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SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
QUEEN SAND RESOURCES, INC.
(Name of Registrant as Specified in Its Charter)
QUEEN SAND RESOURCES, INC.
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
1) Title of each class of securities to which transaction
applies:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11:
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4) Proposed maximum aggregate value of transaction:
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5) Total Fee Paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
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2) Form Schedule or Registration Statement No.:
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3) Filing Party:
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4) Date Filed:
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QUEEN SAND RESOURCES, INC.
13760 Noel Road, Suite 1030
Dallas, Texas 75240-7336
Tel: (972) 233-9906
Fax: (972) 233-9575
Dear Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders
of Queen Sand Resources, Inc. on September 18, 2000, at 3:00 p.m., Dallas time.
The meeting will be held at the Country Inn Hotel, 4355 Beltway Drive, Addison,
Texas 75001. Your board of directors and management look forward to greeting
those stockholders able to attend in person.
Since the completion of the $150 million purchase of royalty and
overriding royalty interests from two trusts managed by the Morgan Guaranty and
Trust Company in April 1998, the Company has encountered a number of external
challenges. These challenges have included the collapse of the high yield bond
market in the summer of 1998, record low energy prices in the winter of
1998-1999 and a cyclical move by the equity capital markets away from junior
energy companies. As a result of these challenges we have been unable to reduce
our high levels of debt and our stock price has been depressed. Management has
developed and the board of directors has approved a plan that we believe can
significantly reduce our debt levels, restore value to the common stock and
position us to take advantage of current energy prices and growth opportunities.
At the annual meeting, you will be asked to consider and approve the
following items:
(1) the election of three directors to serve until the next Annual
Meeting of Stockholders or until their successors are duly
qualified and elected (the board of directors has unanimously
nominated these persons for election as director);
(2) a proposal to approve the following recapitalization
transactions:
o the exchange of the 9,600,000 outstanding shares of
our Series A preferred stock for 212,500 shares of
post reverse-split common stock;
o the exchange of the 2,173 outstanding shares of our
Series C preferred stock and warrants exercisable for
340,153 shares of common stock for 120,000 shares of
post reverse-split common stock;
o the exchange of the 1,593,918 remaining unexercised
common stock repricing rights and warrants
exercisable for 655,000 shares of common stock for
400,000 shares of post reverse-split common stock.
(3) a proposal to amend our Restated Certificate of Incorporation,
as amended, to effect a reverse stock split of the outstanding
shares of our common stock, par value $.0015 per share,
whereby every 156 shares of common stock outstanding will
automatically be reverse split into one share outstanding, and
to effect an automatic increase in the par value of the common
stock from $.0015 per share to $0.234 per share but leave
unchanged the number of authorized shares of our common stock
at 100,000,000 shares. The board of directors
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may delay implementation of the reverse stock split at any
time up to and including October 31, 2000, or, if the
stockholders do not approve the recapitalization proposal, the
board of directors may abandon the reverse stock split as
permitted under Section 242(c) of the Delaware General
Corporation Law;
(4) a proposal to amend our Restated Certificate of Incorporation,
as amended, to change our name to DevX Energy, Inc.;
(5) the appointment of Ernst & Young LLP as our independent
auditors for the fiscal year ended June 30, 2001; and
(6) to transact other business that may properly come before the
annual meeting or any adjournments thereof.
The board of directors has unanimously approved each of the proposals
set forth above and urges you to vote in favor of each of the proposals.
Information about the business to be conducted at the annual meeting is set
forth in the accompanying proxy statement, which you are urged to read
carefully. During the annual meeting, I will review with you the affairs and
progress of the company. Officers of the company will be present to respond to
questions from stockholders.
The vote of every stockholder is important. The board of directors
appreciates and encourages stockholder participation in our affairs. Whether or
not you plan to attend the annual meeting, please sign, date and return the
enclosed proxy promptly in the envelope provided. Your shares will then be
presented at the annual meeting, and we will be able to avoid the expense of
further solicitation. If you attend the annual meeting, you may, at your
discretion, withdraw the proxy and vote in person.
THE EFFECTIVENESS OF THE RECAPITALIZATION PROPOSAL IS CONTINGENT ON THE
APPROVAL OF BOTH THE RECAPITALIZATION PROPOSAL AND THE REVERSE STOCK SPLIT
PROPOSAL. AS A RESULT, IF THE REVERSE STOCK SPLIT PROPOSAL IS NOT APPROVED BY
THE STOCKHOLDERS, THEN WE CANNOT COMPLETE THE RECAPITALIZATION EVEN IF THE
STOCKHOLDERS APPROVE THE RECAPITALIZATION PROPOSAL.
On behalf of the board of directors, thank you for your cooperation and
continued support.
Sincerely,
/s/ EDWARD J. MUNDEN
August 28, 2000 EDWARD J. MUNDEN
Chairman of the Board, President and
Chief Executive Officer
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QUEEN SAND RESOURCES, INC.
13760 Noel Rd., Suite 1030
Dallas, Texas 75240-7336
Tel: (972) 233-9906
Fax: (972) 233-9575
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD SEPTEMBER 18, 2000
The Annual Meeting of Stockholders of Queen Sand Resources, Inc., a
Delaware corporation (the "Company"), will be held at the Country Inn Hotel,
4355 Beltway Drive, Addison, Texas 75001, on September 18, 2000, at 3:00 p.m.,
Dallas time, for the following purposes:
(1) the election of three directors to serve until the next Annual
Meeting of Stockholders or until their successors are duly
qualified and elected (the board of directors has unanimously
nominated these persons for election as director);
(2) a proposal to approve the following recapitalization
transactions:
o the exchange of the 9,600,000 outstanding shares of
Series A preferred stock for 212,500 shares of post
reverse-split common stock;
o the exchange of the 2,173 outstanding Series C
preferred stock and warrants exercisable for 340,153
shares of common stock for 120,000 shares of post
reverse-split common stock;
o the exchange of the 1,593,918 remaining unexercised
common stock repricing rights and warrants
exercisable for 655,000 shares of common stock for
400,000 shares of post reverse-split common stock.
(3) a proposal to amend the Company's Restated Certificate of
Incorporation, as amended, to effect, at any time before
October 31, 2000, a reverse stock split of the outstanding
shares of our common stock, par value $.0015 per share,
whereby every 156 shares of common stock outstanding will
automatically be reverse split into one share outstanding, and
to effect an automatic increase in the par value of the common
stock from $.0015 per share to $0.234 per share but leave
unchanged the number of authorized shares of our common stock
at 100,000,000 shares. The board of directors may delay
implementation of the reverse stock split at any time up to
and including October 31, 2000, or, if the stockholders do not
approve the recapitalization proposal, the board of directors
may abandon the reverse stock split as permitted under Section
242(c) of the Delaware General Corporation Law;
(4) a proposal to amend the Company's Restated Certificate of
Incorporation, as amended, to change the Company's name to
DevX Energy, Inc.;
(5) the appointment of Ernst & Young LLP as the Company's
independent auditors for the fiscal year ended June 30, 2001;
and
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(6) to transact other business that may properly come before the
annual meeting or any adjournments thereof.
Holders of the our common stock, par value $0.0015 per share, of record
on July 21, 2000, holders of our Series A participating convertible preferred
stock, par value $0.01 per share, of record on July 21, 2000, and holders of our
Series C convertible preferred stock, par value $0.01 per share, of record on
July 21, 2000, are entitled to notice of, and to vote at, the annual meeting or
any postponements or adjournments thereof. At the record date for determination
of stockholders entitled to vote at the annual meeting or any postponements or
adjournments thereof, 90,288,538 shares of voting capital stock, comprised of
80,688,538 shares of common stock and 9,600,000 shares of Series A preferred
stock, and 2,173 shares of Series C preferred stock, were issued and
outstanding.
THE EFFECTIVENESS OF THE RECAPITALIZATION PROPOSAL IS CONTINGENT ON THE
APPROVAL OF BOTH THE RECAPITALIZATION PROPOSAL AND THE REVERSE STOCK SPLIT
PROPOSAL. AS A RESULT, IF THE REVERSE STOCK SPLIT PROPOSAL IS NOT APPROVED BY
THE STOCKHOLDERS, THEN THE COMPANY CANNOT COMPLETE THE RECAPITALIZATION EVEN IF
THE STOCKHOLDERS APPROVE THE RECAPITALIZATION PROPOSAL.
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING IN PERSON, YOU ARE
URGED TO FILL OUT, SIGN AND MAIL PROMPTLY THE ENCLOSED PROXY IN THE ACCOMPANYING
ENVELOPE. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES. PROXIES
FORWARDED BY OR FOR BROKERS OR FIDUCIARIES SHOULD BE RETURNED AS REQUESTED BY
THEM. THE PROMPT RETURN OF PROXIES WILL SAVE THE EXPENSE INVOLVED IN FURTHER
COMMUNICATION.
By Order of the Board of Directors,
Dallas, Texas
August 28, 2000
/s/ EDWARD J. MUNDEN
EDWARD J. MUNDEN
Chairman of the Board, President and
Chief Executive Officer
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QUEEN SAND RESOURCES, INC.
13760 Noel Rd., Suite 1030
Dallas, Texas 75240-7336
Tel: (972) 233-9906
Fax: (972) 233-9575
PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD SEPTEMBER 18, 2000
This proxy statement is furnished to holders of our common stock, par
value $0.0015 per share, holders of our Series A Participating Convertible
Preferred Stock, par value $0.01 per share, and holders of our Series C
Convertible Preferred Stock, par value $0.01 per share. Your proxy is being
requested by the board of directors of Queen Sand Resources, Inc., a Delaware
corporation. The proxies are to be used at our annual meeting of stockholders to
be held at the Country Inn Hotel, 4355 Beltway Drive, Addison, Texas 75001, on
September 18, 2000, at 3:00 p.m., Dallas time, and at any and all postponements
or adjournments thereof. The record date for determining stockholders entitled
to vote at the annual meeting is July 21, 2000.
ABOUT THE MEETING
WHAT IS THE PURPOSE OF THE ANNUAL MEETING?
At our annual meeting, stockholders will act upon the matters outlined
in the accompanying notice of annual meeting of stockholders. In addition to
customary items such as the election of directors and the ratification of
auditors, stockholders are being requested to act upon several additional items
of significant importance to the company. Management also will report on the
company and respond to questions from stockholders.
WHAT INFORMATION WILL I RECEIVE?
Copies of (a) our Annual Report on Form 10-K for the fiscal year ended
June 30, 2000, (b) the notice of annual meeting of stockholders, (c) this proxy
statement, and (d) the enclosed proxy card(s) are being mailed or delivered in a
single envelope to stockholders beginning on August 29, 2000. See "General; 2000
Annual Meeting."
We will deliver copies of our Annual Report on Form 10-K and other
proxy materials to brokerage firms and other custodians, nominees and
fiduciaries for forwarding to beneficial owners of our common stock, Series A
preferred stock and Series C preferred stock. We will reimburse those brokerage
firms, custodians, nominees and fiduciaries for their reasonable expenses in
connection with forwarding these materials.
WHO CAN ATTEND THE ANNUAL MEETING?
All holders of our common stock, Series A preferred stock and Series C
preferred stock, outstanding as of the record date, or their duly appointed
proxies, may attend the annual meeting.
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If you hold your shares in "street name," that is, through a broker or
other nominee, you will need to bring a copy of a brokerage or other nominee
statement reflecting your stock ownership as of the record date and check in at
the registration desk at the annual meeting. You can not vote these shares
unless you also bring a broker-issued proxy as discussed below.
WHO IS ENTITLED TO VOTE?
Only holders of record of our common stock, Series A preferred stock
and Series C preferred stock outstanding at the close of business on the record
date are entitled to receive notice of the annual meeting and, as described
below, to vote at the annual meeting, or any postponement or adjournment of the
annual meeting, the shares of common stock, Series A preferred stock and Series
C preferred stock that they held on the record date.
Each share of common stock is entitled to one vote for each director to
be elected and upon all other matters to be voted upon by the stockholders at
the annual meeting.
The holder of our Series A preferred stock is entitled to vote on all
matters submitted to a vote of holders of common stock, voting with the common
stock as a single class. Each share of Series A preferred stock is entitled to
the number of votes equal to the number of shares of common stock into which the
share of Series A preferred stock could be converted on the record date. Each
share of Series A preferred stock currently has one vote. The holder of Series A
preferred stock also has the right to vote separately as a class on the
recapitalization proposal, the reverse stock split proposal and the name change
proposal. In addition, the holder of Series A preferred stock has certain
additional voting rights with respect to the election of directors. See "Certain
Relationships and Related Transactions - JEDI Transaction - Description of
Series A Preferred Stock - Election of Directors." As of the date of this proxy
statement, we have not received notification from the sole holder of the Series
A preferred stock that it intends to exercise its additional director voting
rights.
The holders of Series C preferred stock have the right to vote
separately as a class only on the recapitalization proposal and the reverse
stock split proposal, but not on any other matters.
WHAT CONSTITUTES A QUORUM?
The presence at the annual meeting, in person or by proxy of the
holders of a majority of the shares of common stock and the Series A preferred
stock together as a class, the holders of a majority of the shares of Series A
preferred stock, and the holders of a majority of the shares of Series C
preferred stock, outstanding on the record date will constitute a quorum,
permitting the annual meeting to conduct its business with respect to the
recapitalization proposal and the reverse stock split proposal. The presence at
the annual meeting in person or by proxy of the holders of a majority of the
shares of common stock and the Series A preferred stock, together as a class,
outstanding on the record date will constitute a quorum for purposes of the
election of directors, the proposal to change our name and the ratification of
the appointment of auditors. On the record date, there were outstanding
80,688,538 shares of common stock, 9,600,000 shares of Series A preferred stock
and 2,173 shares of Series C preferred stock. Proxies received by us but marked
as abstentions and broker nonvotes will be included in the calculation of the
number of shares considered to be present for quorum purposes at the annual
meeting.
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HOW DO I VOTE?
If you are a record holder of shares and complete and properly sign the
accompanying proxy card and return it to us, your shares will be voted as you
direct on the proxy card. If you attend the annual meeting, you may vote your
shares by proxy by delivering your completed proxy card in person or you may
vote your shares yourself by completing a ballot at the annual meeting. We will
have ballots available at the annual meeting for stockholders who choose to vote
their shares in person.
Many of our stockholders hold their stock in "street name," which means
that the shares are registered in their brokers', banks' or other nominee
holders' names rather than in the stockholders' own names. The street name
holder should provide to you, along with these proxy solicitation materials that
we have provided to the street name holder, the street name holder's own request
for voting instructions. By completing the voting instruction card, you may
direct your street name holder how to vote your shares. Alternatively, if you
want to vote your street name shares at the annual meeting, you must contact
your broker directly in order to obtain a proxy issued to you by your nominee
holder. A broker letter that identifies you as a stockholder is not the same as
a broker-issued proxy. If you fail to bring a nominee-issued proxy to the annual
meeting, you will not be able to vote your nominee-held shares at the annual
meeting.
If you hold your shares in street name through a broker or other
nominee, your broker or nominee will not be permitted to exercise voting
discretion with respect to some of the matters to be acted upon. Thus, if you do
not give your broker or nominee specific instructions, your shares may not be
voted on those matters and will not be counted in determining the number of
shares necessary for approval. Shares represented by these "broker non-votes"
will, however, be counted in determining whether there is a quorum present at
the annual meeting.
CAN I CHANGE MY VOTE AFTER I RETURN MY PROXY CARD?
Yes. Even after you have submitted your proxy, you may change your vote
at any time before the proxy is exercised by filing with the Secretary of the
company either a notice of revocation or a proxy you have executed bearing a
later date. If you hold your shares in street name and you would like to vote
your shares at the annual meeting, you will also need to bring with you a legal
proxy from your broker. The powers of the proxy holders will be suspended as to
your shares if you attend the annual meeting in person and so request, although
attendance at the annual meeting will not by itself revoke a previously granted
proxy.
WHAT HAPPENS IF THE ANNUAL MEETING IS POSTPONED OR ADJOURNED?
