<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A NO. 1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from _____________ to _____________
COMMISSION FILE NUMBER 0-21179
QUEEN SAND RESOURCES, INC.
QUEEN SAND RESOURCES, INC.
QUEEN SAND OPERATING CO.
CORRIDA RESOURCES, INC.
(EXACT NAME OF REGISTRANTS AS SPECIFIED IN THEIR CHARTER)
DELAWARE 75-2615565
NEVADA 75-2564071
NEVADA 75-2593510
NEVADA 75-2691594
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NOS.)
13760 NOEL RD., SUITE 1030
DALLAS, TEXAS 75240-7336
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(REGISTRANTS' TELEPHONE NUMBER, INCLUDING AREA CODE) (972) 233-9906
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.0015 PER SHARE
(Title of class)
------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve (12) months, and (2) has been subject to such
filing requirements for the past ninety (90) days. YES [X] NO [ ]
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment of this Form 10-K. [X]
The aggregate market value of shares of Common Stock held by
non-affiliates of the Registrant (all directors, officers and holders of five
percent or more of the Common Stock of the Company are presumed to be affiliates
for purposes of this calculation), computed by reference to the closing bid
price of such stock on September 10, 1999, was approximately $8,816,683. As of
September 10, 1999, the Registrant had outstanding 34,216,106 shares of Common
Stock.
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The undersigned Registrant hereby amends its Annual Report on Form 10-K
for the year ended June 30, 1999, to include the information called for by the
following items, as set forth in the pages attached hereto:
Part III. Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners
and Management
Item 13. Certain Relationships and Related Transactions
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amendment to be signed
on its behalf by the undersigned, thereunto duly authorized.
QUEEN SAND RESOURCES, INC.
By: /s/ EDWARD J. MUNDEN
-------------------------------
Name: Edward J. Munden
Title: Chief Executive Officer,
President and Chairman
QUEEN SAND RESOURCES, INC. (NEV)
By: /s/ EDWARD J. MUNDEN
-------------------------------
Name: Edward J. Munden
Title: President
QUEEN SAND OPERATING CO.
By: /s/ EDWARD J. MUNDEN
-------------------------------
Name: Edward J. Munden
Title: President
CORRIDA RESOURCES, INC.
By: /s/ EDWARD J. MUNDEN
-------------------------------
Name: Edward J. Munden
Title: President
October 28, 1999
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AMENDMENT NO. 1 TO
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED JUNE 30, 1999
Because definitive proxy soliciting materials relating to the 1999
Annual Meeting of the Stockholders of Queen Sand Resources, Inc. ("Queen Sand"
or the "Company") will be filed after October 28, 1999, the information called
for by Part III of the Company's Form 10-K for the year ended June 30, 1999 is
included in this Amendment No. 1 to such Form 10-K.
PART III OF FORM 10-K
FOR THE YEAR ENDED JUNE 30, 1999
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS OF THE COMPANY
There are five directors of the Company, each holding office until the
next annual meeting of stockholders or until his successor is elected or
appointed and qualified, or as otherwise provided by the Company's Bylaws or by
Delaware law. The following sets forth information regarding the directors of
the Company:
NAME AGE CURRENT POSITION
---- --- ----------------
Edward J. Munden............... 48 Chairman of the Board,
Chief Executive Officer,
and President
Bruce I. Benn.................. 45 Executive Vice President
and Secretary
Robert P. Lindsay.............. 57 Chief Operating Officer and
Executive Vice President
Ted Collins Jr................. 61 Director
Eli Rebich..................... 48 Director
Edward J. Munden, 48, has been the President and a Director of the
Company since March 6, 1995. He was appointed as Chief Executive Officer in May
1996 and was appointed Chairman of the Board in October 1997. Since 1989, he has
been a director and co-founder of Capital House A Finance and Investment Company
("CHC"), which is a Canadian venture capital firm located in Ottawa, Canada. Mr.
Munden was elected to the board of Mustang Minerals Corp. a Canadian mineral
exploration company in March 1999. From 1994 to 1996, he was a director of
Capital House International Ltd. ("CHIL"). CHIL became the original stockholder
of Queen Sand Resources, Inc., a Nevada corporation and wholly-owned subsidiary
of the Company (`QSRN"), and was previously a majority stockholder of the
Company.
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Mr. Munden has held positions in the mining industry with Eldorado Nuclear
Limited (1980 to 1989), the manufacturing industry with Proctor and Gamble
Company of Canada (1978 to 1980) and the oil and gas industry with Union Oil of
Canada Limited (1974 to 1976). Mr. Munden is a professional geological engineer
and holds a Bachelor of Science degree in Engineering (1974) and a Masters of
Business Administration (1978) from Queens University in Kingston, Canada.
Robert P. Lindsay, 57, joined the Company in 1994 and became Executive
Vice President in September 1995 and Chief Operating Officer in May 1996. From
1973 until 1995 Mr. Lindsay was Chief Executive Officer of Lin-mour Drilling
Company. Mr. Lindsay joined Helmrich & Payne, an oil and natural gas drilling
and exploration company headquartered in Tulsa, Oklahoma, in 1965 and held
increasingly senior positions with that company until 1973. Mr. Lindsay holds a
Bachelor of Arts degree in Accounting (1965) from the University of Texas.
Bruce I. Benn, 45, has been an Executive Vice President and a Director
of the Company since March 1995. In 1989, he, together with Ronald I. Benn and
Edward J. Munden, founded CHC and has been a director since then. From 1994 to
1996, he was a director of CHIL. From 1985 to 1993, he was Vice President and
Director of Corporation House Ltd., where he acted as an investment banker and a
financial advisor to resource development, manufacturing and construction firms
around the world. He is an attorney and holds a Masters of Law degree (LL.M,
1979) from the University of London, England, a Baccalaureate of Laws (LL.B,
1978) from the University of Ottawa, Canada, and a Bachelor of Arts in Economics
(1975) from Carleton University in Ottawa, Canada. Ronald I. Benn, the Chief
Financial Officer of the Company, is the brother of Bruce I. Benn.
Ted Collins, Jr., 61, has been a Director of the Company since October
1997. Since January 1988 he has been President of Collins and Ware, Inc., a
private oil and natural gas exploration and production company headquartered in
Midland, Texas. He is also Chairman of Mid Louisiana Gas Corp., an interstate
pipeline serving industrial and residential customers in Louisiana and
Mississippi with Pan American Petroleum Corp. (now Amoco Production Co.). From
1986 to 1988, Mr. Collins was President of Enron Oil & Gas Company and from 1985
to 1986 he was President of HNG/InterNorth Exploration Company. From 1982 to
1985, Mr. Collins served as President of HNG Oil Company, and from 1969 to 1982
he was Executive Vice President and Director of American Quasar Petroleum Co.
From 1963 to 1969, Mr. Collins served as an independent oil operator, and from
1960 to 1963, he was a petroleum engineer. Mr. Collins holds a Bachelor of
Science in Geological Engineering (1960) from the University of Oklahoma. Mr.
Collins is also a director of Hanover Compression Company.
Eli Rebich, 48, has been a Director of the Company since October 1997.
He is an independent oil and gas producer with over 22 years industry
experience, including evaluation, acquisition, title work and operation of oil
and gas properties. Since 1978, he has acquired producing properties in Texas,
Louisiana, Mississippi, Oklahoma and Colorado. He is President and Director of
Big Run Production Company which operates properties in several states.
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EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth the officers of the Company.
NAME AGE CURRENT POSITION
---- --- ----------------
Edward J. Munden............... 48 Chairman of the Board, Chief
Executive Officer, President
Bruce I. Benn.................. 45 Executive Vice President and
Secretary
Robert P. Lindsay.............. 57 Chief Operating Officer,
Executive Vice President
Ronald I. Benn................. 44 Chief Financial Officer
V. Ed Butler................... 43 Vice President, Asset
Management
Ronald Idom.................... 45 Vice President, Acquisitions
William W. Lesikar............. 46 Vice President, Finance
William A. Williamson.......... 43 Vice President, Land
The following is a brief description of the business backgrounds of
each of the officers who are not also directors of the Company.
