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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED):
MARCH 27, 1997
QUEEN SAND RESOURCES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
STATE OF DELAWARE 0-21179 75-2615565
(STATE OF INCORPORATION) (COMMISSION FILE NO.) (IRS EMPLOYER IDENTIFICATION NO.)
3500 OAK LAWN
SUITE 380, LB #31
DALLAS, TEXAS 75219-4398
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (214) 521-9959
NO CHANGE
(FORMER NAME OR FORMER ADDRESS, IF CHANGE SINCE LAST REPORT)
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ITEM 5. OTHER EVENTS.
THE PROPOSED TRANSACTIONS
General. Queen Sand Resources, Inc., a Delaware corporation (the
"Company"), has entered into a Securities Purchase Agreement, dated March 27,
1997 (the "JEDI Purchase Agreement") with Joint Energy Development Investments
Limited Partnership, a Delaware limited partnership ("JEDI") and an affiliate
of Enron Finance Corp., a Delaware corporation ("EFC"), and has entered into a
Securities Purchase Agreement, dated March 27, 1997 (the "Forseti Purchase
Agreement") with Forseti Investments Ltd., a company organized under the laws
of Barbados ("Forseti") (the two transactions are herein referred to as the
"Proposed Transactions"). The Forseti Purchase Agreement will be closed
immediately after the closing of the JEDI Purchase Agreement.
In addition, EIBOC Investments Ltd., a company organized under the
laws of Barbados ("EIBOC"), and Forseti (Forseti and EIBOC are together
referred to herein as the "Stockholders"), who collectively own approximately
54% of the common stock, par value $0.0015 per share, of the Company (the
"Common Stock"), and the Board of Directors of the Company have approved an
amendment to the Certificate of Incorporation of the Company (the "Charter
Amendment") to facilitate the consummation of the Proposed Transactions and to
provide for additional authorized but unissued capital stock to be available to
the Company for the purpose of raising capital, issuances in connection with
acquisition transactions, employee compensation plans and other corporate
purposes.
JEDI Transaction. JEDI has determined to make a substantial
investment in the Company, on the terms described herein, to provide the
Company with the capital to repurchase the Common Stock owned by Forseti.
Pursuant to the JEDI Purchase Agreement, JEDI has agreed to acquire at
the closing under the JEDI Purchase Agreement 9,600,000 shares of Series A
Participating Convertible Preferred Stock, par value $0.01 per share, of the
Company (the "Series A Preferred Stock"), certain warrants to purchase Common
Stock (the "JEDI Warrants") and warrants to purchase 409,839 shares of Common
Stock (the "Robertson Warrants"). The Robertson Warrants are being granted to
JEDI as a form of maintenance right on the part of JEDI to acquire Common Stock
in the future and maintain JEDI's proportionate ownership in the Company in
relation to shares of Common Stock issued in late February and late March 1997
to fund the Robertson acquisition. See "JEDI Transaction Agreements --
Maintenance Rights" and the Company's Current Report on Form 8-K dated
February 20, 1997 for a more complete description of the acquisition. The
aggregate consideration (excluding the exercise price in respect of the JEDI
Warrants and the Robertson Warrants) cannot exceed $14,400,000 and consists of
(i) $5,000,000 ($0.521 per share) cash at closing of the JEDI Purchase
Agreement plus (ii) contingent cash payment obligations (up to an aggregate of
$9,400,000) to the Company under the JEDI Earn Up Agreement, as described
below. All of such funds would be used by the Company to fund the Forseti
transaction agreements. See "Forseti Transaction Agreements." Based upon
(i) a total number of 20,624,500 shares of Common Stock assumed to be issued
and outstanding immediately following the closing of the Proposed Transactions,
(ii) 3,000,000 shares of Common Stock issuable upon exercise of the Forseti
Warrants (defined below) and (iii) 409,839 shares of Common Stock issuable
upon exercise of the Robertson Warrants, JEDI would own approximately 30% of
the voting capital stock of the Company upon the closing of the Proposed
Transactions.
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In connection with the purchase by JEDI of the Series A Preferred
Stock, the JEDI Warrants and the Robertson Warrants, the Company has agreed to
grant JEDI certain maintenance rights and certain demand and piggyback
registration rights with respect to the shares of Common Stock issuable upon
conversion of the Series A Preferred Stock and the shares of Common Stock
issuable upon exercise of the JEDI Warrants and the Robertson Warrants. Upon
purchasing the Series A Preferred Stock at the closing, JEDI may designate a
number of directors to the Company's Board of Directors, such that the
percentage of the number of directors that JEDI may designate approximates the
percentage voting power JEDI will have with respect to the Company's Common
Stock. In addition, upon certain events of default (as defined in the Series A
Certificate of Designation described below), JEDI will have the right to elect
a majority of the directors of the Company and a put option to sell the Series
A Preferred Stock to the Company. See "JEDI Transaction Agreements."
Forseti Transaction. Pursuant to the Forseti Purchase Agreement, the
Company has agreed to repurchase at the closing under the Forseti Purchase
Agreement, 9,600,000 shares of Common Stock owned by Forseti in exchange for
(i) $5,000,000 ($0.521 per share) cash, (ii) the issuance by the Company of
Class A Common Stock Purchase Warrants to purchase 1,000,000 shares of Common
Stock at an initial exercise price of $2.50 per share (the "Class A Warrants")
and Class B Common Stock Purchase Warrants to purchase 2,000,000 shares of
Common Stock at an initial exercise price of $2.50 per share (the "Class B
Warrants," and together with the Class A Warrants, the "Forseti Warrants"), and
(iii) contingent obligations (up to an aggregate of $9,400,000) to Forseti
under the Forseti Earn Up Agreement, as described below. However, pursuant to
the terms of the Forseti Earn Up Agreement, Forseti will not be able to both
sell or exercise the Forseti Warrants and receive full payment under the
Forseti Earn Up. Instead, Forseti will have the option of either selling or
exercising the Forseti Warrants or receiving any payments due under the
Forseti Earn Up Agreement. The aggregate consideration paid or payable by the
Company to Forseti in respect of the repurchase of the Common Stock owned by
Forseti cannot exceed $14,400,000. This consideration will be funded only
through the JEDI Purchase Agreement and the JEDI Earn Up Agreement. See
"Forseti Transaction Agreements."
The Company anticipates that the closings under the JEDI Purchase
Agreement and the Forseti Purchase Agreement will occur contemporaneously, with
the JEDI transaction closing first. Each agreement is dependent on
consummation of the other.
EIBOC. EIBOC holds of record 6,600,000 shares of Common Stock.
Edward J. Munden, Bruce I. Benn and Ronald I. Benn have the sole beneficial
interest in such shares. Edward J. Munden and Bruce I. Benn are officers and
directors of the Company, and Ronald I. Benn is an officer of the Company.
EIBOC received its shares of Common Stock from Norden Investments, Ltd.
("Norden") on March 27, 1997. Messrs. Munden, Benn and Benn had a beneficial
interest in such shares when they were held by Norden. Norden retained
3,000,000 shares of Common Stock and a 45% stock ownership interest in Capital
House International Ltd., a company organized under the laws of Barbados
("CHIL"). Prior to October 1996, the 9,600,000 shares of Common Stock held by
Norden and the 9,600,000 shares of Common Stock owned by Forseti were held of
record by CHIL.
The Charter Amendment. The Certificate of Incorporation does not
currently authorize the issuance of preferred stock. To consummate the
Proposed Transactions, the Company must amend the Certificate of Incorporation
to authorize a class of preferred stock. The Company has also determined to
authorize additional shares of Common Stock.
