and (ii) thereafter, unless released from their
Subsidiary Guarantees as permitted by the Indenture, the Initial Subsidiary
Guarantors and any other Restricted Subsidiary that becomes a guarantor of the
Notes in compliance with the provisions of the Indenture and executes a
supplemental indenture agreeing to be bound by the terms of the Indenture.
"Subsidiary Guaranty" means a guaranty of the Notes given by any
Restricted Subsidiary pursuant to the terms of the Indenture.
"Trade Accounts Payable" means accounts payable or other obligations of
the Company or any Restricted Subsidiary to trade creditors created or assumed
by the Company or such Restricted Subsidiary in the ordinary course of business
in connection with the obtaining of goods or services.
"12% Bonds" means the Series A Deutschemark denominated (DEM) 12% notes
issued by Queen Sands Resources and being due and payable on July 15, 2000, and
any renewals, extensions or replacements (but not increases in principal amount)
thereof.
"Unrestricted Subsidiary" means (i) each Subsidiary of the Company that
the Company has designated pursuant to the provision of the Indenture described
under "--Certain Covenants--Restricted and Unrestricted Subsidiaries" as an
Unrestricted Subsidiary and (ii) any Subsidiary of an Unrestricted Subsidiary.
"U.S. Government Obligations" means securities that are (i) direct
obligations of the United States of America for the timely payment of which its
full faith and credit is pledged or (ii) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States of
America, the timely payment of which is unconditionally guaranteed as a full
faith and credit obligation by the United States of America which, in either
case, are not callable or redeemable at the option of the issuer thereof, and
shall also include a depository receipt issued by a bank (as defined in Section
3(a)(2) of the Securities Act), as custodian, with respect to any such U.S.
Government Obligation or a specific payment of principal of or interest on any
such U.S. Government Obligation held by such custodian for the account of the
holder of such depository receipt; provided, however, that (except as required
by law) such custodian is not authorized to make any deduction from the amount
payable to the holder of such depository receipt from any amount received by the
custodian in respect of the U.S. Government Obligation or the specific payment
of principal of or interest on the U.S. Government Obligation evidenced by such
depository receipt.
"Volumetric Production Payments" means production payment obligations
recorded as deferred revenue in accordance with GAAP, together with all
undertakings and obligations in connection therewith.
"Voting Stock" of any Person means Capital Stock of such Person which
ordinarily has voting power for the election of directors (or persons performing
similar functions) of such Person whether at all times or only so long as no
senior class of securities has such voting power by reason of any contingency.
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary to
the extent all of the Capital Stock or other ownership interests in such
Restricted Subsidiary, other than any directors' qualifying shares mandated by
applicable law, is owned directly or indirectly by the Company.
"Wholly Owned Subsidiary" means any Subsidiary of the Company to the
extent all of the Capital Stock or other ownership interests in such Subsidiary,
other than any directors' qualifying shares mandated by applicable law, is owned
directly or indirectly by the Company.
DEFEASANCE AND COVENANT DEFEASANCE
The Indenture provides that the Company and the Subsidiary Guarantors
will be discharged from all their obligations with respect to the Notes (except
for certain obligations to exchange or register the transfer of Notes, to
replace stolen, lost or mutilated Notes, to maintain paying agencies and to hold
moneys for payment in trust) upon the deposit in trust for the benefit of the
Holders of the Notes of money or U.S. Government Obligations, or a combination
thereof, which, through the payment of principal, premium, if any, and interest
in respect thereof in
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accordance with their terms, will provide money in an amount sufficient to pay
the principal of and any premium and interest on the Notes at Stated Maturity
thereof or on earlier redemption in accordance with the terms of the Indenture
and the Notes. Such defeasance or discharge may occur only if, among other
things, the Company has delivered to the Trustee an Opinion of Counsel to the
effect that (i) the Company has received from, or there has been published by,
the United States Internal Revenue Service a ruling or (ii) since the date of
the Indenture there has been a change in the applicable federal income tax law,
in either case to the effect that Holders of the Notes will not recognize gain
or loss for federal income tax purposes as a result of such deposit, defeasance
and discharge and will be subject to federal income tax on the same amount, in
the same manner and at the same times as would have been the case if such
deposit, defeasance and discharge were not to occur; and that the resulting
trust will not be an "investment company" within the meaning of the Investment
Company Act of 1940, as amended, unless such trust is qualified thereunder or
exempt from regulation thereunder.
The Indenture provides that if the Company takes certain actions
described below, it may omit to comply with certain covenants, including those
described under "--Purchase at the Option of Holders Upon a Change of Control,"
"--Certain Covenants" and in clauses (d) and (e) under the first paragraph of
"--Certain Covenants --Merger, Consolidation and Sale of Substantially All
Assets," and the occurrence of certain Events of Default, which are described
below in clauses (iii) and (iv) (with respect to such covenants) and clauses (v)
and (vi) under "--Events of Default and Notice" will be deemed not to be or
result in an Event of Default. The Company, in order to exercise such option,
will be required to deposit, in trust for the benefit of the Holders of the
Notes, money or U.S. Government Obligations, or a combination thereof, which,
through the payment of principal, premium, if any, and interest in respect
thereof in accordance with their terms, will provide money in an amount
sufficient to pay the principal of and any premium and interest on the Notes at
Stated Maturity thereof or on earlier redemption in accordance with the terms of
the Indenture and the Notes. The Company will also be required, among other
things, to deliver to the Trustee an Opinion of Counsel to the effect that
Holders of the Notes will not recognize gain or loss for federal income tax
purposes as a result of such deposit and defeasance of certain obligations and
will be subject to federal income tax on the same amount, in the same manner and
at the same times as would have been the case if such deposit and defeasance
were not to occur; and that the resulting trust will not be an "investment
company" within the meaning of the Investment Company Act of 1940, as amended,
unless such trust is qualified thereunder or exempt from regulation thereunder.
If the Company were to exercise this option and the Notes were declared due and
payable because of the occurrence of any Event of Default, the amount of money
and U.S. Government Obligations so deposited in trust would be sufficient to pay
amounts due on the Notes at the time of their Stated Maturity but may not be
sufficient to pay amounts due on the Notes upon any acceleration resulting from
such Event of Default. In such case, the Company would remain liable for such
payments.
EVENTS OF DEFAULT AND NOTICE
The following will be Events of Default under the Indenture with respect
to the Notes: (i) failure to pay any interest on the Notes when due, continued
for 30 days; (ii) failure to pay principal of (or premium or Liquidated Damages,
if any, on) the Notes when due; (iii) failure to perform or comply with the
provisions described under "--Certain Covenants --Merger, Consolidation and
Sale of Substantially All Assets"; (iv) failure to perform any other covenant of
the Company or any Subsidiary Guarantor in the Indenture, continued for 30 days
after written notice as provided in the Indenture; (v) the occurrence and
continuation beyond any applicable grace period of any default in the payment of
the principal of (or premium, if any, on) or interest on any Indebtedness of the
Company (other than the Notes) or any Restricted Subsidiary for money borrowed
when due (whether resulting from maturity, acceleration, mandatory redemption or
otherwise), or any other default causing acceleration of any Indebtedness of the
Company or any Restricted Subsidiary for money borrowed, provided that the
aggregate principal amount of such Indebtedness shall exceed $5.0 million; (vi)
one or more final judgments or orders by a court of competent jurisdiction are
entered against the Company or any Restricted Subsidiary in an uninsured or
unindemnified aggregate amount outstanding at any time in excess of $5.0 million
and such judgments or orders are not discharged, waived, stayed, satisfied or
bonded for a period of 60 consecutive days; (vii) certain events of bankruptcy,
insolvency or reorganization with respect to the Company or any Restricted
Subsidiary; or (viii) a Subsidiary Guaranty ceases to be in full force and
effect (other than in accordance with the terms of the Indenture and such
Subsidiary Guaranty) or a Subsidiary Guarantor denies or disaffirms its
obligations under its Subsidiary Guaranty.
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The Indenture provides that if an Event of Default (other than an Event
of Default described in clause (vii) above) with respect to the Notes at the
time outstanding shall occur and be continuing, either the Trustee or the
Holders of at least 25% in aggregate principal amount of the outstanding Notes
by notice as provided in the Indenture may declare the principal amount of the
Notes to be due and payable immediately. If an Event of Default described in
clause (vii) above with respect to the Notes at the time outstanding shall
occur, the principal amount of all the Notes will automatically, and without any
action by the Trustee or any Holder, become immediately due and payable. After
any such acceleration, but before a judgment or decree based on acceleration,
the Holders of at least a majority in aggregate principal amount of the
outstanding Notes may, under certain circumstances, rescind and annul such
acceleration if all Events of Default, other than the nonpayment of accelerated
principal (or other specified amount), have been cured or waived as provided in
the Indenture.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing, the Trustee
will be under no obligation to exercise any of its rights or powers under the
Indenture at the request or direction of any of the Holders of the Notes, unless
such Holders shall have offered to the Trustee reasonable indemnity. Subject to
such provisions for the indemnification of the Trustee, the Holders of at least
a majority in aggregate principal amount of the outstanding Notes will have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee or exercising any trust or power conferred on
the Trustee with respect to the Notes.
No Holder of Notes will have any right to institute any proceeding with
respect to the Indenture, or for the appointment of a receiver or a trustee, or
for any other remedy thereunder, unless (i) such Holder has previously given to
the Trustee written notice of a continuing Event of Default with respect to the
Notes, (ii) the Holders of at least 25% in aggregate principal amount of the
outstanding Notes have made written request, and such Holder or Holders have
offered reasonable indemnity, to the Trustee to institute such proceeding as
trustee and (iii) the Trustee has failed to institute such proceeding and has
not received from the Holders of at least a majority in aggregate principal
amount of the outstanding Notes a direction inconsistent with such request,
within 60 days after such notice, request and offer. However, such limitations
do not apply to a suit instituted by a Holder of Notes for the enforcement of
payment of the principal of or any premium or interest on such Notes on or after
the applicable due date specified in such Notes.
MODIFICATION OF THE INDENTURE; WAIVER
The Indenture provides that modifications and amendments of the
Indenture may be made by the Company, the Subsidiary Guarantors and the Trustee
without the consent of any Holders of Notes in certain limited circumstances,
including (i) to cure any ambiguity, omission, defect or inconsistency, (ii) to
provide for the assumption of the obligations of the Company under the Indenture
upon the merger, consolidation or sale or other disposition of all or
substantially all of the assets of the Company and its Restricted Subsidiaries
taken as a whole and certain other events specified in the provisions of the
Indenture described under "--Certain Covenants --Merger, Consolidation and
Sale of Substantially All Assets," (iii) to provide for uncertificated Notes in
addition to or in place of certificated Notes, (iv) to comply with any
requirement of the Commission in order to effect or maintain the qualification
of the Indenture under the Trust Indenture Act, (v) to make any change that does
not adversely affect the rights of any Holder of Notes in any material respect,
(vi) to add or remove Subsidiary Guarantors pursuant to the procedure set forth
in the Indenture and (vii) certain other modifications and amendments as set
forth in the Indenture.
The Indenture contains provisions permitting the Company, the Subsidiary
Guarantors and the Trustee, with the written consent of the Holders of not less
than a majority in aggregate principal amount of the outstanding Notes, to
execute supplemental indentures or amendments adding any provisions to or
changing or eliminating any of the provisions of the Indenture or modifying the
rights of the Holders of the Notes, except that no such supplemental indenture,
amendment or waiver may, without the consent of all the Holders of outstanding
Notes, among other things, (i) reduce the principal amount of Notes whose
Holders must consent to an amendment or waiver, (ii) reduce the rate of or
change the time for payment of interest on any Notes, (iii) change the currency
in which any amount due in respect of the Notes is payable, (iv) reduce the
principal of or any premium on or change the Stated Maturity of any Notes or
alter the redemption or repurchase provisions with respect thereto, (v) reduce
the relative ranking of any Notes, (vi) release any security that may have been
granted to the Trustee in respect of the Notes (except as
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contemplated in the documents under which such security was granted to the
Trustee) or (vii) make certain other significant amendments or modifications as
specified in the Indenture.
The Holders of at least a majority in principal amount of the
outstanding Notes may waive compliance by the Company with certain restrictive
provisions of the Indenture. The Holders of at least a majority in principal
amount of the outstanding Notes may waive any past default under the Indenture,
except a default in the payment of principal, premium or interest and certain
covenants and provisions of the Indenture which cannot be amended without the
consent of the Holders of each outstanding Note.
NOTICES
Notices to Holders of the Notes will be given by mail to the addresses
of such Holders as they may appear in the Security Register.
GOVERNING LAW
The Indenture and the Notes are governed by and construed in accordance
with the internal laws of the State of New York without reference to principles
of conflicts of law.
TRUSTEE
Harris Trust and Savings Bank is the Trustee under the Indenture. The
Trustee maintains normal banking relationships with the Company and its
Subsidiaries and may perform certain services for and transact other business
with the Company and its Subsidiaries from time to time in the ordinary course
of business. The Trustee is owned by Bank of Montreal, which is the agent bank
and one of the lenders under the Credit Agreement. The Trustee is an affiliate
of Nesbitt Burns Securities, Inc., which is one of the Initial Purchasers. In
the event of a default under the Indenture, the Trustee may, under certain
circumstances, be required to resign, in which case the Company would be
obligated to have a successor Trustee appointed under the applicable terms of
the Indenture.
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DESCRIPTION OF OTHER INDEBTEDNESS
Set forth below is a description of the Credit Agreement and the ECT Revolving
Credit Agreement.
CREDIT AGREEMENT
On April 17, 1998, the Company amended and restated its Credit Agreement
with Bank of Montreal, as agent for the lenders party thereto. The Credit
Agreement provides for borrowings up to $125.0 million (subject to borrowing
base limitations) from such lenders to, among other things, fund development and
exploitation expenditures, acquisitions and general working capital. On July 9,
1998, the Company received approval to borrow $25.0 million under the Credit
Agreement, of which $10.3 million was outstanding as of July 31, 1998. The
proceeds under the Credit Agreement were used to fund the Property Acquisitions
in part. As of July 31, 1998, the Company is able to borrow up to $25.0 million
under the Credit Agreement. The loan under the Credit Agreement matures on April
17, 2003. In the event of a default on the indebtedness under the Credit
Agreement, not subsequently waived by the bank, it is unlikely that the Company
would be able to continue its business.
Indebtedness incurred under the Credit Agreement generally bears
interest under various interest rate pricing options based upon a Federal Funds
rate (plus .5%), Prime Rate or LIBOR rate options. LIBOR rate loans bear an
applicable margin over the LIBOR rate of (i) 2.25%, if greater than 90% of the
available Borrowing Base has been drawn, (ii) 2%, if greater than 75% and not
more than 90% of the available Borrowing Base has been drawn, (iii) 1.5%, if
greater than 40% but not more than 75% of the available Borrowing Base has been
drawn, and (iv) 1%, if not more than 40% of the available Borrowing Base has
been drawn. There is no margin applicable for base rate pricing options.
The loan under the Credit Agreement is secured by a first lien on the
oil and natural gas properties of QSRn and the stock of two subsidiaries of
QSRn. In addition, Queen Sand Resources and its operating subsidiaries (other
than QSRn which is the borrower) entered into guaranty agreements guaranteeing
the repayment of the indebtedness under the Credit Agreement.
Pursuant to the Credit Agreement, the Company is subject to certain
affirmative and negative financial and operating covenants that are usual and
customary for transactions of this nature. The affirmative covenants include,
but are not limited to, covenants to (i) provide annual audited and unaudited
interim financial information, (ii) provide notices of the occurrence of certain
material events affecting the Company, (iii) promptly provide notice of all
legal or arbital proceedings affecting the Company or its subsidiaries which
could reasonably be expected to have a material adverse effect, (iv) maintain
and preserve its existence and oil and gas properties and other material
properties, (v) implement and comply with certain environmental procedures, (vi)
perform its obligations under the Credit Agreement, (vii) provide reserve
reports, (viii) deliver certain title information, (ix) grant a security
interest in oil and gas properties that are not currently subject to a lien
under the Credit Agreement such that the mortgaged property includes at least
85% (with an obligation to use reasonable efforts to maintain 95%) of the SEC
PV-10 of the Company's total proved reserves, and (x) deliver certain
information relating to compliance with ERISA laws and regulations. The negative
covenants include, but are not limited to, covenants (i) not to incur any
indebtedness except as expressly permitted under the Credit Agreement, (ii) not
to incur any lien on any of its properties except as expressly permitted under
the Credit Agreement, (iii) not to make any loans or advances to or investments
in any person except as expressly permitted under the Credit Agreement, (iv)
(with respect to Queen Sand Resources) not to declare or pay any dividends or
redeem or otherwise acquire for value any capital stock of Queen Sand Resources
except for stock dividends and certain permitted repurchases of Series C
Preferred Stock (defined herein), (v) not to enter into sale and leaseback
transactions, (vi) not to materially change the character of its business as an
independent oil and natural gas exploration and production company, (vii) not to
enter into lease agreements except as expressly permitted under the Credit
Agreement, (viii) not to merge with or sell all or substantially all of its
property or assets to any other person; (ix) not to permit the borrowed proceeds
under the Credit Agreement to be used for any purpose except as expressly
permitted under the Credit Agreement, (x) not to violate ERISA laws and
regulations, (xi) not to discount or sell any notes or accounts receivable,
(xii) not to maintain a working capital ratio of less than 1.0 to 1.0, (xiii)
not to maintain a tangible net worth of less than $18.5 million plus the amount
equal to 75% of the net proceeds of any equity offering, (xiv) to pay its trade
accounts payable when due, (xv) not maintain a fixed charge coverage ratio of
less than 1.5 to 1.0, (xvi) not to sell, assign or otherwise transfer any
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interest in any oil or natural gas properties except as expressly permitted
under the Credit Agreement, (xvii) not to violate environmental laws and
regulations, (xviii) not to enter into transactions with affiliates other than
those entered into in the ordinary course of business on fair and reasonable
terms, (xix) not to create any additional subsidiaries unless such subsidiaries
guarantee the obligations of QSRn under the Credit Agreement or issue stock of
any subsidiaries to third parties, (xx) not to enter into negative pledge
agreements, (xxi) not to enter into any contracts which warrant production of
oil and natural gas and not allow gas imbalances, take-or-pay or other
prepayments which would require the delivery of oil or natural gas at some
future time without receiving full payment therefor to exceed 5% of the current
aggregate monthly gas production from the mortgaged oil and natural gas
properties, (xxii) not to amend or modify any material agreements, (xxiii) not
to repay other indebtedness except as expressly permitted under the Credit
Agreement and (xxiv) not make or pay capital expenditures more than specified
amounts.
The Credit Agreement also contains usual and customary events of default
and provides remedies to the lenders in the event of default. The events of
default include (i) default in payment when due of any principal of or interest
on indebtedness under the Credit Agreement, (ii) default in payment when due of
any principal of or interest on any other indebtedness aggregating $500,000 or
more or an event shall occur which requires the Company to mandatorily redeem
any of its existing preferred stock, (iii) breach of a representation and
warranty under the Credit Agreement, (iv) default in performance of obligations
under the Credit Agreement, (v) the Company shall admit in writing its inability
to pay debts as they become due, (vi) voluntary or involuntary bankruptcy, (vii)
a judgment in excess of $100,000 shall be entered and not vacated within 30
days, (viii) the security agreements under the Credit Agreement shall cease to
be in full force and effect and (ix) the Company discontinues its usual business
or any person or group of persons (other than JEDI, Enron or its affiliates)
shall have acquired beneficial ownership of 30% or more of the outstanding
shares of voting stock of Queen Sand Resources or individuals who constitute the
Board of Directors of Queen Sand Resources cease to constitute a majority of the
then-current Board of Directors of Queen Sand Resources. Although the Company
believes that its cash flows and available sources of financing will be
sufficient to satisfy the interest payments on its debt at currently prevailing
interest rates and oil and natural gas prices, the Company's level of debt may
adversely affect the Company's ability: (i) to obtain additional financing for
working capital, capital expenditures or other purposes, should it need to so
do; or (ii) to acquire additional oil and natural gas properties or to make
acquisitions utilizing new borrowings. There can be no assurances that the
Company will be able to obtain additional financing, if required, or that such
financing, if obtained, will be on terms favorable to the Company.
On September 30, 1997 and December 31, 1997 the Company was not in
compliance with its interest coverage ratio. Bank of Montreal waived the
September 30, 1997 covenant violation solely with respect to these specific
defaults. On February 10, 1998, Bank of Montreal waived the Company's December
31, 1997 noncompliance with the interest coverage ratio. On the same date, the
Credit Agreement was amended to reduce the interest coverage ratio to 1.75:1 for
the quarter ending March 31, 1998 and 3.0:1 thereafter. In addition, the Company
and its subsidiaries agreed that during calendar 1998, they would not incur,
without the prior written consent of Bank of Montreal, in the aggregate, capital
expenditures in excess of those disclosed to Bank of Montreal in the Company's
operating forecast ($2.6 million). The Company believes, but cannot assure, that
it will be able to comply with all restrictive covenants in the future or obtain
waivers from the bank with respect to noncompliance.
From time to time in the future, the Company may submit information to
the lenders in accordance with the procedures provided in the Credit Agreement
to support the Company's request to increase the maximum borrowing base as the
Company believes appropriate. All such applications will be subject to bank
approval. If available, these funds would be allocated toward future development
and acquisition programs.
ECT REVOLVING CREDIT FACILITY
Effective December 29, 1997, the Company established the ECT Revolving
Credit Agreement with ECT, as a lender and as agent for the lenders thereto, to
fund on a revolving basis capital costs incurred with future development
projects and to fund further acquisitions. The ECT Revolving Credit Agreement is
subordinate to the Credit Agreement. The ECT Revolving Credit Agreement provides
for borrowings up to $10.0 million, on a revolving basis and subject to
borrowing base limitations, which has been initially set at an amount equal to
40% of the borrowing base established from time to time under the Credit
Agreement. This facility is designed to provide
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bridge financing for development projects and acquisitions to be completed on
relatively short notice or until the affected assets are eligible to be included
in the borrowing base for the Credit Agreement or financed with longer-term
indebtedness or equity capital; provided, that the availability for acquisitions
under the facility is limited to the lesser of $5.0 million or 50% of the
borrowing base as in effect from time to time. There is no indebtedness
outstanding under this facility as of the date of this Prospectus. Borrowings in
excess of certain amounts under the ECT Revolving Credit Agreement will reduce
the available borrowing base under the Credit Agreement. The loan is secured by
a second priority lien and security interest (behind the first lien position of
the Credit Agreement) in approximately 95% of the oil and natural gas properties
of the Company.
The ECT Revolving Credit Agreement is subject to payment of interest at
a fluctuating rate per annum equal to (i) the rate of 1% above the then highest
rate of interest being paid on any portion of the indebtedness owed under the
Credit Agreement or (ii) the rate of 15%, depending upon whether there is any
indebtedness owed under the Credit Agreement outstanding or whether there has
been a certain amount of indebtedness owed under the ECT Revolving Credit
Agreement for certain time periods.
The maturity date for the ECT Revolving Credit Agreement is the earlier
of December 30, 2002 or the date that is 60 days after the Company receives
written notice that the lenders and their affiliates beneficially own in the
aggregate less than 10% of the capital stock of the Company entitled to vote in
the election of directors. From March 31, 1998 through the maturity date, the
Company will pay interest on the outstanding loans at quarterly intervals, on
the last business day of every March, June, September and December. In addition,
the ECT Revolving Credit Agreement provides for certain voluntary prepayments
and certain mandatory prepayments of amounts borrowed under the facility.
The Company paid an affiliate of ECT a fee of $200,000 in connection
with the arrangement of the ECT Revolving Credit Agreement. In addition,
commencing March 31, 1998, and on each payment date thereafter, the Company is
obligated to pay ECT, for the account of each lender under the ECT Revolving
Credit Agreement, a fee of 3/8% per annum on the daily average of the unadvanced
portion of the facility for the period since January 12, 1998 or the previous
payment date to such payment date, except that payment of this fee was waived
for the period from April 12, 1998 until the date on which the Bridge Facilities
are fully repaid.
The Company is subject to various covenants under the ECT Revolving
Credit Agreement, which covenants are substantially similar to the covenants
described above with respect to the Credit Agreement. In addition to the
covenants, the ECT Revolving Credit Agreement contains representations,
warranties, covenants and default provisions customary for a facility of this
type.
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DESCRIPTION OF CAPITAL STOCK
The authorized capital of the Company consists of (i) 100,000,000 shares
of Common Stock and 50,000,000 shares of Preferred Stock. At July 31, 1998, the
Company had (i) 30,826,527 shares of Common Stock outstanding, (ii) one holder
of record and beneficial owner of Series A Participating Convertible Preferred
Stock (the "Series A Preferred Stock") with 9,600,000 shares outstanding, (iii)
no shares of Series B Participating Convertible Preferred Stock (the "Series B
Preferred Stock") issued or outstanding and (iv) approximately six holders of
record and beneficial owners of Series C Convertible Preferred Stock (the
"Series C Preferred Stock") with 10,400 shares 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 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.
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Voting. The holders of shares of Series A Preferred Stock are generally
entitled to vote (on an as-converted basis) together 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 at
least 960,000 shares of Series A Preferred Stock are outstanding, the following
matters will require the approval of a majority 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 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 in proportion to the percentage of the
outstanding voting power represented by the Series A Preferred Stock (currently,
such holders have the right to elect two 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, subject to antidilution
adjustments, 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 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 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 (as described below).
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 an
amount per share equal to (a) the lesser of (i) $1.50 and (ii) the sum of $0.521
and the quotient obtained by dividing (i) the aggregate amount of all payments
made by JEDI pursuant to the Earn Up Agreement dated as of May 6, 1997 between
the Company and JEDI and (ii) 9,600,000 plus (b) 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.
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Events of Default; Remedies. The Certificate of Designation of the
Series A Preferred Stock 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 Certificate of Designation of the Series B Preferred Stock
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.
Description of Series C Preferred Stock
General. The Certificate of Designation of the Series C Preferred Stock
(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;
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(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 ( 2/3) 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 thirty (30) days following such delivery to
convert their Series C Preferred Stock pursuant to the terms of the Series C
Preferred Stock 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 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.
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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 share of
Series C Preferred Stock in an amount equal to the stated value of such share
multiplied by 5%.
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 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, the
New York Stock Exchange or the American Stock Exchange.
Mandatory Redemption. The Series C Certificate of Designation provides
for mandatory redemption by the Company when a Mandatory Redemption Event (as
defined in the Series C Certificate of Designation) occurs.
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 date 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%.
WARRANTS
As of July 31, 1998, JEDI held warrants to purchase an aggregate of
1,725,947 shares of Common Stock at prices ranging from $5.00 to $7.00. The
warrants held by JEDI expire at various times from March 9, 1999 to July 8,
1999. As of July 31, 1998, certain institutional investors held warrants to
purchase an aggregate of 1,440,138 shares of Common Stock at prices ranging from
$2.50 to a floating rate based on market price at the time of exercise. The
warrants held by the institutional investors expire at various times from
December 31, 1998 through December 24, 2001. In addition, certain investors and
placement agents hold warrants to purchase an aggregate of 1,085,000 shares of
Common Stock. See "Recent Developments--Private Equity Placement."
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EXCHANGE RIGHTS
The ECT Revolving Credit Agreement provides that, commencing January
1999, during certain periods, any indebtedness of QSRn, may be exchanged by the
lenders for shares of the Company's Common Stock. The exchange ratio is based on
a formula that is a function of the market price of the Common Stock at the time
of exchange.
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Haynes and Boone, LLP, special counsel to the Company,
the following discussion describes the material federal income tax consequences
expected to result to holders whose Old Notes are exchanged for New Notes in the
Exchange Offer but does not purport to be a complete analysis of all potential
federal income or other tax effects. The discussion is based upon the Internal
Revenue Code of 1986, as amended (the "Code"), Treasury Regulations, Internal
Revenue Service (the "IRS") rulings and pronouncements and judicial decisions
all in effect as of the date hereof, all of which are subject to change at any
time, and any such change may be applied retroactively in a manner that could
adversely affect a holder of the Notes. The discussion does not address all of
the federal income tax consequences that may be relevant to a holder in light of
such holder's particular circumstances or to holders subject to special rules,
such as certain financial institutions, tax-exempt entities, insurance
companies, dealers in securities, traders in securities who elect to mark to
market and persons holding the Notes as part of a "straddle," "hedge" or
"conversion transaction." Moreover, the effect of any applicable state, local or
foreign tax laws is not discussed. The discussion deals only with Notes held as
"capital assets" within the meaning of Section 1221 of the Code.
The exchange of Old Notes for New Notes will be treated as a "non-event"
for federal income tax purposes because the New Notes will not be considered to
differ materially in kind or extent from the Old Notes. As a result, no material
federal income tax consequences will result to holders exchanging Old Notes for
New Notes.
The exchange of an Old Note for a New Note pursuant to the Exchange
Offer will not be taxable to an exchanging Holder for federal income tax
purposes. As a result, (i) an exchanging Holder will not recognize any gain or
loss on the exchange, (ii) the holding period for the New Note will include the
holding period for the New Note and (iii) the tax basis of the New Note will be
the same as the tax basis for the Old Note.
The Exchange Offer will have no federal income tax consequences to a
nonexchanging Holder of Notes.
As used herein, the term "U.S. Holder" means a beneficial owner of a
Note who or which is for U.S. federal income tax purposes (i) a citizen or
resident of the United States, (ii) a corporation or partnership created or
organized in the United States or under the laws of the United States or of any
State, (iii) an estate the income of which is subject to U.S. federal income
taxation regardless of its source, or (iv) a trust if, and only if, (a) a court
within the United States is able to exercise primary supervision over the
administration of the trust and (b) one or more U.S. persons have the authority
to control all substantial decisions of the trust. The term U.S. Holder also
includes certain former U.S. citizens whose income and gain on the Notes will be
subject to U.S. taxation. As used herein, the term "Non-U.S. Holder" means a
beneficial owner of a Note that is not a U.S. Holder. Unless otherwise indicated
from the context, "Holder" means either a U.S. Holder or a Non-U.S. Holder.
The Company has not sought and will not seek any rulings from the
Service with respect to any position of the Company discussed below. There can
be no assurance that the Service will not take a different position from the
Company concerning aspects of the tax consequences of the acquisition, ownership
or disposition of the Notes or that any such position would not be sustained.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH REGARD
TO THE APPLICATION OF THE TAX CONSIDERATIONS DISCUSSED BELOW TO THEIR PARTICULAR
SITUATIONS AS WELL AS THE APPLICATION OF ANY STATE, LOCAL, FOREIGN OR OTHER TAX
LAWS.
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U.S. HOLDERS
Interest payable on the Notes will be includible in the income of a U.S.
Holder in accordance with such Holder's regular method of accounting. If a Note
is redeemed, sold or otherwise disposed of, a U.S. Holder generally will
recognize gain or loss equal to the difference between the amount realized on
the sale or other disposition of such Note (to the extent such amount does not
represent accrued but unpaid interest) and such Holder's tax basis in the Note.
Such gain or loss generally will be capital gain or loss, provided that the
Holder has held the Note as a capital asset. In general, the maximum tax rate
for non-corporate taxpayers on long-term capital gains is 20% for most capital
assets (including the Notes) held for more than 12 months.
NON-U.S. HOLDERS
On October 14, 1997, final Treasury Regulations (the "1997 Final
Regulations") were issued that affect the U.S. taxation of Non-U.S. Holders of
the Notes. The 1997 Final Regulations generally are effective for payments made
after December 31, 1999, regardless of the issue date of the Notes with respect
to which such payments are made, subject to certain transition rules.
THE DISCUSSION UNDER THIS HEADING AND UNDER "--BACKUP WITHHOLDING"
BELOW IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT INTENDED TO BE A COMPLETE
DISCUSSION OF EITHER THE STATUTORY AND REGULATORY PROVISIONS THAT APPLY TO
PAYMENTS MADE ON THE NOTES BEFORE JANUARY 1, 2000 OR THE PROVISIONS OF THE 1997
FINAL REGULATIONS. PROSPECTIVE NON-U.S. HOLDERS ARE URGED TO CONSULT THEIR TAX
ADVISORS WITH RESPECT TO THE POSSIBLE APPLICABILITY OF THE VARIOUS WITHHOLDING
PROVISIONS OF THE CODE AND THE TREASURY REGULATIONS PROMULGATED THEREUNDER.
Interest on the Notes. Payments of interest on the Notes by the Company
or any paying agent to a beneficial owner of a Note that is a Non-U.S. Holder
will not be subject to U.S. federal withholding tax, provided that (i) such
holder does not own, actually or constructively, 10% or more of the total
combined voting power of all classes of stock of the Company entitled to vote,
(ii) such holder is not, for U.S. federal income tax purposes, a controlled
foreign corporation related, directly or indirectly, to the Company through
stock ownership, (iii) such holder is not a bank receiving interest described in
Section 881(c)(3)(a) of the Code and (iv) certain certification requirements
(summarized below) are met (the "Portfolio Interest Exception"). If a Non-U.S.
Holder of a Note is engaged in a trade or business in the United States, and if
interest on the Note is effectively connected with the conduct of such trade or
business (and, if certain tax treaties apply, is attributable to a U.S.
permanent establishment maintained by the Non-U.S. Holder), the Non-U.S. Holder,
although exempt from U.S. withholding tax, will generally be subject to regular
U.S. income tax on such interest in the same manner as if it were a U.S. Holder.
In addition, if such Non-U.S. Holder is a foreign corporation, it may be subject
to a branch profits tax equal to 30% (or such lower rate provided by an
applicable treaty) of its effectively connected earnings and profits for the
taxable year, subject to certain adjustments. For purposes of the branch profits
tax, interest on a Note will be included in the earnings and profits of such
Non-U.S. Holder if such interest is effectively connected with the conduct by
the Non-U.S. Holder of a trade or business in the United States.
For payments of interest on the Notes made prior to January 1, 2000,
generally in order to qualify for the Portfolio Interest Exception, either (i)
the beneficial owner of a Note must certify on IRS Form W-8 (or an acceptable
substitute form), under penalties of perjury, to the Company or a paying agent,
as the case may be, that such owner is a Non-U.S. Holder and must provide such
owner's name and address or (ii) a securities clearing organization, bank or
other financial institution that holds customers' securities in the ordinary
course of its trade or business (a "Financial Institution") and holds the Note
on behalf of the beneficial owner thereof must certify, under penalties of
perjury, to the Company or paying agent, as the case may be, that such
certificate has been received from the beneficial owner by it or by a Financial
Institution between it and the beneficial owner and must furnish the payor with
a copy thereof. A certificate described in this paragraph is effective only with
respect to payments of interest made to the certifying Non-U.S. Holder after
delivery of the certificate in the calendar year of its delivery and the two
immediately succeeding calendar years. In lieu of the certificate described in
this paragraph, a Non-U.S. Holder engaged in a trade or business in the United
States (with which interest payments on the Note
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are effectively connected) must provide to the Company a properly executed
Internal Revenue Service Form 4224 in order to claim an exemption from
withholding tax.
A payment of interest on the Notes made to a foreign beneficial owner
after December 31, 1999, generally will qualify for the Portfolio Interest
Exception or, as the case may be, the exception from withholding for income
effectively connected with the conduct of a trade or business in the United
States if, at the time such payment is made, the withholding agent holds a valid
Form W-8 (or an acceptable substitute form) from the beneficial owner and can
reliably associate such payment with such Form W-8. In addition, under certain
circumstances a withholding agent is allowed under the 1997 Final Regulations to
rely on Form W-8 (or an acceptable substitute form) furnished by a financial
institution or other intermediary on behalf of one or more beneficial owners (or
other intermediaries) without having to obtain copies of the beneficial owner's
Form W-8 (or an acceptable substitute form), provided that the financial
institution or intermediary has entered into a withholding agreement with the
IRS and thus is a "qualified intermediary," and may not be required to withhold
on payments made to certain other intermediaries if certain conditions are met.
Disposition of Notes. Under current law, a Non-U.S. Holder of a Note
generally will not be subject to U.S. federal income tax on any gain recognized
on the sale, exchange or other disposition of such Note (other than gain
attributable to accrued interest, which is subject to the rules discussed
above), unless (i) the gain is effectively connected with the conduct of a trade
or business in the United States of the Non-U.S. Holder (and, if certain tax
treaties apply, is attributable to a U.S. permanent establishment maintained by
the Non-U.S. Holder), (ii) the Non-U.S. Holder is an individual who holds the
Note as a capital asset, is present in the United States for 183 days or more in
the taxable year of the disposition and either (a) such individual has a U.S.
"tax home" (as defined for U.S. federal income tax purposes) or (b) the gain is
attributable to an office or other fixed place of business maintained in the
United States by such individual or (iii) the Non-U.S. Holder is subject to tax
pursuant to the Code provisions applicable to certain U.S. expatriates. In the
case of a Non-U.S. Holder that is described under clause (i) above, its gain
will be subject to the U.S. federal income tax on net income that applies to
U.S. persons and, in addition, if such Non-U.S. Holder is a foreign corporation,
it may be subject to the branch profits tax as described above. An individual
Non-U.S. Holder that is described under clause (ii) above will be subject to a
flat 30% tax on gain derived from the sale, which may be offset by U.S. capital
losses (notwithstanding the fact that he or she is not considered a U.S.
resident). Thus, individual Non-U.S. Holders who have spent 183 days or more in
the United States in the taxable year in which they contemplate a sale of a Note
are urged to consult their tax advisors as to the tax consequences of such sale.
Estate Tax Consequences. A Note held by an individual who is not a U.S.
citizen or resident (as specially defined for United States federal estate tax
purposes) at the time of his death will not be subject to U.S. federal estate
tax as a result of such individual's death, provided that, at the time of such
individual's death, the individual does not own, actually or constructively, 10%
or more of the total combined voting power of all classes of stock of the
Company entitled to vote and payments with respect to such Note would not have
been effectively connected with the conduct by such individual of a trade or
business in the United States.
BACKUP WITHHOLDING
A Holder may be subject, under certain circumstances, to backup
withholding at a 31% rate with respect to "reportable payments" on the Notes.
This withholding generally applies only if the Holder (i) fails to furnish his
or her social security or other taxpayer identification number ("TIN"), (ii)
furnishes an incorrect TIN, (iii) is notified by the Service that he or she has
failed to report properly payments of interest and dividends and the Service has
notified the Company that the Holder is subject to backup withholding or (iv)
fails, under certain circumstances, to provide a certified statement, signed
under penalty of perjury, that the TIN provided is his or her correct number and
that he or she is not subject to backup withholding. Any amount withheld from
payment to a holder under the backup withholding rules is allowable as a credit
against such holder's U.S. federal income tax liability, provided that the
required information is furnished to the Service. Certain Holders (including,
among others, corporations and foreign individuals who comply with certain
certification requirements) are not subject to backup withholding. Holders
should consult their tax advisors as to their qualifications for exemption from
backup withholding and the procedure for obtaining such an exemption.
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INFORMATION REPORTING
The Company is required to furnish certain information to the IRS and
will furnish annually to record holders of the Notes information with respect to
interest paid on the Notes during the calendar year.
SUBSEQUENT PURCHASERS
The foregoing does not discuss special rules that may affect the
treatment of purchasers that acquire the Notes other than at the time of
original issuance at the issue price, including those provisions of the Code
relating to the treatment of "market discount" and "acquisition premium." For
example, the market discount provisions of the Code may require a subsequent
purchaser of Notes at a market discount to treat all or a portion of any gain
recognized upon sale or other disposition of such Notes as ordinary income and
to defer a portion of any interest expense that would otherwise be deductible on
any indebtedness incurred or maintained to purchase or carry such Notes until
the holder disposes of such Notes in a taxable transaction.
EXPERTS
The consolidated balance sheet of the Company as of June 30, 1997 and
the related consolidated statements of operations, stockholders' equity and cash
flows for the year ended June 30, 1997 and the statements of operating revenues
and direct operating expenses of Collins and Ware Properties for the years ended
June 30, 1996 and 1997 appearing in the Company's Annual Report (Form 10-KSB)
for the year ended June 30, 1997, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon included therein and
incorporated herein by reference. Such financial statements are incorporated
herein by reference in reliance upon such reports given upon the authority of
such firm as experts in accounting and auditing.
The statements of net profits interests and royalty interests revenues
of certain oil and gas producing properties acquired from pension funds managed
by J.P. Morgan Investments for the years ended June 30, 1997, 1996 and 1995
appearing in the Company's Current Report on Form 8-K dated March 19, 1998, as
amended by Current Report on Form 8-K/A-2 dated June 8, 1998, have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report thereon
included therein and incorporated herein by reference. Such financial statements
are incorporated herein by reference in reliance upon such report given upon 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 herein
by reference and upon the authority of said firm as experts in accounting and
auditing.
LEGAL MATTERS
The validity of the New Notes offered hereby, U.S. federal tax effects
relating to the Exchange Offer and certain other legal matters will be passed
upon for the Company by Haynes and Boone, LLP, Dallas, Texas.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Notes were acquired as a result of market-making activities or other
trading activities. The Company has agreed that, starting on the Expiration Date
and ending on the close of business on the first anniversary of the Expiration
Date, it will make this Prospectus, as amended or supplemented, available to any
broker-dealer for use in connection with any such resale.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the Form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant to
the Exchange Offer and any broker or dealer that participates in a distribution
of such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit of any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act.
For a period of one year after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer (including the expenses of one counsel for the
holders of the Notes) other than commissions or concessions of any brokers or
dealers and will indemnify the holders of the Notes (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
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ENGINEERS
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,
1997 (other than with respect to the Property Acquisitions) and at December 31,
1997 (other than with respect to the Morgan Properties) included in this
Prospectus are based upon estimates of such reserves prepared by H.J. Gruy 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 and estimates relating to the NASGAS Properties at June 30, 1997
included in this Prospectus are based upon estimates of such reserves prepared
by Harper and Associates 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 at June 30,
1997 with respect to the Collins and Ware Properties included in this Prospectus
are based upon estimates of such reserves prepared by Joe C. Neal & Associates,
independent consulting petroleum engineers, in reliance upon its report 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 at December 31,
1997 with respect to the Morgan Properties included in this Prospectus are based
upon estimates of such reserves prepared by Ryder Scott, independent consulting
petroleum engineers, in reliance upon its report and upon the authority of this
firm as experts in petroleum engineering.
INDEPENDENT AUDITORS
The consolidated balance sheet of the Company as of June 30, 1997 and
the related consolidated statements of operations, stockholders' equity and cash
flows 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, 1996 and 1997, included in this Prospectus and also included in
the Company's Annual Report (Form 10-KSB) for the year ended June 30, 1997 have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
reports thereon appearing elsewhere herein and also included in the Form 10-KSB
incorporated herein by reference. Such financial statements are included herein
and incorporated herein by reference in reliance upon such reports given upon
the authority of such firm as experts in accounting and auditing.
The statements of net profits interests and royalty interests revenues
of certain oil and gas producing properties acquired from pension funds managed
by J.P. Morgan Investments for the years ended June 30, 1997, 1996 and 1995
included in this prospectus and also included in the Company's Current Report
on Form 8-K dated March 19, 1998, as amended by Current Report on Form 8-K/A-2
dated June 8, 1998, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein and
also included in Form 8-K/A-2 and incorporated herein by reference. Such
financial statements are included herein and incorporated herein by reference
in reliance upon such report given upon 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 included and incorporated by
reference herein and in the registration statement in reliance upon the report
of KPMG Peat Marwick LLP, independent certified public accountants,
incorporated herein by reference and upon the authority of said firm as experts
in accounting and auditing.
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GLOSSARY
The terms defined in this glossary are used throughout this Offering
Memorandum.
"average NYMEX price." The average of the NYMEX closing prices for the
near month.
Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used
herein in reference to crude oil or other liquid hydrocarbons.
Bbl/d. Bbl per day.
Bcf. One billion cubic feet of natural gas.
Bcfe. One billion cubic feet of natural gas equivalents, converting one
Bbl of oil to six Mcf of gas.
"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
Bbl of oil).
"development well." A well drilled within the proved boundaries of an
oil or natural gas reservoir with the intention of completing the stratigraphic
horizon known to be productive.
"dry well." A development or exploratory well found to be incapable of
producing either oil or natural gas in sufficient quantities to justify
completion as an oil or natural gas well.
"exploratory well." A well drilled to find and produce oil or natural
gas in an unproved area, to find a new reservoir in a field previously found to
be productive of oil or natural gas in another reservoir, or to extend a known
reservoir.
"gross acres" or "gross wells." The total number of acres or wells, as
the case may be, in which a working interest is owned.
LOE. Lease operating expenses are those expense directly associated with
crude oil and/or natural gas producing or service wells.
MBbl. One thousand barrels of crude oil or other liquid hydrocarbons.
MBOE. One thousand barrels of oil equivalent (converting six Mcf of
natural gas to one Bbl of oil).
Mcf. One thousand cubic feet of natural gas.
Mcf/d. Mcf per day.
Mcfe. One thousand cubic feet of natural gas equivalents, converting one
Bbl of oil to six Mcf of gas.
MMBbl. One million barrels of crude oil or other liquid hydrocarbons.
MMBOE. One million barrels of all equivalent.
MMcfe. One million cubic feet of natural gas equivalents, converting one
Bbl of oil to six Mcf of gas.
MMcf. One million cubic feet of natural gas.
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"net acres" or "net wells." The sum of the fractional working interests
owned in gross acres or gross wells.
"net profits interest." A share of the gross oil and natural gas
production from a property, measured by net profits from the operation of the
property, that is carved out of the working interest. This is a non-operated
interest.
"non-producing reserves." Non-producing reserves consist of (i) reserves
from wells that have been completed and tested but are not yet producing due to
lack of market or minor completion problems that are expected to be corrected,
and (ii) reserves currently behind-the-pipe in existing wells which are expected
to be productive due to both the well log characteristics and analogous
production in the immediate vicinity of the well.
NYMEX. New York Mercantile Exchange.
"producing well," "production well," or "productive well." A well that
is producing oil or natural gas or that is capable of production.
"proved developed reserves," "proved developed producing" or "PDP."
Proved developed reserves are oil and natural gas reserves that can be expected
to be recovered through existing wells with existing equipment and operating
methods. Additional oil and natural 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 reserves." The estimated quantities of crude oil, natural gas
and natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions.
"proved undeveloped reserves" or PUD. Reserves are oil and natural 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.
"Reserve Life Index." The estimated productive life of a proved
reservoir based upon the economic limit of such reservoir producing hydrocarbons
in paying quantities assuming certain price and cost parameters. For purposes of
this Offering Memorandum, reserve life is calculated by dividing the Proved
Reserves (on a Mcfe basis) at the end of the period by production volumes for
the previous 12 months.
"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.
"SEC PV-10." The present value of proved reserves is an estimate of the
discounted future net cash flows from each of the properties at December 31,
1997, or as otherwise indicated. Net cash flow is defined as net revenues less,
after deducting production and ad valorem taxes, future capital costs and
operating expenses, but before deducting federal income taxes. As required by
rules of the Commission, the future net cash flows have been discounted at an
annual rate of 10% to determine their "present value." The present value is
shown to indicate the effect of time on the value of the revenue stream and
should not be construed as being the fair market value of the properties. In
accordance with Commission rules, estimates have been made using constant oil
and natural gas prices and operating costs, at December 31, 1997, or as
otherwise indicated.
"secondary recovery." A method of oil and natural gas extraction in
which energy sources extrinsic to the reservoir are utilized.
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"service well." A well used for water injection in secondary recovery
projects or for the disposal of produced water.
"Standardized Measure." Under the Standardized Measure, future cash
flows are estimated by applying year-end prices, adjusted for fixed and
determinable escalations, to the estimated future production of year-end proved
reserves. Future cash inflows are reduced by estimated future production and
development costs based on period-end costs to determine pretax cash inflows.
Future income taxes are computed by applying the statutory tax rate to the
excess of pretax cash inflows over the Company's tax basis in the associated
properties. Tax credits, net operating loss carryforwards, and permanent
differences are also considered in the future tax calculation. Future net cash
inflows after income taxes are discounted using a 10% annual discount rate to
arrive at the Standardized Measure.
"undeveloped acreage." Lease acreage on which wells have not been
drilled or completed to a point that would permit the production of commercial
quantities of oil and natural gas regardless of whether such acreage contains
proved reserves.
"working interest." The operating interest which gives the owner the
right to drill, produce and conduct operating activities on the property and a
share of production, subject to all royalties, overriding royalties and other
burdens and to all costs of exploration to, development and operations and all
risks in connection therewith.
129
<PAGE> 131
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report -- Ernst & Young LLP......... F-2
Independent Auditors' Report -- KPMG Peat Marwick LLP..... F-3
Consolidated Balance Sheets as of June 30, 1997 and
1996................................................... F-4
Consolidated Statements of Operations for the years ended
June 30, 1997 and 1996................................. F-5
Consolidated Statements of Cash Flows for the years ended
June 30, 1997 and 1996................................. F-6
Consolidated Statements of Stockholders' Equity for the
years ended June 30, 1997 and 1996..................... F-7
Notes to Consolidated Financial Statements................ F-8
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of June 30, 1997
and March 31, 1998..................................... F-24
Condensed Consolidated Statements of Operations for the
three months and nine months ended March 31, 1997 and
1998................................................... F-25
Condensed Consolidated Statements of Cash Flows for the
nine months ended March 31, 1997 and 1998.............. F-26
Notes to Unaudited Condensed Consolidated Financial
Statements............................................. F-27
STATEMENTS OF REVENUE AND DIRECT OPERATING EXPENSE OF THE
COLLINS AND WARE PROPERTIES
Independent Auditors' Report -- Ernst & Young LLP......... F-29
Statements of Revenue and Direct Operating Expenses of the
Collins and Ware Properties for the years ended June
30, 1997 and 1996...................................... F-30
Notes to Statements of Revenue and Direct Operating
Expenses of the Collins and Ware Properties............ F-31
STATEMENTS OF NET PROFITS INTERESTS AND ROYALTY INTERESTS
REVENUES OF THE MORGAN PROPERTIES
Independent Auditors' Report -- Ernst & Young LLP......... F-33
Statements of Net Profits Interests and Royalty Interests
Revenues of the Morgan Properties for the years ended
June 30, 1997, 1996 and 1995........................... F-34
Unaudited Statement of Net Profits Interests and Royalty
Interests Revenues of the Morgan Properties for the
nine months ended March 31, 1998....................... F-34
Notes to Statements of Net Profits Interests and Royalty
Interests Revenues..................................... F-35
</TABLE>
F-1
<PAGE> 132
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Queen Sand Resources, Inc.
We have audited the accompanying consolidated balance sheet of Queen Sand
Resources, Inc. and subsidiaries as of June 30, 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Queen Sand
Resources, Inc. and subsidiaries as of June 30, 1997, and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
September 18, 1997
F-2
<PAGE> 133
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Queen Sand Resources, Inc.
We have audited the accompanying consolidated balance sheet of Queen Sand
Resources, Inc. and subsidiaries as of June 30, 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Queen Sand
Resources, Inc. and subsidiaries as of June 30, 1996, and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Dallas, Texas
August 30, 1996, except as to the sixth paragraph of Note
3, which is as of September 30, 1996, the fourth
paragraph of Note 2, which is as of November 6, 1996,
the first paragraph of Note 5, which is as of November
12, 1996, and the second paragraph of Note 3, which is
as of November 14, 1996
F-3
<PAGE> 134
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Current assets:
Cash...................................................... $ 309,695 $ 599,621
Accounts receivable:
Oil and gas sales...................................... 579,639 428,259
Joint interest......................................... 165,284 --
Stockholder............................................ -- 500,000
Other..................................................... 11,169 4,933
----------- -----------
Total current assets.............................. 1,065,787 1,532,813
----------- -----------
Property and equipment, at cost (Notes 1, 2, 3, 4 and 9):
Oil and gas properties, based on full cost accounting
method................................................. 17,540,805 10,158,954
Other equipment........................................... 390,404 265,297
----------- -----------
17,931,209 10,424,251
Less accumulated depreciation, depletion, and
amortization........................................... 1,744,000 762,000
----------- -----------
Net property and equipment................................ 16,187,209 9,662,251
Other assets.............................................. -- 87,749
----------- -----------
$17,252,996 $11,282,813
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade.................................................. $ 1,125,160 $ 431,321
Revenue and other...................................... 103,350 --
Accrued liabilities....................................... 360,158 208,396
Notes payable............................................. -- 750,000
Current portion of debt and capitalized lease obligation
(Notes 3 and 4)........................................ 2,080,897 60,010
----------- -----------
Total current liabilities......................... 3,669,565 1,449,727
Long-term obligations, net of current portion (Notes 3 and
4)........................................................ 7,151,881 6,670,441
----------- -----------
Total liabilities................................. 10,821,446 8,120,168
----------- -----------
Commitments (Notes 4 and 5)
Stockholders' equity (Notes 2 and 5):
Preferred stock, $.01 par value:
Authorized shares -- 50,000,000 at June 30, 1997
Issued and outstanding shares -- 9,600,000 at June 30,
1997.................................................. 96,000 --
Aggregate liquidation preference -- $5,000,000
Common stock, $.0015 par value:
Authorized shares -- 100,000,000 and 40,000,000 at June
30, 1997 and 1996, respectively
Issued and outstanding shares -- 20,825,552 and
27,020,000 at June 30, 1997 and 1996, respectively.... 45,635 40,530
Additional paid-in capital................................ 14,474,844 4,997,841
Accumulated deficit....................................... (3,184,929) (1,875,726)
Treasury stock, 9,600,000 shares of common stock, at
cost................................................... (5,000,000) --
----------- -----------
Total stockholders' equity........................ 6,431,550 3,162,645
=========== ===========
Total liabilities and stockholders' equity........ $17,252,996 $11,282,813
=========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 135
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Revenues:
Oil and natural gas sales................................. $ 4,381,035 $ 2,079,413
Interest and other (Note 1)............................... 300,271 71,629
----------- -----------
4,681,306 2,151,042
Expenses:
Oil and gas production expenses........................... 2,506,759 1,175,639
Depreciation, depletion, and amortization (Note 1)........ 982,000 630,000
General and administrative (Notes 1 and 7)................ 1,452,402 1,113,146
Interest and financing costs.............................. 877,967 420,790
----------- -----------
Loss before extraordinary item.............................. (1,137,822) (1,188,533)
Extraordinary item (Note 3)................................. 171,381 --
----------- -----------
Net loss.......................................... $(1,309,203) $(1,188,533)
=========== ===========
Loss before extraordinary item per common share............. $ (.04) $ (.05)
=========== ===========
Net loss per common share................................... $ (.05) $ (.05)
=========== ===========
Weighted average common shares outstanding.................. 26,964,334 26,003,479
=========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 136
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................... $(1,309,203) $(1,188,533)
Adjustments to reconcile net loss to net cash used in
operating activities:
Extraordinary item........................................ 171,381 --
Depreciation, depletion, and amortization................. 982,000 630,000
Foreign currency translation gains........................ (300,271) (62,528)
Issuance of common stock for services..................... 20,880 63,000
Accretion of debt discount................................ 72,032 --
Changes in operating assets and liabilities:
Accounts receivable.................................... (316,664) (257,666)
Other assets........................................... (6,236) 7,951
Accounts payable and accrued liabilities............... 948,951 187,897
----------- -----------
Net cash used in operating activities....................... 262,870 (619,879)
INVESTING ACTIVITIES
Additions to oil and gas properties......................... (4,179,956) (5,414,711)
Additions to other property and equipment................... (125,107) --
Additions to other assets................................... -- (87,749)
----------- -----------
Net cash provided by (used in) investing activities......... (4,305,063) (5,502,460)
FINANCING ACTIVITIES
Proceeds from revolving credit facility..................... 275,982 --
Payments made on revolving credit facility.................. -- (262,610)
Proceeds from revolving line of credit...................... -- 4,582,011
Proceeds from private debt offerings........................ 526,072 1,935,388
Payments made on notes payable.............................. (1,407,923) (600,000)
Collection of stock subscription............................ 500,000 --
Proceeds from sale of convertible preferred stock and
warrants to purchase common stock......................... 5,000,000 --
Proceeds from the sales of common stock..................... 4,059,000 1,024,000
Repurchase of common stock.................................. (5,142,918) --
Payments made on capital lease obligation................... (57,946) (56,276)
----------- -----------
Net cash provided by financing activities................... 3,752,267 6,622,513
Net increase (decrease) in cash............................. (289,926) 500,174
Cash at beginning of year................................... 599,621 99,447
----------- -----------
Cash at end of year......................................... $ 309,695 $ 599,621
=========== ===========
Supplemental cash flow information:
Interest paid in cash..................................... $ 765,181 $ 168,870
=========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 137
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL
------------------- -------------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL TREASURY DEFICIT EQUITY
--------- ------- ---------- ------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1995... -- $ -- 25,800,000 $38,700 $ 3,852,071 $ $ (687,193) $ 3,203,578
Issuance of common stock
for services........... -- -- 350,000 525 62,475 -- -- 63,000
Issuance of common stock
for oil and gas
properties (Note 2).... -- -- 470,000 705 83,895 -- -- 84,600
Issuance of common stock
for cash............... -- -- 400,000 600 999,400 -- -- 1,000,000
Net loss................. -- -- -- -- -- -- (1,188,533) (1,188,533)
--------- ------- ---------- ------- ----------- ----------- ----------- -----------
Balance at June 30, 1996... -- -- 27,020,000 40,530 4,997,841 -- (1,875,726) 3,162,645
Issuance of common stock
for services........... -- -- 116,052 171 20,709 -- -- 20,880
Issuance of common stock
for oil and gas
properties (Note 2).... -- -- 1,529,500 2,294 638,852 -- -- 641,146
Issuance of common stock
for cash (Note 5)...... -- -- 1,760,000 2,640 4,056,360 -- -- 4,059,000
Issuance of convertible
preferred stock and
warrants to purchase
common stock for cash
(Note 5)............... 9,600,000 96,000 -- -- 4,904,000 -- -- 5,000,000
Repurchase of common
stock (Note 5)......... -- -- (9,600,000) -- (142,918) (5,000,000) -- (5,142,918)
Net loss................. -- -- -- -- -- -- (1,309,203) (1,309,203)
--------- ------- ---------- ------- ----------- ----------- ----------- -----------
Balance at June 30,1997.... 9,600,000 $96,000 20,825,552 $45,635 $14,474,844 $(5,000,000) $(3,184,929) $ 6,431,550
========= ======= ========== ======= =========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-7
<PAGE> 138
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
Queen Sand Resources, Inc. (QSRI or the Company) was formed on August 9,
1994 under the laws of the State of Delaware. At June 30, 1997, EIBOC
Investments Ltd. (EIBOC) held approximately 6,600,000 shares of the Company's
common stock, par value $.0015 (Common Stock), representing approximately 30% of
the Company's outstanding shares of common stock on a fully diluted basis.
Certain officers of the Company have beneficial interests in EIBOC. See Note 5.
The Company is engaged in one industry segment, the acquisition,
exploration, development, production, and sale of crude oil and natural gas. The
Company's business activities are carried out primarily in Texas, New Mexico,
Mississippi and Louisiana.
LIQUIDITY
A majority of the Company's proved oil and gas reserves are undeveloped
which, based on June 30, 1997 reserve reports, are expected to require
approximately $23.5 million (unaudited) of development costs over the next 10
years. Accordingly, the Company will need to obtain substantial amounts of funds
in the future to finance development of these undeveloped reserves. The Company
plans to fund these obligations using cash anticipated to be provided from
future operations and future equity offerings and debt financings. However,
there is no assurance funds will be available when needed. Failure to fund these
capital expenditures would substantially diminish the value of the Company's oil
and gas reserves.
The Company had negative cash flows from operations for the year ended June
30, 1996. In the event of future cash flow deficiencies, management believes
that sufficient liquidity will be provided through a combination of common stock
sales, private debt offerings, and acquisitions of oil and gas properties with
positive cash flows.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
PROPERTY AND EQUIPMENT
The Company follows the full cost method of accounting for its oil and gas
activities under which all costs, including direct general and administrative
expenses associated with property acquisition, exploration, and development
activities, are capitalized. Capitalized general and administrative expenses
directly associated with acquisitions, exploration, and development of oil and
gas properties were $316,070 and $231,750 for the years ended June 30, 1997 and
1996, respectively. Capitalized costs are depleted by the unit-of-production
method using independent engineer estimates of unrecovered proved oil and gas
reserves. The costs of unproved properties are excluded from depletion until the
properties are evaluated. Depreciation, depletion, and amortization of oil and
gas properties was $3.78 and $4.60 per equivalent barrel of oil and gas produced
for the years ended June 30, 1997 and 1996, respectively. Sales of oil and gas
properties are accounted for as adjustments to the capitalized cost center
unless such sales significantly alter the relationship between capitalized costs
and proved reserves of oil and gas attributable to the cost center, in which
case a gain or loss is recognized.
The Company limits the capitalized costs of oil and gas properties, net of
accumulated depreciation, depletion, and amortization, to the estimated future
net revenues from proved oil and gas reserves less
F-8
<PAGE> 139
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
estimated future development and production expenditures discounted at 10%, plus
the lower of cost or estimated fair value of unproved properties as adjusted for
related tax effects. If capitalized costs exceed this limit, the excess is
charged to depreciation, depletion, and amortization expense. The Company has
not recorded any write-downs of capitalized costs as a result of this
limitation.
Depreciation, depletion, and amortization expense and limits to capitalized
costs are based on estimates of oil and gas reserves which are inherently
imprecise. Accordingly, it is reasonably possible that such estimates could
differ materially in the near term from amounts currently estimated.
Depreciation and amortization of other property and equipment is provided
principally by the straight-line method over the estimated service lives of the
related assets. Equipment under capital lease is recorded at the lower of fair
value or the present value of future minimum lease payments and are amortized
over the lease term.
Costs incurred to operate, repair, and maintain wells and equipment are
expensed as incurred.
The Company's exploration and development activities are conducted jointly
with others and, accordingly, the consolidated financial statements reflect only
the Company's proportionate interest in such activities.
The Company does not expect future costs for site restoration,
dismantlement and abandonment, postclosure and other exit costs which may occur
in the sale, disposal, or abandonment of a property to be material.
REVENUE RECOGNITION
The Company uses the sales method of accounting for oil and gas revenues.
Under the sales method, revenues are recognized based on actual volumes of oil
and gas sold to purchasers.
ENVIRONMENTAL MATTERS
The Company is subject to extensive federal, state, and local environmental
laws and regulations. These laws, which are constantly changing, regulate the
discharge of materials into the environment and may require the Company to
remove or mitigate the environmental effects of the disposal or release of
petroleum or chemical substances at various sites. Environmental expenditures
are expensed or capitalized depending on their future economic benefit.
Expenditures that relate to an existing condition caused by past operations and
that have no future economic benefits are expensed. Liabilities for expenditures
of a noncapital nature are recorded when environmental assessment and/or
remediation is probable, and the costs can be reasonably estimated.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. The measurement of deferred tax assets
is adjusted by a valuation allowance, if necessary, to recognize the extent to
which based on available evidence, the future tax benefits more likely than not
will be realized.
STATEMENT OF CASH FLOWS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
F-9
<PAGE> 140
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1995, in connection with the sale of 3,200,000 shares of common stock,
the Company recorded a receivable in the amount of $544,000, $20,000 of which
was received by June 30, 1995, and the remainder in fiscal 1996.
In 1996, in connection with certain promotional services rendered by an
unrelated party, the Company issued 350,000 shares of Common Stock valued at
$63,000.
In 1996, in connection with the acquisition of certain interests in oil and
gas properties, the Company issued notes payable to the seller for $750,000 and
issued 470,000 shares of Common Stock valued at $84,600. See Notes 2 and 3.
In 1996, in connection with the sale of 400,000 shares of Common Stock for
$1,000,000, the Company recorded accounts receivable from stockholders in the
amount of $500,000. The receivables were collected in September 1996.
During 1997, in connection with the acquisitions of interests in oil and
gas properties, the Company issued an aggregate of 1,529,500 shares of Common
Stock valued at $641,146 and issued notes payable to the sellers which were
recorded at $2,473,000 net of issuance discount of $354,000. (See Notes 2 and
3).
LOSS PER COMMON SHARE
Earnings (loss) per common and common equivalent share data is computed by
dividing net income (loss) by the weighted average number of common and common
equivalent shares outstanding during each period. Shares issuable upon exercise
of warrants and upon conversion of the Company's convertible preferred stock are
included in the computation of earnings per common and common equivalent share
for periods subsequent to their issuance to the extent they are dilutive.
Because the Company incurred net losses during each of the years ended June 30,
1997 and 1996, the loss per common share data is based on the weighted average
common shares outstanding.
CONCENTRATIONS OF CREDIT RISK
For the year ended June 30, 1997, five oil and gas companies including an
affiliate of one of the Company's stockholders, accounted for 32%, 14%, 17%,
10%, and 9%, respectively, of the Company's oil and gas sales. During the year
ended June 30, 1996, five oil and gas companies accounted for 15%, 15%, 17%,
21%, and 24%, respectively, of the Company's oil and gas sales. Because oil and
gas sales are made to large, well-established companies, the Company does not
believe that this concentration of sales and credit risks represents a material
risk of loss with respect to its financial position as of June 30, 1997 and
1996. The Company's receivables are generally unsecured.
FOREIGN CURRENCY
Foreign currency transactions are translated to U.S. dollars at the rate of
exchange on the date of the transaction. Amounts payable and receivable in
foreign currency are translated at the exchange rate at the
F-10
<PAGE> 141
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
balance sheet date. Translation gains of $300,271 and $62,528 were recognized
during the years ended June 30, 1997 and 1996, respectively, and are included in
interest and other income in the accompanying consolidated statements of
operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the
reporting period. Because of the use of estimates inherent in the financial
reporting process, actual results could differ from those estimates.
2. ACQUISITIONS
The consolidated financial statements include the results of operations of
the acquired interests in oil and gas properties from their respective
acquisition dates.
In April 1996, the Company purchased interests in oil and gas properties
located in East Texas (the East Texas Properties) for $4,250,000 in cash,
$750,000 in notes payable to the seller and 470,000 shares of Common Stock
valued at $84,600.
The following unaudited pro forma summary of the Company's consolidated
results of operations for the year ended June 30, 1996, was prepared as if the
acquisition of the East Texas Properties had occurred on July 1, 1995. The
unaudited pro forma data is based on numerous assumptions and is not necessarily
indicative of future operations or of results which would actually have occurred
if the acquisitions had been made on July 1, 1995.
<TABLE>
<CAPTION>
1996
-----------
<S> <C>
Revenues.................................................... $ 3,288,420
===========
Net loss.................................................... $(1,194,848)
===========
Loss per common share....................................... $ (.05)
===========
</TABLE>
On November 6, 1996, the Company acquired 8.0 gross productive wells (3.0
net productive wells), all located in various counties in Texas (the Frymire
Purchase). In consideration for these properties the Company paid approximately
$650,000 in cash, issued notes for $427,000 and issued 100,000 shares of Common
Stock valued at $18,000.
On December 16, 1996, the Company acquired 15.0 gross productive wells
(15.0 net productive wells), all located in New Mexico (the Trigg Federal
Purchase). In consideration, the Company paid $100,000 in cash and issued 92,000
shares of Common Stock valued at $16,560.
On February 5, 1997, the Company acquired 60 gross productive wells (48.4
net productive wells) and two developmental properties located in Mississippi,
Louisiana and Texas (the "Core Properties"). The adjusted purchase price
consisted of cash of approximately $1,700,000, four notes payable totaling
$2,400,000, and 659,000 shares of Common Stock valued at $329,500. On March 13,
1997, the Company acquired one gross productive well (0.3375 net productive
wells) located in Louisiana (the "Intercoastal Property"). The purchase price
consisted of cash of $562,500 and 578,500 shares of Common Stock valued at
$289,250. The cash portion of these acquisitions was funded through sales of
1,060,000 shares of Common Stock pursuant to Regulation S, resulting in net
proceeds to the Company of $2,385,000 (the Equity Private Placements).
The following unaudited pro forma summary of the Company's consolidated
results of operations for the years ended June 30, 1997 and 1996, was prepared
as if the acquisitions of the Core Properties, the
F-11
<PAGE> 142
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Intercoastal Property, and the Equity Private Placements had occurred on July 1,
1995. The historical results of the Frymire Purchase and the Trigg Federal
Purchase were not significant. The unaudited pro forma data is based on numerous
assumptions and is not necessarily indicative of future operations or of results
which would actually have occurred if the acquisitions and the Equity Private
Placements had been made on July 1, 1995.
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Revenues.................................................... $6,318,362 $4,318,405
========== ==========
Net loss.................................................... $ (505,846) $ (822,537)
========== ==========
Loss per common share....................................... $ (.02) $ (.03)
========== ==========
</TABLE>
On August 1, 1997, the Company acquired 77 productive wells (12.4 net
productive wells) located in New Mexico, Oklahoma, and Texas (the "Collins and
Ware" Properties). In consideration for these properties, the Company paid
$6,000,000 in cash and issued 1,000,000 shares of Common Stock valued at
$3,125,000. The cash portion of these acquisitions was funded with borrowings
under the Company's new credit facility with the Bank of Montreal. See Note 3
3. CURRENT AND LONG-TERM DEBT
A summary of current and long-term debt follows:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
1997 1996
---------- ----------
<S> <C> <C>
Prime plus 1.5% Revolving Credit Note....................... $4,857,993 $4,582,011
12% unsecured DEM notes, due in July 2000................... 2,093,275 1,872,860
9% Acquisition Notes........................................ 2,063,876 --
9% notes to seller, due in July and October 1996 and January
1997...................................................... -- 750,000
Capital lease obligations (Note 4).......................... 217,634 275,580
---------- ----------
9,232,778 7,480,451
Less current portion of debt and capitalized lease
obligation................................................ 2,080,897 810,010
========== ==========
Total long-term obligations....................... $7,151,881 $6,670,441
========== ==========
</TABLE>
On December 1, 1995, the Company entered into a revolving credit note
agreement (Revolving Credit Note) with Comerica Bank ("Comerica") to provide a
revolving line of credit up to $10,000,000. On November 14, 1996, the Revolving
Credit Note was amended to increase the line of credit to $15,000,000, increase
the borrowing base to $5,325,000 and extend the due date to December 1, 1997. At
June 30, 1997, borrowings were secured by substantially all of the Company's
interests in oil and gas properties.
Effective August 1, 1997, the Company terminated the existing credit
agreement with Comerica and entered into a new credit agreement ("Credit
Agreement") with Bank of Montreal. The new agreement provides for an initial
borrowing base of $17,000,000 to be redetermined from time to time by Bank of
Montreal based on engineering reports of oil and gas reserves. The Company must
pay a commitment fee annually of .35% of the unused portion of the borrowing
base. In addition, the Credit Agreement commits Bank of Montreal to provide
standby letters of credit for the Company totaling $5,000,000.
The Credit Agreement provides a revolving credit period terminating on
August 1, 1999, with principal amounts outstanding on that date converting to a
term loan maturing on August 1, 2003. If Bank of Montreal does not renew the
loan or if Bank of Montreal indebtedness is not repaid when due, Bank of
Montreal would have the right to obtain possession of and sell the pledged
properties. Interest on borrowings under the credit agreement is based on, at
the Company's option at the date of borrowing, either (a) the higher of the
federal funds rate plus 1/2 of 1% or the bank's prime rate or (b) the eurodollar
rate, increased by up to 2.25%
F-12
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QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
dependent upon the percentage of the available borrowing base used by the
Company. Interest is payable quarterly, beginning September 30, 1997. Bank of
Montreal is secured by a first lien on substantially all of the Company's oil
and natural gas properties. The loan agreement contains usual and customary
defined events of default and provides remedies to Bank of Montreal.
Subsequent to June 30, 1997, the Company has borrowed approximately
$12,000,000 under the Credit Agreement. Approximately $4,900,000 was used to pay
off the Revolving Credit Note, $6,000,000 was used to fund the cash portion of
the Collins and Ware Properties acquisition (Note 2), and the remainder was used
for working capital.
In July 1995, the Company initiated a private debt offering whereby it may
issue up to a maximum of 5,000,000 Deutschmark (DEM) denominated 12% notes due
on July 15, 2000, of which DEM 2,850,000 was outstanding at June 30, 1996. The
Company issued additional notes aggregating DEM 200,000, DEM 50,000 and DEM
450,000 in July, August and September 1996, respectively.
In addition to issuances described in the preceding paragraph, the Company
has issued additional notes aggregating DEM 100,000 during the remainder of
1997. Subsequent to June 30, 1997, the Company issued an additional DEM 250,000.
The notes may be redeemed at the option of the Company, in whole or in part, at
any time prior to maturity date on or after December 15, 1997, at 101% of the
principal amount, plus accrued interest to the redemption date. The notes are
unsecured, general obligations of the Company, subordinated in right of payment
to any senior and secured indebtedness of the Company including all other
existing indebtedness. The note agreement contains covenants which place
limitations on dividends and liens.
In April 1996, in connection with the acquisition of East Texas Properties
(Note 2), the Company issued three notes payable to the sellers of $250,000
each.
In February 1997, in connection with the acquisition of the Core Properties
(Note 2), the Company issued four notes totaling $2,400,000 (the Acquisition
Notes) secured by a first lien on the Core Properties. Two of these notes,
totaling $400,000, bore no interest and were retired prior to June 30, 1997. The
remaining two notes, totaling $2,000,000, were originally payable no later than
February 4, 2000, and bore no interest for the first two years and 9% for the
final year, payable in Common Stock of the Company. The terms of the remaining
two notes were renegotiated, with the seller surrendering the first lien on the
Core Properties in exchange for a note requiring a payment of $2,000,000 on
January 31, 1998. The note is secured by $2,000,000 of letters of credit
obtained by the Company under the credit agreement with Bank of Montreal. As a
result of the modification of the debt terms, in 1997 the Company recognized an
extraordinary loss on modification of $171,381, the difference between the
carrying value of the original notes (including accreted discount totaling
$72,032) and the present value of the new note.
The aggregate maturities of long-term debt subsequent to June 30, 1998,
reflecting the refinancing of the Revolving Credit Note and the modification of
the Acquisition Notes, are as follows: 1999 -- $51,287, 2000 -- $1,113,288,
2001 -- $3,307,771, 2002 -- $1,214,496, 2003 and thereafter -- $1,315,713.
4. LEASE OBLIGATIONS
In 1995, in connection with the purchase of interests in certain oil and
gas properties, the Company entered into a capital lease with the seller for oil
field service equipment. The excess ($145,000) of the present value of future
lease rentals ($345,000) over the fair value of the equipment has been treated
as part of the acquisition cost of oil and gas properties. The cost and related
accumulated depreciation of the capital
F-13
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QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
equipment at June 30, 1997 is $200,000 and $102,000, respectively. At June 30,
1997, minimum lease payments required under the capital lease are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 90,000
1999........................................................ 90,000
2000........................................................ 67,500
--------
Total minimum lease payments................................ 247,500
Less amount representing interest........................... (29,866)
--------
Present value of minimum lease payments..................... 217,634
Less current installments of obligation under capital
lease..................................................... 68,308
========
Obligation under capital lease, excluding current
installments.............................................. $149,326
========
</TABLE>
5. STOCKHOLDERS' EQUITY
GENERAL
On November 12, 1996, the Company entered into an agreement to sell 100,000
shares of common stock to an unrelated party for $2.50 per share.
During 1997, the Company's Certificate of Incorporation was amended to (i)
authorize the issuance of 50,000,000 shares of preferred stock of the Company,
par value $.01 per share, (the Preferred Stock), of which 9,600,000 shares have
been designated as Series A Preferred Stock and 9,600,000 shares have been
designated as Series B Preferred Stock, and (ii) increase the number of
authorized shares of Common stock from 40,000,000 shares to 100,000,000 shares.
Any authorized but unissued or unreserved Common Stock and undesignated
Preferred Stock is available for issuance at any time, on such terms and for
such purposes as the Board of Directors may deem advisable in the future without
further action by stockholders of the Company, except as may be required by law
or the Series A Certificate of Designation. The Board of Directors of the
Company has the authority to fix the rights, powers, designations, and
preferences of the undesignated Preferred Stock and to provide for one or more
series of undesignated Preferred Stock. The authority will include, but not be
limited to, determination of the number of shares to be included in the series,
dividend rates and rights, voting rights, if any, conversion privileges and
terms, redemption conditions, redemption values, sinking funds and rights upon
involuntary or voluntary liquidation.
CAPITAL STOCK PURCHASE AGREEMENTS
In March 1997, the Company entered into a Securities Purchase Agreement
(the JEDI Purchase Agreement), with Joint Energy Development Investments Limited
Partnership, (JEDI), an affiliate of Enron Finance Corp. (EFC), and a Securities
Purchase Agreement (the Forseti Purchase Agreement), with Forseti Investments
Ltd.
Pursuant to the JEDI Purchase Agreement, in May 1997 at the closing under
such agreement, JEDI acquired 9,600,000 shares of Series A Participating
Convertible Preferred Stock, par value $0.01 per share, of the Company (the
Series A Preferred Stock), certain warrants to purchase Common Stock (the JEDI
Warrants) and warrants to purchase 409,839 shares of Common Stock (the Robertson
Warrants). The Robertson Warrants were granted to JEDI as a form of maintenance
right on the part of JEDI to acquire Common Stock in the future and maintain
JEDI's proportionate ownership in the Company in relation to shares of Common
Stock issued. The aggregate consideration (excluding the exercise price in
respect of the JEDI Warrants and the Robertson Warrants) cannot exceed
$14,400,000 and consists of (i) $5,000,000 ($0.521 per share) cash plus (ii)
contingent cash payment obligations (up to an aggregate of $9,400,000) to
F-14
<PAGE> 145
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company under the JEDI Earn Up Agreement, as described below. All of such
funds would be used by the Company to fund the obligations under the Forseti
transaction agreements.
In connection with the issuance of the Series A Preferred Stock, the JEDI
Warrants, and the Robertson Warrants, the Company granted JEDI certain
maintenance rights and certain demand and piggyback registration rights with
respect to the shares of Common Stock issuable upon conversion of the Series A
Preferred Stock and the shares of Common Stock issuable upon exercise of the
JEDI Warrants and the Robertson Warrants. Pursuant to the terms of the Series A
Preferred Stock, JEDI may designate a number of directors to the Company's Board
of Directors, such that the percentage of the number of directors that JEDI may
designate approximates the percentage voting power JEDI has with respect to the
Company's Common Stock. In addition, upon certain events of default (as defined
in the Series A Certificate of Designation), JEDI will have the right to elect a
majority of the directors of the Company and an option to sell the Series A
Preferred Stock to the Company.
Pursuant to the Forseti Purchase Agreement, in May 1997 at the closing
under such agreement, the Company repurchased 9,600,000 shares of Common Stock
owned by Forseti in exchange for (i) $5,000,000 ($0.521 per share) cash, (ii)
the issuance by the Company of Class A Common Stock Purchase Warrants to
purchase 1,000,000 shares of Common Stock at an initial exercise price of $2.50
per share (the Class A Warrants), and Class B Common Stock Purchase Warrants to
purchase 2,000,000 shares of Common Stock at an initial exercise price of $2.50
per share (the Class B Warrants, and together with the Class A Warrants, the
Forseti Warrants), and (iii) contingent obligations (up to an aggregate of
$9,400,000) to Forseti under the Forseti Earn Up Agreement, as described below.
However, pursuant to the terms of the Forseti Earn Up Agreement, Forseti is not
able to both sell or exercise the Forseti Warrants and receive full payment
under the Forseti Earn Up Agreement. Instead, Forseti has the option of either
selling or exercising the Forseti Warrants or receiving any payments due under
the Forseti Earn Up Agreement. The aggregate consideration paid or payable by
the Company to Forseti in respect of the repurchase of the Common Stock owned by
Forseti cannot exceed $14,400,000. This consideration will be funded only
through proceeds received by the Company under the JEDI Purchase Agreement and
the JEDI Earn Up Agreement.
Pursuant to the JEDI Purchase Agreement, the Company and JEDI entered into
an Earn Up Agreement (the "JEDI Earn Up Agreement"). On or prior to October 15,
1998, subject to the limitations in the JEDI Earn Up Agreement and against
delivery by Forseti to the Company of the Forseti Warrants and a statutory
declaration as to certain matters, JEDI shall pay the Company the Earn Up
Amount. The Earn Up Amount cannot exceed the amount defined as the "Earn Up
Amount" under the Forseti Earn Up Agreement. Pursuant to the Forseti Purchase
Agreement, the Company and Forseti entered the Forseti Earn Up Agreement.
Pursuant to the Forseti Earn Up Agreement, on the later of September 30, 1998 or
the date that is 14 days after the date that the Company notifies Forseti to
request his election (the Election Date), Forseti will elect whether to (i)
accept payment of the Earn Up Amount (in which event Forseti may not exercise or
transfer the Forseti Warrants that have not been previously exercised or
transferred) or (ii) retain the Forseti Warrants that have not been previously
exercised or transferred (in which event the Company is not obligated to pay
Forseti the Earn Up Amount and the Company's obligations under the Forseti Earn
Up Agreement terminate). If Forseti elects to accept payment of the Earn Up
Amount, then subject to limitations in the Forseti Earn Up Agreement and against
delivery by Forseti of the Forseti Warrants and a statutory declaration as to
certain matters, the Company shall pay Forseti the Earn Up Amount on or before
the later of October 15, 1998 or the date that is 15 days after the date Forseti
makes its election (the Payment Date). The maximum amount payable under the Earn
Up Agreement is $9,400,000. The Earn Up Amount is computed using formulas set
forth in the Forseti Earn Up Agreement which are based on the price of the
Common Stock. The Company is obligated to pay Forseti under the Forseti Earn Up
Agreement only to the extent that the Company has received a like amount in cash
from JEDI under the JEDI Earn Up Agreement.
F-15
<PAGE> 146
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The JEDI Purchase Agreement contains certain positive and negative
covenants. The Company was in compliance with all of the applicable covenants at
June 30, 1997. Pursuant to the JEDI Purchase Agreement, the Company agreed to
raise at least $5.4 million in net proceeds from the issuance of Common Stock by
December 31, 1997. Through June 30, 1997, the Company has sold 200,000 shares of
Common Stock pursuant to Regulation S, at $2.50 per share, raising $549,000
towards this requirement. Subsequent to June 30, 1997, the Company sold an
additional 550,000 shares of Common Stock pursuant to Regulation S, resulting in
net proceeds of approximately $1,590,750.
Pursuant to the JEDI Purchase Agreement, the Company granted JEDI the right
to purchase its proportionate share of capital stock of the Company at the same
price and on the same terms as the capital stock to be sold by the Company. From
the date of the JEDI Purchase Agreement until December 31, 1998, if JEDI is
entitled to exercise its maintenance rights, the Company shall issue to JEDI a
warrant for the purchase of the capital stock that JEDI is entitled, but does
not elect, to purchase (a Maintenance Warrant). The exercise price of the
Maintenance Warrant will be the value of the capital stock as of the date of the
issuance of the Maintenance Warrant, and any Maintenance Warrant will be
exercisable for a period of one year. JEDI will not have maintenance rights with
respect to capital stock issued by the Company (i) pursuant to certain employee
and director stock plans; (ii) in connection with a stock split or dividend on
the Common Stock to all holders of Common Stock or (iii) pursuant to an offering
pursuant to a registration statement filed with, and declared effective by, the
Securities and Exchange Commission (SEC). Subject to certain exceptions, JEDI
will not have maintenance rights with respect to the issuance of any rights,
warrants or options to purchase shares of the Company's capital stock or other
securities convertible into or exercisable or exchangeable for shares of the
Company's capital stock but will have maintenance rights if and when capital
stock is issued upon the conversion, exercise or exchange of such securities.
JEDI's maintenance rights will terminate upon the earlier to occur of: (i) the
date on which JEDI and its affiliates beneficially own less than 10 percent of
the voting power of the outstanding voting capital stock of the Company; (ii)
the date on which the Company completes an underwritten public offering of
Common Stock that generates net proceeds to the Company of at least $25,000,000;
and (iii) the date on which all shares of Series A Preferred Stock have been
converted to Common Stock or otherwise are no longer outstanding.
Pursuant to the JEDI Purchase Agreement, JEDI, EIBOC and certain officers
of the Company (Management Stockholders) entered into a Stockholders Agreement
whereby JEDI, EIBOC and the Management Stockholders agreed to certain
restrictions on the transfer of shares of Common Stock held by EIBOC and the
transfer of shares of Common Stock or securities convertible, exercisable or
exchangeable for shares of Common Stock held by JEDI. The Stockholders Agreement
will terminate on the earlier of (i) the fifth anniversary of the date of the
Stockholders Agreement or (ii) the date on which JEDI and its affiliates
beneficially own in the aggregate less than 10% of the voting power of the
Company's capital stock.
SERIES A PREFERRED STOCK
The holders of shares of Series A Preferred Stock are generally entitled to
vote (on an as-converted basis) as a single class with the holders of the Common
Stock, together with all other classes and series of stock of the Company that
are entitled to vote as a single class with the Common Stock, on all matters
coming before the Company's stockholders. In any vote with respect to which the
Series A Preferred Stock shall vote with the holders of Common Stock as a single
class, each share of Series A Preferred Stock entitles the holder thereof to
cast the number of votes equal to the number which could be cast in such vote by
a holder of the number of shares of Common Stock into which such shares of
Series A Preferred Stock is convertible on the date of such vote.
With respect to any matter for which class voting is required by law or the
Company's Certificate of Incorporation, except as otherwise described herein,
the holders of the Series A Preferred Stock vote as a class and each holder is
entitled to one vote for each share held.
F-16
<PAGE> 147
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For so long as 960,000 shares of Series A Preferred Stock are outstanding,
the following matters require the approval of the holders of shares of Series A
Preferred Stock, voting together as a separate class:
(i) the amendment of any provision of the Company's Certificate of
Incorporation or the bylaws;
(ii) the creation, authorization or issuance, or the increase in the
authorized amount of, any class or series of shares ranking on a parity
with or prior to the Series A Preferred Stock either as to dividends or
upon liquidation, dissolution or winding up;
(iii) the merger or consolidation of the Company with or into any
other corporation or other entity or the sale of all or substantially all
of the Company's assets; or
(iv) the reorganization, recapitalization, or restructuring or similar
transaction that requires the approval of the stockholders of the Company.
The holders of shares of Series A Preferred Stock have the right, acting
separately as a class, to elect a number of members to the Company's Board of
Directors. The number shall be a number such that the quotient obtained by
dividing such number by the maximum authorized number of directors is as close
as possible to being equal to the percentage of the outstanding voting power of
the Company entitled to vote generally in the election of directors represented
by the outstanding shares of Series A Preferred Stock at the relevant time.
A holder of shares of Series A Preferred Stock has the right, at the
holder's option, to convert all or a portion of its shares into shares of Common
Stock at any time at an initial rate of one share of Series A Preferred Stock
for one share of Common Stock.
The Series A Certificate of Designation provides for customary adjustments
to the number of shares issuable upon conversion in the event of certain
dividends and distributions to holders of Common Stock, certain
reclassifications of the Common Stock, stock splits, and combinations and
mergers and similar transactions.
Immediately following such conversion, the rights of the holders of Series
A Preferred Stock shall cease and the persons entitled to receive Common Stock
upon the conversion of Series A Preferred Stock shall be treated as the owners
of such Common Stock. The Company is required to maintain a reserve of
authorized but unissued shares of Common Stock to permit the conversion of the
Series A Preferred Stock in full.
Concurrently with the transfer of any shares of Series A Preferred Stock to
any person (other than a direct or indirect affiliate of JEDI or other entity
managed by Enron Corp. or any of its affiliates), the shares of Series A
Preferred Stock so transferred will automatically convert into a like number of
shares of Series B Preferred Stock.
The holders of the shares of Series A Preferred Stock are entitled to
receive dividends, when, and as if declared by the Board of Directors, out of
funds legally available therefor, any dividend (other than a dividend or
distribution paid in shares of, or warrants, rights or options exercisable for
or convertible into or exchangeable for, Common Stock) payable on the Common
Stock, as and when paid, in an amount equal to the amount each such holder would
have received if such holder's shares of Series A Preferred Stock had been
converted into Common Stock immediately prior to the record date, or if there is
no record date, the date of payment thereof. The holders of Series A Preferred
Stock will also have the right to certain dividends upon and during the
continuance of an Event of Default.
Upon the liquidation, dissolution or winding up of the Company, the holders
of the shares of Series A Preferred Stock, before any distribution to the
holders of Common Stock, are entitled to receive (i) an amount per share equal
to the lesser of (A) $1.50 and (B) the sum of (x) $0.521 and (v) the quotient
obtained by dividing (1) the aggregate amount of all payments made, as of the
date of the liquidation,
F-17
<PAGE> 148
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
dissolution or winding up, to the Company by JEDI pursuant to the JEDI Earn Up
Agreement by (2) $9,600,000, plus (ii) all accrued and unpaid dividends thereon
(Liquidation Preference). The holders of the shares of Series A Preferred Stock
will not be entitled to participate further in the distribution of the assets of
the Company.
The Series A Certificate of Designation will provide that an Event of
Default will be deemed to have occurred if the Company fails to comply with any
of its covenants in the JEDI Purchase Agreement; provided, that the Company will
have a 30-day cure period with respect to the non-compliance with certain
covenants.
Upon the occurrence but only during the continuance of an Event of Default,
the holders of Series A Preferred Stock are entitled to receive, in addition to
other dividends payable to holders of Series A Preferred Stock, when, as, and if
declared by the Board of Directors, out of funds legally available therefore,
cumulative preferential cash dividends accruing from the date of the Event of
Default in an amount per share per annum equal to 6% of the Liquidation
Preference in effect at the time of accrual of such dividends, payable quarterly
in arrears on or before the 15th day after the last day of each calendar quarter
during which such dividends are payable. Unless full cumulative dividends
accrued on shares of Series A Preferred Stock have been or contemporaneously are
declared and paid, no dividend may be declared or paid or set aside for payment
on the Common Stock or any other junior securities (other than a dividend or
distribution paid in shares of, or warrants, rights or options exercisable for
or convertible into or exchangeable for, Common Stock or any other junior
securities), nor shall any Common Stock nor any other junior securities be
redeemed, purchased or otherwise acquired for any consideration nor may any
monies be paid to or made available for a sinking fund for the redemption of any
shares of any such securities.
Upon the occurrence and during the continuance of an Event of Default
resulting from the failure to comply with certain covenants, the holders of
shares of Series A Preferred Stock have the right, acting separately as a class,
to elect a number of persons to the Board of Directors of the Company, that
along with any members of the Board of Directors who are serving at the time of
such action, will constitute a majority of the Board of Directors.
Upon the occurrence of an Event of Default resulting from the failure to
comply with certain covenants, each holder of shares of Series A Preferred Stock
has the right, by written notice to the Company, to require the Company to
repurchase, out of funds legally available therefor, such holder's shares of
Series A Preferred Stock for an amount in cash equal to the Liquidation
Preference in effect at the time of the Event of Default.
SERIES B PREFERRED STOCK
The Series B Certificate of Designation authorizes the issuance of up to
9,600,000 shares of Series B Preferred Stock. The terms of the Series B
Preferred Stock are substantially similar to those of the Series A Preferred
Stock, except that the holders of Series B Preferred Stock will not (i) have
class voting rights except as required under Delaware corporate law, (ii) be
entitled to any remedies upon an event of default or (iii) be entitled to elect
any directors of the Company, voting separately as a class.
WARRANTS
Pursuant to the JEDI Purchase Agreement, the Company issued the JEDI
Warrants for the purchase of Common Stock of the Company. The JEDI Warrants will
be exercisable commencing on October 1, 1998 and ending on December 31, 1998. At
the time of exercisability, the JEDI Warrants shall be exercisable for the
number of shares of Common Stock (or amount of other property) equal to the
number of shares of Common Stock (or amount of other property), as adjusted from
time to time pursuant to the JEDI Warrants, which would have been received upon
the exercise on the Election Date (as defined in the Forseti Earn Up Agreement)
of the Forseti Warrants that are deliverable by Forseti to the Company pursuant
to the Forseti Earn Up Agreement. The JEDI Warrants may be exercised in full or
in part by means of payment of the
F-18
<PAGE> 149
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
exercise price (initially $2.50 per share of Common Stock in cash). The JEDI
Warrants provide for customary adjustments to the exercise price and number of
shares to be issued in the event of certain dividends and distributions to
holders of Common Stock, stock splits, combinations and mergers.
Pursuant to the JEDI Purchase Agreement, the Company also issued the
Robertson Warrants for the purchase of 409,839 shares of Common Stock. The
Robertson Warrants are exercisable for a period of one year, commencing on the
date of issuance. The Robertson Warrants may be exercised in full or in part by
means of payment of the exercise price (initially $1.85 per share of Common
Stock in cash). The Robertson Warrants provide for customary adjustments to the
exercise price and number of shares to be issued in the event of certain
dividends and distributions to holders of Common Stock, stock splits,
combinations and mergers.
Pursuant to the Forseti Purchase Agreement, the Company issued the Forseti
Warrants to Forseti, consisting of the Class A Warrants (exercisable for an
aggregate of 1,000,000 shares of Common Stock) and the Class B Warrants
(exercisable for 2,200,000 shares of Common Stock). The Forseti Warrants are
exercisable from their date of issuance and expire December 31, 1998; provided,
that any of the Forseti Warrants held by Forseti on the Election Date will
expire on the Election Date (as defined in the Forseti Earn Up Agreement) unless
Forseti elects to retain the Forseti Warrants under the Forseti Earn Up
Agreement. The Forseti Warrants may be exercised in full or in part by means of
payment of the exercise price (initially $2.50 per share of Common Stock) in
cash. If the Forseti Warrants are exercised only in part, they must be exercised
for the purchase of at least 100,000 shares of Common Stock. The Forseti
Warrants provide for customary adjustments to the exercise price and/or number
of shares to be issued in the event of certain dividends and distributions to
holders of Common Stock, stock splits or combinations and reclassifications. The
Forseti Warrants also make provision for warrant holders to receive certain
items in exchange for the Class A Warrants in the event of certain combinations,
mergers, consolidations, substantial asset sales and similar transactions.
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company defines the fair value of a financial instrument as the amount
at which the instrument could be exchanged in a current transaction between
willing parties. The carrying value of cash, accounts receivable, accounts
payable and accrued liabilities approximates fair value because of the short
maturity of those instruments. The estimated fair value of the Company's
long-term obligations is estimated based on the current rates offered to the
Company for similar maturities. At June 30, 1997 and 1996, the carrying value of
long-term obligations approximates their fair values.
7. RELATED PARTY TRANSACTIONS
The Company is charged a monthly fee by Capital House A Finance and
Investment Corporation (Capital House) (owned by certain officers of the
Company) for general and administrative costs. Such fee covers the services
provided to the Company by certain employees of Capital House and amounted to
$440,000 and $480,000 for the years ended June 30, 1997 and 1996, respectively.
The Company also reimburses Capital House for certain direct general and
administrative costs incurred by Capital House on behalf of the Company. The
Company reimbursed Capital House $128,880 and $163,772 for such costs for the
years ended June 30, 1997 and 1996, respectively. The Company capitalized
$120,000 and $128,717 of the management fees and general and administrative
costs paid to Capital House which were directly associated with oil and gas
property acquisitions, exploration, and development for the years ended June 30,
1997 and 1996, respectively. The agreement with Capital House was terminated
effective May 31, 1997.
F-19
<PAGE> 150
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. INCOME TAXES
The Company's effective tax rate differs from the U.S. statutory rate due
to losses without tax benefit. The tax effects of the primary temporary
differences giving rise to the deferred federal income tax assets and
liabilities as determined under Statement of Accounting Standards No. 109,
"Accounting for Income Taxes," at June 30, 1997 and 1996, follow:
<TABLE>
<CAPTION>
1997 1996
----------- ---------
<S> <C> <C>
Deferred income tax assets (liabilities):
Reverse acquisition costs................................. $ 87,967 $ 127,343
Net operating loss carryforwards.......................... 1,160,646 457,985
Statutory depletion carryforward.......................... 125,983 11,412
Oil and gas properties, principally due to differences in
depreciation, depletion, and amortization.............. (273,789) 40,499
Other..................................................... (20,774) --
----------- ---------
1,080,033 637,239
Less valuation allowance.......................... (1,080,033) (637,239)
----------- ---------
Net deferred income tax asset..................... $ -- $ --
=========== =========
</TABLE>
The net changes in the total valuation allowance for the years ended June
30, 1997 and 1996, were increases of $442,794 and $402,233, respectively. The
Company's net operating loss carryforwards begin expiring in 2010.
9. SUPPLEMENTARY OIL AND GAS DATA
The following tables set forth supplementary disclosures for oil and gas
producing activities in accordance with Statement of Financial Accounting
Standards No. 69.
RESULTS OF OPERATIONS FOR PRODUCING ACTIVITIES
The following sets forth certain information with respect to results of
operations from oil and gas producing activities for the years ended June 30,
1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Oil and gas sales.......................................... $ 4,381,035 $ 2,079,413
Production expenses........................................ (2,506,759) (1,175,639)
Depreciation, depletion, and amortization.................. (915,000) (590,000)
----------- -----------
Results of operations (excludes corporate overhead and
interest expense)........................................ $ 959,276 $ 313,774
=========== ===========
</TABLE>
CAPITALIZED COSTS
The following table summarizes capitalized costs relating to oil and gas
producing activities and related amounts of accumulated depreciation, depletion,
and amortization at June 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Oil and gas properties -- proved........................... $17,540,805 $10,158,954
Accumulated depreciation, depletion, and amortization
(1,627,000) (712,000)
----------- -----------
Net capitalized costs............................ $15,913,805 $ 9,446,954
=========== ===========
</TABLE>
F-20
<PAGE> 151
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COSTS INCURRED
The following sets forth certain information with respect to costs
incurred, whether expensed or capitalized, in oil and gas activities for the
years ended June 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Property acquisition costs.................................. $7,381,851 $5,057,292
========== ==========
Development costs........................................... $1,237,832 $1,177,807
========== ==========
</TABLE>
RESERVE QUANTITY INFORMATION (UNAUDITED)
The following table presents the Company's estimate of its proved oil and
gas reserves, all of which are located in the United States. The Company
emphasizes that reserve estimates are inherently imprecise and that estimates of
new discoveries are more imprecise than those of producing oil and gas
properties. Accordingly, the estimates are expected to change as future
information becomes available. The estimates have been prepared by independent
petroleum reservoir engineers.
<TABLE>
<CAPTION>
OIL (BBLS) GAS (MCF)
---------- ----------
<S> <C> <C>
Proved reserves:
Balance at June 30, 1995.................................. 6,189,896 419,855
Purchase of reserves in place............................. 787,531 12,781,385
Revisions in previous estimates and other................. 56,909 (63,741)
Production................................................ (102,536) (153,833)
---------- ----------
Balance at June 30, 1996.................................. 6,931,800 12,983,666
Purchases of reserves in place............................ 916,000 7,730,000
Revisions of previous estimates and other................. (988,683) 805,156
Production................................................ (150,546) (546,282)
---------- ----------
Balance at June 30, 1997.................................. 6,708,571 20,972,540
========== ==========
Proved developed reserves:
Balance at June 30, 1996.................................. 2,264,962 9,373,888
========== ==========
Balance at June 30, 1997.................................. 2,187,576 12,412,008
========== ==========
</TABLE>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL
AND GAS RESERVES (UNAUDITED)
The Standardized Measure of Discounted Future Net Cash Flows Relating to
Proved Oil and Gas Reserves (Standardized Measure) is a disclosure requirement
under Statement of Financial Accounting Standards No. 69.
The Standardized Measure of discounted future net cash flows does not
purport to be, nor should it be interpreted to present, the fair value of the
Company's oil and gas reserves. An estimate of fair value would also take into
account, among other things, the recovery of reserves not presently classified
as proved, the value of unproved properties, and consideration of expected
future economic and operating conditions.
Under the Standardized Measure, future cash flows are estimated by applying
year-end prices, adjusted for fixed and determinable escalations, to the
estimated future production of year-end proved reserves. Future cash inflows are
reduced by estimated future production and development costs based on period-end
costs to determine pretax cash inflows. Future income taxes are computed by
applying the statutory tax rate to the excess of pretax cash inflows over the
Company's tax basis in the associated properties. Tax credits, net
F-21
<PAGE> 152
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
operating loss carryforwards, and permanent differences are also considered in
the future tax calculation. Future net cash inflows after income taxes are
discounted using a 10% annual discount rate to arrive at the Standardized
Measure.
The Standardized Measure of discounted future net cash flows relating to
proved oil and gas reserves as of June 30, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Future cash inflows...................................... $164,119,700 $167,229,130
Future costs and expenses:
Production expenses.................................... (59,954,366) (62,264,762)
Development costs...................................... (23,569,020) (32,208,222)
Future income taxes...................................... (21,649,362) (21,525,125)
------------ ------------
Future net cash flows.................................... 58,946,952 51,231,021
10% annual discount for estimated timing of cash flows... (28,800,643) (27,260,416)
------------ ------------
Standardized measure of discounted future net cash
flows.................................................. $ 30,146,309 $ 23,970,605
============ ============
</TABLE>
The weighted average price of oil and natural gas at June 30, 1997 were
$17.43 per barrel and $2.25 per MCF, respectively.
Changes in the Standardized Measure of discounted future net cash flows
relating to proved oil and gas reserves for the years ended June 30, 1997 and
1996, are as follows:
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
Beginning balance......................................... $ 23,970,605 $10,875,671
Purchases of minerals in place............................ 14,530,677 12,247,552
Developed during the period............................... 1,237,832 232,685
Net change in prices and costs............................ 5,055,460 9,356,834
Revisions of previous estimates........................... (13,404,571) (5,369,349)
Accretion of discount..................................... 2,397,061 1,444,413
Net change in income taxes................................ (1,766,479) (3,913,427)
Sales of oil and gas produced, net of production
expenses................................................ (1,874,276) (903,774)
------------ -----------
Balance at June 30, 1997 and 1996............... $ 30,146,309 $23,970,605
============ ===========
</TABLE>
The future cash flows shown above include amounts attributable to proved
undeveloped reserves requiring approximately $21,300,000 of future development
costs. If these reserves are not developed, the standardized measure of
discounted future net cash flows as of June 30, 1997, shown above would be
reduced by approximately $7,243,000.
Estimates of economically recoverable natural gas and oil reserves and of
future net revenues are based upon a number of variable factors and assumptions,
all of which are to some degree speculative and may vary considerably from
actual results. Therefore, actual production, revenues, taxes, development, and
operating expenditures may not occur as estimated. The reserve data are
estimates only, are subject to many uncertainties, and are based on data gained
from production histories and on assumptions as to geologic formations and other
matters. Actual quantities of natural gas and oil may differ materially from the
amounts estimated.
F-22
<PAGE> 153
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. HEDGING ACTIVITIES
Subsequent to June 30, 1997, the Company entered into agreements with an
affiliate of JEDI to hedge 50,000 MMBtu of natural gas production and 10,000
barrels of oil production monthly. The agreements, which are effective September
1, 1997, and terminate August 31, 1998, call for a natural gas and oil ceiling
and floor price of $2.66 and $1.90 per MMBtu and $20.40 and $18.00 per barrel,
respectively. If the average market price of oil and natural gas per month, as
defined in the agreements, exceeds the ceiling price, the Company must pay the
counterparty an amount equal to one-half of the amount of the hedged quantities
multiplied by the difference between the ceiling price and the market price. If
the average market price, as defined, falls below the floor price, the
counterparty will pay the Company an amount equal to the amount of the hedged
quantities multiplied by the difference in the floor price and the market price.
F-23
<PAGE> 154
PART I -- FINANCIAL INFORMATION
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1998 1997
----------- -----------
<S> <C> <C>
Current assets:
Cash...................................................... $ 1,136,695 $ 309,695
Accounts receivable and other current assets.............. 1,416,366 756,092
----------- -----------
Total current assets.............................. 2,553,061 1,065,787
Deposit on oil and natural gas properties................... 15,000,000 --
Net property and equipment.................................. 30,466,047 16,187,209
Other assets................................................ 304,388 --
----------- -----------
$48,323,496 $17,252,996
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other................................ $ 2,490,970 $ 1,588,668
Current portion of long-term debt......................... 120,138 2,080,897
----------- -----------
Total current liabilities......................... 2,611,108 3,669,565
Long-term obligations, net of current portion............... 23,309,967 7,151,881
----------- -----------
Total liabilities................................. 25,921,075 10,821,446
----------- -----------
Commitments
Stockholders' equity:
Preferred stock, $.01 par value........................... 96,104 96,000
Common stock, $.0015 par value............................ 49,812 45,635
Additional paid-in capital................................ 32,579,720 14,474,844
Accumulated deficit....................................... (5,323,215) (3,184,929)
Treasury stock............................................ (5,000,000) (5,000,000)
----------- -----------
Total stockholders' equity........................ 22,402,421 6,431,550
----------- -----------
$48,323,496 $17,252,996
=========== ===========
</TABLE>
See accompanying notes.
F-24
<PAGE> 155
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
----------------------- ------------------------
1998 1997 1998 1997
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Oil and Natural Gas Revenues................ $1,507,387 $1,338,179 $ 4,849,281 $3,118,022
Expenses:
Production expenses....................... 1,108,734 648,318 3,182,642 1,632,129
Depreciation, depletion and
amortization........................... 469,250 290,000 1,340,000 747,000
General and administrative expenses....... 427,759 362,130 1,645,927 911,148
Interest and financing costs.............. 259,635 230,149 898,791 655,677
Foreign currency exchange gains............. (64,664) (178,899) (79,793) (200,917)
---------- ---------- ----------- ----------
Net Loss.................................... $ (693,327) $ (13,519) $(2,138,286) $ (627,015)
========== ========== =========== ==========
Net Loss per Common Share................... $ (0.03) $ (0.00) $ (0.09) $ (0.02)
========== ========== =========== ==========
Weighted average number of common shares
outstanding............................... 22,400,009 29,007,546 23,610,660 27,796,918
========== ========== =========== ==========
</TABLE>
See accompanying notes.
F-25
<PAGE> 156
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31,
---------------------------
1998 1997
------------ -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................. $ (2,138,286) $ (627,015)
Depreciation, depletion and amortization.................. 1,340,000 747,000
Issuance of common stock for services rendered............ 300,000 0
Unrealized gains on foreign exchange obligations.......... (51,009) (151,543)
Net changes in operating assets and liabilities........... (62,360) 101,476
------------ -----------
Net cash provided (used) in operating
activities...................................... (608,608) 45,231
------------ -----------
INVESTING ACTIVITIES
Additions to property and equipment....................... (25,788,818) (3,727,469)
FINANCING ACTIVITIES
Proceeds from long-term obligations....................... 16,291,054 779,134
Payments on short-term notes.............................. (2,008,056) (850,000)
Payments on capital lease obligations..................... (52,078) (44,379)
Proceeds from the sale of capital stock................... 12,996,553 3,485,500
------------ -----------
Net cash provided by financing activities......... 27,227,473 3,370,255
------------ -----------
Net increase (decrease) in cash............................. 827,000 (287,296)
Cash at beginning of period................................. 309,695 599,621
------------ -----------
Cash at end of period....................................... $ 1,136,695 $ 312,325
============ ===========
</TABLE>
See accompanying notes.
F-26
<PAGE> 157
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
(1) GENERAL
The information furnished reflects all adjustments (consisting solely of
normal recurring accruals) which are, in the opinion of management, necessary to
a fair presentation of the consolidated financial position of Queen Sand
Resources, Inc. (the "Company") as of June 30, 1997 and March 31, 1998 and the
results of operations for the three and nine month periods ended March 31, 1998
and 1997 respectively, and the cash flows for the nine month periods ended March
31, 1998 and 1997. The results of operations for the three and nine months ended
March 31, 1998 are not necessarily indicative of the operating results for the
full fiscal year ending June 30, 1998. Moreover, these financial statements do
not purport to contain complete disclosure in conformity with generally accepted
accounting principles and should be read in conjunction with the Company's
audited financial statements at, and for the fiscal year ended June 30, 1997.
(2) COMMON STOCK
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share. Statement 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants, and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods presented have been, where necessary, restated to
conform to the Statement 128 requirements.
During the nine months ended March 31, 1998 the Company issued 350,000 and
200,000 shares of common stock pursuant to Regulation S for $1,067,500 and
$700,000 ($3.05 and $3.50 per share), respectively. The Company issued 500,000
shares of common stock pursuant to Regulation S for $1,250,000 ($2.50 per share)
as a result of the exercise of 500,000 "A" Warrants. The Company also issued
247,608 shares of common stock pursuant to Section 4(2) of the Securities Act of
1933 for $619,020 ($2.50 per share) related to the exercise of certain
anti-dilution rights by Joint Energy Development Investments Limited Partnership
("JEDI") arising from the exercise of the 500,000 "A" Warrants. The Company
issued 1,000,000 shares of common stock valued at $3,125,000 ($3.125 per share)
as partial consideration for the acquisition of oil and natural gas producing
properties in New Mexico, Oklahoma and Texas (see Note 4). The Company issued
337,500 shares of common stock valued at $1,687,500 ($5.00 per share) as partial
consideration for the acquisition of natural gas producing properties in
Kentucky (see Note 4). The Company issued 150,000 restricted shares of common
stock in consideration of services rendered, which it valued at $2.00 per share
($300,000).
(3) HEDGING ACTIVITIES
The Company has entered into agreements with Enron Capital & Trade
Resources Corp. ("Enron"), an affiliate of JEDI, the holder of 9,600,000 million
shares of the Company's Series A Participating Convertible Preferred Stock, to
hedge 50,000 MMBtu of natural gas production and 10,000 barrels of oil
production monthly. The agreements, which were effective September 1, 1997, and
terminate August 31, 1998, call for a gas and oil ceiling and floor price of
$2.66 and $1.90 per MMBtu of natural gas and $20.40 and $18.00 per barrel of
crude oil, respectively. If the average market price of oil and natural gas per
month, as defined in the agreements, exceeds the ceiling price, the Company must
pay Enron an amount equal to one-half of the amount of the hedged quantities
multiplied by the difference between the ceiling price and the market price. If
the average market price, as defined, falls below the floor price, Enron will
pay the Company an amount equal to the amount of the hedged quantities
multiplied by the difference in the floor price and the market price. Pursuant
to these hedging agreements, the Company received cumulative net payments from
Enron of
F-27
<PAGE> 158
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$74,000 as a result of crude oil prices below the floor price in the agreement
during the three months ended March 31, 1998.
(4) ACQUISITIONS
On August 1, 1997 (with an effective date of February 1, 1997) the Company
acquired from Collins and Ware, Inc. 77 productive wells (12.35 net productive
wells) located in various counties in New Mexico, Oklahoma and Texas. In
consideration for these properties the Company paid, subject to standard
industry adjustments at closing, approximately $6,000,000 in cash and issued
1,000,000 restricted shares of its common stock which it valued, for purposes of
this transaction, at $3.125 per share ($3,125,000).
On March 9, 1998 (with an effective date of January 1, 1998) the Company
acquired 21 productive wells (12.6 net productive wells) and 61,421 acres
(36,858 net acres) in Kentucky. In consideration for these properties the
Company paid, subject to standard industry adjustments at closing, approximately
$450,000 in cash and issued 337,500 shares of its common stock which it valued,
for purposes of this transaction, at $5.00 per share ($1,687,500).
On March 20, 1998 the Company provided a $15 million deposit pursuant to
the pending acquisition of certain oil and natural gas properties. This
acquisition was completed on April 20, 1998 (see Note 5).
(5) SUBSEQUENT EVENTS
On April 17, 1998 the Company amended and restated its Senior Credit
Agreement with Bank of Montreal to provide for a maximum borrowing of $125
million. The borrowing base is set at $96 million. On April 17, 1998 the Company
entered into a Variable Rate Senior Second Secured Note Purchase Agreement in
the amount of $30 million and a Variable Rate Senior Third Secured Equity Bridge
Note Purchase Agreement with three Lenders, also in the amount of $30 million.
On April 20, 1998 the Company acquired certain non-operated net profits
interests and royalty interests for gross cash consideration of $150 million
plus related costs of approximately $4 million (currently estimated to be
approximately $130 million after adjustments for production and capital
expenditures since October 1, 1997, the effective date of the purchase) from
pension funds managed by J.P. Morgan Investments (the "Morgan Property
Acquisition"). The oil and natural gas properties are primarily located in East
Texas, South Texas and the Mid-Continent region of the United States. The
Company used $92 million of the proceeds of the Senior Credit Agreement, $30
million under the Variable Rate Senior Second Secured Note Purchase Agreement
and $30 million under the Variable Rate Senior Third Secured Equity Bridge Note
Purchase Agreement to fund this acquisition.
On April 22, 1998 the Company entered into a commodity price swap contract
with Enron, an affiliate of a Company shareholder, JEDI, for approximately 25%
of the Company's expected natural gas production between May 1, 1998 and
December 31, 2003, at a price of $2.40 per MMBTU. The Company also entered into
a floor contract with Enron for approximately 10% of the Company's expected
natural gas production between May 1, 1998 and December 31, 2003 at a floor
price of $1.90 per BTU. On April 23, 1998 the Company entered into a
non-participating collar contract with Bank of Montreal for approximately 40% of
its expected natural gas production between May 1, 1998 and December 31, 2003,
with a floor price of $2.00 per MMBTU and ceiling prices ranging from $2.70 to
$2.90 per MMBTU.
On May 8, 1998 the Company entered into a ten year LIBOR swap transaction
with Bank of Montreal at 6.30% on $125 million effective June 30, 1998.
F-28
<PAGE> 159
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Queen Sand Resources, Inc.
We have audited the accompanying statements of operating revenues and
direct operating expenses of the Collins and Ware Properties (as defined in Note
1 to the accompanying statements) for the years ended June 30, 1997 and 1996.
These statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the statements of operating revenues and
direct operating expenses are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the statements of operating revenues and direct operating expenses. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
The accompanying statements of operating revenues and direct operating
expenses were prepared for the purpose of complying with the rules and
regulations of the Securities and Exchange Commission and are not intended to be
a complete presentation of revenues and expenses of the Collins and Ware
Properties.
In our opinion, the statements of operating revenues and direct operating
expenses referred to above present fairly, in all material respects, the
operating revenues and direct operating expenses of the Collins and Ware
Properties for the years ended June 30, 1997 and 1996 in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
September 16, 1997
F-29
<PAGE> 160
COLLINS AND WARE PROPERTIES
STATEMENTS OF OPERATING REVENUES AND DIRECT OPERATING EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------
1997 1996
---------- ----------
<S> <C> <C>
Oil and natural gas sales................................... $2,635,277 $2,740,442
Direct operating expenses................................... 686,164 732,883
---------- ----------
Excess of revenues over direct operating expenses........... $1,949,113 $2,007,559
========== ==========
</TABLE>
See accompanying notes to statements of operating revenues and direct operating
expenses.
F-30
<PAGE> 161
COLLINS AND WARE PROPERTIES
NOTES TO STATEMENTS OF OPERATING REVENUES AND
DIRECT OPERATING EXPENSES
1. BASIS OF PRESENTATION
On August 1, 1997 Queen Sand Resources, Inc. ("the Company") acquired from
an unaffiliated entity 77 gross productive wells (12.35 net productive wells)
and 8 developmental properties located in New Mexico, Oklahoma, and Texas (the
"Collins and Ware Properties"). The purchase price consisted of cash of
approximately $6,000,000 and 1,000,000 shares of restricted common stock of the
Company, valued at $3.125 per share.
The cash portion of this acquisition was funded through borrowings made
under the Company's credit facility with Bank of Montreal.
The accompanying financial statements present the operating revenues and
direct operating expenses of the Collins and Ware Properties. The operating
revenues and direct operating expenses presented herein relate only to the
interests in the producing oil and natural gas properties acquired and do not
represent all of the oil and gas operations of the sellers. Direct operating
expenses include the actual costs of maintaining the producing properties and
their production, but do not include charges for depletion, depreciation, and
amortization; federal and state income taxes; interest; or general and
administrative expenses. Presentation of complete historical financial
statements for the years ended June 30, 1997 and 1996 is not practicable because
the Collins and Ware Properties were not accounted for as a separate entity; and
therefore, such statements are not available. The operating revenues and direct
operating expenses for the periods presented may not be representative of future
operations.
Revenues in the accompanying statements of operating revenues and direct
operating expenses are recognized on the sales method. Direct operating expenses
are recognized on an accrual basis.
2. SUPPLEMENTAL OIL AND GAS RESERVE AND STANDARDIZED MEASURE
INFORMATION (UNAUDITED)
During the fiscal years ended June 30, 1996 and 1997, development costs of
$773,000 and $437,000, respectively, were incurred on the properties. There were
no exploratory costs or incremental general and administrative costs incurred.
RESERVE QUANTITY INFORMATION
The following table presents the Company's estimate of the proved oil and
natural gas reserves of the Collins and Ware Properties, all of which are
located in the United States, as of June 30, 1997. The Company emphasizes that
reserve estimates are inherently imprecise and that estimates of new discoveries
are more imprecise than those of producing oil and gas properties. Accordingly,
the estimates are expected to change as future information becomes available.
The estimates have been prepared by independent petroleum reservoir engineers.
<TABLE>
<CAPTION>
OIL GAS
(BBLS) (MCF)
------- ---------
<S> <C> <C>
Proved reserves............................................. 850,805 1,476,139
======= =========
Proved developed reserves................................... 632,825 1,228,483
======= =========
</TABLE>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL
AND GAS RESERVES
The Standardized Measure of Discounted Future Net Cash Flows Relating to
Proved Oil and Gas Reserves ("Standardized Measure") is a disclosure requirement
under Statement of Financial Accounting Standards No. 69.
F-31
<PAGE> 162
COLLINS AND WARE PROPERTIES
NOTES TO STATEMENTS OF OPERATING REVENUES AND
DIRECT OPERATING EXPENSES -- (CONTINUED)
The Standardized Measure does not purport to be, nor should it be
interpreted to present, the fair value of the oil and natural gas reserves of
the Collins and Ware Properties. An estimate of fair value would also take into
account, among other things, the recovery of reserves not presently classified
as proved, the value of unproved properties, and consideration of expected
future economic and operating conditions.
Under the Standardized Measure, future cash flows are estimated by applying
year-end prices, adjusted for fixed and determinable escalations, to the
estimated future production of year-end proved reserves. Future cash flows are
reduced by estimated future production costs, based on period-end costs, and
projected future development costs to determine net cash inflows. The Collins
and Ware Properties are not a separate tax paying entity. Accordingly, the
Standardized Measure for the Collins and Ware Properties is presented before
deduction of income taxes. Future net cash flows are discounted using a 10%
annual discount rate to arrive at the Standardized Measure.
The Standardized Measure of discounted future net cash flows relating to
proved oil and gas reserves of the Collins and Ware Properties at June 30, 1997
follows:
<TABLE>
<S> <C>
Future cash inflows......................................... $18,929,090
Future production and development........................... 6,031,055
-----------
Future net cash flows....................................... 12,898,035
10% annual discount for estimated timing of cash flows 4,932,053
-----------
Standardized Measure........................................ $ 7,965,982
===========
</TABLE>
Estimates of economically recoverable oil and natural gas reserves and of
future net revenues are based upon a number of variable factors and assumptions,
all of which are to some degree speculative and may vary considerably from
actual results. Therefore, actual production, revenues, taxes, development and
operating expenditures may not occur as estimated. The reserve data are
estimates only, are subject to many uncertainties and are based on data gained
from production histories and on assumptions as to geologic formations and other
matters. Actual quantities of natural gas and oil may differ materially from the
amounts estimated.
The weighted average prices of oil and natural gas at June 30, 1997 used in
the calculation of the Standardized Measure were $19.24 per barrel and $1.74 per
Mcf, respectively.
F-32
<PAGE> 163
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Queen Sand Resources, Inc.
We have audited the accompanying statements of net profits interests and
royalty interests revenues of certain oil and gas producing properties acquired
from pension funds managed by J.P. Morgan Investments (the "Morgan Properties")
by Queen Sand Resources, Inc. (the "Company") for the years ended June 30, 1997,
1996 and 1995. These statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the accompanying statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the accompanying statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
The accompanying statements were prepared for the purpose of complying with
the rules and regulations of the Securities and Exchange Commission and are not
intended to be a complete presentation of the revenues and expenses of certain
oil and gas producing properties acquired from pension funds managed by J.P.
Morgan Investments.
In our opinion, the statements referred to above present fairly, in all
material respects, the net profits interests and royalty interest revenues of
the Morgan Properties for the years ended June 30, 1997, 1996 and 1995 in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Dallas, Texas
April 17, 1998
F-33
<PAGE> 164
CERTAIN OIL AND GAS PRODUCING PROPERTIES
ACQUIRED FROM PENSION FUNDS MANAGED BY J.P. MORGAN INVESTMENTS
STATEMENTS OF NET PROFITS INTERESTS AND ROYALTY INTERESTS REVENUES
($ THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
NINE MONTHS ENDED ---------------------------
MARCH 31,1998 1997 1996 1995
----------------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net profits interests and royalty interests
revenues..................................... $23,460 $31,953 $21,759 $18,657
======= ======= ======= =======
</TABLE>
See accompanying notes
F-34
<PAGE> 165
CERTAIN OIL AND GAS PRODUCING PROPERTIES
ACQUIRED FROM PENSION FUNDS MANAGED BY J.P. MORGAN INVESTMENTS
NOTES TO STATEMENTS OF NET PROFITS INTERESTS
AND ROYALTY INTERESTS REVENUES
NOTE A -- BASIS OF PRESENTATION
In March, 1998, the Queen Sand Resources, Inc. (the "Company") completed
the acquisition of certain oil and natural gas producing properties, primarily
located in East and South Texas and the Mid-Continent region of the United
States, from pension funds managed by J.P. Morgan Investments (the "Morgan
Properties"). The Company's interest in the Morgan Properties primarily takes
the form of non-operated net profits overriding royalty interests, whereby the
Company is entitled to a percentage of the net profits from the operations of
the properties.
The net profits interests and royalty interests revenues presented herein
relate only to the interests in the certain oil and gas producing properties
acquired and do not represent all of the costs of oil and gas operations of the
acquired interests. In determining the overriding royalties and net profits
interest revenues, revenues are recognized on the sales method and production
expenses are recognized on the accrual method. Presentation of complete
historical financial statements is not practicable because these properties were
not accounted for as a separate entity during the past three years. The net
profits interests and royalty interests revenues for the periods presented may
not be indicative of the results of future operations of the acquired interests.
