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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF
SMALL BUSINESS ISSUERS
Under Section 12(b) or (g) of
The Securities Exchange Act of 1934
QUEEN SAND RESOURCES, INC.
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Delaware 75-2615565
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(State of other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
3500 Oak Lawn, Suite 380, LB #31, Dallas, TX, 75219-4398
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(Address or principal executive offices)
(214) 521-9959
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Issuer's telephone number
Securities to be registered under Section 12(b) of the Act: None
Title of each class Name of each exchange on which
to be so registered each class is to be registered
Not applicable Not Applicable
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Securities to be registered under Section 12(g) of the Act:
Title of Class
Common Stock, $.0015 par value
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QUEEN SAND RESOURCES, INC.
FORM 10-SB
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TABLE OF CONTENTS PAGE
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PART I
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ITEM 1. DESCRIPTION OF BUSINESS 1
General 1
Business Strategy 1
Company History 2
Risk Factors 3
Acquisition Risk 3
Acquisition Financing 4
Indebtedness 4
Reserve Replacement 6
Competition 6
Price Fluctuations 6
Marketability of production 7
Government Regulations 7
Title to Properties 9
Significant Number of Authorized But Unissued Shares 9
Control by Two Stockholders and Management 9
Reserve Estimates and Future Net Revenue 9
Dependence on Key Officers and Employees 10
Operational Hazards and Insurability 10
Employees and Consultants 10
Glossary of Oil and Gas Terms 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 15
Selected Financial Data 15
Nine months ended March 31, 1996 compared to period from
August 9, 1994 (inception) to March 31, 1995 18
Period from August 9, 1994 (inception) to June 30, 1995 21
Liquidity and Capital Resources 23
Impact of Inflation and Changes In Oil & Gas Prices 25
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ITEM 3. DESCRIPTION OF PROPERTIES 25
Reserve Information 25
Exploratory and Developmental Acreage 27
Productive Wells 27
Crude Oil and Natural Gas Production and Sales Prices 28
Drilling Activities 28
Oil and Gas Producing Properties 29
Offices and Facilities 32
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 33
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS 34
ITEM 6. EXECUTIVE COMPENSATION 36
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 39
ITEM 8. DESCRIPTION OF SECURITIES 39
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PART II
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ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND OTHER STOCKHOLDER MATTERS 40
ITEM 2. LEGAL PROCEEDINGS 41
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS 41
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES 42
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS 43
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PART F/S
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Index to Financial Statements 43
Financial Statements F-1
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PART III
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ITEM 1. INDEX TO EXHIBITS AND DESCRIPTION OF EXHIBITS 45
Signature Page 46
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PART I
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ITEM 1. DESCRIPTION OF BUSINESS
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GENERAL
Queen Sand Resources, Inc. (the "Company") is an independent energy
company engaged in the exploration for and the acquisition, development,
exploitation and operation of crude oil and natural gas properties, and in the
production of crude oil and natural gas in North America. The Company's
activities are conducted principally in the States of New Mexico, Texas and
Louisiana.
At June 30, 1995, the Company's proved reserves totaled 6.2 MMbbls of
oil and 312 MMcf of natural gas.
Effective April 10, 1996, the Company acquired, from Southern
Exploration Company of Tyler, Texas, 33 gross productive wells (26.6 net
productive wells) all located in east Texas (the "East Texas Purchase"). As
estimated at January 1, 1996, these acquired properties include proved reserves
for the Company totaling 787 Mbbls of crude oil and 12.7 Bcf of natural gas.
BUSINESS STRATEGY
The Company's business strategy has been to increase its reserves,
cash flow and underlying net asset value through a combination of acquisition
activities and of exploration and development. To date, the Company's
activities have been focused on properties in Texas, New Mexico and Louisiana.
Subject to the availability of suitable funding, the Company intends to
diversify its property portfolio in terms of production, location and operating
characteristics.
The Company's objective is to acquire and develop producing crude oil
and natural gas properties that contain the potential for increased value
through exploitation and development. The Company seeks to realize the
potential in such acquisitions through workovers, recompletions, secondary
recovery operations and the drilling of development wells. As a part of its
strategy, the Company will attempt to acquire and develop producing crude oil
and natural gas properties in areas where the Company has knowledge and
operating expertise.
The Company intends to continue its growth strategy emphasizing
reserve additions through its acquisition efforts. The Company believes that
its ability to quickly evaluate and complete acquisitions allows it to take
advantage of acquisition opportunities as they arise. The Company may utilize
any one or a combination of institutional or bank debt financing, equity
offerings, debt offerings and internally generated cash flow to finance its
acquisition efforts. The Company may also use, where appropriate, its equity
securities as all or part of the consideration for such acquisitions. There
can be no assurance that attractive acquisition opportunities will arise, that
the Company will be
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able to consummate acquisitions in the future or that sufficient external or
internal funds will be available to fund the Company's acquisitions.
Although the Company intends to devote most of its resources to
acquisitions and the exploitation and development of the producing properties
acquired, the Company plans to selectively participate in the exploration of
new reserves of crude oil and natural gas. The Company intends to develop
prospects internally and to participate with industry partners in prospects
generated by other parties in its exploration activities.
The Company will periodically evaluate and, from time to time may
elect to sell, certain of its producing properties. The Company believes such
sales will enable the Company to maintain financial flexibility, reduce
overhead and redeploy the proceeds therefrom to activities that the Company
believes to have a potentially higher financial return.
COMPANY HISTORY
The Company was incorporated in the State of Delaware on May 11, 1989
under the name Park Avenue Capital Corp. to search for and to acquire a
business. Except as described below, it had no substantive operations from
inception through March, 1995 other than raising initial capital and searching
for a business to acquire.
In August 1993, the Company acquired approximately 92% of Notebook
Center, Inc. ("NCI"), a New York corporation that operated a retail computer
store. Pursuant to the terms of an agreement dated December 23, 1993 the NCI
acquisition was rescinded.
In January 1994, the Company changed its name to Universal
Biotechnologies, Inc. ("UBTI") in anticipation of an acquisition of certain
rights to a synthetic cancer drug, however, that acquisition was never
consummated.
On March 6, 1995, the Company acquired all of the outstanding common
stock of Queen Sand Resources, Inc. a Nevada corporation ("QSRN") in exchange
for 19,200,000 common shares of the Company. For accounting purposes, the
acquisition has been treated as a recapitalization of QSRN with QSRN as the
acquirer (reverse acquisition). The Company retained the name Queen Sand
Resources, Inc. The historical financial statements prior to March 6, 1995 are
those of QSRN, which have been retroactively restated for the equivalent number
of shares received in the merger. In connection with the reverse acquisition,
the shareholders of UBTI received 2,908,000 shares of the Company for UBTI
shares outstanding prior to the acquisition. In addition, 492,000 common
shares were issued to an unrelated party for investment advisory services in
connection with the reverse acquisition (the "Reverse Acquisition").
QSRN, incorporated August 9, 1994, is a wholly owned subsidiary of the
Company and holds all its assets. Unless the context otherwise requires, the
term the "Company" refers to and include Queen Sand Resources, Inc., the
Delaware corporation, Queen Sand Resources, Inc., the Nevada corporation, and
all subsidiaries and partnerships of which the Company owns a greater than 50%
interest.
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In April 1995, the Company incorporated Northland Operating Co.
("Northland") as a wholly owned oil field operating company. Northland
operates Company properties in New Mexico, Texas and Louisiana.
RISK FACTORS
In addition to the substantial risks inherent in any business venture,
prospective investors should consider the following risk factors which may
specifically affect the Company's performance and its ability to carry on
business.