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The Charter Amendment will (i) authorize the issuance of an aggregate
of 50,000,000 shares of preferred stock of the Company (the "Preferred Stock"),
of which, following closing of the JEDI Purchase Agreement, 9,600,000 shares
will be issued and outstanding shares of Series A Preferred Stock, 9,600,000
shares will be authorized but unissued shares of Series B Preferred Stock, par
value $0.01 per share (the "Series B Preferred Stock") and 30,800,000 shares
will be undesignated preferred stock (the "Undesignated Preferred Stock")
available for issuance by the Company in the future and (ii) authorize an
additional 60,000,000 shares of Common Stock (in addition to the 40,000,000
shares currently authorized under the Certificate of Incorporation). See "JEDI
Transaction Agreements -- Description of Series A Preferred Stock and
Description of Series B Preferred Stock." As of April 1, 1997, there were
30,224,500 issued and outstanding shares of Common Stock and no shares of
Common Stock held in treasury, leaving 9,775,500 shares of Common Stock
authorized for issuance. Following completion of the Proposed Transactions,
there would be an aggregate of 9,600,000 shares held in treasury and 69,775,500
shares of authorized and unissued shares of Common Stock. Any authorized but
unissued or unreserved Common Stock and Undesignated Preferred Stock would be
available for issuance at any time, on such terms and for such purposes as the
Board of Directors may deem advisable in the future without further action by
stockholders of the Company, except as may be required by law or the Series A
Certificate of Designation. The Board of Directors of the Company will have
the authority to fix the rights, powers, designations, and preferences of the
Undesignated Preferred Stock and to provide for one or more series of
Undesignated Preferred Stock. The authority will include, but not be limited
to, determination of the number of shares to be included in the series,
dividend rates and rights, voting rights, if any, conversion privileges and
terms, redemption conditions, redemption values, sinking funds and rights upon
involuntary or voluntary liquidation. Except as described herein, the Company
currently has no plans to issue shares of Undesignated Preferred Stock.
The Board of Directors will file with the Secretary of State of the
State of Delaware a Certificate of Designation to establish the rights, powers,
designations and preferences of the Series A Preferred Stock (the "Series A
Certificate of Designation"). In addition, the Board of Directors will file a
Certificate of Designation to establish the rights, powers, designations and
preferences of the Series B Preferred Stock (the "Series B Certificate of
Designation"). The Charter Amendment will authorize the Board of Directors,
without further stockholder approval, to approve the Series A Certificate of
Designation and the Series B Certificate of Designation.
Dissenters' Rights and Preemptive Rights. The current stockholders of
the Company have no dissenters' rights or preemptive rights in connection with
the issuance of the Series A Preferred Stock or any of the JEDI Warrants,
Robertson Warrants, Maintenance Warrants (as described below) or Forseti
Warrants (or the Common Stock issuable upon exercise of such warrants).
JEDI TRANSACTION AGREEMENTS
Description of the JEDI Purchase Agreement. The following summary of
the material provisions of the JEDI Purchase Agreement is not intended to be
complete and is subject to, and qualified in its entirety by reference to, all
of the provisions of such agreement, a copy of which is filed as an exhibit to
this Report on Form 8-K.
Purchase of Series A Preferred Stock, JEDI Warrants and
Robertson Warrants. Pursuant to the JEDI Purchase Agreement, JEDI will
purchase 9,600,000 shares of Series A Preferred Stock, the JEDI Warrants and
the Robertson Warrants in exchange for (i) the
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payment by JEDI to the Company of $5,000,000 cash; and (ii) the execution and
delivery by JEDI of the JEDI Earn Up Agreement. See "JEDI Transaction
Agreements -- Description of the Series A Preferred Stock, Description of the
JEDI Warrants, Description of the Robertson Warrants and Description of the
JEDI Earn Up Agreement."
Certain Representations and Warranties. Under the JEDI
Purchase Agreement, the Company has made certain representations and warranties
to JEDI regarding the Company and its business, including (i) due corporate
organization of the Company and its subsidiaries; (ii) the due authorization
and issuance of the Series A Preferred Stock, the JEDI Warrants and the
Robertson Warrants and the shares of Common Stock issuable upon conversion of
the Series A Preferred Stock and the exercise of the JEDI Warrants and the
Robertson Warrants; (iii) the due authorization, execution, delivery and
performance by the Company of the JEDI Purchase Agreement and related
agreements and their enforceability; (iv) no conflict with or violation of the
Company's Certificate of Incorporation or bylaws, any of the Company's
agreements and applicable law; (v) required consents from governmental
authorities or other third parties; (vi) the capital structure of the Company
and its subsidiaries; (vii) employee benefit matters; (viii) the accuracy of
reports and other documents filed by the Company with the SEC; (ix) the absence
of certain changes to the Company's or its subsidiaries' business, financial
condition, properties, liabilities, assets, results of operations or future
business prospects; (x) compliance with laws; (xi) disclosure of pending and
threatened litigation; (xii) payment of taxes; (xiii) environmental matters;
(xiv) adequacy of insurance; (xv) title to assets; (xvi) accuracy of books and
records; (xvii) certain regulatory matters; (xviii) accuracy of financial
statements and certain reserve reports; (xix) adequacy of permits and licenses;
(xx) title to intellectual property; (xxi) title to properties; (xxii) no
undisclosed interested director transaction; (xxiii) no payments owed to
brokers and finders; and (xxiv) no material misstatements in any disclosures to
JEDI.
Under the JEDI Purchase Agreement, JEDI has made certain
representations and warranties to the Company, including (i) due organization;
(ii) the due authorization, execution, delivery and performance by JEDI of the
JEDI Purchase Agreement and related agreements and their enforceability; (v) no
conflict with or violation of the JEDI's organizational documents, any of
JEDI's agreements and applicable law; (vi) required consents from governmental
authorities or other third parties; (vii) pending and threatened litigation;
and (viii) certain investment representations.
Conditions Precedent. The JEDI Purchase Agreement provides
that the obligations of the Company to consummate the transactions contemplated
by the JEDI Purchase Agreement are subject to the fulfillment prior to or on
the closing of certain conditions precedent, or the waiver thereof by the
Company, including the following: (i) the representations and warranties of
JEDI shall be true and correct in all material respects as of the closing date;
(ii) the issuance and purchase of the Series A Preferred Stock, the JEDI
Warrants and the Robertson Warrants shall not be prohibited or enjoined by law
nor shall any action seeking such prohibition or enjoinment be pending; (iii)
the delivery of a legal opinion of JEDI's counsel; (iv) the Company shall have
received a certificate of an officer of JEDI as to certain matters; (v) the
Series A Certificate of Designation and the Series B Certificate of Designation
shall have become effective under the General Corporation Law of the State of
Delaware; (vi) JEDI shall have paid for the Series A Preferred Stock, the JEDI
Warrants and the Robertson Warrants; (vii) JEDI shall have executed and
delivered each of the JEDI Earn Up Agreement, the Registration Rights Agreement
(as described below), the Stockholders Agreement, and the Letter Agreement (as
described below); and (viii) the
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Company shall have received the consent of Comerica Bank-Texas to the
transactions contemplated by the agreements.
The JEDI Purchase Agreement provides that the obligations of JEDI to
consummate the transactions contemplated by the JEDI Purchase Agreement are
subject to the fulfilment prior to or on the closing of certain conditions
precedent, or the waiver thereof by JEDI, including the following: (i) the
representations and warranties of the Company shall be true and correct in all
material respects as of the date of the closing; (ii) the Company shall have
performed and complied in all material respects with all agreements contained
in the JEDI Purchase Agreement required to be performed by the Company prior to
or at the closing; (iii) delivery of a legal opinion of the Company's counsel;
(iv) the issuance and purchase of the Series A Preferred Stock, the JEDI
Warrants and the Robertson Warrants shall not be prohibited or enjoined by law;
(v) JEDI shall have received an officer's certificate from the Company as to
certain matters; (vi) the Company shall have executed and delivered each of the
JEDI Earn Up Agreement, the Registration Rights Agreement, the Stockholders
Agreement, the JEDI Warrants, the Robertson Warrants, and the Letter Agreement;
(vii) the Company shall have amended its Certificate of Incorporation and
bylaws as set forth in the JEDI Purchase Agreement; (viii) the Company shall
have filed the Series A Certificate of Designation and the Series B Certificate
of Designation with the Secretary of State of the State of Delaware; (ix) the
Management Services Agreement between the Company and Capital House A Finance
and Investment Corporation, a corporation organized under the laws of Canada
("CHC"), shall have been terminated and the Agency Agreement dated as of June
15, 1996 among Forseti and certain parties named therein shall have been
terminated; (x) the Company shall have entered into certain employment
agreements with each of Messrs. Munden, Benn and Benn; (xi) all of the
conditions to the obligations of the Company and Forseti to consummate the
transactions contemplated under the Forseti Purchase Agreement (other than
conditions that are dependent on the closing under the JEDI Purchase Agreement)
shall have occurred; (xii) the Company shall have paid certain of JEDI's
expenses and paid ECT Securities Corp. amounts due and owing under the Letter
Agreement; (xiii) JEDI's counsel shall be satisfied with proceedings taken in
connection with certain matters; (xiv) the consummation of the transactions
shall have occurred on or before June 15, 1997; (xv) EIBOC shall be the record
owner of 6,600,000 shares of Common Stock and shall have entered into trust or
similar arrangements related to the beneficial ownership of such shares, which
arrangements are satisfactory to JEDI, and EIBOC shall have deposited such
shares in escrow pursuant to an escrow agreement acceptable to JEDI; (xvi) JEDI
shall have received certain letters from the legal owner of the stock of EIBOC
and from the beneficial owners of stock of Forseti and (xvii) the Company shall
have received the consent of Comerica Bank-Texas to the transactions
contemplated by the agreements.
