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EXHIBIT 1.7
EARN UP AGREEMENT
THIS EARN UP AGREEMENT (this "Agreement") is executed as of the 6th
day of May, 1997 between Queen Sand Resources, Inc., a Delaware corporation
(the "Company"), and Joint Energy Development Investments Limited Partnership,
a Delaware limited partnership ("JEDI").
WHEREAS, the Company has entered into the Purchase Agreement (defined
below) with JEDI pursuant to which JEDI is purchasing shares of the Company's
Series A Participating Convertible Preferred Stock, par value $0.01 per share
(the "Convertible Preferred Stock"), and certain warrants to purchase Common
Stock of the Company, in exchange for (i) $5,000,000 cash; and (ii) this
Agreement; and
WHEREAS, the Company is repurchasing 9,600,000 shares of Common Stock
(defined below) from Forseti Investments, ltd., a Barbados corporation
("Forseti"), pursuant to the terms of the Forseti Purchase Agreement (defined
below);
NOW, THEREFORE, in consideration of these premises, the agreements
herein and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, JEDI and the Company agree as follows:
1.0 DEFINITIONS
"AAA" means the American Arbitration Association, or any successor
organization.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control," when used with respect to any Person, means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
"Capital Stock" of any Person means any and all shares, interests,
participations or other equivalents (however designated) of, or rights,
warrants or options to purchase, corporate stock or any other equity interest
(however designated) of or in such Person.
"Capitalized Lease Obligation" means the amount of the liability under
any capital lease that, in accordance with GAAP, is required to be capitalized
and reflected as a liability on the consolidated balance sheet of the Company
and its Subsidiaries.
"Class A Amount" is defined in Section 2(b).
"Class B Amount" is defined in Section 2(c).
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"Class A Warrants" means the Class A Common Stock Purchase Warrants to
purchase 1,000,000 shares of Common Stock issued to Forseti pursuant to the
Forseti Purchase Agreement.
"Class B Warrants" means the Class B Common Stock Purchase Warrants to
purchase 2,000,000 shares of Common Stock issued to Forseti pursuant to the
Forseti Purchase Agreement.
"Common Stock" means the common stock, par value $.0015 per share, of
the Company.
"Consolidated Adjusted Net Income" means the consolidated net income
(or loss) of the Company and its Subsidiaries for the fiscal year ending June
30, 1998 as determined in accordance with GAAP, adjusted by excluding, to the
extent included in consolidated net income, (a) net after-tax extraordinary
gains or losses (less all fees and expenses relating thereto), (b) net
after-tax gains or losses (less all fees and expenses relating thereto)
attributable to asset dispositions, (c) the net income (or net loss) of any
Person (other than the Company or any of its Subsidiaries) in which the Company
or any of its Subsidiaries has an ownership interest, except to the extent of
the amount of dividends or other distributions actually paid to the Company or
its Subsidiaries in cash by such other Person during such period, and (d) net
income (or net loss) of any Person combined with the Company or any of its
Subsidiaries on a "pooling of interests" basis attributable to any period prior
to the date of combination.
"Consolidated Interest Expense" means the amount which, in conformity
with GAAP, is set forth opposite the caption "interest expense" (or any like
caption) on the audited consolidated statement of operations of the Company and
its Subsidiaries for the fiscal year ended June 30, 1998.
"Consolidated Net Working Capital" means (i) the amount which, in
conformity with GAAP, is set forth opposite the caption "total current assets"
(or any like caption) on the audited consolidated balance sheet of the Company
and its Subsidiaries as of June 30, 1998 less (ii) the amount which, in
conformity with GAAP, is set forth opposite the caption "total current
liabilities" (or any like caption) on the audited consolidated balance sheet of
the Company and its Subsidiaries as of June 30, 1998.
"Consolidated Non-cash Charges" means the amount which, in conformity
with GAAP, is set forth opposite the caption "depreciation, depletion and
amortization" (or any like caption) on the audited consolidated statement of
operations of the Company and its Subsidiaries for the fiscal year ended June
30, 1998.