Presented below are the oil and natural gas sales and associated production
expenses from which the overriding royalties and net profits interests revenues
presented in the accompanying statements are derived:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
NINE MONTHS ENDED ---------------------------
MARCH 31, 1998 1997 1996 1995
----------------- ------- ------- -------
(UNAUDITED) ($ THOUSANDS)
<S> <C> <C> <C> <C>
Oil and natural gas sales............. $30,747 $43,243 $35,283 $28,569
Production expenses................... 7,287 11,290 13,524 9,912
------- ------- ------- -------
Net profits interests and royalty
interests revenues.................. $23,460 $31,953 $21,759 $18,657
======= ======= ======= =======
</TABLE>
NOTE B -- SUPPLEMENTARY OIL AND NATURAL GAS DATA (UNAUDITED)
OIL AND NATURAL GAS OPERATIONS
During the years ended June 30, 1997, 1996 and 1995, development costs of
$8.2 million, $14.9 million and $19.2 million, respectively, were incurred. No
exploration or incremental general and administrative costs were incurred.
RESERVE QUANTITY INFORMATION
The following table presents the Company's estimate of the proved oil and
natural gas reserves of the Morgan Properties, all of which are located in the
United States. The Company emphasizes that reserve estimates are inherently
imprecise and that estimates of new discoveries are more imprecise than those of
producing oil and natural gas properties. Accordingly, the estimates are
expected to change as future
F-35
<PAGE> 166
CERTAIN OIL AND GAS PRODUCING PROPERTIES
ACQUIRED FROM PENSION FUNDS MANAGED BY J.P. MORGAN INVESTMENTS
NOTES TO STATEMENTS OF NET PROFITS INTERESTS
AND ROYALTY INTERESTS REVENUES -- (CONTINUED)
information becomes available. The estimates have been prepared by independent
petroleum reservoir engineers.
<TABLE>
<CAPTION>
OIL NATURAL
(BBLS) GAS (MCF)
------ ---------
(IN THOUSANDS)
<S> <C> <C>
Proved reserves:
Balance at June 30, 1994.................................. 3,680 157,934
Acquisitions of reserves.................................. 1,362 --
Development and revisions of previous estimates........... 157 (1,620)
Production................................................ (473) (12,808)
------ -------
Balance at June 30, 1995.................................. 4,726 143,506
Sales of reserves in place................................ (46) --
Development and revisions of previous estimates........... (1,069) 12,662
Production................................................ (490) (13,714)
------ -------
Balance at June 30, 1996.................................. 3,121 142,454
Sales of reserves in place................................ (16) (2,694)
Development and revisions of previous estimates........... 960 (2,445)
Production................................................ (475) (13,188)
------ -------
Balance at June 30, 1997.................................. 3,590 124,127
====== =======
Proved developed reserves:
Balance at June 30, 1995.................................. 4,227 121,934
====== =======
Balance at June 30, 1996.................................. 2,960 118,950
====== =======
Balance at June 30, 1997.................................. 3,220 115,915
====== =======
</TABLE>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL
AND GAS RESERVES
The Standardized Measure of Discounted Future Net Cash Flows Relating to
Proved Oil and Natural Gas Reserves ("Standardized Measure") is a disclosure
requirement under Statement of Financial Accounting Standards No. 69.
The Standardized Measure does not purport to be, nor should it be
interpreted to present, the fair value of the oil and gas reserves of the Morgan
Properties. An estimate of fair value would also take into account, among other
things, the recovery of reserves not presently classified as proved, the value
of unproved properties, and consideration of expected future economic and
operating conditions.
Under the Standardized Measure, future cash flows are estimated by applying
year-end prices, adjusted for fixed and determinable escalations, to the
estimated future production of year-end proved reserves. Future cash flows are
reduced by estimated future production costs, based on period-end costs, and
projected future development costs to determine net cash inflows. The Morgan
Properties are not a separate tax paying entity. Accordingly, the Standardized
Measure for the Morgan Properties is presented before deduction of income taxes.
Future net cash flows are discounted using a 10% annual discount rate to arrive
at the Standardized Measure.
F-36
<PAGE> 167
CERTAIN OIL AND GAS PRODUCING PROPERTIES
ACQUIRED FROM PENSION FUNDS MANAGED BY J.P. MORGAN INVESTMENTS
NOTES TO STATEMENTS OF NET PROFITS INTERESTS
AND ROYALTY INTERESTS REVENUES -- (CONTINUED)
The Standardized Measure of discounted future net cash flows relating to
proved oil and gas reserves of the Morgan Properties at June 30, 1997, 1996 and
1995 follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
($ THOUSANDS)
<S> <C> <C> <C>
Future cash inflows............................... $ 358,833 $ 380,027 $ 324,223
Future costs and expenses:
Production expenses............................. (123,525) (121,690) (115,797)
Development expenses............................ (9,012) (9,572) (9,209)
--------- --------- ---------
Future net cash flows............................. 226,296 248,765 199,217
10% annual discount............................... (99,400) (119,838) (103,611)
--------- --------- ---------
Standardized measure.............................. $ 126,896 $ 128,927 $ 95,606
========= ========= =========
</TABLE>
The weighted average prices of oil and natural gas at June 30, 1997, 1996
and 1995 used in the calculation of the Standardized Measure were $19.26, $18.48
and $18.59 per barrel and $2.32, $2.26 and $1.65 per Mcf, respectively.
Changes in the Standardized Measure of discounted future net cash flows
relating to proved oil and gas reserves for the years ended June 30, 1997, 1996
and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
($ THOUSANDS)
<S> <C> <C> <C>
Balance beginning of year............................ $128,927 $ 95,606 $123,935
Sales of minerals in place......................... (2,510) (133) --
Net change in prices and costs..................... (4,567) 73,425 (63,781)
Accretion of discount.............................. 9,697 7,385 10,528
Sales of oil and gas produced, net of production
expenses........................................ (31,953) (21,759) (18,657)
Development and revisions of previous estimates.... 27,302 (25,597) 43,581
-------- -------- --------
Balance end of year.................................. $126,896 $128,927 $ 95,606
======== ======== ========
</TABLE>
Estimates of economically recoverable oil and gas reserves and of future
net revenues are based upon a number of variable factors and assumptions, all of
which are to some degree speculative and may vary considerably from actual
results. Therefore, actual production, revenues, taxes, development and
operating expenditures may not occur as estimated. The reserve data are
estimates only, are subject to many uncertainties and are based on data gained
from production histories and on assumptions as to geologic formations and other
matters. Actual quantities of gas and oil may differ materially from the amounts
estimated.
F-37
<PAGE> 168
================================================================================
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
described in this Prospectus or an 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 or therein is correct as of any time subsequent to
its date.
---------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Available Information....................................................4
Incorporation of Certain Documents
by Reference............................................................4
Forward-Looking Statements...............................................5
Summary..................................................................6
Risk Factors............................................................18
Recent Developments.....................................................28
The Exchange Offer; Registration Rights.................................33
Use of Proceeds.........................................................41
Capitalization..........................................................42
Selected Consolidated Financial Information.............................43
Unaudited Pro Forma Condensed
Consolidated Financial Information.....................................45
Management's Discussion and Analysis of
Financial Condition and Results of Operations.........................53
Business................................................................61
Management..............................................................78
Security Ownership of Certain Beneficial
Owners and Management.................................................80
Description of Notes....................................................82
Description of Other Indebtedness......................................114
Description of Capital Stock...........................................117
Certain U.S. Federal Income Tax
Considerations........................................................122
Legal Matters..........................................................125
Experts................................................................125
Plan of Distribution...................................................125
Engineers..............................................................126
Independent Auditors...................................................126
Glossary...............................................................127
Index to Financial Statements..........................................F-1
</TABLE>
$125,000,000
QUEEN SAND RESOURCES, INC.
12 1/2% SENIOR NOTES DUE 2008
---------------
PROSPECTUS
---------------
================================================================================
<PAGE> 169
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Restated Certificate of Incorporation, as amended (the
"Certificate of Incorporation"), provides that no director of the Company will
be personally liable to the Company or any of its stockholders for monetary
damages arising from the director's breach of fiduciary duty as a director.
However, this does not apply with respect to any action in which the director
would be liable under Section 174 of the General Corporation Law of the State of
Delaware ("Delaware Code") nor does it apply with respect to any liability in
which the director (i) breached his duty of loyalty to the Company or its
stockholders; (ii) did not act in good faith or, in failing to act, did not act
in good faith; (iii) acted in a manner involving intentional misconduct or a
knowing violation of law or, in failing to act, shall have acted in a manner
involving intentional misconduct or a knowing violation of law; or (iv) derived
an improper personal benefit.
The Certificate of Incorporation of the Company provides that the
Company shall indemnify its directors and officers and former directors and
officers to the fullest extent permitted by the Delaware Code. Pursuant to the
provisions of Section 145 of the Delaware Code, the Company has the power to
indemnify 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 (other than
an action by or in the right of the Company) by reason of the fact that he is or
was a director, officer, employee, or agent of the Company, against any and all
expenses, judgments, fines and amounts paid in settlement actually and
reasonably incurred in connection with such action, suit, or proceeding. The
power to indemnify applies only if such person acted in good faith and in a
manner he reasonably believed to be in the best interest, or not opposed to the
best interest, of the Company and with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
The power to indemnify applies to actions brought by or in the right of
the Company as well, but only to the extent of defense and settlement expenses
and not to any satisfaction of a judgment or settlement of the claim itself and
with the further limitation that in such actions no indemnification shall be
made in the event of any adjudication of negligence or misconduct unless the
court, in its discretion, believes that in light of all the circumstances
indemnification should apply.
The statute further specifically provides that the indemnification
authorized thereby shall not be deemed exclusive of any other rights to which
any such officer or director may be entitled under any bylaws, agreements, vote
of stockholders or disinterested directors, or otherwise.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company 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.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
1.1 Purchase Agreement, dated June 30, 1998 by and among Queen Sand
Resources, Inc. (the "Company") and certain of its subsidiaries, and
Nesbitt Burns Securities Inc., CIBC Oppenheimer Corp. and Societe
Generale Securities Corporation, as Placement Agents, filed as an
Exhibit to the Company's Current Report on Form 8-K dated July 8, 1998,
which Exhibit is incorporated herein by reference.
3.1 Restated Certificate of Incorporation of the Company, filed as an
Exhibit to the Company's Registration Statement on Form S-3 filed with
the Securities and Exchange Commission on March 9, 1998, which Exhibit
is incorporated herein by reference.
II-1
<PAGE> 170
3.2 Certificate of Designation of Series C Convertible Preferred Stock of
the Company, filed as an Exhibit to the Company's Current Report on Form
8-K dated December 24, 1997, which Exhibit is incorporated herein by
reference.
3.3 Amended and Restated Bylaws of the Company, filed as an Exhibit to the
Company's Current Report on Form 8-K dated March 27, 1997, which Exhibit
is incorporated herein by reference.
4.1 Stockholders' Agreement dated as of May 6, 1997, among the Company,
Bruce I. Benn, Edward J. Munden, Ronald I. Benn, Robert P. Lindsay,
EIBOC Investments Ltd. and Joint Energy Development Investments Limited
Partnership ("JEDI"), filed as an Exhibit to the Company's Current
Report on Form 8-K dated May 6, 1997, which Exhibit is incorporated
herein by reference.
4.2 Indenture, dated July 1, 1998, in regard to 12 1/2% Senior Notes due
2008 by and among the Company and certain of its subsidiaries and Harris
Trust and Savings Bank, as Trustee, filed as an Exhibit to the Company's
Current Report on Form 8-K dated July 8, 1998, which Exhibit is
incorporated herein by reference.
4.3 Form of 12% Notes due July 15, 2001, filed as an Exhibit to the
Company's Registration Statement on Form 10-SB filed with the Securities
and Exchange Commission on August 12, 1996, which Exhibit is
incorporated herein by reference.
4.4 Common Stock Purchase Warrant Representing Right to Purchase 100,000
Shares of Common Stock of the Company issued to Forseti Investments Ltd.
on May 6, 1997 and assigned to CSM GmbH, filed as an Exhibit to the
Company's Current Report on Form 8-K dated May 6, 1997, which Exhibit is
incorporated herein by reference.
4.5 Common Stock Purchase Warrant Representing Right to Purchase 1,000,000
Shares of Common Stock of the Company issued to Forseti Investments Ltd.
on May 6, 1997 and assigned to CSM GmbH, filed as an Exhibit to the
Company's Current Report on Form 8-K dated May 6, 1997, which Exhibit is
incorporated herein by reference.
4.6* Common Stock Purchase Warrant Representing Right to Purchase 28,066
Shares of Common Stock of the Company dated July 22, 1998 issued to
JEDI.
4.7* Common Stock Purchase Warrant Representing Right to Purchase 1,697,881
Shares of Common Stock of the Company dated July 22, 1998 issued to
JEDI.
4.8 Form of Common Stock Purchase Warrant dated December 24, 1997 and issued
to certain institutional investors, filed as an Exhibit to the Company's
Current Report on Form 8-K dated December 24, 1997, which Exhibit is
incorporated herein by reference.
4.9 Form of Common Stock Purchase Warrant issued to certain investors
effective July 8, 1998, filed as an Exhibit to the Company's Current
Report on Form 8-K dated July 8, 1998, which Exhibit is incorporated
herein by reference.
4.10* Registration Rights Agreement between the Company and Collins & Ware,
Inc., dated August 1, 1997.
4.11* Registration Rights Agreement between the Company and Riata Energy, et.
al dated April 9, 1998.
4.12 Registration Rights Agreement among the Company and certain
institutional investors named therein, dated December 24, 1997, filed as
an Exhibit to the Company's Current Report on Form 8-K dated December
24, 1997, which Exhibit is incorporated herein by reference.
4.13 Registration Rights Agreement by and between the Company and JEDI dated
May 6, 1997, filed as an Exhibit to the Company's Current Report on Form
8-K dated May 6, 1997, which Exhibit is incorporated herein by
reference.
II-2
<PAGE> 171
4.14 Registration Rights Agreement dated as of December 29, 1997 among the
Company, the ECT Agent and JEDI, filed as an Exhibit to the Company's
Quarterly Report on Form 10-QSB for the quarter ended December 30, 1997,
which Exhibit is incorporated herein by reference.
4.15 Registration Rights Agreement dated as of July 8, 1998 among the Company
and the buyers signatory thereto, filed as an Exhibit to the Company's
Current Report on Form 8-K dated July 8, 1998, which Exhibit is
incorporated herein by reference.
4.16 Registration Rights Agreement, dated July 8, 1998, by and among the
Company and certain of its subsidiaries and Nesbitt Burns Securities
Inc., CIBC Oppenheimer Corp. and Societe Generale Securities
Corporation, as Placement Agents, filed as an Exhibit to the Company's
Current Report on Form 8-K dated July 8, 1998, which Exhibit is
incorporated herein by reference.
5.1* Opinion of Haynes and Boone, LLP, regarding legality of the New Notes
issued.
8.1* Opinion of Haynes and Boone, LLP, as to certain tax matters.
10.1 Purchase and Sale Agreement between Eli Rebich and Southern Exploration
Company, a Texas corporation, and Queen Sand Resources, Inc., a Nevada
corporation, dated April 10, 1996, filed as an Exhibit to the Company's
Registration Statement on Form 10-SB filed with the Securities and
Exchange Commission on August 12, 1996, which Exhibit is incorporated
herein by reference.
10.2 Purchase and Sale Agreement dated June 20, 1997 between Queen Sand
Resources, Inc., a Nevada corporation, and Collins & Ware, Inc., filed
as an Exhibit to the Company's Current Report on Form 8-K dated August
1, 1997, which Exhibit is incorporated herein by reference.
10.3 Purchase and Sale Agreement dated March 19, 1998 among the Morgan
commingled pension funds and Queen Sand Resources, Inc., a Nevada
corporation, filed as an Exhibit to the Company's Current Report on Form
8-K dated March 19, 1998, which Exhibit is incorporated herein by
reference.
10.4 Securities Purchase Agreement dated as of March 27, 1997 between JEDI
and the Company, filed as an Exhibit to the Company's Current Report on
Form 8-K dated March 27, 1997, which Exhibit is incorporated herein by
reference.
10.5 Securities Purchase Agreement dated as of March 27, 1997 between Forseti
Investments Ltd, a Barbados corporation, and the Company, filed as an
Exhibit to the Company's Current Report on Form 8-K dated March 27,
1997, which Exhibit is incorporated herein by reference.
10.6 Securities Purchase Agreement among the Company and certain
institutional investors named therein, dated December 22, 1997, filed as
an Exhibit to the Company's Current Report on Form 8-K dated December
24, 1997, which Exhibit is incorporated herein by reference.
10.7* Queen Sand Resources 1997 Incentive Equity Plan.**
10.8* Employment Agreement dated December 15, 1997 between the Company and
Robert P. Lindsay.**
10.9* Employment Agreement dated December 15, 1997 among the Company, Queen
Sand Resources (Canada) Inc. and Bruce I. Benn.**
10.10* Employment Agreement dated December 15, 1997 among the Company, Queen
Sand Resources (Canada) Inc. and Ronald Benn.**
10.11* Employment Agreement dated December 15, 1997 among the Company, Queen
Sand Resources (Canada) Inc. and Edward J. Munden.**
II-3
<PAGE> 172
10.12 Subordinated Revolving Credit Loan Agreement dated as of December 29,
1997, executed by Queen Sand Resources, Inc., certain lenders now or
hereafter parties thereto, and Enron Capital & Trade Resources Corp.
("ECT"), as agent ("ECT Agent") for the lenders ("ECT Lenders"), filed
as an Exhibit to the Company's Quarterly Report on Form 10-QSB for the
quarter ended December 30, 1997, which Exhibit is incorporated herein by
reference.
10.13* First Amendment to Loan Agreement among Queen Sand Resources, Inc. as
borrower, ECT Agent, and ECT Lenders, effective as of June 30, 1998.
10.14 Guaranty dated as of December 29, 1997, executed by Queen Sand
Resources, Inc., a Delaware corporation, in favor of ECT Agent and the
ECT Lenders, filed as an Exhibit to the Company's Quarterly Report on
Form 10-QSB for the quarter ended December 30, 1997, which Exhibit is
incorporated herein by reference.
10.15 Guaranty dated as of December 29, 1997, executed by Corrida Resources,
Inc., a Nevada corporation, and Northland Operating Co., a Nevada
corporation, in favor of ECT Agent and the ECT Lenders, filed as an
Exhibit to the Company's Quarterly Report on Form 10-QSB for the quarter
ended December 30, 1997, which Exhibit is incorporated herein by
reference.
10.16* Subordination Agreement dated as of December 29, 1997, executed by the
Agent in favor of the Bank of Montreal as agent for the senior lenders,
Queen Sand Resources, Inc. and the Guarantors.
10.17* Amended and Restated Credit Agreement, dated as of April 17, 1998, among
the Company, Queen Sand Resources, Inc., a Nevada corporation, the Bank
of Montreal and the lenders signatory thereto.
10.18* First Amendment to Amended and Restated Credit Agreement executed
effective as of July 1, 1998, among the Company, Queen Sand Resources,
Inc., a Nevada corporation, the Bank of Montreal and the lenders
signatory thereto.
10.19* Amended and Restated Guaranty Agreement executed by the Company, in
favor of the Bank of Montreal, as agent, dated as of April 17, 1998.
10.20* Amended and Restated Guaranty Agreement executed by Northland Operating
Co. in favor of the Bank of Montreal, as agent, dated as of April 17,
1998.
10.21* Amended and Restated Guaranty Agreement dated as of August 1, 1997
executed by Corrida Resources, Inc., a Nevada corporation, in favor of
the Bank of Montreal.
10.22* Amended and Restated Security Agreement dated as of April 17, 1998
executed by Queen Sand Resources, Inc., a Nevada corporation, in favor
of the Bank of Montreal.
10.23* Form of Qualified Stock Option Agreement.**
12.1* Statement of computation of ratio of earnings to fixed charges.
12.2* Statement of computation of ratio of EBITA to interest expense.
16.1 Letter regarding change in certifying accountant, filed as an Exhibit to
the Company's Current Report on Form 8-K dated March 19, 1997, which
Exhibit is incorporated herein by reference.
21.1* Subsidiaries of the Registrant.
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 legal opinions filed as
Exhibits 5.1 and 8.1).
23.4* Consent of Ryder Scott Company.
23.5* Consent of H.J. Gruy and Associates, Inc.
23.6* Consent of Joe C. Neal and Associates.
23.7* Consent of Harper and Associates.
24.1* The power of attorney of officers and directors of the Company (found on
signature page).
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<PAGE> 173
24.2* The power of attorney of officers and directors of Queen Sand Resources,
Inc., a Nevada corporation (found on signature page).
24.3* The power of attorney of officers and directors of Northland Operating
Co. (found on signature page).
24.4* The power of attorney of officers and directors of Corrida Resources,
Inc. (found on signature page).
25.1* Statement of Eligibility and Qualification (Form T-1) under the Trust
Indenture Act of 1939 of Harris Trust and Savings Bank.
99.1* Form of Letter of Transmittal and related documents to be used in
conjunction with the Exchange Offer.
- ----------
* Filed herewith.
** Denotes management contract.
(b) II Financial Statement Schedule and Auditors' Report on Schedule:
No schedules filed.
No other financial statement schedules are filed as part of this
Registration Statement since the required information is included in the
financial statements, including the notes thereto, or circumstances requiring
the inclusion of such schedules are not present.
ITEM 22. UNDERTAKINGS.
Each of the undersigned Registrants hereby undertakes:
(1) to file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) to include any prospectus required by section 10(a)(3) of
the Securities Act of 1933 (the "Securities Act");
(ii) to reflect in the prospectus any facts or events arising
after the effective date of this Registration Statement (or the most
recent post-effective amendment hereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this 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 Securities and Exchange Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no more than
a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in this Registration Statement
when it becomes effective;
(iii) to include any material information with respect to the
plan of distribution not previously disclosed in this Registration
Statement or any material change to such information in this
Registration Statement;
(2) that, for the purpose of determining any liability under the
Securities Act, 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.
II-5
<PAGE> 174
(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 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
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 that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
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 Registrant 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.
Each of the undersigned Registrants hereby undertakes to file an
application for the purpose of determining the eligibility of the trustee to act
under subsection (a) of Section 310 of the Trust Indenture Act in accordance
with the rules and regulations prescribed by the Commission under Section
305(b)(2) of the Trust Indenture Act.
Each of the undersigned Registrants hereby undertakes to respond to
requests for information that is incorporated by reference into the prospectus
pursuant to Items 4, 10(b), 11 or 13 of this Form, within one business day of
receipt of such request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of this Registration Statement
through the date of responding to the request.
Each of the undersigned Registrants hereby undertakes to supply by means
of a post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in this Registration Statement when it became effective.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Exchange Act) that is
incorporated by reference in the registration statement 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-6
<PAGE> 175
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dallas, State of Texas,
on the 13th day of August, 1998.
QUEEN SAND RESOURCES, INC.,
a Delaware corporation
By: /s/ Bruce I. Benn
------------------------------------
Name: Bruce I. Benn
Title: Executive Vice President
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints each of Ronald I. Benn and William W. Lesikar,
his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign, execute and file with the Securities and
Exchange Commission and any state securities regulatory board or commission any
documents relating to the proposed issuance and registration of the securities
offered pursuant to this Registration Statement on Form S-4 under the Securities
Act of 1933, including any amendment or amendments relating thereto (and any
additional Registration Statement related hereto permitted by Rule 462(b)
promulgated under the Securities Act of 1933, including any amendment or
amendments relating thereto), with all exhibits and any and all documents
required to be filed with respect thereto with any regulatory authority,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises in order to effectuate the same
as fully to all intents and purposes as he might or could do if personally
present, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or either of them, or their or his substitute or substitutes, may
lawfully do or cause to be done.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Edward J. Munden Chairman of the Board, President, Chief Executive August 13, 1998
- ----------------------------- Officer and Director (principal executive officer)
Edward J. Munden
/s/ Bruce I. Benn Executive Vice President, Secretary and Director August 13, 1998
- -----------------------------
Bruce I. Benn
/s/ Ronald I. Benn Chief Financial Officer (principal financial officer August 13, 1998
- ----------------------------- and accounting officer)
Ronald I. Benn
/s/ Robert P. Lindsay Chief Operating Officer, Executive Vice President August 13, 1998
- ----------------------------- and Director
Robert P. Lindsay
/s/ Ted Collins, Jr. Director August 13, 1998
- -----------------------------
Ted Collins, Jr.
/s/ Eli Rebich Director August 13, 1998
- -----------------------------
Eli Rebich
</TABLE>
II-7
<PAGE> 176
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dallas, State of Texas,
on the 13th day of August, 1998.
QUEEN SAND RESOURCES, INC.,
a Nevada corporation
By: /s/ Bruce I. Benn
----------------------------------
Name: Bruce I. Benn
Title: Vice President
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints each of Ronald I. Benn and William W.
Lesikar, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign, execute and file with the Securities and
Exchange Commission and any state securities regulatory board or commission any
documents relating to the proposed issuance and registration of the securities
offered pursuant to this Registration Statement on Form S-4 under the Securities
Act of 1933, including any amendment or amendments relating thereto (and any
additional Registration Statement related hereto permitted by Rule 462(b)
promulgated under the Securities Act of 1933, including any amendment or
amendments relating thereto), with all exhibits and any and all documents
required to be filed with respect thereto with any regulatory authority,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises in order to effectuate the same
as fully to all intents and purposes as he might or could do if personally
present, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or either of them, or their or his substitute or substitutes, may
lawfully do or cause to be done.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Edward J. Munden President and Director (principal executive officer) August 13, 1998
- -----------------------------
Edward J. Munden
/s/ Bruce I. Benn Vice President, Secretary and Director August 13, 1998
- -----------------------------
Bruce I. Benn
/s/ Ronald I. Benn Vice President and Treasurer (principal financial August 13, 1998
- ----------------------------- officer and accounting officer)
Ronald I. Benn
/s/ Robert P. Lindsay Vice President August 13, 1998
- -----------------------------
Robert P. Lindsay
</TABLE>
II-8
<PAGE> 177
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dallas, State of Texas,
on the 13th day of August, 1998.
NORTHLAND OPERATING CO.,
a Nevada corporation
By: /s/ Bruce I. Benn
-----------------------------------
Name: Bruce I. Benn
Title: Vice President
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints each of Ronald I. Benn and William W. Lesikar,
his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign, execute and file with the Securities and
Exchange Commission and any state securities regulatory board or commission any
documents relating to the proposed issuance and registration of the securities
offered pursuant to this Registration Statement on Form S-4 under the Securities
Act of 1933, including any amendment or amendments relating thereto (and any
additional Registration Statement related hereto permitted by Rule 462(b)
promulgated under the Securities Act of 1933, including any amendment or
amendments relating thereto), with all exhibits and any and all documents
required to be filed with respect thereto with any regulatory authority,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises in order to effectuate the same
as fully to all intents and purposes as he might or could do if personally
present, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or either of them, or their or his substitute or substitutes, may
lawfully do or cause to be done.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Edward J. Munden President and Director (principal executive officer) August 13, 1998
- -----------------------------
Edward J. Munden
/s/ Bruce I. Benn Vice President, Secretary and Director August 13, 1998
- -----------------------------
Bruce I. Benn
/s/ Ronald I. Benn Vice President and Treasurer (principal financial August 13, 1998
- ----------------------------- officer and accounting officer)
Ronald I. Benn
/s/ Robert P. Lindsay Vice President August 13, 1998
- -----------------------------
Robert P. Lindsay
</TABLE>
II-9
<PAGE> 178
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dallas, State of Texas,
on the 13th day of August, 1998.
CORRIDA RESOURCES, INC.,
a Nevada corporation
By: /s/ Robert P. Lindsay
---------------------------------
Name: Robert P. Lindsay
Title: Vice President
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints each of Ronald I. Benn and William W.
Lesikar, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign, execute and file with the Securities and
Exchange Commission and any state securities regulatory board or commission any
documents relating to the proposed issuance and registration of the securities
offered pursuant to this Registration Statement on Form S-4 under the Securities
Act of 1933, including any amendment or amendments relating thereto (and any
additional Registration Statement related hereto permitted by Rule 462(b)
promulgated under the Securities Act of 1933, including any amendment or
amendments relating thereto), with all exhibits and any and all documents
required to be filed with respect thereto with any regulatory authority,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises in order to effectuate the same
as fully to all intents and purposes as he might or could do if personally
present, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or either of them, or their or his substitute or substitutes, may
lawfully do or cause to be done.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Edward J. Munden President and Director (principal executive officer) August 13, 1998
- ---------------------------------
Edward J. Munden
/s/ Bruce I. Benn Secretary and Director August 13, 1998
- ---------------------------------
Bruce I. Benn
/s/ Ronald I. Benn Treasurer (principal financial officer and August 13, 1998
- --------------------------------- accounting officer)
Ronald I. Benn
/s/ Robert P. Lindsay Vice President, Director August 13, 1998
- ---------------------------------
Robert P. Lindsay
</TABLE>
II-10
<PAGE> 179
INDEX TO EXHIBITS
1.1 Purchase Agreement, dated June 30, 1998 by and among Queen Sand
Resources, Inc. (the "Company") and certain of its subsidiaries, and
Nesbitt Burns Securities Inc., CIBC Oppenheimer Corp. and Societe
Generale Securities Corporation, as Placement Agents, filed as an
Exhibit to the Company's Current Report on Form 8-K dated July 8, 1998,
which Exhibit is incorporated herein by reference.
3.1 Restated Certificate of Incorporation of the Company, filed as an
Exhibit to the Company's Registration Statement on Form S-3 filed with
the Securities and Exchange Commission on March 9, 1998, which Exhibit
is incorporated herein by reference.
3.2 Certificate of Designation of Series C Convertible Preferred Stock of
the Company, filed as an Exhibit to the Company's Current Report on Form
8-K dated December 24, 1997, which Exhibit is incorporated herein by
reference.
3.3 Amended and Restated Bylaws of the Company, filed as an Exhibit to the
Company's Current Report on Form 8-K dated March 27, 1997, which Exhibit
is incorporated herein by reference.
4.1 Stockholders' Agreement dated as of May 6, 1997, among the Company,
Bruce I. Benn, Edward J. Munden, Ronald I. Benn, Robert P. Lindsay,
EIBOC Investments Ltd. and Joint Energy Development Investments Limited
Partnership ("JEDI"), filed as an Exhibit to the Company's Current
Report on Form 8-K dated May 6, 1997, which Exhibit is incorporated
herein by reference.
4.2 Indenture, dated July 1, 1998, in regard to 12 1/2% Senior Notes due
2008 by and among the Company and certain of its subsidiaries and Harris
Trust and Savings Bank, as Trustee, filed as an Exhibit to the Company's
Current Report on Form 8-K dated July 8, 1998, which Exhibit is
incorporated herein by reference.
4.3 Form of 12% Notes due July 15, 2001, filed as an Exhibit to the
Company's Registration Statement on Form 10-SB filed with the Securities
and Exchange Commission on August 12, 1996, which Exhibit is
incorporated herein by reference.
4.4 Common Stock Purchase Warrant Representing Right to Purchase 100,000
Shares of Common Stock of the Company issued to Forseti Investments Ltd.
on May 6, 1997 and assigned to CSM GmbH, filed as an Exhibit to the
Company's Current Report on Form 8-K dated May 6, 1997, which Exhibit is
incorporated herein by reference.
4.5 Common Stock Purchase Warrant Representing Right to Purchase 1,000,000
Shares of Common Stock of the Company issued to Forseti Investments Ltd.
on May 6, 1997 and assigned to CSM GmbH, filed as an Exhibit to the
Company's Current Report on Form 8-K dated May 6, 1997, which Exhibit is
incorporated herein by reference.
4.6* Common Stock Purchase Warrant Representing Right to Purchase 28,066
Shares of Common Stock of the Company dated July 22, 1998 issued to
JEDI.
4.7* Common Stock Purchase Warrant Representing Right to Purchase 1,697,881
Shares of Common Stock of the Company dated July 22, 1998 issued to
JEDI.
4.8 Form of Common Stock Purchase Warrant dated December 24, 1997 and issued
to certain institutional investors, filed as an Exhibit to the Company's
Current Report on Form 8-K dated December 24, 1997, which Exhibit is
incorporated herein by reference.
4.9 Form of Common Stock Purchase Warrant issued to certain investors
effective July 8, 1998, filed as an Exhibit to the Company's Current
Report on Form 8-K dated July 8, 1998, which Exhibit is incorporated
herein by reference.
4.10* Registration Rights Agreement between the Company and Collins & Ware,
Inc., dated August 1, 1997.
1
<PAGE> 180
4.11* Registration Rights Agreement between the Company and Riata Energy, et.
al dated April 9, 1998.
4.12 Registration Rights Agreement among the Company and certain
institutional investors named therein, dated December 24, 1997, filed as
an Exhibit to the Company's Current Report on Form 8-K dated December
24, 1997, which Exhibit is incorporated herein by reference.
4.13 Registration Rights Agreement by and between the Company and JEDI dated
May 6, 1997, filed as an Exhibit to the Company's Current Report on Form
8-K dated May 6, 1997, which Exhibit is incorporated herein by
reference.
4.14 Registration Rights Agreement dated as of December 29, 1997 among the
Company, the ECT Agent and JEDI, filed as an Exhibit to the Company's
Quarterly Report on Form 10-QSB for the quarter ended December 30, 1997,
which Exhibit is incorporated herein by reference.
4.15 Registration Rights Agreement dated as of July 8, 1998 among the Company
and the buyers signatory thereto, filed as an Exhibit to the Company's
Current Report on Form 8-K dated July 8, 1998, which Exhibit is
incorporated herein by reference.
4.16 Registration Rights Agreement, dated July 8, 1998, by and among the
Company and certain of its subsidiaries and Nesbitt Burns Securities
Inc., CIBC Oppenheimer Corp. and Societe Generale Securities
Corporation, as Placement Agents, filed as an Exhibit to the Company's
Current Report on Form 8-K dated July 8, 1998, which Exhibit is
incorporated herein by reference.
5.1* Opinion of Haynes and Boone, LLP, regarding legality of the New Notes
issued.
8.1* Opinion of Haynes and Boone, LLP, as to certain tax matters.
10.1 Purchase and Sale Agreement between Eli Rebich and Southern Exploration
Company, a Texas corporation, and Queen Sand Resources, Inc., a Nevada
corporation, dated April 10, 1996, filed as an Exhibit to the Company's
Registration Statement on Form 10-SB filed with the Securities and
Exchange Commission on August 12, 1996, which Exhibit is incorporated
herein by reference.
10.2 Purchase and Sale Agreement dated June 20, 1997 between Queen Sand
Resources, Inc., a Nevada corporation, and Collins & Ware, Inc., filed
as an Exhibit to the Company's Current Report on Form 8-K dated August
1, 1997, which Exhibit is incorporated herein by reference.
10.3 Purchase and Sale Agreement dated March 19, 1998 among the Morgan
commingled pension funds and Queen Sand Resources, Inc., a Nevada
corporation, filed as an Exhibit to the Company's Current Report on Form
8-K dated March 19, 1998, which Exhibit is incorporated herein by
reference.
10.4 Securities Purchase Agreement dated as of March 27, 1997 between JEDI
and the Company, filed as an Exhibit to the Company's Current Report on
Form 8-K dated March 27, 1997, which Exhibit is incorporated herein by
reference.
10.5 Securities Purchase Agreement dated as of March 27, 1997 between Forseti
Investments Ltd, a Barbados corporation, and the Company, filed as an
Exhibit to the Company's Current Report on Form 8-K dated March 27,
1997, which Exhibit is incorporated herein by reference.
10.6 Securities Purchase Agreement among the Company and certain
institutional investors named therein, dated December 22, 1997, filed as
an Exhibit to the Company's Current Report on Form 8-K dated December
24, 1997, which Exhibit is incorporated herein by reference.
10.7* Queen Sand Resources 1997 Incentive Equity Plan.**
10.8* Employment Agreement dated December 15, 1997 between the Company and
Robert P. Lindsay.**
10.9* Employment Agreement dated December 15, 1997 among the Company, Queen
Sand Resources (Canada) Inc. and Bruce I. Benn.**
2
<PAGE> 181
10.10* Employment Agreement dated December 15, 1997 among the Company, Queen
Sand Resources (Canada) Inc. and Ronald Benn.**
10.11* Employment Agreement dated December 15, 1997 among the Company, Queen
Sand Resources (Canada) Inc. and Edward J. Munden.**
10.12 Subordinated Revolving Credit Loan Agreement dated as of December 29,
1997, executed by Queen Sand Resources, Inc., certain lenders now or
hereafter parties thereto, and Enron Capital & Trade Resources Corp.
("ECT"), as agent ("ECT Agent") for the lenders ("ECT Lenders"), filed
as an Exhibit to the Company's Quarterly Report on Form 10-QSB for the
quarter ended December 30, 1997, which Exhibit is incorporated herein by
reference.
10.13* First Amendment to Loan Agreement among Queen Sand Resources, Inc. as
borrower, ECT Agent, and ECT Lenders, effective as of June 30, 1998.
10.14 Guaranty dated as of December 29, 1997, executed by Queen Sand
Resources, Inc., a Delaware corporation, in favor of ECT Agent and the
ECT Lenders, filed as an Exhibit to the Company's Quarterly Report on
Form 10-QSB for the quarter ended December 30, 1997, which Exhibit is
incorporated herein by reference.
10.15 Guaranty dated as of December 29, 1997, executed by Corrida Resources,
Inc., a Nevada corporation, and Northland Operating Co., a Nevada
corporation, in favor of ECT Agent and the ECT Lenders, filed as an
Exhibit to the Company's Quarterly Report on Form 10-QSB for the quarter
ended December 30, 1997, which Exhibit is incorporated herein by
reference.
10.16* Subordination Agreement dated as of December 29, 1997, executed by the
Agent in favor of the Bank of Montreal as agent for the senior lenders,
Queen Sand Resources, Inc. and the Guarantors.
10.17* Amended and Restated Credit Agreement, dated as of April 17, 1998, among
the Company, Queen Sand Resources, Inc., a Nevada corporation, the Bank
of Montreal and the lenders signatory thereto.
10.18* First Amendment to Amended and Restated Credit Agreement executed
effective as of July 1, 1998, among the Company, Queen Sand Resources,
Inc., a Nevada corporation, the Bank of Montreal and the lenders
signatory thereto.
10.19* Amended and Restated Guaranty Agreement executed by the Company, in
favor of the Bank of Montreal, as agent, dated as of April 17, 1998.
10.20* Amended and Restated Guaranty Agreement executed by Northland Operating
Co. in favor of the Bank of Montreal, as agent, dated as of April 17,
1998.
10.21* Amended and Restated Guaranty Agreement dated as of August 1, 1997
executed by Corrida Resources, Inc., a Nevada corporation, in favor of
the Bank of Montreal.
10.22* Amended and Restated Security Agreement dated as of April 17, 1998
executed by Queen Sand Resources, Inc., a Nevada corporation, in favor
of the Bank of Montreal.
10.23* Form of Qualified Stock Option Agreement.**
12.1* Statement of computation of ratio of earnings to fixed charges.
12.2* Statement of computation of ratio of EBITA to interest expense.
16.1 Letter regarding change in certifying accountant, filed as an Exhibit to
the Company's Current Report on Form 8-K dated March 19, 1997, which
Exhibit is incorporated herein by reference.
21.1* Subsidiaries of the Registrant.
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 legal opinions filed as
Exhibits 5.1 and 8.1).
23.4* Consent of Ryder Scott Company.
23.5* Consent of H.J. Gruy and Associates, Inc.
3
<PAGE> 182
23.6* Consent of Joe C. Neal and Associates.
23.7* Consent of Harper and Associates.
24.1* The power of attorney of officers and directors of the Company (found on
signature page).
24.2* The power of attorney of officers and directors of Queen Sand Resources,
Inc., a Nevada corporation (found on signature page).
24.3* The power of attorney of officers and directors of Northland Operating
Co. (found on signature page).
24.4* The power of attorney of officers and directors of Corrida Resources,
Inc. (found on signature page).
25.1* Statement of Eligibility and Qualification (Form T-1) under the Trust
Indenture Act of 1939 of Harris Trust and Savings Bank.
99.1* Form of Letter of Transmittal and related documents to be used in
conjunction with the Exchange Offer.
- ----------
* Filed herewith.
** Denotes management contract.
4
<PAGE> 1
EXHIBIT 4.6
- --------------------------------------------------------------------------------
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE SHARES OF COMMON STOCK
ISSUABLE UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES OR BLUE SKY LAWS AND
MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR IN RELIANCE ON AN OPINION,
REASONABLY SATISFACTORY TO QUEEN SAND RESOURCES, INC. IN FORM AND SUBSTANCE, OF
COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY, THAT SUCH SALE, PLEDGE OR OTHER
TRANSFER IS BEING MADE IN RELIANCE ON AN EXEMPTION FROM THE ACT AND ANY
APPLICABLE STATE SECURITIES OR BLUE SKY LAWS.
- --------------------------------------------------------------------------------
WARRANT TO PURCHASE
28,066 SHARES
QUEEN SAND RESOURCES, INC.
Common Stock Purchase Warrant
Representing Right To Purchase Shares of
Common Stock
of
Queen Sand Resources, Inc.
FOR VALUE RECEIVED, QUEEN SAND RESOURCES, INC., a Delaware corporation
(the "Company"), hereby certifies that Joint Energy Development Investments
Limited Partnership, a Delaware limited partnership (the "Holder"), is entitled,
subject to the provisions of this Warrant, to purchase from the Company, at any
time or from time to time during the Exercise Period (as hereinafter defined), a
total of 28,066 shares (as such number of shares may be adjusted pursuant to the
terms hereof, the "Warrant Shares") of Common Stock, par value $.0015 per share,
of the Company, at a price per share equal to the Exercise Price (as defined
below). This Warrant is issued to the Holder (together with such other warrants
as may be issued in exchange, transfer or replacement of this Warrant, the
"Warrants") pursuant to the Securities Purchase Agreement (as defined below) and
entitles the Holder to purchase the Warrant Shares and to exercise the other
rights, powers and privileges hereinafter provided.
<PAGE> 2
Section 1. Definitions. The following terms, as used herein, have the
following respective meanings:
"Common Stock" means the Company's common stock, $0.0015 par value.
"Company" is defined in the introductory paragraph of this Warrant.
"Date of Issuance" means March 9, 1998.
"Exercise Period" means the period of time between the Date of Issuance
and 5:00 p.m. (New York City time) on the Expiration Date.
"Exercise Price" means an amount, per share, equal to $5.000. The
Exercise Price shall be subject to adjustment, as set forth in Section 4.
"Expiration Date" means March 9, 1999.
"Holder" means Joint Energy Development Investments Limited Partnership
and its permitted assignees.
"Person" means any individual, corporation, limited or general
partnership, joint venture, association, joint-stock company, trust, limited
liability company, unincorporated organization or government or any agency or
political subdivision thereof.
"Required Holders" means the Holders of more than 50% of all Warrant
Shares then outstanding (assuming the full exercise of all Warrants).
"Securities Purchase Agreement" means the Securities Purchase
Agreement, dated as of March 27, 1997, between the Company and the Holder, as
such agreement shall be modified, amended and supplemented and in effect from
time to time.
"Value" means, as of any date of determination, with respect to the
Common Stock, $3.50 per share of Common Stock.
"Warrants" is defined in the introductory paragraph of this Warrant.
"Warrant Shares" is defined in the introductory paragraph of this
Warrant.
- 2 -
<PAGE> 3
Section 2. Exercise of Warrant; Cancellations of Warrant. This Warrant
may be exercised in whole or in part, at any time or from time to time, during
the Exercise Period, by presentation and surrender hereof to the Company at its
principal office at the address set forth in Section 10 (or at such other
reasonable address as the Company may after the date hereof notify the Holder in
writing, coming into effect not before 14 days after receipt of such notice by
the Holder), with the Purchase Form annexed hereto as Exhibit A duly executed
and accompanied by either (at the option of the Holder) proper payment in cash
or certified or bank check equal to the Exercise Price for the Warrant Shares
for which this Warrant is being exercised. Upon exercise of this Warrant as
aforesaid, the Company shall as promptly as practicable, and in any event within
20 days thereafter, execute and deliver to the Holder a certificate or
certificates for the total number of Warrant Shares for which this Warrant is
being exercised, in such names and denominations as requested in writing by the
Holder. The Company shall pay any and all documentary stamp or similar issue
taxes payable in respect of the issue of the Warrant Shares. If this Warrant is
exercised in part only, the Company shall, upon surrender of this Warrant,
execute and deliver a new Warrant evidencing the rights of the Holder thereof to
purchase the balance of the Warrant Shares issuable hereunder.
Section 3. Exchange, Transfer, Assignment or Loss of Warrant. This
Warrant is exchangeable, without expense, at the option of the Holder, upon
presentation and surrender hereof to the Company for other Warrants of different
denominations, entitling the Holder to purchase in the aggregate the same number
of Warrant Shares. The Holder of this Warrant shall be entitled, without
obtaining the consent of the Company, to transfer or assign its interest in (and
rights under) this Warrant in whole or in part to any Person or Persons. Upon
surrender of this Warrant to the Company, with the Assignment Form annexed
hereto as Exhibit B duly executed and funds sufficient to pay any transfer tax,
the Company shall, without charge, execute and deliver a new Warrant or Warrants
in the name of the assignee or assignees named in such Assignment Form and, if
the Holder's entire interest is not being assigned, in the name of the Holder,
and this Warrant shall promptly be canceled. This Warrant may be divided or
combined with other Warrants that carry the same rights upon presentation hereof
at the office of the Company, together with a written notice specifying the
names and denominations in which new Warrants are to be issued and signed by the
Holder hereof. Upon receipt by the Company of evidence satisfactory to it of the
loss, theft, destruction or mutilation of this Warrant, and (in the case of
loss, theft or destruction) of reasonably satisfactory indemnification
(including, if required in the reasonable judgment of the Company, a statement
of net worth of such Holder that is at a level reasonably satisfactory to the
Company), and upon surrender and cancellation of this Warrant, if mutilated, the
Company shall execute and deliver a new Warrant of like tenor and date.
- 3 -
<PAGE> 4
Section 4. Antidilution Provisions.
(a) Adjustment of Number of Warrant Shares and Exercise Price.
The number of Warrant Shares purchasable pursuant hereto and
the Exercise Price, each shall be subject to adjustment from
time to time on and after the Date of Issuance as provided
in this Section 4(a). In case the Company shall at any time
after the Date of Issuance (i) pay a dividend of shares of
Common Stock or make a distribution of shares of Common
Stock, (ii) subdivide its outstanding shares of Common Stock
into a larger number of shares of Common Stock, (iii)
combine its outstanding shares of Common Stock into a
smaller number of shares of Common Stock or (iv) issue any
shares of its capital stock or other assets in a
reclassification or reorganization of the Common Stock
(including any such reclassification in connection with a
consolidation or merger in which the Company is the
continuing entity), then (x) the securities purchasable
pursuant hereto shall be adjusted to the number of Warrant
Shares and amount of any other securities, cash or other
property of the Company which the Holder would have owned or
have been entitled to receive after the happening of any of
the events described above, had this Warrant been exercised
immediately prior to the happening of such event or any
record date with respect thereto, and (y) the Exercise Price
shall be adjusted to equal the Exercise Price immediately
prior to the adjustment multiplied by a fraction, (A) the
numerator of which is the number of Warrant Shares for which
this Warrant is exercisable immediately prior to the
adjustment, and (B) the denominator of which is the number
of shares for which this Warrant is exercisable immediately
after such adjustment. The adjustments made pursuant to this
Section 4(a) shall become effective immediately after the
effective date of the event creating such right of
adjustment, retroactive to the record date, if any, for such
event. Any Warrant Shares purchasable as a result of such
adjustment shall not be issued prior to the effective date
of such event.
For the purpose of this Section 4(a) and (b), the term
"shares of Common Stock" means (i) the classes of stock
designated as the Common Stock of the Company as of the date
hereof, or (ii) any other class of stock resulting from
successive changes or reclassifications of such shares consisting
solely of changes in par value, or from par value to no par
value, or from no par value to par value. In the event that at
any time, as a result of an adjustment made pursuant to this
Section 4(a), the Holder shall become entitled to receive any
securities of the Company other than shares of Common Stock,
thereafter the number of such other securities so receivable upon
exercise of this Warrant shall be subject to
- 4 -
<PAGE> 5
adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to the
Warrant Shares contained in this Section 4.
(b) Reorganization, Merger, etc. If any capital reorganization,
reclassification or similar transaction involving the
capital stock of the Company (other than as specified in
Section 4(a)), any consolidation, merger or business
combination of the Company with another corporation or the
sale or conveyance of all or any substantial part of its
assets to another corporation, shall be effected in such a
way that holders of the shares of Common Stock shall be
entitled to receive stock, securities or assets (including,
without limitation, cash) with respect to or in exchange for
shares of the Common Stock, then, prior to and as a
condition of such reorganization, reclassification, similar
transaction, consolidation, merger, business combination,
sale or conveyance, lawful and adequate provision shall be
made whereby the Holder shall thereafter have the right to
purchase and receive upon the basis and upon the terms and
conditions specified in this Warrant and in lieu of the
Warrant Shares immediately theretofore purchasable and
receivable upon the exercise of this Warrant, such shares of
stock, securities or assets as may be issued or payable with
respect to or in exchange for a number of outstanding
Warrant Shares equal to the number of Warrant Shares
immediately theretofore purchasable and receivable upon the
exercise of this Warrant had such reorganization,
reclassification, similar transaction, consolidation,
merger, business combination, sale or conveyance not taken
place. The Company shall not effect any such consolidation,
merger, business combination, sale or conveyance unless
prior to or simultaneously with the consummation thereof the
survivor or successor corporation (if other than the
Company) resulting from such consolidation or merger or the
corporation purchasing such assets shall assume by written
instrument executed and sent to the Holder, the obligation
to deliver to the Holder such shares of stock, securities or
assets as, in accordance with the foregoing provisions, the
Holder may be entitled to receive.
(c) Statement on Warrant Certificates. Irrespective of any
adjustments in the Exercise Price or the number or kind of
Warrant Shares, this Warrant may continue to express the
same price and number and kind of shares as are stated on
the front page hereof.
- 5 -
<PAGE> 6
(d) Exception to Adjustment. Anything herein to the contrary
notwithstanding, the Company shall not be required to make
any adjustment of the number of Warrant Shares issuable
hereunder or to the Exercise Price in the case of the
issuance of the Warrants or the issuance of shares of the
Common Stock (or other securities) upon exercise of the
Warrants.
(e) Treasury Shares. The number of shares of the Common Stock
outstanding at any time shall not include treasury shares or
shares owned or held by or for the account of the Company or
any of its subsidiaries, and the disposition of any such
shares shall be considered an issue or sale of the Common
Stock for the purposes of this Section 4.
(f) Adjustment Notices to Holder. Upon any increase or decrease
in the number of Warrant Shares purchasable upon the
exercise of this Warrant or the Exercise Price the Company
shall, within 30 days thereafter, deliver written notice
thereof to all Holders, which notice shall state the
increased or decreased number of Warrant Shares purchasable
upon the exercise of this Warrant and the adjusted Exercise
Price, setting forth in reasonable detail the method of
calculation and the facts upon which such calculations are
based.
Section 5. Notification by the Company. In case at any time while this
Warrant remains outstanding:
(a) the Company shall declare any dividend or make any
distribution upon its Common Stock or any other class of its
capital stock; or
(b) the Company shall offer for subscription pro rata to the
holders of its Common Stock or any other class of its
capital stock any additional shares of stock of any class or
any other securities convertible into or exchangeable for
shares of stock or any rights or options to subscribe
thereto; or
(c) the Board of Directors of the Company shall authorize any
capital reorganization, reclassification or similar
transaction involving the capital stock of the Company, or a
sale or conveyance of all or a substantial part of the
assets of the Company, or a consolidation, merger or
business combination of the Company with another Person; or
- 6 -
<PAGE> 7
(d) actions or proceedings shall be authorized or commenced for
a voluntary or involuntary dissolution, liquidation or
winding-up of the Company;
then, in any one or more of such cases, the Company shall give written notice to
the Holder, at the earliest time legally practicable (and not less than 20 days
before any record date or other date set for definitive action) of the date on
which (i) the books of the Company shall close or a record shall be taken for
such dividend, distribution or subscription rights or options or (ii) such
reorganization, reclassification, sale, conveyance, consolidation, merger,
dissolution, liquidation or winding-up shall take place or be voted on by
shareholders of the Company, as the case may be. Such notice shall also specify
the date as of which the holders of the Common Stock of record shall participate
in said dividend, distribution, subscription rights or options or shall be
entitled to exchange their Common Stock for securities or other property
deliverable upon such reorganization, reclassification, sale, conveyance,
consolidation, merger, dissolution, liquidation or winding-up, as the case may
be. If the action in question or the record date is subject to the effectiveness
of a registration statement under the Securities Act or to a favorable vote of
shareholders, the notice required by this Section 5 shall so state.
Section 6. No Voting Rights: Limitations of Liability. Prior to
exercise, this Warrant will not entitle the Holder to any voting rights or other
rights as a stockholder of the Company. No provision hereof, in the absence of
affirmative action by the Holder to exercise this Warrant, and no enumeration
herein of the rights or privileges of the Holder, shall give rise to any
liability of the Holder for the purchase price of the Warrant Shares pursuant to
the exercise hereof.
Section 7. Amendment and Waiver.
(a) No failure or delay of the Holder in exercising any power or
right hereunder shall operate as a waiver thereof, nor shall
any single or partial exercise of such right or power, or
any abandonment or discontinuance of steps to enforce such a
right or power, preclude any other or further exercise
thereof or the exercise of any other right or power. The
rights and remedies of the Holder are cumulative and not
exclusive of any rights or remedies which it would otherwise
have. The provisions of this Warrant may be amended,
modified or waived with (and only with) the written consent
of the Company and the Required Holders.
(b) No notice or demand on the Company in any case shall entitle
the Company to any other or further notice or demand in
similar or other circumstances.
- 7 -
<PAGE> 8
Section 8. No Fractional Warrant Shares. The Company shall not be
required to issue stock certificates representing fractions of Warrant Shares,
but shall in respect of any fraction of a Warrant Share make a payment in cash
based on the Value of the Common Stock after giving effect to the full exercise
or conversion of the Warrants.
Section 9. Reservation of Warrant Shares. The Company shall authorize,
reserve and keep available at all times, free from preemptive rights, a
sufficient number of Warrant Shares to satisfy the requirements of this Warrant.
Section 10. Notices. Unless otherwise specified, whenever this Warrant
requires or permits any consent, approval, notice, request, or demand from one
party to another, that communication must be in writing (which may be by
telecopy) to be effective and is deemed to have been given (a) if by telecopy,
when transmitted to the appropriate telecopy number (and all communications sent
by telecopy must be confirmed promptly by telephone; but any requirement in this
parenthetical does not affect the date when the telecopy is deemed to have been
delivered), or (b) if by any other means, including by internationally
acceptable courier or hand delivery, when actually delivered. Until changed by
notice pursuant to this Warrant, the address (and telecopy number) for the
Holder and the Company are:
If to Holder: Joint Energy Development Investments Limited
Partnership
c/o Enron Corp.
1400 Smith Street
Houston, Texas 77002
Attn: Donna Lowry - Director, 28th Floor
Facsimile: (713) 646-3602
If to Company: Queen Sand Resources, Inc.
3500 Oak Lawn, Suite 380, L.B.#31
Dallas, Texas 75219-4398
Attn: Robert P. Lindsay
Facsimile: (214) 521-9960
With copies to: Queen Sand Resources, Inc.
30 Metcalfe Street
Suite 620
Ottawa, Ontario, Canada K1P 5L4
Attn: Edward J. Munden
Facsimile: (613) 230-6055
- 8 -
<PAGE> 9
Haynes and Boone, LLP
901 Main Street, Suite 3100
Dallas, Texas 75202
Attn: William L. Boeing, Esq.
Facsimile: (214) 651-5940
Section 11. Section and Other Headings. The headings contained in this
Warrant are for reference purposes only and will not affect in any way the
meaning or interpretation of this Warrant.
Section 12. Governing Law. THIS WARRANT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE.
Section 13. Binding Effect. The terms and provisions of this Warrant
shall inure to the benefit of the Holder and its successors and assigns and
shall be binding upon the Company and its successors and assigns, including,
without limitation, any Person succeeding to the Company by merger,
consolidation or acquisition of all or substantially all of the Company's
assets.
* * * * *
- 9 -
<PAGE> 10
IN WITNESS WHEREOF, the seal of the Company and the signature of its
duly authorized officer have been affixed hereto as of July 22, 1998.
QUEEN SAND RESOURCES, INC.
Attest: /s/ V. ED BUTLER By: /s/ ROBERT P. LINDSAY
------------------------- ---------------------------------
V. Ed Butler Name: Robert P. Lindsay
Assistant Secretary Title: Chief Operating Officer and
Executive Vice President
<PAGE> 11
EXHIBIT A
TO
WARRANT
PURCHASE FORM
To Be Executed by the Holder
Desiring to Exercise a Warrant of
Queen Sand Resources, Inc.
The undersigned holder hereby exercises the right to purchase ______
shares of Common Stock covered by the within Warrant, according to the
conditions thereof, and herewith makes payment in full of the Exercise Price of
such shares, in the amount of $__________.
Name of Holder:
-------------------------------------------
Signature:
---------------------------------
Title:
-------------------------------------
Address:
-----------------------------------
-------------------------------------------
-------------------------------------------
Dated: ____________, _____
<PAGE> 12
EXHIBIT B
TO
WARRANT
ASSIGNMENT FORM
To Be Executed by the Holder
Desiring to Transfer a Warrant of
Queen Sand Resources, Inc.
FOR VALUE RECEIVED, the undersigned holder hereby sells, assigns and
transfers unto ________________________________________________________ the
right to purchase ______ shares of Common Stock covered by the within Warrant,
and does hereby irrevocably constitute and appoint _________________ Attorney to
transfer the said Warrant on the books of the Company (as defined in such
Warrant), with full power of substitution.
Name of Holder:
-------------------------------------------
Signature:
---------------------------------
Title:
-------------------------------------
Address:
-----------------------------------
-------------------------------------------
-------------------------------------------
Dated: _____________, ____
In the presence of
- ------------------------------------
NOTICE:
The signature to the foregoing Assignment Form must correspond to the name as
written upon the face of the within Warrant in every detail, without alteration
or enlargement or any change whatsoever.
<PAGE> 1
EXHIBIT 4.7
- --------------------------------------------------------------------------------
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE SHARES OF COMMON STOCK
ISSUABLE UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES OR BLUE SKY LAWS AND
MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR IN RELIANCE ON AN OPINION,
REASONABLY SATISFACTORY TO QUEEN SAND RESOURCES, INC. IN FORM AND SUBSTANCE, OF
COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY, THAT SUCH SALE, PLEDGE OR OTHER
TRANSFER IS BEING MADE IN RELIANCE ON AN EXEMPTION FROM THE ACT AND ANY
APPLICABLE STATE SECURITIES OR BLUE SKY LAWS.
- --------------------------------------------------------------------------------
WARRANT TO PURCHASE
1,697,881 SHARES
QUEEN SAND RESOURCES, INC.
Common Stock Purchase Warrant
Representing Right To Purchase Shares of
Common Stock
of
Queen Sand Resources, Inc.
FOR VALUE RECEIVED, QUEEN SAND RESOURCES, INC., a Delaware corporation
(the "Company"), hereby certifies that Joint Energy Development Investments
Limited Partnership, a Delaware limited partnership (the "Holder"), is entitled,
subject to the provisions of this Warrant, to purchase from the Company, at any
time or from time to time during the Exercise Period (as hereinafter defined), a
total of 1,697,881 shares (as such number of shares may be adjusted pursuant to
the terms hereof, the "Warrant Shares") of Common Stock, par value $.0015 per
share, of the Company, at a price per share equal to the Exercise Price (as
defined below). This Warrant is issued to the Holder (together with such other
warrants as may be issued in exchange, transfer or replacement of this Warrant,
the "Warrants") pursuant to the Securities Purchase Agreement (as defined below)
and entitles the Holder to purchase the Warrant Shares and to exercise the other
rights, powers and privileges hereinafter provided.
<PAGE> 2
Section 1. Definitions. The following terms, as used herein, have the
following respective meanings:
"Common Stock" means the Company's common stock, $0.0015 par value.
"Company" is defined in the introductory paragraph of this Warrant.
"Date of Issuance" means July 8, 1998.
"Exercise Period" means the period of time between the Date of Issuance
and 5:00 p.m. (New York City time) on the Expiration Date.
"Exercise Price" means an amount, per share, equal to $7.000. The
Exercise Price shall be subject to adjustment, as set forth in Section 4.
"Expiration Date" means July 8, 1999.
"Holder" means Joint Energy Development Investments Limited Partnership
and its permitted assignees.
"Person" means any individual, corporation, limited or general
partnership, joint venture, association, joint-stock company, trust, limited
liability company, unincorporated organization or government or any agency or
political subdivision thereof.
"Required Holders" means the Holders of more than 50% of all Warrant
Shares then outstanding (assuming the full exercise of all Warrants).
"Securities Purchase Agreement" means the Securities Purchase
Agreement, dated as of March 27, 1997, between the Company and the Holder, as
such agreement shall be modified, amended and supplemented and in effect from
time to time.
"Value" means, as of any date of determination, with respect to the
Common Stock, $3.50 per share of Common Stock.
"Warrants" is defined in the introductory paragraph of this Warrant.
"Warrant Shares" is defined in the introductory paragraph of this
Warrant.
- 2 -
<PAGE> 3
Section 2. Exercise of Warrant; Cancellations of Warrant. This Warrant
may be exercised in whole or in part, at any time or from time to time, during
the Exercise Period, by presentation and surrender hereof to the Company at its
principal office at the address set forth in Section 10 (or at such other
reasonable address as the Company may after the date hereof notify the Holder in
writing, coming into effect not before 14 days after receipt of such notice by
the Holder), with the Purchase Form annexed hereto as Exhibit A duly executed
and accompanied by either (at the option of the Holder) proper payment in cash
or certified or bank check equal to the Exercise Price for the Warrant Shares
for which this Warrant is being exercised. Upon exercise of this Warrant as
aforesaid, the Company shall as promptly as practicable, and in any event within
20 days thereafter, execute and deliver to the Holder a certificate or
certificates for the total number of Warrant Shares for which this Warrant is
being exercised, in such names and denominations as requested in writing by the
Holder. The Company shall pay any and all documentary stamp or similar issue
taxes payable in respect of the issue of the Warrant Shares. If this Warrant is
exercised in part only, the Company shall, upon surrender of this Warrant,
execute and deliver a new Warrant evidencing the rights of the Holder thereof to
purchase the balance of the Warrant Shares issuable hereunder.
Section 3. Exchange, Transfer, Assignment or Loss of Warrant. This
Warrant is exchangeable, without expense, at the option of the Holder, upon
presentation and surrender hereof to the Company for other Warrants of different
denominations, entitling the Holder to purchase in the aggregate the same number
of Warrant Shares. The Holder of this Warrant shall be entitled, without
obtaining the consent of the Company, to transfer or assign its interest in (and
rights under) this Warrant in whole or in part to any Person or Persons. Upon
surrender of this Warrant to the Company, with the Assignment Form annexed
hereto as Exhibit B duly executed and funds sufficient to pay any transfer tax,
the Company shall, without charge, execute and deliver a new Warrant or Warrants
in the name of the assignee or assignees named in such Assignment Form and, if
the Holder's entire interest is not being assigned, in the name of the Holder,
and this Warrant shall promptly be canceled. This Warrant may be divided or
combined with other Warrants that carry the same rights upon presentation hereof
at the office of the Company, together with a written notice specifying the
names and denominations in which new Warrants are to be issued and signed by the
Holder hereof. Upon receipt by the Company of evidence satisfactory to it of the
loss, theft, destruction or mutilation of this Warrant, and (in the case of
loss, theft or destruction) of reasonably satisfactory indemnification
(including, if required in the reasonable judgment of the Company, a statement
of net worth of such Holder that is at a level reasonably satisfactory to the
Company), and upon surrender and cancellation of this Warrant, if mutilated, the
Company shall execute and deliver a new Warrant of like tenor and date.
- 3 -
<PAGE> 4
Section 4. Antidilution Provisions.
(a) Adjustment of Number of Warrant Shares and Exercise Price.
The number of Warrant Shares purchasable pursuant hereto and
the Exercise Price, each shall be subject to adjustment from
time to time on and after the Date of Issuance as provided
in this Section 4(a). In case the Company shall at any time
after the Date of Issuance (i) pay a dividend of shares of
Common Stock or make a distribution of shares of Common
Stock, (ii) subdivide its outstanding shares of Common Stock
into a larger number of shares of Common Stock, (iii)
combine its outstanding shares of Common Stock into a
smaller number of shares of Common Stock or (iv) issue any
shares of its capital stock or other assets in a
reclassification or reorganization of the Common Stock
(including any such reclassification in connection with a
consolidation or merger in which the Company is the
continuing entity), then (x) the securities purchasable
pursuant hereto shall be adjusted to the number of Warrant
Shares and amount of any other securities, cash or other
property of the Company which the Holder would have owned or
have been entitled to receive after the happening of any of
the events described above, had this Warrant been exercised
immediately prior to the happening of such event or any
record date with respect thereto, and (y) the Exercise Price
shall be adjusted to equal the Exercise Price immediately
prior to the adjustment multiplied by a fraction, (A) the
numerator of which is the number of Warrant Shares for which
this Warrant is exercisable immediately prior to the
adjustment, and (B) the denominator of which is the number
of shares for which this Warrant is exercisable immediately
after such adjustment. The adjustments made pursuant to this
Section 4(a) shall become effective immediately after the
effective date of the event creating such right of
adjustment, retroactive to the record date, if any, for such
event. Any Warrant Shares purchasable as a result of such
adjustment shall not be issued prior to the effective date
of such event.
For the purpose of this Section 4(a) and (b), the term
"shares of Common Stock" means (i) the classes of stock
designated as the Common Stock of the Company as of the date
hereof, or (ii) any other class of stock resulting from
successive changes or reclassifications of such shares consisting
solely of changes in par value, or from par value to no par
value, or from no par value to par value. In the event that at
any time, as a result of an adjustment made pursuant to this
Section 4(a), the Holder shall become entitled to receive any
securities of the Company other than shares of Common Stock,
thereafter the number of such other securities so receivable upon
exercise of this Warrant shall be subject to
- 4 -
<PAGE> 5
adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to the
Warrant Shares contained in this Section 4.
(b) Reorganization, Merger, etc. If any capital reorganization,
reclassification or similar transaction involving the
capital stock of the Company (other than as specified in
Section 4(a)), any consolidation, merger or business
combination of the Company with another corporation or the
sale or conveyance of all or any substantial part of its
assets to another corporation, shall be effected in such a
way that holders of the shares of Common Stock shall be
entitled to receive stock, securities or assets (including,
without limitation, cash) with respect to or in exchange for
shares of the Common Stock, then, prior to and as a
condition of such reorganization, reclassification, similar
transaction, consolidation, merger, business combination,
sale or conveyance, lawful and adequate provision shall be
made whereby the Holder shall thereafter have the right to
purchase and receive upon the basis and upon the terms and
conditions specified in this Warrant and in lieu of the
Warrant Shares immediately theretofore purchasable and
receivable upon the exercise of this Warrant, such shares of
stock, securities or assets as may be issued or payable with
respect to or in exchange for a number of outstanding
Warrant Shares equal to the number of Warrant Shares
immediately theretofore purchasable and receivable upon the
exercise of this Warrant had such reorganization,
reclassification, similar transaction, consolidation,
merger, business combination, sale or conveyance not taken
place. The Company shall not effect any such consolidation,
merger, business combination, sale or conveyance unless
prior to or simultaneously with the consummation thereof the
survivor or successor corporation (if other than the
Company) resulting from such consolidation or merger or the
corporation purchasing such assets shall assume by written
instrument executed and sent to the Holder, the obligation
to deliver to the Holder such shares of stock, securities or
assets as, in accordance with the foregoing provisions, the
Holder may be entitled to receive.
(c) Statement on Warrant Certificates. Irrespective of any
adjustments in the Exercise Price or the number or kind of
Warrant Shares, this Warrant may continue to express the
same price and number and kind of shares as are stated on
the front page hereof.
- 5 -
<PAGE> 6
(d) Exception to Adjustment. Anything herein to the contrary
notwithstanding, the Company shall not be required to make
any adjustment of the number of Warrant Shares issuable
hereunder or to the Exercise Price in the case of the
issuance of the Warrants or the issuance of shares of the
Common Stock (or other securities) upon exercise of the
Warrants.
(e) Treasury Shares. The number of shares of the Common Stock
outstanding at any time shall not include treasury shares or
shares owned or held by or for the account of the Company or
any of its subsidiaries, and the disposition of any such
shares shall be considered an issue or sale of the Common
Stock for the purposes of this Section 4.
(f) Adjustment Notices to Holder. Upon any increase or decrease
in the number of Warrant Shares purchasable upon the
exercise of this Warrant or the Exercise Price the Company
shall, within 30 days thereafter, deliver written notice
thereof to all Holders, which notice shall state the
increased or decreased number of Warrant Shares purchasable
upon the exercise of this Warrant and the adjusted Exercise
Price, setting forth in reasonable detail the method of
calculation and the facts upon which such calculations are
based.
Section 5. Notification by the Company. In case at any time while this
Warrant remains outstanding:
(a) the Company shall declare any dividend or make any
distribution upon its Common Stock or any other class of its
capital stock; or
(b) the Company shall offer for subscription pro rata to the
holders of its Common Stock or any other class of its
capital stock any additional shares of stock of any class or
any other securities convertible into or exchangeable for
shares of stock or any rights or options to subscribe
thereto; or
(c) the Board of Directors of the Company shall authorize any
capital reorganization, reclassification or similar
transaction involving the capital stock of the Company, or a
sale or conveyance of all or a substantial part of the
assets of the Company, or a consolidation, merger or
business combination of the Company with another Person; or
- 6 -
<PAGE> 7
(d) actions or proceedings shall be authorized or commenced for
a voluntary or involuntary dissolution, liquidation or
winding-up of the Company;
then, in any one or more of such cases, the Company shall give written notice to
the Holder, at the earliest time legally practicable (and not less than 20 days
before any record date or other date set for definitive action) of the date on
which (i) the books of the Company shall close or a record shall be taken for
such dividend, distribution or subscription rights or options or (ii) such
reorganization, reclassification, sale, conveyance, consolidation, merger,
dissolution, liquidation or winding-up shall take place or be voted on by
shareholders of the Company, as the case may be. Such notice shall also specify
the date as of which the holders of the Common Stock of record shall participate
in said dividend, distribution, subscription rights or options or shall be
entitled to exchange their Common Stock for securities or other property
deliverable upon such reorganization, reclassification, sale, conveyance,
consolidation, merger, dissolution, liquidation or winding-up, as the case may
be. If the action in question or the record date is subject to the effectiveness
of a registration statement under the Securities Act or to a favorable vote of
shareholders, the notice required by this Section 5 shall so state.
Section 6. No Voting Rights: Limitations of Liability. Prior to
exercise, this Warrant will not entitle the Holder to any voting rights or other
rights as a stockholder of the Company. No provision hereof, in the absence of
affirmative action by the Holder to exercise this Warrant, and no enumeration
herein of the rights or privileges of the Holder, shall give rise to any
liability of the Holder for the purchase price of the Warrant Shares pursuant to
the exercise hereof.
Section 7. Amendment and Waiver.
(a) No failure or delay of the Holder in exercising any power or
right hereunder shall operate as a waiver thereof, nor shall
any single or partial exercise of such right or power, or
any abandonment or discontinuance of steps to enforce such a
right or power, preclude any other or further exercise
thereof or the exercise of any other right or power. The
rights and remedies of the Holder are cumulative and not
exclusive of any rights or remedies which it would otherwise
have. The provisions of this Warrant may be amended,
modified or waived with (and only with) the written consent
of the Company and the Required Holders.
(b) No notice or demand on the Company in any case shall entitle
the Company to any other or further notice or demand in
similar or other circumstances.
- 7 -
<PAGE> 8
Section 8. No Fractional Warrant Shares. The Company shall not be
required to issue stock certificates representing fractions of Warrant Shares,
but shall in respect of any fraction of a Warrant Share make a payment in cash
based on the Value of the Common Stock after giving effect to the full exercise
or conversion of the Warrants.
Section 9. Reservation of Warrant Shares. The Company shall authorize,
reserve and keep available at all times, free from preemptive rights, a
sufficient number of Warrant Shares to satisfy the requirements of this Warrant.
Section 10. Notices. Unless otherwise specified, whenever this Warrant
requires or permits any consent, approval, notice, request, or demand from one
party to another, that communication must be in writing (which may be by
telecopy) to be effective and is deemed to have been given (a) if by telecopy,
when transmitted to the appropriate telecopy number (and all communications sent
by telecopy must be confirmed promptly by telephone; but any requirement in this
parenthetical does not affect the date when the telecopy is deemed to have been
delivered), or (b) if by any other means, including by internationally
acceptable courier or hand delivery, when actually delivered. Until changed by
notice pursuant to this Warrant, the address (and telecopy number) for the
Holder and the Company are:
If to Holder: Joint Energy Development Investments Limited
Partnership
c/o Enron Corp.
1400 Smith Street
Houston, Texas 77002
Attn: Donna Lowry - Director, 28th Floor
Facsimile: (713) 646-3602
If to Company: Queen Sand Resources, Inc.
3500 Oak Lawn, Suite 380, L.B.#31
Dallas, Texas 75219-4398
Attn: Robert P. Lindsay
Facsimile: (214) 521-9960
With copies to: Queen Sand Resources, Inc.
30 Metcalfe Street
Suite 620
Ottawa, Ontario, Canada K1P 5L4
Attn: Edward J. Munden
Facsimile: (613) 230-6055
- 8 -
<PAGE> 9
Haynes and Boone, LLP
901 Main Street, Suite 3100
Dallas, Texas 75202
Attn: William L. Boeing, Esq.
Facsimile: (214) 651-5940
Section 11. Section and Other Headings. The headings contained in this
Warrant are for reference purposes only and will not affect in any way the
meaning or interpretation of this Warrant.
Section 12. Governing Law. THIS WARRANT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE.
Section 13. Binding Effect. The terms and provisions of this Warrant
shall inure to the benefit of the Holder and its successors and assigns and
shall be binding upon the Company and its successors and assigns, including,
without limitation, any Person succeeding to the Company by merger,
consolidation or acquisition of all or substantially all of the Company's
assets.
* * * * *
- 9 -
<PAGE> 10
IN WITNESS WHEREOF, the seal of the Company and the signature of its
duly authorized officer have been affixed hereto as of July 22, 1998.
QUEEN SAND RESOURCES, INC.
Attest: /s/ V. ED BUTLER By: /s/ ROBERT P. LINDSAY
------------------------- ---------------------------------
V. Ed Butler Name: Robert P. Lindsay
Assistant Secretary Title: Chief Operating Officer and
Executive Vice President
<PAGE> 11
EXHIBIT A
TO
WARRANT
PURCHASE FORM
To Be Executed by the Holder
Desiring to Exercise a Warrant of
Queen Sand Resources, Inc.
The undersigned holder hereby exercises the right to purchase ______
shares of Common Stock covered by the within Warrant, according to the
conditions thereof, and herewith makes payment in full of the Exercise Price of
such shares, in the amount of $__________.
Name of Holder:
-------------------------------------------
Signature:
---------------------------------
Title:
-------------------------------------
Address:
-----------------------------------
-------------------------------------------
-------------------------------------------
Dated: ____________, _____
<PAGE> 12
EXHIBIT B
TO
WARRANT
ASSIGNMENT FORM
To Be Executed by the Holder
Desiring to Transfer a Warrant of
Queen Sand Resources, Inc.
FOR VALUE RECEIVED, the undersigned holder hereby sells, assigns and
transfers unto ________________________________________________________ the
right to purchase ______ shares of Common Stock covered by the within Warrant,
and does hereby irrevocably constitute and appoint _________________ Attorney to
transfer the said Warrant on the books of the Company (as defined in such
Warrant), with full power of substitution.
Name of Holder:
-------------------------------------------
Signature:
---------------------------------
Title:
-------------------------------------
Address:
-----------------------------------
-------------------------------------------
-------------------------------------------
Dated: _____________, ____
In the presence of
NOTICE:
The signature to the foregoing Assignment Form must correspond to the name as
written upon the face of the within Warrant in every detail, without alteration
or enlargement or any change whatsoever.
<PAGE> 1
EXHIBIT 4.10
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement ("Agreement") is made and entered
into as of August 1, 1997, by and between Queen Sand Resources, Inc., a
Delaware corporation (the "Company"), and Collins & Ware, Inc., a Texas
corporation ("C&W").
This Agreement is made pursuant to the Purchase and Sales Agreement (the
"Purchase Agreement") dated as of June 20, 1997, between the Company; Queen
Sand Resources, Inc., a Nevada corporation; and C&W. In order to induce C&W to
enter into the Purchase Agreement, the Company has agreed to provide the
registration and other rights set forth in this Agreement. The execution and
delivery of this Agreement is a condition to the Closing (as defined in the
Purchase Agreement) under the Purchase Agreement.
The parties agree as follows:
ARTICLE I
SECTION 1.01. DEFINITIONS. Capitalized terms used and not otherwise
defined herein which are defined in the Purchase Agreement are used herein as
so defined. The terms set forth below are used herein as so defined:
"Holder" means the record holder of any shares of Registrable
Securities.
"Registrable Securities" means 1,000,000 shares of the Company's Common
Stock, par value $.0015 per share, issued to C&W pursuant to the Purchase
Agreement, until such time as such securities cease to be Registrable
Securities pursuant to Section 1.02 hereof.
"Selling Holder" means a holder who is selling Registrable Securities
pursuant to a Registration Statement (as defined herein).
SECTION 1.02. REGISTRABLE SECURITIES. Any Registrable Security will
cease to be a Registrable Security when (i) a Registration Statement covering
such Registrable Security has been declared effective by the Securities and
Exchange Commission (the "Commission") and such Registrable Security has been
issued, sold or disposed of pursuant to such effective Registration Statement
or (ii) such Registrable Security is deposed of pursuant to Rule 144 (or any
similar provision then in force) under the Securities Act, (iii) such
Registrable Security is eligible to be disposed of pursuant to paragraph (k) of
Rule 144 (or any similar provision then in force) under the Securities Act of
the 1933 (the "Securities Act") or (iv) such Registrable Security is held by
the Company or one of its Subsidiaries.
ARTICLE II
SECTION 2.01. PIGGY-BACK REGISTRATION. If the Company proposes to
register any equity securities under the Securities Act for sale to the public
for cash, whether for its own account or for the account of other security
holders or both (except with respect to Registration Statements on Forms S-4 or
S-8 for purposes permissible under such forms as of the date hereof, or any
successor forms for comparable purposes that may be adopted by the Commission)
each such time it will give written notice to all Holders of its intention to
do so no less than 15 Business Days prior to the anticipated
<PAGE> 2
filing date. Upon the written request of any Holder, received by the Company no
later than the 10th Business Day after receipt by such Holder of the notice
sent by the Company, to register, on the terms and conditions as the securities
otherwise being sold pursuant to such registration, any of its Registrable
Securities (which request shall state the intended method of disposition
thereof), the Company will use its best efforts to cause the Registrable
Securities as to which registration shall have been so requested to be included
in the securities to be covered by the Registration Statement proposed to be
filed by the Company, on the same terms and condition as any similar securities
included therein, all to the extent requisite to permit the sale or other
disposition by each Holder (in accordance with its written request) of such
Registrable Securities so registered; provided, however, that the Company may
at any time prior to the effectiveness of any such Registration Statement, in
its sole discretion and with the consent of any Holder, abandon the proposed
offering in which any Holder had requested to participate. The number of
Registrable Securities to be included in such a registration may be reduced or
eliminated if and to the extent, in the case of an underwritten offering, the
managing underwriter shall render to the Company its opinion that such
inclusion would materially jeopardize the successful marketing of the
securities (including the Registrable Securities) proposed to be sold therein;
provided, however, that such number of shares of Registrable Securities shall
not be reduced (i) if any securities included in such registration are included
other than for the account of (x) the Company or (y) persons exercising
registration rights granted pursuant to the agreements listed on Schedule I
hereto (as in effect on the date hereof) (the "Schedule I Agreements"), (ii)
unless the shares included in the registration pursuant to the Schedule I
Agreements are also reduced on a pro rata basis, and (iii) and subject in all
events to the prior right of holders (the "JEDI Holders") of registrable shares
of Common Stock under that certain Registration Rights Agreement (the "JEDI
Rights Agreement"), dated as of May 6, 1997, between the Company and Joint
Energy Development Investments Limited Partnership to include any or all of the
JEDI Holder's Registrable Shares (as defined in the JEDI Rights Agreement")
before Holder includes any or all of its Registrable Securities in any
registration relating to an underwritten public offering with respect to which,
in the opinion of the managing underwriter, the inclusion in the offering of
all shares requested to be registered by all persons holding registration
rights would materially jeopardize the successful marketing of the securities
(including the JEDI Holder's Registrable Shares) to be sold. In the event that
the number of Registrable Securities to be included in a registration is to be
reduced as provided above, within 10 Business Days after receipt by each Holder
proposing to sell Registrable Securities pursuant to the registered offering of
the opinion of such managing underwriter, all such Selling Holders may allocate
among themselves the number of shares of such Registrable Securities which such
opinion states may be distributed without adversely affecting the distribution
of the securities covered by the Registration Statement, and if such Holders
are unable to agree among themselves with respect to such allocation, such
allocation shall be made in proportion to the respective number of shares
specified in their respective written requests. Notwithstanding anything to
the contrary contained in this Section 2.01, in the event that there is a firm
underwriting commitment offer of securities of the Company pursuant to a
Registration Statement covering Registrable Securities and a Person does not
elect to sell its Registrable Securities to the underwriters of the Company's
securities in connection with such offering, such Person shall not offer for
sale, sell, grant any option for the sale of, or otherwise dispose of, directly
or indirectly, any shares of Common Stock, or any securities convertible into
or exchangeable into or exercisable for any shares of Common Stock during the
period of distribution of the Company's securities by such underwriters, which
shall be specified in writing by the underwriters, shall not exceed any period
during which management of the Company and others are similarly prohibited from
disposing of shares of Common Stock and shall not exceed 180 days following the
effectiveness under the Securities Act of the Registration Statement relating
thereto.
2
<PAGE> 3
SECTION 2.02. REGISTRATION PROCEDURES. If and whenever the Company is
required pursuant to this Agreement to effect the registration of any of the
Registrable Securities under the Securities Act, the Company will, as
expeditiously as possible:
(a) prepare and file as promptly as possible with the
Commission a Registration Statement, on a form available to the
Company, with respect to such securities (which filing shall be made
within 45 days after the receipt by the Company of a Request Notice) and
use its best efforts to cause such Registration Statement to become and
remain effective for the period of distribution contemplated thereby
(determined pursuant to subparagraph (g) below);
(b) prepare and file with the Commission such amendments and
supplements to such Registration Statement and the prospectus used in
connection therewith as may be necessary to keep such Registration
Statement effective for the period specified in subsection (g) below and
as may be necessary to comply with the provisions of the Securities Act
with respect to the disposition of all securities covered by such
Registration Statement in accordance with the sellers' intended method
of disposition set forth in such Registration Statement for such period;
(c) furnish to each Selling Holder and to each underwriter
such number of copies of the Registration Statement and the prospectus
included therein (including each preliminary prospectus and each
document incorporated by reference therein to the extent then required
by the rules and regulations of the Commission) as such Persons may
reasonably request in order to facilitate the public sale or other
disposition of the Registrable Securities covered by such Registration
Statement;
(d) use its best efforts to register or qualify the
Registrable Securities covered by such Registration Statement under the
securities or blue sky laws of such jurisdictions as the Selling Holders
or, in the case of an underwritten public offering, the managing
underwriter, shall reasonably request, provided, however, that the
Company will not be required to subject itself to taxation in any such
jurisdiction or to consent to general service of process in any such
jurisdiction;
(e) immediately notify each Selling Holder and each
underwriter, at any time when a prospectus relating thereto is required
to be delivered under the Securities Act, of the happening of any event
as a result of which the prospectus contained in such Registration
Statement, as then in effect, includes an untrue statement of a material
fact or omits to state any material fact required to be stated therein
or necessary to make the statements therein not misleading in the light
of the circumstances then existing and as promptly as practicable amend
the Registration Statement or supplement the prospectus or take other
appropriate action so that the prospectus does not include an untrue
statement of a material fact or omit to state a material fact required
to be stated herein or necessary to make the statements therein not
misleading in the light of the circumstances then existing; provided,
however, that, in the case of a shelf registration, the Company may
delay taking such action for a period of 60 days, during which time the
Selling Holders shall not sell any Registrable Securities, if the Board
of Directors determines in its reasonable judgment and in good faith
that the making of any required disclosure in connection therewith would
have a material adverse effect on the Company or substantially interfere
with a significant transaction in which the Company is then engaged;
provided, that, the Company covenants to provide any Selling Holder, an
unblocked selling period of at least 45 days under any such shelf
registration
3
<PAGE> 4
(f) in the case of an underwritten public offering, furnish,
(i) on the date that Registrable Securities are delivered to the
underwriters for sale pursuant to such Registration Statement, an
opinion of counsel for the Company dated as of such date and addressed
to the underwriters and to the Selling Holder, stating that such
Registration Statement has become effective under the Securities Act and
that (A) to the best knowledge of such counsel, no stop order suspending
the effectiveness thereof has been issued and no proceedings for that
purpose have been instituted or are pending or contemplated under the
Securities Act, (B) the Registration Statement, the related prospectus,
and each amendment or supplement thereof, comply as to form in all
material respects with the requirements of the Securities Act and the
applicable rules and regulations thereunder of the Commission (except
that such counsel need express no opinion as to the financial statements
or any engineering report contained or incorporated therein) and (C) to
such other effects as may reasonable be requested by counsel for the
underwriters, and (ii) on the effective date of the Registration
Statement and on the date that Registrable Securities are delivered to
the underwriters for sale pursuant to such Registration Statement, a
letter dated such dates from the independent accountants retained by the
Company, addressed to the underwriters and to the Selling Holders,
stating that they are independent public accountants within the meaning
of the Securities Act and that, in the opinion of such accountants, the
financial statements of the Company and the schedules thereto that are
included or incorporated by reference in the Registration Statement or
the prospectus, or any amendment or supplement thereof, comply as to
form in all material respects with the applicable requirements of the
Securities Act and the published rules and regulations thereunder, and
such letter shall additionally address such other financial matters
(including information as to the period ending no more than five
Business Days prior to the date of such letter) including in the
Registration Statement in respect of which such letter is being given as
the underwriters may reasonably request;
(g) make available for inspection by one representative of the
Selling Holders designated by a majority thereof, any underwriter
participating in any distribution pursuant to such Registration
Statement, and any attorney, accountant or other agent retained by such
representative of the Selling Holders or underwriter (the "Inspectors"),
all financial and other records, pertinent corporate documents and
properties of the Company, and cause the Company's officers, directors
and employees to supply all information reasonably requested by any such
Inspector in connection with such Registration Statement. For purposes
of subsections (a) and (b) above, the period of distribution of
Registrable Securities in a firm commitment underwritten public offering
shall be deemed to extend until each underwriter has completed the
distribution of all securities purchased by it, and the period of
distribution of Registrable Securities in any other registration shall
be deemed to extend until the earlier of the sale of all Registrable
Securities covered thereby or 180 days.
(h) use its best efforts to keep effective and maintain for
the period specified in subparagraph (g) a registration, qualification,
approval or listing obtained to cover the Registrable Securities as may
be necessary for the Selling Holders to dispose thereof and shall from
time to time amend or supplement any prospectus used in connection
therewith to the extent necessary in order to comply with applicable
law;
(i) use its best efforts to cause the Registrable Securities
to be registered with or approved by such other governmental agencies or
authorities as may be necessary by virtue of the business and operations
of the Company to enable the Selling Holders to consummate the
disposition of such Registrable Securities; and
4
<PAGE> 5
(j) enter into customary agreements (including, if requested,
an underwriting agreement in customary form) and take such other actions
as are reasonable requested by the Selling Holders or the underwriters,
if any, in order to expedite or facilitate the disposition of such
Registrable Securities.
In connection with each registration hereunder, each Selling Holder will
furnish promptly to the Company in writing such information with respect to
itself and the proposed distribution by it as shall be reasonably necessary in
order to ensure compliance with federal and applicable state securities laws.
In connection with each registration hereunder with respect to an
underwritten public offering, the Company and each Selling Holder agrees to
enter into a written agreement with the managing underwriter or underwriters
and containing such provisions as are customary in the securities business for
such an arrangement between underwriters and companies of the Company's size
and investment stature, provided that such agreement shall not contain any such
provision applicable to the Company or the Selling Holders that is inconsistent
with the provisions hereof.
If the Registrable Securities are to be sold pursuant to Rule 415
promulgated under the Securities Act, Holder represents and warrants to, and
agrees with, the Company that:
(a) Selling Holder will furnish each broker through whom
Selling Holder offers the Registrable Securities such number of copies
of the Prospectus and any supplements thereto or amendments thereof
which such broker may require; will inform such broker as to the number
of Registrable Securities offered through such broker; that such
Registrable Securities are part of a distribution and that such broker
is subject to the provisions of Regulation M under the Securities
Exchange Act of 1934 until such time as such broker has completed the
sale of all such Registrable Securities; and will notify such broker
when distribution of the Registrable Securities by Selling Holder
pursuant to the Registration Statement has been completed or the
Registration Statement is no longer effective or is withdrawn;
(b) Selling Holder will, promptly after the end of each week
in which any disposition of the Registrable Securities by Selling Holder
has occurred and upon completion of the distribution of the Registrable
Securities pursuant to the Registration Statement, report to the Company
such dispositions made during such week or upon such completion, as the
case may be;
(c) At least five (5) business days prior to any disposition
of the Registrable Securities, Selling Holder shall advise the Company
of the dates on which such disposition is expected to commence and
terminate, the number of Registrable Securities expected to be sold, the
method of disposition and such other information as the Company may
reasonably request in order to supplement the Prospectus in accordance
with the rules and regulations of the SEC.
SECTION 2.03. EXPENSES.
(a) All expenses incident to the Company's performance under
or compliance with this Agreement, including without limitation, all
registration and filing and independent public accountants for the
Company, fees of the National Association of Securities Dealers, Inc.,
5
<PAGE> 6
transfer taxes, fees of transfer agents and registrars and costs of
insurance, but excluding any Selling Expenses (as defined below), are
herein called "Registration Expenses." All underwriting fees, discounts
and selling commissions allocable to the sale of the Registrable
Securities are herein called "Selling Expenses."
(b) The Company will pay all Registration Expenses in
connection with each Registration Statement filed pursuant to this
Agreement, whether or not the Registration Statement becomes effective,
and the Selling Holders shall pay Selling Expenses and any incidental
expenses incurred by the Selling Holders (including, without limitation,
legal fees of their counsel, if any) in connection with any Registrable
Securities registered pursuant to this Agreement.
SECTION 2.04. INDEMNIFICATION.
(a) In the event of a registration of any Registrable
Securities under the Securities Act pursuant to this Agreement, the
Company will indemnify and hold harmless each Selling Holder thereunder
and each underwriter of Registrable Securities thereunder and each
Person, if any, who controls such Selling Holder or underwriter within
the meaning of the Securities Act and the Securities Exchange Act of
1934 (the "Exchange Act"), against any losses, claims, damages or
liabilities (including reasonable attorneys' fees) ("Losses"), joint or
several, to which such Selling Holder or underwriter or controlling
Person may become subject under the Securities Act, the Exchange Act or
otherwise, insofar as such Losses (or actions in respect thereof), arise
out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in any Registration Statement
under which such Registrable Securities were registered under the
Securities Act pursuant to this Agreement, any preliminary prospectus or
final prospectus contained herein, or any amendment or supplement
thereof, or arise out of or are based upon 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, and will
reimburse each such Selling Holder, each such underwriter and each such
controlling Person for any legal or other expenses reasonably incurred
by them in connection with investigating or defending any such Loss or
actions; provided, however, that the Company will not be liable in any
such case if and to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged
untrue statement or omission or alleged omission so made in conformity
with information furnished by such Selling Holder, such underwriter or
such controlling Person in writing specifically for use in such
Registration Statement or prospectus.
(b) Each Selling Holder agrees to indemnify and hold harmless
the Company, its directors, officers, employees and agents and each
Person, if any, who controls the Company within the meaning of the
Securities Act or of the Exchange Act to the same extent as the
foregoing indemnity from the Company to such Selling Holder, but only
with respect to information regarding such Selling Holder furnished in
writing by or on behalf of such Selling Holder expressly for inclusion
in any Registration Statement or prospectus relating to the Registrable
Securities, or any amendment or supplement thereto; provided, however,
that the liability of such Selling Holder shall not be greater in amount
than the dollar amount of the proceeds (net of any Selling Expenses)
received by such Selling Holder from the sale of the Registrable
Securities giving rise to such indemnification.
6
<PAGE> 7
(c) Promptly after receipt by an indemnified party hereunder
of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the
indemnifying party hereunder, notify the indemnifying party in writing
thereof, but the omission so to notify the indemnifying party shall not
relieve it from any liability which it may have to any indemnified party
other than under this Section 2.04. In case any such action shall be
brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party
shall be entitled to participate in and, to the extent it shall wish, to
assume and undertake the defense thereof with counsel reasonably
satisfactory to such indemnified party and, after notice from the
indemnifying party to indemnified party of its election so to assume and
undertake the defense thereof, the indemnifying party shall not be
liable to such indemnified party in connection with the defense thereof
other than reasonable costs of investigation and of liaison with counsel
so selected; provided, however, that (i) if the indemnifying party has
failed to assume the defense and employ counsel or (ii) if the
defendants in any such action include both the indemnified party and the
indemnifying party and counsel to the indemnified party shall have
concluded that there may be reasonable defenses available to the
indemnified party that are different from or additional to those
available to the indemnifying party or if the interests of the
indemnified party reasonably may be deemed to conflict with the
interests of the indemnifying party, then the indemnifying party shall
have the right to select a separate counsel and to assume such legal
defense and otherwise to participate in the defense of such action, with
the expenses and fees of such separate counsel and other expenses
related to such participation to be reimbursed by the indemnifying party
as incurred, provided that such fees and expenses shall be reimbursed
for only one counsel for all indemnified parties.
(d) If the indemnification provided for in this Section 2.04
is unavailable to the Company or the Selling Holders or it is
insufficient to hold them harmless in respect of any losses, claims,
damages, liabilities or expenses referred to herein, then each such
indemnifying party, in lieu of indemnifying such indemnified party,
shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages, liabilities and expenses as
between the Company on the one hand and each Selling Holder on the
other, in such proportion as is appropriate to reflect the relative
fault of the Company on the one hand and of such Selling Shareholder on
the other in connection with the statements or omissions which resulted
in such losses, claims, damages or liabilities, as well as any other
relevant equitable considerations. The relative fault of the Company
one the one hand and each Selling Holder on the other shall be
determined by reference to, among other things, whether the untrue or
alleged untrue statements of a material fact or the omission or alleged
omission to state a material fact has been made by, or relates to,
information supplied by such party, and the parties' relative knowledge,
access to information and opportunity to correct or prevent such
statement or omission.
No person guilty of a fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any Person who is not guilty of such fraudulent misrepresentation.
SECTION 2.05. TRADING RESTRICTION.
(a) In addition to the restriction on resale imposed by the
requirements of the Securities Act and applicable state securities or
blue sky laws, the Holder also covenants hereby that it shall not resell
any shares of Common Stock unless:
7
<PAGE> 8
(w) such sales are in blocks of the lesser of at least
25,000 shares in share amount or at least $100,000 in sales
amount; or
(x) any such sale not meeting the criteria set forth in
the preceding clause (w) may not exceed, together with all other
sales [including any block sales which have occurred pursuant to
the preceding clause (w)] of Registrable Securities for the
account of such Holder within the preceding ninety days, an
amount equal to the average weekly reported volume of trading in
the Common Stock on all national securities exchanges and/or
reported through NASDAQ during the eight calendar weeks preceding
the intended date of sale; or
(y) such amount as agreed upon by the Company.
(b) Prior to disposing of any shares of Common Stock pursuant
to Rule 144 (or any successor rule) promulgated under the Securities
Act, the Holder agrees to give the Company ten days' prior notice of any
proposed disposition and to act in good faith in evaluating any
proposals made by the Company concerning the number of shares to be
disposed of by the Holder, as well as any alternate arrangements which
the Company may suggest to provide liquidity to the Holder with respect
to such shares of Common Stock.
(c) Notwithstanding the limitations imposed by this Section
2.05, if the Company, subsequent to the date of this agreement, issues
greater than 200,000 shares of its restricted common stock (other than
pursuant to Regulation S promulgated under the Securities Act of 1933 as
amended) to a third party in a transaction where less restrictive
trading restrictions are imposed on such third party than those set
forth in this Section 2.05, the Company shall provide notice to the
Holder, and the Holder shall thereafter be entitled to rely upon such
lesser restrictions.
ARTICLE III
SECTION 3.01. COMMUNICATIONS. All notices and other communications
provided for or permitted hereunder shall be made in writing by telecopy,
courier service or personal delivery:
(a) if to a Holder of Registrable Securities, at the most
current address given by such Holder of the Company in accordance with
the provisions of this Section 3.01, which address initially is, with
respect to the Purchaser, the address set forth in the Purchase
Agreement; and
(b) if to the Company, initially at its address set forth in
the Purchase Agreement and thereafter at such other address, notice of
which is given in accordance with the provisions of this Section 3.01.
All such notices and communication shall be deemed to have been received
at the time delivered by hand, if personally delivered; when receipt
acknowledged, if telecopied; and on the next Business Day if timely delivered
to an air courier guaranteeing overnight delivery.
SECTION 3.02. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the
benefit of and be binding upon the successors and assigns of each of the
parties, including without limitation and without the need for an express
assignment, subsequent holders of Registrable Securities.
8
<PAGE> 9
SECTION 3.03. COUNTERPARTS. This Agreement may be executed in any
number of counterparts and by different parties hereto in separate
counterparts, each of which counterparts, when so executed and delivered, shall
be deemed to be an original and all of which counterparts, taken together,
shall constitute but one and the same Agreement.
SECTION 3.04. HEADINGS. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
SECTION 3.05. GOVERNING LAW. The laws of the State of Texas shall
govern this Agreement without regard to principles of conflict of laws.
SECTION 3.06. SEVERABILITY OF PROVISIONS. Any provision of this
Agreement which is prohibited or unenforceable in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition or un-
enforceability without invalidating the remaining provisions hereof or
affecting or impairing the validity or enforceability of such provision in any
other jurisdiction.
SECTION 3.07. ENTIRE AGREEMENT. This Agreement, together with the
Purchase Agreement is intended by the parties as a final expression of their
agreement and intended to be a compromise and exclusive statement of the
agreement and understanding of the parties hereto in respect of the subject
matter contained herein. There are no restrictions, promises, warranties or
undertakings, other than those set forth or referred to herein with respect to
the registration rights granted by the Company with respect to the securities
sold pursuant to the Purchase Agreement. This Agreement and the Purchase
Agreement supersede all prior agreements and understandings between the parties
with respect to such subject matter.
SECTION 3.08. ATTORNEYS' FEES. In any action or proceeding brought to
enforce any provision of this Agreement, the successful party shall be entitled
to recover reasonable attorneys' fees in addition to its costs and expenses and
any other available remedy.
SECTION 3.09. AMENDMENT. This Agreement may be amended only by means of
a written amendment signed by the Company and by the Holders of a majority of
the Registrable Securities.
SECTION 3.10. REGISTRABLE SECURITIES HELD BY THE COMPANY OR IT
AFFILIATES. In determining whether the Holders of the required amount of
Registrable Securities have concurred in any direction, amendment, supplement,
waiver or consent, Registrable Securities owned by the Company or one of its
Affiliates shall be disregarded.
SECTION 3.11. ASSIGNMENT OF RIGHTS.
(a) The rights of any Holder under this Agreement may be
assigned to any Person who acquires the Registrable Securities issuable
on conversion or exercise thereof. Any assignment of registration
rights pursuant to this Section 3.11(a) shall be effective only upon
receipt by the Company of written notice from such assigning Holder
stating the name and address of any assignee.
(b) The rights of an assignee under Section 3.11(a) shall be
the same rights granted to the assigning Holder under this Agreement.
In connection with any such assignment, the term "Holder" as used herein
shall, where appropriate to assign the rights and obligations of the
assigning Holder hereunder to such assignee, be deemed to refer to the
assignee.
9
<PAGE> 10
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
QUEEN SAND RESOURCES, INC.
By: /s/ ROBERT P. LINDSAY
---------------------------------------------
Robert P. Lindsay, Vice President
COLLINS & WARE, INC.
By: /s/ W. BRETT SMITH
---------------------------------------------
W. Brett Smith, Vice President, Operations
10
<PAGE> 1
EXHIBIT 4.11
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement ("Agreement") is made and entered
into as of March 9, l998, by and between Queen Sand Resources, Inc., a Delaware
corporation (the "Company"), and Riata Energy, Inc., a Texas corporation, Four
Sevens Oil Co., Ltd., a Texas limited partnership, Sidney M. Reilly, Peggy Lynn
Mcleland, Dan H. Mcleland, Robert W. Dica, Jr., Trustees of The Grady Family
Trust, under Trust Agreement dated June 18, 1992, Peggy Lynn Mcleland, Trustee
of The Peggy McLeland Trust, under Trust Agreement dated December 24, 1992,
Sidney M. Reilly, Trustee of The Sidney Reilly Trust, under Trust Agreement
dated December 24, 1992, Nasgas LLC, a Texas limited liability company, Hunter
Enis, Dick Lowe, and Dan Poland (the "Sellers").
This Agreement is made pursuant to the Purchase and Sales Agreement
(the "Purchase Agreement") dated as of March 9, 1998, between the Company;
Queen Sand Resources, Inc., a Nevada corporation; and the Sellers. In order to
induce the Sellers to enter into the Purchase Agreement, the Company has agreed
to provide the registration and other rights set forth in this Agreement. The
execution and delivery of this Agreement is a condition to the Closing (as
defined in the Purchase Agreement) under the Purchase Agreement.
The parties agree as follows:
ARTICLE I
1.01. DEFINITIONS. Capitalized terms used and not otherwise defined
herein which are defined in the Purchase Agreement are used herein as so
defined. The terms set forth below are used herein as so defined:
"Holder" means the record holder of any shares of Registrable
Securities.
"Registrable Securities" means 337,500 shares of the Company's
Common Stock, par value $.0015 per share, issued to Hunter Enis, Dick
Lowe, Dan Poland, The Peggy McLeland Trust, The Sidney M. Reilly
Trust, The Grady Family Trust, and Riata Energy, Inc., pursuant to the
Purchase Agreement, until such time as such securities cease to be
Registrable Securities pursuant to Section 1.02 hereof.
"Selling Holder" means a holder who is selling Registrable
Securities pursuant to a Registration Statement (as defined herein).
"Permitted Transferee" as used in Section 2.05 hereof shall
with respect to each Shareholder mean (i) the beneficiaries under such
Shareholder's will or persons to whom the Registrable Securities are
distributable under the laws of descent and distribution, (ii) a trust
for the sole benefit of the Shareholder's spouse, children or
grandchildren, (iii) any other Shareholder, or (iv) a partnership or
other entity established by one or more shareholders for the sole
benefit of the immediate members of the family of one or more
Shareholders.
<PAGE> 2
1.02. REGISTRABLE SECURITIES. Any Registrable Security will cease
to be a Registrable Security when (i) a Registration Statement covering such
Registrable Security has been declared effective by the Securities and Exchange
Commission (the "Commission") and such Registrable Security has been issued,
sold or disposed of pursuant to such effective Registration Statement or (ii)
such Registrable Security is deposed of pursuant to Rule 144 (or any similar
provision then in force) under the Securities Act, (iii) such Registrable
Security is eligible to be disposed of pursuant to paragraph (k) of Rule 144
(or any similar provision then in force) under the Securities Act of the 1933
(the "Securities Act") or (iv) such Registrable Security is held by the Company
or one of its Subsidiaries.
ARTICLE II
2.01. PIGGY-BACK REGISTRATION. The rights granted to Holders under
this Article II shall not be effective until six months from the date of
closing. Beginning on September 9, 1998, if the Company proposes to register
any equity securities under the Securities Act for sale to the public for cash,
whether for its own account or for the account of other security holders or
both (except with respect to Registration Statements on Forms S-4 or S-8 for
purposes permissible under such forms as of the date hereof, or any successor
forms for comparable purposes that may be adopted by the Commission) each such
time it will give written notice to all Holders of its intention to do so no
less than 15 Business Days prior to the anticipated filing date. Upon the
written request of any Holder, received by the Company no later than the 10th
Business Day after receipt by such Holder of the notice sent by the Company, to
register, on the terms and conditions as the securities otherwise being sold
pursuant to such registration, any of its Registrable Securities (which request
shall state the intended method of disposition thereof), the Company will use
its best efforts to cause the Registrable Securities as to which registration
shall have been so requested to be included in the securities to be covered by
the Registration Statement proposed to be filed by the Company, on the same
terms and condition as any similar securities included therein, all to the
extent requisite to permit the sale or other disposition by each Holder (in
accordance with its written request) of such Registrable Securities so
registered; provided, however, that the Company may at any time prior to the
effectiveness of any such Registration Statement, in its sole discretion and
with the consent of any Holder, abandon the proposed offering in which any
Holder had requested to participate. The number of Registrable Securities to
be included in such a registration may be reduced or eliminated if and to the
extent, in the case of an underwritten offering, the managing underwriter shall
render to the Company its opinion that such inclusion would materially
jeopardize the successful marketing of the securities (including the
Registrable Securities) proposed to be sold therein. The rights granted herein
shall be subject in all events to any priority rights (if any) of holders
("Prior Holders") under and pursuant to the following agreements and documents:
(a) That certain Registration Rights Agreement dated as
of May 6, 1997, between the Company and Joint Energy Development
Investments Limited Partnership;
(b) Purchase and Sale Agreement dated June 20, 1997, by
and between Collins & Ware, Inc., as Seller, and Queen Sand Resources,
Inc., as Purchaser;
(c) Registration Rights Agreement dated December 22,
1997, by and between Queen Sand Resources, Inc., and certain
institutional investors;
REGISTRATION RIGHTS AGREEMENT PAGE 2
<PAGE> 3
(d) Registration Rights Agreement dated December 29,
1997, by and between Queen Sand Resources, Inc., and Enron Capitol &
Trade Resources, Inc., as Agent;
to include any or all of the Prior Holder's registrable shares (as defined in
said documents) before Holder includes any or all of its Registrable Securities
in any registration relating to an underwritten public offering with respect to
which, in the opinion of the managing underwriter, the inclusion in the
offering of all shares requested to be registered by all persons holding
registration rights would materially jeopardize the successful marketing of the
securities (including the prior holders) to be sold. In the event that the
number of Registrable Securities to be included in a registration is to be
reduced as provided above, priority shall be given to the Prior Holders, to the
extent of the rights of the Prior Holders grants such priority. Further, the
Company may hereafter grant registration rights to third party holders of
registrable securities. In the event holders of registrable securities propose
to sell registrable securities pursuant to the registered offering, and in the
managing underwriter's opinion the inclusion of all shares requested would
materially jeopardize the successful marketing of the securities, then, within
10 Business Days after receipt by each such holder of the opinion of such
managing underwriter, all such selling holders may allocate among themselves
after taking into account the priority rights of any holders the number of
shares of such registrable securities which such opinion states may be
distributed without adversely affecting the distribution of the securities
covered by the Registration Statement. If such holders are unable to agree
among themselves with respect to such allocation, such allocation shall be made
in proportion to the respective number of shares specified in their respective
written requests. Notwithstanding anything to the contrary contained in this
Section 2.01, in the event that there is a firm underwriting commitment offer
of securities of the Company pursuant to a Registration Statement covering
Registrable Securities and a Person does not elect to sell its Registrable
Securities to the underwriters of the Company's securities in connection with
such offering, such Person shall not offer for sale, sell, grant any option for
the sale of, or otherwise dispose of, directly or indirectly, any shares of
Common Stock, or any securities convertible into or exchangeable into or
exercisable for any shares of Common Stock during the period of distribution of
the Company's securities by such underwriters, which shall be specified in
writing by the underwriters, shall not exceed any period during which
management of the Company and others are similarly prohibited from disposing of
shares of Common Stock and shall not exceed 180 days following the
effectiveness under the Securities Act of the Registration Statement relating
thereto.
2.02. REGISTRATION PROCEDURES. If and whenever the Company is
required pursuant to this Agreement to effect the registration of any of the
Registrable Securities under the Securities Act, the Company will, as
expeditiously as possible:
(a) prepare and file as promptly as possible with the
Commission a Registration Statement, on a form available to the
Company, with respect to such securities (which filing shall be made
within 45 days after the receipt by the Company of a Request Notice)
and use its best efforts to cause such Registration Statement to
become and remain effective for the period of distribution
contemplated thereby (determined pursuant to subparagraph (g) below);
(b) prepare and file with the Commission such amendments
and supplements to such Registration Statement and the prospectus used
in connection therewith as may be
REGISTRATION RIGHTS AGREEMENT PAGE 3
<PAGE> 4
necessary to keep such Registration Statement effective for the period
specified in subsection (g) below and as may be necessary to comply
with the provisions of the Securities Act with respect to the
disposition of all securities covered by such Registration Statement
in accordance with the sellers' intended method of disposition set
forth in such Registration Statement for such period;
(c) furnish to each Selling Holder and to each
underwriter such number of copies of the Registration Statement and
the prospectus included therein (including each preliminary prospectus
and each document incorporated by reference therein to the extent then
required by the rules and regulations of the Commission) as such
Persons may reasonably request in order to facilitate the public sale
or other disposition of the Registrable Securities covered by such
Registration Statement;
(d) use its best efforts to register or qualify the
Registrable Securities covered by such Registration Statement under
the securities or blue sky laws of such jurisdictions as the Selling
Holders or, in the case of an underwritten public offering, the
managing underwriter, shall reasonably request, provided, however,
that the Company will not be required to subject itself to taxation in
any such jurisdiction or to consent to general service of process in
any such jurisdiction;
(e) immediately notify each Selling Holder and each
underwriter, at any time when a prospectus relating thereto is
required to be delivered under the Securities Act, of the happening of
any event as a result of which the prospectus contained in such
Registration Statement, as then in effect, includes an untrue
statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing
and as promptly as practicable amend the Registration Statement or
supplement the prospectus or take other appropriate action so that the
prospectus does not include an untrue statement of a material fact or
omit to state a material fact required to be stated herein or
necessary to make the statements therein not misleading in the light
of the circumstances then existing; provided, however, that, in the
case of a shelf registration, the Company may delay taking such action
for a period of 60 days, during which time the Selling Holders shall
not sell any Registrable Securities, if the Board of Directors
determines in its reasonable judgment and in good faith that the
making of any required disclosure in connection therewith would have a
material adverse effect on the Company or substantially interfere with
a significant transaction in which the Company is then engaged;
provided, that, the Company covenants to provide any Selling Holder,
an unblocked selling period of at least 45 days under any such shelf
registration;
(f) in the case of an underwritten public offering,
furnish, (i) on the date that Registrable Securities are delivered to
the underwriters for sale pursuant to such Registration Statement, an
opinion of counsel for the Company dated as of such date and addressed
to the underwriters and to the Selling Holder, stating that such
Registration Statement has become effective under the Securities Act
and that (A) to the best knowledge of such counsel, no stop order
suspending the effectiveness thereof has been issued and no
proceedings for that purpose have been instituted or are pending or
contemplated under the Securities Act,
REGISTRATION RIGHTS AGREEMENT PAGE 4
<PAGE> 5
(B) the Registration Statement, the related prospectus, and each
amendment or supplement thereof, comply as to form in all material
respects with the requirements of the Securities Act and the
applicable rules and regulations thereunder of the Commission (except
that such counsel need express no opinion as to the financial
statements or any engineering report contained or incorporated
therein) and (C) to such other effects as may reasonable be requested
by counsel for the underwriters, and (ii) on the effective date of the
Registration Statement and on the date that Registrable Securities are
delivered to the underwriters for sale pursuant to such Registration
Statement, a letter dated such dates from the independent accountants
retained by the Company, addressed to the underwriters and to the
Selling Holders, stating that they are independent public accountants
within the meaning of the Securities Act and that, in the opinion of
such accountants, the financial statements of the Company and the
schedules thereto that are included or incorporated by reference in
the Registration Statement or the prospectus, or any amendment or
supplement thereof, comply as to form in all material respects with
the applicable requirements of the Securities Act and the published
rules and regulations thereunder, and such letter shall additionally
address such other financial matters (including information as to the
period ending no more than five Business Days prior to the date of
such letter) including in the Registration Statement in respect of
which such letter is being given as the underwriters may reasonably
request;
(g) make available for inspection by one representative
of the Selling Holders designated by a majority thereof, any
underwriter participating in any distribution pursuant to such
Registration Statement, and any attorney, accountant or other agent
retained by such representative of the Selling Holders or underwriter
(the "Inspectors"), all financial and other records, pertinent
corporate documents and properties of the Company, and cause the
Company's officers, directors and employees to supply all information
reasonably requested by any such Inspector in connection with such
Registration Statement. For purposes of subsections (a) and (b)
above, the period of distribution of Registrable Securities in a firm
commitment underwritten public offering shall be deemed to extend
until each underwriter has completed the distribution of all
securities purchased by it, and the period of distribution of
Registrable Securities in any other registration shall be deemed to
extend until the earlier of the sale of all Registrable Securities
covered thereby or 180 days;
(h) use its best efforts to keep effective and maintain
for the period specified in subparagraph (g) a registration,
qualification, approval or listing obtained to cover the Registrable
Securities as may be necessary for the Selling Holders to dispose
thereof and shall from time to time amend or supplement any prospectus
used in connection therewith to the extent necessary in order to
comply with applicable law;
(i) use its best efforts to cause the Registrable
Securities to be registered with or approved by such other
governmental agencies or authorities as may be necessary by virtue of
the business and operations of the Company to enable the Selling
Holders to consummate the disposition of such Registrable Securities;
and
(j) enter into customary agreements (including, if
requested, an underwriting agreement in customary form) and take such
other actions as are reasonable requested by the
REGISTRATION RIGHTS AGREEMENT PAGE 5
<PAGE> 6
Selling Holders or the underwriters, if any, in order to expedite or
facilitate the disposition of such Registrable Securities.
In connection with each registration hereunder, each Selling Holder
will furnish promptly to the Company in writing such information with respect
to itself and the proposed distribution by it as shall be reasonably necessary
in order to ensure compliance with federal and applicable state securities
laws.
In connection with each registration hereunder with respect to an
underwritten public offering, the Company and each Selling Holder agrees to
enter into a written agreement with the managing underwriter or underwriters
and containing such provisions as are customary in the securities business for
such an arrangement between underwriters and companies of the Company's size
and investment stature, provided that such agreement shall not contain any such
provision applicable to the Company or the Selling Holders that is inconsistent
with the provisions hereof.
If the Registrable Securities are to be sold pursuant to Rule 415
promulgated under the Securities Act, Holder represents and warrants to, and
agrees with, the Company that:
(a) Selling Holder will furnish each broker through whom
Selling Holder offers the Registrable Securities such number of copies
of the Prospectus and any supplements thereto or amendments thereof
which such broker may require; will inform such broker as to the
number of Registrable Securities offered through such broker; that
such Registrable Securities are part of a distribution and that such
broker is subject to the provisions of Regulation M under the
Securities Exchange Act of 1934 until such time as such broker has
completed the sale of all such Registrable Securities; and will notify
such broker when distribution of the Registrable Securities by Selling
Holder pursuant to the Registration Statement has been completed or
the Registration Statement is no longer effective or is withdrawn;
(b) Selling Holder will, promptly after the end of each
week in which any disposition of the Registrable Securities by Selling
Holder has occurred and upon completion of the distribution of the
Registrable Securities pursuant to the Registration Statement, report
to the Company such dispositions made during such week or upon such
completion, as the case may be;
(c) At least five (5) business days prior to any
disposition of the Registrable Securities, Selling Holder shall advise
the Company of the dates on which such disposition is expected to
commence and terminate, the number of Registrable Securities expected
to be sold, the method of disposition and such other information as
the Company may reasonably request in order to supplement the
Prospectus in accordance with the rules and regulations of the SEC.
2.03. EXPENSES.
(a) All expenses incident to the Company's performance
under or compliance with this Agreement, including without limitation,
all registration and filing and independent
REGISTRATION RIGHTS AGREEMENT PAGE 6
<PAGE> 7
public accountants for the Company, fees of the National Association
of Securities Dealers, Inc., transfer taxes, fees of transfer agents
and registrars and costs of insurance, but excluding any Selling
Expenses (as defined below), are herein called "Registration
Expenses." All underwriting fees, discounts and selling commissions
allocable to the sale of the Registrable Securities are herein called
"Selling Expenses."
(b) The Company will pay all Registration Expenses in
connection with each Registration Statement filed pursuant to this
Agreement, whether or not the Registration Statement becomes
effective, and the Selling Holders shall pay Selling Expenses and any
incidental expenses incurred by the Selling Holders (including,
without limitation, legal fees of their counsel, if any) in connection
with any Registrable Securities registered pursuant to this Agreement.
2.04. INDEMNIFICATION.
(a) In the event of a registration of any Registrable
Securities under the Securities Act pursuant to this Agreement, the
Company will indemnify and hold harmless each Selling Holder
thereunder and each underwriter of Registrable Securities thereunder
and each Person, if any, who controls such Selling Holder or
underwriter within the meaning of the Securities Act and the
Securities Exchange Act of 1934 (the "Exchange Act"), against any
losses, claims, damages or liabilities (including reasonable
attorneys' fees) ("Losses"), joint or several, to which such Selling
Holder or underwriter or controlling Person may become subject under
the Securities Act, the Exchange Act or otherwise, insofar as such
Losses (or actions in respect thereof), arise out of or are based upon
any untrue statement or alleged untrue statement of any material fact
contained in any Registration Statement under which such Registrable
Securities were registered under the Securities Act pursuant to this
Agreement, any preliminary prospectus or final prospectus contained
herein, or any amendment or supplement thereof, or arise out of or are
based upon 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, and will reimburse each such
Selling Holder, each such underwriter and each such controlling Person
for any legal or other expenses reasonably incurred by them in
connection with investigating or defending any such Loss or actions;
provided, however, that the Company will not be liable in any such
case if and to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission so made in
conformity with information furnished by such Selling Holder, such
underwriter or such controlling Person in writing specifically for use
in such Registration Statement or prospectus.
(b) Each Selling Holder agrees to indemnify and hold
harmless the Company, its directors, officers, employees and agents
and each Person, if any, who controls the Company within the meaning
of the Securities Act or of the Exchange Act to the same extent as the
foregoing indemnity from the Company to such Selling Holder, but only
with respect to information regarding such Selling Holder furnished in
writing by or on behalf of such Selling Holder expressly for inclusion
in any Registration Statement or prospectus relating to the
Registrable Securities, or any amendment or supplement thereto;
provided, however,
REGISTRATION RIGHTS AGREEMENT PAGE 7
<PAGE> 8
that the liability of such Selling Holder shall not be greater in
amount than the dollar amount of the proceeds (net of any Selling
Expenses) received by such Selling Holder from the sale of the
Registrable Securities giving rise to such indemnification.
(c) Promptly after receipt by an indemnified party
hereunder of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made
against the indemnifying party hereunder, notify the indemnifying
party in writing thereof, but the omission so to notify the
indemnifying party shall not relieve it from any liability which it
may have to any indemnified party other than under this Section 2.04.
In case any such action shall be brought against any indemnified party
and it shall notify the indemnifying party of the commencement
thereof, the indemnifying party shall be entitled to participate in
and, to the extent it shall wish, to assume and undertake the defense
thereof with counsel reasonably satisfactory to such indemnified party
and, after notice from the indemnifying party to indemnified party of
its election so to assume and undertake the defense thereof, the
indemnifying party shall not be liable to such indemnified party in
connection with the defense thereof other than reasonable costs of
investigation and of liaison with counsel so selected; provided,
however, that (i) if the indemnifying party has failed to assume the
defense and employ counsel or (ii) if the defendants in any such
action include both the indemnified party and the indemnifying party
and counsel to the indemnified party shall have concluded that there
may be reasonable defenses available to the indemnified party that are
different from or additional to those available to the indemnifying
party or if the interests of the indemnified party reasonably may be
deemed to conflict with the interests of the indemnifying party, then
the indemnifying party shall have the right to select a separate
counsel and to assume such legal defense and otherwise to participate
in the defense of such action, with the expenses and fees of such
separate counsel and other expenses related to such participation to
be reimbursed by the indemnifying party as incurred, provided that
such fees and expenses shall be reimbursed for only one counsel for
all indemnified parties.
(d) If the indemnification provided for in this Section
2.04 is unavailable to the Company or the Selling Holders or it is
insufficient to hold them harmless in respect of any losses, claims,
damages, liabilities or expenses referred to herein, then each such
indemnifying party, in lieu of indemnifying such indemnified party,
shall contribute to the amount paid or payable by such indemnified
party as a result of such losses, claims, damages, liabilities and
expenses as between the Company on the one hand and each Selling
Holder on the other, in such proportion as is appropriate to reflect
the relative fault of the Company on the one hand and of such Selling
Shareholder on the other in connection with the statements or
omissions which resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations.
The relative fault of the Company one the one hand and each Selling
Holder on the other shall be determined by reference to, among other
things, whether the untrue or alleged untrue statements of a material
fact or the omission or alleged omission to state a material fact has
been made by, or relates to, information supplied by such party, and
the parties' relative knowledge, access to information and opportunity
to correct or prevent such statement or omission.
REGISTRATION RIGHTS AGREEMENT PAGE 8
<PAGE> 9
No person guilty of a fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any Person who is not guilty of such fraudulent misrepresentation.