Ronald I. Benn was appointed Chief Financial Officer of QSRN in 1994
and assumed the same position with the Company when it acquired QSRN in March
1995. Since 1989, he has been a senior executive, director and co-founder of
CHC. From 1994 to 1996, Mr. Benn was a director of CHIL. From 1980 to 1985, Mr.
Benn, a Chartered Accountant, held positions in the auditing division, in
management consulting as a turnaround specialist, and the insolvency division of
the accounting firm of Clarkson Gordon Chartered Accountants (now known as Ernst
& Young Chartered Accountants). From 1985 to 1986 he also had experience in the
commercial banking industry and as senior financial officer to certain start-up
companies. Mr. Benn holds a Bachelor of Science degree (1977) from Carleton
University in Ottawa, Canada and a Bachelor of Commerce (Honours) (1980) from
the University of Windsor, Canada. Ronald I. Benn is the brother of Bruce I.
Benn.
V. Ed Butler joined the Company in June 1996 as Vice President,
Operations. He has 20 years of experience in oil field engineering and
operations. From 1993 to 1995, he was Executive Vice President for Echo
Production, Inc. From 1982 to 1993 he held the position of Operations Manager
for Triad Energy Corporation. He has also been a staff engineer for Blocker
Exploration Company from 1980 to 1982 and an area production engineer for Texas
Oil and Gas Corporation from 1978 to 1980. Mr. Butler holds an M.B.A. (1988)
from the University of Texas, and a Bachelor of Science in Petroleum Engineering
(1978) from Texas A&M University.
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Ronald Idom joined the Company in January 1998 as Vice President,
Acquisitions. He has over 22 years of experience in reservoir engineering and
management. From 1991 to 1997, he was Manager Gas Supply for Delhi Gas Pipeline
Corporation and Manager Engineering/Project Development from 1988 to 1991. From
1985 to 1988 he held the position of Chief Reservoir Engineer for TXO Production
Corp. (both Delhi Gas Pipeline and TXO Production Corp. were subsidiaries of
USX/Texas Oil & Gas Corporation). He also served as acquisition engineer for NRM
Petroleum from 1983 to 1985; a self-employed petroleum consultant from 1980 to
1983 and held various engineering positions with Texas Oil and Gas Corporation
from 1976 to 1980. Mr. Idom graduated from Texas A&M University in 1976 with a
Bachelor of Science in Petroleum Engineering.
William W. Lesikar joined the Company in June 1998 as Vice President,
Finance. Mr. Lesikar, a Certified Public Accountant, has 22 years of experience
in finance and accounting with nearly 17 years in the oil and gas industry. From
1981 to 1998, Mr. Lesikar held increasing positions of authority with Lyco
Energy Corporation of Dallas, Texas including Controller from 1981 to 1983, and
Chief Financial Officer and Executive Vice President from 1988 to 1998. From
1978 to 1981, Mr. Lesikar was an audit manager and senior auditor with Arthur
Young & Company (now known as Ernst & Young LLP). From 1976 to 1978, Mr. Lesikar
was an auditor with Haskins & Sells (now known as Deloitte & Touche LLP). Mr.
Lesikar holds a Masters of Business Administration (1988) from Southern
Methodist University and a Bachelor of Business Administration (1975) from
University of Texas at Austin.
William A. Williamson joined the Company in March 1998 as Vice
President, Land. He has over 17 years of experience in petroleum land
management. From 1989 to 1998, he served as President of BAW Energy, Inc. BAW
Energy, Inc. was formed primarily to provide oil and gas asset management from a
land and legal perspective to independent oil and gas companies. Clients of BAW
Energy, Inc. included INCO Oil Corporation, Janex Oil Co., Inc., Walter
Exploration, Inc. and the Company. From 1979 to 1989, he was self-employed as an
independent Petroleum Landman. Mr. Williamson holds a Bachelor of Business
Administration in Finance (1978) from Texas A&M University.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
To the Company's knowledge, based solely on a review of the copies of
reports furnished to the Company and, in certain instances, written
representations that no additional reports were required, during the fiscal year
ended June 30, 1999, all of the Company's executive officers, directors and
holders of more than 10% of its Common Stock timely filed all reports required
by Section 16(a) of the Securities Exchange Act of 1934, as amended (the "1934
Act").
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ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF OFFICERS
The following table sets forth a summary of the compensation of the
Chief Executive Officer and the four other most highly compensated officers of
the Company for the fiscal years ended June 30, 1999, 1998 and 1997. No
compensation information is given for any person for any fiscal year in which
that person was not an officer of the Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------------------------------------------------------
NUMBER OF
FISCAL YEAR SECURITIES
ENDED OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION JUNE 30, SALARY BONUS COMP. OPTIONS COMPENSATION
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Edward J. Munden 1999 $160,000 $ 40,000 -0- 55,000 -0-
Chief Executive 1998 130,000 100,000 -0- 45,000 -0-
Officer, 1997 88,200 30,000 -0- 37,000 -0-
President and
Chairman
of the Board
Robert P. Lindsay 1999 $160,000 $ 40,000 -0- 55,000 -0-
Chief Operating 1998 132,000 98,000 -0- 45,000 -0-
Officer and 1997 120,000 30,500 -0- 37,000 -0-
Executive Vice
President
Bruce I. Benn 1999 $160,000 $ 40,000 -0- 55,000 -0-
Executive Vice 1998 130,000 100,000 -0- 45,000 -0-
President 1997 88,200 30,000 -0- 37,000 -0-
and Secretary
Ronald I. Benn 1999 $160,000 $ 40,000 -0- 55,000 -0-
Chief Financial 1998 130,000 100,000 -0- 45,000 -0-
Officer 1997 88,200 30,000 -0- 37,000 -0-
V. Ed Butler 1999 $125,000 $ 20,000 -0- 15,500 -0-
Vice President 1998 112,000 40,500 -0- 14,500 -0-
1997 100,000 25,500 -0- 22,000 -0-
</TABLE>
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The preceding table shows all the cash compensation paid or to be paid
by the Company, as well as certain other non-cash compensation paid or accrued,
during the fiscal years indicated, to each of the Chief Executive Officer and
the other named officers for such period in all capacities in which he served.
Total cash compensation paid to all five officers as a group during the fiscal
year ended June 30, 1999 was $915,000.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Number of % of total
Securities Options/SARs
Underlying Granted to Exercise or Base Grant Date
Options/SARs Employees in Price Expiration Present
Name Granted (#) Fiscal year $/Sh) Date Value (3)
- --------------------------- ------------ ------------- ---------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Edward J. Munden 100,000(1) 17.5% $7.375 08/13/07 $623,000
Robert P. Lindsay 100,000(1) 17.5% $7.375 08/13/07 $623,000
Bruce I. Benn 100,000(1) 17.5% $7.375 08/13/07 $623,000
Ronald I. Benn 100,000(1) 17.5% $7.375 08/13/07 $623,000
V. Ed Butler 30,000(2) 4.9% $7.375 08/13/07 $186,900
</TABLE>
(1) 45,000 are exercisable cumulatively at the rate of 50% on and after August
13, 1999 and 25% per year on each August 13 thereafter and continue to be
exercisable until November 19, 2007 unless earlier terminated; 55,000 are
exercisable cumulatively at the rate of 25% per year on and after August
13, 1999, and each August 13 thereafter, and continue to be exercisable
until November 19, 2008 unless earlier terminated.
(2) 14,500 are exercisable cumulatively at the rate of 50% on and after August
13, 1999 and 25% per year on each August 13 thereafter and continue to be
exercisable until November 19, 2007 unless earlier terminated; 15,500 are
exercisable cumulatively at the rate of 25% per year on and after August
13, 1999, and each August 13 thereafter, and continue to be exercisable
until November 19, 2008 unless earlier terminated.
