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As filed with the Securities and Exchange Commission on February 18, 1999
Registration No. 333-70993
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Pre-Effective Amendment No. 1
to
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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QUEEN SAND RESOURCES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2615565
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13760 NOEL ROAD, SUITE 1030
DALLAS, TEXAS 75240-7336
(972) 233-9906
(Address, including zip code, and telephone
number, including area code, of
registrant's principal executive offices)
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ROBERT P. LINDSAY
CHIEF OPERATING OFFICER
13760 NOEL ROAD, SUITE 1030
DALLAS, TEXAS 75240-7336
TELEPHONE: (972) 233-9906
FAX: (972) 233-9575
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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COPY TO:
WILLIAM L. BOEING
HAYNES AND BOONE, LLP
901 MAIN STREET, SUITE 3100
DALLAS, TEXAS 75202-3789
TELEPHONE: (214) 651-5000
FAX: (214) 651-5940
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
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PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
OF SECURITIES TO BE REGISTERED REGISTERED (1) SHARE (2) PRICE (2) FEE(3)
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Common Stock, par value $0.0015 per
share ................................ 9,507,755 shares $2.437 $23,170,398 $7,006
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(1) The Registrant is registering for resale an additional 8,096,878 shares
under this Amendment No. 1. Pursuant to Rule 416, the Registration
Statement also covers such indeterminate additional shares of Common Stock
as may become issuable to prevent dilution resulting from stock splits,
stock dividends or similar events.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) based on the average of the high and low prices reported on
the Nasdaq SmallCap Market on February 12, 1999.
(3) The Registrant has previously paid a fee of $1,520 in respect of the
registration of 1,410,877 shares. Pursuant to Rule 457(a), the Registrant
is paying an additional fee of $5,486 based on the proposed maximum
aggregate offering price of the additional shares only.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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The information in this Prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This Prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Subject to Completion Dated February 18, 1999
QUEEN SAND RESOURCES, INC.
9,507,755 SHARES OF COMMON STOCK
This Prospectus relates to shares of Common Stock of Queen Sand Resources,
Inc., a Delaware corporation (the "Company"), to be sold from time to time by
the selling stockholders named in this Prospectus (the "Selling Stockholders").
The Company will not receive any of the proceeds from the sale of the shares of
Common Stock.
The Selling Stockholders may sell the shares of Common Stock covered by
this Prospectus through one or more underwriters. The Selling Stockholders may
also sell the shares of Common Stock directly to other purchasers or through
agents on the Nasdaq SmallCap Market in ordinary brokerage transactions, in
negotiated transactions or otherwise, at market prices prevailing at the time of
sales, at prices related to the then prevailing market price or at negotiated
prices. You should read this Prospectus and any supplement carefully before you
invest.
The Company's Common Stock is traded on the Nasdaq SmallCap Market under
the symbol "QSRI."
YOU SHOULD READ THE SECTION ENTITLED "RISK FACTORS" BEGINNING ON PAGE 4 FOR
A DISCUSSION OF CERTAIN FACTORS YOU SHOULD CONSIDER BEFORE BUYING THE COMPANY'S
COMMON STOCK.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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The date of this Prospectus is , 1999
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TABLE OF CONTENTS
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Page
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A Warning about Forward-looking Statements...............................................3
The Company..............................................................................4
Risk Factors.............................................................................4
Use of Proceeds.........................................................................17
Selling Stockholders....................................................................17
Description of Capital Stock............................................................20
Shares Eligible for Future Sale.........................................................32
Plan of Distribution....................................................................33
Legal Matters...........................................................................34
Engineers...............................................................................35
Independent Auditors....................................................................35
Additional Information..................................................................35
Incorporation by Reference..............................................................36
Disclosure of Commission Position on Indemnification for Securities Act Liabilities.....36
Certain Definitions.....................................................................38
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A WARNING ABOUT FORWARD-LOOKING STATEMENTS
We make forward-looking statements in this document, and in our public
documents to which we refer, that are subject to risks and uncertainties in
addition to those set forth below. These forward-looking statements include
information about possible or assumed future results of our operations. Also,
when we use any of the words "believes," "expects," "anticipates" or similar
expressions, we are making forward-looking statements. Many possible events or
factors could affect our future financial results and performance. This could
cause our results or performance to differ materially from those we express in
our forward-looking statements. You should consider these risks when you
purchase our Common Stock.
These possible events or facts include the following:
o the timing and extent of changes in commodity prices for oil and
natural gas;
o the need to acquire, develop and replace reserves;
o the Company's ability to obtain financing to fund its strategy;
o environmental risks;
o drilling and operating risks;
o risks related to exploitation and development;
o uncertainties about the estimates of reserves;
o competition;
o government regulation; and
o the Company's ability to meet its stated business goals.
Please read the section entitled "Risk Factors" beginning on page 4 for a
discussion of certain risks of our business and in investment in our Common
Stock.
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THE COMPANY
As used herein, the "Company" refers to Queen Sand Resources, Inc., a
Delaware corporation ("Queen Sand Resources"), and its subsidiaries unless the
context indicates otherwise. Certain industry terms used herein such as "SEC
PV-10" are defined in the section entitled "Certain Definitions" beginning on
page 38 of this Prospectus.
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 we have grown
primarily through 20 acquisitions of oil and natural gas properties for
aggregate consideration of approximately $160.0 million.
Our objective is to increase our reserves, production, earnings, cash flow
and net asset value by acquiring oil and natural gas reserves with stable
production and operating characteristics. To accomplish this objective, we not
only acquire oil and natural gas properties but also develop and exploit our
existing reserve base. We evaluate potential acquisition properties based on
their particular impact upon our portfolio of reserves. We focus on low reserve
replacement costs, long reserve life, an inventory of attractive development and
exploitation projects, and the potential for reserve and production growth. We
intend to fully develop these reserves by drilling primarily low-risk
development wells.
Our properties are located throughout 114 producing fields in the
southwestern United States. Our 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 our proved reserves (on a SEC PV-10
basis) at June 30, 1998. In addition, we have substantial operations in
Oklahoma, Kentucky and Louisiana.
The Company's principal executive offices and mailing address are 13760
Noel Road, Suite 1030, Dallas, Texas 75240-7336 and its telephone number at that
address is (972) 233-9906.
RISK FACTORS
Before you invest in our Common Stock, you should be aware that there are
various risks, including those described below.
SUBSTANTIAL LEVERAGE AND DEBT SERVICE OBLIGATIONS
We have a significant level of indebtedness. As of December 31, 1998, our
ratio of total indebtedness to total capitalization was 87% and our consolidated
total interest coverage ratio was 1.3:1:0. We intend to borrow more money in the
future to fund our acquisition and exploitation strategy. This relatively high
leverage could negatively affect our operations in a number of ways, including
the following:
o We rely on cash from our operations to pay the principal and interest
on our indebtedness. Our ability to generate cash from operations
depends on our level of production from our properties, general
economic conditions, including the prices paid for our oil and natural
gas, and other factors. Our operations may not generate enough cash to
pay the principal and interest on our indebtedness.
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o We must use a substantial portion of our cash flow from operations to
pay principal of and interest on our indebtedness, thereby reducing
funds available for other corporate purposes.
o Since our bank indebtedness (approximately $17.3 million at
February 15, 1999) is at variable or floating interest rates, if the
market rates rise, our indebtedness service obligations will become
more expensive.
o Our loan agreements contain covenants which require us to satisfy
ongoing financial tests and which limit our ability to among other
things, borrow additional money, pay dividends and sell assets.
o The level of our indebtedness could limit our flexibility in responding
to downturns in the economy or in our business.
Further, our high indebtedness level creates an increased risk that we may
default on our obligations. If we default, then the banks who lent us funds
could foreclose on our oil and natural gas properties securing their loans. In
the past, we have defaulted under certain financial covenants under the loans,
but the lenders have waived these defaults.
VOLATILITY OF OIL AND NATURAL GAS PRICES
Our financial condition, operating results and future growth are
substantially dependent upon commodity prices and the demand for oil and natural
gas. Historically, the markets for oil and natural gas have been volatile and
will likely continue to be volatile in the future. Prices for oil and natural
gas fluctuate widely in response to market uncertainty, changes in supply and
demand and a variety of additional factors, all of which are beyond our control.
These factors include:
o domestic and foreign political conditions;
o the overall supply of, and demand for, oil and natural gas;
o the price of imports of oil and natural gas;
o weather conditions;
o the price and availability of alternative fuels; and
o overall economic conditions.
Our future financial condition and results of operations will be dependent,
in part, upon the prices received for our oil and natural gas production, as
well as the costs of acquiring, finding, developing and producing reserves. We
have entered into and may in the future enter into hedging contracts to reduce
our exposure to price risks. See "-- Risks of Hedging Activities." Furthermore,
the prices we receive for the sale of our natural gas production depends in part
upon the availability, proximity and capacity of gathering systems. Our current
production is predominantly weighted toward natural gas, making earnings and
cash flow more sensitive to natural gas price fluctuations. For the fiscal year
ended June 30, 1998, we have estimated that a $0.10 per Mcf decline in natural
gas prices would have resulted in a $505,000 decrease in our earnings before
interest, taxes, depreciation and amortization ("EBITDA"), and a $1.00 per Bbl
decline in oil prices would have resulted in a $572,000 decrease in our EBITDA.
For the fiscal year ended June 30, 1998, we have estimated that a $0.10 per Mcf
increase in natural gas prices would have resulted in a $505,000 increase in our
EBITDA, and a $1.00 per Bbl increase in oil prices would have resulted in a
$931,000 increase in our EBITDA. Our ability to repay our outstanding
indebtedness, as well as our ability to maintain or increase our borrowing
capacity and to obtain additional capital on attractive terms, are also
substantially dependent upon oil and natural gas prices. See "-- Substantial
Capital Requirements."
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HISTORY OF LOSSES
Since commencing operations in 1995, we have not been profitable on an
annual or quarterly basis. We incurred net losses of approximately $32.8
million, $1.3 million and $1.1 million for the years ended June 30, 1998, June
30, 1997 and June 30, 1996, respectively, and approximately $40.0 million and
$1.4 million for the six months ended December 31, 1998 and December 31, 1997,
respectively. We expect operating losses and negative cash flows to continue for
the foreseeable future as we continue to incur significant operating expenses
and to make capital expenditures. We may not ever generate sufficient revenues
to achieve profitability. Even if we do achieve profitability, we may not
sustain or increase profitability on a quarterly or annual basis in the future.
At December 31, 1998, we had an accumulated deficit of approximately $18.0
million.
REPLACEMENT AND EXPANSION OF RESERVES
Our financial condition and results of operations depend substantially upon
our ability to acquire or find and successfully develop additional oil and
natural gas reserves. Our proved reserves will generally decline as reserves are
produced unless we acquire properties containing proved reserves or conduct
successful development, exploitation or exploration activities that add to our
reserves. The decline rate varies depending upon reservoir characteristics and
other factors. There can be no assurance that we will be able to economically
find and develop or acquire additional reserves to replace our current and
future production.
ACQUISITION RISKS
We expect to continue to evaluate and pursue acquisition opportunities,
primarily in the mid-continent and southwest regions of the United States.