2.05. TRADING RESTRICTION.
(a) In addition to the restriction on resale imposed by
the requirements of the Securities Act and applicable state securities
or blue sky laws, the Holder also covenants hereby that it shall not
resell any shares of the Registrable Securities unless:
(v) such sales are in blocks of the lesser of at
least 25,000 shares in share amount or at least $100,000 in
sales amount; or
(w) any such sale not meeting the criteria set
forth in the preceding clause (v) may not exceed, together
with all other sales [including any block sales which have
occurred pursuant to the preceding clause (v)] of Registrable
Securities for the account of such Holder within the preceding
ninety days, an amount equal to the average weekly reported
volume of trading in the Common Stock on all national
securities exchanges and/or reported through NASDAQ during the
eight calendar weeks preceding the intended date of sale; or
(x) such sale is pursuant to the sale, transfer,
assignment, or disposition of such securities to a Permitted
Transferee; or
(y) such sale is pursuant to a tender offer or
exchange offer, or a merger or consolidation in which the
Company is acquired, or a plan of liquidation of the Company;
or
(z) such amount as agreed upon by the Company.
(b) Prior to disposing of any shares of Common Stock
pursuant to Rule 144 (or any successor rule) promulgated under the
Securities Act, the Holder agrees to give the Company ten days' prior
notice of any proposed disposition and to act in good faith in
evaluating any proposals made by the Company concerning the number of
shares to be disposed of by the Holder, as well as any alternate
arrangements which the Company may suggest to provide liquidity to the
Holder with respect to such shares of Common Stock.
(c) Notwithstanding the limitations imposed by this
Section 2.05, if the Company, subsequent to the date of this
agreement, issues greater than 200,000 shares of its restricted common
stock (other than pursuant to Regulation S promulgated under the
Securities Act of 1933 as amended) to a third party in a transaction
where less restrictive trading restrictions are imposed on such third
party than those set forth in this Section 2.05, the Company shall
provide notice to the Holder, and the Holder shall thereafter be
entitled to rely upon such lesser restrictions.
REGISTRATION RIGHTS AGREEMENT PAGE 9
<PAGE> 10
ARTICLE III
3.01. COMMUNICATIONS. All notices and other communications provided
for or permitted hereunder shall be made in writing by telecopy, courier
service or personal delivery:
(a) if to a Holder of Registrable Securities, at the most
current address given by such Holder of the Company in accordance with
the provisions of this Section 3.01, which address initially is, with
respect to the Purchaser, the address set forth in the Purchase
Agreement; and
(b) if to the Company, initially at its address set forth
in the Purchase Agreement and thereafter at such other address, notice
of which is given in accordance with the provisions of this Section
3.01.
All such notices and communication shall be deemed to have been
received at the time delivered by hand, if personally delivered; when receipt
acknowledged, if telecopied; and on the next Business Day if timely delivered
to an air courier guaranteeing overnight delivery.
3.02. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the
benefit of and be binding upon the successors and assigns of each of the
parties, including without limitation and without the need for an express
assignment, subsequent holders of Registrable Securities.
3.03. COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which counterparts, when so executed and delivered, shall be deemed to be an
original and all of which counterparts, taken together, shall constitute but
one and the same Agreement.
3.04. HEADINGS. The headings in this Agreement are for convenience
of reference only and shall not limit or otherwise affect the meaning hereof.
3.05. GOVERNING LAW. The laws of the State of Texas shall govern
this Agreement without regard to principles of conflict of laws.
3.06. SEVERABILITY OF PROVISIONS. Any provision of this Agreement
which is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
un-enforceability without invalidating the remaining provisions hereof or
affecting or impairing the validity or enforceability of such provision in any
other jurisdiction.
3.07. ENTIRE AGREEMENT. This Agreement, together with the Purchase
Agreement is intended by the parties as a final expression of their agreement
and intended to be a compromise and exclusive statement of the agreement and
understanding of the parties hereto in respect of the subject matter contained
herein. There are no restrictions, promises, warranties or undertakings, other
than those set forth or referred to herein with respect to the registration
rights granted by the Company with respect to the securities sold pursuant to
the Purchase Agreement. This Agreement and the Purchase Agreement supersede
all prior agreements and understandings between the parties with respect to
such subject matter.
REGISTRATION RIGHTS AGREEMENT PAGE 10
<PAGE> 11
3.08. ATTORNEYS' FEES. In any action or proceeding brought to
enforce any provision of this Agreement, the successful party shall be entitled
to recover reasonable attorneys' fees in addition to its costs and expenses and
any other available remedy.
3.09. AMENDMENT. This Agreement may be amended only by means of a
written amendment signed by the Company and by the Holders of a majority of the
Registrable Securities.
3.10. REGISTRABLE SECURITIES HELD BY THE COMPANY OR IT AFFILIATES.
In determining whether the Holders of the required amount of Registrable
Securities have concurred in any direction, amendment, supplement, waiver or
consent, Registrable Securities owned by the Company or one of its Affiliates
shall be disregarded.
3.11. ASSIGNMENT OF RIGHTS.
(a) The rights of any Holder under this Agreement may be
assigned to any Person who acquires the Registrable Securities
issuable on conversion or exercise thereof. Any assignment of
registration rights pursuant to this Section 3.11(a) shall be
effective only upon receipt by the Company of written notice from such
assigning Holder stating the name and address of any assignee.
(b) The rights of an assignee under Section 3.11(a) shall
be the same rights granted to the assigning Holder under this
Agreement. In connection with any such assignment, the term "Holder"
as used herein shall, where appropriate to assign the rights and
obligations of the assigning Holder hereunder to such assignee, be
deemed to refer to the assignee.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
<TABLE>
<S> <C>
RIATA ENERGY, INC.
By: /s/ MALONE MITCHELL
-------------------------------------------------------------
Malone Mitchell, 3rd, President
FOUR SEVENS OIL CO., LTD.
By: Hunter Production Co., a Texas corporation,
General Partner
By: /s/ HUNTER ENIS
-------------------------------------------------------------
Hunter Enis, President
</TABLE>
REGISTRATION RIGHTS AGREEMENT PAGE 11
<PAGE> 12
<TABLE>
<S> <C>
NASGAS LLC
By: /s/ MALONE MITCHELL
-------------------------------------------------------------
Malone Mitchell 3rd, President
THE GRADY FAMILY TRUST,
UNDER AGREEMENT DATED JUNE 18, 1992
By: /s/ PEGGY LYNN McLELAND
-------------------------------------------------------------
Peggy Lynn McLeland, Trustee
By: /s/ SIDNEY M. REILLY
-------------------------------------------------------------
Sidney M. Reilly, Trustee
By: /s/ DAN H. McLELAND
-------------------------------------------------------------
Dan H. McLeland, Trustee
By: /s/ ROBERT W. DICA, JR.
-------------------------------------------------------------
Robert W. Dica, Jr., Trustee
By: /s/ RICHARD WALT
-------------------------------------------------------------
Richard Walt, Trustee
/s/ SIDNEY M. REILLY
----------------------------------------------------------------------
Sidney M. Reilly, Trustee of the Sidney M. Reilly
Trust, Under Agreement dated December 24, 1992
/s/ PEGGY LYNN McLELAND
----------------------------------------------------------------------
Peggy Lynn McLeland, Trustee of the Peggy Lynn
McLeland Trust, Under Agreement dated December 24,
1992
/s/ HUNTER ENIS
----------------------------------------------------------------------
Hunter Enis
</TABLE>
REGISTRATION RIGHTS AGREEMENT PAGE 12
<PAGE> 13
<TABLE>
<S> <C>
/s/ DICK LOWE
----------------------------------------------------------------------
Dick Lowe
/s/ DAN POLAND
----------------------------------------------------------------------
Dan Poland
QUEEN SAND RESOURCES, INC.,
a Delaware Corporation
By: /s/ ROBERT P. LINDSAY
-------------------------------------------------------------
Robert P. Lindsay
Vice President
</TABLE>
REGISTRATION RIGHTS AGREEMENT PAGE 13
<PAGE> 1
EXHIBIT 5.1
FORM OF LEGALITY OPINION
________ __, 1998
Queen Sand Resources, Inc.
Queen Sand Resources, Inc.
Northland Operating Co.
Corrida Resources, Inc.
Re: Registration Statement on Form S-4; $125,000,000 Aggregate Principal
Amount of 12 1/2% Senior Notes due 2008 and the Guarantees thereof
Ladies and Gentlemen:
We have acted as special counsel for Queen Sand Resources, Inc., a
Delaware corporation (the "Company"), and Queen Sand Resources, Inc., a Nevada
corporation, Northland Operating Co., a Nevada corporation, and Corrida
Resources, Inc., a Nevada corporation (the "Guarantors"), in connection with the
proposed issuance by the Company of $125,000,000 aggregate principal amount of
12 1/2% Senior Notes due 2008 (the "Notes") and the guarantees thereof by the
Guarantors (the "Guarantees") in exchange for an equivalent amount of the
Company's outstanding 12 1/2% Senior Notes due 2008 (the "Old Notes"), which are
also guaranteed by the Guarantors. The terms of the offer to exchange are
described in the Registration Statement on Form S-4 (the "Registration
Statement") filed with the Securities and Exchange Commission for the
registration of the Notes and the Guarantees under the Securities Act of 1933,
as amended (the "Act"). The Old Notes have been, and the Notes will be, issued
pursuant to an indenture (the "Indenture") dated as of July 1, 1998, among the
Company, the Guarantors and Harris Trust and Savings Bank, as Trustee (the
"Trustee").
In our capacity as your special counsel in connection with such
registration, we are familiar with the proceedings taken and proposed to be
taken by the Company and the Guarantors in connection with the authorization and
issuance of the Notes and the Guarantees and, for the purposes of this opinion,
have assumed such proceedings will be timely completed in the manner presently
proposed. In addition, we have made such legal and factual examinations and
inquiries, including an examination of originals or copies certified or
otherwise identified to our satisfaction of such documents, corporate records
and instruments, as we have deemed necessary or appropriate for purposes of this
opinion.
In our examination, we have assumed the genuineness of all signatures,
the authenticity of all documents submitted to us as originals, and the
conformity to authentic original documents of all documents submitted to us as
copies.
We are opining herein as to the effect on the subject transaction only
of the internal laws of the State of Texas. To the extent that the opinions
expressed involve considerations of the laws of the State of New York, we have
assumed, with your consent, that the laws of the State of New York are identical
in all respects to the laws of the State of Texas, other than as to usury (as to
which we express no opinion). We express no opinion with respect to the
applicability thereto, or the effect thereon, of the laws of any other
jurisdiction or as to any matters of municipal law or the laws of any other
local agencies within any state.
<PAGE> 2
Queen Sand Resources, Inc.
______ __, 1998
Page 2
Subject to the foregoing and the other matters set forth herein, it is
our opinion that, as of the date hereof:
1. When executed and delivered by or on behalf of the Company and the
Guarantors and authenticated by the Trustee in accordance with the terms of the
Indenture, the Notes and the Guarantees will constitute valid and binding
obligations of the Company and the Guarantors, enforceable against the Company
and the Guarantors in accordance with their terms.
To the extent that the obligations of the Company or the Guarantors
under the Indenture may be dependent upon such matters, we assume for purposes
of this opinion that the Trustee is duly organized, validly existing and in good
standing under the laws of its jurisdiction of organization; that the Trustee is
duly qualified to engage in the activities contemplated by the Indenture; that
the Indenture has been duly authorized, executed and delivered by the Trustee
and constitutes the legally valid and binding obligation of the Trustee,
enforceable against the Trustee in accordance with its terms; that the Trustee
is in compliance, generally and with respect to acting as a trustee under the
Indenture, with all applicable laws and regulations; and that the Trustee has
the requisite organizational and legal power and authority to perform its
obligations under the Indenture.
We consent to your filing this opinion as an exhibit to the
Registration Statement and to the reference to our firm contained therein under
the heading "Legal Matters."
Specific Limitations and Qualifications on
Opinions Regarding Enforceability of the Notes and Guarantees
The enforceability of the Notes and the Guarantees are subject to (a) the
effects of (i) applicable bankruptcy, insolvency, reorganization, moratorium,
rearrangement, liquidation, conservatorship or similar laws of general
application now or hereafter in effect relating to or affecting the rights or
remedies of creditors generally, (ii) general equity principles (regardless of
whether enforcement is sought in a proceeding in equity or law), and (iii)
statutory provisions of the federal Bankruptcy Code and the Uniform Fraudulent
Conveyance Act as adopted by the State of Texas (and related court decisions)
pertaining to the voidability of preferential or fraudulent transfers,
conveyances and obligations, (b) the rights of the United States under the
Federal Tax Lien Act of 1966, as amended, and (c) the application of a standard
of "good faith" such as that defined in Section 1.203 of the Uniform Commercial
Code as adopted in the State of Texas (the "Code"); provided, however, that we
note that any limitations referred to in clauses (a)(ii), and (c) imposed by
such laws on the enforceability of the Notes and the Guarantees will not prevent
the holders thereof from the ultimate realization of the practical benefits of
such instruments, except for the economic consequences of any judicial,
administrative or other procedural delay that may result from such laws.
We express no opinion as to the enforceability of provisions of the Notes or the
Guarantees to the extent that such provisions: (i) state that any party's
failure or delay in exercising rights, powers, privileges or remedies under the
Notes or the Guarantees, as the case may be, shall not operate as a waiver
thereof; (ii) purport to preclude the amendment, waiver, release or discharge of
obligations except by an instrument in writing; (iii) purport to indemnify any
person for (A) such person's violations of federal or state
<PAGE> 3
Queen Sand Resources, Inc.
______ __, 1998
Page 3
securities laws or environmental laws, or (B) any obligation to the extent
such obligation arises from or is a result of such person's own negligence; (iv)
purport to establish or satisfy certain factual standards or conditions; (v)
purport to sever unenforceable provisions from the Notes or the Guarantees, to
the extent that the enforcement of remaining provisions would frustrate the
fundamental intent of the parties to such instruments; (vi) restrict access to
legal or equitable remedies; or (vii) purport to waive any claim arising out of,
or in any way related to, the Notes or the Guarantees. We advise you that the
inclusion of such provisions in the Notes or the Guarantees does not render void
or invalidate the obligations and liabilities of the Company under other
provisions of such instruments.
We express no opinion as to: (i) whether a court would grant specific
performance or any other equitable remedy with respect to enforcement of any
provision contained in the Notes or the Guarantees; or (ii) the enforceability
of any provision contained in the Indenture relating to the appointment of a
receiver, to the extent that appointment of a receiver is governed by applicable
statutory requirements, and to the extent that such provision may not be in
compliance with such requirements.
We express no opinion as to the enforceability of those provisions of the
Guarantees that state or mean that the Guarantees shall not be impaired,
adversely affected or released by any of the following: (i) any action taken by
any holder of the Notes in bad faith, for the purpose of or with the effect of,
impairing any of the Guarantors' rights of subrogation, reimbursement,
contribution, indemnity or exoneration against the Company, any other guarantor
or collateral for the obligations guaranteed; or (ii) a legal determination that
the obligations guaranteed are void as a result of illegality.
Very truly yours,
Haynes and Boone, LLP
<PAGE> 1
EXHIBIT 8.1
FORM OF TAX OPINION
__________ ____, 1998
Queen Sand Resources, Inc.
Queen Sand Resources, Inc.
Northland Operating Co.
Corrida Resources, Inc.
Re: Registration Statement on Form S-4; $125,000,000 Aggregate
Principal Amount of 12 1/2% Senior Notes due 2008 and the
Guarantees thereof
Ladies and Gentlemen:
We have acted as special counsel for Queen Sand Resources, Inc., a
Delaware corporation (the "Company"), and Queen Sand Resources, Inc., a Nevada
corporation, Northland Operating Co., a Nevada corporation, and Corrida
Resources, Inc., a Nevada corporation (the "Guarantors"), in connection with the
proposed issuance by the Company of $125,000,000 aggregate principal amount of
12 1/2% Senior Notes due 2008 (the "Notes") and the guarantees thereof by the
Guarantors (the "Guarantees") in exchange for an equivalent amount of the
Company's outstanding 12 1/2% Senior Notes due 2008 (the "Old Notes"), which are
also guaranteed by the Guarantors. The terms of the offer to exchange (the
"Exchange Offer") are described in the Registration Statement on Form S-4 (the
"Registration Statement") filed with the Securities and Exchange Commission for
the registration of the Notes and the Guarantees under the Securities Act of
1933, as amended. The Old Notes have been, and the Notes will be, issued
pursuant to an indenture (the "Indenture") dated as of July 1, 1998, among the
Company, the Guarantors and Harris Trust and Savings Bank, as Trustee.
You have requested our opinion as to certain United States federal
income tax consequences of the Exchange Offer. In preparing our opinion, we have
reviewed and relied upon the Company's Registration Statement and such other
documents as we deemed necessary.
On the basis of the foregoing, it is our opinion that the exchange of
the Private Notes for Exchange Notes pursuant to the Exchange Offer will not be
treated as an "exchange" for United States federal income tax purposes and
therefore, is not a taxable transaction for such purposes.
The opinion set forth above is based upon the applicable provisions of
the Internal Revenue Code of 1986, as amended, the Treasury Regulations
promulgated or proposed thereunder, current positions of the Internal Revenue
Service (the "IRS") contained in published revenue rulings, revenue procedures,
and announcements, existing judicial decisions, and other applicable
authorities. No tax rulings have been or will be sought from the IRS with
respect to any of the matters discussed herein. Unlike a ruling from the IRS,
opinions of counsel are not binding on the IRS. Hence, no assurance can be given
that the opinion stated in this letter will not be successfully challenged by
the IRS. We express no opinion concerning any United States federal income tax
consequences of the Exchange Offer except as expressly set forth above.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this firm and the summarization
of this opinion under the section titled "Certain Federal Income Tax
Considerations" in the Registration Statement.
Very truly yours,
Haynes and Boone, LLP
<PAGE> 1
EXHIBIT 10.7
QUEEN SAND RESOURCES, INC.
1997 INCENTIVE EQUITY PLAN
<PAGE> 2
QUEEN SAND RESOURCES, INC.
1997 INCENTIVE EQUITY PLAN
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE 1 PURPOSE . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE 2 DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE 3 ADMINISTRATION . . . . . . . . . . . . . . . . . . . . . . . . 4
ARTICLE 4 ELIGIBILITY . . . . . . . . . . . . . . . . . . . . . . . . . 5
ARTICLE 5 SHARES SUBJECT TO PLAN . . . . . . . . . . . . . . . . . . . . 5
ARTICLE 6 GRANT OF AWARDS . . . . . . . . . . . . . . . . . . . . . . . 5
6.1 In General . . . . . . . . . . . . . . . . . . . . . . . . . . 5
6.2 Maximum ISO Grants . . . . . . . . . . . . . . . . . . . . . . 6
6.3 SAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
6.4 Maximum Individual Grants . . . . . . . . . . . . . . . . . . 6
6.5 Tandem Awards . . . . . . . . . . . . . . . . . . . . . . . . 6
ARTICLE 7 OPTION PRICE; SAR PRICE . . . . . . . . . . . . . . . . . . . 7
ARTICLE 8 AWARD PERIOD; VESTING . . . . . . . . . . . . . . . . . . . . 7
8.1 Award Period . . . . . . . . . . . . . . . . . . . . . . . . . 7
8.2 Vesting . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
ARTICLE 9 TERMINATION OF SERVICE . . . . . . . . . . . . . . . . . . . . 7
ARTICLE 10 EXERCISE OF INCENTIVE . . . . . . . . . . . . . . . . . . . . 7
10.1 In General . . . . . . . . . . . . . . . . . . . . . . . . . 7
(a) Stock Options . . . . . . . . . . . . . . . . . . . . . 8
(b) SARs . . . . . . . . . . . . . . . . . . . . . . . . . 8
10.2 Disqualifying Disposition of ISO . . . . . . . . . . . . . . . 9
ARTICLE 11 AMENDMENT OR DISCONTINUANCE . . . . . . . . . . . . . . . . . 9
ARTICLE 12 TERM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
ARTICLE 13 CAPITAL ADJUSTMENTS . . . . . . . . . . . . . . . . . . . . . . 10
</TABLE>
- i -
<PAGE> 3
<TABLE>
<S> <C> <C>
ARTICLE 14 RECAPITALIZATION, MERGER AND CONSOLIDATION; CHANGE IN
CONTROL . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
ARTICLE 15 LIQUIDATION OR DISSOLUTION . . . . . . . . . . . . . . . . . . 11
ARTICLE 16 INCENTIVES IN SUBSTITUTION FOR INCENTIVES GRANTED BY OTHER
CORPORATIONS . . . . . . . . . . . . . . . . . . . . . . . . . 12
ARTICLE 17 MISCELLANEOUS PROVISIONS . . . . . . . . . . . . . . . . . . . 12
17.1 Investment Intent . . . . . . . . . . . . . . . . . . . . . . 12
17.2 No Right to Continued Employment . . . . . . . . . . . . . . . 12
17.3 Indemnification of Board and Committee . . . . . . . . . . . . 12
17.4 Effect of the Plan . . . . . . . . . . . . . . . . . . . . . . 12
17.5 Compliance With Other Laws and Regulations . . . . . . . . . . 12
17.6 Tax Requirements . . . . . . . . . . . . . . . . . . . . . . . 13
17.7 Assignability . . . . . . . . . . . . . . . . . . . . . . . . 13
17.8 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . 13
</TABLE>
- ii -
<PAGE> 4
QUEEN SAND RESOURCES, INC.
1997 INCENTIVE EQUITY PLAN
The name of the plan is the QUEEN SAND RESOURCES, INC. 1997 INCENTIVE
EQUITY PLAN (the "PLAN"). The Plan was adopted by the Board of Directors of
QUEEN SAND RESOURCES, INC., a Delaware corporation (the "COMPANY"), effective
as of July 1, 1997, and was approved by the Company's stockholders on
_____________ ___, 1997.
ARTICLE 1
PURPOSE
The purpose of the Plan is to attract and retain the services of key
management employees of the Company and its Subsidiaries and to provide such
persons with a proprietary interest in the Company through the granting of
incentive stock options, non-qualified stock options, stock appreciation
rights, or whether granted singly, or in combination, or in tandem, that will
(a) increase the interest of such persons in the Company's
welfare and success;
(b) furnish an incentive to such persons to continue their
services for the Company; and
(c) provide a means through which the Company may attract able
persons as employees.
With respect to Reporting Participants, the Plan and all transactions
under the Plan are intended to comply with all applicable conditions of Rule
16b-3 promulgated under the Securities Exchange Act of 1934 (the "1934 ACT").
To the extent any provision of the Plan or action by the Committee fails to so
comply, it shall be deemed null and void ab initio, to the extent permitted by
law and deemed advisable by the Committee.
ARTICLE 2
DEFINITIONS
Unless the context requires otherwise, the following terms shall have
the meanings indicated:
2.1 "AWARD" means the grant of any Incentive Stock Option, Non-
qualified Stock Option, or SAR whether granted singly, in combination or in
tandem (each individually referred to herein as an "INCENTIVE").
2.2 "AWARD AGREEMENT" means a written agreement between a Participant
and the Company which sets out the terms of the grant of an Award.
2.3 "AWARD PERIOD" means the period during which one or more
Incentives granted under an Award may be exercised.
2.4 "BOARD" means the board of directors of the Company.
<PAGE> 5
2.5 "CHANGE OF CONTROL" means any of the following: (i) any
consolidation, merger or share exchange of the Company in which the Company is
not the continuing or surviving corporation or pursuant to which shares of the
Company's Common Stock would be converted into cash, securities or other
property of another entity, other than a consolidation, merger or share
exchange of the Company in which the holders of the Company's Common Stock
immediately prior to such transaction have the same proportionate ownership of
Common Stock of the surviving entity immediately after such transaction; (ii)
any sale, lease, exchange or other transfer (excluding transfer by way of
pledge or hypothecation) in one transaction or a series of related
transactions, of all or substantially all of the assets of the Company; (iii)
the stockholders of the Company approve any plan or proposal for the
liquidation or dissolution of the Company; (iv) the cessation of control (by
virtue of their not constituting a majority of directors) of the Board by the
individuals (the "CONTINUING DIRECTORS") who (x) at the date of this Plan were
directors or (y) become directors after the date of this Plan and whose
election or nomination for election by the Company's stockholders was approved
by a vote of at least two-thirds of the directors (1) then in office who were
directors at the date of this Plan or (2) whose election or nomination for
election was previously so approved; (v) the acquisition of beneficial
ownership (within the meaning of Rule 13d-3 under the 1934 Act) of an aggregate
of twenty percent (20%) of the voting power of the Company's outstanding voting
securities by any person or group (as such term is used in Rule 13d-5 under the
1934 Act) who beneficially owned less than fifteen percent (15%) of the voting
power of the Company's outstanding voting securities on the date of this Plan,
or the acquisition of beneficial ownership of an additional five percent (5%)
of the voting power of the Company's outstanding voting securities by any
person or group who beneficially owned at least fifteen percent (15%) of the
voting power of the Company's outstanding voting securities on the date of this
Plan, provided, however, that notwithstanding the foregoing, an acquisition
shall not constitute a Change of Control hereunder if the acquiror is (x) a
trustee or other fiduciary holding securities under an employee benefit plan of
the Company and acting in such capacity, (y) a Subsidiary of the Company or a
corporation owned, directly or indirectly, by the stockholders of the Company
in substantially the same proportions as their ownership of voting securities
of the Company or (z) any other person whose acquisition of shares of voting
securities is approved in advance by a majority of the Continuing Directors; or
(vi) in a Title 11 bankruptcy proceeding, the appointment of a trustee or the
conversion of a case involving the Company to a case under Chapter 7.
2.6 "CODE" means the Internal Revenue Code of 1986, as amended, or
any successor legislation.
2.7 "COMMITTEE" means the committee appointed or designated by the
Board to serve as the Compensation and Stock Option Committee (or a similarly
named Committee generally intended to administer and oversee employee
compensation plans such as the Plan) of the Board to administer the Plan in
accordance with ARTICLE 3 of this Plan.
2.8 "COMMON STOCK" means the common stock, par value $0.0015 per
share, which the Company is currently authorized to issue or may in the future
be authorized to issue.
2.9 "COMPANY" means QUEEN SAND RESOURCES, INC., a Delaware
corporation, and any successor entity.
2.10 "DATE OF GRANT" means the effective date on which an Award is
made to a Participant as set forth in the applicable Award Agreement; provided,
however, that solely for purposes of Section 16 of the 1934 Act and the rules
and regulations promulgated thereunder, the Date of Grant of an Award shall be
the date of stockholder approval of the Plan if such date is later than the
effective date of such Award as set forth in the Award Agreement.
2
<PAGE> 6
2.11 "EMPLOYEE" means common law employee (as defined in accordance
with the Regulations and Revenue Rulings then applicable under Section 3401(c)
of the Code) of the Company or any Subsidiary of the Company.
2.12 "FAIR MARKET VALUE" of a share of Common Stock is (i) the mean of
the highest and lowest prices per share on any exchange or stock quotation
system that reports daily high and low sales prices, (ii) the mean of the bid
and sale prices on any other stock quotation system, or (iii) if the common
stock is not then-traded on any organized system, the fair market value of a
share of Common Stock as determined in good faith by the Board, on the
appropriate date, or in the absence of reported sales on such day, the most
recent previous day for which sales were reported.
2.13 "INCENTIVE STOCK OPTION" or "ISO" means an incentive stock option
within the meaning of Section 422 of the Code, granted pursuant to this Plan.
2.14 "NON-EMPLOYEE DIRECTOR" means a member of the Board who is not an
Employee and who satisfies the requirements of Rule 16b-3(b)(3) promulgated
under the 1934 Act or any successor provision.
2.15 "NON-QUALIFIED STOCK OPTION" or "NQSO" means a non-qualified
stock option, granted pursuant to this Plan.
2.16 "OPTION PRICE" means the price which must be paid by a
Participant upon exercise of a Stock Option to purchase a share of Common
Stock.
2.17 "PARTICIPANT" shall mean an Employee of the Company or a
Subsidiary to whom an Award is granted under this Plan.
2.18 "PLAN" means this QUEEN SAND RESOURCES, INC. 1997 INCENTIVE
EQUITY PLAN, as amended from time to time.
2.19 "REPORTING PARTICIPANT" means a Participant who is subject to the
reporting requirements of Section 16 of the 1934 Act.
2.20 "RETIREMENT" means any Termination of Service solely due to
retirement upon attainment of age 62, or permitted early retirement as
determined by the Committee.
2.21 "SAR" means the right to receive a payment, in cash and/or Common
Stock, equal to the excess of the Fair Market Value of a specified number of
shares of Common Stock on the date the SAR is exercised over the SAR Price for
such shares.
2.22 "SAR PRICE" means the Fair Market Value of each share of Common
Stock covered by an SAR, determined on the Date of Grant of the SAR.
2.23 "STOCK OPTION" means a Non-qualified Stock Option or an Incentive
Stock Option.
2.24 "SUBSIDIARY" means (i) any corporation in an unbroken chain of
corporations beginning with the Company, if each of the corporations other than
the last corporation in the unbroken chain owns stock possessing a majority of
the total combined voting power of all classes of stock in one of the other
corporations in the chain, (ii) any limited partnership, if the Company or any
corporation described in item (i) above owns a majority of the general
partnership interest and a majority of the limited partnership interests
entitled to vote on the removal and replacement of the general partner, and
(iii) any partnership
3
<PAGE> 7
or limited liability company, if the partners or members thereof are composed
only of the Company, any corporation listed in item (i) above or any limited
partnership listed in item (ii) above. "SUBSIDIARIES" means more than one of
any such corporations, limited partnerships, partnerships or limited liability
companies.
2.25 "TERMINATION OF SERVICE" occurs when a Participant who is an
Employee of the Company or any Subsidiary shall cease to serve as an Employee
of the Company and its Subsidiaries, for any reason.
2.26 "TOTAL AND PERMANENT DISABILITY" means a Participant is qualified
for long-term disability benefits under the Company's disability plan or
insurance policy; or, if no such plan or policy is then in existence, that the
Participant, because of ill health, physical or mental disability or any other
reason beyond his or her control, is unable to perform his or her duties of
employment for a period of six (6) continuous months, as determined in good
faith by the Committee; provided that, with respect to any Incentive Stock
Option, Total and Permanent Disability shall have the meaning given it under
the rules governing Incentive Stock Options under the Code.
ARTICLE 3
ADMINISTRATION
The Plan shall be administered by a committee appointed by the Board
(the "Committee"). The Committee shall consist of not fewer than two persons.
Any member of the Committee may be removed at any time, with or without cause,
by resolution of the Board. Any vacancy occurring in the membership of the
Committee may be filled by appointment by the Board.
Membership on the Committee shall be limited to those members of the
Board who are Non-employee Directors and who are "OUTSIDE DIRECTORS" under
Section 162(m) of the Code. The Committee shall select one of its members to
act as its Chairman. A majority of the Committee shall constitute a quorum,
and the act of a majority of the members of the Committee present at a meeting
at which a quorum is present shall be the act of the Committee.
The Committee shall determine and designate from time to time the
eligible persons to whom Awards will be granted and shall set forth in each
related Award Agreement the Award Period, the Date of Grant, and such other
terms, provisions, limitations, and performance requirements, as are approved
by the Committee, but not inconsistent with the Plan. The Committee shall
determine whether an Award shall include one type of Incentive, two or more
Incentives granted in combination, or two or more Incentives granted in tandem
(that is, a joint grant where exercise of one Incentive results in cancellation
of all or a portion of the other Incentive).
The Committee, in its discretion, shall (i) interpret the Plan, (ii)
prescribe, amend, and rescind any rules and regulations necessary or
appropriate for the administration of the Plan, and (iii) make such other
determinations and take such other action as it deems necessary or advisable in
the administration of the Plan. Any interpretation, determination, or other
action made or taken by the Committee shall be final, binding, and conclusive
on all interested parties.
With respect to restrictions in the Plan that are based on the
requirements of Rule 16b-3 promulgated under the 1934 Act, Section 422 of the
Code, Section 162(m) of the Code, the rules of any exchange or inter-dealer
quotation system upon which the Company's securities are listed or quoted, or
any other applicable law, rule or restriction (collectively, "APPLICABLE LAW"),
to the extent that any such restrictions are no longer required by applicable
law, the Committee shall have the sole discretion and
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authority to grant Awards that are not subject to such mandated restrictions
and/or to waive any such mandated restrictions with respect to outstanding
Awards.
ARTICLE 4
ELIGIBILITY
Any Employee (including an Employee who is also a director or an
officer) whose judgment, initiative, and efforts contributed or may be expected
to contribute to the successful performance of the Company is eligible to
participate in the Plan; provided that only Employees shall be eligible to
receive Incentive Stock Options. The Committee, upon its own action, may
grant, but shall not be required to grant, an Award to any Employee of the
Company or any Subsidiary. Awards may be granted by the Committee at any time
and from time to time to new Participants, or to then Participants, or to a
greater or lesser number of Participants, and may include or exclude previous
Participants, as the Committee shall determine. Except as required by this
Plan, Awards granted at different times need not contain similar provisions.
The Committee's determinations under the Plan (including without limitation
determinations of which Employees, if any, are to receive Awards, the form,
amount and timing of such Awards, the terms and provisions of such Awards and
the agreements evidencing same) need not be uniform and may be made by it
selectively among Employees who receive, or are eligible to receive, Awards
under the Plan.
ARTICLE 5
SHARES SUBJECT TO PLAN
Subject to adjustment as provided in ARTICLES 13 and 14, the maximum
number of shares of Common Stock that may be delivered pursuant to Awards
granted under the Plan is (a) three million (3,000,000) shares; plus (b) shares
of Common Stock previously subject to Awards which are forfeited, terminated,
settled in cash in lieu of Common Stock, or exchanged for Awards that do not
involve Common Stock, or expired unexercised; plus (c) without duplication for
shares counted under the immediately preceding clause, a number of shares of
Common Stock equal to the number of shares repurchased by the Company in the
open market or otherwise and having an aggregate repurchase price no greater
than the amount of cash proceeds received by the Company from the sale of
shares of Common Stock under the Plan; plus (d) any shares of Common Stock
surrendered to the Company in payment of the exercise price of options issued
under the Plan.
Shares to be issued may be made available from authorized but unissued
Common Stock, Common Stock held by the Company in its treasury, or Common Stock
purchased by the Company on the open market or otherwise. During the term of
this Plan, the Company will at all times reserve and keep available the number
of shares of Common Stock that shall be sufficient to satisfy the requirements
of this Plan.
ARTICLE 6
GRANT OF AWARDS
6.1 IN GENERAL. The grant of an Award shall be authorized by the
Committee and shall be evidenced by an Award Agreement setting forth the
Incentive or Incentives being granted, the total number of shares of Common
Stock subject to the Incentive(s), the Option Price (if applicable), the Award
Period, the Date of Grant, and such other terms, provisions, limitations, and
performance objectives, as are
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approved by the Committee, but not inconsistent with the Plan. The Company
shall execute an Award Agreement with a Participant after the Committee
approves the issuance of an Award. Any Award granted pursuant to this Plan
must be granted within ten (10) years of the date of adoption of this Plan. The
Plan shall be submitted to the Company's stockholders for approval; however,
the Committee may grant Awards under the Plan prior to the time of stockholder
approval. Any such Award granted prior to such stockholder approval shall be
made subject to such stockholder approval. The grant of an Award to a
Participant shall not be deemed either to entitle the Participant to, or to
disqualify the Participant from, receipt of any other Award under the Plan.
6.2 MAXIMUM ISO GRANTS. The Committee may not grant Incentive Stock
Options under the Plan to any Employee which would permit the aggregate Fair
Market Value (determined on the Date of Grant) of the Common Stock with respect
to which Incentive Stock Options (under this and any other plan of the Company
and its Subsidiaries) are exercisable for the first time by such Employee
during any calendar year to exceed $100,000. To the extent any Stock Option
granted under this Plan which is designated as an Incentive Stock Option
exceeds this limit or otherwise fails to qualify as an Incentive Stock Option,
such Stock Option shall be a Non-qualified Stock Option.
6.3 SAR. An SAR shall entitle the Participant at his election to
surrender to the Company the SAR, or portion thereof, as the Participant shall
choose, and to receive from the Company in exchange therefor cash in an amount
equal to the excess (if any) of the Fair Market Value (as of the date of the
exercise of the SAR) per share over the SAR Price per share specified in such
SAR, multiplied by the total number of shares of the SAR being surrendered. In
the discretion of the Committee, the Company may satisfy its obligation upon
exercise of an SAR by the distribution of that number of shares of Common Stock
having an aggregate Fair Market Value (as of the date of the exercise of the
SAR) equal to the amount of cash otherwise payable to the Participant, with a
cash settlement to be made for any fractional share interests, or the Company
may settle such obligation in part with shares of Common Stock and in part with
cash.
6.4 MAXIMUM INDIVIDUAL GRANTS. No participant may receive during any
calendar year of the Company Awards covering an aggregate of more than one
hundred thousand (100,000) shares of Common Stock.
6.5 TANDEM AWARDS. The Committee may grant two or more Incentives in
one Award in the form of a "TANDEM AWARD," so that the right of the Participant
to exercise one Incentive shall be canceled if, and to the extent, the other
Incentive is exercised. For example, if a Stock Option and an SAR are issued
in a tandem Award, and the Participant exercises the SAR with respect to one
hundred (100) shares of Common Stock, the right of the Participant to exercise
the related Stock Option shall be canceled to the extent of one hundred (100)
shares of Common Stock.
ARTICLE 7
OPTION PRICE; SAR PRICE
The Option Price for a Non-qualified Stock Option shall be such price as
determined by the Committee; provided, however, such Option Price shall not be
less than the par value per share of the Common Stock. The Option Price for an
Incentive Stock Option and the SAR Price for any share of Common Stock subject
to an SAR shall be at least one hundred percent (100%) of the Fair Market Value
of the share on the Date of Grant. If an Incentive Stock Option is granted to
an Employee who owns or is deemed to own (by reason of the attribution rules of
Section 424(d) of the Code) more than ten percent (10%) of the combined voting
power of all classes of stock of the Company (or any parent or Subsidiary),
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the Option Price shall be at least one hundred and ten percent (110%) of the
Fair Market Value of the Common Stock on the Date of Grant.
ARTICLE 8
AWARD PERIOD; VESTING
8.1 AWARD PERIOD. Subject to the other provisions of this Plan, the
Committee may, in its discretion, provide that an Incentive may not be
exercised in whole or in part for any period or periods of time or beyond any
date specified in the Award Agreement. Except as provided in the Award
Agreement, an Incentive may be exercised in whole or in part at any time during
its term. The Award Period for an Incentive shall be reduced or terminated
upon Termination of Service in accordance with this ARTICLE 8 and ARTICLE 9.
No Incentive granted under the Plan may be exercised at any time after the end
of its Award Period. No portion of any Incentive may be exercised after the
expiration of ten (10) years from its Date of Grant. However, if an Employee
owns or is deemed to own (by reason of the attribution rules of Section 424(d)
of the Code) more than ten percent (10%) of the combined voting power of all
classes of stock of the Company (or any parent or Subsidiary) and an Incentive
Stock Option is granted to such Employee, the term of such Incentive Stock
Option (to the extent required by the Code at the time of grant) shall be no
more than five (5) years from the Date of Grant.
8.2 VESTING. The Committee, in its sole discretion, may determine
that an Incentive will be immediately exercisable, in whole or in part, or that
all or any portion may not be exercised until a date, or dates, subsequent to
its Date of Grant, or until the occurrence of one or more specified events,
subject in any case to the terms of the Plan. If the Committee imposes
conditions upon exercise, then subsequent to the Date of Grant, the Committee
may, in its sole discretion, accelerate the date on which all or any portion of
the Incentive may be exercised.
ARTICLE 9
TERMINATION OF SERVICE
In the event of Termination of Service of a Participant, an Incentive
may only be exercised as determined by the Committee and provided in the Award
Agreement.
ARTICLE 10
EXERCISE OF INCENTIVE
10.1 IN GENERAL. A vested Incentive may be exercised during its
Award Period, subject to limitations and restrictions set forth therein and in
ARTICLE 9. A vested Incentive may be exercised at such times and in such
amounts as provided in this Plan and the applicable Award Agreement, subject to
the terms, conditions, and restrictions of the Plan.
In no event may an Incentive be exercised or shares of Common Stock be
issued pursuant to an Award if a necessary listing or quotation of the shares
of Common Stock on a stock exchange or inter-dealer quotation system or any
registration under state or federal securities laws required under the
circumstances has not been accomplished. No Incentive may be exercised for a
fractional share of Common Stock. The granting of an Incentive shall impose no
obligation upon the Participant to exercise that Incentive.
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<PAGE> 11
(a) STOCK OPTIONS. Subject to such administrative regulations as the
Committee may from time to time adopt, a Stock Option may be exercised by the
delivery of written notice to the Committee setting forth the number of shares
of Common Stock with respect to which the Stock Option is to be exercised and
the date of exercise thereof (the "EXERCISE DATE") which shall be at least
three (3) days after giving such notice unless an earlier time shall have been
mutually agreed upon. On the Exercise Date, the Participant shall deliver to
the Company consideration with a value equal to the total Option Price of the
shares to be purchased, payable as follows: (a) cash, check, bank draft, or
money order payable to the order of the Company, (b) Common Stock owned by the
Participant on the Exercise Date, valued at its Fair Market Value on the
Exercise Date, (c) by delivery (including by FAX) to the Company or its
designated agent of an executed irrevocable option exercise form together with
irrevocable instructions from the Participant to a broker or dealer, reasonably
acceptable to the Company, to sell certain of the shares of Common Stock
purchased upon exercise of the Stock Option or to pledge such shares as
collateral for a loan and promptly deliver to the Company the amount of sale or
loan proceeds necessary to pay such purchase price, and/or (d) in any other
form of valid consideration that is acceptable to the Committee in its sole
discretion.
Upon payment of all amounts due from the Participant, the Company shall
cause certificates for the Common Stock then being purchased to be delivered as
directed by the Participant (or the person exercising the Participant's Stock
Option in the event of his death) at its principal business office promptly
after the Exercise Date; provided that if the Participant has exercised an
Incentive Stock Option, the Company may at its option retain physical
possession of the certificate evidencing the shares acquired upon exercise
until the expiration of the holding periods described in Section 422(a)(1) of
the Code. The obligation of the Company to deliver shares of Common Stock
shall, however, be subject to the condition that if at any time the Committee
shall determine in its discretion that the listing, registration, or
qualification of the Stock Option or the Common Stock upon any securities
exchange or inter-dealer quotation system or under any state or federal law, or
the consent or approval of any governmental regulatory body, is necessary or
desirable as a condition of, or in connection with, the Stock Option or the
issuance or purchase of shares of Common Stock thereunder, the Stock Option may
not be exercised in whole or in part unless such listing, registration,
qualification, consent, or approval shall have been effected or obtained free
of any conditions not acceptable to the Committee.
If the Participant fails to pay for any of the Common Stock specified in
such notice or fails to accept delivery thereof, the Participant's right to
purchase such Common Stock may be terminated by the Company.
(b) SARS. Subject to the conditions of this Section 10.1(b) and such
administrative regulations as the Committee may from time to time adopt, an SAR
may be exercised by the delivery (including by FAX) of written notice to the
Committee setting forth the number of shares of Common Stock with respect to
which the SAR is to be exercised and the date of exercise thereof (the
"EXERCISE DATE") which shall be at least three (3) days after giving such
notice unless an earlier time shall have been mutually agreed upon. On the
Exercise Date, the Participant shall receive from the Company in exchange
therefor cash in an amount equal to the excess (if any) of the Fair Market
Value (as of the date of the exercise of the SAR) per share of Common Stock
over the SAR Price per share specified in such SAR, multiplied by the total
number of shares of Common Stock of the SAR being surrendered. In the
discretion of the Committee, the Company may satisfy its obligation upon
exercise of an SAR by the distribution of that number of shares of Common Stock
having an aggregate Fair Market Value (as of the date of the exercise of the
SAR) equal to the amount of cash otherwise payable to the Participant, with a
cash settlement to be made for any fractional share interests, or the Company
may settle such obligation in part with shares of Common Stock and in part with
cash.
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10.2 DISQUALIFYING DISPOSITION OF ISO. If shares of Common Stock
acquired upon exercise of an Incentive Stock Option are disposed of by a
Participant prior to the expiration of either two (2) years from the Date of
Grant of such Stock Option or one (1) year from the transfer of shares of
Common Stock to the Participant pursuant to the exercise of such Stock Option,
or in any other disqualifying disposition within the meaning of Section 422 of
the Code, such Participant shall notify the Company in writing of the date and
terms of such disposition. A disqualifying disposition by a Participant shall
not affect the status of any other Stock Option granted under the Plan as an
Incentive Stock Option within the meaning of Section 422 of the Code.
ARTICLE 11
AMENDMENT OR DISCONTINUANCE
Subject to the limitations set forth in this ARTICLE 11, the Board may
at any time and from time to time, without the consent of the Participants,
alter, amend, revise, suspend, or discontinue the Plan in whole or in part;
provided, however, that no amendment which requires stockholder approval in
order for the Plan and Incentives awarded under the Plan to continue to comply
with Section 162(m) of the Code, including any successors to such Section,
shall be effective unless such amendment shall be approved by the requisite
vote of the stockholders of the Company entitled to vote thereon. Any such
amendment shall, to the extent deemed necessary or advisable by the committee,
be applicable to any outstanding Incentives theretofore granted under the Plan,
notwithstanding any contrary provisions contained in any stock option
agreement. In the event of any such amendment to the Plan, the holder of any
Incentive outstanding under the Plan shall, upon request of the Committee and
as a condition to the exercisability thereof, execute a conforming amendment in
the form prescribed by the Committee to any Award Agreement relating thereto.
Notwithstanding anything contained in this Plan to the contrary, unless
required by law, no action contemplated or permitted by this ARTICLE 11 shall
adversely affect any rights of Participants or obligations of the Company to
Participants with respect to any Incentive theretofore granted under the Plan
without the consent of the affected Participant.
ARTICLE 12
TERM
The Plan shall be effective from the date that this Plan is approved by
the Board. Unless sooner terminated by action of the Board, the Plan will
terminate on July 1, 2007, but Incentives granted before that date will
continue to be effective in accordance with their terms and conditions.
ARTICLE 13
CAPITAL ADJUSTMENTS
If at any time while the Plan is in effect, or Incentives are
outstanding, there shall be any increase or decrease in the number of issued
and outstanding shares of Common Stock resulting from (1) the declaration or
payment of a stock dividend, (2) any recapitalization resulting in a stock
split-up, combination, or exchange of shares of Common Stock, or (3) other
increase or decrease in such shares of Common Stock effected without receipt of
consideration by the Company, then and in such event:
(i) An appropriate adjustment shall be made in the maximum
number of shares of Common Stock then subject to being awarded under the
Plan and in the maximum number of shares of Common Stock that may be
awarded to a Participant to the end that the same proportion
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of the Company's issued and outstanding shares of Common Stock shall
continue to be subject to being so awarded.
(ii) Appropriate adjustments shall be made in the number of
shares of Common Stock and the Option Price thereof then subject to
purchase pursuant to each such Stock Option previously granted and
unexercised, to the end that the same proportion of the Company's issued
and outstanding shares of Common Stock in each such instance shall
remain subject to purchase at the same aggregate Option Price.
(iii) Appropriate adjustments shall be made in the number of
SARs and the SAR Price thereof then subject to exercise pursuant to each
such SAR previously granted and unexercised, to the end that the same
proportion of the Company's issued and outstanding shares of Common
Stock in each instance shall remain subject to exercise at the same
aggregate SAR Price.
Except as otherwise expressly provided herein, the issuance by the
Company of shares of its capital stock of any class, or securities convertible
into shares of capital stock of any class, either in connection with direct
sale or upon the exercise of rights or warrants to subscribe therefor, or upon
conversion of shares or obligations of the Company convertible into such shares
or other securities, shall not affect, and no adjustment by reason thereof
shall be made with respect to (i) the number of or Option Price of shares of
Common Stock then subject to outstanding Stock Options granted under the Plan,
or (ii) the number of or SAR Price or SARs then subject to outstanding SARs
granted under the Plan.
Upon the occurrence of each event requiring an adjustment with respect
to any Incentive, the Company shall mail to each affected Participant its
computation of such adjustment which shall be conclusive and shall be binding
upon each such Participant.
ARTICLE 14
RECAPITALIZATION, MERGER AND
CONSOLIDATION; CHANGE IN CONTROL
(a) The existence of this Plan and Incentives granted
hereunder shall not affect in any way the right or power of the Company
or its stockholders to make or authorize any or all adjustments,
recapitalizations, reorganizations, or other changes in the Company's
capital structure and its business, or any merger or consolidation of
the Company, or any issue of bonds, debentures, preferred or preference
stocks ranking prior to or otherwise affecting the Common Stock or the
rights thereof (or any rights, options, or warrants to purchase same),
or the dissolution or liquidation of the Company, or any sale or
transfer of all or any part of its assets or business, or any other
corporate act or proceeding, whether of a similar character or
otherwise.
(b) Subject to any required action by the stockholders, if the
Company shall be the surviving or resulting corporation in any
reorganization, merger, consolidation or share exchange, any Incentive
granted hereunder shall pertain to and apply to the securities or rights
(including cash, property, or assets) to which a holder of the number of
shares of Common Stock subject to the Incentive would have been
entitled. Notwithstanding the foregoing, however, all such Incentives
may be canceled by the Company as of the effective date of any such
reorganization, merger, consolidation or share exchange by giving notice
to each holder thereof or his personal representative of its intention
to do so and by permitting the purchase during the thirty (30) day
period next preceding such effective date of all of the shares of Common
Stock subject to such outstanding Incentives.
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(c) In the event of any reorganization, merger, consolidation
or share exchange pursuant to which the Company is not the surviving or
resulting corporation, there shall be substituted for each share of
Common Stock subject to the unexercised portions of such outstanding
Incentives, that number of shares of each class of stock or other
securities or that amount of cash, property, or assets of the surviving,
resulting or consolidated company which were distributed or
distributable to the stockholders of the Company in respect to each
share of Common Stock held by them, such outstanding Incentives to be
thereafter exercisable for such stock, securities, cash, or property in
accordance with their terms.
(d) In the event of a Change of Control, then, notwithstanding
any other provision in this Plan to the contrary, all unmatured
installments of Incentives outstanding shall thereupon automatically be
accelerated and exercisable in full. The determination of the Committee
that any of the foregoing conditions has been met shall be binding and
conclusive on all parties.
ARTICLE 15
LIQUIDATION OR DISSOLUTION
In case the Company shall, at any time while any Incentive under this
Plan shall be in force and remain unexpired, (i) sell all or substantially all
of its property, or (ii) dissolve, liquidate, or wind up its affairs, then each
Participant shall be thereafter entitled to receive, in lieu of each share of
Common Stock of the Company which such Participant would have been entitled to
receive under the Incentive, the same kind and amount of any securities or
assets as may be issuable, distributable, or payable upon any such sale,
dissolution, liquidation, or winding up with respect to each share of Common
Stock of the Company. If the Company shall, at any time prior to the
expiration of any Incentive, make any partial distribution of its assets, in
the nature of a partial liquidation, whether payable in cash or in kind (but
excluding the distribution of a cash dividend payable out of earned surplus and
designated as such) then in such event the Option Prices or SAR Prices then in
effect with respect to each Stock Option or SAR shall be reduced, on the
payment date of such distribution, in proportion to the percentage reduction in
the tangible book value of the shares of the Company's Common Stock (determined
in accordance with generally accepted accounting principles) resulting by
reason of such distribution.
ARTICLE 16
INCENTIVES IN SUBSTITUTION FOR
INCENTIVES GRANTED BY OTHER CORPORATIONS
Incentives may be granted under the Plan from time to time in
substitution for similar instruments held by employees of a corporation who
become or are about to become management Employees of the Company or any
Subsidiary as a result of a merger or consolidation of the employing
corporation with the Company or the acquisition by the Company of stock of the
employing corporation. The terms and conditions of the substitute Incentives
so granted may vary from the terms and conditions set forth in this Plan to
such extent as the Board at the time of grant may deem appropriate to conform,
in whole or in part, to the provisions of the Incentives in substitution for
which they are granted.
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ARTICLE 17
MISCELLANEOUS PROVISIONS
17.1 INVESTMENT INTENT. The Company may require that there be
presented to and filed with it by any Participant under the Plan, such evidence
as it may deem necessary to establish that the Incentives granted or the shares
of Common Stock to be purchased or transferred are being acquired for
investment and not with a view to their distribution.
17.2 NO RIGHT TO CONTINUED EMPLOYMENT. Neither the Plan nor any
Incentive granted under the Plan shall confer upon any Participant any right
with respect to continuance of employment by the Company or any Subsidiary.
17.3 INDEMNIFICATION OF BOARD AND COMMITTEE. No member of the Board
or the Committee, nor any officer or Employee of the Company acting on behalf
of the Board or the Committee, shall be personally liable for any action,
determination, or interpretation taken or made in good faith with respect to
the Plan, and all members of the Board or the Committee and each and any
officer or employee of the Company acting on their behalf shall, to the extent
permitted by law, be fully indemnified and protected by the Company in respect
of any such action, determination, or interpretation.
17.4 EFFECT OF THE PLAN. Neither the adoption of this Plan nor any
action of the Board or the Committee shall be deemed to give any person any
right to be granted an Award or any other rights except as may be evidenced by
an Award Agreement, or any amendment thereto, duly authorized by the Committee
and executed on behalf of the Company, and then only to the extent and upon the
terms and conditions expressly set forth therein.
17.5 COMPLIANCE WITH OTHER LAWS AND REGULATIONS. Notwithstanding
anything contained herein to the contrary, the Company shall not be required to
sell or issue shares of Common Stock under any Incentive if the issuance
thereof would constitute a violation by the Participant or the Company of any
provisions of any law or regulation of any governmental authority or any
national securities exchange or inter-dealer quotation system or other forum in
which shares of Common Stock are quoted or traded (including without limitation
Section 16 of the 1934 Act and Section 162(m) of the Code); and, as a condition
of any sale or issuance of shares of Common Stock under an Incentive, the
Committee may require such agreements or undertakings, if any, as the Committee
may deem necessary or advisable to assure compliance with any such law or
regulation. The Plan, the grant and exercise of Incentives hereunder, and the
obligation of the Company to sell and deliver shares of Common Stock, shall be
subject to all applicable federal and state laws, rules and regulations and to
such approvals by any government or regulatory agency as may be required.
17.6 TAX REQUIREMENTS. The Company shall have the right to deduct
from all amounts hereunder paid in cash or other form, any Federal, state, or
local taxes required by law to be withheld with respect to such payments. The
Participant receiving shares of Common Stock issued under the Plan shall be
required to pay the Company the amount of any taxes which the Company is
required to withhold with respect to such shares of Common Stock.
Notwithstanding the foregoing, in the event of an assignment of a Non-qualified
Stock Option or SAR pursuant to Section 17.7, the Participant who assigns the
Non-qualified Stock Option or SAR shall remain subject to withholding taxes
upon exercise of the Non-qualified Stock Option or SAR by the transferee to the
extent required by the Code or the rules and regulations promulgated
thereunder. Such payments shall be required to be made prior to the delivery
of any certificate representing such shares of Common Stock. Such payment may
be made in cash, by check,
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or through the delivery of shares of Common Stock owned by the Participant
(which may be effected by the actual delivery of shares of Common Stock by the
Participant or by the Company's withholding a number of shares to be issued
upon the exercise of a Stock Option, if applicable), which shares have an
aggregate Fair Market Value equal to the required minimum withholding payment,
or any combination thereof.
17.7 ASSIGNABILITY. Incentive Stock Options may not be transferred or
assigned other than by will or the laws of descent and distribution and may be
exercised during the lifetime of the Participant only by the Participant or the
Participant's legally authorized representative, and each Award Agreement in
respect of an Incentive Stock Option shall so provide. The designation by a
Participant of a beneficiary will not constitute a transfer of the Stock
Option. The Committee may waive or modify any limitation contained in the
preceding sentences of this Section 17.7 that is not required for compliance
with Section 422 of the Code. The Committee may, in its discretion, authorize
all or a portion of a Non-qualified Stock Option or SAR to be granted to a
Participant to be on terms which permit transfer by such Participant to (i) the
spouse, children or grandchildren of the Participant ("IMMEDIATE FAMILY
MEMBERS"), (ii) a trust or trusts for the exclusive benefit of such Immediate
Family Members, or (iii) a partnership in which such Immediate Family Members
are the only partners, (iv) an entity exempt from federal income tax pursuant
to Section 501(c)(3) of the Code or any successor provision, or (v) a split
interest trust or pooled income fund described in Section 2522(c)(2) of the
Code or any successor provision, provided that (x) there shall be no
consideration for any such transfer, (y) the Award Agreement pursuant to which
such Non-qualified Stock Option or SAR is granted must be approved by the
Committee and must expressly provided for transferability in a manner
consistent with this Section, and (z) subsequent transfers of transferred Non-
qualified Stock Options or SARs shall be prohibited except those by will or the
laws of descent and distribution or pursuant to a qualified domestic relations
order as defined in the Code or Title I of the Employee Retirement Income
Security Act of 1974, as amended. Following transfer, any such Non-qualified
Stock Option and SAR shall continue to be subject to the same terms and
conditions as were applicable immediately prior to transfer, provided that for
purposes of ARTICLES 10, 11, 13, 15 and 17 hereof the term "PARTICIPANT" shall
be deemed to include the transferee. The events of Termination of Service
shall continue to be applied with respect to the original Participant,
following which the Non-qualified Stock Options and SARs shall be exercisable
by the transferee only to the extent and for the periods specified in the Award
Agreement. The Committee and the Company shall have no obligation to inform
any transferee of a Non-qualified Stock Option or SAR of any expiration,
termination, lapse or acceleration of such Option. The Company shall have no
obligation to register with any federal or state securities commission or
agency any Common Stock issuable or issued under a Non-qualified Stock Option
or SAR that has been transferred by a Participant under this Section 17.7.
17.8 USE OF PROCEEDS. Proceeds from the sale of shares of Common
Stock pursuant to Incentives granted under this Plan shall constitute general
funds of the Company.
A copy of this Plan shall be kept on file in the office of the Company
in Dallas, Texas or any successor location of the Company's principal executive
offices.
* * * * * * * * * * * * * * *
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IN WITNESS WHEREOF, the Company has caused this instrument to be
executed by its duly authorized representative pursuant to prior action taken
by the Board.
QUEEN SAND RESOURCES, INC.
By: /s/ Edward J. Munden
---------------------------------------------
Name: Edward J. Munden
---------------------------------------
Title: Chief Executive Officer and President
---------------------------------------
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EXHIBIT 10.8
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made and entered into this 15th day of December,
1997 (the "EFFECTIVE DATE") by and between Queen Sand Resources, Inc., a
Delaware corporation (the "COMPANY"), having a business address at 3500 Oak
Lawn, Suite 380, L.B. #31, Dallas, Texas 75219-1398, and Robert P. Lindsay (the
"EXECUTIVE"), having a mailing address at 405 San Sebastian, P.O. Box 728,
Denton, Texas 76205.
RECITALS
The Executive possesses extensive knowledge of the business and
affairs of the Company, its policies, methods, personnel, and plans for the
future.
The Board has determined that it is in the best interests of the
Company to assure that the Company will have the continued dedication of the
Executive, notwithstanding the possibility, threat or occurrence of a Change of
Control (as defined in Section 5 hereof). The Board believes it is imperative
to retain the Executive's services, to diminish the inevitable distraction of
the Executive by virtue of the personal uncertainties and risks created by a
pending or threatened Change of Control and to encourage the Executive's full
attention and dedication to the Company currently and in the event of any
threatened or pending Change of Control, and to provide the Executive with
compensation and benefits arrangements upon a Change of Control.
The Company wishes to protect the Executive from loss of compensation
and benefits if his continued employment is no longer possible through no fault
of the Executive.
The Executive is desirous of committing himself to serve the Company
on the terms herein provided.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements herein contained, the parties agree as follows:
AGREEMENT
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the Company and the Executive hereby agree as
follows:
1. EMPLOYMENT. Upon the terms and subject to the conditions
contained in this Agreement, the Executive agrees to provide full-time services
for the Company during the Employment Period (as defined below). The Executive
agrees to devote his best efforts to the business of the Company, and shall
perform his duties in a diligent, trustworthy and business-like manner, all for
the purpose of advancing the business of the Company.
2. DUTIES. The Executive shall have the title of Chief Operating
Officer and shall have the duties that are customarily attendant to that office
and such other duties as are from time to time assigned by the Board of
Directors. During the Employment Period, the Executive's position (including
status, offices, titles and reporting requirements), authority, duties and
responsibilities shall be at least commensurate in all material respects with
the most significant of those held, exercised and assigned at any time during
the 90-day period immediately preceding the Effective Date. During the
Employment Period, and excluding any periods of vacation and sick leave to
which the Executive is entitled, the Executive agrees
<PAGE> 2
to devote reasonable attention and time during normal business hours to the
business and affairs of the Company and, to the extent necessary to discharge
the responsibilities assigned to the Executive hereunder, to use the
Executive's reasonable best efforts to perform faithfully and efficiently such
responsibilities. During the Employment Period it shall not be a violation of
this Agreement for the Executive to (A) serve on corporate, civic or charitable
boards or committees, (B) deliver lectures, fulfill speaking engagements or
teach at educational institutions and (C) manage personal investments, so long
as such activities do not significantly interfere with the performance of the
Executive's responsibilities as an employee of the Company in accordance with
this Agreement. It is expressly understood and agreed that to the extent that
any such activities have been conducted by the Executive prior to the Effective
Date, the continued conduct of such activities (or the conduct of activities
similar in nature and scope thereto) subsequent to the Effective Date shall not
thereafter be deemed to interfere with the performance of the Executive's
responsibilities to the Company.
3. EMPLOYMENT PERIOD. Subject to the terms and conditions
hereof, the Company agrees to employ the Executive for a term (the "EMPLOYMENT
PERIOD") commencing as of the Effective Date and terminating on June 30, 2002.
4. SALARY AND BENEFITS. The salary and benefits of the Executive
hereunder are as set forth on Exhibit A attached hereto.
5. TERMINATION OF EMPLOYMENT. The Board of Directors of the
Company may terminate the employment of the Executive at any time as it deems
appropriate.
(a) Termination Without Cause; Resignation for Good
Reason. If during the term of this Agreement, (i) the Executive's
employment is terminated by the Company without Cause (defined below)
or (ii) the Executive voluntarily terminates his employment during the
Employment Period for Good Reason, then the Company shall pay the
Executive (in a lump sum) an amount equal to the sum of (x) the Base
Salary for one year in effect immediately prior to the termination and
(y) the amount of the Bonus that would have been payable to the
Executive for such year, prorated to the Termination Date, and the
Company shall issue to the Executive a number of stock options that
the Executive would have been entitled to receive for that year,
prorated to the Termination Date.
For purposes of this Agreement, "GOOD REASON" shall mean:
(i) Without his express written consent, the
assignment to the Executive of any duties materially
inconsistent with his positions, duties, responsibilities and
status with the Company as of the Effective Date, or a
substantial reduction in his reporting responsibilities,
titles or offices as of the Effective Date, or any removal of
the Executive from or any failure to re-elect the Executive to
any of such positions, except in connection with the
termination of his employment for Cause, Disability (defined
below) or as a result of his death or by the Executive other
than for Good Reason;
(ii) A reduction by the Company in the Executive's
Base Salary (as defined in Exhibit A attached hereto) as in
effect immediately prior to the Effective Date or as the same
may be increased from time to time;
(iii) A reduction by the Company in the amounts
payable under the Company's annual incentive plan unless such
reduction affects all executive officers of the Company and
does not result in a proportionately greater
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<PAGE> 3
reduction in the rights of or benefits to the Executive as
compared with any other executive officer of the Company;
(iv) The failure by the Company to continue in
effect any benefit or compensation plan (including but not
limited to any stock option plan, pension plan, life insurance
plan, health and accident plan or disability plan) in which
the Executive from time to time participates (or plans
providing substantially similar benefits, and whether by or
through the Company or another member of the Company Group),
the taking of any action by the Company which would adversely
affect the Executive's participation in or materially reduce
his benefits under any of such plans or deprive him of any
material fringe benefit enjoyed by him, or the failure by the
Company to provide the Executive with the number of paid
vacation days to which he is then entitled on the basis of
years of service with the Company in accordance with the
Company's normal vacation policy in effect immediately prior
to the Effective Date except for such changes in benefits that
affect all executive officers of the Company and do not result
in a proportionately greater reduction in the rights of or
benefits to the Executive as compared with any other executive
officer of the Company;
(v) Any failure of the Company to obtain the
assumption of, or the agreement to perform, this Agreement by
any successor as contemplated in Section 13(a) hereof; or
(vi) Any purported termination of the Executive's
employment which is not effected pursuant to a notice of
termination satisfying the requirements of Section 5(b) or
5(d) hereof; and for purposes of this Agreement, no such
purported termination shall be effective.
(b) Voluntary Resignation or Termination for Cause. If
the Executive shall voluntarily terminate his employment for other
than Good Reason or if the Company shall discharge the Executive for
Cause, this Agreement shall terminate immediately and the Company
shall have no further obligation to make any payment under this
Agreement except that the Company shall pay the Executive accrued but
unpaid salary, bonuses and benefits pursuant to Section 4 hereof
through the Date of Termination.
For the purposes of this Agreement, the Company shall have
"CAUSE" to terminate the Executive's employment hereunder upon (A) the
willful and continued failure by the Executive to substantially
perform his duties with the Company (other than any such failure
resulting from incapacity due to physical or mental illness), and such
failure is not remedied in a reasonable time after a written demand
for substantial performance is delivered to the Executive by the Board
which specifically identifies the manner in which the Board believes
that he has not substantially performed his duties, or (B) the final,
nonappealable conviction of a felony. For purposes of this paragraph,
no act, or failure to act, on the Executive's part shall be considered
"WILLFUL" unless done, or omitted to be done, by him not in good faith
and without reasonable belief that his action or omission was not in
the best interest of the Company. Notwithstanding the foregoing, the
Executive shall not be deemed to have been terminated for Cause under
(A) above unless and until there shall have been delivered to him a
copy of a resolution duly adopted by the affirmative vote of not less
than two- thirds (2/3) of the entire authorized membership of the
Board at a meeting of the Board called and held for the purpose (after
reasonable notice and an opportunity for the Executive, together with
counsel, to be heard before the Board), finding that in the good faith
opinion of the Board he was guilty of conduct set forth
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<PAGE> 4
above in clause (A) of the first sentence of this paragraph and
specifying the particulars thereof in detail.
(c) Termination After Change of Control. If, within six
(6) months after a Change of Control (defined below), the Company
shall terminate the Executive's employment other than pursuant to
Section 3 or 5(b)hereof or if the Executive shall terminate his
employment for Good Reason, then the Company shall pay to the
Executive as severance pay in a lump sum not later than the tenth
(10th) day following the Date of Termination, the following amounts:
(i) The Executive's full Base Salary through the
Date of Termination at the rate in effect at the time of
notice of termination is given;
(ii) In lieu of any further salary payments to the
Executive for periods subsequent to the Date of Termination,
an amount equal to the sum of (x) the Base Salary for one year
in effect immediately prior to the termination and (y) the
amount of the Bonus that would have been payable to the
Executive for such year, prorated to the Termination Date and
the Company shall issue to the Executive a number of stock
options that the Executive would have been entitled to receive
for that year, prorated to the Termination Date;
(iii) In lieu of shares of common stock of the
Company, par value $.0015 per share ("COMPANY SHARES")
issuable upon exercise of options ("OPTIONS"), if any, granted
to the Executive under any stock option plan of the Company
(which Options shall be canceled upon the making of the
payment referred to below), the Executive shall receive an
amount in cash equal to the aggregate spread between the
exercise prices of all Options held by the Executive whether
or not then fully exercisable, and the highest price per
Company Share of Common Stock actually paid (including the
fair market value of non- cash consideration per Company Share
received) in connection with any change in control of the
Company (such price being hereinafter referred to as
"TERMINATION PRICE"); and
(iv) The Company shall also pay all reasonable
legal fees and expenses incurred by the Executive as a result
of such termination (including all such reasonable fees and
expenses, if any, incurred in contesting or disputing any such
termination or in seeking to obtain or enforce any right or
benefit provided by this Agreement).
"CHANGE OF CONTROL" means any of the following:
(i) any consolidation or merger of the Company in
which the Company is not the continuing or surviving
corporation or pursuant to which shares of the Company's
common stock would be converted into cash, securities or other
property, other than a merger of the Company in which the
holders of the Company's common stock immediately prior to the
merger have the same proportionate ownership of common stock
of the surviving corporation immediately after the merger;
(ii) any sale, lease, exchange or other transfer
(in one transaction or a series of related transactions) of
all or substantially all of the assets of the Company;
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<PAGE> 5
(iii) any approval by the stockholders of the
Company of any plan or proposal for the liquidation or
dissolution of the Company;
(iv) the cessation of control (by virtue of their
not constituting a majority of directors) of the Company's
Board of Directors by the individuals (the "CONTINUING
DIRECTORS") who (x) at the date of this Agreement were
directors or (y) become directors after the date of this
Agreement and whose election or nomination for election by the
Company's stockholders, was approved by a vote of at least
two-thirds of the directors then in office who were directors
at the date of this Agreement or whose election or nomination
for election was previously so approved);
(v) (A) the acquisition of beneficial ownership
(within the meaning of Rule 13d-3 under the Securities
Exchange Act of 1934, as amended ("BENEFICIAL OWNERSHIP")) of
an aggregate of 15% of the voting power of the Company's
outstanding voting securities by any person or group (as such
term is used in Rule 13d-5 under such Act) who Beneficially
Owned less than 10% of the voting power of the Company's
outstanding voting securities on the date hereof, (B) the
acquisition of Beneficial Ownership of an additional 5% of the
voting power of the Company's outstanding voting securities by
any person or group who Beneficially Owned at least 10% of the
voting power of the Company's outstanding voting securities on
the date hereof, or (C) the execution by the Company and a
stockholder of a contract that by its terms grants such
stockholder (in its, hers or his capacity as a stockholder) or
such stockholder's Affiliate (as defined in Rule 405
promulgated under the Securities Act of 1933 (an "AFFILIATE"))
including, without limitation, such stockholder's nominee to
the Board of Directors (in its, hers or his capacity as an
Affiliate of such stockholder), the right to veto or block
decisions or actions of the Board of Directors; provided,
however, that notwithstanding the foregoing, the events
described in items (A), (B) or (C) above shall not constitute
a Change in Control hereunder if the securityholder is (aa) a
trustee or other fiduciary holding securities under an
employee benefit plan of the Company and acting in such
capacity, (bb) a corporation owned, directly or indirectly, by
the stockholders of the Company in substantially the same
proportions as their ownership of voting securities of the
Company or (cc) in the case of an acquisition described in
items (A) or (B) above (but not in the case of an acquisition
described in item (C) above), any other person whose
acquisition of shares of voting securities is approved in
advance by a majority of the Continuing Directors; provided
further, however that none of the following shall constitute a
Change in Control: (aa) the right of the holders of any voting
securities of the Company to vote as a class on any matter or
(bb) any vote required of disinterested or unaffiliated
directors or stockholders including, without limitation,
pursuant to Section 144 of the Delaware General Corporation
Law or Rule 16b-3 promulgated pursuant to the Securities
Exchange Act of 1934; or
(vi) subject to applicable law, in a Chapter 11
bankruptcy proceeding, the appointment of a trustee or the
conversion of a case involving the Company to a case under
Chapter 7.
(d) Disability. The Company may terminate this Agreement
for Disability. If the Company shall terminate the Executive's
employment for Disability, the Company's obligation to pay salary,
bonuses and benefits pursuant to Section 4 hereof shall terminate,
except that the Company shall pay the Executive (i) accrued but
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<PAGE> 6
unpaid salary and benefits pursuant to Section 4 hereof through the
Date of Termination, and (ii) the benefits set forth in Section 5(e)
hereof. The Company also shall make any additional payments necessary
to provide the disability benefits set forth in Exhibit A attached
hereto. "DISABILITY" shall exist if because of ill health, physical
or mental disability, or any other reason beyond his control, and
notwithstanding reasonable accommodations made by the Company, the
Executive shall have been unable, unwilling or shall have failed to
perform his duties under this Agreement, as determined in good faith
by the Compensation Committee of the Company's Board of Directors, for
a period of 180 consecutive days, or if, in any 12-month period, the
Executive shall have been unable or unwilling or shall have failed to
perform his duties for a period of 270 days, irrespective of whether
or not such days are consecutive.
(e) Employee Benefits. Unless the Executive's employment
is terminated pursuant to Section 5(b) hereof, the Company shall
maintain in full force and effect (to the extent consistent with past
practice), for the continued benefit of the Executive and, if
applicable, the Executive's spouse and children, the employee benefits
set forth in [subsections (d) ("LIFE INSURANCE"), (e) ("DISABILITY
INSURANCE"), (f) ("MEDICAL EXPENSES") and (h) ("FRINGE BENEFITS AND
PERQUISITES")] of Exhibit A attached hereto that he was entitled to
receive immediately prior to the Date of Termination (subject to the
general terms and conditions of the plans and programs under which he
receives such benefits) for the balance of the Employment Period
notwithstanding the termination hereof or for the period provided for
under the terms and conditions of such plans and programs, whichever
is longer, provided that his continued participation or, if
applicable, the participation of the Executive's spouse and children,
is possible under the general terms and conditions of such plans and
programs.
(f) Notice of Termination. Any termination by the
Company or by the Executive shall be communicated by Notice of
Termination to the other party thereto given in accordance with
Section 13(c) hereof. For purposes of this Agreement, a "NOTICE OF
TERMINATION" means a written notice which (i) indicates the specific
termination provision in this Agreement relied upon, (ii) to the
extent applicable, sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the
Executive's employment under the provision so indicated and (iii) if
the Date of Termination (as defined below) is other than the date of
receipt of such notice, specifies the termination date (which date
shall be not more than fifteen (15) days after the giving of such
notice). The failure by the Executive or the Company to set forth in
the Notice of Termination any fact or circumstance which contributes
to a showing of Good Reason, Cause or Disability shall not waive any
right of the Executive or the Company hereunder or preclude the
Executive or the Company from asserting such fact or circumstance in
enforcing the Executive's or the Company's rights hereunder.
(g) Date of Termination. "DATE OF TERMINATION" means (i)
if the Executive's employment is terminated by the Company for Cause
or Disability or by the Executive for Good Reason or within six (6)
months after a Change of Control, the date of receipt of the Notice of
Termination or any later date specified therein, as the case may be,
(ii) if the Executive's employment is terminated by the Company or
other than for Cause, the Date of Termination shall be the date on
which the Company notifies the Executive of such termination and (iii)
if the Executive's employment is terminated by reason of death, the
Date of Termination shall be the date of death of the Executive.
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<PAGE> 7
(h) Mitigation of Amounts Payable Hereunder. The
Executive shall not be required to mitigate the amount of any payment
provided for in this Section 5 by seeking other employment or
otherwise, nor shall the amount of any payment provided for in this
Section 5 be reduced by any compensation earned by the Executive as
the result of employment by another employer after the Date of
Termination, or otherwise.
6. DEATH OF THE EXECUTIVE. If the Executive dies prior to the
end of Employment Period, the Executive's employment and other obligations
under this Agreement shall automatically terminate and all compensation, to
which the Executive is or would have been entitled hereunder (including without
limitation under subsections (a) ("BASE SALARY"), (b) ("BONUS") and (c) ("STOCK
OPTIONS") of Exhibit A attached hereto), shall terminate as of the end of the
month in which the Executive's death occurs; provided, however, that (i) the
Company shall pay to the Executive's estate, as soon as practicable, a prorated
Annual Incentive Payment, if earned in accordance with the Company's annual
incentive plan; (ii) for the balance of the Employment Period, the Executive's
spouse and children shall be entitled to receive their benefits under the
Company's group hospitalization, medical and dental plans (if any); and (iii)
the Executive's named beneficiary or beneficiaries shall receive the benefits
payable pursuant to subsection (d) ("LIFE INSURANCE") of Exhibit A attached
hereto and such reimbursement as may have been due to the Executive pursuant to
subsection (g) ("PAYMENT AND REIMBURSEMENT OF EXPENSES") of Exhibit A attached
hereto.
7. CONFIDENTIAL INFORMATION. The Executive recognizes and
acknowledges that he will have access to certain information of members of the
Company Group (as defined below) and that such information is confidential and
constitutes valuable, special and unique property of such members of the
Company Group. The Executive shall not at any time, either during or
subsequent to the term of this Agreement, disclose to others, use, copy or
permit to be copied, except in pursuance of his duties for and on behalf of the
Company, it successors, assigns or nominees, any Confidential Information of
any member of the Company Group (regardless of whether developed by the
Executive) without the prior written consent of the Company. As used herein,
"COMPANY GROUP" means the Company, and any entity that directly or indirectly
controls, is controlled by, or is under common control with, the Company. For
purposes hereof, "CONTROL" means the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of such
entity, whether through the ownership of voting securities, by contract or
otherwise. The term "CONFIDENTIAL INFORMATION" with respect to any person
means any secret or confidential information or know-how and shall include, but
shall not be limited to, the plans, customers, costs, prices, uses, and
applications of products and services, results of investigations, studies or
experiments owned or used by such person, and all apparatus, products,
processes, compositions, samples, formulas, computer programs, computer
hardware designs, computer firmware designs, and servicing, marketing or
manufacturing methods and techniques at any time used, developed, investigated,
made or sold by such person, before or during the term of this Agreement, that
are not readily available to the public or that are maintained as confidential
by such person. The Executive shall maintain in confidence any Confidential
Information of third parties received as a result of his employment with the
Company in accordance with the Company's obligations to such third parties and
the policies established by the Company.
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<PAGE> 8
8. DELIVERY OF DOCUMENTS UPON TERMINATION. The Executive shall
deliver to the Company or its designee at the termination of his employment all
correspondence, memoranda, notes, records, drawings, sketches, plans, customer
lists, product compositions, and other documents and all copies thereof, made,
composed or received by the Executive, solely or jointly with others, that are
in the Executive's possession, custody, or control at termination and that are
related in any manner to the past, present, or anticipated business or any
member of the Company Group. In this regard, the Executive hereby grants and
conveys to the Company all right, title and interest in and to, including
without limitation, the right to possess, print, copy, and sell or otherwise
dispose of, any reports, records, papers, summaries, photographs, drawings or
other documents, and writings, and copies, abstracts or summaries thereof, that
may be prepared by the Executive or under his direction or that may come into
his possession in any way during the term of his employment with the Company
that relate in any manner to the past, present or anticipate business of any
member of the Company Group.
9. FURTHER ACTS. At the request of the Company (but without
additional compensation from the Company during his employment by the Company)
the Executive shall execute any and all papers and perform all lawful acts that
the Company may deem necessary or appropriate to further evidence or carry out
the transactions contemplated in this Agreement including, without limitation,
such acts as may be necessary for the preparation, filing, prosecution, and
maintenance of applications for United States letters patent and foreign
letters patent, or for United States and foreign copyright, on the
Developments.
10. NO COMPETITION. Throughout the term of the Agreement and,
unless the Agreement terminates pursuant to Section 3, 5(a) or 5(c), through
the first anniversary of the expiration thereof, the Executive shall not
directly or indirectly engage in the business of acquiring oil and natural gas
reserves and oil and natural gas production and exploitation; or any other
business in which any member of the Company Group directly or indirectly
engages during the term of the Agreement; provided, however, that the
restriction in this Section 10 shall apply only to the reasonable and limited
geographic area consisting of any state in which any member of the Company
Group directly or indirectly has offices, operations, or customers, or
otherwise conducts business; and provided further that if the Agreement
terminates pursuant to Section 5(b), the Executive shall be subject to the
provisions of this Section 10 only if the Company pays the Executive in a lump
sum an amount equal to the annual Base Salary in effect at the Date of
Termination. For purposes of this Section 10, the Executive shall be deemed to
engage in a business if he directly or indirectly, engages or invests in, owns,
manages, operates, controls or participates in the ownership, management,
operation or control of, is employed by, associated or in any manner connected
with, or renders services or advice to, any business engaged in acquiring oil
and natural gas reserves and oil and natural gas production and exploitation;
provided, however, that the Executive may invest in the securities of any
enterprise (but without otherwise participating in the activities of such
enterprise) if (x) such securities are listed on any national or regional
securities exchange or have been registered under Section 12(g) of the
Securities Exchange Act of 1934 and (y) the Executive does not beneficially own
(as defined Rule 13d-3 promulgated under the Securities Exchange Act of 1934)
in excess of 5% of the outstanding capital stock of such enterprise;
The Executive agrees that if a court of competent jurisdiction
determines that the length of time or any other restriction, or portion
thereof, set forth in this Section 10 is overly restrictive and unenforceable,
the court may reduce or modify such restrictions to those which it deems
reasonable and enforceable under the circumstances, and as so reduced or
modified, the parties hereto agree that the restrictions of this Section 10
shall remain in full force and effect. The Executive further agrees that if a
court of competent jurisdiction determines that
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<PAGE> 9
any provision of this Section 10 is invalid or against public policy, the
remaining provisions of this Section 10 and the remainder of this Agreement
shall not be affected thereby, and shall remain in full force and effect.
The Executive acknowledges that the business of the Company and the
other members of the Company Group is southwest United States in scope and that
the restrictions imposed by this Agreement are legitimate, reasonable and
necessary to protect the Company's and its affiliates' investment in their
businesses and the goodwill thereof. The Executive acknowledges that the scope
and duration of the restrictions contained herein are reasonable in light of
the time that the Executive has been engaged in the business of the Company and
the other members of the Company Group, the Executive's reputation in the
markets for the Company's and the businesses of the other members of the
Company Group and the Executive's relationship with the suppliers, customers
and clients of the Company and the other members of the Company Group. The
Executive further acknowledges that the restrictions contained herein are not
burdensome to the Executive in light of the consideration paid therefor and the
other opportunities that remain open to the Executive. Moreover, the Executive
acknowledges that he has other means available to him for the pursuit of his
livelihood.
11. REMEDIES. The Executive acknowledges that a remedy at law for
any breach or attempted breach of the Executive's obligations under Sections 7
through 10 hereof may be inadequate, agrees that the Company may be entitled to
specific performance and injunctive and other equitable remedies in case of any
such breach or attempted breach, and further agrees to waive any requirement
for the securing or posting of any bond in connection with the obtaining of any
such injunctive or other equitable relief. The Company shall have the right to
offset against amounts to be paid to the Executive pursuant to the terms hereof
any amounts from time to time owing by the Executive to the Company. The
termination of the Agreement pursuant to Section 3, 5(b) or 5(d) hereof shall
not be deemed to be a waiver by the Company of any breach by the Executive of
this Agreement or any other obligation owed the Company, and notwithstanding
such a termination the Executive shall be liable for all damages attributable
to such a breach.
12. DISPUTE RESOLUTION. Subject to the Company's right to seek
injunctive relief in court as provided in Section 11 hereof, any dispute,
controversy or claim arising out of or in relation to or connection to this
Agreement, including without limitation any dispute as to the construction,
validity, interpretation, enforceability or breach of this Agreement, shall be
exclusively and finally settled by arbitration, and any party may submit such
dispute, controversy or claim, including a claim for indemnification under this
Section 12, to arbitration.
(a) Arbitrators. The arbitration shall be heard and
determined by one arbitrator, who shall be impartial and who shall be
selected by mutual agreement of the parties. If the parties cannot
agree on the sole arbitrator, then the appointing authority for the
implementation of such procedure shall be the Senior United States
District Judge for the Northern District of Texas, who shall appoint
an independent arbitrator who does not have any financial interest in
the dispute, controversy or claim. If the Senior United States
District Judge for the Northern District of Texas refuses or fails to
act as the appointing authority within ninety (90) days after being
requested to do so, then the appointing authority shall be the Chief
Executive Officer of the American Arbitration Association, who shall
appoint an independent arbitrator who does not have any financial
interest in the dispute, controversy or claim. All decisions and
awards by the arbitration tribunal shall be made by majority vote.
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(b) Proceedings. Unless otherwise expressly agreed in
writing by the parties to the arbitration proceedings:
(i) The arbitration proceedings shall be held in
Dallas, Texas, at a site chosen by mutual agreement of the
parties, or if the parties cannot reach agreement on a
location within thirty (30) days of the appointment of the
last arbitrator, then at a site chosen by the arbitrators;
(ii) The arbitrators shall be and remain at all
times wholly independent and impartial;
(iii) The arbitration proceedings shall be
conducted in accordance with the Commercial Arbitration Rules
of the American Arbitration Association, as amended from time
to time;
(iv) Any procedural issues not determined under
the arbitral rules selected pursuant to item (iii) above shall
be determined by the law of the place of arbitration, other
than those laws which would refer the matter to another
jurisdiction;
(v) The decision of the arbitrators shall be
reduced to writing; final and binding without the right of
appeal; the sole and exclusive remedy regarding any claims,
counterclaims, issues or accounting presented to the
arbitrators; made and promptly paid in United States dollars
free of any deduction or offset; and any costs or fees
incident to enforcing the award shall, to the maximum extent
permitted by law, be charged against the party resisting such
enforcement;
(vi) The award shall include interest from the
date of any breach or violation of this Agreement, as
determined by the arbitral award, and from the date of the
award until paid in full, at the applicable Federal rate
provided for in Section 7872(f)(2)(A) of the Code; and
(vii) Judgment upon the award may be entered in any
court having jurisdiction over the person or the assets of the
party owing the judgment or application may be made to such
court for a judicial acceptance of the award and an order of
enforcement, as the case may be.
(c) Acknowledgment Of Parties. Each party acknowledges
that he or it has voluntarily and knowingly entered into an agreement
to arbitration under this Section by executing this Agreement.
13. MISCELLANEOUS PROVISIONS.
(a) Successors of the Company. The Company will require
any successor (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company, by agreement in form and
substance satisfactory to the Executive, expressly to assume and agree
to perform this Agreement in the same manner and to the same extent
that the Company would be required to perform it if no such succession
had taken place. Failure of the Company to obtain such agreement
prior to the effectiveness of any such succession shall be a breach of
this Agreement and shall entitle the Executive to compensation from
the Company in the same amount and on the same terms as the Executive
would be entitled hereunder if the Executive terminated his employment
for Good Reason,
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except that for purposes of implementing the foregoing, the date on
which any such succession becomes effective shall be deemed the Date
of Termination. As used in this Agreement, "COMPANY" shall mean the
Company as hereinbefore defined and any successor to its business
and/or assets as aforesaid which executes and delivers the agreement
provided for in this Section 13(a) or which otherwise becomes bound by
all the terms and provisions of this Agreement by operation of law.
(b) Executive's Heirs, etc. The Executive may not assign
his rights or delegate his duties or obligations hereunder without the
written consent of the Company. This Agreement shall inure to the
benefit of and be enforceable by the Executive's personal or legal
representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Executive should die
while any amounts would still be payable to him hereunder as if he had
continued to live, all such amounts, unless other provided herein,
shall be paid in accordance with the terms of this Agreement to his
designee or, if there be no such designee, to his estate.
(c) Notice. For the purposes of this Agreement, notices
and all other communications provide for in the Agreement shall be in
writing and shall be deemed to have been duly given when delivered or
mailed by United States registered or certified mail, return receipt
requested, postage prepaid, addressed to the respective addresses set
forth on the first page of this Agreement, provided that all notices
to the Company shall be directed to the attention of the Chief
Executive Officer of the Company with a copy to the Secretary of the
Company, or to such other in writing in accordance herewith, except
that notices of change of address shall be effective only upon
receipt.
(d) Amendment; Waiver. No provisions of this Agreement
may be modified, waived or discharged unless such waiver, modification
or discharge is agreed to in writing signed by the Executive and such
officer as may be specifically designated by the Board of Directors of
the Company. No waiver by either party hereto at any time of any
breach by the other party hereto of, or compliance with, any condition
or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. No
agreements or representations, oral or otherwise, express or implied,
with respect to the subject matter hereof have been made by either
party which are not set forth expressly in this Agreement.
(e) Invalid Provisions. Should any portion of this
Agreement be adjudged or held to be invalid, unenforceable or void,
such holding shall not have the effect of invalidating or voiding the
remainder of this Agreement and the parties hereby agree that the
portion so held invalid, unenforceable or void shall, if possible, be
deemed amended or reduced in scope, or otherwise be stricken from this
Agreement to the extent required for the purposes of validity and
enforcement thereof.
(f) Survival of the Executive's Obligations. The
Executive's obligations under this Agreement shall survive regardless
of whether the Executive's employment by the Company is terminated,
voluntarily or involuntarily, by the Company or the Executive, with or
without Cause.
(g) Counterparts. This Agreement may be executed in one
or more counterparts, each of which shall be deemed to be an original
but all of which together will constitute one and the same instrument.
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<PAGE> 12
(h) Governing Law. This Agreement shall be governed by
and construed under the laws of the State of Texas.
(i) Captions and Gender. The use of captions and Section
headings herein is for purposes of convenience only and shall not
effect the interpretation or substance of any provisions contained
herein. Similarly, the use of the masculine gender with respect to
pronouns in this Agreement is for purposes of convenience and includes
either sex who may be a signatory.
(j) Entire Agreement. This Agreement constitutes the
entire agreement between the parties hereto with respect to the
subject matter hereof and supersedes all prior agreements, both
written and oral, between the parties with respect to the subject
matter hereof, including, without limitation, the Employment Agreement
dated July 1, 1997 between the Company and the Executive.
(k) Legal Costs; Payments During Dispute. The Company
shall pay promptly as incurred, to the full extent permitted by law,
all legal fees and expenses which the Executive may reasonably incur
as a result of any contest (regardless of the outcome thereof) by the
Company, the Executive or others of the validity or enforceability of,
or liability under, any provision of this Agreement or any guarantee
of performance thereof (including as a result of any contest by the
Executive about the amount of any payment pursuant to this Agreement),
plus in each case interest on any delayed payment at the applicable
Federal rate provided for in Section 7872(f)(2)(A) of the Code. If
there shall be any dispute between the Company and the Executive (i)
in the event of any termination of the Executive's employment by the
Company, whether such termination was for Cause or Disability, or (ii)
in the event of any termination of employment by the Executive,
whether Good Reason existed, then, unless and until there is a final,
nonappealable judgment by a court of competent jurisdiction or
decision of arbitration declaring that such termination was for Cause
or Disability or that the determination by the Executive of the
existence of Good Reason was not made in good faith, the Company shall
pay all amounts, and provide all benefits, to the Executive and/or the
Executive's family or other beneficiaries, as the case may be, that
the Company would be required to pay or provide pursuant to Section 5
hereof as though such termination were by the Company without Cause or
Disability or by the Executive with Good Reason; provided, however,
that the Company shall not be required to pay any disputed amounts
pursuant to this paragraph except upon receipt of an undertaking by or
on behalf of the Executive to repay all such amounts to which the
Executive is ultimately adjudged by such court not to be entitled.
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<PAGE> 13
IN WITNESS WHEREOF, the parties hereto have signed this Agreement as
of the date first set forth above.
QUEEN SAND RESOURCES, INC.
By: /s/ AUTHORIZED SIGNATORY
--------------------------------
Name:
---------------------------
Title:
--------------------------
and
By: /s/ AUTHORIZED SIGNATORY
--------------------------------
Name:
---------------------------
Title:
--------------------------
(EXECUTIVE)
/s/ ROBERT P. LINDSAY
--------------------------------------
Robert P. Lindsay
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<PAGE> 14
EXHIBIT A
SALARY AND BENEFITS
(a) Base Salary. The Company shall pay the Executive as
compensation an aggregate salary of $130,000 per year during the
Employment Period (pro rated for periods less than twelve (12)
months), or such greater amount as shall be approved by the
Compensation Committee of the Company's Board of Directors ("BASE
SALARY"). The Compensation Committee shall review the Executive's
Base Salary at least annually and in conducting such review shall take
into consideration the most recent executive compensation assessment
prepared by an independent compensation consultant to the Company.
The Base Salary for each year shall be paid by the Company in
accordance with the regular payroll practices of the Company. The
Company may not reduce the Executive's Base Salary at any time during
the term hereof.
(b) Bonus. Subject to the provisions of this paragraph
(b), the Company shall pay the Executive an annual bonus for each
fiscal year during the Term of this Agreement (the amount of the Bonus
will be prorated for any period of less than twelve calendar months).
Such bonus shall be paid on the last business day of the third month
following the fiscal year end of the Company during the Term of this
Agreement. The Compensation Committee shall review the method of
determination of the Executive's Bonus at least annually and in
conducting such review shall take into consideration the most recent
executive compensation assessment prepared by an independent
compensation consultant to the Company.
(c) Stock Options. The Company shall grant the Executive
stock options pursuant to the Company's 1997 Incentive Equity Plan
(the "PLAN") on terms and conditions to be determined by the
Compensation Committee of the Company's Board of Directors, and in
making such determination shall take into consideration the most
recent executive compensation assessment prepared by an independent
compensation consultant to the Company
(d) Life Insurance. During the Employment Period and
subject to the Executive's qualification under normal life insurance
underwriting standards as of the date hereof and at any policy renewal
date, the Company shall provide, at the Company's expense, a term life
insurance policy on the life of the Executive for the benefit of such
beneficiary or beneficiaries as may be designated from time to time by
the Executive, such policy to be in a face amount as designated by the
Board of Directors for all executives generally.
(e) Disability Insurance. During the Employment Period
and subject to the Executive's qualification under normal disability
insurance underwriting standards as of the date hereof and at any
policy renewal date, the Company shall provide, at the Company's
expense, a disability insurance policy with such terms that are
designated by the Board of Directors for all executives generally.
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<PAGE> 15
(f) Medical Expenses. During the Employment Period, the
Company shall pay, or reimburse the Executive for, all medical and
dental expenses incurred by the Executive or his spouse or Dependents
(as defined in Section 152 of the Internal Revenue Code ("Code")).
The Executive acknowledges that the Company may enter into insurance
agreements with respect to the payments and reimbursements described
in this subsection. The Executive will use reasonable efforts to
assist the Company in recovering payments and reimbursements from such
insurers.
(g) Payment and Reimbursement of Expenses. During the
Employment Period, the Company shall pay or reimburse the Executive
for all reasonable travel and other expenses incurred by the Executive
in performing his obligations under this Agreement in accordance with
the policies and procedures of the Company for its senior executive
officers, provided that the Executive properly accounts therefor in
accordance with the regular policies of the Company. In addition, the
Company shall pay or reimburse the Executive for reasonable costs of
accountants, lawyers, compensation specialists and other professionals
retained by the Executive in connection with the negotiation and
execution of this Agreement.
(h) Fringe Benefits and Perquisites. During the
Employment Period, the Executive shall be entitled to participate in
or receive benefits under any plan or arrangement made available by
the Company to its senior executive officers, subject to and on a
basis consistent with the terms, conditions and overall administration
of such plans and arrangements. Nothing paid to the Executive under
any plan or arrangement made available to the Executive shall be
deemed to be in lieu of compensation hereunder.
(i) Vacations. During the Employment Period and in
accordance with the regular policies of the Company, the Executive
shall be entitled to the number of paid vacation days in each calendar
year determined by the Company from time to time for its senior
executive officers, but not less than four (4) weeks in any calendar
year (prorated in any calendar year in which the Executive is employed
hereunder for less than the entire year in accordance with the number
of days in such calendar year during which the Executive is so
employed).
(j) Tax. The Company may withhold from any compensation,
benefits, or amounts payable under this Agreement all federal, state,
city, or other taxes as may be required pursuant to any law or
governmental regulation or ruling.
15
<PAGE> 1
EXHIBIT 10.9
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made and entered into this 15th day of December,
1997 (the "EFFECTIVE DATE") by and between Queen Sand Resources (Canada) Inc.,
a corporation formed under the laws of Ontario (the "COMPANY"), and Bruce I.
Benn (the "EXECUTIVE"), having a mailing address at 83 Homestead, Nepean,
Ontario, Canada K2E 7T3.
RECITALS
The Executive possesses extensive knowledge of the business and
affairs of the Company, its policies, methods, personnel, and plans for the
future.
The Board has determined that it is in the best interests of the
Company to assure that the Company will have the continued dedication of the
Executive, notwithstanding the possibility, threat or occurrence of a Change of
Control (as defined in Section 5 hereof). The Board believes it is imperative
to retain the Executive's services, to diminish the inevitable distraction of
the Executive by virtue of the personal uncertainties and risks created by a
pending or threatened Change of Control and to encourage the Executive's full
attention and dedication to the Company currently and in the event of any
threatened or pending Change of Control, and to provide the Executive with
compensation and benefits arrangements upon a Change of Control.
The Company wishes to protect the Executive from loss of compensation
and benefits if his continued employment is no longer possible through no fault
of the Executive.
The Executive is desirous of committing himself to serve the Company
on the terms herein provided.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements herein contained, the parties agree as follows:
AGREEMENT
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the Company and the Executive hereby agree as
follows:
1. EMPLOYMENT. Upon the terms and subject to the conditions
contained in this Agreement, the Executive agrees to provide full-time services
for the Company during the Employment Period (as defined below). The Executive
agrees to devote his best efforts to the business of the Company, and shall
perform his duties in a diligent, trustworthy and business-like manner, all for
the purpose of advancing the business of the Company.
2. DUTIES. The Executive shall have the title of Executive Vice
President and shall have the duties that are customarily attendant to that
office and such other duties as are from time to time assigned by the Board of
Directors. During the Employment Period, the Executive's position (including
status, offices, titles and reporting requirements), authority, duties and
responsibilities shall be at least commensurate in all material respects with
the most significant of those held, exercised and assigned at any time during
the 90-day period immediately preceding the Effective Date. During the
Employment Period, and excluding any periods of vacation and sick leave to
which the Executive is entitled, the
<PAGE> 2
Executive agrees to devote reasonable attention and time during normal business
hours to the business and affairs of the Company and, to the extent necessary
to discharge the responsibilities assigned to the Executive hereunder, to use
the Executive's reasonable best efforts to perform faithfully and efficiently
such responsibilities. During the Employment Period it shall not be a
violation of this Agreement for the Executive to (A) serve on corporate, civic
or charitable boards or committees, (B) deliver lectures, fulfill speaking
engagements or teach at educational institutions and (C) manage personal
investments, so long as such activities do not significantly interfere with the
performance of the Executive's responsibilities as an employee of the Company
in accordance with this Agreement. It is expressly understood and agreed that
to the extent that any such activities have been conducted by the Executive
prior to the Effective Date, the continued conduct of such activities (or the
conduct of activities similar in nature and scope thereto) subsequent to the
Effective Date shall not thereafter be deemed to interfere with the performance
of the Executive's responsibilities to the Company. Notwithstanding anything
herein to the contrary it is acknowledged and agreed that the Executive may
hold positions as director, officer or employee of Capital House A Finance and
Investment Corporation and any corporation associated therewith; provided, that
such activities do not impair the performance by Executive of his duties
hereunder or otherwise interfere with Executive's compliance with his
obligations set forth in the preceding sentence.
3. EMPLOYMENT PERIOD. Subject to the terms and conditions
hereof, the Company agrees to employ the Executive for a term (the "EMPLOYMENT
PERIOD") commencing as of the Effective Date and terminating on June 30, 2002.
4. SALARY AND BENEFITS. The salary and benefits of the Executive
hereunder are as set forth on Exhibit A attached hereto.
5. TERMINATION OF EMPLOYMENT. The Board of Directors of the
Company may terminate the employment of the Executive at any time as it deems
appropriate.
(a) Termination Without Cause; Resignation for Good
Reason. If during the term of this Agreement, (i) the Executive's
employment is terminated by the Company without Cause (defined below)
or (ii) the Executive voluntarily terminates his employment during the
Employment Period for Good Reason, then the Company shall pay the
Executive (in a lump sum) an amount equal to the sum of (x) the Base
Salary for one year in effect immediately prior to the termination and
(y) the amount of the Bonus that would have been payable to the
Executive for such year, prorated to the Termination Date, and the
Company shall issue to the Executive a number of stock options that
the Executive would have been entitled to receive for that year,
prorated to the Termination Date.
For purposes of this Agreement, "GOOD REASON" shall mean:
(i) Without his express written consent, the
assignment to the Executive of any duties materially
inconsistent with his positions, duties, responsibilities and
status with the Company as of the Effective Date, or a
substantial reduction in his reporting responsibilities,
titles or offices as of the Effective Date, or any removal of
the Executive from or any failure to re-elect the Executive to
any of such positions, except in connection with the
termination of his employment for Cause, Disability (defined
below) or as a result of his death or by the Executive other
than for Good Reason;
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<PAGE> 3
(ii) A reduction by the Company in the Executive's
Base Salary (as defined in Exhibit A attached hereto) as in
effect immediately prior to the Effective Date or as the same
may be increased from time to time;
(iii) A reduction by the Company in the amounts
payable under the Company's annual incentive plan unless such
reduction affects all executive officers of the Company and
does not result in a proportionately greater reduction in the
rights of or benefits to the Executive as compared with any
other executive officer of the Company;
(iv) The failure by the Company to continue in
effect any benefit or compensation plan (including but not
limited to any stock option plan, pension plan, life insurance
plan, health and accident plan or disability plan) in which
the Executive from time to time participates (or plans
providing substantially similar benefits, and whether by or
through the Company or another member of the Company Group),
the taking of any action by the Company which would adversely
affect the Executive's participation in or materially reduce
his benefits under any of such plans or deprive him of any
material fringe benefit enjoyed by him, or the failure by the
Company to provide the Executive with the number of paid
vacation days to which he is then entitled on the basis of
years of service with the Company in accordance with the
Company's normal vacation policy in effect immediately prior
to the Effective Date except for such changes in benefits that
affect all executive officers of the Company and do not result
in a proportionately greater reduction in the rights of or
benefits to the Executive as compared with any other executive
officer of the Company;
(v) Any failure of the Company to obtain the
assumption of, or the agreement to perform, this Agreement by
any successor as contemplated in Section 13(a) hereof; or
(vi) Any purported termination of the Executive's
employment which is not effected pursuant to a notice of
termination satisfying the requirements of Section 5(b) or
5(d) hereof; and for purposes of this Agreement, no such
purported termination shall be effective.
(b) Voluntary Resignation or Termination for Cause. If
the Executive shall voluntarily terminate his employment for other
than Good Reason or if the Company shall discharge the Executive for
Cause, this Agreement shall terminate immediately and the Company
shall have no further obligation to make any payment under this
Agreement except that the Company shall pay the Executive accrued but
unpaid salary, bonuses and benefits pursuant to Section 4 hereof
through the Date of Termination.
For the purposes of this Agreement, the Company shall have
"CAUSE" to terminate the Executive's employment hereunder upon (A) the
willful and continued failure by the Executive to substantially
perform his duties with the Company (other than any such failure
resulting from incapacity due to physical or mental illness), and such
failure is not remedied in a reasonable time after a written demand
for substantial performance is delivered to the Executive by the Board
which specifically identifies the manner in which the Board believes
that he has not substantially performed his duties, or (B) the final,
nonappealable conviction of a felony. For purposes of this paragraph,
no act, or failure to act, on the Executive's part shall be
3
<PAGE> 4
considered "WILLFUL" unless done, or omitted to be done, by him not in
good faith and without reasonable belief that his action or omission
was not in the best interest of the Company. Notwithstanding the
foregoing, the Executive shall not be deemed to have been terminated
for Cause under (A) above unless and until there shall have been
delivered to him a copy of a resolution duly adopted by the
affirmative vote of not less than two- thirds (2/3) of the entire
authorized membership of the Board at a meeting of the Board called
and held for the purpose (after reasonable notice and an opportunity
for the Executive, together with counsel, to be heard before the
Board), finding that in the good faith opinion of the Board he was
guilty of conduct set forth above in clause (A) of the first sentence
of this paragraph and specifying the particulars thereof in detail.
(c) Termination After Change of Control. If, within six
(6) months after a Change of Control (defined below), the Company
shall terminate the Executive's employment other than pursuant to
Section 3 or 5(b)hereof or if the Executive shall terminate his
employment for Good Reason, then the Company shall pay to the
Executive as severance pay in a lump sum not later than the tenth
(10th) day following the Date of Termination, the following amounts:
(i) The Executive's full Base Salary through the
Date of Termination at the rate in effect at the time of
notice of termination is given;
(ii) In lieu of any further salary payments to the
Executive for periods subsequent to the Date of Termination,
an amount equal to the sum of (x) the Base Salary for one year
in effect immediately prior to the termination and (y) the
amount of the Bonus that would have been payable to the
Executive for such year, prorated to the Termination Date and
the Company shall issue to the Executive a number of stock
options that the Executive would have been entitled to receive
for that year, prorated to the Termination Date;
(iii) In lieu of shares of common stock of Queen
Sand Resources, Inc., a Delaware corporation, ("QSR-DE"), par
value $.0015 per share ("QSR-DE SHARES") issuable upon
exercise of options ("OPTIONS"), if any, granted to the
Executive under any stock option plan of QSR-DE (which Options
shall be canceled upon the making of the payment referred to
below), the Executive shall receive an amount in cash equal to
the aggregate spread between the exercise prices of all
Options held by the Executive whether or not then fully
exercisable, and the highest price per QSR-DE Share of Common
Stock actually paid (including the fair market value of
non-cash consideration per QSR-DE Share received) in
connection with any change in control of QSR-DE (such price
being hereinafter referred to as "TERMINATION PRICE"); and
(iv) The Company shall also pay all reasonable
legal fees and expenses incurred by the Executive as a result
of such termination (including all such reasonable fees and
expenses, if any, incurred in contesting or disputing any such
termination or in seeking to obtain or enforce any right or
benefit provided by this Agreement).
4
<PAGE> 5
"CHANGE OF CONTROL" means any of the following:
(i) any consolidation or merger of QSR-DE in
which QSR-DE is not the continuing or surviving corporation or
pursuant to which shares of QSR-DE's common stock would be
converted into cash, securities or other property, other than
a merger of QSR-DE in which the holders of QSR-DE's common
stock immediately prior to the merger have the same
proportionate ownership of common stock of the surviving
corporation immediately after the merger;
(ii) any sale, lease, exchange or other transfer
(in one transaction or a series of related transactions) of
all or substantially all of the assets of QSR-DE;
(iii) any approval by the stockholders of QSR-DE of
any plan or proposal for the liquidation or dissolution of
QSR-DE;
(iv) the cessation of control (by virtue of their
not constituting a majority of directors) of QSR-DE's Board of
Directors by the individuals (the "CONTINUING DIRECTORS") who
(x) at the date of this Agreement were directors or (y) become
directors after the date of this Agreement and whose election
or nomination for election by QSR-DE's stockholders, was
approved by a vote of at least two- thirds of the directors
then in office who were directors at the date of this
Agreement or whose election or nomination for election was
previously so approved);
(v) (A) the acquisition of beneficial ownership
(within the meaning of Rule 13d-3 under the Securities
Exchange Act of 1934, as amended ("BENEFICIAL OWNERSHIP")) of
an aggregate of 15% of the voting power of QSR-DE's
outstanding voting securities by any person or group (as such
term is used in Rule 13d-5 under such Act) who Beneficially
Owned less than 10% of the voting power of QSR-DE's
outstanding voting securities on the date hereof, (B) the
acquisition of Beneficial Ownership of an additional 5% of the
voting power of QSR-DE's outstanding voting securities by any
person or group who Beneficially Owned at least 10% of the
voting power of QSR-DE's outstanding voting securities on the
date hereof, or (C) the execution by QSR-DE and a stockholder
of a contract that by its terms grants such stockholder (in
its, hers or his capacity as a stockholder) or such
stockholder's Affiliate (as defined in Rule 405 promulgated
under the Securities Act of 1933 (an "AFFILIATE")) including,
without limitation, such stockholder's nominee to the Board of
Directors (in its, hers or his capacity as an Affiliate of
such stockholder), the right to veto or block decisions or
actions of the Board of Directors; provided, however, that
notwithstanding the foregoing, the events described in items
(A), (B) or (C) above shall not constitute a Change in Control
hereunder if the securityholder is (aa) a trustee or other
fiduciary holding securities under an employee benefit plan of
QSR-DE and acting in such capacity, (bb) a corporation owned,
directly or indirectly, by the stockholders of QSR-DE in
substantially the same proportions as their ownership of
voting securities of QSR-DE or (cc) in the case of an
acquisition described in items (A) or (B) above (but not in
the case of an acquisition described in item (C) above), any
other person whose acquisition of shares of voting securities
is approved in advance by a majority of the Continuing
5
<PAGE> 6
Directors; provided further, however that none of the
following shall constitute a Change in Control: (aa) the right
of the holders of any voting securities of QSR-DE to vote as a
class on any matter or (bb) any vote required of disinterested
or unaffiliated directors or stockholders including, without
limitation, pursuant to Section 144 of the Delaware General
Corporation Law or Rule 16b-3 promulgated pursuant to the
Securities Exchange Act of 1934; or
(vi) subject to applicable law, in a Chapter 11
bankruptcy proceeding, the appointment of a trustee or the
conversion of a case involving QSR-DE to a case under Chapter
7.
(d) Disability. The Company may terminate this Agreement
for Disability. If the Company shall terminate the Executive's
employment for Disability, the Company's obligation to pay salary,
bonuses and benefits pursuant to Section 4 hereof shall terminate,
except that the Company shall pay the Executive (i) accrued but unpaid
salary and benefits pursuant to Section 4 hereof through the Date of
Termination, and (ii) the benefits set forth in Section 5(e) hereof.
The Company also shall make any additional payments necessary to
provide the disability benefits set forth in Exhibit A attached
hereto. "DISABILITY" shall exist if because of ill health, physical
or mental disability, or any other reason beyond his control, and
notwithstanding reasonable accommodations made by the Company, the
Executive shall have been unable, unwilling or shall have failed to
perform his duties under this Agreement, as determined in good faith
by the Compensation Committee of the Company's Board of Directors, for
a period of 180 consecutive days, or if, in any 12-month period, the
Executive shall have been unable or unwilling or shall have failed to
perform his duties for a period of 270 days, irrespective of whether
or not such days are consecutive.
(e) Employee Benefits. Unless the Executive's employment
is terminated pursuant to Section 5(b) hereof, the Company shall
maintain in full force and effect (to the extent consistent with past
practice), for the continued benefit of the Executive and, if
applicable, the Executive's spouse and children, the employee benefits
set forth in [subsections (d) ("LIFE INSURANCE"), (e) ("DISABILITY
INSURANCE"), (f) ("MEDICAL EXPENSES") and (h) ("FRINGE BENEFITS AND
PERQUISITES")] of Exhibit A attached hereto that he was entitled to
receive immediately prior to the Date of Termination (subject to the
general terms and conditions of the plans and programs under which he
receives such benefits) for the balance of the Employment Period
notwithstanding the termination hereof or for the period provided for
under the terms and conditions of such plans and programs, whichever
is longer, provided that his continued participation or, if
applicable, the participation of the Executive's spouse and children,
is possible under the general terms and conditions of such plans and
programs.
(f) Notice of Termination. Any termination by the
Company or by the Executive shall be communicated by Notice of
Termination to the other party thereto given in accordance with
Section 13(c) hereof. For purposes of this Agreement, a "NOTICE OF
TERMINATION" means a written notice which (i) indicates the specific
termination provision in this Agreement relied upon, (ii) to the
extent applicable, sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the
Executive's employment under the provision so indicated and (iii) if
the Date of Termination (as defined below) is other than the date of
receipt of such notice, specifies the termination date (which date
shall be not more than fifteen (15)
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<PAGE> 7
days after the giving of such notice). The failure by the Executive
or the Company to set forth in the Notice of Termination any fact or
circumstance which contributes to a showing of Good Reason, Cause or
Disability shall not waive any right of the Executive or the Company
hereunder or preclude the Executive or the Company from asserting such
fact or circumstance in enforcing the Executive's or the Company's
rights hereunder.
(g) Date of Termination. "DATE OF TERMINATION" means (i)
if the Executive's employment is terminated by the Company for Cause
or Disability or by the Executive for Good Reason or within six (6)
months after a Change of Control, the date of receipt of the Notice of
Termination or any later date specified therein, as the case may be,
(ii) if the Executive's employment is terminated by the Company or
other than for Cause, the Date of Termination shall be the date on
which the Company notifies the Executive of such termination and (iii)
if the Executive's employment is terminated by reason of death, the
Date of Termination shall be the date of death of the Executive.
(h) Mitigation of Amounts Payable Hereunder. The
Executive shall not be required to mitigate the amount of any payment
provided for in this Section 5 by seeking other employment or
otherwise, nor shall the amount of any payment provided for in this
Section 5 be reduced by any compensation earned by the Executive as
the result of employment by another employer after the Date of
Termination, or otherwise.
6. DEATH OF THE EXECUTIVE. If the Executive dies prior to the
end of Employment Period, the Executive's employment and other obligations
under this Agreement shall automatically terminate and all compensation, to
which the Executive is or would have been entitled hereunder (including without
limitation under subsections (a) ("BASE SALARY"), (b) ("BONUS") and (c) ("STOCK
OPTIONS") of Exhibit A attached hereto), shall terminate as of the end of the
month in which the Executive's death occurs; provided, however, that (i) the
Company shall pay to the Executive's estate, as soon as practicable, a prorated
Annual Incentive Payment, if earned in accordance with the Company's annual
incentive plan; (ii) for the balance of the Employment Period, the Executive's
spouse and children shall be entitled to receive their benefits under the
Company's group hospitalization, medical and dental plans (if any); and (iii)
the Executive's named beneficiary or beneficiaries shall receive the benefits
payable pursuant to subsection (d) ("LIFE INSURANCE") of Exhibit A attached
hereto and such reimbursement as may have been due to the Executive pursuant to
subsection (g) ("PAYMENT AND REIMBURSEMENT OF EXPENSES") of Exhibit A attached
hereto.
7. CONFIDENTIAL INFORMATION. The Executive recognizes and
acknowledges that he will have access to certain information of members of the
Company Group (as defined below) and that such information is confidential and
constitutes valuable, special and unique property of such members of the
Company Group. The Executive shall not at any time, either during or
subsequent to the term of this Agreement, disclose to others, use, copy or
permit to be copied, except in pursuance of his duties for and on behalf of the
Company, it successors, assigns or nominees, any Confidential Information of
any member of the Company Group (regardless of whether developed by the
Executive) without the prior written consent of the Company. As used herein,
"COMPANY GROUP" means the Company, and any entity that directly or indirectly
controls, is controlled by, or is under common control with, the Company. For
purposes hereof, "CONTROL" means the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of such
entity, whether through the ownership of voting securities, by contract or
otherwise. The term
7
<PAGE> 8
"CONFIDENTIAL INFORMATION" with respect to any person means any secret or
confidential information or know-how and shall include, but shall not be
limited to, the plans, customers, costs, prices, uses, and applications of
products and services, results of investigations, studies or experiments owned
or used by such person, and all apparatus, products, processes, compositions,
samples, formulas, computer programs, computer hardware designs, computer
firmware designs, and servicing, marketing or manufacturing methods and
techniques at any time used, developed, investigated, made or sold by such
person, before or during the term of this Agreement, that are not readily
available to the public or that are maintained as confidential by such person.
The Executive shall maintain in confidence any Confidential Information of
third parties received as a result of his employment with the Company in
accordance with the Company's obligations to such third parties and the
policies established by the Company.
8. DELIVERY OF DOCUMENTS UPON TERMINATION. The Executive shall
deliver to the Company or its designee at the termination of his employment all
correspondence, memoranda, notes, records, drawings, sketches, plans, customer
lists, product compositions, and other documents and all copies thereof, made,
composed or received by the Executive, solely or jointly with others, that are
in the Executive's possession, custody, or control at termination and that are
related in any manner to the past, present, or anticipated business or any
member of the Company Group. In this regard, the Executive hereby grants and
conveys to the Company all right, title and interest in and to, including
without limitation, the right to possess, print, copy, and sell or otherwise
dispose of, any reports, records, papers, summaries, photographs, drawings or
other documents, and writings, and copies, abstracts or summaries thereof, that
may be prepared by the Executive or under his direction or that may come into
his possession in any way during the term of his employment with the Company
that relate in any manner to the past, present or anticipate business of any
member of the Company Group.
9. FURTHER ACTS. At the request of the Company (but without
additional compensation from the Company during his employment by the Company)
the Executive shall execute any and all papers and perform all lawful acts that
the Company may deem necessary or appropriate to further evidence or carry out
the transactions contemplated in this Agreement including, without limitation,
such acts as may be necessary for the preparation, filing, prosecution, and
maintenance of applications for United States letters patent and foreign
letters patent, or for United States and foreign copyright, on the
Developments.
10. NO COMPETITION. Throughout the term of the Agreement and,
unless the Agreement terminates pursuant to Section 3, 5(a) or 5(c), through
the first anniversary of the expiration thereof, the Executive shall not
directly or indirectly engage in the business of acquiring oil and natural gas
reserves and oil and natural gas production and exploitation; or any other
business in which any member of the Company Group directly or indirectly
engages during the term of the Agreement; provided, however, that the
restriction in this Section 10 shall apply only to the reasonable and limited
geographic area consisting of any state in which any member of the Company
Group directly or indirectly has offices, operations, or customers, or
otherwise conducts business; and provided further that if the Agreement
terminates pursuant to Section 5(b), the Executive shall be subject to the
provisions of this Section 10 only if the Company pays the Executive in a lump
sum an amount equal to the annual Base Salary in effect at the Date of
Termination. For purposes of this Section 10, the Executive shall be deemed to
engage in a business if he directly or indirectly, engages or invests in, owns,
manages, operates, controls or participates in the ownership, management,
operation or control of, is employed by, associated or in any manner
8
<PAGE> 9
connected with, or renders services or advice to, any business engaged in
acquiring oil and natural gas reserves and oil and natural gas production and
exploitation; provided, however, that the Executive may invest in the
securities of any enterprise (but without otherwise participating in the
activities of such enterprise) if (x) such securities are listed on any
national or regional securities exchange or have been registered under Section
12(g) of the Securities Exchange Act of 1934 and (y) the Executive does not
beneficially own (as defined Rule 13d-3 promulgated under the Securities
Exchange Act of 1934) in excess of 5% of the outstanding capital stock of such
enterprise;
The Executive agrees that if a court of competent jurisdiction
determines that the length of time or any other restriction, or portion
thereof, set forth in this Section 10 is overly restrictive and unenforceable,
the court may reduce or modify such restrictions to those which it deems
reasonable and enforceable under the circumstances, and as so reduced or
modified, the parties hereto agree that the restrictions of this Section 10
shall remain in full force and effect. The Executive further agrees that if a
court of competent jurisdiction determines that any provision of this Section
10 is invalid or against public policy, the remaining provisions of this
Section 10 and the remainder of this Agreement shall not be affected thereby,
and shall remain in full force and effect.
The Executive acknowledges that the business of the Company and the
other members of the Company Group is southwest United States in scope and that
the restrictions imposed by this Agreement are legitimate, reasonable and
necessary to protect the Company's and its affiliates' investment in their
businesses and the goodwill thereof. The Executive acknowledges that the scope
and duration of the restrictions contained herein are reasonable in light of
the time that the Executive has been engaged in the business of the Company and
the other members of the Company Group, the Executive's reputation in the
markets for the Company's and the businesses of the other members of the
Company Group and the Executive's relationship with the suppliers, customers
and clients of the Company and the other members of the Company Group. The
Executive further acknowledges that the restrictions contained herein are not
burdensome to the Executive in light of the consideration paid therefor and the
other opportunities that remain open to the Executive. Moreover, the Executive
acknowledges that he has other means available to him for the pursuit of his
livelihood.
11. REMEDIES. The Executive acknowledges that a remedy at law for
any breach or attempted breach of the Executive's obligations under Sections 7
through 10 hereof may be inadequate, agrees that the Company may be entitled to
specific performance and injunctive and other equitable remedies in case of any
such breach or attempted breach, and further agrees to waive any requirement
for the securing or posting of any bond in connection with the obtaining of any
such injunctive or other equitable relief. The Company shall have the right to
offset against amounts to be paid to the Executive pursuant to the terms hereof
any amounts from time to time owing by the Executive to the Company. The
termination of the Agreement pursuant to Section 3, 5(b) or 5(d) hereof shall
not be deemed to be a waiver by the Company of any breach by the Executive of
this Agreement or any other obligation owed the Company, and notwithstanding
such a termination the Executive shall be liable for all damages attributable
to such a breach.
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<PAGE> 10
12. DISPUTE RESOLUTION. Subject to the Company's right to seek
injunctive relief in court as provided in Section 11 hereof, any dispute,
controversy or claim arising out of or in relation to or connection to this
Agreement, including without limitation any dispute as to the construction,
validity, interpretation, enforceability or breach of this Agreement, shall be
exclusively and finally settled by arbitration, and any party may submit such
dispute, controversy or claim, including a claim for indemnification under this
Section 12, to arbitration.
(a) Arbitrators. The arbitration shall be heard and
determined by one arbitrator, who shall be impartial and who shall be
selected by mutual agreement of the parties. If the parties cannot
agree on the sole arbitrator, then the appointing authority for the
implementation of such procedure shall be the Senior United States
District Judge for the Northern District of Texas, who shall appoint
an independent arbitrator who does not have any financial interest in
the dispute, controversy or claim. If the Senior United States
District Judge for the Northern District of Texas refuses or fails to
act as the appointing authority within ninety (90) days after being
requested to do so, then the appointing authority shall be the Chief
Executive Officer of the American Arbitration Association, who shall
appoint an independent arbitrator who does not have any financial
interest in the dispute, controversy or claim. All decisions and
awards by the arbitration tribunal shall be made by majority vote.