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(3) This amount was calculated using the Black-Scholes option pricing model, a
complex mathematical formula that uses a number of factors to estimate the
present value of stock options. The assumptions used in the valuation of
the options were: an exercise price of $7.375, stock price volatility
factor: 0.792 %, expected life: 10 years, interest rate: 6.0% and a
dividend yield of 0.0%. The Black-Scholes model generates an estimate of
the value of the right to purchase a share of stock at a fixed price over a
fixed period. The actual value, if any, an executive realizes will depend
on whether the stock price at exercise is greater than the grant price as
well as the executive's continued employment through the vesting period and
the option term.
The following table provides information on the value of each named
officer's unexercised options to acquire Common Stock at June 30, 1999. No named
officers held options to acquire Common Stock that were in-the-money at June 30,
1999.
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
Name Shares Acquired On Value Realized ($) Number of Securities Value of Unexercised
Exercise (#) Underlying In-the-Money
Unexercised Options/ Options/SARs at
SARs at FY-End (#) FY-End ($)
Exercisable/ Exercisable/
Unexercisable Unexercisable (1)
------------------ ------------------ -------------------- --------------------
<S> <C> <C> <C> <C>
Edward J. Munden -- -- 31,750/105,250 $0/$0
Robert P. Lindsay -- -- 31,750/105,250 $0/$0
Bruce I. Benn -- -- 31,750/105,250 $0/$0
Ronald I. Benn -- -- 31,750/105,250 $0/$0
V. Ed Butler -- -- 12,750/39,250 $0/$0
</TABLE>
EXECUTIVE EMPLOYMENT AGREEMENTS
In December 1977, the Company entered into employment agreements with
each of Edward J. Munden, Bruce I. Benn, Ronald I. Benn and Robert P. Lindsay.
The terms of each of the employment agreements are substantially similar. Each
of the officers receives a base salary of $160,000 per annum. Incentive bonuses
are paid depending upon the Company's performance. For fiscal 1999, the Company
paid each of the officers a $40,000 bonus. Each of the agreements terminates on
June 30, 2002 but is automatically renewable for 2 years on June 30 unless
terminated earlier.
Each of the employment agreements includes a severance provision which
is triggered by the Company's termination of the agreement without cause, as
defined in the agreement, or the officer's termination with good reason, as
defined in the agreement. Under the severance provisions, the Company must pay
the officer one year's base salary and bonus, prorated to the termination date,
and issue a number of stock options based on the number of options granted in
the previous year, prorated to the termination date. In addition, if the
termination follows a change of control, then the Company must pay the officer,
in lieu of exercising his options, cash in an amount equal to the spread between
the exercise price of his options and the highest price paid for the common
stock in the change of control transaction.
"Change of control" is defined in the agreements to include a merger or
sale of the Company in which the Company is not the surviving entity, the sale
of all or substantially all of the Company's assets, the approval by the
Company's stockholders of a plan of liquidation, bankruptcy of the Company,
specified changes in the composition of the board of directors, and the
acquisition of beneficial ownership of an aggregate of 15% of the voting power
of the Company's outstanding voting securities by any person or group who
beneficially owned less than 10% of the voting power of the Company's
outstanding voting securities on the date of the agreement, the acquisition of
beneficial ownership of an additional 5% of the voting power of the Company's
outstanding voting securities by any person or group who beneficially owned at
least 10% of the voting power of the Company's outstanding voting securities on
the date of the agreement, or the execution by the Company and a stockholder of
a contract that by its terms grants such stockholder or such stockholder's
affiliate, the right to veto or block decisions or actions of the Board of
Directors.
Each of the agreements includes a noncompetition covenant pursuant to
which throughout the term of the agreement and, unless the agreement terminates
at the expiration of the term, or the Company terminates the agreement without
cause or the officer terminates the agreement with good reason or the agreement
is terminated after a change of control, through the first anniversary of the
expiration of the agreement, the officer may not engage in the business of
acquiring oil and natural gas reserves and oil and natural gas production and
exploitation. The geographic area covered by the noncompetition covenant
includes any state in which the Company has offices, operations, customers or
otherwise conducts business. In addition, if the Company terminates the
agreement for cause or the officer terminates without good reason, then the
officer is subject to the noncompetition provisions only if the Company pays the
officer in a lump sum an amount equal to the annual base salary in effect at the
date of termination.
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control, non-competition and confidentiality provisions. The Bruce Benn
Agreement terminates on June 30, 2002.
Ronald I. Benn. In December 1997, the Company entered into an
employment agreement with Mr. Benn (the "Ronald Benn Agreement"), pursuant to
which the Company employed him as Chief Financial Officer. Under the Ronald Benn
Agreement, for the fiscal year ending June 30, 2000, Mr. Benn will receive a
base salary of $160,000 per annum. He also received a bonus of $40,000 for the
fiscal year ended June 30, 1999, which was based on the Company' performance.
The Ronald Benn Agreement includes customary severance, change of control,
non-competition and confidentiality provisions. The Ronald Benn Agreement
terminates on June 30, 2002.
Robert P. Lindsay. In December 1997, the Company entered into an
employment agreement with Mr. Lindsay (the "Lindsay Agreement"), pursuant to
which the Company employed him as Chief Operating Officer. Under the Lindsay
Agreement, for the fiscal year ending June 30, 2000, Mr. Lindsay will receive a
base salary of $160,000 per annum. He also received a bonus of $40,000 for the
fiscal year ended June 30, 1999, which was based on the Company's performance.
The Lindsay Agreement includes customary severance, change of control,
non-competition and confidentiality provisions. The Lindsay Agreement terminates
on June 30, 2002.
COMPENSATION COMMITTEE REPORT
The compensation committee of our board of directors is responsible for
overseeing the compensation of our executive officers.
Compensation policies. In August, 1997 we retained the consulting firm
of Arthur Anderson to prepare a comprehensive report to identify an appropriate
peer group and the key-employee compensation packages paid by members of that
group. Our executive officer compensation package is based on this report and
consists of three components: base salary, annual incentive bonuses and stock
option grants. We are committed to pay base salaries that are near the 75th
percentile among the companies in our peer group to attract and retain skilled
and talented management. We pay annual incentive bonuses as a percent of salary
based upon the performance of the Company. We award stock option grants to our
executive officers to provide management with incentives to create value for our
company. We encourage stock ownership to ensure that top management's interests
are closely aligned with the interests of exiting stockholders.
Relationship of compensation to performance. Our company focuses on a
growth strategy of developing, exploiting and acquiring oil and natural gas
reserves. Our executive pay strategy is designed to support this business
strategy through competitive base salaries, annual incentive bonuses and stock
option grants.
We determine the level of base salaries based upon the 75th percentile
of salaries of executive officers at our peer group companies. Our compensation
committee reviews industry standards and increases in costs of living to arrive
at this level.
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Annual incentive bonuses are awarded based primarily on operating cash
flow, reserve replacement and increases in reserve value. Performance measures
and goals are reevaluated annually, and in making an award, the committee may
reflect other relevant performance results as identified in the next paragraph.
As a general guideline, we target cash bonuses at 50% of base pay. Since fiscal
1997, actual bonuses have varied between 25% and 77% of base pay depending on
performances and cash availability. Cash bonuses in respect of fiscal 1999 were
set at less than 50% of base pay due to cash constraints.
Due to the effects of uncontrollable factors in the oil and gas
industry, such as oil and gas prices, an evaluation of our performance based on
only one or two measures may not provide a complete picture of overall
performance. In addition the Company's history has been characterized by rapid
growth and consequent changes in the location, quantity and certain qualitative
aspects of our reserve profile. As a consequence, our committee annually looks
at other important indicators of performance, such as reserve growth, lease
operating expenses, finding costs, administrative expenses and returns to
stockholders. Based on the results of these assessments and an evaluation by our
committee of individual executive performance, our committee may adjust awards
to reflect individual performance.
Long-term incentives are an essential component of our pay package
because they hold our executive officers accountable for attaining our business
strategy. At this time, stock options are our primary long-term incentive reward
vehicles. The stock options are granted annually with the option price equal to
the fair market value of our stock on the date of the grant and with incremental
vesting restrictions. Through the end of June 30, 1999, a total of 558,000
options have been granted at exercise prices ranging from $5.35 to $7.38.