ACQUISITION RISK
The Company may consider acquiring additional producing oil and gas
properties although it has not yet committed to any new acquisition and does
not now have adequate financial resources to complete any substantial
acquisition. Therefore, even if the Company identifies oil and gas reserves
for possible acquisition, the completion of any transaction would be dependent
on obtaining required funding. There can be no assurance that the Company
would be able to obtain financing on terms or in amounts sufficient to enable
it to purchase producing properties. Alternatively, the Company may consider
issuing additional securities in exchange for producing properties, which would
reduce the percentage ownership in the Company by present stockholders and may
result in further dilution to the per share book value of all issued and
outstanding shares. Further, there is no assurance that any such acquisition,
if completed, would result in ongoing revenues to the Company in excess of
related operating and financing costs. (See "Part I, Item 1, Business
Strategy")
Although the Company performs a review of acquired properties that it
believes is consistent with industry practices, such reviews are inherently
incomplete. Acquisitions will continue to be investigated and proceeded with
on the assumption that it is generally not feasible to review in-depth every
aspect of each individual property or well involved in an acquisition and that
even an in-depth review of all properties and records may not necessarily
reveal all or any existing or potential problems, nor will it permit the
Company to become sufficiently familiar with the properties to assess fully
their deficiencies and capabilities. In addition, inspections may not always
be performed on every well prior to acquisition and some problems, including
downhole conditions, latent equipment defects, groundwater contamination and
certain environmental problems, are not necessarily observable even on
inspection. Ordinarily therefore, the Company's review and due diligence has
been and will continue to be focused on higher value properties with a sample
review of the remainder. Reliance will continue to be made on information
provided by the vendors of the properties with or without independent
verification.
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ACQUISITION FINANCING
The Company does not have sufficient liquidity or capital to undertake
all of the acquisition prospects that it generates or to fund fully the
development of any prospect. Therefore, the Company will continue to be
dependent on raising substantial amounts of additional capital through any one
or a combination of institutional or bank debt financing, equity offerings,
debt offerings and internally generated cash flow, or by forming sharing
arrangements with industry participants. Although the Company has been able to
obtain such financings and to enter into such sharing arrangements in certain
of its projects to date, there can be no assurance that additional financings
or sharing arrangements can be obtained, notwithstanding the Company's need for
substantial amounts of additional capital. If the Company is unable to obtain
capital that may be necessary or desired for its acquisition, development or
exploration activities, it may be forced to defer or abandon specific projects,
reduce substantially its overall efforts, dilute its interest in existing
sharing arrangements for specific projects, attempt to sell all or a portion of
specific prospects or leasehold positions, or otherwise severely curtail its
acquisition, development and exploration activities. (See "Part I, Item 1,
Risk Factors, Indebtedness" and "Part I, Item 2, Liquidity and Capital
Resources")
INDEBTEDNESS
The Company has secured a revolving loan facility of $10 million with
Comerica Bank in Dallas, Texas ("Comerica Bank") to, among other things, fund
working capital and make additional acquisitions as and if appropriate
opportunities are identified. As of March 31, 1996, the Company had received
approval from Comerica Bank to borrow up to $1.25 million under this revolving
loan facility of which there was approximately $857,000 outstanding. In
addition, Comerica Bank issued a letter of credit on behalf of the Company in
the amount of $49,000 that is secured under this revolving loan facility. On
April 10, 1996, and subsequent to the nine months ended March 31, 1996, the
Company completed the East Texas Purchase. In order to help finance this
acquisition, Comerica Bank increased its approval to borrow under the Company's
revolving loan facility to a maximum of $5.6 million. Upon closing of the East
Texas Purchase, the Company drew down additional funds and increased the
outstanding balance under the loan facility to $4.48 million. The loan under
this revolving credit facility is due for renewal by Comerica Bank on December
1, 1996. If Comerica Bank does not renew the loan or if the Comerica Bank
indebtedness is not repaid when due, Comerica Bank would have the right to
obtain possession of and sell the pledged properties, including any equipment,
new wells, or other improvements placed on the property by the Company. The
Company believes it will obtain renewal of the loan from Comerica on or before
the due date for one additional year. In the event of a default on the bank
indebtedness, not subsequently waived by the bank, it is unlikely that the
Company would be able to continue its business. In addition, the Company is
subject to certain financial and operating covenants that are usual and
customary for transactions of this nature, including, but not limited to,
requirements to provide annual audited and unaudited interim financial
information, prohibitions on additional debt, restrictions on certain payments
and distributions to affiliates and others, restrictions on changes in the
nature of the business, and maintenance of minimum net worth, cash flow, and
operating ratios. The loan agreement also contains usual and customary events
of default and provides remedies to Comerica Bank in the event of default.
Although the Company believes that its cash flows and available sources of
financing will be sufficient to satisfy the interest payments on its debt at
currently prevailing interest rates and oil and gas prices, the Company's level
of debt may adversely affect the Company's ability: (i) to obtain additional
financing for working capital, capital expenditures or other purposes, should
it
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need to so do; or (ii) to acquire additional oil and gas properties or to make
acquisitions utilizing new borrowings. There can be no assurances that the
Company will be able to obtain additional financing, if required, or that such
financing, if obtained, will be on terms favorable to the Company. (See "Part
I, Item 2: Liquidity and Capital Resources")
On March 31, 1996 the Company was not in compliance with its minimum
net worth covenant. Similarly, on April 30, 1996 the Company was not in
compliance with its working capital covenant. The Company subsequently
corrected these defaults in June 1996. Comerica Bank provided the Company
with letters waiving these covenant violations solely with respect to these
specific defaults. The Company believes it will be able to comply with all
restrictive covenants in the future or obtain waivers from the bank with
respect to noncompliance.
On April 10, 1996 the Company completed the East Texas Purchase. The
Company issued three notes to the Vendor, each in the amount of $250,000, for a
total of $750,000. The principal and accrued interest on each note are payable
on July 9, 1996, October 7, 1996 and January 5, 1997 respectively. Each note
bears interest at nine per cent (9%). The notes are unsecured and subordinated
to the Comerica Bank indebtedness. The Company paid the first note plus
accrued interest on July 10, 1996 in accordance with its obligations under that
note.
In addition, as of June 30, 1996, the Company had approximately $1.9
million of indebtedness as a result of the sale of Deutschmark (DEM2.9 million
issued) denominated 12% Promissory Notes (the offering was released on July 7,
1995 in the total amount of 5.0 million DEM). (See "Part II, Item 4": Recent
Sales of Unregistered Securities") The Deutschmark bonds are unsecured,
general obligations of the Company and any of its subsidiaries and are
subordinated in right of payment to all existing and future secured
indebtedness of the Company and any of its subsidiaries.
These bonds are denominated in Deutchemarks (DEM). The Company has
the obligation to make periodic interest payments (January 15 and July 15 of
each year) and to repay the principal when it comes due on July 15, 2000 in
DEM. The funds generated by the Company from operations, which form the
primary source of funds to pay the interest, are denominated in $US. The
source of funds required to repay the principal outstanding on these bonds has
not yet been identified, since the bonds do not mature until July 15, 2000.
The Company is exposed to the risk that, upon repayment, the exchange rate
between DEM and $US may be less favorable than that which existed at the time
that the bonds were issued. This would result in the Company having to repay a
larger number of $US than it received initially. Changes in the $US equivalent
of the DEM bonds arising from changes to the DEM:$US exchange rate are
recognized monthly. At March 31, 1996 the Company had recorded unrealized
exchange rate gains of approximately $12,000 (at June 30, 1996 $62,000).
However, there are no assurances that the Company will continue to realize
gains related to favorable changes in the DEM:$US exchange rates in the future.
Unfavorable changes to the DEM:$US exchange rate will result in the Company
recording unrealized exchange rate losses related to the changes as they occur.
The Company believes it has the opportunity to enter into arrangements to
manage its DEM:$US exchange rate risk. At this time, the Company has not
entered into any such arrangements.