(b) Proceedings. Unless otherwise expressly agreed in
writing by the parties to the arbitration proceedings:
(i) The arbitration proceedings shall be held in
Dallas, Texas, at a site chosen by mutual agreement of the
parties, or if the parties cannot reach agreement on a
location within thirty (30) days of the appointment of the
last arbitrator, then at a site chosen by the arbitrators;
(ii) The arbitrators shall be and remain at all
times wholly independent and impartial;
(iii) The arbitration proceedings shall be
conducted in accordance with the Commercial Arbitration Rules
of the American Arbitration Association, as amended from time
to time;
(iv) Any procedural issues not determined under
the arbitral rules selected pursuant to item (iii) above shall
be determined by the law of the place of arbitration, other
than those laws which would refer the matter to another
jurisdiction;
(v) The decision of the arbitrators shall be
reduced to writing; final and binding without the right of
appeal; the sole and exclusive remedy regarding any claims,
counterclaims, issues or accounting presented to the
arbitrators; made and promptly paid in United States dollars
free of any deduction or offset; and any costs or fees
incident to enforcing the award shall, to the maximum extent
permitted by law, be charged against the party resisting such
enforcement;
(vi) The award shall include interest from the
date of any breach or violation of this Agreement, as
determined by the arbitral award, and from the
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<PAGE> 11
date of the award until paid in full, at the applicable
Federal rate provided for in Section 7872(f)(2)(A) of the
Code; and
(vii) Judgment upon the award may be entered in any
court having jurisdiction over the person or the assets of the
party owing the judgment or application may be made to such
court for a judicial acceptance of the award and an order of
enforcement, as the case may be.
(c) Acknowledgment Of Parties. Each party acknowledges
that he or it has voluntarily and knowingly entered into an agreement
to arbitration under this Section by executing this Agreement.
13. MISCELLANEOUS PROVISIONS.
(a) Successors of the Company. The Company will require
any successor (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company, by agreement in form and
substance satisfactory to the Executive, expressly to assume and agree
to perform this Agreement in the same manner and to the same extent
that the Company would be required to perform it if no such succession
had taken place. Failure of the Company to obtain such agreement
prior to the effectiveness of any such succession shall be a breach of
this Agreement and shall entitle the Executive to compensation from
the Company in the same amount and on the same terms as the Executive
would be entitled hereunder if the Executive terminated his employment
for Good Reason, except that for purposes of implementing the
foregoing, the date on which any such succession becomes effective
shall be deemed the Date of Termination. As used in this Agreement,
"COMPANY" shall mean the Company as hereinbefore defined and any
successor to its business and/or assets as aforesaid which executes
and delivers the agreement provided for in this Section 13(a) or which
otherwise becomes bound by all the terms and provisions of this
Agreement by operation of law.
(b) Executive's Heirs, etc. The Executive may not assign
his rights or delegate his duties or obligations hereunder without the
written consent of the Company. This Agreement shall inure to the
benefit of and be enforceable by the Executive's personal or legal
representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Executive should die
while any amounts would still be payable to him hereunder as if he had
continued to live, all such amounts, unless other provided herein,
shall be paid in accordance with the terms of this Agreement to his
designee or, if there be no such designee, to his estate.
(c) Notice. For the purposes of this Agreement, notices
and all other communications provide for in the Agreement shall be in
writing and shall be deemed to have been duly given when delivered or
mailed by United States registered or certified mail, return receipt
requested, postage prepaid, addressed to the respective addresses set
forth on the first page of this Agreement, provided that all notices
to the Company shall be directed to the attention of the Chief
Executive Officer of the Company with a copy to the Secretary of the
Company, or to such other in writing in accordance herewith, except
that notices of change of address shall be effective only upon
receipt.
(d) Amendment; Waiver. No provisions of this Agreement
may be modified, waived or discharged unless such waiver, modification
or discharge is agreed to in
11
<PAGE> 12
writing signed by the Executive and such officer as may be
specifically designated by the Board of Directors of the Company. No
waiver by either party hereto at any time of any breach by the other
party hereto of, or compliance with, any condition or provision of
this Agreement to be performed by such other party shall be deemed a
waiver of similar or dissimilar provisions or conditions at the same
or at any prior or subsequent time. No agreements or representations,
oral or otherwise, express or implied, with respect to the subject
matter hereof have been made by either party which are not set forth
expressly in this Agreement.
(e) Invalid Provisions. Should any portion of this
Agreement be adjudged or held to be invalid, unenforceable or void,
such holding shall not have the effect of invalidating or voiding the
remainder of this Agreement and the parties hereby agree that the
portion so held invalid, unenforceable or void shall, if possible, be
deemed amended or reduced in scope, or otherwise be stricken from this
Agreement to the extent required for the purposes of validity and
enforcement thereof.
(f) Survival of the Executive's Obligations. The
Executive's obligations under this Agreement shall survive regardless
of whether the Executive's employment by the Company is terminated,
voluntarily or involuntarily, by the Company or the Executive, with or
without Cause.
(g) Counterparts. This Agreement may be executed in one
or more counterparts, each of which shall be deemed to be an original
but all of which together will constitute one and the same instrument.
(h) Governing Law. This Agreement shall be governed by
and construed under the laws of the State of Texas.
(i) Captions and Gender. The use of captions and Section
headings herein is for purposes of convenience only and shall not
effect the interpretation or substance of any provisions contained
herein. Similarly, the use of the masculine gender with respect to
pronouns in this Agreement is for purposes of convenience and includes
either sex who may be a signatory.
(j) Entire Agreement. This Agreement constitutes the
entire agreement between the parties hereto with respect to the
subject matter hereof and supersedes all prior agreements, both
written and oral, between the parties with respect to the subject
matter hereof, including, without limitation, the Employment Agreement
dated May 6, 1997 between QSR-DE and the Executive.
(k) Legal Costs; Payments During Dispute. The Company
shall pay promptly as incurred, to the full extent permitted by law,
all legal fees and expenses which the Executive may reasonably incur
as a result of any contest (regardless of the outcome thereof) by the
Company, the Executive or others of the validity or enforceability of,
or liability under, any provision of this Agreement or any guarantee
of performance thereof (including as a result of any contest by the
Executive about the amount of any payment pursuant to this Agreement),
plus in each case interest on any delayed payment at the applicable
Federal rate provided for in Section 7872(f)(2)(A) of the Code. If
there shall be any dispute between the Company and the Executive (i)
in the event of any termination of the Executive's employment by the
Company, whether such termination was for Cause or Disability, or (ii)
in the event of any termination of employment by the Executive,
whether Good Reason existed,
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<PAGE> 13
then, unless and until there is a final, nonappealable judgment by a
court of competent jurisdiction or decision of arbitration declaring
that such termination was for Cause or Disability or that the
determination by the Executive of the existence of Good Reason was not
made in good faith, the Company shall pay all amounts, and provide all
benefits, to the Executive and/or the Executive's family or other
beneficiaries, as the case may be, that the Company would be required
to pay or provide pursuant to Section 5 hereof as though such
termination were by the Company without Cause or Disability or by the
Executive with Good Reason; provided, however, that the Company shall
not be required to pay any disputed amounts pursuant to this paragraph
except upon receipt of an undertaking by or on behalf of the Executive
to repay all such amounts to which the Executive is ultimately
adjudged by such court not to be entitled.
(l) Parent Guaranty. QSR-DE hereby agrees to guaranty
the performance of the Company's obligations under this Agreement.
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<PAGE> 14
IN WITNESS WHEREOF, the parties hereto have signed this Agreement as
of the date first set forth above.
QUEEN SAND RESOURCES (CANADA) INC.
By: /s/ AUTHORIZED SIGNATORY
---------------------------------
Name:
----------------------------
Title:
---------------------------
(EXECUTIVE)
/s/ BRUCE I. BENN
---------------------------------------
Bruce I. Benn
ACCEPTED AND AGREED TO:
QUEEN SAND RESOURCES, INC.
By: /s/ AUTHORIZED SIGNATORY
---------------------------------
Name:
----------------------------
Title:
---------------------------
and
By: /s/ AUTHORIZED SIGNATORY
---------------------------------
Name:
----------------------------
Title:
---------------------------
14
<PAGE> 15
EXHIBIT A
SALARY AND BENEFITS
(a) Base Salary. The Company shall pay the Executive as
compensation an aggregate salary of $130,000 per year during the
Employment Period (pro rated for periods less than twelve (12)
months), or such greater amount as shall be approved by the
Compensation Committee of the Company's Board of Directors ("BASE
SALARY"). The Compensation Committee shall review the Executive's
Base Salary at least annually and in conducting such review shall take
into consideration the most recent executive compensation assessment
prepared by an independent compensation consultant to the Company.
The Base Salary for each year shall be paid by the Company in
accordance with the regular payroll practices of the Company. The
Company may not reduce the Executive's Base Salary at any time during
the term hereof.
(b) Bonus. Subject to the provisions of this paragraph
(b), the Company shall pay the Executive an annual bonus for each
fiscal year during the Term of this Agreement (the amount of the Bonus
will be prorated for any period of less than twelve calendar months).
Such bonus shall be paid on the last business day of the third month
following the fiscal year end of the Company during the Term of this
Agreement. The Compensation Committee shall review the method of
determination of the Executive's Bonus at least annually and in
conducting such review shall take into consideration the most recent
executive compensation assessment prepared by an independent
compensation consultant to the Company.
(c) Stock Options. The Company shall grant the Executive
stock options pursuant to the Queen Sand Resources, Inc. 1997
Incentive Equity Plan (the "PLAN") on terms and conditions to be
determined by the Compensation Committee of the Company's Board of
Directors, and in making such determination shall take into
consideration the most recent executive compensation assessment
prepared by an independent compensation consultant to the Company
(d) Life Insurance. During the Employment Period and
subject to the Executive's qualification under normal life insurance
underwriting standards as of the date hereof and at any policy renewal
date, the Company shall provide, at the Company's expense, a term life
insurance policy on the life of the Executive for the benefit of such
beneficiary or beneficiaries as may be designated from time to time by
the Executive, such policy to be in a face amount as designated by the
Board of Directors for all executives generally.
(e) Disability Insurance. During the Employment Period
and subject to the Executive's qualification under normal disability
insurance underwriting standards as of the date hereof and at any
policy renewal date, the Company shall provide, at the Company's
expense, a disability insurance policy with such terms that are
designated by the Board of Directors for all executives generally.
15
<PAGE> 16
(f) Medical Expenses. During the Employment Period, the
Company shall pay, or reimburse the Executive for, all medical and
dental expenses incurred by the Executive or his spouse or Dependents
(as defined in Section 152 of the Internal Revenue Code ("CODE")).
The Executive acknowledges that the Company may enter into insurance
agreements with respect to the payments and reimbursements described
in this subsection. The Executive will use reasonable efforts to
assist the Company in recovering payments and reimbursements from such
insurers.
(g) Payment and Reimbursement of Expenses. During the
Employment Period, the Company shall pay or reimburse the Executive
for all reasonable travel and other expenses incurred by the Executive
in performing his obligations under this Agreement in accordance with
the policies and procedures of the Company for its senior executive
officers, provided that the Executive properly accounts therefor in
accordance with the regular policies of the Company. In addition, the
Company shall pay or reimburse the Executive for reasonable costs of
accountants, lawyers, compensation specialists and other professionals
retained by the Executive in connection with the negotiation and
execution of this Agreement.
(h) Fringe Benefits and Perquisites. During the
Employment Period, the Executive shall be entitled to participate in
or receive benefits under any plan or arrangement made available by
the Company to its senior executive officers, subject to and on a
basis consistent with the terms, conditions and overall administration
of such plans and arrangements. Nothing paid to the Executive under
any plan or arrangement made available to the Executive shall be
deemed to be in lieu of compensation hereunder.
(i) Vacations. During the Employment Period and in
accordance with the regular policies of the Company, the Executive
shall be entitled to the number of paid vacation days in each calendar
year determined by the Company from time to time for its senior
executive officers, but not less than four (4) weeks in any calendar
year (prorated in any calendar year in which the Executive is employed
hereunder for less than the entire year in accordance with the number
of days in such calendar year during which the Executive is so
employed).
(j) Tax. The Company may withhold from any compensation,
benefits, or amounts payable under this Agreement all federal, state,
city, or other taxes as may be required pursuant to any law or
governmental regulation or ruling. It is acknowledged by the parties
that the Executive is and, at his option, may remain a resident of
Canada during the term of this Agreement. In the event that the
Executive should be liable for any federal, provincial, state or local
income or payroll taxes, on any income or benefits earned by the
Executive in respect of his employment by the Company, in an amount
greater than that amount of taxes that the Executive would be liable
for (after taking into account any and all credits or deductions
permitted under the laws of the United States and Canada and any tax
treaties in effect between those countries) on the same income and
benefits solely under the federal, provincial or local laws in effect
in the Commonwealth of Canada (collectively, the "EXCESS TAXES"), then
the Company shall "gross up" the Executive's compensation under this
Agreement in an amount sufficient to pay such Excess Taxes.
16
<PAGE> 1
EXHIBIT 10.10
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made and entered into this 15th day of December,
1997 (the "EFFECTIVE DATE") by and between Queen Sand Resources (Canada) Inc.,
a corporation formed under the laws of Ontario (the "COMPANY"), and Ronald I.
Benn (the "EXECUTIVE"), having a mailing address at 26 Strathbury, Nepean,
Ontario, Canada K2G 5N9.
RECITALS
The Executive possesses extensive knowledge of the business and
affairs of the Company, its policies, methods, personnel, and plans for the
future.
The Board has determined that it is in the best interests of the
Company to assure that the Company will have the continued dedication of the
Executive, notwithstanding the possibility, threat or occurrence of a Change of
Control (as defined in Section 5 hereof). The Board believes it is imperative
to retain the Executive's services, to diminish the inevitable distraction of
the Executive by virtue of the personal uncertainties and risks created by a
pending or threatened Change of Control and to encourage the Executive's full
attention and dedication to the Company currently and in the event of any
threatened or pending Change of Control, and to provide the Executive with
compensation and benefits arrangements upon a Change of Control.
The Company wishes to protect the Executive from loss of compensation
and benefits if his continued employment is no longer possible through no fault
of the Executive.
The Executive is desirous of committing himself to serve the Company
on the terms herein provided.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements herein contained, the parties agree as follows:
AGREEMENT
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the Company and the Executive hereby agree as
follows:
1. EMPLOYMENT. Upon the terms and subject to the conditions
contained in this Agreement, the Executive agrees to provide full-time services
for the Company during the Employment Period (as defined below). The Executive
agrees to devote his best efforts to the business of the Company, and shall
perform his duties in a diligent, trustworthy and business-like manner, all for
the purpose of advancing the business of the Company.
2. DUTIES. The Executive shall have the title of Chief Financial
Officer and shall have the duties customarily attendant to such office and such
other duties as are from time to time assigned by the Board of Directors.
During the Employment Period, the Executive's position (including status,
offices, titles and reporting requirements), authority, duties and
responsibilities shall be at least commensurate in all material respects with
the most significant of those held, exercised and assigned at any time during
the 90-day period immediately preceding the Effective Date. During the
Employment Period, and excluding any periods of vacation and sick leave to
which the Executive is entitled, the Executive agrees
<PAGE> 2
to devote reasonable attention and time during normal business hours to the
business and affairs of the Company and, to the extent necessary to discharge
the responsibilities assigned to the Executive hereunder, to use the
Executive's reasonable best efforts to perform faithfully and efficiently such
responsibilities. During the Employment Period it shall not be a violation of
this Agreement for the Executive to (A) serve on corporate, civic or charitable
boards or committees, (B) deliver lectures, fulfill speaking engagements or
teach at educational institutions and (C) manage personal investments, so long
as such activities do not significantly interfere with the performance of the
Executive's responsibilities as an employee of the Company in accordance with
this Agreement. It is expressly understood and agreed that to the extent that
any such activities have been conducted by the Executive prior to the Effective
Date, the continued conduct of such activities (or the conduct of activities
similar in nature and scope thereto) subsequent to the Effective Date shall not
thereafter be deemed to interfere with the performance of the Executive's
responsibilities to the Company. Notwithstanding anything herein to the
contrary it is acknowledged and agreed that the Executive may hold positions as
director, officer or employee of Capital House A Finance and Investment
Corporation and any corporation associated therewith; provided, that such
activities do not impair the performance by Executive of his duties hereunder
or otherwise interfere with Executive's compliance with his obligations set
forth in the preceding sentence.
3. EMPLOYMENT PERIOD. Subject to the terms and conditions
hereof, the Company agrees to employ the Executive for a term (the "EMPLOYMENT
PERIOD") commencing as of the Effective Date and terminating on June 30, 2002.
4. SALARY AND BENEFITS. The salary and benefits of the Executive
hereunder are as set forth on Exhibit A attached hereto.
5. TERMINATION OF EMPLOYMENT. The Board of Directors of the
Company may terminate the employment of the Executive at any time as it deems
appropriate.
(a) Termination Without Cause; Resignation for Good
Reason. If during the term of this Agreement, (i) the Executive's
employment is terminated by the Company without Cause (defined below)
or (ii) the Executive voluntarily terminates his employment during the
Employment Period for Good Reason, then the Company shall pay the
Executive (in a lump sum) an amount equal to the sum of (x) the Base
Salary for one year in effect immediately prior to the termination and
(y) the amount of the Bonus that would have been payable to the
Executive for such year, prorated to the Termination Date, and the
Company shall issue to the Executive a number of stock options that
the Executive would have been entitled to receive for that year,
prorated to the Termination Date.
For purposes of this Agreement, "GOOD REASON" shall mean:
(i) Without his express written consent, the
assignment to the Executive of any duties materially
inconsistent with his positions, duties, responsibilities and
status with the Company as of the Effective Date, or a
substantial reduction in his reporting responsibilities,
titles or offices as of the Effective Date, or any removal of
the Executive from or any failure to re-elect the Executive to
any of such positions, except in connection with the
termination of his employment for Cause, Disability (defined
below) or as a result of his death or by the Executive other
than for Good Reason;
2
<PAGE> 3
(ii) A reduction by the Company in the Executive's
Base Salary (as defined in Exhibit A attached hereto) as in
effect immediately prior to the Effective Date or as the same
may be increased from time to time;
(iii) A reduction by the Company in the amounts
payable under the Company's annual incentive plan unless such
reduction affects all executive officers of the Company and
does not result in a proportionately greater reduction in the
rights of or benefits to the Executive as compared with any
other executive officer of the Company;
(iv) The failure by the Company to continue in
effect any benefit or compensation plan (including but not
limited to any stock option plan, pension plan, life insurance
plan, health and accident plan or disability plan) in which
the Executive from time to time participates (or plans
providing substantially similar benefits, and whether by or
through the Company or another member of the Company Group),
the taking of any action by the Company which would adversely
affect the Executive's participation in or materially reduce
his benefits under any of such plans or deprive him of any
material fringe benefit enjoyed by him, or the failure by the
Company to provide the Executive with the number of paid
vacation days to which he is then entitled on the basis of
years of service with the Company in accordance with the
Company's normal vacation policy in effect immediately prior
to the Effective Date except for such changes in benefits that
affect all executive officers of the Company and do not result
in a proportionately greater reduction in the rights of or
benefits to the Executive as compared with any other executive
officer of the Company;
(v) Any failure of the Company to obtain the
assumption of, or the agreement to perform, this Agreement by
any successor as contemplated in Section 13(a) hereof; or
(vi) Any purported termination of the Executive's
employment which is not effected pursuant to a notice of
termination satisfying the requirements of Section 5(b) or
5(d) hereof; and for purposes of this Agreement, no such
purported termination shall be effective.
(b) Voluntary Resignation or Termination for Cause. If
the Executive shall voluntarily terminate his employment for other
than Good Reason or if the Company shall discharge the Executive for
Cause, this Agreement shall terminate immediately and the Company
shall have no further obligation to make any payment under this
Agreement except that the Company shall pay the Executive accrued but
unpaid salary, bonuses and benefits pursuant to Section 4 hereof
through the Date of Termination.
For the purposes of this Agreement, the Company shall have
"CAUSE" to terminate the Executive's employment hereunder upon (A) the
willful and continued failure by the Executive to substantially
perform his duties with the Company (other than any such failure
resulting from incapacity due to physical or mental illness), and such
failure is not remedied in a reasonable time after a written demand
for substantial performance is delivered to the Executive by the Board
which specifically identifies the manner in which the Board believes
that he has not substantially performed his duties, or (B) the final,
nonappealable conviction of a felony. For purposes of this paragraph,
no act, or failure to act, on the Executive's part shall be
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considered "WILLFUL" unless done, or omitted to be done, by him not in
good faith and without reasonable belief that his action or omission
was not in the best interest of the Company. Notwithstanding the
foregoing, the Executive shall not be deemed to have been terminated
for Cause under (A) above unless and until there shall have been
delivered to him a copy of a resolution duly adopted by the
affirmative vote of not less than two- thirds (2/3) of the entire
authorized membership of the Board at a meeting of the Board called
and held for the purpose (after reasonable notice and an opportunity
for the Executive, together with counsel, to be heard before the
Board), finding that in the good faith opinion of the Board he was
guilty of conduct set forth above in clause (A) of the first sentence
of this paragraph and specifying the particulars thereof in detail.
(c) Termination After Change of Control. If, within six
(6) months after a Change of Control (defined below), the Company
shall terminate the Executive's employment other than pursuant to
Section 3 or 5(b) hereof or if the Executive shall terminate his
employment for Good Reason, then the Company shall pay to the
Executive as severance pay in a lump sum not later than the tenth
(10th) day following the Date of Termination, the following amounts:
(i) The Executive's full Base Salary through the
Date of Termination at the rate in effect at the time of
notice of termination is given;
(ii) In lieu of any further salary payments to the
Executive for periods subsequent to the Date of Termination,
an amount equal to the sum of (x) the Base Salary for one year
in effect immediately prior to the termination and (y) the
amount of the Bonus that would have been payable to the
Executive for such year, prorated to the Termination Date and
the Company shall issue to the Executive a number of stock
options that the Executive would have been entitled to receive
for that year, prorated to the Termination Date;
(iii) In lieu of shares of common stock of Queen
Sand Resources, Inc., a Delaware corporation ("QSR-DE"), par
value $.0015 per share ("QSR-DE SHARES") issuable upon
exercise of options ("OPTIONS"), if any, granted to the
Executive under any stock option plan of QSR-DE (which Options
shall be canceled upon the making of the payment referred to
below), the Executive shall receive an amount in cash equal to
the aggregate spread between the exercise prices of all
Options held by the Executive whether or not then fully
exercisable, and the highest price per QSR-DE Share of Common
Stock actually paid (including the fair market value of
non-cash consideration per QSR-DE Share received) in
connection with any change in control of QSR-DE (such price
being hereinafter referred to as "TERMINATION PRICE"); and
(iv) The Company shall also pay all reasonable
legal fees and expenses incurred by the Executive as a result
of such termination (including all such reasonable fees and
expenses, if any, incurred in contesting or disputing any such
termination or in seeking to obtain or enforce any right or
benefit provided by this Agreement).
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"CHANGE OF CONTROL" means any of the following:
(i) any consolidation or merger of QSR-DE in
which QSR-DE is not the continuing or surviving corporation or
pursuant to which shares of QSR-DE's common stock would be
converted into cash, securities or other property, other than
a merger of QSR-DE in which the holders of QSR-DE's common
stock immediately prior to the merger have the same
proportionate ownership of common stock of the surviving
corporation immediately after the merger;
(ii) any sale, lease, exchange or other transfer
(in one transaction or a series of related transactions) of
all or substantially all of the assets of QSR-DE;
(iii) any approval by the stockholders of QSR-DE of
any plan or proposal for the liquidation or dissolution of
QSR-DE;
(iv) the cessation of control (by virtue of their
not constituting a majority of directors) of QSR-DE's Board of
Directors by the individuals (the "CONTINUING DIRECTORS") who
(x) at the date of this Agreement were directors or (y) become
directors after the date of this Agreement and whose election
or nomination for election by QSR-DE's stockholders, was
approved by a vote of at least two- thirds of the directors
then in office who were directors at the date of this
Agreement or whose election or nomination for election was
previously so approved);
(v) (A) the acquisition of beneficial ownership
(within the meaning of Rule 13d-3 under the Securities
Exchange Act of 1934, as amended ("BENEFICIAL OWNERSHIP")) of
an aggregate of 15% of the voting power of QSR-DE's
outstanding voting securities by any person or group (as such
term is used in Rule 13d-5 under such Act) who Beneficially
Owned less than 10% of the voting power of QSR-DE's
outstanding voting securities on the date hereof, (B) the
acquisition of Beneficial Ownership of an additional 5% of the
voting power of QSR-DE's outstanding voting securities by any
person or group who Beneficially Owned at least 10% of the
voting power of QSR-DE's outstanding voting securities on the
date hereof, or (C) the execution by QSR-DE and a stockholder
of a contract that by its terms grants such stockholder (in
its, hers or his capacity as a stockholder) or such
stockholder's Affiliate (as defined in Rule 405 promulgated
under the Securities Act of 1933 (an "AFFILIATE")) including,
without limitation, such stockholder's nominee to the Board of
Directors (in its, hers or his capacity as an Affiliate of
such stockholder), the right to veto or block decisions or
actions of the Board of Directors; provided, however, that
notwithstanding the foregoing, the events described in items
(A), (B) or (C) above shall not constitute a Change in Control
hereunder if the securityholder is (aa) a trustee or other
fiduciary holding securities under an employee benefit plan of
QSR-DE and acting in such capacity, (bb) a corporation owned,
directly or indirectly, by the stockholders of QSR-DE in
substantially the same proportions as their ownership of
voting securities of QSR-DE or (cc) in the case of an
acquisition described in items (A) or (B) above (but not in
the case of an acquisition described in item (C) above), any
other person whose acquisition of shares of voting securities
is approved in advance by a majority of the Continuing
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Directors; provided further, however that none of the
following shall constitute a Change in Control: (aa) the right
of the holders of any voting securities of QSR-DE to vote as a
class on any matter or (bb) any vote required of disinterested
or unaffiliated directors or stockholders including, without
limitation, pursuant to Section 144 of the Delaware General
Corporation Law or Rule 16b-3 promulgated pursuant to the
Securities Exchange Act of 1934; or
(vi) subject to applicable law, in a Chapter 11
bankruptcy proceeding, the appointment of a trustee or the
conversion of a case involving QSR-DE to a case under Chapter
7.
(d) Disability. The Company may terminate this Agreement
for Disability. If the Company shall terminate the Executive's
employment for Disability, the Company's obligation to pay salary,
bonuses and benefits pursuant to Section 4 hereof shall terminate,
except that the Company shall pay the Executive (i) accrued but unpaid
salary and benefits pursuant to Section 4 hereof through the Date of
Termination, and (ii) the benefits set forth in Section 5(e) hereof.
The Company also shall make any additional payments necessary to
provide the disability benefits set forth in Exhibit A attached
hereto. "DISABILITY" shall exist if because of ill health, physical
or mental disability, or any other reason beyond his control, and
notwithstanding reasonable accommodations made by the Company, the
Executive shall have been unable, unwilling or shall have failed to
perform his duties under this Agreement, as determined in good faith
by the Compensation Committee of the Company's Board of Directors, for
a period of 180 consecutive days, or if, in any 12-month period, the
Executive shall have been unable or unwilling or shall have failed to
perform his duties for a period of 270 days, irrespective of whether
or not such days are consecutive.
(e) Employee Benefits. Unless the Executive's employment
is terminated pursuant to Section 5(b) hereof, the Company shall
maintain in full force and effect (to the extent consistent with past
practice), for the continued benefit of the Executive and, if
applicable, the Executive's spouse and children, the employee benefits
set forth in [subsections (d) ("LIFE INSURANCE"), (e) ("DISABILITY
INSURANCE"), (f) ("MEDICAL EXPENSES") and (h) ("FRINGE BENEFITS AND
PERQUISITES")] of Exhibit A attached hereto that he was entitled to
receive immediately prior to the Date of Termination (subject to the
general terms and conditions of the plans and programs under which he
receives such benefits) for the balance of the Employment Period
notwithstanding the termination hereof or for the period provided for
under the terms and conditions of such plans and programs, whichever
is longer, provided that his continued participation or, if
applicable, the participation of the Executive's spouse and children,
is possible under the general terms and conditions of such plans and
programs.
(f) Notice of Termination. Any termination by the
Company or by the Executive shall be communicated by Notice of
Termination to the other party thereto given in accordance with
Section 13(c) hereof. For purposes of this Agreement, a "NOTICE OF
TERMINATION" means a written notice which (i) indicates the specific
termination provision in this Agreement relied upon, (ii) to the
extent applicable, sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the
Executive's employment under the provision so indicated and (iii) if
the Date of Termination (as defined below) is other than the date of
receipt of such notice, specifies the termination date (which date
shall be not more than fifteen (15)
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days after the giving of such notice). The failure by the Executive or
the Company to set forth in the Notice of Termination any fact or
circumstance which contributes to a showing of Good Reason, Cause or
Disability shall not waive any right of the Executive or the Company
hereunder or preclude the Executive or the Company from asserting such
fact or circumstance in enforcing the Executive's or the Company's
rights hereunder.
(g) Date of Termination. "DATE OF TERMINATION" means (i)
if the Executive's employment is terminated by the Company for Cause
or Disability or by the Executive for Good Reason or within six (6)
months after a Change of Control, the date of receipt of the Notice of
Termination or any later date specified therein, as the case may be,
(ii) if the Executive's employment is terminated by the Company or
other than for Cause, the Date of Termination shall be the date on
which the Company notifies the Executive of such termination and (iii)
if the Executive's employment is terminated by reason of death, the
Date of Termination shall be the date of death of the Executive.
(h) Mitigation of Amounts Payable Hereunder. The
Executive shall not be required to mitigate the amount of any payment
provided for in this Section 5 by seeking other employment or
otherwise, nor shall the amount of any payment provided for in this
Section 5 be reduced by any compensation earned by the Executive as
the result of employment by another employer after the Date of
Termination, or otherwise.
6. DEATH OF THE EXECUTIVE. If the Executive dies prior to the
end of Employment Period, the Executive's employment and other obligations
under this Agreement shall automatically terminate and all compensation, to
which the Executive is or would have been entitled hereunder (including without
limitation under subsections (a) ("BASE SALARY"), (b) ("BONUS") and (c) ("STOCK
OPTIONS") of Exhibit A attached hereto), shall terminate as of the end of the
month in which the Executive's death occurs; provided, however, that (i) the
Company shall pay to the Executive's estate, as soon as practicable, a prorated
Annual Incentive Payment, if earned in accordance with the Company's annual
incentive plan; (ii) for the balance of the Employment Period, the Executive's
spouse and children shall be entitled to receive their benefits under the
Company's group hospitalization, medical and dental plans (if any); and (iii)
the Executive's named beneficiary or beneficiaries shall receive the benefits
payable pursuant to subsection (d) ("LIFE INSURANCE") of Exhibit A attached
hereto and such reimbursement as may have been due to the Executive pursuant to
subsection (g) ("PAYMENT AND REIMBURSEMENT OF EXPENSES") of Exhibit A attached
hereto.
7. CONFIDENTIAL INFORMATION. The Executive recognizes and
acknowledges that he will have access to certain information of members of the
Company Group (as defined below) and that such information is confidential and
constitutes valuable, special and unique property of such members of the
Company Group. The Executive shall not at any time, either during or
subsequent to the term of this Agreement, disclose to others, use, copy or
permit to be copied, except in pursuance of his duties for and on behalf of the
Company, it successors, assigns or nominees, any Confidential Information of
any member of the Company Group (regardless of whether developed by the
Executive) without the prior written consent of the Company. As used herein,
"COMPANY GROUP" means the Company, and any entity that directly or indirectly
controls, is controlled by, or is under common control with, the Company. For
purposes hereof, "CONTROL" means the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of such
entity, whether through the ownership of voting securities, by contract or
otherwise. The term
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"CONFIDENTIAL INFORMATION" with respect to any person means any secret or
confidential information or know-how and shall include, but shall not be
limited to, the plans, customers, costs, prices, uses, and applications of
products and services, results of investigations, studies or experiments owned
or used by such person, and all apparatus, products, processes, compositions,
samples, formulas, computer programs, computer hardware designs, computer
firmware designs, and servicing, marketing or manufacturing methods and
techniques at any time used, developed, investigated, made or sold by such
person, before or during the term of this Agreement, that are not readily
available to the public or that are maintained as confidential by such person.
The Executive shall maintain in confidence any Confidential Information of
third parties received as a result of his employment with the Company in
accordance with the Company's obligations to such third parties and the
policies established by the Company.
8. DELIVERY OF DOCUMENTS UPON TERMINATION. The Executive shall
deliver to the Company or its designee at the termination of his employment all
correspondence, memoranda, notes, records, drawings, sketches, plans, customer
lists, product compositions, and other documents and all copies thereof, made,
composed or received by the Executive, solely or jointly with others, that are
in the Executive's possession, custody, or control at termination and that are
related in any manner to the past, present, or anticipated business or any
member of the Company Group. In this regard, the Executive hereby grants and
conveys to the Company all right, title and interest in and to, including
without limitation, the right to possess, print, copy, and sell or otherwise
dispose of, any reports, records, papers, summaries, photographs, drawings or
other documents, and writings, and copies, abstracts or summaries thereof, that
may be prepared by the Executive or under his direction or that may come into
his possession in any way during the term of his employment with the Company
that relate in any manner to the past, present or anticipate business of any
member of the Company Group.
9. FURTHER ACTS. At the request of the Company (but without
additional compensation from the Company during his employment by the Company)
the Executive shall execute any and all papers and perform all lawful acts that
the Company may deem necessary or appropriate to further evidence or carry out
the transactions contemplated in this Agreement including, without limitation,
such acts as may be necessary for the preparation, filing, prosecution, and
maintenance of applications for United States letters patent and foreign
letters patent, or for United States and foreign copyright, on the
Developments.
10. NO COMPETITION. Throughout the term of the Agreement and,
unless the Agreement terminates pursuant to Section 3, 5(a) or 5(c), through
the first anniversary of the expiration thereof, the Executive shall not
directly or indirectly engage in the business of acquiring oil and natural gas
reserves and oil and natural gas production and exploitation; or any other
business in which any member of the Company Group directly or indirectly
engages during the term of the Agreement; provided, however, that the
restriction in this Section 10 shall apply only to the reasonable and limited
geographic area consisting of any state in which any member of the Company
Group directly or indirectly has offices, operations, or customers, or
otherwise conducts business; and provided further that if the Agreement
terminates pursuant to Section 5(b), the Executive shall be subject to the
provisions of this Section 10 only if the Company pays the Executive in a lump
sum an amount equal to the annual Base Salary in effect at the Date of
Termination. For purposes of this Section 10, the Executive shall be deemed to
engage in a business if he directly or indirectly, engages or invests in, owns,
manages, operates, controls or participates in the ownership, management,
operation or control of, is employed by, associated or in any manner
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<PAGE> 9
connected with, or renders services or advice to, any business engaged in
acquiring oil and natural gas reserves and oil and natural gas production and
exploitation; provided, however, that the Executive may invest in the
securities of any enterprise (but without otherwise participating in the
activities of such enterprise) if (x) such securities are listed on any
national or regional securities exchange or have been registered under Section
12(g) of the Securities Exchange Act of 1934 and (y) the Executive does not
beneficially own (as defined Rule 13d-3 promulgated under the Securities
Exchange Act of 1934) in excess of 5% of the outstanding capital stock of such
enterprise;
The Executive agrees that if a court of competent jurisdiction
determines that the length of time or any other restriction, or portion
thereof, set forth in this Section 10 is overly restrictive and unenforceable,
the court may reduce or modify such restrictions to those which it deems
reasonable and enforceable under the circumstances, and as so reduced or
modified, the parties hereto agree that the restrictions of this Section 10
shall remain in full force and effect. The Executive further agrees that if a
court of competent jurisdiction determines that any provision of this Section
10 is invalid or against public policy, the remaining provisions of this
Section 10 and the remainder of this Agreement shall not be affected thereby,
and shall remain in full force and effect.
The Executive acknowledges that the business of the Company and the
other members of the Company Group is southwest United States in scope and that
the restrictions imposed by this Agreement are legitimate, reasonable and
necessary to protect the Company's and its affiliates' investment in their
businesses and the goodwill thereof. The Executive acknowledges that the scope
and duration of the restrictions contained herein are reasonable in light of
the time that the Executive has been engaged in the business of the Company and
the other members of the Company Group, the Executive's reputation in the
markets for the Company's and the businesses of the other members of the
Company Group and the Executive's relationship with the suppliers, customers
and clients of the Company and the other members of the Company Group. The
Executive further acknowledges that the restrictions contained herein are not
burdensome to the Executive in light of the consideration paid therefor and the
other opportunities that remain open to the Executive. Moreover, the Executive
acknowledges that he has other means available to him for the pursuit of his
livelihood.
11. REMEDIES. The Executive acknowledges that a remedy at law for
any breach or attempted breach of the Executive's obligations under Sections 7
through 10 hereof may be inadequate, agrees that the Company may be entitled to
specific performance and injunctive and other equitable remedies in case of any
such breach or attempted breach, and further agrees to waive any requirement
for the securing or posting of any bond in connection with the obtaining of any
such injunctive or other equitable relief. The Company shall have the right to
offset against amounts to be paid to the Executive pursuant to the terms hereof
any amounts from time to time owing by the Executive to the Company. The
termination of the Agreement pursuant to Section 3, 5(b) or 5(d) hereof shall
not be deemed to be a waiver by the Company of any breach by the Executive of
this Agreement or any other obligation owed the Company, and notwithstanding
such a termination the Executive shall be liable for all damages attributable
to such a breach.
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12. DISPUTE RESOLUTION. Subject to the Company's right to seek
injunctive relief in court as provided in Section 11 hereof, any dispute,
controversy or claim arising out of or in relation to or connection to this
Agreement, including without limitation any dispute as to the construction,
validity, interpretation, enforceability or breach of this Agreement, shall be
exclusively and finally settled by arbitration, and any party may submit such
dispute, controversy or claim, including a claim for indemnification under this
Section 12, to arbitration.
(a) Arbitrators. The arbitration shall be heard and
determined by one arbitrator, who shall be impartial and who shall be
selected by mutual agreement of the parties. If the parties cannot
agree on the sole arbitrator, then the appointing authority for the
implementation of such procedure shall be the Senior United States
District Judge for the Northern District of Texas, who shall appoint
an independent arbitrator who does not have any financial interest in
the dispute, controversy or claim. If the Senior United States
District Judge for the Northern District of Texas refuses or fails to
act as the appointing authority within ninety (90) days after being
requested to do so, then the appointing authority shall be the Chief
Executive Officer of the American Arbitration Association, who shall
appoint an independent arbitrator who does not have any financial
interest in the dispute, controversy or claim. All decisions and
awards by the arbitration tribunal shall be made by majority vote.
(b) Proceedings. Unless otherwise expressly agreed in
writing by the parties to the arbitration proceedings:
(i) The arbitration proceedings shall be held in
Dallas, Texas, at a site chosen by mutual agreement of the
parties, or if the parties cannot reach agreement on a
location within thirty (30) days of the appointment of the
last arbitrator, then at a site chosen by the arbitrators;
(ii) The arbitrators shall be and remain at all
times wholly independent and impartial;
(iii) The arbitration proceedings shall be
conducted in accordance with the Commercial Arbitration Rules
of the American Arbitration Association, as amended from time
to time;
(iv) Any procedural issues not determined under
the arbitral rules selected pursuant to item (iii) above shall
be determined by the law of the place of arbitration, other
than those laws which would refer the matter to another
jurisdiction;
(v) The decision of the arbitrators shall be
reduced to writing; final and binding without the right of
appeal; the sole and exclusive remedy regarding any claims,
counterclaims, issues or accounting presented to the
arbitrators; made and promptly paid in United States dollars
free of any deduction or offset; and any costs or fees
incident to enforcing the award shall, to the maximum extent
permitted by law, be charged against the party resisting such
enforcement;
(vi) The award shall include interest from the
date of any breach or violation of this Agreement, as
determined by the arbitral award, and from the
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date of the award until paid in full, at the applicable
Federal rate provided for in Section 7872(f)(2)(A) of the
Code; and
(vii) Judgment upon the award may be entered in any
court having jurisdiction over the person or the assets of the
party owing the judgment or application may be made to such
court for a judicial acceptance of the award and an order of
enforcement, as the case may be.
(c) Acknowledgment Of Parties. Each party acknowledges
that he or it has voluntarily and knowingly entered into an agreement
to arbitration under this Section by executing this Agreement.
13. MISCELLANEOUS PROVISIONS.
(a) Successors of the Company. The Company will require
any successor (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company, by agreement in form and
substance satisfactory to the Executive, expressly to assume and agree
to perform this Agreement in the same manner and to the same extent
that the Company would be required to perform it if no such succession
had taken place. Failure of the Company to obtain such agreement
prior to the effectiveness of any such succession shall be a breach of
this Agreement and shall entitle the Executive to compensation from
the Company in the same amount and on the same terms as the Executive
would be entitled hereunder if the Executive terminated his employment
for Good Reason, except that for purposes of implementing the
foregoing, the date on which any such succession becomes effective
shall be deemed the Date of Termination. As used in this Agreement,
"COMPANY" shall mean the Company as hereinbefore defined and any
successor to its business and/or assets as aforesaid which executes
and delivers the agreement provided for in this Section 13(a) or which
otherwise becomes bound by all the terms and provisions of this
Agreement by operation of law.
(b) Executive's Heirs, etc. The Executive may not assign
his rights or delegate his duties or obligations hereunder without the
written consent of the Company. This Agreement shall inure to the
benefit of and be enforceable by the Executive's personal or legal
representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Executive should die
while any amounts would still be payable to him hereunder as if he had
continued to live, all such amounts, unless other provided herein,
shall be paid in accordance with the terms of this Agreement to his
designee or, if there be no such designee, to his estate.
(c) Notice. For the purposes of this Agreement, notices
and all other communications provide for in the Agreement shall be in
writing and shall be deemed to have been duly given when delivered or
mailed by United States registered or certified mail, return receipt
requested, postage prepaid, addressed to the respective addresses set
forth on the first page of this Agreement, provided that all notices
to the Company shall be directed to the attention of the Chief
Executive Officer of the Company with a copy to the Secretary of the
Company, or to such other in writing in accordance herewith, except
that notices of change of address shall be effective only upon
receipt.
(d) Amendment; Waiver. No provisions of this Agreement
may be modified, waived or discharged unless such waiver, modification
or discharge is agreed to in
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writing signed by the Executive and such officer as may be
specifically designated by the Board of Directors of the Company. No
waiver by either party hereto at any time of any breach by the other
party hereto of, or compliance with, any condition or provision of
this Agreement to be performed by such other party shall be deemed a
waiver of similar or dissimilar provisions or conditions at the same
or at any prior or subsequent time. No agreements or representations,
oral or otherwise, express or implied, with respect to the subject
matter hereof have been made by either party which are not set forth
expressly in this Agreement.
(e) Invalid Provisions. Should any portion of this
Agreement be adjudged or held to be invalid, unenforceable or void,
such holding shall not have the effect of invalidating or voiding the
remainder of this Agreement and the parties hereby agree that the
portion so held invalid, unenforceable or void shall, if possible, be
deemed amended or reduced in scope, or otherwise be stricken from this
Agreement to the extent required for the purposes of validity and
enforcement thereof.
(f) Survival of the Executive's Obligations. The
Executive's obligations under this Agreement shall survive regardless
of whether the Executive's employment by the Company is terminated,
voluntarily or involuntarily, by the Company or the Executive, with or
without Cause.
(g) Counterparts. This Agreement may be executed in one
or more counterparts, each of which shall be deemed to be an original
but all of which together will constitute one and the same instrument.
(h) Governing Law. This Agreement shall be governed by
and construed under the laws of the State of Texas.
(i) Captions and Gender. The use of captions and Section
headings herein is for purposes of convenience only and shall not
effect the interpretation or substance of any provisions contained
herein. Similarly, the use of the masculine gender with respect to
pronouns in this Agreement is for purposes of convenience and includes
either sex who may be a signatory.
(j) Entire Agreement. This Agreement constitutes the
entire agreement between the parties hereto with respect to the
subject matter hereof and supersedes all prior agreements, both
written and oral, between the parties with respect to the subject
matter hereof, including, without limitation, the Employment Agreement
dated May 6, 1997 between QSR-DE and the Executive.
(k) Legal Costs; Payments During Dispute. The Company
shall pay promptly as incurred, to the full extent permitted by law,
all legal fees and expenses which the Executive may reasonably incur
as a result of any contest (regardless of the outcome thereof) by the
Company, the Executive or others of the validity or enforceability of,
or liability under, any provision of this Agreement or any guarantee
of performance thereof (including as a result of any contest by the
Executive about the amount of any payment pursuant to this Agreement),
plus in each case interest on any delayed payment at the applicable
Federal rate provided for in Section 7872(f)(2)(A) of the Code. If
there shall be any dispute between the Company and the Executive (i)
in the event of any termination of the Executive's employment by the
Company, whether such termination was for Cause or Disability, or (ii)
in the event of any termination of employment by the Executive,
whether Good Reason existed,
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then, unless and until there is a final, nonappealable judgment by a
court of competent jurisdiction or decision of arbitration declaring
that such termination was for Cause or Disability or that the
determination by the Executive of the existence of Good Reason was not
made in good faith, the Company shall pay all amounts, and provide all
benefits, to the Executive and/or the Executive's family or other
beneficiaries, as the case may be, that the Company would be required
to pay or provide pursuant to Section 5 hereof as though such
termination were by the Company without Cause or Disability or by the
Executive with Good Reason; provided, however, that the Company shall
not be required to pay any disputed amounts pursuant to this paragraph
except upon receipt of an undertaking by or on behalf of the Executive
to repay all such amounts to which the Executive is ultimately adjudged
by such court not to be entitled.
(l) Parent Guaranty. QSR-DE hereby agrees to guaranty
the performance of the Company's obligations under this Agreement.
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<PAGE> 14
IN WITNESS WHEREOF, the parties hereto have signed this Agreement as
of the date first set forth above.
QUEEN SAND RESOURCES (CANADA) INC.
By: /s/ AUTHORIZED SIGNATORY
--------------------------------
Name:
---------------------------
Title:
--------------------------
(EXECUTIVE)
/s/ RONALD I. BENN
--------------------------------------
Ronald I. Benn
ACCEPTED AND AGREED TO:
QUEEN SAND RESOURCES, INC.
By: /s/ AUTHORIZED SIGNATORY
--------------------------------
Name:
---------------------------
Title:
--------------------------
and
By: /s/ AUTHORIZED SIGNATORY
--------------------------------
Name:
---------------------------
Title:
--------------------------
14
<PAGE> 15
EXHIBIT A
SALARY AND BENEFITS
(a) Base Salary. The Company shall pay the Executive as
compensation an aggregate salary of $130,000 per year during the
Employment Period (pro rated for periods less than twelve (12)
months), or such greater amount as shall be approved by the
Compensation Committee of the Company's Board of Directors ("BASE
SALARY"). The Compensation Committee shall review the Executive's
Base Salary at least annually and in conducting such review shall take
into consideration the most recent executive compensation assessment
prepared by an independent compensation consultant to the Company.
The Base Salary for each year shall be paid by the Company in
accordance with the regular payroll practices of the Company. The
Company may not reduce the Executive's Base Salary at any time during
the term hereof.
(b) Bonus. Subject to the provisions of this paragraph
(b), the Company shall pay the Executive an annual bonus for each
fiscal year during the Term of this Agreement (the amount of the Bonus
will be prorated for any period of less than twelve calendar months).
Such bonus shall be paid on the last business day of the third month
following the fiscal year end of the Company during the Term of this
Agreement. The Compensation Committee shall review the method of
determination of the Executive's Bonus at least annually and in
conducting such review shall take into consideration the most recent
executive compensation assessment prepared by an independent
compensation consultant to the Company.
(c) Stock Options. The Company shall grant the Executive
stock options pursuant to the Queen Sand Resources Inc. 1997 Incentive
Equity Plan (the "PLAN") on terms and conditions to be determined by
the Compensation Committee of the Company's Board of Directors, and in
making such determination shall take into consideration the most
recent executive compensation assessment prepared by an independent
compensation consultant to the Company.
(d) Life Insurance. During the Employment Period and
subject to the Executive's qualification under normal life insurance
underwriting standards as of the date hereof and at any policy renewal
date, the Company shall provide, at the Company's expense, a term life
insurance policy on the life of the Executive for the benefit of such
beneficiary or beneficiaries as may be designated from time to time by
the Executive, such policy to be in a face amount as designated by the
Board of Directors for all executives generally.
(e) Disability Insurance. During the Employment Period
and subject to the Executive's qualification under normal disability
insurance underwriting standards as of the date hereof and at any
policy renewal date, the Company shall provide, at the Company's
expense, a disability insurance policy with such terms that are
designated by the Board of Directors for all executives generally.
15
<PAGE> 16
(f) Medical Expenses. During the Employment Period, the
Company shall pay, or reimburse the Executive for, all medical and
dental expenses incurred by the Executive or his spouse or Dependents
(as defined in Section 152 of the Internal Revenue Code ("CODE")).
The Executive acknowledges that the Company may enter into insurance
agreements with respect to the payments and reimbursements described
in this subsection. The Executive will use reasonable efforts to
assist the Company in recovering payments and reimbursements from such
insurers.
(g) Payment and Reimbursement of Expenses. During the
Employment Period, the Company shall pay or reimburse the Executive
for all reasonable travel and other expenses incurred by the Executive
in performing his obligations under this Agreement in accordance with
the policies and procedures of the Company for its senior executive
officers, provided that the Executive properly accounts therefor in
accordance with the regular policies of the Company. In addition, the
Company shall pay or reimburse the Executive for reasonable costs of
accountants, lawyers, compensation specialists and other professionals
retained by the Executive in connection with the negotiation and
execution of this Agreement.
(h) Fringe Benefits and Perquisites. During the
Employment Period, the Executive shall be entitled to participate in
or receive benefits under any plan or arrangement made available by
the Company to its senior executive officers, subject to and on a
basis consistent with the terms, conditions and overall administration
of such plans and arrangements. Nothing paid to the Executive under
any plan or arrangement made available to the Executive shall be
deemed to be in lieu of compensation hereunder.
(i) Vacations. During the Employment Period and in
accordance with the regular policies of the Company, the Executive
shall be entitled to the number of paid vacation days in each calendar
year determined by the Company from time to time for its senior
executive officers, but not less than four (4) weeks in any calendar
year (prorated in any calendar year in which the Executive is employed
hereunder for less than the entire year in accordance with the number
of days in such calendar year during which the Executive is so
employed).
(j) Tax. The Company may withhold from any compensation,
benefits, or amounts payable under this Agreement all federal, state,
city, or other taxes as may be required pursuant to any law or
governmental regulation or ruling. It is acknowledged by the parties
that the Executive is and, at his option, may remain a resident of
Canada during the term of this Agreement. In the event that the
Executive should be liable for any federal, provincial, state or local
income or payroll taxes, on any income or benefits earned by the
Executive in respect of his employment by the Company, in an amount
greater than that amount of taxes that the Executive would be liable
for (after taking into account any and all credits or deductions
permitted under the laws of the United States and Canada and any tax
treaties in effect between those countries) on the same income and
benefits solely under the federal, provincial or local laws in effect
in the Commonwealth of Canada (collectively, the "EXCESS TAXES"), then
the Company shall "gross up" the Executive's compensation under this
Agreement in an amount sufficient to pay such Excess Taxes.
16
<PAGE> 1
EXHIBIT 10.11
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made and entered into this 15th day of December,
1997 (the "EFFECTIVE DATE") by and between Queen Sand Resources (Canada) Inc.,
a corporation formed under the laws of Ontario (the "COMPANY"), and Edward J.
Munden (the "EXECUTIVE"), having a mailing address at 21 Dayton Crescent,
Nepean, Ontario, Canada K2H 1H9.
RECITALS
The Executive possesses extensive knowledge of the business and
affairs of the Company, its policies, methods, personnel, and plans for the
future.
The Board has determined that it is in the best interests of the
Company to assure that the Company will have the continued dedication of the
Executive, notwithstanding the possibility, threat or occurrence of a Change of
Control (as defined in Section 5 hereof). The Board believes it is imperative
to retain the Executive's services, to diminish the inevitable distraction of
the Executive by virtue of the personal uncertainties and risks created by a
pending or threatened Change of Control and to encourage the Executive's full
attention and dedication to the Company currently and in the event of any
threatened or pending Change of Control, and to provide the Executive with
compensation and benefits arrangements upon a Change of Control.
The Company wishes to protect the Executive from loss of compensation
and benefits if his continued employment is no longer possible through no fault
of the Executive.
The Executive is desirous of committing himself to serve the Company
on the terms herein provided.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements herein contained, the parties agree as follows:
AGREEMENT
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the Company and the Executive hereby agree as
follows:
1. EMPLOYMENT. Upon the terms and subject to the conditions
contained in this Agreement, the Executive agrees to provide full-time services
for the Company during the Employment Period (as defined below). The Executive
agrees to devote his best efforts to the business of the Company, and shall
perform his duties in a diligent, trustworthy and business-like manner, all for
the purpose of advancing the business of the Company.
2. DUTIES. The Executive shall have the titles of Chairman of
the Board, Chief Executive Officer and President and shall have the duties that
are customarily attendant to such offices and such other duties as are from
time to time assigned by the Board of Directors. During the Employment Period,
the Executive's position (including status, offices, titles and reporting
requirements), authority, duties and responsibilities shall be at least
commensurate in all material respects with the most significant of those held,
exercised and assigned at any time during the 90-day period immediately
preceding the Effective Date.
<PAGE> 2
During the Employment Period, and excluding any periods of vacation and sick
leave to which the Executive is entitled, the Executive agrees to devote
reasonable attention and time during normal business hours to the business and
affairs of the Company and, to the extent necessary to discharge the
responsibilities assigned to the Executive hereunder, to use the Executive's
reasonable best efforts to perform faithfully and efficiently such
responsibilities. During the Employment Period it shall not be a violation of
this Agreement for the Executive to (A) serve on corporate, civic or charitable
boards or committees, (B) deliver lectures, fulfill speaking engagements or
teach at educational institutions and (C) manage personal investments, so long
as such activities do not significantly interfere with the performance of the
Executive's responsibilities as an employee of the Company in accordance with
this Agreement. It is expressly understood and agreed that to the extent that
any such activities have been conducted by the Executive prior to the Effective
Date, the continued conduct of such activities (or the conduct of activities
similar in nature and scope thereto) subsequent to the Effective Date shall not
thereafter be deemed to interfere with the performance of the Executive's
responsibilities to the Company. Notwithstanding anything herein to the
contrary it is acknowledged and agreed that the Executive may hold positions as
director, officer or employee of Capital House A Finance and Investment
Corporation and any corporation associated therewith; provided, that such
activities do not impair the performance by Executive of his duties hereunder
or otherwise interfere with Executive's compliance with his obligations set
forth in the preceding sentence.
3. EMPLOYMENT PERIOD. Subject to the terms and conditions
hereof, the Company agrees to employ the Executive for a term (the "EMPLOYMENT
PERIOD") commencing as of the Effective Date and terminating on June 30, 2002.
4. SALARY AND BENEFITS. The salary and benefits of the Executive
hereunder are as set forth on Exhibit A attached hereto.
5. TERMINATION OF EMPLOYMENT. The Board of Directors of the
Company may terminate the employment of the Executive at any time as it deems
appropriate.
(a) Termination Without Cause; Resignation for
Good Reason. If during the term of this Agreement, (i) the
Executive's employment is terminated by the Company without Cause
(defined below) or (ii) the Executive voluntarily terminates his
employment during the Employment Period for Good Reason, then the
Company shall pay the Executive (in a lump sum) an amount equal to
the sum of (x) the Base Salary for one year in effect immediately
prior to the termination and (y) the amount of the Bonus that would
have been payable to the Executive for such year, prorated to the
Termination Date, and the Company shall issue to the Executive a
number of stock options that the Executive would have been entitled to
receive for that year, prorated to the Termination Date.
For purposes of this Agreement, "GOOD REASON" shall mean:
(i) Without his express written consent,
the assignment to the Executive of any duties materially
inconsistent with his positions, duties, responsibilities and
status with the Company as of the Effective Date, or a
substantial reduction in his reporting responsibilities,
titles or offices as of the Effective Date, or any removal of
the Executive from or any failure to re-elect the Executive to
any of such positions, except in connection with the
termination of his employment for Cause, Disability (defined
below) or as a result of his death or by the Executive other
than for Good Reason;
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<PAGE> 3
(ii) A reduction by the Company in the
Executive's Base Salary (as defined in Exhibit A attached
hereto) as in effect immediately prior to the Effective Date
or as the same may be increased from time to time;
(iii) A reduction by the Company in the
amounts payable under the Company's annual incentive plan
unless such reduction affects all executive officers of the
Company and does not result in a proportionately greater
reduction in the rights of or benefits to the Executive as
compared with any other executive officer of the Company;
(iv) The failure by the Company to
continue in effect any benefit or compensation plan (including
but not limited to any stock option plan, pension plan, life
insurance plan, health and accident plan or disability plan)
in which the Executive from time to time participates (or
plans providing substantially similar benefits, and whether by
or through the Company or another member of the Company
Group), the taking of any action by the Company which would
adversely affect the Executive's participation in or
materially reduce his benefits under any of such plans or
deprive him of any material fringe benefit enjoyed by him, or
the failure by the Company to provide the Executive with the
number of paid vacation days to which he is then entitled on
the basis of years of service with the Company in accordance
with the Company's normal vacation policy in effect
immediately prior to the Effective Date except for such
changes in benefits that affect all executive officers of the
Company and do not result in a proportionately greater
reduction in the rights of or benefits to the Executive as
compared with any other executive officer of the Company;
(v) Any failure of the Company to obtain
the assumption of, or the agreement to perform, this Agreement
by any successor as contemplated in Section 13(a) hereof; or
(vi) Any purported termination of the
Executive's employment which is not effected pursuant to a
notice of termination satisfying the requirements of Section
5(b) or 5(d) hereof; and for purposes of this Agreement, no
such purported termination shall be effective.
(b) Voluntary Resignation or Termination for
Cause. If the Executive shall voluntarily terminate his employment
for other than Good Reason or if the Company shall discharge the
Executive for Cause, this Agreement shall terminate immediately and
the Company shall have no further obligation to make any payment under
this Agreement except that the Company shall pay the Executive
accrued but unpaid salary, bonuses and benefits pursuant to Section 4
hereof through the Date of Termination.
For the purposes of this Agreement, the Company shall have
"CAUSE" to terminate the Executive's employment hereunder upon (A) the
willful and continued failure by the Executive to substantially
perform his duties with the Company (other than any such failure
resulting from incapacity due to physical or mental illness), and such
failure is not remedied in a reasonable time after a written Nothing
to report.demand for substantial performance is delivered to the
Executive by the Board which specifically identifies the manner in
which the Board believes that he has not substantially performed his
duties, or (B) the final, nonappealable conviction of a felony. For
3
<PAGE> 4
purposes of this paragraph, no act, or failure to act, on the
Executive's part shall be considered "WILLFUL" unless done, or omitted
to be done, by him not in good faith and without reasonable belief
that his action or omission was not in the best interest of the
Company. Notwithstanding the foregoing, the Executive shall not be
deemed to have been terminated for Cause under (A) above unless and
until there shall have been delivered to him a copy of a resolution
duly adopted by the affirmative vote of not less than two-thirds (2/3)
of the entire authorized membership of the Board at a meeting of the
Board called and held for the purpose (after reasonable notice and an
opportunity for the Executive, together with counsel, to be heard
before the Board), finding that in the good faith opinion of the Board
he was guilty of conduct set forth above in clause (A) of the first
sentence of this paragraph and specifying the particulars thereof in
detail.
(c) Termination After Change of Control. If,
within six (6) months after a Change of Control (defined below), the
Company shall terminate the Executive's employment other than pursuant
to Section 3 or 5(b) hereof or if the Executive shall terminate his
employment for Good Reason, then the Company shall pay to the
Executive as severance pay in a lump sum not later than the tenth
(10th) day following the Date of Termination, the following amounts:
(i) The Executive's full Base Salary
through the Date of Termination at the rate in effect at the
time of notice of termination is given;
(ii) In lieu of any further salary
payments to the Executive for periods subsequent to the Date
of Termination, an amount equal to the sum of (x) the Base
Salary for one year in effect immediately prior to the
termination and (y) the amount of the Bonus that would have
been payable to the Executive for such year, prorated to the
Termination Date and the Company shall issue to the Executive
a number of stock options that the Executive would have been
entitled to receive for that year, prorated to the Termination
Date;
(iii) In lieu of shares of common stock of
Queen Sand Resources, Inc. a Delaware corporation ("QSR-DE"),
par value $.0015 per share ("QSR-DE SHARES") issuable upon
exercise of options ("OPTIONS"), if any, granted to the
Executive under any stock option plan of QSR-DE (which Options
shall be canceled upon the making of the payment referred to
below), the Executive shall receive an amount in cash equal to
the aggregate spread between the exercise prices of all
Options held by the Executive whether or not then fully
exercisable, and the highest price per QSR-DE Share of Common
Stock actually paid (including the fair market value of
non-cash consideration per QSR-DE Share received) in
connection with any change in control of QSR-DE (such price
being hereinafter referred to as "TERMINATION PRICE"); and
(iv) The Company shall also pay all
reasonable legal fees and expenses incurred by the Executive
as a result of such termination (including all such reasonable
fees and expenses, if any, incurred in contesting or disputing
any such termination or in seeking to obtain or enforce any
right or benefit provided by this Agreement).
4
<PAGE> 5
"CHANGE OF CONTROL" means any of the following:
(i) any consolidation or merger of QSR-DE in
which QSR-DE is not the continuing or surviving corporation or
pursuant to which shares of QSR-DE's common stock would be
converted into cash, securities or other property, other than
a merger of QSR-DE in which the holders of QSR-DE's common
stock immediately prior to the merger have the same
proportionate ownership of common stock of the surviving
corporation immediately after the merger;
(ii) any sale, lease, exchange or other transfer
(in one transaction or a series of related transactions) of
all or substantially all of the assets of QSR-DE;
(iii) any approval by the stockholders of QSR-DE of
any plan or proposal for the liquidation or dissolution of
QSR-DE;
(iv) the cessation of control (by virtue of their
not constituting a majority of directors) of QSR-DE's Board of
Directors by the individuals (the "CONTINUING DIRECTORS") who
(x) at the date of this Agreement were directors or (y) become
directors after the date of this Agreement and whose election
or nomination for election by QSR-DE's stockholders, was
approved by a vote of at least two-thirds of the directors
then in office who were directors at the date of this
Agreement or whose election or nomination for election was
previously so approved);
(v) (A) the acquisition of beneficial ownership
(within the meaning of Rule 13d-3 under the Securities
Exchange Act of 1934, as amended ("BENEFICIAL OWNERSHIP")) of
an aggregate of 15% of the voting power of QSR-DE's
outstanding voting securities by any person or group (as such
term is used in Rule 13d-5 under such Act) who Beneficially
Owned less than 10% of the voting power of QSR-DE's
outstanding voting securities on the date hereof, (B) the
acquisition of Beneficial Ownership of an additional 5% of the
voting power of QSR-DE's outstanding voting securities by any
person or group who Beneficially Owned at least 10% of the
voting power of QSR-DE's outstanding voting securities on the
date hereof, or (C) the execution by QSR-DE and a stockholder
of a contract that by its terms grants such stockholder (in
its, hers or his capacity as a stockholder) or such
stockholder's Affiliate (as defined in Rule 405 promulgated
under the Securities Act of 1933 (an "AFFILIATE")) including,
without limitation, such stockholder's nominee to the Board of
Directors (in its, hers or his capacity as an Affiliate of
such stockholder), the right to veto or block decisions or
actions of the Board of Directors; provided, however, that
notwithstanding the foregoing, the events described in items
(A), (B) or (C) above shall not constitute a Change in Control
hereunder if the securityholder is (aa) a trustee or other
fiduciary holding securities under an employee benefit plan of
QSR-DE and acting in such capacity, (bb) a corporation owned,
directly or indirectly, by the stockholders of QSR-DE in
substantially the same proportions as their ownership of
voting securities of QSR-DE or (cc) in the case of an
acquisition described in items (A) or (B) above (but not in
the case of an acquisition described in item (C) above), any
other person whose acquisition of shares of voting securities
is approved in advance by a majority of the Continuing
5
<PAGE> 6
Directors; provided further, however that none of the
following shall constitute a Change in Control: (aa) the right
of the holders of any voting securities of QSR-DE to vote as a
class on any matter or (bb) any vote required of disinterested
or unaffiliated directors or stockholders including, without
limitation, pursuant to Section 144 of the Delaware General
Corporation Law or Rule 16b-3 promulgated pursuant to the
Securities Exchange Act of 1934; or
(vi) subject to applicable law, in a Chapter 11
bankruptcy proceeding, the appointment of a trustee or the
conversion of a case involving QSR-DE to a case under Chapter
7.
(d) Disability. The Company may terminate this Agreement
for Disability. If the Company shall terminate the Executive's
employment for Disability, the Company's obligation to pay salary,
bonuses and benefits pursuant to Section 4 hereof shall terminate,
except that the Company shall pay the Executive (i) accrued but unpaid
salary and benefits pursuant to Section 4 hereof through the Date of
Termination, and (ii) the benefits set forth in Section 5(e) hereof.
The Company also shall make any additional payments necessary to
provide the disability benefits set forth in Exhibit A attached
hereto. "DISABILITY" shall exist if because of ill health, physical
or mental disability, or any other reason beyond his control, and
notwithstanding reasonable accommodations made by the Company, the
Executive shall have been unable, unwilling or shall have failed to
perform his duties under this Agreement, as determined in good faith
by the Compensation Committee of the Company's Board of Directors, for
a period of 180 consecutive days, or if, in any 12-month period, the
Executive shall have been unable or unwilling or shall have failed to
perform his duties for a period of 270 days, irrespective of whether
or not such days are consecutive.
(e) Employee Benefits. Unless the Executive's employment
is terminated pursuant to Section 5(b)hereof, the Company shall
maintain in full force and effect (to the extent consistent with past
practice), for the continued benefit of the Executive and, if
applicable, the Executive's spouse and children, the employee benefits
set forth in [subsections (d) ("LIFE INSURANCE"), (e) ("DISABILITY
INSURANCE"), (f) ("MEDICAL EXPENSES") and (h) ("FRINGE BENEFITS AND
PERQUISITES")] of Exhibit A attached hereto that he was entitled to
receive immediately prior to the Date of Termination (subject to the
general terms and conditions of the plans and programs under which he
receives such benefits) for the balance of the Employment Period
notwithstanding the termination hereof or for the period provided for
under the terms and conditions of such plans and programs, whichever
is longer, provided that his continued participation or, if
applicable, the participation of the Executive's spouse and children,
is possible under the general terms and conditions of such plans and
programs.
(f) Notice of Termination. Any termination by the Company
or by the Executive shall be communicated by Notice of Termination to
the other party thereto given in accordance with Section 13(c) hereof.
For purposes of this Agreement, a "NOTICE OF TERMINATION" means a
written notice which (i) indicates the specific termination provision
in this Agreement relied upon, (ii) to the extent applicable, sets
forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of the Executive's employment under
the provision so indicated and (iii) if the Date of Termination (as
defined below) is other than the date of receipt of such notice,
specifies the termination date (which date shall be not more than
fifteen (15)
6
<PAGE> 7
days after the giving of such notice). The failure by the Executive
or the Company to set forth in the Notice of Termination any fact or
circumstance which contributes to a showing of Good Reason, Cause or
Disability shall not waive any right of the Executive or the Company
hereunder or preclude the Executive or the Company from asserting such
fact or circumstance in enforcing the Executive's or the Company's
rights hereunder.
(g) Date of Termination. "DATE OF TERMINATION" means (i)
if the Executive's employment is terminated by the Company for Cause
or Disability or by the Executive for Good Reason or within six (6)
months after a Change of Control, the date of receipt of the Notice of
Termination or any later date specified therein, as the case may be,
(ii) if the Executive's employment is terminated by the Company or
other than for Cause, the Date of Termination shall be the date on
which the Company notifies the Executive of such termination and (iii)
if the Executive's employment is terminated by reason of death, the
Date of Termination shall be the date of death of the Executive.
(h) Mitigation of Amounts Payable Hereunder. The
Executive shall not be required to mitigate the amount of any payment
provided for in this Section 5 by seeking other employment or
otherwise, nor shall the amount of any payment provided for in this
Section 5 be reduced by any compensation earned by the Executive as
the result of employment by another employer after the Date of
Termination, or otherwise.
6. DEATH OF THE EXECUTIVE. If the Executive dies prior to the
end of Employment Period, the Executive's employment and other obligations
under this Agreement shall automatically terminate and all compensation, to
which the Executive is or would have been entitled hereunder (including without
limitation under subsections (a) ("BASE SALARY"), (b) ("BONUS") and (c) ("STOCK
OPTIONS") of Exhibit A attached hereto), shall terminate as of the end of the
month in which the Executive's death occurs; provided, however, that (i) the
Company shall pay to the Executive's estate, as soon as practicable, a prorated
Annual Incentive Payment, if earned in accordance with the Company's annual
incentive plan; (ii) for the balance of the Employment Period, the Executive's
spouse and children shall be entitled to receive their benefits under the
Company's group hospitalization, medical and dental plans (if any); and (iii)
the Executive's named beneficiary or beneficiaries shall receive the benefits
payable pursuant to subsection (d) ("LIFE INSURANCE") of Exhibit A attached
hereto and such reimbursement as may have been due to the Executive pursuant to
subsection (g) ("PAYMENT AND REIMBURSEMENT OF EXPENSES") of Exhibit A attached
hereto.
7. CONFIDENTIAL INFORMATION. The Executive recognizes and
acknowledges that he will have access to certain information of members of the
Company Group (as defined below) and that such information is confidential and
constitutes valuable, special and unique property of such members of the
Company Group. The Executive shall not at any time, either during or
subsequent to the term of this Agreement, disclose to others, use, copy or
permit to be copied, except in pursuance of his duties for and on behalf of the
Company, it successors, assigns or nominees, any Confidential Information of
any member of the Company Group (regardless of whether developed by the
Executive) without the prior written consent of the Company. As used herein,
"COMPANY GROUP" means the Company, and any entity that directly or indirectly
controls, is controlled by, or is under common control with, the Company. For
purposes hereof, "CONTROL" means the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of such
entity, whether through the ownership of voting securities, by contract or
otherwise. The term
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<PAGE> 8
"CONFIDENTIAL INFORMATION" with respect to any person means any secret or
confidential information or know-how and shall include, but shall not be
limited to, the plans, customers, costs, prices, uses, and applications of
products and services, results of investigations, studies or experiments owned
or used by such person, and all apparatus, products, processes, compositions,
samples, formulas, computer programs, computer hardware designs, computer
firmware designs, and servicing, marketing or manufacturing methods and
techniques at any time used, developed, investigated, made or sold by such
person, before or during the term of this Agreement, that are not readily
available to the public or that are maintained as confidential by such person.
The Executive shall maintain in confidence any Confidential Information of
third parties received as a result of his employment with the Company in
accordance with the Company's obligations to such third parties and the
policies established by the Company.
8. DELIVERY OF DOCUMENTS UPON TERMINATION. The Executive shall
deliver to the Company or its designee at the termination of his employment all
correspondence, memoranda, notes, records, drawings, sketches, plans, customer
lists, product compositions, and other documents and all copies thereof, made,
composed or received by the Executive, solely or jointly with others, that are
in the Executive's possession, custody, or control at termination and that are
related in any manner to the past, present, or anticipated business or any
member of the Company Group. In this regard, the Executive hereby grants and
conveys to the Company all right, title and interest in and to, including
without limitation, the right to possess, print, copy, and sell or otherwise
dispose of, any reports, records, papers, summaries, photographs, drawings or
other documents, and writings, and copies, abstracts or summaries thereof, that
may be prepared by the Executive or under his direction or that may come into
his possession in any way during the term of his employment with the Company
that relate in any manner to the past, present or anticipate business of any
member of the Company Group.
9. FURTHER ACTS. At the request of the Company (but without
additional compensation from the Company during his employment by the Company)
the Executive shall execute any and all papers and perform all lawful acts that
the Company may deem necessary or appropriate to further evidence or carry out
the transactions contemplated in this Agreement including, without limitation,
such acts as may be necessary for the preparation, filing, prosecution, and
maintenance of applications for United States letters patent and foreign
letters patent, or for United States and foreign copyright, on the
Developments.
10. NO COMPETITION. Throughout the term of the Agreement and,
unless the Agreement terminates pursuant to Section 3, 5(a) or 5(c), through
the first anniversary of the expiration thereof, the Executive shall not
directly or indirectly engage in the business of acquiring oil and natural gas
reserves and oil and natural gas production and exploitation; or any other
business in which any member of the Company Group directly or indirectly
engages during the term of the Agreement; provided, however, that the
restriction in this Section 10 shall apply only to the reasonable and limited
geographic area consisting of any state in which any member of the Company
Group directly or indirectly has offices, operations, or customers, or
otherwise conducts business; and provided further that if the Agreement
terminates pursuant to Section 5(b), the Executive shall be subject to the
provisions of this Section 10 only if the Company pays the Executive in a lump
sum an amount equal to the annual Base Salary in effect at the Date of
Termination. For purposes of this Section 10, the Executive shall be deemed to
engage in a business if he directly or indirectly, engages or invests in, owns,
manages, operates, controls or participates in the ownership, management,
operation or control of, is employed by, associated or in any manner
8
<PAGE> 9
connected with, or renders services or advice to, any business engaged in
acquiring oil and natural gas reserves and oil and natural gas production and
exploitation; provided, however, that the Executive may invest in the
securities of any enterprise (but without otherwise participating in the
activities of such enterprise) if (x) such securities are listed on any
national or regional securities exchange or have been registered under Section
12(g) of the Securities Exchange Act of 1934 and (y) the Executive does not
beneficially own (as defined Rule 13d-3 promulgated under the Securities
Exchange Act of 1934) in excess of 5% of the outstanding capital stock of such
enterprise;
The Executive agrees that if a court of competent jurisdiction
determines that the length of time or any other restriction, or portion
thereof, set forth in this Section 10 is overly restrictive and unenforceable,
the court may reduce or modify such restrictions to those which it deems
reasonable and enforceable under the circumstances, and as so reduced or
modified, the parties hereto agree that the restrictions of this Section 10
shall remain in full force and effect. The Executive further agrees that if a
court of competent jurisdiction determines that any provision of this Section
10 is invalid or against public policy, the remaining provisions of this
Section 10 and the remainder of this Agreement shall not be affected thereby,
and shall remain in full force and effect.
The Executive acknowledges that the business of the Company and the
other members of the Company Group is southwest United States in scope and that
the restrictions imposed by this Agreement are legitimate, reasonable and
necessary to protect the Company's and its affiliates' investment in their
businesses and the goodwill thereof. The Executive acknowledges that the scope
and duration of the restrictions contained herein are reasonable in light of
the time that the Executive has been engaged in the business of the Company and
the other members of the Company Group, the Executive's reputation in the
markets for the Company's and the businesses of the other members of the
Company Group and the Executive's relationship with the suppliers, customers
and clients of the Company and the other members of the Company Group. The
Executive further acknowledges that the restrictions contained herein are not
burdensome to the Executive in light of the consideration paid therefor and the
other opportunities that remain open to the Executive. Moreover, the Executive
acknowledges that he has other means available to him for the pursuit of his
livelihood.
11. REMEDIES. The Executive acknowledges that a remedy at law for
any breach or attempted breach of the Executive's obligations under Sections 7
through 10 hereof may be inadequate, agrees that the Company may be entitled to
specific performance and injunctive and other equitable remedies in case of any
such breach or attempted breach, and further agrees to waive any requirement
for the securing or posting of any bond in connection with the obtaining of any
such injunctive or other equitable relief. The Company shall have the right to
offset against amounts to be paid to the Executive pursuant to the terms hereof
any amounts from time to time owing by the Executive to the Company. The
termination of the Agreement pursuant to Section 3, 5(b) or 5(d) hereof shall
not be deemed to be a waiver by the Company of any breach by the Executive of
this Agreement or any other obligation owed the Company, and notwithstanding
such a termination the Executive shall be liable for all damages attributable
to such a breach.
9
<PAGE> 10
12. DISPUTE RESOLUTION. Subject to the Company's right to seek
injunctive relief in court as provided in Section 11 hereof, any dispute,
controversy or claim arising out of or in relation to or connection to this
Agreement, including without limitation any dispute as to the construction,
validity, interpretation, enforceability or breach of this Agreement, shall be
exclusively and finally settled by arbitration, and any party may submit such
dispute, controversy or claim, including a claim for indemnification under this
Section 12, to arbitration.
(a) Arbitrators. The arbitration shall be heard and
determined by one arbitrator, who shall be impartial and who shall be
selected by mutual agreement of the parties. If the parties cannot
agree on the sole arbitrator, then the appointing authority for the
implementation of such procedure shall be the Senior United States
District Judge for the Northern District of Texas, who shall appoint
an independent arbitrator who does not have any financial interest in
the dispute, controversy or claim. If the Senior United States
District Judge for the Northern District of Texas refuses or fails to
act as the appointing authority within ninety (90) days after being
requested to do so, then the appointing authority shall be the Chief
Executive Officer of the American Arbitration Association, who shall
appoint an independent arbitrator who does not have any financial
interest in the dispute, controversy or claim. All decisions and
awards by the arbitration tribunal shall be made by majority vote.
(b) Proceedings. Unless otherwise expressly agreed in
writing by the parties to the arbitration proceedings:
(i) The arbitration proceedings shall be held in
Dallas, Texas, at a site chosen by mutual agreement of the
parties, or if the parties cannot reach agreement on a
location within thirty (30) days of the appointment of the
last arbitrator, then at a site chosen by the arbitrators;
(ii) The arbitrators shall be and remain at all
times wholly independent and impartial;
(iii) The arbitration proceedings shall be
conducted in accordance with the Commercial Arbitration Rules
of the American Arbitration Association, as amended from time
to time;
(iv) Any procedural issues not determined under
the arbitral rules selected pursuant to item (iii) above shall
be determined by the law of the place of arbitration, other
than those laws which would refer the matter to another
jurisdiction;
(v) The decision of the arbitrators shall be
reduced to writing; final and binding without the right of
appeal; the sole and exclusive remedy regarding any claims,
counterclaims, issues or accounting presented to the
arbitrators; made and promptly paid in United States dollars
free of any deduction or offset; and any costs or fees
incident to enforcing the award shall, to the maximum extent
permitted by law, be charged against the party resisting such
enforcement;
(vi) The award shall include interest from the
date of any breach or violation of this Agreement, as
determined by the arbitral award, and from the
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<PAGE> 11
date of the award until paid in full, at the applicable
Federal rate provided for in Section 7872(f)(2)(A) of the
Code; and
(vii) Judgment upon the award may be entered in any
court having jurisdiction over the person or the assets of the
party owing the judgment or application may be made to such
court for a judicial acceptance of the award and an order of
enforcement, as the case may be.
(c) Acknowledgment Of Parties. Each party acknowledges
that he or it has voluntarily and knowingly entered into an agreement
to arbitration under this Section by executing this Agreement.
13. MISCELLANEOUS PROVISIONS.
(a) Successors of the Company. The Company will require
any successor (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company, by agreement in form and
substance satisfactory to the Executive, expressly to assume and agree
to perform this Agreement in the same manner and to the same extent
that the Company would be required to perform it if no such succession
had taken place. Failure of the Company to obtain such agreement
prior to the effectiveness of any such succession shall be a breach of
this Agreement and shall entitle the Executive to compensation from
the Company in the same amount and on the same terms as the Executive
would be entitled hereunder if the Executive terminated his employment
for Good Reason, except that for purposes of implementing the
foregoing, the date on which any such succession becomes effective
shall be deemed the Date of Termination. As used in this Agreement,
"COMPANY" shall mean the Company as hereinbefore defined and any
successor to its business and/or assets as aforesaid which executes
and delivers the agreement provided for in this Section 13(a) or which
otherwise becomes bound by all the terms and provisions of this
Agreement by operation of law.
(b) Executive's Heirs, etc. The Executive may not assign
his rights or delegate his duties or obligations hereunder without the
written consent of the Company. This Agreement shall inure to the
benefit of and be enforceable by the Executive's personal or legal
representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Executive should die
while any amounts would still be payable to him hereunder as if he had
continued to live, all such amounts, unless other provided herein,
shall be paid in accordance with the terms of this Agreement to his
designee or, if there be no such designee, to his estate.
(c) Notice. For the purposes of this Agreement, notices
and all other communications provide for in the Agreement shall be in
writing and shall be deemed to have been duly given when delivered or
mailed by United States registered or certified mail, return receipt
requested, postage prepaid, addressed to the respective addresses set
forth on the first page of this Agreement, provided that all notices
to the Company shall be directed to the attention of the Chief
Executive Officer of the Company with a copy to the Secretary of the
Company, or to such other in writing in accordance herewith, except
that notices of change of address shall be effective only upon
receipt.
(d) Amendment; Waiver. No provisions of this Agreement
may be modified, waived or discharged unless such waiver, modification
or discharge is agreed to in
11
<PAGE> 12
writing signed by the Executive and such officer as may be
specifically designated by the Board of Directors of the Company. No
waiver by either party hereto at any time of any breach by the other
party hereto of, or compliance with, any condition or provision of
this Agreement to be performed by such other party shall be deemed a
waiver of similar or dissimilar provisions or conditions at the same
or at any prior or subsequent time. No agreements or representations,
oral or otherwise, express or implied, with respect to the subject
matter hereof have been made by either party which are not set forth
expressly in this Agreement.
(e) Invalid Provisions. Should any portion of this
Agreement be adjudged or held to be invalid, unenforceable or void,
such holding shall not have the effect of invalidating or voiding the
remainder of this Agreement and the parties hereby agree that the
portion so held invalid, unenforceable or void shall, if possible, be
deemed amended or reduced in scope, or otherwise be stricken from this
Agreement to the extent required for the purposes of validity and
enforcement thereof.
(f) Survival of the Executive's Obligations. The
Executive's obligations under this Agreement shall survive regardless
of whether the Executive's employment by the Company is terminated,
voluntarily or involuntarily, by the Company or the Executive, with or
without Cause.
(g) Counterparts. This Agreement may be executed in one
or more counterparts, each of which shall be deemed to be an original
but all of which together will constitute one and the same instrument.
(h) Governing Law. This Agreement shall be governed by
and construed under the laws of the State of Texas.
(i) Captions and Gender. The use of captions and Section
headings herein is for purposes of convenience only and shall not
effect the interpretation or substance of any provisions contained
herein. Similarly, the use of the masculine gender with respect to
pronouns in this Agreement is for purposes of convenience and includes
either sex who may be a signatory.
(j) Entire Agreement. This Agreement constitutes the
entire agreement between the parties hereto with respect to the
subject matter hereof and supersedes all prior agreements, both
written and oral, between the parties with respect to the subject
matter hereof, including, without limitation, the Employment Agreement
dated May 6, 1997 between QSR-DE and the Executive.
(k) Legal Costs; Payments During Dispute. The Company
shall pay promptly as incurred, to the full extent permitted by law,
all legal fees and expenses which the Executive may reasonably incur
as a result of any contest (regardless of the outcome thereof) by the
Company, the Executive or others of the validity or enforceability of,
or liability under, any provision of this Agreement or any guarantee
of performance thereof (including as a result of any contest by the
Executive about the amount of any payment pursuant to this Agreement),
plus in each case interest on any delayed payment at the applicable
Federal rate provided for in Section 7872(f)(2)(A) of the Code. If
there shall be any dispute between the Company and the Executive (i)
in the event of any termination of the Executive's employment by the
Company, whether such termination was for Cause or Disability, or (ii)
in the event of any termination of employment by the Executive,
whether Good Reason existed,
12
<PAGE> 13
then, unless and until there is a final, nonappealable judgment by a
court of competent jurisdiction or decision of arbitration declaring
that such termination was for Cause or Disability or that the
determination by the Executive of the existence of Good Reason was not
made in good faith, the Company shall pay all amounts, and provide all
benefits, to the Executive and/or the Executive's family or other
beneficiaries, as the case may be, that the Company would be required
to pay or provide pursuant to Section 5 hereof as though such
termination were by the Company without Cause or Disability or by the
Executive with Good Reason; provided, however, that the Company shall
not be required to pay any disputed amounts pursuant to this paragraph
except upon receipt of an undertaking by or on behalf of the Executive
to repay all such amounts to which the Executive is ultimately
adjudged by such court not to be entitled.
(l) Parent Guaranty. QSR-DE hereby agrees to guaranty
the performance of the Company's obligations under this Agreement.
13
<PAGE> 14
IN WITNESS WHEREOF, the parties hereto have signed this Agreement as
of the date first set forth above.
QUEEN SAND RESOURCES (CANADA) INC.
By: /s/ AUTHORIZED SIGNATORY
-------------------------------
Name:
--------------------------
Title:
-------------------------
(EXECUTIVE)
/s/ EDWARD J. MUNDEN
-----------------------------------
Edward J. Munden
ACCEPTED AND AGREED TO:
QUEEN SAND RESOURCES, INC.
By: /s/ AUTHORIZED SIGNATORY
-------------------------------
Name:
--------------------------
Title:
-------------------------
and
By: /s/ AUTHORIZED SIGNATORY
-------------------------------
Name:
--------------------------
Title:
-------------------------
14
<PAGE> 15
EXHIBIT A
SALARY AND BENEFITS
(a) Base Salary. The Company shall pay the Executive as
compensation an aggregate salary of $130,000 per year during the
Employment Period (pro rated for periods less than twelve (12)
months), or such greater amount as shall be approved by the
Compensation Committee of the Company's Board of Directors ("BASE
SALARY"). The Compensation Committee shall review the Executive's
Base Salary at least annually and in conducting such review shall take
into consideration the most recent executive compensation assessment
prepared by an independent compensation consultant to the Company.
The Base Salary for each year shall be paid by the Company in
accordance with the regular payroll practices of the Company. The
Company may not reduce the Executive's Base Salary at any time during
the term hereof.
(b) Bonus. Subject to the provisions of this paragraph
(b), the Company shall pay the Executive an annual bonus for each
fiscal year during the Term of this Agreement (the amount of the Bonus
will be prorated for any period of less than twelve calendar months).
Such bonus shall be paid on the last business day of the third month
following the fiscal year end of the Company during the Term of this
Agreement. The Compensation Committee shall review the method of
determination of the Executive's Bonus at least annually and in
conducting such review shall take into consideration the most recent
executive compensation assessment prepared by an independent
compensation consultant to the Company.
(c) Stock Options. The Company shall grant the Executive
stock options pursuant to the Queen Sand Resources, Inc. 1997
Incentive Equity Plan (the "PLAN") on terms and conditions to be
determined by the Compensation Committee of the Company's Board of
Directors, and in making such determination shall take into
consideration the most recent executive compensation assessment
prepared by an independent compensation consultant to the Company
(d) Life Insurance. During the Employment Period and
subject to the Executive's qualification under normal life insurance
underwriting standards as of the date hereof and at any policy renewal
date, the Company shall provide, at the Company's expense, a term life
insurance policy on the life of the Executive for the benefit of such
beneficiary or beneficiaries as may be designated from time to time by
the Executive, such policy to be in a face amount as designated by the
Board of Directors for all executives generally.
(e) Disability Insurance. During the Employment Period and
subject to the Executive's qualification under normal disability
insurance underwriting standards as of the date hereof and at any
policy renewal date, the Company shall provide, at the Company's
expense, a disability insurance policy with such terms that are
designated by the Board of Directors for all executives generally.
15
<PAGE> 16
(f) Medical Expenses. During the Employment Period, the
Company shall pay, or reimburse the Executive for, all medical and
dental expenses incurred by the Executive or his spouse or Dependents
(as defined in Section 152 of the Internal Revenue Code ("CODE")).
The Executive acknowledges that the Company may enter into insurance
agreements with respect to the payments and reimbursements described
in this subsection. The Executive will use reasonable efforts to
assist the Company in recovering payments and reimbursements from such
insurers.
(g) Payment and Reimbursement of Expenses. During the
Employment Period, the Company shall pay or reimburse the Executive
for all reasonable travel and other expenses incurred by the Executive
in performing his obligations under this Agreement in accordance with
the policies and procedures of the Company for its senior executive
officers, provided that the Executive properly accounts therefor in
accordance with the regular policies of the Company. In addition, the
Company shall pay or reimburse the Executive for reasonable costs of
accountants, lawyers, compensation specialists and other professionals
retained by the Executive in connection with the negotiation and
execution of this Agreement.
(h) Fringe Benefits and Perquisites. During the Employment
Period, the Executive shall be entitled to participate in or receive
benefits under any plan or arrangement made available by the Company
to its senior executive officers, subject to and on a basis consistent
with the terms, conditions and overall administration of such plans
and arrangements. Nothing paid to the Executive under any plan or
arrangement made available to the Executive shall be deemed to be in
lieu of compensation hereunder.
(i) Vacations. During the Employment Period and in
accordance with the regular policies of the Company, the Executive
shall be entitled to the number of paid vacation days in each calendar
year determined by the Company from time to time for its senior
executive officers, but not less than four (4) weeks in any calendar
year (prorated in any calendar year in which the Executive is employed
hereunder for less than the entire year in accordance with the number
of days in such calendar year during which the Executive is so
employed).
(j) Tax. The Company may withhold from any compensation,
benefits, or amounts payable under this Agreement all federal, state,
city, or other taxes as may be required pursuant to any law or
governmental regulation or ruling. It is acknowledged by the parties
that the Executive is and, at his option, may remain a resident of
Canada during the term of this Agreement. In the event that the
Executive should be liable for any federal, provincial, state or local
income or payroll taxes, on any income or benefits earned by the
Executive in respect of his employment by the Company, in an amount
greater than that amount of taxes that the Executive would be liable
for (after taking into account any and all credits or deductions
permitted under the laws of the United States and Canada and any tax
treaties in effect between those countries) on the same income and
benefits solely under the federal, provincial or local laws in effect
in the Commonwealth of Canada (collectively, the "EXCESS TAXES"), then
the Company shall "gross up" the Executive's compensation under this
Agreement in an amount sufficient to pay such Excess Taxes.
16
<PAGE> 1
EXHIBIT 10.13
FIRST AMENDMENT
TO
LOAN AGREEMENT
AMONG
QUEEN SAND RESOURCES, INC.
AS BORROWER,
ENRON CAPITAL & TRADE RESOURCES CORP.
AS AGENT,
AND
THE LENDERS SIGNATORY HERETO
Effective as of June 30, 1998
<PAGE> 2
FIRST AMENDMENT TO LOAN AGREEMENT
This FIRST AMENDMENT TO LOAN AGREEMENT (this "First Amendment")
executed effective as of June 30, 1998 (the "Effective Date") is among Queen
Sand Resources, Inc., a Nevada corporation (the "Borrower"), Northland
Operating Co., a Nevada corporation ("Northland"), Corrida Resources, Inc., a
Nevada corporation ("Corrida"), Queen Sand Resources, Inc., a Delaware
corporation (the "Parent Company"; the Borrower, Northland, Corrida, and the
Parent Company being collectively referred to herein as the "Obligors"), the
undersigned lenders who are parties to the Loan Agreement referred to below
(the "Lenders") and Enron Capital & Trade Resources Corp., a Delaware
corporation, as agent for the Lenders (in such capacity, together with its
successors in such capacity, the "Agent").
RECITALS
A. The Borrower, the Agent and the Lenders are parties to that
certain Subordinated Revolving Credit Loan Agreement dated as of December 29,
1997 (the "Loan Agreement"), pursuant to which the Lenders have made certain
credit available to and on behalf of the Borrower.
B. The Borrower has requested and the Agent and the Lenders have
agreed to amend certain provisions of the Loan Agreement.
C. NOW, THEREFORE, in consideration of the premises and the
mutual covenants herein contained, for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
Section 1. Defined Terms. All capitalized terms which are defined in the
Loan Agreement, but which are not defined in this First Amendment, shall have
the same meanings as defined in the Loan Agreement. Unless otherwise
indicated, all section references in this First Amendment refer to the Loan
Agreement.
Section 2. Amendments to Credit Agreement.
2.1 New and Replaced Definitions. Section 1.1 of the Loan
Agreement is hereby amended by replacing or inserting the following definitions
as appropriate:
"Bridge Loan Documents" shall mean, collectively, (i) Equity
Bridge Note Purchase Agreements dated as of April 17, 1998, among the
Parent Company, the Borrower and the initial purchasers named therein,
(ii) the $30,000,000 Variable Rate Senior Third Secured Equity Bridge
Notes sold pursuant to the terms thereof, (iii) Note Purchase
Agreements dated as of April 17, 1998, among the Parent Company, the
Borrower and the initial purchasers named therein, (iv) the
$30,000,000 Variable Rate Senior Second Secured Notes sold pursuant to
the terms thereof, and (v) any and all other agreements or instruments
now or hereafter executed and delivered in connection with any of the
foregoing or as security for the payment or performance thereof.
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<PAGE> 3
"Bridge Loans" shall mean collectively the Debt Bridge Loan
and the Equity Bridge Loan.
"Consolidated Subsidiaries" shall mean each Subsidiary of the
Parent Company or other Person owned by the Parent Company, whether
now existing or hereafter created or acquired which are not
Non-Recourse Subsidiaries and the financial statements of which shall
be (or should have been) consolidated with the financial statements of
the Parent Company in accordance with GAAP.
"Debt Bridge Loan" shall mean the sale by the Borrower of
$30,000,000 Variable Rate Senior Second Secured Notes due 2003
pursuant to those certain Note Purchase Agreements dated as of April
17, 1998, among the Parent Company, the Borrower and the initial
purchasers named therein.
"Equity Bridge Loan" shall mean the sale by the Borrower of
$30,000,000 Variable Rate Senior Third Secured Equity Bridge Notes due
2004 pursuant to those certain Equity Bridge Note Purchase Agreements
dated as of April 17, 1998, among the Parent Company, the Borrower and
each initial purchaser named therein.
"Escrow Agreement" shall mean the Escrow Agreement entered
into among Morgan Guaranty Trust Company of New York, as trustee, the
Borrower, and Chase Bank of Texas, National Association, as escrow
agent, pursuant to Section 2.2 of the Purchase and Sale Agreement.
"Equity Offering" shall mean any sale or issuance for cash of
any equity securities of the Parent Company or warrants or options
with respect thereto (whether done by a registered public offering or
an exempt private placement of such securities) occurring after the
Closing Date; provided the foregoing shall not include any warrants or
options granted in connection with the Equity Bridge Loan or any
extensions relating to the Equity Bridge Loan or relating to any other
warrants or class of Preferred Stock or Debt outstanding prior to the
Closing Date or which arise after closing but are attributable to
agreements in effect prior to the date of Closing.
"Hi-Yield Offering" shall mean any sale or issuance of any
hi-yield Debt securities of the Parent Company (whether done by a
registered public offering or an exempt private placement of such
securities) occurring after the Closing Date; provided the foregoing
shall not include the Debt Bridge Loan or the Equity Bridge Loan.
"Loan" shall mean any loan made pursuant to Section 2.1, all
of such Loans being referred to collectively as the "Loans".
"Preferred Stock" shall mean (i) the Parent Company's Series A
Participating Convertible Preferred Stock; (ii) the Parent Company's
Series B Participating Convertible Preferred Stock; and (iii) the
Parent Company's Series C Convertible Preferred Stock issued pursuant
to the Certificate of Designation of Series C Convertible Preferred
Stock adopted as of December 23, 1997, together with any and all
amendments and modifications thereto.
-2-
<PAGE> 4
"Purchase and Sale Agreement" shall mean that certain Purchase
and Sale Agreement dated as of March 19, 1998, among Morgan Guaranty
Trust Company of New York, as Trustee, Investment Royalty Corporation
and Milam Royalty Corporation, as sellers, and the Borrower, as
purchaser.
"Senior Indenture" shall mean the Indenture, dated as of July
1, 1998 among the Parent Company, as issuer, the Borrower, Northland
Operating Co. and Corrida Resources, Inc., as initial subsidiary
guarantors, and Harris Trust & Savings Bank, as trustee, pursuant to
which the Senior Notes, if any, are to be issued with terms
substantially similar to those contained in the Senior Notes Offering
Memorandum.
"Senior Indenture Indebtedness" shall mean the Senior Notes,
the guarantees thereof and any other Indebtedness of the Borrower, the
Parent Company, the Guarantors under the Senior Indenture, together
with any refinancings thereof permitted by the terms of Section
5.4(a).
"Senior Loan Agreement" shall mean the Amended and Restated
Credit Agreement dated as of April 17, 1998, among the Borrower, the
Bank of Montreal, as agent, and the other lenders signatory thereto
and as the same be further amended and supplemented.
"Senior Note Documents" shall mean the collective reference to
the Senior Notes, the Senior Indenture, the Senior Note Offering
Memorandum and each agreement, instrument and document delivered in
connection therewith or relating thereto.
"Senior Note Offering Memorandum" shall mean the Offering
Memorandum, dated June 30, 1998, related to the issuance of the Senior
Notes, as amended or supplemented from time to time.
"Senior Notes" shall mean the 12 1/2% Senior Notes due 2008 of
the Parent Company issued pursuant to the Senior Indenture.
2.2 Amendment to "Excepted Liens". Section 1.1 of the Loan
Agreement is hereby amended by replacing clause (f) of the definition of
"Excepted Liens" with the following:
(f) Liens securing payment of the Senior Debt and the
Bridge Loans.
2.3 Section 3.4. Section 3.4 is hereby amended by replacing the
reference to "any Governmental Requirement" contained therein with "any material
Governmental Requirement".
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<PAGE> 5
2.4 Section 3.9. Section 3.9 is hereby amended by replacing the
reference to "all United States Federal income tax returns" contained therein
with "all required United States Federal returns that are currently due".
2.5 Section 3.14. Section 3.14 is hereby amended by replacing
such section in its entirety with the following:
Section 3.14 Subsidiaries and Partnerships. Except as set
forth on Schedule 3.14, the Parent Company has no Subsidiaries and has
no interest in any partnerships; and the Borrower has no Subsidiaries
and has no interest in any partnerships. Schedule 3.14 sets forth the
principal place of business of each such Subsidiary and the ownership
interest of QSRD and the Borrower in such Subsidiary.
2.6 Section 3.15. Section 3.15 is hereby amended by replacing
such section in its entirety with the following:
Section 3.15 Location of Business and Offices. The
Borrower's principal place of business and chief executive offices are
located at the address stated on its signature page of this Agreement.
The principal place of business and chief executive office of each
Subsidiary are located at the addresses stated on Schedule 3.14.
2.7 Section 3.19. Section 3.19 is hereby amended by replacing
the reference to "companies engaged in the same or a similar business"
contained therein with "similarly situated companies engaged in the same or a
similar business".
2.8 Section 3.21. Section 3.21 is hereby amended by replacing
such section in its entirety with the following:
Section 3.21 Restriction on Liens. Neither the Parent
Company, the Borrower nor any of its Subsidiaries (other than
Non-Recourse Subsidiaries) is a party to any agreement or arrangement
(other than this Agreement and the Security Instruments), or subject to
any order, judgment, writ or decree, which either restricts or purports
to restrict its ability to grant Liens to other Persons on or in
respect of their respective assets or Properties, except for such
restrictions as are contained in the documents and agreements
evidencing the DEM Subordinated Debt, the Senior Debt, the Bridge
Loans, any High Yield Offering, or any Equity Offering; provided that
such restrictions do not impair the ability of the Parent Company, the
Borrower, or any of its Subsidiaries (other than Non-Recourse
Subsidiaries) to grant Liens to the Agent and the Banks except as
provided in the Senior Loan Agreement and the Subordination Agreement.
2.9 Section 4.1. Section 4.1 is hereby amended by replacing
Section 4.1(a) in its entirety with the following:
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<PAGE> 6
(a) As soon as available and in any event within 120 days
after the end of each fiscal year of the Parent Company, the audited
consolidated statements of operations, stockholders' equity, changes
in financial position and cash flow of the Parent Company and its
Consolidated Subsidiaries for such fiscal year, and the related
consolidated and consolidating balance sheets of the Parent Company
and its Consolidated Subsidiaries as at the end of such fiscal year,
and setting forth in each case in comparative form the corresponding
figures for the preceding fiscal year, and accompanied by the related
audit report of an independent public accountant of recognized
national standing acceptable to the Agent which audit report shall
state that said financial statements fairly present, in all material
respects, the consolidated financial condition and results of
operations of the Parent Company and its Consolidated Subsidiaries as
at the end of, and for, such fiscal year and that such financial
statements have been prepared in accordance with GAAP except for such
changes in such principles with which the independent public
accountants shall have concurred and such audit report shall be
consistent with the standard audit report format promulgated by the
relevant regulatory authorities governing such reports and shall not
contain a "going concern" or like qualification or exception.
2.10 Section 4.3. Section 4.3 is hereby amended by replacing
Section 4.3(a) with the following Section 4.3(a) and inserting the following
new Section 4.3(e) after Section 4.3(d):
(a) The Borrower and the Parent Company shall, and the
Parent Company shall cause each of its Subsidiaries to: preserve and
maintain its corporate existence and all of its material rights,
privileges and franchises (except for mergers or dissolutions upon
transfer of all or substantially all assets permitted pursuant to
Section 5.9); keep books of record and account in which full, true and
correct entries will be made of all dealings or transactions in
relation to its business and activities in accordance with GAAP;
comply with all Governmental Requirements if failure to comply with
such requirements will have a Material Adverse Effect; pay and
discharge all taxes, assessments and governmental charges or levies
imposed on it or on its income or profits or on any of its Property
prior to the date on which penalties attach thereto, except for any
such tax, assessment, charge or levy the payment of which is being
contested in good faith and by proper proceedings and against which
adequate reserves are being maintained; upon reasonable notice, permit
representatives of the Agent or any Lender, during normal business
hours, to examine, copy and make extracts from its books and records,
to inspect its Properties, and to discuss its business and affairs
with its officers, all to the extent reasonably requested by such
Lender or the Agent (as the case may be); and keep, or cause to be
kept, insured by financially sound and reputable insurers all Property
of a character usually insured by Persons engaged in the same or
similar business similarly situated against loss or damage of the
kinds and in the amounts customarily insured against by such Persons
and carry such other insurance as is usually carried by such Persons
including, without limitation, environmental risk insurance to the
extent reasonably available.
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<PAGE> 7
(e) In the event that all or any portion of any Oil and
Gas Property owned by the Parent Company or its Subsidiaries is
comprised of interests in the Hydrocarbon Property which are not
working interests or which are operated by a Person or Persons other
than the Parent Company or one of its Subsidiaries, then, with respect
to such interests and Properties, the Borrower and the Parent Company
shall, and shall cause such Subsidiary to, use reasonable efforts
consistent with usual and customary industry practice to obtain
compliance with the foregoing covenants contained in this Section 4.3
by the working interest owners or the operator or operators of such
interests or Properties.
2.11 Section 4.7. Section 4.7 is hereby amended by replacing
Section 4.7(a) in its entirety with the following:
(a) No later than 30 days prior to each Scheduled
Redetermination Date, commencing with the Scheduled Redetermination
Date to occur on September 15, 1998, the Borrower shall furnish to the
Agent a Reserve Report. The June 30 Reserve report of each year shall
be prepared by certified independent petroleum engineers or other
independent petroleum consultant(s) acceptable to the Agent and the
December 31 Reserve Report of each year shall be prepared by or under
the supervision of the chief engineer of the Borrower who shall
certify such Reserve Report to be true and accurate and to have been
prepared in accordance with the procedures used in the immediately
preceding June 30 Reserve Report.
2.12 Section 4.9. Section 4.9 is hereby amended by inserting the
following new Section 4.9(d):
(d) Notwithstanding anything to the contrary in this
Section 4.9, compliance with the requirements of Sections 4.9(a), (b),
and (c) shall not be required if no Loans are outstanding, provided
that prior to the making of any Loan hereunder it shall be a condition
precedent to making such Loan that all requirements and deliveries
required under Sections 4.9 (a), (b), and (c) shall have been complied
with and made prior to the making of such Loan.
2.13 Article 5. The introductory sentence of Article 5 is hereby
amended by replacing the reference to "Loan" with a reference to "the Loans".
2.14 Section 5.1. Section 5.1 is hereby amended by deleting "and"
at the end of Section 5.1(j), replacing the period (".") at the end of Section
5.1(k) with "; and", and inserting the following new Section 5.1(l):
(l) Debt of the Parent Company and its Subsidiaries
incurred pursuant to (i) the Senior Note Documents and (ii) any
subsequent Hi-Yield Offering; provided that (A) such Debt under this
Section 5.1(l)(ii) is issued on terms satisfactory to the Agent and
the Majority Lenders with respect to principal amount, maturity,
interest rate, covenants and, if applicable, subordination language,
and (B) in connection with the issuance of any such Debt under this
Section 5.1(l)(ii), the Majority Lenders may cause the Borrowing Base
to be redetermined.
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<PAGE> 8
2.15 Section 5.2. Section 5.2 is hereby amended by deleting "and"
at the end of Section 5.2(e), replacing the period (".") at the end of Section
5.2(f) with a semicolon (";"), and inserting the following Sections 5.2(g) and
5.2(h):
(g) Liens on Property of a Non-Recourse Subsidiary to
secure Debt permitted by Section 5.1(k) and Liens on stock or other
equity interests of any Non-Recourse Subsidiary; and
(h) Liens that secured the Bridge Loans which have yet
not been released.
2.16 Section 5.3. Section 5.3 is hereby amended by (i) inserting
", the Parent Company," after the first reference to the Borrower in the first
sentence and (ii) replacing Sections 5.3 (h), 5.3(i), 5.3(j), 5.3(k), and
5.3(l) in their entirety with the following:
(h) investments by the Borrower or any Guarantor related
to its direct ownership interests in additional Oil and Gas Properties
in an amount not to exceed 10% of the amount of the Senior Borrowing
Base at the time of such investment;
(i) advances to operators under operating agreements
entered into by the Borrower or any of its Subsidiaries in the
ordinary course of business;
(j) [intentionally deleted];
(k) investments, loans or advances made by (i) the
Borrower or any Guarantor to any Non-Recourse Subsidiary not to exceed
at any one time outstanding $100,000 in the aggregate, or (ii) a
Non-Recourse Subsidiary to any other Non-Recourse Subsidiary; provided
that the Parent Company may make loans, advances or investments to
Queen Sand Resources (Canada), Inc. to satisfy its obligations under
any employment agreements to which it is a party and for (A) fixtures,
furniture and equipment, provided that the aggregate amount spent
under this clause (A) shall not exceed $150,000 in the aggregate
during any twelve-month period and (B) normal general and
administrative expenses incurred in the ordinary course of its
business and for which Queen Sand Resources (Canada), Inc. is
ultimately entitled to reimbursement from the Parent Company and/or
its Subsidiaries; and
(l) loans or advances to officers and employees of the
parent Company or any of its Subsidiary in the ordinary course of
business not to exceed (i) while the Bridge Loans are outstanding (and
whether or not all or any of the Bridge Loans have been extended to be
long-term obligations), $100,000 in the aggregate outstanding at any
time, and (ii) after repayment in full of the Bridge Loans, $250,000
in the aggregate outstanding at any time.
2.17 Section 5.4. Section 5.4 is hereby amended by replacing such
section in its entirety with the following:
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<PAGE> 9
Section 5.4 Repayment of Other Debt.
(a) The Parent Company and the Borrower shall not, and
shall not permit any Subsidiary to, amend, supplement or modify any
Senior Note Document or repay the principal of, or make any other
payment in relation to, the Senior Notes; provided, so long as no
Borrowing Base deficiency then exists under Section 2.10 and no
Default or Event of Default has occurred and is continuing, the
foregoing shall not prohibit (i) the payment of interest on the Senior
Notes, or (ii) the repayment of the Senior Notes with the proceeds of
any refinancing thereof (provided that such refinancing Debt is on
terms substantially similar to the Senior Notes).
(b) The Parent Company and the Borrower shall not, and
shall not permit any Subsidiary to, amend, supplement, modify or
prepay the DEM Subordinated Debt in any material respect, except that
all or any part of the DEM Subordinated Debt may be prepaid so long as
no Loans are outstanding under this Agreement.
2.18 Section 5.8. Section 5.8 is hereby amended by replacing such
section in its entirety with the following:
Section 5.8 Dividends, Distributions and Redemptions.
Without the written approval of the Majority Lenders, the Parent
Company shall not declare or pay any dividend, purchase, redeem or
otherwise acquire for value any of its capital stock now or hereafter
outstanding, return any capital to its stockholders or make any
distribution of its assets to its stockholders, except for (i)
dividends or distributions payable solely in capital stock of the
Parent Company and (ii) the repurchase or redemption of any shares of
the Series C Preferred Stock with the aggregate net cash proceeds in
excess of $50,000,000 of any Equity Offering(s) occurring after April
17, 1998 provided that (A) no Default or Event of Default has occurred
at the time such shares are repurchased or redeemed or would result
from such repurchase or redemption and (B) no Loan is outstanding
immediately prior and after giving effect to such repurchase or
redemption. Notwithstanding anything to the contrary in this Section
5.8 and without limiting the Agent's and Lenders' rights under
Sections 6.1(k) and 6.2, the Parent Company may, after giving the
Agent 5 Business Days' prior written notice thereof, effect mandatory
redemptions and cash payments payable upon Parent Company defaults
pursuant to the Certificate of Designation governing the Series C
Preferred Stock.
2.19 Section 5.13. Section 5.13 is hereby amended by replacing
such section in its entirety with the following:
Section 5.13 Current Ratio and Net Worth.
(a) Consolidated Current Ratio. The Parent Company's ratio
of (i) consolidated current assets plus unused availability under the
"Aggregate Commitments" under the Senior Loan Agreement to (ii)
consolidated current liabilities (excluding (A) current maturities of
the Senior Debt, (B) the Bridge Loans unless the Bridge Loans have been
extended to be long-term obligations as contemplated by the terms of
the Bridge Loan Documents and (C) the Indebtedness so long as the
indebtedness does not mature within one year of the date of
calculation) shall not be less than 1.0 to 1.0 at any time.
-8-
<PAGE> 10
(b) Consolidated Tangible Net Worth. On and after April
17, 1998, the Parent Company will not permit its Consolidated Tangible
Net Worth to be less than $18,500,000 plus the amount equal to
seventy-five percent (75%) of the aggregate net proceeds of all Equity
Offerings by the Parent Company after April 17, 1998.
For the purposes of this Section 5.13, "Consolidated Tangible Net
Worth" shall have the meaning specified in the Senior Loan Agreement.
2.20 Section 5.15. Section 5.15 is hereby amended by replacing
such section in its entirety with the following:
Section 5.15 Fixed Charge Coverage Ratio.
(a) The Parent Company's Fixed Charge Coverage Ratio
shall be not less than 1.5 to 1.0 for the three-month period ending
June 30, 1998.
(b) If the aggregate net cash proceeds to the Parent
Company from Hi-Yield Offerings are greater than $75,000,000, the
Parent Company's Fixed Charge Coverage Ratio as of the end of any full
fiscal quarter occurring after the completion of the first such
Hi-Yield Offering shall not be less than the following for the period
then applicable:
(i) for the six month period ending on
September 30, 1998, 1.5 to 1.0;
(ii) for the nine month period ending on
December 31, 1998, 1.5 to 1.0;
(iii) for each rolling period of four fiscal
quarters thereafter, 1.5 to 1.0.
(c) If no Hi-yield Offering has been completed or the
aggregate net cash proceeds to the Parent Company from one or more
Hi-Yield Offerings are less than or equal to $75,000,000, the Parent
Company's Fixed Charge Coverage Ratio as of the end of any fiscal
quarter shall not be less than the following for the period then
applicable:
(i) for the six month period ending on
September 30, 1998, 1.75 to 1.0;
(ii) for the nine month period ending on
December 31, 1998, 2.0 to 1.0;
(iii) for each rolling period of four fiscal
quarters thereafter, 2.2 to 1.0.
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<PAGE> 11
For the purposes of this Section 5.15, "Fixed Charge Coverage Ratio"
shall have the meaning specified in the Senior Loan Agreement.
2.21 Section 5.16. Section 5.16 is hereby amended by replacing
such section in its entirety with the following:
Section 5.16 Sale of Oil and Gas Properties. The Parent
Company and the Borrower will not, and will not permit any Subsidiary
to, sell, assign, farm-out, convey or otherwise transfer any Oil and
Gas Property or any interest in any Oil and Gas Property except for
(i) sales of Hydrocarbons in the ordinary course of business, (ii)
sales of assets which are worn-out or obsolete and are not material to
the continuation of its business, (iii) intercompany sales or other
dispositions by the Parent Company or any Guarantor to the Borrower or
by any Guarantor to another Guarantor (provided the foregoing shall
not permit dispositions to Non-Recourse Subsidiaries, except to the
extent permitted by Section 5.3(k)), (iv) dispositions of equipment
when substantially similar equipment has been or will be acquired, and
(v) sales or other dispositions of Oil and Gas Properties or other
assets which shall not exceed $2,500,000 in the aggregate in any
fiscal year.
2.22 Section 5.19. Section 5.19 is hereby amended by replacing
such section in its entirety with the following:
Section 5.19 Subsidiaries and Partnerships. Without the
prior written consent of the Majority Lenders, the Parent Company and
the Borrower shall not, and shall not permit any of its respective
Subsidiaries to, create any additional Subsidiaries or partnerships,
unless such Subsidiary or partnership becomes a Guarantor hereunder or
is designated by the Parent Company to be a Non-Recourse Subsidiary.
Neither the Parent Company nor the Borrower shall or shall permit any
of its Subsidiaries to sell or issue any shares of stock of any class
of one of its Subsidiaries or any interest in a partnership except to
the Parent Company or any of its Subsidiaries (other than Non-Recourse
Subsidiaries). In connection with the execution of any Guaranty
hereunder, the Borrower shall provide corporate documentation and
opinion letters reasonably satisfactory to the Agent reflecting the
corporate status of such new Subsidiary and the enforceability of such
Guaranty.
2.23 Section 5.20. Section 5.20 is hereby amended by replacing
such section in its entirety with the following:
Section 5.20 Negative Pledge Agreements. Neither the
Parent Company, the Borrower nor any of its Subsidiaries will create,
incur, assume or suffer to exist any contract, agreement or
understanding (other than this Agreement, the Security Instruments, and
the documents and agreements evidencing the Senior Debt, the DEM
Subordinated Debt, the Bridge Loans, any Hi-Yield Offering, or any
Equity Offering) which in any way prohibits or restricts the granting,
conveying, creation or imposition of any Lien on any of its Property or
restricts any of its Subsidiaries from paying dividends to the
Borrower, or which requires the consent of other Persons in connection
therewith.
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<PAGE> 12
2.24 Section 6.1. Section 6.1 is hereby amended by replacing the
reference to "$100,000" contained in Section 6.1(h) with a reference to
"$500,000".
2.25 Section 7.2. Section 7.2 is hereby amended by inserting the
following Sections 7.2(h) and 7.2(i) after Section 7.2(g):
(h) Bridge Loans. The Bridge Loans shall have been
repaid in full and all mortgages, deeds of trusts, and other
agreements or instruments creating Liens securing the Bridge Loans
shall have been released in a manner that is satisfactory to the
Agent.
(i) Certificate Regarding Incurrence of Debt under Senior
Indenture. The Borrower shall have delivered a certificate from an
authorized officer, in form and substance reasonably satisfactory to
the Agent, certifying that, as of the date of incurrence, the Parent
Company and the Borrower are permitted to incur such Indebtedness
under the Senior Indenture (because either (i) such Indebtedness will
constitute "Permitted Indebtedness" under the Senior Indenture or (ii)
such Indebtedness may be incurred without violation of the then
applicable Consolidated Interest Coverage Ratio set forth in the
Senior Indenture) and setting forth in reasonable detail calculations
to support the certification.
2.26 Section 9.2. Section 9.2 is hereby amended by replacing the
reference to "$1,000,000" contained therein with "$2,500,000".
2.27 Schedules. Schedules 3.2(Liabilities), 3.14(Subsidiaries and
Partnerships), 3.17(Environmental Matters), 3.19(Insurance), and 3.23 (Material
Contracts) are hereby amended by replacing such schedules in their entirety
with Schedules 3.2(Liabilities), 3.14(Subsidiaries and Partnerships),
3.17(Environmental Matters), 3.19(Insurance), and 3.23 (Material Contracts)
attached hereto.
Section 3. Representations and Warranties; Etc. Each Obligor hereby
affirms: (a) that as of the date of execution and delivery of this First
Amendment, all of the representations and warranties contained in each Loan
Document to which such Obligor is a party are true and correct in all material
respects as though made on and as of the Effective Date; and (b) that after
giving effect to this First Amendment and to the transactions and waivers
contemplated hereby, no Defaults exist under the Loan Documents or will exist
under the Loan Documents.
Section 4. Conditions Precedent. The effectiveness of this First
Amendment (including Section 5.1 hereof) is subject to the receipt by the Agent
of the following documents and the satisfaction of the other conditions
provided in this Section 4, each of which shall be reasonably satisfactory to
the Agent in form and substance:
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<PAGE> 13
4.1 Loan Documents. The Agent shall have received multiple
counterparts as requested of this First Amendment.
4.2 No Default. No Default or Event of Default shall have
occurred and be continuing as of the Effective Date.
4.3 Issuance of Senior Notes. The Senior Notes shall have been
issued and purchased by the initial holder(s) thereof as contemplated in the
Senior Note Offering Memorandum.
4.4 Repayment of Bridge Loans. The Agent shall have received
evidence that all outstanding principal, accrued and unpaid interest and other
fees and compensation owed in connection with the Bridge Loans shall have been
paid in full.
Section 5. Miscellaneous.
5.1 Suspension Agreement. Reference is made to that certain
Agreement dated as of April 17, 1998 ("Suspension Agreement"), among the
Obligors, the Agent and the Lenders which suspended the Lenders' commitments to
make Loans and contained certain waivers of the Obligors' performance under the
Loan Documents. Each of the parties hereto agrees that (a) the Lenders'
commitments to make Loans under the Loan Agreement (as amended by this First
Amendment) are reinstated under the terms and conditions contained in the Loan
Agreement (as amended by this First Amendment) and (b) the waivers of the
Obligors' performance under the Loan Documents contained in the Suspension
Agreement are hereby terminated as of the date hereof, and each of the Obligors
shall be required to comply with all of the covenants and other provisions of
the Loan Documents (as amended by this First Amendment).
5.2 Confirmation. The provisions of the Loan Agreement (as
amended by this First Amendment) shall remain in full force and effect in
accordance with its terms following the effectiveness of this First Amendment.
5.3 Ratification and Affirmation of Obligors. Each of the
Obligors hereby expressly (i) acknowledges the terms of this First Amendment,
(ii) ratifies and affirms its obligations under its respective Guaranty and the
other Security Instruments to which it is a party, (iii) acknowledges, renews
and extends its continued liability under its respective Guaranty and the other
Security Instruments to which it is a party and agrees that its respective
Guaranty and the other Security Instruments to which it is a party remain in
full force and effect with respect to the Indebtedness as amended hereby.
5.4 Counterparts. This First Amendment may be executed by one or
more of the parties hereto in any number of separate counterparts, and all of
such counterparts taken together shall be deemed to constitute one and the same
instrument.
5.5 No Oral Agreement. THIS WRITTEN FIRST AMENDMENT, THE LOAN
AGREEMENT AND THE OTHER LOAN DOCUMENTS EXECUTED IN CONNECTION HEREWITH AND
THEREWITH REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND
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<PAGE> 14
MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR UNWRITTEN
ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO SUBSEQUENT ORAL AGREEMENTS
BETWEEN THE PARTIES.
5.6 GOVERNING LAW. THIS FIRST AMENDMENT (INCLUDING, BUT NOT
LIMITED TO, THE VALIDITY AND ENFORCEABILITY HEREOF) SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
[SIGNATURES BEGIN NEXT PAGE]
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<PAGE> 15
IN WITNESS WHEREOF, the parties hereto have caused this First
Amendment to be duly executed effective as of the date first written above.
BORROWER: QUEEN SAND RESOURCES, INC.,
a Nevada corporation
By: /s/ ROBERT P. LINDSAY
----------------------------------
Robert P. Lindsay
Vice President
PARENT COMPANY: QUEEN SAND RESOURCES, INC.,
a Delaware corporation
By: /s/ ROBERT P. LINDSAY
----------------------------------
Robert P. Lindsay
Chief Operating Officer
and Executive Vice President
GUARANTORS: NORTHLAND OPERATING CO.
By: /s/ ROBERT P. LINDSAY
----------------------------------
Robert P. Lindsay
Vice President
CORRIDA RESOURCES, INC.
By: /s/ ROBERT P. LINDSAY
----------------------------------
Robert P. Lindsay
Vice President
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<PAGE> 16
AGENT: ENRON CAPITAL & TRADE RESOURCES CORP.,
as Agent
By: /s/ AUTHORIZED SIGNATORY
----------------------------------
Name:
---------------------------------
Title:
--------------------------------
LENDERS: ENRON CAPITAL & TRADE RESOURCES CORP.
By: /s/ AUTHORIZED SIGNATORY
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
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<PAGE> 17
SCHEDULE 3.2
LIABILITIES
[TO BE PROVIDED BY BORROWER]
<PAGE> 18
SCHEDULE 3.14
SUBSIDIARIES AND PARTNERSHIPS
[TO BE PROVIDED BY BORROWER]
<PAGE> 19
SCHEDULE 3.17
ENVIRONMENTAL MATTERS
[TO BE PROVIDED BY BORROWER]
<PAGE> 20
SCHEDULE 3.19
INSURANCE
[TO BE PROVIDED BY BORROWER]
<PAGE> 21
SCHEDULE 3.23
MATERIAL CONTRACTS
[TO BE PROVIDED BY BORROWER]
<PAGE> 1
EXHIBIT 10.16
SUBORDINATION AGREEMENT
THIS SUBORDINATION AGREEMENT (the "Subordination Agreement") is made as
of December 29, 1997, by and among the undersigned (the "Subordinated
Lenders"), in favor of each of the lenders that is a signatory thereto or which
becomes a signatory thereto as provided in Section 12.06 of the herein defined
Senior Credit Agreement (collectively, the "Senior Lenders"), and BANK OF
MONTREAL, as agent for the Senior Lenders (in such capacity, the "Agent").
RECITALS
A. Queen Sand Resources, Inc., a Nevada corporation, as the borrower
(the "Borrower"), Queen Sand Resources, Inc., a Delaware corporation, as the
parent guarantor (the "Parent Company"), the Agent and the Senior Lenders are
parties to that certain Credit Agreement dated as of August 1, 1997, as amended
by that certain First Amendment to Credit Agreement dated as of December 3,
1997, and as amended by that certain Second Amendment to Credit Agreement dated
as of December 29, 1997 (such agreement, as the same may be from time to time
further amended, supplemented or replaced, the "Senior Credit Agreement"),
pursuant to which the Senior Lenders have made certain credit available to and
on behalf of the Borrower.