1999 Compensation for our chief executive officer. In determining the
compensation of Edward J. Munden, the Chairman and Chief Executive Officer, the
compensation committee considered our company's operating and financial results
for fiscal year 1998, evaluated Mr. Munden's individual performance and
substantial contribution to those results and considered the compensation range
for other chief executive officers in our peer group. Based on that review and
assessment, for the fiscal year ended June 30, 1999, our company paid Mr. Munden
a base salary of $160,000 and an annual incentive bonus of $40,000.
Compensation committee
Ted Collins, Jr.
Eli Rebich
BOARD OF DIRECTORS INTERLOCKS AND INSIDER
PARTICIPATION IN COMPENSATION DECISIONS
None of the members of the compensation committee of the board of
directors is an officer or employee of our company. No executive officer of our
company serves as a member of the board of directors or compensation committee
of any entity that has one or more executive officers serving on our company's
compensation committee.
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COMPENSATION OF DIRECTORS
The Board of Directors has adopted a policy whereby each non-employee
Director is paid an annual retainer fee of $12,000 plus meeting fees of $750 for
each Board of Directors and committee meeting (other than telephonic meetings)
attended by that Director. The Company also reimburses its Directors for travel,
lodging and related expenses they may incur attending Board of Directors and
committee meetings. At the 1998 annual meeting, the Stockholders approved of the
adoption of the Directors's Nonqualified Stock Option Plan for its non-employee
Directors. During the course of the fiscal year ending June 30, 1999, the
Company granted 5,000 options to each of Ted Collins Jr. and Eli Rebich under
the Nonqualified Stock Option Plan. The exercise price of these options was
$5.25 per share and they vest as follows: (i) 50% on the first anniversary date
of the grant and 25% on each of the second and third anniversary dates of the
grant. These options expire on December 20, 2007.
STOCKHOLDER RETURN COMPARISON
Set forth below is a line graph comparing the total return on the
Common Stock with the cumulative total return of the Russell 2000 index and the
3 digit MG Industry Group Index for Independent Oil and Gas Companies, resulting
from an initial assumed investment of $100 in each and assuming the reinvestment
of any dividends, for the period beginning on May 22, 1997, the date that the
Company's Common Stock began trading on the Nasdaq SmallCap Market, and ending
on June 30, 1999. The stock performance graph is not necessarily indicative of
future price performance.
COMPANY/INDEX 5/22/97 6/30/97 6/30/98 6/30/99
Queen Sand Resources, Inc 100.00 105.60 188.60 26.40
MG 121 Index 100.00 99.54 86.06 87.52
Russell 2000 Index 100.00 104.29 121.48 122.14
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
OWNERSHIP OF SECURITIES
The following table sets forth information with respect to the number
of shares of Common Stock and Voting Stock beneficially owned as of August 20,
1999, by (1) all holders of shares of Common Stock and Voting Stock known by the
Company to own beneficially more than 5% of the outstanding shares of any class
of the Voting Stock, (2) the executive officers of the Company named in the
table under "Executive Compensation C Compensation of Executive Officers" (3)
each director of the Company and (4) all directors and executive officers of the
Company as a group.
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<PAGE> 14
<TABLE>
<CAPTION>
APPROXIMATE APPROXIMATE
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENTAGE OF PERCENTAGE OF
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP COMMON STOCK VOTING STOCK
- ------------------- -------------------- ------------- -------------
<S> <C> <C> <C>
Officers and Directors:
Edward J. Munden(1) 6,650,250(2),(3) 19.53% 15.23%
30 Metcalfe Street, Suite 620
Ottawa, Canada
K1P 5L4
Bruce I. Benn(1) 6,650,250(2),(3) 19.53% 15.23%
30 Metcalfe Street, Suite 620
Ottawa, Canada
K1P 5L4
Robert P. Lindsay(1) 6,634,536(2),(3),(4) 19.56% 15.26%
3500 Oak Lawn Drive
Suite 380, L.B. #31
Dallas, Texas 75219
Ronald I. Benn(1) 6,650,250(2),(3) 19.53% 15.23%
30 Metcalfe Street, Suite 620
Ottawa, Canada
K1P 5L4
Eli Rebich(1) 475,000(2) 1.4% 1.09%
318 West Rusk
Tyler, Texas 75701
Ted Collins, Jr.(1),(5) 1,005,000(2) 2.95% 2.3%
303 West Wall, Suite 1200
Midland, Texas 79701-5076
All executive officers and directors
as a group (7 persons) 8,295,296(2),(3) 24.23% 18.93%
Five Percent Stockholders
Joint Energy Development Investments
Limited Partnership 13,265,223(6) 29.72% 29.72%
("JEDI")
1400 Smith St.
Houston, Texas 77002-7361
EIBOC Investments Ltd. 6,600,000(3) 19.41% 15.14%
Charlton House
White Park Road
Bridgetown, Barbados W.I.
</TABLE>
- -----------------
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<PAGE> 15
(1) Executive Officer and/or Director.
(2) Includes options exercisable within 60 days.
(3) Edward J. Munden, Ronald I. Benn and Bruce I. Benn have a beneficial
interest in the shares of Common Stock owned by EIBOC Investments Ltd.
("EIBOC"). In addition, EIBOC has granted an irrevocable proxy to Messrs.
Munden, Benn, Benn and Lindsay to vote 6,600,000 shares owned of record by
EIBOC. Accordingly, the 6,600,000 shares owned of record by EIBOC have been
included as beneficially owned by each of the foregoing individuals, and by
all executive officers and Directors as a group.
(4) Mr. Lindsay acquired 14,286 shares of Common Stock in the name of his
children and disclaims any beneficial interest in these shares.
(5) These shares are owned of record by Collins and Ware, Inc. Mr. Collins is
the President and a controlling shareholder of Collins and Ware, Inc. but
disclaims beneficial ownership of such shares.
(6) Based on information provided by JEDI on October 27, 1999. Includes
9,600,000 shares of Common Stock issuable upon conversion of the 9,600,000
shares of Series A Preferred Stock, 2,634,952 shares of Common Stock and
764,892 shares of Common Stock issuable upon exercise of certain warrants
and 261,021 upon the exercise of certain maintenance rights. JEDI is a
limited partnership, the general partner of which is Enron Capital
Management Limited Partnership, which is an indirect wholly-owned
subsidiary of Enron Corp. Upon the occurrence of certain Events of Default
(as defined in the Company's Restated Certificate of Incorporation), JEDI,
the holder of the Series A Preferred Stock, has the right to require the
Company to repurchase the Series A Preferred Stock.
Upon the occurrence of certain Events of Default (as defined in the
Company's Restated Certificate of Incorporation, the holder of the Series A
Preferred Stock has (i) the right to require the Company to repurchase the
Series A Preferred Stock and (ii) the right, acting separately as a class, to
elect a number of persons to the Board of Directors of the Company that, along
with any members of the Board of Directors who are serving at the time of such
action, will constitute a majority of the Board of Directors. See "Certain
Relationships and Related Transactions-JEDI Transaction- Description of Series A
Preferred Stock-Events of Default."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
JEDI TRANSACTION
GENERAL
On May 6, 1997, JEDI became a significant stockholder by purchasing
9,600,000 shares of our Series A preferred stock and warrants (all of which have
terminated or been exercised) to purchase our common stock in exchange for the
payment to us of $5,000,000 cash and the execution and delivery by JEDI of an
earn up agreement (which has since been terminated).
Description of the purchase agreement. The following summary of the
material provisions of the JEDI purchase agreement is not intended to be
complete. You should read all
15
<PAGE> 16
of the provisions of the agreement, a copy of which is filed as an exhibit to
our Current Report on Form 8-K dated March 27, 1997.
Representations and warranties. Under the JEDI purchase agreement, we
made customary representations and warranties to JEDI regarding our business,
and JEDI made customary representations and warranties to us.