Before acquiring oil and natural gas properties, we assess the recoverable
reserves, future oil and natural gas prices, operating costs, potential
environmental and other liabilities and other factors relating to the
properties. This assessment is necessarily inexact and its accuracy is
inherently uncertain. In connection with such an assessment, we believe our
method of review is generally consistent with industry practices. We may not
discover all existing or potential problems associated with the properties, and
we may not become sufficiently familiar with the properties to fully assess
their deficiencies and capabilities. We do not generally perform inspections on
every well, and we may not be able to observe structural and environmental
problems even when we conduct an inspection. Even if we identify problems, the
seller may not be willing or financially able to give contractual protection
against such problems, and we may decide to assume environmental and other
liabilities in connection with acquired properties. There can be no assurance
that our acquisitions will be successful. Any unsuccessful acquisition could
have a material adverse effect on our financial condition and results of
operations.
DRILLING AND OPERATING RISKS
Our 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:
o uncontrollable flows of oil, natural gas, brine or well fluids
(including fluids used in waterflood activities) into the environment
(including groundwater contamination);
o fires;
o explosions; and
o pollution,
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any of which could result in substantial losses. Drilling activities are subject
to many risks, including the risk that no commercially productive oil or natural
gas reservoirs will be encountered. There can be no assurance that new wells
drilled or participated in by us will be productive or that we will recover all
or any portion of our 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. We do not have control over the cost of
drilling, completing and operating wells. Our drilling operations may be
curtailed, delayed or canceled as a result of a variety of factors, many of
which are beyond our control, including:
o economic and industry conditions (including the prices received for oil
and natural gas);
o mechanical problems;
o pressure or irregularities in formations;
o title problems;
o weather conditions;
o compliance with governmental requirements; and
o shortages in or delays in the delivery of equipment and services.
Our future drilling activities may not be successful. Lack of drilling success
could materially adversely affect our financial condition and results of
operations.
In addition to the substantial risk that wells drilled will not be
productive, the following hazards are inherent in oil and natural gas
development, exploitation, exploration, production and gathering, including:
o unusual or unexpected geologic formations;
o unanticipated pressures;
o downhole fires;
o mechanical failures;
o blowouts;
o cratering;
o explosions;
o uncontrollable flows of oil, natural gas or well fluids;
o pollution; and
o other environmental risks.
We could suffer substantial losses from these hazards 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. We carry insurance that
we believe is in accordance with customary industry practices for companies of
our size. However, we do not fully insure against all risks associated with our
business either because such insurance is not available or because we believe
the cost thereof is prohibitive. The occurrence of an event that is not covered,
or not fully covered by insurance, could have a material adverse effect on our
financial condition and results of operations.
There are certain risks associated with secondary recovery operations,
especially the use of waterflooding techniques. 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
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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.
SUBSTANTIAL CAPITAL REQUIREMENTS
Our strategy of acquiring, developing and exploiting oil and natural gas
properties depends upon our ability to obtain financing for any such
expenditures. We expect to borrow a significant portion of the funds required
under our revolving credit facilities. These facilities limit the amounts we may
borrow thereunder to amounts, determined by the lenders in their sole
discretion, based upon projected net revenues from our oil and natural gas
properties and restricts the amounts we may borrow under other credit
facilities. As of the date of this Prospectus, the Bank of Montreal and the
other Lenders under our Credit Agreement are reviewing our borrowing base under
the Credit Agreement. There can be no assurance as to the amount at which the
borrowing base will be set or as to how much we may borrow under the Credit
Agreement in the future. We could, under certain circumstances, borrow under the
revolving credit agreement with Enron Capital & Trade Resources, Inc. (the "ECT
Revolving Credit Agreement") up to the lesser of $10.0 million or 40% of the
borrowing base established under the Credit Agreement. The lenders can
semi-annually adjust the borrowings permitted to be outstanding under these
credit facilities. The lenders require that we repay outstanding borrowings in
excess of the borrowing limit ratably over a period no longer than six months.
No assurances can be given that we will be able to make any such mandatory
principal payments required by the lenders.
Any future acquisition by us requiring financing in excess of the amount
then available under the revolving credit facilities will depend upon the
lenders' evaluations of the properties proposed to be acquired.
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 our control. Reservoir
engineering is a subjective process of estimating underground accumulations of
oil and natural gas that cannot be exactly measured. 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. Therefore, estimates of the economically recoverable quantities of
oil and natural gas attributable to any particular group of properties and
classifications of such reserves based on risk of recovery are a function of the
quality of available data and of engineering and geological interpretation and
judgment. Although we believe such estimates and projections are reasonable,
reserve estimates are imprecise and may be expected to change as additional
information becomes available. The estimated future net cash flows prepared by
different engineers or by the same engineers at different times may vary
substantially. There also can be no assurance that the Company's estimated
reserves 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 our reserves will likely vary from the
estimates, and such variances may be material.
In addition, the estimates of future net revenues from our proved reserves
and the present value thereof are based upon certain assumptions about future
production levels, prices and costs that may not be correct. We emphasize with
respect to the estimates prepared by independent petroleum engineers that SEC
PV-10 should not be considered as representative of the fair market value of our
proved oil and natural gas properties because 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
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meaningfulness of such estimates is highly dependent upon the reasonableness of
the assumptions upon which they are based. Actual future prices and costs may
differ materially from those estimated.
NATURE OF THE NET PROFITS INTERESTS AND ROYALTY INTERESTS
General. As a result of the acquisition of interests in oil and natural gas
properties from pension funds managed by J.P. Morgan Investments (the "Morgan
Property Acquisition"), a substantial portion of our oil and natural gas
property interests are in the form of non-operated, net profits interests
("NPIs") and royalty interests ("RIs" and, together with the NPIs, the "Morgan
Properties"). The NPIs were conveyed to us by various assignors from such
assignor's net revenue interest (generally, a leasehold working interest less
lease burdens) in the oil and natural gas properties burdened by the NPIs and
RIs (the "Underlying Properties"). These conveyances were designed to be
conveyances of interests in real property.
As the owner of NPIs, we do 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 one of the Underlying Properties, then the affected assignor must give
us notice of such proposal. Under the ancillary agreement covering the affected
Underlying Property, we will then have the option to pay the Applicable
Percentage (as defined in the ancillary agreement) of the assignor's working
interest share of the expenses of any well that is proposed. We would 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, we 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 in such
well elect not to participate in the well, the well will not be drilled unless
the money to pay the costs allocable to the working interest owners who do not
elect to participate in the well is obtained. 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 Underlying
Properties. Possible consequences of the NPIs being subject to the applicable
operating agreements include:
o 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
o 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.
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 our revenue stream from our NPI for unpaid bills arising from the
nonpayment by a bankrupt assignor.
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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 natural 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 oil or natural
gas in commercially paying quantities. We may not control the timing of plugging
and abandoning wells. The conveyances provide that the assignor's working
interest share of the costs of plugging and abandoning uneconomic wells will be
deducted in calculating our net cash flow from the property.
The assignor can sell the Underlying Properties, subject to and burdened by
the RIs, without our consent. Accordingly, 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 our title to our
royalty interest. We believe 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
overturned and a judgment is later entered against the pension funds managed by
J.P. Morgan Investments (or us 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 us and we
would convey our property interest in the J.C. Martin Field to the plaintiff.
Certain Bankruptcy Issues. Although the matter is not entirely free from
doubt, we believe that the Morgan Properties should constitute real property
interests under applicable state law. 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 the NPIs are determined to constitute real property interests, a
bankruptcy proceeding should not affect the NPIs in any material respect. If in
such a proceeding the NPI's are determined to 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) under applicable state law, and if such contract were not to be assumed
in a bankruptcy proceeding involving an assignor, we would be treated as an
unsecured creditor of such assignor with respect to such NPI in the pending
bankruptcy. As a result, our economic interest in any revenues generated by
production from the Underlying Property could be reduced or even eliminated.
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FINANCIAL REPORTING IMPACT OF FULL COST METHOD OF ACCOUNTING
We use the full cost method of accounting for our 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 such costs are incurred. As oil or
natural gas production takes place, the capitalized costs in the pool are
depleted using the unit-of-production method based on the ratio of current
production to total estimated proved oil and natural gas reserves. The resulting
depletion is charged to operations. To the extent that such capitalized costs
(net of accumulated depreciation, depletion and amortization) less deferred
taxes exceed the SEC PV-10 value 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. At June
30, 1998, we recorded a write-down of our oil and natural gas properties of
$28.2 million. Significant downward revisions of quantity estimates or declines
in oil and natural gas prices from those in effect on June 30, 1998 which are
not offset by other factors could result in further write-downs for impairment
of oil and natural gas properties. Due to the decline in prices of oil and
natural gas from June 30, 1998 to December 31, 1998, we wrote down our oil and
natural gas properties at December 31, 1998 by $35 million.
ADVERSE EFFECTS OF COMPETITION
The oil and natural gas market is highly competitive. Competition in this
market takes many forms, including:
o acquiring properties;
o marketing oil and natural gas;
o securing equipment and personnel; and
o operating properties.
Our competitors include major oil companies, numerous independent oil and
natural gas companies, individual proprietors and others. Many of our
competitors have greater financial resources than we have and have been engaged
in the energy business for a much longer time than we have. We may not be able
to compete successfully with such competitors. Competition could prevent us from
acquiring properties at affordable prices. 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 our financial or personnel resources will
permit.
GOVERNMENT LAWS AND REGULATIONS
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, state and local 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 our profitability. Because such rules and regulations are frequently
amended or reinterpreted, we are unable to predict the future cost or impact of
complying with such laws.
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<PAGE> 12
The Federal Energy Regulatory Commission ("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 that have significantly altered
the marketing and transportation of natural gas. It is difficult to predict the
ultimate impact of the orders on the Company. Generally, these orders have
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.
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.
Environmental Regulation
Our exploration, development and production of oil and natural gas,
including the 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. We are also subject to regulations
governing the handling, transportation, storage and disposal of naturally
occurring radioactive materials that are found in our 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 wildlife areas or species, and
impose substantial liabilities for cleanup of pollution.
Certain federal and 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 the federal statute
currently exempts petroleum, including but not limited to, crude oil, natural
gas and natural gas liquids from the definition of hazardous substance, our
operations may involve the use or handling of other materials that may be
classified as hazardous substances. Furthermore, there can be no assurance that
the exemption will be preserved in future amendments of the statute, if any.
Various statutes impose standards for the management, including treatment,
storage, and disposal of both hazardous and nonhazardous solid wastes. We
generate hazardous and nonhazardous solid waste in connection with our 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" 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 our 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 our properties by previous owners and
operators, materials from these operations remain on some of the properties and
in some instances require remediation. In addition, we have agreed to indemnify
some sellers of producing properties from whom we have acquired reserves against
certain
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<PAGE> 13
liabilities for environmental claims associated with such properties. While we
do not believe that costs to be incurred by us 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 our routine oil and natural gas operations,
surface spills and leaks, including casing leaks, of oil or other materials
occur, and we incur costs for waste handling and environmental compliance.
Moreover, we are able to control directly the operations of only those wells for
which we act as the operator. Notwithstanding our lack of control over wells
owned by us but operated by others, we may be responsible for, in certain
circumstances, the failure of the operator to comply with the applicable
environmental regulations.