B. Corrida Resources, Inc., a Nevada corporation ("Corrida"), and
Northland Operating Co., a Nevada corporation ("Northland", Corrida and
Northland collectively being the "Obligors"), each executed a Guaranty
Agreement dated as of August 1, 1997 (such agreements, as the same may be from
time to time further amended, supplemented or replaced, the "Senior Subsidiary
Guaranty Agreements") in favor of the Agent and the Senior Lenders to secure,
inter alia, the obligations of the Borrower under the Senior Credit Agreement.
C. The Borrower and Corrida each executed a Mortgage, Deed of Trust,
Assignment of Production, Security Agreement and Financing Statement (such
agreements, as the same may be from time to time further amended, supplemented
or replaced, the "Senior Mortgages") dated as of August 1, 1997 in favor of the
Agent to secure, inter alia, the obligations outstanding under the Credit
Agreement.
D. The Parent Company executed a Guaranty Agreement dated as of
August 1, 1997 (such agreement, as the same may be from time to time further
amended, supplemented or replaced, the "Senior Parent Guaranty Agreement") in
favor of the Agent and the Senior Lenders to secure, inter alia, the
obligations of the Borrower under the Senior Credit Agreement. (The Senior
Credit Agreement, the Senior Subsidiary Guaranty Agreements, the Senior
Mortgages, the Senior Parent Guaranty Agreement and the other documents or
instruments given in connection therewith being collectively referred to herein
as the "Senior Loan Documents").
E. Of even date herewith, the Borrower, the Parent Company and the
Obligors are executing the documents described on Exhibit A hereto (such
agreements, as the same may be from time to time further amended, supplemented
or replaced in accordance with the terms hereof, the "Subordinated Loan
Documents") with and in favor of the Subordinated Lenders and Enron Trade &
Capital Resources Corp., as agent for the Subordinated Lenders (the
"Subordinated Agent").
F. One of the conditions to the Agent and the Senior Lenders
executing the Second Amendment to Credit Agreement referred to above is the
execution and delivery of this Subordination
<PAGE> 2
Agreement, and Subordinated Agent and the Subordinated Lenders have agreed to
enter into this Subordination Agreement.
G. Therefore, (i) in order to comply with the terms and conditions
of the Second Amendment to Credit Agreement, (ii) at the special insistence and
request of the Agent and the Senior Lenders, and (iii) for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Subordinated Agent and the Subordinated Lenders hereby agree
as follows:
ARTICLE I
Definitions
Section 1.01 Terms Defined Above. As used in this Subordination
Agreement, the terms defined above shall have the meanings respectively
assigned to them.
Section 1.02 Certain Definitions. As used in this Subordination
Agreement the following terms shall have the following meanings, unless the
context otherwise requires:
"Hedging Agreements" shall mean any commodity, interest rate or currency
swap, rate cap, rate floor, rate collar, forward agreement or other exchange,
price or rate protection agreements or any option with respect to any such
transaction.
"Lien" shall mean any interest in Property securing an obligation owed
to, or a claim by, a Person other than the owner of the Property, whether such
interest is based on the common law, statute or contract, and whether such
obligation or claim is fixed or contingent, and including but not limited to
(i) the lien or security interest arising from a mortgage, charge, encumbrance,
pledge, lien (statutory or otherwise), security agreement, conditional sale or
trust receipt or a lease, consignment or bailment for security purposes, or
preferential arrangement of any kind or nature whatsoever (including, any
agreement to give or grant a lien), or (ii) production payments and the like
payable out of oil and gas Properties.
"Person" shall mean any individual, corporation, limited liability
company, voluntary association, partnership, joint venture, trust,
unincorporated organization or governmental authority, or any other form of
entity.
"Property" shall mean any interest in any kind of property or asset,
whether real, personal or mixed, or tangible or intangible.
"Subordinated Debt" shall mean any and all indebtedness, liabilities and
obligations owed by the Borrower, the Parent Company and/or any Obligor to the
Subordinated Agent and/or the Subordinated Lenders, whether (i) absolute or
contingent, direct or indirect, joint, several or independent, (ii) now
outstanding or owing or hereafter existing or incurred, (iii) arising by
operation of law or otherwise, (iv) due or to become due, or (v) held or to be
held by the Subordinated Agent or any Subordinated Lender; including all
indebtedness, obligations and liabilities of the Borrower, the Parent Company
and/or the Obligors to the Subordinated Agent and/or any Subordinated Lender
arising out of the Subordinated Loan Documents (described in greater detail on
Exhibit A hereto), and all renewals, extensions, rearrangements, refundings and
modifications thereof permitted by the terms hereof; provided the foregoing
shall not include (A) any Hedging Agreement between the Borrower, the Parent
Company or any Obligor with the Subordinated Agent or any Subordinated Lender
or any affiliate of a Subordinated Lender, and (B) any liabilities or
obligations in respect of shares of stock or other equity interests that
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<PAGE> 3
are subordinated to all Superior Indebtedness of the Borrower, the Parent
Company or an Obligor to at least the same extent as the Subordinated Debt.
"Superior Indebtedness" shall mean any and all indebtedness, liabilities
and obligations owed by the Borrower, the Parent Company and/or any Obligor to
the Agent and/or any Senior Lender under the Credit Agreement, any Hedging
Agreement between the Borrower, the Parent Company or any other Obligor and any
Senior Lender, or any Senior Loan Document, whether (i) absolute or contingent,
direct or indirect, joint, several or independent, (ii) now outstanding or
owing or which may hereafter be existing or incurred, (iii) arising by
operation of law or otherwise, (iv) due or to become due, or (v) held or to be
held by the Agent or any Senior Lender, including without limitation all
indebtedness, obligations and liabilities of the Borrower, the Parent Company
and/or the Obligors arising out of the Senior Loan Documents. The Superior
Indebtedness shall include amounts accruing subsequently to the filing of any
bankruptcy, receivership, insolvency or similar petition. Without limiting the
generality of the foregoing, Superior Indebtedness shall include all
obligations for fees, all indemnity and reimbursement payments (whether for
expenses or for advances) to the Agent or any Senior Lender.
ARTICLE II
Subordination
Section 2.01 Agreement to Subordinate. The payment of any and all
Subordinated Debt is expressly subordinated to the extent and in the manner set
forth in Sections 2.02 through 2.07 hereof to Superior Indebtedness.
Section 2.02 Payment Subordination upon Default.
(a) If any principal, interest or other amounts due in respect of the
Superior Indebtedness is not paid when due (including at maturity) or a
borrowing base deficiency under Section 2.07(c) of the Senior Credit Agreement
and as a result thereof, either the Agent or any Senior Lender shall give the
Subordinated Agent notice (which may be oral, provided that it is promptly
confirmed in writing or by facsimile transmission) that an "Event of Default"
has occurred under any Senior Loan Document, then, unless and until such Event
of Default shall have been cured or the Superior Indebtedness shall have been
paid in full, the Subordinated Agent and the Subordinated Lenders will not
take, receive or accept from the Borrower, the Parent Company or any other
Obligor, by set-off or in any other manner, any payment or distribution on
account of the Subordinated Debt nor present any instrument evidencing the
Subordinated Debt for payment (other than such presentment as may be necessary
to prevent discharge of other liable parties on such instrument).
(b) If any Event of Default on the Senior Indebtedness occurs other
than one described under Section 2.02(a), and as a result thereof, either the
Agent or any Senior Lender shall give the Subordinated Agent notice (which may
be oral, provided that it is promptly confirmed in writing or by facsimile
transmission) that an "Event of Default" has occurred under any Senior Loan
Document, then, unless and until such Event of Default shall have been cured or
the Superior Indebtedness shall have been paid in full, the Subordinated Agent
and the Subordinated Lenders will not, for a period of 135 days following its
receipt of such notice, take, receive or accept from the Borrower, the Parent
Company or any other Obligor, by set-off or in any other manner, any payment or
distribution on account of the Subordinated Debt nor present any instrument
evidencing the Subordinated Debt for payment (other than such presentment as
may be necessary to prevent discharge of other liable parties on such
instrument).
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Section 2.03 Payments Received or Made in Violation of Subordination
Agreement.
(a) In the event the Subordinated Agent or any Subordinated Lender
shall receive any payment or distribution on account of the Subordinated Debt
which it is not entitled to receive under the provisions of Section 2.02, the
Subordinated Agent or such Subordinated Lender will hold any amount so received
in trust for the Senior Lenders and will forthwith turn over such payment to
the Agent in the form received by it (together with any necessary endorsement)
to be applied to the Superior Indebtedness. In the event of any failure by the
Subordinated Agent or any Subordinated Lender to make any such endorsement, the
Agent is hereby irrevocably authorized and granted a power of attorney (which
is irrevocable and coupled with interest) to make the same.
(b) The Borrower, the Parent Company or any Obligor hereby
acknowledge and agree to follow the payment priorities established in Section
2.02. If the Borrower, the Parent Company or any Obligor shall become aware
that an "Event of Default" has occurred under any Senior Loan Document, then
such Person shall give the Agent, the Senior Lenders and the Subordinated Agent
prompt written notice thereof.
(c) This Subordination Agreement defines the relative rights of Agent
and the Senior Lenders and the Subordinated Agent and Subordinated Lenders.
Nothing in this Subordination Agreement shall: (i) impair, as between the
Borrower, the Parent Company or any Obligor, the Subordinated Agent and the
Subordinated Lenders, the obligation of the Borrower, the Parent Company and
the Obligors, which are absolute and unconditional, to pay principal of and
interest on the Subordinated Debt in accordance with the terms of the
Subordinated Loan Documents; or (ii) prevent the Subordinated Agent or any
Subordinated Lender from exercising its available remedies, subject to the
terms of Section 2.05 and the rights of the Agent and the Senior Lenders to
receive distributions otherwise payable to the Subordinated Agent and the
Subordinated Lenders.
Section 2.04 Liens Subordinated.
(a) The Subordinated Agent and the Subordinated Lenders agree that
any Liens, upon the Property of any of the Borrower, the Parent Company or any
Obligor securing payments of the Subordinated Debt are and shall be and remain
inferior and subordinated to any Liens securing payments of the Superior
Indebtedness regardless of whether such encumbrances in favor of the
Subordinated Agent or any Subordinated Lender or the Agent and the Senior
Lenders presently exist or are hereafter created or attached.
(b) Other than the Liens taken on or about the date hereof for which
the Subordinated Agent has already given notice, the Subordinated Agent and
each Subordinated Lender agree to give the Agent written notice at least
fifteen (15) days prior to the time that it takes a Lien on any Property of the
Parent Company, the Borrower or any Obligor, such notice to specify the
Property to be encumbered by the proposed Lien. If the Subordinated Agent or
any Subordinated Lender shall obtain a Lien on Property of any of the Borrower,
the Parent Company or any Obligor which is not subject to a Lien in favor of
the Agent and the Senior Lenders, then Subordinated Agent and the Subordinated
Lenders agree to exercise their respective rights under the instruments
evidencing such Lien in accordance with the terms of this Subordination
Agreement.
(c) The Subordinated Agent and the Subordinated Lenders covenant and
agree not to contest or dispute, whether in any proceeding or otherwise, the
validity, enforceability, attachment, priority or perfected status of any Lien
granted in favor of the Agent or any Senior Lender or take any steps or
actions, including the institution of any proceedings, to enjoin or restrain
the Agent or any Senior Lender from the exercise of the remedies afforded them
under the Senior Loan Documents or applicable law.
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<PAGE> 5
(d) If the Borrower, the Parent Company or any Obligor shall, after
the date hereof, acquire any Oil and Gas Properties (or a Person owning Oil and
Gas Properties), then the Subordinated Agent and the Subordinated Lenders
covenant and agree not to take or perfect any Lien against such Properties
until the earlier of (i) 30 days following the date of such acquisition or (ii)
the date the Agent and the Senior Lenders have been granted and have perfected
a Lien in their favor on such Properties.
Section 2.05 Agreement Not to Pursue Actions.
(a) If the Agent or the Senior Lenders have given the Subordinated
Agent notice under Section 2.02 that an Event of Default under the Senior Loan
Documents has occurred, the Subordinated Agent and each Subordinated Lender
covenants that it will not, for a period of 180 days following its receipt of
such notice, do any of the following unless the Agent shall also join in such
action or commence a similar action: (i) commence any action or proceeding
against the Borrower, the Parent Company or any Obligor to recover all or any
part of the Subordinated Debt or join with any other creditor in bringing any
proceedings against such Person under any bankruptcy, reorganization,
readjustment of debt, arrangement of debt, receivership, liquidation or
insolvency law or statute of the Federal or any state government or (ii)
foreclose, repossess, sequester or otherwise take steps or institute any action
or proceeding to enforce any Lien, collateral right, judgment or other
encumbrances on any Property of the Borrower, the Parent Company or any Obligor
held by the Subordinated Agent or any Subordinated Lender; provided the
foregoing will not prohibit such presentment as may be necessary to prevent
discharge of other liable parties an instrument.
(b) If the Subordinated Agent and the Subordinated Lenders shall not
file a proper claim or proof of debt in the form required in any insolvency,
bankruptcy or liquidation proceeding prior to 30 days before the expiration of
the time to file such claim or claims, then the Agent shall have the right to
file an appropriate claim for and on behalf of the Subordinated Agent or such
Subordinated Lender. Nothing herein contained shall be deemed to authorize or
consent to or accept or adopt on behalf of the Subordinated Agent or any
Subordinated Lender any plan of reorganization, arrangement, adjustment or
composition affecting the Subordinated Debt or the rights of the Subordinated
Agent and the Subordinated Lenders, or to authorize the Agent or any Senior
Lender to vote in respect of the claim of the Subordinated Agent or any
Subordinated Lender in any such proceeding.
Section 2.06 Rights of the Agent and the Senior Lenders. The Agent and
the Senior Lenders may, at any time, and from time to time, without the consent
of or notice to the Subordinated Agent or any Subordinated Lender, without
incurring responsibility to the Subordinated Agent and/or any Subordinated
Lender, without impairing or releasing any of the Agent or the Senior Lenders'
rights or any of the obligations of the Subordinated Agent and the Subordinated
Lenders under this Subordination Agreement:
(a) change the amount, manner, place or terms of payment, or change
or extend for any period the time of payment of, or renew, increase or
otherwise alter the Superior Indebtedness or any Senior Loan Document or any
other instrument or agreement now or hereafter executed or evidencing any of
the Superior Indebtedness in any manner, or enter into or amend in any manner
any other agreement relating to the Superior Indebtedness (including provisions
restricting or further restricting payments of the Subordinated Debt);
(b) sell, exchange, release or otherwise deal with all or any part of
any Property by whomsoever at any time pledged or mortgaged to secure,
howsoever securing, the Superior Indebtedness;
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<PAGE> 6
(c) release any Person liable in any manner for payment or collection
of the Superior Indebtedness;
(d) exercise or refrain from exercising any rights against the
Borrower, the Parent Company or any other Obligor or others, including the
Subordinated Agent and the Subordinated Lenders; and
(e) apply any sums received by the Senior Lenders, paid by any Person
and however realized, to payment of the Superior Indebtedness in such a manner
as the Agent and the Senior Lenders, in their sole discretion, may deem
appropriate.
Section 2.07 Payments within 90 Days of Default. The obligations under
the Subordinated Loan Documents are revolving in nature and, except as set
forth in Section 2.02, this Subordination Agreement will not prohibit certain
payments made prior to the occurrence of an "Event of Default" under the Senior
Loan Documents. To effect the subordinations intended hereby, the Subordinated
Agent and each Subordinated Lender agree that if (i) it receives a payment in
any manner on account of the Subordinated Debt and within 90 days following its
receipt of such payment the Agent or any Senior Lender shall give a notice
under Section 2.02 that an Event of Default under the Senior Loan Documents has
occurred (other than an Event of Default: (1) for which the Agent or the Senior
Lenders have previously given notice and instituted a payment blockage pursuant
to Section 2.02(b) and (2) which has continued for over 135 days), and (ii) the
Superior Indebtedness has not been paid in full, then such payment will be
treated as if it had been made after the giving of a notice that an Event of
Default under the Senior Loan Documents has occurred and the Subordinated Agent
and the Subordinated Lenders will hold such amount in trust and pay to the
Agent, for its benefit and the benefit of the Senior Lenders, any amount equal
to the amount so received during such 90 day period. The foregoing provisions
shall apply without regard to whether the payments would or would not
constitute preferential payments under the Federal Bankruptcy Code or other
applicable insolvency laws. The Subordinated Agent and the Subordinated
Lenders acknowledge and agree that for purposes of clause (i) above, any
subsequent action, failure to act or any breach of a financial covenant for a
period commencing after the date of the commencement of a payment blockage
under Section 2.02(b) that would give rise to a new Event of Default pursuant
to any provision under which a payment blockage previously existed or was
continuing shall constitute a new Event of Default for purposes of Section
2.02(b) and this Section 2.07. The Subordinated Agent and the Subordinated
Lenders shall be subrogated to the claims and rights of the Agent and the
Senior Lenders to the extent of the Superior Indebtedness so acquired; provided
that the Subordinated Agent and the Subordinated Lenders shall have no rights
until such time as the Superior Indebtedness shall have been paid in full.
Section 2.08 Conversions Not Affected. Nothing in this Subordination
Agreement is intended or shall be construed to prevent: (a) the exercise by the
Subordinated Agent or any Subordinated Lender (or an affiliate of it) of
conversion rights contained in the Subordinated Loan Documents, (b) the receipt
by the Subordinated Agent or any Subordinated Lender of shares of stock and
debt securities that are subordinated to all Superior Indebtedness of the
Borrower, the Parent Company or an Obligor to at least the same extent as the
Subordinated Debt, and (c) the presentment of an instrument to prevent
discharge of other liable parties on such instrument.
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ARTICLE III
Representations, Warranties and Covenants
Section 3.01 Representations of Subordinated Agent and Subordinated
Lenders. The Subordinated Agent and each Subordinated Lender represent and
warrant that:
(a) neither the execution nor delivery of this Subordination
Agreement nor fulfillment of or compliance with the terms and provisions hereof
will conflict with, or result in a breach of the terms, conditions or
provisions of, or constitute a default under, any agreement or instrument which
it is now subject to;
(b) it has all requisite authority to execute, deliver and perform
its obligations under this Subordination Agreement; and
(c) this Subordination Agreement constitutes it legal, valid, and
binding obligation in accordance to its terms, subject to applicable
bankruptcy, insolvency or similar laws and general principles of equity.
Section 3.02 Covenants. The Subordinated Agent and each Subordinated
Lender covenant that so long as any of the Superior Indebtedness remains
outstanding and until the termination of the "Aggregate Commitments" (as
defined in the Senior Credit Agreement), it will:
(a) cause all Subordinated Debt to be evidenced by a note, debenture
or other instrument evidencing the Subordinated Debt;
(b) cause any such note, debenture, or instrument evidencing the
Subordinated Debt to contain a statement or legend to the effect that such
note, debenture, or other instrument is subordinated to the Superior
Indebtedness in the manner and to the extent set forth in this Subordination
Agreement;
(c) not assign or transfer to others the Subordinated Debt or any
claim it has or may have against the Borrower, the Parent Company or any other
Obligor as long as any of the Superior Indebtedness remains outstanding, unless
such assignment or transfer is expressly made subject to this Subordination
Agreement;
(d) not ask for, sue for, take, demand, receive or accept any
principal or interest on any of the Subordinated Debt except in accordance with
the terms of this Subordination Agreement;
(e) not amend, supplement or otherwise modify the terms of the
Subordinated Debt without the express written consent of the Agent and the
Senior Lenders, which consent will not be unreasonably withheld, which has the
effect of (i) increasing the "Commitment" under the Subordinated Loan Agreement
(provided that the foregoing shall not affect the Subordinated Agent and the
Subordinated Lenders' ability to increase its borrowing base), (ii) increasing
the rate of interest charged on the Subordinated Debt (provided that the
foregoing shall not prohibit changes in the rate of interest contemplated by
the terms of the Subordinated Loan Agreement), (iii) changes the fees charged
under the Subordinated Loan Documents, or (iv) modifies or deletes the terms of
Section 9.22 of the Subordinated Loan Agreement or the subordination language
contained in the note issued pursuant to the Subordinated Loan Agreement;
(f) promptly upon either receipt or delivery, forward to the Agent
and the Senior Lenders a true and complete copy of any material notices or
communications either received or delivered to or from the Parent Company, the
Borrower or any Obligor with respect to the Subordinated Debt; and
(g) execute any and all other instruments necessary as reasonably
required by the Agent or the Senior Lenders to effect the subordinations
intended hereby.
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ARTICLE IV
Miscellaneous
Section 4.01 Acceptance by the Agent and the Senior Lenders. The
foregoing subordination provisions are, and are intended to be, an inducement
and a consideration to the Agent and each Senior Lender, whether such Senior
Lender's Superior Indebtedness is created or acquired before or after the
issuance of Subordinated Debt, to acquire and continue to hold, or to continue
to hold, such Superior Indebtedness and each such Senior Lender shall be deemed
conclusively to have relied on such subordination provisions in acquiring and
continuing to hold, or in continuing to hold, such Superior Indebtedness.
Notice of acceptance of this Subordination Agreement is waived, acceptance on
the part of the Agent and the Senior Lenders being conclusively presumed by
their request for this Subordination Agreement and delivery of the same to
them.
Section 4.02 Assignment by the Agent and the Senior Lenders. This
Subordination Agreement may be assigned by the Agent and the Senior Lenders in
connection with any assignment or transfer of the Superior Indebtedness.
Section 4.03 Notices. All notices and other communications provided for
herein shall be given or made by telecopy, courier or U.S. Mail or in writing
and telecopied, mailed or delivered to the intended recipient at the "Address
for Notices" specified below its name on the signature pages hereof or at such
other address as shall be designated by such party in a notice to each other
party; and in the case of the Agent or any Senior Lender in care of the Agent
at the following address:
Bank of Montreal, as Agent
700 Louisiana, Suite 4400
Houston, Texas 77002
Telecopier No.: (713) 223-4007
Telephone No.: (713) 546-9700
Attention: Client Services Group
Except as otherwise provided in this Subordination Agreement, all such
communications shall be deemed to have been duly given when transmitted by
telecopier, delivered to the telegraph or cable office or personally delivered
or, in the case of a mailed notice, three (3) Business Days after the date
deposited in the mails, postage prepaid, in each case given or addressed as
aforesaid.
Section 4.04 Amendments and Waivers. The Agent or any Senior Lender's
acceptance of partial or delinquent payments or any forbearance, failure or
delay by the Agent and the Senior Lenders in exercising any right, power or
remedy hereunder shall not be deemed a waiver of any obligation of the
Borrower, the Parent Company or any Obligor or the Subordinated Agent or any
Subordinated Lender, or of any right, power or remedy of the Agent and the
Senior Lenders; and no partial exercise of any right, power or remedy shall
preclude any other or further exercise thereof. The Subordinated Agent and the
Subordinated Lenders hereby agree that if the Agent and/or any Senior Lender
agrees to a waiver of any provision hereunder, or an exchange of or release of
collateral, or the addition or release of any Person as an Obligor, any such
action shall not constitute a waiver of any of the Agent's and/or any Senior
Lender's other rights or of the Subordinated Agent's or any Subordinated
Lender's obligations hereunder. This Subordination Agreement may be amended
only by an instrument in writing executed jointly by Subordinated Agent and the
Agent and may be supplemented only by documents delivered or to be delivered in
accordance with the express terms hereof.
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Section 4.05 Parties to the Agreement. The provisions of this
Subordination Agreement are and are intended solely for the purpose of defining
the relative rights of the Subordinated Agent, the Subordinated Lenders, the
Agent and the Senior Lenders, and are solely for the benefit of the Agent, the
Senior Lenders, the Subordinated Agent and the Subordinated Lenders; and may
not be relied upon or enforced by any party other than the Agent, the Senior
Lenders, the Subordinated Agent or the Subordinated Lenders.
Section 4.06 Reinstatement. To the extent that any payments on the
Superior Indebtedness or proceeds of any collateral are subsequently
invalidated, declared to be fraudulent or preferential, set aside or required
to be repaid by the Agent or any Senior Lender to a trustee, debtor in
possession, receiver or other Person under any bankruptcy law, common law or
equitable cause, then to such extent, obligations hereunder with respect to the
Superior Indebtedness so satisfied shall be revived and continue as if such
payment or proceeds had not been received and the Agent's and the Senior
Lenders' Liens, interests, rights, powers and remedies under the Senior Loan
Documents and this Subordination Agreement shall continue in full force and
effect. In such event, each Senior Loan Document and this Subordination
Agreement shall be automatically reinstated and the Borrower, the Parent
Company, the Obligors, the Subordinated Agent and the Subordinated Lenders
shall take such action as may be reasonably requested by the Agent and the
Senior Lenders to effect such reinstatement.
Section 4.07 Governing Law. THIS SUBORDINATION AGREEMENT SHALL BE
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS.
Section 4.08 ENTIRE AGREEMENT. THIS WRITTEN SUBORDINATION AGREEMENT
EMBODIES THE ENTIRE AGREEMENT AND UNDERSTANDING BETWEEN THE AGENT AND THE
SENIOR LENDERS, THE SUBORDINATED AGENT AND THE SUBORDINATED LENDER AND
SUPERSEDES ALL OTHER AGREEMENTS AND UNDERSTANDINGS BETWEEN SUCH PARTIES
RELATING TO THE SUBJECT MATTER HEREOF AND THEREOF. THIS WRITTEN SUBORDINATION
AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.
Section 4.09 References and Titles. All references in this
Subordination Agreement to articles, sections, subsections and other
subdivisions refer to the articles, sections, subsections and other
subdivisions of this Subordination Agreement unless expressly provided
otherwise. Titles appearing at the beginning of any subdivisions are for
convenience only and do not constitute any part of such subdivisions and shall
be disregarded in construing the language contained in such subdivisions.
Section 4.10 Severability. All rights, remedies and powers provided
herein may be exercised only to the extent that the exercise thereof does not
violate any applicable provision of law; and all the provisions hereof are
intended (a) to be subject to all applicable mandatory provisions of law which
may be controlling and (b) to be limited to the extent necessary so that they
will not render this Subordination Agreement invalid under the provisions of
any applicable law. If any term or provision of this Subordination Agreement
shall be determined to be illegal or unenforceable, all other terms and
provisions of this Subordination Agreement shall nevertheless remain effective
and shall be enforced to the fullest extent permitted by applicable law and the
parties agree to promptly meet and negotiate in good faith to establish new
arrangements which have the effect of preserving in the economic and commercial
benefits established by this Subordination Agreement.
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WITNESS THE EXECUTION HEREOF, as of this the 29th day of December 1997.
Subordinated Agent and Subordinated Lender:
Enron Capital & Trade Resources Corp., as Subordinated
Agent and as sole Subordinated Lender
By: /s/ AUTHORIZED SIGNATORY
--------------------------------------------------
Name:
Title:
Address for the Subordinated Agent and Lender:
1400 Smith
Houston, Texas 77002
Attention: Donna Lowry
Telephone: (713) 853-
Telecopy: (713) 646-3602
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<PAGE> 11
The Borrower, the Parent Company and the Obligors hereby execute this
Subordination Agreement to evidence their agreement that:
1. each shall be bound by all of the terms and provisions of the
Subordination Agreement.
2. each acknowledge and agree that the terms of the Subordination
Agreement shall control over the terms of the Senior Loan
Documents and the Subordinated Loan Documents, any notes issued
pursuant thereto, and the instruments evidencing any of the
foregoing to the extent of any conflict relating to the relative
rights of the Agent and the Senior Lenders, the Subordinated
Agent or the Subordinated Lenders.
3. the terms and provisions of the Subordination Agreement shall
inure solely to the benefit of the Agent, the Senior Lenders, the
Subordinated Agent, the Subordinated Lenders and their respective
successors and assigns and the terms and provisions of this
Subordination Agreement shall not inure to the benefit of nor be
enforceable by the Borrower, the Parent Company or any Obligor or
their successors or assigns.
4. each at its expense will execute, acknowledge and deliver all
such agreements and instruments and take all such action as any
party to this Subordination Agreement from time to time may
reasonably request in order further to effectuate the purposes of
this Subordination Agreement and to carry out the terms hereof.
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BORROWER: QUEEN SAND RESOURCES, INC., a Nevada corporation
By: /s/ ROBERT P. LINDSAY
---------------------------------------
Robert P. Lindsay
Vice President
Address for Notices:
Queen Sand Resources, Inc.
3500 Oak Lawn Drive, Suite 380
Dallas, Texas 75219
Attention: Robert P. Lindsay
Telephone: (214) 521-9959
Facsimile: (214) 521-9960
with copy to:
Queen Sand Resources, Inc.
60 Queen Street, Suite 1400
Ottawa, Canada KIP 5Y7
Attention: Mr. Ronald Benn
Telephone: (613) 230-7211
Facsimile: (613) 230-6055
and
Haynes & Boone LLP
901 Main Street, Suite 3100
Dallas, Texas 75202-3789
Attention: Mr. William L. Boeing
Telephone: (214) 651-5553
Facsimile: (214) 651-5940
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PARENT COMPANY: QUEEN SAND RESOURCES, INC., a Delaware corporation
By: /s/ ROBERT P. LINDSAY
---------------------------------------
Robert P. Lindsay
Chief Operating Officer
and Executive Vice President
Address for Notices:
Queen Sand Resources, Inc.
3500 Oak Lawn Drive, Suite 380
Dallas, Texas 75219
Attention: Robert P. Lindsay
Telephone: (214) 521-9959
Facsimile: (214) 521-9960
with copy to:
Queen Sand Resources, Inc.
60 Queen Street, Suite 1400
Ottawa, Canada KIP 5Y7
Attention: Mr. Ronald Benn
Telephone: (613) 230-7211
Facsimile: (613) 230-6055
and
Haynes & Boone LLP
901 Main Street, Suite 3100
Dallas, Texas 75202-3789
Attention: Mr. William L. Boeing
Telephone: (214) 651-5553
Facsimile: (214) 651-5940
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GUARANTORS: NORTHLAND OPERATING CO.
By: /s/ ROBERT P. LINDSAY
---------------------------------------
Robert P. Lindsay
Vice President
CORRIDA RESOURCES, INC.
By: /s/ ROBERT P. LINDSAY
---------------------------------------
Robert P. Lindsay
Vice President
Address for Notices of each Guarantor: [same as
Parent Company]
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Exhibit A
Subordinated Loan Documents
1. Subordinated Revolving Credit Loan Agreement dated as of December 29,
1997 between the Borrower, the Subordinated Lenders party thereto and
the Subordinated Agent (the "Subordinated Loan Agreement").
2. Subordinated Note(s) in the aggregate principal amount of $10,000,000
issued by the Borrower in favor of the Subordinated Lender(s).
3. Mortgage, Line of Credit Mortgage, Deed of Trust, Assignment of
Production, Security Agreement and Financing Statement (Subordinated
Revolving Credit Loan Agreement) dated as of December 29, 1997 executed
by the Borrower in favor of the Subordinated Agent, for its benefit and
the benefit of Subordinated Lenders.
4. Financing Statement executed by the Borrower with respect to item 3
above.
5. Guaranty Agreement dated as of December 29, 1997 executed by the Parent
Company in favor of the Subordinated Agent and Subordinated Lenders.
6. Guaranty Agreement dated as of December 29, 1997 executed by Corrida
Resources, Inc. and Northland Operating Co. in favor of the Subordinated
Agent and Subordinated Lenders.
7. Fee Letter dated as of December 29, 1997 executed between the Borrower
and ECT Securities Corp.
8. Any other Security Instrument or Loan Document (as defined in the
Subordinated Revolving Credit Loan Agreement described in paragraph 1
above).
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EXHIBIT 10.17
AMENDED AND RESTATED
CREDIT AGREEMENT
Dated as of April 17, 1998
Among
QUEEN SAND RESOURCES, INC.,
a Delaware corporation,
as Guarantor,
QUEEN SAND RESOURCES, INC.,
a Nevada corporation,
as Borrower,
BANK OF MONTREAL,
as Agent,
and
The Lenders Signatory Hereto
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TABLE OF CONTENTS
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ARTICLE I
DEFINITIONS AND ACCOUNTING MATTERS
Section 1.01 Terms Defined in Recitals . . . . . . . . . . . . . . . 1
Section 1.02 Certain Defined Terms . . . . . . . . . . . . . . . . . 1
Section 1.03 Accounting Terms and Determinations . . . . . . . . . . 16
ARTICLE II
COMMITMENTS
Section 2.01 Loans and Letters of Credit . . . . . . . . . . . . . . 16
Section 2.02 Borrowings, Continuations, Conversions and Letters
of Credit . . . . . . . . . . . . . . . . . . . . . . . 17
Section 2.03 Changes of Commitments . . . . . . . . . . . . . . . . 19
Section 2.04 Fees . . . . . . . . . . . . . . . . . . . . . . . . . 19
Section 2.05 Several Obligations . . . . . . . . . . . . . . . . . . 20
Section 2.06 Notes . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 2.07 Prepayments . . . . . . . . . . . . . . . . . . . . . . 20
Section 2.08 Borrowing Base . . . . . . . . . . . . . . . . . . . . 21
Section 2.09 Assumption of Risks . . . . . . . . . . . . . . . . . . 22
Section 2.10 Obligation to Reimburse and to Prepay . . . . . . . . . 23
Section 2.11 Lending Offices . . . . . . . . . . . . . . . . . . . . 24
ARTICLE III
PAYMENTS OF PRINCIPAL AND INTEREST
Section 3.01 Repayment of Loans . . . . . . . . . . . . . . . . . . 24
Section 3.02 Interest . . . . . . . . . . . . . . . . . . . . . . . 25
ARTICLE IV
PAYMENTS; PRO RATA TREATMENT; COMPUTATIONS; ETC.
Section 4.01 Payments . . . . . . . . . . . . . . . . . . . . . . . 26
Section 4.02 Pro Rata Treatment . . . . . . . . . . . . . . . . . . 26
Section 4.03 Computations . . . . . . . . . . . . . . . . . . . . . 26
Section 4.04 Non-receipt of Funds by the Agent . . . . . . . . . . . 27
Section 4.05 Set-off, Sharing of Payments, Etc. . . . . . . . . . . 27
Section 4.06 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 4.07 Disposition of Proceeds . . . . . . . . . . . . . . . . 30
</TABLE>
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ARTICLE V
YIELD MAINTENANCE; CAPITAL ADEQUACY
Section 5.01 Additional Costs . . . . . . . . . . . . . . . . . . . 31
Section 5.02 Limitation on Eurodollar Loans . . . . . . . . . . . . 32
Section 5.03 Illegality . . . . . . . . . . . . . . . . . . . . . . 32
Section 5.04 Base Rate Loans Pursuant to Sections 5.01, 5.02
and 5.03 . . . . . . . . . . . . . . . . . . . . . . . 33
Section 5.05 Breakage Compensation . . . . . . . . . . . . . . . . . 33
Section 5.06 Replacement Lenders. . . . . . . . . . . . . . . . . . 33
ARTICLE VI
CONDITIONS PRECEDENT
Section 6.01 Initial Funding . . . . . . . . . . . . . . . . . . . . 35
Section 6.02 Initial and Subsequent Loans . . . . . . . . . . . . . 37
Section 6.03 Conditions Relating to Letters of Credit . . . . . . . 37
ARTICLE VII
REPRESENTATIONS AND WARRANTIES
Section 7.01 Corporate Existence . . . . . . . . . . . . . . . . . . 37
Section 7.02 Financial Condition . . . . . . . . . . . . . . . . . . 38
Section 7.03 Litigation . . . . . . . . . . . . . . . . . . . . . . 38
Section 7.04 No Breach . . . . . . . . . . . . . . . . . . . . . . . 38
Section 7.05 Authority . . . . . . . . . . . . . . . . . . . . . . . 39
Section 7.06 Approvals . . . . . . . . . . . . . . . . . . . . . . . 39
Section 7.07 Use of Loans . . . . . . . . . . . . . . . . . . . . . 39
Section 7.08 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . 39
Section 7.09 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . 40
Section 7.10 Titles, etc. . . . . . . . . . . . . . . . . . . . . . 40
Section 7.11 No Material Misstatements . . . . . . . . . . . . . . . 41
Section 7.12 Investment Company Act . . . . . . . . . . . . . . . . 41
Section 7.13 Public Utility Holding Company Act . . . . . . . . . . 41
Section 7.14 Subsidiaries and Partnerships . . . . . . . . . . . . . 41
Section 7.15 Location of Business and Offices . . . . . . . . . . . 42
Section 7.16 Defaults . . . . . . . . . . . . . . . . . . . . . . . 42
Section 7.17 Environmental Matters . . . . . . . . . . . . . . . . . 42
Section 7.18 Compliance with the Law . . . . . . . . . . . . . . . . 43
Section 7.19 Insurance . . . . . . . . . . . . . . . . . . . . . . . 43
Section 7.20 Risk Management Agreements . . . . . . . . . . . . . . 44
Section 7.21 Restriction on Liens . . . . . . . . . . . . . . . . . 44
Section 7.22 Gas Imbalances . . . . . . . . . . . . . . . . . . . . 44
Section 7.23 Material Agreements . . . . . . . . . . . . . . . . . . 44
Section 7.24 Solvency . . . . . . . . . . . . . . . . . . . . . . . 45
</TABLE>
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ARTICLE VIII
AFFIRMATIVE COVENANTS
Section 8.01 Financial Statements . . . . . . . . . . . . . . . . . 45
Section 8.02 Litigation . . . . . . . . . . . . . . . . . . . . . . 47
Section 8.03 Maintenance, Etc. . . . . . . . . . . . . . . . . . . . 47
Section 8.04 Environmental Matters . . . . . . . . . . . . . . . . . 49
Section 8.05 Further Assurances . . . . . . . . . . . . . . . . . . 49
Section 8.06 Performance of Obligations . . . . . . . . . . . . . . 49
Section 8.07 Engineering Reports . . . . . . . . . . . . . . . . . . 50
Section 8.08 Title Information. . . . . . . . . . . . . . . . . . . 51
Section 8.09 Additional Collateral. . . . . . . . . . . . . . . . . 51
Section 8.10 ERISA Information and Compliance . . . . . . . . . . . 52
Section 8.11 Hedging Program. . . . . . . . . . . . . . . . . . . . 52
Section 8.12 Offering. . . . . . . . . . . . . . . . . . . . . . . . 52
ARTICLE IX
NEGATIVE COVENANTS
Section 9.01 Debt . . . . . . . . . . . . . . . . . . . . . . . . . 53
Section 9.02 Liens . . . . . . . . . . . . . . . . . . . . . . . . . 54
Section 9.03 Investments, Loans and Advances . . . . . . . . . . . . 54
Section 9.04 Dividends, Distributions and Redemptions. . . . . . . . 55
Section 9.05 Sales and Leasebacks . . . . . . . . . . . . . . . . . 55
Section 9.06 Nature of Business . . . . . . . . . . . . . . . . . . 56
Section 9.07 Limitation on Leases . . . . . . . . . . . . . . . . . 56
Section 9.08 Mergers, Etc. . . . . . . . . . . . . . . . . . . . . . 56
Section 9.09 Proceeds of Notes . . . . . . . . . . . . . . . . . . . 56
Section 9.10 ERISA Compliance . . . . . . . . . . . . . . . . . . . 56
Section 9.11 Sale or Discount of Receivables . . . . . . . . . . . . 57
Section 9.12 Current Ratio and Net Worth . . . . . . . . . . . . . . 57
Section 9.13 Accounts Payable. . . . . . . . . . . . . . . . . . . . 58
Section 9.14 Fixed Charge Coverage Ratio . . . . . . . . . . . . . . 58
Section 9.15 Sale of Oil and Gas Properties . . . . . . . . . . . . 59
Section 9.16 Environmental Matters . . . . . . . . . . . . . . . . . 59
Section 9.17 Transactions with Affiliates . . . . . . . . . . . . . 59
Section 9.18 Subsidiaries and Partnerships . . . . . . . . . . . . . 59
Section 9.19 Negative Pledge Agreements . . . . . . . . . . . . . . 59
Section 9.20 Gas Imbalances, Take-or-Pay or Other Prepayments . . . 59
Section 9.21 Material Agreements. . . . . . . . . . . . . . . . . . 60
Section 9.22 Repayment of Other Debt . . . . . . . . . . . . . . . . 60
Section 9.23 Limitations on Capital Expenditures. . . . . . . . . . 61
</TABLE>
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ARTICLE X
EVENTS OF DEFAULT; REMEDIES
Section 10.01 Events of Default . . . . . . . . . . . . . . . . . . 61
Section 10.02 Remedies . . . . . . . . . . . . . . . . . . . . . . . 63
ARTICLE XI
THE AGENT
Section 11.01 Appointment, Powers and Immunities . . . . . . . . . . 64
Section 11.02 Reliance by Agent . . . . . . . . . . . . . . . . . . 64
Section 11.03 Defaults . . . . . . . . . . . . . . . . . . . . . . . 65
Section 11.04 Rights as a Lender . . . . . . . . . . . . . . . . . . 65
Section 11.05 INDEMNIFICATION . . . . . . . . . . . . . . . . . . . 65
Section 11.06 Non-Reliance on Agent and other Lenders . . . . . . . 66
Section 11.07 Action by Agent . . . . . . . . . . . . . . . . . . . 66
Section 11.08 Resignation or Removal of Agent . . . . . . . . . . . 66
ARTICLE XII
MISCELLANEOUS
Section 12.01 Waiver . . . . . . . . . . . . . . . . . . . . . . . . 67
Section 12.02 Notices . . . . . . . . . . . . . . . . . . . . . . . 67
Section 12.03 Payment of Expenses, Indemnities, etc . . . . . . . . 67
Section 12.04 Amendments, Etc. . . . . . . . . . . . . . . . . . . . 69
Section 12.05 Successors and Assigns . . . . . . . . . . . . . . . . 69
Section 12.06 Assignments and Participations . . . . . . . . . . . . 69
Section 12.07 Invalidity . . . . . . . . . . . . . . . . . . . . . . 71
Section 12.08 Counterparts . . . . . . . . . . . . . . . . . . . . . 71
Section 12.09 References . . . . . . . . . . . . . . . . . . . . . . 71
Section 12.10 Survival . . . . . . . . . . . . . . . . . . . . . . . 71
Section 12.11 Captions . . . . . . . . . . . . . . . . . . . . . . . 71
Section 12.12 NO ORAL AGREEMENTS . . . . . . . . . . . . . . . . . . 71
Section 12.13 GOVERNING LAW; SUBMISSION TO JURISDICTION . . . . . . 71
Section 12.14 Interest . . . . . . . . . . . . . . . . . . . . . . . 72
Section 12.15 Confidentiality . . . . . . . . . . . . . . . . . . . 73
Section 12.16 EXCULPATION PROVISIONS . . . . . . . . . . . . . . . . 74
Section 12.17 Designated Senior Indebtedness . . . . . . . . . . . . 74
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Annex I - List of Maximum Credit Amounts
Exhibit A - Form of Note
Exhibit B - Form of Borrowing, Continuation and Conversion Request
Exhibit C - Form of Compliance Certificate
Exhibit D - List of Security Instruments
Exhibit E - Form of Assignment Agreement
Schedule 7.02 - Liabilities
Schedule 7.03 - Litigation
Schedule 7.10 - Titles, etc.
Schedule 7.14 - Subsidiaries and Partnerships
Schedule 7.17 - Environmental Matters
Schedule 7.19 - Insurance
Schedule 7.20 - Risk Management Agreements
Schedule 7.21 - Restrictions of Liens
Schedule 7.22 - Gas Imbalances
Schedule 7.23 - Material Agreements
Schedule 9.01 - Debt
Schedule 9.02 - Liens
Schedule 9.03 - Investments, Loans and Advances
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<PAGE> 7
THIS AMENDED AND RESTATED CREDIT AGREEMENT dated as of April 17, 1998 is
among: QUEEN SAND RESOURCES, INC., a corporation formed under the laws of the
State of Delaware ("QSRD"); QUEEN SAND RESOURCES, INC., a corporation formed
under the laws of the State of Nevada (the "Borrower"); each of the lenders
that is a signatory hereto or which becomes a signatory hereto as provided in
Section 12.06 (individually, together with its successors and assigns, a
"Lender" and, collectively, the "Lenders"); and BANK OF MONTREAL, as agent for
the Lenders (in such capacity, together with its successors in such capacity,
the "Agent").
R E C I T A L S
A. QSRD, the Borrower, certain of the Lenders and the Agent are
parties to that certain Credit Agreement dated as of August 1, 1997, as amended
by that certain First Amendment to Credit Agreement dated as of December 3,
1997, as further amended by that certain Second Amendment to Credit Agreement
dated as of December 29, 1997, as further amended by that certain Third
Amendment to Credit Agreement dated as of February 10, 1998, and as further
amended by that certain Fourth Amendment to Credit Agreement dated as of March
20, 1998 (such credit agreement, as amended, the "Prior Credit Agreement").
B. QSRD and the Borrower have requested that the Agent and the
Lenders amend and restate the Prior Credit Agreement and make credit available
to and on behalf of the Borrower on the terms and conditions stated herein.
C. The Agent and the Lenders, subject to the terms and conditions
stated herein, are willing to amend and restate the Prior Credit Agreement and
to make such credit facilities available.
D. NOW, THEREFORE, for good and valuable consideration, the receipt
and sufficiency of which are acknowledged, the parties agree as follows:
ARTICLE I
DEFINITIONS AND ACCOUNTING MATTERS
Section 1.01 Terms Defined in Recitals. As used in this Agreement, the
terms defined in the Recitals, shall have the meanings indicated in the
Recitals.
Section 1.02 Certain Defined Terms. As used herein, including the
Recitals, the following terms shall have the following meanings (all terms
defined in this Article I or in other provisions of this Agreement in the
singular to have the same meanings when used in the plural and vice versa):
"Acquisition" shall mean the acquisition by the Borrower of the Oil and
Gas Properties described in the Purchase and Sale Agreement from Morgan
Guaranty Trust Company of New York, as Trustee, Investment Royalty Corporation
and Milam Royalty Corporation, as sellers, as contemplated in the Purchase and
Sale Agreement.
"Additional Costs" shall have the meaning assigned such term in Section
5.01(a).
"Affected Loans" shall have the meaning assigned such term in Section
5.04.
<PAGE> 8
"Affiliate" of any Person shall mean (i) any Person directly or
indirectly controlled by, controlling or under common control with such first
Person, (ii) any director or officer of such first Person or of any Person
referred to in clause (i) above, and (iii) if any Person in clause (i) above is
an individual, any member of the immediate family (including parents, spouse
and children) of such individual and any trust whose principal beneficiary is
such individual or one or more members of such immediate family and any Person
who is controlled by any such member or trust. As used in this definition,
"control" (including, with its correlative meanings, "controlled by" and "under
common control with") shall mean any Person which owns directly or indirectly
10% or more of the securities having ordinary voting power for the election of
directors or other governing body of a corporation or 10% or more of the
partnership or other ownership interests of any other Person (other than as a
limited partner of such other Person) will be deemed to control such
corporation or other Person.
"Agreement" shall mean this Amended and Restated Credit Agreement, as
amended from time to time.
"Aggregate Commitments" at any time shall equal the amount calculated in
accordance with Section 2.03(a).
"Aggregate Maximum Credit Amounts" at any time shall equal the sum of
the Maximum Credit Amounts of the Lenders, as the same may be reduced pursuant
to Sections 2.03(b).
"Applicable Lending Office" shall mean, for each Lender and for each
Type of Loan, the lending office of such Lender (or an Affiliate of such
Lender) designated for such Type of Loan on the signature pages hereof or such
other offices of such Lender (or of an Affiliate of such Lender) as such Lender
may from time to time specify to the Agent and the Borrower as the office by
which its Loans of such Type are to be made and maintained.
"Applicable Margin" shall mean:
(a) with respect to any Loan outstanding during the Revolving Credit
Period, for each day such Loan is outstanding, the following rate per annum
based upon the Percentage Usage of the available Borrowing Base as is
applicable:
<TABLE>
<CAPTION>
=========================================================================================================
Percentage Usage Applicable Margin for Applicable Margin for
Eurodollar Loans Base Rate Loans
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Greater than 90% 2.25% 0.00%
- ---------------------------------------------------------------------------------------------------------
Less than or equal to 90% and
greater than 75% 2.00% 0.00%
- ---------------------------------------------------------------------------------------------------------
Less than or equal to 75% and 1.50% 0.00%
greater than 40%
- ---------------------------------------------------------------------------------------------------------
Less than or equal to 40% 1.00% 0.00%
=========================================================================================================
</TABLE>
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(b) notwithstanding clause (a) of this definition, if on any day any
portion of the Bridge Loans is outstanding (and whether or not such Bridge
Loans have been converted into long term obligations), then the Applicable
Margin for such day shall be (i) 2.50% per annum for Eurodollar Loans and (ii)
0.00% per annum for Base Rate Loans; and
(c) with respect to any Loan outstanding during the Term Loan
Period, for each day such Loan is outstanding, (i) 2.50% per annum for
Eurodollar Loans and (ii) .25% per annum for Base Rate Loans.
"Assignment" shall have the meaning assigned such term in Section
12.06(b).
"Base Rate" shall mean, with respect to any Base Rate Loan, for any day,
the higher of (i) the Federal Funds Rate for any such day plus 1/2 of 1% or
(ii) the Prime Rate for such day. Each change in any interest rate provided
for herein based upon the Base Rate resulting from a change in the Base Rate
shall take effect at the time of such change in the Base Rate.
"Base Rate Loans" shall mean Loans that bear interest at rates based
upon the Base Rate.
"Borrowing Base" shall mean at any time an amount equal to the amount
determined in accordance with Section 2.08.
"Bridge Loan Documents" shall mean, collectively, (i) Equity Bridge Note
Purchase Agreement dated of even date herewith among QSRD, the Borrower and the
initial purchasers named therein, (ii) the $30,000,000 Equity Bridge Notes sold
pursuant to the terms thereof, (iii) Debt Bridge Note Purchase Agreement dated
of even date herewith among QSRD, the Borrower and the initial purchasers named
therein, (iv) the $30,000,000 Debt Bridge Notes sold pursuant to the terms
thereof, and (v) any and all other agreements or instruments now or hereafter
executed and delivered in connection with any of the foregoing or as security
for the payment or performance thereof.
"Bridge Loans" shall mean collectively the Debt Bridge Loan and the
Equity Bridge Loan.
"Business Day" shall mean any day other than a day on which commercial
banks are authorized or required to close in Chicago, Illinois and, where such
term is used in the definition of "Quarterly Date" or if such day relates to a
borrowing or continuation of, a payment or prepayment of principal of or
interest on, or a conversion of or into, or the Interest Period for, a
Eurodollar Loan or a notice by the Borrower with respect to any such borrowing
or continuation, payment, prepayment, conversion or Interest Period, any day
which is also a day on which dealings in Dollar deposits are carried out in the
London interbank market.
"Closing Date" shall mean April 17, 1998.
"Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time and any successor statute.
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<PAGE> 10
"Commitment" shall mean, for any Lender, its obligation to make Loans up
to the lesser of such Lender's Maximum Credit Amount or the Lender's Percentage
Share of the then effective Borrowing Base and to participate in the Letters of
Credit as provided in Section 2.01(b).
"Commitment Fee Rate" shall mean during the Revolving Credit Period, the
following rate per annum based upon the Percentage Usage of the available
Borrowing Base as is applicable:
<TABLE>
<CAPTION>
======================================================================
Percentage Usage Commitment Fee Rate
- ----------------------------------------------------------------------
<S> <C>
Greater than 75% 0.50%
- ----------------------------------------------------------------------
Less than or equal to 75% 0.35%
======================================================================
</TABLE>
"Consolidated Net Income" shall mean with respect to QSRD and its
Consolidated Subsidiaries, for any period, the aggregate of the net income (or
loss) of QSRD and its Consolidated Subsidiaries after allowances for taxes for
such period, determined on a consolidated basis in accordance with GAAP;
provided that there shall be excluded from such net income (to the extent
otherwise included therein) the following: (i) the net income of any Person in
which QSRD or any Consolidated Subsidiary has an interest (which interest does
not cause the net income of such other Person to be consolidated with the net
income of QSRD and its Consolidated Subsidiaries in accordance with GAAP),
except to the extent of the amount of dividends or distributions actually paid
in such period by such other Person to QSRD or to a Consolidated Subsidiary, as
the case may be; (ii) the net income (but not loss) of any Consolidated
Subsidiary to the extent that the declaration or payment of dividends or
similar distributions or transfers or loans by that Consolidated Subsidiary is
not at the time permitted by operation of the terms of its charter or any
agreement, instrument or Governmental Requirement applicable to such
Consolidated Subsidiary, or is otherwise restricted or prohibited in each case
determined in accordance with GAAP; (iii) the net income (or loss) of any
Person acquired in a pooling-of-interests transaction for any period prior to
the date of such transaction; (iv) any extraordinary gains or losses, including
gains or losses attributable to Property sales not in the ordinary course of
business; (v) the cumulative effect of a change in accounting principles and
any gains or losses attributable to writeups or writedowns of assets; and (vi)
any writedowns of non-current assets, provided however, that any ceiling
limitation writedowns under SEC guidelines shall be treated as capitalized
costs, as if such writedowns had not occurred.
"Consolidated Tangible Net Worth" shall mean, with respect to QSRD and
its Subsidiaries, the sum of preferred stock (if any), par value of common
stock, capital in excess of par value of common stock and retained earnings,
less treasury stock (if any), less (without duplication) goodwill and cost in
excess of fair value of net assets acquired and less all other assets that are
properly classified as intangible assets (other than unamortized finance costs
and underwriting and other related fees payable in connection with this
Agreement and the Bridge Loans to the extent classified as intangible assets),
but plus the amount of noncash write downs attributable to any period ending on
or before January 1, 1999 if in compliance with GAAP or SEC guidelines, and
plus or minus, as appropriate, foreign currency translation adjustments, all as
determined on a consolidated basis.
"Consolidated Subsidiaries" shall mean each Subsidiary of QSRD or other
Person owned by QSRD, whether now existing or hereafter created or acquired,
which are not Non-Recourse
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<PAGE> 11
Subsidiaries and the financial statements of which shall be (or should have
been) consolidated with the financial statements of QSRD in accordance with
GAAP.
"Debt" shall mean, for any Person the sum of the following (without
duplication): (i) all obligations of such Person for borrowed money or
evidenced by bonds, debentures, notes or other similar instruments (including
principal, interest, fees and charges); (ii) all obligations of such Person
(whether contingent or otherwise) in respect of bankers' acceptances, letters
of credit, surety or other bonds and similar instruments; (iii) all obligations
of such Person to pay the deferred purchase price of Property or services
(other than for borrowed money); (iv) all obligations under leases which shall
have been, or should have been, in accordance with GAAP, recorded as capital
leases in respect of which such Person is liable (whether contingent or
otherwise); (v) all Debt and other obligations of others secured by a Lien on
any asset of such Person, whether or not such Debt is assumed by such Person;
(vi) all Debt and other obligations of others guaranteed by such Person or in
which such Person otherwise assures a creditor against loss of the debtor or
obligations of others; (vii) all obligations or undertakings of such Person to
maintain or cause to be maintained the financial position or covenants of
others or to purchase the Debt or Property of others (other than the purchase
of Property in the ordinary course of business); (viii) the undischarged
balance of any production payment created by such Person or for the creation of
which such Person directly or indirectly received payment; and (ix) the net
mark to market value of all obligations of such Person under Risk Management
Agreements.
"Debt Bridge Loan" shall mean the sale by the Borrower of $30,000,000
Variable Rate Senior Second Secured Notes due 2003 pursuant to those certain
Note Purchase Agreements dated of even date herewith among QSRD, the Borrower
and each initial purchaser named therein.
"Default" shall mean an Event of Default or an event which with notice
or lapse of time or both would become an Event of Default.
"DEM Subordinated Debt" shall mean the Series A DEM 5,000,0000 12% notes
issued by QSRD and being due and payable on July 15, 2000, and any renewals,
extensions or replacements (but not increases in principal amount) thereof.
"Dollars" and "$" shall mean lawful money of the United States of
America.
"EBITDA" shall mean, for any period, the sum, determined (without
duplication) for QSRD and its Consolidated Subsidiaries of (i) Consolidated Net
Income plus (ii) Interest Expense for such period to the extent deducted in the
determination of Consolidated Net Income plus (iii) depreciation, amortization
and other similar non-cash items to the extent deducted in the determination of
Consolidated Net Income plus (iv) all taxes accrued for such period on or
measured by income to the extent deducted in the determination of Consolidated
Net Income.
"ECT Subordinated Debt" shall mean collectively, (i) the Subordinated
Revolving Credit Loan Agreement dated as of December 29, 1997 among the
Borrower, Enron Capital & Trade Resources Corp., as agent for itself and the
other lenders from time to time parties thereto, and such lenders, (ii) the
promissory note(s) in the aggregate principal amount of $10,000,000 issued by
the Borrower thereunder, (iii) all agreements, instruments and documents given
by the Borrower, QSRD
5
<PAGE> 12
or any Obligor to secure the obligations of the Borrower under the agreement
and instruments described in clauses (i) and (ii), as the same may be renewed,
extended, amended or modified from time to time to the extent permitted by
Section 9.22(e).
"Engineering Reports" shall have the meaning assigned such term in
Section 2.08(b).
"Environmental Laws" shall mean any and all Governmental Requirements
pertaining to health, safety or the environment in effect in any and all
jurisdictions in which QSRD or any of its Subsidiaries is conducting or at any
time has conducted business, or where any Property of any such Person is
located, including without limitation, the Oil Pollution Act of 1990 ("OPA"),
the Clean Air Act, as amended, the Comprehensive Environmental, Response,
Compensation, and Liability Act of 1980 ("CERCLA"), as amended, the Federal
Water Pollution Control Act, as amended, the Occupational Safety and Health Act
of 1970, as amended, the Resource Conservation and Recovery Act of 1976
("RCRA"), as amended, the Safe Drinking Water Act, as amended, the Toxic
Substances Control Act, as amended, the Superfund Amendments and
Reauthorization Act of 1986, as amended, the Hazardous Materials Transportation
Act, as amended, and other environmental conservation or protection laws. The
term "oil" shall have the meaning specified in OPA, the terms "hazardous
substance" and "release" (or "threatened release") have the meanings specified
in CERCLA, and the terms "solid waste" and "disposal" (or "disposed") have the
meanings specified in RCRA; provided, however, that (i) in the event either
OPA, CERCLA or RCRA is amended so as to broaden the meaning of any term defined
thereby, such broader meaning shall apply subsequent to the effective date of
such amendment and (ii) to the extent the laws of the state in which any
Property of QSRD or any of its Subsidiaries is located establish a meaning for
"oil," "hazardous substance," "release," "solid waste" or "disposal" which is
broader than that specified in either OPA, CERCLA or RCRA, such broader meaning
shall apply.
"Equity Bridge Loan" shall mean the sale by the Borrower of $30,000,000
Variable Rate Senior Third Secured Equity Bridge Notes due 2004 pursuant to
those certain Equity Bridge Note Purchase Agreements dated of even date
herewith among QSRD, the Borrower and each initial purchaser named therein.
"Equity Offering" shall mean any sale or issuance for cash of any equity
securities of QSRD or warrants or options with respect thereto (whether done by
a registered public offering or an exempt private placement of such securities)
occurring after the Closing Date; provided the foregoing shall not include any
warrants or options granted in connection with the Equity Bridge Loan or any
extensions relating to the Equity Bridge Loan or relating to any other
warrants, options, rights or class of Preferred Stock or Debt outstanding prior
to the Closing Date or which arise after the date of Closing but are
attributable to agreements in effect prior to the date of Closing.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended from time to time and any successor statute.
"ERISA Affiliate" shall mean each trade or business (whether or not
incorporated) which together with QSRD or any of its Affiliates would be deemed
to be a "single employer" within the meaning of section 4001(b)(1) of ERISA or
subsections (b), (c), (m) or (o) of section 414 of the Code.
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"ERISA Event" shall mean (i) a "Reportable Event" described in Section
4043 of ERISA and the regulations issued thereunder, (ii) the withdrawal of
QSRD or any ERISA Affiliate from a Plan during a plan year in which it was a
"substantial employer" as defined in Section 4001(a)(2) of ERISA, (iii) the
filing of a notice of intent to terminate a Plan or the treatment of a Plan
amendment as a termination under Section 4041 of ERISA, (iv) the institution of
proceedings to terminate a Plan by the PBGC or (v) any other event or condition
which might constitute grounds under Section 4042 of ERISA for the termination
of, or the appointment of a trustee to administer, any Plan.
"Escrow Agreement" shall mean the Escrow Agreement entered into among
Morgan Guaranty Trust Company of New York, as trustee, the Borrower, and Chase
Bank of Texas, National Association, as escrow agent, pursuant to Section 2.2
of the Purchase and Sale Agreement.
"Eurodollar Loans" shall mean Loans the interest rates on which are
determined on the basis of rates referred to in the definition of "Eurodollar
Rate".
"Eurodollar Rate" shall mean, with respect to any Eurodollar Loan, the
rate per annum (rounded upwards, if necessary, to the nearest 1/16 of 1%)
quoted by the Agent at approximately 11:00 a.m. London time (or as soon
thereafter as practicable) two (2) Business Days prior to the first day of the
Interest Period for such Loan for the offering by the Agent to leading banks in
the London interbank market of Dollar deposits having a term comparable to such
Interest Period and in an amount comparable to the principal amount of the
Eurodollar Loan to be made by the Agent for such Interest Period.
"Event of Default" shall have the meaning assigned such term in Section
10.01.
"Excepted Liens" shall mean: (i) Liens for taxes, assessments or other
governmental charges or levies not yet due or which are being contested in good
faith by appropriate action and for which appropriate reserves have been
maintained; (ii) Liens in connection with workmen's compensation, unemployment
insurance or other social security, old age pension or public liability
obligations not yet due or which are being contested in good faith by
appropriate action and for which appropriate reserves have been maintained in
accordance with GAAP; (iii) operators', vendors', carriers', warehousemen's,
repairmen's, mechanics', workmen's, materialmen's, construction or other like
Liens arising by operation of law in the ordinary course of business or
incident to the exploration, development, operation and maintenance of Oil and
Gas Properties or statutory landlord's Liens, each of which is in respect of
obligations that have not been outstanding more than 90 days or which are being
contested in good faith by appropriate proceedings and for which appropriate
reserves have been maintained in accordance with GAAP; (iv) any Liens reserved
in leases or farmout agreements for rent or royalties and for compliance with
the terms of the farmout agreements or leases in the case of leasehold estates,
to the extent that any such Lien referred to in this clause does not materially
impair the use of the Property covered by such Lien for the purposes for which
such Property is held by QSRD or any of its Subsidiaries or materially impair
the value of such Property subject thereto; and (v) encumbrances (other than to
secure the payment of borrowed money or the deferred purchase price of Property
or services), easements, restrictions, servitudes, permits, conditions,
covenants, exceptions or reservations in any rights of way or other Property of
QSRD or any of its Subsidiaries for the purpose of roads, pipelines,
transmission lines, transportation lines, distribution lines for the removal of
gas, oil, coal or other minerals or timber, and other like
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<PAGE> 14
purposes, or for the joint or common use of real estate, rights of way,
facilities and equipment, and defects, irregularities, zoning restrictions and
deficiencies in title of any rights of way or other Property which in the
aggregate do not materially impair the use of such rights of way or other
Property for the purposes of which such rights of way and other Property are
held by any such Person or materially impair the value of such Property subject
thereto.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time, and any successor act thereto.
"Federal Funds Rate" shall mean, for any day, the rate per annum
(rounded upwards, if necessary, to the nearest 1/100 of 1%) equal to the
weighted average of the rates on overnight federal funds transactions with a
member of the Federal Reserve System arranged by federal funds brokers on such
day, as published by the Federal Reserve Bank of New York on the Business Day
next succeeding such day, provided that (i) if the date for which such rate is
to be determined is not a Business Day, the Federal Funds Rate for such day
shall be such rate on such transactions on the next preceding Business Day as
so published on the next succeeding Business Day, and (ii) if such rate is not
so published for any day, the Federal Funds Rate for such day shall be the
average rate charged to the Agent on such day on such transactions as
determined by the Agent.
"Financial Statements" shall mean the financial statement or statements
of QSRD and its Consolidated Subsidiaries described or referred to in Section
7.02(a).
"Fixed Charge Coverage Ratio" shall mean, for any period, the ratio of
EBITDA for such period to the sum of (i) Interest Expense for such period and
(ii) dividends paid in cash on Preferred Stock during such period.
"GAAP" shall mean generally accepted accounting principles in the United
States of America in effect from time to time.
"Governmental Authority" shall include the country, the state, county,
city and political subdivisions in which any Person or such Person's Property
is located or which exercises valid jurisdiction over any such Person or such
Person's Property, and any court, agency, department, commission, board, bureau
or instrumentality of any of them including monetary authorities which
exercises valid jurisdiction over any such Person or such Person's Property.
Unless otherwise specified, all references to Governmental Authority herein
shall mean a Governmental Authority having jurisdiction over, where applicable,
QSRD or any of its Subsidiaries or any of their Properties or the Agent, any
Lender or any Applicable Lending Office.
"Governmental Requirement" shall mean any law, statute, code, ordinance,
order, determination, rule, regulation, judgment, decree, injunction,
franchise, permit, certificate, license, authorization or other directive or
requirement (whether or not having the force of law), including, without
limitation, Environmental Laws, energy regulations and occupational, safety and
health standards or controls, of any Governmental Authority.
"Highest Lawful Rate" shall mean, with respect to the Agent or a Lender,
the maximum nonusurious interest rate, if any, that at any time or from time to
time may be contracted for, taken,
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<PAGE> 15
reserved, charged or received on the Notes or on other Indebtedness under laws
applicable to the Agent or such Lender which are presently in effect or, to the
extent allowed by law, under such applicable laws which may hereafter be in
effect and which allow a higher maximum nonusurious interest rate than
applicable laws now allow.
"Hi-Yield Offering" shall mean any sale or issuance of any hi-yield Debt
securities of QSRD (whether done by a registered public offering or an exempt
private placement of such securities) occurring after the Closing Date;
provided the foregoing shall not include any of the Debt Bridge Loan or the
Equity Bridge Loan.
"Hydrocarbon Interests" shall mean all rights, titles, interests and
estates now or hereafter acquired in and to oil and gas leases, oil, gas and
mineral leases, or other liquid or gaseous hydrocarbon leases, mineral fee
interests, overriding royalty and royalty interests, net profit interests and
production payment interests, including any reserved or residual interests of
whatever nature.
"Hydrocarbons" shall mean oil, gas, casinghead gas, drip gasoline,
natural gasoline, condensate, distillate, liquid hydrocarbons, gaseous
hydrocarbons and all products refined or separated therefrom.
"Indebtedness" shall mean any and all amounts owing or to be owing by
QSRD, the Borrower or any Obligor to the Agent and/or Lenders in connection
with the Loan Documents and any Risk Management Agreements now or hereafter
arising between QSRD or the Borrower and any Lender, and all renewals,
extensions and/or rearrangements of any of the above.
"Indemnified Parties" shall have the meaning assigned such term in
Section 12.03(b).
"Indemnity Matters" shall mean any and all actions, suits, proceedings
(including any investigations, litigation or inquiries), claims, demands and
causes of action made or threatened against an Indemnified Party and, in
connection therewith, all losses, liabilities, damages (including, without
limitation, consequential damages) or reasonable costs and expenses of any kind
or nature whatsoever incurred by such Indemnified Party whether caused by the
sole or concurrent negligence of the Indemnified Party seeking indemnification.
"Initial Funding" shall mean the funding of the initial Loans or
issuance of the initial Letters of Credit pursuant to Section 6.01 hereof.
"Initial Reserve Report" shall mean collectively, (i) the report of H.J.
Gruy & Associates dated March 31, 1998 with respect to the Oil and Gas
Properties set forth therein as of December 31, 1997, (ii) the report of H.J.
Gruy & Associates dated March 31, 1998 with respect to the Oil and Gas
Properties set forth therein as of December 31, 1997, and (iii) the report of
Ryder Scott Company dated March 30, 1998 with respect to the Oil and Gas
Properties set forth therein as of December 31, 1997.
"Interest Expense" shall mean, for any period, the sum (determined
without duplication) of the aggregate amount of interest expense accruing
during such period on Debt of QSRD and its
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Consolidated Subsidiaries, including the interest portion of payments under
capitalized leases and any capitalized interest, but excluding amortization of
debt discount and expense.
"Interest Period" shall mean, with respect to any Eurodollar Loan, the
period commencing on the date such Eurodollar Loan is made and ending on the
numerically corresponding day in the first, second, third or sixth month
thereafter, as the Borrower may select as provided in Section 2.02 (or such
longer period as may be requested by the Borrower and agreed to by the Majority
Lenders), except that each Interest Period which commences on the last Business
Day of a calendar month (or on any day for which there is no numerically
corresponding day in the appropriate subsequent calendar month) shall end on
the last Business Day of the appropriate subsequent calendar month.
Notwithstanding the foregoing: (i) no Interest Period may commence
before and end after the Maturity Date; (ii) no Interest Period for any
Eurodollar Loan may end after any scheduled payment date occurring during the
Term Loan Period to the extent that such Eurodollar Loan would need to be
prepaid prior to the end of such Interest Period in order to give effect to
such payment; (iii) each Interest Period which would otherwise end on a day
which is not a Business Day shall end on the next succeeding Business Day (or,
if such next succeeding Business Day falls in the next succeeding calendar
month, on the next preceding Business Day); and (iv) no Interest Period shall
have a duration of less than one month and, if the Interest Period for any
Eurodollar Loans would otherwise be for a shorter period, such Loans shall not
be available hereunder.
"JEDI" shall mean Joint Energy Development Investments Limited
Partnership, a Delaware limited partnership.
"LC Commitment" at any time shall mean $20,000,000.
"LC Exposure" at any time shall mean the aggregate face amount of all
undrawn and uncancelled Letters of Credit and the aggregate of all amounts
drawn under all Letters of Credit and not yet reimbursed.
"Letter of Credit Agreements" shall mean the written agreements with the
Agent, as issuing bank for any Letter of Credit, executed or hereafter executed
in connection with the issuance by the Agent of the Letters of Credit, such
agreements to be on the Agent's customary form for letters of credit of
comparable amount and purpose as from time to time in effect or as otherwise
agreed to by the Borrower and the Agent.
"Letters of Credit" shall mean the letters of credit issued pursuant to
Section 2.01(b) and all reimbursement obligations pertaining to any such
letters of credit, and "Letter of Credit" shall mean any one of the Letters of
Credit and the reimbursement obligations pertaining thereto.
"Lien" shall mean any interest in Property securing an obligation owed
to, or a claim by, a Person other than the owner of the Property, whether such
interest is based on the common law, statute or contract, and whether such
obligation or claim is fixed or contingent, and including but not limited to
(i) the lien or security interest arising from a mortgage, charge, encumbrance,
pledge, lien (statutory or otherwise), security agreement, conditional sale or
trust receipt or a lease, consignment or bailment for security purposes, or
preferential arrangement of any kind or nature
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whatsoever (including, any agreement to give or grant a lien), or (ii)
production payments and the like payable out of Oil and Gas Properties. The
term "Lien" shall include reservations, exceptions, encroachments, easements,
rights of way, covenants, conditions, restrictions, leases and other title
exceptions and encumbrances affecting Property. For the purposes of this
Agreement, QSRD or any of its Subsidiaries shall be deemed to be the owner of
any Property which it has acquired or holds subject to a conditional sale
agreement, or leases under a financing lease or other arrangement pursuant to
which title to the Property has been retained by or vested in some other Person
in a transaction intended to create a financing.
"Loan Documents" shall mean this Agreement, the Notes and the Security
Instruments.
"Loans" shall mean the loans as provided for by Section 2.01(a).
"Majority Lenders" shall mean, at any time while no Loans are
outstanding, Lenders having at least sixty-six and two-thirds percent (66-2/3%)
of the Aggregate Commitments and, at any time while Loans are outstanding,
Lenders holding at least sixty-six and two-thirds percent (66-2/3%) of the
outstanding aggregate principal amount of the Loans (without regard to any sale
by a Lender of a participation in any Loan under Section 12.06(c)).
"Material Adverse Effect" shall mean any material and adverse effect on
(i) the assets, liabilities, financial condition, business, operations,
prospects or affairs of QSRD and its Consolidated Subsidiaries taken as a whole
different from those reflected in the financial statements most recently
delivered pursuant to Sections 7.02(a) or 8.01 hereof or from the facts
represented or warranted in this Agreement or any Loan Document, or (ii) the
ability of QSRD and its Consolidated Subsidiaries, taken as a whole, to carry
out its business as at the Closing Date or as proposed as of the Closing Date
to be conducted or meet its obligations under the Loan Documents on a timely
basis.
"Material Agreements" shall mean the Purchase and Sale Agreement and
each of the instruments, contracts or agreements described in Schedule 7.23, as
the same may be amended, modified or replaced from time to time in accordance
with the terms of Section 9.21.
"Maturity Date" shall mean, unless the Aggregate Maximum Credit Amounts
are sooner terminated under Section 2.03(b) or the Notes are sooner accelerated
under Section 10.02 hereof, April 17, 2003.
"Maximum Credit Amount" shall mean, as to each Lender, the amount set
forth opposite such Lender's name on Annex I under the caption "Maximum Credit
Amounts" (as the same may be reduced pursuant to Section 2.03(b) pro rata to
each Lender based on its Percentage Share), as modified from time to time to
reflect any assignments permitted by Section 12.06(b) or amendments to this
Agreement.
"Mortgaged Property" shall mean the Property owned by any Obligor and
which is subject to the Liens existing and to exist under the terms of the
Security Instruments.
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"Multiemployer Plan" shall mean a Plan defined as such in Section 3(37)
or 4001(a)(3) of ERISA.
"Non-Recourse Subsidiary" shall mean any Subsidiary of QSRD organized or
acquired after the Closing Date as to which all of the following conditions
apply: (i) neither such Subsidiary nor any of its Subsidiaries provides credit
support for any of the Indebtedness or any other Debt of QSRD, the Borrower or
any Subsidiary Guarantor; (ii) neither QSRD, the Borrower nor any Subsidiary
Guarantor is liable, directly or indirectly, with respect to any Debt of such
Subsidiary; (iii) no Oil and Gas Properties of such Non-Recourse Subsidiary is
included in the Borrowing Base; and (iv) the Board of Directors of QSRD shall
have designated such Subsidiary to be a Non-Recourse Subsidiary by a written
resolution. Any such designation by the Board of Directors of QSRD shall be
evidenced to the Agent by delivering to it a resolution giving effect to such
designation and an officers' certificate certifying that such designation
complies with the foregoing conditions. The Board of Directors of QSRD may (i)
designate any of its Subsidiaries as a Non-Recourse Subsidiary or (ii)
designate any Non-Recourse Subsidiary to be a Subsidiary Guarantor; provided
that, in either such case, no Default or Event of Default would occur or be
continuing after giving effect to such designation. Any Subsidiary of a Non-
Recourse Subsidiary shall be a Non-Recourse Subsidiary for purposes of this
Agreement.
"Non-Recourse Debt" shall mean Debt of any Non-Recourse Subsidiary (i)
as to which neither QSRD, the Borrower nor any Subsidiary Guarantor is directly
or indirectly liable (by virtue of such Person or any Subsidiary Guarantor
being the primary obligor on, guarantor of, or otherwise liable in any respect
to, such Debt); (ii) which, upon the occurrence of a default with respect
thereto, does not result in, or permit any holder of any Debt of QSRD, the
Borrower or any Subsidiary Guarantor to declare a default on such Debt of such
Person or cause the payment thereof to be accelerated or payable prior to its
stated maturity; and (iii) that is not secured by a Lien upon any Property of
QSRD, the Borrower or any Subsidiary Guarantor (other than stock or other
equity interests of a Non-Recourse Subsidiary).
"Notes" shall mean the Notes provided for by Section 2.06, together with
any and all renewals, extensions for any period, increases, rearrangements,
substitutions or modifications thereof.
"Notice of Termination" shall have the meaning set forth in Section
5.06(a).
"Obligor" shall mean any or all of QSRD, the Borrower or the Subsidiary
Guarantors, as appropriate.
"Oil and Gas Properties" shall mean Hydrocarbon Interests; the
Properties now or hereafter pooled or unitized with Hydrocarbon Interests; all
presently existing or future unitization, pooling agreements and declarations
of pooled units and the units created thereby (including without limitation all
units created under orders, regulations and rules of any Governmental Authori-
ty) which may affect all or any portion of the Hydrocarbon Interests; all
operating agreements, contracts and other agreements which relate to any of the
Hydrocarbon Interests or the production, sale, purchase, exchange or processing
of Hydrocarbons from or attributable to such Hydrocarbon Interests; all
Hydrocarbons in and under and which may be produced and saved or attributable
to
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the Hydrocarbon Interests, including all oil in tanks, the lands covered
thereby and all rents, issues, profits, proceeds, products, revenues and other
incomes from or attributable to the Hydrocarbon Interests; all tenements,
hereditaments, appurtenances and Properties in any manner appertaining, belong-
ing, affixed or incidental to the Hydrocarbon Interests; and all Properties,
rights, titles, interests and estates described or referred to above, including
any and all Property, real or personal, now owned or hereinafter acquired and
situated upon, used, held for use or useful in connection with the operating,
working or development of any of such Hydrocarbon Interests or Property
(excluding drilling rigs, automotive equipment or other personal property which
may be on such premises for the purpose of drilling a well or for other similar
temporary uses) and including any and all oil wells, gas wells, injection wells
or other wells, buildings, structures, fuel separators, liquid extraction
plants, plant compressors, pumps, pumping units, field gathering systems, tanks
and tank batteries, fixtures, valves, fittings, machinery and parts, engines,
boilers, meters, apparatus, equipment, appliances, tools, implements, cables,
wires, towers, casing, tubing and rods, surface leases, rights-of-way,
easements and servitudes together with all additions, substitutions,
replacements, accessions and attachments to any and all of the foregoing.
"Other Taxes" shall have the meaning assigned such term in Section
4.06(b).
"PBGC" shall mean the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions.
"Percentage Share" shall mean the percentage of the Aggregate
Commitments to be provided by a Lender under this Agreement as indicated on
Annex I hereto, as modified from time to time to reflect any assignments
permitted by Section 12.06(b) or amendments to this Agreement.
"Percentage Usage" shall mean, as of any date of determination, the
quotient (expressed as a percentage) obtained by dividing the balance of all
Loans and the LC Exposure at the close of business on such date by the
available Borrowing Base at the close of business on such date. The Applicable
Margin for a Type of Loan shall change on the same day as any change in the
Percentage Usage to the extent required by the terms of the definition of
Applicable Margin.
"Person" shall mean any individual, corporation, limited liability
company, voluntary association, partnership, joint venture, trust,
unincorporated organization or government or any agency, instrumentality or
political subdivision thereof, or any other form of entity.
"Plan" shall mean any employee pension benefit plan, as defined in
Section 3(2) of ERISA, which (i) is currently or hereafter sponsored,
maintained or contributed to by QSRD or any of its Subsidiaries or an ERISA
Affiliate or (ii) was at any time during the preceding six calendar years
sponsored, maintained or contributed to, by QSRD or any of its ERISA
Affiliates.
"Post-Default Rate" shall mean (i) in the event a Borrowing Base
deficiency is being cured as permitted under Section 2.07(c)(ii), or (ii) in
respect of any principal of any Loan or any other amount payable by any Obligor
under this Agreement, any Note or any Loan Document which is not paid when due
(whether at stated maturity, by acceleration or otherwise), in each case, a
rate per annum during the period commencing on the first day of such deficiency
period or the due date, as applicable, until such Borrowing Base deficiency is
cured or the amount is paid in full or the default
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<PAGE> 20
is cured or waived, as applicable, equal to the sum of .75% per annum, the
Applicable Margin for Base Rate Loans, if any, and the Base Rate; provided that
with respect to all Eurodollar Loans or amounts due in respect of a Eurodollar
Loan, the sum of (A) if clause (a) of the definition of "Applicable Margin" is
applicable, .75% per annum, or (B) if clause (b) or (c) of the definition of
"Applicable Margin" is applicable, .50% per annum, the then Applicable Margin
and the Eurodollar Rate for such Loan, but in no event to exceed the Highest
Lawful Rate.
"Preferred Stock" shall mean (i) QSRD's Series A Participating
Convertible Preferred Stock, par value $0.01 per share; (ii) QSRD's Series B
Participating Convertible Preferred Stock; and (iii) QSRD's Series C
Convertible Preferred Stock issued pursuant to the Certificate of Designation
of Series C Convertible Preferred Stock adopted as of December 23, 1997,
together with any and all amendments and modifications thereto.
"Prime Rate" shall mean the rate of interest from time to time announced
publicly by the Agent at the Principal Office as its prime commercial lending
rate. Such rate is set by the Agent as a general reference rate of interest,
taking into account such factors as the Agent may deem appropriate, it being
understood that many of the Agent's commercial or other loans are priced in
relation to such rate, that it is not necessarily the lowest or best rate
actually charged to any customer and that the Agent may make various commercial
or other loans at rates of interest having no relationship to such rate.
"Principal Office" shall mean the principal office of the Agent,
presently located at 115 South LaSalle Street, Chicago, Illinois 60603.
"Property" shall mean any interest in any kind of property or asset,
whether real, personal or mixed, or tangible or intangible.
"Proved Reserves" shall mean those Oil and Gas Properties designated as
"proved" (in accordance with the Definitions for Oil and Gas Reserves
established by the Society for Petroleum Engineers from time to time) in the
Reserve Report and used in establishing the Borrowing Base.
"Purchase and Sale Agreement" shall mean that certain Purchase and Sale
Agreement dated as of March 19, 1998 among Morgan Guaranty Trust Company of
New York, as Trustee, Investment Royalty Corporation and Milam Royalty
Corporation, as sellers, and the Borrower, as purchaser.
"Quarterly Dates" shall mean the last day of each March, June, September
and December, in each year, the first of which shall be June 30, 1998;
provided, however, that if any such day is not a Business Day, such Quarterly
Date shall be the next succeeding Business Day.
"Redetermination Date" shall have the meaning assigned such term in
Section 2.08(a).
"Regulation D" shall mean Regulation D of the Board of Governors of the
Federal Reserve System (or any successor), as the same may be amended or
supplemented from time to time.
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"Regulatory Change" shall mean, with respect to any Lender, any change
after the Closing Date in any Governmental Requirement (including Regulation D)
or the adoption or making after such date of any interpretations, directives or
requests applying to a class of lenders (including such Lender or its
Applicable Lending Office) of or under any Governmental Requirement (whether or
not having the force of law) by any Governmental Authority charged with the
interpretation or administration thereof.
"Replacement Lender" shall have the meaning set forth in Section
5.06(b).
"Required Lenders" shall mean with respect to any redetermination of the
Borrowing Base: (i) all of the Lenders in the case of any increase in the
Borrowing Base, and (ii) the Majority Lenders in all other cases.
"Required Payment" shall have the meaning assigned such term in Section
4.04.
"Reserve Report" shall mean a report, in form and substance satisfactory
to the Agent, setting forth, as of each June 30 or December 31, as applicable
(or such other date in the event of an unscheduled redetermination): (i) the
oil and gas reserves attributable to the Oil and Gas Properties to comprise the
Borrowing Base together with a projection of the rate of production and future
net income, taxes, operating expenses and capital expenditures with respect
thereto as of such date, based upon the pricing assumptions consistent with SEC
reporting requirements at the time and (ii) such other information as the Agent
may reasonably request. The term "Reserve Report" shall also include the
information to be provided by the Borrower by February 15 of each year pursuant
to Section 8.07(a).
"Responsible Officer" shall mean, as to any Person, the Chief Executive
Officer, the President or any Vice President of such Person and, with respect
to financial matters, the term "Responsible Officer" shall include the Chief
Financial Officer of such Person. Unless otherwise specified, all references
to a Responsible Officer herein shall mean a Responsible Officer of QSRD or the
Borrower, as applicable.
"Revolving Credit Period" shall mean the period commencing on the
Closing Date and ending on the Revolving Credit Termination Date.
"Revolving Credit Termination Date" shall mean, unless the Commitments
are sooner terminated pursuant to Sections 2.03(b) or 10.02 hereof, April 17,
1999.
"Risk Management Agreements" shall mean any commodity, interest rate or
currency swap, rate cap, rate floor, rate collar, forward agreement or other
exchange, price or rate protection agreements or any option with respect to any
such transaction.
"Scheduled Redetermination Date" shall have the meaning assigned such
term in Section 2.08(d).
"SEC" shall mean the Securities and Exchange Commission or any successor
Governmental Authority.
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"SEC Value" shall mean the future net revenues before income taxes from
Proved Reserves, estimated assuming that oil and natural gas prices and
production costs remain constant, then discounted at the rate of 10% per year
to obtain the present value.
"Security Instruments" shall mean the Letters of Credit, the Letter of
Credit Agreements, the agreements or instruments described or referred to in
Exhibit D, and any and all other agreements or instruments now or hereafter
executed and delivered by QSRD, the Borrower, any Obligor or any other Person
(other than Assignments, participation or similar agreements between any Lender
and any other lender or creditor with respect to any Indebtedness pursuant to
this Agreement) in connection with, or as security for the payment or
performance of the Notes, this Agreement or the LC Exposure, as such agreements
may be amended, supplemented or restated from time to time.
"Subordinated Debt" shall mean, collectively, DEM Subordinated Debt, the
Bridge Loans and ECT Subordinated Debt; provided that the characterization of
any such Debt as "Subordinated Debt" for purposes of this Agreement and the
Loan Documents shall not affect the characterization of such Debt for purposes
of any other agreement or instrument or as between the holders of any such Debt
and others; the concept herein expressed being that for purposes of this
Agreement and the Loan Documents, the parties hereto expect all such Debt to be
junior and subordinated to the Indebtedness either contractually or by virtue
of junior Lien positions, but only to the extent such Debt is expressly
contractually subordinated or junior by operation of law.
"Subsidiary" shall mean, for any Person, any Person of which at least a
majority of the outstanding shares of stock or other equity interests having by
the terms thereof ordinary voting power to elect a majority of the board of
directors or manager of such Person (irrespective of whether or not at the time
stock or other interests of any other class or classes of such Person shall
have or might have voting power by reason of the happening of any contingency)
is at the time directly or indirectly owned or controlled by such Person or one
or more of its Subsidiaries or by such Person and one or more of its
Subsidiaries. Unless otherwise indicated, a reference to a Subsidiary in any
Loan Document is to a Subsidiary of QSRD.
"Subsidiary Guarantor" shall mean each of Northland Operating Co., a
Nevada corporation, Corrida Resources, Inc., a Nevada corporation, and all
future Subsidiaries of QSRD executing and delivering a guarantee under Section
9.18 other than the Borrower and the Non-Recourse Subsidiaries.
"Taxes" shall have the meaning assigned such term in Section 4.06(a).
"Term Loan Period" shall mean the period commencing on the day next
succeeding the Revolving Credit Termination Date and ending on the Maturity
Date.
"Terminated Lender" shall have the meaning set forth in Section 5.06(a).
"Termination Date" shall have the meaning set forth in Section 5.06(c).
"Type" shall mean, with respect to any Loan, a Base Rate Loan or a
Eurodollar Loan.
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Section 1.03 Accounting Terms and Determinations. Unless otherwise
specified herein, all accounting terms used herein shall be interpreted, all
determinations with respect to accounting matters hereunder shall be made, and
all financial statements and certificates and reports as to financial matters
required to be furnished to the Agent or the Lenders hereunder shall be
prepared, in accordance with GAAP, applied on a basis consistent with the
Financial Statements (except for changes concurred with by QSRD's independent
public accountants).
ARTICLE II
COMMITMENTS
Section 2.01 Loans and Letters of Credit.
(a) Loans. Each Lender severally agrees, on the terms of this
Agreement, to make Loans to the Borrower during the Revolving Credit Period in
an aggregate principal amount at any one time outstanding up to but not
exceeding the amount of such Lender's Commitment as then in effect; provided,
however, that the sum of (i) aggregate principal amount of all Loans by all
Lenders hereunder at any one time outstanding plus (ii) the LC Exposure shall
not exceed the Aggregate Commitments. Subject to the terms of this Agreement,
during the Revolving Credit Period, the Borrower may borrow, repay and reborrow
the amount described in this Section 2.01(a).
(b) Letters of Credit. During the Revolving Credit Period, the
Agent, as issuing bank for the Lenders, agrees to extend credit for the account
of the Borrower at any time and from time to time by issuing renewing,
extending or reissuing Letters of Credit; provided however, the LC Exposure at
any one time outstanding shall not exceed the lesser of (i) the LC Commitment
or (ii) the Aggregate Commitments, as then in effect, minus the aggregate
principal amount of all Loans then outstanding. Each Lender shall participate
in such Letters of Credit according to its Percentage Share.
(c) Limitation on Types of Loans. Subject to the other terms and
provisions of this Agreement, at the option of the Borrower, the Loans may be
Base Rate Loans or Eurodollar Loans; provided that, without the prior written
consent of the Majority Lenders, no more than ten (10) Eurodollar Loans may be
outstanding at any time.
(d) Loans under Prior Credit Agreement. On the Closing Date:
(i) the Borrower shall pay all accrued and unpaid commitment fees
outstanding under the Prior Credit Agreement for the account of each
"Lender" under the Prior Credit Agreement;
(ii) each "Base Rate Loan" under the Prior Credit Agreement shall be
deemed to be repaid with the proceeds of a new Base Rate Loan under this
Agreement; and
(iii) each "Eurodollar Loan" under the Prior Credit Agreement shall be
deemed to be a Eurodollar Loan under this Agreement; and
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(iv) the Prior Credit Agreement and the commitments thereunder shall
be superseded by this Agreement and such commitments shall terminate.
Section 2.02 Borrowings, Continuations, Conversions and Letters of
Credit.
(a) Borrowings. The Borrower shall give the Agent (which shall
promptly notify the Lenders) advance notice as hereinafter provided of each
borrowing hereunder, which shall specify the aggregate amount of such
borrowing, the Type and the date (which shall be a Business Day) of the Loans
to be borrowed and (in the case of Eurodollar Loans) the duration of the
Interest Period therefor.
(b) Minimum Amounts. All Base Rate Loan borrowings shall be in
amounts of at least $500,000 or the remaining balance of the Aggregate
Commitments, if less, or any whole multiple of $500,000 in excess thereof, and
all Eurodollar Loans shall be in amounts of at least $1,000,000 or any whole
multiple of $1,000,000 in excess thereof.
(c) Notices. All borrowings, continuations and conversions shall
require advance written notice to the Agent (which shall promptly notify the
Lenders) in the form of Exhibit B hereto (or telephonic notice promptly
confirmed by such a written notice), which in each case shall be irrevocable,
from the Borrower to be received by the Agent not later than 11:00 a.m. Houston
time on the date (which shall be a Business Day) of each Base Rate Loan
borrowing and at least three Business Days prior to the date of each Eurodollar
Loan borrowing, continuation or conversion. Without in any way limiting the
Borrower's obligation to confirm in writing any telephonic notice, the Agent
may act without liability upon the basis of telephonic notice believed by the
Agent in good faith to be from the Borrower prior to receipt of written
confirmation. In each such case, the Borrower hereby waives the right to
dispute the Agent's record of the terms of such telephonic notice except in the
case of manifest error, gross negligence or willful misconduct by the Agent.
(d) Continuation Options. Subject to the provisions made in this
Section 2.02(d), the Borrower may elect to continue all or any part of any
Eurodollar Loan beyond the expiration of the then current Interest Period
relating thereto by giving advance notice as provided in Section 2.02(c) to the
Agent (which shall promptly notify the Lenders) of such election, specifying
the amount of such Loan to be continued and the Interest Period therefor. In
the absence of such a timely and proper election, the Borrower shall be deemed
to have elected to convert such Eurodollar Loan to a Base Rate Loan pursuant to
Section 2.02(e). All or any part of any Eurodollar Loan may be continued as
provided herein, provided that (i) any continuation of any such Loan shall be
(as to each Loan as continued for an applicable Interest Period) in amounts of
at least $1,000,000 or any whole multiple of $1,000,000 in excess thereof and
(ii) no Default shall have occurred and be continuing. If a Default shall have
occurred and be continuing, each Eurodollar Loan shall be converted to a Base
Rate Loan on the last day of the Interest Period applicable thereto.
(e) Conversion Options. The Borrower may elect to convert all or any
part (subject to the minimum amount requirements set forth in Section 2.02(b))
of any Eurodollar Loan on the last day of the then current Interest Period
relating thereto to a Base Rate Loan by giving advance notice to the Agent
(which shall promptly notify the Lenders) of such election. Subject to the
provisions made in this Section 2.02(e), the Borrower may elect to convert all
or any part of any Base Rate
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Loan at any time and from time to time to a Eurodollar Loan by giving advance
notice as provided in Section 2.02(c) to the Agent (which shall promptly notify
the Lenders) of such election. All or any part of any outstanding Loan may be
converted as provided herein, provided that (i) any conversion of any Base Rate
Loan into a Eurodollar Loan shall be (as to each such Loan into which there is
a conversion for an applicable Interest Period) in amounts of at least
$1,000,000 or any whole multiple of $1,000,000 in excess thereof and (ii) no
Default shall have occurred and be continuing. If a Default shall have oc-
curred and be continuing, no Base Rate Loan may be converted into a Eurodollar
Loan.
(f) Advances. Not later than 1:00 p.m. Houston time on the date
specified for each borrowing hereunder, each Lender shall make available the
amount of the Loan to be made by it on such date to the Agent, to an account
which the Agent shall specify, in immediately available funds, for the account
of the Borrower. The amounts so received by the Agent shall, subject to the
terms and conditions of this Agreement, be made available to the Borrower by
depositing the same, in immediately available funds, in an account of the
Borrower, designated by the Borrower and maintained at the Principal Office.
(g) Letters of Credit. The Borrower shall give the Agent (which
shall promptly notify the Lenders of such request and their Percentage Share of
such Letter of Credit) advance notice to be received by the Agent not later
than 11:00 a.m. Houston time not less than three (3) Business Days prior
thereto of each request for the issuance, the renewal or extension of a Letter
of Credit hereunder which request shall specify the amount of such Letter of
Credit, the date (which shall be a Business Day) such Letter of Credit is to be
issued, renewed or extended, the duration thereof, the name and address of the
beneficiary thereof, the form of the Letter of Credit and such other
information as the Agent may reasonably request all of which shall be reason-
ably satisfactory to the Agent. Subject to the terms and conditions of this
Agreement, on the date specified for the issuance, renewal or extension of a
Letter of Credit, the Agent shall issue such Letter of Credit to the
beneficiary thereof.
In conjunction with the issuance of each Letter of Credit, the Borrower,
shall execute a Letter of Credit Agreement. In the event of any conflict
between any provision of a Letter of Credit Agreement and this Agreement, QSRD,
the Borrower, the Agent and the Lenders hereby agree that the provisions of
this Agreement shall govern.
The Agent will send to the Borrower and each Lender, immediately upon
issuance of any Letter of Credit, or an amendment thereto, a true and complete
copy of such Letter of Credit, or such amendment thereto.
Section 2.03 Changes of Commitments.
(a) The Aggregate Commitments shall at all times be equal to the
lesser of (i) the Aggregate Maximum Credit Amounts, after adjustments resulting
from reductions pursuant to Sections 2.03(b), or (ii) the Borrowing Base as
determined from time to time.
(b) The Borrower shall have the right to terminate or to reduce the
amount of the Aggregate Maximum Credit Amounts at any time or from time to time
upon not less than three (3)
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Business Days' prior notice to the Agent (which shall promptly notify the
Lenders) of each such termination or reduction, which notice shall specify the
effective date thereof and the amount of any such reduction (which shall not be
less than $5,000,000 or any whole multiple of $1,000,000 in excess thereof) and
shall be irrevocable and effective only upon receipt by the Agent.
(c) The Aggregate Maximum Credit Amounts once terminated or reduced
may not be reinstated.
Section 2.04 Fees.
(a) The Borrower shall pay to the Agent for the account of each
Lender a commitment fee on the daily average unused amount of the Aggregate
Commitments during the Revolving Credit Period at a rate per annum equal to the
then applicable Commitment Fee Rate. Accrued commitment fees shall be payable
quarterly on each Quarterly Date in arrears and on the earlier of the date the
Aggregate Commitments are terminated or the Revolving Credit Termination Date.
(b) The Borrower agrees to pay the Agent, for the account of each
Lender, commissions for issuing the Letters of Credit on the daily average
outstanding of the maximum liability of the Agent existing from time to time
under such Letter of Credit (calculated separately for each Letter of Credit)
at the rate per annum equal to the then Applicable Margin for Eurodollar Loans,
provided that each Letter of Credit shall bear a minimum commission of $300.00
and that each Letter of Credit shall be deemed to be outstanding in the full
face amount of the Letter of Credit until the earlier of the expiry date
thereof or the date the Agent has received the canceled Letter of Credit or a
written cancellation of the Letter of Credit from the beneficiary of such
Letter of Credit in form and substance acceptable to the Agent, or for any
reductions in the amount of the Letter of Credit (other than from a drawing),
written notification from the Borrower. Such commissions are payable quarterly
on each Quarterly Date in arrears and on the earlier of the date the Aggregate
Commitments are terminated or the Revolving Credit Termination Date.
(c) In addition to the above commission, the Borrower agrees to pay
the Agent for its own account 0.10% on the face amount of each Letter of Credit
issued hereunder payable on the day such Letter of Credit is issued as an
issuing fee.
(d) Upon each transfer of any Letter of Credit to a successor
beneficiary in accordance with its terms, the Borrower shall pay the sum of
$500 to the Agent for its own account.
(e) Upon each amendment of any Letter of Credit, the Borrower shall
pay the sum of $500 to the Agent for its own account.
(f) The Borrower shall pay such other amounts as are set forth in
that certain letter agreement of even date herewith between the Borrower and
Bank of Montreal.
Section 2.05 Several Obligations. The failure of any Lender to make
any Loan to be made by it or to provide funds for disbursements or
reimbursements under Letters of Credit on the date specified therefor shall not
relieve any other Lender of its obligation to make its Loan or provide
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funds on such date, but no Lender shall be responsible for the failure of any
other Lender to make a Loan to be made by such other Lender or to provide funds
to be provided by such other Lender.
Section 2.06 Notes. The Loans made by each Lender shall be evidenced
by a single promissory note of the Borrower in substantially the form of
Exhibit A hereto, dated (i) the Closing Date or (ii) the effective date of an
Assignment pursuant to Section 12.06(b), payable to the order of such Lender in
a principal amount equal to its Maximum Credit Amount as originally in effect
and otherwise duly completed. The date, amount, Type, interest rate and
Interest Period of each Loan made by each Lender, and all payments made on
account of the principal thereof, shall be recorded by such Lender on its books
for its Note, and, prior to any transfer, endorsed by such Lender on the
schedule attached to such Note or any continuation thereof. Such records shall
be presumed correct; provided that the failure of any Lender to make any such
notation on its Note shall not affect the Borrower's obligations in respect of
its Loan from such Lender.
Section 2.07 Prepayments.
(a) Generally. The Borrower may prepay (i) Base Rate Loans upon not
less than one (1) Business Day's prior notice and (ii) Eurodollar Loans upon
not less than three (3) Business Day's prior notice, to the Agent (which shall
promptly notify the Lenders), which notice shall specify the prepayment date
(which shall be a Business Day) and the amount of the prepayment (which shall
be at least $1,000,000 in the case of a Eurodollar Loan or $500,000 in the case
of a Base Rate Loan or the remaining aggregate principal balance outstanding of
the Base Rate Loans, if less) and shall be irrevocable and effective only upon
receipt by the Agent, provided that interest on the principal prepaid, accrued
to the prepayment date, shall be paid on the prepayment date. Prepayments of
Eurodollar Loans shall be subject to the terms of Section 5.05.
(b) Following Reduction of Credit Amounts. If, after giving effect
to any termination or reduction of the Aggregate Maximum Credit Amounts
pursuant to Sections 2.03(b), the outstanding aggregate principal amount of the
Loans plus the LC Exposure exceeds the Aggregate Maximum Credit Amounts, the
Borrower shall (i) prepay the Loans on the date of such termination or
reduction in an aggregate principal amount equal to the excess, together with
interest on the principal amount paid accrued to the date of such prepayment
and (ii) if any excess remains after prepaying all of the Loans, pay to the
Agent on behalf of the Lenders an amount equal to the remaining excess to be
held as cash collateral as provided in Section 2.10(b).
(c) Following Redetermination. Upon any redetermination or
adjustment of the amount of the Borrowing Base in accordance with Section 2.08
or adjustment in accordance with Sections 2.08(c), 8.08(b) or 9.15, if the
redetermined or adjusted Borrowing Base is less than the sum of the aggregate
outstanding principal amount of the Loans and the LC Exposure, then the
Borrower shall within thirty (30) days of receipt of written notice thereof:
either (i) prepay the Loans (and/or provide cash collateral) in an aggregate
principal amount equal to such excess, together with interest on the principal
amount paid accrued to the date of such prepayment or (ii) notify the Agent of
its election to eliminate such Borrowing Base deficiency by making six (6)
consecutive monthly payments equal to such excess divided by six (6), the first
of such payments being due and payable immediately and each subsequent payment
being due at thirty (30) day intervals thereafter. Any scheduled payments of
principal made during such deficiency period shall be applied to such
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deficiency payments in direct order of maturity; provided that in the event of
an acceleration of the maturity of the Notes pursuant to Section 10.02, such
acceleration shall also accelerate the maturity of the monthly deficiency
payments.
(d) During Term Loan Period. Any prepayments made during the Term
Loan Period shall be applied to reduce pro rata the remaining scheduled
payments.
(e) No Premium; Penalty. Prepayments permitted or required under
this Section 2.07 shall be without premium or penalty, except as required under
Section 5.05 for prepayment of Eurodollar Loans. Any prepayment may be
reborrowed during the Revolving Credit Period subject to the then effective
Aggregate Commitments.
Section 2.08 Borrowing Base.
(a) The Borrowing Base shall be determined in accordance with Section
2.08(b) by the Agent with the concurrence of the Required Lenders and is
subject to redetermination in accordance with Section 2.08(d). Upon any
redetermination of the Borrowing Base, such redetermination shall remain in
effect until the next successive Redetermination Date. "Redetermination Date"
shall mean the date that the redetermined Borrowing Base becomes effective
subject to the notice requirements specified in Section 2.08(e) both for
scheduled redeterminations and unscheduled redeterminations. So long as any of
the Commitments are in effect or any LC Exposure or Loans are outstanding
hereunder, this Agreement shall be governed by the then effective Borrowing
Base. During the period from and after the Closing Date until the first
Redetermination Date to occur after the Closing Date, unless redetermined
pursuant to Section 2.08(d) or adjusted pursuant to Sections 2.08(c), 8.08(b)
or 9.15, the amount of the Borrowing Base shall be $96,000,000.
(b) Upon receipt of the reports required by Section 8.07 and such
other reports, data and supplemental information as may from time to time be
reasonably requested by the Agent (the "Engineering Reports"), the Agent will
propose a redetermined the Borrowing Base. Such proposal will be in accordance
with the Agent's normal and customary procedures for evaluating oil and gas
reserves and other related assets as such exist at that particular time,
including assessing the effect of any Risk Management Agreements or fixed price
sales contracts with investment grade counterparties or purchasers and
assessing the amount of outstanding Debt and interest expense associated with
the Subordinated Debt as well as the level of fixed charges, including
mandatory cash dividend payments on Preferred Stock. The Agent may make
adjustments to the rates, volumes and prices and other assumptions set forth
therein in accordance with its normal and customary procedures for evaluating
oil and gas reserves and other related assets as such exist at that particular
time. The Agent shall propose to the Lenders a new Borrowing Base by no later
than the earlier of (i) 30 days following receipt by the Agent of the
Engineering Reports or (ii) 10 days prior to the next Scheduled Redetermination
Date, in each case assuming its receipt of the Engineering Reports in a timely
and complete manner. After having received notice of such proposal by the
Agent, each Lender shall have 10 days to agree or disagree with such proposal.
If at the end of the 10 days, any Lender has not communicated its approval or
disapproval, such silence shall be deemed to be an approval. If however, the
Required Lenders have not approved the Agent's proposal within 10 days, the
Borrowing Base shall be set at the lower of the Agent's proposal or the amount
of the then current Borrowing Base; and the Borrowing Base shall remain at such
level until the Agent has
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proposed and Required Lenders have agreed on a new Borrowing Base, which the
Agent and each Lender agree to do within a reasonable period of time.
(c) The Agent may exclude any Oil and Gas Property or portion of
production therefrom or any income from any other Property from the Borrowing
Base, at any time, because title information is not reasonably satisfactory or
such Property is not Mortgaged Property. Without limitation of the forgoing,
if the Escrow Agreement is terminated and the Property subject thereof is not
vested with the Borrower, then the Borrowing Base shall be reduced by an amount
equal to the value assigned such Property in the most recently determined
Borrowing Base.
(d) So long as any of the Commitments are in effect and until payment
in full of all Loans hereunder, on or around the 15th Business Day of each
March and September, commencing September 15, 1998 (each being a "Scheduled
Redetermination Date"), the amount of the Borrowing Base shall be determined in
accordance with Section 2.08(b). Without limitation of the foregoing, the
Majority Lenders may initiate an unscheduled redetermination of the Borrowing
Base in connection with any Hi-Yield Offering and may initiate two (2)
unscheduled redeterminations of the Borrowing Base during any consecutive
twelve (12) month period by specifying in writing to the Borrower the date on
which the Borrower is to furnish a Reserve Report in accordance with Section
8.07(b) and the date on which such redetermination is to occur. The Borrower
may also request one unscheduled redetermination during any consecutive twelve
(12) month period.
(e) The Agent shall promptly notify in writing QSRD, the Borrower and
the Lenders of the new Borrowing Base. Any redetermination of the Borrowing
Base shall not be in effect until written notice is received by the Borrower.
Section 2.09 Assumption of Risks. The Borrower assumes all risks of
the acts or omissions of any beneficiary of any Letter of Credit or any
transferee thereof with respect to its use of such Letter of Credit. Neither
the Agent (except in the case of gross negligence, willful misconduct or bad
faith on the part of the Agent or any of its employees), its correspondents nor
any Lender shall be responsible (i) for the validity, sufficiency or
genuineness of certificates or other documents or any endorsements thereon,
even if such certificates or other documents should in fact prove to be
invalid, insufficient, fraudulent or forged; (ii) for errors, omissions,
interruptions or delays in transmissions or delivery of any messages by mail,
telex, or otherwise, whether or not they be in code; (iii) for errors in
translation or errors in interpretation of technical terms; (iv) for the
validity or sufficiency of any instrument transferring or assigning or
purporting to transfer or assign any Letter of Credit or the rights or benefits
thereunder or proceeds thereof, in whole or in part, which may prove to be
invalid or ineffective for any reason; (v) for the failure of any beneficiary
or any transferee of any Letter of Credit to comply fully with conditions
required in order to draw upon any Letter of Credit; or (vi) for any other
consequences arising from causes beyond the Agent's control or the control of
the Agent's correspondents. In addition, neither the Agent nor any Lender
shall be responsible for any error, neglect, or default of any of the Agent's
correspondents; and none of the above shall affect, impair or prevent the
vesting of any of the Agent's or any Lender's rights or powers hereunder or
under the Letter of Credit Agreements, all of which rights shall be cumulative.
The Agent and its correspondents may accept certificates or other documents
that appear on their face to be in order, without responsibility for further
investigation of any matter contained therein regardless of any notice or
information to the contrary. In furtherance and not in limitation of the
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foregoing provisions, the Borrower agrees that any action, inaction or omission
taken or not taken by the Agent or by any correspondent for the Agent in good
faith in connection with any Letter of Credit or any related drafts,
certificates, documents or instruments shall be binding on the Borrower and
shall not put the Agent or its correspondents under any resulting liability to
the Borrower (except in the case of gross negligence, willful misconduct or bad
faith on the part of the Agent or any of its employees).
Section 2.10 Obligation to Reimburse and to Prepay.
(a) If a disbursement by the Agent is made under any Letter of
Credit, and no Default under this Agreement shall have occurred and be
continuing, the Borrower may elect to have the amount of such disbursement,
subject to the then available Aggregate Commitment and the other terms and
conditions set forth in this Agreement (including the provisions relating to
minimum amounts), treated as a Base Rate Loan to the Borrower as provided in
Section 2.01(a) hereof. With respect to any disbursement under a Letter of
Credit for which no election is made or permitted, or after and during the
continuance of a Default, the Borrower shall pay to the Agent within two (2)
Business Days after notice of any such disbursement is received by the Borrow-
er, the amount of such disbursement made by the Agent under the Letter of
Credit (if such payment is not sooner effected as may be required under this
Section 2.10 or under other provisions of the Letter of Credit), together with
interest on the amount disbursed from and including the date of disbursement
until payment in full of such disbursed amount at a varying rate per annum
equal to (i) the Base Rate plus the Applicable Margin for Base Rate Loans
through the second Business Day after notice of such disbursement is received
by the Borrower and (ii) thereafter, the Post-Default Rate for Base Rate Loans
(but in no event to exceed the Highest Lawful Rate) for the period from and
including the third Business Day following the date of such disbursement to and
including the date of repayment in full of such disbursed amount. The
obligations of the Borrower under this Agreement and each Letter of Credit
shall be absolute, unconditional and irrevocable and shall be paid or performed
strictly in accordance with the terms of this Agreement under all circumstances
whatsoever, including, without limitation, but only to the fullest extent
permitted by applicable law, the following circumstances: (i) any lack of
validity or enforceability of this Agreement, any Letter of Credit or any of
the Security Instruments; (ii) any amendment or waiver of (including any
default), or any consent to departure from this Agreement (except to the extent
permitted by any amendment or waiver), any Letter of Credit or any of the
Security Instruments; (iii) the existence of any claim, set-off, defense or
other rights which the Borrower may have at any time against the beneficiary of
any Letter of Credit or any transferee of any Letter of Credit (or any Persons
for whom any such beneficiary or any such transferee may be acting), the Agent,
any Lender or any other Person, whether in connection with this Agreement, any
Letter of Credit, the Security Instruments, the transactions contemplated
hereby or any unrelated transaction; provided however, the foregoing shall not
constitute a waiver, release or estoppel with respect to any such claim,
setoff, defense or other rights which the Borrower may have at any time against
the beneficiary of such Letter of Credit or any transferee of such Letter of
Credit (or any Persons for whom any such beneficiary or any such transferee may
be acting), the Agent, any Lender or any other Person, whether in connection
with this Agreement, any Letter of Credit, the Security Instruments, the
transactions contemplated hereby or any unrelated transaction; (iv) any
statement, certificate, draft, notice or any other document presented under any
Letter of Credit proves to have been forged, fraudulent, insufficient or
invalid in any respect or any statement therein proves to have been untrue or
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inaccurate in any respect whatsoever; and (v) payment by the Agent under any
Letter of Credit against presentation of a draft or certificate which appears
on its face to comply, but does not comply, with the terms of such Letter of
Credit.
Notwithstanding anything in this Agreement to the contrary, the Borrower
will not be liable for payment or performance that results from the gross
negligence or willful misconduct of the Agent, except where the Borrower or any
of its Subsidiaries actually recovers the proceeds for itself or the Agent of
any payment made by the Agent in connection with such gross negligence or
willful misconduct.
(b) In the event (i) of the occurrence of any Event of Default, (ii)
of the maturity of the Notes, whether by acceleration or otherwise, or (iii)
any Letter of Credit remains outstanding after the Revolving Credit Termination
Date, an amount equal to the LC Exposure shall be deemed to be forthwith due
and owing by the Borrower to the Agent and the Lenders as of the date of any
such occurrence; and the Borrower's obligation to pay such amount shall be
absolute and unconditional, without regard to whether any beneficiary of any
such Letter of Credit has attempted to draw down all or a portion of such
amount under the terms of a Letter of Credit, and, to the fullest extent
permitted by applicable law, shall not be subject to any defense or be affected
by a right of set-off, counterclaim or recoupment which the Borrower may now or
hereafter have against any such beneficiary, the Agent, the Lenders or any
other Person for any reason whatsoever. Such payments (together with all
interest accruing thereon) shall be held by the Agent on behalf of the Lenders
as cash collateral securing the LC Exposure in an interest bearing account or
accounts at the Principal Office; and the Borrower hereby grants to the Agent a
security interest in such cash collateral. In the event of any such payment by
the Borrower of amounts contingently owing under outstanding Letters of Credit
and in the event that thereafter drafts or other demands for payment complying
with the terms of such Letters of Credit are not made prior to the respective
expiration dates thereof, the Agent agrees, if no Event of Default has occurred
and is continuing or if no other amounts are outstanding under this Agreement,
the Notes or the Loan Documents, to remit to the Borrower amounts for which the
contingent obligations evidenced by the Letters of Credit have ceased.
(c) Each Lender severally and unconditionally agrees that it shall
promptly reimburse the Agent an amount equal to such Lender's Percentage Share
of any disbursement made by the Agent under any Letter of Credit that is not
reimbursed according to this Section 2.10.
Section 2.11 Lending Offices. The Loans of each Type made by each
Lender shall be made and maintained at such Lender's Applicable Lending Office
for Loans of such Type.
ARTICLE III
PAYMENTS OF PRINCIPAL AND INTEREST
Section 3.01 Repayment of Loans. The Borrower will pay to the Agent,
for the account of each Lender, the principal payments required by this Section
3.01. Commencing on the last day of the calendar month immediately following
the Revolving Credit Termination Date, the aggregate principal amount of the
Notes outstanding on the Revolving Credit Termination Date shall be payable in
forty-eight (48) equal consecutive monthly installments sufficient to amortize
the
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outstanding principal amount equally over the Term Loan Period with final
payment of the remaining principal balance on the Notes due on the Maturity
Date.
Section 3.02 Interest.
(a) The Borrower will pay to the Agent, for account of each Lender,
interest on the unpaid principal amount of each Loan made by such Lender for
the period commencing on the date such Loan is made to but excluding the date
such Loan shall be paid in full, at the following rates per annum:
(i) if such a Loan is a Base Rate Loan, the Base Rate (as in effect
from time to time) plus the Applicable Margin, but in no event to exceed
the Highest Lawful Rate; and
(ii) if such a Loan is a Eurodollar Loan, for each Interest Period
relating thereto, the Eurodollar Rate for such Loan plus the Applicable
Margin, but in no event to exceed the Highest Lawful Rate.
(b) Notwithstanding the foregoing, (i) during any curative period for
a Borrowing Base deficiency under Section 2.07(c)(ii), the Borrower will pay to
the Agent, for the account of each Lender interest at the applicable Post-
Default Rate on any principal of each Loan made by such Lender; and (ii) in all
other cases, the Borrower will pay to the Agent, for the account of each Lender
interest at the applicable Post-Default Rate on the unpaid principal of each
Loan made by such Lender, and (to the fullest extent permitted by law) on each
other amount payable by the Borrower hereunder or under any other Loan Document
to or for account of such Lender, which shall not be paid in full when due
(whether at stated maturity, by acceleration or otherwise), for the period
commencing on the due date thereof until the same is paid in full.
(c) Accrued interest on Base Rate Loans shall be payable on each
Quarterly Date, commencing on June 30, 1998, and on the Maturity Date; and
accrued interest on each Eurodollar Loan shall be payable on the last day of
the Interest Period therefor and, if such Interest Period is longer than three
months at three-month intervals following the first day of such Interest
Period. Interest payable at the Post-Default Rate shall be payable: (i) during
any curative period for a Borrowing Base deficiency under Section 2.07(c)(ii),
on the same day any deficiency payments are made under Section 2.07(c)(ii); and
(ii) in all other case, from time to time on demand. Interest on any
Eurodollar Loan that is converted into a Base Rate Loan (pursuant to Section
5.04) shall be payable on the date of conversion (but only to the extent so
converted).
(d) Upon any change during the Revolving Credit Period in the amount
of the Indebtedness (including the LC Exposure) outstanding hereunder or the
Borrowing Base, the Agent shall promptly redetermine the Percentage Usage; and
in the event such circumstances result in a change in the Applicable Margin or
the Commitment Fee Rate, the Agent shall notify the Lenders and the Borrower
thereof. Each determination by the Agent of an interest rate or fee hereunder
shall, except in cases of manifest error, be final, conclusive and binding on
the parties.
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ARTICLE IV
PAYMENTS; PRO RATA TREATMENT; COMPUTATIONS; ETC.
Section 4.01 Payments. Except to the extent otherwise provided herein,
all payments of principal, interest and other amounts to be made by the
Borrower under this Agreement, the Notes, the Letter of Credit Agreements and
any other Loan Document shall be made in Dollars, in immediately available
funds, to the Agent at such account as the Agent shall specify by notice to the
Borrower from time to time, not later than 1:00 p.m. Houston time on the date
on which such payments shall become due (each such payment made after such time
on such due date to be deemed to have been made on the next succeeding Business
Day). Such payments shall be made without (to the fullest extent permitted by
applicable law) defense, set-off or counterclaim, but shall not constitute a
waiver, release or estoppel with respect to any such defense, set-off or
counterclaim. Each payment to be made to the Agent under this Agreement, any
Note or any other Loan Document for account of a Lender shall be paid promptly
to such Lender in immediately available funds. Except as provided in the
definition of "Interest Period", if the due date of any payment under this
Agreement, any Note or any other Loan Document would otherwise fall on a day
which is not a Business Day such date shall be extended to the next succeeding
Business Day and interest shall be payable for any principal so extended for
the period of such extension. At the time of each payment to the Agent of any
principal of or interest on any borrowing, the Borrower shall notify the Agent
of the Loans to which such payment shall apply. In the absence of such notice,
the Agent may specify the Loans to which such payment shall apply, but to the
extent possible such payment or prepayment will be applied first to the Loans
comprised of Base Rate Loans.
Section 4.02 Pro Rata Treatment. Except to the extent otherwise
provided herein each Lender agrees that: (i) each borrowing from the Lenders
under Section 2.01 shall be made from each Lender pro rata in accordance with
its Percentage Share, each payment of commitment fee or other fees under Sec-
tions 2.04(a) and (b) shall be made for account of each Lender pro rata in
accordance with its Percentage Share, and each termination or reduction of the
amount of the Aggregate Maximum Credit Amounts under Section 2.03(b) shall be
applied to the Commitment of each Lender, pro rata in accordance with its
Percentage Share; (ii) each payment of principal of Loans by the Borrower shall
be made for account of the Lenders pro rata in accordance with the respective
unpaid principal amount of the Loans held by the Lenders; (iii) each payment of
interest on Loans by the Borrower shall be made for account of the Lenders pro
rata in accordance with the amounts of interest due and payable to the
respective Lenders; and (iv) each reimbursement by the Borrower of
disbursements under Letters of Credit shall be made for account of the Agent
or, if funded by the Lenders, pro rata for the account of the Lenders in
accordance with the amounts of reimbursement obligations due and payable to
each respective Lender.
Section 4.03 Computations. Interest on Eurodollar Loans and fees shall
be computed on the basis of a year of 360 days and actual days elapsed
(including the first day but excluding the last day) occurring in the period
for which such interest is payable, unless such calculation would exceed the
Highest Lawful Rate, in which case interest shall be calculated on the per
annum basis of a year of 365 or 366 days, as the case may be. Interest on Base
Rate Loans shall be computed on the basis of a year of 365 or 366 days, as the
case may be, and actual days elapsed (including the first day but excluding the
last day) occurring in the period for which such interest is payable.
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Section 4.04 Non-receipt of Funds by the Agent. Unless the Agent shall
have been notified by a Lender or the Borrower prior to the date on which such
notifying party is scheduled to make payment to the Agent (in the case of a
Lender) of the proceeds of a Loan or a payment under a Letter of Credit to be
made by it hereunder or (in the case of the Borrower) a payment to the Agent
for account of one or more of the Lenders hereunder (such payment being herein
called the "Required Payment"), which notice shall be effective upon receipt,
that it does not intend to make the Required Payment to the Agent, the Agent
may assume that the Required Payment has been made and may, in reliance upon
such assumption (but shall not be required to), make the amount thereof
available to the intended recipient(s) on such date; and, if such Lender or the
Borrower (as the case may be) has not in fact made the Required Payment to the
Agent, the recipient(s) of such payment shall, on demand, repay to the Agent
the amount so made available together with interest thereon in respect of each
day during the period commencing on the date such amount was so made available
by the Agent until but excluding the date the Agent recovers such amount at a
rate per annum which, for any Lender as recipient, will be equal to the Federal
Funds Rate, and for the Borrower as recipient, will be equal to the Base Rate
plus the Applicable Margin.
Section 4.05 Set-off, Sharing of Payments, Etc.
(a) The Borrower agrees that, in addition to (and without limitation
of) any right of set-off, bankers' lien or counterclaim a Lender may otherwise
have, after the occurrence and during the continuation of an Event of Default,
each Lender shall have the right and be entitled (after consultation with the
Agent), at its option, to offset balances held by it or by any of its
Affiliates for account of any Obligor at any of its offices, in Dollars or in
any other currency, against any principal of or interest on any of such
Lender's Loans, or any other amount payable to such Lender hereunder, which is
not paid when due (regardless of whether such balances are then due to such
Obligor), in which case it shall promptly notify such Obligor and the Agent
thereof, provided that such Lender's failure to give such notice shall not
affect the validity thereof.
(b) If any Lender shall obtain payment of any principal of or
interest on any Loan made by it to any Obligor under this Agreement or any
other Loan Document through the exercise of any right of set-off, banker's lien
or counterclaim or similar right or otherwise, and, as a result of such
payment, such Lender shall have received a greater percentage of the principal
or interest then due hereunder by the Borrower to such Lender than the
percentage received by any other Lenders, it shall promptly (i) notify the
Agent and each other Lender thereof and (ii) purchase from such other Lenders
participations in (or, if and to the extent specified by such Lender, direct
interests in) the Loans made by such other Lenders (or in interest due thereon,
as the case may be) in such amounts, and make such other adjustments from time
to time as shall be equitable, to the end that all the Lenders shall share the
benefit of such excess payment (net of any expenses which may be incurred by
such Lender in obtaining or preserving such excess payment) pro rata in
accordance with the unpaid principal and/or interest on the Loans held by each
of the Lenders. To such end all the Lenders shall make appropriate adjustments
among themselves (by the resale of participations sold or otherwise) if such
payment is rescinded or must otherwise be restored. QSRD and the Borrower
agree that any Lender so purchasing a participation (or direct interest) in the
Loans made by other Lenders (or in interest due thereon, as the case may be)
may exercise all rights of set-off, banker's lien, counterclaim or similar
rights with respect to such participation as fully as if such Lender were a
direct holder of Loans in the amount of such participation. Nothing contained
herein shall require
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any Lender to exercise any such right or shall affect the right of any Lender
to exercise, and retain the benefits of exercising, any such right with respect
to any other indebtedness or obligation of such Obligor. If under any
applicable bankruptcy, insolvency or other similar law, any Lender receives a
secured claim in lieu of a set-off to which this Section 4.05 applies, such
Lender shall, to the extent practicable, exercise its rights in respect of such
secured claim in a manner consistent with the rights of the Lenders entitled
under this Section 4.05 to share the benefits of any recovery on such secured
claim.