If the annual meeting is postponed or adjourned for any reason, at any
subsequent reconvening of the annual meeting all proxies will be voted in the
same manner as the proxies would have been voted at the original convening of
the annual meeting. However, proxies may be revoked or withdrawn in the manner
we described above prior to the reconvened annual meeting even if they have been
voted on the same or any other matter at the prior meeting.
WHAT ARE THE BOARD'S RECOMMENDATIONS?
Unless you give other instructions on your proxy card, the persons
named as proxy holders on the proxy card will vote in accordance with the
recommendations of the board of directors. The board's recommendations are set
forth below together with the description of each item in this proxy statement.
In summary, the board recommends a vote in favor of:
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(1) the election of three directors to serve until the next Annual
Meeting of Stockholders or until their successors are duly
qualified and elected (the board of directors has unanimously
nominated these persons for election as director);
(2) a proposal to approve the following recapitalization
transactions (the "Recapitalization Proposal"):
o the exchange of the 9,600,000 outstanding shares of
Series A preferred stock for 212,500 shares of post
reverse-split common stock;
o the exchange of the 2,173 outstanding shares of
Series C preferred stock and warrants exercisable for
340,153 shares of common stock for 120,000 shares of
post reverse-split common stock;
o the exchange of the 1,593,918 remaining unexercised
common stock repricing rights and warrants
exercisable for 655,000 shares of common stock for
400,000 shares of post reverse-split common stock.
(3) a proposal to amend our restated certificate of incorporation,
as amended, to effect a reverse stock split of the outstanding
shares of our common stock, par value $.0015 per share,
whereby every 156 shares of common stock outstanding will
automatically be reverse split into one share outstanding, and
to effect an automatic increase in the par value of the common
stock from $.0015 per share to $0.234 per share but leave
unchanged the number of authorized shares of our common stock
at 100,000,000 shares. The board of directors may delay
implementation of the reverse stock split at any time up to
and including October 31, 2000, or, if the stockholders do not
approve the recapitalization proposal, the board of directors
may abandon the reverse stock split as permitted under Section
242(c) of the Delaware General Corporation Law;
(4) a proposal to amend our Restated Certificate of Incorporation,
as amended, to change our name to DevX Energy, Inc.; and
(5) the appointment of Ernst & Young LLP as our independent
auditors for the fiscal year ended June 30, 2001.
With respect to any other matters that properly come before the annual
meeting, the proxy holders will vote as recommended by the board of directors,
or, if no recommendation is given, in their own discretion. The board of
directors does not know of any other business to be presented at the annual
meeting.
HOW ARE ABSTENTIONS AND BROKER NON-VOTES TREATED?
Brokers and other nominee holders holding shares of record for their
customers generally are not entitled to vote on certain matters unless they
receive voting instructions from their customers. "Broker non-votes" means those
votes that could have been cast on the matter in question by brokers and other
nominee holders with respect to uninstructed shares if the brokers and other
nominee holders had received their customers' instructions. "Uninstructed
shares" means those shares held by a broker or other nominee who has not
received instructions from its customers on the matters and the broker or other
nominee has so notified the company on a proxy form in accordance with industry
practice or has otherwise advised the company that the nominee lacks voting
authority.
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The effect of broker non-votes and abstentions is described with
respect to each proposal below in "Summary of Proposals to be Considered at the
Annual Meeting."
SUMMARY OF PROPOSALS TO BE CONSIDERED AT THE ANNUAL MEETING
The following is a summary of the proposals presented in this proxy
statement. You are urged to read this entire proxy statement and the attached
appendix.
Proposal 1. Election of directors. At the annual meeting, stockholders
will elect three directors, who make up the entire board of directors, to hold
office until the next annual meeting of stockholders or until their successors
are elected and qualified. The affirmative vote of a plurality of the shares of
common stock and Series A preferred stock, voting together as a class,
represented at the annual meeting will be required to elect each of these
directors. Votes may be cast in favor of or withheld with respect to each
nominee. Abstentions and broker non-votes will not be taken into account in
determining the outcome of the election.
Proposal 2. Recapitalization. Stockholders are being asked to approve
the Recapitalization Proposal which consists of the following:
o the exchange of the 9,600,000 outstanding shares of
Series A preferred stock for 212,500 shares of post
reverse-split common stock;
o the exchange of the 2,173 outstanding shares of
Series C preferred stock and warrants exercisable for
340,153 shares of common stock for 120,000 shares of
post reverse-split common stock; and
o the exchange of the 1,593,918 remaining unexercised
common stock and warrants exercisable for 655,000
shares of common stock repricing rights for 400,000
shares of post reverse-split common stock.
To be adopted, the Recapitalization Proposal must receive the
affirmative vote of (1) a majority of the issued and outstanding shares of
common stock and Series A preferred stock, voting together as a single class,
(2) a majority of the issued and outstanding shares of Series A preferred stock,
voting separately as a class, and (3) a two-thirds majority of the issued and
outstanding shares of Series C preferred stock, voting separately as a class.
Uninstructed shares are not entitled to vote on this matter, and therefore
broker non-votes will have the effect of negative votes on this proposal.
Abstentions have the effect of negative votes.
THE EFFECTIVENESS OF THE RECAPITALIZATION PROPOSAL IS CONTINGENT ON THE
APPROVAL OF BOTH THE RECAPITALIZATION PROPOSAL AND THE REVERSE STOCK SPLIT
PROPOSAL. AS A RESULT, IF THE REVERSE STOCK SPLIT PROPOSAL IS NOT APPROVED BY
THE STOCKHOLDERS, THEN WE CANNOT COMPLETE THE RECAPITALIZATION EVEN IF THE
STOCKHOLDERS APPROVE THE RECAPITALIZATION PROPOSAL.
Proposal 3. Reverse stock split. Stockholders are being asked to
approve an amendment to our restated certificate of incorporation to effect a
reverse stock split at any time before October 31, 2000 in the discretion of the
board of directors. Pursuant to the reverse stock split every 156 shares of
outstanding common stock will automatically be reverse split into one share
outstanding. The board will have authority to implement the reverse stock split
at any time before October 31, 2000 or, if the stockholders do not
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approve the Recapitalization Proposal, alternatively to abandon and not effect
the reverse stock split at all. To be adopted, the approval of the reverse stock
split must receive the affirmative vote of (1) the majority of the issued and
outstanding shares of common stock and Series A preferred stock, voting together
as a single class, (2) a majority of issued and outstanding Series A preferred
stock, voting separately as a class, and (3) a two-thirds majority of issued and
outstanding Series C preferred stock voting separately as a class. Uninstructed
shares are not entitled to vote on this matter, and therefore broker non-votes
will have the effect of negative votes on this proposal. Abstentions have the
effect of negative votes.
Proposal 4. Change of Name. Stockholders are being asked to approve an
amendment to our restated certificate of incorporation to change our name to
DevX Energy, Inc. To be adopted, the approval of the name change must receive
the affirmative vote of (1) the majority of the issued and outstanding shares of
common stock and Series A preferred stock voting together as a single class, and
(2) a majority of issued and outstanding Series A preferred stock, voting
separately as a class. Uninstructed shares are not entitled to vote on this
matter, and therefore broker non-votes will have the effect of negative votes on
this proposal. Abstentions have the effect of negative votes.
Proposal 5. Ratification of auditors. Stockholders are being asked to
ratify the appointment of Ernst & Young LLP as our independent auditors for the
fiscal year ended June 30, 2001. To be approved, this matter must receive the
affirmative vote of the majority of the issued and outstanding shares of common
stock and Series A preferred stock, voting together as a single class, present
in person or by proxy at the annual meeting and entitled to vote. Abstentions
and broker non-votes will not be taken into account in determining the outcome
of the appointment of auditors.
VOTING COMMITMENTS OF SOME STOCKHOLDERS
Under the terms of the recapitalization agreement described below, the
holder of our Series A preferred stock agreed to vote all of the Series A
preferred stock and common stock beneficially owned and held of record by it for
each of the proposals in this proxy statement. As of the record date, the holder
of our Series A preferred stock held of record and beneficially an aggregate of
9,600,000 shares of Series A preferred stock and 2,634,952 shares of common
stock, representing approximately 14% of the common stock and Series A preferred
stock, together as a class, and all of the outstanding Series A preferred stock.
Under the terms of the recapitalization agreement, the holders of
repricing rights agreed to vote all of the common stock beneficially owned and
held of record by them for each of the proposals in this proxy statement. As of
the record date, the holders of the repricing rights held of record and
beneficially an aggregate of 22,635,028 shares of common stock, representing
approximately 25% of the common stock and Series A preferred stock, together as
a class.
Under the terms of the recapitalization agreement, the holders of our
Series C preferred stock agreed to vote all of the Series C preferred stock
beneficially owned and held of record by them for each of the proposals in this
proxy statement. These holders also agreed to vote any shares of common stock
beneficially held and/or held of record by them for each of the proposals in
this proxy statement. As of the record date, the holders of the Series C
preferred stock held of record and beneficially an aggregate of 3,062,825 shares
of common stock, representing approximately 3% of the common stock and Series A
preferred stock, together as a class. As of the record date, the holders of the
Series C preferred stock held of record and beneficially an aggregate of 2,173
shares of Series C preferred stock, representing 100% of the Series C preferred
stock.
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<PAGE> 12
The company's management, board of directors and former members of our
board of directors, who held an aggregate of 8,070,000 shares of common stock at
the record date, representing approximately 8.9% of the outstanding shares of
common stock and Series A preferred stock together as a class, have stated they
intend to vote in favor of each of the proposals in this proxy statement.
The shares of voting stock described above aggregate 46,002,805 voting
shares or approximately 51% of the total common stock and Series A preferred
stock, together as a class.
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PROPOSAL ONE
ELECTION OF DIRECTORS
GENERAL
Three directors are to be elected at the annual meeting. The current
size of our board of directors is three. Unless otherwise instructed, the proxy
holders intend to vote the proxies received by them FOR the three nominees
below.
EDWARD J. MUNDEN
ROBERT P. LINDSAY
BRUCE I. BENN
All of our nominees currently serve as directors of the company, and
each director was elected by our stockholders at our last annual meeting. Each
nominee has consented to being named in this proxy statement and to serve if
elected. If any nominee becomes unavailable before the election, your proxy
authorizes us to vote for a replacement nominee if the board names one. The
three nominees will serve until the next annual meeting of stockholders and
until their successors are elected.
As of the date of this proxy statement, we have reached a tentative
agreement with Joseph T. Williams that, subject to documentation, Mr. Williams
will be appointed as a director and as Chairman of the Board immediately
following the annual meeting. From July 1998 to August 1999, Mr. Williams served
as President and Chief Executive Officer of MCN Investment Corporation, a
diversified energy company with $2 billion in oil and natural gas, natural gas
pipeline and electrical power assets. Prior to this, Mr. Williams served as
President and Chief Executive Officer of MCNIC Oil and Gas Company, a
broad-based exploration and production company, from August 1997 to July 1998.
From June 1995 to June 1996, Mr. Williams served as Vice Chairman and Chief
Executive Officer of Enserch Exploration, Inc., an oil and gas exploration and
production company. Mr. Williams holds a B.S. in Petroleum Engineering from the
University of Texas at Austin. Mr. Williams has informed us that if we do not
successfully complete either the proposed public offering of common stock or
other acceptable financing arrangements, Mr. Williams will likely resign from
the positions as director and Chairman of the Board.
We are also in the process of recruiting two outside, non-employee
directors, in connection with the recapitalization and the other actions
described in this proxy statement. Once we have identified the two additional
directors who will serve on our board, the current directors will increase the
size of our board and appoint the two additional directors to fill the newly
created vacancies in accordance with our bylaws. We anticipate that those
persons would also be appointed to the board's Compensation Committee and the
Audit Committee.
DIRECTORS AND NOMINEES FOR ELECTION TO THE BOARD OF DIRECTORS
Edward J. Munden, 49, 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 Corporation ("CHC"), which is a
Canadian venture capital firm located in Ottawa, Ontario, Canada. Mr. Munden was
elected to the board of Mustang Minerals Corp. a Canadian mineral exploration
company in March 1999. 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
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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 Helmerich & 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, 46, has been an Executive Vice President and a director
of the company since March 1995. 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.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF THE
NOMINEES FOR DIRECTOR NAMED ABOVE.
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PROPOSAL TWO
PROPOSAL TO APPROVE RECAPITALIZATION
INTRODUCTION
On July 17, 2000, we entered into a recapitalization agreement with the
holders of our Series A preferred stock, Series C preferred stock and common
stock repricing rights which calls for these holders to exchange all of their
holdings of our Series A preferred stock, Series C preferred stock and common
stock repricing rights together with all warrants and maintenance rights that
they may own for an aggregate of 732,500 shares of common stock after giving
effect to the 156 to 1 reverse split of our common stock described below in
Proposal Three. As required by the recapitalization agreement, our board of
directors is soliciting stockholder approval of the Recapitalization Proposal,
which consists of the exchange of stock and repricing rights described above
that are held by the stockholders who have entered into the recapitalization
agreement. Our board of directors approved the recapitalization agreement,
including the Recapitalization Proposal, on July 17, 2000.
The closing contemplated under the recapitalization agreement is
subject to:
o stockholder approval of the Recapitalization Proposal and the
reverse split proposal;
o our delivery of 732,500 shares of post-reverse split shares of
common stock without any restrictive legend or stop transfer
orders, except as otherwise provided in the recapitalization
agreement;
o the completion of an equity financing on or before October 31,
2000 generating net proceeds to us of at least $50 million;
o our repurchase of not less than $75 million in original
principal amount of our 12 1/2% senior notes on or before
October 31, 2000; and
o the representations and warranties contained in the
recapitalization agreement being true as of the date of the
agreement and the date of delivery of shares of common stock
to the Series A preferred stock, the Series C preferred stock
and the repricing rights holders.
The recapitalization agreement also prohibits the holders from
converting any shares of Series A preferred stock or Series C preferred stock
into shares of common stock or exercising any common stock repricing rights
pending fulfillment of the conditions noted above. Upon the closing contemplated
under the recapitalization agreement and the reverse stock split described in
Proposal Three, we will have approximately 1,250,000 shares of common stock
outstanding. There will be no warrants, no maintenance rights, no common share
repricing rights or shares of any class of preferred stock outstanding at that
time.
We intend to make a tender offer or an exchange offer to effect a
repurchase of not less than $75 million original principal amount of our senior
notes. We have executed a binding participation agreement with the holders of
approximately $94 million of senior notes pursuant to which these holders have
agreed to tender their senior notes to us. The participation agreement is
conditioned upon the tender or exchange offer closing on or before October 31,
2000 with the participation of not less than $110 million of the senior notes.
To finance the repurchase of our senior notes, we intend to complete a public
offering or private placement of post-reverse split common stock on or before
October 31, 2000. We have filed a registration
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statement with the Securities and Exchange Commission contemplating the sale of
up to 10,000,000 shares of our common stock (11,500,000 shares if the
underwriters' over-allotment option is exercised in full) at a post-reverse
split price between $7.00 and $9.00 per share. Depending on market conditions we
may sell fewer shares than we currently contemplate. We can not assure you that
we will successfully complete this equity offering.
Stockholder approval is not required and is not being sought for the
repurchase of our senior notes or for the public offering or private placement.
BACKGROUND AND REASONS FOR RECAPITALIZATION
Conditions in the capital and energy markets began to deteriorate in
the months following our acquisition of certain oil and natural gas interests
from two trusts managed by Morgan Guaranty and Trust Company (the "Morgan
Transaction") in April 1998. The Morgan Transaction was our largest acquisition
to date and increased our reserve base from approximately $50 million to over
$200 million. The Morgan Transaction was initially financed with a bridge debt
facility provided by the Bank of Montreal and Enron Capital & Trade Resources
Corp. which provided specified penalties if it was not refinanced by July 20,
1998. Our intention at the time we entered into the Morgan Transaction was to
refinance the bridge facility with a combination of $25 million in new equity
and $125 million in a high yield note offering. Based on the market conditions
at the time we closed the Morgan Transaction, management expected that our
senior notes would bear interest at not more than 10% per annum. However, as we
were preparing to go to the high yield debt market late in the second quarter of
1998, interest rates began to move strongly against us and our offering was
ultimately priced with an interest rate of 12.5% per annum. In addition, we
found that some investors who had previously expressed an interest in
participating in our equity offering withdrew while others who were prepared to
participate sought to impose more onerous terms. During the last three quarters
of 1998, energy prices fell, reducing our revenues significantly. These
deteriorating conditions in the capital and energy markets negatively affected
the company in three major ways. First, it depressed our stock price; second, it
impaired our liquidity; and third, we were forced to write down the carrying
value of our investment in our oil and natural gas producing properties.