We do not anticipate that we will be required in the near future to expend
amounts that are material in relation to our total capital expenditures program
by reason of environmental laws and regulations, but inasmuch as such laws and
regulations are frequently changed, we cannot 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 we will not otherwise
incur material expenses in connection with environmental laws and regulations in
the future.
RISKS OF HEDGING ACTIVITIES
In order to reduce our exposure to material fluctuations in the prices paid
for oil and natural gas, we have entered into and may in the future enter into
hedging contracts. While hedges can be structured in many different ways,
generally the hedges we enter into are intended to provide for "floors" (or
"caps" and "floors") on the prices paid for a set volume of production of oil or
natural gas over a set period of time. Our hedging contracts apply to only a
portion of our production and provide only limited price protection against
fluctuations in the oil and natural gas markets. If our reserves are not
produced at rates equivalent to the hedged position, we would be required to
satisfy our obligations under the hedging contracts on potentially unfavorable
terms without the ability to hedge that risk through sales of comparable
quantities of our own production. Further, the terms under which we enter 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
and the actual results experienced could materially adversely affect our
anticipated profit margins and our 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 we
enter into hedging contracts, we 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 our financial condition and results of
operations.
SIGNIFICANT NUMBER OF AUTHORIZED BUT UNISSUED SHARES
The Board of Directors has total discretion in the issuance of shares of
Common Stock and Preferred Stock which may be issued in the future. We are
authorized to issue 100,000,000 shares of Common Stock (32,147,708 shares were
issued and outstanding at February 17, 1999). We are also authorized to issue
50,000,000 shares of Preferred Stock (9,605,543 shares of preferred stock were
issued and outstanding at February 17, 1999).
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<PAGE> 14
POTENTIAL CONFLICTS OF INTEREST
We have been, and continue to be, involved in various transactions with one
of our significant stockholders, Joint Energy Development Investments Limited
Partnership ("JEDI"). As of December 31, 1998, JEDI, an affiliate of Enron
Corp., 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 2,748,649 shares of the Company's Common
Stock and 2,634,951 shares of Common 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 Corp.),
may have the ability to exercise significant influence over the management of
the Company. Enron Corp. 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, we entered into the ECT Revolving Credit Agreement with ECT, a
wholly-owned subsidiary of Enron Corp. We are also a party to certain commodity
hedging arrangements with a subsidiary of Enron Corp. In addition, Enron Corp.
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.
CONTROL BY CERTAIN STOCKHOLDERS
As of December 31, 1998, the current officers and directors of the Company
as a group had a beneficial interest in or hold a proxy for approximately 19.7%
of the undiluted voting power, and JEDI had a beneficial interest in
approximately 29.5% of the undiluted voting power, of the Company's voting
equity. Consequently, these stockholders, if they decide to act together, will
be able exercise significant control over the Company through their ability to
determine the outcome of votes of stockholders regarding, among other things,
election of directors and approval of significant transactions.
DILUTIVE ISSUANCES AND IMPACT OF SHARES ELIGIBLE FOR FUTURE SALE
The Company has issued shares of its Series C Preferred Stock and shares of
its Common Stock that have potentially dilutive "reset" rights. Holders of
Series C Preferred Stock have the right to convert their shares into shares of
Common Stock at a conversion price generally equal to the stated value of the
Series C Preferred Stock ($1,000 per share) divided by the average of the
closing bid prices for the Common Stock immediately preceding the conversion
date. Of the 10,400 shares of Series C Preferred Stock issued in December 1997,
as of January 15, 1999, 2,152 shares have been repurchased by the Company and
2,705 shares have been converted into 581,153 shares of Common Stock (including
accrued dividends at 5% per annum payable in shares of Common Stock).
Pursuant to two purchase agreements signed in July and November 1998, we
issued an aggregate of 3,845,240 shares of Common Stock. As part of those
issuances and in consideration for the original issuance price paid by the
investors, we agreed to protect the holders against declines in the price of
their Common Stock by granting them one repricing right for every share issued.
Each repricing right gives the holder a one-time right to require the Company to
issue additional shares without the payment of additional consideration by the
shareholders. Generally, subject to certain limitations, the number of
additional shares that will be issued when repricing rights are exercised by the
holder is determined by
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<PAGE> 15
multiplying the number of reset rights being exercised times the "repricing
rate." The repricing rate is determined by the following formula:
"repricing price" - market price
--------------------------------
market price
The repricing price is determined by multiplying the original purchase price of
the share by a premium that rises to 128% over time. The repricing rights expire
upon exercise. As long as the market price exceeds the repricing price, the
Company is not required to issue any additional shares. Since the date the
holders of the July transaction were first able to exercise their reset rights,
a total of 814,619 shares of Common Stock have been issued through the date of
this Prospectus upon exercise of such rights.
Because both the conversion provision of the Series C Preferred Stock and
the reset formula for the reset rights are based on the current bid price of the
Common Stock at the time of conversion or exercise, a significant number of
shares of Common Stock could be issued depending upon the market price of the
Common Stock.
Future sales by existing stockholders could adversely affect the prevailing
market price of the Common Stock. As of February 17, 1999, the Company had
32,147,708 shares of Common Stock outstanding. In addition,
o 9,600,000 shares of Common Stock are issuable upon conversion of our
Series A Participating Convertible Preferred Stock,
o 2,930,576 shares of Common Stock are issuable upon conversion of the
Series C Preferred Stock (assuming a conversion price of $2.00 per
share),
o 5,294,007 shares of Common Stock are issuable upon exercise of
outstanding warrants,
o 763,500 shares of Common Stock are issuable upon exercise of
outstanding stock options, and
o 8,164,341 shares could be issued upon exercise of the repricing rights
(assuming a market price of $2.00 per share).
FUTURE SALES OF COMMON STOCK
Of the issued and outstanding shares of Common Stock, 27,625,033 are freely
tradeable without restriction or further registration under the Securities Act
and the shares of Common Stock issuable upon (i) conversion of the Series C
Preferred Stock, (ii) certain of the warrants, (iii) the options and (iv) the
repricing rights will be eligible for resale in the public marketplace pursuant
to Registration Statements filed by the Company. The remaining issued and
outstanding shares of Common Stock (4,881,193 shares) are "restricted shares."
Of these, 2,643,693 shares are held by affiliates of the Company and 346,242
shares were issued in private transactions. Certain stockholders who hold
"restricted securities" have previously been granted registration rights
entitling them to demand, in certain circumstances, that the Company register
the shares of Common Stock held by them for sale under the Securities Act. Sales
of substantial amounts of Common Stock in the public market, pursuant to Rule
144 or otherwise, or the availability of such shares for sale, could adversely
affect the prevailing market price of the Common Stock and impair the Company's
ability to raise additional capital through the sale of equity securities. See
"Shares Eligible for Future Sale."
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<PAGE> 16
DEPENDENCE ON KEY PERSONNEL
We believe that our ability to successfully implement our business strategy
depends on the continued employment of 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, Asset Management and
Ronald Idom, Vice President, Acquisitions. If any of these persons becomes
unable or unwilling to continue in their present positions, our business and
financial results could be materially adversely affected. 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.
REPURCHASE OBLIGATIONS IN CONNECTION WITH PRIVATE EQUITY PLACEMENTS
In connection with two recent private equity placements, we granted to the
buyers the right to require us to repurchase such buyer's shares of Common Stock
and rights to acquire additional shares of Common Stock after the occurrence of
certain major transactions or triggering events, including, without limitation,
certain consolidations or mergers, the sale or transfer of all or substantially
all of our assets, a tender offer for more than 40% of the outstanding shares of
Common Stock, and certain defaults by us under our covenants to the buyers. In
addition, in connection with two private placements of our Preferred Stock, we
granted to the buyers the right to require us to repurchase such buyer's shares
of Preferred Stock after the occurrence of certain defaults and other events. We
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 Company's 12 1/2% Senior Notes due 2008 (the "Notes") before repurchasing
such shares and rights. If we could not obtain such consents, we would be in
default under our agreements with the buyers, and such default could trigger
cross defaults under the Credit Agreement, the ECT Revolving Credit Agreement or
the Indenture governing the Notes (the "Indenture"). In addition, if we fail to
repurchase the shares of Common Stock and repricing rights as required, we could
be liable to the buyers for damages. See "Description of Capital Stock-- Private
Equity Placements --Put Rights of Buyers."
EFFECT OF CHANGE OF CONTROL
The Indenture contains provisions that, under certain circumstances, will
cause the indebtedness to become due upon the occurrence of a change of control
(as defined in the Indenture) of the Company. If a change of control occurs, we
may not have the financial resources to repay this debt. These provisions could
also make it more difficult for a third party to acquire control of us.
PREFERRED STOCK; ANTI-TAKEOVER PROVISIONS
The Common Stock is subordinate to all outstanding classes of Preferred
Stock of the Company in the payment of dividends and other distributions made
with respect to the stock, including distributions upon liquidation or
dissolution of the Company. The Board of Directors of the Company is authorized
to issue up to 30,789,600 additional shares of Preferred Stock (excluding
9,605,543 shares currently outstanding and 9,600,000 reserved for issuance in
exchange for shares of Series A Participating Convertible Preferred Stock)
without first obtaining stockholder approval except in limited circumstances.
The Board of Directors may establish the preferences and rights of any new
shares of Preferred Stock issued. These new shares may have dividend and
liquidation preference over the Common Stock and may, if convertible into Common
Stock, dilute the current stockholders percentage interests.
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<PAGE> 17
Our Restated Certificate of Incorporation and Amended and Restated Bylaws
include certain provisions that may have the effect of discouraging persons
considering unsolicited tender offers or other unilateral takeover proposals.
These provisions include the Board of Directors' ability to issue additional
Common Stock and to issue, and determine the terms and provisions of, additional
Preferred Stock. The issuance of Preferred Stock may have the effect of delaying
or preventing someone taking control of us, even if a change of control were in
our stockholders' best interests. In certain circumstances the issuance of
Preferred Stock could depress the market price of the Common Stock.
USE OF PROCEEDS
We will not receive any proceeds from any sale of shares of Common Stock by
a Selling Stockholder (other than the exercise price payable upon the exercise
of any warrants issued to the Selling Stockholders (the "Warrants")). Assuming
the Warrants for the 100,000 shares of Common Stock (the resale of which shares
of covered by this Prospectus) are exercised through a cash exercise we would
receive an aggregate of up to $660,000 of proceeds. We anticipate that we will
use any such proceeds for general corporate purposes in the execution of our
business strategy.
SELLING STOCKHOLDERS
General. This Prospectus covers offers and sales from time to time by each
Selling Stockholder of the Common Stock owned by such person. Each Selling
Stockholder acquired their shares pursuant to one or more private placements of
equity by us: (i) a private placement of convertible preferred equity in
December 1997, (ii) a private placement of common equity in July 1998 and (iii)
a private placement of common equity in November 1998. Each of the Selling
Stockholders currently holds or has the right to acquire one or more of the
following: (i) shares of Common Stock, (ii) shares of Common Stock issuable upon
conversion of the Company's Series C Convertible Preferred Stock, par value
$0.01 per share (the "Series C Preferred Stock"), (iii) shares of Common Stock
issuable upon the exercise of certain repricing rights (the "Repricing Rights")
and (iv) shares of Common Stock issuable upon the exercise of Warrants. Pursuant
to Rule 416 of the Securities Act, the Selling Stockholders may also offer and
sell shares of Common Stock issued as a result of, among other events, stock
splits, stock dividends and similar events. We have prepared and filed the
Registration Statement of which this Prospectus is a part pursuant to
Registration Rights Agreements entered into in connection with each of the
private placements.