Section 4.06 Taxes.
(a) Payments Free and Clear. Any and all payments by any Obligor
hereunder or under any other Loan Document shall be made, in accordance with
Section 4.01, free and clear of and without deduction for any and all present
or future taxes, levies, imposts, deductions, charges or withholdings, and all
liabilities with respect thereto, excluding, in the case of each Lender and the
Agent, taxes imposed on its income, and franchise or similar taxes imposed on
it, by (i) any jurisdiction (or political subdivision thereof) of which the
Agent or such Lender, as the case may be, is a citizen or resident or in which
such Lender has an Applicable Lending Office, (ii) the jurisdiction (or any
political subdivision thereof) in which the Agent or such Lender is organized,
or (iii) any jurisdiction (or political subdivision thereof) in which such
Lender or the Agent is presently doing business which taxes are imposed solely
as a result of doing business in such jurisdiction (all such non-excluded
taxes, levies, imposts, deductions, charges, withholdings and liabilities being
hereinafter referred to as "Taxes"). If such Obligor shall be required by law
to deduct any Taxes from or in respect of any sum payable hereunder to the
Lenders or the Agent: (i) the sum payable shall be increased by the amount
necessary so that after making all required deductions (including deductions
applicable to additional sums payable under this Section 4.06) such Lender or
the Agent (as the case may be) shall receive an amount equal to the sum it
would have received had no such deductions been made, (ii) such Obligor shall
make such deductions and (iii) such Obligor shall pay the full amount deducted
to the relevant taxing authority or other Governmental Authority in accordance
with applicable law.
(b) Other Taxes. In addition, to the fullest extent permitted by
applicable law, the Borrower agrees to pay any present or future stamp or
documentary taxes or any other excise or property taxes, charges or similar
levies that arise from any payment made hereunder or from the execution,
delivery or registration of, or otherwise with respect to, this Agreement, any
Assignment or any other Loan Document (hereinafter referred to as "Other
Taxes").
(c) INDEMNIFICATION. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE
LAW, THE BORROWER WILL INDEMNIFY EACH LENDER AND THE AGENT FOR THE FULL AMOUNT
OF TAXES AND OTHER TAXES (INCLUDING, BUT NOT LIMITED TO, ANY TAXES OR OTHER
TAXES IMPOSED BY ANY GOVERNMENTAL AUTHORITY ON AMOUNTS PAYABLE UNDER THIS
SECTION 4.06) PAID BY SUCH LENDER OR THE AGENT (ON THEIR BEHALF OR ON BEHALF OF
ANY LENDER), AS THE CASE MAY BE, AND ANY LIABILITY (INCLUDING PENALTIES,
INTEREST AND EXPENSES) ARISING THEREFROM OR WITH RESPECT THERETO, WHETHER OR
NOT SUCH TAXES OR OTHER TAXES WERE CORRECTLY OR LEGALLY ASSERTED UNLESS THE
PAYMENT OF SUCH TAXES WAS NOT CORRECTLY OR LEGALLY ASSERTED AND SUCH LENDER'S
PAYMENT OF SUCH TAXES OR
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OTHER TAXES WAS THE RESULT OF ITS GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. ANY
PAYMENT PURSUANT TO SUCH INDEMNIFICATION SHALL BE MADE WITHIN THIRTY (30) DAYS
AFTER THE DATE ANY LENDER OR THE AGENT, AS THE CASE MAY BE, MAKES WRITTEN
DEMAND THEREFOR. IF ANY LENDER OR THE AGENT RECEIVES A REFUND OR CREDIT IN
RESPECT OF ANY TAXES OR OTHER TAXES FOR WHICH SUCH LENDER OR THE AGENT HAS
RECEIVED PAYMENT FROM THE BORROWER IT SHALL PROMPTLY NOTIFY THE BORROWER OF
SUCH REFUND OR CREDIT AND SHALL, IF NO DEFAULT HAS OCCURRED AND IS CONTINUING,
WITHIN THIRTY (30) DAYS AFTER RECEIPT OF A REQUEST BY THE BORROWER (OR PROMPTLY
UPON RECEIPT, IF THE BORROWER HAS REQUESTED APPLICATION FOR SUCH REFUND OR
CREDIT PURSUANT HERETO), PAY AN AMOUNT EQUAL TO SUCH REFUND OR CREDIT TO THE
BORROWER WITHOUT INTEREST (BUT WITH ANY INTEREST SO REFUNDED OR CREDITED),
PROVIDED THAT THE BORROWER, UPON THE REQUEST OF SUCH LENDER OR THE AGENT,
AGREES TO RETURN SUCH REFUND OR CREDIT (PLUS PENALTIES, INTEREST OR OTHER
CHARGES) TO SUCH LENDER OR THE AGENT IN THE EVENT SUCH LENDER OR THE AGENT IS
REQUIRED TO REPAY SUCH REFUND OR CREDIT.
(d) Lender Representations.
(i) Each Lender represents that it is either (i) a corporation
organized under the laws of the United States of America or any state
thereof or (ii) it is entitled to complete exemption from United States
withholding tax imposed on or with respect to any payments, including
fees, to be made to it pursuant to this Agreement and the other Loan
Documents (A) under an applicable provision of a tax convention to which
the United States of America is a party or (B) because it is acting
through a branch, agency or office in the United States of America and
any payment to be received by it hereunder is effectively connected with
a trade or business in the United States of America. Each Lender that
is not a corporation organized under the laws of the United States of
America or any state thereof agrees to provide to the Borrower and the
Agent on the Closing Date, or on the date of its delivery of the
Assignment pursuant to which it becomes a Lender, and at such other
times as required by United States law or as the Borrower or the Agent
shall reasonably request, two accurate and complete original signed
copies of either (A) Internal Revenue Service Form 4224 (or successor
form) certifying that all payments to be made to it hereunder will be
effectively connected to a United States trade or business (the "Form
4224 Certification") or (B) Internal Revenue Service Form 1001 (or
successor form) certifying that it is entitled to the benefit of a
provision of a tax convention to which the United States of America is a
party which completely exempts from United States withholding tax all
payments to be made to it hereunder (the "Form 1001 Certification"). In
addition, each Lender agrees that if it previously filed a Form 4224
Certification, it will deliver to the Borrower and the Agent a new Form
4224 Certification prior to the first payment date occurring in each of
its subsequent taxable years; and if it previously filed a Form 1001
Certification, it will deliver to the Borrower and the Agent a new
certification prior to the first payment date falling in the third year
following the previous filing of such certification. Each Lender also
agrees to deliver to the Borrower and the Agent such other or
supplemental forms as may at any time be required as a result of changes
in applicable law or regulation in order to confirm or maintain in
effect its entitlement to exemption from United States withholding tax
on any payments hereunder, provided that the circumstances of such
Lender at the relevant time and
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applicable laws permit it to do so. If a Lender determines, as a result
of any change in either (i) a Governmental Requirement or (ii) its
circumstances, that it is unable to submit any form or certificate that
it is obligated to submit pursuant to this Section 4.06, or that it is
required to withdraw or cancel any such form or certificate previously
submitted, it shall promptly notify the Borrower and the Agent of such
fact. If a Lender is organized under the laws of a jurisdiction outside
the United States of America, unless the Borrower and the Agent have
received a Form 1001 Certification or Form 4224 Certification
satisfactory to them indicating that all payments to be made to such
Lender hereunder are not subject to United States withholding tax, the
Agent (in consultation with the Borrower) shall withhold taxes from such
payments at the applicable statutory rate. Each Lender agrees to
indemnify and hold harmless from any United States taxes, penalties,
interest and other expenses, costs and losses incurred or payable by (i)
the Borrower or the Agent as a result of such Lender's failure to submit
any form or certificate that it is required to provide pursuant to this
Section 4.06 or (ii) the Borrower or the Agent as a result of their
reliance on any such form or certificate which such Lender has provided
to them pursuant to this Section 4.06.
(ii) For any period with respect to which a Lender has failed to
provide the Borrower with the form required pursuant to this Section
4.06, if any (other than if such failure is due to a change in a
Governmental Requirement occurring subsequent to the date on which a
form originally was required to be provided), such Lender shall not be
entitled to indemnification under Section 4.06 with respect to taxes
imposed by the United States which taxes would not have been imposed but
for such failure to provide such forms; provided, however, that should a
Lender, which is otherwise exempt from or subject to a reduced rate of
withholding tax becomes subject to taxes because of its failure to
deliver a form required hereunder, the Borrower shall take such steps as
such Lender shall reasonably request to assist such Lender to recover
such taxes.
(iii) Any Lender claiming any additional amounts payable pursuant to
this Section 4.06 shall use reasonable efforts (consistent with legal
and regulatory restrictions) to file any certificate or document
requested by the Borrower or the Agent or to change the jurisdiction of
its Applicable Lending Office or to contest any tax imposed if the
making of such a filing or change or contesting such tax would avoid the
need for or reduce the amount of any such additional amounts that may
thereafter accrue and would not, in the sole determination of such
Lender, be otherwise disadvantageous to such Lender.
Section 4.07 Disposition of Proceeds. The Security Instruments contain
an assignment unto and in favor of the Agent for the benefit of the Lenders of
all production and all proceeds attributable thereto which may be produced from
or allocated to the Mortgaged Property, and the Security Instruments further
provide in general for the application of such proceeds to the satisfaction of
the Indebtedness and other obligations described therein and secured thereby.
Notwithstanding the assignment contained in such Security Instruments, until
the occurrence of an Event of Default, the Lenders agree that they will neither
notify the purchaser or purchasers of such production nor take any other action
to cause such proceeds to be remitted to the Lenders, but the Lenders will
instead permit such proceeds to be paid to QSRD and its Subsidiaries. In
addition, until the occurrence of an Event of Default, the Lenders will, upon
written request of the Borrower given to the Agent, execute and deliver, at the
Borrower's expense, such transfer orders and other
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instruments reasonably necessary to allow payment of production proceeds
directly to QSRD and its Subsidiaries.
ARTICLE V
YIELD MAINTENANCE; CAPITAL ADEQUACY
Section 5.01 Additional Costs.
(a) Eurodollar Regulations, etc. The Borrower shall pay directly to
each Lender from time to time such amounts as such Lender may determine to be
necessary to compensate such Lender for any costs which it determines are
attributable to its making or maintaining of any Eurodollar Loans hereunder or
its obligation to make any Eurodollar Loans hereunder, or any reduction in any
amount receivable by such Lender hereunder in respect of any of such Eurodollar
Loans or such obligation (such increases in costs and reductions in amounts
receivable being herein called "Additional Costs"), resulting from any
Regulatory Change which: (i) changes the basis of taxation of any amounts
payable to such Lender under this Agreement or any Note in respect of any of
such Eurodollar Loans (other than taxes imposed on the overall net income of
such Lender or of its Applicable Lending Office for any of such Eurodollar
Loans by the jurisdiction in which such Lender has its principal office or
Applicable Lending Office); or (ii) imposes or modifies any reserve, special
deposit, minimum capital, capital ratio or similar requirements relating to any
extensions of credit or other assets of, or any deposits with or other
liabilities of such Lender (including any of such Eurodollar Loans or any
deposits referred to in the definition of "Eurodollar Rate" in Section 1.02
hereof), or the Commitment of such Lender or the Eurodollar interbank market;
or (iii) imposes any other condition affecting this Agreement or any Note (or
any of such extensions of credit or liabilities) or such Lender's Commitment.
Each Lender will notify the Agent and the Borrower of any event occurring after
the Closing Date which will entitle such Lender to compensation pursuant to
this Section 5.01(a) as promptly as practicable after it obtains knowledge
thereof and determines to request such compensation, and will designate a
different Applicable Lending Office for the Loans of such Lender affected by
such event if such designation will avoid the need for, or reduce the amount
of, such compensation and will not, in the sole opinion of such Lender, be
disadvantageous to such Lender, provided that such Lender shall have no
obligation to so designate an Applicable Lending Office located outside of the
United States. If any Lender requests compensation from the Borrower under
this Section 5.01(a), the Borrower may, by notice to such Lender, suspend the
obligation of such Lender to make additional Loans of the Type with respect to
which such compensation is requested until the Regulatory Change giving rise to
such request ceases to be in effect (in which case the provisions of Section
5.04 shall be applicable).
(b) Regulatory Change. Without limiting the effect of the provisions
of Section 5.01(a), in the event that, by reason of any Regulatory Change or
any other circumstances arising after the Closing Date affecting such Lender,
the Eurodollar interbank market or such Lender's position in such market, any
Lender either (i) incurs Additional Costs based on or measured by the excess
above a specified level of the amount of a category of deposits or other
liabilities of such Lender which includes deposits by reference to which the
interest rate on Eurodollar Loans is determined as provided in this Agreement
or a category of extensions of credit or other assets of such Lender which
includes Eurodollar Loans or (ii) becomes subject to restrictions on the amount
of such a category of liabilities or assets which it may hold, then, if such
Lender so elects by notice to the
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Borrower, the obligation of such Lender to make additional Eurodollar Loans
shall be suspended until such Regulatory Change or other circumstances ceases
to be in effect (in which case the provisions of Section 5.04 shall be
applicable).
(c) Capital Adequacy. Without limiting the effect of the foregoing
provisions of this Section 5.01 (but without duplication), the Borrower shall
pay directly to any Lender from time to time on request such amounts as such
Lender may reasonably determine to be necessary to compensate such Lender or
its parent or holding company for any costs which it determines are attrib-
utable to the maintenance by such Lender or its parent or holding company (or
any Applicable Lending Office), pursuant to any Governmental Requirement
following any Regulatory Change, of capital in respect of its Commitment, its
Note, its Loans or any interest held by it in any Letter of Credit, such
compensation to include, without limitation, an amount equal to any reduction
of the rate of return on assets or equity of such Lender or its parent or
holding company (or any Applicable Lending Office) to a level below that which
such Lender or its parent or holding company (or any Applicable Lending Office)
could have achieved but for such Governmental Requirement. Such Lender will
notify the Borrower that it is entitled to compensation pursuant to this
Section 5.01(c) as promptly as practicable after it determines to request such
compensation.
(d) Compensation Procedure. Any Lender notifying the Borrower of the
incurrence of additional costs under this Section 5.01 shall in such notice to
the Borrower and the Agent set forth in reasonable detail the basis and amount
of its request for compensation. Determinations and allocations by each Lender
for purposes of this Section 5.01 of the effect of any Regulatory Change
pursuant to Section 5.01(a) or (b), or of the effect of capital maintained
pursuant to Section 5.01(c), on its costs or rate of return of maintaining
Loans or its obligation to make Loans or issue or participate in Letters of
Credit, or on amounts receivable by it in respect of Loans or Letters of
Credit, and of the amounts required to compensate such Lender under this Sec-
tion 5.01, shall be conclusive and binding for all purposes, provided that such
determinations and allocations are made on a reasonable basis. Any request for
additional compensation under this Section 5.01 shall be paid by the Borrower
within thirty (30) days of the receipt by the Borrower of the notice described
in this Section 5.01(d).
Section 5.02 Limitation on Eurodollar Loans. Anything herein to the
contrary notwithstanding, if, on or prior to the determination of any
Eurodollar Rate for any Interest Period:
(i) the Agent determines (which determination shall be conclusive,
absent manifest error) that quotations of interest rates for the
relevant deposits referred to in the definition of "Eurodollar Rate" in
Section 1.02 are not being provided in the relevant amounts or for the
relevant maturities for purposes of determining rates of interest for
Eurodollar Loans as provided herein; or
(ii) the Agent determines (which determination shall be conclusive,
absent manifest error) that the relevant rates of interest referred to
in the definition of "Eurodollar Rate" in Section 1.02 upon the basis of
which the rate of interest for Eurodollar Loans for such Interest Period
is to be determined are not sufficient to adequately cover the cost to
the Lenders of making or maintaining Eurodollar Loans;
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then the Agent shall give the Borrower prompt notice thereof, and so long as
such condition remains in effect, the Lenders shall be under no obligation to
make additional Eurodollar Loans.
Section 5.03 Illegality. Notwithstanding any other provision of this
Agreement, in the event that it becomes unlawful for any Lender or its
Applicable Lending Office to honor its obligation to make or maintain
Eurodollar Loans hereunder, then such Lender shall promptly notify the Borrower
and the Agent thereof and such Lender's obligation to make Eurodollar Loans
shall be suspended until such time as such Lender may again make and maintain
Eurodollar Loans (in which case the provisions of Section 5.04 shall be
applicable).
Section 5.04 Base Rate Loans Pursuant to Sections 5.01, 5.02 and 5.03.
If the obligation of any Lender to make Eurodollar Loans shall be suspended
pursuant to Sections 5.01, 5.02 or 5.03 ("Affected Loans"), all Affected Loans
which would otherwise be made by such Lender shall be made instead as Base Rate
Loans (and, if an event referred to in Section 5.01(b) or Section 5.03 has
occurred and such Lender so requests by notice to the Borrower, all Affected
Loans of such Lender then outstanding shall be automatically converted into
Base Rate Loans on the date specified by such Lender in such notice) and, to
the extent that Affected Loans are so made as (or converted into) Base Rate
Loans, all payments of principal which would otherwise be applied to such
Lender's Affected Loans shall be applied instead to its Base Rate Loans.
Section 5.05 Breakage Compensation. The Borrower shall pay to each
Lender within thirty (30) days of receipt of written request of such Lender
(which request shall set forth, in reasonable detail, the basis for requesting
such amounts and which shall be conclusive and binding for all purposes
provided that such determinations are made on a reasonable basis), such amount
or amounts as shall compensate it for any loss, cost, expense or liability
which such Lender determines are attributable to:
(i) any payment, prepayment or conversion of a Eurodollar Loan
properly made by such Lender or the Borrower for any reason (including,
without limitation, the acceleration of the Loans pursuant to Section
10.02) on a date other than the last day of the Interest Period for such
Loan; or
(ii) any failure by the Borrower for any reason (including but not
limited to, the failure of any of the conditions precedent specified in
Article VI to be satisfied) to borrow, continue or convert a Eurodollar
Loan from such Lender on the date for such borrowing, continuation or
conversion specified in the relevant notice given pursuant to Sec- tion
2.02(c).
Without limiting the effect of the preceding sentence, such compensation shall
include an amount equal to the excess, if any, of (i) the amount of interest
which would have accrued on the principal amount so paid, prepaid or converted
or not borrowed for the period from the date of such payment, prepayment or
conversion or failure to borrow to the last day of the Interest Period for such
Loan (or, in the case of a failure to borrow, the Interest Period for such Loan
which would have commenced on the date specified for such borrowing) at the
applicable rate of interest for such Loan provided for herein over (ii) the
interest component of the amount such Lender would have bid in the London
interbank market for Dollar deposits of leading banks in amounts comparable to
such
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principal amount and with maturities comparable to such period (as reasonably
determined by such Lender).
Section 5.06 Replacement Lenders.
(a) If any Lender has (i) notified the Borrower that it has or will
incur Additional Costs or request compensation under Section 5.01, (ii)
notified the Borrower that the making or maintaining of Eurodollar Loans is or
will be illegal under Section 5.03, or (iii) required the Borrower to make
payments for Taxes under Section 4.06, then the Borrower may, unless such
Lender has notified the Borrower that the circumstances giving rise to such
notice no longer apply, terminate, in whole but not in part, the Commitment of
such Lender (other than the Agent) (the "Terminated Lender") at any time upon
five (5) Business Days' prior written notice to the Terminated Lender and the
Agent (such notice referred to herein as a "Notice of Termination").
(b) In order to effect the termination of the Commitment of the
Terminated Lender, the Borrower shall: (i) obtain an agreement with one or more
Lenders to increase their Commitment or Commitments and/or (ii) request any one
or more other banking institutions to become parties to this Agreement in place
and instead of such Terminated Lender and agree to accept a Commitment or
Commitments; provided, however, that such one or more other banking
institutions are reasonably acceptable to the Agent and become parties by
executing an Assignment (the Lenders or other banking institutions that agree
to accept in whole or in part the Commitment of the Terminated Lender being
referred to herein as the "Replacement Lenders"), such that the aggregate
increased and/or accepted Commitments of the Replacement Lenders under clauses
(i) and (ii) above equal the Commitment of the Terminated Lender.
(c) The Notice of Termination shall include the name of the
Terminated Lender, the date the termination will occur (the "Termination
Date"), and the Replacement Lender or Replacement Lenders to which the
Terminated Lender will assign its Commitment and, if there will be more than
one Replacement Lender, the portion of the Terminated Lender's Commitment to be
assigned to each Replacement Lender.
(d) On the Termination Date, (i) the Terminated Lender shall by
execution and delivery of an Assignment assign its Commitment to the
Replacement Lender or Replacement Lenders (unless otherwise agreed, pro rata,
if there is more than one Replacement Lender, in proportion to the portion of
the Terminated Lender's Commitment to be assigned to each Replacement Lender)
indicated in the Notice of Termination and shall assign to the Replacement
Lender or Replacement Lenders each of its Loans (if any) then outstanding and
participation interests in Letters of Credit (if any) then outstanding pro rata
as aforesaid), (ii) the Borrower will pay the Terminated Lender the Additional
Costs, compensation or Taxes accrued and owing prior to the Termination Date,
(iii) the Terminated Lender shall endorse its Note, payable without recourse,
representation or warranty to the order of the Replacement Lender or
Replacement Lenders (as aforesaid), (iv) the Replacement Lender or Replacement
Lenders shall purchase the Note held by the Terminated Lender (as aforesaid) at
a price equal to the unpaid principal amount thereof plus interest and fees
accrued and unpaid to the Termination Date, and (v) the Replacement Lender or
Replacement Lenders will thereupon (pro rata as aforesaid) succeed to and be
substituted in all respects for the Terminated Lender with like effect as if
becoming a Lender pursuant to the terms of Section 12.06(b), and the
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Terminated Lender will have the rights and benefits of an assignor under
Section 12.06(b). To the extent not in conflict, the terms of Section 12.06(b)
shall supplement the provisions of this Section 5.06(d).
ARTICLE VI
CONDITIONS PRECEDENT
Section 6.01 Initial Funding. The obligation of the Lenders to
make the Initial Funding is subject to: (i) the receipt by the Agent of all
fees payable pursuant to Section 2.04(f) on or before the Closing Date or
otherwise payable under this Agreement, (ii) the receipt by each Lender or any
of its Affiliates of any structuring or other fees payable pursuant to any fee
agreements between QSRD, the Borrower and/or such Lender or Affiliate, and
(iii) the receipt by the Agent of the following documents and satisfaction of
the other conditions provided in this Section 6.01, each of which shall be
satisfactory to the Agent in form and substance:
(a) A certificate of the Secretary or an Assistant Secretary of the
Borrower setting forth (i) resolutions of its board of directors with respect
to the authorization of the Borrower to execute and deliver the Loan Documents
to which it is a party and to enter into the transactions contemplated in the
Loan Documents, (ii) the officers of the Borrower (y) who are authorized to
sign the Loan Documents to which Borrower is a party and (z) who will, until
replaced by another officer or officers duly authorized for that purpose, act
as its representative for the purposes of signing Loan Documents and giving
notices and other communications in connection with this Agreement, the other
Loan Documents and the transactions contemplated hereby, (iii) specimen
signatures of the authorized officers, and (iv) the articles or certificate of
incorporation and bylaws of the Borrower, certified as being true and complete.
The Agent and the Lenders may conclusively rely on such certificate until the
Agent receives notice in writing from the Borrower to the contrary.
(b) A certificate of the Secretary or an Assistant Secretary of QSRD
and each Subsidiary Guarantor setting forth (i) resolutions of its board of
directors with respect to the authorization of such Person to execute and
deliver the Loan Documents to which it is a party and to enter into the
transactions contemplated in the Loan Documents, (ii) its officers (y) who are
authorized to sign the Loan Documents to which it is a party and (z) who will,
until replaced by another officer or officers duly authorized for that purpose,
act as its representative for the purposes of signing Loan Documents and giving
notices and other communications in connection with this Agreement, the other
Loan Documents and the transactions contemplated hereby, (iii) specimen
signatures of the authorized officers, and (iv) the articles or certificate of
incorporation and bylaws of such Person, certified as being true and complete.
The Agent and the Lenders may conclusively rely on such certificate until the
Agent receives notice in writing from the Borrower to the contrary.
(c) Certificates of the appropriate state agencies with respect to
the existence, qualification and good standing of QSRD, the Borrower and each
Subsidiary Guarantor.
(d) A compliance certificate which shall be substantially in the form
of Exhibit C, duly and properly executed by a Responsible Officer and dated as
of the date of the Initial Funding.
(e) The Notes, duly completed and executed.
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(f) The Security Instruments described on Exhibit D duly completed
and executed in sufficient number of counterparts for recording, if necessary.
(g) The following opinions:
(i) an opinion of Haynes and Boone, L.L.P., special counsel to the
Borrower, in form and substance reasonably satisfactory to the Agent.
(ii) an opinion of local counsel in each of the following
jurisdictions: Louisiana, Oklahoma, Mississippi, Kansas and Wyoming, in
each case in form and substance satisfactory to the Agent.
(h) A certificate of insurance coverage of QSRD evidencing that QSRD
and its Subsidiaries are carrying insurance in accordance with Section 7.19
hereof.
(i) The Agent and the Lenders shall be reasonably satisfied with the
status of title and the environmental condition of the Properties of the
Borrower and the Subsidiary Guarantors being acquired pursuant to the Purchase
and Sale Agreement.
(j) Multiple originals of the Security Instruments and accompanying
financing statements covering the Mortgaged Property for filing and recordation
in the appropriate offices to establish and perfect the Liens created thereby;
and the Agent shall be reasonably satisfied that, upon such filing and
recordation, the Security Instruments create valid and perfected, first
priority Liens on not less than 95% of each of proved producing and the total
proved SEC Value of the Oil and Gas Properties included in the Initial Reserve
Report.
(k) The Agent shall have been furnished with appropriate UCC search
certificates reflecting no prior Liens except those contemplated by Section
9.02.
(l) The Initial Reserve Reports.
(m) All holders of the ECT Subordinated Debt shall have executed and
delivered to the Agent a consent, (i) which consents to the increase in the
amount of Indebtedness contemplated hereby over the Prior Credit Agreement,
(ii) which agrees to subordinate the Liens securing the ECT Subordinated Debt
to the Liens securing the full amount of the Indebtedness contemplated hereby,
(iii) which consents to the full amount of the Bridge Loans, and (iv) which
addresses such other issues as the Agent may reasonably request.
(n) A certificate of a Responsible Officer certifying and
representing (i) that the Borrower is consummating the Acquisition and that all
conditions precedent to the closing of the transactions contemplated thereby
have been either satisfied or waived as of the Closing Date, and (ii) that
attached thereto are true and complete copies of all material documentation
relating to the Acquisition, including the Purchase and Sale Agreement, the
Preliminary Closing Statement referred to in Section 2.3(c) thereof and notices
of title defect; and the Agent shall be reasonably satisfied with the form and
substance of such documents.
(o) A certificate of a Responsible Officer certifying and
representing that QSRD and the Borrower has executed and delivered the Bridge
Loan Documents and that all conditions precedent
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to the closing of the transactions contemplated thereby have been either
satisfied or waived as of the Closing Date.
(p) A proposal outlining the proposed capitalization of QSRD prior,
and after giving effect, to the currently contemplated Hi-Yield Offering and
Equity Offering, and such proposed capital structure shall be reasonably
satisfactory to the Agent.
(q) Such other documents as the Agent or any Lender or special
counsel to the Agent may reasonably request.
Section 6.02 Initial and Subsequent Loans. The obligation of the
Lenders to make Loans to the Borrower upon the occasion of each borrowing
hereunder and to issue, renew, extend or reissue Letters of Credit for the
account of the Borrower (including the Initial Funding) is subject to the
further conditions precedent that, as of the date of such Loans and after
giving effect thereto: (a) no Default shall have occurred and be continuing;
(b) no Material Adverse Effect shall have occurred; and (c) the representations
and warranties made by QSRD and its Subsidiaries in Article VII and in the Loan
Documents shall be true on and as of the date of the making of such Loans or
issuance, renewal, extension or reissuance of a Letter of Credit with the same
force and effect as if made on and as of such date and following such new
borrowing or issuance, renewal, extension or reissuance, except to the extent
such representations and warranties are expressly limited to an earlier date or
the Majority Lenders may expressly consent in writing to the contrary.
Section 6.03 Conditions Relating to Letters of Credit. In addition to
the satisfaction of all other conditions precedent set forth in this Article
VI, the issuance, renewal, extension or reissuance of the Letters of Credit
referred to in Section 2.01(b) hereof is subject to the following conditions
precedent:
(a) At least three (3) Business Days prior to the date of the
issuance, renewal, extension or reissuance of each Letter of Credit, the Agent
shall have received a written request for a Letter of Credit.
(b) Each of the Letters of Credit shall (i) be issued by the Agent,
(ii) contain such terms and provisions as are reasonably required by the Agent,
(iii) be for the account of the Borrower and (iv) expire not later than the
earlier of one (1) year from the date of the issuance or renewal thereof or the
Revolving Credit Termination Date.
(c) The Borrower shall have duly and validly executed and delivered
to the Agent a Letter of Credit Agreement pertaining to the Letter of Credit.
ARTICLE VII
REPRESENTATIONS AND WARRANTIES
QSRD and the Borrower represent and warrant to the Agent and the Lenders
that (each representation and warranty herein is given as of the Closing Date
and shall be deemed repeated and reaffirmed on the dates of each borrowing and
issuance, renewal, extension or reissuance of a Letter of Credit as provided in
Section 6.02, except that the representations contained in Section 7.02 shall
be deemed to be made with respect to the most recent financial statements
delivered to the Agent pursuant to Section 8.01):
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Section 7.01 Corporate Existence. Each of QSRD, the Borrower and its
Subsidiaries: (i) is a corporation duly organized, legally existing and in good
standing under the laws of the jurisdiction of its incorporation; (ii) has all
requisite corporate power, and has all material governmental licenses,
authorizations, consents and approvals necessary to own its assets and carry on
its business as now being or as proposed to be conducted; and (iii) is
qualified to do business in all jurisdictions in which the nature of the
business conducted by it makes such qualification necessary and where failure
so to qualify would have a Material Adverse Effect.
Section 7.02 Financial Condition.
(a) The audited consolidated balance sheet of QSRD and its
Consolidated Subsidiaries, as at June 30, 1997 and the related consolidated
statement of operations, stockholders' equity and cash flow of QSRD and its
Consolidated Subsidiaries, for the fiscal year ended on said date, with the
audit report thereon of Ernst & Young L.L.P. heretofore furnished to each of
the Lenders, and the unaudited consolidated balance sheet of QSRD and its
Consolidated Subsidiaries as at December 31, 1997 and their related
consolidated statements of operations, stockholders' equity and cash flow of
QSRD and its Consolidated Subsidiaries for the 6-month period ended on such
date heretofore furnished to the Lenders are complete and correct in all
material respects and fairly present the consolidated financial condition of
QSRD and its Consolidated Subsidiaries as at said dates and the results of its
operations for the fiscal year and the 6-month period ending on said dates, all
in accordance with GAAP, as applied on a consistent basis (subject, in the case
of the interim financial statements, to normal year-end adjustments).
(b) Neither QSRD nor any of its Subsidiaries has on the Closing Date
any material Debt, contingent liabilities, liabilities for taxes, unusual
forward or long-term commitments or unrealized or anticipated losses from any
unfavorable commitments, except as referred to or reflected or provided for in
the Financial Statements or in Schedule 7.02 which could reasonably be expected
to have a Material Adverse Effect. Since June 30, 1997, there has been no
change or event having a Material Adverse Effect. Since June 30, 1997, neither
the business nor the Properties of QSRD or any of its Subsidiaries have been
materially and adversely affected as a result of any fire, explosion,
earthquake, flood, drought, windstorm, accident, strike or other labor
disturbance, embargo, requisition or taking of Property or cancellation of
contracts, permits or concessions by any Governmental Authority, riot,
activities of armed forces or acts of God or of any public enemy.
Section 7.03 Litigation. Except as disclosed to the Lenders in
Schedule 7.03 hereto, at the Closing Date there is no litigation, legal,
administrative or arbitral proceeding, investigation or other action of any
nature pending or, to the knowledge of QSRD and the Borrower threatened against
or affecting QSRD or any of its Subsidiaries which involves the possibility of
any judgment or liability against QSRD or any of its Subsidiaries not fully
covered by insurance (except for normal deductibles), and which would have a
Material Adverse Effect.
Section 7.04 No Breach. Neither the execution and delivery of the Loan
Documents nor compliance with the terms and provisions hereof will conflict
with or result in a breach of, or require any consent which has not been
obtained as of the Closing Date or which if not obtained would have a Material
Adverse Effect under, the respective charter or by-laws of QSRD or any of its
Subsidiaries, including the Borrower, or any material Governmental Requirement,
agreement or instrument to which QSRD or any of its Subsidiaries, including the
Borrower, is a party or by which it is bound or to which it or its Properties
are subject, or constitute a default under any such
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agreement or instrument, or result in the creation or imposition of any Lien
upon any of the revenues or assets of QSRD or any of its Subsidiaries,
including the Borrower, pursuant to the terms of any such agreement or
instrument other than the Liens created by the Loan Documents.
Section 7.05 Authority. QSRD and each of its Subsidiaries, including
the Borrower, have all necessary corporate power and authority to execute,
deliver and perform its obligations under the Loan Documents to which it is a
party; and the execution, delivery and performance by QSRD and each of its
Subsidiaries, including the Borrower, of the Loan Documents to which it is a
party have been duly authorized by all necessary corporate action on its part;
and the Loan Documents constitute the legal, valid and binding obligations of
each such Person, enforceable against it in accordance with its terms, subject
to applicable bankruptcy, insolvency or similar laws and general principles of
equity.
Section 7.06 Approvals. No authorizations, approvals or consents of,
and no filings or registrations with, any Governmental Authority are necessary
for the execution, delivery or performance by QSRD or any of its Subsidiaries,
including the Borrower, of the Loan Documents or for the validity or enforce-
ability thereof, except for the recording and filing of the Security
Instruments as required by this Agreement.
Section 7.07 Use of Loans. The proceeds of the Loans shall be used for
refinancing certain existing Debt, general working capital purposes, including
the Acquisition, and the further acquisition and development of Oil and Gas
Properties and the making of intercompany loans, investments and dividends to
the extent permitted by this Agreement. The Borrower is not engaged
principally, or as one of its important activities, in the business of
extending credit for the purpose, whether immediate, incidental or ultimate, of
buying or carrying margin stock (within the meaning of Regulation G, T, U or X
of the Board of Governors of the Federal Reserve System) and no part of the
proceeds of any Loan or Letter of Credit hereunder will be used to buy or carry
any margin stock.
Section 7.08 ERISA.
(a) QSRD and its ERISA Affiliates have complied in all material
respects with ERISA and, where applicable, the Code regarding each Plan.
(b) Each Plan is, and has been, maintained in substantial compliance
with ERISA and, where applicable, the Code.
(c) To the best knowledge of QSRD, no act, omission or transaction
has occurred which could result in imposition on QSRD or any of its ERISA
Affiliates (whether directly or indirectly) of (i) either a civil penalty
assessed pursuant to section 502(c), (i) or (l) of ERISA or a tax imposed
pursuant to Chapter 43 of Subtitle D of the Code or (ii) breach of fiduciary
duty liability damages under section 409 of ERISA.
(d) No Plan (other than a defined contribution plan) or any trust
created under any such Plan has been terminated since September 2, 1974. No
liability to the PBGC (other than for the payment of current premiums which are
not past due) by QSRD or any of its ERISA Affiliates has been or is expected by
QSRD to be incurred with respect to any Plan. No ERISA Event with respect to
any Plan has occurred.
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(e) Full payment when due has been made of all amounts which QSRD
and/or its ERISA Affiliates is required under the terms of each Plan or
applicable law to have paid as contributions to such Plan, and no accumulated
funding deficiency (as defined in section 302 of ERISA and section 412 of the
Code), whether or not waived, exists with respect to any Plan.
(f) The actuarial present value of the benefit liabilities under each
Plan which is subject to Title IV of ERISA does not, as of the end of QSRD's
most recently ended fiscal year, exceed the current value of the assets
(computed on a plan termination basis in accordance with Title IV of ERISA) of
such Plan allocable to such benefit liabilities. The term "actuarial present
value of the benefit liabilities" shall have the meaning specified in section
4041 of ERISA.
(g) None of QSRD or its ERISA Affiliates sponsors, maintains, or
contributes to an employee welfare benefit plan, as defined in section 3(1) of
ERISA, including, without limitation, any such plan maintained to provide
benefits to former employees of such entities, that may not be terminated by
QSRD or any of its ERISA Affiliates in its sole discretion at any time without
any material liability.
(h) None of QSRD or its ERISA Affiliates sponsors, maintains or
contributes to, or has at any time in the preceding six calendar years,
sponsored, maintained or contributed to, any Multiemployer Plan.
(i) None of QSRD or its ERISA Affiliates is required to provide
security under section 401(a)(29) of the Code due to a Plan amendment that
results in an increase in current liability for the Plan.
Section 7.09 Taxes. Each of QSRD and its Subsidiaries, including the
Borrower, has filed all required United States Federal income tax returns that
are currently due and, to the best of QSRD's knowledge, all other tax returns
which are required to be filed by them and have paid all material taxes due
pursuant to such returns or pursuant to any assessment received by QSRD or any
of its Subsidiaries, including the Borrower, except for those being contested
in good faith by appropriate proceedings and for which adequate reserves have
been provided in accordance with GAAP. The charges, accruals and reserves on
the books of QSRD and its Subsidiaries in respect of taxes and other
governmental charges are, in the opinion of QSRD, adequate. No tax Lien has
been filed and, to the knowledge of QSRD, no claim is being asserted with
respect to any such tax, fee or other charge which could reasonably be expected
to have a Material Adverse Effect.
Section 7.10 Titles, etc.
(a) Except as set out in Schedule 7.10, each of QSRD and its
Subsidiaries has good and defensible title to its material (individually or in
the aggregate) Properties, free and clear of all Liens except Liens permitted
by Section 9.02. Except as set forth in Schedule 7.10, after giving full effect
to the Excepted Liens, QSRD and its Subsidiaries, as applicable, owns the net
interests in production attributable to the lands and leases reflected in the
most recently delivered Reserve Report and the ownership of such Properties
shall not in any material respect obligate such Person to bear the costs and
expenses relating to the maintenance, development and operations of each such
Property in an amount in excess of the working interest of each Property set
forth in the most recently delivered Reserve Report. All information contained
in the most recently delivered Reserve Report is true and correct in all
material respects as of the date thereof.
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(b) All material leases and agreements necessary for the conduct of
the business of QSRD and its Subsidiaries are valid and subsisting and are in
full force and effect. There exists no default or event or circumstance which
with the giving of notice or the passage of time or both would give rise to a
default under any such lease or leases which would affect in any material
respect the conduct of the business of QSRD and its Subsidiaries taken as a
whole or which would have a Material Adverse Effect.
(c) The rights, properties and other assets presently owned, leased
or licensed by QSRD and its Subsidiaries including, without limitation, all
easements and rights of way, include all rights, Properties and other assets
reasonably necessary to permit QSRD and its Subsidiaries to conduct their
business in all material respects in the same manner as its business has been
conducted prior to the Closing Date.
(d) All of the assets and Properties of QSRD and its Subsidiaries
which are reasonably necessary for the operation of its business are in good
working condition and are maintained in accordance with prudent business
standards.
Section 7.11 No Material Misstatements. No written information,
statement, exhibit, certificate, document or report furnished to the Agent and
the Lenders (or any of them) by QSRD or any of its Subsidiaries in connection
with the negotiation of this Agreement contained any material misstatement of
fact or omitted to state a material fact or any fact necessary to make the
statement contained therein not materially misleading in the light of the
circumstances in which made. There is no fact known to QSRD which has a
Material Adverse Effect or in the future is reasonably likely to have (so far
as QSRD can now foresee) a Material Adverse Effect and which has not been set
forth in this Agreement or the other documents, certificates and statements
furnished to the Agent by or on behalf of QSRD or any of its Subsidiaries prior
to, or on, the Closing Date in connection with the transactions contemplated
hereby.
Section 7.12 Investment Company Act. Neither QSRD nor any of its
Subsidiaries is an "investment company" or a company "controlled" by an
"investment company," within the meaning of the Investment Company Act of 1940,
as amended.
Section 7.13 Public Utility Holding Company Act. QSRD and its
Subsidiaries are not subject to regulation, or are exempt from regulation, as a
"holding company," or a "subsidiary company" of a "holding company," or an
"affiliate" of a "holding company" or of a "subsidiary company" of a "holding
company," or a "public utility" within the meaning of the Public Utility
Holding Company Act of 1935, as amended.
Section 7.14 Subsidiaries and Partnerships. Except as set forth on
Schedule 7.14, QSRD has no Subsidiaries and has no interest in any
partnerships; and the Borrower has no Subsidiaries and has no interest in any
partnerships. Schedule 7.14 sets forth the principal place of business of each
such Subsidiary and the ownership interest of QSRD and the Borrower in such
Subsidiary.
Section 7.15 Location of Business and Offices. Each of QSRD and the
Borrower's principal place of business and chief executive offices are located
at the address stated on the signature page of this Agreement. The principal
place of business and chief executive office of each Subsidiary are located at
the addresses stated on Schedule 7.14.
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Section 7.16 Defaults. Neither QSRD nor any of its Subsidiaries is in
default nor has any event or circumstance occurred which, but for the
expiration of any applicable grace period or the giving of notice, or both,
would constitute a default under any Material Agreement to which any such
Person is a party or by which any such Person is bound which default would have
a Material Adverse Effect. No Default hereunder has occurred and is
continuing.
Section 7.17 Environmental Matters. Except (i) as provided in Schedule
7.17 or (ii) as would not have a Material Adverse Effect (or with respect to
(c), (d) and (e) below, where the failure to take such actions would not have a
Material Adverse Effect):
(a) Neither any Property of QSRD or any of its Subsidiaries nor the
operations conducted thereon violate any order or requirement of any court or
Governmental Authority or any Environmental Laws.
(b) Without limitation of clause (a) above, no Property of QSRD or
any of its Subsidiaries nor the operations currently conducted thereon or, to
the best knowledge of QSRD, by any prior owner or operator of such Property or
operation, are in violation of or subject to any existing, pending or (to the
knowledge of QSRD) threatened action, suit, investigation, inquiry or proceed-
ing by or before any court or Governmental Authority or to any remedial
obligations under Environmental Laws.
(c) All notices, permits, licenses or similar authorizations, if any,
required to be obtained or filed in connection with the operation or use of any
and all Property of QSRD and each of its Subsidiaries, including without
limitation past or present treatment, storage, disposal or release of a
hazardous substance or solid waste into the environment, have been duly
obtained or filed, and QSRD and each of its Subsidiaries are in compliance with
the terms and conditions of all such notices, permits, licenses and similar
authorizations.
(d) All hazardous substances, solid waste, and oil and gas
exploration and production wastes, if any, generated at any and all Property of
QSRD or any of its Subsidiaries have in the past been transported, treated and
disposed of in accordance with Environmental Laws and so as not to pose an
imminent and substantial endangerment to public health or welfare or the
environment, and, to the best knowledge of QSRD, all such transport carriers
and treatment and disposal facilities have been and are operating in compliance
with Environmental Laws and so as not to pose an imminent and substantial
endangerment to public health or welfare or the environment, and are not the
subject of any existing, pending or (to the knowledge of QSRD) threatened
action, investigation or inquiry by any Governmental Authority in connection
with any Environmental Laws.
(e) QSRD has taken all steps reasonably necessary to determine and
has determined that no hazardous substances, solid waste, or oil and gas
exploration and production wastes, have been disposed of or otherwise released
and there has been no threatened release of any hazardous substances on or to
any Property of QSRD or any of its Subsidiaries except in compliance with
Environmental Laws and so as not to pose an imminent and substantial
endangerment to public health or welfare or the environment.
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(f) To the extent applicable, all Property of QSRD and each of its
Subsidiaries currently satisfies all design, operation, and equipment
requirements imposed by OPA or scheduled as of the Closing Date to be imposed
by OPA during the term of this Agreement, and QSRD does not have any reason to
believe that such Property, to the extent subject to OPA, will not be able to
maintain compliance with the OPA requirements during the term of this
Agreement.
(g) Neither QSRD nor any of its Subsidiaries has any known contingent
liability in connection with any release or threatened release of any oil,
hazardous substance or solid waste into the environment.
Section 7.18 Compliance with the Law. Neither QSRD nor any of its
Subsidiaries has violated any Governmental Requirement or failed to obtain any
license, permit, franchise or other governmental authorization necessary for
the ownership of any of its Properties or the conduct of its business, which
violation or failure would have (in the event such violation or failure were
asserted by any Person through appropriate action) a Material Adverse Effect.
Except for such acts or failures to act as would not have a Material Adverse
Effect, the Oil and Gas Properties (and Properties unitized therewith) have
been maintained, operated and developed in a good and workmanlike manner and in
substantial conformity with all applicable laws and all rules, regulations and
orders of all duly constituted authorities having jurisdiction and in
substantial conformity with the provisions of all leases, subleases or other
contracts comprising a part of the Hydrocarbon Interests and other contracts
and agreements forming a part of the Oil and Gas Properties; specifically in
this connection, (i) after the Closing Date, no Oil and Gas Property is subject
to having allowable production reduced below the full and regular allowable
(including the maximum permissible tolerance) because of any overproduction
(whether or not the same was permissible at the time) prior to the Closing Date
and (ii) none of the wells comprising a part of the Oil and Gas Properties (or
properties unitized therewith) are deviated from the vertical more than the
maximum permitted by applicable laws, regulations, rules and orders, and such
wells are, in fact, bottomed under and are producing from, and the well bores
are wholly within, the Oil and Gas Properties (or in the case of wells located
on Properties unitized therewith, such unitized Properties).
Section 7.19 Insurance. Schedule 7.19 attached hereto contains an
accurate and complete description of all material policies of fire, liability,
workmen's compensation and other forms of insurance owned or held by QSRD and
each of its Subsidiaries. All such policies are in full force and effect, all
premiums with respect thereto covering all periods up to and including the
Closing Date have been paid, and no notice of cancellation or termination has
been received with respect to any such policy. Such policies are sufficient
for substantial compliance with all requirements of law and of all agreements
to which QSRD or any of its Subsidiaries is a party; are valid, outstanding and
enforceable policies; provide adequate insurance coverage in at least such
amounts and against at least such risks (but including in any event public
liability) as are usually insured against in the same general area by similarly
situated companies engaged in the same or a similar business for the assets and
operations of QSRD and each of its Subsidiaries; will remain in full force and
effect through the respective dates set forth in Schedule 7.19 without the
payment of additional premiums; and will not in any way be affected by, or
terminate or lapse by reason of, the transactions contemplated by this Agree-
ment. Schedule 7.19 identifies all material risks, if any, which QSRD and its
Subsidiaries and their respective Board of Directors or officers have
designated as being self insured. Neither QSRD nor any of its Subsidiaries has
been refused any insurance with respect to its assets or operations, nor has
its coverage been limited below usual and customary policy limits, by an
insurance carrier
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to which it has applied for any such insurance or with which it has carried
insurance during the last three years.
Section 7.20 Risk Management Agreements. Schedule 7.20 sets forth, as
of the Closing Date, a true and complete list of all Risk Management Agreements
(including commodity price swap agreements, forward agreements or contracts of
sale which provide for prepayment for deferred shipment or delivery of oil, gas
or other commodities) of QSRD and each of its Subsidiaries, the material terms
thereof (including the type, term, effective date, termination date and
notional amounts or volumes), the net mark to market value thereof, all credit
support agreements relating thereto (including any margin required or
supplied), and the counterparty to each such agreement.
Section 7.21 Restriction on Liens. Except as set forth on Schedule
7.21, neither QSRD nor any of its Subsidiaries (other than Non-Recourse
Subsidiaries) is a party to any agreement or arrangement or subject to any
order, judgment, writ or decree, which either restricts or purports to restrict
its ability to grant Liens to other Persons on or in respect of their
respective assets or Properties; provided that such restrictions do not impair
the ability of QSRD or any of its Subsidiaries (other than Non-Recourse
Subsidiaries) to grant Liens to the Agent and the Lenders.
Section 7.22 Gas Imbalances. As of the Closing Date, except as set
forth on Schedule 7.22 or on the most recent certificate delivered pursuant to
Section 8.07(c), on a net basis there are no gas imbalances, take or pay or
other prepayments with respect to QSRD and its Subsidiaries' Oil and Gas
Properties which would require such Person to either make cash settlements for
such production or deliver Hydrocarbons produced from such Oil and Gas
Properties at some future time without then or thereafter receiving full
payment therefor exceeding five percent (5%) of the then current monthly
production of gas from the Oil and Gas Properties of QSRD and its Subsidiaries
in the aggregate.
Section 7.23 Material Agreements.
(a) Set forth on Schedule 7.23 hereto is a complete and correct list
of all Material Agreements in effect or to be in effect as of the Closing Date
(other than Risk Management Agreements) providing for, evidencing, securing or
otherwise relating to any Debt of QSRD or any of its Subsidiaries, and such
list correctly sets forth the names of the debtor or lessee and creditor or
lessor with respect to the Debt or lease obligations outstanding or to be
outstanding and the Property subject to any Lien securing such Debt or lease
obligation. Also set forth on Schedule 7.23 hereto is a complete and correct
list of all material agreements and other instruments of QSRD and its Subsid-
iaries relating to the purchase, transportation by pipeline, gas processing,
marketing, sale and supply of natural gas and other Hydrocarbons, but in any
event, any such agreement or other instrument that will account for more than
20% of the sales of QSRD and its Subsidiaries during QSRD's current fiscal
year.
(b) QSRD has delivered to the Agent true and complete copies of each
of the agreements evidencing the Subordinated Debt and each Material Agreement,
as each may have been amended. QSRD has heretofore delivered to the Agent a
complete and correct copy of the Purchase and Sale Agreement and all other
relevant documents for the Acquisition, including any modifications or supple-
ments thereto, as in effect on the Closing Date. The Borrower is not, and to
the best of the Borrower's knowledge, no other party to the Purchase and Sale
Agreement is, in material default of the terms thereof and such agreement is in
full force and effect. The representations and warranties of the Borrower
contained therein are true and correct in all material respects. The Borrower
has
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delivered to the Agent a copy of each notice of title defect referred to in
Section 3.3 of the Purchase and Sale Agreement, with a description of what
action it proposes to take with respect thereto, if any.
Section 7.24 Solvency. QSRD and its Consolidated Subsidiaries, taken
as a whole, (i) are not insolvent as of the date hereof and will not be
rendered insolvent as a result of the transactions contemplated by this
Agreement and the other Loan Documents, (ii) are not engaged in business or a
transaction, or about to engage in a business or a transaction, for which any
Property or assets remaining with QSRD and its Consolidated Subsidiaries
constitutes unreasonably small capital, and (iii) do not intend to incur, or
believe any of them will incur, debts that will be beyond their ability to pay
as such debts mature.
ARTICLE VIII
AFFIRMATIVE COVENANTS
QSRD and the Borrower covenant and agree that, so long as any of the
Commitments are in effect and until payment in full of all Loans hereunder, all
interest thereon and all other amounts payable by the Borrower hereunder and
any Obligor under any Loan Document:
Section 8.01 Financial Statements. QSRD shall deliver, or shall cause
to be delivered, to the Agent with sufficient copies of each for the Lenders:
(a) As soon as available and in any event within 120 days after the
end of each fiscal year of QSRD, the audited consolidated statements of
operations, stockholders' equity, changes in financial position and cash flow
of QSRD and its Consolidated Subsidiaries for such fiscal year, and the related
consolidated and consolidating balance sheets of QSRD and its Consolidated
Subsidiaries as at the end of such fiscal year, and setting forth in each case
in comparative form the corresponding figures for the preceding fiscal year,
and accompanied by the related audit report of independent public accountants
of recognized national standing acceptable to the Agent which audit report
shall state that said financial statements fairly present, in all material
respects, the consolidated financial condition and results of operations of
QSRD and its Consolidated Subsidiaries as at the end of, and for, such fiscal
year and that such financial statements have been prepared in accordance with
GAAP except for such changes in such principles with which the independent
public accountants shall have concurred and such audit report shall be
consistent with the standard audit report format promulgated by the relevant
regulatory authorities governing such reports and shall not contain a "going
concern" or like qualification or exception.
(b) As soon as available and in any event within 60 days after the
end of each of the first three fiscal quarterly periods of each fiscal year of
QSRD, consolidated statements of operations, stockholders' equity, changes in
financial position and cash flow of QSRD and its Consolidated Subsidiaries for
such period and for the period from the beginning of the respective fiscal year
to the end of such period, and the related consolidated balance sheets as at
the end of such period, and setting forth in each case in comparative form the
corresponding figures for the corresponding period in the preceding fiscal
year, accompanied by the certificate of a Responsible Officer, which
certificate shall state that said financial statements fairly present the
consolidated financial condition and results of operations of QSRD and its
Consolidated Subsidiaries in accordance with GAAP, as at the end of, and for,
such period (subject to normal year-end audit adjustments).
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(c) Promptly after QSRD or the Borrower knows that any Default or
Material Adverse Effect has occurred, a notice of such Default or Material
Adverse Effect, describing the same in reasonable detail and the action QSRD or
the Borrower proposes to take with respect thereto.
(d) Promptly upon receipt thereof, a copy of each other material
report or letter submitted to QSRD by its independent accountants in connection
with any annual, interim or special audit made by them of the books of QSRD and
its Consolidated Subsidiaries and a copy of any response by QSRD or its Board
of Directors to such letter or report.
(e) Promptly upon its becoming available, each financial statement,
report, notice or proxy statement sent by QSRD to stockholders generally and
each regular or periodic report and any registration statement, prospectus or
written communication (other than transmittal letters) in respect thereof filed
by QSRD with or received by QSRD in connection therewith from any securities
exchange or the SEC.
(f) From time to time such other information regarding the business,
affairs or financial condition of QSRD or any of its Subsidiaries, including
the Borrower (including, without limitation, any Plan or Multiemployer Plan and
any reports or other information required to be filed under ERISA), as any
Lender or the Agent may reasonably request.
(g) As soon as available and in any event within ten (10) Business
Days after each Quarterly Date, a report, in form and substance satisfactory to
the Agent, setting forth as of the last Business Day of such Quarterly Date, a
summary of its hedging positions under all Risk Management Agreements
(including commodity price swap agreements, forward agreements or contracts of
sale which provide for prepayment for deferred shipment or delivery of oil, gas
or other commodities) of QSRD and each of its Subsidiaries, including the type,
term, effective date, termination date and notional principal amounts or
volumes, the hedged price(s), interest rate(s) or exchange rates(s), as
applicable, and any new credit support agreements relating thereto.
(h) Within two (2) Business Days following receipt by QSRD or the
Borrower, a copy of the notice from JEDI of its intent to sell, or otherwise
dispose of, to any Person its interests in the Series A Preferred Stock of QSRD
if such sale or disposition reduces the aggregate remaining shares of such
class of Preferred Stock owned by JEDI or its Affiliates below 75% of the total
shares of such class of Preferred Stock owned by JEDI as of the Closing Date.
(i) Within forty-five (45) days following the end of each calendar
month, a summary of the operating and financial results of QSRD and its
Subsidiaries (other than Non-Recourse Subsidiaries) for such preceding calendar
month, together with management's discussion and analysis of such results, all
of which shall be in form and substance reasonably satisfactory to the Agent.
(j) Promptly after QSRD knows that any "mandatory redemption event"
in respect of any class of Preferred Stock has occurred, a notice thereof,
describing the same in reasonable detail and the action QSRD proposes to take
with respect thereto; and if any mandatory redemption notices are given or
received in respect of any class of Preferred Stock, a copy thereof.
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(k) If the event described in Section 2.5(a)(ii) of the Subordinated
Revolving Credit Loan Agreement described in clause (i) of the definition of
ECT Subordinated Debt shall occur, the Borrower shall promptly give the Agent
written notice thereof.
(l) Within five (5) Business Days following its receipt, any material
notices or other material communications either delivered or received pursuant
to the Purchase and Sale Agreement, including, without limitation, the Final
Closing Statement referred to in Section 2.5 thereof.
(m) With the delivery of the June 30th Reserve Report, the Borrower
shall also provide projections and budgets of QSRD and its Subsidiaries for the
forthcoming fiscal year, which shall include, on a monthly basis for the
forthcoming fiscal year, an operating and capital budget, income and cash flow
statements and balance sheets, in each case together with the analysis and
discussion of management of such projections, all certified by a Responsible
Officer of the Borrower as being prepared based on the assumptions and
assessments believed by the Borrower to be reasonable and appropriate both as
of the date of such projections and as of the date of submission thereof to the
Agent.
QSRD and the Borrower will furnish to the Agent, at the time QSRD
furnishes each set of financial statements pursuant to paragraph (a) or (b)
above, a certificate substantially in the form of Exhibit C hereto executed by
a Responsible Officer (i) certifying as to the matters set forth therein and
stating that no Default has occurred and is continuing (or, if any Default has
occurred and is continuing, describing the same in reasonable detail), and (ii)
setting forth in reasonable detail the computations necessary to determine
whether QSRD and the Borrower are in compliance with Sections 9.12, 9.13 and
9.14 as of the end of the respective fiscal quarter or fiscal year.
Section 8.02 Litigation. QSRD shall promptly give to the Agent notice
of all legal or arbitral proceedings, and of all proceedings before any
Governmental Authority affecting QSRD or any of its Subsidiaries, including the
Borrower, except proceedings which, if adversely determined, could not
reasonably be expected to have a Material Adverse Effect. QSRD will, and will
cause each of its Subsidiaries to, promptly notify the Agent and each of the
Lenders of any claim, judgment, Lien or other encumbrance affecting any
Property of QSRD or any of its Subsidiaries if the value of the claim,
judgment, Lien or other encumbrance affecting such Property shall exceed
$250,000.
Section 8.03 Maintenance, Etc.
(a) The Borrower and QSRD shall, and QSRD shall cause each of its
Subsidiaries to: preserve and maintain its corporate existence and all of its
material rights, privileges and franchises (except for mergers or dissolutions
upon transfer of all or substantially all assets permitted pursuant to Section
9.08); keep books of record and account in which full, true and correct entries
will be made of all dealings or transactions in relation to its business and
activities in accordance with GAAP; comply with all Governmental Requirements
if failure to comply with such requirements will have a Material Adverse
Effect; pay and discharge all taxes, assessments and governmental charges or
levies imposed on it or on its income or profits or on any of its Property
prior to the date on which penalties attach thereto, except for any such tax,
assessment, charge or levy the payment of which is being contested in good
faith and by proper proceedings and against which adequate reserves are being
maintained; upon reasonable notice, permit representatives of the Agent or any
Lender, during normal business hours, to examine, copy and make extracts from
its books and
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records, to inspect its Properties, and to discuss its business and affairs
with its officers, all to the extent reasonably requested by such Lender or the
Agent (as the case may be); and keep, or cause to be kept, insured by
financially sound and reputable insurers all Property of a character usually
insured by Persons engaged in the same or similar business similarly situated
against loss or damage of the kinds and in the amounts customarily insured
against by such Persons and carry such other insurance as is usually carried by
such Persons including, without limitation, environmental risk insurance to the
extent reasonably available.
(b) Contemporaneously with the delivery of the financial statements
required by Section 8.01(a) to be delivered for each year, QSRD will furnish or
cause to be furnished to the Agent and the Lenders a certificate of insurance
coverage from its insurer(s) in form and substance satisfactory to the Agent
and, if requested, will furnish the Agent and the Lenders copies of the
applicable policies.
(c) The Borrower and QSRD shall, and shall cause each of its
Subsidiaries to, operate its Properties or cause such Properties to be operated
in a careful and efficient manner in accordance with the usual and customary
practices of the industry and in substantial compliance with all applicable
contracts and agreements and in compliance in all material respects with all
Governmental Requirements.
(d) The Borrower and QSRD shall, and shall cause each of its
Subsidiaries to, at its own expense, do or cause to be done all things
reasonably necessary to preserve and keep in good repair, working order and
efficiency all of its Oil and Gas Properties and other material Properties
including, without limitation, all equipment, machinery and facilities, and
from time to time will make all the reasonably necessary repairs, renewals and
replacements so that at all times the state and condition of its Oil and Gas
Properties and other material Properties will be fully preserved and
maintained, except to the extent a portion of such Properties is no longer
capable of producing Hydrocarbons in economically reasonable amounts. The
Borrower and QSRD, shall and QSRD shall cause each of its Subsidiaries to,
promptly: (i) pay and discharge, or make reasonable and customary efforts to
cause to be paid and discharged, all delay rentals, royalties, expenses and
indebtedness accruing under the leases or other agreements affecting or
pertaining to its Oil and Gas Properties, (ii) perform or make reasonable and
customary efforts to cause to be performed, in accordance with usual and
customary industry standards, the obligations required by each and all of the
assignments, deeds, leases, sub-leases, contracts and agreements affecting its
interests in its Oil and Gas Properties and other material Properties, (iii)
will and will cause each of its Subsidiaries to do all other things necessary
to keep unimpaired, except for Liens described in Section 9.02, its rights with
respect thereto and prevent any forfeiture thereof or a default thereunder,
except to the extent a portion of such Properties is no longer capable of
producing Hydrocarbons in economically reasonable amounts. The Borrower and
QSRD shall, and QSRD shall, cause each of its Subsidiaries to, operate its Oil
and Gas Properties and other material Properties or cause or make reasonable
and customary efforts to cause such Oil and Gas Properties and other material
Properties to be operated in a careful and efficient manner in accordance with
the usual and customary practices of the industry and in substantial compliance
with all applicable contracts and agreements and in compliance in all material
respects with all Governmental Requirements.
(e) In the event that all or any portion of any Oil and Gas Property
owned by QSRD and its Subsidiaries is comprised of interests in the Hydrocarbon
Property which are not working interests or which are operated by a Person or
Persons other than QSRD or one of its Subsidiaries,
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then, with respect to such interests and Properties, QSRD shall, and shall
cause such Subsidiary to, use reasonable efforts consistent with usual and
customary industry practice to obtain compliance with the foregoing covenants
contained in this Section 8.03 by the working interest owners or the operator
or operators of such interests or Properties.
Section 8.04 Environmental Matters.
(a) QSRD will, and will cause each of its Subsidiaries to, establish
and implement such procedures as may be reasonably necessary, consistent with
its ownership interests, to continuously determine and assure that any failure
of the following does not have a Material Adverse Effect: (i) all Property of
such Persons and the operations conducted thereon are in compliance with and do
not violate the requirements of any Environmental Laws, (ii) no oil, hazardous
substances or solid wastes are disposed of or otherwise released on or to any
Property owned by any such party except in compliance with Environmental Laws,
(iii) no hazardous substance will be released on or to any such Property in a
quantity equal to or exceeding that quantity which requires reporting pursuant
to Section 103 of CERCLA, and (iv) no oil, oil and gas exploration and
production wastes or hazardous substance is released on or to any such Property
so as to pose an imminent and substantial endangerment to public health or
welfare or the environment.
(b) QSRD will promptly notify the Agent and the Lenders in writing of
any threatened action, investigation or inquiry by any Governmental Authority
of which QSRD has knowledge in connection with any Environmental Laws,
excluding routine testing and corrective action.
(c) QSRD will, and will cause each of its Subsidiaries to, provide
environmental audits and tests in accordance with American Society of Testing
and Mechanics standards as reasonably requested by the Agent and the Lenders or
as otherwise required to be obtained by the Agent or the Lenders by any
Governmental Authority in connection with any future acquisitions of Oil and
Gas Properties or other material Properties.
Section 8.05 Further Assurances. QSRD and the Borrower will and will
cause each of its respective Subsidiaries to cure promptly any defects in the
creation and issuance of the Notes and the execution and delivery of the Loan
Documents and this Agreement. QSRD at its expense will, and will cause each of
its Subsidiaries to, promptly execute and deliver to the Agent upon request all
such other documents, agreements and instruments to comply with or accomplish
the covenants and agreements of QSRD or any of its Subsidiaries, as the case
may be, in the Loan Documents and this Agreement, or to further evidence and
more fully describe the collateral intended as security for the Notes, or to
correct any omissions in the Security Instruments, or to state more fully the
security obligations set out herein or in any of the Security Instruments, or
to perfect, protect or preserve any Liens created pursuant to any of the
Security Instruments, or to make any recordings, to file any notices or obtain
any consents, all as may be reasonably necessary or appropriate in connection
therewith.
Section 8.06 Performance of Obligations. The Borrower will pay the
Notes according to the reading, tenor and effect thereof; and QSRD will and
will cause each of its Subsidiaries, including the Borrower, to do and perform
every act and discharge all of the obligations to be performed and discharged
by them under the Loan Documents, at the time or times and in the manner
specified.
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Section 8.07 Engineering Reports.
(a) No later than 30 days prior to each Scheduled Redetermination
Date, commencing with the Scheduled Redetermination Date to occur on September
15, 1998, the Borrower shall furnish to the Agent and the Lenders a Reserve
Report. The June 30 Reserve Report of each year shall be prepared by certified
independent petroleum engineers or other independent petroleum consultant(s)
acceptable to the Agent and the December 31 Reserve Report of each year shall
be prepared by or under the supervision of the chief engineer of the Borrower
who shall certify such Reserve Report to be true and accurate and to have been
prepared in accordance with the procedures used in the immediately proceeding
June 30 Reserve Report.
(b) In the event of an unscheduled redetermination, the Borrower
shall, at the Agent's request, furnish to the Agent and the Lenders a Reserve
Report prepared by or under the supervision of the chief engineer of the
Borrower who shall certify such Reserve Report to be true and accurate and to
have been prepared in accordance with the procedures used in the immediately
preceding Reserve Report. For any unscheduled redetermination requested by the
Agent (or as requested by the Lenders pursuant to Section 2.08(d)), the
Borrower shall provide such Reserve Report with an "as of" date as required by
the Majority Lenders as soon as possible, but in any event no later than 45
days following the receipt of the request by the Agent.
(c) With the delivery of each Reserve Report, the Borrower shall
provide to the Agent and the Lenders, a certificate from a Responsible Officer
certifying that, to the best of his knowledge and in all material respects: (i)
the information contained in the Reserve Report and any other information
delivered in connection therewith is true and correct, (ii) the Borrower or a
Subsidiary Guarantor, as applicable, owns good and defensible title to its Oil
and Gas Properties evaluated in such Reserve Report and such Properties are
free of all Liens except for Liens permitted by Section 9.02, (iii) except as
set forth on an exhibit to the certificate, on a net basis there are no gas
imbalances, take or pay or other prepayments with respect to its Oil and Gas
Properties evaluated in such Reserve Report which would require the Borrower or
a Subsidiary to deliver Hydrocarbons produced from such Oil and Gas Properties
at some future time without then or thereafter receiving full payment therefor,
(iv) none of its Oil and Gas Properties have been sold since the date of the
last Borrowing Base determination except as set forth on an exhibit to the
certificate, which certificate shall list all of its Oil and Gas Properties
sold and in such detail as reasonably required by the Majority Lenders, (v)
attached to the certificate is a list of its Oil and Gas Properties added to
and deleted from the immediately prior Reserve Report and a list of all Persons
disbursing proceeds to the Borrower or a Subsidiary Guarantor, as applicable,
from its Oil and Gas Properties, (vi) except as set forth on a schedule
attached to the certificate all of the Oil and Gas Properties evaluated by such
Reserve Report are Mortgaged Property and (vii) any change in working interest
or net revenue interest in its Oil and Gas Properties occurring and the reason
for such change.
(d) As soon as available and in any event within 45 days after the
end of fiscal quarter, the Borrower shall provide (i) a production report, in
the form currently prepared internally by the Borrower and which has been
approved by the Agent, and (ii) a summary of all general and administrative
costs of QSRD and its Consolidated Subsidiaries for such quarter which are not
reflected in the Consolidated Net Income for such quarter for its Oil and Gas
Properties, which reports shall include quantities or volume of production,
revenue, realized product prices, operating expenses, taxes, capital
expenditures and lease operating costs which have accrued to the account
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of QSRD, the Borrower or any Subsidiary (other than Non-Recourse Subsidiaries)
in such period, and such other information with respect thereto as the Agent or
any Lender may reasonably require.
Section 8.08 Title Information.
(a) On or before the delivery to the Agent and the Lenders of each
Reserve Report required by Section 8.07(a), the Borrower will deliver title
information in form and substance reasonably satisfactory to the Agent covering
the Oil and Gas Properties evaluated by such Reserve Report and included in the
Borrowing Base that were not included in the immediately preceding Borrowing
Base evaluation, so that the Agent shall have received together with title
information previously delivered to the Agent, satisfactory title information
on at least 85% of the SEC Value of the Oil and Gas Properties evaluated by
such Reserve Report and included in the Borrowing Base. The Borrower shall cure
any title defects or exceptions which are not Excepted Liens raised by the
title information within 60 days after a request by the Agent or the Lenders to
cure such defects or exceptions.
(b) If the Borrower is unable to cure any title defect requested by
the Agent or the Lenders to be cured within the 60 day period, such default
shall not be a Default or an Event of Default, but instead the Agent and the
Lenders shall have the right to exercise the following remedy in their sole
discretion from time to time, and any failure to so exercise this remedy at any
time shall not be a waiver as to future exercise of the remedy by the Agent or
the Lenders. To the extent that the Agent or the Lenders are not satisfied
with title to any Oil and Gas Property after the time period in Section 8.08(a)
has elapsed, such unacceptable Oil and Gas Property shall not count towards the
85% requirement, and the Agent may send a notice to the Borrower and the
Lenders that the then outstanding Borrowing Base shall be reduced by an amount
as determined by all of the Lenders to cause the Borrower to be in compliance
with the requirement to provide acceptable title information on 85% of the SEC
Value of the Oil and Gas Properties included in the Borrowing Base. This new
Borrowing Base shall become effective immediately after receipt of such notice.
Section 8.09 Additional Collateral.
(a) QSRD and the Borrower will, and will cause each Subsidiary
Guarantor to, grant to the Agent as security for the Indebtedness a
first-priority Lien (subject only to Excepted Liens and to the extent
applicable, Liens permitted by Section 9.02) on such Person's interest in any
Oil and Gas Properties not already subject to a Lien of the Security
Instruments such that the Mortgaged Property shall include at least 85% (and
will use reasonable efforts to maintain 95%) of its and such Subsidiaries' SEC
Value of each of proved producing and the total Proved Reserves at all times,
which Lien will be created and perfected by and in accordance with the
provisions of deeds of trust, security agreements and financing statements, or
other Security Instruments, all in form and substance satisfactory to the Agent
in its sole discretion and in sufficient executed (and acknowledged where
necessary or appropriate) counterparts for recording purposes. If the Agent so
requests in writing, QSRD and the Borrower will, and will cause each Subsidiary
Guarantor to, within 25 days following such request (and in any event prior to
the granting of any Liens in favor of the holder(s) of the ECT Subordinated
Debt), grant to the Agent as security for the Indebtedness a first-priority
Lien interest (subject only to Excepted Liens and to the extent applicable,
Liens permitted by Section 9.02) on such Person's interest in any Oil and Gas
Properties not already subject to a Lien of the Security Instruments such that
the Mortgaged Property shall include a
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percentage requested by the Agent (not to exceed 95%) of its and such
Subsidiaries' SEC Value of each of proved producing and the total Proved
Reserves at all times.
(b) Concurrently with the granting of the Lien or other action
referred to in Section 8.09(a) above, the Borrower will (i) provide to the
Agent title information in form and substance satisfactory to the Agent in its
sole discretion with respect to the relevant Obligor's interests in such Oil
and Gas Properties; and (ii) promptly after the filing of any new Security
Instrument in any state, upon the reasonable request of the Agent, provide to
the Agent an opinion addressed to the Agent for the benefit of the Lenders in
form and substance satisfactory to the Agent in its sole discretion from
counsel acceptable to Agent, stating that the Security Instrument is valid,
binding and enforceable in accordance with its terms and in legally sufficient
form for such jurisdiction.
Section 8.10 ERISA Information and Compliance. QSRD will promptly
furnish and will cause its ERISA Affiliates to promptly furnish to the Agent
with sufficient copies to the Lenders (i) promptly after the filing thereof
with the United States Secretary of Labor, the Internal Revenue Service or the
PBGC, copies of each annual and other report with respect to each Plan or any
trust created thereunder, (ii) immediately upon becoming aware of the
occurrence of any ERISA Event or of any "prohibited transaction," as described
in section 406 of ERISA or in section 4975 of the Code, in connection with any
Plan or any trust created thereunder, a written notice signed by a Responsible
Officer specifying the nature thereof, what action QSRD or any ERISA Affiliate
is taking or proposes to take with respect thereto, and, when known, any action
taken or proposed by the Internal Revenue Service, the Department of Labor or
the PBGC with respect thereto, and (iii) immediately upon receipt thereof,
copies of any notice of the PBGC's intention to terminate or to have a trustee
appointed to administer any Plan. With respect to each Plan (other than a
Multiemployer Plan), QSRD will, and will cause each of its ERISA Affiliates to,
(i) satisfy in full and in a timely manner, without incurring any late payment
or underpayment charge or penalty and without giving rise to any Lien, all of
the contribution and funding requirements of section 412 of the Code
(determined without regard to subsections (d), (e), (f) and (k) thereof) and of
section 302 of ERISA (determined without regard to sections 303, 304 and 306 of
ERISA), and (ii) pay, or cause to be paid, to the PBGC in a timely manner,
without incurring any late payment or underpayment charge or penalty, all
premiums required pursuant to sections 4006 and 4007 of ERISA.
Section 8.11 Hedging Program. On or before the expiration of the Risk
Management Agreements contained in part II of Schedule 7.20, the Borrower shall
enter into one or more Risk Management Agreements with one or more Lenders or
Affiliates of Lenders (or with any other investment grade counterparties, rated
BBB+ or better or the equivalent) the effective term of such Risk Management
Agreements expire no earlier than December 31, 2002, and the aggregate notional
volumes of Hydrocarbons subject of such Risk Management Agreements constitute,
at all times during the term thereof not less than eighty percent (80%) of the
Obligors' forecasted production for such period from Oil and Gas Properties
classified as proved, developed, producing as of the date the Acquisition is
consummated.
Section 8.12 Offering. QSRD will use commercially reasonable efforts
to consummate a Hi-Yield Offering and/or an Equity Offering in an aggregate
combined principal amount of not less than $150,000,000 on or before September
30, 1998.
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ARTICLE IX
NEGATIVE COVENANTS
QSRD and the Borrower covenant and agree that, so long as any of the
Commitments are in effect and until payment in full of Loans hereunder, all
interest thereon and all other amounts payable by the Borrower hereunder or any
Obligor under any Loan Document, without the prior written consent of the
Majority Lenders:
Section 9.01 Debt. Neither QSRD nor any of its Subsidiaries, including
the Borrower, will incur, create, assume or suffer to exist any Debt, except:
(a) the Notes or other Indebtedness or any guaranty of or suretyship
arrangement for the Notes or other Indebtedness;
(b) the Debt of any Obligor existing on and not repaid on the Closing
Date which is disclosed in Schedule 9.01, and any renewals or extensions (but
not increases) thereof;
(c) accounts payable (for the deferred purchase price of Property or
services) from time to time incurred in the ordinary course of business which,
if greater than 90 days past the invoice or billing date, are being contested
in good faith by appropriate proceedings if reserves adequate under GAAP shall
have been established therefor;
(d) Debt under capital leases (as required to be reported on the
financial statements of QSRD pursuant to GAAP) and other Debt of QSRD and the
Borrower not otherwise permitted under this Section 9.01 in an aggregate
principal amount not to exceed $500,000 at any one time outstanding;
(e) Debt of the Borrower under Risk Management Agreements with either
any Lender, investment grade counterparties or as disclosed in Section 7.20;
(f) Debt associated with bonds or surety obligations required by
Governmental Requirements in connection with the operation of the Oil and Gas
Properties;
(g) the Subordinated Debt; provided, without the prior written
consent of the Agent, no such Debt (other than the DEM Subordinated Debt) shall
be denominated in any currency other than U.S. Dollars;
(h) intercompany Debt to the extent permitted by Section 9.03;
(i) Debt arising from or related to any of the Liens described in
clauses (iii) to (v) of the definition of "Excepted Liens";
(j) Non-Recourse Debt of any Non-Recourse Subsidiary; and
(k) Debt of QSRD and its Subsidiaries, including the Borrower,
incurred pursuant to any Hi-Yield Offering; provided that (i) such Debt that is
issued on terms reasonably satisfactory to the Majority Lenders with respect to
principal amount, maturity, interest rate, covenants and, if
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applicable, subordination language, and (ii) in connection with the issuance of
any such Debt under this Section 9.01(k), the Lenders may cause the Borrowing
Base to be redetermined.
Section 9.02 Liens. Neither QSRD nor any of its Subsidiaries,
including the Borrower, will create, incur, assume or permit to exist any Lien
on any of its Properties (now owned or hereafter acquired), except:
(a) Liens securing the payment of any Indebtedness;
(b) Excepted Liens;
(c) Liens securing capital leases (but not other Debt) allowed under
Section 9.01(d) but only on the Property under lease;
(d) Liens disclosed on Schedule 9.02;
(e) Liens on cash or securities of the Borrower securing the Debt
described in Section 9.01(f);
(f) Liens on Property of a Non-Recourse Subsidiary to secure Debt
permitted by Section 9.01(j) and Liens on stock or other equity interests of
any Non-Recourse Subsidiary; and
(g) Liens to secure the ECT Subordinated Debt and the Bridge Loans;
provided that such Liens are subordinated to the Liens in favor of the Agent
and the Lenders on terms reasonably satisfactory to the Majority Lenders.
Section 9.03 Investments, Loans and Advances. Neither QSRD nor any of
its Subsidiaries, including the Borrower, will make or permit to remain
outstanding any loans or advances to or investments in any Person, except that
the foregoing restriction shall not apply to:
(a) investments, loans or advances reflected in the Financial
Statements or which are disclosed to the Lenders in Schedule 9.03;
(b) accounts receivable arising in the ordinary course of business;
(c) direct obligations of the United States or any agency thereof, or
obligations guaranteed by the United States or any agency thereof, in each case
maturing within one year from the date of creation thereof;
(d) commercial paper maturing within 180 days from the date of
creation thereof rated in the highest grade by Standard & Poor's Ratings
Service or Moody's Investors Service, Inc.;
(e) deposits maturing within one year from the date of creation
thereof with, including certificates of deposit issued by, any Lender or any
office located in the United States or any other bank or trust company which is
organized under the laws of the United States or any state thereof, has
capital, surplus and undivided profits aggregating at least $100,000,000.00 (as
of the date of such Lender's or bank or trust company's most recent financial
reports) and has a short term deposit
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rating of no lower than A2 or P2, as such rating is set forth from time to
time, by Standard & Poor's Rating Service or Moody's Investors Service, Inc.,
respectively;
(f) deposits in money market funds investing exclusively in
investments described in Section 9.03(c), 9.03(d) or 9.03(e);
(g) investments, loans or advances made by (i) QSRD in or to the
Borrower or any Subsidiary Guarantor, (ii) the Borrower in or to QSRD or any
Subsidiary Guarantor, and (iii) any Subsidiary of QSRD in or to any Subsidiary
Guarantor, QSRD or the Borrower;
(h) investments by the Borrower or any Subsidiary Guarantor related
to its direct ownership interests in additional Oil and Gas Properties in an
amount not to exceed 10% of the amount of the Borrowing Base at the time of
such investment;
(i) advances to operators under operating agreements entered into by
QSRD or any of its Subsidiaries in the ordinary course of business;
(j) investments, loans or advances made by (i) the Borrower or any
Subsidiary Guarantor to any Non-Recourse Subsidiary not to exceed at any one
time outstanding $100,000 in the aggregate, or (ii) a Non-Recourse Subsidiary
to any other Non-Recourse Subsidiary; provided that QSRD may make loans,
advances or investments to Queen Sand Resources (Canada), Inc. to satisfy its
obligations under any employment agreements to which it is a party and for (A)
fixtures, furniture and equipment, provided that the aggregate amount spent
under this clause (A) shall not exceed $150,000 in the aggregate during any
twelve-month period and (B) normal general and administrative expenses incurred
in the ordinary course of its business and for which Queen Sand Resources
(Canada), Inc. is ultimately entitled to reimbursement from QSRD and/or its
Subsidiaries; and
(k) loans or advances to officers and employees of QSRD or any
Subsidiary in the ordinary course of business not to exceed (i) while the
Bridge Loans are outstanding (and whether or not all or any of the Bridge Loans
have been extended to be long-term obligations) $100,000 in the aggregate
outstanding at any time, and (ii) after repayment in full of the Bridge Loans,
$250,000 in the aggregate outstanding at any time.
Section 9.04 Dividends, Distributions and Redemptions. QSRD shall not
declare or pay any dividend, purchase, redeem or otherwise acquire for value
any of its capital stock now or hereafter outstanding, return any capital to
its stockholders or make any distribution of its assets to its stockholders,
except for (i) dividends or distributions payable solely in capital stock of
QSRD; and (ii) the repurchase or redemption of any shares of the Series C
Preferred Stock with the aggregate net cash proceeds in excess of $50,000,000
of any Equity Offering(s) occurring after the Closing Date, provided that (A)
no Default or Event of Default has occurred at the time such shares are repur-
chased or redeemed or would result from such repurchase or redemption and (B)
the Percentage Usage is less than eighty percent (80%) prior and after giving
effect to such repurchase or redemption.
Section 9.05 Sales and Leasebacks. Neither QSRD nor any of its
Subsidiaries will enter into any arrangement, directly or indirectly, with any
Person whereby QSRD or any of its Subsidiaries shall sell or transfer any of
its Property, whether now owned or hereafter acquired, and whereby QSRD or any
of its Subsidiaries shall then or thereafter rent or lease as lessee such
Property or any
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part thereof or other Property which QSRD or any of its Subsidiaries intends to
use for substantially the same purpose or purposes as the Property sold or
transferred.
Section 9.06 Nature of Business. Neither QSRD, nor any of its
Subsidiaries will allow any material change to be made in the character of its
business as an independent oil and gas exploration and production company.
Section 9.07 Limitation on Leases. Neither QSRD nor any of its
Subsidiaries will create, incur, assume or suffer to exist any obligation for
the payment of rent or hire of Property of any kind whatsoever (real or
personal, including capital leases but excluding leases of Hydrocarbon
Interests and leases directly related to oil and gas field operations), under
leases or lease agreements which would cause the aggregate amount of all
payments made by such Persons pursuant to such leases or lease agreements to
exceed $500,000 in any period of twelve consecutive calendar months in the
aggregate. Neither QSRD nor any of its Subsidiaries will create, incur, assume
or suffer to exist any obligation for the payment of rent or hire of Property
of any kind whatsoever (real or personal, including capital leases but
excluding royalty payments under leases of Hydrocarbon Interests), for oil and
gas field operations under leases or lease agreements (other than leases for
any drilling, workover or other rig related activities) which would cause the
aggregate amount of all payments made by such Persons pursuant to such leases
or lease agreements to exceed $8,000,000 in any period of twelve consecutive
calendar months.
Section 9.08 Mergers, Etc. Neither QSRD nor any of its Subsidiaries
will merge into or with or consolidate with any other Person, or sell, lease or
otherwise dispose of (whether in one transaction or in a series of
transactions) all or substantially all of its Property or assets to any other
Person; provided that (i) any Subsidiary Guarantor may merge with any other
Subsidiary Guarantor or may merge with the Borrower so long as the Borrower is
the surviving entity, (ii) the Borrower or any Subsidiary Guarantor may merge
with QSRD so long as QSRD is the surviving entity, and (iii) any Non-Recourse
Subsidiary may merge with any Person; provided that if such Non-Recourse
Subsidiary merges with QSRD, the Borrower or any Subsidiary Guarantor, no
Default or Event of Default would occur or be continuing after giving effect to
such merger and QSRD, the Borrower or such Subsidiary Guarantor, as the case
may be, shall be the surviving entity.
Section 9.09 Proceeds of Notes. The Borrower will not permit the
proceeds of the Notes or the Letters of Credit to be used for any purpose other
than those permitted by Section 7.07. Neither the Borrower nor any Person
acting on behalf of the Borrower has taken or will take any action which might
cause any of the Loan Documents to violate Regulation G, T, U or X or any other
regulation of the Board of Governors of the Federal Reserve System or to
violate Section 7 of the Securities Exchange Act of 1934 or any rule or
regulation thereunder, in each case as now in effect or as the same may
hereinafter be in effect.
Section 9.10 ERISA Compliance. QSRD will not at any time:
(a) Engage in, or permit any of its ERISA Affiliates to engage in,
any transaction in connection with which QSRD or any of its ERISA Affiliates
could be subjected to either a civil penalty assessed pursuant to section
502(c), (i) or (l) of ERISA or a tax imposed by Chapter 43 of Subtitle D of the
Code;
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(b) Terminate, or permit any of its ERISA Affiliates to terminate,
any Plan in a manner, or take any other action with respect to any Plan, which
could reasonably be expected result in any liability to QSRD or any of its
ERISA Affiliates to the PBGC in excess of $100,000;
(c) Fail to make, or permit any of its ERISA Affiliates to fail to
make, full payment when due of all amounts which, under the provisions of any
Plan, agreement relating thereto or applicable law, QSRD or any of its ERISA
Affiliates is required to pay as contributions thereto;
(d) Permit to exist, or allow any of its ERISA Affiliates to permit
to exist, any accumulated funding deficiency within the meaning of Section 302
of ERISA or section 412 of the Code in excess of $100,000, whether or not
waived, with respect to any Plan;
(e) Permit, or allow any of its ERISA Affiliates to permit, the
actuarial present value of the benefit liabilities under any Plan maintained by
QSRD of its ERISA Affiliates which is regulated under Title IV of ERISA to
exceed the current value of the assets (computed on a plan termination basis in
accordance with Title IV of ERISA) of such Plan allocable to such benefit
liabilities in an amount which exceeds $100,000; and for purposes of this
Agreement, the term "actuarial present value of the benefit liabilities" shall
have the meaning specified in section 4041 of ERISA;
(f) Contribute to or assume an obligation to contribute to, or permit
any of its ERISA Affiliates to contribute to or assume an obligation to
contribute to, any Multiemployer Plan;
(g) Acquire, or permit any of its ERISA Affiliates to acquire, an
interest in any Person that causes such Person to become an ERISA Affiliate
with respect to QSRD or any of its ERISA Affiliates if such Person sponsors,
maintains or contributes to, or at any time in the six-year period preceding
such acquisition has sponsored, maintained, or contributed to, (1) any
Multiemployer Plan, or (2) any other Plan that is subject to Title IV of ERISA
under which the actuarial present value of the benefit liabilities under such
Plan exceeds the current value of the assets (computed on a plan termination
basis in accordance with Title IV of ERISA) of such Plan allocable to such
benefit liabilities in an amount which exceeds $100,000;
(h) Incur, or permit any of its ERISA Affiliates to incur, a
liability to or on account of a Plan under sections 515, 4062, 4063, 4064, 4201
or 4204 of ERISA in an amount which exceeds $100,000;
(i) Contribute to or assume an obligation to contribute to, or permit
any of its ERISA Affiliates to contribute to or assume an obligation to
contribute to, any employee welfare benefit plan, as defined in section 3(1) of
ERISA, including, without limitation, any such plan maintained to provide
benefits to former employees of such entities, that may not be terminated by
such entities in their sole discretion at any time without any material
liability; or
(j) Amend or permit any of its ERISA Affiliates to amend, a Plan
resulting in an increase in current liability such that QSRD or any of its
ERISA Affiliates is required to provide security to such Plan under section
401(a)(29) of the Code.
Section 9.11 Sale or Discount of Receivables. Neither QSRD nor any of
its Subsidiaries will discount or sell (with or without recourse) any of its
notes receivable or accounts receivable.
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Section 9.12 Current Ratio and Net Worth.
(a) Consolidated Current Ratio. QSRD's ratio of (i) consolidated
current assets plus unused availability under the Aggregate Commitments to (ii)
consolidated current liabilities (excluding (A) current maturities of the
Notes, (B) the Bridge Loans unless the Bridge Loans have been extended to be a
long-term obligation as contemplated by the terms of the Bridge Loan Documents
and (C) the ECT Subordinated Debt so long as the ECT Subordinated Debt does not
mature within one (1) year of the date of determination) shall not be less
than 1.0 to 1.0 at any time.
(b) Consolidated Tangible Net Worth. On and after the Closing Date
and after giving effect to the transactions contemplated herein, QSRD will not
permit its Consolidated Tangible Net Worth to be less than $18,500,000 plus the
amount equal to seventy-five percent (75%) of the net proceeds of any Equity
Offering by QSRD at any time after the Closing Date.
Section 9.13 Accounts Payable. QSRD will, and will cause its
Subsidiaries to, pay their respective trade account payables when due in
accordance with their terms and usual and customary industry practices (which
shall not, in any event exceed 90 days from the date of invoice), except for
such payable which are being contested in good faith by appropriate proceedings
diligently pursued and for which adequate reserves under GAAP are being
maintained. QSRD and its Subsidiaries will not permit the weighted average
maturity of their trade accounts payables (excluding payables being contested
pursuant to the foregoing sentence) to exceed 75 days (measured quarterly as of
the last day of each fiscal quarter).
Section 9.14 Fixed Charge Coverage Ratio.
(a) QSRD's Fixed Charge Coverage Ratio shall be at not less than 1.5
to 1.0 for the three-month period ending June 30, 1998.
(b) If the aggregate net cash proceeds to QSRD from Hi-Yield
Offerings are greater than $75,000,000, QSRD's Fixed Charge Coverage Ratio as
of the end of any full fiscal quarter occurring after the completion of the
first such Hi-Yield Offering shall not be less than the following for the
period then applicable:
(i) for the six month period ending on September 30, 1998, 1.5 to 1.0;
(ii) for the nine month period ending on December 31, 1998, 1.5 to 1.0;
(iii) for each rolling period on of four fiscal quarters thereafter, 1.5
to 1.0.
(c) If no Hi-Yield Offering has been completed or the aggregate net
cash proceeds to QSRD from Hi-Yield Offerings are less than or equal to
$75,000,000, QSRD's Fixed Charge Coverage Ratio as of the end of any fiscal
quarter shall not be less than the following for the period then applicable:
(i) for the six month period ending on September 30, 1998, 1.75 to
1.0;
(ii) for the nine month period ending on December 31, 1998, 2.0 to 1.0;
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(iii) for each rolling period on of four fiscal quarters thereafter, 2.2
to 1.0.
Section 9.15 Sale of Oil and Gas Properties. QSRD and the Borrower
will not, and will not permit any Subsidiary to, sell, assign, farm-out, convey
or otherwise transfer any Oil and Gas Property or any interest in any Oil and
Gas Property except for (i) sales of Hydrocarbons in the ordinary course of
business, (ii) sales of assets which are worn-out or obsolete and are not
material to the continuation of its business, (iii) intercompany sales or other
dispositions by any Obligor to the Borrower or by any Subsidiary Guarantor to
another Subsidiary Guarantor, provided the foregoing shall not permit
dispositions to Non-Recourse Subsidiaries, except to the extent permitted by
Section 9.03(j), (iv) dispositions of equipment when substantially similar
equipment has been or will be acquired, and (v) sales or other dispositions of
Oil and Gas Properties or other assets which shall not exceed $2,500,000 in the
aggregate in any fiscal year; provided that, while the Bridge Loans are
outstanding, the Borrowing Base shall be adjusted by an amount equal to the
value, if any, assigned such Property or asset in the most recently determined
Borrowing Base.
Section 9.16 Environmental Matters. Neither QSRD nor any of its
Subsidiaries will cause or permit any of its Property to be in violation of, or
do anything or permit anything to be done which will subject any such Property
to any remedial obligations under any Environmental Laws, assuming disclosure
to the applicable Governmental Authority of all relevant facts, conditions and
circumstances, if any, pertaining to such Property where such violations or
remedial obligations would have a Material Adverse Effect.
Section 9.17 Transactions with Affiliates. Neither QSRD nor any
Subsidiary will enter into any transaction, including, without limitation, any
purchase, sale, lease or exchange of Property or the rendering of any service,
with any Affiliate (other than QSRD, the Borrower or any Subsidiary Guarantor)
unless such transactions are in the ordinary course of its business and are
upon fair and reasonable terms no less favorable to it than it would obtain in
a comparable arm's length transaction with a Person not an Affiliate.
Section 9.18 Subsidiaries and Partnerships. Without the prior written
consent of the Agent, QSRD and the Borrower shall not, and shall not permit any
of its respective Subsidiaries to, create any additional Subsidiaries or
partnerships, unless such Subsidiary or partnership becomes a Subsidiary
Guarantor hereunder or is designated by QSRD to be Non-Recourse Subsidiary.
QSRD shall not and shall not permit any of its Subsidiaries to sell or issue
any shares of stock of any class of one of its Subsidiaries or any interest in
a partnership except to QSRD or any of its Subsidiaries (other than Non-
Recourse Subsidiaries).
Section 9.19 Negative Pledge Agreements. Neither QSRD nor any of its
Subsidiaries will create, incur, assume or suffer to exist any contract,
agreement or understanding (other than this Agreement, the Security Instruments
and the documents and agreements listed on Scheduled 7.23) which in any way
prohibits or restricts the granting, conveying, creation or imposition of any
Lien on any of its Property or restricts any of its Subsidiaries from paying
dividends to QSRD or the Borrower, or which requires the consent of other
Persons in connection therewith.
Section 9.20 Gas Imbalances, Take-or-Pay or Other Prepayments. QSRD
and the Borrower will not, and will not permit any Subsidiary Guarantor to,
enter into any contracts or agreements which warrant production of Hydrocarbons
(other than Risk Management Agreements otherwise permitted hereunder) and will
not hereafter allow gas imbalances, take-or-pay or other prepayments
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with respect to their Oil and Gas Properties which would require such Person to
deliver Hydrocarbons produced on Oil and Gas Properties at some future time
without then or thereafter receiving full payment therefor to exceed, during
any monthly period, five percent (5%) of the current aggregate monthly gas
production for such monthly period from the Mortgaged Properties.
Section 9.21 Material Agreements. QSRD and the Borrower shall not, and
shall not permit any Subsidiary to, amend or modify in any material respect or
terminate any of the Material Agreements. Without limitation of the generality
of the foregoing, the Borrower will not amend, modify or supplement in any
material respect the Purchase and Sale Agreement or the Escrow Agreement
referred to therein; and neither QSRD nor the Borrower will waive any condition
precedent or requirement associated with the release of funds held in escrow
pursuant to the terms of the Escrow Agreement. QSRD and the Borrower will, and
will cause each of their Subsidiaries to, perform and comply in all material
respects with all of their obligations under each Material Agreement in such a
manner as to at all times not be in default of any material provisions
thereunder.
Section 9.22 Repayment of Other Debt.
(a) QSRD and the Borrower shall not, and shall not permit any
Subsidiary to, amend, supplement or modify any Bridge Loan Document or repay
the principal of, or make any other payment in relation to, either Bridge Loan,
except as contemplated by Sections 9.22(b) and (c); provided, so long as no
Default or Event of Default has occurred and is continuing, the foregoing shall
not prohibit the payment of interest on the Bridge Loans before and after
extension of all or any portion of the Bridge Loans, the payment of the
extension fees required under the Bridge Loan Documents or the repayment of the
Bridge Loans with the proceeds of any refinancing thereof (provided that such
refinancing Debt is subordinated on terms substantially similar to the Bridge
Loans and the Agent has approved in writing the terms thereof).
(b) QSRD and the Borrower agree to use the net cash proceeds of any
Hi-Yield Offering to (i) eliminate a Borrowing Base deficiency which then
exists under Section 2.07(c), if any, (ii) thereafter to repay in cash the Debt
Bridge Loan to the extent of such net cash proceeds, and (iii) thereafter use
any excess remaining to repay in cash the Equity Bridge Loans to the extent of
such excess proceeds.
(c) QSRD and the Borrower agree to use the net cash proceeds of any
Equity Offering to (i) eliminate a Borrowing Base deficiency which then exists
under Section 2.07(c), if any, (ii) thereafter to repay in cash the Equity
Bridge Loan to the extent of such net cash proceeds, and (iii) thereafter use
any excess remaining to repay in cash the Debt Bridge Loans to the extent of
such excess proceeds.
(d) QSRD and the Borrower shall not, and shall not permit any
Subsidiary to, amend, supplement, modify or prepay the DEM Subordinated Debt in
any material respect, except that all or any part of the DEM Subordinated Debt
may be prepaid with any excess proceeds from any Hi-Yield Offering or Equity
Offering so long as (i) the Percentage Usage is less than eighty (80%) prior
and after giving effect to such payment and (ii) the Bridge Loans have been
paid in full.
(e) QSRD and the Borrower shall not, and shall not permit any
Subsidiary to: (i) amend, supplement, modify, repay or prepay the ECT
Subordinated Debt without the prior written consent
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of the Majority Lenders, except for amendments or modifications to and payments
of the ECT Subordinated Debt outstanding on the Closing Date and other
amendments or modifications to and payments of the ECT Subordinated Debt as
permitted by that certain Subordination Agreement (herein so called) dated as
of December 29, 1997 by the holder(s) of the ECT Subordinated Debt in favor of
the Agent and the Lenders; (ii) borrow or permit to be outstanding any ECT
Subordinated Debt until such time as the Bridge Loans and any extensions
thereof have been repaid in full; or (iii) make any payment or repayment of
interest, principal or fees on the ECT Subordinated Debt if a Default or Event
of Default pursuant to Section 10.01(a) has occurred and is continuing or if a
Borrowing Base deficiency then exists under Section 2.07(c) except as otherwise
may be expressly permitted in the Subordination Agreement.
(f) If the amounts deposited in the Escrow Agreement under the
Purchase Agreement are to be returned to the Borrower as contemplated in
Section 2.02(g) of the Purchase and Sale Agreement, then, to the extent that
any such amounts have not been applied to repay the Indebtedness after giving
effect to Section 2.08(c) and Section 2.07(c), the Borrower shall immediately
prepay the Debt Bridge Loan in an amount equal to such excess.
Section 9.23 Limitations on Capital Expenditures. While the Bridge
Loans are outstanding or have been extended as permitted by the Bridge Loan
Documents, QSRD and the Borrower shall not, and shall not permit any
Subsidiaries to, make or pay any capital expenditures (other than maintenance
capital expenditures and emergency capital expenditures) if, after giving
effect thereto, the aggregate of all such expenditures would exceed (i)
$10,000,000 during the period from the Closing Date until the following clause
(ii) is applicable, and (ii) during any fiscal year for which a budget has been
supplied under Section 8.07, a level approved in writing by the Majority
Lenders based on QSRD's budget provided to the Lenders in connection with the
Reserve Reports supplied under Section 8.07.
ARTICLE X
EVENTS OF DEFAULT; REMEDIES
Section 10.01 Events of Default. One or more of the following events
shall constitute an "Event of Default":
(a) the Borrower or any Obligor shall default in the payment or
prepayment when due of any principal of or interest on any Loan, or any
reimbursement obligation for a disbursement made under any Letter of Credit; or
the Borrower or any Obligor shall default in the payment of any fees or other
amount payable by it hereunder or under any Loan Document and such default
shall continue unremedied for a period of three (3) Business Days; or
(b) QSRD, the Borrower or any Subsidiary Guarantor shall default in
the payment when due of any principal of or interest on any of its Debt
(including the Subordinated Debt) aggregating $500,000 or more, or any event
specified in any note, agreement, indenture or other document evidencing or
relating to any such Debt shall occur if the effect of such event is to cause,
or (with the giving of any notice or the lapse of time or both) to permit the
holder or holders of such Debt (or a trustee or agent on behalf of such holder
or holders) to cause, such Debt to become due prior to its stated maturity; or
QSRD shall become obligated to mandatorily redeem any of the Preferred Stock or
a "mandatory redemption event" shall occur under the Certificate of Designation
for any class of Preferred Stock; or
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(c) any representation, warranty or certification made or deemed made
herein or in any Security Instrument by QSRD, the Borrower or any Subsidiary
Guarantor, or any certificate furnished to any Lender or the Agent pursuant to
the provisions hereof or any Loan Document, shall prove to have been false or
misleading as of the time made or furnished in any material respect; or
(d) QSRD or the Borrower shall default in the performance of any of
its obligations or any requirement shall not be complied with under Article IX;
or QSRD, the Borrower or any Subsidiary Guarantor shall default in the
performance of any of its obligations under Article VIII, under any other
Article of this Agreement other than under Article IX or any Loan Document
(other than the payment of amounts due which shall be governed by Section
10.01(a)) and such default shall continue unremedied for a period of thirty
(30) days after the earlier to occur of (i) notice thereof to the Borrower by
the Agent or any Lender (through the Agent), or (ii) the Borrower or such
Obligor otherwise becoming aware of such default; or
(e) QSRD or the Borrower shall admit in writing its inability to, or
be generally unable to, pay its debts as such debts become due; or
(f) QSRD or the Borrower shall (i) apply for or consent to the
appointment of, or the taking of possession by, a receiver, custodian, trustee
or liquidator of itself or of all or a substantial part of its Property, (ii)
make a general assignment for the benefit of its creditors, (iii) commence a
voluntary case under the Federal Bankruptcy Code (as now or hereafter in ef-
fect), (iv) file a petition seeking to take advantage of any other law relating
to bankruptcy, insolvency, reorganization, winding-up, or composition or
readjustment of debts, (v) fail to controvert in a timely and appropriate
manner, or acquiesce in writing to, any petition filed against it in an
involuntary case under the Federal Bankruptcy Code, or (vi) take any corporate
action for the purpose of effecting any of the foregoing; or
(g) a proceeding or case shall be commenced, without the application
or consent of QSRD or the Borrower, in any court of competent jurisdiction,
seeking (i) its liquidation, reorganization, dissolution or winding-up, or the
composition or readjustment of its debts, (ii) the appointment of a trustee,
receiver, custodian, liquidator or the like of either QSRD or the Borrower of
all or any substantial part of its assets, or (iii) similar relief in respect
of such Person under any law relating to bankruptcy, insolvency,
reorganization, winding-up, or composition or adjustment of debts, and such
proceeding or case shall continue undismissed, or an order, judgment or decree
approving or ordering any of the foregoing shall be entered and continue
unstayed and in effect, for a period of 60 days; or (iv) an order for relief
against either QSRD or the Borrower shall be entered in an involuntary case
under the Federal Bankruptcy Code; or
(h) a judgment or judgments for the payment of money in excess of
$100,000 in the aggregate shall be rendered by a court against QSRD, the
Borrower or any Subsidiary Guarantor and the same shall not be discharged (or
provision shall not be made for such discharge), or a stay of execution thereof
shall not be procured, within thirty (30) days from the date of entry thereof
and QSRD, the Borrower or such Subsidiary shall not, within said period of 30
days, or such longer period during which execution of the same shall have been
stayed, appeal therefrom and cause the execution thereof to be stayed during
such appeal; or
(i) the Security Instruments after delivery thereof shall for any
reason, except to the extent permitted by the terms thereof, cease to be in
full force and effect and valid, binding and
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enforceable in accordance with their terms, or cease to create a valid and
perfected Lien of the priority required thereby on any of the collateral
purported to be covered thereby, except to the extent permitted by the terms of
this Agreement, or QSRD, the Borrower, any Subsidiary Guarantor or any Person
on their behalf shall so state in writing; or
(j) any Subsidiary Guarantor takes, suffers or permits to exist any
of the events or conditions referred to in paragraphs (e), (f) or (g) hereof;
or
(k) QSRD or the Borrower discontinues its usual business; or after
the Closing Date, any Person or two or more Persons (other than JEDI, Enron
Corp. or its Affiliates or the controlling persons thereof) acting as a group
(as defined in Section 13(d)(3) of the Securities Exchange Act of 1934) shall
have acquired beneficial ownership (within the meaning of Rule 13d-3 of the
Securities and Exchange Commission under the Securities Exchange Act of 1934)
of 30% or more of the outstanding shares of voting stock of QSRD; or
individuals who, as of the date hereof, constitute the Board of Directors of
QSRD (the "Incumbent Board") cease for any reason to constitute at least a
majority of the Board of Directors of QSRD; provided, however, that any
individual becoming a director of QSRD subsequent to the Closing Date whose
election, or nomination for election by QSRD's shareholders, was approved by a
vote of at least a majority of the directors then comprising the Incumbent
Board, shall be considered as though such individual were a member of the
Incumbent Board, but excluding, for this purpose, any such individual whose
initial assumption of office occurs as a result of either an actual or
threatened election contest (as such terms are used in Rule 14a-11 of
Regulation 14A promulgated under the Securities Exchange Act of 1934) or other
actual or threatened solicitation of proxies or consents by or on behalf of a
Person other than the Board of Directors of QSRD; or QSRD shall cease to
directly or indirectly own 100% of each class of stock of the Borrower and each
Subsidiary Guarantor (except directors' qualifying shares).
Section 10.02 Remedies. If any Event of Default shall have occurred
and be continuing, then:
(a) in the case of an Event of Default other than one referred to in
clauses (e), (f) or (g) of Section 10.01 or in clause (j) to the extent it
relates to clauses (e), (f) or (g), the Agent may and, upon request of the
Majority Lenders, shall, by notice to the Borrower, cancel the Commitments
and/or declare the principal amount then outstanding of, and the accrued inter-
est on, the Loans and all other amounts payable by the Borrower hereunder and
under the Notes (including without limitation the payment of cash collateral to
secure the LC Exposure as provided in Section 2.10(b) hereof) to be forthwith
due and payable, whereupon such amounts shall be immediately due and payable
without presentment, demand, protest, notice of intent to accelerate, notice of
acceleration or other formalities of any kind, all of which are hereby
expressly waived by the Borrower.
(b) in the case of the occurrence of an Event of Default referred to
in clauses (e), (f) or (g) of Section 10.01 or in clause (j) to the extent it
relates to clauses (e), (f) or (g), the Commitments shall be automatically
canceled and the principal amount then outstanding of, and the accrued interest
on, the Loans and all other amounts payable by the Borrower hereunder and under
the Notes (including without limitation the payment of cash collateral to
secure the LC Exposure as provided in Section 2.10(b) hereof) shall become
automatically immediately due and payable without presentment, demand, protest,
notice of intent to accelerate, notice of acceleration or other formalities of
any kind, all of which are hereby expressly waived by the Borrower.
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(c) All proceeds received after maturity of the Notes, whether by
acceleration or otherwise shall be applied first to reimbursement of expenses
and indemnities provided for in this Agreement and the Loan Document; second to
accrued interest on the Notes; third to fees; fourth pro rata to principal
outstanding on the Notes and other Indebtedness; fifth to serve as cash
collateral to be held by the Agent to secure the LC Exposure; and any excess
shall be paid to the Borrower or as otherwise required by any Governmental
Requirement.
ARTICLE XI
THE AGENT
Section 11.01 Appointment, Powers and Immunities. Each Lender hereby
irrevocably appoints and authorizes the Agent to act as its agent hereunder and
under the Loan Document with such powers as are specifically delegated to the
Agent by the terms of this Agreement and the Loan Document, together with such
other powers as are reasonably incidental thereto. The Agent (which term as
used in this sentence and in Section 11.05 and the first sentence of Section
11.06 shall include reference to its Affiliates and its and its Affiliates'
officers, directors, employees, attorneys, accountants, experts and agents):
(i) shall have no duties or responsibilities except those expressly set forth
in this Agreement, and shall not by reason of this Agreement be a trustee or
fiduciary for any Lender; (ii) makes no representation or warranty to any
Lender and shall not be responsible to the Lenders for any recitals,
statements, representations or warranties contained in this Agreement, or in
any certificate or other document referred to or provided for in, or received
by any of them under, this Agreement, or for the value, validity, effec-
tiveness, genuineness, execution, effectiveness, legality, enforceability or
sufficiency of this Agreement, any Note or any other document referred to or
provided for herein or for any failure by any Obligor or any other Person
(other than the Agent) to perform any of its obligations hereunder or
thereunder or for the existence, value, perfection or priority of any
collateral security or the financial or other condition of any Obligor; (iii)
except pursuant to Section 11.07 shall not be required to initiate or conduct
any litigation or collection proceedings hereunder; and (iv) shall not be
responsible for any action taken or omitted to be taken by it hereunder or
under any other document or instrument referred to or provided for herein or in
connection herewith including its own ordinary negligence, except for its own
gross negligence or willful misconduct. The Agent may employ agents,
accountants, attorneys and experts and shall not be responsible for the
negligence or misconduct of any such agents, accountants, attorneys or experts
selected by it in good faith or any action taken or omitted to be taken in good
faith by it in accordance with the advice of such agents, accountants,
attorneys or experts. The Agent may deem and treat the payee of any Note as
the holder thereof for all purposes hereof unless and until a written notice of
the assignment or transfer thereof permitted hereunder shall have been filed
with the Agent.
Section 11.02 Reliance by Agent. The Agent shall be entitled to rely
upon any certification, notice or other communication (including any thereof by
telephone, telex, telecopier, telegram or cable) believed by it to be genuine
and correct and to have been signed or sent by or on behalf of the proper
Person or Persons, and upon advice and statements of legal counsel, independent
accountants and other experts selected by the Agent.
Section 11.03 Defaults. The Agent shall not be deemed to have
knowledge of the occurrence of a Default (other than the non-payment of
principal of or interest on Loans or of fees or failure to reimburse for Letter
of Credit drawings) unless the Agent has received notice from a Lender or an
Obligor specifying such Default and stating that such notice is a "Notice of
Default."
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In the event that the Agent receives such a notice of the occurrence of a
Default, the Agent shall give prompt notice thereof to the Lenders. In the
event of a payment Default, the Agent shall give each Lender prompt notice of
each such payment Default.
Section 11.04 Rights as a Lender. With respect to its Commitments and
the Loans made by it and its participation in the issuance of Letters of
Credit, Bank of Montreal (and any successor acting as Agent) in its capacity as
a Lender hereunder shall have the same rights and powers hereunder as any other
Lender and may exercise the same as though it were not acting as the Agent, and
the term "Lender" or "Lenders" shall, unless the context otherwise indicates,
include the Agent in its individual capacity. Bank of Montreal (and any
successor acting as Agent) and its Affiliates may (without having to account
therefor to any Lender) accept deposits from, lend money to and generally
engage in any kind of banking, trust or other business with the Borrower (any
and of its Affiliates) as if it were not acting as the Agent, and Bank of
Montreal and its Affiliates may accept fees and other consideration from the
Borrower for services in connection with this Agreement or otherwise without
having to account for the same to the Lenders.
Section 11.05 INDEMNIFICATION. EACH LENDER AGREES TO INDEMNIFY THE
AGENT RATABLY IN ACCORDANCE WITH ITS PERCENTAGE SHARE FOR THE INDEMNITY MATTERS
AS DESCRIBED IN SECTION 12.03 TO THE EXTENT NOT INDEMNIFIED OR REIMBURSED BY
THE BORROWER UNDER SECTION 12.03, BUT WITHOUT LIMITING THE OBLIGATIONS OF THE
BORROWER UNDER SAID SECTION 12.03 AND FOR ANY AND ALL OTHER LIABILITIES,
OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS,
EXPENSES OR DISBURSEMENTS OF ANY KIND AND NATURE WHATSOEVER WHICH MAY BE
IMPOSED ON, INCURRED BY OR ASSERTED AGAINST THE AGENT IN ANY WAY RELATING TO OR
ARISING OUT OF: (I) THIS AGREEMENT, THE LOAN DOCUMENT OR ANY OTHER DOCUMENTS
CONTEMPLATED BY OR REFERRED TO HEREIN OR THE TRANSACTIONS CONTEMPLATED HEREBY,
BUT EXCLUDING, UNLESS A DEFAULT HAS OCCURRED AND IS CONTINUING, NORMAL
ADMINISTRATIVE COSTS AND EXPENSES INCIDENT TO THE PERFORMANCE OF ITS AGENCY
DUTIES HEREUNDER OR (II) THE ENFORCEMENT OF ANY OF THE TERMS OF THIS AGREEMENT,
ANY LOAN DOCUMENT OR OF ANY SUCH OTHER DOCUMENTS; WHETHER OR NOT ANY OF THE
FOREGOING SPECIFIED IN THIS SECTION 11.05 ARISES FROM THE SOLE OR CONCURRENT
NEGLIGENCE OF THE AGENT, PROVIDED THAT NO LENDER SHALL BE LIABLE FOR ANY OF THE
FOREGOING TO THE EXTENT THEY ARISE FROM THE GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT OF THE AGENT. THE FOREGOING INDEMNITIES SHALL EXTEND TO THE AGENT
NOTWITHSTANDING THE SOLE OR CONCURRENT NEGLIGENCE OF EVERY KIND OR CHARACTER
WHATSOEVER, WHETHER ACTIVE OR PASSIVE, WHETHER AN AFFIRMATIVE ACT OR AN
OMISSION, INCLUDING WITHOUT LIMITATION, ALL TYPES OF NEGLIGENT CONDUCT
IDENTIFIED IN THE RESTATEMENT (SECOND) OF TORTS OF THE AGENT OR BY REASON OF
STRICT LIABILITY IMPOSED WITHOUT FAULT ON THE AGENT. TO THE EXTENT THAT THE
AGENT IS FOUND TO HAVE COMMITTED AN ACT OF GROSS NEGLIGENCE OR WILLFUL MISCON-
DUCT, THIS CONTRACTUAL OBLIGATION OF INDEMNIFICATION SHALL CONTINUE BUT SHALL
ONLY EXTEND TO THE PORTION OF THE CLAIM THAT IS DEEMED TO HAVE OCCURRED BY
REASON OF EVENTS OTHER THAN THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE
AGENT.
Section 11.06 Non-Reliance on Agent and other Lenders. Each Lender
acknowledges and agrees that it has, independently and without reliance on the
Agent or any other Lender, and based on such documents and information as it
has deemed appropriate, made its own credit analysis of QSRD and its
Subsidiaries, including the Borrower, and its decision to enter into this
Agreement,
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and that it will, independently and without reliance upon the Agent or any
other Lender, and based on such documents and information as it shall deem
appropriate at the time, continue to make its own analysis and decisions in
taking or not taking action under this Agreement. The Agent shall not be
required to keep itself informed as to the performance or observance by any
Obligor of this Agreement, the Notes, the other Loan Documents or any other
document referred to or provided for herein or to inspect the properties or
books of any Obligor. Except for notices, reports and other documents and
information expressly required to be furnished to the Lenders by the Agent
hereunder, the Agent shall not have any duty or responsibility to provide any
Lender with any credit or other information concerning the affairs, financial
condition or business of any Obligor (or any of its Affiliates) which may come
into the possession of the Agent or any of its Affiliates.
Section 11.07 Action by Agent. Except for action or other matters
expressly required of the Agent hereunder, the Agent shall in all cases be
fully justified in failing or refusing to act hereunder unless it shall (i)
receive written instructions from the Majority Lenders specifying the action to
be taken, and (ii) be indemnified to its satisfaction by the Lenders against
any and all liability and expenses which may be incurred by it by reason of
taking, not taking or continuing to take any such action. The instructions of
the Majority Lenders and any action taken or failure to act pursuant thereto by
the Agent shall be binding on all of the Lenders. If a Default has occurred
and is continuing, the Agent shall take such action with respect to such
Default as shall be directed by the Majority Lenders in the written
instructions (with indemnities) described in this Section 11.07, provided that,
unless and until the Agent shall have received such directions, the Agent may
(but shall not be obligated to) take such action, or refrain from taking such
action, with respect to such Default as it shall deem advisable in the best
interests of the Lenders. In no event, however, shall the Agent be required to
take any action which exposes the Agent to personal liability or which is
contrary to this Agreement and the Loan Documents or applicable law.
Section 11.08 Resignation or Removal of Agent. Subject to the
appointment and acceptance of a successor Agent as provided below, the Agent
may resign at any time by giving notice thereof to the Lenders and the
Borrower, and the Agent may be removed at any time with or without cause by the
Majority Lenders. Upon any such resignation or removal, the Majority Lenders
shall have the right to appoint a successor Agent. If no successor Agent shall
have been so appointed by the Majority Lenders and approved by the Borrower and
shall have accepted such appointment within thirty (30) days after the retiring
Agent's giving of notice of resignation or the Majority Lenders' removal of the
retiring Agent, then the retiring Agent may, on behalf of the Lenders, appoint
a successor Agent (which successor Agent must be approved by the Borrower, such
approval not to be unreasonably withheld or delayed). Upon the acceptance of
such appointment hereunder by a successor Agent, such successor Agent shall
thereupon succeed to and become vested with all the rights, powers, privileges
and duties of the retiring Agent, and the retiring Agent shall be discharged
from its duties and obligations hereunder. After any retiring Agent's
resignation or removal hereunder as Agent, the provisions of this Article XI
and Section 12.03 shall continue in effect for its benefit in respect of any
actions taken or omitted to be taken by it while it was acting as the Agent.
ARTICLE XII
MISCELLANEOUS
Section 12.01 Waiver. No failure on the part of the Agent or any
Lender to exercise and no delay in exercising, and no course of dealing with
respect to, any right, power or privilege under any
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of the Loan Documents shall operate as a waiver thereof, nor shall any single
or partial exercise of any right, power or privilege under any of the Loan
Documents preclude any other or further exercise thereof or the exercise of any
other right, power or privilege. The remedies provided herein are cumulative
and not exclusive of any remedies provided by law.
Section 12.02 Notices. All notices and other communications provided
for herein and in the Loan Documents (including, without limitation, any
modifications of, or waivers or consents under, this Agreement or the Loan
Documents) shall be given or made by telecopy, courier or U.S. Mail or in
writing and telecopied, mailed or delivered to the intended recipient at the
"Address for Notices" specified below its name on the signature pages hereof or
in the Loan Documents or, as to any party, at such other address as shall be
designated by such party in a notice to each other party. Except as otherwise
provided in this Agreement or in the Loan Documents, all such communications
shall be deemed to have been duly given when transmitted by telecopier,
delivered to the telegraph or cable office or personally delivered or, in the
case of a mailed notice, three (3) Business Days after the date deposited in
the mails, postage prepaid, or in the case of overnight courier, one (1)
Business Day after the date deposited with such courier, in each case given or
addressed as aforesaid.