Covenants. Pursuant to the JEDI Purchase Agreement, the
Company will covenant to: (i) use the entire cash proceeds received under the
JEDI Purchase Agreement to repurchase the Common Stock owned by Forseti under
the Forseti Purchase Agreement; (ii) maintain its corporate existence and cause
its subsidiaries to maintain their corporate existence; (iii) comply with
applicable laws and cause its subsidiaries to do the same; (iv) maintain its
properties and cause its subsidiaries to maintain their properties; (v) not
materially change its accounting methods or permit its subsidiaries to change
their accounting methods; (vi) allow JEDI the right to have notice of, and
attendees at, the Company's Board of Directors' meetings; (vii) furnish to JEDI
certain reports and accounts furnished to the Company's Board of Directors;
(viii) effect the placement of Common Stock with net proceeds to the Company of
at least $5,400,000 commencing March 15, 1997 through December 31, 1997; (ix)
deliver an officer's certificate to JEDI annually regarding compliance
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with the covenants; (x) provide JEDI with certain financial statements and
reserve reports; (xi) use its best efforts to cause the Common Stock to be
listed on THE NASDAQ Small Cap Market; (xii) use reasonable commercial efforts
to cause the Common Stock, including the Common Stock issuable upon conversion
of the Series A Preferred Stock and upon exercise of the JEDI Warrants and the
Robertson Warrants, to be listed on THE NASDAQ National Market no later than
March 15, 2003; (xiii) approve customary stock option and other benefit plans;
(xiv) no later than June 30, 1997, enter into an employment agreement with V.
Ed Butler or a person with comparable qualifications reasonably acceptable to
JEDI; (xv) not to amend the Forseti Purchase Agreement or related documents
without the prior written consent of JEDI; and (xvi) use its best efforts to
obtain the consent of Comerica Bank-Texas to the transactions contemplated by
the agreement.
In addition, the Company will covenant not, and not permit any of its
subsidiaries, to engage in asset sales not in the ordinary course of business
unless the asset sale is for not less than the fair market value of the assets
sold and the consideration received by the Company or its subsidiary is at
least 85% cash; provided, that the following are deemed to be cash for purposes
of the covenant: (i) the amount of liabilities of the Company or a subsidiary
assumed by the transferee; (ii) the amount of any notes or other obligations
received by the Company or a subsidiary from such transferee converted into
cash within 90 days of the closing of the sale and (iii) the fair market value
of certain oil and gas properties and permitted business investments received
by the Company or its subsidiaries from such transferee. Further, if the
Company engages in an asset sale that is not in the ordinary course of
business, then the Company shall repay indebtedness, if required, and if not so
required, then within 60 days after the receipt of proceeds from such sale, the
Company may apply the proceeds to reduce 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.
The Company will covenant not, and not permit any of its subsidiaries,
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 affiliate of the Company unless (i) the terms of the transaction are
no less favorable to the Company than those that could have been obtained in a
transaction with an unaffiliated party or an arms-length basis and (ii) the
transaction is approved by a majority of disinterested directors of the
Company; provided, that this covenant will not apply to customary compensation
to officers, directors, and employees in the ordinary course of business,
intercompany transactions, dividend payments, or the transactions contemplated
by the Letter Agreement. See "JEDI Transaction Agreements -- Description of
the Letter Agreement."
The Company will also covenant 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, the Company will be required to (i)
distribute to its stockholders annual reports containing audited financial
statements and quarterly reports containing statements of operating results,
(ii) maintain a minimum of two independent directors of the Company's Board of
Directors, (iii) maintain an audit committee, a majority of the members of
which are independent directors, (iv) hold an annual meeting of stockholders,
(v) solicit proxies and provide proxy statements for all meetings of
stockholders, (vi) conduct an appropriate review of related party transactions
on an ongoing basis, (vii) require stockholder approval prior to the adoption
of certain stock option plans and prior to the issuance of designated
securities that will result in a change of control of the Company or certain
other issuances in connection with the acquisition of the stock or assets of
another company or in connection with a
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transaction other than a public offering involving a significant amount of the
Company's securities and (viii) not take any action that will have the effect
of nullifying, restricting or disparately reducing the voting rights of the
holders of the Company's Common Stock; provided, that the Company is not
required to appoint two outside directors to the Company's Board of Directors
until June 30, 1997 and is not required to establish an Audit Committee until
June 30, 1997.
Maintenance Rights. Pursuant to the JEDI Purchase Agreement,
the Company has granted JEDI the right to purchase its proportionate share of
capital stock of the Company at the same price and on the same terms as the
capital stock to be sold by the Company. From the date of the JEDI Purchase
Agreement until December 31, 1998, if JEDI is entitled to exercise its
maintenance rights, the Company shall issue to JEDI a warrant for the purchase
of the capital stock that JEDI is entitled, but does not elect, to purchase (a
"Maintenance Warrant"). The exercise price of the Maintenance Warrant will be
the value of the capital stock as of the date of the issuance of the Maintenance
Warrant, and any Maintenance Warrant will be exercisable for a period of one
year. JEDI will not have maintenance rights with respect to capital stock
issued by the Company (i) pursuant to certain employee and director stock plans;
(ii) in connection with a stock split or dividend on the Common Stock to all
holders of Common Stock or (iii) pursuant to an offering pursuant to a
registration statement filed with, and declared effective by, the Securities and
Exchange Commission (the "SEC"). Subject to certain exceptions, JEDI will not
have maintenance rights with respect to the issuance of any rights, warrants or
options to purchase shares of the Company's capital stock or other securities
convertible into or exercisable or exchangeable for shares of the Company's
capital stock but will have maintenance rights if and when capital stock is
issued upon the conversion, exercise or exchange of such securities. JEDI's
maintenance rights will terminate upon the earlier to occur of: (i) the date on
which JEDI and its affiliates beneficially own less than 10 percent of the
voting power of the outstanding voting capital stock of the Company; (ii) the
date on which the Company completes an underwritten public offering of Common
Stock that generates net proceeds to the Company of at least $25,000,000; and
(iii) the date on which all shares of Series A Preferred Stock have been
converted to Common Stock or otherwise are no longer outstanding.
Termination. The JEDI Purchase Agreement may be terminated
(i) by the Company if the conditions to the Company's obligations under the
JEDI Purchase Agreement have not been fulfilled by the earlier of the fifth
business day after the twentieth day after the date the Information Statement of
the Company is first sent or given to the Company's stockholders or June 15,
1997; or (ii) by JEDI if the conditions to JEDI's obligations under the JEDI
Purchase Agreement have not been fulfilled by the earlier of the fifth
business day after the twentieth day after the date the Information Statement of
the Company is first sent or given to the Company's stockholders or June 15,
1997.
Indemnification. The JEDI Purchase Agreement provides that
the Company 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) ("Losses") arising out of or resulting from the breach of any
representation, warranty, convent or agreement of the Company contained in the
JEDI Purchase Agreement.