"Consolidated Tax Expense" means the amount which, in conformity with
GAAP, is set forth opposite the caption "income tax expense" (or any like
caption) on the audited consolidated statement of operations of the Company and
its Subsidiaries for the fiscal year ended June 30, 1998.
"Dispute" is defined in Section 4.
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"EBITDA" means, without duplication, for the fiscal year ended June
30, 1998, the sum of (i) Consolidated Adjusted Net Income and (ii) to the
extent deducted in computing Consolidated Adjusted Net Income, Consolidated
Interest Expense, Consolidated Tax Expense and Consolidated Non-cash Charges.
"Earn Up Amount" is defined in Section 2(a).
"Election Date" means September 30, 1998.
"Exercise Price" means $2.50.
"Forseti Earn Up Agreement" means the Earn Up Agreement entered into
between the Company and Forseti substantially in the form of Exhibit A to this
Agreement.
"Forseti Interests" means all of the outstanding ownership interests
in Forseti and each entity that controls or owns an ownership interests in
Forseti.
"Forseti Purchase Agreement" means the Securities Purchase Agreement
dated March 27, 1997 between the Company and Forseti.
"Generally Accepted Accounting Principles" or "GAAP" means generally
accepted accounting principles in the United States, in effect from time to
time.
"Guaranteed Debt" means, without duplication, all Indebtedness of any
other Person guaranteed directly or indirectly in any manner by the Company or
any of its Subsidiaries, or in effect guaranteed directly or indirectly by the
Company or any of its Subsidiaries through an agreement (i) to pay or purchase
such Indebtedness or to advance or supply funds for the payment or purchase of
such Indebtedness, (ii) to purchase, sell or lease (as lessee or lessor)
property, or to purchase or sell services, primarily for the purpose of
enabling the debtor to make payment of such Indebtedness or to assure the
holder of such Indebtedness against loss, (iii) to supply funds to, or in any
other manner invest in, the debtor (including any agreement to pay for property
or services to be acquired by such debtor irrespective of whether such property
is received or such services are rendered), (iv) to maintain working capital or
equity capital of the debtor, or otherwise to maintain the net worth, solvency
or other financial condition of the debtor or (v) otherwise to assure a
creditor against loss; provided that the term "guarantee" shall not include
endorsements for collection or deposit.
"Indebtedness" means, as of June 30, 1998, without duplication, (i)
all indebtedness of the Company or any of its Subsidiaries for borrowed money
or for the deferred purchase price of property or services, excluding any trade
accounts payable and other accrued current liabilities incurred in the ordinary
course of business, (ii) all obligations of the Company or any of its
Subsidiaries evidenced by bonds, notes, debentures or other similar
instruments, (iii) all indebtedness created or arising under any conditional
sale or other title retention agreement with respect to property acquired by
the Company or any of its Subsidiaries (even if the rights and remedies of the
seller or lender under such agreement in the event of default are limited to
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repossession or sale of such property), but excluding trade accounts payable
arising in the ordinary course of business, (iv) all Capitalized Lease
Obligations, (v) all indebtedness referred to in (but not excluded from) clause
(i), (ii), (iii) or (iv) above of other Persons, the payment of which is
secured by (or for which the holder of such indebtedness has an existing right,
contingent or otherwise, to be secured by) any Lien upon or in property
(including, without limitation, accounts and contract rights) owned by the
Company or any of its Subsidiaries, even though such Person has not assumed or
become liable for the payment of such indebtedness, (vi) all Guaranteed Debt,
(vii) all Redeemable Capital Stock valued at its maximum fixed repurchase price
plus accrued and unpaid dividends, and (viii) any amendment, supplement,
modification, deferral, renewal, extension or refunding of any liability of the
types referred to in clauses (i) through (vii) above. For purposes hereof, the
"maximum fixed repurchase price" of any Redeemable Capital Stock that does not
have a fixed repurchase price shall be calculated in accordance with the terms
of such Redeemable Capital Stock as if such Redeemable Capital Stock were
purchased on any date on which Indebtedness shall be required to be determined
pursuant to this Agreement, and if such price is based upon, or measured by,
the fair market value of such Redeemable Capital Stock, such fair market value
to be determined in good faith by the Board of Directors of the issuer of such
Redeemable Capital Stock.