December 1997 Placement. On December 24, 1997, pursuant to a Securities
Purchase Agreement dated December 22, 1997, we issued to certain of the Selling
Stockholders an aggregate of 10,000 shares of Series C Preferred Stock and
warrants to purchase an aggregate of 340,138 shares of Common Stock in exchange
for aggregate cash consideration of $10,000,000 (the "December 1997 Placement").
Under the terms of the December 1997 Placement, the shares of Series C Preferred
Stock may be converted into shares of Common Stock (the "Conversion Shares").
Because the number of Conversion Shares issuable is determined in part upon the
market price of the Common Stock prior to conversion, the Registration Rights
Agreement entered into in connection with the December 1997 Placement required
us to initially register for resale 200% of the shares issuable upon conversion
of the Series C Preferred Stock and exercise of the Warrants. Pursuant to the
Registration Rights Agreement, we filed a Registration Statement on Form S-3
(No. 333-47577) registering 3,401,366 shares of Common Stock that could be sold
by the Selling Stockholders who purchased Series C Preferred Stock in the
December 1997 Placement. The 3,401,366 shares represented 200% of the Common
Stock issuable upon conversion of the Series C Preferred Stock and upon exercise
of the warrants at that time. This Registration Statement was declared effective
by the SEC.
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<PAGE> 18
The Registration Rights Agreement executed in connection with the December
1997 Placement requires us to file a new Registration Statement on Form S-3 to
register additional shares of Common Stock issuable to these Selling
Stockholders in the event that a decrease in the market price of the Common
Stock renders the number of shares of Common Stock previously registered
insufficient to cover the conversion of the Series C Preferred Stock and
exercises of the warrants. Assuming a conversion price of $2.00 per share of
Common Stock, the number of shares of Common Stock issued and issuable pursuant
to the December 1997 Placement will have increased, and the number of shares
registered under the Registration Statement on Form S-3 (No. 333-47577) would
not currently be sufficient to register all of the number of shares of Common
Stock as required under the Registration Rights Agreement. As a result, we are
registering an aggregate of 3,656,589 additional shares of Common Stock for
resale by these Selling Stockholders, which number represents the difference
between (x) the sum of the number of shares of Common Stock issued and 200% of
the shares issuable upon conversion of the Series C Preferred Stock at an
assumed conversion price of $2.00 per share and exercise of the Warrants and (y)
the number of shares previously registered for resale. If the actual price of
the Common Stock at the time of conversion of the Series C Preferred Stock were
to rise above $2.00 per share, the Company would issue less (and possibly
significantly less) than all of the shares being registered hereby.
July 1998 Placement. Pursuant to the Amended and Restated Securities
Purchase Agreement dated July 8, 1998 among the Company and the buyers named
therein (the "July Purchase Agreement"), the Company issued to certain of the
Selling Stockholders (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, (ii) certain repricing rights to acquire additional shares of
Common Stock and (iii) warrants to purchase an aggregate of up to 605,000 shares
of Common Stock (collectively, the "July 1998 Placement"). The aggregate gross
consideration for the issuances was $24 million. Under the terms of the July
Purchase Agreement, the Repricing Rights may be exercised for shares of Common
Stock (the "Repricing Shares"). Because the number of Repricing Shares issuable
is determined in part upon the market price of the Common Stock prior to the
determination of the repricing rate pursuant to the repricing rate mechanism,
the Registration Rights Agreement entered into in connection with the July 1998
Placement required us to initially register for resale shares of Common Stock
which represented the number of shares of Common Stock initially issued, the
number of shares of Common Stock issuable upon exercise of the warrants, and
150% of the shares issuable upon exercise of Repricing Rights (calculated based
on the then market price of the Common Stock). Pursuant to a Registration Rights
Agreement entered into in connection with the July Purchase Agreement, we filed
a Registration Statement on Form S-3 (No. 333- 61375) registering 9,656,438
shares of Common Stock to be sold by the Selling Stockholders who purchased
securities pursuant to the July Purchase Agreement. This Registration Statement
was declared effective by the SEC.
Based on an assumed price of $2.00 per share of Common Stock, the number of
shares of Common Stock issued and issuable pursuant to the July 1998 Placement
will have increased. As a result, we are registering additional shares of Common
Stock for resale by these Selling Stockholders, which number represents the
difference between (x) the sum of the number of shares of Common Stock issued
and the shares issuable upon exercise of the Repricing Rights at an assumed
stock price of $2.00 per share and the Warrants and (y) the number of shares
previously registered for resale. If the actual price of the Common Stock at the
time of exercise of the Repricing Rights were to rise above $2.00 per share, the
Company would likely issue less (and possibly significantly less) than all of
the shares being registered hereby.
November 1998 Placement. Pursuant to a Securities Purchase Agreement dated
November 10, 1998 among the Company and certain of the Selling Stockholders (the
"November Purchase Agreement"), we
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issued, to certain of the Selling Stockholders, an aggregate of 416,667 shares
of Common Stock, Repricing Rights to acquire additional shares of Common Stock
and Warrants to purchase an aggregate of 50,000 shares of Common Stock in
exchange for aggregate cash consideration of $2.5 million (the "November 1998
Placement"). Because the number of Repricing Shares issuable is determined in
part upon the market price of the Common Stock prior to the determination of the
repricing rate pursuant to the repricing rate mechanism, the Registration Rights
Agreement entered into in connection with the November 1998 Placement requires
us to register for resale at least an aggregate of 1,350,000 shares of Common
Stock (which represents the sum of the number of shares of Common Stock issued,
the number of shares of Common Stock issuable upon exercise of the warrants and
200% of the shares issuable upon exercise of Repricing Rights).
In connection with the November 1998 Placement, we paid $187,500 cash and
issued warrants to purchase 50,000 shares of the Company's Common Stock in
consideration for Jesup & Lamont Securities Corp. acting as a placement agent
and Wellington Capital Corporation acting as a consultant in connection with the
private equity placement to certain of the Selling Stockholders. The resale of
the shares issuable upon the exercise of these warrants are also covered by this
Prospectus. In addition, we also issued rights to acquire an aggregate of 60,876
shares of Common Stock to certain of the Selling Stockholders to obtain their
participation. These rights were exercised immediately after they were granted.
The resale of the shares described in this paragraph are also covered by this
Prospectus.
Selling Stockholders Table. The following table lists the name of each
Selling Stockholder, the number of shares of Common Stock owned by each Selling
Stockholder before this offering (the "Offering"), the number of shares of
Common Stock that may be offered by each Selling Stockholder pursuant to this
Prospectus and the number of shares of Common Stock to be owned by each Selling
Stockholder upon completion of the Offering if all shares registered for resale
hereby are sold. None of the Selling Stockholders has held any position or
office or had any other material relationship with us in the last three years,
other than in connection with the Company's private placement of equity in July
1998. See "Description of Capital Stock - Private Equity Placements." The
information below is as of December 31, 1998 and has been furnished by the
respective Selling Stockholders.
<TABLE>
<CAPTION>
NUMBER OF SHARES
NUMBER OF SHARES BEING REGISTERED FOR NUMBER OF SHARES
NAME OF OWNED BEFORE THIS RESALE OWNED AFTER THIS
SELLING STOCKHOLDER OFFERING OFFERING(1)
- ------------------------------------------ ----------------- -------------------- ----------------
<S> <C> <C> <C>
Dominion Capital Fund Ltd................. 1,610,274(2) 1,236,403(3)(4) 373,871
Sovereign Partners L.P.................... 3,403,087(5) 2,042,914(3)(4) 1,360,173
JNC Opportunity Fund Ltd.................. 5,127,728(6) 1,625,800(3)(4) 3,501,928
Diversified Strategies Fund, L.P.......... 123,317(7) 27,417(4) 95,900
KA Investments LDC........................ 1,936,012(8) 701,488(3)(4) 1,214,524
Advantage (Bermuda) Fund Ltd.............. 330,002(9) 141,429(4) 188,573
Metro International Mortgage Company Ltd. 987,392(10) 28,715(11) 958,677
Jesup & Lamont Securities Corp............ 220,000(12) 20,000(13) 200,000
Wellington Capital Corporation............ 163,334(12) 30,000(13) 133,334
Montrose Investments L.P.................. 1,116,265(14) 652,411(15) 463,854
Marshall Capital Management, Inc.......... 3,576,884(16) 2,534,576(15) 1,042,308
Westover Investments L.P.................. 779,862(17) 466,602(15) 313,260
------------ ----------- ------------
TOTAL............................ 19,374,157 9,507,755 9,846,402
</TABLE>
- ----------------
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<PAGE> 20
(1) Assumes all shares registered under this Registration Statement will be
offered and sold. The shares owned after this Offering include the
shares acquired by the Selling Stockholders under the July Purchase
Agreement, which shares were registered for resale under the Company's
Registration Statement on Form S-3 (No. 333-61375), or shares acquired
in the December 1997 Placement, which shares were registered for resale
under the Company's Registration Statement on Form S-3 (No. 333-47577).
(2) Represents (i) 147,749 shares currently held by such holder, (ii) 75,000
shares currently issuable to such holder upon exercise of warrants to
purchase shares of the Company's Common Stock, (iii) 720,858 shares
issuable to such holder upon exercise of the repricing rights under the
July Purchase Agreement (computed assuming a market price of $2.00), and
(iv) 666,667 shares issuable to such holder upon exercise of the
Repricing Rights granted under the November Purchase Agreement (computed
assuming a market price of $2.00).
(3) Includes (i) the shares of Common Stock issued pursuant to or in
connection with the November Purchase Agreement, (ii) the shares
currently issuable upon exercise of the warrants issued under the
November Purchase Agreement and (iii) shares issuable to such holder
upon exercise of the Repricing Rights granted under the November
Purchase Agreement (computed assuming a market price of $2.00 but
without regard to the covenants in the November Purchase Agreement
limiting the number of shares of Common Stock an individual holder may
beneficially own).
(4) Includes additional shares to be registered pursuant to the Registration
Rights Agreement entered into in connection with the July 1998 Placement
at an assumed market price of $2.00 per share: (i) Dominion Capital Fund
Ltd.-324,916 shares; (ii) Sovereign Partners L.P.-1,131,429 shares;
(iii) JNC Opportunity Fund Ltd.-1,625,800 shares; (iv) Diversified
Strategies Fund, L.P.-27,417 shares; (v) KA Investments LDC-692,299
shares; and (vi) Advantage (Bermuda) Fund Ltd.-141,429.
(5) Represents (i) 642,848 shares currently held by such holder, (ii)
105,000 shares currently issuable to such holder upon exercise of
warrants to purchase shares of the Company's Common Stock, (iii)
1,988,573 shares issuable to such holder upon exercise of the repricing
rights under the July Purchase Agreement (computed assuming a market
price of $2.00), and (iv) 666,666 shares issuable to such holder upon
exercise of the Repricing Rights granted under the November Purchase
Agreement (computed assuming a market price of $2.00).