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RESERVE REPLACEMENT
The Company's future success depends upon its ability to find, to
develop or to acquire additional oil and gas reserves that are economically
producing or recoverable. The proved reserves of the Company will generally
decline as reserves are depleted, except to the extent that the Company
conducts successful exploration or development activities or acquires
properties containing proved reserves, or both. Therefore, in order to
increase reserves and production, the Company must continue its acquisition,
development drilling and recompletion programs or undertake other replacement
activities. The Company's current strategy is to maintain its focus on
low-cost operations while increasing its reserve base, production and cash flow
through (i) acquisition of producing oil and gas properties with undeveloped
reserves; (ii) investing in other oil and gas properties with unexploited
reserves; and (iii) using available cash flows to continue to exploit its
existing properties. There can be no assurance, however, that the Company's
planned development projects and acquisition activities will result in
significant additional reserves or that the Company will have success drilling
productive wells at low finding and development costs. Furthermore, if
prevailing oil and gas prices were to increase significantly, the Company's
finding costs to add reserves could increase. (See "Part 1, Item 2, Impact of
Inflation and Changes in Oil and Gas Prices" and "Part I, Item 3")
COMPETITION
The exploration for, the development and the production of oil and
natural gas is highly competitive. Major and independent oil and gas companies
and individuals actively bid for desirable oil and gas properties and compete
for equipment, services, and labor required to develop and operate such
properties. The Company competes with numerous firms and other individuals in
its activities, including major oil firms and independent exploration and
producing firms, many of which have substantially greater financial resources,
management and technical staffs and facilities than those of the Company.
Accordingly, many of the Company's competitors may be better positioned to
acquire and exploit prospects, to obtain funding, to hire personnel and to
market production. In addition, the producing, processing and marketing of
crude oil and natural gas is affected by a number of factors which are beyond
the control of the Company, the effect of which cannot be accurately predicted.
Many of the Company's larger competitors may be able to respond better to
factors that affect the demand for oil and natural gas production such as
changes in worldwide oil and natural gas prices and levels of production, the
cost and availability of alternate fuels and the application of government
regulations.
PRICE FLUCTUATIONS
The Company's revenues are dependent upon prevailing prices for oil
and gas. Oil and gas prices can be extremely volatile. Prevailing prices are
also affected by the actions of foreign governments, international cartels and
the United States government. If oil or gas prices were to decrease
significantly, certain of the Company's wells could become uneconomic, thereby
adversely affecting: (i) the level of proved reserves attributable to the
Company's properties; (ii) the Company's ability to increase its reserves and
production; (iii) the borrowing base under any financing agreement; and (iv)
cash flow from operations, revenues and operating income. (See "Part I, Item
2, Impact of Inflation and Changes in Oil and Gas Prices")
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MARKETABILITY OF PRODUCTION
The marketability of the Company's production depends upon the
availability and capacity of oil and natural gas gathering systems and
pipelines, the effect of federal and state regulations and general economic
conditions. Further, the Company sells a large percentage of its oil and gas
to a few large purchasers. Although the Company does not believe that the loss
of one or all of these customers would have a material adverse effect in the
long term, it could adversely affect cash flows until other marketing
arrangements were made. (See "Part I, Item 1, Risk Factors, Indebtedness" and
"Part I, Item 2, Liquidity and Capital Resources")
GOVERNMENT REGULATIONS
The following discussion of government regulation is necessarily brief
and is not intended to constitute a comprehensive discussion of the various
statutes, rules, regulations, and governmental orders, policies, and practices
which may affect operations of the Company.
General The oil and gas industry is subject to comprehensive federal, state,
and local laws, regulations and policies which control the exploration,
production, marketing and taxation of oil and gas. Numerous departments and
agencies, at federal, state and even local levels, have issued quantities of
rules and regulations, some or all of which have imposed or may impose
additional expenditures, restrictions, and delays on the Company's business
activities and profitability. For example, such regulations can render
drilling in certain locations more expensive or uneconomical due to increased
surface owner compensation and bonding requirements or environmental regulatory
constraints.
Matters subject to regulation include discharge permits for drilling
operations, drilling bonds, reports concerning operations, the spacing of
wells, unitization and pooling of properties, taxation and environmental
protection. From time to time, regulatory agencies have imposed price controls
and limitations on production by restricting the rate of flow of oil and gas
wells below actual production capacity in order to conserve supplies of oil and
gas. Because the regulatory environment within which it operates is always
changing, the Company is unable to predict the future cost or impact of
continued regulatory compliance.
Various jurisdictions have laws regarding unitization or forced
pooling which require the working interest owners of a well to participate in
the cost and revenues associated with neighboring wells or require neighboring
owners to participate in their own wells. If acreage included within a lease
becomes subject of a unitization or forced pooling order, drilling operations
may have to be undertaken at a time or with other parties not of the Company's
choosing or which may not be in the Company's best interest.
In an attempt to promote competition, the Federal Energy Regulatory
Commission ("FERC") has issued a series of orders which have restructured the
interstate natural gas transportation and marketing system. To date, the
Company has not experienced any adverse effect as a result of these FERC
orders. However, there can be no assurance that the Company's production of
natural gas will not be subject to federal regulation in the future and it is
not possible to predict what effect such regulations may have on its future gas
marketing.
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State and Local Regulation of Drilling and Production State regulatory
authorities have established rules and regulations requiring permits for
drilling, drilling bonds and reports concerning drilling and producing
activities. Such regulations also cover the location of wells, the method of
drilling and casing wells, the surface use and restoration of well locations,
the plugging and abandoning of wells, the density of wells (well spacing)
within a given area and other matters. The states in which the Company
operates also have statutes and regulations governing a number of environmental
and conservation matters, including the unitization and pooling of oil and gas
properties and establishment of maximum rates of production from oil and gas
wells. Local authorities may also chose to exercise regulatory control.
Environmental Regulations The Company's activities are subject to numerous
laws and regulations concerning the storage, use and discharge of materials
into the environment, the remediation of environmental impacts, and other
matters relating to environmental protection, all of which may adversely affect
the Company's operations and the costs of doing business. It is likely that
state and federal environmental laws and regulations will become more stringent
in the future. Current legislative initiatives are focussed on the disposal of
"hazardous" or other waste material associated with oil and gas exploration and
production.
Under the federal Comprehensive Environmental Response, Compensation
and Liability Act ("CERLA"), the Company may become fully liable for the
cleanup costs associated with the release of "hazardous substances" into the
air, water or ground even though the discharge may have been caused in whole or
in part by a previous owner or third party. Many states have similar
provisions. The imposition of liability under CERLA and similar laws would
likely have a serious adverse effect on the ability of the Company to continue
its business.
Violation of environmental laws and regulations may also result in the
imposition of an order requiring the removal, remediation or abatement of the
conditions which gave rise to the violation.
The costs of comprehensive environmental investigation or audits prior
to the acquisition of a property can be expensive and there is no guarantee
that all deficiencies or sources of liability will be identified by such
audits. In connection with the acquisition of producing properties in Texas,
New Mexico and Louisiana, the Company performed limited environmental inquiries
and found no material environmental noncompliance or cleanup liabilities. The
Company does not currently believe that it will be required in the near future
to expend material amounts due to environmental laws and regulations.
Safety and Health Regulations The Company must also conduct its operations in
accordance with various laws and regulations concerning occupational safety and
health. Currently, the Company does not foresee expending material amounts to
comply with these occupational safety and health laws and regulations.
However, since such laws and regulations are frequently changed and amended,
the Company is unable to predict the future effect of these laws and
regulations.