"Mediator" is defined in Section 6.
"Outstanding Shares" means, as of June 30, 1998, the issued and
outstanding shares of Common Stock, assuming the conversion of all shares of
preferred stock of the Company that are convertible into shares of Common
Stock, and excluding any shares of Common Stock held in treasury by the Company
or held by any wholly-owned Subsidiary of the Company.
"Payment Date" means October 15, 1998.
"Person" means any individual, corporation, limited or general
partnership, joint venture, association, joint- stock company, trust, limited
liability company, unincorporated organization or government or any agency or
political subdivision thereof.
"Price" means, if:
-----
|Price(1) - Price(2)|
---------------------- Less than or equal to 0.1,
Greater of Price(1) or then (Price(1) + Price(2))/2;
Price(2)
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
agreed upon within 5 business days after the determination of Price(1) and
Price(2), then the determination of the Price shall be submitted to nonbinding
mediation and arbitration in accordance with this Agreement. Notwithstanding
anything to the contrary in this Agreement, under no circumstances shall the
Price exceed the higher of Price(1) and Price(2) or be less than the lower of
Price(1) and Price(2).
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(1.1 * SEC PV10)) - Indebtedness + Consolidated Net Working Capital
"Price(1)" = ------------------------------------------------------------------------------
Outstanding Shares
(6.0 * EBITDA) - Indebtedness + Consolidated Net Working Capital
"Price(2)" = ------------------------------------------------------------------------------
Outstanding Shares
"Purchase Agreement" means the Securities Purchase Agreement dated
March 27, 1997 between the Company and JEDI.
"Redeemable Capital Stock" means any Capital Stock of the Company or
any of its Subsidiaries that, either by its terms, by the terms of any security
into which it is convertible or exchangeable or otherwise, (i) is, or upon the
happening of an event or passage of time would be, required to be redeemed, or
(ii) is, or upon the happening of an event or passage of time would be,
redeemable at the option of the holder thereof, or (iii) is, or upon the
happening of an event or passage of time would be, convertible into or
exchangeable for debt securities.
"SEC PV(10)" means the pre tax future net cash flows from proved oil
and gas reserves of the Company and its Subsidiaries at June 30, 1998, computed
using a discount factor of ten percent, as determined in accordance with the
rules, regulations and guidelines of the United States Securities and Exchange
Commission and reported in the reserve report dated as of such date prepared in
accordance with Section 6.11 of the Purchase Agreement.
"Statutory Declaration" means a statutory declaration by Forseti that
as of the Election Date and the Payment Date (i) the individual who, as of the
date hereof, owned all of the Forseti Interests owns all of the Forseti
Interests (ii) there are no encumbrances, pledges or other liens on any equity
interests in Forseti, and (iii) no other event under Section 6(h) has occurred.
"Subsidiary" of a Person means any corporation, limited liability
company, limited or general partnership, joint venture, association,
joint-stock company or business trust of which at the time of determination
such Person, directly and/or indirectly through one or more other Persons, owns
more than 50% of the voting interests.
"Transfer" of any property means any exercise, or any direct or
indirect sale, transfer, encumbrance, gift, donation, assignment, grant of any
interest, pledge, hypothecation or other disposition of such property or any
interest therein, whether voluntary or involuntary, including, but not limited
to, any transfer by operation of law, by court order, by judicial process, or
by foreclosure, levy, or attachment.
"Value" is defined in Section 2(e).
"Warrant Transfer Amount" is defined in Section 2(d).
"Warrants" means, collectively, the Class A Warrants and the Class B
Warrants.
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2.0 PAYMENT OF EARN UP AMOUNT
(a) On the Payment Date, subject to the limitations in Section 3,
and only against delivery by the Company to JEDI of evidence
satisfactory to JEDI that Forseti has delivered to the Company (x) the
Warrants and (y) the Statutory Declaration, JEDI shall pay the Company
an amount (the "Earn Up 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.
(b) The "Class A Amount" means 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.
(c) The "Class B Amount" means 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.