The JEDI Purchase Agreement provides that JEDI will indemnify,
defend and hold harmless the Company to the fullest extent lawful from and
against all 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.
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Dispute Resolution. The JEDI Purchase Agreement provides that
all disputes shall be submitted to non- binding mediation upon the request of
the Company or JEDI. If the non-binding mediation does not resolve the
disputes in question within 30 days after appointment of a mediator, the
dispute shall be resolved by arbitration governed by the Commercial Arbitration
Rules of the American Arbitration Association.
Expenses. The Company will pay its own expenses and the
out-of-pocket third party expenses reasonably incurred by JEDI in connection
with the transactions contemplated by the JEDI Purchase Agreement.
Description of Series A Preferred Stock. The Series A Certificate of
Designation will authorize the issuance of up to 9,600,000 shares of Series A
Preferred Stock. The following description of the rights, preferences and
limitations of the Series A Preferred Stock is a summary only and is qualified
in its entirety by reference to the entire text of the Series A Certificate of
Designation which is an exhibit to the JEDI Purchase Agreement.
Voting. The holders of shares of Series A Preferred Stock
will generally be entitled to vote (on an as-converted basis) as a single class
with the holders of the Common Stock, together with all other classes and
series of stock of the Company that are entitled to vote as a single class with
the Common Stock, on all matters coming before the Company's stockholders. In
any vote with respect to which the Series A Preferred Stock shall vote with the
holders of Common Stock as a single class, each share of Series A Preferred
Stock shall entitle the holder thereof to cast the number of votes equal to the
number which could be cast in such vote by a holder of the number of shares of
Common Stock into which such shares of Series A Preferred Stock is convertible
on the date of such vote.
With respect to any matter for which class voting is required by law
or the Company's Certificate of Incorporation, except as otherwise described
herein, the holders of the Series A Preferred Stock will vote as a class and
each holder shall be entitled to one vote for each share held.
For so long as 960,000 shares of Series A Preferred Stock are
outstanding, the following matters will require the approval of the holders of
shares of Series A Preferred Stock, voting together as a separate class:
(i) the amendment of any provision of the Company's
Certificate of Incorporation or the bylaws;
(ii) the creation, authorization or issuance, or the
increase in the authorized amount of, any class or series of shares
ranking on a parity with or prior to the Series A Preferred Stock
either as to dividends or upon liquidation, dissolution or winding up;
(iii) the merger or consolidation of the Company with or
into any other corporation or other entity or the sale of all or
substantially all of the Company's assets; or
(iv) the reorganization, recapitalization, or
restructuring or similar transaction that requires the approval of the
stockholders of the Company.
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Election of Directors. The holders of shares of Series A
Preferred Stock shall have the right, acting separately as a class, to elect a
number of members to the Company's Board of Directors. The number shall be a
number such that the quotient obtained by dividing such number by the maximum
authorized number of directors is as close as possible to being equal to the
percentage of the outstanding voting power of the Company entitled to vote
generally in the election of directors represented by the outstanding shares of
Series A Preferred Stock at the relevant time.
Conversion. A holder of shares of Series A Preferred Stock
shall have the right, at the holder's option, to convert all or a portion of
its shares into shares of Common Stock at any time at an initial rate of one
share of Series A Preferred Stock for one share of Common Stock.
The Series A Certificate of Designation provides for customary
adjustments to the number of shares issuable upon conversion in the event of
certain dividends and distributions to holders of Common Stock, certain
reclassifications of the Common Stock, stock splits, and combinations and
mergers and similar transactions.
Immediately following such conversion, the rights of the holders of
Series A Preferred Stock shall cease and the persons entitled to receive Common
Stock upon the conversion of Series A Preferred Stock shall be treated as the
owners of such Common Stock. The Company is required to maintain a reserve of
authorized but unissued shares of Common Stock to permit the conversion of the
Series A Preferred Stock in full.
Concurrently with the transfer of any shares of Series A Preferred
Stock to any person (other than a direct or indirect affiliate of JEDI or other
entity managed by Enron Corp. or any of its affiliates), the shares of Series A
Preferred Stock so transferred will automatically convert into a like number of
shares of Series B Preferred Stock. See "JEDI Transaction Agreements --
Description of Series B Preferred Stock."
Dividends. The holders of the shares of Series A Preferred
Stock will be entitled to receive dividends, when, and as if declared by the
Board of Directors, out of funds legally available therefor, any dividend
(other than a dividend or distribution paid in shares of, or warrants, rights
or options exercisable for or convertible into or exchangeable for, Common
Stock) payable on the Common Stock, as and when paid, in an amount equal to the
amount each such holder would have received if such holder's shares of Series A
Preferred Stock had been converted into Common Stock immediately prior to the
record date, or if there is no record date, the date of payment thereof. The
holders of Series A Preferred Stock will also have the right to certain
dividends upon and during the continuance of an event of default. See "JEDI
Transaction Agreements -- Description of Series A Preferred Stock -- Events of
Default; Remedies."
Liquidation. Upon the liquidation, dissolution or winding up
of the Company, the holders of the shares of Series A Preferred Stock, before
any distribution to the holders of Common Stock, will be entitled to receive
(i) an amount per share equal to the lesser of (A) $1.50 and (B) the sum of (x)
$0.521 and (v) the quotient obtained by dividing (1) the aggregate amount of
all payments made, as of the date of the liquidation, dissolution or winding
up, to the Company by JEDI pursuant to the JEDI Earn Up Agreement by (2)
9,600,000, plus (ii) all accrued and unpaid dividends thereon ("Liquidation
Preference"). The holders of the shares of Series A Preferred Stock will not
be entitled to participate further in the distribution of the assets of the
Company.
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Events of Default; Remedies. The Series A Certificate of
Designation will provide that an Event of Default will be deemed to have
occurred if the Company fails to comply with any of its covenants in the JEDI
Purchase Agreement; provided, that the Company will have a 30-day cure period
with respect to the non-compliance with certain covenants. See "JEDI
Transaction Agreements -- Description of JEDI Purchase Agreement -- Covenants."
JEDI may waive any Event of Default.
Upon the occurrence but only during the continuance of an Event of
Default, the holders of Series A Preferred Stock will be entitled to receive,
in addition to other dividends payable to holders of Series A Preferred Stock,
when, as, and if declared by the Board of Directors, out of funds legally
available therefor, cumulative preferential cash dividends accruing from the
date of the Event of Default in an amount per share per annum equal to 6% of
the Liquidation Preference in effect at the time of accrual of such dividends,
payable quarterly in arrears on or before the 15th day after the last day of
each calendar quarter during which such dividends are payable. Unless full
cumulative dividends accrued on shares of Series A Preferred Stock have been or
contemporaneously are declared and paid, no dividend may be declared or paid or
set aside for payment on the Common Stock or any other junior securities (other
than a dividend or distribution paid in shares of, or warrants, rights or
options exercisable for or convertible into or exchangeable for, Common Stock
or any other junior securities), nor shall any Common Stock nor any other
junior securities be redeemed, purchased or otherwise acquired for any
consideration nor may any monies be paid to or made available for a sinking
fund for the redemption of any shares of any such securities.
Upon the occurrence and during the continuance of an Event of Default
resulting from the failure to comply with certain covenants, the holders of
shares of Series A Preferred Stock will have the right, acting separately as a
class, to elect a number of persons to the Board of Directors of the Company,
that along with any members of the Board of Directors who are serving at the
time of such action, will constitute a majority of the Board of Directors.
Upon the occurrence of an Event of Default resulting from the failure
to comply with certain covenants, each holder of shares of Series A Preferred
Stock will have the right, by written notice to the Company, to require the
Company to repurchase, out of funds legally available therefor, such holder's
shares of Series A Preferred Stock for an amount in cash equal to the
Liquidation Preference in effect at the time of the Event of Default.