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TITLE TO PROPERTIES
All of the Company's working interests are held under leases from
third parties. The Company evaluates title in a manner which it believes to be
consistent with industry practice. Depending on the history of the property
and the investment required to acquire the interest under consideration, the
Company may or may not obtain third party title opinions prior to acquisition
or rely on the title opinions in the possession of the vendor or such other
third party review as it may deem relevant to verify the occupation or interest
of the vendor. The Company is of the opinion that it has satisfactory title to
all such properties sufficient to meet standards generally accepted in the oil
and gas industry. The Company's properties are mortgaged under the loan
agreement with Comerica Bank. They are also subject to common burdens,
including customary royalty interests and liens for current taxes, but the
Company has concluded that such burdens do not materially interfere with the
use of such properties. Further, the Company believes that the economic effect
of such common burdens have been appropriately reflected in the Company's
acquisition costs of such properties.
SIGNIFICANT NUMBER OF AUTHORIZED BUT UNISSUED SHARES
The Board of Directors has total discretion in the issuance of any
shares of Common Stock which may be issued in the future. The Company is
authorized to issue 40,000,000 shares of its Common Stock (27.02 million shares
were issued and outstanding as at July 31, 1996). (See "Part I, Item 8")
CONTROL BY TWO STOCKHOLDERS AND MANAGEMENT
Two stockholders, Norden Investments Ltd. ("Norden") and Forseti
Investments Ltd., ("Forseti") each own 9,600,000 shares (approximately 36% each
as of July 31, 1996) of the Company's outstanding Common Stock. Edward Munden
and Bruce Benn, Executive Officers and Directors of the Company and Ronald
Benn, Executive Officer of the Company have beneficial interests in Norden.
There is no common ownership, officers or directors between Norden and Forseti.
These two stockholders and management are in a position to elect all of the
Company's directors, appoint its officers, and control the Company's affairs
and operations. The Company's Articles of Incorporation do not provide for
cumulative voting. (See "Part I, Item 4" and "Part I, Item 8 ")
RESERVES ESTIMATES AND FUTURE NET REVENUE
This Registration Statement contains estimates of the Company's oil
and gas reserves and the future net revenue therefrom derived from studies
prepared by the independent engineering firm of Harper and Associates, Inc. of
Forth Worth, Texas ("Harper and Associates"). These estimates are based on
various assumptions. Although the Company believes that the assumptions are
reasonable, any assumptions are inherently imprecise. Actual future
production, revenue, taxes, development expenditures, operating expenses and
quantities of recoverable oil and gas reserves may vary substantially from
those assumed in the estimates. In addition, the Company's reserves may be
subject to downward or upward revision, based upon production history, results
of future exploration and development, prevailing oil and gas prices and other
factors. Accordingly, future operating results are, in fact, impossible to
predict precisely and accurately. (See "Part I, Item 3, Reserve Information")
DEPENDENCE ON KEY OFFICERS AND EMPLOYEES
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The Company is dependent upon Edward J. Munden, President and Chief
Executive Officer, Robert P. Lindsay, Chief Operating Officer, Ronald I. Benn,
Chief Financial Officer and Treasurer, Bruce I Benn, Vice-President, and other
key personnel, for its various activities, the loss of any one of whom for any
reason may adversely affect the Company. The Company does not maintain key man
insurance on key executives. (See "Part I, Item 3, Executive Officers and
Directors")
OPERATIONAL HAZARDS AND INSURABILITY
The Company is engaged in the drilling and production of oil and gas
and, as such, its operations are subject to the usual hazards incident to the
industry. These hazards include, but are not limited to, blowouts, cratering,
explosions, adverse weather, uncontrollable flows of oil, natural gas or well
fluids, fires, pollution, releases of toxic gas, and other environmental
hazards and risks. These hazards can cause personal injury and loss of life,
severe damage to and destruction of property and equipment, pollution or
environmental damage and suspension of operations.
In order to lessen the effects of these hazards, the Company maintains
insurance of various types to cover its operations. The Company has $5.0
million of general liability insurance. This insurance, however, does not
cover every potential risk associated with the drilling and production of oil
and may not be sufficient to cover all potential liabilities. In particular,
coverage is not obtainable for certain types of environmental hazards. The
occurrence of a significant adverse event that is not fully covered by
insurance could have a materially adverse effect on the Company. Further, the
Company cannot assure that it will be able to maintain adequate insurance in
the future at rates it considers reasonable.
EMPLOYEES AND CONSULTANTS
The Company currently has eleven employees consisting of three
executive officers and eight support staff. Four of the employees are located
in the Dallas office and six are on site in New Mexico. In addition, the
Company regularly engages technical consultants and independent contractors to
provide specific advice or to perform certain administrative or technical
functions.
The executive services of Edward Munden, Ronald Benn and Bruce Benn
have been provided to the Company under a management contract with Capital
House A Finance and Investment Corporation ("CHC"), a Canadian venture capital
company. Bruce Benn, Edward Munden and Ronald Benn are directors and
shareholders of CHC. Edward Munden and Bruce Benn are officers and directors
of the Company. Ronald Benn is an officer of the Company. (See "Part I, Item
6" and "Part I, Item 7")
10
<PAGE> 15
GLOSSARY OF OIL AND GAS TERMS
The following are abbreviations and definitions of terms commonly used
in the oil and gas industry and in this Registration Statement.
<TABLE>
<S> <C>
Bbl Barrel (42 U.S. gallons)
Bcf Billion cubic feet.
Bcfe Billion cubic feet of natural gas equivalent,
which is determined using the ratio of six Mcf of
natural gas to one barrel of crude oil, condensate
or natural gas liquids so that one barrel of oil
is referred to as six Mcf of natural gas
equivalent or "Mcfe."
BOE Barrel of oil equivalent, determined using the
ratio of six Mcf of natural gas (including natural
gas liquids) to one Bbl of crude oil or
condensate.
BOPD Barrels of oil per day.
BTU British Thermal Unit, which is the heat required
to raise the temperature of a one-pound mass of
water from 58.5 to 59.5 degrees Fahrenheit.
Behind-the-pipe Refers to the completion of an existing well for
recompletion production from a formation that exists behind the
casing of the well. See "proved developed behind-
the-pipe reserves" below.
Capital Costs associated with development and exploratory
expenditures drilling, leasehold acquisitions, producing
property acquisitions, and other miscellaneous
capital expenditures.
Condensate Liquid hydrocarbons that were gaseous while in the
reservoir.
Developed Acres spaced or assigned to a Productive well.
acreage
Development A well drilled within the proved area of crude oil
well or natural gas reservoir to the depth of a
stratigraphic horizon (rock layer or formation)
known to be productive.
Dry Hole An exploratory or development well found to be
incapable of producing either crude oil or natural
gas in sufficient quantities to justify completion
as a crude oil or natural gas well.
Exploratory well A well drilled to find commercially productive
hydrocarbons in an unproved area or to extend
significantly a known prospect.
Finding costs Costs calculated by dividing the amount of total
capital expenditures, reduced by proceeds from any
sale of interests in mineral properties, by the
</TABLE>
11
<PAGE> 16
<TABLE>
<S> <C>
amount of total reserves added during the same
period as a result of drilling activities,
property acquisitions and reserve revisions and
are expressed in dollars per Mcfe.
"Gross" oil and A gross well is a well in which the Company owns a
gas well working interest. The number of gross wells is
the total number of wells in which the Company
owns a working interest.
"Gross" acres Gross acres refers to the number of acres in which
the Company owns a working interest.
Lease operating All direct costs associated with and necessary to
Expense or "LOE" operate a producing property.
Mbbls Thousand barrels.
Mcf Thousand cubic feet.
Mcfe Thousand cubic feet of natural gas equivalent,
which is determined using the ratio of six Mcf of
natural gas to one barrel of crude oil, condensate
or natural gas liquids so that one barrel of oil
is referred to as six Mcf of natural gas
equivalent or "Mcfe."
MMbbls Million barrels of crude oil or other liquid
hydrocarbons.
MMBtu Million Btus.
MMcf Million cubic feet.