(d) The "Warrant Transfer Amount" means a dollar amount equal to
the greatest of (i) the product of (x) $3.50 multiplied by (y) the
aggregate number of Class A Warrants and Class B Warrants Transferred
by Forseti before the Payment Date; (ii) the aggregate gross proceeds
that Forseti has received or is entitled to receive from the Transfer
of all of the Class A Warrants and Class B Warrants Transferred by
Forseti before the Payment Date; and (iii) the difference between the
average daily bid price of the Company's Common Stock for the 21-day
period ending on the Election Date less the Exercise Price, multiplied
by the number of Class A Warrants and the Class B Warrants Transferred
by Forseti before the Payment Date.
(e) The "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 Company's shares of Common Stock for the 21-day
period ending on the Election Date 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.
(f) The Company represents and warrants to JEDI that the
definitions of the terms "Price" and "Value" in the Forseti Earn Up
Agreement are identical to the definitions of such terms in this
Agreement.
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3.0 LIMITATION ON EARN UP AMOUNT
The Earn Up Amount shall in no event exceed the amount defined in the
Forseti Purchase Agreement as the "Earn Up Amount."
4.0 MEDIATION.
Any controversy, dispute or claim arising out of or relating to this
Agreement (a "Dispute") shall be submitted to non-binding mediation upon the
request of the Company or Forseti on the following terms. Upon the request of
either party, a neutral mediator acceptable to both parties (the "Mediator")
shall be appointed within 15 days. The Mediator shall attempt through
negotiations in any manner deemed reasonably appropriate by the Mediator, in
which the parties shall participate, to resolve the Dispute. The Mediator
shall be compensated at a rate agreeable to the Company, Forseti and the
Mediator, and each of the Company and Forseti shall pay its pro rata share of
such compensation and other expenses of the mediation.
5.0 ARBITRATION.
In the event that mediation of a Dispute has not commenced within 15
days after a request for mediation is submitted or is terminated without
resolution under Section 5.0, any controversy or claim arising out of or
relating to this Agreement, including the right to or amount of indemnity,
shall be settled by arbitration in accordance with the Commercial Arbitration
Rules of the AAA by three (3) arbitrators. Each of Forseti and the Company
shall appoint one arbitrator, who shall be an impartial person. If a party
fails to appoint an arbitrator within thirty (30) days from the date a Demand
to Arbitrate was made under Rule 6, the AAA shall make the appointment of the
arbitrator. The two (2) arbitrators thus appointed shall appoint the third
arbitrator, who shall be an impartial person. If said two (2) arbitrators fail
to appoint the third arbitrator within sixty (60) days from the date a Demand
to Arbitrate was made under Rule 6, the AAA shall make the appointment of the
third arbitrator, who shall be an impartial person. Should any of the
arbitrators appointed die, resign, refuse or become unable to act before a
decision is given, the vacancy shall be filled by the method set forth in this
clause for the original appointment. The arbitration shall be held in Dallas,
Texas and shall be conducted in the English language. A decision by the
arbitrators shall be final and binding on all the parties. The arbitrators
shall execute and deliver to the respective parties the arbitration panel's
decision in writing. Judgment upon the award, if any, rendered by the
arbitrators (which must be expressed in United States Dollars) may be entered
in any court having jurisdiction thereof. In any award, the arbitrators shall
assess the arbitration costs and expenses, including, without limitation,
attorneys fees of the parties, in a manner deemed equitable by the arbitrators,
taking into account the arbitration decision. Notwithstanding anything to the
contrary in this Agreement, if a Dispute involves the determination of Price,
the Price, as determined by arbitration under this Section 5, shall not (i) (a)
exceed the higher or Price(1) and Price(2), or (b) be lower than the lower of
Price(1) and Price(2), or (ii) exceed the Price as determined under the Forseti
Earn Up Agreement, including a Price as determined by arbitration under the
provisions of the Forseti Earn Up Agreement.
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6.0 MISCELLANEOUS
(a) Governing Law. This Agreement shall be governed by the
substantive laws of the State of Texas.
(b) Invalid Provisions. If any provision of this Agreement is
held to be illegal, invalid or unenforceable, such provision shall be
fully severable.