Covenants. We agreed to: maintain our corporate existence, comply with
applicable laws, maintain our properties, not materially change our accounting
methods, allow JEDI the right to have notice of, and attendees at, our the board
of directors meetings, deliver to JEDI reports furnished to our board of
directors, deliver an officers certificate to JEDI annually regarding compliance
with the covenants, provide JEDI with our financial statements and reserve
reports, use reasonable commercial efforts to cause our common stock, to be
listed on The NASDAQ National Market no later than March 15, 2003,approve
customary stock option and other benefit plans, and not to amend the securities
purchase agreement dated as of March 27, 1997 between us and Forseti Investments
Ltd. or related documents without the prior written consent of JEDI.
In addition, we agreed not to sell assets outside the ordinary course
of business unless the consideration is at least 85% cash and equal to or
greater than the fair market value of the assets sold. Under the covenant, the
following types of consideration are considered cash: the amount of liabilities
assumed by the buyer, the amount of any notes or other obligations received by
us from the buyer that are converted into cash within 90 days of the closing of
the sale, and the fair market value of certain oil and gas properties and
permitted business investments received by us from the transferee.
Further, if we sell assets outside the ordinary course of our business,
then we must repay indebtedness, if required by our lenders under our loan
documents, and if not so required, then within 60 days after the receipt of
proceeds from the sale, we may use the proceeds to pay indebtedness, acquire a
controlling interest in another oil and gas business or permitted business
investment, make certain capital expenditures, purchase assets useful to the oil
and gas business or retain cash for working capital.
We also agreed not to directly or indirectly enter into any transaction
or series of related transactions involving aggregate consideration equal to or
greater than $60,000 with any of our affiliates unless the terms of the
transaction are no less favorable to us than those that could have been obtained
in a transaction with an unaffiliated party or an arms-length basis and the
transaction is approved by a majority of our disinterested directors. This
covenant does not apply to customary compensation to officers, directors, and
employees in the ordinary course of business, inter-company transactions,
dividend payments, or the transactions contemplated by the ECT letter agreement
described below.
We also agreed to comply with substantially all of the provisions of
Rule 4460 of the National Association of Securities Dealers, Inc.'s Bylaws.
Pursuant to this covenant, we must distribute to our stockholders annual reports
containing audited financial statements and quarterly reports containing
statements of operating results, maintain a minimum of two independent directors
on our board of directors, maintain an audit committee, a majority of the
members of which are independent directors, hold an annual meeting of
stockholders, solicit proxies and provide proxy statements for all meetings of
stockholders, conduct an appropriate
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<PAGE> 17
review of related party transactions on an ongoing basis, require stockholder
approval prior to the adoption of some stock option plans and prior to the
issuance of securities that will result in a change of control or some other
issuances in connection with the acquisition of the stock or assets of another
company or in connection with a transaction other than a public offering
involving a significant amount of our securities and not take any action that
will have the effect of nullifying, restricting or disparately reducing the
voting rights of the holders of our common stock.
Maintenance Rights. Pursuant to the JEDI purchase agreement, we granted
JEDI the right to purchase its proportionate share of our capital stock at the
same price and on the same terms as the capital stock to be sold by us. JEDI
does not have maintenance rights with respect to capital stock issued by us:
pursuant to certain employee and director stock plans, in connection with a
stock split or dividend on our common stock to all holders of common stock, or
pursuant to an offering pursuant to a registration statement filed with, and
declared effective by, the SEC. Subject to certain exceptions, JEDI does not
have maintenance rights with respect to the issuance of any rights, warrants or
options to purchase shares of our capital stock or other securities convertible
into or exercisable or exchangeable for shares of our capital stock, but JEDI
does have maintenance rights if and when capital stock is issued upon the
conversion, exercise or exchange of these types of securities.
In addition, from March 27, 1997 through December 31, 1998, we agreed
to grant JEDI a warrant for the purchase of capital stock that JEDI was
entitled, but did not elect, to purchase. The exercise price of the maintenance
warrant was the value of the capital stock as of the date of the issuance of the
warrant. These warrants are exercisable for a period of one year. As of
October 25, 1999, JEDI held outstanding warrants issued pursuant to its
maintenance rights for the purchase of an aggregate of 764,892 shares of our
common stock.
After December 31, 1998, JEDI has 30 days within which to exercise its
maintenance rights in respect of stock issuances by the Company after that date.
JEDI is not entitled to any warrants in respect of maintenance rights it does
not elect to exercise in this period. As of October 25, 1999, JEDI held 337,504
unexercised maintenance rights in respect of shares issued by the Company during
the preceding 30 days.
JEDI's maintenance rights will terminate upon the earlier to occur of:
the date on which JEDI and its affiliates beneficially own less than 10% of our
voting capital stock, the date on which we complete an underwritten public
offering of common stock that generates net proceeds to us of at least
$25,000,000, and the date on which all shares of Series A preferred stock have
been converted to common stock or otherwise are no longer outstanding.
Indemnification. The JEDI purchase agreement provides that we will
indemnify, defend and hold harmless JEDI to the fullest extent lawful from and
against all losses, expenses, damages, deficiencies, liabilities, payments,
penalties, litigation, demands, defenses, judgments, proceedings, costs,
obligations, settlement costs, and attorneys', accountants' and other
professional advisors' fees (including costs of investigation or preparation)
arising out of or resulting from the breach of any representation, warranty,
convent or agreement of us contained in the JEDI purchase agreement.
The JEDI purchase agreement provides that JEDI will indemnify, defend
and hold us harmless to the fullest extent lawful from and against all similar
losses arising out of or resulting from the breach of any representation,
warranty, covenant, obligation or agreement of JEDI contained in the JEDI
purchase agreement.
Dispute resolution. The JEDI purchase agreement provides that all
disputes shall be submitted to non-binding mediation upon our request or JEDI's
request. If the non-binding mediation does not resolve the disputes in question
within 30 days after appointment of a
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<PAGE> 18
mediator, the dispute will be resolved by arbitration governed by the Commercial
Arbitration Rules of the American Arbitration Association.
Description of the stockholders agreement. Pursuant to the JEDI
purchase agreement, on May 6, 1997, EIBOC Investments, Ltd., Bruce I. Benn,
Ronald I. Benn, Edward J. Munden, Robert P. Lindsay and JEDI entered into a
stockholders agreement. Bruce I. Benn and Edward J. Munden are directors and
officers of our company and have a material beneficial interest in the shares of
EIBOC. Robert P. Lindsay is a director and officer of our company. Ronald I.
Benn is an officer of our company and has a material beneficial interest in the
shares of EIBOC. Pursuant to the stockholders agreement, each of EIBOC, Bruce I.
Benn, Ronald I. Benn, Edward J. Munden and Robert P. Lindsay agreed to
restrictions on the transfer of shares of our capital stock.
Pursuant to the stockholders agreement, each of EIBOC and Bruce I.
Benn, Ronald I. Benn, Edward J. Munden and Robert P. Lindsay (collectively, the
"management stockholders") agreed not to transfer, nor to authorize transfer of,
any of the 6,600,000 shares of common stock in which they have or may acquire a
beneficial interest except by will or the laws of descent and distribution, by
operation of law or judicial decree or as permitted by the stockholders
agreement.
The stockholders agreement permits EIBOC and the management
stockholders to make the following transfers of shares of common stock: EIBOC
and the management stockholders in the aggregate may transfer shares of common
stock if the number of shares of common stock to be transferred, together with
all shares of common stock transferred by them during the preceding 12 months,
does not exceed the lesser of (a) 4% of the outstanding shares of common stock,
(b) four times the average weekly reported volume of trading, excluding any
trades made by them on all national securities exchanges and/or reported through
the automated quotation system of a registered securities association during the
four calendar weeks preceding the date of transfer or (c) four times the average
weekly volume of trading, excluding any trades made by them in common stock
reported through the consolidated transaction reporting system, contemplated by
Rule 11Aa3-1 under the 1934 Act during the four week period specified in clause
(b)EIBOC and the management stockholders may transfer shares of common stock in
a registered underwritten public offering of common stock; provided, that
neither EIBOC nor any management stockholder may transfer shares of common stock
if after the transfer they own less than 4,950,000 shares of common stock,
subject to adjustments for stock splits, combinations, and stock dividends; and
EIBOC and the management stockholders may transfer common stock to family
members and related entities and to transfer common stock upon their death or
disability.