Description of Series B Preferred Stock. The Series B Certificate
of Designation will authorize the issuance of up to 9,600,000 shares of Series
B Preferred Stock. The following description of the rights, preferences and
limitations of the Series B Preferred Stock is a summary only and is qualified
in its entirety by reference to the entire text of the Series B Certificate of
Designation which is an exhibit to the JEDI Purchase Agreement. The terms of
the Series B Preferred Stock are substantially similar to those of the Series A
Preferred Stock except that the holders of Series B Preferred Stock will not
(i) have class voting rights except as required under Delaware corporate law,
(ii) be entitled to any remedies upon an event of default or (iii) be entitled
to elect any directors of the Company, voting separately as a class.
Description of the JEDI Warrants. Pursuant to the JEDI Purchase
Agreement, at the closing under such agreement, the Company shall issue the
JEDI Warrants for the purchase of Common Stock of the Company. The JEDI
Warrants will be exercisable commencing on October 1, 1998 and ending on
December 31, 1998. At the time of exercisability, the JEDI
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Warrants shall be exercisable for the number of shares of Common Stock (or
amount of other property) equal to the number of shares of Common Stock (or
amount of other property), as adjusted from time to time pursuant to the JEDI
Warrants, which would have been received upon the exercise on the Election Date
(as defined in the Forseti Earn Up Agreement) of the Forseti Warrants that are
deliverable by Forseti to the Company pursuant to the Forseti Earn Up
Agreement. The JEDI Warrants may be exercised in full or in part by means of
payment of the exercise price (initially $2.50 per share of Common Stock in
cash). The JEDI Warrants provide for customary adjustments to the exercise
price and number of shares to be issued in the event of certain dividends and
distributions to holders of Common Stock, stock splits, combinations and
mergers. The JEDI Warrants also include customary provisions with respect to,
among other things, reservation of shares of Common Stock for issuance upon
exercise of the JEDI Warrants, mutilated or lost warrant certificates, and
notices to holder(s) of the JEDI Warrants.
Description of the Robertson Warrants. Pursuant to the JEDI Purchase
Agreement, at the closing under such agreement, the Company shall issue the
Robertson Warrants for the purchase of 409,839 shares of Common Stock. The
Robertson Warrants will be exercisable for a period of one year, commencing on
the date of issuance. The Robertson Warrants may be exercised in full or in
part by means of payment of the exercise price (initially $1.85 per share of
Common Stock in cash). The Robertson Warrants provide for customary
adjustments to the exercise price and number of shares to be issued in the
event of certain dividends and distributions to holders of Common Stock, stock
splits, combinations and mergers. The Robertson Warrants also include
customary provisions with respect to, among other things, reservation of shares
of Common Stock for issuance upon exercise of the Robertson Warrants, mutilated
or lost warrant certificates, and notices to holder(s) of the Robertson
Warrants.
Description of the Stockholders Agreement. Pursuant to the JEDI
Purchase Agreement, at the closing under such agreement, EIBOC, Bruce I. Benn,
Ronald I. Benn, Edward J. Munden, Robert P. Lindsay and JEDI will enter into the
Stockholders Agreement. Pursuant to the Stockholders Agreement, each of EIBOC,
Bruce I. Benn, Ronald I. Benn, Edward J. Munden and Robert P. Lindsay will
agree to certain restrictions on the transfer of shares of the 6,600,000 shares
of Common Stock held by EIBOC, and JEDI will agree to certain restrictions on
the transfer of shares of Common Stock or securities convertible into or
exercisable or exchangeable for shares of Common Stock (including the Series A
Preferred Stock, the JEDI Warrants and the Robertson Warrants) held by JEDI.
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") will covenant not to transfer, nor to authorize
transfer of, any of the 6,600,000 shares of Common Stock in which they have or
may acquire a beneficial interest except by will or the laws of descent and
distribution or otherwise by operation of law or judicial decree or as
permitted by the Stockholders Agreement.
The Stockholders Agreement will permit EIBOC and the Management
Stockholders to make the following transfers of shares of Common Stock after
October 1, 1997: (i) EIBOC and the Management Stockholders in the aggregate
may transfer shares of Common Stock provided that the number of shares of
Common Stock to be transferred together with all shares of Common Stock
transferred by EIBOC and the Management Stockholders during the preceding 12
months does not exceed the lesser of (x) four percent of the outstanding shares
of Common Stock, (y) four times the average weekly reported volume of trading,
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excluding any trades made by EIBOC or a Management Stockholder on all national
securities exchanges and/or reported through the automated quotation system of
a registered securities association during the four calendar weeks preceding
the date of transfer or (z) four times the average weekly volume of trading,
excluding any trades made by EIBOC or a Management Stockholder, in Common Stock
reported through the consolidated transaction reporting system, contemplated by
Rule 11Aa3-1 under the Securities Exchange Act of 1934, as amended, during the
four week period specified in clause (y); and (ii) EIBOC and the Management
Stockholders may transfer shares of Common Stock in a registered underwritten
public offering of Common Stock; provided, that neither EIBOC nor any Management
Stockholder may transfer shares of Common Stock if after the transfer EIBOC and
the Management Stockholders would beneficially own less than 4,950,000 shares of
Common Stock in the aggregate, subject to certain adjustments for stock splits,
combinations, and stock dividends. In addition, the Stockholders Agreement will
permit EIBOC and the Management Stockholders to transfer Common Stock to certain
family members and related entities and to make certain transfers of Common
Stock upon the death or disability of a Management Stockholder.
Pursuant to the Stockholders Agreement, JEDI will agree 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 of Common Stock or blocks of Common Stock Equivalents
that are convertible into or exchangeable or exercisable for at least 600,000
shares of Common Stock.
Pursuant to the Stockholders Agreement, JEDI will agree 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 the 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, the Company will have the first right,
which must be exercised within 30 days after receipt of notice of the proposed
transfer, to purchase the shares of Common Stock or Common Stock Equivalents to
be transferred. If the Company does not elect to acquire the shares of Common
Stock or Common Stock Equivalents to be transferred, the Management
Stockholders (if the Management Stockholders own in the aggregate more than 10%
of the voting power of the Company's capital stock) will have the right to
purchase such securities if the Management Stockholders notify JEDI of such
election within 30 days after the Company's receipt of notice of the proposed
transfer.
Pursuant to the Stockholders Agreement, EIBOC and the Management
Stockholders will make certain representations and warranties to JEDI, and
EIBOC will covenant 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 (i) will be deposited in escrow pursuant to escrow agreements mutually
acceptable to EIBOC, the Management Stockholders and JEDI, and (ii) will be
held in escrow until the earlier of the
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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 will grant 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 (i) the
fifth anniversary of the date of the Stockholders Agreement or (ii) the date on
which JEDI and its affiliates beneficially own in the aggregate less than 10%
of the voting power of the Company's capital stock.
Description of the Registration Rights Agreement. The Common Stock
issuable upon conversion of the Series A Preferred Stock or upon exercise of
the JEDI Warrants or the Robertson Warrants will not be registered with the SEC
and therefore, will be, when issued, restricted securities. The JEDI Purchase
Agreement provides that at the closing under the agreement the Company shall
enter 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, as amended (the "Securities Act"), of shares of Common
Stock issuable upon conversion of Series A Preferred Stock or upon exercise of
the JEDI Warrants, the Robertson Warrants or the Maintenance Warrants (the
"Registrable Securities").
The Registration Rights Agreement provides for demand and piggyback
registration rights. A holder of Registrable Securities (a "Holder") 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 such Holder or Holders portion of Registrable
Securities is at least $1,000,000. Generally, the Company bears the expense of
the demand registration statements, while the selling Holders bear selling
expenses such as underwriting fees and discounts. The Registration Rights
Agreement also provides for unlimited priority piggyback registration rights.
That is, in the event that the Company proposes to register the sale for cash
of any of its securities under the Securities Act for its own account, or for
the account of any other person, the holders will be entitled to include
Registrable Securities in any such registration, subject to the limited right
of the managing underwriter of any such offering under certain circumstances to
exclude some or all of such Registrable Securities from such registration. The
Company generally bears the expense of any piggyback registration statement,
while selling holders generally bear selling expenses such as underwriting fees
and discounts. The Registration Rights Agreement also includes customary
indemnification and contribution provisions, and with regard to demand
registration rights, a provision allowing the Company 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 the Company is 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 the Company.