(6) Represents (i) 1,085,616 shares currently held by such holder, (ii)
364,500 shares currently issuable to such holder upon exercise of
warrants to purchase shares of the Company's Common Stock and (iii)
3,677,612 shares issuable to such holder upon exercise of the repricing
rights under the July Purchase Agreement (computed assuming a market
price of $2.00).
(7) Represents (i) 25,817 shares currently held by such holder, (ii) 10,500
shares currently issuable to such holder upon exercise of warrants to
purchase shares of the Company's Common Stock and (iii) 87,000 shares
issuable to such holder upon exercise of the repricing rights under the
July Purchase Agreement (computed assuming a market price of $2.00).
(8) Represents (i) 414,286 shares currently held by such holder, (ii) 80,000
shares currently issuable to such holder upon exercise of warrants to
purchase shares of the Company's Common Stock and (iii) 1,441,726 shares
issuable to such holder upon exercise of the repricing rights under the
July Purchase Agreement (computed assuming a market price of $2.00).
(9) Represents (i) 71,429 shares currently held by such holder, (ii) 10,000
shares currently issuable to such holder upon exercise of warrants to
purchase shares of the Company's Common Stock and (iii) 248,573 shares
issuable to such holder upon exercise of the Repricing Rights granted
under the July Purchase Agreement (computed assuming a market price of
$2.00).
(10) Represents shares currently held by such holder.
(11) Metro International Mortgage Company Ltd. acquired these shares from JNC
Opportunity Fund Ltd. and Diversified Strategies Fund L.P., each of whom
acquired the shares from the Company in connection with the November
1998 Placement.
(12) Represents shares issuable upon exercise of warrants issued in
connection with the July 1998 Placement and the November 1998 Placement.
(13) Represents shares issuable upon exercise of warrants issued in
connection with the November 1998 Placement.
(14) Represents (i) 87,013 shares of Common Stock that are currently held by
the holder and (ii) 1,029,252 shares of Common Stock issuable upon
exercise of Warrants held by the holder and upon conversion of shares of
Series C Preferred Stock held by such holder (200% of the shares
issuable assuming a conversion price of $2.00).
(15) Represents additional shares to be registered pursuant to the
Registration Rights Agreement entered into in connection with the
December 1997 Placement at an assumed price of $2.00 per share.
(16) Represents (i) 67,658 shares of Common Stock that are currently held by
the holder and (ii) 3,509,226 shares of Common Stock issuable upon
exercise of Warrants held by the holder and upon conversion of shares of
Series C Preferred Stock held by such holder (200% of the shares
issuable assuming a conversion price of $2.00).
(17) Represents (i) 56,685 shares of Common Stock that are currently held by
the holder and (ii) 723,177 shares of Common Stock issuable upon
exercise of Warrants held by the holder and upon conversion of shares of
Series C Preferred Stock held by such holder (200% of the shares
issuable assuming a conversion price of $2.00).
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DESCRIPTION OF CAPITAL STOCK
Our authorized capital consists of 100,000,000 shares of Common Stock and
50,000,000 shares of Preferred Stock. At February 17, 1999, we had (i)
32,147,708 shares of Common Stock outstanding, (ii) 9,600,000 shares of Series A
Participating Convertible Preferred Stock (the "Series A Preferred Stock")
outstanding, (iii) no shares of Series B Participating Convertible Preferred
Stock (the "Series B Preferred Stock") issued or outstanding and (iv) 5,543
shares of Series C Convertible Preferred Stock (the "Series C Preferred Stock")
outstanding.
COMMON STOCK
The holders of shares of Common Stock possess full voting power for the
election of directors and for all other purposes, each holder of Common Stock
being entitled to one vote for each share of Common Stock held of record by such
holder. The shares of Common Stock do not have cumulative voting rights.
As described below, the holders of Series A Preferred Stock are generally
entitled to vote (on an as-converted basis) as a single class with the holders
of the Common Stock, together with all other classes and series of stock of the
Company that are entitled to vote as a single class with the Common Stock, on
all matters coming before the Company's stockholders. Holders of a majority of
the shares of Common Stock and Series A Preferred Stock represented at a meeting
may approve most actions submitted to the stockholders except for certain
corporate actions (e.g. mergers, sale of assets and charter amendments) which
require the approval of holders of a majority of the total outstanding shares of
Common Stock and the Series A Preferred Stock or other matters that require a
class vote of the Preferred Stock.
Subject to the right of holders of any outstanding shares of Preferred
Stock, dividends may be paid on the Common Stock as and when declared by the
Company's Board of Directors out of any funds of the Company legally available
for the payment thereof. Holders of Common Stock have no subscription,
redemption, sinking fund, conversion or preemptive rights. The outstanding
shares of Common Stock are fully paid and nonassessable. After payment is made
in full to the holders of any outstanding shares of Preferred Stock in the event
of any liquidation, dissolution or winding up of the affairs of the Company, the
remaining assets and funds of the Company will be distributed to the holders of
Common Stock according to their respective shares.
PREFERRED STOCK
General
The Board of Directors may, without further action by the Company's
stockholders (subject to the terms of the Series A Preferred Stock and the
Series C Preferred Stock described below), from time to time, direct the
issuance of fully authorized shares of Preferred Stock, in classes or series and
may, at the time of issuance, determine the powers, rights, preferences and
limitations of each class or series. Satisfaction of any dividend preferences on
outstanding shares of Preferred Stock would reduce the amount of funds available
for the payment of dividends on Common Stock. Also, holders of Preferred Stock
would be entitled to receive a preference payment in the event of any
liquidation, dissolution or winding up of the Company before any payment is made
to the holders of Common Stock. Under certain circumstances, the issuance of
such Preferred Stock may render more difficult 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.
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Description of Series A Preferred Stock
General. The Certificate of Designation of the Series A Preferred Stock
authorizes the issuance of up to 9,600,000 shares of Series A Preferred Stock.
Voting. The holders of shares of Series A Preferred Stock are generally
entitled to vote (on an as-converted basis) 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, the
sole holder 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 Corp. or any of its affiliates), the shares of Series A
Preferred Stock so transferred will automatically convert into a like number of
shares of Series B Preferred Stock.
Dividends. The holders of the shares of Series A Preferred Stock are
entitled to receive dividends, when, and as if declared by the Board of
Directors, out of funds legally available therefor, any dividend
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<PAGE> 23
(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) $0.521 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.
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.
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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;
(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
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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. 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 994,986 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 1,489,500 shares if all outstanding shares of Series C Preferred Stock
were converted). If the Company fails to deliver shares of Common Stock to a
holder following a conversion in accordance with the Series C Certificate of
Designation, then the Company will be liable to the holder for certain cash
default payments set forth in the Series C Certificate of Designation.
On December 24, 2001, all shares of Series C Preferred Stock that are then
outstanding shall be automatically converted into the number of shares of Common
Stock determined in accordance with the formula set forth in the Series C
Certificate of Designation.
The Series C Certificate of Designation provides for customary adjustments
to the number of shares issuable upon conversion in the event of certain
dividends and distributions to holders of Common Stock, certain
reclassifications of the Common Stock, stock splits, combinations and mergers
and similar transactions and certain changes of control.
Dividends. The holders of the shares of Series C Preferred Stock are
entitled to receive dividends, when, and as if declared by the Board of
Directors, out of funds legally available therefor, subject to the prior payment
of any accumulated and unpaid dividends to holders of Senior Securities, but
before payment of dividends to holders of Junior Securities (as defined in the
Series C Certificate of Designation), cumulative dividends on each 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.
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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%.
PRIVATE EQUITY PLACEMENTS
General. The Company recently completed two private equity placements. In
the first placement, pursuant to the July Purchase Agreement, the Company issued
to the buyers (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, (ii) certain repricing rights to acquire additional shares of Common
Stock and (iii) warrants to purchase an aggregate of up to 605,000 shares of
Common Stock. 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 Stock issued or issuable pursuant
to the terms of a Registration Rights Agreement dated as of July 8, 1998.
In addition, pursuant to the November Purchase Agreement, on November 24,
1998, the Company issued to the buyers (i) 416,667 shares of Common Stock, (ii)
certain repricing rights to acquire additional shares of Common Stock and (iii)
warrants to purchase 50,000 shares of Common Stock. The Company also agreed to
register for resale the Common Stock issued or issuable pursuant to a
Registration Rights Agreement dated November 10, 1998.
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Set forth below is a description of the terms of the repricing rights as
well as certain other provisions contained in both the July Purchase Agreement
and the November Purchase Agreement. Initially capitalized terms used but not
defined in this section "Private Equity Placements" have the meanings ascribed
to such terms in the July Purchase Agreement and the November Purchase Agreement
filed as Exhibits to this Registration Statement on Form S-3.
Repricing Rights. Pursuant to the July Purchase Agreement and the November
Purchase Agreement, the Company granted certain Repricing Rights to the Buyers,
pursuant to which each of the Buyers (or their permitted assignees or
successors) may exercise its Repricing Rights and acquire shares of Common Stock
in accordance with the following formula (the "Repricing Rate"):
(Repricing Price -- Market Price)
---------------------------------
Market Price
The "Repricing Price" means, (i) during the period beginning on and
including the date which is 121 days after the Closing Date and ending on and
including the date which is 150 days after the Closing Date, 124% of the
Purchase Price, (ii) during the period beginning on and including the date which
is 151 days after the Closing Date and ending on and including the date which is
180 days after the Closing Date, 125% of the Purchase Price, (iii) during the
period beginning on and including the date which is 181 days after the Closing
Date and ending on and including the date which is 210 days after the Closing
Date, 126% of the Purchase Price, (iv) during the period beginning on and
including the date which is 211 days after the Closing Date and ending on and
including the date which is 240 days after the Closing Date, 127% of the
Purchase Price and (v) after the date which is 240 days after the Closing Date,
128% of the Purchase Price.
The "Market Price" means, as of any date of determination, the lowest
closing bid price during the fifteen consecutive trading days immediately
preceding such date of determination.
The Repricing Rate is multiplied by the number of Common Shares the Buyer
has chosen to reprice in order to determine the number of shares to be issued to
the Buyer.
If the Company fails to issue a stock certificate for the number of shares
of Common Stock to which the holder is entitled or to credit the holder's
balance account with The Depository Trust Company for such number of shares of
Common Stock to which the holder is entitled upon such holder's exercise of the
Repricing Rights within three trading days after the Company's or the transfer
agent's receipt of the exercise notice, the Company shall pay damages to such
holder on each day after the third trading day that such exercise is not
effected. The amount of damages shall equal 0.5% of the product of (i) the sum
of the number of shares of Common Stock not issued to the holder on a timely
basis and (ii) the closing bid price of the Common Stock on the last possible
date which the Company could have issued such Common Stock without violating its
delivery requirements. In addition, if the Buyer to whom the Company has failed
to timely deliver the shares is forced to purchase other outstanding shares of
Common Stock of the Company in order to cover a sale order by such Buyer (a
"Buy-In"), then the Company will be required to pay to such Buyer the positive
difference between the price at which the Buyer bought its covering shares and
the sale price in respect of the shares sold by it.
The right of a holder of Repricing Rights to exercise such Repricing Rights
is limited as set forth below.