While we expect to be able to meet our obligations for the foreseeable
future, our ability to remain a going concern, to repay our indebtedness and to
grow the company in a manner that will ultimately benefit our equity holders
depends on our ability to not only replace producing reserves, but to add to our
reserve base. To accomplish this we must attract additional capital on favorable
terms and/or complete merger or acquisition transactions using our capital
stock. Management believes that in the absence of a restructuring, the company
will find it increasingly difficult to locate new capital and our ability to pay
interest on our indebtedness could eventually become impaired. Our discussions
with potential investors and merger partners have led management to believe that
a restructuring will allow us to attract new capital and successfully pursue
merger and acquisition opportunities.
The following is a more detailed discussion of how the deteriorating
conditions in the capital and energy markets during 1998 negatively affected our
company and continue to impede our growth. This will be followed by a discussion
of the alternatives we have considered and the interim steps we have taken to
adjust to these negative effects. Finally, we discuss the strategic benefits of
the Recapitalization Proposal and the details of what it will involve.
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NEGATIVE EFFECTS
Depressed Stock Price led to Further Dilution
In August 1998, after we had successfully refinanced the Bank of
Montreal/Enron bridge facility, our common stock price reached a high of $8.00
per share. However, by the end of December 1998 it had fallen to less than $4.00
per share. The decline in our stock price continued throughout 1999 and by
November 30, 1999 it had fallen to less than $0.40 per share. The decline has
continued through 2000 and, as of August 17, 2000, the price of our common stock
closed at $0.075 per share.
The decline in our common stock price had the effect of increasing the
possibility that the existing common equity of the company could be
significantly diluted because both the conversion provisions of the Series C
preferred stock that we had issued in December 1997 and the repricing formula
for the repricing rights that were attached to the common stock that we issued
in two private placements in 1998 were based on the current bid price of the
common stock at the time of conversion or exercise. Because of this link to the
current bid price, the number of shares of common stock that potentially became
issuable to the holders of Series C preferred stock and repricing rights
increased significantly as the common stock price fell.
In December 1997, we raised gross proceeds of $10,000,000 from the sale
of the 10,400 shares of Series C preferred stock. The conversion rights provide
that the number of shares of common stock issuable upon conversion of each share
of Series C preferred stock equals the liquidation value of the Series C
preferred stock ($1,000 per share) divided by the average of the closing bid
prices of our common stock over a specified number of trading days preceding the
date of conversion. Thus, the number of common shares issuable upon conversion
when the closing bid prices are in the range of $1.00, which is where it had
fallen by June 1999, are four times as many as when the bid price is in the
range of $4.00, as it had been in late December 1998. The Series C was intended
to be bridge equity capital to allow us to make acquisitions pending a
subsequent planned public offering of common stock. At the time the company
issued the Series C shares, management planned on completing a public offering
of common stock by the third quarter of 1998, the proceeds of which were to be
used, in part, to redeem the Series C shares.
In July 1998, we raised gross proceeds of $24 million from the private
placement of 3,428,573 shares of common stock at an issue price of $7.00 per
share. The buyers of this common stock demanded repricing rights to protect them
against declines in the price of the common stock they were purchasing. The net
proceeds of this transaction were used to refinance a portion of the bridge
facility that we used to initially fund the Morgan Transaction. One repricing
right was granted for each share of common stock purchased. Each repricing right
granted the holder a one-time right to require us to issue to the rights holder
additional shares of common stock without the payment of additional
consideration. The repricing rights expire upon exercise. The July 1998 issuance
of shares with repricing rights attached was approved by our stockholders at the
1998 annual meeting held on November 20, 1998.
We negotiated the right to repurchase the repricing rights under
certain circumstances. At the time we sold those shares of common stock to the
investors, management believed that the equity markets would support a
subsequent private placement or public offering of common stock sufficient to
finance the repurchase of the repricing rights on favorable terms later in 1998
once we had time to consolidate the Morgan Transaction.
In November 1998 we sold 416,667 shares of common stock at an issue
price of $6.00 per share to two of the same investors who participated in the
July 1998 transaction. The November sale raised an additional $2.5 million of
gross proceeds for the Company. The net proceeds of this sale were used to
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purchase 2,152 shares of Series C preferred stock. The shares issued in the
November transaction also carried repricing rights on substantially the same
terms as those issued in the July 1998 transaction.
Subject to certain limitations, the number of additional shares that
are issuable when repricing rights are exercised by a holder is determined by
multiplying the number of repricing 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, $7.00 per share in the case of the July 1998 transaction and
$6.00 per share in the case of the November 1998 transaction, by a premium that
rose in steps to 128% over the eight months following the original sale and
remained constant thereafter. The market price in the formula is determined by
averaging the closing bid prices of the common stock over a certain number of
trading days preceding the date of exercise of the repricing right. As long as
the market price exceeded the repricing price, we were not required to issue any
additional shares. However, as the market price of our common stock fell below
the repricing price, the number of shares of common stock issuable upon the
exercise of the repricing rights increased. For example, the number of shares of
common stock issuable upon the exercise of each repricing right at a market
price of $2.00 is more than four times greater than it would be at a market
price of $5.00.
Since their issuance in December 1997, 2,152 shares of Series C
preferred stock have been repurchased by us and 6,075 shares have been converted
into 10,538,754 shares of common stock. As of August 17, 2000, 2,173 shares of
Series C preferred stock remain outstanding and would be convertible into
32,811,308 shares of common stock if all these shares were converted on that
date at the then-prevailing conversion price ($0.075 per share).
Since their issuance in 1998, a total of 2,251,322 repricing rights
have been exercised for an aggregate of 39,497,894 shares of common stock. As of
August 17, 2000, 1,593,918 repricing rights remained outstanding and could have
been exercised for 184,000,092 shares of common stock at the then-prevailing
exercise price ($0.075 per share).
If the holders of Series A and Series C preferred stock had elected to
convert all their remaining shares and the holders of the repricing rights
elected to exercise all the outstanding repricing rights as of August 17, 2000
at the prices that were then in effect ($0.075 per share), we would have been
required to issue 226,411,399 additional shares of common stock raising the
total amount of common shares issued and outstanding to 307,099,937 which
exceeds the 100,000,000 shares of common stock authorized by our certificate of
incorporation. We believe the potential dilution which this represents acts to
depress the price of our common stock.
Impaired Liquidity
The second major effect of the deteriorating conditions in the capital
and energy markets during 1998 was to impair our liquidity and ability to raise
additional capital. We were forced to raise the interest rate on our high yield
note offering of July 1998 from an originally anticipated rate of 10% to 12.5%,
which increased our annual interest expense by $3 million and reduced the amount
of cash available for capital expenditures dollar for dollar. In the first
quarter of 1999, the Bank of Montreal, the agent on our secured credit facility
and one of our secured lenders at the time, advised us that they would not
permit us to make any further draws under our credit facility, and that they
desired us to repay the whole of the outstanding
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indebtedness, approximately $17 million at the time, as soon as practicable. As
a result, we were constrained in our ability to acquire additional properties
and we had to scale back the capital expenditure program that we had instituted
to develop and enhance our existing asset base until an alternative lender could
be put in place. We believe the availability of new equity capital also declined
significantly for small independent oil and gas companies generally and we were
forced to suspend our plans to pursue a private placement or public offering in
late 1999.
Reduction in Asset Carrying Value
Pursuant to the full cost method of accounting rules for oil and
natural gas properties, we are required to record the value of our oil and
natural gas producing properties on our balance sheet at the lesser of their
adjusted historical cost or their present value as determined by the prevailing
energy prices. Generally speaking if, during a fiscal quarter, energy prices
decline below the levels that existed at the time we purchased an oil and
natural gas producing property we may be required to record a non-cash write
down of the value of that property at the end of that quarter. The closing of
the Morgan Transaction in April 1998 coincided with a peak in energy prices.
Thus, as energy prices declined in 1998 following our completion of the Morgan
Transaction, we were obliged to record a $28 million write down on June 30, 1998
and a further $35 million write down on December 31, 1998. Under generally
accepted accounting principles, we are not allowed to record a corresponding
increase in asset valuation in the event of a recovery in oil and gas prices as
subsequently occurred during 1999.
Because of these write downs in the carrying value of our assets, our
net tangible asset base (assets less liabilities) fell below the $2 million
minimum listing requirement threshold of the Nasdaq SmallCap market on which our
common stock had been trading since May 1997. In addition, the decline in our
common stock price eventually reduced our market capitalization below the $35
million Nasdaq SmallCap market minimum. Accordingly, on July 22, 1999, we
received formal notice of Nasdaq's intention to delist our common stock as a
result of our noncompliance with these thresholds. Subsequently, on August 13,
1999, Nasdaq also advised us that we no longer met the $1.00 minimum trading
price threshold. By written brief and at an oral hearing we attempted to
persuade Nasdaq to grant us additional time within which to implement a plan to
restore compliance with the minimum listing thresholds. However, by letter dated
November 10, 1999, we were notified that a final decision had been made to
delist our common stock from the SmallCap Market effective November 11, 1999. We
have since traded on the Nasdaq Over-the-Counter Bulletin Board. Many
institutional and other investors refuse to invest in stocks that are traded or
quoted on markets below the Nasdaq SmallCap Market which could make our effort
to raise capital in the future more difficult.
ACTION PLAN AND ALTERNATIVES CONSIDERED
In order to adjust to the effects of the downturn in the energy and
capital markets during 1998, management has at various times considered the
following options:
o refinance our secured debt;
o repurchase the Series C preferred stock and the repricing
rights in accordance with their terms;
o seek protection under the bankruptcy laws;
o merge with one of our peers;
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o raise a substantial equity investment in the company; or
o recapitalize our convertible securities into a set number of
shares of common stock.
Our first priority was to seek a refinancing of our existing secured
debt with a new lender. Our goal was to increase our borrowing base to allow us
to fund properties acquisitions and capital expenditures. On July 21, 1999, we
signed a term sheet with Ableco Finance LLC and Foothill Capital Corporation
("Ableco") for a new revolving credit facility. On October 22, 1999, we signed
an amended and restated credit agreement with Ableco. This credit facility
provides for borrowing up to $50 million, subject to borrowing base limitations.
As of August 17, 2000 our borrowings under this facility were limited to $30
million of which approximately $14.5 million was outstanding on that date. This
facility was funded on October 29, 1999 and replaced our previous credit
facility led by the Bank of Montreal. In addition, the subordinated credit
agreement with Enron Capital & Trade Resources Corp. was terminated upon funding
of the Ableco credit facility. With the new Ableco facility in place we were
able to increase our capital expenditure program beginning in the last quarter
of 1999.
We also moved to sell some non-core assets to provide limited interim
liquidity. This sale was closed on June 30, 1999 and raised approximately $10
million. The proceeds of this sale were used to pay down secured debt and fund
capital expenditures.
We also engaged Friedman, Billings, Ramsey & Co., Inc. ("FBR") on
August 2, 1999 to work with us to identify and evaluate various strategic
alternatives to maximize stockholder value. FBR is a broker-dealer and an
investment banking and an institutional research firm. After consultation with
FBR, management rejected all the alternatives described above except for the
refinancing of the secured debt and the recapitalization outlined in this proxy
solicitation. For the reasons discussed below, all other alternatives have been
rejected as being impractical or because in management's opinion they would
produce less value to the stockholders than the Recapitalization Proposal for
which your approval is being solicited.
Exercising the repurchase options under the applicable Securities
Purchase Agreements and our restated certificate of incorporation, as amended,
was rejected because the exercise of the repurchase options would have cost us
approximately $17 million and we did not have sufficient funds on hand to
repurchase these securities. Further, management had determined that there were
no reasonable prospects of raising these funds from external sources in the
company's current condition.
The bankruptcy option was also rejected because we believe that a
voluntary bankruptcy filing would likely not have maximized a recovery for
holders of our unsecured indebtedness or holders of our capital stock.
Management believes that the most likely liquidation scenario would be a
court-administered forced sale of assets. Under this scenario, we believe that
the liquidation proceeds might not be sufficient to satisfy even the claims of
the company's creditors, which are in excess of $140 million. In addition, the
holders of Series A and Series C preferred stock have liquidation preferences
over the holders of common stock. Management is of the view that it is extremely
unlikely that sufficient value would be realized to satisfy the creditors and
the holders of stock having liquidation preferences over the holders of common
stock and, accordingly, the common stockholders would receive no value for their
shares in a bankruptcy scenario.
We have considered selling the company through a merger or sale of
substantially all our assets and have contacted more than 16 potential
purchasers and merger partners in this regard. None of the parties contacted
have chosen to pursue discussions with us beyond a preliminary stage. We believe
that our current capital structure makes it unlikely that we can attract a
merger partner on favorable terms.
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Our company and FBR have contacted various institutional investors
about making an investment in the company. None have expressed any willingness
to invest given our current capital structure and market conditions.
STRATEGIC BENEFITS OF THE PROPOSED RECAPITALIZATION
After due consideration of our company's current position and
prospects, the board of directors has concluded that recapitalizing the company
is the best alternative to facilitate our growth and enhance stockholder value.
Although the proposed recapitalization will have a negative effect on the
current common stockholders, as discussed in more detail below, the board of
directors believes that this negative effect is less than would occur under any
other viable alternative and as a result the recapitalization provides the best
prospects of preserving and, in time, enhancing common stockholder value. We can
complete the recapitalization only if the stockholders approve the
Recapitalization Proposal. However, even if the stockholders approve the
Recapitalization Proposal, we may not be able to complete the recapitalization
if our stockholders do not approve the reverse stock split proposal or if the
other conditions to the recapitalization agreement are not met.
We believe that the proposed recapitalization, including the repurchase
$75 million face value of our senior notes for approximately $49 million and the
sale of our common stock with net proceeds sufficient to repurchase the senior
notes and to fund our acquisition and capital expenditure programs, will have
the following benefits if completed:
o it will eliminate all outstanding shares of any class of stock
having a put right or a liquidation preference over our common
stock;
o it will reduce outstanding indebtedness from approximately
$144 million to approximately $50 million (or $68.5 million if
the net proceeds from the common stock offering are only $50
million);
o it will improve interest coverage from 1.3:1 to 3.7:1 (or
3.2:1 if the net proceeds from the common stock offering are
only $50 million);
o it will increase stockholders' equity value to approximately
$67 million (or $43 million if the net proceeds from the
common stock offering are only $50 million); and
o it will increase the likelihood that our common stock will
qualify for trading on the NASDAQ National Market or the
American Stock Exchange
In addition, we believe the recapitalization has the following
advantages over other strategic alternatives:
o The recapitalization is immediately achievable, subject to
stockholder approval and completion of the common stock
placement and the repurchase of senior notes;
o The recapitalization enhances our ability to attract new
capital; and
o The recapitalization maintains our flexibility to pursue a
sale of the company and preserve a greater share of common
stockholder value as compared to other alternatives. In
particular, the proposed transaction captures a significant
portion of the discount at which
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our senior notes have recently been trading and effectively
transfers it to stockholders' equity.
We believe that our financial flexibility will be improved
significantly if the recapitalization and the reverse stock split are completed.
Therefore, the board of directors has approved the recapitalization and
recommends that the stockholders approve it.
THE PROPOSED RECAPITALIZATION
The Recapitalization Proposal involves the following elements:
o the exchange of the 9,600,000 outstanding Series A
preferred shares for 212,500 shares of post
reverse-split common stock;
o the exchange of the 2,173 outstanding Series C
preferred shares and warrants exercisable for 340,153
shares of common stock for 120,000 shares of post
reverse-split common stock;
o the exercise and exchange of the 1,593,918 remaining
unexercised common stock repricing rights and
warrants exercisable for 655,000 shares of common
stock for 400,000 shares of post reverse-split common
stock.