Section 12.03 Payment of Expenses, Indemnities, etc. The Borrower
agrees:
(a) whether or not the transactions hereby contemplated are
consummated, to pay all reasonable expenses of the Agent (both before and after
the execution hereof and including reasonable attorneys' fees in connection
with the negotiation, syndication, investigation, preparation, execution and
delivery of, recording or filing of, enforcement of, and refinancing,
renegotiation or restructuring of, the Loan Documents and any amendment, waiver
or consent relating thereto (including, without limitation, travel, photocopy,
mailing, courier, telephone and other similar expenses of the Agent, allocated
internal collateral examination and monitoring charges, cost of environmental
audits, the reasonable fees and disbursements of counsel for the Agent and in
the case of enforcement for any of the Lenders); and promptly reimburse the
Agent for all amounts expended, advanced or incurred by the Agent or the
Lenders to satisfy any obligation of any Obligor under this Agreement or any
Security Instrument;
(b) TO INDEMNIFY THE AGENT AND EACH LENDER AND EACH OF THEIR
AFFILIATES AND EACH OF THEIR OFFICERS, DIRECTORS, EMPLOYEES, REPRESENTATIVES
AND AGENTS ("INDEMNIFIED PARTIES") FROM, HOLD EACH OF THEM HARMLESS AGAINST AND
PROMPTLY UPON DEMAND PAY OR REIMBURSE EACH OF THEM FOR, THE INDEMNITY MATTERS
WHICH MAY BE INCURRED BY OR ASSERTED AGAINST OR INVOLVE ANY OF THEM (WHETHER OR
NOT ANY OF THEM IS DESIGNATED A PARTY THERETO) AS A RESULT OF, ARISING OUT OF
OR IN ANY WAY RELATED TO (I) ANY ACTUAL OR PROPOSED USE BY THE BORROWER OF THE
PROCEEDS OF ANY OF THE LOANS, (II) THE EXECUTION, DELIVERY AND PERFORMANCE OF
THE LOAN DOCUMENTS, (III) THE OPERATIONS OF THE BUSINESS OF QSRD AND ITS
SUBSIDIARIES, (IV) THE FAILURE OF QSRD OR ANY OF ITS SUBSIDIARIES TO COMPLY
WITH THE TERMS OF ANY LOAN DOCUMENT, THIS AGREEMENT OR WITH ANY GOVERNMENTAL
REQUIREMENT, (V) ANY INACCURACY OF ANY REPRESENTATION OR ANY BREACH OF ANY
WARRANTY OF ANY OBLIGOR SET FORTH IN ANY OF THE LOAN DOCUMENTS, (VI) THE
ISSUANCE, EXECUTION AND DELIVERY OR TRANSFER OF OR PAYMENT OR FAILURE TO PAY
UNDER ANY LETTER OF CREDIT, OR (VII) THE PAYMENT OF A DRAWING UNDER ANY LETTER
OF CREDIT NOTWITHSTANDING THE NON-COMPLIANCE, NON-DELIVERY OR OTHER IMPROPER
PRESENTATION OF THE MANUALLY EXECUTED DRAFT(S) AND
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CERTIFICATION(S), (VIII) ANY ASSERTION THAT THE LENDERS WERE NOT ENTITLED TO
RECEIVE ANY AMOUNTS RECEIVED PURSUANT TO THE LOAN DOCUMENTS OR (IX) ANY OTHER
ASPECT OF THE LOAN DOCUMENTS, INCLUDING, WITHOUT LIMITATION, THE REASONABLE
FEES AND DISBURSEMENTS OF COUNSEL AND ALL OTHER EXPENSES INCURRED IN CONNECTION
WITH INVESTIGATING, DEFENDING OR PREPARING TO DEFEND ANY SUCH ACTION, SUIT,
PROCEEDING (INCLUDING ANY INVESTIGATIONS, LITIGATION OR INQUIRIES) OR CLAIM AND
INCLUDING ALL INDEMNITY MATTERS ARISING BY REASON OF THE ORDINARY NEGLIGENCE OF
ANY INDEMNIFIED PARTY, BUT EXCLUDING ALL INDEMNITY MATTERS ARISING SOLELY BY
REASON OF CLAIMS BETWEEN THE LENDERS OR ANY LENDER AND THE AGENT OR A LENDER'S
SHAREHOLDERS AGAINST THE AGENT OR LENDER OR BY REASON OF THE GROSS NEGLIGENCE
OR WILLFUL MISCONDUCT ON THE PART OF THE INDEMNIFIED PARTY; AND
(c) TO INDEMNIFY AND HOLD HARMLESS FROM TIME TO TIME THE INDEMNIFIED
PARTY FROM AND AGAINST ANY AND ALL LOSSES, CLAIMS, COST RECOVERY ACTIONS,
ADMINISTRATIVE ORDERS OR PROCEEDINGS, DAMAGES AND LIABILITIES TO WHICH ANY SUCH
PERSON MAY BECOME SUBJECT (I) UNDER ANY ENVIRONMENTAL LAW APPLICABLE TO QSRD OR
ANY OF ITS SUBSIDIARIES OR ANY OF THEIR PROPERTIES, INCLUDING WITHOUT
LIMITATION, THE TREATMENT OR DISPOSAL OF HAZARDOUS SUBSTANCES ON ANY OF THEIR
PROPERTIES, (II) AS A RESULT OF THE BREACH OR NON-COMPLIANCE BY QSRD OR ANY OF
ITS SUBSIDIARIES WITH ANY ENVIRONMENTAL LAW APPLICABLE TO QSRD OR ANY OF ITS
SUBSIDIARIES, (III) DUE TO PAST OWNERSHIP BY QSRD OR ANY OF ITS SUBSIDIARIES OF
ANY OF THEIR PROPERTIES OR PAST ACTIVITY ON ANY OF THEIR PROPERTIES WHICH,
THOUGH LAWFUL AND FULLY PERMISSIBLE AT THE TIME, COULD RESULT IN PRESENT
LIABILITY, (IV) THE PRESENCE, USE, RELEASE, STORAGE, TREATMENT OR DISPOSAL OF
HAZARDOUS SUBSTANCES ON OR AT ANY OF THE PROPERTIES OWNED OR OPERATED BY QSRD
OR ANY OF ITS SUBSIDIARIES, OR (V) ANY OTHER ENVIRONMENTAL, HEALTH OR SAFETY
CONDITION IN CONNECTION WITH THE LOAN DOCUMENTS, PROVIDED, HOWEVER, NO
INDEMNITY SHALL BE AFFORDED UNDER THIS SECTION 12.03(C) IN RESPECT OF ANY
PROPERTY FOR ANY OCCURRENCE ARISING FROM THE ACTS OR OMISSIONS OF THE AGENT OR
ANY LENDER DURING THE PERIOD AFTER WHICH SUCH PERSON, ITS SUCCESSORS OR ASSIGNS
SHALL HAVE OBTAINED POSSESSION OF SUCH PROPERTY (WHETHER BY FORECLOSURE OR DEED
IN LIEU OF FORECLOSURE, AS MORTGAGEE-IN-POSSESSION OR OTHERWISE).
(d) No Indemnified Party may settle any claim to be indemnified
without the consent of the indemnitor, such consent not to be unreasonably
withheld; provided, that the indemnitor may not reasonably withhold consent to
any settlement that an Indemnified Party proposes, if the indemnitor does not
have the financial ability to pay all its obligations outstanding and asserted
against the indemnitor at that time, including the maximum potential claims
against the Indemnified Party to be indemnified pursuant to this Section 12.03.
(e) In the case of any indemnification hereunder, the Agent or
Lender, as appropriate, shall give notice to the Borrower of any such claim or
demand being made against the Indemnified Party and the Borrower shall have the
non-exclusive right to join in the defense against any such claim or demand
provided that if the Borrower provides a defense, the Indemnified Party shall
bear its own cost of defense unless there is a conflict between the Borrower
and such Indemnified Party.
(f) THE FOREGOING INDEMNITIES SHALL EXTEND TO THE INDEMNIFIED PARTIES
NOTWITHSTANDING THE SOLE OR CONCURRENT NEGLIGENCE OF EVERY KIND OR CHARACTER
WHATSOEVER, WHETHER ACTIVE OR PASSIVE, WHETHER AN AFFIRMATIVE ACT OR AN
OMISSION,
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INCLUDING WITHOUT LIMITATION, ALL TYPES OF NEGLIGENT CONDUCT IDENTIFIED IN THE
RESTATEMENT (SECOND) OF TORTS OF ONE OR MORE OF THE INDEMNIFIED PARTIES OR BY
REASON OF STRICT LIABILITY IMPOSED WITHOUT FAULT ON ANY ONE OR MORE OF THE
INDEMNIFIED PARTIES. TO THE EXTENT THAT AN INDEMNIFIED PARTY IS FOUND TO HAVE
COMMITTED AN ACT OF GROSS NEGLIGENCE OR WILLFUL MISCONDUCT, THIS CONTRACTUAL
OBLIGATION OF INDEMNIFICATION SHALL CONTINUE BUT SHALL ONLY EXTEND TO THE
PORTION OF THE CLAIM THAT IS DEEMED TO HAVE OCCURRED BY REASON OF EVENTS OTHER
THAN THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE INDEMNIFIED PARTY.
(g) The Borrower's obligations under this Section 12.03 shall survive
any termination of this Agreement and the payment of the Notes and shall
continue thereafter in full force and effect.
(h) The Borrower shall pay any amounts due under this Section 12.03
within thirty (30) days of the receipt by the Borrower of notice of the amount
due.
Section 12.04 Amendments, Etc. Any provision of this Agreement or any
Security Instrument may be amended, modified or waived with QSRD's, the
Borrower's and the Majority Lenders' prior written consent; provided that (i)
no amendment, modification or waiver which extends the maturity of the Loans,
increases the Aggregate Maximum Credit Amounts, modifies any term herein
providing for the determination of the Borrowing Base, forgives any
Indebtedness outstanding under this Agreement, releases any Obligor or
collateral the aggregate SEC Value of which exceeds $2,500,000 during any
fiscal year, reduces the interest rate applicable to the Loans or the fees
payable to the Lenders generally, affects Section 2.03(a), this Section 12.04
or Section 12.06(a) or modifies the definition of "Majority Lenders" or
"Required Lenders" shall be effective without consent of all Lenders; (ii) no
amendment, modification or waiver which increases the Maximum Credit Amount of
any Lender shall be effective without the consent of such Lender; and (iii) no
amendment, modification or waiver which modifies the rights, duties or
obligations of the Agent shall be effective without the consent of the Agent.
Section 12.05 Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns.
Section 12.06 Assignments and Participations.
(a) No Obligor, including the Borrower, may assign its rights or
obligations hereunder, under the Notes, any Letter of Credit or any other Loan
Documents without the prior consent of all of the Lenders and the Agent.
(b) Any Lender may, upon the written consent of the Agent and the
Borrower (which consent will not be unreasonably withheld), assign to one or
more assignees all or a portion of its rights and obligations under this
Agreement pursuant to an Assignment Agreement substantially in the form of
Exhibit E (an "Assignment") provided, however, that (i) any such assignment
shall be in the amount of at least $10,000,000 or such lesser amount to which
the Borrower has consented and (ii) the assignee shall pay to the Agent a
processing and recordation fee of $2,000 for each assignment. Any such
assignment will become effective upon the execution and delivery to the Agent
of the Assignment and the consent of the Agent. Promptly after receipt of an
executed Assignment, the Agent shall send to the Borrower a copy of such
executed Assignment. Upon receipt of such executed Assignment, the Borrower,
will, at its own expense, execute and deliver
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<PAGE> 77
new Notes to the assignor and/or assignee, as appropriate, in accordance with
their respective interests as they appear. Upon the effectiveness of any
assignment pursuant to this Section 12.06(b), the assignee will become a
"Lender," if not already a "Lender," for all purposes of this Agreement and the
Security Instruments. The assignor shall be relieved of its obligations
hereunder to the extent of such assignment (and if the assigning Lender no
longer holds any rights or obligations under this Agreement, such assigning
Lender shall cease to be a "Lender" hereunder except that its rights under
Sections 4.06, 5.01, 5.05 and 12.03 shall not be affected). The Agent will
prepare on the last Business Day of each month during which an assignment has
become effective pursuant to this Section 12.06(b), a new Annex I giving effect
to all such assignments effected during such month, and will promptly provide
the same to the Borrower and each of the Lenders.
(c) Each Lender may transfer, grant or assign participations in all
or any part of such Lender's interests hereunder pursuant to this Section
12.06(c) to any Person, provided that: (i) such Lender shall remain a "Lender"
for all purposes of this Agreement and the transferee of such participation
shall not constitute a "Lender" hereunder; and (ii) no participant under any
such participation shall have rights to approve any amendment to or waiver of
any of the Loan Documents except to the extent such amendment or waiver would
(w) forgive or reduce the amount of principal due hereunder or under any Note,
(x) extend the Revolving Credit Termination Date or the Maturity Date, (y)
reduce the interest rate (other than as a result of waiving the applicability
of any post-default increases in interest rates) or fees applicable to any of
the Commitments or Loans or Letters of Credit in which such participant is
participating, or postpone the payment of any thereof, or (z) release all or
substantially all of the collateral or any guarantor (except as expressly
provided herein or in any Loan Document) supporting any of the Commitments or
Loans or Letters of Credit in which such participant is participating. In the
case of any such participation, the participant shall not have any rights under
this Agreement or any of the Loan Documents (the participant's rights against
the granting Lender in respect of such participation to be those set forth in
the agreement with such Lender creating such participation), and all amounts
payable by the Borrower hereunder shall be determined as if such Lender had not
sold such participation, provided that such participant shall be entitled to
receive additional amounts under Article V on the same basis as if it were a
Lender and be indemnified under Section 12.03 as if it were a Lender. In
addition, each agreement creating any participation must include an agreement
by the participant to be bound by the provisions of Section 12.15.
(d) The Lenders may furnish any information concerning the Obligors
in the possession of the Lenders from time to time to assignees and
participants (including prospective assignees and participants); provided that,
such Persons agree to be bound by the provisions of Section 12.15 hereof.
(e) Notwithstanding anything in this Section 12.06 to the contrary,
any Lender may assign and pledge its Note to any Federal Reserve Bank or the
United States Treasury as collateral security pursuant to Regulation A of the
Board of Governors of the Federal Reserve System and any operating circular
issued by such Federal Reserve System and/or such Federal Reserve Bank. No
such assignment and/or pledge shall release the assigning and/or pledging
Lender from its obligations hereunder.
(f) Notwithstanding any other provisions of this Section 12.06, no
transfer or assignment of the interests or obligations of any Lender or any
grant of participations therein shall be permitted
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<PAGE> 78
if such transfer, assignment or grant would require QSRD or the Borrower to
file a registration statement with the SEC or to qualify the Loans under the
"Blue Sky" laws of any state.
Section 12.07 Invalidity. In the event that any one or more of the
provisions contained in any of the Loan Documents or the Letters of Credit, the
Letter of Credit Agreements shall, for any reason, be held invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provision of the Notes, this Agreement or any other
Loan Document.
Section 12.08 Counterparts. Each Loan Document may be executed in any
number of counterparts, all of which taken together shall constitute one and
the same instrument and any of the parties hereto may execute this Agreement by
signing any such counterpart.
Section 12.09 References. The words "herein," "hereof," "hereunder"
and other words of similar import when used in this Agreement refer to this
Agreement as a whole, and not to any particular article, section or subsection.
Any reference herein to a Section shall be deemed to refer to the applicable
Section of this Agreement unless otherwise stated herein. Any reference herein
to an exhibit or schedule shall be deemed to refer to the applicable exhibit or
schedule attached hereto unless otherwise stated herein.
Section 12.10 Survival. The obligations of the parties under Section
4.06, Article V, and Sections 11.05 and 12.03 shall survive the repayment of
the Loans and the termination of the Commitments. To the extent that any
payments on the Indebtedness or proceeds of any collateral are subsequently
invalidated, declared to be fraudulent or preferential, set aside or required
to be repaid to a trustee, debtor in possession, receiver or other Person under
any bankruptcy law, common law or equitable cause, then to such extent, the
Indebtedness so satisfied shall be revived and continue as if such payment or
proceeds had not been received and the Agent's and the Lenders' Liens, security
interests, rights, powers and remedies under this Agreement and each Loan
Document shall continue in full force and effect. In such event, each Loan
Document shall be automatically reinstated and QSRD and the Borrower shall take
and shall cause each Subsidiary Guarantor to take, such action as may be
reasonably requested by the Agent and the Lenders to effect such reinstatement.
Section 12.11 Captions. Captions and section headings appearing herein
are included solely for convenience of reference and are not intended to affect
the interpretation of any provision of this Agreement.
Section 12.12 NO ORAL AGREEMENTS. THE LOAN DOCUMENTS EMBODY THE ENTIRE
AGREEMENT AND UNDERSTANDING BETWEEN THE PARTIES AND SUPERSEDE ALL OTHER
AGREEMENTS AND UNDERSTANDINGS BETWEEN SUCH PARTIES RELATING TO THE SUBJECT
MATTER HEREOF AND THEREOF. THE LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEM-
PORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN
ORAL AGREEMENTS BETWEEN THE PARTIES.
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<PAGE> 79
Section 12.13 GOVERNING LAW; SUBMISSION TO JURISDICTION.
(a) THIS AGREEMENT AND THE NOTES (INCLUDING, BUT NOT LIMITED TO, THE
VALIDITY AND ENFORCEABILITY HEREOF AND THEREOF) SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS. TEX. REV. CIV.
STAT. ANN. ART. 5069, CH. 15 (WHICH REGULATES CERTAIN REVOLVING CREDIT LOAN
ACCOUNTS AND REVOLVING TRI-PARTY ACCOUNTS) SHALL NOT APPLY TO THIS AGREEMENT OR
THE NOTES.
(b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THE LOAN DOCUMENTS
SHALL BE BROUGHT IN THE COURTS OF THE STATE OF TEXAS OR OF THE UNITED STATES OF
AMERICA FOR THE SOUTHERN DISTRICT OF TEXAS, HOUSTON DIVISION, AND, BY EXECUTION
AND DELIVERY OF THIS AGREEMENT, EACH PARTY HEREBY ACCEPTS FOR ITSELF AND (TO
THE EXTENT PERMITTED BY LAW) IN RESPECT OF ITS PROPERTY, GENERALLY AND
UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS. EACH PARTY HEREBY
IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING, WITHOUT LIMITATION, ANY OBJECTION
TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH
IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY SUCH ACTION OR PROCEEDING
IN SUCH RESPECTIVE JURISDICTIONS. THIS SUBMISSION TO JURISDICTION IS NON-
EXCLUSIVE AND DOES NOT PRECLUDE THE PARTIES FROM OBTAINING JURISDICTION OVER
OTHER PARTIES IN ANY COURT OTHERWISE HAVING JURISDICTION.
(c) QSRD AND THE BORROWER IRREVOCABLY CONSENTS TO THE SERVICE OF
PROCESS OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY
THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID,
TO QSRD OR THE BORROWER, AS APPROPRIATE, AT ITS SAID ADDRESS, SUCH SERVICE TO
BECOME EFFECTIVE THIRTY (30) DAYS AFTER SUCH MAILING.
(d) NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE AGENT OR ANY LENDER
OR ANY HOLDER OF A NOTE TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW
OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST QSRD OR THE
BORROWER IN ANY OTHER JURISDICTION.
(e) EACH OF QSRD, THE BORROWER AND EACH LENDER HEREBY (I) IRREVOCABLY
AND UNCONDITIONALLY WAIVE, TO THE FULLEST EXTENT PERMITTED BY LAW, TRIAL BY
JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY
SECURITY INSTRUMENT AND FOR ANY COUNTERCLAIM THEREIN; (II) IRREVOCABLY WAIVE,
TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR
RECOVER IN ANY SUCH LITIGATION ANY SPECIAL, EXEMPLARY, PUNITIVE OR
CONSEQUENTIAL DAMAGES, OR DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL
DAMAGES; (III) CERTIFY THAT NO PARTY HERETO NOR ANY REPRESENTATIVE OR AGENT OR
COUNSEL FOR ANY PARTY HERETO HAS REPRESENTED, EXPRESSLY OR OTHERWISE, OR
IMPLIED THAT SUCH PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE
THE FOREGOING WAIVERS, AND (IV) ACKNOWLEDGE THAT IT HAS BEEN INDUCED TO ENTER
INTO THIS AGREEMENT, THE SECURITY INSTRUMENTS AND THE TRANSACTIONS CONTEMPLATED
HEREBY AND THEREBY BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND
CERTIFICATIONS CONTAINED IN THIS SECTION 12.13.
Section 12.14 Interest. It is the intention of the parties hereto that
the Agent or each Lender shall conform strictly to usury laws applicable to it.
Accordingly, if the transactions contemplated
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hereby, by the Notes or any other Loan Document would be usurious as to the
Agent or any Lender under laws applicable to it (including the laws of the
United States of America and the State of Texas or any other jurisdiction whose
laws may be mandatorily applicable to such Lender notwithstanding the other
provisions of this Agreement), then, in that event, notwithstanding anything to
the contrary in any of the Loan Documents or any agreement entered into in
connection with or as security for the Notes, it is agreed as follows: (i) the
aggregate of all consideration which constitutes interest under law applicable
to the Agent or any Lender that is contracted for, taken, reserved, charged or
received by the Agent or such Lender under any of the Loan Documents or
agreements or otherwise in connection with the Notes shall under no
circumstances exceed the maximum amount allowed by such applicable law, and any
excess shall be canceled automatically and if theretofore paid shall be
credited by the Agent or such Lender on the principal amount of the
Indebtedness (or, to the extent that the principal amount of the Indebtedness
shall have been or would thereby be paid in full, refunded by the Agent or such
Lender to the Borrower); and (ii) in the event that the maturity of the Notes
is accelerated by reason of an election of the holder thereof resulting from
any Event of Default under this Agreement or otherwise, or in the event of any
required or permitted prepayment, then such consideration that constitutes
interest under law applicable to the Agent or any Lender may never include more
than the maximum amount allowed by such applicable law, and excess interest, if
any, provided for in this Agreement or otherwise shall be canceled
automatically by the Agent or such Lender as of the date of such acceleration
or prepayment and, if theretofore paid, shall be credited by the Agent or such
Lender on the principal amount of the Indebtedness (or, to the extent that the
principal amount of the Indebtedness shall have been or would thereby be paid
in full, refunded by the Agent or such Lender to the Borrower). All sums paid
or agreed to be paid to the Agent or any Lender for the use, forbearance or
detention of sums due hereunder shall, to the extent permitted by law
applicable to the Agent or such Lender, be amortized, prorated, allocated and
spread throughout the full term of the Loans evidenced by the Notes until
payment in full so that the rate or amount of interest on account of any Loans
hereunder does not exceed the maximum amount allowed by such applicable law.
If at any time and from time to time (i) the amount of interest payable to the
Agent or any Lender on any date shall be computed at the Highest Lawful Rate
applicable to the Agent or such Lender pursuant to this Section 12.14 and (ii)
in respect of any subsequent interest computation period the amount of interest
otherwise payable to the Agent or such Lender would be less than the amount of
interest payable to the Agent or such Lender computed at the Highest Lawful
Rate applicable to the Agent or such Lender, then the amount of interest
payable to the Agent or such Lender in respect of such subsequent interest
computation period shall continue to be computed at the Highest Lawful Rate
applicable to the Agent or such Lender until the total amount of interest
payable to the Agent or such Lender shall equal the total amount of interest
which would have been payable to the Agent or such Lender if the total amount
of interest had been computed without giving effect to this Section 12.14.
To the extent that the Texas Credit Title is relevant to any Agent or
Lender for the purpose of determining the Highest Lawful Rate, each such Agent
and Lender hereby elects to determine the applicable rate ceiling under the
Texas Credit Title by the weekly rate ceiling from time to time in effect.
Section 12.15 Confidentiality. In the event that the Borrower
provides to the Agent or the Lenders written confidential information belonging
to the Borrower, if the Borrower shall denominate such information in writing
as "confidential", the Agent and the Lenders shall thereafter maintain such
information in confidence in accordance with the standards of care and
diligence that each utilizes in maintaining its own confidential information.
This obligation of confidence shall
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<PAGE> 81
not apply to such portions of the information which (i) are in the public
domain, (ii) hereafter become part of the public domain without the Agent or
the Lenders breaching their obligation of confidence to the Borrower, (iii) are
previously known by the Agent or the Lenders from some source other than the
Borrower (which disclosing source did not, to the knowledge of such disclosing
Person, breach any confidentiality agreement with the Borrower), (iv) are
hereafter developed by the Agent or the Lenders without using the Borrower's
information, (v) are hereafter obtained by or available to the Agent or the
Lenders from a third party who owes no obligation of confidence to the Borrower
with respect to such information or through any other means other than through
disclosure by the Borrower, (vi) are disclosed with the Borrower's consent,
(vii) must be disclosed either pursuant to any Governmental Requirement or to
Persons regulating the activities of the Agent or the Lenders, or (viii) as may
be required by law or regulation or order of any Governmental Authority in any
judicial, arbitration or governmental proceeding. Further, the Agent or a
Lender may disclose any such information to any other Lender, any independent
petroleum engineers or consultants, any independent certified public
accountants or any legal counsel employed by such Person in connection with
this Agreement or any Security Instrument, including without limitation, the
enforcement or exercise of all rights and remedies thereunder, or any assignee
or participant (including prospective assignees and participants) in the Loans;
provided, however, that the Agent or Lender imposes on the Person to whom such
information is disclosed the same obligation to maintain the confidentiality of
such information as is imposed upon it hereunder. Notwithstanding anything to
the contrary provided herein, this obligation of confidence shall cease three
(3) years from the date the information was furnished, unless the Borrower
requests in writing at least thirty (30) days prior to the expiration of such
three year period, to maintain the confidentiality of such information for an
additional three year period. The Borrower waives any and all other rights it
may have to confidentiality as against the Agent and the Lenders arising by
contract, agreement, statute or law except as expressly stated in this Section
12.15.
Section 12.16 EXCULPATION PROVISIONS. EACH OF THE PARTIES HERETO
SPECIFICALLY AGREES THAT IT HAS A DUTY TO READ THIS AGREEMENT AND THE OTHER
LOAN DOCUMENTS AND AGREES THAT IT IS CHARGED WITH NOTICE AND KNOWLEDGE OF THE
TERMS OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS; THAT IT HAS IN FACT READ
THIS AGREEMENT AND IS FULLY INFORMED AND HAS FULL NOTICE AND KNOWLEDGE OF THE
TERMS, CONDITIONS AND EFFECTS OF THIS AGREEMENT; THAT IT HAS BEEN REPRESENTED
BY INDEPENDENT LEGAL COUNSEL OF ITS CHOICE THROUGHOUT THE NEGOTIATIONS
PRECEDING ITS EXECUTION OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS; AND HAS
RECEIVED THE ADVICE OF ITS ATTORNEY IN ENTERING INTO THIS AGREEMENT AND THE
OTHER LOAN DOCUMENTS; AND THAT IT RECOGNIZES THAT CERTAIN OF THE TERMS OF THIS
AGREEMENT AND THE OTHER LOAN DOCUMENTS RESULT IN ONE PARTY ASSUMING THE
LIABILITY INHERENT IN SOME ASPECTS OF THE TRANSACTION AND RELIEVING THE OTHER
PARTY OF ITS RESPONSIBILITY FOR SUCH LIABILITY. EACH PARTY HERETO AGREES AND
COVENANTS THAT IT WILL NOT CONTEST THE VALIDITY OR ENFORCEABILITY OF ANY EXCUL-
PATORY PROVISION OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS ON THE BASIS
THAT THE PARTY HAD NO NOTICE OR KNOWLEDGE OF SUCH PROVISION OR THAT THE
PROVISION IS NOT "CONSPICUOUS."
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Section 12.17 Designated Senior Indebtedness. QSRD and the Borrower
hereby designate all Indebtedness outstanding under this Agreement, the Notes
and the other Loan Documents to be "Designated Senior Indebtedness" (as defined
in the Offering Memorandum dated July 15, 1995 relating to the DEM Subordinated
Debt) for purposes of the DEM Subordinated Debt and to be "guarantor senior
indebtedness", "designated guarantor senior indebtedness" or any other similar
or equivalent classification under any debt instrument or agreement to which
either QSRD or the Borrower is now or hereafter a party.
Section 12.18 Amendments to Prior Loan Documents. The loan documents
executed and delivered in connection with the Prior Credit Agreement are being
amended and restated contemporaneously with this Agreement. Each Lender hereby
consents to such action.
The parties hereto have caused this Agreement to be duly executed as of
the day and year first above written.
[SIGNATURES BEGIN ON THE NEXT PAGE]
76
<PAGE> 83
QUEEN SAND RESOURCES, INC., a Delaware
corporation
By: /s/ ROBERT P. LINDSAY
---------------------------------
Robert P. Lindsay
Chief Operating Officer
By: /s/ EDWARD J. MUNDEN
---------------------------------
Edward J. Munden
President
QUEEN SAND RESOURCES, INC., a Nevada
corporation
By: /s/ ROBERT P. LINDSAY
---------------------------------
Robert P. Lindsay
Vice President
By: /s/ EDWARD J. MUNDEN
---------------------------------
Edward J. Munden
President
Address for Notices for QSRD and the
Borrower:
Queen Sand Resources, Inc.
3500 Oak Lawn Drive, Suite 380
Dallas, Texas 75219
Attention: Robert P. Lindsay
Telephone: (214) 521-9959
Facsimile: (214) 521-9960
with copy to:
Queen Sand Resources, Inc.
60 Queen Street, Suite 1400
Ottawa, Canada K1P 5Y7
Attention: Mr. Ronald Benn
Telephone: (613) 230-7211
Facsimile: (613) 230-6055
and
Haynes & Boone LLP
901 Main Street, Suite 3100
Dallas, Texas 75202-3789
Attention: Mr. William L. Boeing
Telephone: (214) 651-5553
Facsimile: (214) 651-5940
<PAGE> 84
AGENT: BANK OF MONTREAL, as Agent
By: /s/ ROBERT L. ROBERTS
---------------------------------
Robert L. Roberts
Director, U.S. Corporate
Banking
Address for Notices:
115 South LaSalle St.
Chicago, Illinois 60603
Attention: Marlon Sesson
Telecopier No.: (312) 750-5947
Telephone No.: (312) 750-6061
with copy to:
700 Louisiana, Suite 4400
Houston, Texas 77002
Telecopier No. (713) 223-4007
Telephone No.: (713) 546-9700
Attention: Client Services Group
<PAGE> 85
LENDER: BANK OF MONTREAL
By: /s/ ROBERT L. ROBERTS
---------------------------------
Robert L. Roberts
Director, U.S. Corporate
Banking
Applicable Lending Office for Base
Rate and Eurodollar Loans
115 South LaSalle St.
Chicago, Illinois 60603
Attention: Marlon Sesson
Telecopier No.: (312) 750-5947
Telephone No.: (312) 750-6061
Address for Notices:
700 Louisiana, Suite 4400
Houston, Texas 77002
Telecopier No.: (713) 223-4007
Telephone No.: (713) 546-9700
Attention: Client Services Group
<PAGE> 86
LENDER: ENRON CAPITAL & TRADE RESOURCES CORP.
By: /s/ STEVEN M. EMSHOFF
---------------------------------
Steven M. Emshoff
Agent and Attorney-in-fact
Address and Applicable Lending Office
for Base Rate and Eurodollar Loans:
1400 Smith
Houston, Texas 77002
Attention: Donna Lowry
Telephone: (713) 853-1939
Telecopy: (713) 646-4039
<PAGE> 87
LENDER: JOINT ENERGY DEVELOPMENT INVESTMENTS II
LIMITED PARTNERSHIP
By: Enron Capital Management II Limited
Partnership, its sole general partner
By: Enron Capital II Corp., its sole
general partner
By: /s/ STEVEN M. EMSHOFF
---------------------------------
Steven M. Emshoff
Agent and Attorney-in-fact
Address and Applicable Lending Office
for Base Rate and Eurodollar Loans:
1400 Smith
Houston, Texas 77002
Attention: Shirley Hudler
Telephone: (713) 853-4859
Telecopy: (713) 646-8008
<PAGE> 1
EXHIBIT 10.18
FIRST AMENDMENT
TO
AMENDED AND RESTATED
CREDIT AGREEMENT
Among
QUEEN SAND RESOURCES, INC.,
a Delaware corporation,
as Guarantor,
QUEEN SAND RESOURCES, INC.,
a Nevada corporation
as Borrower,
BANK OF MONTREAL,
as Agent,
and
The Lenders Signatory Hereto
Effective as of July 1, 1998
<PAGE> 2
FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
This FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
(this "First Amendment") executed effective as of the 1st of July, 1998 (the
"Effective Date") is among QUEEN SAND RESOURCES, INC., a Delaware corporation
("QSRD"), QUEEN SAND RESOURCES, INC., a corporation formed under the laws of the
State of Nevada (the "Borrower"); NORTHLAND OPERATING CO., a Nevada corporation
("Northland"), CORRIDA RESOURCES, INC., a Nevada corporation ("Corrida"), each
of the lenders that is a signatory hereto or which becomes a signatory hereto as
provided in Section 12.06 (individually, together with its successors and
assigns, a "Lender" and, collectively, the "Lenders"); and BANK OF MONTREAL, as
agent for the Lenders (in such capacity, together with its successors in such
capacity, the "Agent").
RECITALS
A. QSRD, the Borrower, the Agent and the Lenders are parties to that
certain Amended and Restated Credit Agreement dated as of April 17, 1998 (the
"Credit Agreement"), pursuant to which the Lenders have made certain credit
available to and on behalf of the Borrower.
B. The Borrower has requested and the Agent and the Lenders have agreed
to amend certain provisions of the Credit Agreement.
C. NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
Section 1. Defined Terms. All capitalized terms which are defined in
the Credit Agreement, but which are not defined in this First Amendment, shall
have the same meanings as defined in the Credit Agreement. Unless otherwise
indicated, all section references in this First Amendment refer to the Credit
Agreement.
Section 2. Amendments to Credit Agreement.
2.1 Amendments to Section 1.01.
(a) The definitions of "Agreement" and "Revolving Credit Termination
Date" are hereby amended to read as follows:
"Agreement" shall mean this Credit Agreement, as amended by
the First Amendment and as further amended from time to time.
"Revolving Credit Termination Date" shall mean, unless the
Commitments are sooner terminated pursuant to Sections 2.03(b) or 10.02
hereof, April 16, 1999.
(b) The following definitions are hereby added where alphabetically
appropriate:
<PAGE> 3
"First Amendment" shall mean that certain First Amendment to
Amended and Restated Credit Agreement dated as of July 1, 1998 among
the Obligors, the Agent and the Lenders.
"First Amendment Effective Date" shall mean the "Effective
Date" as such term is defined in the First Amendment.
"Senior Indenture" shall mean the Indenture, dated as of the
First Amendment Effective Date, among QSRD, as issuer, the Borrower,
Northland and Corrida, as initial subsidiary guarantors, and Harris
Trust & Savings Bank, as trustee, pursuant to which the Senior Notes,
if any, are to be issued with terms substantially similar to those
contained in the Senior Note Offering Memorandum.
"Senior Indenture Indebtedness" shall mean the Senior Notes,
the guarantees thereof and any other Indebtedness of any Obligor under
the Senior Indenture, together with any refinancings thereof permitted
by the terms of Section 9.22(a).
"Senior Note Documents" shall mean the collective reference to
the Senior Notes, the Senior Indenture, the Senior Note Offering
Memorandum and each agreement, instrument and document delivered in
connection therewith or relating thereto.
"Senior Note Offering Memorandum" shall mean the Offering
Memorandum, dated June 30, 1998, related to the issuance of the Senior
Notes, as amended or supplemented from time to time.
"Senior Notes" shall mean the 12-1/2% $125,000,000 Senior
Notes due 2008 of QSRD issued pursuant to the Senior Indenture.
2.2 Section 2.08. The last sentence of Section 2.08(a) is hereby
deleted in its entirety and the following is inserted in lieu thereof:
During the period from and after the First Amendment Effective Date
until the first Redetermination Date to occur after the First Amendment
Effective Date, unless redetermined pursuant to Section 2.08(d) or
adjusted pursuant to Sections 2.08(c), 8.08(b) or 9.15, the amount of
the Borrowing Base shall be $25,000,000.
2.3 Section 6.02. Section 6.02 is hereby amended to add the following
new paragraph which reads in its entirety as follows:
CERTIFICATE REGARDING INCURRENCE OF DEBT UNDER SENIOR
INDENTURE. The obligation of the Lenders to make Loans to the Borrower
or of the Agent to issue Letters of Credit in an aggregate amount in
excess of $35,000,000 is subject to the further condition precedent
that QSRD deliver a certificate from an authorized officer, in form and
substance reasonably satisfactory to the Agent, certifying that,
2
<PAGE> 4
as of the date of incurrence, QSRD and the Borrower are permitted to
incur such Indebtedness under the Senior Indenture (because either (i)
such Indebtedness will constitute "Permitted Indebtedness" under the
Senior Indenture or (ii) such Indebtedness may be incurred without
violation of the then applicable Consolidated Interest Coverage Ratio
set forth in the Senior Indenture) and setting forth in reasonable
detail calculations to support the certification.
2.4 Section 8.12. Section 8.12 is hereby deleted in its entirety.
2.5 Section 9.1. Section 9.1(k) is hereby deleted in its entirety and
the following is inserted in lieu thereof:
(k) Debt of QSRD and its Subsidiaries, including the Borrower,
incurred pursuant to (i) the Senior Note Documents and (ii) any
subsequent Hi- Yield Offering; provided that (A) such Debt under this
Section 9.01(k)(ii) is issued on terms reasonably satisfactory to the
Majority Lenders with respect to principal amount, maturity, interest
rate, covenants and, if applicable, subordination language, and (B) in
connection with the issuance of any such Debt under this Section
9.01(k)(ii), the Lenders may cause the Borrowing Base to be
redetermined.
2.6 Section 9.22. Sections 9.22(a), (b), (c) and (f) are hereby deleted
in their entirety and the following is inserted in lieu thereof:
(a) QSRD and the Borrower shall not, and shall not permit any
Subsidiary to, amend, supplement or modify any Senior Note Document or
repay the principal of, or make any other payment in relation to, the
Senior Notes; provided, so long as no Borrowing Base deficiency then
exists under Section 2.07(c) and Default or Event of Default has
occurred and is continuing, the foregoing shall not prohibit (i) the
payment of interest on the Senior Notes, or (ii) the repayment of the
Senior Notes with the proceeds of any refinancing thereof (provided
that such refinancing Debt is on terms substantially similar to the
Senior Notes).
(b) Omitted.
(c) Omitted.
(f) Omitted.
Section 3. Conditions Precedent. The effectiveness of this First
Amendment is subject to the receipt by the Agent of the following documents and
satisfaction of the other conditions provided in this Section 3, each of which
shall be reasonably satisfactory to the Agent in form and substance:
3.1 Loan Documents. The Agent shall have received multiple counterparts
as requested of this First Amendment.
3
<PAGE> 5
3.2 No Default. No Default or Event of Default shall have occurred and
be continuing as of the Effective Date.
3.3 Issuance of Senior Notes. The Senior Notes shall have been issued
and purchased by the initial holder(s) thereof as contemplated in the Senior
Note Offering Memorandum.
3.4 Repayment of Bridge Loans. The Agent shall have received evidence
that all outstanding principal, accrued and unpaid interest and other fees and
compensation owed in connection with the Bridge Loans shall have been paid in
full.
Section 4. Representations and Warranties; Etc. Each Obligor hereby
affirms: (a) that as of the date of execution and delivery of this First
Amendment, all of the representations and warranties contained in each Loan
Document to which such Obligor is a party are true and correct in all material
respects as though made on and as of the Effective Date; and (b) that after
giving effect to this First Amendment and to the transactions and waivers
contemplated hereby, no Defaults exist under the Loan Documents or will exist
under the Loan Documents.
Section 5. Miscellaneous.
5.1 Confirmation. The provisions of the Credit Agreement (as amended by
this First Amendment) shall remain in full force and effect in accordance with
its terms following the effectiveness of this First Amendment.
5.2 Ratification and Affirmation of Obligors. Each of the Obligors
hereby expressly (i) acknowledges the terms of this First Amendment, (ii)
ratifies and affirms its obligations under the Loan Documents to which it is a
party, (iii) acknowledges, renews and extends its continued liability under its
respective Guaranty Agreement, if applicable, and the other Security Instruments
to which it is a party and agrees that its respective Guaranty Agreement, if
applicable, and the other Security Instruments to which it is a party remains in
full force and effect with respect to the Indebtedness as amended hereby.
5.3 Counterparts. This First Amendment may be executed by one or more
of the parties hereto in any number of separate counterparts, and all of such
counterparts taken together shall be deemed to constitute one and the same
instrument.
5.4 No Oral Agreement. THIS WRITTEN FIRST AMENDMENT, THE CREDIT
AGREEMENT AND THE OTHER LOAN DOCUMENTS EXECUTED IN CONNECTION HEREWITH AND
THEREWITH REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR UNWRITTEN ORAL AGREEMENTS
OF THE PARTIES. THERE ARE NO SUBSEQUENT ORAL AGREEMENTS BETWEEN THE PARTIES.
5.5 GOVERNING LAW. THIS FIRST AMENDMENT (INCLUDING, BUT NOT LIMITED TO,
THE VALIDITY AND ENFORCEABILITY HEREOF) SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS.
4
<PAGE> 6
5.6 Approval of Senior Notes; Hedging Program. Each Lender hereby
acknowledges its satisfaction with the terms of the Senior Notes as described in
the Senior Note Offering Memorandum. Each Lender hereby further acknowledges its
satisfaction with the hedging program which the Borrower has put in place and
that such program satisfies the requirements of Section 8.11 of the Credit
Agreement.
[SIGNATURES BEGIN NEXT PAGE]
5
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment
to be duly executed effective as of the date first written above.
BORROWER: QUEEN SAND RESOURCES, INC., a Nevada corporation
By: /s/ ROBERT P. LINDSAY
-------------------------------------------
Robert P. Lindsay
Vice President
By: /s/ EDWARD J. MUNDEN
-------------------------------------------
Edward J. Munden
President
QSRD: QUEEN SAND RESOURCES, INC., a Delaware corporation
By: /s/ ROBERT P. LINDSAY
-------------------------------------------
Robert P. Lindsay
Chief Operating Officer
By: /s/ EDWARD J. MUNDEN
-------------------------------------------
Edward J. Munden
President
GUARANTORS: NORTHLAND OPERATING CO.
By: /s/ ROBERT P. LINDSAY
-------------------------------------------
Robert P. Lindsay
Vice President
By: /s/ EDWARD J. MUNDEN
-------------------------------------------
Edward J. Munden
President
<PAGE> 8
CORRIDA RESOURCES, INC.
By: /s/ ROBERT P. LINDSAY
-------------------------------------------
Robert P. Lindsay
Vice President
By: /s/ EDWARD J. MUNDEN
-------------------------------------------
Edward J. Munden
President
AGENT: BANK OF MONTREAL, as Agent
By: /s/ ROBERT L. ROBERTS
-------------------------------------------
Robert L. Roberts
Director, U.S. Corporate Banking
LENDER: BANK OF MONTREAL
By: /s/ MELISSA A. BAUMAN
-------------------------------------------
Melissa A. Bauman
Director, U.S. Corporate Banking
SOCIETE GENERALE, SOUTHWEST AGENCY
By: /s/ MARK A. COX
-------------------------------------------
Mark A. Cox
Director
ENRON CAPITAL & TRADE RESOURCES CORP.
By: /s/ STEVEN M. EMSHOFF
-------------------------------------------
Steven M. Emshoff
Agent and Attorney-in-fact
<PAGE> 9
JOINT ENERGY DEVELOPMENT INVESTMENTS II LIMITED
PARTNERSHIP
By: Enron Capital Management II Limited
Partnership, its sole general partner
By: Enron Capital II Corp., its sole
general partner
By: /s/ STEVEN M. EMSHOFF
---------------------------------------
Steven M. Emshoff
Agent and Attorney-in-fact
<PAGE> 1
EXHIBIT 10.19
AMENDED AND RESTATED
GUARANTY AGREEMENT
Dated as of April 17, 1998
By
QUEEN SAND RESOURCES, INC.,
as the Guarantor,
in favor of
BANK OF MONTREAL,
as Agent,
and
THE LENDERS NOW OR HEREAFTER SIGNATORY TO THE CREDIT AGREEMENT
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I
Definitions and Accounting Matters
Section 1.01 Terms Defined in Recitals...........................................1
Section 1.02 Certain Definitions.................................................1
Section 1.03 Credit Agreement Definitions........................................2
ARTICLE II
The Guaranty
Section 2.01 Obligations Guaranteed..............................................2
Section 2.02 Nature of Guaranty..................................................2
Section 2.03 Lenders' Rights.....................................................2
Section 2.04 Guarantor's Waivers.................................................3
Section 2.05 Maturity of Obligations; Payment....................................3
Section 2.06 Lenders' Expenses...................................................3
Section 2.07 Obligation..........................................................3
Section 2.08 Events and Circumstances Not Reducing or Discharging the
Guarantor's Obligations........................................3
Section 2.09 Subrogation.........................................................5
ARTICLE III
Representations and Warranties
Section 3.01 Representations and Warranties......................................5
ARTICLE IV
Subordination of Indebtedness
Section 4.01 Subordination of All Guarantor Claims...............................6
Section 4.02 Claims in Bankruptcy................................................6
Section 4.03 Payments Held in Trust..............................................6
Section 4.04 Liens Subordinate...................................................7
Section 4.05 Notation of Records.................................................7
ARTICLE V
Miscellaneous
Section 5.01 Successors and Assigns..............................................7
Section 5.02 Notices.............................................................7
Section 5.03 Authority of Agent..................................................7
Section 5.04 Governing Law; Submission to Jurisdiction...........................8
Section 5.05 Entire Agreement....................................................8
Section 5.06 Survival of Obligations.............................................8
Section 5.07 Designated Senior Indebtedness......................................8
Section 5.08 Prior Guaranty......................................................8
</TABLE>
i
<PAGE> 3
AMENDED AND RESTATED
GUARANTY AGREEMENT
This AMENDED AND RESTATED GUARANTY AGREEMENT dated as of April 17,
1998 is by QUEEN SAND RESOURCES, INC., a corporation duly organized and validly
existing under the laws of the state of Delaware ("Guarantor"), in favor of each
of the following: each of the financial institutions that is now or hereafter a
signatory to the Credit Agreement (as defined below) (individually, a "Lender"
and, collectively, the "Lenders"); and BANK OF MONTREAL, AS AGENT for the
Lenders (in such capacity, the "Agent").
RECITALS
A. Guarantor, QUEEN SAND RESOURCES, INC., a corporation duly organized
and validly existing under the laws of the state of Nevada (the "Borrower"), the
Agent and the Lenders have executed that certain Amended and Restated Credit
Agreement of even date herewith (such credit agreement, as amended, the "Credit
Agreement").
B. One of the terms and conditions stated in the Credit Agreement for
the making of the loans and extensions of credit described in the Credit
Agreement is the execution and delivery to the Agent and the Lenders of this
Guaranty Agreement.
C. NOW, THEREFORE, (i) in order to comply with the terms and conditions
of the Credit Agreement, (ii) to induce the Lenders to enter the Credit
Agreement, and (iii) for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Guarantor hereby agrees as
follows:
ARTICLE I
DEFINITIONS AND ACCOUNTING MATTERS
SECTION 1.01 TERMS DEFINED IN RECITALS. As used in this Guaranty
Agreement, the terms defined in the Recitals shall have the meanings indicated
in the Recitals.
SECTION 1.02 CERTAIN DEFINITIONS. As used in this Guaranty Agreement,
the following terms shall have the following meanings, unless the context
otherwise requires:
"Guarantor Claims" shall have the meaning indicated in Section 4.01.
"Guaranty Agreement" shall mean this Amended and Restated Guaranty
Agreement, as the same may from time to time be amended or supplemented.
"Obligations" shall mean (a) the payment and performance of all present
and future indebtedness, obligations and liabilities of the Borrower and/or the
Guarantor to the Agent and the Lenders under the Credit Agreement, including but
not limited to, (i) the full and punctual payment of the Notes issued
thereunder, and any and all promissory notes given in substitution for such
Notes or in modification, renewal, extension or rearrangement thereof in whole
or in part, and (ii) the reimbursement and other obligations of the Borrower
under and with respect to
<PAGE> 4
Letters of Credit and Letter of Credit Agreements now outstanding or hereafter
issued under the Credit Agreement; (b) all obligations of the Guarantor under
this Guaranty Agreement; (c) all interest (whether pre or post petition),
charges, expenses, reasonable attorneys' or other fees and any other sums
payable to or incurred by the Agent and, to the extent provided in the Credit
Agreement, the Lenders in connection with the execution or enforcement of any of
their rights and remedies hereunder or any other Security Instrument; (d)
payment of and performance of any and all present or future obligations of the
Guarantor or the Borrower according to the terms of any present or future
interest rate or currency swap, rate cap, rate floor, rate collar, forward rate
agreement or other exchange or rate protection agreements or any option with
respect to any such transaction now existing or hereafter entered into between
the Guarantor or the Borrower and any Lender or an Affiliate of such Lender; and
(e) payment of and performance of any and all present or future obligations of
the Guarantor or the Borrower according to the terms of any present or future
swap agreements, cap, floor, collar, forward agreement or other exchange or
protection agreements relating to crude oil, natural gas or other hydrocarbons
or any option with respect to any such transaction now existing or hereafter
entered into between the Guarantor or the Borrower and any Lender or an
Affiliate of such Lender.
SECTION 1.03 CREDIT AGREEMENT DEFINITIONS. Unless otherwise defined
herein, all terms beginning with a capital letter which are defined in the
Credit Agreement shall have the same meanings herein as therein.
ARTICLE II
THE GUARANTY
SECTION 2.01 OBLIGATIONS GUARANTEED. The Guarantor hereby irrevocably
and uncondi tionally guarantees the prompt payment at maturity of the
Obligations.
SECTION 2.02 NATURE OF GUARANTY. This guaranty is an absolute,
irrevocable, completed and continuing guaranty of payment and not a guaranty of
collection, and no notice of the Obligations or any extension of credit already
or hereafter contracted by or extended to the Borrower need be given to the
Guarantor. The guaranty evidenced hereby is joint and several with all other
guarantees of the Obligations. This guaranty may not be revoked by the Guarantor
and shall continue to be effective with respect to debt under the Obligations
arising or created after any attempted revocation by the Guarantor and shall
remain in full force and effect until the Obligations are paid in full and the
Aggregate Commitments are terminated, notwithstanding that from time to time
prior thereto no Obligations may be outstanding. The Borrower, the Agent and the
Lenders may modify, alter, rearrange, extend for any period and/or renew from
time to time, the Obligations and the Agent and the Lenders may waive any
Default or Events of Default without notice to the Guarantor and in such event
the Guarantor will remain fully bound hereunder on the Obligations. This
Guaranty Agreement may be enforced by the Agent and/or the Lenders and any
subsequent holder of the Obligations and shall not be discharged by the
assignment or negotiation of all or part of the Obligations. The Guarantor
hereby expressly waives presentment, demand, notice of non-payment, protest and
notice of protest and dishonor, notice of Event of Default, notice of intent to
accelerate the maturity and notice of acceleration of the maturity and any other
notice in connection with the Obligations, and also notice of acceptance of this
Guaranty Agreement, acceptance on the part of the Agent and the Lenders
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<PAGE> 5
being conclusively presumed by their request for this Guaranty Agreement and
delivery of the same to the Agent.
SECTION 2.03 LENDERS' RIGHTS. Subject to the terms of the Credit
Agreement, the Guarantor authorizes the Lenders (or the Agent on behalf of the
Lenders), without notice or demand and without affecting the Guarantor's
obligation hereunder, to take and hold security for the payment of the
Obligations, and exchange, enforce, waive and release any such security; and to
apply such security and direct the order or manner of sale thereof as the Agent
and the Lenders in their discretion may determine; and to obtain a guaranty of
the Obligations from any one or more Persons and at any time or times to
enforce, waive, rearrange, modify, limit or release any of such other Persons
from their obligations under such guaranties.
SECTION 2.04 GUARANTOR'S WAIVERS. The Guarantor waives any right to
require the Agent and the Lenders to (a) proceed against the Borrower or any
other Person liable on the Obligations, (b) enforce their rights against any
other guarantor of the Obligations, (c) proceed or enforce their rights against
or exhaust any security given to secure the Obligations, (d) have the Borrower
joined with the Guarantor in any suit arising out of this Guaranty Agreement
and/or the Obligations, or (e) pursue any other remedy whatsoever. Neither the
Agent nor the Lenders shall be required to mitigate damages or take any action
to reduce, collect or enforce the Obligations. The Guarantor waives any defense
arising by reason of any disability, lack of corporate authority or power, or
other defense of the Borrower or any other guarantor of the Obligations, and
shall remain liable hereon regardless of whether the Borrower or any other
guarantor be found not liable thereon for any reason.
SECTION 2.05 MATURITY OF OBLIGATIONS; PAYMENT. The Guarantor agrees
that if the maturity of the Obligations is accelerated by bankruptcy or
otherwise, such maturity shall also be deemed accelerated for the purpose of
this Guaranty Agreement without demand or notice to the Guarantor. The Guarantor
will, forthwith upon notice from the Agent of the Borrower's failure to pay the
Obligations at maturity, pay to the Agent for the benefit of the Agent and the
Lenders at the Agent's Principal Office, the amount due and unpaid by the
Borrower and guaranteed hereby. The failure of the Agent to give this notice
shall not in any way release the Guarantor hereunder.
SECTION 2.06 LENDERS' EXPENSES. If the Guarantor fails to pay the
Obligations after notice from the Agent of the Borrower's failure to pay any
Obligations at maturity (whether by acceleration or otherwise), and if
thereafter the Agent or the Lenders obtain the services of an attorney for
collection of amounts owing by the Guarantor hereunder or if suit is filed to
enforce this Guaranty Agreement, or if proceedings are had in any bankruptcy,
receivership or other judicial proceedings for the establishment or collection
of any amount owing by the Guarantor hereunder, or if any amount owing by the
Guarantor hereunder is collected through such proceedings, the Guarantor agrees
to pay to the Agent at its Principal Office, the reasonable attorneys' fees of
the Agent and the Lenders.
SECTION 2.07 OBLIGATION. It is expressly agreed that the obligation of
the Guarantor for the payment of the Obligations guaranteed hereby shall be
primary and not secondary.
3
<PAGE> 6
SECTION 2.08 EVENTS AND CIRCUMSTANCES NOT REDUCING OR DISCHARGING THE
GUARANTOR'S OBLIGATIONS. The Guarantor hereby consents and agrees to each of the
following to the fullest extent permitted by law, agrees its obligations under
this Guaranty Agreement shall not be released, diminished, impaired, reduced or
adversely affected by any of the following, and waives any rights (including
without limitation rights to notice) which it might otherwise have as a result
of or in connection with any of the following:
(a) Modifications, etc. Any renewal, extension, modification, or
increase in the amount of the Aggregate Commitments as in effect on the
Effective Date, decrease, alteration or rearrangement of all or any part of the
Obligations, any Security Instrument or any instrument executed in connection
therewith, or any contract or understanding between the Borrower, any Agent
and/or the Lenders, or any other Person, pertaining to the Obligations;
(b) Adjustment, etc. Any adjustment, indulgence, forbearance or
compromise that might be granted or given by the Agent or the Lenders to the
Borrower or the Guarantor or any Person liable on the Obligations;
(c) Condition of the Borrower or the Guarantor. The insolvency,
bankruptcy arrangement, reorganization, adjustment, composition, liquidation,
disability, dissolution or lack of power of the Borrower or the Guarantor or any
other Person at any time liable for the payment of all or part of the
Obligations; or any sale, lease or transfer of any or all of the assets of the
Borrower or the Guarantor, or any changes in the shareholders of the Borrower or
the Guarantor;
(d) Invalidity of Obligations. The invalidity, illegality or
unenforceability of all or any part of the Obligations or any Security
Instrument, including the Notes, for any reason whatsoever, including without
limitation the fact that the Obligations, or any part thereof, exceed the amount
permitted by law, the act of creating the Obligations or any part thereof is
ultra vires, the officers or representatives executing any Security Instrument
acted in excess of their authority, the Obligations violate applicable usury
laws, the Borrower has valid defenses, claims or offsets (whether at law, in
equity or by agreement) which render the Obligations wholly or partially
uncollectible from the Borrower, the creation, performance or repayment of the
Obligations (or the execution, delivery and performance of any Security
Instrument) is illegal, uncollectible, legally impossible or unenforceable, or
the Credit Agreement, the Notes or other Security Instruments have been forged
or otherwise are irregular or not genuine or authentic;
(e) Release of Obligors. Any full or partial release of the obligation
of the Borrower on the Obligations or any part thereof, of any co-guarantors, or
any other Person now or hereafter liable, whether directly or indirectly,
jointly, severally, or jointly and severally, to pay, perform, guarantee or
assure the payment of the Obligations or any part thereof, it being recognized,
acknowledged and agreed by the Guarantor that the Guarantor may be required to
pay the Obligations in full without assistance or support of any other Person,
and the Guarantor has not been induced to enter into this Guaranty Agreement on
the basis of a contemplation, belief, understanding or agreement that other
parties other than the Borrower will be liable to perform the Obligations, or
that the Agent and Lenders will look to other parties to perform the
Obligations;
4
<PAGE> 7
(f) Other Security. The taking or accepting of any other security,
collateral or guaranty, or other assurance of payment, for all or any part of
the Obligations;
(g) Release of Collateral, etc. Any release, surrender, exchange,
subordination, deterioration, waste, loss or impairment (including without
limitation negligent, willful, unreasonable or unjustifiable impairment) of any
collateral, Property or security, at any time existing in connection with, or
assuring or securing payment of, all or any part of the Obligations;
(h) Care and Diligence. The failure of any Agent or Lender or any other
Person to exercise diligence or reasonable care in the preservation, protection,
enforcement, sale or other handling or treatment of all or any part of such
collateral, Property or security;
(i) Status of Liens. The fact that any collateral, security or Lien
contemplated or intended to be given, created or granted as security for the
repayment of the Obligations shall not be properly perfected or created, or
shall prove to be unenforceable or subordinate to any other Lien, it being
recognized and agreed by the Guarantor that the Guarantor is not entering into
this Guaranty Agreement in reliance on, or in contemplation of the benefits of,
the validity, enforceability, collectability or value of any of the collateral
for the Obligations;
(j) Payments Rescinded. Any payment by the Borrower to any Agent or
Lender is held to constitute a preference under the bankruptcy laws, or for any
reason an Agent or Lender is required to refund such payment or pay such amount
to the Borrower or someone else; or
(k) Other Actions Taken or Omitted. Any other action taken or omitted
to be taken with respect to the Credit Agreement or the other Security
Instruments, the Obligations, or the security and collateral therefor, whether
or not such action or omission prejudices the Guarantor or increases the
likelihood that the Guarantor will be required to pay the Obligations pursuant
to the terms hereof; it being the unambiguous and unequivocal intention of the
Guarantor that the Guarantor shall be obligated to pay the Obligations when due,
notwithstanding any occurrence, circumstance, event, action, or omission
whatsoever, whether contemplated or uncontemplated, and whether or not otherwise
or particularly described herein, except for the full and final payment and
satisfaction of the Obligations.
SECTION 2.09 SUBROGATION. The Guarantor shall not exercise any rights
which it may acquire by way of subrogation, reimbursement, exoneration,
indemnification or participation, by any payment made under this Guaranty
Agreement, under any other Security Instrument or otherwise until the
Obligations have been paid in full and the Aggregate Commitments are terminated;
provided that, notwithstanding the foregoing, the Guarantor reserves its rights
of contribution and reimbursement, if any, from its co-guarantors and other
Persons liable on the Obligations or otherwise. Except as described in this
Section 2.10, the Guarantor further waives any benefit of any right to
participate in any security now or hereafter held by the Agent and/or the
Lenders.
5
<PAGE> 8
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.01 REPRESENTATIONS AND WARRANTIES. In order to induce the
Agent and the Lenders to accept this Guaranty Agreement, the Guarantor
represents and warrants to the Agent and the Lenders (which representations and
warranties will survive the creation of the Obligations and any extension of
credit thereunder) that:
(a) Benefit to the Guarantor. The Borrower is a wholly-owned Subsidiary
of the Guarantor and the Guarantor's guaranty pursuant to this Guaranty
Agreement reasonably may be expected to benefit, directly or indirectly, the
Guarantor; and the Guarantor has determined that this Guaranty Agreement is
necessary and convenient to the conduct, promotion and attainment of the
business of the Guarantor and the Borrower.
(b) Solvency. The Guarantor (i) is not insolvent as of the date hereof
and will not be rendered insolvent as a result of this Guaranty Agreement, (ii)
is not engaged in business or a transaction, or about to engage in a business or
a transaction, for which any Property or assets remaining with the Guarantor
constitute unreasonably small capital, and (iii) does not intend to incur, or
believe it will incur, debts that will be beyond its ability to pay as such
debts mature.
(c) No Representation by Agent or Lenders. Neither any Agent, any
Lender nor any other Person has made any representation, warranty or statement
to the Guarantor in order to induce the Guarantor to execute this Guaranty
Agreement.
ARTICLE IV
SUBORDINATION OF INDEBTEDNESS
SECTION 4.01 SUBORDINATION OF ALL GUARANTOR CLAIMS. As used herein, the
term "Guarantor Claims" shall mean all debts and obligations of the Borrower to
the Guarantor, whether such debts and obligations now exist or are hereafter
incurred or arise, or whether the obligation of the Borrower thereon be direct,
contingent, primary, secondary, several, joint and several, or otherwise, and
irrespective of whether such debts or obligations be evidenced by note,
contract, open account, or otherwise, and irrespective of the Person or Persons
in whose favor such debts or obligations may, at their inception, have been, or
may hereafter be created, or the manner in which they have been or may hereafter
be acquired by. Except for payments permitted by the Credit Agreement, until the
Obligations shall be paid and satisfied in full, the Aggregate Commitments are
terminated and the Guarantor shall have performed all of its obligations
hereunder and under the other Security Instruments to which it is a party, the
Guarantor shall not receive or collect, directly or indirectly, from the
Borrower any amount upon the Guarantor Claims.
SECTION 4.02 CLAIMS IN BANKRUPTCY. In the event of receivership,
bankruptcy, reorganization, arrangement, debtor's relief, or other insolvency
proceedings involving the Borrower, the Agent on behalf of the Agent and the
Lenders shall have the right to prove their claim in any proceeding, so as to
establish their rights hereunder and receive directly from the receiver, trustee
or other court custodian, dividends and payments which would otherwise be
6
<PAGE> 9
payable upon Guarantor Claims. The Guarantor hereby assigns such dividends and
payments to the Agent for the benefit of the Agent and the Lenders. Should any
Agent or Lender receive, for application upon the Obligations, any such dividend
or payment which is otherwise payable to the Guarantor, and which, as between
the Borrower and the Guarantor, shall constitute a credit upon the Guarantor
Claims, then upon payment in full of the Obligations, the Guarantor shall become
subrogated to the rights of the Agent and the Lenders to the extent that such
payments to the Agent and the Lenders on the Guarantor Claims have contributed
toward the liquidation of the Obligations, and such subrogation shall be with
respect to that proportion of the Obligations which would have been unpaid if
the Agent and the Lenders had not received dividends or payments upon the
Guarantor Claims.
SECTION 4.03 PAYMENTS HELD IN TRUST. In the event that notwithstanding
Sections 4.01 and 4.02, the Guarantor should receive any funds, payments, claims
or distributions which is prohibited by such Sections, the Guarantor agrees: (a)
to hold in trust for the Agent and the Lenders an amount equal to the amount of
all funds, payments, claims or distributions so received, and (b) that it shall
have absolutely no dominion over the amount of such funds, payments, claims or
distributions except to pay them promptly to the Agent, for the benefit of the
Agent and the Lenders; and the Guarantor covenants promptly to pay the same to
the Agent.
SECTION 4.04 LIENS SUBORDINATE. The Guarantor agrees that, until the
Obligations are paid in full and the Aggregate Commitments terminated, any Liens
upon the Borrower's assets securing payment of the Guarantor Claims shall be and
remain inferior and subordinate to any Liens upon the Borrower's assets securing
payment of the Obligations, regardless of whether such encumbrances in favor of
the Guarantor, any Agent or Lender presently exist or are hereafter created or
attach. Without the prior written consent of the Agent, the Guarantor, during
the period in which any of the Obligations are outstanding or the Aggregate
Commitments are in effect, shall not (a) exercise or enforce any creditor's
right it may have against the Borrower, or (b) foreclose, repossess, sequester
or otherwise take steps or institute any action or proceeding (judicial or
otherwise, including without limitation the commencement of or joinder in any
liquidation, bankruptcy, rearrangement, debtor's relief or insolvency
proceeding) to enforce any Lien on assets of the Borrower held by the Guarantor.
SECTION 4.05 NOTATION OF RECORDS. All promissory notes and, upon the
request of the Agent, all accounts receivable ledgers or other evidence of the
Guarantor Claims accepted by or held by the Guarantor shall contain a specific
written notice thereon that the indebtedness evi denced thereby is subordinated
under the terms of this Guaranty Agreement.
ARTICLE V
MISCELLANEOUS
SECTION 5.01 SUCCESSORS AND ASSIGNS. This Guaranty Agreement is and
shall be in every particular available to the successors and assigns of the
Agent and Lenders and is and shall always be fully binding upon the legal
representatives, successors and assigns of the Guarantor, notwithstanding that
some or all of the monies, the repayment of which this Guaranty Agreement
applies, may be actually advanced after any bankruptcy, receivership,
reorganization or other event affecting either the Borrower or the Guarantor.
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<PAGE> 10
SECTION 5.02 NOTICES. Any notice or demand to the Guarantor under or in
connection with this Guaranty Agreement may be given and shall conclusively be
deemed and considered to have been given and received in the manner and to the
address of the Guarantor set forth on the signature page hereto as provided for
in Section 12.02 of the Credit Agreement.
SECTION 5.03 AUTHORITY OF AGENT. The Guarantor acknowledges that the
rights and responsibilities of the Agent under this Guaranty Agreement with
respect to any action taken by the Agent or the exercise or non-exercise by the
Agent of any option, right, request, judgment or other right or remedy provided
for herein or resulting or arising out of this Guaranty Agreement shall, as
between the Agent and the Lenders, be governed by the Credit Agreement and by
such other agreements with respect thereto as may exist from time to time among
them, but, as between the Agent and the Guarantor, the Agent shall be
conclusively presumed to be acting as agent for the Lenders with full and valid
authority so to act or refrain from acting; and the Guarantor shall not be under
any obligation, or entitlement, to make any inquiry respecting such authority.
SECTION 5.04 GOVERNING LAW; SUBMISSION TO JURISDICTION. THIS GUARANTY
AGREEMENT (INCLUDING, BUT NOT LIMITED TO, THE VALIDITY AND ENFORCEABILITY
HEREOF) SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE
STATE OF TEXAS.
SECTION 5.05 ENTIRE AGREEMENT. This Guaranty Agreement and the other
Security Instruments embody the entire agreement and understanding between the
Lenders, the Agent and the Guarantor and supersede all prior agreements and
understandings between such parties relating to the subject matter hereof and
thereof. There are no unwritten oral agreements between the parties.
SECTION 5.06 SURVIVAL OF OBLIGATIONS. To the extent that any payments
on the Obligations or proceeds of any collateral are subsequently invalidated,
declared to be fraudulent or preferential, set aside or required to be repaid to
a trustee, debtor in possession, receiver or other Person under any bankruptcy
law, common law or equitable cause, then to such extent, the Obligations so
satisfied shall be revived and continue as if such payment or proceeds had not
been received and the Agent' and the Lenders' Liens, rights, powers and remedies
under this Guaranty Agreement and each Security Instrument to which the
Guarantor is a party shall continue in full force and effect. In such event,
each Security Instrument shall be automatically reinstated and the Guarantor
shall take such action as may be reasonably requested by the Agent and the
Lenders to effect such reinstatement.
SECTION 5.07 DESIGNATED SENIOR INDEBTEDNESS. The Guarantor hereby
designates all Obligations outstanding under this Guaranty Agreement, the Note
and the other Loan Documents to be "Designated Senior Indebtedness" for purposes
of the DEM Subordinated Debt and is "senior indebtedness", "designated senior
indebtedness" or any similar or equivalent classification for all purposes in
any other debt instrument or agreement to which Guarantor is now or hereafter a
party.
8
<PAGE> 11
SECTION 5.08 PRIOR GUARANTY. This Guaranty Agreement supersedes and
replaces that certain Guaranty Agreement dated August 1, 1997 given by the
Guarantor in favor of the Agents and the Lenders.
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<PAGE> 12
WITNESS THE EXECUTION HEREOF, effective as of the date first written
above.
QUEEN SAND RESOURCES, INC., a Delaware
corporation
By: /s/ ROBERT P. LINDSAY
--------------------------------------
Robert P. Lindsay
Chief Operating Officer
and Executive Vice President
By: /s/ EDWARD J. MUNDEN
--------------------------------------
Edward J. Munden
President
Address for Notices:
Queen Sand Resources, Inc.
3500 Oak Lawn Drive, Suite 380
Dallas, Texas 75219
Attention: Robert P. Lindsay
Telephone: (214) 521-9959
Facsimile: (214) 521-9960
with copy to:
Queen Sand Resources, Inc.
60 Queen Street, Suite 1400
Ottawa, Canada K1P 5Y7
Attention: Mr. Ronald Benn
Telephone: (613) 230-7211
Facsimile: (613) 230-6055
and
Haynes & Boone LLP
901 Main Street, Suite 3100
Dallas, Texas 75202-3789
Attention: Mr. William L. Boeing
Telephone: (214) 651-5553
Facsimile: (214) 651-5940
<PAGE> 1
EXHIBIT 10.20
AMENDED AND RESTATED
GUARANTY AGREEMENT
Dated as of April 17, 1998
By
NORTHLAND OPERATING CO.,
as the Guarantor,
in favor of
BANK OF MONTREAL,
as Agent,
and
THE LENDERS NOW OR HEREAFTER SIGNATORY TO THE CREDIT AGREEMENT
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I
Definitions and Accounting Matters
Section 1.01 Terms Defined in the Recitals .......................... 2
Section 1.02 Certain Definitions .................................... 2
Section 1.03 Credit Agreement Definitions ........................... 3
ARTICLE II
The Guaranty
Section 2.01 Obligations Guaranteed ................................. 3
Section 2.02 Nature of Guaranty ..................................... 3
Section 2.03 Lenders' Rights ........................................ 3
Section 2.04 Guarantor's Waivers .................................... 4
Section 2.05 Maturity of Obligations; Payment ....................... 4
Section 2.06 Lenders' Expenses ...................................... 4
Section 2.07 Obligation ............................................. 4
Section 2.08 Events and Circumstances Not Reducing or Discharging the
Guarantor's Obligations ................................ 4
Section 2.09 Limitations on Obligation of the Guarantor Hereunder ... 6
Section 2.10 Subrogation ............................................ 6
ARTICLE III
Representations and Warranties
Section 3.01 By the Guarantor ....................................... 7
ARTICLE IV
Subordination of Indebtedness
Section 4.01 Subordination of All Guarantor Claims .................. 8
Section 4.02 Claims in Bankruptcy ................................... 8
Section 4.03 Payments Held in Trust ................................. 9
Section 4.04 Liens Subordinate ...................................... 9
Section 4.05 Notation of Records .................................... 9
ARTICLE V
Miscellaneous
Section 5.01 Successors and Assigns ................................. 9
Section 5.02 Notices ................................................ 9
Section 5.03 Authority of Agent ..................................... 9
Section 5.04 Governing Law; Submission to Jurisdiction .............. 10
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
Section 5.05 Entire Agreement ....................................... 11
Section 5.06 Survival of Obligations ................................ 11
Section 5.07 Status as Guarantor Senior Indebtedness ................ 11
Section 5.08 Prior Guaranty ......................................... 11
</TABLE>
ii
<PAGE> 4
AMENDED AND RESTATED
GUARANTY AGREEMENT
This AMENDED AND RESTATED GUARANTY AGREEMENT dated as of April 17, 1998
is by NORTHLAND OPERATING CO., a corporation duly organized and validly existing
under the laws of the state of Nevada ("Guarantor"), in favor of each of the
following: each of the financial institutions that is now or hereafter a
signatory to the Credit Agreement (as defined below) (individually, a "Lender"
and, collectively, the "Lenders"); and BANK OF MONTREAL, AS AGENT for the
Lenders (in such capacity, the "Agent").
RECITALS
A. QUEEN SAND RESOURCES, INC., a corporation duly organized and validly
existing under the laws of the state of Delaware ("QSRD"), as Guarantor, QUEEN
SAND RESOURCES, INC., a corporation duly organized and validly existing under
the laws of the state of Nevada (the "Borrower"), the Agent and the Lenders have
executed that certain Amended and Restated Credit Agreement of even date
herewith (such credit agreement, as amended, the "Credit Agreement").
B. One of the terms and conditions stated in the Credit Agreement for the
making of the loans and extensions of credit described in the Credit Agreement
is the execution and delivery to the Agent and the Lenders of this Guaranty
Agreement.
C. NOW, THEREFORE, (i) in order to comply with the terms and conditions
of the Credit Agreement, (ii) to induce the Lenders to enter into the Credit
Agreement, and (iii) for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Guarantor hereby agrees as
follows:
ARTICLE I
DEFINITIONS AND ACCOUNTING MATTERS
SECTION 1.01 TERMS DEFINED IN THE RECITALS. As used in This Guaranty
Agreement, the terms defined in the Recitals shall have the meanings indicated
in the Recitals.
SECTION 1.02 CERTAIN DEFINITIONS. As used in this Guaranty Agreement,
the following terms shall have the following meanings, unless the context
otherwise requires:
"Guarantor Claims" shall have the meaning indicated in Section 4.01.
"Guaranty Agreement" shall mean this Amended and Restated Guaranty
Agreement, as the same may from time to time be amended or supplemented.
"Obligations" shall mean (a) the payment and performance of all present
and future indebtedness, obligations and liabilities of QSRD, the Borrower
and/or the Guarantor to the Agent and the Lenders under the Credit Agreement,
including but not limited to, (i) the full and punctual payment of the Notes
issued thereunder, and any and all promissory notes given in substitution for
such Notes or in modification, renewal, extension or rearrangement thereof in
<PAGE> 5
whole or in part, and (ii) the reimbursement and other obligations of the
Borrower under and with respect to Letters of Credit and Letter of Credit
Agreements now outstanding or hereafter issued under the Credit Agreement; (b)
all obligations of the Guarantor under this Guaranty Agreement; (c) all interest
(whether pre or post petition), charges, expenses, reasonable attorneys' or
other fees and any other sums payable to or incurred by the Agent and, to the
extent provided in the Credit Agreement, the Lenders in connection with the
execution or enforcement of any of their rights and remedies hereunder or any
other Security Instrument; (d) payment of and performance of any and all present
or future obligations of QSRD or the Borrower according to the terms of any
present or future interest rate or currency swap, rate cap, rate floor, rate
collar, forward rate agreement or other exchange or rate protection agreements
or any option with respect to any such transaction now existing or hereafter
entered into between QSRD or the Borrower and any Lender or an Affiliate of such
Lender; and (e) payment of and performance of any and all present or future
obligations of QSRD or the Borrower according to the terms of any present or
future swap agreements, cap, floor, collar, forward agreement or other exchange
or protection agreements relating to crude oil, natural gas or other
hydrocarbons or any option with respect to any such transaction now existing or
hereafter entered into between QSRD or the Borrower and any Lender or an
Affiliate of such Lender.
SECTION 1.03 CREDIT AGREEMENT DEFINITIONS. Unless otherwise defined
herein, all terms beginning with a capital letter which are defined in the
Credit Agreement shall have the same meanings herein as therein.
ARTICLE II
THE GUARANTY
SECTION 2.01 OBLIGATIONS GUARANTEED. The Guarantor hereby irrevocably
and unconditionally guarantees the prompt payment at maturity of the
Obligations.
SECTION 2.02 NATURE OF GUARANTY. This guaranty is an absolute,
irrevocable, completed and continuing guaranty of payment and not a guaranty of
collection, and no notice of the Obligations or any extension of credit already
or hereafter contracted by or extended to the Borrower need be given to the
Guarantor. The guaranty evidenced hereby is joint and several with all other
guarantees of the Obligations. This guaranty may not be revoked by the Guarantor
and shall continue to be effective with respect to debt under the Obligations
arising or created after any attempted revocation by the Guarantor and shall
remain in full force and effect until the Obligations are paid in full and the
Aggregate Commitments are terminated, notwithstanding that from time to time
prior thereto no Obligations may be outstanding. The Borrower, the Agent and the
Lenders may modify, alter, rearrange, extend for any period and/or renew from
time to time, the Obligations and the Agent and the Lenders may waive any
Default or Events of Default without notice to the Guarantor and in such event
the Guarantor will remain fully bound hereunder on the Obligations. This
Guaranty Agreement may be enforced by the Agent and/or the Lenders and any
subsequent holder of the Obligations and shall not be discharged by the
assignment or negotiation of all or part of the Obligations. The Guarantor
hereby expressly waives presentment, demand, notice of non-payment, protest and
notice of protest and dishonor, notice of Event of Default, notice of intent to
accelerate the maturity and notice of acceleration of the maturity and any other
notice in connection with the Obligations, and also notice of
2
<PAGE> 6
acceptance of this Guaranty Agreement, acceptance on the part of the Agent and
the Lenders being conclusively presumed by their request for this Guaranty
Agreement and delivery of the same to the Agent.
SECTION 2.03 LENDERS' RIGHTS. Subject to the terms of the Credit
Agreement, the Guarantor authorizes the Lenders (or the Agent on behalf of the
Lenders), without notice or demand and without affecting the Guarantor's
obligation hereunder, to take and hold security for the payment of the
Obligations, and exchange, enforce, waive and release any such security; and to
apply such security and direct the order or manner of sale thereof as the Agent
and the Lenders in their discretion may determine; and to obtain a guaranty of
the Obligations from any one or more Persons and at any time or times to
enforce, waive, rearrange, modify, limit or release any of such other Persons
from their obligations under such guaranties.
SECTION 2.04 GUARANTOR'S WAIVERS. The Guarantor waives any right to
require the Agent and the Lenders to (a) proceed against the Borrower or any
other Person liable on the Obligations, (b) enforce their rights against any
other guarantor of the Obligations, (c) proceed or enforce their rights against
or exhaust any security given to secure the Obligations, (d) have the Borrower
joined with the Guarantor in any suit arising out of this Guaranty Agreement
and/or the Obligations, or (e) pursue any other remedy whatsoever. Neither the
Agent nor the Lenders shall be required to mitigate damages or take any action
to reduce, collect or enforce the Obligations. The Guarantor waives any defense
arising by reason of any disability, lack of corporate authority or power, or
other defense of the Borrower or any other guarantor of the Obligations, and
shall remain liable hereon regardless of whether the Borrower or any other
guarantor be found not liable thereon for any reason.
SECTION 2.05 MATURITY OF OBLIGATIONS; PAYMENT. The Guarantor agrees that
if the maturity of the Obligations is accelerated by bankruptcy or otherwise,
such maturity shall also be deemed accelerated for the purpose of this Guaranty
Agreement without demand or notice to the Guarantor. The Guarantor will,
forthwith upon notice from the Agent of the Borrower's failure to pay the
Obligations at maturity, pay to the Agent for the benefit of the Agent and the
Lenders at the Agent's Principal Office, the amount due and unpaid by the
Borrower and guaranteed hereby. The failure of the Agent to give this notice
shall not in any way release the Guarantor hereunder.
SECTION 2.06 LENDERS' EXPENSES. If the Guarantor fails to pay the
Obligations after notice from the Agent of the Borrower's failure to pay any
Obligations at maturity (whether by acceleration or otherwise), and if
thereafter the Agent or the Lenders obtain the services of an attorney for
collection of amounts owing by the Guarantor hereunder or if suit is filed to
enforce this Guaranty Agreement, or if proceedings are had in any bankruptcy,
receivership or other judicial proceedings for the establishment or collection
of any amount owing by the Guarantor hereunder, or if any amount owing by the
Guarantor hereunder is collected through such proceedings, the Guarantor agrees
to pay to the Agent at its Principal Office, the reasonable attorneys' fees of
the Agent and the Lenders.
SECTION 2.07 OBLIGATION. It is expressly agreed that the obligation of
the Guarantor for the payment of the Obligations guaranteed hereby shall be
primary and not secondary.
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<PAGE> 7
SECTION 2.08 EVENTS AND CIRCUMSTANCES NOT REDUCING OR DISCHARGING THE
GUARANTOR'S OBLIGATIONS. The Guarantor hereby consents and agrees to each of
the following to the fullest extent permitted by law, agrees its obligations
under this Guaranty Agreement shall not be released, diminished, impaired,
reduced or adversely affected by any of the following, and waives any rights
(including without limitation rights to notice) which it might otherwise have as
a result of or in connection with any of the following:
(a) Modifications, etc. Any renewal, extension, modification, or increase
in the amount of the Aggregate Commitments as in effect on the Effective Date,
decrease, alteration or rearrangement of all or any part of the Obligations, any
Security Instrument or any instrument executed in connection therewith, or any
contract or understanding between the Borrower, any Agent and/or the Lenders, or
any other Person, pertaining to the Obligations;
(b) Adjustment, etc. Any adjustment, indulgence, forbearance or
compromise that might be granted or given by the Agent or the Lenders to the
Borrower or the Guarantor or any Person liable on the Obligations;
(c) Condition of the Borrower or the Guarantor. The insolvency,
bankruptcy arrangement, reorganization, adjustment, composition, liquidation,
disability, dissolution or lack of power of the Borrower or the Guarantor or any
other Person at any time liable for the payment of all or part of the
Obligations; or any sale, lease or transfer of any or all of the assets of the
Borrower or the Guarantor, or any changes in the shareholders of the Borrower or
the Guarantor;
(d) Invalidity of Obligations. The invalidity, illegality or
unenforceability of all or any part of the Obligations or any Security
Instrument, including the Notes, for any reason whatsoever, including without
limitation the fact that the Obligations, or any part thereof, exceed the amount
permitted by law, the act of creating the Obligations or any part thereof is
ultra vires, the officers or representatives executing any Security Instrument
acted in excess of their authority, the Obligations violate applicable usury
laws, the Borrower has valid defenses, claims or offsets (whether at law, in
equity or by agreement) which render the Obligations wholly or partially
uncollectible from the Borrower, the creation, performance or repayment of the
Obligations (or the execution, delivery and performance of any Security
Instrument) is illegal, uncollectible or legally unenforceable, or the Credit
Agreement, the Notes or other Security Instruments have been forged or otherwise
are irregular or not genuine or authentic;
(e) Release of Obligors. Any full or partial release of the obligation of
the Borrower on the Obligations or any part thereof, of any co-guarantors, or
any other Person now or hereafter liable, whether directly or indirectly,
jointly, severally, or jointly and severally, to pay, perform, guarantee or
assure the payment of the Obligations or any part thereof, it being recognized,
acknowledged and agreed by the Guarantor that the Guarantor may be required to
pay the Obligations in full without assistance or support of any other Person,
and the Guarantor has not been induced to enter into this Guaranty Agreement on
the basis of a contemplation, belief, understanding or agreement that other
parties other than the Borrower will be liable to perform the Obligations, or
that the Agent and Lenders will look to other parties to perform the
Obligations;
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<PAGE> 8
(f) Other Security. The taking or accepting of any other security,
collateral or guaranty, or other assurance of payment, for all or any part of
the Obligations;
(g) Release of Collateral, etc. Any release, surrender, exchange,
subordination, deterioration, waste, loss or impairment (including without
limitation negligent, willful, unreasonable or unjustifiable impairment) of any
collateral, Property or security, at any time existing in connection with, or
assuring or securing payment of, all or any part of the Obligations;
(h) Care and Diligence. The failure of any Agent or Lender or any other
Person to exercise diligence or reasonable care in the preservation, protection,
enforcement, sale or other handling or treatment of all or any part of such
collateral, Property or security;
(i) Status of Liens. The fact that any collateral, security or Lien
contemplated or intended to be given, created or granted as security for the
repayment of the Obligations shall not be properly perfected or created, or
shall prove to be unenforceable or subordinate to any other Lien, it being
recognized and agreed by the Guarantor that the Guarantor is not entering into
this Guaranty Agreement in reliance on, or in contemplation of the benefits of,
the validity, enforceability, collectability or value of any of the collateral
for the Obligations;
(j) Payments Rescinded. Any payment by the Borrower to any Agent or
Lender is held to constitute a preference under the bankruptcy laws, or for any
reason an Agent or Lender is required to refund such payment or pay such amount
to the Borrower or someone else; or
(k) Other Actions Taken or Omitted. Any other action taken or omitted to
be taken with respect to the Credit Agreement or the other Security Instruments,
the Obligations, or the security and collateral therefor, whether or not such
action or omission prejudices the Guarantor or increases the likelihood that the
Guarantor will be required to pay the Obligations pursuant to the terms hereof;
it being the unambiguous and unequivocal intention of the Guarantor that the
Guarantor shall be obligated to pay the Obligations when due, notwithstanding
any occurrence, circumstance, event, action, or omission whatsoever, whether
contemplated or uncontemplated, and whether or not otherwise or particularly
described herein, except for the full and final payment and satisfaction of the
Obligations.
SECTION 2.09 LIMITATIONS ON OBLIGATION OF THE GUARANTOR HEREUNDER. The
parties hereto (i) intend that the obligation of the Guarantor hereunder be
limited to the maximum amount that would not result in the obligation created
hereby being avoidable under Section 548 of the Federal Bankruptcy Code (11
U.S.C. Section 548; hereinafter "Section 548") or other applicable state
fraudulent conveyance or transfer law and (ii) agree that this Guaranty
Agreement shall be so construed. Accordingly, the obligation of the Guarantor
hereunder is limited to an amount that is the greater of (x) the "reasonably
equivalent value" or "fair consideration" received by the Guarantor in exchange
for the obligation incurred hereunder, within the meaning of Section 548, as
amended, or any applicable state fraudulent conveyance or transfer law, as
amended; or (y) the lesser of (1) the maximum amount that will not render the
Guarantor insolvent or (2) the maximum amount that will not leave the Guarantor
with any Property deemed an unreasonably
5
<PAGE> 9
small capital. Clauses (1) and (2) are and shall be determined pursuant to
Section 548, as amended, or other applicable state fraudulent conveyance or
transfer law, as amended.
SECTION 2.10 SUBROGATION. The Guarantor shall not exercise any rights
which it may acquire by way of subrogation, reimbursement, exoneration,
indemnification or participation, by any payment made under this Guaranty
Agreement, under any other Security Instrument or otherwise until the
Obligations have been paid in full and the Aggregate Commitments are terminated;
provided that, notwithstanding the foregoing, the Guarantor reserves its rights
of contribution and reimbursement, if any, from its co-guarantors and other
Persons liable on the Obligations or otherwise. Except as described in this
Section 2.10, the Guarantor further waives any benefit of any right to
participate in any security now or hereafter held by the Agent and/or the
Lenders.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.01 BY THE GUARANTOR. In order to induce the Agent and the
Lenders to accept this Guaranty Agreement, the Guarantor represents and warrants
to the Agent and the Lenders (which representations and warranties will survive
the creation of the Obligations and any extension of credit thereunder) that:
(a) Benefit to the Guarantor. The Guarantor is a wholly-owned Subsidiary
of the Borrower and the Guarantor's guaranty pursuant to this Guaranty Agreement
reasonably may be expected to benefit, directly or indirectly, the Guarantor;
and the Guarantor has determined that this Guaranty Agreement is necessary and
convenient to the conduct, promotion and attainment of the business of the
Guarantor and the Borrower.
(b) Corporate Existence. The Guarantor: (i) is duly organized and validly
existing under the laws of the jurisdiction of its formation; (ii) has all
requisite power, and has all material governmental licenses, authorizations,
consents and approvals necessary to own its assets and carry on its business as
now being conducted; and (iii) is qualified to do business in all jurisdictions
in which the nature of the business conducted by it makes such qualification
necessary and where failure so to qualify would have a Material Adverse Effect.
(c) No Breach. The execution and delivery by the Guarantor of this
Guaranty Agreement and the other Security Instruments to which it is a party,
the consummation of the transactions herein or therein contemplated, and the
compliance with the terms and provisions hereof will not (i) conflict with or
result in a breach of, or require any consent under (A) the respective charter
or by-laws of the Guarantor, or (B) any applicable law or regulation, or any
order, writ, injunction or decree of any court or other Governmental Authority,
or any material agreement or instrument to which the Guarantor is a party or by
which it is bound or to which it is subject in each case in such manner as could
reasonably be expected to have a Material Adverse Effect; or (ii) constitute a
default under any such agreement or instrument, or result in the creation or
imposition of any Lien upon any of the revenues or Property of the Guarantor in
each case in such manner as could reasonably be expected to have a Material
Adverse Effect.
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<PAGE> 10
(d) Corporate Action. The Guarantor has all necessary corporate power and
authority to execute, deliver and perform its obligations under this Guaranty
Agreement and the Security Instruments to which it is a party; and the
execution, delivery and performance by the Guarantor of this Guaranty Agreement
and the other Security Instruments to which such Person is a party have been
duly authorized by all necessary corporate action on its part. This Guaranty
Agreement and the Security Instruments to which the Guarantor is a party
constitute the legal, valid and binding obligation of the Guarantor, enforceable
against the Guarantor in accordance with their terms, except as may be limited
by applicable bankruptcy, insolvency, reorganization or other similar laws
affecting creditors' rights and general principals of equity.
(e) Approvals. Other than consents heretofore obtained or described in
the Credit Agreement, no authorizations, approvals or consents of, and no
filings or registrations with, any Governmental Authority are necessary for the
execution, delivery or performance by the Guarantor of this Guaranty Agreement
or the Security Instruments to which it is a party or for the validity or
enforceability thereof. It is understood that continued performance by the
Guarantor of this Guaranty Agreement and the other Security Instruments to which
it is a party will require various filings, such as filings related to
environmental matters, ERISA matters, Taxes and intellectual property, filings
required to maintain corporate and similar standing and existence, filings
pursuant to the Uniform Commercial Code and other security filings and
recordings and filings required by the SEC, routine filings in the ordinary
course of business, and filings required in connection with the exercise by the
Lenders and the Agent of remedies in connection with the Security Instruments.
(f) Solvency. The Guarantor (i) is not insolvent as of the date hereof
and will not be rendered insolvent as a result of this Guaranty Agreement, (ii)
is not engaged in business or a transaction, or about to engage in a business or
a transaction, for which any Property or assets remaining with the Guarantor
constitute unreasonably small capital, and (iii) does not intend to incur, or
believe it will incur, debts that will be beyond its ability to pay as such
debts mature.
(g) No Representation by Agent or Lenders. Neither any Agent, any Lender
nor any other Person has made any representation, warranty or statement to the
Guarantor in order to induce the Guarantor to execute this Guaranty Agreement.
ARTICLE IV
SUBORDINATION OF INDEBTEDNESS
SECTION 4.01 SUBORDINATION OF ALL GUARANTOR CLAIMS. As used herein, the
term "Guarantor Claims" shall mean all debts and obligations of the Borrower to
the Guarantor, whether such debts and obligations now exist or are hereafter
incurred or arise, or whether the obligation of the Borrower thereon be direct,
contingent, primary, secondary, several, joint and several, or otherwise, and
irrespective of whether such debts or obligations be evidenced by note,
contract, open account, or otherwise, and irrespective of the Person or Persons
in whose favor such debts or obligations may, at their inception, have been, or
may hereafter be created, or the manner in which they have been or may hereafter
be acquired by. Except for payments permitted by the Credit Agreement, until the
Obligations shall be paid and satisfied in full, the Aggregate Commitments are
terminated and the Guarantor shall have performed all of its obligations
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<PAGE> 11
hereunder and under the other Security Instruments to which it is a party, the
Guarantor shall not receive or collect, directly or indirectly, from the
Borrower any amount upon the Guarantor Claims.
SECTION 4.02 CLAIMS IN BANKRUPTCY. In the event of receivership,
bankruptcy, reorganization, arrangement, debtor's relief, or other insolvency
proceedings involving the Borrower, the Agent on behalf of the Agent and the
Lenders shall have the right to prove their claim in any proceeding, so as to
establish their rights hereunder and receive directly from the receiver, trustee
or other court custodian, dividends and payments which would otherwise be
payable upon Guarantor Claims. The Guarantor hereby assigns such dividends and
payments to the Agent for the benefit of the Agent and the Lenders. Should any
Agent or Lender receive, for application upon the Obligations, any such dividend
or payment which is otherwise payable to the Guarantor, and which, as between
the Borrower and the Guarantor, shall constitute a credit upon the Guarantor
Claims, then upon payment in full of the Obligations, the Guarantor shall become
subrogated to the rights of the Agent and the Lenders to the extent that such
payments to the Agent and the Lenders on the Guarantor Claims have contributed
toward the liquidation of the Obligations, and such subrogation shall be with
respect to that proportion of the Obligations which would have been unpaid if
the Agent and the Lenders had not received dividends or payments upon the
Guarantor Claims.
SECTION 4.03 PAYMENTS HELD IN TRUST. In the event that notwithstanding
Sections 4.01 and 4.02, the Guarantor should receive any funds, payments, claims
or distributions which is prohibited by such Sections, the Guarantor agrees: (a)
to hold in trust for the Agent and the Lenders an amount equal to the amount of
all funds, payments, claims or distributions so received, and (b) that it shall
have absolutely no dominion over the amount of such funds, payments, claims or
distributions except to pay them promptly to the Agent, for the benefit of the
Agent and the Lenders; and the Guarantor covenants promptly to pay the same to
the Agent.
SECTION 4.04 LIENS SUBORDINATE. The Guarantor agrees that, until the
Obligations are paid in full and the Aggregate Commitments terminated, any Liens
upon the Borrower's assets securing payment of the Guarantor Claims shall be and
remain inferior and subordinate to any Liens upon the Borrower's assets securing
payment of the Obligations, regardless of whether such encumbrances in favor of
the Guarantor, any Agent or Lender presently exist or are hereafter created or
attach. Without the prior written consent of the Agent, the Guarantor, during
the period in which any of the Obligations are outstanding or the Aggregate
Commitments are in effect, shall not (a) exercise or enforce any creditor's
right it may have against the Borrower, or (b) foreclose, repossess, sequester
or otherwise take steps or institute any action or proceeding (judicial or
otherwise, including without limitation the commencement of or joinder in any
liquidation, bankruptcy, rearrangement, debtor's relief or insolvency
proceeding) to enforce any Lien on assets of the Borrower held by the Guarantor.
SECTION 4.05 NOTATION OF RECORDS. All promissory notes and, upon the
request of the Agent, all accounts receivable ledgers or other evidence of the
Guarantor Claims accepted by or held by the Guarantor shall contain a specific
written notice thereon that the indebtedness evidenced thereby is subordinated
under the terms of this Guaranty Agreement.
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ARTICLE V
MISCELLANEOUS
SECTION 5.01 SUCCESSORS AND ASSIGNS. This Guaranty Agreement is and
shall be in every particular available to the successors and assigns of the
Agent and Lenders and is and shall always be fully binding upon the legal
representatives, successors and assigns of the Guarantor, notwithstanding that
some or all of the monies, the repayment of which this Guaranty Agreement
applies, may be actually advanced after any bankruptcy, receivership,
reorganization or other event affecting either the Borrower or the Guarantor.
SECTION 5.02 NOTICES. Any notice or demand to the Guarantor under or in
connection with this Guaranty Agreement may be given and shall conclusively be
deemed and considered to have been given and received in the manner and to the
address of the Guarantor set forth on the signature page hereto as provided for
in Section 12.02 of the Credit Agreement.
SECTION 5.03 AUTHORITY OF AGENT. The Guarantor acknowledges that the
rights and responsibilities of the Agent under this Guaranty Agreement with
respect to any action taken by the Agent or the exercise or non-exercise by the
Agent of any option, right, request, judgment or other right or remedy provided
for herein or resulting or arising out of this Guaranty Agreement shall, as
between the Agent and the Lenders, be governed by the Credit Agreement and by
such other agreements with respect thereto as may exist from time to time among
them, but, as between the Agent and the Guarantor, the Agent shall be
conclusively presumed to be acting as agent for the Lenders with full and valid
authority so to act or refrain from acting; and the Guarantor shall not be under
any obligation, or entitlement, to make any inquiry respecting such authority.
SECTION 5.04 GOVERNING LAW; SUBMISSION TO JURISDICTION.
(a) THIS GUARANTY AGREEMENT (INCLUDING, BUT NOT LIMITED TO, THE VALIDITY
AND ENFORCEABILITY HEREOF) SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE
WITH, THE LAWS OF THE STATE OF TEXAS.
(b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS GUARANTY
AGREEMENT OR THE OTHER SECURITY INSTRUMENTS TO WHICH THE GUARANTOR IS A PARTY
MAY BE BROUGHT IN THE COURTS OF THE STATE OF TEXAS OR OF THE UNITED STATES OF
AMERICA FOR THE SOUTHERN DISTRICT OF TEXAS, HOUSTON DIVISION, AND, BY EXECUTION
AND DELIVERY OF THIS GUARANTY AGREEMENT, THE GUARANTOR HEREBY ACCEPTS FOR ITSELF
AND (TO THE EXTENT PERMITTED BY LAW) IN RESPECT OF ITS PROPERTY, GENERALLY AND
UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS. THE GUARANTOR HEREBY
IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING, WITHOUT LIMITATION, ANY OBJECTION
TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT
MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY SUCH ACTION OR PROCEEDING IN
SUCH RESPECTIVE JURISDICTIONS. THIS SUBMISSION TO JURISDICTION IS NONEXCLUSIVE
AND DOES NOT PRECLUDE THE AGENT OR ANY LENDER FROM OBTAINING JURISDICTION OVER
THE GUARANTOR IN ANY COURT OTHERWISE HAVING JURISDICTION.
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(c) THE GUARANTOR IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OF ANY
OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF
COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO IT, AS THE
CASE MAY BE, AT ITS SAID ADDRESS, SUCH SERVICE TO BECOME EFFECTIVE 30 DAYS AFTER
SUCH MAILING.
(d) NOTHING HEREIN SHALL AFFECT THE RIGHT OF ANY AGENT OR ANY LENDER OR
ANY HOLDER OF A NOTE TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO
COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE GUARANTOR IN ANY
OTHER JURISDICTION.
(e) THE GUARANTOR, THE AGENT, AND EACH LENDER HEREBY (I) IRREVOCABLY AND
UNCONDITIONALLY WAIVE, TO THE FULLEST EXTENT PERMITTED BY LAW, TRIAL BY JURY IN
ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS GUARANTY AGREEMENT OR ANY LOAN
DOCUMENTS TO WHICH IT IS A PARTY OR RECEIVES THE BENEFIT OF AND FOR ANY
COUNTERCLAIM THEREIN; (II) IRREVOCABLY WAIVE, TO THE MAXIMUM EXTENT NOT
PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY SUCH
LITIGATION ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES, OR DAMAGES
OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES; (III) CERTIFY THAT NO PARTY
HERETO NOR ANY REPRESENTATIVE OR AGENT OR COUNSEL FOR ANY PARTY HERETO HAS
REPRESENTED, EXPRESSLY OR OTHERWISE, OR IMPLIED THAT SUCH PARTY WOULD NOT, IN
THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS, AND (IV)
ACKNOWLEDGE THAT IT HAS BEEN INDUCED TO ENTER INTO THIS GUARANTY AGREEMENT, THE
LOAN DOCUMENTS TO WHICH IT IS A PARTY AND THE TRANSACTIONS CONTEMPLATED HEREBY
AND THEREBY BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS
CONTAINED IN THIS SECTION 5.04.
(f) THE GUARANTOR AGREES THAT, IN ADDITION TO (AND WITHOUT LIMITATION OF)
ANY RIGHT OF SET-OFF, BANKERS' LIEN OR COUNTERCLAIM A LENDER MAY OTHERWISE HAVE,
AFTER THE OCCURRENCE AND DURING THE CONTINUATION OF AN EVENT OF DEFAULT, EACH
LENDER SHALL HAVE THE RIGHT AND BE ENTITLED (AFTER CONSULTATION WITH THE AGENT),
AT ITS OPTION, TO OFFSET BALANCES HELD BY IT OR BY ANY OF ITS AFFILIATES FOR
ACCOUNT OF THE GUARANTOR AT ANY OF ITS OFFICES, IN DOLLARS OR IN ANY OTHER
CURRENCY, AGAINST ANY PRINCIPAL OF OR INTEREST ON ANY OF SUCH LENDER'S LOANS, OR
ANY OTHER AMOUNT PAYABLE TO SUCH LENDER HEREUNDER, WHICH IS NOT PAID WHEN DUE
(REGARDLESS OF WHETHER SUCH BALANCES ARE THEN DUE TO THE GUARANTOR), IN WHICH
CASE IT SHALL PROMPTLY NOTIFY THE GUARANTOR AND THE AGENT THEREOF, PROVIDED THAT
SUCH LENDER'S FAILURE TO GIVE SUCH NOTICE SHALL NOT AFFECT THE VALIDITY THEREOF.
SECTION 5.05 ENTIRE AGREEMENT. This Guaranty Agreement and the other
Security Instruments embody the entire agreement and understanding between the
Lenders, the Agent and the Guarantor and supersede all prior agreements and
understandings between such parties relating to the subject matter hereof and
thereof. There are no unwritten oral agreements between the parties.
SECTION 5.06 SURVIVAL OF OBLIGATIONS. To the extent that any payments on
the Obligations or proceeds of any collateral are subsequently invalidated,
declared to be fraudulent or preferential, set aside or required to be repaid to
a trustee, debtor in possession, receiver or other Person under any bankruptcy
law, common law or equitable cause, then to such extent, the
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Obligations so satisfied shall be revived and continue as if such payment or
proceeds had not been received and the Agent' and the Lenders' Liens, rights,
powers and remedies under this Guaranty Agreement and each Security Instrument
to which the Guarantor is a party shall continue in full force and effect. In
such event, each Security Instrument shall be automatically reinstated and the
Guarantor shall take such action as may be reasonably requested by the Agent and
the Lenders to effect such reinstatement.
SECTION 5.07 STATUS AS GUARANTOR SENIOR INDEBTEDNESS . The obligations of
the Guarantor under this Guaranty Agreement are intended to be "guarantor senior
indebtedness", "designated guarantor senior indebtedness" or any other similar
or equivalent classification for all purposes in any debt instrument or
agreement to which the Guarantor is now or hereafter a party.
SECTION 5.08 PRIOR GUARANTY . This Guaranty Agreement supersedes and
replaces that certain Guaranty Agreement dated August 1, 1997 given by the
Guarantor in favor of the Agent and the Lenders.
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WITNESS THE EXECUTION HEREOF, effective as of the date first written
above.
NORTHLAND OPERATING CO.
By: /s/ ROBERT P. LINDSAY
------------------------------
Robert P. Lindsay
Vice President
By: /s/ EDWARD J. MUNDEN
------------------------------
Edward J. Munden
President
Address for Notices:
Northland Operating Co.
c/o Queen Sand Resources, Inc.
3500 Oak Lawn Drive, Suite 380
Dallas, Texas 75219
Attention: Robert P. Lindsay
Telephone: (214) 521-9959
Facsimile: (214) 521-9960
with copy to:
Queen Sand Resources, Inc.
60 Queen Street, Suite 1400
Ottawa, Canada K1P 5Y7
Attention: Mr. Ronald Benn
Telephone: (613) 230-7211
Facsimile: (613) 230-6055
and
Haynes & Boone LLP
901 Main Street, Suite 3100
Dallas, Texas 75202-3789
Attention: Mr. William L. Boeing
Telephone: (214) 651-5553
Facsimile: (214) 651-5940
<PAGE> 1
EXHIBIT 10.21
AMENDED AND RESTATED
GUARANTY AGREEMENT
Dated as of April 17, 1998
By
CORRIDA RESOURCES, INC.,
as the Guarantor,
in favor of
BANK OF MONTREAL,
as Agent,
and
THE LENDERS NOW OR HEREAFTER SIGNATORY TO THE CREDIT AGREEMENT
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
ARTICLE I
Definitions and Accounting Matters
<S> <C> <C>
Section 1.01 Terms Defined in the Recitals..............................................................2
Section 1.02 Certain Definitions........................................................................2
Section 1.03 Credit Agreement Definitions...............................................................3
ARTICLE II
The Guaranty
Section 2.01 Obligations Guaranteed.....................................................................3
Section 2.02 Nature of Guaranty.........................................................................3
Section 2.03 Lenders' Rights............................................................................3
Section 2.04 Guarantor's Waivers........................................................................4
Section 2.05 Maturity of Obligations; Payment...........................................................4
Section 2.06 Lenders' Expenses..........................................................................4
Section 2.07 Obligation.................................................................................4
Section 2.08 Events and Circumstances Not Reducing or Discharging the
Guarantor's Obligations................................................................4
Section 2.09 Limitations on Obligation of the Guarantor Hereunder.......................................6
Section 2.10 Subrogation................................................................................6
ARTICLE III
Representations and Warranties
Section 3.01 By the Guarantor...........................................................................7
ARTICLE IV
Subordination of Indebtedness
Section 4.01 Subordination of All Guarantor Claims......................................................8
Section 4.02 Claims in Bankruptcy.......................................................................8
Section 4.03 Payments Held in Trust.....................................................................9
Section 4.04 Liens Subordinate..........................................................................9
Section 4.05 Notation of Records........................................................................9
ARTICLE V
Miscellaneous
Section 5.01 Successors and Assigns.....................................................................9
Section 5.02 Notices....................................................................................9
Section 5.03 Authority of Agent.........................................................................9
Section 5.04 Governing Law; Submission to Jurisdiction.................................................10
</TABLE>
i
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<TABLE>
<S> <C> <C>
Section 5.05 Entire Agreement..........................................................................11
Section 5.06 Survival of Obligations...................................................................11
Section 5.07 Status as Guarantor Senior Indebtedness...................................................11
Section 5.08 Prior Guaranty............................................................................11
</TABLE>
ii
<PAGE> 4
AMENDED AND RESTATED
GUARANTY AGREEMENT
This AMENDED AND RESTATED GUARANTY AGREEMENT dated as of April
17, 1998 is by CORRIDA RESOURCES, INC., a corporation duly organized and validly
existing under the laws of the state of Nevada ("Guarantor"), in favor of each
of the following: each of the financial institutions that is now or hereafter a
signatory to the Credit Agreement (as defined below) (individually, a "Lender"
and, collectively, the "Lenders"); and BANK OF MONTREAL, AS AGENT for the
Lenders (in such capacity, the "Agent").
RECITALS
A. QUEEN SAND RESOURCES, INC., a corporation duly organized and validly
existing under the laws of the state of Delaware ("QSRD"), as Guarantor, QUEEN
SAND RESOURCES, INC., a corporation duly organized and validly existing under
the laws of the state of Nevada (the "Borrower"), the Agent and the Lenders have
executed that certain Amended and Restated Credit Agreement of even date
herewith (such credit agreement, as amended, the "Credit Agreement").
B. One of the terms and conditions stated in the Credit Agreement for
the making of the loans and extensions of credit described in the Credit
Agreement is the execution and delivery to the Agent and the Lenders of this
Guaranty Agreement.
C. NOW, THEREFORE, (i) in order to comply with the terms and conditions
of the Credit Agreement, (ii) to induce the Lenders to enter into the Credit
Agreement, and (iii) for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Guarantor hereby agrees as
follows:
ARTICLE I
DEFINITIONS AND ACCOUNTING MATTERS
SECTION 1.01 TERMS DEFINED IN THE RECITALS. As used in This Guaranty
Agreement, the terms defined in the Recitals shall have the meanings indicated
in the Recitals.
SECTION 1.02 CERTAIN DEFINITIONS. As used in this Guaranty Agreement,
the following terms shall have the following meanings, unless the context
otherwise requires:
"Guarantor Claims" shall have the meaning indicated in Section 4.01.
"Guaranty Agreement" shall mean this Amended and Restated Guaranty
Agreement, as the same may from time to time be amended or supplemented.
"Obligations" shall mean (a) the payment and performance of all present
and future indebtedness, obligations and liabilities of QSRD, the Borrower
and/or the Guarantor to the Agent and the Lenders under the Credit Agreement,
including but not limited to, (i) the full and punctual payment of the Notes
issued thereunder, and any and all promissory notes given in substitution for
such Notes or in modification, renewal, extension or rearrangement thereof in
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<PAGE> 5
whole or in part, and (ii) the reimbursement and other obligations of the
Borrower under and with respect to Letters of Credit and Letter of Credit
Agreements now outstanding or hereafter issued under the Credit Agreement; (b)
all obligations of the Guarantor under this Guaranty Agreement; (c) all interest
(whether pre or post petition), charges, expenses, reasonable attorneys' or
other fees and any other sums payable to or incurred by the Agent and, to the
extent provided in the Credit Agreement, the Lenders in connection with the
execution or enforcement of any of their rights and remedies hereunder or any
other Security Instrument; (d) payment of and performance of any and all present
or future obligations of QSRD or the Borrower according to the terms of any
present or future interest rate or currency swap, rate cap, rate floor, rate
collar, forward rate agreement or other exchange or rate protection agreements
or any option with respect to any such transaction now existing or hereafter
entered into between QSRD or the Borrower and any Lender or an Affiliate of such
Lender; and (e) payment of and performance of any and all present or future
obligations of QSRD or the Borrower according to the terms of any present or
future swap agreements, cap, floor, collar, forward agreement or other exchange
or protection agreements relating to crude oil, natural gas or other
hydrocarbons or any option with respect to any such transaction now existing or
hereafter entered into between QSRD or the Borrower and any Lender or an
Affiliate of such Lender.
SECTION 1.03 CREDIT AGREEMENT DEFINITIONS. Unless otherwise defined
herein, all terms beginning with a capital letter which are defined in the
Credit Agreement shall have the same meanings herein as therein.
ARTICLE II
THE GUARANTY
SECTION 2.01 OBLIGATIONS GUARANTEED. The Guarantor hereby irrevocably
and uncondi tionally guarantees the prompt payment at maturity of the
Obligations.
SECTION 2.02 NATURE OF GUARANTY. This guaranty is an absolute,
irrevocable, completed and continuing guaranty of payment and not a guaranty of
collection, and no notice of the Obligations or any extension of credit already
or hereafter contracted by or extended to the Borrower need be given to the
Guarantor. The guaranty evidenced hereby is joint and several with all other
guarantees of the Obligations. This guaranty may not be revoked by the Guarantor
and shall continue to be effective with respect to debt under the Obligations
arising or created after any attempted revocation by the Guarantor and shall
remain in full force and effect until the Obligations are paid in full and the
Aggregate Commitments are terminated, notwithstanding that from time to time
prior thereto no Obligations may be outstanding. The Borrower, the Agent and the
Lenders may modify, alter, rearrange, extend for any period and/or renew from
time to time, the Obligations and the Agent and the Lenders may waive any
Default or Events of Default without notice to the Guarantor and in such event
the Guarantor will remain fully bound hereunder on the Obligations. This
Guaranty Agreement may be enforced by the Agent and/or the Lenders and any
subsequent holder of the Obligations and shall not be discharged by the
assignment or negotiation of all or part of the Obligations. The Guarantor
hereby expressly waives presentment, demand, notice of non-payment, protest and
notice of protest and dishonor, notice of Event of Default, notice of intent to
accelerate the maturity and notice of acceleration of the maturity and any other
notice in connection with the Obligations, and also notice of
2
<PAGE> 6
acceptance of this Guaranty Agreement, acceptance on the part of the Agent and
the Lenders being conclusively presumed by their request for this Guaranty
Agreement and delivery of the same to the Agent.
SECTION 2.03 LENDERS' RIGHTS. Subject to the terms of the Credit
Agreement, the Guarantor authorizes the Lenders (or the Agent on behalf of the
Lenders), without notice or demand and without affecting the Guarantor's
obligation hereunder, to take and hold security for the payment of the
Obligations, and exchange, enforce, waive and release any such security; and to
apply such security and direct the order or manner of sale thereof as the Agent
and the Lenders in their discretion may determine; and to obtain a guaranty of
the Obligations from any one or more Persons and at any time or times to
enforce, waive, rearrange, modify, limit or release any of such other Persons
from their obligations under such guaranties.
SECTION 2.04 GUARANTOR'S WAIVERS. The Guarantor waives any right to
require the Agent and the Lenders to (a) proceed against the Borrower or any
other Person liable on the Obligations, (b) enforce their rights against any
other guarantor of the Obligations, (c) proceed or enforce their rights against
or exhaust any security given to secure the Obligations, (d) have the Borrower
joined with the Guarantor in any suit arising out of this Guaranty Agreement
and/or the Obligations, or (e) pursue any other remedy whatsoever. Neither the
Agent nor the Lenders shall be required to mitigate damages or take any action
to reduce, collect or enforce the Obligations. The Guarantor waives any defense
arising by reason of any disability, lack of corporate authority or power, or
other defense of the Borrower or any other guarantor of the Obligations, and
shall remain liable hereon regardless of whether the Borrower or any other
guarantor be found not liable thereon for any reason.
SECTION 2.05 MATURITY OF OBLIGATIONS; PAYMENT. The Guarantor agrees
that if the maturity of the Obligations is accelerated by bankruptcy or
otherwise, such maturity shall also be deemed accelerated for the purpose of
this Guaranty Agreement without demand or notice to the Guarantor. The Guarantor
will, forthwith upon notice from the Agent of the Borrower's failure to pay the
Obligations at maturity, pay to the Agent for the benefit of the Agent and the
Lenders at the Agent's Principal Office, the amount due and unpaid by the
Borrower and guaranteed hereby. The failure of the Agent to give this notice
shall not in any way release the Guarantor hereunder.
SECTION 2.06 LENDERS' EXPENSES. If the Guarantor fails to pay the
Obligations after notice from the Agent of the Borrower's failure to pay any
Obligations at maturity (whether by acceleration or otherwise), and if
thereafter the Agent or the Lenders obtain the services of an attorney for
collection of amounts owing by the Guarantor hereunder or if suit is filed to
enforce this Guaranty Agreement, or if proceedings are had in any bankruptcy,
receivership or other judicial proceedings for the establishment or collection
of any amount owing by the Guarantor hereunder, or if any amount owing by the
Guarantor hereunder is collected through such proceedings, the Guarantor agrees
to pay to the Agent at its Principal Office, the reasonable attorneys' fees of
the Agent and the Lenders.
SECTION 2.07 OBLIGATION. It is expressly agreed that the obligation of
the Guarantor for the payment of the Obligations guaranteed hereby shall be
primary and not secondary.
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<PAGE> 7
SECTION 2.08 EVENTS AND CIRCUMSTANCES NOT REDUCING OR DISCHARGING THE
GUARANTOR'S OBLIGATIONS. The Guarantor hereby consents and agrees to each of the
following to the fullest extent permitted by law, agrees its obligations under
this Guaranty Agreement shall not be released, diminished, impaired, reduced or
adversely affected by any of the following, and waives any rights (including
without limitation rights to notice) which it might otherwise have as a result
of or in connection with any of the following:
(a) Modifications, etc. Any renewal, extension, modification, or
increase in the amount of the Aggregate Commitments as in effect on the
Effective Date, decrease, alteration or rearrangement of all or any part of the
Obligations, any Security Instrument or any instrument executed in connection
therewith, or any contract or understanding between the Borrower, any Agent
and/or the Lenders, or any other Person, pertaining to the Obligations;
(b) Adjustment, etc. Any adjustment, indulgence, forbearance or
compromise that might be granted or given by the Agent or the Lenders to the
Borrower or the Guarantor or any Person liable on the Obligations;
(c) Condition of the Borrower or the Guarantor. The insolvency,
bankruptcy arrangement, reorganization, adjustment, composition, liquidation,
disability, dissolution or lack of power of the Borrower or the Guarantor or any
other Person at any time liable for the payment of all or part of the
Obligations; or any sale, lease or transfer of any or all of the assets of the
Borrower or the Guarantor, or any changes in the shareholders of the Borrower or
the Guarantor;
(d) Invalidity of Obligations. The invalidity, illegality or
unenforceability of all or any part of the Obligations or any Security
Instrument, including the Notes, for any reason whatsoever, including without
limitation the fact that the Obligations, or any part thereof, exceed the amount
permitted by law, the act of creating the Obligations or any part thereof is
ultra vires, the officers or representatives executing any Security Instrument
acted in excess of their authority, the Obligations violate applicable usury
laws, the Borrower has valid defenses, claims or offsets (whether at law, in
equity or by agreement) which render the Obligations wholly or partially
uncollectible from the Borrower, the creation, performance or repayment of the
Obligations (or the execution, delivery and performance of any Security
Instrument) is illegal, uncollectible or legally unenforceable, or the Credit
Agreement, the Notes or other Security Instruments have been forged or otherwise
are irregular or not genuine or authentic;
(e) Release of Obligors. Any full or partial release of the obligation
of the Borrower on the Obligations or any part thereof, of any co-guarantors, or
any other Person now or hereafter liable, whether directly or indirectly,
jointly, severally, or jointly and severally, to pay, perform, guarantee or
assure the payment of the Obligations or any part thereof, it being recognized,
acknowledged and agreed by the Guarantor that the Guarantor may be required to
pay the Obligations in full without assistance or support of any other Person,
and the Guarantor has not been induced to enter into this Guaranty Agreement on
the basis of a contemplation, belief, understanding or agreement that other
parties other than the Borrower will be liable to perform the Obligations, or
that the Agent and Lenders will look to other parties to perform the
Obligations;
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<PAGE> 8
(f) Other Security. The taking or accepting of any other security,
collateral or guaranty, or other assurance of payment, for all or any part of
the Obligations;
(g) Release of Collateral, etc. Any release, surrender, exchange,
subordination, deterioration, waste, loss or impairment (including without
limitation negligent, willful, unreasonable or unjustifiable impairment) of any
collateral, Property or security, at any time existing in connection with, or
assuring or securing payment of, all or any part of the Obligations;
(h) Care and Diligence. The failure of any Agent or Lender or any other
Person to exercise diligence or reasonable care in the preservation, protection,
enforcement, sale or other handling or treatment of all or any part of such
collateral, Property or security;
(i) Status of Liens. The fact that any collateral, security or Lien
contemplated or intended to be given, created or granted as security for the
repayment of the Obligations shall not be properly perfected or created, or
shall prove to be unenforceable or subordinate to any other Lien, it being
recognized and agreed by the Guarantor that the Guarantor is not entering into
this Guaranty Agreement in reliance on, or in contemplation of the benefits of,
the validity, enforceability, collectability or value of any of the collateral
for the Obligations;
(j) Payments Rescinded. Any payment by the Borrower to any Agent or
Lender is held to constitute a preference under the bankruptcy laws, or for any
reason an Agent or Lender is required to refund such payment or pay such amount
to the Borrower or someone else; or
(k) Other Actions Taken or Omitted. Any other action taken or omitted
to be taken with respect to the Credit Agreement or the other Security
Instruments, the Obligations, or the security and collateral therefor, whether
or not such action or omission prejudices the Guarantor or increases the
likelihood that the Guarantor will be required to pay the Obligations pursuant
to the terms hereof; it being the unambiguous and unequivocal intention of the
Guarantor that the Guarantor shall be obligated to pay the Obligations when due,
notwithstanding any occurrence, circumstance, event, action, or omission
whatsoever, whether contemplated or uncontemplated, and whether or not otherwise
or particularly described herein, except for the full and final payment and
satisfaction of the Obligations.
SECTION 2.09 LIMITATIONS ON OBLIGATION OF THE GUARANTOR HEREUNDER. The
parties hereto (i) intend that the obligation of the Guarantor hereunder be
limited to the maximum amount that would not result in the obligation created
hereby being avoidable under Section 548 of the Federal Bankruptcy Code (11
U.S.C. ss. 548; hereinafter "Section 548") or other applicable state fraudulent
conveyance or transfer law and (ii) agree that this Guaranty Agreement shall be
so construed. Accordingly, the obligation of the Guarantor hereunder is limited
to an amount that is the greater of (x) the "reasonably equivalent value" or
"fair consideration" received by the Guarantor in exchange for the obligation
incurred hereunder, within the meaning of Section 548, as amended, or any
applicable state fraudulent conveyance or transfer law, as amended; or (y) the
lesser of (1) the maximum amount that will not render the Guarantor insolvent or
(2) the maximum amount that will not leave the Guarantor with any Property
deemed an unreasonably
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<PAGE> 9
small capital. Clauses (1) and (2) are and shall be determined pursuant to
Section 548, as amended, or other applicable state fraudulent conveyance or
transfer law, as amended.
SECTION 2.10 SUBROGATION. The Guarantor shall not exercise any rights
which it may acquire by way of subrogation, reimbursement, exoneration,
indemnification or participation, by any payment made under this Guaranty
Agreement, under any other Security Instrument or otherwise until the
Obligations have been paid in full and the Aggregate Commitments are terminated;
provided that, notwithstanding the foregoing, the Guarantor reserves its rights
of contribution and reimbursement, if any, from its co-guarantors and other
Persons liable on the Obligations or otherwise. Except as described in this
Section 2.10, the Guarantor further waives any benefit of any right to
participate in any security now or hereafter held by the Agent and/or the
Lenders.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.01 BY THE GUARANTOR. In order to induce the Agent and the
Lenders to accept this Guaranty Agreement, the Guarantor represents and warrants
to the Agent and the Lenders (which representations and warranties will survive
the creation of the Obligations and any extension of credit thereunder) that:
(a) Benefit to the Guarantor. The Guarantor is a wholly-owned
Subsidiary of the Borrower and the Guarantor's guaranty pursuant to this
Guaranty Agreement reasonably may be expected to benefit, directly or
indirectly, the Guarantor; and the Guarantor has determined that this Guaranty
Agreement is necessary and convenient to the conduct, promotion and attainment
of the business of the Guarantor and the Borrower.
(b) Corporate Existence. The Guarantor: (i) is duly organized and
validly existing under the laws of the jurisdiction of its formation; (ii) has
all requisite power, and has all material governmental licenses, authorizations,
consents and approvals necessary to own its assets and carry on its business as
now being conducted; and (iii) is qualified to do business in all jurisdictions
in which the nature of the business conducted by it makes such qualification
necessary and where failure so to qualify would have a Material Adverse Effect.
(c) No Breach. The execution and delivery by the Guarantor of this
Guaranty Agreement and the other Security Instruments to which it is a party,
the consummation of the transactions herein or therein contemplated, and the
compliance with the terms and provisions hereof will not (i) conflict with or
result in a breach of, or require any consent under (A) the respective charter
or by-laws of the Guarantor, or (B) any applicable law or regulation, or any
order, writ, injunction or decree of any court or other Governmental Authority,
or any material agreement or instrument to which the Guarantor is a party or by
which it is bound or to which it is subject in each case in such manner as could
reasonably be expected to have a Material Adverse Effect; or (ii) constitute a
default under any such agreement or instrument, or result in the creation or
imposition of any Lien upon any of the revenues or Property of the Guarantor in
each case in such manner as could reasonably be expected to have a Material
Adverse Effect.
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<PAGE> 10
(d) Corporate Action. The Guarantor has all necessary corporate power
and authority to execute, deliver and perform its obligations under this
Guaranty Agreement and the Security Instruments to which it is a party; and the
execution, delivery and performance by the Guarantor of this Guaranty Agreement
and the other Security Instruments to which such Person is a party have been
duly authorized by all necessary corporate action on its part. This Guaranty
Agreement and the Security Instruments to which the Guarantor is a party
constitute the legal, valid and binding obligation of the Guarantor, enforceable
against the Guarantor in accordance with their terms, except as may be limited
by applicable bankruptcy, insolvency, reorganization or other similar laws
affecting creditors' rights and general principals of equity.
(e) Approvals. Other than consents heretofore obtained or described in
the Credit Agreement, no authorizations, approvals or consents of, and no
filings or registrations with, any Governmental Authority are necessary for the
execution, delivery or performance by the Guarantor of this Guaranty Agreement
or the Security Instruments to which it is a party or for the validity or
enforceability thereof. It is understood that continued performance by the
Guarantor of this Guaranty Agreement and the other Security Instruments to which
it is a party will require various filings, such as filings related to
environmental matters, ERISA matters, Taxes and intellectual property, filings
required to maintain corporate and similar standing and existence, filings
pursuant to the Uniform Commercial Code and other security filings and
recordings and filings required by the SEC, routine filings in the ordinary
course of business, and filings required in connection with the exercise by the
Lenders and the Agent of remedies in connection with the Security Instruments.
(f) Solvency. The Guarantor (i) is not insolvent as of the date hereof
and will not be rendered insolvent as a result of this Guaranty Agreement, (ii)
is not engaged in business or a transaction, or about to engage in a business or
a transaction, for which any Property or assets remaining with the Guarantor
constitute unreasonably small capital, and (iii) does not intend to incur, or
believe it will incur, debts that will be beyond its ability to pay as such
debts mature.
(g) No Representation by Agent or Lenders. Neither any Agent, any
Lender nor any other Person has made any representation, warranty or statement
to the Guarantor in order to induce the Guarantor to execute this Guaranty
Agreement.