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(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 the Closing Date and ending on
and including the 120th day thereafter, (B) 0.25 for the period beginning
on the 121st day after the Closing Date and ending on and including the
150th day after the Closing Date, (C) 0.50 for the period beginning on and
including the 151st day after the Closing Date and ending on and including
the 180th day after the Closing Date, (D) 0.75 for the period beginning on
the 181st day after the Closing Date and ending on and including the 210th
day after the Closing Date, and (E) 1.00 for the period beginning on and
including the 211th day after the Closing Date. 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 the Closing Date.
(ii) As more fully described in the July Purchase Agreement and the
November 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 to the exercise restrictions, a Buyer's right to exercise its
Repricing Right terminates automatically on the earlier to occur 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 July Purchase Agreement and the
November 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.
Pursuant to the July Purchase Agreement and the November Purchase
Agreement, 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) 124% 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.
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Put Rights of Buyers. Pursuant to the July Purchase Agreement and the November
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 Securities
and Exchange Commission (the "SEC") on or prior to the 210th day after the
Closing Date;
(ii) during the Effectiveness Period 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;
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(v) the Company fails to deliver shares of Common Stock pursuant to the
exercise of Repricing Rights within ten days of an exercise date or to pay
the amount due in respect of a Buy-In within ten days after notice of such
Buy-In is delivered to the Company;
(vi) the Company is not required to issue any Repricing Common Shares
pursuant to the exercise of Repricing Rights due to certain restrictions
imposed under the rules and regulations of The Nasdaq Stock Market or the
Company is otherwise unable to issue shares of Common Stock upon delivery
of an exercise notice for any reason;
(vii) if stockholder approval of the issuance of the securities is
required, the Company's stockholders fail to approve the issuance of the
shares of Common Stock upon the exercise of Repricing Rights within 135
days of a Proxy Statement Trigger Date;
(viii) the Company breaches any representation, warranty, covenant or
other material term or condition of the July Purchase Agreement or the
November Purchase Agreement, as the case may be, 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
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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 Agreements. Each of the July Purchase Agreement and
the November Purchase Agreement contains customary representations and
warranties of the Company for transactions of this type.
Pursuant to the July Purchase Agreement, the Company has agreed, among
other things, to abide by certain limitations on the Company's ability to raise
equity (the "Capital Raising Limitation"). The Capital Raising Limitation
prohibits the Company and its subsidiaries from negotiating with any party for
any equity financing or issue any equity securities of the Company or any
subsidiary or securities convertible or exchangeable into or for equity
securities of the Company or any subsidiary during the period beginning on July
8, 1998 and ending on and including the 365th day after the Closing Date unless
it first delivers a written notice of the future offering to each Buyer and
provides each Buyer an option to purchase up to its pro rata portion of the
shares to be offered in the future offering.
Also, under the November Purchase Agreement, if the Company would be, if
all Repricing Rights were exercised on such date required by the rules by the
Nasdaq Stock Market, Inc. to obtain the approval of the stockholders of the
Company to issue the Repricing Shares upon such exercise, then the Company must
within 15 days file proxy materials with the SEC relating to such stockholder
approval and use its best efforts to obtain as soon as possible, and in any
event within 75 days, such stockholder approval. If the Company fails to obtain
the approval of the stockholders as described in this paragraph, 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 the stockholder approval is not obtained, divided by (y) 30.
Warrants. Pursuant to the July Purchase Agreement, on July 8, 1998 the
Company issued the warrants to purchase an aggregate of up to 605,000 shares of
Common Stock to the Buyers. The warrants are exercisable for three years
commencing July 8, 1998 at an exercise price equal to 110% of the Purchase
Price. The 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 warrants also include customary provisions with respect to, among
other things, transfer of the Warrants, mutilated or lost warrant certificates,
and notices to holder(s) of the warrants. The Company also issued warrants to
purchase up to 480,000 shares of Common Stock to the placement agents in
connection with the July Purchase Agreement.
Pursuant to the November Purchase Agreement, as of November 10, 1998 the
Company issued the warrants to purchase an aggregate of up to 50,000 shares of
Common Stock to the Buyers. The warrants are exercisable for three years
commencing November 10, 1998 at an exercise price equal to 110% of the Purchase
Price. The 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 warrants also include customary provisions with respect to, among
other things, transfer of the Warrants, mutilated or lost warrant certificates,
and notices to holder(s) of the warrants. The Company also issued warrants to
purchase up to 50,000 shares of Common Stock to the placement agents in
connection with the November Purchase Agreement.
Registration Rights Agreement. At the time of sale none of the securities
issued or issuable under the July Purchase Agreement or the November Purchase
Agreement will be registered under the Securities Act
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and therefore, will be, when issued, "restricted securities." In connection with
each of the July Purchase Agreement and the November Purchase Agreement, 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").
The Company has filed a Registration Statement on Form S-3 with the SEC in
connection with the July Purchase Agreement, and the SEC declared the
Registration Statement effective September 22, 1998.
Pursuant to the Registration Rights Agreement in connection with the
November Purchase Agreement, the Company agreed to file a registration statement
on Form S-3 on or before January 23, 1999, 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) April 8, 1999
and (ii) the fifth business day after the Company learns that the SEC will not
review the registration statement or that the SEC 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.
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., Philip Louis Trading Co., Inc., Wellington Capital
Corporation and James Cahill acting as the placement agents in connection with
the placement under the July Purchase Agreement. The Company paid $187,500 cash
and issued warrants to purchase 50,000 shares of the Company's Common Stock in
consideration for Jesup & Lamont Securities Corp. and Wellington Capital
Corporation acting as the placement agents in connection with the placement
under the November Purchase Agreement.
Additional Rights to Purchase Common Stock. In November 1998, the Company
granted to certain investors the right to an aggregate of 60,876 shares of
Common Stock to obtain their participation. All of such rights were exercised
immediately after being granted.
WARRANTS
As of December 31, 1998, JEDI held warrants to purchase an aggregate of
2,748,649 shares of Common Stock at prices ranging from $3.54 to $7.00. The
warrants held by JEDI expire at various times from March 9, 1999 through
December 28, 1999. As of December 31, 1998, certain institutional investors hold
warrants to purchase an aggregate of 2,545,358 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 March 9, 1999 through December 24, 2001.
EXCHANGE RIGHTS
The ECT Revolving Credit Agreement provides that, commencing January 1999,
during certain periods, any indebtedness of Queen Sand Resources, Inc., a Nevada
corporation ("QSRn"), may be
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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.
SHARES ELIGIBLE FOR FUTURE SALE
As of February 17, 1999, the Company had outstanding 32,147,708 shares of
Common Stock. In addition, 9,600,000 shares will be issuable upon conversion of
the Series A Participating Convertible Preferred Stock, 2,930,576 shares will be
issuable upon conversion of the Series C Preferred Stock (assuming a conversion
price of $2.00 per share), 5,294,007 shares will be issuable upon exercise of
outstanding warrants and 763,500 shares will be issuable upon exercise of
outstanding stock options. Also, 8,164,341 shares could be issued upon exercise
of the reset rights (assuming a market price of $2.00 per share). Of the issued
and outstanding shares of Common Stock, 27,625,033 shares are freely tradable
without restriction or further registration under the Securities Act and the
shares of Common Stock issuable upon (i) conversion of the Series C Preferred
Stock, (ii) certain of the warrants, (iii) the options and (iv) the repricing
rights will be eligible for resale in the public marketplace pursuant to
Registration Statements filed by the Company. All of the remaining 4,881,193
shares of Common Stock held by existing stockholders will be "restricted"
securities within the meaning of the Securities Act as a result of the issuance
thereof in private transactions not involving a public offering. The
"restricted" securities may not be resold unless they are registered under the
Securities Act or are sold pursuant to an available exemption from registration,
including Rule 144 under the Securities Act. Certain stockholders, including
holders of "restricted" securities, have been granted certain rights with
respect to registration under the Securities Act of shares of Common Stock held
by them.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least one
year (including the holding period of any prior owner except an "affiliate" (as
that term is defined in Rule 144)) is entitled to sell, within any three-month
period, a number of those shares that does not exceed the greater of (i) 1% of
the then outstanding shares of the Common Stock (321,477 shares immediately
after this Offering) or (ii) the average weekly trading volume in the Common
Stock during the four calendar weeks preceding the date on which notice of the
sale is filed with the SEC. Sales under Rule 144 are also subject to certain
manner of sale provisions, notice requirements and requirements as to the
availability of current public information concerning the Company. Rule 144
provides that a person (or persons whose shares are aggregated) who is not
deemed to have been an affiliate of the Company at any time during the 90 days
preceding a sale, and who has beneficially owned shares for at least two years
(including, in certain circumstances, the holding period of any prior owner) is
entitled to sell those shares under Rule 144(k) without regard to the
limitations described above.
The Company can make no prediction as to the effect, if any, that sales of
shares or the availability of shares for sale will have on the market price for
the Common Stock prevailing from time to time. Nevertheless, sales of
substantial amounts of Common Stock in the public market could adversely affect
prevailing market prices. See "Risk Factors - Impact of Shares Eligible for
Future Sale."
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PLAN OF DISTRIBUTION
The Selling Stockholders, their pledgees, donees, transferees or other
successors-in-interest, may, from time to time, sell all or a portion of the
shares of Common Stock being registered hereunder in privately negotiated
transactions or otherwise, at fixed prices that may be changed, at market prices
prevailing at the time of sale, at prices related to such market prices or at
negotiated prices. The shares of Common Stock may be sold by the Selling
Stockholders by one or more of the following methods, without limitation:
(a) block trades in which the broker or dealer so engaged will attempt
to sell the shares of Common Stock as agent but may position and resell a
portion of the block as principal to facilitate the transaction;
(b) purchases by a broker or dealer as principal and resale by such
broker or dealer for its account pursuant to this Prospectus;
(c) an exchange distribution in accordance with the rules of the
applicable exchange;
(d) ordinary brokerage transactions and transactions in which the
broker solicits purchasers;
(e) privately negotiated transactions;
(f) short sales;
(g) a combination of any such methods of sale; and
(h) any other method permitted pursuant to applicable law.
From time to time the Selling Stockholders may engage in short sales, short
sales against the box, puts and calls and other transactions in securities of
the Company or derivatives thereof, and may sell and deliver the shares of
Common Stock in connection therewith or in settlement of securities loans. If
the Selling Stockholders engage in such transactions, the applicable conversion
price may be affected. From time to time the Selling Stockholders may pledge
their shares of Common Stock pursuant to the margin provisions of its customer
agreements with its brokers. Upon a default by the Selling Stockholders, the
broker may offer and sell the pledged shares of Common Stock from time to time.