Even if our stockholders approve the Recapitalization Proposal, we will
be able to implement the Recapitalization Proposal only if our stockholders
approve the reverse stock split proposal and if the other conditions in the
recapitalization agreement are met, including the repurchase of $75 million face
value of our senior notes for approximately $49 million and the sale of common
stock in a public offering or private placement with net proceeds sufficient to
repurchase the senior notes and to fund our acquisition and capital expenditure
programs. We cannot assure you that we will be able to satisfy the conditions in
the recapitalization agreement.
Series A Recapitalization Background
In March 1997 we entered into a series of agreements with Joint Energy
Development Investments Limited Partnership, or JEDI, an affiliate of Enron
Corp., which agreements included a Securities Purchase Agreement providing for
the purchase and sale of 9,600,000 shares of Series A preferred stock, a
Registration Rights Agreement and a Stockholders Agreement (collectively, the
"JEDI Agreements"). The terms of the Series A preferred stock provide that the
holder of the Series A preferred stock is entitled to a liquidation preference
over all other classes of shares. JEDI is the registered owner of all 9,600,000
shares of Series A preferred stock and as of July 21, 2000 is the record owner
of 2,634,952 shares of common stock. For further description of the JEDI
Agreements, see "Certain Relationships and Related Transactions - JEDI
transaction." JEDI also has the right to convert its 9,600,000 shares of Series
A preferred stock into 9,600,000 shares of common stock at any time. To date,
JEDI has not converted any of its shares of Series A preferred stock. If JEDI
demanded to convert all their shares of Series A preferred stock into shares of
common stock simultaneously with a demand by the holders Series C preferred
stock to convert their shares of Series C preferred stock into shares of common
stock and an exercise of all remaining repricing rights, the company would not
have sufficient shares of common stock authorized to meet these demands.
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Recapitalization Proposal as it pertains to Series A Preferred Stock
Under the terms of the recapitalization agreement, JEDI will exchange
all its shares of Series A preferred stock into an aggregate of 212,500 post
reverse-split shares on or before October 31, 2000. JEDI also agreed that until
October 31, 2000 it will not take any action to pursue any other rights or
remedies to which it may be entitled under the Securities Purchase Agreement or
otherwise. Upon delivery to JEDI of the 212,500 shares of post-split common
stock, the JEDI Agreements will be terminated and there will no longer be any
shares of Series A preferred stock outstanding. As of July 21, 2000, JEDI held
2,634,952 pre-split shares of common stock. Those shares will be fully subject
to the proposed 156 to 1 reverse-split, leaving JEDI with 16,890 post
reverse-split shares and proportionately diluted by the other transactions
contemplated in this proxy statement.
Series C Recapitalization Background
As of July 21, 2000, there were 2,173 shares of Series C preferred
stock issued and outstanding. In addition the holders of Series C preferred
stock hold warrants to purchase 340,153 shares of common stock. As of August 17,
2000, the holders of the Series C preferred stock would have been entitled to an
aggregate of 32,811,308 shares of common stock upon conversion of all of their
shares of Series C preferred stock, at the conversion price of $0.075 per share
then applicable. Between the date of the issuance of the Series C preferred
stock in December 1997 and July 21, 2000, we have repurchased 2,152 shares of
Series C preferred stock and 6,075 shares have been converted into 10,538,754
shares of common stock. If a demand for conversion is made simultaneously with a
demand to convert the shares of Series A preferred stock and an exercise of all
remaining repricing rights, the company would not have sufficient shares of
common stock authorized to meet these demands. Pursuant to the Series C
Certificate of Designation, any shares of Series C preferred stock outstanding
on December 24, 2001 will be automatically converted into shares of common stock
at the then-prevailing market price. The company is also party to a Registration
Rights Agreement with the holders of Series C preferred stock by which the
company is obligated to register and keep reserved for issuance a sufficient
number of shares to satisfy any and all demands for conversion. The company does
not presently have a sufficient number of shares so registered and reserved to
satisfy the conversion of all remaining Series C preferred stock at current
market prices. The Certificate of Designation governing the Series C preferred
stock grants the holders a liquidation preference over all classes of common
shares.
Recapitalization Proposal as it pertains to Series C Preferred Stock
Under the terms of the recapitalization agreement, the holders of
Series C preferred stock will exchange their shares of Series C preferred stock,
in aggregate 2,173 shares plus dividends, and all their unexercised warrants to
purchase common stock into an aggregate of 120,000 shares of post-split common
stock on or before October 31, 2000. These shares of post-split common stock
will be divided pro rata among the holders of Series C stock. Each holder also
agreed, in the interim, not to deliver any further conversion notices to the
company pending delivery of the 120,000 post-reverse split shares. Until that
time none of the holders will take any action to pursue any other rights or
remedies to which they may be entitled under the Series C Securities Purchase
Agreement or otherwise. The Series C Securities Purchase Agreement and
Registration Rights Agreement will be terminated upon delivery of the common
stock that the company is obligated to deliver and effective as of that time
there will no longer be any shares of Series C preferred stock outstanding.
-18-
<PAGE> 24
Common Stock Repricing Rights Recapitalization Background
As of July 21, 2000 there were 1,593,918 unexercised repricing rights
issued and outstanding. As of August 17, the holders of those repricing rights
would have been entitled, upon exercise, to an aggregate of 184,000,092 shares
of common stock, at the exercise price of $0.075 per share prevailing at that
date. If a demand for exercise were made, the company would not have sufficient
shares of common stock authorized to meet the demand. Between the date of their
issuance in 1998 and July 21, 2000, an aggregate of 2,251,322 repricing rights
have been exercised for 39,497,894 shares of common stock. The holders of
repricing rights also hold warrants to purchase 655,000 shares of common stock.
The company is also party to a Registration Rights Agreement with the holders of
repricing rights by which the company is obligated to register and keep reserved
for issuance a sufficient number of shares to satisfy any and all demands for
exercise. The company does not presently have sufficient number of shares so
registered and reserved to satisfy the exercise all remaining repricing rights
at current market prices.
Recapitalization Proposal as it pertains to Repricing Rights
Under the terms of the recapitalization agreement, the holders of
repricing rights will exchange all their warrants and unexercised repricing
rights for an aggregate of 400,000 shares of post reverse-split common stock.
These shares of post-split common stock will be divided pro rata among the
holders of unexercised repricing rights. To the extent that the holders of
unexpired repricing rights currently also hold shares of common stock, they will
also receive their proportionate share of post-split common stock to be
distributed to the common stockholders pursuant to the recapitalization
described in this proxy statement. Each holder of unexpired repricing rights
also agreed, in the interim, not to deliver any further exercise notices to the
company pending delivery of the 400,000 post-reverse split shares. Until that
time none of the holders will take any action to pursue any other rights or
remedies to which they may be entitled under the Securities Purchase Agreements
to which they are party with the company or otherwise. Upon delivery of the
requisite number of shares of post-split common stock to the stockholders, the
repricing right Securities Purchase Agreement and Registration Rights Agreement
will be terminated and there will no longer be any unexercised repricing rights
outstanding.
Other terms of the recapitalization agreement. The recapitalization
agreement includes representations and warranties of the stakeholders covering
authority to enter into the agreement, ownership of the shares and rights being
exchanged and investment representations. The agreement also includes
representations and warranties of our company covering organization, authority
to enter into the agreement, the absence of any other agreements relating to a
recapitalization and the validity of the shares being issued under the
agreement.
Pursuant to the recapitalization agreement, we agreed to file with the
SEC, within 5 days of obtaining the signatures of all stakeholders on the
recapitalization agreement, preliminary proxy materials for a stockholders'
meeting to be held not later than the later of (a) September 21, 2000, or (b) if
the SEC notifies us that it will review the proxy materials, 15 days following
the date on which we receive notification from the SEC that it has no further
comments. The proxy materials must solicit each stockholder's affirmative vote
for approval of the transactions pertaining to the recapitalization agreement
including a 156 for one reverse split of our common stock. The proxy materials
may also seek approval of an increase in our authorized capital, one or more
mergers or acquisitions, the election of directors and the appointment of
auditors for the current fiscal year, change of name, change of our fiscal year
end and other amendments to our certificate of incorporation as we may determine
are necessary or desirable to effect the recapitalization agreement. We agreed
to use our best efforts to solicit our stockholders' approval of these matters
and to cause our board of directors to recommend stockholder approval. Each
stakeholder signing the
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<PAGE> 25
recapitalization agreement agreed to vote not less than the number of shares set
forth in the agreement in favor of the proposals in this proxy statement.
We also agreed to use our best efforts to close on or before October
31, 2000 a private placement or public offering of common stock generating net
proceeds to us of at least $50 million. We have filed a registration statement
with the Securities and Exchange Commission contemplating the sale of up to
10,000,000 shares (11,500,000 if the underwriters' over-allotment option is
exercised in full) of our common stock at a post-reverse split price between
$7.00 and $9.00 per share. Depending on market conditions we may sell fewer
shares than we currently contemplate. We can not assure you that we will
successfully complete this equity offering.
The closing under the recapitalization agreement is subject to the
following:
o stockholder approval of the Recapitalization Proposal
and the reverse split proposal;
o our delivery of 732,500 shares of post-reverse split
shares of common stock without any restrictive legend
or stop transfer orders, except as otherwise provided
in the recapitalization agreement;
o the completion of an equity financing on or before
October 31, 2000 generating net proceeds to us of at
least $50 million;
o our repurchase of not less than $75 million in
original principal amount of our 12 1/2% senior notes
on or before October 31, 2000; and
o the representations and warranties contained in the
recapitalization agreement being true as of the date
of the agreement and the date of delivery of shares
of common stock to the Series A preferred stock, the
Series C preferred stock and the repricing rights
holders.
The recapitalization agreement will terminate on the earlier of:
o 5:00 p.m., Eastern time, October 31, 2000;
o the date of a stockholders meeting at which our
stockholders do not approve the Recapitalization
Proposal;
o the date on which we file for protection under
bankruptcy or insolvency laws or a court enters an
order that we are insolvent or bankrupt;
o the date on which an event of default occurs under
the indenture governing our senior notes; and
o the date on which a change of control that has been
approved by our board of directors occurs
unless the closing under the recapitalization agreement has occurred.
-20-
<PAGE> 26
From and after the closing under the agreement, the holders of Series A
preferred stock, Series C preferred stock and the repricing rights agreed to
release us from any claims that existed before the closing, other than claims
arising out of the recapitalization agreement.
Repurchase of Senior Notes Background
In July 1998 we issued $125 million original principal amount of senior
notes paying interest at 12.5% per annum. The net proceeds of the sale of the
senior notes were used to retire a portion of the Bank of Montreal/Enron bridge
facility that the company arranged to fund the Morgan Transaction. The senior
notes were originally issued in a Rule 144A private placement. These senior
notes have traded at increasing discounts to face value since they were issued.
Proposed Repurchase of Senior Notes
We have executed a binding participation agreement with the holders of
or persons controlling the voting or disposition power over approximately $94
million of our senior notes pursuant to which we agreed to make a tender or
exchange offer to all holders of our senior notes to repurchase not less than
$75 million of our senior notes for a purchase price of $48.75 million. The
offer must close no later than 5:00 p.m., Eastern time, October 31, 2000. The
offer is conditioned on:
o the tender or exchange of not less than $110 million
of senior notes;
o the receipt of all necessary regulatory approvals;
and
o the receipt by us of at least $50 million net
proceeds from a public offering or private placement
of equity.
Each holder who has signed the participation agreement has agreed to
tender or exchange its pro rata portion of all of the senior notes tendered
pursuant to the offer described above. If the offer is an exchange offer, then
any new notes or debt instruments to be issued in the exchange must be on
substantially the same terms and subject to an indenture on substantially the
same terms as the senior notes and the indenture governing the senior notes, as
amended in accordance with the participation agreement. The holders of senior
notes who executed the participation agreement also agreed to vote to amend the
indenture to increase the amount of permitted indebtedness. We currently intend
to conduct a cash tender offer for the purchase of these senior notes; however,
we may purchase these senior notes outside the tender offer or in lieu of the
tender offer in open market purchases or in privately negotiated transactions.
The participation agreement also includes customary representations and
warranties, including, with respect to the holders, representations covering
authority and investment representations, and with respect to our company,
representations covering organization, authority and enforceability.
The effect of a repurchase of the senior notes would be to reduce the
company's annual interest costs from $18 million to less than $8 million. In
addition EBITDA to interest coverage would increase to approximately 3:1. As a
result, the company will have additional borrowing capacity under its indenture
governing the senior notes and its credit agreement with Ableco Finance LLC with
which to carry out its redevelopment program and finance future acquisitions.
-21-
<PAGE> 27
Proposed Equity Offering
Following the approval of the Recapitalization Proposal, the company
intends to effect a private placement or public offering of shares of post
reverse split common stock sufficient to generate net proceeds to the company to
finance the repurchase of the senior notes as well as its acquisition and
capital expenditure programs. The proceeds of the private placement or public
offering will be used to finance the repurchase of the senior notes as well as
the company's acquisition and capital expenditure program.
We have filed a registration statement with the Securities and Exchange
Commission contemplating the sale of up to 10,000,000 shares (11,500,000 if the
underwriters' over-allotment option is exercised in full) of our common stock at
a post-reverse split price between $7.00 and $9.00 per share. Depending on
market conditions we may sell fewer shares than we currently contemplate. We can
not assure you that we will successfully complete this equity offering.
STOCKHOLDER APPROVAL IS NOT REQUIRED AND IS NOT BEING SOUGHT FOR THE
REPURCHASE OF OUR SENIOR NOTES OR FOR THE PUBLIC OFFERING OR PRIVATE PLACEMENT.
EFFECT OF RECAPITALIZATION ON CAPITAL STOCK
General. The board of directors believes that the Recapitalization
Proposal is in the best interests of the stockholders and has recommended that
the stockholders approve the Recapitalization Proposal because the board of
directors believes that if we are able to implement the recapitalization,
including the repurchase of a portion of our senior notes and the sale of common
stock, then:
o The recapitalization will significantly improve our chances to
access the equity capital markets and pursue our growth
strategy;
o The stockholders' equity will increase after the
recapitalization because our indebtedness will be reduced at a
discount;
o The termination of the dilutive share issuance rights, coupled
with the reverse stock split, will lessen the depressive
effects on the market price of the common stock;
o There will no longer be any outstanding shares of preferred
stock having dividends or liquidation preferences over the
common stock; and
o No stockholder will have rights to require us to repurchase
its stock.
However, the recapitalization will negatively affect the current common
stockholders by significantly reducing their percentage equity interest.
The board of directors believes that the positive effects outweigh the
negative effect of the recapitalization as described below.
Positive effects of the Recapitalization.
Facilitate growth and raising capital. The board of directors
believes that our ability to raise new equity capital, to use our capital stock
as consideration in acquisitions and to grow our business will be significantly
enhanced as a result of the recapitalization. This is because the
recapitalization will reduce to
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<PAGE> 28
zero the number of outstanding shares of preferred stock and unexercised
repricing rights and the potential dilution they represent. In addition, the
reverse stock split will reduce the number of outstanding shares while leaving
our asset base and revenue unaffected. As a result management expects, but
cannot be certain, that the price of the stock and market capitalization of the
company may rise to levels which will allow the company to qualify for Nasdaq
National Market or another stock exchange which should in turn allow the company
to attract a wider institutional investor base. We have concluded that under our
current capital structure it is impossible to raise sufficient new capital to
expand our production and therefore our revenues.
Higher stockholders' equity. The recapitalization will result
in an increase in stockholders equity through the purchase of a portion of the
senior notes at a discount. As set forth in the unaudited pro forma financial
statements presented below, the stockholders' deficit is $34.8 million as of
June 30, 2000.
Market price. The board of directors believes that the
outstanding, unconverted Series C preferred stock and the unexercised repricing
rights have had a negative effect on the market price of the common stock
because of our potential obligation to issue large amounts of common stock for
no additional consideration. The board of directors believes, but is not
certain, that the elimination of these securities will have a positive effect on
the market price of the common stock because the new common stock holders will
not face the prospect of continuing dilution from these types of conversions and
exercises.
Elimination of preferences. If the recapitalization is
effected, there will no longer be outstanding any shares of preferred stock.