MMcfd Million cubic feet per day.
MMcfe Million cubic feet of natural gas equivalent.
Natural Gas Liquids Those hydrocarbons that are liquefied at the
surface in field facilities or in gas processing
plants. Natural gas liquids include ethane,
butane and propane.
"Net" acres Determined by multiplying gross acres by the
Company's working interest and/or royalty interest
in those acres. (eg. a 50% working interest in a
lease covering 320 acres is equivalent to 160 net
acres).
"Net" oil and gas well A net well is deemed to exist when the sum of
fractional ownership working interests in gross
wells equals one. The number of net wells is the
sum of the Company's fractional working interest
owned in gross wells.
Net revenue interest The percentage of production to which the owner of
a working interest is entitled. For example, the
owner of a 100% working interest in a well
</TABLE>
12
<PAGE> 17
<TABLE>
<S> <C>
burdened only by a typical 1/8 landowner's royalty
would have an 87.5% net revenue interest in that
well.
Net operating Revenues less LOE.
revenue or "NOR"
Operator The company that operates an oil or gas well,
lease, concession or joint venture.
Present value of Estimated future net revenues discounted by a
estimated pre-tax factor of 10% per annum, after
future net revenues LOE and before income taxes.
or PV10
Productive well A well that is producing oil or natural gas or
that is capable of production.
Proved reserves Those quantities of crude oil, natural gas, and
natural gas liquids which, upon analysis of
geologic and engineering data, appear with
reasonable certainty to be recoverable in the
future from known oil and gas reservoirs under
existing economic and operating conditions.
Proved reserves are limited to those quantities of
oil and gas which can be expected, with little
doubt, to be recoverable commercially at current
prices and costs, under existing regulatory
practices and with existing conventional equipment
and operating methods.
Proved developed Include proved developed producing reserves and
reserves proved developed behind the-pipe reserves.
Proved developed Include only those reserves expected to be
producing reserves recovered from existing completion intervals in
existing wells.
Proved developed Include those reserves contained in geological
behind-the-pipe- formations through which an existing well has been
reserves drilled but from which the well has not yet
produced. The reserves are said to be "behind-
the-pipe" because the oil and gas are sealed out
of the well bore by the casing leading to the
existing completion interval. Behind-the-pipe
reserves are classified as proved developed only
if the cost of completing the well for production
of such reserves is relatively small compared to
the cost of a new well.
Proved undeveloped Include those reserves expected to be recovered
reserves from new wells on proved undrilled acreage or from
existing wells where a relatively major
expenditure is required for recompletion.
Recompletion The completion for production from another
formation within an existing well bore.
</TABLE>
13
<PAGE> 18
<TABLE>
<S> <C>
Reserves Natural gas and crude oil, condensate and natural
gas liquids, on a net revenue interest basis,
found to be commercially recoverable.
Royalty An interest in an oil and gas lease that gives the
owner of the interest the right to receive a
portion of the production from the leased acreage
(or of the proceeds of the sale thereof), but does
not require the owner to pay any portion of the
costs of drilling or operating the wells on the
leased acreage. Royalties may be either
landowner's royalties, which are reserved by the
owner of the leased acreage at the time the lease
is granted, or overriding royalty interests, which
are usually reserved by an owner of the leasehold
in connection with a transfer to a subsequent
owner.
Seismic Pertaining to an earth vibration, including earth
vibrations that are artificially induced to
produce data used to map subsurface structures.
Service Well A service well is used for water injection in
secondary recovery projects or for the disposal of
produced water.
Undeveloped Lease acreage on which wells have not been drilled
acreage or completed to a point that would permit
the production of commercial quantities of oil and
natural gas regardless of whether such acreage
contains proved reserves.
Working interest An interest in an oil and gas lease that gives the
owner of the interest the right to drill for and
produce oil and gas on the leased acreage and
requires the owner to pay a share of the costs of
drilling and production operations. The share of
production to which a working interest owner is
entitled will always be smaller than the share of
costs that the working interest owner is required
to bear, with the balance of the production
accruing to the owners of royalties. See the
definitions of "net revenue interest" and
"royalty" above. For example, the owner of a 100%
working interest in a lease burdened only by a
typical 1/8 landowner's royalty would be required
to pay 100% of the costs of a well but would be
entitled to retain 87.5% of the production. The
remaining 12.5% would accrue to the royalty
owners.
Workover To perform recompletion or mechanical work in an
existing well bore.
</TABLE>
14
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
On March 6, 1995, the Company acquired all of the outstanding common
stock of Queen Sand Resources, Inc. a Nevada corporation ("QSRN") in exchange
for 19,200,000 common shares of the Company. For accounting purposes, the
acquisition has been treated as a recapitalization of QSRN with QSRN as the
acquirer (reverse acquisition). The historical financial statements prior to
March 6, 1995 are those of QSRN, which have been retroactively restated for the
equivalent number of shares received in the merger. QSRN was formed on August
9, 1994.
The primary focus of the following discussion is on the business of
QSRN. The Company, prior to the March 6, 1995 acquisition of QSRN, had no
material operations.
SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the
Company. The financial data was derived from the consolidated financial
statements of the Company and should be read in conjunction with the
Consolidated Financial Statements and related Notes thereto included herein.
The consolidated financial statements as of and for the interim periods ended
March 31, 1996 and 1995 reflect all adjustments which, in the opinion of the
Company, are necessary for a fair presentation of the results of operations and
financial position of the Company. The results of operations for the nine
months and three months ended March 31, 1996 are not necessarily indicative of
the operating results for the full fiscal year ending June 30, 1996.
15
<PAGE> 20
<TABLE>
<CAPTION>
Period from August Period from August
9, 1994 (inception) Nine months ended 9, 1994 (inception)
to June 30, 1995 March 31, 1996 to March 31, 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
OPERATIONS DATA:
Oil and Gas Sales $434,513 $1,401,102 $26,401
Oil & Gas Production Expenses 279,825 880,010 34,475
Net Oil and Gas Revenues 154,688 521,092 (8,074)
Depreciation, Depletion and Amortization 132,000 390,000 7,900
General and Administration Expense 293,658 946,625 75,000
Interest Expense 25,144 140,717 --
Reverse acquisition expenses 401,120 -- 401,120
Interest income 10,041 -- 9,479
Net loss (687,193) (956,250) (482,615)
Net loss per common share (0.06) (0.04) (0.06)
CASH FLOWS DATA:
Net cash used in operating activities (303,210) (10,836) (168,771)
Net cash used in investing activities (3,129,952) (771,803) (2,417,475)
Net cash provided by financing activities 3,532,609 1,647,997 3,262,131
Net increase in cash 99,447 887,030 675,885
BALANCE SHEET DATA (AT END OF PERIOD):
Total current assets $806,924 $1,240,958
Property and equipment, net 4,042,952 4,424,755
Total assets 4,849,876 5,665,713
Total current liabilities 770,706 1,424,691
Long-term obligations, net of current portion 875,592 1,930,694
Total stockholders' equity 3,203,578 2,310,328
</TABLE>
16
<PAGE> 21
The following table sets forth certain operating information of the
Company for the periods presented.
<TABLE>
<CAPTION>
Period from
Period from August August 9, 1994
9, 1994 (inception) Nine months ended (inception) to
to June 30, 1995 March 31, 1996 March 31, 1995
---------------- -------------- --------------
<S> <C> <C> <C>
AVERAGE SALES PRICE:
Gas ($/Mcf) 1.65 2.22 --
Oil ($/Bbl) 16.52 19.18 16.31
BOE ($/BOE) 16.32 18.92 16.31
PRODUCTION DATA:
Gas (MMcf) 4,678 19,228 --
Oil (Mbbls) 25,839 70,847 1,619
MBOE 26,619 74,052 1,619
AVERAGE COST ($/BOE) DATA:
Production and operating costs 10.51 10.91 21.29
Production and severance taxes 1.29 1.38 1.30
Depreciation, depletion and amortization 4.96 5.27 4.88
</TABLE>
The following discussion of the results of operations and financial
condition should be read in conjunction with the Consolidated Financial
Statements and related Notes thereto included herein.