In effecting sales, brokers and dealers engaged by the Selling Stockholders
may arrange for other brokers or dealers to participate in such sales. Brokers
or dealers may receive commissions or discounts from the Selling Stockholders
(or, if any such broker-dealer acts as agent for the purchaser of such shares,
from such purchaser) in amounts to be negotiated which are not expected to
exceed those customary in the types of transactions involved. Broker-dealers may
agree with the Selling Stockholders to sell a specified number of such shares of
Common Stock at a stipulated price per share, and, to the extent such
broker-dealer is unable to do so acting as agent for a Selling Stockholder, to
purchase as principal any unsold shares of Common Stock at the price required to
fulfill the broker-dealer commitment to the Selling Stockholders. Broker-dealers
who acquire shares of Common Stock as principal may thereafter resell such
shares of Common Stock from time to time in transactions (which may involve
block transactions and sales to and through other broker-dealers, including
transactions of the nature described above) in the over-the-counter market or
otherwise at prices and on terms then prevailing at the time of sale, at prices
then related to the then-current market price or in negotiated transactions and,
in connection with such resales, may pay to or receive from the purchasers of
such Shares commissions as described above. The Selling
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Stockholders may also sell the shares of Common Stock in accordance with Rule
144 under the Securities Act, rather than pursuant to this Prospectus.
The Selling Stockholders and any broker-dealers or agents that participate
with the Selling Stockholders in sales of the shares of Common Stock may be
deemed to be "underwriters" within the meaning of the Securities Act in
connection with such sales. In such event, any commissions received by such
broker-dealers or agents and any profit on the resale of the shares of Common
Stock purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act.
The Company is required to pay all fees and expenses incident to the
registration of the shares of Common Stock, including fees and disbursements of
one counsel (not to exceed $7,500) to the Selling Stockholders. The Company has
agreed to indemnify the Selling Stockholders against certain losses, claims,
damages and liabilities, including liabilities under the Securities Act.
In order to comply with certain states' securities laws, if applicable, the
shares of Common Stock will be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
Common Stock may not be sold unless the Common Stock has been registered or
qualified for sale in such state or an exemption from registration or
qualification is available and is satisfied.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby have been passed
upon for the Company by its counsel, Haynes and Boone, LLP, Dallas, Texas.
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 June 30, 1998
(other than with respect to the Morgan Properties) incorporated in this
Prospectus by reference to the Company's Annual Report on Form 10-KSB for the
year ended June 30, 1998 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, 1996
incorporated in this Prospectus by reference to the Company's Annual Report on
Form 10-KSB for the year ended June 30, 1998 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, 1998 with
respect to the Morgan Properties incorporated in this Prospectus by reference to
the Company's Annual Report on Form 10-KSB for the year ended June 30, 1998 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.
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INDEPENDENT AUDITORS
The consolidated financial statements of the Company appearing in the
Company's Annual Report (Form 10-KSB) for the year ended June 30, 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
consolidated financial statements have been incorporated herein by reference in
reliance upon such report 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 natural 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 filed 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 have been incorporated herein by reference in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
ADDITIONAL INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. Our SEC filings are available to the public over the
Internet at the SEC's web site at http://www.sec.gov. You may also read and copy
any document we file at the SEC's public reference rooms at 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the SEC'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. Please call the SEC at 1(800)
SEC-0330 for further information on the public reference rooms.
This Prospectus is part of a registration statement that we filed with the
SEC utilizing a "shelf" registration process. Under this shelf process, the
Selling Stockholders may, over the next three years, sell up to 9,507,755 shares
of Common Stock. This Prospectus provides you with a general description of the
Common Stock the Selling Stockholders may offer and information about the
various alternative methods by which they may sell the Common Stock. Under
certain circumstances the Selling Stockholders may be required to provide
additional information about the method by which they intend to sell the Common
Stock. We will provide a Prospectus Supplement that will contain specific
information about the terms of that offering. The Prospectus Supplement may also
add, update or change information contained in this Prospectus. You should read
both this Prospectus and any Prospectus Supplement together with additional
information described under this heading "Additional Information."
INCORPORATION BY REFERENCE
The SEC allows us to "incorporate by reference" the information we file with
them, which means that we can disclose important information to you by referring
you to those documents. The information incorporated by reference is an
important part of this Prospectus, and information that we file later with the
SEC will automatically update and supersede this information. We incorporate by
reference the documents listed below and any future filings we make with the SEC
under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934
until the Selling Stockholders' offering is completed:
o Annual Report on Form 10-KSB for the year ended June 30, 1998;
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o Quarterly Report on Form 10-Q for the quarter ended September 30, 1998;
o Quarterly Report on Form 10-Q for the quarter ended December 31, 1998;
o Item 7 of 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;
o Current Report on Form 8-K dated November 24, 1998; and
o The description of our Common Stock contained in our Registration
Statement filed under Section 12 of the Securities Exchange Act of 1934.
We will provide these filings to any person, including any beneficial
owner, to whom this Prospectus is delivered, at no cost, upon written or oral
request to the Company as follows:
13760 Noel Road, Suite 1030
Dallas, Texas 75240-7336
Attn: Investor Relations
You may call William W. Lesikar, Vice-President Finance, of the Company at
(972) 233-9906 to request filings. You should rely only on the information
incorporated by reference or provided in this Prospectus or any Prospectus
Supplement. We have not authorized anyone else to provide you with different
information. The Selling Stockholders are not making an offer of these
securities in any state where the offer is not permitted. You should not assume
that the information in this Prospectus or any Prospectus Supplement is accurate
as of any date other than the date on the front of those documents.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Pursuant to the Registration Rights Agreement among the Company and the
Selling Stockholders, the Company has agreed to indemnify each Selling
Stockholder and its officers, directors, agents, brokers, investment advisors,
employees and any person who controls such Selling Stockholder against any
losses, claims, damages, liabilities, costs and expenses arising out of or
relating to (i) any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement or any Prospectus, including any
amendments or supplements thereto, or (ii) the omission or alleged omission to
state therein a material fact required to be stated therein, or necessary to
make the statements therein (in the case of any Prospectus or form of prospectus
or supplement thereto, in light of the circumstances under which they were made)
not misleading, except to the extent that such liabilities arise out of or are
based upon and in conformity with any information furnished in writing to the
Company by each respective Selling Stockholder expressly for use in the
Registration Statement or and amendment or supplement thereto. In addition, each
Selling Stockholder, acting severally and not jointly, under the Registration
Rights Agreement has agreed to indemnify the Company and its officers,
directors, employees, agents and any person who controls the Company against any
losses, claims, damages, liabilities, costs or expenses arising out of or based
upon and in conformity with written information furnished by such Selling
Stockholder expressly for use in the Registration Statement or an amendment or
supplement thereto. However, the foregoing indemnity shall not apply to amounts
paid in settlement of any such liability if the settlement is effected without
the consent of such Selling Stockholder.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
issuer pursuant to the foregoing provisions, or otherwise, the issuer has been
advised that in the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
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CERTAIN DEFINITIONS
The following are certain defined terms used in this Prospectus:
"BBL." One stock tank barrel, or 42 US gallons liquid volume, used herein in
reference to crude oil or other liquid hydrocarbons.
"DEVELOPMENT WELL." A well drilled within the proved boundaries of an oil and
natural gas reservoir to the depth of a stratigraphic horizon known to be
productive.
"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.
"MCF." One thousand cubic feet.
"MORGAN PROPERTY ACQUISITION." The acquisition by the Company in April 1998 of
certain non-operated, net profits interests and royalty interests revenues
from pension funds managed by J.P. Morgan Investments.
"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.
"PREFERRED STOCK." Capital stock of any 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.
"PROPERTY ACQUISITIONS." Property Acquisitions means, collectively, (i) the
acquisition by the Company of certain natural gas properties in western
Kentucky on March 8, 1998, (ii) the acquisition by the Company of certain
oil and natural gas properties in New Mexico, Texas and Oklahoma from
Collins and Ware, Inc. and (iii) the Morgan Property Acquisition.
"PROVED RESERVES." The estimated quantities of crude oil, natural gas and 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 gas reserves that
are expected to be recovered from new wells on undrilled acreage, or from
existing wells where a relatively major expenditure is required for
recompletion. Reserves on undrilled acreage shall be limited to those
drilling units offsetting productive units that are reasonably certain of
production when drilled. Proved reserves for other undrilled units can be
claimed only where it can be demonstrated with certainty that there is
continuity of production from the existing productive formation. Under no
circumstances should estimates for proved undeveloped reserves be
attributable to any acreage for which an application of fluid injection or
other improved recovery techniques is contemplated, unless such techniques
have been proved effective by actual tests in the area and in the same
reservoir.
"ROYALTY INTEREST." An interest in an oil and natural gas property entitling the
owner to a share of oil and natural gas production, free of costs of
production.
38
<PAGE> 39
"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 June 30,
1998, 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 SEC, 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 SEC rules, estimates have been made
using constant oil and natural gas prices and operating costs, at June 30,
1998, or as otherwise indicated.
"SECONDARY RECOVERY." A method of oil and natural gas extraction in which energy
sources extrinsic to the reservoir are utilized.
"WORKING INTEREST." The operating interest which gives the owner the right to
drill, produce and conduct operating activities on the property and a share
of production, subject to all royalties, overriding royalties and other
burdens and to all costs of exploration, development and operations and all
risks in connection therewith.
39
<PAGE> 40
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee...................... $ 7,006
Nasdaq SmallCap Market Listing Fee....................................... 4,160
Transfer Agent Fees...................................................... 100
Printing Expenses........................................................ 0
Accounting Fees and Expenses............................................. 2,500
Legal Fees and Expenses (including fees of selling holders' counsel)..... 20,000
Engineer Fees and Expenses............................................... 500
Blue Sky Fees and Expenses............................................... 500
Miscellaneous Expenses................................................... 720
----------
Total................................................................. $ 35,486
==========
</TABLE>
All of the above expenses except the Securities and Exchange Commission
registration fee and the Nasdaq SmallCap Market listing fee are estimated. All
of such expenses will be borne by the Company.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
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
II-1
<PAGE> 41
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 Securities and Commission such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
ITEM 16. EXHIBITS
EXHIBIT NO. EXHIBIT DESCRIPTION
- ---------------- -------------------------------------------------------------
3.1 Restated Certificate of Incorporation, filed as Exhibit 4.5
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, 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, 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.
4.1 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, filed as an Exhibit to the Company's
Registration Statement on Form S-4 (No. 333-61403), filed
August 13, 1998.
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, filed as an Exhibit to the Company's
Registration Statement on Form S-4 (No. 333-61403), filed
August 13, 1998.
II-2
<PAGE> 42
EXHIBIT NO. EXHIBIT DESCRIPTION
- ---------------- -------------------------------------------------------------
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
and Ware, Inc., dated August 1, 1997, filed as an Exhibit to
the Company's Registration Statement on Form S-4 (No.
333-61403), filed August 13, 1998.
4.11 Registration Rights Agreement between the Company and Riata
Energy, et. al dated April 9, 1998, filed as an Exhibit to
the Company's Registration Statement on Form S-4 (No.
333-61403), filed August 13, 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.
4.17 Common Stock Purchase Warrant Representing Right to Purchase
48,701 Shares of Common Stock of the Company dated August 19,
1998 and issued to JEDI, filed as an Exhibit to the Company's
Annual Report on Form 10-KSB for the fiscal year ended June
30, 1998, which Exhibit is incorporated herein by reference.
4.18* Common Stock Purchase Warrant Representing Right to Purchase
80,108 Shares of Common Stock of the Company dated as of
November 30, 1998 issued to JEDI.
4.19* Common Stock Purchase Warrant Representing Right to Purchase
4,329 Shares of Common Stock of the Company dated as of
September 11, 1998 issued to JEDI.