The Company will no longer 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 such Registrable Security has been declared
effective by the SEC and such Registrable Security has been issued, sold or
disposed of pursuant to such effective registration statement. JEDI may
transfer its
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registration rights (including demand registration rights that JEDI has not
exercised) to a third party but may not transfer more than one demand
registration right.
Description of the JEDI Earn Up Agreement. Pursuant to the JEDI
Purchase Agreement, the Company and JEDI will enter into, at the closing of the
transactions under the JEDI Purchase Agreement, an Earn Up Agreement (the "JEDI
Earn Up Agreement"). On or prior to October 15, 1998, subject to the
limitations in the JEDI Earn Up Agreement and against delivery by Forseti to
the Company of the Forseti Warrants and a statutory declaration as to certain
matters, JEDI shall pay the Company the Earn Up Amount. The Earn Up Amount
cannot exceed the amount defined as the "Earn Up Amount" under the Forseti Earn
Up Agreement.
The "Earn Up Amount" is a dollar amount equal to the amount, if any,
by which (i) the sum of the Class A Amount and the Class B Amount exceeds (ii)
the Warrant Transfer Amount; provided, that in no event shall the Earn Up
Amount exceed $9,400,000.
The "Class A Amount" is a dollar amount equal to the product of (i)
the Value (not to exceed $1.50) less $1.25, multiplied by (ii) 9,600,000;
provided, that in no event shall the Class A Amount be greater than $2,400,000;
and if the Class A Amount is zero or a negative number, the Class A Amount
shall be deemed to be zero.
The "Class B Amount" is a dollar amount equal to the product of (i)
the Value (not to exceed $1.25) less $0.521, multiplied by (ii) 9,600,000;
provided, that in no event shall the Class B Amount be greater than $7,000,000;
and if the Class B Amount is zero or a negative number, the Class B Amount
shall be deemed to be zero.
The "Warrant Transfer Amount" is a dollar amount equal to the greatest
of (i) the product of (x) $3.50 multiplied by (y) the aggregate number of
Forseti Warrants transferred by Forseti before October 15, 1998; (ii) the
aggregate gross proceeds that Forseti has received or is entitled to receive
from the transfer of all of the Forseti Warrants transferred by Forseti before
October 15, 1998; and (iii) the difference between the average bid price of the
Company's shares of Common Stock for the 21-day period ending on September 30,
1998 less $2.50, multiplied by the number of Forseti Warrants transferred by
Forseti before October 15, 1998.
"Value" means the product of the Price, multiplied by 0.60; provided,
that if (i) the Common Stock is quoted on The Nasdaq National Market at the
Election Date and (ii) the average daily trading volume of the Common Stock for
the 21-day period ending on September 30, 1998 is at least 50,000 shares per
day (excluding trading of shares in any accounts controlled by the Company or
Forseti or their respective affiliates, and provided, that if on any of the 21
days the trading volume is greater than 300,000 shares, then only 300,000
shares on such days may be used in calculating the average), then Value means
the product of the Price, multiplied by 0.75.
"Price" means, if:
-----
|Price(1) - Price(2)|
---------------------- Less than or greater than 0.1, then (Price(1) + Price(2))/2;
Greater of Price(1) or Price(2)
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provided, that if: |Price(1) - Price(2)|
---------------------- Greater than 0.1, then the Company and JEDI
Greater of Price(1) or Price(2)
shall negotiate the Price; provided, further, that if the Price has not been
negotiated within 5 business days after the determination of Price1 and Price2,
then the determination of the Price shall be submitted to nonbinding mediation
and arbitration in accordance with the JEDI Earn Up Agreement. Notwithstanding
anything to the contrary in the JEDI Earn Up Agreement, under no circumstances
can the Price be higher than the higher of Price(1) and Price(2) or be less than
the lower of Price(1) and Price(2).
"Price(1)" = (1.1 * SEC PV(10)) - Indebtedness + Consolidated Working Capital
----- -------------------------------------------------------------------------------------------
Outstanding Shares
"Price(2)" = (6.0 * EBITDA) - Indebtedness + Consolidated Working Capital
----- -----------------------------------------------------------------------------------------
Outstanding Shares
Terms used but not defined in the above definitions of Price(1) and
Price(2) are defined in the JEDI Earn Up Agreement.
The parties must first attempt to resolve disputes under the JEDI Earn
Up Agreement pursuant to non-binding mediation. Disputes that are not resolved
pursuant to non-binding mediation shall be settled by arbitration in accordance
with the Commercial Arbitration Rules of the American Arbitration Association.
The JEDI Earn Up Agreement will terminate upon the earlier of (i) in
the event the "Election Date" under the Forseti Earn Up Agreement is after
September 30, 1998 or the "Payment Date" under the Forseti Earn Up Agreement is
after October 15, 1998, (ii) a transfer of any Forseti Warrants in violation
of the restrictions on transfer in the Forseti Purchase Agreement, (iii) the
election by Forseti to retain the Forseti Warrants pursuant to the Forseti Earn
Up Agreement, (iv) the transfer of all of the Forseti Warrants, (v) upon the
transfer of any ownership interest in Forseti or any entity controlling Forseti
where the purpose of the transfer is to realize or receive cash, securities or
any other property as consideration for the Forseti Warrants without
transferring the Forseti Warrants or (vi) as of September 30, 1998 or October
15, 1998, the individual, who as of the date of the Forseti Earn Up Agreement
owned directly or indirectly all of the ownership interests of Forseti and each
entity controlling Forseti does not own, directly or indirectly, all of the
ownership interests of Forseti and each entity controlling Forseti.
Description of the Letter Agreement. Pursuant to the JEDI Purchase
Agreement, at the closing under such agreement, the Company and ECT Securities
Corp., a Delaware corporation and an affiliate of the general partner of JEDI
("ECT Securities Corp."), shall enter into a letter agreement (the "Letter
Agreement"). Pursuant to the Letter Agreement, the Company will retain ECT
Securities Corp. to act as the Company's advisor and provide consultation,
assistance and advice to the Company with respect to certain of its operations
and properties. In consideration for such services, the Company will pay ECT
Securities Corp. $100,000 at the closing of the transactions under the JEDI
Purchase Agreement and an annual fee, payable quarterly in arrears, of $100,000
during the term of the Letter Agreement. The term of the Letter Agreement will
be five years, subject to earlier termination if JEDI's ownership of voting
capital stock of the Company should decrease to less than 10% of the Company's
voting capital stock. ECT Securities Corp. may terminate the Letter Agreement
effective as of the end of any calendar quarter of the Company upon written
notice not less than 30 days before the date on which such termination is to be
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effective. The Letter Agreement includes customary provisions for
indemnification of ECT Securities Corp.
Employment Agreements. Pursuant to the JEDI Purchase Agreement, at
the closing under such agreement, the Company shall enter into an employment
agreement (the "Employment Agreement") with each of Bruce I. Benn, Ronald I.
Benn and Edward J. Munden as a condition to the closing under the JEDI Purchase
Agreement. The term of each Employment Agreement will be six months. Pursuant
to the Employment Agreement, each of Messrs. Benn, Benn and Munden will be
employed in his current position with the Company and will be entitled to a
base salary equal to $10,000 per month plus such other compensation and
employee benefit plans and programs implemented by the Company after the date
of the Employment Agreement. The Company will have the right to terminate
employment under the Employment Agreement for cause (as defined) or upon the
death or disability of the employee. Each of Messrs. Benn, Benn and Munden
will be entitled to terminate the Employment Agreement at any time for any
reason; provided, that none of Messrs. Benn, Benn or Munden will be entitled to
any compensation or benefits following such termination. The Employment
Agreement will include customary confidentiality and noncompetition provisions.
FORSETI TRANSACTION AGREEMENTS
Description of the Forseti Purchase Agreement. The following summary
of the material provisions of the Forseti Purchase Agreement is not intended to
be complete and is subject to, and qualified in its entirety by reference to,
all of the provisions of such agreement, a copy of which is filed as an exhibit
to this Report on Form 8-K.