The Company acquired substantially all of the operating properties it
owned at March 31, 1996 during March and April 1995. On March 28, 1995 the
Company acquired its current interests in the Caprock Field in New Mexico. On
March 29, the Company acquired its interests in the Parkey Ranch in Texas . On
April 20, the Company acquired its interests in the Cecelia Field, South Bell
City Field, East Bell City Field, Shuteson Field and Holmwood Field all in
Louisiana (See "Part I, Item 3, Description of Property, Oil and Gas Producing
Properties"). Prior to these acquisitions the Company held limited interests
in the Drickey Queen and West Cap units of the Caprock Field in New Mexico which
it purchased in September 1994. Due to this significant increase in the
operating assets of the Company during March and April 1995, there is limited
comparison between the results of operation and cash flow for the nine months
ended March 31, 1996 and the period from August 9, 1994 (inception) to March 31,
1995.
17
<PAGE> 22
NINE MONTHS ENDED MARCH 31, 1996 COMPARED TO PERIOD FROM AUGUST 9, 1994
(INCEPTION) TO MARCH 31, 1995
RESULTS OF OPERATION
REVENUES: During the nine months ended March 31, 1996, operating
revenue from the sale of crude oil and natural gas was $1.4 million. This
consisted of 70,847 barrels of crude oil, at an average price per barrel of
$19.18, and 19,228 McF of natural gas, at an average price per McF of $2.22.
The increase in the volumes of oil and gas produced during the period, as
compared to the period from August 9, 1994 (inception) to March 31, 1995,
reflects the fact that the Company's oil and gas properties were operated for a
full nine months. This is compared to the period from August 9, 1994
(inception) to March 31, 1995 when all of the production attributed to the
Company came from its limited interests in the Drickey Queen and West Cap units
of the Caprock Field in New Mexico.
COSTS AND EXPENSES: As discussed in the following four paragraphs,
oil and gas production expenses and operating costs for the nine months ended
March 31, 1996 were $2,217,000, as compared to $518,000 for the period ended
March 31, 1995.
The production expenses for the nine months ended March 31, 1996 were $880,000,
or $10.91 per BOE. In the corresponding period ended March 31, 1995 the cost
per BOE was $21.29. During the period August 9, 1994 (inception) to March 31,
1995 the Drickey Queen and West Cap units of the Caprock Field in New Mexico
were not operated profitably. On March 28, 1995 the Company assumed operating
control of the entire Caprock Field and subsequently brought the cost of
production down. In addition to these operating improvements, the Company
acquired its properties in Texas and Louisana, the combination of which
resulted in a reduced average cost of production per BOE.
Depletion, depreciation and amortization were $390,000 during the nine months
ended March 31, 1996, as compared to only $7,900 for the period ended March 31,
1995. The significant increase in the volume of oil and gas produced during
the nine months ended March 31, 1996 is the cause for the significant increase
in depletion, depreciation and amortization expense.
General and administrative expenses for the nine months ended March 31, 1996
were $947,000. The Company believes it has a fixed overhead infrastructure
that is capable of servicing a significantly larger revenue base than that
which was in place throughout the period. The East Texas Purchase, which
effectively doubled the operating assets of the Company, should not result in a
significant increase in general and administrative expenses. During the period
ended March 31, 1995 the Company recorded general and administrative expenses
of $75,000. As stated previously, the expenses incurred in the period ended
March 31, 1995 are not comparable to those of the nine months ended March 31,
1996 due to the significant change in operations that occured after March 31,
1995.
Interest charges during the nine months ended March 31, 1996 were $141,000.
These interest charges related to a $600,000 note payable, bearing interest at
9%, that the Company issued to Cleo Oil Inc. when it acquired the Parkey Ranch
(See "Part I, Item 3, Oil and Gas Producing Properties) and the Comerica Bank
loan. The Company used part of the proceeds from the Comerica loan to retire
the $600,000 note payable to Cleo Oil Inc. There were no interest charges
during the period ended March 31, 1995.
18
<PAGE> 23
NET INCOME(LOSS) The Company has incurred losses since its inception,
including a loss of $956,000 ($0.04/share) during the nine months ended March
31, 1996, as compared to a loss of $483,000 for the period ended March 31,
1995. These losses are for the most part attributable to the start up nature
of operations. The initial stage of the Company's oil and gas history has been
spent in acquiring properties. Prior to the East Texas Purchase the Company
lacked the oil and gas production volumes required to sustain a viable
operation. As a result of this acquisition, the Company believes it is now in
a position to cover its production costs and operating expenses from oil and
gas revenues, subject to the prevailing prices for crude oil and natural gas
and the volumes thereof produced by the Company. The Company continues to look
for oil and gas properties to add to its portfolio of revenue producing
properties, the acquisition of which should add to the profitability of the
company. The Company's revenues, profitability and future rate of growth are
substantially dependent upon prevailing prices for crude oil and natural gas
and the volumes of crude oil and natural gas produced by the Company. In
addition, the Company's proved reserves will decline as crude oil and natural
gas are produced unless the Company is successful in acquiring properties
containing proved reserves or conducts successful exploration and development
activities.
For the period from August 9, 1994 (inception) to March 31, 1995 the
net loss approximated $483,000. A significant component of the activities for
this period related to the March 6, 1995 reverse acquisition, for which the
Company recorded costs of $401,120, including 492,000 common shares issued to
an unrelated party for investment advisory services (valued at $0.17 per
share), incurred in connection with the March 6, 1995 reverse acquisition.
These costs have been charged to expense as UBTI at the time of the reverse
acquisition had no net tangible assets.
CASH FLOW DATA
During the nine months ended March 31, 1996 the Company generated
$11,000 from operations. It utilized $772,000 in investing activities.
However, it generated $1,648,000 in funds from its financing activities. The
net change in cash was $887,000 during the period. During the period ended
March 31, 1995, the Company consumed $169,000 from operations, while investing
$2,417,000 and raising $3,262,000 from its investing activities.
INVESTING ACTIVITIES: During the nine months ended March 31, 1996 the
Company invested $772,000 to acquire additional properties and to develop
existing oil and gas producing properties. Of this total, $216,000 was spent
on acquiring and developing a working interest in a lease in Louisiana,
$384,000 was spent on developing existing properties and $172,000 of direct
engineering and technical support costs were capitalized from activities
directly related to the evaluation of prospective properties.
Subsequent to March 31, 1996, the Company completed the East Texas Purchase.
In consideration for these properties, the Company paid $4,250,000 in cash,
issued $750,000 in short-term interest bearing notes (9%) and issued 470,000
restricted common shares which it valued at $0.18 for the purposes of this
transaction, for a total of $84,600. In addition, the Company incurred $250,000
in closing costs. The acquisition has been recorded at a cost of $5.3 million.
During the period ended March 31, 1995, the Company invested $2,417,000 in oil
producing properties. Of this amount, $1,889,000 was invested in the last four
days of March, 1995.
19
<PAGE> 24
FINANCING ACTIVITIES: During the nine months ended March 31, 1996,
the Company raised debt financing from two sources (as described in the next
two paragraphs) and collected $524,000 in proceeds from the share subscriptions
that were outstanding at June 30, 1995.
A revolving loan facility was arranged with Comerica Bank on December 1, 1995.