Therefore, there would be no outstanding equity securities with a preference
over the common stock in respect of dividends or liquidation. Currently, the
Series A preferred stock and the Series C preferred stock each have a preference
over the common stock in terms of dividends and liquidation preference. If the
company were to file bankruptcy or otherwise liquidate its assets while these
shares of preferred stock are outstanding, then the common stockholders would
not receive any liquidation proceeds until the liquidation preferences of the
preferred stock were paid. Based on expected liquidation values of the company's
asset base as it existed on June 30, 2000, we believe that the common
stockholders would receive nothing in a bankruptcy or liquidation context
because of the liquidation preference.
Elimination of "put" rights. If the recapitalization is
effected, there will no longer be any outstanding "put" rights of stockholders
to require us to repurchase their securities. Currently, the holders of the
Series A preferred stock, the holders of the Series C preferred stock and the
holders of the repricing rights have the ability, in certain circumstances of
default by the company, which circumstances are within the control of the
company, to demand that the company repurchase their securities. At the present
time no defaults exist which would trigger a repurchase right. The amount
required to satisfy the collective put rights of the holders of the Series A
preferred stock, Series C preferred stock and the repricing rights, if
triggered, as of July 21, 2000 was approximately $16.7 million. We do not
presently have available sufficient funds to repurchase all of these securities.
The elimination of these "put" rights will improve the position of the common
stockholders because it will reduce our potential cash obligations and the
holders of the put rights attached to the Series A and Series C preferred stock
will no longer be able to liquidate their equity investment ahead of the common
stockholders.
Negative effect of the Recapitalization.
Change in percentage equity interest. If the recapitalization
is effected, then, based on 80,688,538 shares of common stock outstanding as of
July 21, 2000, the percentage equity ownership of the current common
stockholders will be approximately 41% before giving effect to the proposed
public offering or private placement of newly issued shares of common stock.
However, in the absence of a recapitalization
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<PAGE> 29
agreement, the percentage equity ownership of the current common stockholders
would be reduced to approximately 31%, on a fully diluted basis, assuming that
the holders of the Series A preferred stock, the Series C preferred stock and
the repricing rights converted all their stock and exercised all their rights at
market as of July 21, 2000. Therefore, even though there will be a decrease in
percentage ownership as a result of the recapitalization, the board of directors
believes that the recapitalization is in the best interests of the stockholders
because the percentage ownership after giving effect to the recapitalization
will be greater than the current percentage ownership on a fully diluted basis
in the absence of the recapitalization and because of the other positive effects
discussed above.
PERCENTAGE EQUITY INTEREST
<TABLE>
<CAPTION>
PERCENTAGE OF EQUITY INTEREST
------------------------------------------------------------
CURRENT ON A PRO FORMA
FULLY DILUTED PRO FORMA FOR AFTER
BASIS(1) RECAPITALIZATION(2) OFFERING (3)
------------- ------------------- ------------
<S> <C> <C> <C>
Common stockholders(4)........................... 30.9% 41.4% 4.6%
Series A holder(5)............................... 3.7% 17.0% 1.9%
Series C holders(5).............................. 9.9% 9.6% 1.1%
Repricing rights holders(5)...................... 55.5% 32.0% 3.6%
Management....................................... 2.53% 3.38% 0.4%
</TABLE>
----------
(1) Assumes all outstanding repricing rights and Series C preferred stock
as of July 21, 2000 are converted at an effective price of $0.095 per
common share.
(2) Assumes that (a) the 156 to 1 reverse stock split of the common stock
and (b) the exchange of Series A preferred stock, Series C preferred
stock and repricing rights for 732,500 shares of post-reverse split
common stock have occurred.
(3) Assumes that (a) the 156 to 1 reverse stock split of the common stock,
(b) the exchange of Series A preferred stock, Series C preferred stock
and repricing rights for 732,500 shares of post-reverse split common
stock have occurred, and (c) the completion of a public offering of
10,000,000 shares of post-reverse split shares of common stock.
(4) Includes shares held by management. Also includes shares of common
stock currently held by holders of our Series A preferred stock, Series
C preferred stock and repricing rights.
(5) Includes only the common stock issuable upon the conversion of Series A
preferred stock or Series C preferred stock or the exercise of
repricing rights, as the case may be. Does not include shares of common
stock currently held by these holders.
-24-
<PAGE> 30
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated financial
statements present the effects of:
(1) (a) the receipt of $50 million net proceeds from a common stock
placement or public offering, (b) the exchange of shares of Series A preferred
stock, Series C preferred stock and repricing rights in the recapitalization for
shares of post-reverse split common stock, (c) the reverse stock split and (d)
the purchase of $75 million principal amount of senior notes for approximately
$49 million; and
(2) (a) the receipt of $74 million net proceeds from a common stock
placement or public offering, (b) the exchange of shares of Series A preferred
stock, Series C preferred stock and repricing rights in the recapitalization for
shares of post-reverse split common stock, (c) the reverse stock split, (d) the
purchase of $75 million principal amount of senior notes for approximately $49
million and (e) the repayment of $18.5 million outstanding under the borrowings
under our credit facility.
We have filed a registration statement with the Securities and Exchange
Commission registering up to 10,000,000 shares (11,500,000 shares if the
underwriters' over-allotment option is exercised in full) at a post-reverse
split price between $7.00 and $9.00 per shares. Depending on market conditions
we may sell fewer shares than we currently contemplate, and as a result, we are
presenting pro forma information (1) assuming that we are able to sell
10,000,000 shares at an assumed price of $8.00 per share and (2) assuming that
we are able to sell 6,750,000 shares at an assumed price of $8.00 per share.
The unaudited pro forma condensed consolidated balance sheets present
the financial position of the company as of June 30, 2000 assuming the proposed
transactions had occurred as of June 30, 2000. This pro forma information is
based upon the historical June 30, 2000 balance sheet of the company included in
the Annual Report on Form 10-K accompanying this proxy statement.
The unaudited pro forma condensed consolidated statements of operations
give effect to the proposed transactions as if such transactions had been
entered into on July 1, 1999. This pro forma information is based upon the
historical results of operations of the company for the year ended June 30,
2000, included in the Annual Report on Form 10-K accompanying this proxy
statement.
The unaudited pro forma condensed consolidated financial statements are
based upon available information and assumptions that management of the company
believes are reasonable. The unaudited pro forma condensed consolidated
financial data do not purport to represent the financial position or results of
operations which would have occurred if these transactions had been completed on
the dates indicated or the company's financial position or results of operations
for any future date or period. You should read this unaudited pro forma
condensed consolidated financial data together with the company's historical
financial statements and the notes to those financial statements included in the
Annual Report on Form 10-K accompanying this proxy statement.
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<PAGE> 31
QUEEN SAND RESOURCES, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000
AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
$50 MILLION NET PROCEEDS $74 MILLION NET PROCEEDS
------------------------------- ---------------------------------
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENT PRO FORMA ADJUSTMENTS PRO FORMA
------------ ------------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash..................................... $ 11,881 $ 50,000 (3a) $ 13,131 $ 74,000 (3b) $ 18,631
(48,750) (4) (48,750) (4)
(18,500) (5)
Other current assets..................... 6,643 6,643 6,643
------------ ------------ ----------- ----------- -------------
Total current assets........................ 18,524 1,250 19,774 6,750 25,274
Net property & equipment.................... 92,525 92,525 92,525
Other assets................................ 8,144 (3,462) (4) 4,682 (3,462) (4) 4,682
------------ ------------ ----------- ----------- -------------
Total assets................................ $ 119,193 $ (2,212) $ 116,981 $ 3,288 $ 122,481
============ ============ =========== =========== =============
LIABILITIES & STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities
Accounts payable and accrued
liabilities............................ $ 9,951 $ (4,688) (4) $ 5,263 $ (4,688) (4) $ 5,263
Current portion of long-term debt........ 584 584 584
------------ ------------ ----------- ----------- -------------
Total current liabilities................... 10,535 (4,688) 5,847 (4,688) 5,847
............................................ (18,500) (5)
Long-term obligations, net of current
portion................................ 143,500 (75,000) (4) 68,500 (75,000) (4) 50,000
------------ ------------ ----------- ----------- -------------
Total liabilities........................... 154,035 (79,688) 74,347 (98,188) 55,847
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock.......................... 96 (96) (1) -- (96) (1) --
Common stock............................. 135 158 (1) 1,872 158 (1) 2,633
1,579 (3a) 2,340 (3b)
Additional paid-in capital............... 65,112 (62) (1) 106,220 (62) (1) 129,459
(7,251) (1) 71,660 (3b)
48,421 (3a) (7,251) (1) (65,458
Accumulated Deficit...................... (92,934) 27,476 (4) (65,458) 27,476 (4)
Treasury stock........................... (7,251) 7,251 (1) -- 7,251 (1) --
------------ ------------ ----------- ----------- -------------
Total stockholders' equity (deficit)........ (34,842) 77,476 42,634 101,476 66,634
------------ ------------ ----------- ----------- -------------
Total liabilities and stockholders'
equity (deficit)........................... $ 119,193 $ (2,212) $ 116,981
============ ============ =========== $ 3,288 $ 122,481
=========== =============
SHARE INFORMATION
SHARES AUTHORIZED:
Preferred Stock.......................... 50,000,000 -- 50,000,000
Common Stock............................. 100,000,000 -- 100,000,000 -- 50,000,000
Shares Issued and Outstanding -- 100,000,000
Preferred Stock.......................... 9,602,173 (9,602,173) (1) --
Common Stock............................. 80,688,538 732,500 (1) 8,000,000 (9,602,173) (1) --
(80,171,038) (2) 732,500 (1) 11,250,000
6,750,000 (3a) (80,171,038) (2)
10,000,000 (3b)
</TABLE>
See accompanying notes.
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<PAGE> 32
QUEEN SAND RESOURCES, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 2000
AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
$50 MILLION NET PROCEEDS $74 MILLION NET PROCEEDS
---------------------------- --------------------------------
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA ADJUSTMENTS PRO FORMA
----------- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Oil and natural gas revenues................ $ 3,967 $ -- $ 3,967 $ -- $ 3,967
Net profits and royalties interests......... 22,990 22,990 22,990
Interest and other income................... 143 143 143
----------- ------------ ---------- ------------ ------------
Total revenues................................. 27,100 27,100 27,100
Expenses:
Oil and natural gas production expenses..... 1,372 1,372 1,372
General and administrative expenses......... 3,026 3,026 3,026
Interest and financing costs................ 18,561 (9,807)(6) 8,754 (9,807)(6) 7,626
(1,128)(7)
Hedge contract termination costs............ 3,328 3,328 3,328
Depreciation, depletion and amortization.... 8,741 8,741 8,741
----------- ------------ ---------- ------------ ------------
35,028 (9,807) 25,221 (10,935) 24,093
Net income (loss) before extraordinary loss.... $ (7,928) $ 9,807 $ 1,879 $ 10,935 $ 3,007
=========== ============ ========== ============ ============
Net income (loss) before extraordinary
loss per common share, basic and diluted..... $ (0.18) $ 0.24 $ 0.27
=========== ========== ============
Weighted average shares of common stock
outstanding during the period................ 43,465,423 732,500 (8) 7,761,125 732,500 (8) 11,011,125
(43,186,798)(9) (43,186,798)(9)
6,750,000 (10) 10,000,000 (10)
</TABLE>
See accompanying notes.
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<PAGE> 33
QUEEN SAND RESOURCES, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
NOTE A. GENERAL
The proposed recapitalization includes the following:
o a reverse stock split of every 156 shares of our common stock
into one share;
o the exchange of 9,600,000 outstanding shares of our Series A
preferred stock for 212,500 shares of post reverse-split
common stock;
o the exchange of 2,173 outstanding shares of our Series C
preferred stock and warrants exercisable for 340,153 shares of
common stock for 120,000 shares of post reverse-split common
stock;
o the exercise and exchange of the 1,593,918 remaining
unexercised common stock repricing rights and warrants
exercisable for 655,000 shares of common stock for 400,000
shares of post reverse-split common stock.
o the repurchase of $75 million face value of our senior notes
for approximately $49 million.
Simultaneous with the completion of the proposed recapitalization and
reverse stock split, the company intends to complete a public offering or a
private placement of post reverse split common stock to generate net proceeds
sufficient to finance the repurchase of the senior notes and help to fund the
company's acquisition and capital expenditure programs. We have filed a
registration statement with the Securities and Exchange Commission registering
up to 10,000,000 shares (11,500,000 shares if the underwriters' over-allotment
option is exercised in full) at a post-reverse split price between $7.00 and
$9.00 per shares. Depending on market conditions we may sell fewer shares than
we currently contemplate, and as a result, we are presenting pro forma
information (1) assuming that we are able to sell 10,000,000 shares at an
assumed price of $8.00 per share and (2) assuming that we are able to sell
6,750,000 shares at an assumed price of $8.00 per share. The proceeds of the
private placement or public offering will be used to finance the acquisition of
Notes from the selling senior note holders. No assurance can be given that the
company will be successful in effecting the private placement or public offering
or that the company will be able to raise sufficient funds in the public
offering or private placement or otherwise to effect the repurchase of the
senior notes.
NOTE B. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
The accompanying unaudited pro forma condensed consolidated balance
sheet assumes the transactions discussed in Note A above were entered into on
June 30, 2000 and reflects the following pro forma adjustments:
(1) To record the effects of the following recapitalization transactions:
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o the exchange of the 9,600,000 outstanding shares of Series A
preferred stock for 212,500 shares of post reverse-split
common stock;
o the exchange of the 2,173 outstanding shares of Series C
preferred stock and warrants exercisable for 340,153 shares of
common stock for 120,000 shares of post reverse-split common
stock;
o the exercise and exchange of the 1,593,918 remaining
unexercised common stock repricing rights and warrants
exercisable for 655,000 shares of common stock for 400,000
shares of post reverse-split common stock; and
o the cancellation of existing treasury stock.
(2) To record a proposed reverse stock split of our common stock whereby
every 156 shares of common stock outstanding will be reverse split
into one share outstanding.
(3a) To record the net proceeds from a public offering or private
placement of common stock of approximately $50 million in cash.
(3b) To record the net proceeds from a public offering or private
placement of common stock of approximately $74 million in cash.
(4) To record the retirement at a discount of $75 million original face
value of our outstanding senior notes for $48.75 million, including
the writeoff of unamortized debt issuance costs and accrued interest
payable.
(5) To record repayment of the borrowings under our credit facility.
NOTE C. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying unaudited pro forma condensed consolidated statements of
operations assume the transactions discussed in Note A above were entered into
on July 1, 1999 and reflect the following pro forma adjustments:
(6) To record a reduction in interest expense related to the retirement
of $75 million original face value of our outstanding senior notes.
(7) To record reduction in interest expense related to repayment of the
borrowings under our credit facility.
(8) To record the effects of the number of post reverse stock split
common shares issued to holders of Series A and C preferred stock and
stock repricing rights and warrants in the recapitalization.
(9) To record the effects of the proposed reverse stock split on the
number of weighted average shares outstanding during the period
presented.
(10a) To record the shares of common stock issued in conjunction with the
public offering or private placement of approximately $50 million.
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(10b) To record the shares of common stock issued in conjunction with the
public offering or private placement of approximately $74 million.