(c) Entirety and Amendments. This Agreement embodies the entire
agreement and understanding relating to the subject matter hereof,
supersedes all prior understandings between the parties relating to
the subject matter hereof, and may be amended only by an instrument in
writing executed by the Company and JEDI.
(d) Parties Bound. This Agreement shall be binding upon and inure
to the benefit of the Company and JEDI, and their respective
successors and permitted assigns. Neither the Company nor JEDI may
assign its rights or delegate its obligations hereunder (whether
voluntarily, involuntarily, or by operation of law) without the prior
written consent of the other party.
(e) Notices. Unless otherwise specified, whenever this Agreement
requires or permits any consent, approval, notice, request, or demand
from one party to another, that communication must be in writing
(which may be by telecopy) to be effective and is deemed to have been
given (a) if by telecopy, when transmitted to the appropriate telecopy
number (and all communications sent by telecopy must be confirmed
promptly by telephone; but any requirement in this parenthetical does
not affect the date when the telecopy is deemed to have been
delivered), or (b) if by any other means, including by internationally
acceptable courier or hand delivery, when actually delivered. Until
changed by notice pursuant to this Agreement, the address (and
telecopy number) for the Company and JEDI are:
If to JEDI: Joint Energy Development Investments
Limited Partnership
c/o Enron Corp.
1400 Smith Street
Houston, Texas 77002
Attention: Donna Lowry - Director, 28th Floor
Telecopier: (713) 646-3602
If to Company: Queen Sand Resources, Inc.
3500 Oak Lawn, Suite 380, L.B.#31
Dallas, Texas 75219-4398
Attn: Robert P. Lindsay
Facsimile: (214) 521-9960
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With copies to: Queen Sand Resources, Inc.
60 Queen Street, Suite 1400
Ottawa, Canada K1P 5Y7
Attn: Edward J. Munden
Facsimile: (613) 230-6055
Haynes and Boone, LLP
901 Main Street, Suite 3100
Dallas, Texas 75202
Attn: William L. Boeing
Facsimile: (214) 651-5940
(f) Section and Other Headings. The headings contained in this
Agreement are for reference purposes only and will not affect in any
way the meaning or interpretation of this Agreement.
(g) Counterparts. This Agreement may be executed in two or more
counterparts, each of which will be deemed an original and all of
which together will constitute one instrument.
(h) Termination. This Agreement shall terminate automatically,
and JEDI shall have no obligation to pay any Earn Up Amount, (a) 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, (b) upon the Transfer of any
Warrants in violation of the restrictions on Transfer of Warrants
under the Forseti Purchase Agreement, (c) upon the election by Forseti
to retain the Warrants under Section 2(a)(ii) of the Forseti Earn Up
Agreement, (d) upon the Transfer by Forseti of all of the Warrants,
(e) 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 Warrants without transferring the Warrants, (f)
in the event that, on the Election Date or the Payment Date, the
individual who, as of the date hereof owned, directly or indirectly,
all of the Forseti Interests does not own, directly or indirectly, all
of the Forseti Interests, or (g) the termination of the Forseti Earn
Up Agreement for any reason.
(i) Currency. All dollar amounts in this Agreement shall mean
United States dollars.
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IN WITNESS WHEREOF, JEDI and the Company have executed this Agreement
as of the day and year first stated above.
JOINT ENERGY DEVELOPMENT
INVESTMENTS LIMITED PARTNERSHIP
By: Enron Capital Management Limited
Partnership, its General Partner
By: Enron Capital Corp., its General
Partner
By: /s/ Steven M. Emshoff
----------------------------------------------
Steven M. Emshoff
Agent and Attorney-in-Fact
QUEEN SAND RESOURCES, INC.
By: /s/ Edward J. Munden
----------------------------------------------
Edward J. Munden
President and Chief Executive Officer
and
By: /s/ Robert P. Lindsay
----------------------------------------------
Robert P. Lindsay
Chief Operating Officer
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EXHIBIT A
FORSETI EARN UP AGREEMENT
[See Exhibit 1.12 to
this Current
Report on Form 8-K]
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