Pursuant to the stockholders agreement, JEDI agreed that until the
second anniversary of the date of the stockholders agreement, and except
pursuant to its registration rights under the registration rights agreement,
JEDI will not transfer any shares of common stock or securities convertible into
or exercisable or exchangeable for shares of common stock (a "common stock
equivalent") to any person that is not an affiliate of JEDI except in blocks of
at least 600,000 shares or blocks of common stock equivalents that are
convertible into or exchangeable or exercisable for at least 600,000 shares.
Pursuant to the stockholders agreement, JEDI agreed that until the
second anniversary of the date of the stockholders agreement and except pursuant
to its registration rights under the
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<PAGE> 19
registration rights agreement, JEDI will not transfer any shares of common stock
or common stock equivalents to a person that is not an affiliate of JEDI without
first giving our company and the management stockholders a right of first
refusal to purchase the shares of common stock or common stock equivalents at
the proposed sale price. Pursuant to the right of first refusal, we will have
the first right, which must be exercised within 30 days after receipt of notice
of the proposed transfer, to purchase the shares of common stock or common stock
equivalents to be transferred. If we do not elect to acquire the shares of
common stock or common stock equivalents to be transferred, the management
stockholders (if the management stockholders own in the aggregate more than 10%
of the voting capital stock) will have the right to purchase the securities if
the management stockholders notify JEDI of such election within 30 days after
our receipt of notice of the proposed transfer.
Pursuant to the stockholders agreement, EIBOC agreed not to issue any
capital stock, permit its capital stock to be transferred or enter into any
agreement relating to the issuance of its capital stock or engage in any
business or activity other than the ownership of 6,600,000 shares of common
stock.
Pursuant to the stockholders agreement, the 6,600,000 shares of common
stock owned by EIBOC and all of the outstanding shares of capital stock of EIBOC
(1) were deposited in escrow pursuant to escrow agreements mutually acceptable
to EIBOC, the management stockholders and JEDI, and (2) will be held in escrow
until the earlier of the transfer of the 6,600,000 shares of common stock owned
by EIBOC in accordance with the stockholders agreement to a person other than a
management stockholder or related party and the termination of the stockholders
agreement.
Pursuant to the stockholders agreement, EIBOC granted to the management
stockholders an irrevocable proxy to vote the 6,600,000 shares of common stock
owned by EIBOC.
The stockholders agreement will terminate on the earlier of May 6, 2002
or the date on which JEDI and its affiliates beneficially own in the aggregate
less than 10% of our voting capital stock.
Description of the registration rights agreement. The common stock
issuable upon conversion of the Series A preferred stock will not be, and the
common stock issued upon exercise of the warrants was not, registered with the
SEC and therefore, will be, when issued, restricted securities. Pursuant to the
JEDI purchase agreement, on May 6, 1997, we entered into a registration rights
agreement with JEDI pursuant to which JEDI will be entitled to certain rights
with respect to the registration under the Securities Act of 1933 of shares of
common stock issuable upon conversion of Series A preferred stock or upon
exercise of the warrants or the maintenance warrants (the "Registrable
Securities").
The registration rights agreement provides for demand and piggyback
registration rights. A holder of Registrable Securities or holders who hold at
least a majority of the Registrable Securities may demand registration up to 3
times; provided that the proposed aggregate offering proceeds from the sale of
the holder or holder's portion of Registrable Securities is at least $1,000,000.
Generally, we must pay the expenses of the demand registration statements, while
the selling holders must pay selling expenses such as underwriting fees and
discounts. The registration rights agreement also provides for unlimited
priority
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<PAGE> 20
piggyback registration rights. That is, if we propose to register the sale for
cash of any of our securities under the Securities Act for our own account, or
for the account of any other person, the holders will be entitled to include
Registrable Securities in that registration, subject to the limited right of the
managing underwriter of the offering to exclude some or all of such Registrable
Securities from the registration. We generally must pay the expenses of any
piggyback registration statement, while the selling holders generally must pay
the selling expenses such as underwriting fees and discounts. The registration
rights agreement also includes customary indemnification and contribution
provisions, and with regard to demand registration rights, a provision allowing
us to postpone filing or the declaration of effectiveness of an applicable
registration statement for up to an aggregate of 90 days if at the relevant time
we are engaged in a firm commitment underwritten public offering in which
Registrable Securities may be included or for up to an aggregate of 60 days if
there exists information the disclosure of which would be materially harmful to
us. We will not be obligated to register the Registrable Securities upon
disposition pursuant to Rule 144 under the Securities Act, the eligibility of
disposal under Rule 144(k) under the Securities Act or a registration statement
covering the Registrable Security has been declared effective by the SEC and
such Registrable Security has been issued, sold or disposed of pursuant to such
effective registration statement. JEDI may transfer its registration rights
(including demand registration rights that JEDI has not exercised) to a third
party but may not transfer more than one demand registration right.
Description of the ECT letter agreement. Pursuant to the JEDI purchase
agreement, on May 6, 1997, we entered into a letter agreement with ECT
Securities Corp., a Delaware corporation and an affiliate of the general partner
of JEDI. Pursuant to the letter agreement, we retained ECT Securities Corp. to
act as our advisor and provide consultation, assistance and advice to us with
respect our operations and properties. In consideration for these services, we
paid ECT Securities Corp. $100,000 at the closing of the transactions under the
JEDI purchase agreement and we pay an annual fee, payable quarterly in arrears,
of $100,000 during the term of the letter agreement. The term of the letter
agreement is five years, subject to earlier termination if JEDI's ownership of
our voting capital stock decreases to less than 10% of our voting capital stock.
ECT Securities Corp. may terminate the letter agreement effective as of the end
of any calendar quarter upon written notice not less than 30 days before the
date on which the termination is to be effective. The letter agreement includes
customary provisions for indemnification of ECT Securities Corp.
BANK OF MONTREAL CREDIT AGREEMENT
Each of JEDI and Enron Capital & Trade Resources Corp. ("ECT"), an
affiliate of JEDI, is a lender under our amended and restated Credit Agreement
dated as of April 17, 1998 (the "Credit Agreement"). Societe Generale, Southwest
Agency and The Bank of Montreal are the two other lenders under the Credit
Agreement. The Bank of Montreal also acts as agent for the lender parties. As of
October 25, 1999, the Company signed a credit agreement with Ableco Finance LLC
and Foothill Capital Corporation (the "Ableco Credit Agreement") that, when
funded, of which there can be no assurance, will replace the current Credit
Agreement. Neither of the lenders to the October 1999 credit agreement are
affiliates of the Company.
The Credit Agreement provides for borrowings up to $125.0 million (subject
to borrowing base limitations) from the lenders to, among other things, fund
development and exploitation
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<PAGE> 21
expenditures, acquisitions and general working capital. The proceeds under the
Credit Agreement were used to fund the property acquisitions in part. As of
September 10, 1999, we were able to borrow up to $8.0 million under the Credit
Agreement, all of which was outstanding as of September 10, 1999. The loan under
the Credit Agreement matures on October 1, 2000. In the event of a default on
the indebtedness under the Credit Agreement, not subsequently waived by the
lenders, it is unlikely that we would be able to continue our business.
Indebtedness incurred under the Credit Agreement generally bears interest
at bank prime plus 2.0%.
The loan under the Credit Agreement is secured by a first lien on our oil
and natural gas properties, the title to which is held by a wholly owned
subsidiary of Queen Sand Resources, and on the stock of two of our subsidiaries.
In addition, the parent company and its operating subsidiaries, other than the
subsidiary which is the borrower of record entered into guaranty agreements
guaranteeing the repayment of the indebtedness under the Credit Agreement.