DILUTION
Our net tangible book value per share of common stock as of June 30, 2000
was zero due to a shareholders' deficit of approximately $34.8 million. Net
tangible book value per share represents the amount of our total tangible assets
reduced by the amount of our total liabilities and divided by the total number
of shares of common stock outstanding. The following table describes the effect
of the recapitalization by setting forth as of June 30, 2000, (1) the net
tangible book value per share, (2) the pro forma net tangible book value per
share assuming that all shares of Series A preferred stock and Series C
preferred stock are converted and all repricing rights are exercised, (3) the
pro forma net tangible book value per share assuming that the exchange of Series
A preferred stock, Series C preferred stock and repricing rights and the reverse
stock split have been effected, and (4) the pro forma net tangible book value
per share assuming that the recapitalization, including the reverse stock split,
the repurchase of a portion of our senior notes for approximately $49 million
and a sale of common stock with net proceeds to us of a minimum of $50 million
and a maximum of $74 million, is effected:
<TABLE>
<CAPTION>
Minimum Maximum
------- -------
<S> <C> <C>
Current net tangible book value per share................................. $ -0- $ -0-
Pro forma net tangible book value per share assuming exercise
of repricing rights and conversion of the Series A
preferred stock and Series C preferred stock............................ $ -0- $ -0-
Pro forma net tangible book value per share after the exchange
of Series A preferred stock, Series C preferred stock
and repricing rights and the reverse stock split........................ $ -0- $ -0-
Pro forma net tangible book value per share after the
recapitalization on a post-split basis.................................. $ 4.74 $ 5.51
</TABLE>
SHIFT IN CONTROL OF THE COMPANY
The private placement or public offering of shares to new investors
described in this proxy statement will mean that these new investors will own
among themselves a minimum of approximately 84% of the voting stock of the
Company and a maximum of approximately 89% of the voting stock of the company,
depending on whether we issue 6.75 million post-reverse split shares or 10
million post-reverse split shares. However, if the recapitalization does not
proceed and the holders of Series A preferred stock, Series C preferred stock
and unexercised repricing rights decide to exercise their respective conversion
and exercise rights, they would own collectively at least 72% of the voting
stock. If they decided to act as a group, they would be in a position to control
the company or significantly influence the business operations and policies of
the company.
The board of directors believes that the recapitalization is in the
best interests of the stockholders despite the negative effects because the
board believes that the positive effects will outweigh the negative effects and
because the current capital structure, when considered on a fully diluted basis,
is less favorable to the current common stockholders than it would be following
the recapitalization.
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INTERESTS OF CERTAIN PERSONS IN THE RECAPITALIZATION
Each of Edward J. Munden, Bruce I. Benn, Ronald I. Benn, Robert P.
Lindsay and William W. Lesikar is party to an employment agreement with the
company that includes a severance provision if the executive's employment is
terminated under specified circumstances following a change of control. A change
of control will occur under the employment agreements if the recapitalization is
effected. At the present time none of Edward J. Munden, Bruce I. Benn, Ronald I.
Benn, Robert P. Lindsay and William W. Lesikar intend to effect the severance
provisions of their respective employment contracts in the event that the
recapitalization is approved and implemented as proposed.
NO DISSENTER'S RIGHTS
The Delaware General Corporation Law does not grant stockholders of a
Delaware corporation with dissenter's rights with respect to the
Recapitalization Proposal.
APPROVAL
The affirmative vote of the holders of a majority of the shares of
common stock and Series A preferred stock voting together as a class, entitled
to vote on the record date is required to approve the recapitalization. In
addition, the affirmative vote of the holders of a majority of the shares of our
Series A preferred stock outstanding and entitled to vote on the record date,
voting separately as a class, is required to approve the reverse stock split,
and the affirmative vote of the holders of at least two-thirds of the shares of
our Series C preferred stock outstanding and entitled to vote on the record
date, voting separately as a class, is required to approve the reverse stock
split.
THE EFFECTIVENESS OF THE RECAPITALIZATION PROPOSAL IS CONTINGENT ON
THE APPROVAL OF BOTH THE RECAPITALIZATION PROPOSAL AND THE REVERSE STOCK SPLIT
PROPOSAL. AS A RESULT, IF THE REVERSE STOCK SPLIT PROPOSAL IS NOT APPROVED BY
THE STOCKHOLDERS, THEN WE CANNOT COMPLETE THE RECAPITALIZATION EVEN IF THE
STOCKHOLDERS APPROVE THE RECAPITALIZATION PROPOSAL.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE
RECAPITALIZATION PROPOSAL.
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PROPOSAL THREE
PROPOSAL TO APPROVE REVERSE STOCK SPLIT
In connection with the recapitalization, the board of directors has
adopted, and proposes that the stockholders approve, an amendment to our
certificate of incorporation, which would effect, at any time prior to October
31, 2000 in the discretion of the board of directors pursuant to Section 242(c)
of the Delaware General Corporation Law, a reverse stock split of the
outstanding shares of common stock whereby every 156 shares of outstanding
common stock will automatically be reverse split into one share of common stock
outstanding, increase the par value from $.0015 to $0.234 per share and,
assuming the Recapitalization Proposal is also approved, to maintain the number
of shares common stock authorized to be issued at 100,000,000 which will have
the effect of increasing the number of shares of common stock available to be
issued. Approval of the reverse stock split will also authorize the board of
directors in its discretion to abandon and not effect the reverse stock split if
the stockholders do not approve the Recapitalization Proposal.
If the stockholders approve the reverse stock split and the
Recapitalization Proposal, then our restated certificate of incorporation would
be amended to effect the reverse stock split on or before October 31, 2000. If
the stockholders approve the reverse stock split but do not approve the
Recapitalization Proposal, then the board of directors may decide not to
implement the reverse stock split.
REASONS FOR THE REVERSE STOCK SPLIT
Listing of our common stock. The asset write downs at June 30, 1998
and December 31, 1998 reduced our net tangible asset base below the minimum
listing requirement threshold of the Nasdaq SmallCap Market on which our common
stock had been trading since May 1997. In addition, the decline in our stock
price that followed the decline in the price of oil and natural gas in the last
quarter of 1998 eventually reduced our market capitalization below the $35
million Nasdaq SmallCap market minimum. Accordingly, on July 22, 1999, we
received formal notice of Nasdaq's intention to delist our common stock as a
result of our noncompliance with these thresholds. Subsequently on August 13,
1999, Nasdaq also advised us that we no longer met the $1.00 minimum trading
price threshold. We attempted to persuade Nasdaq by written brief and at an oral
hearing to grant us additional time within which to implement a plan to restore
compliance with the minimum listing thresholds. However, we were notified by
letter dated November 10, 1999 that a final decision had been made to delist our
stock from the SmallCap Market effective November 11, 1999. We have since traded
on the Over-the-Counter Bulletin Board. Many institutional and other investors
refuse to invest in stocks that are traded or quoted in markets below the Nasdaq
SmallCap Market which could make our effort to raise capital in the future more
difficult. In addition, the firms that currently make a market for our common
stock could discontinue that role. Although it has not been the experience of
our common stock, many OTC Bulletin Board and "pink sheet" stocks are lightly
traded or not traded at all on any given day. If the trading activity of our
common stock does decrease it could have adverse consequences on our holders
either because of reduced market prices or a lack of a regular, active trading
market for our common stock and the resulting impaired liquidity.
We believe that after effecting the reverse stock split, there will be
an improved likelihood that our common stock will again meet the minimum bid
price per share listing requirement, and, as part of the overall
recapitalization described in this proxy statement, all of the other listing
requirements of the Nasdaq National Market or some other market such as the
American Stock Exchange. While the market price of our common stock may improve
if the reverse stock split is implemented, we cannot assure you
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that the reverse stock split will result in any change in the price of the
common stock or that, if the price does increase as a result of the split, the
increase will be sufficient to meet the minimum bid price requirements of the
Nasdaq National Market or the American Stock Exchange. In addition, we do not
know if we will be able to comply with the other continued listing requirements
of the Nasdaq National Market or the American Stock Exchange following the
reverse stock split or that the reduced number of shares outstanding after the
reverse stock split will not adversely affect the liquidity of the common stock.
We have filed an application to list our common stock on the Nasdaq
National Market as soon as practicable. However, we cannot assure you that we
will be able to list our common stock on the Nasdaq National Market or any other
market or exchange, or, if we are able to list our common stock, that we will be
able to continue that listing.
Marketability. The board of directors believes that the reverse stock
split may result in a broader market for the common stock than currently exists
by increasing the per share price. The board of directors believes that the
present level of the per share market prices of the common stock impairs the
acceptability of the stock by portions of the financial community and the
investing public. Many investors look upon low priced stock as more speculative
in nature, and, as a matter of policy, avoid investment in these stocks. Any
increase in the price per share may encourage interest and trading in our common
stock and possibly promote greater liquidity for the stockholders, although this
liquidity could be adversely affected by the reduced number of shares
outstanding after the reverse stock split. We cannot be certain that these
effects will occur or that the per share price level of the common stock
immediately after the proposed reverse stock split will be maintained for any
period of time.
Effective increase of authorized shares. As a part of the reverse
stock split, the board of directors proposes to effectively increase the number
of authorized shares of common stock by maintaining the authorized number at
100,000,000 shares. The board of directors believes that the reverse stock split
will provide greater flexibility to the board of directors to issue additional
equity securities, which will facilitate our ability to raise additional capital
and acquire oil and natural gas properties in exchange for our common stock. Our
preferred stock would not be affected by the reverse stock split. The board of
directors believes the proposed amounts of common stock and preferred stock
authorized for issuance are adequate to meet our company's needs in the
foreseeable future. If the reverse stock split is approved, no stockholder
approval will be solicited for the issuance of all or any portion of the
additional shares of common stock and preferred stock unless required by law or
any rules or regulations to which the company is subject.
BOARD DISCRETION TO IMPLEMENT OR ABANDON REVERSE STOCK SPLIT
The board of directors has determined the reverse stock split is in
the best interests of the stockholders. If the stockholders approve both the
Recapitalization Proposal and the reverse stock split, then we will file an
amendment to our restated certificate of incorporation to effect the reverse
stock split. However, if the stockholders approve the reverse stock split but do
not approve the Recapitalization Proposal, then the reverse stock split will be
effected only upon a determination by the board of directors to implement the
reverse stock split. The board will base this determination upon factors
including the existing and expected marketability and liquidity of the common
stock. If the stockholders approve the reverse stock split but do not approve
the Recapitalization Proposal, then the board may, in its sole discretion,
abandon the reverse stock split and determine not to effect the reverse stock
split as permitted under Section 242(c) of the Delaware General Corporation Law.
If the board
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fails to implement the reverse stock split before October 31, 2000, then
stockholder approval would again be required before implementing any reverse
stock split.
EFFECT OF REVERSE STOCK SPLIT
Our certificate of incorporation currently authorizes the issuance of
100,000,000 shares of common stock and 50,000,000 shares of preferred stock. At
the record date, we had outstanding 80,688,538 shares of common stock. In
addition we have reserved 3,500,000 shares of common stock under our option
plans and a further 9,600,000 shares of common stock to satisfy the possible
conversion of Series A and Series B preferred stock. The company therefore has a
total of 6,211,462 authorized, unissued, unreserved shares of common stock
available for future issuances. Following the reverse stock split and the
recapitalization, approximately 1,250,000 shares of common stock will be issued
and outstanding. After reserving the required number of shares of common stock
required to effect the public offering or private placement of common stock, the
company would have approximately 88,750,000 authorized but unissued and
unreserved shares of common stock available for issuance. Outstanding stock
options under our stock plans will be canceled.
Pursuant to the reverse stock split, the par value of the common stock
would also automatically increase from $.0015 per share to $0.234 per share.
There would be no increase or decrease in our "stated capital" account
(outstanding shares multiplied by par value) or "surplus" account (excess of our
net assets over our stated capital) other than noting the change in par value
and outstanding shares of common stock. We will need to adjust the historical
earnings per share on our financial statements. No other adjustment will be
required in the company's financial statements as a result of the reverse stock
split.
The proposed reverse stock split by itself will not affect the
proportionate equity interest of any holder of common stock in the company,
except as a result of stockholders who would receive cash in lieu of fractional
shares. However, the recapitalization will result in a significant change in the
proportionate equity interest in the holders of our common stock. In addition,
we will be able to issue new shares of common stock because of the effective
increase in authorized common stock, and these actions could result in a
significant decrease in the percentage equity interest of the current common
stockholders.
If the amendment is approved by the stockholders and our board
determines to implement the reverse split, we will file a certificate of
amendment to our certificate of incorporation with the Secretary of State of the
State of Delaware. The proposed amendment would become effective on the date of
the filing. Upon filing, without further action of the company or its
stockholders:
o every 156 shares of common stock outstanding will automatically be
reverse stock split into one share outstanding;
o the number of shares of authorized common stock will remain fixed
at 100,000,000; and
o the par value of the common stock will increase from $0.0015 per
share to $0.234 per share.
Upon filing the amendment, we will notify the stockholders that the reverse
stock split has been effected.
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EXCHANGE OF CERTIFICATES; NO FRACTIONAL SHARES
Upon filing of the amendment legally effecting the reverse stock
split, every 156 outstanding common shares automatically, without any further
action of the holder, will be deemed to represent one share of common stock.
NO FRACTIONAL SHARES OF COMMON STOCK WILL BE ISSUED IN CONNECTION WITH
THE PROPOSED REVERSE STOCK SPLIT. ASSUMING THE APPROVAL OF THE REVERSE STOCK
SPLIT, A STOCKHOLDER WHO WOULD OTHERWISE BE ENTITLED TO RECEIVE A FRACTIONAL
SHARE OF COMMON STOCK WILL RECEIVE, IN LIEU THEREOF, CASH IN A PROPORTIONAL
AMOUNT EQUAL TO THE LAST BID PRICE OF THE COMMON STOCK ON THE OVER-THE-COUNTER
BULLETIN BOARD ON THE DATE OF THIS PROXY STATEMENT.
We will appoint Continental Stock Transfer & Trust Company as exchange
agent in connection with the reverse stock split. As soon as practicable after
the effective date of the reverse stock split, our common stock holders will be
notified and requested to surrender to the exchange agent any certificate(s)
representing outstanding shares of common stock in exchange for certificate(s)
representing the reduced number of shares of common stock that will result from
the reverse stock split, together with cash in lieu of any fractional share.
However, holders are not required to tender their certificates. The company's
stock records will be adjusted to reflect the post reverse-split shares held by
each common stockholder. On the effective date, each certificate representing
shares of common stock will be deemed for all purposes to represent the reduced
number of shares of common stock that will result from the reverse stock split,
whether or not the certificates representing the outstanding common stock are
surrendered for exchange. We will deposit with the exchange agent, as soon as
practicable after the effective date, cash in an amount equal to the value of
the estimated aggregate number of fractional shares that will result from the
reverse stock split. Any portion of the cash deposited with the exchange agent
to pay for fractional shares that is held by the exchange agent six months after
the effective date will be returned to us on demand. Thereafter, holders of post
reverse-split shares eligible for this cash settlement would be paid directly by
us. We intend to use existing cash to make the payments in lieu of fractional
shares. We currently have approximately 1,400 stockholders of record, and
following the reverse stock split, we do not anticipate that this number will
change materially.
NO DISSENTER'S RIGHTS
The Delaware General Corporation Law does not grant stockholders of a
Delaware corporation with dissenter's rights with respect to the reverse stock
split.
RESALES OF RESTRICTED SECURITIES
The proposed amendment will not affect the transferability of shares
of common stock or any present restriction on the sale thereof. Therefore, for
purposes of determining the relevant holding period as prescribed by Rule 144
under the Securities Act of 1933, as amended, the shares of common stock to be
issued to each stockholder after the effective date will be deemed to have been
acquired on the date on which the stockholder acquired the shares of common
stock held immediately prior to the effective date.
FEDERAL INCOME TAX CONSEQUENCES
A summary of the federal income tax consequences of the reverse stock
split is set forth below. The discussion is based on the present federal income
tax law. The discussion is not, and should not be relied on as, a comprehensive
analysis of the tax issues arising from or relating to the proposed
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amendment. Accordingly, stockholders are urged to consult their personal tax
advisors for an analysis of the effect of the reverse stock split on their
respective tax situations, including consequences under applicable state tax
laws.
The reverse stock split will be deemed to be a tax-free
recapitalization to the company and its stockholders to the extent that
outstanding shares of common stock are exchanged for a reduced number of shares
of common stock. Therefore, neither the company nor its stockholders will
recognize any gain or loss for federal income tax purposes as a result thereof.
However, if a stockholder receives cash in lieu of any fractional share interest
in the common stock, the stockholder will be treated as having received the cash
in redemption of his or her fractional share interest. Depending on the
stockholder's retained stock interest, this cash redemption will be treated as
either (a) a dividend to the extent of our current and accumulated earnings and
profit with any excess first applied against the stockholder's adjusted tax
basis allocable to the fractional share interest and the remainder treated as
gain from the sale or exchange of the fractional shares or (b) gain or loss from
the sale or exchange of the fractional shares in an amount equal to the
difference, if any, between the cash received and the stockholder's basis.