All of the Company's oil and gas properties have been encumbered to secure
repayment of this loan, which bears interest at bank prime plus 1.5%. The loan
is subject to renewal on December 1, 1996. At March 31, 1996, the Company
could borrow up to $1,250,000, of which $857,000 was outstanding, with a
further $49,000 of this credit facility being used to secure a letter of
credit. Subsequent to March 31, 1996 the Company incurred a further $3,625,000
of debt with Comerica Bank in conjunction with the East Texas Purchase.
Comerica Bank has also agreed to provide an additional $725,000 to fund
incremental development of these leases. Additionally, the Company issued
470,000 restricted common shares to the vendor of the property, which it valued
for the purposes of this transaction at $0.18 per share, for a total of
$84,600.
During the period of July 1, 1995 to March 31, 1996, the Company issued the
equivalent of $1.7 million bonds denominated in Deutschemarks (DEM 2,500,000).
These bonds, which are due July 15, 2000 bear interest at 12%, payable
semi-annually.
During the period, the Company repaid the $600,000 note payable to Cleo Oil
Inc. from the proceeds of the Comerica bank loan and retired a revolving loan
facility totalling $263,000.
The Company also entered into a capital lease with an original balance of
$350,000, in connection with the acquisition of its working interests in the
Caprock Field in New Mexico (See "Part I, Item 3, Oil and Gas Properties").
The lease expires on March 31, 2000.
BALANCE SHEET DATA
TOTAL ASSETS: At March 31, 1996 the Company had assets of $5,666,000,
comprised of current assets of $1,241,000, oil and gas producing properties,
net of accumulated depletion, depreciation and amortization of $4,184,000 and
oil field and other equipment, net of accumulated depreciation, of $241,000.
As a result of the East Texas Purchase on April 10, 1996, the Company's total
oil and gas producing assets rose by $5.3 million, to a total asset base of
$10.2 million.
TOTAL STOCKHOLDERS EQUITY: The Stockholders' Equity of the Company at
March 31, 1996 totalled $2,310,000. As a result of the acquisition of the
working interests in oil and natural producing leases in east Texas on April
10, 1996, the Company issued 470,000 restricted common shares which it has
valued at $0.18 per share for the purposes of this transaction. The
stockholders' equity rose by $84,600 as a result of this transaction. On June
21, 1996 the Company entered into a subscription agreement for 400,000
restricted common shares at $2.50 per share, for a total cash consideration of
$1,000,000. Of this amount $500,000 was collected prior to June 30, 1996. The
remaining $500,000 is still outstanding at August 8, 1996.
20
<PAGE> 25
PERIOD FROM AUGUST 9, 1994 (INCEPTION) TO JUNE 30, 1995
RESULTS OF OPERATION
REVENUES: During the period from August 9, 1994 (inception) to June
30, 1995 operating revenue from crude oil and natural gas was $435,000. This
consisted of 25,839 barrels of crude oil, at an average price per barrel of
$16.52, and 4,678 McF of natural gas, at an average price per Mcf of $1.65.
COSTS AND EXPENSES: Operating costs and expenses for the period from
August 9, 1994 (inception) to June 30, 1995 were $1,132,000. Of this total,
lease operating costs were $280,000 ($10.51 per BOE) and depletion,
depreciation and amortization charges were $132,000. General and
administrative expenses for the period were $294,000, with a further expense of
$401,000 associated with the March 6, 1995 reverse acquisition of the Company.
Interest charges during the year were $25,000. During the period the Company
directed its attention towards acquiring and developing a portfolio of oil and
gas producing properties and the reverse acquisition that was consumated on
March 6, 1995. These efforts required an investment in activities other than
those specifically directed at revenue production. Subsequent to the
acquisitions of late March through April 1995 the Company started to build its
overhead infrastructure, one that the Company believes is capable of servicing
a significantly larger revenue base than that which was in place at June 30,
1995.
NET LOSS: The Company has incurred losses since its inception,
including a net loss of $687,000 ($0.06 per share) for the period from August
9, 1994 (inception) to June 30, 1995. The loss for the period ended June 30,
1995 is a reflection of the start up nature of the Company's oil and gas
production activities and the March 6, 1995 reverse acquisition. The Company
entered the following fiscal year (July 1, 1995 to June 30, 1996) with a plan
to improve production from the properties it had acquired in March and April
1995 and to acquire additional oil and gas producing properties to provide the
revenue base required to generate positive cash flow from operations. The
Company's revenues, profitability and future rate of growth are substantially
dependent upon prevailing prices for crude oil and natural gas and the volumes
of crude oil and natural gas produced by the Company. In addition, the
Company's proved reserves will decline as crude oil and natural gas are
produced unless the Company is successful in acquiring properties containing
proved reserves or conducts successful exploration and development activities.
21
<PAGE> 26
CASH FLOW DATA
- --------------
INVESTING ACTIVITIES: During the period from August 9, 1994
(inception) to June 30, 1995, the Company invested $3,130,000 acquire
properties and to develop those properties. Of this total, $889,000 was spent
on acquiring working interests in oil producing leases in New Mexico, $396,000
for working interests in oil and natural gas producing leases in Louisiana, and
$1,100,000 for working interests in oil producing leases in Texas. A total of
$54,000 in closing costs pursuant to these acquisitions were also capitalized.
Additional expenditures of $691,000 related to the development of these
properties were capitalized during the period.
FINANCING ACTIVITIES: During the period from August 9, 1994
(inception) to June 30, 1995, the Company entered into a number of stock
transactions occuring prior to the May 1995 two-for-one stock split. All stock
transactions occuring prior to that stock split have been restated to reflect
that split. Prior to the March 6, 1995 reverse acquisition QSRN raised
$3,262,131 in exchange for 326,213 common shares of QSRN. The March 6, 1995
reverse acquisition is explained in footnote 2 to the June 30, 1995 audited
financial statements. Subsequent to the March 6, 1995 reverse acquisition, the
Company issued 3,100,000 common shares for $0.17 per share ($527,000) on a
private placement basis. A second private placement of 100,000 shares was
issued for $0.17 per share ($17,000). At June 30, 1995 $524,000 was still
outstanding related to these private placements. The funds were collected
after the year end.
The Company made use of a revolving credit facility from Banque Indosuez,
Switzerland denominated in Deutschemarks during the period from August 9, 1994
(inception) to June 30, 1995. As of June 30, 1995, the total advanced was
$263,000 (DEM 300,000). This loan was secured by the assets of Capital House
International Limited, a company that, at the time the loan facility was
arranged, owned a majority interest in the shares of the Company. This loan
was repaid during the nine months ended March 31, 1996 from a portion of the
funds received from the private placement of stock described more fully in the
preceeding paragraph.
Additionally, the Company incurred a $600,000 note payable to Cleo Oil, Inc.
and entered into a capital lease, which as of June 30, 1996 had an outstanding
balance of $332,000. These two obligations are discussed more fully in the
financing activities of the nine months ended March 31, 1996 as compared to the
period from August 9, 1994 (inception) to March 31, 1995.
CASH FLOW: During the period from August 9, 1994 (inception) to June
30, 1995 the Company consumed $303,000 in cash in operations. It utilized a
further $3,130,000 in investing activities. The Company generated $3,532,000
in cash from its financing activities. The net change in cash was $99,000
during the period from August 9, 1994 (inception) to June 30, 1995. During
this period the Company was in a start up phase. The Company was raising the
funds required to acquire oil and gas properties and to complete the March 6,
1995 reverse acquisition while evaluating prospective oil and gas properties
for acquisition. Substantially all of the Company's oil and gas properties
were acquired during March and April 1995. As a result, the Company believes
the period from August 9, 1994 (inception) to June 30, 1995 is not indicative
of the results of operations, financing and investing activities of subsequent
periods.