Pursuant to the Credit Agreement, we are subject to certain affirmative and
negative financial and operating covenants that are usual and customary for
transactions of this nature. The affirmative covenants include, but are not
limited to, covenants to:
o provide annual audited and unaudited interim financial information;
o provide notices of the occurrence of certain material events affecting us;
o promptly provide notice of all legal or arbital proceedings affecting us or
our subsidiaries which could reasonably be expected to have a material
adverse effect;
o maintain and preserve its existence and oil and gas properties and other
material properties;
o implement and comply with certain environmental procedures;
o perform our obligations under the Credit Agreement;
o provide reserve reports;
o deliver certain title information;
o grant a security interest in oil and gas properties that are not currently
subject to a lien under the Credit Agreement such that the mortgaged
property includes at least 85% (with an obligation to use reasonable
efforts to maintain 95%) of the SEC PV-10 of our total proved reserves; and
o deliver certain information relating to compliance with ERISA laws and
regulations.
The negative covenants include, but are not limited to, covenants:
o not to incur any indebtedness except as expressly permitted under the
Credit Agreement;
o not to incur any lien on any of its properties except as expressly
permitted under the Credit Agreement;
o not to make any loans or advances to or investments in any person except as
expressly permitted under the Credit Agreement;
o with respect to the parent company, not to declare or pay any dividends or
redeem or otherwise acquire for value any capital stock of the parent
company except for stock dividends and certain permitted repurchases of
Series C preferred stock;
o not to enter into sale and leaseback transactions;
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o not to materially change the character of our business as an independent
oil and natural gas exploration and production company;
o not to enter into lease agreements except as expressly permitted under the
Credit Agreement;
o not to merge with or sell all or substantially all of our property or
assets to any other person;
o not to permit the borrowed proceeds under the Credit Agreement to be used
for any purpose except as expressly permitted under the Credit Agreement;
o not to violate ERISA laws and regulations;
o not to discount or sell any notes or accounts receivable;
o not to maintain a working capital ratio of less than 1.0 to 1.0;
o not to maintain a consolidated tangible net worth of less than $18.5
million plus the amount equal to 75% of the net proceeds of any equity
offering;
o to pay our trade accounts payable when due;
o not maintain a fixed charge coverage ratio of less than 1.15 to 1.0;
o not to sell, assign or otherwise transfer any interest in any oil or
natural gas properties except as expressly permitted under the Credit
Agreement;
o not to violate environmental laws and regulations;
o not to enter into transactions with affiliates other than those entered
into in the ordinary course of business on fair and reasonable terms;
o not to create any additional subsidiaries unless such subsidiaries
guarantee the obligations under the Credit Agreement or issue stock of any
subsidiaries to third parties;
o not to enter into negative pledge agreements;
o not to enter into any contracts which warrant production of oil and natural
gas and not allow gas imbalances, take-or-pay or other prepayments which
would require the delivery of oil or natural gas at some future time
without receiving full payment therefor to exceed 5% of the current
aggregate monthly gas production from the mortgaged oil and natural gas
properties;
o not to amend or modify any material agreements;
o not to repay other indebtedness except as expressly permitted under the
Credit Agreement; and
o not make or pay capital expenditures more than specified amounts.
The Credit Agreement also contains usual and customary events of default
and provides remedies to the lenders in the event of default. The events of
default include:
o default in payment when due of any principal of or interest on indebtedness
under the Credit Agreement;
o default in payment when due of any principal of or interest on any other
indebtedness aggregating $500,000 or more or an event shall occur which
requires us to mandatorily redeem any of our existing preferred stock;
o breach of a representation and warranty under the Credit Agreement;
o default in performance of obligations under the Credit Agreement;
o our admitting in writing our inability to pay debts as they become due;
o voluntary or involuntary bankruptcy;
o a judgment in excess of $100,000 shall be entered and not vacated within 30
days;
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o the security agreements under the Credit Agreement shall cease to be in
full force and effect; and
o we discontinue our usual business or any person or group of persons (other
than JEDI, Enron or its affiliates) shall have acquired beneficial
ownership of 30% or more of the outstanding shares of voting stock the
parent company or individuals who constitute the Board of Directors of the
parent company cease to constitute a majority of the then-current Board of
Directors of the parent company.
Although we believe that our cash flows and available sources of financing
will be sufficient to satisfy the interest payments on our debt at currently
prevailing interest rates and oil and natural gas prices, our level of debt may
adversely affect our ability:
o to obtain additional financing for working capital, capital expenditures or
other purposes, should we need to so do; or
o to acquire additional oil and natural gas properties or to make
acquisitions utilizing new borrowings.
There can be no assurances that we will be able to obtain additional
financing, if required, or that such financing, if obtained, will be on terms
favorable to us.
On September 30, 1998 and December 31, 1998 and March 31, 1999 we were not
in compliance with the interest coverage ratio specified in the Credit
Agreement. The lenders waived the September 30, 1998 and December 31, 1998
covenant violation solely with respect to these specific defaults. On May 14,
1999, the lenders waived our March 31, 1999 noncompliance with the interest
coverage ratio. On the same date, the Credit Agreement was amended to reduce the
interest coverage ratio to 1.15:1 for the quarter ending June 30, 1999 and for
each quarter thereafter. We believe, but cannot assure, that we will be able to
comply with all restrictive covenants in the future or obtain waivers from the
bank with respect to noncompliance.
On June 30, 1999 we were not in compliance with the minimum tangible net
worth covenant in the Credit Agreement. On October 12, 1999 the lenders waived
this covenant violation and the Credit Agreement was amended to reduce the
Minimum Tangible Net Worth covenant to $33 million. We are in the process of
arranging additional capital to achieve a long-term resolution of our defaults
under the Credit Agreement. If we are not successful, our lenders may declare
all amounts borrowed under the Credit Agreement, together with accrued interest,
to be due and payable. If we do not repay the indebtedness promptly, our lenders
could then foreclose against any collateral securing
ECT CREDIT AGREEMENT
Effective December 29, 1997, we established the ECT revolving credit
agreement with ECT, as a lender and as agent for the lenders thereto, to fund on
a revolving basis capital costs incurred with future development projects and to
fund further acquisitions. The ECT revolving credit agreement is subordinate to
the Credit Agreement. The ECT revolving credit agreement provides for borrowings
up to $10.0 million, on a revolving basis and subject to borrowing
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base limitations, which has been initially set at an amount equal to 40% of the
borrowing base established from time to time under the Credit Agreement.
There were no amounts outstanding under the ECT Credit Agreement as of June
30, 1999 and there have been no advances since then. Upon funding of the Ableco
Credit Agreement, of which there can be no assurances the ECT Credit Agreement
will be terminated.
This facility was designed to provide bridge financing for development
projects and acquisitions to be completed on relatively short notice or until
the affected assets are eligible to be included in the borrowing base for the
Credit Agreement or financed with longer-term indebtedness or equity capital;
provided, that the availability for acquisitions under the facility is limited
to the lesser of $5.0 million or 50% of the borrowing base as in effect from
time to time. There is no indebtedness outstanding under this facility as of the
date of this Form 10-K. Borrowings in excess of certain amounts under the ECT
Revolving Credit Agreement will reduce the available borrowing base under the
Credit Agreement. The loan is secured by a second priority lien and security
interest (behind the first lien position of the Credit Agreement) in
approximately 95% of our oil and natural gas properties.
The ECT revolving credit agreement is subject to payment of interest at a
fluctuating rate per annum equal to (i) the rate of 1% above the then highest
rate of interest being paid on any portion of the indebtedness owed under the
Credit Agreement or (ii) the rate of 15%, depending upon whether there is any
indebtedness owed under the Credit Agreement outstanding or whether there has
been a certain amount of indebtedness owed under the ECT revolving Credit
Agreement for certain time periods.
The maturity date for the ECT revolving credit agreement is the earlier of
December 30, 2002 or the date that is 60 days after we receive written notice
that the lenders and their affiliates beneficially own in the aggregate less
than 10% of the capital stock of the parent company entitled to vote in the
election of directors. From March 31, 1998 through the maturity date, we must
pay interest on the outstanding loans at quarterly intervals, on the last
business day of every March, June, September and December. In addition, the ECT
revolving credit agreement provides for certain voluntary prepayments and
certain mandatory prepayments of amounts borrowed under the facility.