The shares of common stock to be issued to each stockholder will have
an aggregate basis, for computing gain or loss, equal to the aggregate basis of
the shares of common stock held by the stockholder immediately prior to the
effective date, less any basis allocable to the fractional shares redeemed (if
any) to the extent the redemption is treated as a sale or exchange under the
preceding paragraph. A stockholder's holding period for the shares of common
stock to be issued will include the holding period for shares of common stock
exchanged therefor, provided, that the outstanding shares of common stock were
held by the stockholder as capital assets on the effective date.
AMENDMENT
If the reverse stock split is approved, the restated certificate of
incorporation, as amended, will be amended by deleting paragraph (a) of Article
Fifth in its entirety and inserting in its place the following:
"FIFTH. Description and Authorization of Stock.
(a) Stock Authorization. The total number of shares of capital stock
that the Corporation shall have authority to issue is one hundred fifty million
(150,000,000) shares, which shall consist of (i) one hundred million
(100,000,000) shares of common stock, par value ($0.234) per share (the "Common
Stock") and (ii) fifty million (50,000,000) shares of preferred stock, par value
($.01) per share (the "Preferred Stock"). Simultaneously with the effective date
of this amendment (the "Effective Date"), each 156 shares of the Company's
Common Stock issued and outstanding immediately prior to the Effective Date (the
"Old Common Stock") shall automatically and without any action on the part of
the holder thereof be reclassified as and changed, pursuant to a reverse stock
split, into one share of Common Stock, par value ($0.234) per share (the "New
Common Stock"), subject to the treatment of fractional share interests as
described below. Each holder of a certificate or certificates which immediately
prior to the Effective Date represented outstanding shares of Old Common Stock
(the "Old Certificates", whether one or more) shall be entitled to receive upon
surrender of such Old Certificates to the Company's transfer agent for
cancellation, a certificate or certificates (the "New Certificates", whether one
or more) representing the number of whole shares of the New Common Stock into
which and for which the shares of the Old Common Stock formerly represented by
the Old Certificates so surrendered are reclassified under the terms hereof.
From and after the Effective Date, Old Certificates shall represent only the
right to receive New Certificates pursuant to the provisions hereof. No
certificate or scrip representing
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fractional share interests in New Common Stock will be issued, and no fractional
share interest will entitle the holder thereof to vote, or to any rights of a
stockholder of the Company. The Corporation shall issue to each stockholder of
the Corporation otherwise entitled to receive a fractional share of common
stock, cash in an amount equal to the product obtained by multiplying the
fraction by the last bid price for the common stock on the OTC Bulletin Board on
the date that this amendment is filed with the Secretary of State of the State
of Delaware in lieu of a fractional share of common stock. If more than one Old
Certificate shall be surrendered at one time for the account of the same
shareholder, the number of full shares of New Common Stock for which New
Certificates shall be issued shall be computed on the basis of the aggregate
number of shares represented by the Old Certificates so surrendered. In the
event that the Company's transfer agent determines that a holder of Old
Certificates has not tendered all his certificates for exchange, the transfer
agent shall carry forward any fractional share until all certificates of that
holder have been presented for exchange such that payment for fractional shares
to any one person shall not exceed the value of one share. If any New
Certificate is to be issued in a name other than that in which the Old
Certificates surrendered for exchange are issued, the Old Certificates so
surrendered shall be properly endorsed and otherwise in proper form for
transfer, and the person or persons requesting the exchange shall affix any
requisite stock transfer tax stamps to the Old Certificates surrendered, or
provide funds for their purchase, or establish to the satisfaction of the
transfer agent that the taxes are not payable. From and after the Effective Date
the amount of capital represented by the shares of the New Common Stock into
which and for which the shares of the Old Common Stock are reclassified under
the terms hereof shall be the same as the amount of capital represented by the
shares of Old Common Stock so reclassified, until thereafter reduced or
increased in accordance with applicable law."
APPROVAL
The affirmative vote of the holders of a majority of the shares of
common stock outstanding and entitled to vote on the record date and Series A
preferred stock, voting together as a class, is required to approve the reverse
stock split. In addition, the affirmative vote of the holders of a majority of
the shares of our Series A preferred stock outstanding and entitled to vote on
the record date, voting separately as a class, is required to approve the
reverse stock split. The affirmative vote of the holders of two-thirds of the
shares of our Series C preferred stock outstanding and entitled to vote on the
record date, voting separately as a class, is required to approve the reverse
stock split.
THIS PROPOSAL MAY BE EFFECTED EVEN IF THE STOCKHOLDERS DO NOT APPROVE
THE RECAPITALIZATION PROPOSAL.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE AMENDMENT
TO EFFECT THE REVERSE STOCK SPLIT.
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PROPOSAL FOUR
PROPOSAL TO CHANGE THE COMPANY'S NAME
On August 9, 2000, subject to stockholder approval, our board of
directors approved an amendment to our restated certificate of incorporation to
change our name to "DevX Energy, Inc." The proposed amendment would change
Article First of our restated certificate of incorporation to read in its
entirety:
"The name of the corporation is DevX Energy, Inc."
Our board of directors believes that the proposed name change is
appropriate because it states the objective of the company to develop and
explore for oil and natural gas throughout North America better than does the
current name which is linked to a particular producing region of New Mexico.
The affirmative vote of a majority of the outstanding shares of common
stock and Series A preferred stock, voting together as a class, is required to
approve this proposal. If this proposal is approved by our stockholders, an
amendment to our restated certificate of incorporation will be filed to effect
the name change as promptly as practicable after the annual meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL TO APPROVE
THE AMENDMENT TO CHANGE THE COMPANY'S NAME TO "DEVX ENERGY, INC."
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PROPOSAL FIVE
PROPOSAL TO RATIFY APPOINTMENT OF AUDITORS
The board of directors, upon the recommendation of its audit committee,
has appointed Ernst & Young LLP as the independent auditors of the company for
the fiscal year ended June 30, 2001. Stockholders are being asked to ratify this
appointment. The Company has been informed that Ernst & Young LLP are
independent with respect to the Company within the meaning of the applicable
published rules and regulations of the Securities and Exchange Commission, the
pronouncements of the Independence Standards Board, and Rule 101 of the American
Institute of Certified Public Accountants' Code of Professional Conduct, its
interpretations and rulings.
Representatives of Ernst & Young are expected to be present at the
annual meeting with the opportunity to make a statement if they so desire and to
be available to respond to appropriate questions.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL TO RATIFY THE
APPOINTMENT OF ERNST & YOUNG LLP AS INDEPENDENT AUDITORS FOR THE COMPANY FOR THE
FISCAL YEAR ENDING JUNE 30, 2001.
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MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
BOARD OF DIRECTOR MEETINGS
During the fiscal year ended June 30, 2000, the entire board of
directors acted 3 times by written consent. No director attended fewer than 75%
of the meetings of the board of directors or of the committees of the board of
directors on which they served. The board of directors has established three
standing committees to assist it in the discharge of its responsibilities.
AUDIT COMMITTEE
The audit committee recommends the independent public auditors that the
company considers to perform the annual audit, reviews financial statements, and
reviews the observations of independent auditors concerning their annual audit.
During fiscal year 2000, the audit committee consisted of Ted Collins, Jr., Eli
Rebich and Edward J. Munden. The audit committee currently consists of Mr.
Munden. During the fiscal year ended June 30, 2000, there were no meetings or
actions taken by the audit committee. In August 1999 the board adopted a code of
conduct for the audit committee pursuant to the 1999 Blue Ribbon Panel
Recommendations to the Securities and Exchange Commission's Public Oversight
Board.
COMPENSATION COMMITTEE
The compensation committee reviews and makes recommendations regarding
executive compensation and oversees the company's incentive compensation plans
as they may exist from time to time. During fiscal year 2000, the compensation
committee consisted of Ted Collins, Jr. and Eli Rebich until their resignations.
The compensation committee currently has no members. For the fiscal year ended
June 30, 2000, there were no meetings or actions taken by the compensation
committee.
SECURITIES TRADING POLICY COMMITTEE
Pursuant to the company's bylaws, effective December 20, 1997 the board
of directors has established a standing securities trading policy committee. The
securities trading policy committee oversees the implementation of the company's
securities trading policy which is designed to provide employees and directors
with an understanding of the limitations placed on them by regulatory bodies.
The securities trading policy committee consists of Bruce I. Benn and Edward J.
Munden. For the fiscal year ended June 30, 2000, there were no meetings of the
securities trading policy committee.
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<PAGE> 46
OFFICERS
The following table sets forth the officers of the company.
<TABLE>
<CAPTION>
NAME AGE CURRENT POSITION
---- --- ----------------
<S> <C> <C>
Edward J. Munden .............. 49 Chairman of the Board, Chief Executive Officer,
President
Bruce I. Benn ................. 46 Executive Vice President and Secretary
Robert P. Lindsay ............. 57 Chief Operating Officer, Executive Vice President
Ronald I. Benn ................ 45 Chief Financial Officer, Executive Vice President
V. Ed Butler .................. 44 Vice President, Asset Management
Ronald Idom ................... 45 Vice President, Acquisitions
William W. Lesikar ............ 47 Vice President, Finance
William A. Williamson ......... 44 Vice President, Land
</TABLE>
The following is a brief description of the business backgrounds of
each of the officers who are not also nominees for directors. For a narrative
description of the business background of Messrs. Munden, Bruce I. Benn and
Lindsay see "Directors and nominees for election to the board of directors."
Ronald I. Benn was appointed Chief Financial Officer of Queen Sand
Resources, Inc. , a Nevada corporation, or 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 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 22 years of experience in oil field engineering and
operations. From 1993 to 1995, he was Executive Vice President for Echo
Production, Inc. From 1982 to 1993 he held the position of Operations Manager
for Triad Energy Corporation. He has also been a staff engineer for Blocker
Exploration Company from 1980 to 1982 and an area production engineer for Texas
Oil and Gas Corporation from 1978 to 1980. Mr. Butler holds an M.B.A. (1988)
from the University of Texas, and a Bachelor of Science in Petroleum Engineering
(1978) from Texas A&M University.
Ronald Idom joined the company in January 1998 as Vice President,
Acquisitions. He has over 24 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
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<PAGE> 47
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 24 years of experience
in finance and accounting with nearly 19 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 20 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.
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<PAGE> 48
EXECUTIVE COMPENSATION
COMPENSATION OF OFFICERS
The following table shows the compensation of the chief executive
officer and the three other executive officers of the company for the fiscal
years ended June 30, 2000, 1999 and 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------------- ------------------
FISCAL YEAR OTHER NUMBER OF
ENDED ANNUAL SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION JUNE 30, SALARY BONUS COMP. UNDERLYING OPTIONS COMPENSATION
------------------------------- ----------- --------- --------- ------ ------------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Edward J. Munden 2000 $ 160,000 $ 0 -0- 0 -0-
Chief Executive Officer, 1999 160,000 40,000 -0- 55,000 -0-
President and Chairman 1998 130,000 100,000 -0- 45,000 -0-
of the Board
Robert P. Lindsay 2000 160,000 $ 0 -0- 0 -0-
Chief Operating Officer and 1999 160,000 40,000 -0- 55,000 -0-
Executive Vice President 1998 130,000 98,000 -0- 45,000 -0-
Bruce I. Benn 2000 160,000 $ 0 -0- 0 -0-
Executive Vice President 1999 160,000 40,000 -0- 55,000 -0-
and Secretary 1998 130,000 100,000 -0- 45,000 -0-
Ronald I. Benn 2000 160,000 $ 0 -0- 0 -0-
Chief Financial Officer 1999 160,000 40,000 -0- 55,000 -0-
1998 130,000 100,000 -0- 45,000 -0-
</TABLE>
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 four officers as a group during the fiscal
year ended June 30, 2000 was $640,000.
We did not grant any options to the named executive officers in the
fiscal year ended June 30, 2000.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END
OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying In-the-Money
Unexercised Options/ Options/SARs at
SARs at FY-End(#) FY-End($)
Shares Acquired On Exercisable/ Exercisable/
Name Exercise(#) Value Realized($) Unexercisable Unexercisable
-------------------- ------------------ ------------------ -------------------- --------------------
<S> <C> <C> <C> <C>
Edward J. Munden -- -- 84,500/52,500 $0/$0
Robert P. Lindsay -- -- 84,500/52,500 $0/$0
Bruce I. Benn -- -- 84,500/52,500 $0/$0
Ronald I. Benn -- -- 84,500/52,500 $0/$0
</TABLE>
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<PAGE> 49
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' nonqualified stock option plan for our nonemployee
directors.
COMPENSATION REPORT
During the fiscal year ended June 30, 2000, the compensation committee
of our board of directors, until the resignations in 2000 of the directors on
that committee, was responsible for overseeing the compensation of our executive
officers.
Compensation policies. In August, 1997 we retained the consulting firm
of Arthur Andersen 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 establish executive base salaries at a level within the second
highest quartile among the companies in our peer group to attract and retain
skilled and talented management. We pay annual incentive bonuses up to a maximum
of base 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 second highest
quartile 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.
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 expect cash bonuses to be in the range of 30% to 100%
of base pay, with a target bonus of 60% 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 2000 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
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<PAGE> 50
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, 2000, a total of 558,000
options have been granted at exercise prices ranging from $5.35 to $7.38.
2000 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 1999, 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, 2000, our company paid Mr. Munden
a base salary of $160,000.
Board of Directors
Edward J. Munden
Bruce I. Benn
Robert P. Lindsay
BOARD OF DIRECTORS INTERLOCKS AND INSIDER
PARTICIPATION IN COMPENSATION DECISIONS
None of the members of the compensation committee of the board of
directors who served during the fiscal year ended June 30, 2000 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.
EXECUTIVE EMPLOYMENT AGREEMENTS
In December 1997, 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 these officers receives a base salary of $160,000 per annum. Incentive
bonuses are paid depending upon the company's performance. Each of the
agreements terminates on June 30, 2002.
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
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<PAGE> 51
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.
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, 2000, 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 except for a late filing
of a Form 3 by JNC Opportunity Fund, Ltd.
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<PAGE> 52
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, 2000. The stock performance graph is not necessarily indicative of
future price performance.
<TABLE>
<CAPTION>
COMPANY/INDEX MAY 22, 1997 JUNE 30, 1997 JUNE 30, 1998 JUNE 30, 1999 JUNE 30, 2000
--------------------------- ------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Queen Sand Resources, Inc 100.00 105.6 188.6 26.4 2.56
MG 121 Index 100.00 99.54 86.06 87.52 109.4
Russell 2000 Index 100.00 104.29 121.48 122.14 137.83
</TABLE>
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<PAGE> 53
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the
number of shares of common stock and voting stock (includes Series A preferred
stock which is entitled to vote on all matters submitted to a vote by the
holders of common stock) beneficially owned as of July 21, 2000, 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 -- Compensation of Executive Officers," (3) each
director of the company and (4) all directors and executive officers of the
company as a group.
<TABLE>
<CAPTION>
PRO FORMA
APPROXIMATE PRO FORMA AMOUNT APPROXIMATE
AMOUNT AND NATURE PERCENTAGE OF AND NATURE OF PERCENTAGE OF
OF BENEFICIAL VOTING STOCK BENEFICIAL VOTING STOCK
NAME AND ADDRESS OWNERSHIP BEFORE OWNED BEFORE OWNERSHIP AFTER OWNED AFTER THE
OF BENEFICIAL OWNER REVERSE STOCK SPLIT THE MEETING THE RECAPITALIZATION(1) RECAPITALIZATION(1)
--------------------------------- --------------------- --------------- ----------------------- ---------------------
<S> <C> <C> <C> <C>
Officers and Directors:
Edward J. Munden(2) 6,684,500(4) 7.4% 42,849(4) 0.38%
30 Metcalfe Street, Suite 620
Ottawa, Canada
K1P 5L4
Bruce I. Benn(2) 6,684,500(4) 7.4% 42,849(4) 0.38%
30 Metcalfe Street, Suite 620
Ottawa, Canada
K1P 5L4
Robert P. Lindsay(2) 6,698,786(4,5) 7.4% 42,941(4,5) 0.38%
3500 Oak Lawn Drive
Suite 380, L.B. #31
Dallas, Texas 75219
Ronald I. Benn(2) 6,684,500(4) 7.4% 42,849(4) 0.38%
30 Metcalfe Street, Suite 620
Ottawa, Canada
K1P 5L4
All executive officers and directors 6,952,286(4) 7.6% 44,566(4) 0.40%
as a group (4 persons)
Five Percent Stockholders
Joint Energy Development Investments 12,234,952(3,6) 13.6% 229,391 2.04%
Limited Partnership
1400 Smith St.
Houston, Texas 77002-7361
EIBOC Investments Ltd. 6,600,000(4) 7.3% 42,308(4) 0.38%
Charlton House
White Park Road
Bridgetown, Barbados W.I.