Repurchase of Common Stock; Issuance of Forseti Warrants.
Pursuant to the Forseti Purchase Agreement, the Company will repurchase from
Forseti 9,600,000 shares of the Company's Common Stock owned by Forseti in
exchange for (i) the payment by the Company to Forseti of $5,000,000 cash; (ii)
the issuance by the Company to Forseti of the Forseti Warrants; and (iii) the
execution and delivery by the Company of the Forseti Earn Up Agreement. See
"Forseti Transaction Agreements -- Description of the Forseti Warrants and
Description of the Forseti Earn Up Agreement."
Certain Representations and Warranties. Under the Forseti
Purchase Agreement, the Company has made certain representations and warranties
to Forseti, including (i) due corporate organization; (ii) the due
authorization, issuance and enforceability of the Forseti Warrants and the
shares of Common Stock issuable upon exercise of the Forseti Warrants; (iii)
the due authorization, execution, delivery and performance by the Company of
the Forseti Purchase Agreement and related agreements and their enforceability;
(iv) no conflict with or violation of the Company's Certificate of
Incorporation or bylaws, any of the Company's agreements or applicable law; and
(v) required consents from governmental authorities or other third parties.
Under the Forseti Purchase Agreement, Forseti has made certain
representations and warranties to the Company, including (i) due corporate
organization; (ii) title to the 9,600,000 shares of Common Stock; (iii) the due
authorization, execution, delivery and performance by Forseti of the Forseti
Purchase Agreement and related agreements and their enforceability; (iv) no
conflict with or violation of Forseti's organizational documents, any of
Forseti's agreements or applicable law or alternative dispute resolution; (v)
required consents from governmental authorities or other third parties;
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(vi) no litigation; (vii) absence of brokers or finders; (viii) no interested
director transactions; and (ix) certain investment representations, including
that Forseti is not a U.S. person within the meaning of Regulation S,
promulgated under the Securities Act.
Restrictions on Transfer of the Forseti Warrants and Warrant
Shares. The Forseti Purchase Agreement provides that the holder of the Forseti
Warrants or the shares of Common Stock issuable upon the exercise of the
Forseti Warrants (the "Warrant Shares") may not transfer or exercise the
Forseti Warrants or Warrant Shares except in accordance with the Forseti
Purchase Agreement and the Forseti Warrants.
The agreement permits a transfer of the Forseti Warrants or
Warrant Shares (i) with the Company's prior written consent or (ii) the
transfer occurs after the first anniversary of the closing under the Forseti
Purchase Agreement, provided, that, in either case certain conditions are met,
including, without limitation, that (a) the transfer is in compliance with
Regulation S promulgated under the Securities Act, (b) Forseti delivers certain
notices to the Company, and (c) any transfer of the Forseti Warrants must
involve at least 100,000 warrants. To ensure compliance with the transfer
restrictions, at the closing under the Forseti Purchase Agreement, the Forseti
Warrants will be deposited in escrow pursuant to the Escrow Agreement among the
Company, Forseti, and an escrow agent acceptable to the Company and Forseti
(the "Escrow Agreement"). See "Forseti Transaction Agreements -- Description
of the Escrow Agreement." The Company and Forseti shall send a notice to the
escrow agent to release the Forseti Warrants if the Company and Forseti
determine that the proposed transfer is in compliance with the Forseti Purchase
Agreement.
If at any time on or before September 30, 1998 the Company
identifies a proposed transferee of the Forseti Warrants who is willing to
purchase for cash at least 100,000 of the Forseti Warrants at a price of at
least $2.40 per Class A Warrant and $3.50 per Class B Warrant and the Company
determines that the proposed transfer would be in compliance with the transfer
restrictions in the Forseti Purchase Agreement, then Forseti will be required
to transfer the Forseti Warrants to the transferee identified by the Company
upon notice by the Company.
Conditions Precedent. The Forseti Purchase Agreement provides
that the obligations of the Company to consummate the transactions contemplated
by the Forseti Purchase Agreement are subject to the fulfillment prior to or on
the closing of certain conditions precedent, or the waiver thereof by the
Company, including the following: (i) the representations and warranties of
Forseti shall be true and correct in all material respects as of the closing;
(ii) Forseti shall have performed and complied in all material respects with
all agreements contained in the Forseti Purchase Agreement required to be
performed by Forseti prior to or at the closing; (iii) the closing under the
JEDI Purchase Agreement shall have occurred; (iv) the Company shall have
adequate surplus for the repurchase; and (v) Forseti shall have executed and
delivered a release and certain other documents to the Company.
The Forseti Purchase Agreement provides that the obligations
of Forseti to consummate the transactions contemplated by the Forseti Purchase
Agreement are subject to the fulfilment prior to or on the closing of certain
conditions precedent, or the waiver thereof by Forseti, including the
following: (i) the representations and warranties of the Company shall be true
and correct in all material respects as of the closing; (ii) the Company shall
have performed and complied in all material respects with all agreements
contained in the Forseti Purchase Agreement required to be performed by the
Company prior to or at the
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closing; (iii) the Company shall have delivered the Forseti Earn Up Agreement,
the Escrow Agreement and the Forseti Warrants to Forseti; (iv) the Company
shall have delivered an opinion of its counsel to Forseti; and (v) Forseti
shall have received or obtained all required consents, approvals, permits and
waivers from governmental entities and other third parties required to
consummate the transactions contemplated by the Forseti Purchase Agreement.
Termination. The Forseti Purchase Agreement may be terminated
(i) at any time before closing under the JEDI Purchase Agreement by the mutual
written consent of the Company and Forseti; (ii) at any time before the closing
under the JEDI Purchase Agreement by the Company or Forseti if the transactions
contemplated by the Forseti Purchase Agreement have not been consummated and
such failure to consummate is not caused by breach of the Forseti Purchase
Agreement; or (iii) at any time following termination of the JEDI Purchase
Agreement.
If the Forseti Purchase Agreement is terminated as provided
above, then the fees and expense provision will remain in effect and the
termination shall be without liability or further obligation of either the
Company or Forseti to the other party to the Forseti Purchase Agreement, except
that no such termination shall relieve any party from liability or a prior
breach of the Forseti Purchase Agreement.
Indemnification. The Forseti Purchase Agreement provides that
the Company will indemnify, defend and hold harmless Forseti and certain
related parties to the fullest extent lawful from and against all Losses
arising out of or resulting from the breach of any representation, warranty,
covenant or agreement of the Company contained in the Forseti Purchase
Agreement or related documents.
The Forseti Purchase Agreement provides that Forseti will
indemnify, defend and hold harmless the Company and certain related parties to
the fullest extent lawful from and against all Losses arising out of or
resulting from the breach of any representation, warranty, covenant or
agreement of Forseti contained in the Forseti Purchase Agreement or related
documents.
Dispute Resolution. The Forseti Purchase Agreement provides
that all disputes shall first be subject to non-binding mediation, and if such
disputes are not resolved by non-binding mediation, such disputes shall be
governed by arbitration governed by the Commercial Arbitration Rules of the
American Arbitration Association.
Expenses. Forseti will pay its own expenses and the
reasonable expenses of the Company in connection with the transactions
contemplated by the Forseti Purchase Agreement.
Description of the Forseti Warrants. Pursuant to the Forseti Purchase
Agreement, at the closing under such agreement, the Company shall issue the
Forseti Warrants to Forseti. The Class A Warrants will be exercisable for an
aggregate of 1,000,000 shares of Common Stock. The Class A Warrants will be
exercisable from their date of issuance (subject to Regulation S and the
Forseti Purchase Agreement) and shall expire December 31, 1998; provided, that
any of the Class A Warrants held by Forseti on the Election Date will expire on
the Election Date (as defined in the Forseti Earn Up Agreement) unless Forseti
elects to retain the Class A Warrants under the Forseti Earn Up Agreement. The
Class A Warrants may be exercised in full or in part by means of payment of the
exercise price (initially $2.50 per share of Common Stock) in cash (the "Class
A Warrant Shares"). If the Class A Warrants
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are exercised only in part, they must be exercised for the purchase of at least
100,000 shares of Common Stock. The Class A Warrants provide for customary
adjustments to the exercise price and/or number of shares to be issued in the
event of certain dividends and distributions to holders of Common Stock, stock
splits or combinations and reclassifications. The Class A Warrants also make
provision for warrant holders to receive certain items in exchange for the
Class A Warrants in the event of certain combinations, mergers, consolidations,
substantial asset sales and similar transactions. The Class A Warrants also
include customary provisions with respect to, among other things, reservation
of Class A Warrant Shares, mutilated or lost warrant certificates, and notices
to holder(s) of the Class A Warrants. The Class A Warrants will be subject to
transfer restrictions as described above under "Forseti Transaction Agreements
- -- Forseti Purchase Agreement -- Restrictions on Transfer."