ARTICLE IV
SUBORDINATION OF INDEBTEDNESS
SECTION 4.01 SUBORDINATION OF ALL GUARANTOR CLAIMS. As used herein, the
term "Guarantor Claims" shall mean all debts and obligations of the Borrower to
the Guarantor, whether such debts and obligations now exist or are hereafter
incurred or arise, or whether the obligation of the Borrower thereon be direct,
contingent, primary, secondary, several, joint and several, or otherwise, and
irrespective of whether such debts or obligations be evidenced by note,
contract, open account, or otherwise, and irrespective of the Person or Persons
in whose favor such debts or obligations may, at their inception, have been, or
may hereafter be created, or the manner in which they have been or may hereafter
be acquired by. Except for payments permitted by the Credit Agreement, until the
Obligations shall be paid and satisfied in full, the Aggregate Commitments are
terminated and the Guarantor shall have performed all of its obligations
7
<PAGE> 11
hereunder and under the other Security Instruments to which it is a party, the
Guarantor shall not receive or collect, directly or indirectly, from the
Borrower any amount upon the Guarantor Claims.
SECTION 4.02 CLAIMS IN BANKRUPTCY. In the event of receivership,
bankruptcy, reorganization, arrangement, debtor's relief, or other insolvency
proceedings involving the Borrower, the Agent on behalf of the Agent and the
Lenders shall have the right to prove their claim in any proceeding, so as to
establish their rights hereunder and receive directly from the receiver, trustee
or other court custodian, dividends and payments which would otherwise be
payable upon Guarantor Claims. The Guarantor hereby assigns such dividends and
payments to the Agent for the benefit of the Agent and the Lenders. Should any
Agent or Lender receive, for application upon the Obligations, any such dividend
or payment which is otherwise payable to the Guarantor, and which, as between
the Borrower and the Guarantor, shall constitute a credit upon the Guarantor
Claims, then upon payment in full of the Obligations, the Guarantor shall become
subrogated to the rights of the Agent and the Lenders to the extent that such
payments to the Agent and the Lenders on the Guarantor Claims have contributed
toward the liquidation of the Obligations, and such subrogation shall be with
respect to that proportion of the Obligations which would have been unpaid if
the Agent and the Lenders had not received dividends or payments upon the
Guarantor Claims.
SECTION 4.03 PAYMENTS HELD IN TRUST. In the event that notwithstanding
Sections 4.01 and 4.02, the Guarantor should receive any funds, payments, claims
or distributions which is prohibited by such Sections, the Guarantor agrees: (a)
to hold in trust for the Agent and the Lenders an amount equal to the amount of
all funds, payments, claims or distributions so received, and (b) that it shall
have absolutely no dominion over the amount of such funds, payments, claims or
distributions except to pay them promptly to the Agent, for the benefit of the
Agent and the Lenders; and the Guarantor covenants promptly to pay the same to
the Agent.
SECTION 4.04 LIENS SUBORDINATE. The Guarantor agrees that, until the
Obligations are paid in full and the Aggregate Commitments terminated, any Liens
upon the Borrower's assets securing payment of the Guarantor Claims shall be and
remain inferior and subordinate to any Liens upon the Borrower's assets securing
payment of the Obligations, regardless of whether such encumbrances in favor of
the Guarantor, any Agent or Lender presently exist or are hereafter created or
attach. Without the prior written consent of the Agent, the Guarantor, during
the period in which any of the Obligations are outstanding or the Aggregate
Commitments are in effect, shall not (a) exercise or enforce any creditor's
right it may have against the Borrower, or (b) foreclose, repossess, sequester
or otherwise take steps or institute any action or proceeding (judicial or
otherwise, including without limitation the commencement of or joinder in any
liquidation, bankruptcy, rearrangement, debtor's relief or insolvency
proceeding) to enforce any Lien on assets of the Borrower held by the Guarantor.
SECTION 4.05 NOTATION OF RECORDS. All promissory notes and, upon the
request of the Agent, all accounts receivable ledgers or other evidence of the
Guarantor Claims accepted by or held by the Guarantor shall contain a specific
written notice thereon that the indebtedness evi denced thereby is subordinated
under the terms of this Guaranty Agreement.
8
<PAGE> 12
ARTICLE V
MISCELLANEOUS
SECTION 5.01 SUCCESSORS AND ASSIGNS. This Guaranty Agreement is and
shall be in every particular available to the successors and assigns of the
Agent and Lenders and is and shall always be fully binding upon the legal
representatives, successors and assigns of the Guarantor, notwithstanding that
some or all of the monies, the repayment of which this Guaranty Agreement
applies, may be actually advanced after any bankruptcy, receivership,
reorganization or other event affecting either the Borrower or the Guarantor.
SECTION 5.02 NOTICES. Any notice or demand to the Guarantor under or in
connection with this Guaranty Agreement may be given and shall conclusively be
deemed and considered to have been given and received in the manner and to the
address of the Guarantor set forth on the signature page hereto as provided for
in Section 12.02 of the Credit Agreement.
SECTION 5.03 AUTHORITY OF AGENT. The Guarantor acknowledges that the
rights and responsibilities of the Agent under this Guaranty Agreement with
respect to any action taken by the Agent or the exercise or non-exercise by the
Agent of any option, right, request, judgment or other right or remedy provided
for herein or resulting or arising out of this Guaranty Agreement shall, as
between the Agent and the Lenders, be governed by the Credit Agreement and by
such other agreements with respect thereto as may exist from time to time among
them, but, as between the Agent and the Guarantor, the Agent shall be
conclusively presumed to be acting as agent for the Lenders with full and valid
authority so to act or refrain from acting; and the Guarantor shall not be under
any obligation, or entitlement, to make any inquiry respecting such authority.
SECTION 5.04 GOVERNING LAW; SUBMISSION TO JURISDICTION.
(a) THIS GUARANTY AGREEMENT (INCLUDING, BUT NOT LIMITED TO, THE
VALIDITY AND ENFORCEABILITY HEREOF) SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS.
(b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS GUARANTY
AGREEMENT OR THE OTHER SECURITY INSTRUMENTS TO WHICH THE GUARANTOR IS A PARTY
MAY BE BROUGHT IN THE COURTS OF THE STATE OF TEXAS OR OF THE UNITED STATES OF
AMERICA FOR THE SOUTHERN DISTRICT OF TEXAS, HOUSTON DIVISION, AND, BY EXECUTION
AND DELIVERY OF THIS GUARANTY AGREEMENT, THE GUARANTOR HEREBY ACCEPTS FOR ITSELF
AND (TO THE EXTENT PERMITTED BY LAW) IN RESPECT OF ITS PROPERTY, GENERALLY AND
UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS. THE GUARANTOR HEREBY
IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING, WITHOUT LIMITATION, ANY OBJECTION
TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT
MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY SUCH ACTION OR PROCEEDING IN
SUCH RESPECTIVE JURISDICTIONS. THIS SUBMISSION TO JURISDICTION IS NONEXCLUSIVE
AND DOES NOT PRECLUDE THE AGENT OR ANY LENDER FROM OBTAINING JURISDICTION OVER
THE GUARANTOR IN ANY COURT OTHERWISE HAVING JURISDICTION.
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(c) THE GUARANTOR IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OF ANY
OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF
COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO IT, AS THE
CASE MAY BE, AT ITS SAID ADDRESS, SUCH SERVICE TO BECOME EFFECTIVE 30 DAYS AFTER
SUCH MAILING.
(d) NOTHING HEREIN SHALL AFFECT THE RIGHT OF ANY AGENT OR ANY LENDER OR
ANY HOLDER OF A NOTE TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO
COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE GUARANTOR IN ANY
OTHER JURISDICTION.
(e) THE GUARANTOR, THE AGENT, AND EACH LENDER HEREBY (I) IRREVOCABLY
AND UNCONDITIONALLY WAIVE, TO THE FULLEST EXTENT PERMITTED BY LAW, TRIAL BY JURY
IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS GUARANTY AGREEMENT OR ANY
LOAN DOCUMENTS TO WHICH IT IS A PARTY OR RECEIVES THE BENEFIT OF AND FOR ANY
COUNTERCLAIM THEREIN; (II) IRREVOCABLY WAIVE, TO THE MAXIMUM EXTENT NOT
PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY SUCH
LITIGATION ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES, OR DAMAGES
OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES; (III) CERTIFY THAT NO PARTY
HERETO NOR ANY REPRESENTATIVE OR AGENT OR COUNSEL FOR ANY PARTY HERETO HAS
REPRESENTED, EXPRESSLY OR OTHERWISE, OR IMPLIED THAT SUCH PARTY WOULD NOT, IN
THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS, AND (IV)
ACKNOWLEDGE THAT IT HAS BEEN INDUCED TO ENTER INTO THIS GUARANTY AGREEMENT, THE
LOAN DOCUMENTS TO WHICH IT IS A PARTY AND THE TRANSACTIONS CONTEMPLATED HEREBY
AND THEREBY BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS
CONTAINED IN THIS SECTION 5.04.
(f) THE GUARANTOR AGREES THAT, IN ADDITION TO (AND WITHOUT LIMITATION
OF) ANY RIGHT OF SET-OFF, BANKERS' LIEN OR COUNTERCLAIM A LENDER MAY OTHERWISE
HAVE, AFTER THE OCCURRENCE AND DURING THE CONTINUATION OF AN EVENT OF DEFAULT,
EACH LENDER SHALL HAVE THE RIGHT AND BE ENTITLED (AFTER CONSULTATION WITH THE
AGENT), AT ITS OPTION, TO OFFSET BALANCES HELD BY IT OR BY ANY OF ITS AFFILIATES
FOR ACCOUNT OF THE GUARANTOR AT ANY OF ITS OFFICES, IN DOLLARS OR IN ANY OTHER
CURRENCY, AGAINST ANY PRINCIPAL OF OR INTEREST ON ANY OF SUCH LENDER'S LOANS, OR
ANY OTHER AMOUNT PAYABLE TO SUCH LENDER HEREUNDER, WHICH IS NOT PAID WHEN DUE
(REGARDLESS OF WHETHER SUCH BALANCES ARE THEN DUE TO THE GUARANTOR), IN WHICH
CASE IT SHALL PROMPTLY NOTIFY THE GUARANTOR AND THE AGENT THEREOF, PROVIDED THAT
SUCH LENDER'S FAILURE TO GIVE SUCH NOTICE SHALL NOT AFFECT THE VALIDITY THEREOF.
SECTION 5.05 ENTIRE AGREEMENT. This Guaranty Agreement and the other
Security Instruments embody the entire agreement and understanding between the
Lenders, the Agent and the Guarantor and supersede all prior agreements and
understandings between such parties relating to the subject matter hereof and
thereof. There are no unwritten oral agreements between the parties.
SECTION 5.06 SURVIVAL OF OBLIGATIONS. To the extent that any payments
on the Obligations or proceeds of any collateral are subsequently invalidated,
declared to be fraudulent or preferential, set aside or required to be repaid to
a trustee, debtor in possession, receiver or other Person under any bankruptcy
law, common law or equitable cause, then to such extent, the
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Obligations so satisfied shall be revived and continue as if such payment or
proceeds had not been received and the Agent' and the Lenders' Liens, rights,
powers and remedies under this Guaranty Agreement and each Security Instrument
to which the Guarantor is a party shall continue in full force and effect. In
such event, each Security Instrument shall be automatically reinstated and the
Guarantor shall take such action as may be reasonably requested by the Agent and
the Lenders to effect such reinstatement.
SECTION 5.07 STATUS AS GUARANTOR SENIOR INDEBTEDNESS. The obligations
of the Guarantor under this Guaranty Agreement are intended to be "guarantor
senior indebtedness", "designated guarantor senior indebtedness" or any other
similar or equivalent classification for all purposes in any debt instrument or
agreement to which the Guarantor is now or hereafter a party.
SECTION 5.08 PRIOR GUARANTY. This Guaranty Agreement supersedes and
replaces that certain Guaranty Agreement dated August 1, 1997 given by the
Guarantor in favor of the Agent and the Lenders.
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WITNESS THE EXECUTION HEREOF, effective as of the date first written
above.
CORRIDA RESOURCES, INC.
By: /s/ ROBERT P. LINDSAY
--------------------------------------
Robert P. Lindsay
Vice President
By: /s/ EDWARD J. MUNDEN
--------------------------------------
Edward J. Munden
President
Address for Notices:
Corrida Resources, Inc.
c/o Queen Sand Resources, Inc.
3500 Oak Lawn Drive, Suite 380
Dallas, Texas 75219
Attention: Robert P. Lindsay
Telephone: (214) 521-9959
Facsimile: (214) 521-9960
with copy to:
Queen Sand Resources, Inc.
60 Queen Street, Suite 1400
Ottawa, Canada K1P 5Y7
Attention: Mr. Ronald Benn
Telephone: (613) 230-7211
Facsimile: (613) 230-6055
and
Haynes & Boone LLP
901 Main Street, Suite 3100
Dallas, Texas 75202-3789
Attention: Mr. William L. Boeing
Telephone: (214) 651-5553
Facsimile: (214) 651-5940
<PAGE> 1
EXHIBIT 10.22
AMENDED AND RESTATED
SECURITY AGREEMENT
(Stock, Bonds and Other Securities)
by
QUEEN SAND RESOURCES, INC.
in favor of
BANK OF MONTREAL,
as Agent
as of April 17, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I
Definitions
Section 1.01 Terms Defined in the Recitals or in the Credit Agreement.........1
Section 1.02 Certain Definitions..............................................1
ARTICLE II
Security Interest
Section 2.01 Pledge...........................................................2
Section 2.02 Transfer of Collateral...........................................3
ARTICLE III
Representations and Warranties
Section 3.01 Ownership of Collateral; Encumbrances............................3
Section 3.02 No Required Consent..............................................3
Section 3.03 Pledged Securities...............................................3
Section 3.04 First Priority Security Interest.................................3
ARTICLE IV
Covenants and Agreements
Section 4.01 Sale, Disposition or Encumbrance of Collateral...................4
Section 4.02 Dividends or Distributions.......................................4
Section 4.03 Stock Powers.....................................................4
Section 4.04 Voting and Other Consensual Rights...............................4
Section 4.05 Pledged Securities Percentage....................................4
ARTICLE V
Rights, Duties and Powers of Secured Party
Section 5.01 Discharge Encumbrances...........................................4
Section 5.02 Transfer of Collateral...........................................5
Section 5.03 Cumulative and Other Rights......................................5
Section 5.04 Disclaimer of Certain Duties.....................................5
Section 5.05 Modification of Obligations; Other Security......................5
Section 5.06 Waiver of Notice; Demand and Presentment.........................5
Section 5.07 Custody and Preservation of the Collateral.......................6
</TABLE>
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<TABLE>
<S> <C>
ARTICLE VI
Events of Default
Section 6.01 Events...........................................................6
Section 6.02 Remedies.........................................................6
Section 6.03 Attorney-in-Fact.................................................7
Section 6.04 Liability for Deficiency.........................................7
Section 6.05 Reasonable Notice................................................7
Section 6.06 Pledged Securities...............................................8
Section 6.07 Non-judicial Enforcement.........................................8
Section 6.08 Private Sale of Collateral.......................................8
ARTICLE VII
Miscellaneous
Section 7.01 Notices..........................................................9
Section 7.02 Amendments and Waivers...........................................9
Section 7.03 Copy as Financing Statement......................................9
Section 7.04 Possession of Collateral.........................................9
Section 7.05 Redelivery of Collateral.........................................9
Section 7.06 GOVERNING LAW...................................................10
Section 7.07 Effectiveness...................................................10
Section 7.08 Continuing Security Agreement...................................10
Section 7.09 Termination.....................................................10
Section 7.10 Prior Security Agreement........................................10
</TABLE>
ii
<PAGE> 4
AMENDED AND RESTATED
SECURITY AGREEMENT
(Stock, Bonds and Other Securities)
This Amended and Restated Security Agreement is made as of April 17,
1998 by QUEEN SAND RESOURCES, INC., a Nevada corporation ("Pledgor"), in favor
of BANK OF MONTREAL, as Agent (together with any successor agent, the "Secured
Party") for the Lenders.
RECITALS
A. QUEEN SAND RESOURCES, INC., a corporation duly organized and validly
existing under the laws of the state of Delaware ("QSRD"), Pledgor, each of the
financial institutions that is now or hereafter a signatory thereto
(collectively, the "Lenders"); and Secured Party, as agent for the Lenders (in
such capacity, the "Agent"), have entered into that certain Amended and Restated
Credit Agreement dated of even date herewith (as amended from time to time, the
"Credit Agreement").
B. One of the terms and conditions stated in the Credit Agreement for
the Lenders becoming signatories to the Credit Agreement thereto and agreeing to
make extensions of credit to or on behalf of the Pledgor thereunder is the
execution and delivery to Secured Party of this Security Agreement.
C. NOW, THEREFORE, (i) in order to comply with the terms and conditions
of the Credit Agreement, (ii) to induce the Lenders to enter into the terms of
the Credit Agreement, and (iii) for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, Pledgor hereby agrees
as follows:
ARTICLE I
Definitions
Section 1.01 Terms Defined in the Recitals or in the Credit Agreement.
As used in this Security Agreement, the terms defined in the Recitals shall have
the meanings respectively assigned to them. Other capitalized terms which are
defined in the Credit Agreement but which are not defined herein shall have the
same meanings as defined in the Credit Agreement.
Section 1.02 Certain Definitions. As used in this Security Agreement,
the following terms shall have the following meanings, unless the context
otherwise requires:
"Code" shall mean the Uniform Commercial Code as presently in effect in
the State of Texas. Unless otherwise indicated by the context herein, all
uncapitalized terms which are defined in the Code shall have their respective
meanings as used in Articles 8 and 9 of the Code.
"Collateral" shall mean any of the following types or items of
Property:
(a) the securities described or referred to in Exhibit A
attached hereto and made a part hereof; and
<PAGE> 5
(b) (i) the certificates or instruments, if any, representing
such securities, (ii) all dividends (cash, stock or otherwise), cash,
instruments, rights to subscribe, purchase or sell and all other rights
and property from time to time received, receivable or otherwise
distributed in respect of or in exchange for any or all of such
securities, (iii) all replacements, additions to and substitutions for
any of the property referred to in this definition, including, without
limitation, claims against third parties, (iv) the proceeds, interest,
profits and other income of or on any of the property referred to in
this definition and (v) all books and records relating to any of the
property referred to in this definition.
(c) Additional securities or other Property may from time to
time be pledged, assigned or granted to Secured Party as additional
security for the Obligations and the term "Collateral" as used herein
shall be deemed for all purposes to include all such additional
securities and Property, together with all other Property of the types
described above related thereto.
"Obligations" shall mean (a) the payment and performance of all present
and future indebtedness, obligations and liabilities of QSRD or the Pledgor to
the Agent and the Lenders under the Credit Agreement or any other Loan Document,
including but not limited to, (i) the full and punctual payment of the Notes
issued thereunder, and any and all promissory notes given in substitution for
such Notes or in modification, renewal, extension or rearrangement thereof in
whole or in part, and (ii) the reimbursement and other obligations of the
Pledgor under and with respect to Letters of Credit and Letter of Credit
Agreements now outstanding or hereafter issued under the Credit Agreement; (b)
all obligations of the Pledgor under this Security Agreement; (c) all interest
(whether pre or post petition), charges, expenses, reasonable attorneys' or
other fees and any other sums payable to or incurred by the Agent and, to the
extent provided in the Credit Agreement, the Lenders in connection with the
execution or enforcement of any of their rights and remedies hereunder or any
other Security Instrument; (d) payment of and performance of any and all present
or future obligations of QSRD or the Pledgor according to the terms of any
present or future interest rate or currency swap, rate cap, rate floor, rate
collar, forward rate agreement or other exchange or rate protection agreements
or any option with respect to any such transaction now existing or hereafter
entered into between QSRD or the Pledgor and any Lender or an Affiliate of such
Lender; and (e) payment of and performance of any and all present or future
obligations of QSRD or the Pledgor according to the terms of any present or
future swap agreements, cap, floor, collar, forward agreement or other exchange
or protection agreements relating to crude oil, natural gas or other
hydrocarbons or any option with respect to any such transaction now existing or
hereafter entered into between QSRD or the Pledgor and any Lender or an
Affiliate of such Lender.
"Pledged Securities" shall mean all of the securities and other
property (whether or not the same constitutes a "security" under the Code)
referred to in the definition of "Collateral" and all additional securities (as
that term is defined in the Code), if any, constituting Collateral under this
Security Agreement.
"Security Agreement" shall mean this Amended and Restated Security
Agreement, as the same may from time to time be amended or supplemented.
2
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ARTICLE II
Security Interest
Section 2.01 Pledge. Pledgor hereby pledges, assigns and grants to
Secured Party, for the benefit of the Lenders, a security interest in and right
of set-off against the Collateral to secure the prompt payment and performance
of the Obligations.
Section 2.02 Transfer of Collateral. All certificates or instruments
representing or evidencing the Pledged Securities shall be delivered to and held
pursuant hereto by Secured Party or a Person designated by Secured Party and
shall be in suitable form for transfer by delivery, or shall be accompanied by
duly executed instruments of transfer or assignment in blank, and accompanied by
any required transfer tax stamps to effect the pledge of the Pledged Securities
to Secured Party. Notwithstanding the preceding sentence, at Secured Party's
discretion, all Pledged Securities must be delivered or transferred in such
manner as to permit Secured Party to be a "protected purchaser" to the extent of
its security interest as provided in Section 8.303 of the Code (if Secured Party
otherwise qualifies as a protected purchaser). During the continuance of an
Event of Default, Secured Party shall have the right, at any time in its
discretion and without notice to Pledgor, to transfer to or to register in the
name of Secured Party or any of its nominees any or all of the Pledged
Securities, subject only to the revocable rights specified in Section 6.06. In
addition, during the continuance of an Event of Default, Secured Party shall
have the right at any time to exchange certificates or instruments representing
or evidencing Pledged Securities for certificates or instruments of smaller or
larger denominations.
ARTICLE III
Representations and Warranties
In order to induce Secured Party to accept this Security Agreement on
behalf of the Lenders, Pledgor represents and warrants to Secured Party (which
representations and warranties will survive the creation and payment of the
Obligations) that:
Section 3.01 Ownership of Collateral; Encumbrances. Pledgor is the
legal and beneficial owner of the Collateral free and clear of any adverse
claim, lien, security interest, option or other charge or encumbrance except for
the security interest created by this Security Agreement. Pledgor has full
right, power and authority to pledge, assign and grant a security interest in
the Collateral to Secured Party.
Section 3.02 No Required Consent. No authorization, consent, approval
or other action by, and no notice to or filing with, any Person is required for
(a) the due execution, delivery and performance by Pledgor of this Security
Agreement, (b) the grant by Pledgor of the security interest granted by this
Security Agreement, (c) the perfection of such security interest or (d) the
exercise by Secured Party of its rights and remedies under this Security
Agreement, including the transfer of the Collateral upon foreclosure.
Section 3.03 Pledged Securities. The Pledged Securities have been duly
authorized and validly issued, and are fully paid and non-assessable. The
Pledged Securities constitute 100%
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of the capital stock of the issuer thereof outstanding together with the number
of shares subject to issuance pursuant to any warrants, options or other stock
rights.
Section 3.04 First Priority Security Interest. The pledge of Pledged
Securities pursuant to this Security Agreement creates a valid and perfected
first priority security interest in the Collateral, enforceable against Pledgor
and all third parties and securing payment of the Obligations.
ARTICLE IV
Covenants and Agreements
Pledgor will at all times comply with the covenants and agreements
contained in this Article IV, from the date hereof and for so long as any part
of the Obligations are outstanding.
Section 4.01 Sale, Disposition or Encumbrance of Collateral. Pledgor
will not in any way encumber any of the Collateral (or permit or suffer any of
the Collateral to be encumbered) or sell, pledge, assign, lend or otherwise
dispose of or transfer any of the Collateral to or in favor of any Person other
than Secured Party.
Section 4.02 Dividends or Distributions. So long as no Event of Default
shall have occurred and be continuing: Pledgor shall be entitled to receive and
retain any and all dividends and interest paid in respect of the Collateral,
provided, however, that any and all (a) dividends and interest paid or payable
other than in cash in respect of, and instruments and other property received,
receivable or otherwise distributed in respect of, or in exchange for
(including, without limitation, any certificate or share purchased or exchanged
in connection with a tender offer or merger agreement), any Collateral, (b)
dividends and other distributions paid or payable in cash in respect of any
Collateral in connection with a partial or total liquidation or dissolution or
in connection with a reduction of capital, capital surplus or paid-in surplus,
or reclassification, and (c) cash paid, payable or otherwise distributed in
respect of principal of, or in redemption of, or in exchange for, any
Collateral, shall be, and shall be forthwith delivered to Secured Party to hold
as, Collateral and shall, if received by Pledgor, be received in trust for the
benefit of Secured Party, be segregated from the other property or funds of
Pledgor, and be forthwith delivered to Secured Party as Collateral in the same
form as so received (with any necessary indorsement).
Section 4.03 Stock Powers. Pledgor shall furnish to Secured Party such
stock powers and other instruments as may be required by Secured Party to assure
the transferability of the Collateral when and as often as may be reasonably
requested by Secured Party.
Section 4.04 Voting and Other Consensual Rights. Except to the extent
otherwise provided in subsection 6.06(d), Pledgor shall be entitled to exercise
any and all voting and other consensual rights pertaining to the Collateral or
any part thereof for any purpose not inconsistent with the terms of this
Security Agreement; provided however, that Pledgor shall not exercise or refrain
from exercising any such right if such action would have a Material Adverse
Effect.
Section 4.05 Pledged Securities Percentage. The Pledged Securities will
at all times constitute not less than 100% of the capital stock of the issuer
thereof outstanding, together with
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<PAGE> 8
the number of shares subject to issuance pursuant to any warrants, options or
other stock rights. Pledgor will not permit any issuer of any of the Pledged
Securities to issue any new shares of any class of capital stock of such issuer
without the prior written consent of Secured Party.
ARTICLE V
Rights, Duties and Powers of Secured Party
The following rights, duties and powers of Secured Party are applicable
irrespective of whether an Event of Default occurs and is continuing:
Section 5.01 Discharge Encumbrances. Secured Party may, at its option,
discharge any taxes or Liens at any time levied or placed on the Collateral and
not paid by the Pledgor when due, except for those items being contested in good
faith, by appropriate proceedings, diligently pursued and for which adequate
reserves have been provided in accordance with GAAP. Pledgor agrees to reimburse
Secured Party upon demand for any payment so made, plus interest thereon from
the date of Secured Party's demand at the Post-Default Rate.
Section 5.02 Transfer of Collateral. To the extent permitted and in the
manner required by the Credit Agreement, Secured Party may transfer any or all
of the Obligations, and upon any such transfer Secured Party may transfer its
interest in any or all of the Collateral and shall be fully discharged
thereafter from all liability therefor. Any transferee of the Collateral shall
be vested with all rights, powers and remedies of Secured Party hereunder.
Section 5.03 Cumulative and Other Rights. The rights, powers and
remedies of Secured Party hereunder are in addition to all rights, powers and
remedies given by law or in equity. The exercise by Secured Party of any one or
more of the rights, powers and remedies herein shall not be construed as a
waiver of any other rights, powers and remedies, including, without limitation,
any other rights of set-off. If any of the Obligations are given in renewal,
extension for any period or rearrangement, or applied toward the payment of debt
secured by any lien, Secured Party shall be, and is hereby, subrogated to all
the rights, titles, interests and liens securing the debt so renewed, extended,
rearranged or paid.
Section 5.04 Disclaimer of Certain Duties.
(a) The powers conferred upon Secured Party by this Security Agreement
are to protect its interest in the Collateral and shall not impose any duty upon
Secured Party or any Lender to exercise any such powers. Pledgor hereby agrees
that Secured Party shall not be liable for, nor shall the indebtedness evidenced
by the Obligations be diminished by, Secured Party's delay or failure to collect
upon, foreclose, sell, take possession of or otherwise obtain value for the
Collateral (other than for acts or omissions that constitute gross negligence or
wilful misconduct).
(b) To the fullest extent permitted by applicable law, Secured Party
shall be under no duty whatsoever to make or give any presentment, notice of
dishonor, protest, demand for performance, notice of non-performance, notice of
intent to accelerate, notice of acceleration, or other notice or demand in
connection with any Collateral or the Obligations, or to take any steps
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<PAGE> 9
necessary to preserve any rights against any Guarantor or other Person. Pledgor
waives any right of marshaling in respect of any and all Collateral, and waives
any right to require Secured Party or any Lender to proceed against any
Guarantor or other Person, exhaust any Collateral or enforce any other remedy
which Secured Party or any Lender now has or may hereafter have against the
Pledgor, any Guarantor or other Person.
Section 5.05 Modification of Obligations; Other Security. Pledgor
waives: (a) any and all notice of acceptance, creation, modification,
rearrangement, renewal or extension for any period of any instrument executed by
the Pledgor, any Guarantor or any other Person in connection with the
Obligations and (b) any defense of the Pledgor, any Guarantor or any such Person
by reason of disability, lack of authorization, cessation of the liability of
the Pledgor, any Guarantor or any such Person or for any other reason. Pledgor
authorizes Secured Party, without notice or demand and without any reservation
of rights against Pledgor and without affecting Pledgor's liability hereunder or
on the Obligations, from time to time to (i) take and hold other property, other
than the Collateral, as security for the Obligations, and exchange, enforce,
waive and release any or all of the Collateral, (ii) apply the Collateral in the
manner permitted by this Security Agreement and (iii) renew, extend for any
period, accelerate, amend or modify, supplement, enforce, compromise, settle,
waive or release the obligations of the Pledgor, any Guarantor or any other
Person or any instrument or Agreement of such other Person with respect to any
or all of the Obligations or Collateral.
Section 5.06 Waiver of Notice; Demand and Presentment. Except as may be
expressly required in the Credit Agreement, this Security Agreement or the Code,
Pledgor hereby waives any demand, notice of default, notice of acceleration of
the maturity of the Obligations, notice of intention to accelerate the maturity
of the Obligations, presentment, protest and notice of dishonor as to any action
taken by Secured Party or any Lender in connection with this Security Agreement,
or any instrument or document.
Section 5.07 Custody and Preservation of the Collateral. Secured Party
shall be deemed to have exercised reasonable care in the custody and
preservation of the Collateral in its possession if the Collateral is accorded
treatment substantially equal to that which comparable secured parties accord
comparable collateral, it being understood and agreed, however, that neither
Secured Party nor any Lender shall have responsibility for (a) ascertaining or
taking action with respect to calls, conversions, exchanges, maturities, tenders
or other matters relative to any Collateral, whether or not such Person has or
is deemed to have knowledge of such matters, or (b) taking any necessary steps
to preserve rights against Persons or entities with respect to any Collateral.
ARTICLE VI
Events of Default
Section 6.01 Events. The occurrence of any Event of Default under the
Credit Agreement shall constitute an Event of Default under this Security
Agreement.
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Section 6.02 Remedies. During the continuance of any Event of Default,
Secured Party may take any or all of the following actions without notice
(except where expressly required below or in the Credit Agreement) or demand to
Pledgor:
(a) Sell, in one or more sales and in one or more parcels, or otherwise
dispose of any or all of the Collateral in any commercially reasonable manner as
Secured Party may elect, in a public or private transaction, at any location as
deemed reasonable by Secured Party either for cash or credit or for future
delivery at such price as Secured Party may deem fair, and (unless prohibited by
the Code, as adopted in any applicable jurisdiction) Secured Party or any Lender
may be the purchaser of any or all Collateral so sold and may apply upon the
purchase price therefor any Obligations secured hereby. Any such sale or
transfer by Secured Party either to itself or to any other Person shall be
absolutely free from any claim of right by Pledgor, including any equity or
right of redemption, stay or appraisal which Pledgor has or may have under any
rule of law, regulation or statute now existing or hereafter adopted. Upon any
such sale or transfer, Secured Party shall have the right to deliver, assign and
transfer to the purchaser or transferee thereof the Collateral so sold or
transferred. If Secured Party deems it advisable to do so, it may restrict the
bidders or purchasers of any such sale or transfer to Persons or entities who
will represent and agree that they are purchasing the Collateral for their own
account and not with the view to the distribution or resale of any of the
Collateral. Secured Party may, at its discretion, provide for a public sale, and
any such public sale shall be held at such time or times within ordinary
business hours and at such place or places as Secured Party may fix in the
notice of such sale. Secured Party shall not be obligated to make any sale
pursuant to any such notice. Secured Party may, without notice or publication,
adjourn any public or private sale by announcement at any time and place fixed
for such sale, and such sale may be made at any time or place to which the same
may be so adjourned. In the event any sale or transfer hereunder is not
completed or is defective in the opinion of Secured Party, such sale or transfer
shall not exhaust the rights of Secured Party hereunder, and Secured Party shall
have the right to cause one or more subsequent sales or transfers to be made
hereunder. If only part of the Collateral is sold or transferred such that the
Obligations remain outstanding (in whole or in part), Secured Party's rights and
remedies hereunder shall not be exhausted, waived or modified, and Secured Party
is specifically empowered to make one or more successive sales or transfers
until all the Collateral shall be sold or transferred and all the Obligations
are paid. In the event that Secured Party elects not to sell the Collateral,
Secured Party retains its rights to dispose of or utilize the Collateral or any
part or parts thereof in any manner authorized or permitted by law or in equity,
and to apply the proceeds of the same towards payment of the Obligations. Each
and every method of disposition of the Collateral described in this Section
6.02(a) or in Section 6.02(d) shall constitute disposition in a commercially
reasonable manner.
(b) Apply proceeds of the disposition of the Collateral to the
Obligations in any manner elected by Secured Party and permitted by the Credit
Agreement, the Code or otherwise permitted by law or in equity. Such application
may include, without limitation, the reasonable attorneys' fees and legal
expenses incurred by Secured Party and the Lenders.
(c) Appoint any Person as agent to perform any act or acts necessary or
incident to any sale or transfer by Secured Party of the Collateral.
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(d) Apply and set-off (i) any deposits of Pledgor now or hereafter held
by Secured Party or any Lender; (ii) all claims of Pledgor against Secured Party
or any Lender, now or hereafter existing; (iii) any other property, rights or
interests of Pledgor which comes into the possession or custody or under the
control of Secured Party or any Lender; and (iv) the proceeds of any of the
foregoing as if the same were included in the Collateral. Secured Party agrees
to notify Pledgor promptly after any such set-off or application (or after
learning thereof in the case of such action by a Lender); provided, however, the
failure of Secured Party to give any notice shall not affect the validity of
such set-off or application.
(e) Execute, assign and endorse negotiable and other instruments for
the payment of money, documents of title or other evidences of payment, shipment
or storage for any form of Collateral on behalf of and in the name of Pledgor.
(f) Exercise all other rights and remedies permitted by law or in
equity.
Section 6.03 Attorney-in-Fact. Pledgor hereby irrevocably appoints
Secured Party as Pledgor's attorney-in-fact, with full authority in the place
and stead of Pledgor and in the name of Pledgor or otherwise, from time to time
in Secured Party's discretion during the continuance of an Event of Default, but
at Pledgor's cost and expense and without notice to Pledgor, to take any action
and to execute any assignment, certificate, financing statement, stock power,
notification, document or instrument which Secured Party may deem necessary or
advisable to accomplish the purposes of this Security Agreement, including,
without limitation, to receive, endorse and collect all instruments made payable
to Pledgor representing any dividend, interest payment or other distribution in
respect of the Collateral or any part thereof and to give full discharge for the
same.
Section 6.04 Liability for Deficiency. If any sale or other disposition
of Collateral by Secured Party or any other action of Secured Party or any
Lender hereunder or under any other Security Instrument results in reduction of
the Obligations, such action will not release Pledgor from its liability to
Secured Party and the Lenders for any unpaid Obligations, including costs,
charges and expenses incurred in the liquidation of Collateral, together with
interest thereon, and the same shall be immediately due and payable to Agent at
its Principal Office for the benefit of the Lenders.
Section 6.05 Reasonable Notice. If any applicable provision of any law
requires Secured Party or any Lender to give reasonable notice of any sale or
disposition or other action, Pledgor hereby agrees that 10 days' prior written
notice shall constitute reasonable notice thereof. Such notice, in the case of
public sale, shall state the time and place fixed for such sale and, in the case
of private sale, the time after which such sale is to be made.
Section 6.06 Pledged Securities. During the continuance of an Event of
Default:
(a) All rights of Pledgor to receive the dividends and interest
payments which it would otherwise be authorized to receive and retain pursuant
to Section 4.02 shall cease, and all such rights shall thereupon become vested
in Secured Party who shall thereupon have the sole right to receive and hold as
Collateral such dividends and interest payments, but Secured Party shall
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have no duty to receive and hold such dividends and interest payments and shall
not be responsible for any failure to do so or delay in so doing.
(b) All dividends and interest payments which are received by Pledgor
contrary to the provisions of this Section 6.06 shall be received in trust for
the benefit of Secured Party (on behalf of the Lenders), shall be segregated
from other funds of Pledgor and shall be forthwith paid over to Secured Party as
Collateral in the same form as so received (with any necessary indorsement).
(c) Secured Party may exercise any and all rights of conversion,
exchange, subscription or any other rights, privileges or options pertaining to
any of the Pledged Securities as if it were the absolute owner thereof,
including, without limitation, the right to exchange at its discretion, any and
all of the Pledged Securities upon the merger, consolidation, reorganization,
recapitalization or other readjustment of any issuer of such Pledged Securities
or upon the exercise by any such issuer or Secured Party of any right, privilege
or option pertaining to any of the Pledged Securities, and in connection
therewith, to deposit and deliver any and all of the Pledged Securities with any
committee, depository, transfer agent, registrar or other designated agency upon
such terms and conditions as it may determine, all without liability except to
account for property actually received by it, but Secured Party shall have no
duty to exercise any of the aforesaid rights, privileges or options and shall
not be responsible for any failure to do so or delay in so doing.
(d) If the issuer of any Pledged Securities is the subject of
bankruptcy, insolvency, receivership, custodianship or other proceedings under
the supervision of any Governmental Authority, then all rights of Pledgor to
exercise the voting and other consensual rights which Pledgor would otherwise be
entitled to exercise pursuant to Section 4.04 with respect to the Pledged
Securities issued by such issuer shall cease, and all such rights shall
thereupon become vested in Secured Party who shall thereupon have the sole right
to exercise such voting and other consensual rights, but Secured Party shall
have no duty to exercise any such voting or other consensual rights and shall
not be responsible for any failure to do so or delay in so doing.
Section 6.07 Non-judicial Enforcement. Secured Party may enforce its
rights hereunder without prior judicial process or judicial hearing, and to the
extent permitted by law, Pledgor expressly waives any and all legal rights which
might otherwise require Secured Party to enforce its rights by judicial process.
Section 6.08 Private Sale of Collateral. Pledgor recognizes that
Secured Party may deem it impracticable to effect a public sale of all or any
part of the Collateral and that Secured Party may, therefore, determine to make
one or more private sales of any such Collateral to a restricted group of
purchasers who will be obligated to agree, among other things, to acquire such
Collateral for their own account, for investment and not with a view to the
distribution or resale thereof. Pledgor acknowledges that any such private sale
may be at prices and on terms less favorable to the seller than the prices and
other terms which might have been obtained at a public sale and, notwithstanding
the foregoing, agrees that such private sale shall be deemed to have been made
in a commercially reasonably manner and that Secured Party shall have no
obligation to delay sale of any such securities for the period of time necessary
to permit Pledgor to register
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such Collateral for public sale under the Securities Act of 1933, as amended
(the "Securities Act"). Pledgor further acknowledges and agrees that any offer
to sell such Collateral which has been (i) publicly advertised on a bona fide
basis in a newspaper or other publication of general circulation in the
financial community of Houston, Texas (to the extent that such an offer may be
so advertised without prior registration under the Securities Act), or (ii) made
privately in the manner described above to not less than fifteen (15) bona fide
offerees shall be deemed to involve a "public sale" for the purposes of Section
9-504(c) of the Code (or any successor or similar, applicable statutory
provision) as then in effect in the State of Texas, notwithstanding that such
sale may not constitute a "public offering" under the Securities Act and that
Secured Party or any Lender may, in such event, bid for the purchase of such
Collateral.
ARTICLE VII
Miscellaneous
Section 7.01 Notices. Any notice required or permitted to be given
under or in connection with this Security Agreement shall be in writing and
shall be given as provided in the Credit Agreement at the address set forth
therein.
Section 7.02 Amendments and Waivers. The acceptance of partial or
delinquent payments by any Lender or any forbearance, failure or delay by them
in exercising any right, power or remedy under any Security Instrument shall not
be deemed a waiver of any obligation of Pledgor or of any of their rights,
powers or remedies; and no partial exercise of any right, power or remedy shall
preclude any other or further exercise thereof. The Lenders may remedy any Event
of Default hereunder or in connection with the Obligations without waiving the
Event of Default so remedied. Pledgor hereby agrees that if the Lenders agrees
to a waiver of any provision hereunder, or an exchange of or release of the
Collateral, or the addition or release of any other Person, any such action
shall not constitute a waiver of any of Secured Party's other rights or of
Pledgor's obligations hereunder. This Agreement may be amended only by an
instrument in writing as set forth in Section 12.04 of the Credit Agreement.
Section 7.03 Copy as Financing Statement. A photocopy or other
reproduction of this Security Agreement may be delivered by Pledgor or Secured
Party to any financial intermediary or other third party for the purpose of
transferring or perfecting any or all of the Pledged Securities to Secured Party
or its designee or assignee.
Section 7.04 Possession of Collateral. Secured Party shall be deemed to
have possession of any Collateral in transit to it or set apart for it (or, in
either case, any of its agents, affiliates or correspondents).
Section 7.05 Redelivery of Collateral. If any sale or transfer of
Collateral by Secured Party results in full satisfaction of the Obligations, and
after such sale or transfer and discharge there remains a surplus of proceeds,
Secured Party will deliver to Pledgor such excess proceeds in a commercially
reasonable time; provided, however, that neither Secured Party nor any Lender
shall have any liability for any interest, cost or expense in connection with
any reasonable delay in delivering such proceeds to Pledgor.
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Section 7.06 GOVERNING LAW. THIS SECURITY AGREEMENT (INCLUDING, BUT NOT
LIMITED TO, THE VALIDITY AND ENFORCEABILITY HEREOF) SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS.
Section 7.07 Effectiveness. This Security Agreement becomes effective
upon the execution hereof by Pledgor and delivery of the same to Secured Party;
and it is not necessary for Secured Party or any Lender to execute any
acceptance hereof or otherwise signify or express its acceptance hereof.
Section 7.08 Continuing Security Agreement.
(a) Except as may be expressly applicable pursuant to Section 9-505 of
the Code, no action taken or omission to act by Secured Party or the Lenders
hereunder, including, without limitation, any exercise of voting or consensual
rights pursuant to Section 4.04 or any other action taken or inaction pursuant
to Section 6.02, shall be deemed to constitute a retention of the Collateral in
satisfaction of the Obligations or otherwise to be in full satisfaction of the
Obligations, and the Obligations shall remain in full force and effect, until
Secured Party and the Lenders shall have applied payments (including, without
limitation, collections from Collateral) towards the Obligations in the full
amount then outstanding or until such subsequent time as is hereinafter provided
in Section 7.09.
(b) To the extent that any payments on the Obligations or proceeds of
the Collateral are subsequently invalidated, declared to be fraudulent or
preferential, set aside or required to be repaid to a trustee, debtor in
possession, receiver or other Person under any bankruptcy law, common law or
equitable cause, then to such extent the Obligations so satisfied shall be
revived and continue as if such payment or proceeds had not been received by
Secured Party or the Lenders; and their respective security interests, rights,
powers and remedies hereunder and under the other Security Instruments shall
continue in full force and effect. In such event, this Security Agreement shall
be automatically reinstated if it shall theretofore have been terminated
pursuant to Section 7.09.
Section 7.09 Termination. The grant of a security interest hereunder
and all of rights, powers and remedies in connection herewith shall remain in
full force and effect until Secured Party has (a) retransferred and delivered
all Collateral in its possession to Pledgor, (b) executed a registration of
release with respect to all Pledged Securities, if any, as to which Secured
Party held a registered pledge; and (c) executed a written release or
termination statement and reassigned to Pledgor without recourse or warranty any
remaining Collateral and all rights conveyed hereby. Upon the complete payment
of the Obligations and the compliance by Pledgor with all covenants and
agreements hereof, Secured Party, at the written request and expense of Pledgor,
will release, reassign and transfer the Collateral to Pledgor and declare this
Security Agreement to be of no further force or effect. Notwithstanding the
foregoing, the provisions of subsection 7.08(b) shall survive the termination of
this Security Agreement unless such provisions are specifically terminated by a
written release thereof.
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Section 7.10 Prior Security Agreement. This Security Agreement
supersedes and replaces that certain Security Agreement dated August 1, 1997
given by the Pledgor in favor of the Agent and the Lenders.
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PLEDGOR: QUEEN SAND RESOURCES, INC., a Nevada
corporation
By: /s/ ROBERT P. LINDSAY
---------------------------------
Robert P. Lindsay
Vice President
By: /s/ EDWARD J. MUNDEN
---------------------------------
Edward J. Munden
President
<PAGE> 17
EXHIBIT A
PLEDGED SECURITIES
Corrida Resources, Inc., a Nevada corporation
One hundred thousand shares (100,000) of the capital stock, par value
$0.01 per share, of Corrida Resources, Inc., standing in the name of
the Pledgor and being evidenced by Certificate No. 001.
Northland Operating Co., a Nevada corporation
One thousand shares (1000) of the capital stock, par value $0.01 per
share, of Northland Operating Co., standing in the name of the Pledgor
and being evidenced by Certificate No. 001.
<PAGE> 1
EXHIBIT 10.23
QUEEN SAND RESOURCES, INC.
INCENTIVE STOCK OPTION AGREEMENT
1. GRANT OF OPTION. Pursuant to the QUEEN SAND RESOURCES, INC. 1997
Incentive Equity Plan (the "PLAN") for employees of QUEEN SAND RESOURCES, INC.,
a Delaware corporation (the "COMPANY"), and its Subsidiaries, the Company grants
to
-------------------------------------
(the "PARTICIPANT")
an option to purchase from the Company a total of _________ full shares
("OPTIONED SHARES") of Common Stock ("COMMON STOCK") of the Company at $______
per share (being the Fair Market Value per share of the Common Stock on this
Date of Grant, or 110% of the Fair Market Value in the case of a 10% or more
stockholder), in the amounts, during the periods, and upon the terms and
conditions set forth in this Agreement. The Date of Grant of this Stock Option
is _____________________, 19___.
This Stock Option is an Incentive Stock Option.
2. SUBJECT TO PLAN. The Plan is a separate legal document that contains
the general terms and conditions applicable to this Stock Option. This Stock
Option and its exercise are subject to the terms and conditions of the Plan, but
the terms of the Plan shall not be considered an enlargement of any benefits
under this Agreement. This Stock Option is subject to any rules promulgated
pursuant to the Plan by the Board or the Committee and communicated to the
Participant in writing.
3. DEFINITIONS. The capitalized terms used herein that are defined in
the Plan shall have the same meanings assigned to them in the Plan. For the
purpose of this Stock Option Agreement, "CAUSE" means, with respect to
Participant (i) acts of fraud or dishonesty in the course of his employment with
or service to the Company or any of its Subsidiaries, (ii) substance abuse
causing harm to the Company or any of its Subsidiaries or impairing the
Participant's performance of his regular duties, (iii) conviction of a felony
involving moral turpitude, or (iv) insubordination, dereliction of duties,
habitual absenteeism, materially deficient performance after (solely in the case
of this clause (iv)) notice to Participant and Participant's failure to correct
same within the time period specified in the notice, which time period shall be
not less than 10 business days, or (v) any event described as "cause" (or in any
other term or phrase having similar import) in any written
PAGE 1
<PAGE> 2
employment agreement between the Option Holder and the Company (or any
Subsidiary).
4. VESTING; TIME OF EXERCISE. Except as specifically provided in this
Agreement and subject to certain restrictions and conditions set forth in the
Plan, this Stock Option is vested and exercisable in the following cumulative
installments:
FIRST INSTALLMENT. [_______________(__)] of the total Optioned Shares
on or after the first anniversary following the Date of Grant and until
the date specified in SECTION 6, provided that the Participant is still
employed by the Company or one of its Subsidiaries or serving as a
director of the Company on such first anniversary.
SECOND INSTALLMENT. An additional [______________ (__)] of the total
Optioned Shares on or after the second anniversary of the Date of Grant
and until the date specified in SECTION 6, provided that the
Participant is still employed by the Company or one of its Subsidiaries
or serving as a director of the Company on such second anniversary.
THIRD INSTALLMENT. An additional [_______________ (__)] of the total
Optioned Shares on or after the third anniversary of the Date of Grant
and until the date specified in SECTION 6, provided that the
Participant is still employed by the Company or one of its Subsidiaries
or serving as a director of the Company on such third anniversary.
5. ACCELERATION OF VESTING. Notwithstanding the provisions of SECTION 4
of this Stock Option Agreement, unvested Optioned Shares shall automatically
vest upon the occurrence of any of the following:
(a) a Change of Control in the Company;
[(b) Participant's death;]
[(c) Participant's Termination of Service due to
Retirement or the Disability;] or
[(d) the Company's termination of the Participant's
employment or service as a director without Cause.]
6. TERM; FORFEITURE. This Stock Option, and all unexercised Optioned
Shares granted to the Participant hereunder, will terminate and be forfeited at
the first of the following to occur:
PAGE 2
<PAGE> 3
(a) 5:00 p.m. on _________________, 19__ [maximum 10 years
from Date of Grant, or 5 years for a 10% or more stockholder];
(b) 5:00 p.m. on the date which is one hundred eighty (180)
days following the Participant's Termination of Service due to death or
Disability;
(c) 5:00 p.m. on the date which is ninety (90) days following
the Participant's Termination of Service due to Retirement; or
(d) 5:00 p.m. on the date which is ninety (90) days following
the date of any other Termination of Service of the Participant.
7. WHO MAY EXERCISE. Subject to the terms and conditions set forth in
SECTIONS 4, 5 AND 6 above, during the lifetime of the Participant, this Stock
Option may be exercised only by the Participant or the Participant's guardian.
If a Termination of Service of the Participant occurs as a result of death or
Disability prior to the termination date specified in SECTION 6(A) hereof and
the Participant has not exercised this Stock Option as to the maximum percentage
of Optioned Shares set forth in SECTION 4 hereof as of the date of death or
Disability, the following persons may exercise the exercisable portion of this
Stock Option on behalf of the Participant at any time prior to the earlier of
the dates specified in SECTIONS 6(A) OR (B) hereof: (i) if the Participant is
disabled, the guardian of the Participant; or (ii) if the Participant dies, the
personal representative of his estate, or the person who acquired the right to
exercise this Stock Option by bequest or inheritance or by reason of the death
of the Participant; provided that this Stock Option shall remain subject to the
other terms of this Agreement, the Plan, and applicable laws, rules, and
regulations.
8. NO FRACTIONAL SHARES. This Stock Option may be exercised only with
respect to full shares of Common Stock, and no fractional share of Common Stock
shall be issued.
9. MANNER OF EXERCISE. Subject to such administrative regulations as
the Board or the Committee may from time to time adopt, this Stock Option may be
exercised by the delivery of written notice to the Secretary of the Company
setting forth the number of shares of Common Stock with respect to which the
Stock Option is to be exercised and the date of exercise thereof (the "EXERCISE
DATE") which shall be at least three (3) days after giving such notice unless an
earlier time shall have been mutually agreed upon. On the Exercise Date, the
Participant shall deliver to the Company consideration with a value equal to the
total Option Price of the shares to be purchased, payable as follows: (a) cash,
check, bank draft, or money order payable to the order of the Company, (b)
Common Stock (including Restricted Stock) owned by the Participant on the
Exercise Date, valued at its Fair Market Value on the Exercise Date, (c) by
delivery to the Company or its designated agent of an executed
PAGE 3
<PAGE> 4
irrevocable option exercise form together with irrevocable instructions from the
Participant to a broker or dealer, reasonably acceptable to the Company, to sell
certain of the shares of Common Stock purchased upon exercise of the Stock
Option or to pledge such shares as collateral for a loan and promptly deliver to
the Company the amount of sale or loan proceeds necessary to pay such purchase
price, and/or (d) in any other form of valid consideration that is acceptable to
the Committee in its sole discretion.
Upon payment of all amounts due from the Participant, the Company shall
cause certificates for the Optioned Shares then being purchased to be delivered
as directed by the Participant (or the person exercising the Participant's Stock
Option pursuant to SECTION 7) at its principal business office promptly after
the Exercise Date. The obligation of the Company to deliver shares of Common
Stock shall, however, be subject to the condition that if at any time the
Committee shall determine in its discretion that the listing, registration,
quotation or qualification of the Stock Option or the Optioned Shares upon any
securities exchange or inter-dealer quotation system or under any state or
federal law, or the consent or approval of any governmental regulatory body, is
necessary or desirable as a condition of, or in connection with, the Stock
Option or the issuance or purchase of shares of Common Stock thereunder, then
the Stock Option may not be exercised in whole or in part unless such listing,
registration, qualification, consent, or approval shall have been effected or
obtained free of any conditions not acceptable to the Committee.
If the Participant fails to pay for any of the Optioned Shares
specified in such notice or fails to accept delivery thereof, then the
Participant's right to purchase such Optioned Shares may be terminated by the
Company.
10. NON-ASSIGNABILITY. This Stock Option is not assignable or
transferable by the Participant except (i) by will or by the laws of descent and
distribution or (ii) pursuant to the terms of a qualified domestic relations
order (as defined in Section 411(a) (13) of the Code or Section 206(d) (3) of
the Employee Retirement Income Act of 1974, as amended), provided that in the
case of an Incentive Stock Option, such transfer or assignment may occur only to
the extent it will not result in disqualifying such option as an incentive stock
option under Section 422 of the Code, or any other successor provision.
11. RIGHTS AS STOCKHOLDER. The Participant will have no rights as a
stockholder with respect to any shares covered by this Stock Option until the
issuance of a certificate or certificates to the Participant for the shares.
Except as otherwise provided in SECTION 12 hereof, no adjustment shall be made
for dividends or other rights for which the record date is prior to the issuance
of such certificate or certificates.
PAGE 4
<PAGE> 5
12. ADJUSTMENT OF NUMBER OF SHARES AND RELATED MATTERS. The number of
shares of Common Stock covered by this Stock Option, and the Option Price
thereof, shall be subject to adjustment in accordance with ARTICLES 13, 14, AND
15 of the Plan.
13. PARTICIPANT'S REPRESENTATIONS. Notwithstanding any of the
provisions hereof, the Participant hereby agrees that he or she will not
exercise the Stock Option granted hereby, and that the Company will not be
obligated to issue any shares to the Participant hereunder, if the exercise
thereof or the issuance of such shares shall constitute a violation by the
Participant or the Company of any provision of any law or regulation of any
governmental authority. Any determination in this connection by the Committee
shall be final, binding, and conclusive. The obligations of the Company and the
rights of the Participant are subject to all applicable laws, rules, and
regulations.
14. INVESTMENT REPRESENTATION. Unless the Common Stock is issued to him
in a transaction registered under applicable federal and state securities laws,
by his or her execution hereof, the Participant represents and warrants to the
Company that all Common Stock which may be purchased hereunder will be acquired
by the Participant for investment purposes for his or her own account and not
with any intent for resale or distribution in violation of federal or state
securities laws. Unless the Common Stock is issued to him in a transaction
registered under the applicable federal and state securities laws, all
certificates issued with respect to the Common Stock shall bear an appropriate
restrictive investment legend.
15. DISQUALIFYING DISPOSITION. In the event that Common Stock acquired
upon exercise of a Stock Option pursuant to this Agreement is disposed of by an
Participant prior to the expiration of either two years from the Date of Grant
of such Stock Option or one year from the issuance of shares to the Participant
pursuant to the exercise of such Stock Option, such Participant shall notify the
Company in writing of the date and terms of such disposition.
16. PARTICIPANT'S ACKNOWLEDGMENTS. The Participant acknowledges receipt
of a copy of the Plan, which is annexed hereto, and represents that he or she is
familiar with the terms and provisions thereof, and hereby accepts this Stock
Option subject to all the terms and provisions thereof. The Participant hereby
agrees to accept as binding, conclusive, and final all decisions or
interpretations of the Board, as that term is defined in the Plan, upon any
questions arising under the Plan or this Agreement.
17. GOVERNING LAW: FORUM. This Agreement shall be governed by,
construed, and enforced in accordance with the laws of the State of Texas
(excluding any conflict of laws rule or principle of Texas law that might refer
the governance,
PAGE 5
<PAGE> 6
construction, or interpretation of this agreement to the laws of another state).
The parties agree that any proceeding regarding any dispute arising out of the
subject matter hereof shall be exclusively brought in federal or state courts
sitting in Dallas, Texas, U.S.A., and the parties hereto irrevocably waive any
objection to such venue based on forum nonconveniens or similar principle
18. NO RIGHT TO CONTINUE EMPLOYMENT. Nothing herein shall be construed
to confer upon the Participant the right to continue in the employment of the
Company or any Subsidiary or interfere with or restrict in any way the right of
the Company or any Subsidiary to discharge the Participant at any time (subject
to any contract rights of the Participant).
19. LEGAL CONSTRUCTION. In the event that any one or more of the terms,
provisions, or agreements that are contained in this Agreement shall be held by
a Court of competent jurisdiction to be invalid, illegal, or unenforceable in
any respect for any reason, the invalid, illegal, or unenforceable term,
provision, or agreement shall not affect any other term, provision, or agreement
that is contained in this Agreement and this Agreement shall be construed in all
respects as if the invalid, illegal, or unenforceable term, provision, or
agreement had never been contained herein.
20. COVENANTS AND AGREEMENTS AS INDEPENDENT AGREEMENTS. Each of the
covenants and agreements that is set forth in this Agreement shall be construed
as a covenant and agreement independent of any other provision of this
Agreement. The existence of any claim or cause of action of the Participant
against the Company, whether predicated on this Agreement or otherwise, shall
not constitute a defense to the enforcement by the Company of the covenants and
agreements that are set forth in this Agreement.
21. ENTIRE AGREEMENT. This Agreement together with the Plan supersede
any and all other prior understandings and agreements, either oral or in
writing, between the parties with respect to the subject matter hereof and
constitute the sole and only agreements between the parties with respect to the
said subject matter. All prior negotiations and agreements between the parties
with respect to the subject matter hereof are merged into this Agreement. Each
party to this Agreement acknowledges that no representations, inducements,
promises, or agreements, orally or otherwise, have been made by any party or by
anyone acting on behalf of any party, which are not embodied in this Agreement
or the Plan and that any agreement, statement or promise that is not contained
in this Agreement or the Plan shall not be valid or binding or of any force or
effect.
22. PARTIES BOUND. The terms, provisions, representations, warranties,
covenants, and agreements that are contained in this Agreement shall apply to,
be binding upon, and inure to the benefit of the parties and their respective
heirs,
PAGE 6
<PAGE> 7
executors, administrators, legal representatives, and permitted successors and
assigns.
23. MODIFICATION. No change or modification of this Agreement shall be
valid or binding upon the parties unless the change or modification is in
writing and signed by the parties. Notwithstanding the preceding sentence, the
Company may amend the Plan or revoke this Stock Option to the extent permitted
in the Plan.
24. HEADINGS. The headings that are used in this Agreement are used for
reference and convenience purposes only and do not constitute substantive
matters to be considered in construing the terms and provisions of this
Agreement.
25. GENDER AND NUMBER. Words of any gender used in this Agreement shall
be held and construed to include any other gender, and words in the singular
number shall be held to include the plural, and vice versa, unless the context
requires otherwise.
26. NOTICE. Any notice required or permitted to be delivered hereunder
shall be deemed to be delivered only when actually received by the Company or by
the Participant, as the case may be, at the addresses set forth below, or at
such other addresses as they have theretofore specified by written notice
delivered in accordance herewith:
(A) Notice to the Company shall be addressed and delivered as
follows:
QUEEN SAND RESOURCES, INC.
--------------------------
--------------------------
Attention:
----------------
(B) Notice to the Participant shall be addressed and delivered
as follows:
--------------------------
--------------------------
--------------------------
--------------------------
* * * * *
PAGE 7
<PAGE> 8
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
PAGE 8
<PAGE> 9
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its duly authorized officer, and the Participant, to evidence his or
her consent and approval of all the terms hereof, has duly executed this
Agreement, as of the date specified in SECTION 1 hereof.
QUEEN SAND RESOURCES, INC.
By:
---------------------------------------
Title:
---------------------------------
PARTICIPANT:
------------------------------------------
PAGE 9
<PAGE> 1
Statement of Computation of Earnings to Fixed Charges Exhibit 12.1
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------- Nine Months Ended March 31,
Pro Forma Pro Forma
Historical As Adjusted Historical As Adjusted
-------------------------------------------------- ------------------------------------
1995 1996 1997 1997 1997 1998 1998
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Income (Loss) before extraordinary $ (687) $ (1,189) $ (1,138) $ 1,919 $ (627) $ (2,138) $ (1,533)
items and income taxes
Fixed Charges $ 25 $ 421 $ 878 $ 17,795 $ 656 $ 899 $ 13,481
-------- -------- -------- -------- -------- -------- --------
Earnings for Computation $ (662) $ (768) $ (260) $ 19,714 $ 29 $ (1,239) $ 11,948
Fixed Charges
Interest and financing costs $ 25 $ 421 $ 878 $ 17,795 $ 656 $ 899 $ 13,481
Ratio of Earnings to NM NM NM 1.1 NM NM NM
Fixed Charges
Short Fall $ (687) $ (1,189) $ (1,138) $ (627) $ (2,138) $ (1,533)
</TABLE>
<PAGE> 1
Statement of Computation of EBITDA to interest expense Exhibit 12.2
<TABLE>
<CAPTION>
Year Ended June 30, Nine Months Ended March 31,
--------------------------------------------
Pro Forma Pro Forma
Historical As Adjusted Historical As Adjusted
-------------------------------------------- --------------------------------
1995 1996 1997 1997 1997 1998 1998
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Income (Loss) before extraordinary $ (687) $ (1,189) $ (1,138) $ 1,919 $ (627) $ (2,138) $ (1,533)
items and income taxes
Interest and financing costs $ 25 $ 421 $ 878 $ 17,975 $ 656 $ 899 $ 13,481
Depreciation, Depletion and Depreciation $ 132 $ 630 $ 982 $ 14,120 $ 747 $ 1,340 $ 11,330
-------- -------- -------- -------- -------- -------- --------
EBITDA $ (530) $ (138) $ 722 $ 34,014 $ 776 $ 101 $ 23,278
Interest and financing costs $ 25 $ 421 $ 878 $ 17,975 $ 656 $ 899 $ 13,481
less debt issuance costs $ -- $ -- $ -- $ 1,200 $ -- $ 15 $ 930
-------- -------- -------- -------- -------- -------- --------
Interest Costs $ 25 $ 421 $ 878 $ 16,775 $ 656 $ 884 $ 12,551
Ratio of EBITDA to NM NM NM 2.0 1.2 NM 1.9
Interest Expense
Short Fall $ (555) $ (559) $ (156) $ (798)
</TABLE>
<PAGE> 1
EXHIBIT 21.1
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
Name Jurisdiction
- ---- ------------
<S> <C>
Queen Sand Resources, Inc. Nevada
Northland Operating Co. Nevada
Corrida Resources, Inc. Nevada
Queen Sand Resources (Canada) Inc. Canada
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP
We consent to the reference to our firm under the caption "Independent Auditors"
and to the inclusion of our reports dated (i) September 18, 1997 with respect to
the financial statements of Queen Sand Resources, Inc. for the year ended June
30, 1997 and September 16, 1997 with respect to 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 the Registration Statement
(Form S-4) and related Prospectus of Queen Sand Resources, Inc. (the "Company")
for the registration 12 1/2% Senior Notes Due 2008 and also included in the
Company's Annual Report (Form 10-KSB) for the year ended June 30, 1997 and filed
with the Securities and Exchange Commission and (ii) our report dated April 17,
1998, with respect to the statements of net profits interests and royalty
interests revenues of certain oil and gas producing properties acquired from
pension funds managed by J.P. Morgan Investments for the years ended June 30,
1997, 1996 and 1995 included in the Registration Statement (Form S-4) and
related Prospectus of Queen Sand Resources, Inc. (the "Company") for the
registration 12 1/2% Senior Notes Due 2008 and also included in the Company's
Current Report on Form 8-K dated March 19, 1998, as amended by Current Report on
Form 8-K/A-2 dated June 8, 1998 and filed with the Securities and Exchange
Commission.
August 11, 1998
/s/ ERNST & YOUNG LLP
<PAGE> 1
EXHIBIT 23.2
Consent of Independent Auditors
The Board of Directors
Queen Sand Resources, Inc.
We consent to the inclusion and incorporation by reference in the registration
statement on Form S-4 of Queen Sand Resources, Inc. of our report dated August
30, 1996, except as to the sixth paragraph of Note 3, which is as of September
30, 1996, the fourth paragraph of Note 2, which is as of November 6, 1996, the
first paragraph of Note 5, which is as of November 12, 1996, and the second
paragraph of Note 3, which is as of November 14, 1996, relating to the
consolidated balance sheet of Queen Sand Resources, Inc. and subsidiaries as of
June 30, 1996, and the related consolidated statements of operation,
stockholders' equity and cash flow for the year then ended, which report also
appears in the June 30, 1997, annual report on Form 10KSB of Queen Sand
Resources, Inc. We also consent to the reference to our firm under the heading
"Independent Auditors" in the prospectus.
Dallas, Texas
August 11, 1998 KPMG PEAT MARWICK LLP
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
We hereby consent to (i) the use in the Prospectus (the "Prospectus")
constituting a part of the Registration Statement on Form S-4 filed by Queen
Sand Resources, Inc., a Delaware corporation (the "Company"), under the
Securities Act of 1933, of information contained in our reserve reports relating
to the oil and natural gas reserves and future net revenues of oil and natural
gas reserves at December 31, 1997 with respect to the Morgan Properties (as
defined in the Prospectus) and all references to such report letters and/or to
this firm in such Prospectus and (ii) further consent to our being named as an
expert therein in the section titled "Engineers."
RYDER SCOTT COMPANY
<PAGE> 1
EXHIBIT 23.5
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
We hereby consent to (i) the use in the Prospectus (the "Prospectus")
constituting a part of the Registration Statement on Form S-4 filed by Queen
Sand Resources, Inc., a Delaware corporation (the "Company"), under the
Securities Act of 1933, of information contained in our reserve reports relating
to the oil and natural gas reserves and future net revenues of oil and natural
gas reserves as of June 30, 1997 (other than with respect to the Property
Acquisitions (as defined in the Prospectus)) and December 31, 1997 (other than
with respect to the Morgan Properties (as defined in the Prospectus)) and all
references to such report letters and/or to this firm in such Prospectus, (ii)
the incorporation by reference in the Prospectus of information contained in our
reserve report relating to the proved oil and gas reserves of the Company at
June 30, 1997 (other than with respect to the Property Acquisitions (as defined
in the Prospectus)) and in the Company's Annual Report on Form 10-KSB for the
fiscal year ended June 30, 1997, as amended by Form 10-KSB/A filed April 23,
1998 and (iii) further consent to our being named as an expert therein in the
section titled "Engineers."
H.J. GRUY AND ASSOCIATES, INC.
<PAGE> 1
EXHIBIT 23.6
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
We hereby consent to (i) the use in the Prospectus (the "Prospectus")
constituting a part of the Registration Statement on Form S-4 filed by Queen
Sand Resources, Inc., a Delaware corporation (the "Company"), under the
Securities Act of 1933, of information contained in our reserve reports relating
to the oil and natural gas reserves and future net revenues of oil and natural
gas reserves at June 30, 1997 with respect to the Collins and Ware Properties
(as defined in the Prospectus) and all references to such report letters and/or
to this firm in such Prospectus and (ii) further consent to our being named as
an expert therein in the section titled "Engineers."
JOE C. NEAL & ASSOCIATES
<PAGE> 1
EXHIBIT 23.7
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
We hereby consent to (i) the use in the Prospectus (the "Prospectus")
constituting a part of the Registration Statement on Form S-4 filed by Queen
Sand Resources, Inc., a Delaware corporation (the "Company"), under the
Securities Act of 1933, of information contained in our reserve reports relating
to the oil and natural gas reserves and future net revenues of oil and natural
gas reserves as of June 30, 1995 and June 30, 1996, and estimates relating to
the NASGAS Properties (as defined in the Prospectus) at June 30, 1997 and all
references to such report letters and/or to this firm in such Prospectus and
(ii) further consent to our being named as an expert therein in the section
titled "Engineers."
HARPER AND ASSOCIATES, INC.
<PAGE> 1
EXHIBIT 25.1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM T-1
Statement of Eligibility
Under the Trust Indenture Act of 1939
of a Corporation Designated to Act as Trustee
Check if an Application to Determine Eligibility
of a Trustee Pursuant to Section 305(b)(2) ______
HARRIS TRUST AND SAVINGS BANK
(Name of Trustee)
Illinois 36-1194448
(State of Incorporation) (I.R.S. Employer Identification No.)
111 West Monroe Street, Chicago, Illinois 60603
(Address of principal executive offices)
Carolyn Potter, Harris Trust and Savings Bank,
311 West Monroe Street, Chicago, Illinois, 60606
312-461-2531 phone 312-461-3525 facsimile
(Name, address and telephone number for agent for service)
QUEEN SAND RESOURCES, INC.
(Name of obligor)
Delaware 75-2615565
(State of Incorporation) (I.R.S. Employer Identification No.)
Nevada Queen Sand Resources, Inc. 75-2564071
Nevada Northland Operating Co. 75-2593510
Nevada Corrida Resources, Inc. 75-2691594
(State of Incorporation) (Name of Guarantor) (I.R.S. Employer
Identification No.)
3500 Oak Lawn, Suite 380
Dallas Texas 75219-4398
(Address of principal executive offices)
12 1/2 Senior Notes due 2008
(Title of indenture securities)
<PAGE> 2
1. GENERAL INFORMATION. Furnish the following information as to the
Trustee:
(a) Name and address of each examining or supervising authority to which
it is subject.
Commissioner of Banks and Trust Companies, State of
Illinois, Springfield, Illinois; Chicago Clearing House
Association, 164 West Jackson Boulevard, Chicago,
Illinois; Federal Deposit Insurance Corporation,
Washington, D.C.; The Board of Governors of the Federal
Reserve System,Washington, D.C.
(b) Whether it is authorized to exercise corporate trust powers.
Harris Trust and Savings Bank is authorized to exercise corporate
trust powers.
2. AFFILIATIONS WITH OBLIGOR. If the Obligor is an affiliate of the
Trustee, describe each such affiliation.
The Obligor is not an affiliate of the Trustee.
3. thru 15.
NO RESPONSE NECESSARY
16. LIST OF EXHIBITS.
1. A copy of the articles of association of the Trustee is now in
effect which includes the authority of the trustee to commence
business and to exercise corporate trust powers.
A copy of the Certificate of Merger dated April 1, 1972 between
Harris Trust and Savings Bank, HTS Bank and Harris Bankcorp,
Inc. which constitutes the articles of association of the
Trustee as now in effect and includes the authority of the
Trustee to commence business and to exercise corporate trust
powers was filed in connection with the Registration Statement
of Louisville Gas and Electric Company, File No. 2-44295, and is
incorporated herein by reference.
2. A copy of the existing by-laws of the Trustee.
A copy of the existing by-laws of the Trustee was filed in
connection with the Registration Statement of Commercial Federal
Corporation, File No. 333-20711, and is incorporated herein by
reference.
3. The consents of the Trustee required by Section 321(b) of the
Act.
(included as Exhibit A on page 2 of this statement)
4. A copy of the latest report of condition of the Trustee
published pursuant to law or the requirements of its supervising
or examining authority.
(included as Exhibit B on page 3 of this statement)
1
<PAGE> 3
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, the Trustee,
HARRIS TRUST AND SAVINGS BANK, a corporation organized and existing under the
laws of the State of Illinois, has duly caused this statement of eligibility to
be signed on its behalf by the undersigned, thereunto duly authorized, all in
the City of Chicago, and State of Illinois, on the 10th day of August, 1998.
HARRIS TRUST AND SAVINGS BANK
By: /s/ C. POTTER
--------------------------------
C. Potter
Assistant Vice President
EXHIBIT A
The consents of the trustee required by Section 321(b) of the Act.
Harris Trust and Savings Bank, as the Trustee herein named, hereby consents that
reports of examinations of said trustee by Federal and State authorities may be
furnished by such authorities to the Securities and Exchange Commission upon
request therefor.
HARRIS TRUST AND SAVINGS BANK
By: /s/ C. POTTER
--------------------------------
C. Potter
Assistant Vice President
July
2
<PAGE> 4
EXHIBIT B
Attached is a true and correct copy of the statement of condition of Harris
Trust and Savings Bank as of March 31, 1998, as published in accordance with a
call made by the State Banking Authority and by the Federal Reserve Bank of the
Seventh Reserve District.
[LOGO] HARRIS BANK
Harris Trust and Savings Bank
111 West Monroe Street
Chicago, Illinois 60603
of Chicago, Illinois, And Foreign and Domestic Subsidiaries, at the close of
business on March 31, 1998, a state banking institution organized and operating
under the banking laws of this State and a member of the Federal Reserve System.
Published in accordance with a call made by the Commissioner of Banks and Trust
Companies of the State of Illinois and by the Federal Reserve Bank of this
District.
Bank's Transit Number 71000288
<TABLE>
<CAPTION>
THOUSANDS
ASSETS OF DOLLARS
<S> <C> <C>
Cash and balances due from depository institutions:
Non-interest bearing balances and currency and coin................... $ 1,039,854
Interest bearing balances............................................. $ 290,921
Securities:.............................................................................
a. Held-to-maturity securities $ 0
b. Available-for-sale securities $ 4,266,201
Federal funds sold and securities purchased under agreements to resell $ 82,000
Loans and lease financing receivables:
Loans and leases, net of unearned income.............................. $8,726,578
LESS: Allowance for loan and lease losses............................ $ 101,318
----------
Loans and leases, net of unearned income, allowance, and reserve
(item 4.a minus 4.b).................................................. $ 8,625,260
Assets held in trading accounts......................................................... $ 120,674
Premises and fixed assets (including capitalized leases)................................ $ 219,475
Other real estate owned................................................................. $ 699
Investments in unconsolidated subsidiaries and associated companies..................... $ 120
Customer's liability to this bank on acceptances outstanding............................ $ 46,688
Intangible assets....................................................................... $ 266,411
Other assets............................................................................ $ 773,386
-----------
TOTAL ASSETS $15,731,689
===========
</TABLE>
3
<PAGE> 5
<TABLE>
<CAPTION>
LIABILITIES
<S> <C> <C>
Deposits:
In domestic offices.............................................................. $ 8,270,648
Non-interest bearing................................................. $2,684,862
Interest bearing..................................................... $5,585,786
In foreign offices, Edge and Agreement subsidiaries, and IBF's................... $ 1,307,928
Non-interest bearing................................................. $23,432
Interest bearing..................................................... $1,284,496
Federal funds purchased and securities sold under agreements to repurchase in
domestic offices of the bank and of its Edge and Agreement subsidiaries, and in
IBF's:
Federal funds purchased & securities sold under agreements to repurchase............... $ 3,599,510
Trading Liabilities 74,487
Other borrowed money:..................................................................
a. With remaining maturity of one year or less $ 471,692
b. With remaining maturity of more than one year $ 0
Bank's liability on acceptances executed and outstanding $ 46,688
Subordinated notes and debentures...................................................... $ 325,000
Other liabilities...................................................................... $ 386,442
--------------------------------
TOTAL LIABILITIES $14,482,395
================================
EQUITY CAPITAL
Common stock........................................................................... $ 100,000
Surplus................................................................................ $ 601,026
a. Undivided profits and capital reserves............................................. $ 545,185
b. Net unrealized holding gains (losses) on available-for-sale securities $ 2,802
--------------------------------
TOTAL EQUITY CAPITAL $1,249,294
================================
Total liabilities, limited-life preferred stock, and equity capital.................... $15,731,689
================================
</TABLE>
I, Pamela Piarowski, Vice President of the above-named bank, do
hereby declare that this Report of Condition has been prepared in conformance
with the instructions issued by the Board of Governors of the Federal Reserve
System and is true to the best of my knowledge and belief.
PAMELA PIAROWSKI
1/30/98
We, the undersigned directors, attest to the correctness of this
Report of Condition and declare that it has been examined by us and, to the best
of our knowledge and belief, has been prepared in conformance with the
instructions issued by the Board of Governors of the Federal Reserve System and
the Commissioner of Banks and Trust Companies of the State of Illinois and is
true and correct.
EDWARD W. LYMAN,
ALAN G. McNALLY,
RICHARD E. TERRY
Directors.
4
<PAGE> 1
EXHIBIT 99.1
LETTER OF TRANSMITTAL
To Tender for Exchange
12 1/2% Senior Notes due 2008 of
QUEEN SAND RESOURCES, INC.
A DELAWARE CORPORATION
and the Guarantees thereof by
QUEEN SAND RESOURCES, INC., A NEVADA CORPORATION
CORRIDA RESOURCES, INC., A NEVADA CORPORATION
NORTHLAND OPERATING CO., A NEVADA CORPORATION
Pursuant to the Prospectus dated ______________, 1998
================================================================================
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY
TIME, ON ___________________, 1998 (THE "EXPIRATION DATE") UNLESS THE EXCHANGE
OFFER IS EXTENDED, IN WHICH CASE THE TERM "EXPIRATION DATE" SHALL MEAN THE
LATEST DATE AND TIME TO WHICH THE EXCHANGE OFFER IS EXTENDED. TENDERS MAY BE
WITHDRAWN AT ANY TIME PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION
DATE.
================================================================================
The Exchange Agent is:
Harris Trust and Savings Bank
By Registered or Certified Mail: By Overnight or Hand Delivery:
Harris Trust and Savings Bank Harris Trust and Savings Bank
________________________________ ________________________________
________________________________ ________________________________
________________________________ ________________________________
Attn:___________________________ Attn:___________________________
By Facsimile: By Telephone:
(___)___________________________ (___)___________________________
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR
TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER THAN THE ONE LISTED
ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS SET FORTH IN THIS
LETTER OF TRANSMITTAL SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL
IS COMPLETED.
<PAGE> 2
The undersigned acknowledges receipt of the Prospectus dated
_________________________, 1998 (the "Prospectus") of Queen Sand Resources,
Inc., a Delaware corporation (the "Company"), and Queen Sand Resources, Inc., a
Nevada corporation, Corrida Resources, Inc. and Northland Operating Co., a
Nevada corporation (collectively, the "Guarantors"), and this Letter of
Transmittal (the "Letter of Transmittal"), which, together with the Prospectus,
constitutes the Company's and the Guarantors' offer (the "Exchange Offer") to
exchange $1,000 principal amount of its 12 1/2% Senior Notes due 2008 and the
guarantees thereof (the "New Notes") for each $1,000 principal amount of its
outstanding 12 1/2% Senior Notes due 2008 and the guarantees thereof (the "Old
Notes"). Recipients of the Prospectus should read the requirements described in
such Prospectus with respect to eligibility to participate in the Exchange
Offer. Capitalized terms used but not defined herein have the meaning given to
them in the Prospectus.
The undersigned hereby tenders the Old Notes described in the box
entitled "Description of Old Notes" below pursuant to the terms and conditions
described in the Prospectus and this Letter of Transmittal. The undersigned is
the registered owner of all the Old Notes and the undersigned represents that it
has received from each beneficial owner of Old Notes ("Beneficial Owners") a
duly completed and executed form of "Instruction to Registered Holder from
Beneficial Owner" accompanying this Letter of Transmittal, instructing the
undersigned to take the action described in this Letter of Transmittal.
This Letter of Transmittal is to be used only by a holder of Old
Notes (i) if certificates representing Old Notes are to be forwarded herewith or
(ii) if delivery of Old Notes is to be made by book-entry transfer to the
Exchange Agent's account at The Depository Trust Company (the "Depository"),
pursuant to the procedures set forth in the section of the Prospectus entitled
"The Exchange Offer -- Procedures for Tendering." If delivery of the Old Notes
is to be made by book-entry transfer to the account maintained by the Exchange
Agent at the Depository, this Letter of Transmittal need not be manually
executed; provided, however, that tenders of the Old Notes must be effected in
accordance with the procedures mandated by the Depository's Automated Tender
Offer Program and the procedures set forth in the Prospectus under the caption
"The Exchange Offer -- Book Entry Transfer."
The undersigned hereby represents and warrants that the information
set forth in the box entitled "Beneficial Owner(s)" is true and correct.
Any Beneficial Owner whose Old Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact such registered holder of Old Notes promptly and
instruct such registered holder of Old Notes to tender on behalf of the
Beneficial Owner. If such Beneficial Owner wishes to tender on its own behalf,
such Beneficial Owner must, prior to completing and executing this Letter of
Transmittal and delivering its Old Notes, either make appropriate arrangements
to register ownership of the Old Notes in such Beneficial Owner's name or obtain
a properly completed bond power from the registered holder of Old Notes. The
transfer of record ownership may take considerable time.
In order to properly complete this Letter of Transmittal, a holder
of Old Notes must (i) complete the box entitled "Description of Old Notes," (ii)
if appropriate, check and complete the boxes relating to book-entry transfer,
guaranteed delivery, Special Issuance Instructions and Special Delivery
Instructions, (iii) sign the Letter of Transmittal by completing the box
entitled "Sign Here" and (iv) complete the Substitute Form W-9. Each holder of
Old Notes should carefully read the detailed instructions below prior to
completing the Letter of Transmittal.
Holders of Old Notes who desire to tender their Old Notes for
exchange and (i) whose Old Notes are not immediately available, (ii) who cannot
deliver their Old Notes and all other documents required hereby to the Exchange
Agent on or prior to the Expiration Date or (iii) who are unable to complete the
procedure for book-entry transfer on a timely basis, must tender the Old Notes
pursuant to the guaranteed delivery procedures set forth in the section of the
Prospectus entitled "The
2
<PAGE> 3
Exchange Offer--Guaranteed Delivery Procedures." See Instruction 2 of the
Instructions beginning on page 10 hereof.
Holders of Old Notes who wish to tender their Old Notes for exchange
must, at a minimum, complete columns (1), (2), if applicable (see footnote 1
below), and (3) in the box below entitled "Description of Old Notes" and sign
the box on page 9 under the words "Sign Here." If only those columns are
completed, such holder of Old Notes will have tendered for exchange all Old
Notes listed in column (3) below. If the holder of Old Notes wishes to tender
for exchange less than all of such Old Notes, column (4) must be completed in
full. In such case, such holder of Old Notes should refer to Instruction 5 on
page 11.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
DESCRIPTION OF OLD NOTES
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(1) (2) (3) (4)
Principal Amount
Tendered for
Name(s) and Address(es) of Exchange (only if
Registered Holder(s) of Old different amount
Notes(s), exactly as name(s) Old Note Number(s) from column (3))
appear(s) on Old Note Certificate(s) (Attach signed List Aggregate (must be in integral
(Please fill in, if blank) if necessary)(1) Principal Amount multiples of $1,000)(2)
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Column (2) need not be completed by holders of Old Notes tendering Old
Notes for exchange by book-entry transfer. Please check the appropriate
box on the next page and provide the requested information.
(2) Column (4) need not be completed by holders of Old Notes who wish to
tender for exchange the principal amount of Old Notes listed in column
(3). Completion of column (4) will indicate that the holder of Old Notes
wishes to tender for exchange only the principal amount of Old Notes
indicated in column (4).
3
<PAGE> 4
[ ] CHECK HERE IF TENDERED OLD NOTES ARE ENCLOSED HEREWITH.
[ ] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY
TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE
DEPOSITORY AND COMPLETE THE FOLLOWING (FOR USE BY ELIGIBLE INSTITUTIONS
(AS HEREINAFTER DEFINED) ONLY):
Name of Tendering Institution: __________________________________
Account of Number: __________________________________
Transaction Code Number: __________________________________
[ ] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A
NOTICE OF GUARANTEED DELIVERY ENCLOSED HEREWITH AND COMPLETE THE
FOLLOWING (FOR USE BY ELIGIBLE INSTITUTIONS ONLY):
Name of Registered Holder of Old Note(s): _____________________________
Date of Execution of Notice of Guaranteed Delivery: ___________________
Name of Institution which Guaranteed Delivery: ________________________
Account Number (if delivered by book-entry transfer): _________________
[ ] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO:
Name: _________________________________________________________________
Address: ______________________________________________________________
_______________________________________________________________________
Number of Additional Copies Desired: __________________________________
4
<PAGE> 5
SPECIAL ISSUANCE INSTRUCTIONS
(See Instructions 1,6, 7 and 8)
To be completed ONLY (i) if the New Notes issued in exchange for Old
Notes (or if certificates for Old Notes not tendered for exchange for New Notes
or Old Notes) are to be issued in the name of someone other than the undersigned
or (ii) if Old Notes tendered by book-entry transfer which are not exchanged are
to be returned by credit to an account maintained at the Depository.
Issue to:
Name __________________________________________________________________________
(Please Print)
Address _______________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
(Include Zip Code)
_______________________________________________________________________________
(Tax Identification or Social Security No.)
Credit Old Notes not exchanged and delivered by book-entry transfer to
the Depository account set forth below:
_______________________________________________________________________________
(Account Number)
SPECIAL DELIVERY INSTRUCTIONS
(See Instructions 1, 6, 7 and 8)
To be completed ONLY if the New Notes issued in exchange for Old Notes
(or if certificates for Old Notes not tendered for exchange for New Notes or Old
Notes) are to be mailed or delivered (i) to someone other than the undersigned,
or (ii) the undersigned at an address other than the address shown below the
undersigned's signature.
Mail or deliver to:
Name __________________________________________________________________________
(Please Print)
Address _______________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
(Include Zip Code)
_______________________________________________________________________________
(Tax Identification or Social Security No.)
5
<PAGE> 6
<TABLE>
<CAPTION>
_____________________________________________________________________________________________
BENEFICIAL OWNER(S)
_____________________________________________________________________________________________
<S> <C>
State of Principal Residence of Each Beneficial Principal Amount of Old Notes Held for
Owner of Old Notes Account of Beneficial Owner(s)
_____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________
</TABLE>
If delivery of Old Notes is to be made by book-entry transfer to the
account maintained by the Exchange Agent at the Depository, then tenders of Old
Notes must be effected in accordance with the procedures mandated by the
Depository's Automated Tender Offer Program and the procedures set forth in the
Prospectus under the caption "The Exchange Offer -- Book-Entry Transfer."
6
<PAGE> 7
SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Pursuant to the offer by Queen Sand Resources, Inc., a Delaware
corporation (the "Company"), and Queen Sand Resources, Inc., a Nevada
corporation, Corrida Resources, Inc. and Northland Operating Co., a Nevada
corporation (collectively, the "Guarantors"), upon the terms and subject to the
conditions set forth in the Prospectus dated _________________, 1998 (the
"Prospectus") and this Letter of Transmittal (the "Letter of Transmittal"),
which, together with the Prospectus, constitutes the Company's offer (the
"Exchange Offer") to exchange $1,000 principal amount of its 12 1/2% Senior
Notes due 2008 and the guarantees thereof (the "New Notes") for each $1,000
principal amount of its outstanding 12 1/2% Senior Notes due 2008 and the
guarantees thereof (the "Old Notes"). The undersigned hereby tenders to the
Company and the Guarantors for exchange the Old Notes indicated above.
By executing this Letter of Transmittal and subject to and effective
upon acceptance for exchange of the Old Notes tendered for exchange herewith,
the undersigned (A) acknowledges and agrees that all of the rights of such
undersigned pursuant to that certain Registration Rights Agreement, dated as of
July 8, 1998, among the Company, the Guarantors and the Initial Purchasers (as
defined in the Prospectus), will have been satisfied and extinguished in all
respects and (B) will have irrevocably sold, assigned, transferred and
exchanged, to the Company and the Guarantors, all right, title and interest in,
to and under all of the Old Notes tendered for exchange hereby, and hereby
appoints Harris Trust and Savings Bank (the "Exchange Agent") as the true and
lawful agent and attorney-in-fact (with full knowledge that the Exchange Agent
also acts as agent of the Company and the Guarantors) of such holder of Old
Notes with respect to such Old Notes, with full power of substitution to (i)
deliver certificates representing such Old Notes, or transfer ownership of such
Old Notes on the account books maintained by The Depository Trust Company (the
"Depository") (together, in any such case, with all accompanying evidences of
transfer and authenticity), to the Company, (ii) present and deliver such Old
Notes for transfer on the books of the Company and (iii) receive all benefits
and otherwise exercise all rights and incidents of beneficial ownership with
respect to such Old Notes, all in accordance with the terms of the Exchange
Offer. The power of attorney granted in this paragraph shall be deemed to be
irrevocable and coupled with an interest.
The undersigned hereby represents and warrants that (i) the
undersigned is the owner of the Old Notes, (ii) the undersigned has a net long
position within the meaning of Rule 14c-4 ("Rule 14c-4") under the Securities
Exchange Act of 1934, as amended, equal to or greater than the principal amount
of Old Notes tendered hereby, (iii) the tender of such Old Notes complies with
Rule 14c-4 (to the extent that Rule 14c-4 is applicable to such exchange), (iv)
the undersigned has full power and authority to tender, exchange, assign and
transfer the Old Notes and (v) when such Old Notes are accepted for exchange by
the Company and the Guarantors, the Company and the Guarantors will acquire good
and marketable title thereto, free and clear of all liens, restrictions, charges
and encumbrances and not subject to any adverse claims. The undersigned will,
upon receipt, execute and deliver any additional documents deemed by the
Exchange Agent, the Company or the Guarantors to be necessary or desirable to
complete the exchange, assignment and transfer of the Old Notes tendered for
exchange hereby.
The undersigned hereby further represents to the Company and the
Guarantors that (i) the New Notes to be acquired by the undersigned in exchange
for the Old Notes tendered hereby and any beneficial owner(s) of such Old Notes
in connection with the Exchange Offer will be acquired by the undersigned and
such beneficial owner(s) in the ordinary course of business of the undersigned,
(ii) the undersigned (if not a broker-dealer referred to in the last sentence of
this paragraph) is not engaging and does not intend to engage in the
distribution of the New Notes, (iii) the undersigned has no arrangement or
understanding with any person to participate in the distribution of the New
Notes,
7
<PAGE> 8
(iv) the undersigned and each beneficial owner acknowledge and agree that any
person participating in the Exchange Offer for the purpose of distributing the
New Notes must comply with the registration and prospectus delivery requirements
of the Securities Act of 1933, as amended (the "Securities Act"), in connection
with a secondary resale transaction of the New Notes acquired by such person and
cannot rely on the position of the staff of the Securities and Exchange
Commission (the "Commission") set forth in certain no-action letters, (v) the
undersigned and each beneficial owner understand that a secondary resale
transaction described in clause (iv) above should be covered by an effective
registration statement containing the selling security holder information
required by Item 507 or Item 508, as applicable, of Regulation S-K of the
Commission and (vi) neither the undersigned nor any beneficial owner is an
"affiliate" of the Company, as defined under Rule 405 under the Securities Act.
If the undersigned is a broker-dealer that will receive New Notes for its own
account in exchange for Old Notes that were acquired as a result of market
making activities or other trading activities, it acknowledges that it will
deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of such New Notes received in respect of such Old
Notes pursuant to the Exchange Offer; however, by so acknowledging and by
delivering a prospectus, the undersigned will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act.
For purposes of the Exchange Offer, the Company and the Guarantors
will be deemed to have accepted for exchange, and to have exchanged, validly
tendered Old Notes, if, as and when the Company gives oral or written notice
thereof to the Exchange Agent. Tenders of Old Notes for exchange may be
withdrawn at any time prior to 5:00 p.m. New York City time, on ______________,
1998 (the "Expiration Date"). See "The Exchange Offer -- Withdrawal of Tenders"
in the Prospectus. Any Old Notes tendered by the undersigned and not accepted
for exchange will be returned to the undersigned at the address set forth above
unless otherwise indicated in the box above entitled "Special Delivery
Instructions."
The undersigned acknowledges that the Company's and the Guarantors'
acceptance of Old Notes validly tendered for exchange pursuant to any one of the
procedures described in the section of the Prospectus entitled "The Exchange
Offer" and in the instructions hereto will constitute a binding agreement among
the undersigned, the Company and the Guarantors upon the terms and subject to
the conditions of the Exchange Offer.
Unless otherwise indicated in the box entitled "Special Issuance
Instructions," please return any Old Notes not tendered for exchange in the
name(s) of the undersigned. Similarly, unless otherwise indicated in the box
entitled "Special Delivery Instructions," please mail any certificates for Old
Notes not tendered or exchanged (and accompanying documents, as appropriate) to
the undersigned at the address shown below the undersigned's signature(s). In
the event that both "Special Issuance Instructions" and "Special Delivery
Instructions are completed, please issue the certificates representing the New
Notes issued in exchange for the Old Notes accepted for exchange in the name(s)
of, and return any Old Notes not tendered for exchange or not exchanged to, the
person(s) so indicated. The undersigned recognizes that the Company and the
Guarantors have no obligation pursuant to the "Special Issuance Instructions"
and "Special Delivery Instructions" to transfer any Old Notes from the name of
the holder of Old Note(s) thereof if the Company and the Guarantors do not
accept for exchange any of the Old Notes so tendered for exchange or if such
transfer would not be in compliance with any transfer restrictions applicable to
such Old Note(s).
In order to validly tender Old Notes for exchange, holders of Old
Notes must complete, execute and deliver this Letter of Transmittal.
Except as stated in the Prospectus, all authority herein conferred
or agreed to be conferred shall survive the death or incapacity of the
undersigned, and any obligation of the undersigned hereunder shall be binding
upon the heirs, personal representatives, successors and assigns of the
undersigned. Except as otherwise stated in the Prospectus, this tender for
exchange of Old Notes is irrevocable.
8
<PAGE> 9
SIGN HERE
_______________________________________________________________________________
(Signature(s) of Owner(s))
Date: ___________________________, 1998
Must be signed by the registered holder(s) of Old Notes exactly as
name(s) appear(s) on certificate(s) representing the Old Notes or on a security
position listing or by person(s) authorized to become registered Old Note
holder(s) by certificates and documents transmitted herewith. If signature is by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, please
provide the following information (See Instruction 6).
Name(s): ______________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
(Please Print)
Capacity (full title): ________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
Address: ______________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
(Include Zip Code)
Area Code and Telephone No. (___) _____________________________________________
Tax Identification or Social Security Nos:_____________________________________
Please complete Substitute Form W-9
GUARANTEE OF SIGNATURE(S)
(Signature(s) must be guaranteed if required by Instruction 1)
Authorized Signature:__________________________________________________________
Dated:_________________________________________________________________________
Name and Title:________________________________________________________________
(Please Print)
Name of Firm:__________________________________________________________________
9
<PAGE> 10
INSTRUCTIONS
Forming Part of the Terms and Conditions of the Exchange Offer
1. GUARANTEE OF SIGNATURES. Except as otherwise provided below, all
signatures on this Letter of Transmittal must be guaranteed by an institution
which is an "eligible guarantor institution" within the meaning of Rule l7Ad-15
under the Securities Exchange Act of 1934, as amended, which is a member of one
of the following recognized Signature Guarantee Programs (an "Eligible
Institution"):
a. The Securities Transfer Agents Medallion Program (STAMP)
b. The New York Stock Exchange Medallion Signature Program (MSP)
c. The Stock Exchange Medallion Program (SEMP)
Signatures on this Letter of Transmittal need not be guaranteed (i) if this
Letter of Transmittal is signed by the registered holder(s) of the Old Notes
tendered herewith and such registered holder(s) have not completed the box
entitled "Special Issuance Instructions" or the box entitled "Special Delivery
Instructions" on this Letter of Transmittal or (ii) if such Old Notes are
tendered for the account of an Eligible Institution. IN ALL OTHER CASES, ALL
SIGNATURES MUST BE GUARANTEED BY AN ELIGIBLE INSTITUTION.
2. DELIVERY OF THIS LETTER OF TRANSMITTAL AND OLD NOTES; GUARANTEED
DELIVERY PROCEDURES. This Letter of Transmittal is to be completed by holders of
Old Notes (i) if certificates are to be forwarded herewith or (ii) if tenders
are to be made pursuant to the procedures for tender by book-entry transfer of
guaranteed delivery set forth in the section of the Prospectus entitled "The
Exchange Offer." Certificates for all physically tendered Old Notes or any
confirmation of a book-entry transfer (a "Book-Entry Confirmation"), as well as
a properly completed and duly executed copy of this Letter of Transmittal or
facsimile hereof, and any other documents required by this Letter of
Transmittal, must be received by the Exchange Agent at its address set forth on
the cover of this Letter of Transmittal prior to 5:00 p.m., New York City time,
on the Expiration Date. Holders of Old Notes who elect to tender Old Notes and
(i) whose Old Notes are not immediately available, (ii) who cannot deliver the
Letter of Transmittal, Old Notes or other required documents to the Exchange
Agent prior to 5:00 p.m., New York City time, on the Expiration Date or (iii)
who are unable to complete the procedure for book-entry transfer on a timely
basis, may have such tender effected if: (a) such tender is made by or through
an Eligible Institution, (b) prior to 5:00 p.m., New York City time, on the
Expiration Date, the Exchange Agent has received from such Eligible Institution
a properly completed and duly executed Notice of Guaranteed Delivery (by
facsimile transmission, mail or hand delivery) setting forth the name and
address of the holder of such Old Notes, the certificate number(s) of such Old
Notes and the principal amount of Old Notes tendered for exchange, stating that
tender is being made thereby and guaranteeing that, within five New York Stock
Exchange trading days after the Expiration Date, this Letter of Transmittal (or
a manually executed facsimile thereof), properly completed and duly executed,
the certificates representing such Old Notes (or a Book-Entry Confirmation), in
proper form for transfer, and any other documents required by this Letter of
Transmittal, will be deposited by such Eligible Institution with the Exchange
Agent, and (c) a properly completed and duly executed Letter of Transmittal (or
a manually executed facsimile thereof) with certificates for all tendered Old
Notes, or a Book-Entry Confirmation, and any other documents required by this
Letter of Transmittal are received by the Exchange Agent within five New York
Stock Exchange trading days after the Expiration Date.
THE METHOD OF DELIVERY OF OLD NOTES, THIS LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE TENDERING HOLDER
OF OLD NOTES. EXCEPT AS OTHERWISE PROVIDED BELOW, THE DELIVERY WILL BE DEEMED
MADE ONLY WHEN ACTUALLY RECEIVED OR CONFIRMED BY THE EXCHANGE AGENT. IF DELIVERY
IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS
RECOMMENDED.
10
<PAGE> 11
NEITHER THIS LETTER OF TRANSMITTAL NOR ANY OLD NOTES SHOULD BE SENT TO THE
COMPANY OR THE GUARANTORS.
No alternative, conditional or contingent tenders will be accepted. All
tendering holders of Old Notes, by execution of this Letter of Transmittal (or
facsimile hereof, if applicable), waive any right to receive notice of the
acceptance of their Old Notes for exchange.
3. INADEQUATE SPACE. If the space provided in the box entitled
"Description of Old Notes" above is inadequate, the certificate numbers and
principal amounts of the Old Notes being tendered should be listed on a separate
signed schedule affixed hereto.
4. WITHDRAWALS. A tender of Old Notes may be withdrawn at any time prior
to 5:00 p.m., New York City time, on the Expiration Date by delivery of written
notice of withdrawal to the Exchange Agent at the address set forth on the cover
of this Letter of Transmittal. To be effective, a notice of withdrawal of Old
Notes must (i) specify the name of the person who tendered the Old Notes to be
withdrawn (the "Depositor"), (ii) identify the Old Notes to be withdrawn
(including the certificate number or numbers and aggregate principal amount of
such Old Notes), (iii) be signed by the holder of Old Notes in the same manner
as the original signature on the Letter of Transmittal by which such Old Notes
were tendered (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the applicable transfer agent register
the transfer of such Old Notes into the name of the person withdrawing the
tender, and (iv) be received by the Exchange Agent prior to 5:00 p.m., New York
City time, on the Expiration Date. Withdrawals of tenders of Old Notes may not
be rescinded, and any Old Notes withdrawn will thereafter be deemed not validly
tendered for purposes of the Exchange Offer and no New Notes will be issued with
respect thereto unless the Old Notes so withdrawn are validly retendered.
Properly withdrawn Old Notes may be retendered by following one of the
procedures described in the section of the Prospectus entitled "The Exchange
Offer -- Procedures for Tendering" at any time prior to 5:00 p.m., New York City
time, on the Expiration Date.
5. PARTIAL TENDERS. (Not applicable to holders of Old Notes who tender
Old Notes by book-entry transfer). Tenders of Old Notes will be accepted only in
integral multiples of $1,000 principal amount. If a tender for exchange is to be
made with respect to less than the entire principal amount of any Old Notes,
fill in the principal amount of Old Notes which are tendered for exchange in
column (4) of the box entitled "Description of Old Notes" on page 3, as more
fully described in the footnotes thereto. In case of a partial tender for
exchange, a new certificate, in fully registered form, for the remainder of the
principal amount of the Old Notes, will be sent to the holders of Old Notes
unless otherwise indicated in the appropriate box on this Letter of Transmittal
as promptly as practicable after the expiration or termination of the Exchange
Offer.
6. SIGNATURES ON THIS LETTER OF TRANSMITTAL, POWERS OF ATTORNEY AND
ENDORSEMENTS.
(a) The signature(s) of the holder of Old Notes on this Letter of
Transmittal must correspond with the name(s) as written on the face of the Old
Notes without alternation, enlargement or any change whatsoever.
(b) If tendered Old Notes are owned of record by two or more joint
owners, all such owners must sign this Letter of Transmittal.
(c) If any tendered Old Notes are registered in different names on
several certificates, it will be necessary to complete, sign and submit as many
separate copies of this Letter of Transmittal and any necessary or required
documents as there are different registrations or certificates.
(d) When this Letter of Transmittal is signed by the holder of the Old
Notes listed and transmitted hereby, no endorsements of Old Notes or separate
powers of attorney are required. If,
11
<PAGE> 12
however, Old Notes not tendered or not accepted, are to be issued or returned in
the name of a person other than the holder of Old Notes, then the Old Notes
transmitted hereby must be endorsed or accompanied by appropriate powers of
attorney in a form satisfactory to the Company, in either case signed exactly as
the name(s) of the holder of Old Notes appear(s) on the Old Notes. Signatures on
such Old Notes or powers of attorney must be guaranteed by an Eligible
Institution (unless signed by an Eligible Institution).
(e) If this Letter of Transmittal or Old Notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and proper evidence
satisfactory to the Company of their authority so to act must be submitted.
(f) If this Letter of Transmittal is signed by a person other than the
registered holder of Old Notes listed, the Old Notes must be endorsed or
accompanied by appropriate powers of attorney, in either case signed exactly as
the name(s) of the registered holder of Old Notes appear(s) on the certificates.
Signatures on such Old Notes or powers of attorney must be guaranteed by an
Eligible Institution (unless signed by an Eligible Institution).
7. TRANSFER TAXES. Except as set forth in this Instruction 7, the
Company will pay all transfer taxes, if any, applicable to the transfer and
exchange of Old Notes pursuant to the Exchange Offer. If, however, issuance of
New Notes is to be made to, or Old Notes not tendered for exchange are to be
issued or returned in the name of, any person other than the holder of Old
Notes, and satisfactory evidence of payment of such taxes or exemptions from
taxes therefrom is not submitted with this Letter of Transmittal, the amount of
any transfer taxes payable on account of the transfer to such person will be
imposed on and payable by the holder of Old Notes tendering Old Notes for
exchange prior to the issuance of the New Notes.
8. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. If the New Notes, or if
any Old Notes not tendered for exchange, are to be issued or sent to someone
other than the holder of Old Notes or to an address other than that shown above,
the appropriate boxes on this Letter of Transmittal should be completed. Holders
of Old Notes tendering Old Notes by book-entry transfer may request that Old
Notes not accepted be credited to such account maintained at the Depository as
such holder of Old Notes may designate.
9. IRREGULARITIES. All questions as to the form of documents and the
validity, eligibility (including time of receipt), acceptance and withdrawal of
Old Notes will be determined by the Company, in its sole discretion, whose
determination shall be final and binding. The Company reserves the absolute
right to reject any or all tenders for exchange of any particular Old Notes that
are not in proper form, or the acceptance of which would, in the opinion of the
Company (or its counsel), be unlawful. The Company reserves the absolute right
to waive any defect, irregularity or condition of tender for exchange with
regard to any particular Old Notes. The Company's interpretation of the term of,
and conditions to, the Exchange Offer (including the instructions herein) will
be final and binding. Unless waived, any defects or irregularities in connection
with the Exchange Offer must be cured within such time as the Company shall
determine. Neither the Company, the Guarantors, the Exchange Agent nor any other
person shall be under any duty to give notice of any defects or irregularities
in Old Notes tendered for exchange, nor shall any of them incur any liability
for failure to give such notice. A tender of Old Notes will not be deemed to
have been made until all defects and irregularities with respect to such tender
have been cured or waived. Any Old Notes received by the Exchange Agent that are
not properly tendered and as to which the defects or irregularities have not
been cured or waived will be returned by the Exchange Agent to the tendering
holders, unless otherwise provided in this Letter of Transmittal, as soon as
practicable following the Expiration Date.
10. WAIVER OF CONDITION. The Company and the Guarantors reserve the
absolute right to waive, amend or modify certain of the specified conditions as
described under "The Exchange
12
<PAGE> 13
Offer--Conditions" in the Prospectus in the case of any Old Notes tendered
(except as otherwise provided in the Prospectus).
11. MUTILATED, LOST, STOLEN OR DESTROYED OLD NOTES. If a holder of Old
Notes desires to tender Old Notes pursuant to the Exchange Offer, but any of
such Old Notes has been mutilated, lost, stolen or destroyed, such holder of Old
Notes should write to or telephone the Trustee at the address listed below,
concerning the procedures for obtaining replacement certificates for such Old
Notes, arranging for indemnification or any other matter that requires handling
by the Trustee:
Harris Trust and Savings Bank
_____________________________
_____________________________
_____________________________
_____________________________
12. REQUESTS FOR INFORMATION OR ADDITIONAL COPIES. Requests for
information or for additional copies of the Prospectus and this Letter of
Transmittal may be directed to the Exchange Agent at the address or telephone
number set forth on the cover of this Letter of Transmittal.
IMPORTANT: This Letter of Transmittal (or a facsimile thereof, if
applicable) together with certificates, or confirmation of book-entry or the
Notice of Guaranteed Delivery, and all other required documents must be received
by the Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration
Date.
IMPORTANT TAX INFORMATION
Under current federal income tax law, a holder of Old Notes whose
tendered Old Notes are accepted for exchange may be subject to backup
withholding unless the holder provides the Company (as payor), through the
Exchange Agent, with either (i) such holder's correct taxpayer identification
number ("TIN") on Substitute Form W-9 attached hereto, certifying that the TIN
provided on Substitute Form W-9 is correct (or that such holder of Old Notes is
awaiting a TIN) and that (A) the holder of Old Notes has not been notified by
the Internal Revenue Service that he or she is subject to backup withholding as
a result of a failure to report all interest or dividends or (B) the Internal
Revenue Service has notified the holder of Old Notes that he or she is no longer
subject to backup withholding, or (ii) an adequate basis for exemption from
backup withholding. If such holder of Old Notes is an individual, the TIN is
such holder's social security number. If the Exchange Agent is not provided with
the correct TIN, the holder of Old Notes may be subject to certain penalties
imposed by the Internal Revenue Service.
Certain holders of Old Notes (including, among others, all corporations
and certain foreign individuals) are not subject to these backup withholding and
reporting requirements. Exempt holders of Old Notes should indicate their exempt
status on Substitute Form W-9. A foreign individual may quality as an exempt
recipient by submitting to the Exchange Agent a properly completed Internal
Revenue Service Form W-8 (the terms of which the Exchange Agent will provide
upon request) signed under penalty of perjury, attesting to the holder's exempt
status. See the enclosed Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9 (the "Guidelines") for additional instructions.
If backup withholding applies, the Company is required to withhold 31%
of any payment made to the holder of Old Notes or other payee. Backup
withholding is not an additional federal income tax. Rather, the federal income
tax liability of persons subject to backup withholding will be reduced by the
amount of tax withheld. If withholding results in an overpayment of taxes, a
refund may be obtained from the Internal Revenue Service.
13
<PAGE> 14
The holder of Old Notes is required to give the Exchange Agent the TIN
(e.g., social security number or employer identification number) of the record
owner of the Old Notes. If the Old Notes are held in more than one name or are
not held in the name of the actual owner, consult the enclosed guidelines for
additional guidance regarding which number to report.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
PAYER'S NAME: Harris Trust and Savings Bank
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
SUBSTITUTE Part 1 - PLEASE PROVIDE YOUR ______________________________
TIN IN THE BOX AT RIGHT AND Social Security Number
Form W-9 CERTIFY BY SIGNING AND
DATING BELOW
Department of the Treasury OR
Internal Revenue Service
______________________________
Payer's Request for Taxpayer Employer Identification Number
Identification Number (TIN) -------------------------------------------------------------------
Part 2 - Part 3 -
Certification Under Penalties of
Perjury, I certify that:
(1) The number shown on this Awaiting TIN [ ]
form is my correct taxpayer
identification number (or I am
waiting for a number to be
issued to me); and
(2) I am not subject to backup
withholding either because I
have not been notified by the
Internal Revenue Service (the
"IRS") that I am subject to
backup withholding as a result
of a failure to report all
interest or dividends, or the
IRS has notified me that I am
no longer subject to backup
withholding.
-------------------------------------------------------------------
Certificate instructions - You must cross out item (2) in Part 2
above if you have been notified by the IRS that you are subject
to backup withholding because of under reporting interest or
dividends on your tax return. However, if after being notified
by the IRS that you are subject to backup withholding you
received another notification from the IRS stating that you are
no longer subject to backup withholding, do not cross out item
(2).
SIGNATURE _____________________________________ DATE ______________
NAME ______________________________________________________________
ADDRESS ___________________________________________________________
CITY _________________________ STATE ___________ ZIP CODE _________
- ----------------------------------------------------------------------------------------------------
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF
31% OF ANY PAYMENT MADE TO YOU PURSUANT TO THE EXCHANGE OFFER. PLEASE REVIEW
THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER
ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
</TABLE>
14
<PAGE> 15
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU
CHECK THE BOX IN PART 3 OF SUBSTITUTE FORM W-9
- --------------------------------------------------------------------------------
PAYER'S NAME: Harris Trust and Savings Bank
- --------------------------------------------------------------------------------
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification
number has not been issued to me, and either (a) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Officer or (b)
I intend to mail or deliver such an application in the near future. I understand
that if I do not provide a taxpayer identification number within sixty (60)
days, 31% of all reportable payments made to me thereafter will be withheld
until I provide such a number.
________________________________________________________ ____________
Signature Date
15
<PAGE> 16
INSTRUCTION TO REGISTERED HOLDER
FROM BENEFICIAL OWNER
OF
12 1/2% SENIOR NOTES DUE 2008 OF QUEEN SAND RESOURCES, INC.
The undersigned hereby acknowledges receipt of the Prospectus dated ___________,
1998 (the "Prospectus") of Queen Sand Resources, Inc., a Delaware corporation
(the "Company"), and Queen Sand Resources, Inc., a Nevada corporation, Corrida
Resources, Inc. and Northland Operating Co., Inc., a Nevada corporation
(collectively, the "Guarantors"), and the accompanying Letter of Transmittal
(the "Letter of Transmittal"), that together constitute the Company's and the
Guarantors' offer (the "Exchange Offer"). Capitalized terms used but not defined
herein have the meanings ascribed to them in the Prospectus.
This will instruct you, the registered holder, as to the action to be taken by
you relating to the Exchange Offer with respect to the 12 1/2% Senior Notes due
2008 and the guarantees thereof (the "Old Notes") held by you for the account of
the undersigned.
The aggregate face amount of the Old Notes held by you for the account of the
undersigned is (fill in amount):
$ _________________ of the Old Notes.
With respect to the Exchange Offer, the undersigned hereby instructs you (check
appropriate box):
[ ]
To TENDER the following Old Notes held by you for the account of the undersigned
(insert principal amount of Old Notes to be tendered, if any):
$ _________________ of the Old Notes.
[ ]
NOT to TENDER any Old Notes held by you for the account of the undersigned.
If the undersigned instructs you to tender the Old Notes held by you for the
account of the undersigned, it is understood that you are authorized (a) to
make, on behalf of the undersigned (and the undersigned, by its signature below,
hereby makes to you), the representations and warranties contained in the Letter
of Transmittal that are to be made with respect to the undersigned as a
beneficial owner of the Old Notes, including but not limited to the
representations that (i) the undersigned's principal residence is in the state
of (fill in state) __________________ (ii) the undersigned is acquiring the New
Notes in the ordinary course of business of the undersigned, (iii) the
undersigned is not participating, does not intend to participate, and has no
arrangement or understanding with any person to participate, in the distribution
of New Notes, (iv) the undersigned acknowledges that any person participating in
the Exchange Offer for the purpose of distributing the New Notes must comply
with the registration and prospectus delivery requirements of the Securities Act
of 1933, as amended, in connection with any resale transaction of the New Notes
acquired by such person and cannot rely on the position of the Staff of the
Securities and Exchange Commission set forth in certain no-action letters (See
the section of the Prospectus entitled "The Exchange Offer -- Purpose and
Effect"), (v) the undersigned understands that a secondary resale transaction
described in clause (iv) above should be covered by an effective registration
statement containing the selling securityholder information required by Item 507
or Item 508, if applicable, of Regulation S-K of the Commission, (vi) the
undersigned is not an "affiliate," as defined in Rule 405 under the Securities
Act, of the Company, (vii) if the undersigned is not a broker-dealer, the
undesigned represents that it is not engaged in, and does not intend to engage
in, a distribution of New Notes, (viii) if the undersigned is a broker-dealer
that will receive New Notes for its own account in exchange for Old Notes, it
represents that the Old Notes to be exchanged for New Notes were acquired by it
as a result of market-making activities or other trading activities and
acknowledges that it will deliver a prospectus in connection with any resale of
such New Notes; however, by so acknowledging and by delivering a prospectus, the
undersigned will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
SIGN HERE
Name of Beneficial Owner(s) (please print): ___________________________________
Signature(s): _________________________________________________________________
Address: ______________________________________________________________________
Telephone Number: _____________________________________________________________
Taxpayer Identification or Social Security Number: ____________________________
Date: _________________________________________________________________________
16
<PAGE> 17
NOTICE OF GUARANTEED DELIVERY
With Respect to
12 1/2% Senior Notes due 2008 of
QUEEN SAND RESOURCES, INC.
A DELAWARE CORPORATION
and the Guarantees thereof by
QUEEN SAND RESOURCES, INC., A NEVADA CORPORATION
CORRIDA RESOURCES, INC., A NEVADA CORPORATION
NORTHLAND OPERATING CO., A NEVADA CORPORATION
This form must be used by a holder of 12 1/2% Senior Notes due 2008
and the guarantees thereof (the "Old Notes") of Queen Sand Resources, Inc., a
Delaware corporation (the "Company"), and Queen Sand Resources, Inc., a Nevada
corporation, Corrida Resources, Inc., a Nevada corporation, and Northland
Operating Co., a Nevada corporation (collectively, the "Guarantors"), who wishes
to tender Old Notes to the Exchange Agent in exchange for 12 1/2 Senior Notes
due 2008 and the guarantees thereof (the "New Notes") pursuant to the guaranteed
delivery procedures described in the "The Exchange Offer -- Guaranteed Delivery
Procedures" of the Prospectus, dated __________, 1998 (the "Prospectus"), and in
Instruction 2 to the related Letter of Transmittal. Any holder who wishes to
tender Old Notes pursuant to such guaranteed delivery procedures must ensure
that the Exchange Agent receives this Notice of Guaranteed Delivery prior to the
Expiration Date of the Exchange Offer. Capitalized terms not defined herein have
the meanings ascribed to them in the Prospectus or the Letter of Transmittal.
- --------------------------------------------------------------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON , 1998, UNLESS EXTENDED (THE "EXPIRATION DATE").
- --------------------------------------------------------------------------------
To: Harris Trust and Savings Bank
(the "Exchange Agent")
By Registered or Certified Mail:
Harris Trust and Savings Bank
_________________________________
_________________________________
Attn: ___________________________
By Overnight or Hand Delivery:
Harris Trust and Savings Bank
_________________________________
_________________________________
_________________________________
Attn: ___________________________
By Facsimile: ( )________________
By Telephone: ( )________________
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION VIA A FACSIMILE NUMBER OTHER THAN THE ONE LISTED ABOVE
WILL NOT CONSTITUTE A VALID DELIVERY.
This form is not to be used to guarantee signatures. If a signature
on the Letter of Transmittal is required to be guaranteed by an "Eligible
Institution" under the instructions thereto, such signature guarantee must
appear in the applicable space provided in the signature box on the Letter of
Transmittal.
<PAGE> 18
LADIES AND GENTLEMEN:
The undersigned hereby tenders to the Company and the Guarantors,
upon the terms and subject to the conditions set forth in the Prospectus and the
related Letter of Transmittal, receipt of which is hereby acknowledged, the
principal amount of Old Notes set forth below pursuant to the guaranteed
delivery procedures set forth in the Prospectus and in Instruction 2 of the
Letter of Transmittal.
The undersigned hereby tenders the Old Notes listed below:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Certificate Number(s) (if known) of Old Notes or Aggregate Principal Aggregate Principal
Account Number at the Book-Entry Facility Amount Represented Amount Tendered
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
PLEASE SIGN AND COMPLETE
Signatures of Registered Holder(s) or Date: ______________________________, 1998
Authorized Signatory: __________________________________ Address: _________________________________
________________________________________________________ __________________________________________
________________________________________________________ Area Code and Telephone No.: _____________
Name of Registered Holder(s):
________________________________________________________
________________________________________________________
________________________________________________________
- --------------------------------------------------------------------------------
</TABLE>
This Notice of Guaranteed Delivery must be signed by the Holder(s)
exactly as their name(s) appear on certificates for Old Notes or on a security
position listing as the owner of Old Notes, or by person(s) authorized to become
Holder(s) by endorsements and documents transmitted with this Notice of
Guaranteed Delivery. If signature is by a trustee, executor, administrator,
guardian, attorney-in-fact, officer or other person acting in a fiduciary or
representative capacity, such person must provide the following information:
Please print name(s) and address(es)
Name(s): _______________________________________________________________________
________________________________________________________________________________
Capacity: ______________________________________________________________________
________________________________________________________________________________
Address(es): ___________________________________________________________________
________________________________________________________________________________
-2-
<PAGE> 19
GUARANTEE
(Not to be used for signature guarantee)
The undersigned, a firm which is a member of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
or is a commercial bank or trust company having an office or correspondent in
the United States, or is otherwise an "eligible guarantor institution" within
the meaning of Rule 17Ad-15 under the Securities Exchange Act of 1934, as
amended, guarantees deposit with the Exchange Agent of the Letter of Transmittal
(or facsimile thereof), together with the Old Notes tendered hereby in proper
form for transfer (or confirmation of the book-entry transfer of such Old Notes
into the Exchange Agent's account at the Book-Entry Transfer Facility described
in the Prospectus under the caption "The Exchange Offer--Guaranteed Delivery
Procedures" and in the Letter of Transmittal) and any other required documents,
all by 5:00 p.m., New York City time, on the fifth New York Stock Exchange
trading day following the Expiration Date.
Name of Firm: ___________________________ __________________________________
Authorized Signature
Address: ________________________________
_________________________________________ __________________________________
Area Code and Telephone No.: ____________ Title: ___________________________
Date: ______________________, 1998
DO NOT SEND OLD NOTES WITH THIS FORM. ACTUAL SURRENDER OF
OLD NOTES MUST BE MADE PURSUANT TO, AND BE ACCOMPANIED
BY, AN EXECUTED LETTER OF TRANSMITTAL.
-3-
<PAGE> 20
INSTRUCTIONS FOR NOTICE OF GUARANTEED DELIVERY
1. Delivery of this Notice of Guaranteed Delivery. A properly completed
and duly executed copy of this Notice of Guaranteed Delivery and any other
documents required by this Notice of Guaranteed Delivery must be received by the
Exchange Agent at its address set forth herein prior to 5:00 p.m., New York City
time, on the Expiration Date. The method of delivery of this Notice of
Guaranteed Delivery and any other required documents to the Exchange Agent is at
the election and sole risk of the holder, and the delivery will be deemed made
only when actually received by the Exchange Agent. If delivery is by mail,
registered mail with return receipt requested, properly insured, is recommended.
As an alternative to delivery by mail, the holders may wish to consider using an
overnight or hand delivery service. In all cases, sufficient time should be
allowed to assure timely delivery. For a description of the guaranteed delivery
procedures, see Instruction 2 of the Letter of Transmittal.
2. Signatures on this Notice of Guaranteed Delivery. If this Notice of
Guaranteed Delivery is signed by the registered holder(s) of the Old Notes
referred to herein, the signature must correspond with the name(s) written on
the face of the Old Notes without alteration, enlargement, or any change
whatsoever. If this Notice of Guaranteed Delivery is signed by a participant of
the Book-Entry Transfer Facility whose name appears on a security position
listing as the owner of Old Notes, the signature must correspond with the name
shown on the security position listing as the owner of the Old Notes.
If this Notice of Guaranteed Delivery is signed by a person other than
the registered holder(s) of any Old Notes listed or a participant of the
Book-Entry Transfer Facility, this Notice of Guaranteed Delivery must be
accompanied by appropriate bond powers, signed as the name of the registered
holder(s) appears on the Old Notes or signed as the name of the participant
shown on the Book-Entry Transfer Facility's security position listing.
If this Notice of Guaranteed Delivery is signed by a trustee, executor,
administrator, guardian, attorney-in-fact, officer of a corporation, or other
person acting in a fiduciary or representative capacity, such person should so
indicate when signing and submit with the Letter of Transmittal evidence
satisfactory to the Company and the Guarantors of such person's authority to so
act.
3. Requests for Assistance or Additional Copies. Question and requests
for assistance and requests for additional copies of the Prospectus may be
directed to the Exchange Agent at the address specified in the Prospectus.
Holders may also contact their broker, dealer, commercial bank, trust company,
or other nominee for assistance concerning the Exchange Offer.
-4-