JNC Opportunity Fund, Ltd. 13,947,1617 15.4% 292,193 2.60%
c/o Encore Capital Management, LLC
12007 Sunrise Valley Drive, Suite 460
Reston, Virginia 20191
</TABLE>
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<PAGE> 54
----------
1 Assumes that the recapitalization, the reverse stock split and a private
placement or public offering of 10,000,000 shares of common stock have
occurred as described in proposals 2 and 3 in this proxy statement.
2 Executive officer and/or director.
3 Includes options exercisable within 60 days.
4 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., or
EIBOC. In addition, EIBOC has granted an irrevocable proxy to Messrs.
Munden, Benn, Benn and Lindsay to vote 6,600,000 shares, or 42,308 post
reverse split shares, owned of record by EIBOC. Accordingly, the 6,600,000
shares, or 42,308 post reverse split 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.
5 Mr. Lindsay acquired 14,286 shares, or 91 post reverse split shares, of
common stock in the name of his children and disclaims any beneficial
interest in these shares.
6 Includes 9,600,000 shares of common stock issuable upon conversion of the
9,600,000 shares of Series A preferred stock and 2,634,952 shares of common
stock. 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 our 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.
7 Includes 364,500 shares of pre-split common stock issuable upon exercise of
warrants held by JNC Opportunity Fund, Ltd., or JNC. Also includes 283,827
shares of pre-split common stock held by Diversified Strategies Fund, L.P.,
under common management with JNC, and 10,500 shares of pre-split common
stock issuable to Diversified Strategies Fund, L.P. upon exercise of
warrants. Does not include 76,825,534 shares of pre-split common stock
issuable to JNC and 1,688,355 shares of pre-split common stock issuable to
Diversified upon exercise of repricing rights as of July 21, 2000 (computed
without regard to the covenants in the securities purchase agreement
limiting the number of shares of common stock an individual holder may
beneficially own).
Upon the occurrence of certain Events of Default (as defined in our
restated certificate of incorporation), the holder of the Series A preferred
stock has (a) the right to require the company to repurchase the Series A
preferred stock and (b) the right, acting separately as a class, to elect a
number of persons to our board of directors that, along with any members of the
board of directors who are serving at the time of the 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." Upon consummation of the recapitalization, there will no
longer be any Series A preferred stock outstanding.
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<PAGE> 55
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). The JEDI purchase
agreement, registration rights agreement, stockholder agreement and ECT letter
agreement will be terminated upon completion of the recapitalization.
Description of the purchase agreement. The following summary of the
material provisions of the JEDI purchase agreement is not intended to be
complete. You may read all 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 board of
directors meetings, deliver to JEDI reports furnished to our board of directors,
deliver an officer's 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
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<PAGE> 56
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 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 warrants for the purchase of capital stock that JEDI was entitled
pursuant to its maintenance right, 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 December 31, 1999, all outstanding warrants held by JEDI
pursuant to its maintenance rights had expired.
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 August 25, 2000, JEDI held no
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.
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<PAGE> 57
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 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.
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<PAGE> 58
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 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 its 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 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 the
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
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<PAGE> 59
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 the Registrable Security has been
issued, sold or disposed of pursuant to the 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. Pursuant to the Series A recapitalization agreement,
JEDI has agreed not to exercise its demand and piggyback registration rights in
connection with the public offering or private placement that the company
intends to effect upon completion of the recapitalization.
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.
Effective upon the completion of the recapitalization, the ECT letter
agreement, the EIBOC stockholders' agreement, the JEDI registration rights
agreement and the JEDI securities purchase agreement will be terminated.
JNC OPPORTUNITY FUND, LTD. SECURITIES PURCHASE AGREEMENT
Pursuant to an amended and restated securities purchase agreement dated
July 8, 1998 we issued to JNC Opportunity Fund, Ltd. and other stockholders (a)
2,357,144 shares of our common stock on July 8, 1998 and issued an additional
1,071,430 shares of our common stock on July 20, 1998, (b) repricing rights to
acquire additional shares of common stock and (c) warrants to purchase an
aggregate of up to 605,000 shares of our common stock. The aggregate gross
consideration for the issuances was $24 million. Under the terms of the July
purchase agreement, the repricing rights were exercisable for shares of common
stock. The number of shares issuable upon repricing was determined in part upon
the market price of the common stock prior to the determination of the repricing
rate pursuant to a repricing rate mechanism.
In connection with the securities purchase agreement, we entered into a
registration rights agreement pursuant to which we agreed to register for resale
shares of our common stock issued and issuable to the stockholders. Pursuant to
this registration rights agreement, we initially registered 9,656,438 shares of
our common stock to be sold by stockholders who purchased securities pursuant to
the July purchase agreement. This registration statement was declared effective
by the Securities and Exchange Commission. As the price per share of common
stock decreased, the number of shares of common stock issued and issuable
pursuant to the July 1998 placement increased. As a result, we registered
additional shares of common stock for resale by the stockholders.
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<PAGE> 60
Effective upon the completion of the recapitalization, this securities
purchase agreement, the registration rights agreement and the warrants issued
under the securities purchase agreement will be terminated.
BANK OF MONTREAL CREDIT AGREEMENT
Each of JEDI and Enron Capital & Trade Resources Corp. ("ECT"), an
affiliate of JEDI, was a lender under our amended and restated credit agreement
dated as of April 17, 1998 (the "BMO Credit Agreement"). Societe Generale,
Southwest Agency and The Bank of Montreal were the two other lenders under the
credit agreement. The Bank of Montreal acted as agent for the lenders. As of
October 25, 1999, we signed a credit agreement with Ableco Finance LLC and
Foothill Capital Corporation (the "Ableco Credit Agreement"), that has replaced
the BMO Credit Agreement. Neither of the lenders in the Ableco Credit Agreement
is an affiliate of the company.
The BMO Credit Agreement provided for borrowings up to $125.0 million
(subject to borrowing base limitations) from the lenders to, among other things,
fund development and exploitation expenditures, acquisitions and general working
capital. The proceeds under the BMO Credit Agreement were used to fund the
property acquisitions in part.
Indebtedness incurred under the BMO Credit Agreement generally bore
interest at bank prime plus 2.0%.
The loan under the BMO Credit Agreement was 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 BMO Credit Agreement.
Pursuant to the BMO Credit Agreement, we were subject to certain
affirmative and negative financial and operating covenants that are usual and
customary for transactions of this nature.
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 was subordinate to
the BMO Credit Agreement. The ECT revolving credit agreement provided for
borrowings up to $10.0 million, on a revolving basis and subject to borrowing
base limitations.
The ECT Credit Agreement was terminated on October 29, 1999 upon
funding of the Ableco Credit Agreement.
HEDGING ACTIVITIES
During the year ended June 30, 2000 we had the following natural gas and crude
oil commodity price risk contracts with an affiliate of Enron. All prices quoted
for natural gas are NYMEX Henry Hub. All prices quoted for crude oil are NYMEX
Sweet Light Crude. All volumes presented are divided equally over the months
during the period.
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<PAGE> 61
A Natural Gas Swap Contract at $2.40 per MMBTU.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
Period Beginning Period Ending Volume (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>
A Natural Gas Floor Contract at $1.90 per MMBTU.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
Period Beginning Period Ending Volume (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>
Crude Oil Swap Contracts at the price and for the volumes noted in the table
below.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
Period Beginning Period Ending Price per Barrel Volume (Barrels)
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
March 1, 1999 August 31, 1999 $13.50 60,000
---------------------------------------------------------------------------------------------------------
April 1, 1999 September 30, 1999 $14.35 30,000
---------------------------------------------------------------------------------------------------------
April 1, 1999 September 30, 1999 $14.82 30,000
---------------------------------------------------------------------------------------------------------
</TABLE>
Crude Oil Collar Contracts at the prices and for the volumes noted in the table
below.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
Period Beginning Period Ending Floor Price Ceiling Price Volume
per Barrel per Barrel (Barrels)
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 1, 1999 March 31, 2000 $22.90 $25.77 40,000
---------------------------------------------------------------------------------------------------------------------
April 1, 2000 June 30, 2000 $23.00 $28.16 15,000
---------------------------------------------------------------------------------------------------------------------
July 1, 2000 December 31, 2000 $22.00 $28.63 30,000
---------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 62
We are required to provide a letter of credit to the affiliate of Enron in an
amount that approximates the market value of these contracts, as calculated from
time to time, as security for these contracts. At June 30, 2000, the letter of
credit was in the amount of $6.2 million.
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<PAGE> 63
GENERAL; 2001 ANNUAL MEETING
The Annual Report on Form 10-K for the fiscal year ended June 30, 2000
is enclosed herewith. The Annual Report does not form any part of the material
for the solicitation of proxies, other than "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the company's
consolidated financial statements for the fiscal year ended June 30, 2000.
Pursuant to the rules of the Securities and Exchange Commission, a
proposal to be presented by a stockholder at the company's 2001 annual meeting
must be received by the company at its principal executive offices no later than
May 2, 2001 to be included in the company's proxy statement for that meeting. At
the 2001 annual meeting, management proxies will have discretionary authority to
vote on stockholder proposals that are not submitted for inclusion in the
company's proxy statement unless received by the company before July 15, 2001.
The solicitation of proxies in the enclosed form is made on behalf of
our board of directors. The entire cost of soliciting these proxies, including
the costs of preparing, printing and mailing this proxy statement and
accompanying materials to stockholders, will be borne by the company. In
addition to use of the mails, proxies may be solicited personally or by
telephone or otherwise by officers, directors and employees of the company, who
will receive no additional compensation for these activities. Arrangements will
also be made with brokerage houses and other custodians, nominees and
fiduciaries to forward solicitation materials to the beneficial owners of shares
held of record by brokerage houses, custodians, nominees and fiduciaries. These
parties will be reimbursed for their reasonable expenses incurred in forwarding
the proxy materials.
Representatives of our principal auditors Ernst & Young LLP are
expected to be present at the annual meeting, will have the opportunity to make
a statement if they desire to do so and we expect to be available to respond to
appropriate questions from stockholders.
OTHER BUSINESS
Management knows of no other matter that will come before the meeting.
However, if other matters do come before the meeting, the proxy holders will
vote in accordance with their best judgment.
By Order of the Board of Directors,
/s/ BRUCE I. BENN
BRUCE I. BENN
Secretary and Executive Vice President
August 28, 2000
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<PAGE> 64
APPENDIX A
COMMON STOCK AND SERIES A PARTICIPATING CONVERTIBLE PREFERRED STOCK
PROXY
QUEEN SAND RESOURCES, INC.
13760 NOEL RD., SUITE 1030
DALLAS, TEXAS 75240-7336
TEL: (972) 233-9906
FAX: (972) 233-9575
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned hereby appoints Edward J. Munden and Bruce I. Benn as Proxies,
each with the power to appoint his or her substitute, and hereby authorizes them
to represent and to vote, as designated below, all the shares of COMMON STOCK
and SERIES A PARTICIPATING CONVERTIBLE PREFERRED STOCK of Queen Sand Resources,
Inc. held of record by the undersigned on July 21, 2000 at the annual meeting of
stockholders to be held at the Country Inn Hotel, 4355 Beltway Drive, Addison,
Texas 75001 on September 18, 2000 at 3:00 p.m., Dallas time, or any adjournment
or postponement thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY
THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED
FOR PROPOSALS 1 THROUGH 5.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR EACH OF THE
PROPOSALS. PLEASE REVIEW CAREFULLY THE PROXY STATEMENT DELIVERED WITH THIS
PROXY.
1. Proposal to elect EDWARD J. MUNDEN, BRUCE I. BENN AND ROBERT P. LINDSAY as
directors until the next annual meeting or until their successors have been
duly qualified and elected.
[ ] FOR all nominees listed above
(except as marked to the contrary below)
[ ] WITHHOLD AUTHORITY
to vote for all nominees listed above
--------------------------------------------------------------------------------
(Instruction: to withhold authority to vote for any individual nominee write
that nominee's name in the space provided above)
2. Proposal to approve the Recapitalization Proposal.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. Proposal to effect a 156 for 1 reverse stock split of the outstanding shares
of common stock.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. Proposal to approve a change of the Company's name.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
5. Proposal to approve the appointment of Ernst & Young LLP as the independent
auditors of the company to audit the accounts of the company for the fiscal
year ended June 30, 2001.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
THE EFFECTIVENESS OF PROPOSAL (2), THE RECAPITALIZATION, IS CONTINGENT
ON THE APPROVAL OF BOTH PROPOSAL (2) AND PROPOSAL (3), THE REVERSE STOCK SPLIT.
AS A RESULT, IF PROPOSAL (3), THE REVERSE STOCK SPLIT, IS NOT APPROVED BY THE
STOCKHOLDERS, THEN WE CANNOT COMPLETE THE RECAPITALIZATION EVEN IF THE
STOCKHOLDERS APPROVE PROPOSAL (2).
The Proxies are authorized to vote, in their discretion, upon such other
business as may properly come before the meeting.
---------------------------------------
Signature
Dated: ____________ ___, 2000 ---------------------------------------
Signature, if held jointly
Please sign exactly as name appears below. When shares are held by joint
tenants, both should sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such. If a corporation, please
sign in full corporate name by the President or other authorized officer. If a
partnership, please sign in partnership name by an authorized person.
<PAGE> 65
APPENDIX B
SERIES C CONVERTIBLE PREFERRED STOCK
PROXY
QUEEN SAND RESOURCES, INC.
13760 NOEL RD., SUITE 1030
DALLAS, TEXAS 75240-7336
TEL: (972) 233-9906
FAX: (972) 233-9575
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned hereby appoints Edward J. Munden and Bruce I. Benn as Proxies,
each with the power to appoint his or her substitute, and hereby authorizes them
to represent and to vote, as designated below, all the shares of SERIES C
CONVERTIBLE PREFERRED STOCK of Queen Sand Resources, Inc. held of record by the
undersigned on July 21, 2000 at the annual meeting of stockholders to be held at
the Country Inn Hotel, 4355 Beltway Drive, Addison, Texas 75001 on September 18,
2000 at 3:00 p.m., Dallas time, or any adjournment or postponement thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY
THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED
FOR PROPOSALS 1 AND 2.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR EACH OF THE
PROPOSALS. PLEASE REVIEW CAREFULLY THE PROXY STATEMENT DELIVERED WITH THIS
PROXY.
1. Proposal to approve the Recapitalization Proposal.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. Proposal to effect a 156 for 1 reverse stock split of the outstanding shares
of common stock.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
THE EFFECTIVENESS OF PROPOSAL (2), THE RECAPITALIZATION, IS CONTINGENT ON
THE APPROVAL OF BOTH PROPOSAL (2) AND PROPOSAL (3), THE REVERSE STOCK SPLIT. AS
A RESULT, IF PROPOSAL (3), THE REVERSE STOCK SPLIT, IS NOT APPROVED BY THE
STOCKHOLDERS, THEN WE CANNOT COMPLETE THE RECAPITALIZATION EVEN IF THE
STOCKHOLDERS APPROVE PROPOSAL (2).
The Proxies are authorized to vote, in their discretion, upon such other
business as may properly come before the meeting.
---------------------------------------
Signature
Dated: ____________ ___, 2000 ---------------------------------------
Signature, if held jointly
Please sign exactly as name appears below. When shares are held by joint
tenants, both should sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such. If a corporation, please
sign in full corporate name by the President or other authorized officer. If a
partnership, please sign in partnership name by an authorized person.