We are obligated to pay ECT, for the account of each lender under the ECT
revolving credit agreement, a fee of 3/8% per annum on the daily average of the
unadvanced portion of the facility, payable at the end of each quarter. This fee
has been waived indefinitely since April 1998.
We are subject to various covenants under the ECT revolving credit
agreement, which covenants are substantially similar to the covenants described
above with respect to the Credit Agreement. In addition to the covenants, the
ECT revolving credit agreement contains representations, warranties, covenants
and default provisions customary for a facility of this type.
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<PAGE> 25
HEDGING ACTIVITIES
On April 25, 1998 we entered into a series of natural gas futures
contract with the Bank of Montreal and an affiliate of Enron. These contracts
are part of our five year commodity price risk management (hedging) strategy
that is designed to provide protection from low commodity prices while providing
some opportunity to enjoy the benefits of higher commodity prices. This strategy
is designed to provide a degree of protection of negative shifts in natural gas
prices (Henry Hub Nymex Index) on approximately 80% of our expected natural gas
production from reserves currently classified as proved developed producing
during the fiscal year ending June 30, 2000. At the same time, we are able to
participate completely in upward movements in the Henry Hub Nymex Index to the
extent of approximately 30% of our expected natural gas production for the
fiscal year ending June 30, 2000, and up to $2.70 per MMBtu on approximately 73%
of our expected natural gas production for the fiscal year ended June 30, 2000.
In addition to the natural gas contracts entered into on April 25,
1998, we were under contract with an affiliate of Enron for 10,000 Bbls of oil
per month with a floor of $18.00 per Bbl and a ceiling of $20.40 per Bbl with
participation on 50% of the price of WTI Nymex over $20.40 for the period from
September 1, 1997 through August 31, 1998. We also had a contract for 50,000
MMBtu of natural gas per month with an affiliate of Enron, with a floor price of
$1.90 per MMBtu and a ceiling price of $2.66 per MMBtu, with participation on
50% of the price of Henry Hub Nymex Index over $2.66 per MMBtu for the period
from September 1, 1997 through August 31, 1998. In September 1998 we entered
into a swap contract on 12,000 barrels of crude oil per month at $17.00 per
barrel from October 1 through December 31, 1998. In March 1999 we entered into a
swap contract on 10,000 barrels of crude oil per month at $13.50 per barrel from
March 1 through August 31, 1999. We also entered into two additional swap
contracts of 5,000 barrels of crude oil per month at $14.35 per barrel and
$14.82 per barrel respectively from April 1 through September 30, 1999.
The following table summarizes the results of our hedging activity for the last
three fiscal years.
<TABLE>
<CAPTION>
JUNE 30
-----------------------------------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
GAS (PER MCF):
Price received at wellhead $2.00 $2.24 $2.31
Effect of hedge contracts 0.13 0.03 --
Effective price received, including hedge contracts 2.13 2.27 2.31
Average NYMEX Henry Hub 2.01 2.46 2.52
Average basis differential including hedge contracts 0.12 (0.19) (0.21)
Average basis differential excluding hedge contracts (0.01) (0.22) (0.21)
OIL (PER BARREL):
Average price received at wellhead per barrel 12.37 15.07 20.73
Average effect of hedge contract 0.00 0.45 --
</TABLE>
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<PAGE> 26
<TABLE>
<S> <C> <C> <C>
Average price received, including hedge contracts 12.37 15.52 20.73
Average NYMEX Sweet Light Oil 14.45 17.62 22.40
Average basis differential including hedge contracts (2.08) (2.10) (1.67)
Average basis differential excluding hedge contracts (2.08) (2.55) (1.67)
</TABLE>
As part of our hedging strategy, we have placed approximately 25% of the
expected natural gas production from our proved developed producing reserves
over the five years ending in April 2003 into a swap at $2.40 per MMBtu.
Approximately 10% of the expected natural gas production from our proved
developed producing reserves is hedged in a five year contract with a floor of
$1.90 per MMBtu. We also hedged approximately 40% of the expected natural gas
production from our proved developed producing reserves with a series of
non-participating collars with ceilings that escalate from $2.70 per MMBtu to
$2.90 per MMBtu over the remainder of the five year period.
The table below sets out volume of natural gas hedged with a floor price of
$1.90 per MMBtu with Enron. The volumes presented in this table are divided
equally over the months during the five year period:
<TABLE>
<CAPTION>
VOLUME
PERIOD BEGINNING PERIOD ENDING (MMBTU)
---------------- ----------------- ---------
<S> <C> <C>
May 1, 1998 December 31, 1998 885,000
January 1, 1999 December 31, 1999 1,080,000
January 1, 2000 December 31, 2000 880,000
January 1, 2001 December 31, 2001 740,000
January 1, 2002 December 31, 2002 640,000
January 1, 2003 December 31, 2003 560,000
</TABLE>
The table below sets out volume of natural gas hedged with a swap at $2.40
per MMBtu with Enron. The volumes presented in this table are divided equally
over the months during the period:
<TABLE>
<CAPTION>
VOLUME
PERIOD BEGINNING PERIOD ENDING (MMBTU)
---------------- ----------------- ---------
<S> <C> <C>
May 1, 1998 December 31, 1998 2,210,000
January 1, 1999 December 31, 1999 2,710,000
January 1, 2000 December 31, 2000 2,200,000
January 1, 2001 December 31, 2001 1,850,000
January 1, 2002 December 31, 2002 1,600,000
January 1, 2003 December 31, 2003 1,400,000
</TABLE>
Effective May 1, 1998 through December 31, 2003 we have a contract
involving the hedging of a portion of our future natural gas production
involving floor and ceiling prices as
26
<PAGE> 27
set out in the table below. The volumes presented in this table are divided
equally over the months during the period.
<TABLE>
<CAPTION>
VOLUME
PERIOD BEGINNING PERIOD ENDING (MMBTU) FLOOR PRICE CEILING PRICE
---------------- ------------- ------- ----------- -------------
<S> <C> <C> <C> <C>
May 1, 1998 December 31, 1998 3,540,000 $2.00 $2.70
January 1, 1999 December 31, 1999 4,330,000 2.00 2.70
January 1, 2000 December 31, 2000 3,520,000 2.00 2.70
January 1, 2001 April 30, 2001 900,000 2.00 2.70
May 1, 2001 December 31, 2001 1,980,000 2.00 2.80
January 1, 2002 April 30, 2002 850,000 2.00 2.80
May 1, 2002 December 31, 2002 1,700,000 2.00 2.90
January 1, 2003 December 31, 2003 2,250,000 2.00 2.90
</TABLE>
PURCHASE AND SALE AGREEMENTS
On August 1, 1997, we purchased certain operated oil and natural gas
properties from Collins and Ware, Inc. for cash consideration (net of production
subsequent to the February 1, 1997 effective date) of approximately $6.0 million
and 1,000,000 shares of our common stock. Ted Collins, Jr., one of our
directors, is the controlling shareholder of Collins and Ware, Inc. This
transaction was negotiated and closed prior to Mr. Collins becoming one of our
directors. The consummation of the acquisition was not conditioned upon Mr.
Collins becoming one of our directors. In connection with this purchase, we
entered into a registration rights agreement with Collins and Ware, Inc.
granting piggyback registration rights with respect to the resale of the common
stock issued to Collins and Ware, Inc. We registered this stock for resale
pursuant to a registration statement filed with, and declared effective by, the
SEC in June 9, 1999.
On April 10, 1996, we purchased certain operated oil and natural gas
properties for cash consideration of approximately $5 million and 470,000 shares
of our common stock from Eli Rebich and Southern Exploration Company. Eli
Rebich, one of our directors, is the controlling shareholder of Southern
Exploration Company. This transaction was negotiated and closed prior to Mr.
Rebich becoming one of our directors. The consummation of the acquisition was
not a condition to Mr. Rebich becoming one of our directors. As part of the
Purchase Agreement, we granted Mr. Rebich piggyback registration rights with
respect to register the resale of the common stock issued to him.
27