The Class B Warrants will be exercisable for an aggregate of 2,000,000
shares of Common Stock. The Class B Warrants will be exercisable from their
date of issuance (subject to Regulation S and the Forseti Purchase Agreement)
and shall expire on December 31, 1998; provided, that any Class B Warrants held
by Forseti on the Election Date (as defined in the Forseti Earn Up Agreement)
will expire on the Election Date unless Forseti elects to retain the Class B
Warrants under the Forseti Earn Up Agreement. The Class B Warrants may be
exercised in full or in part by means of payment of the exercise price
(initially $2.50 per share of Common Stock) in cash (the "Class B Warrant
Shares"). If the Class B Warrants are exercised only in part, they must be
exercised for the purchase of at least 100,000 shares of Common Stock. The
Class B Warrants provide for customary adjustments to the exercise price and/or
number of shares to be issued in the event of certain dividends and
distributions to holders of Common Stock, stock splits or combinations and
reclassifications. The Class B Warrants also make provision for warrant
holders to receive certain items in exchange for their Class B Warrants in the
event of certain combinations, mergers, consolidations, substantial asset sales
and similar transactions. The Class B Warrants also includes customary
provisions with respect to, among other things, reservation of Class B Warrant
Shares, mutilated or lost warrant certificates, and notices to holder(s) of the
Class B Warrants. The Class B Warrants will be subject to transfer
restrictions as described above under "Forseti Transaction Agreements --
Forseti Purchase Agreement -- Restrictions on Transfer."
Description of the Forseti Earn Up Agreement. Pursuant to the Forseti
Purchase Agreement, the Company and Forseti will enter into, at the closing of
the transactions under the Forseti Purchase Agreement, the Forseti Earn Up
Agreement. Pursuant to the Forseti Earn Up Agreement, on the later of
September 30, 1998 or the date that is 14 days after the date that the Company
notifies Forseti to request his election (the "Election Date"), Forseti will
elect whether to (i) accept payment of the Earn Up Amount (in which event
Forseti may not exercise or transfer the Forseti Warrants that have not been
previously exercised or transferred) or (ii) retain the Forseti Warrants that
have not been previously exercised or transferred (in which event the Company
is not obligated to pay Forseti the Earn Up Amount and the Company's
obligations under the Forseti Earn Up Agreement terminate). If Forseti elects
to accept payment of the Earn Up Amount, then subject to limitations in the
Forseti Earn Up Agreement and against delivery by Forseti of the Forseti
Warrants and a statutory declaration as to certain matters, the Company shall
pay Forseti the Earn Up Amount on or before the later of October 15, 1998 or
the date that is 15 days after the date Forseti makes its election (the
"Payment Date").
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The Company shall be obligated to pay Forseti under the Forseti Earn
Up Agreement only to the extent that the Company has received a like amount in
cash from JEDI under the JEDI Earn Up Agreement.
If the sum of (i) $5,000,000 and (ii) the aggregate amount received by
Forseti from the transfer of Warrants, exceeds the sum of (x) $14,400,000 plus
(y) a dollar amount equal to the sum of the expenses of the Company paid by
Forseti pursuant to the Forseti Purchase Agreement, the reasonable
out-of-pocket expenses up to a maximum of $50,000 incurred by Forseti in
connection with the Forseti Purchase Agreement, and the escrow agent fees
incurred by Forseti under the Escrow Agreement (the sum of subclauses (x) and
(y) being referred to as the "Net Proceeds"), then within 10 days of the date
(the "Excess Determination Date") the aggregate amount received by Forseti
exceeds the Net Proceeds, (x) Forseti shall deliver to the Company an amount in
cash or by wire transfer of immediately available funds equal to 75% of such
amount received by Forseti in excess of the Net Proceeds, and (y) Forseti shall
spend the remaining 25% of such excess amount to purchase from the Company,
subject to applicable securities laws, Common Stock at a price equal to the
average of the Nasdaq bid price over 21 trading days ending on the Excess
Determination Date.
Pursuant to the Forseti Earn Up Agreement, the Company will grant to
Forseti an option to purchase from the Company a number of shares of Common
Stock equal to the quotient of (x) the amount by which the Earn Up Amount
exceeds $7,000,000 and (y) $2.50, at a price equal to $2.50. The option will
be exercisable in full or in part only from the date that the Earn Up Amount is
paid by the Company to Forseti through the fifth business day after the date of
payment of the Earn Up Amount. The Forseti Earn Up Agreement will provide for
customary adjustments to the exercise price and the number of shares to be
issued in the event of certain dividends and distributions to holders of Common
Stock, stock splits or combinations or reclassifications.
The parties must first attempt to resolve disputes under the Forseti
Earn Up Agreement pursuant to non-binding mediation. Disputes that are not
resolved pursuant to non-binding mediation shall be settled by arbitration in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association.
The Forseti Earn Up Agreement will terminate upon the earlier of (i) a
transfer of any Forseti Warrants in violation of the restrictions on transfer
in the Forseti Purchase Agreement, (ii) the election by Forseti to retain the
Forseti Warrants pursuant to the Forseti Earn Up Agreement, (iii) the transfer
of all of the Forseti Warrants, (iv) upon the transfer of any ownership
interest in Forseti or any entity controlling Forseti where the purpose of the
transfer is to realize or receive cash, securities or any other property as
consideration for the Forseti Warrants without transferring the Forseti
Warrants and (v) as of the Election Date or the Payment Date, the individual,
who as of the date of the Forseti Earn Up Agreement owned, directly or
indirectly, all of the ownership interests of Forseti and each
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entity controlling Forseti does not own, directly or indirectly, all of the
ownership interests of Forseti and each entity controlling Forseti.
Description of the Escrow Agreement. Pursuant to the Forseti Purchase
Agreement, at the closing under such agreement, the Company, Forseti and an
escrow agent mutually acceptable to the Company and Forseti shall enter into
the Escrow Agreement. The Escrow Agreement will govern the deposit into escrow
of the Forseti Warrants and the consideration for the transfer of Warrants.
The escrow agent may deliver the Forseti Warrants and the consideration for the
transfer of the Forseti Warrants to Forseti only upon receipt of notice from
the Company and Forseti to release the Forseti Warrants and the consideration
for the transfer of the Forseti Warrants. The Escrow Agreement contains
customary provisions regarding indemnification of the escrow agent. Forseti
will pay the fees of the escrow agent for its services under the Escrow
Agreement.
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ITEM 7. EXHIBITS.
The following documents are attached hereto as exhibits:
(a) Exhibits:
1.1 Securities Purchase Agreement dated as of March 27,
1997 between Queen Sand Resources, Inc. and Joint
Energy Development Investments Limited Partnership.
1.2 Securities Purchase Agreement dated as of March 27,
1997 between Queen Sand Resources, Inc. and Forseti
Investments Ltd.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
QUEEN SAND RESOURCES, INC.
Date: April 14, 1997 By:/s/ Edward J. Munden
---------------------------------
Name: Edward J. Munden
----------------------------
Title: President and Chief
Executive Officer
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
1.1 Securities Purchase Agreement dated as of March 27, 1997
between Queen Sand Resources, Inc. and Joint Energy
Development Investments Limited Partnership.
1.2 Securities Purchase Agreement dated as of March 27, 1997
between Queen Sand Resources, Inc. and Forseti Investments
Ltd.
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