4.20* Common Stock Purchase Warrant Representing Right to Purchase
206,340 Shares of Common Stock of the Company dated as of
November 23, 1998 issued to JEDI.
4.21* Common Stock Purchase Warrant Representing Right to Purchase
18,836 Shares of Common Stock of the Company dated as of
November 27, 1998 issued to JEDI.
4.22* Common Stock Purchase Warrant Representing Right to Purchase
3,160 Shares of Common Stock of the Company dated as of
November 25, 1998 issued to JEDI.
4.23* Common Stock Purchase Warrant Representing Right to Purchase
162,955 Shares of Common Stock of the Company dated as of
November 30, 1998 issued to JEDI.
4.24 Registration Rights Agreement dated November 10, 1998 among
Queen Sand Resources, Inc. and the buyers signatory thereto,
filed as an Exhibit to the Company's Current Report on Form
8-K dated November 24, 1998, which Exhibit is incorporated
herein by reference.
II-3
<PAGE> 43
EXHIBIT NO. EXHIBIT DESCRIPTION
- ---------------- -------------------------------------------------------------
4.25 Form of Common Stock Purchase Warrant issued to certain
investors as of November 10, 1998, filed as an Exhibit to the
Company's Current Report on Form 8-K dated November 24, 1998,
which Exhibit is incorporated herein by reference.
4.26* Common Stock Purchase Warrant Representing Right to Purchase
22,033 Shares of Common Stock of the Company dated as of
December 28, 1998 issued to JEDI.
4.27* Common Stock Purchase Warrant Representing Right to Purchase
12,380 Shares of Common Stock of the Company dated as of
December 15, 1998 issued to JEDI.
4.28* Common Stock Purchase Warrant Representing Right to Purchase
133,708 Shares of Common Stock of the Company dated as of
December 14, 1998 issued to JEDI.
4.29* Common Stock Purchase Warrant Representing Right to Purchase
37,141 Shares of Common Stock of the Company dated as of
December 11, 1998 issued to JEDI.
4.30* Common Stock Purchase Warrant Representing Right to Purchase
8,360 Shares of Common Stock of the Company dated as of
December 9, 1998 issued to JEDI.
4.31* Common Stock Purchase Warrant Representing Right to Purchase
10,973 Shares of Common Stock of the Company dated as of
December 7, 1998 issued to JEDI.
4.32* Common Stock Purchase Warrant Representing Right to Purchase
8,180 Shares of Common Stock of the Company dated as of
December 4, 1998 issued to JEDI.
4.33* Common Stock Purchase Warrant Representing Right to Purchase
13,335 Shares of Common Stock of the Company dated as of
December 4, 1998 issued to JEDI.
4.34* Common Stock Purchase Warrant Representing Right to Purchase
8,180 Shares of Common Stock of the Company dated as of
December 2, 1998 issued to JEDI.
4.35* Common Stock Purchase Warrant Representing Right to Purchase
21,331 Shares of Common Stock of the Company dated as of
December 2, 1998 issued to JEDI.
4.36* Common Stock Purchase Warrant Representing Right to Purchase
18,372 Shares of Common Stock of the Company dated as of
November 30, 1998 issued to JEDI.
5.1* Opinion of Haynes and Boone, LLP.
23.1** Consent of Ernst & Young LLP.
23.2* Consent of Haynes and Boone, LLP, contained in the opinion
filed as Exhibit 5.1.
23.3* Consent of H.J. Gruy and Associates, Inc.
23.4* Consent of Harper & Associates, Inc.
23.5* Consent of Ryder Scott Company.
24.1* Power of Attorney, included as part of signature page of this
Registration Statement.
- -----------------------------
* Previously filed.
** Filed herewith.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set
II-4
<PAGE> 44
forth in the Registration Statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would
not exceed that which was registered) and any deviation from
the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the
Securities and Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more
than a 20 percent change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table
in the effective Registration Statement;
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
registration statement;
provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the Registrant pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in this Registration Statement.
(2) that, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof; and
(3) to remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
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 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.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating
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<PAGE> 45
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.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) 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.
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<PAGE> 46
SIGNATURES AND POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Dallas, State of Texas, on the 18th day of February,
1999.
QUEEN SAND RESOURCES, INC.
By: /s/ Edward J. Munden
-------------------------------------------
Name: Edward J. Munden
Title: Chairman of the Board, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-3 has been signed by the following persons on
behalf of the Registrant in the capacities and on the 18th day of February,
1999:
Signature Title
- --------- -----
/s/ Edward H, Munden Chairman of the Board, President, Chief Executive
- --------------------------- Officer and Director (principal executive officer)
Edward J. Munden
Bruce I. Benn* Executive Vice President, Secretary and Director
- ---------------------------
Bruce I. Benn
Ronald I. Benn* Chief Financial Officer (principal financial
- --------------------------- officer and accounting officer)
Ronald I. Benn
Robert P. Lindsay* Chief Operating Officer, Executive Vice President
- --------------------------- and Director
Robert P. Lindsay
Ted Collins, Jr.* Director
- ---------------------------
Ted Collins, Jr.
Eli Rebich* Director
- ---------------------------
Eli Rebich
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<PAGE> 47
William W. Lesikar, by signing his name hereto, does sign and execute this
Amendment No. 1 to its Registration Statement on behalf of the above-named
officers and directors of the Registrant on this day of February, 1999, pursuant
to powers of attorney executed on behalf of each such officers and directors,
and previously filed with the Securities and Exchange Commission.
*By: /s/ William W. Lesikar
---------------------------------
William W. Lesikar
Attorney-in-Fact
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<PAGE> 48
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION
- ---------------- -------------------------------------------------------------
<S> <C>
3.1 Restated Certificate of Incorporation, filed as Exhibit 4.5
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, 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, 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.
4.1 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, filed as an Exhibit to the Company's
Registration Statement on Form S-4 (No. 333-61403), filed
August 13, 1998.
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, filed as an Exhibit to the Company's
Registration Statement on Form S-4 (No. 333-61403), filed
August 13, 1998.
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
and Ware, Inc., dated August 1, 1997, filed as an Exhibit to
the Company's Registration Statement on Form S-4 (No.
333-61403), filed August 13, 1998.
4.11 Registration Rights Agreement between the Company and Riata
Energy, et. al dated April 9, 1998, filed as an Exhibit to
the Company's Registration Statement on Form S-4 (No.
333-61403), filed August 13, 1998.
</TABLE>
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<PAGE> 49
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION
- ---------------- -------------------------------------------------------------
<S> <C>
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.
4.17 Common Stock Purchase Warrant Representing Right to Purchase
48,701 Shares of Common Stock of the Company dated August 19,
1998 and issued to JEDI, filed as an Exhibit to the Company's
Annual Report on Form 10-KSB for the fiscal year ended June
30, 1998, which Exhibit is incorporated herein by reference.
4.18* Common Stock Purchase Warrant Representing Right to Purchase
80,108 Shares of Common Stock of the Company dated as of
November 30, 1998 issued to JEDI.
4.19* Common Stock Purchase Warrant Representing Right to Purchase
4,329 Shares of Common Stock of the Company dated as of
September 11, 1998 issued to JEDI.
4.20* Common Stock Purchase Warrant Representing Right to Purchase
206,340 Shares of Common Stock of the Company dated as of
November 23, 1998 issued to JEDI.
4.21* Common Stock Purchase Warrant Representing Right to Purchase
18,836 Shares of Common Stock of the Company dated as of
November 27, 1998 issued to JEDI.
4.22* Common Stock Purchase Warrant Representing Right to Purchase
3,160 Shares of Common Stock of the Company dated as of
November 25, 1998 issued to JEDI.
4.23* Common Stock Purchase Warrant Representing Right to Purchase
162,955 Shares of Common Stock of the Company dated as of
November 30, 1998 issued to JEDI.
4.24 Registration Rights Agreement dated November 10, 1998 among
Queen Sand Resources, Inc. and the buyers signatory thereto,
filed as an Exhibit to the Company's Current Report on Form
8-K dated November 24, 1998, which Exhibit is incorporated
herein by reference.
4.25 Form of Common Stock Purchase Warrant issued to certain
investors as of November 10, 1998, filed as an Exhibit to the
Company's Current Report on Form 8-K dated November 24, 1998,
which Exhibit is incorporated herein by reference.
4.26* Common Stock Purchase Warrant Representing Right to Purchase
22,033 Shares of Common Stock of the Company dated as of
December 28, 1998 issued to JEDI.
4.27* Common Stock Purchase Warrant Representing Right to Purchase
12,380 Shares of Common Stock of the Company dated as of
December 15, 1998 issued to JEDI.
4.28* Common Stock Purchase Warrant Representing Right to Purchase
133,708 Shares of Common Stock of the Company dated as of
December 14, 1998 issued to JEDI.
4.29* Common Stock Purchase Warrant Representing Right to Purchase
37,141 Shares of Common Stock of the Company dated as of
December 11, 1998 issued to JEDI.
4.30* Common Stock Purchase Warrant Representing Right to Purchase
8,360 Shares of Common Stock of the Company dated as of
December 9, 1998 issued to JEDI.
</TABLE>
II-10
<PAGE> 50
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION
- ---------------- -------------------------------------------------------------
<S> <C>
4.31* Common Stock Purchase Warrant Representing Right to Purchase
10,973 Shares of Common Stock of the Company dated as of
December 7, 1998 issued to JEDI.
4.32* Common Stock Purchase Warrant Representing Right to Purchase
8,180 Shares of Common Stock of the Company dated as of
December 4, 1998 issued to JEDI.
4.33* Common Stock Purchase Warrant Representing Right to Purchase
13,335 Shares of Common Stock of the Company dated as of
December 4, 1998 issued to JEDI.
4.34* Common Stock Purchase Warrant Representing Right to Purchase
8,180 Shares of Common Stock of the Company dated as of
December 2, 1998 issued to JEDI.
4.35* Common Stock Purchase Warrant Representing Right to Purchase
21,331 Shares of Common Stock of the Company dated as of
December 2, 1998 issued to JEDI.
4.36* Common Stock Purchase Warrant Representing Right to Purchase
18,372 Shares of Common Stock of the Company dated as of
November 30, 1998 issued to JEDI.
5.1* Opinion of Haynes and Boone, LLP.
23.1** Consent of Ernst & Young LLP.
23.2* Consent of Haynes and Boone, LLP, contained in the opinion
filed as Exhibit 5.1.
23.3* Consent of H.J. Gruy and Associates, Inc.
23.4* Consent of Harper & Associates, Inc.
23.5* Consent of Ryder Scott Company.
24.1* Power of Attorney, included as part of signature page of this
Registration Statement.
</TABLE>
- -----------------------------
* Previously filed.
** Filed herewith.
II-11
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP
We consent to the reference to our firm under the caption "Independent Auditors"
in the Registration Statement (Form S-3) and related Prospectus of Queen Sand
Resources, Inc. (the "Company") for the registration of 9,507,755 shares of its
Common Stock and to the incorporation by reference therein of (i) our report
dated September 2, 1998 with respect to the consolidated financial statements of
the Company included in its Annual Report (Form 10-KSB) for the year ended June
30, 1998 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 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 and filed with the Securities and
Exchange Commission.
/s/ ERNST & YOUNG LLP
February 16, 1999