22
<PAGE> 27
BALANCE SHEET DATA
TOTAL ASSETS: At June 30, 1995 the Company had assets of $4.85
million, comprised of current assets of $807,000, investments in oil and gas
producing properties (net of accumulated depletion, depreciation and
amortization charges) of $3,802,000 and oil field and other equipment (net of
accumulated depreciation) of $241,000.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL: The Company's general financial strategy is to use cash from
operations to service interest on the Company's indebtedness, to pay ongoing
operating expenses, and to contribute limited amounts toward further
development of the Company's existing proved reserves as well as additional
acquisitions. There can be no assurance that cash from operations will be
sufficient in the future to cover all of those purposes.
The Company will continue to be dependent on external funding sources
to carry out its planned redevelopment and acquisition program. If such
additional funds are not available, the Company will be required to delay or
reduce substantially both of such activities.
BANK DEBT: The Company has secured a revolving loan facility of $10 million
with Comerica Bank in Dallas, Texas ("Comerica Bank") to, among other things,
fund working capital and make additional acquisitions as and if appropriate
opportunities are identified. As of March 31, 1996, the Company had received
approval from Comerica Bank to borrow up to $1.25 million under this revolving
loan facility of which there was approximately $857,000 outstanding. In
addition, Comerica Bank issued a letter of credit on behalf of the Company in
the amount of $49,000 that is secured under this revolving loan facility. On
April 10, 1996, and subsequent to the nine months ended March 31, 1996, the
Company completed the East Texas Purchase. In order to help finance this
acquisition, Comerica Bank increased its approval to borrow under the Company's
revolving loan facility to a maximum of $5.6 million. Upon closing of the East
Texas Purchase, the Company drew down additional funds and increased the
outstanding balance under the loan facility to $4.48 million. At June 30, 1996
the balance outstanding was $4.6 million. Based on a loan interest rate of
9.75%, the monthly interest obligation is approximately $37,000. The loan
under this revolving credit facility is due for renewal by Comerica Bank on
December 1, 1996. If Comerica Bank does not renew the loan or if the Comerica
Bank indebtedness is not repaid when due, Comerica Bank would have the right to
obtain possession of and sell the pledged properties, including any equipment,
new wells, or other improvements placed on the property by the Company. The
Company believes it will obtain renewal of the loan from Comerica on or before
the due date for one additional year. In the event of a default on the bank
indebtedness, not subsequently waived by the bank it is unlikely that the
Company would be able to continue its business. In addition, the Company is
subject to certain financial and operating covenants that are usual and
customary for transactions of this nature, including, but not limited to,
requirements to provide annual audited and unaudited interim financial
information, prohibitions on additional debt, restrictions on certain payments
and distributions to affiliates and others, restrictions on changes in the
nature of the business, and maintenance of minimum net worth, cash flow, and
operating ratios. The loan agreement also contains usual and customary events
of default and provides remedies to Comerica Bank in the event of default.
Although the Company believes that its cash flows and available sources of
financing will be sufficient to satisfy the interest payments on
23
<PAGE> 28
its debt at currently prevailing interest rates and oil and gas prices, the
Company's level of debt may adversely affect the Company's ability: (i) to
obtain additional financing for working capital, capital expenditures or other
purposes, should it need to so do; or (ii) to acquire additional oil and gas
properties or to make acquisitions utilizing new borrowings. There can be no
assurances that the Company will be able to obtain additional financing, if
required, or that such financing, if obtained, will be on terms favorable to
the Company. (See "Part I, Item 1 Risk Factors, Acquisition Financing and
Indebtedness").
On March 31, 1996 the Company was not in compliance with its minimum
net worth covenant. Similarly, on April 30, 1996 the Company was not in
compliance with its working capital covenant. The Company subsequently
corrected these defaults in June 1996. Comerica Bank provided the Company
with letters waiving these covenant violations solely with respect to these
specific defaults. The Company believes it will be able to comply with all
restrictive covenants in the future or obtain waivers from the bank with
respect to noncompliance.
From time to time in the future, the Company may submit information to
Comerica Bank in accordance with the procedures provided in the loan agreement
to support the Company's request to increase the maximum borrowing base as the
Company believes appropriate. All such applications will be subject to bank
approval. If available, these funds would be allocated toward the 1996
development and acquisition program.
REGULATION S BOND: The Company is in the process of selling 5.0 million
Deutschemark 12% Bonds due July 15, 2000. Under Regulation S of the Act, the
Company is prohibited from selling these Bonds to U.S. persons (as defined in
Regulation S). As of March 31, 1996, the Company had issued DEM 2.5 million
($1.7 million) of these bonds to non-U.S. persons. As of June 30, 1996 this
had increased to DEM 2.9 million ($1.9 million). The Company is continuing its
efforts to sell the remaining portion of the issue and, although no assurances
can be given, it expects to do so on or before December 31, 1996. Proceeds
from such sales will be available to fund further development and acquisitions
of oil and gas properties.
These bonds are denominated in Deutchemarks (DEM). The Company has
the obligation to make periodic interest payments (January 15 and July 15 of
each year) and to repay the principal when it comes due on July 15, 2000 in
DEM. The funds generated by the Company from operations, which form the
primary source of funds to pay the interest, are denominated in $US. The
source of funds required to repay the principal outstanding on these bonds has
not yet been identified, since the bonds do not mature until July 15, 2000.
The Company is exposed to the risk that, upon repayment, the exchange rate
between DEM and $US may be less favorable than that which existed at the time
that the bonds were issued. This would result in the Company having to repay a
larger number of $US than it received initially. Changes in the $US equivalent
of the DEM bonds arising from changes to the DEM:$US exchange rate are
recognized monthly. At March 31, 1996 the Company had recorded unrealized
exchange rate gains of approximately $12,000 (at June 30, 1996 $62,000).
However, there are no assurances that the Company will continue to realize
gains related to favorable changes in the DEM:$US exchange rates in the future.
Unfavorable changes to the DEM:$US exchange rate will result in the Company
recording unrealized exchange rate losses related to the changes as they occur.
The Company believes it has the opportunity to enter into arrangements to
manage its DEM:$US exchange rate risk. At this time, the Company has not
entered into any such arrangements. (See "Part I, Item 1, Risk Factors,
Indebtedness").
24
<PAGE> 29
OTHER SOURCES: The Company does not have sufficient liquidity or capital to
undertake all potential acquisition prospects or to fund fully the development
of any prospect. Therefore, the Company will continue to be dependent on
raising substantial amounts of additional capital through any one or a
combination of institutional or bank debt financing, equity offerings, debt
offerings and internally generated cash flow, or by forming sharing
arrangements with industry participants. Although the Company has been able to
obtain such financings and to enter into such sharing arrangements in certain
of its projects to date, there can be no assurance that it will continue to be
able to do so. Alternatively, the Company may consider issuing additional
securities in exchange for producing properties. There can be no assurance
that any such financings or sharing arrangement can be obtained. Therefore,
notwithstanding the Company's need for substantial amounts of additional
capital, there can be no assurance that it can be obtained.
Further acquisitions and development activities in addition to those
for which the Company is contractually obligated are discretionary and depend
exclusively on cash availability from outside sources such as bank debt and
sale of securities or properties.
IMPACT OF INFLATION AND CHANGES IN OIL & GAS PRICES
The Company's activities have not been, and in the near term are not
expected to be, materially affected by inflation. However, the Company's
acquisition, development and exploration activities are affected by changes in
prevailing prices for oil and gas, over which the Company has no control.
Although it can give no assurances, the Company believes that if oil
and gas prices remain at or above current levels, its cash flow will be
sufficient to cover monthly operational expenses and contribute towards the
planned development and acquisition activities.
ITEM 3. DESCRIPTION OF PROPERTY
-----------------------
RESERVE INFORMATION
The crude oil and natural gas reserves of the Company have been
estimated as of June 30, 1995, by the independent engineering firm of Harper &
Associates. Estimates of the crude oil and natural gas reserves were
determined based on then current prices and costs. Reserve calculations
involved the estimate of future net revenues to be received therefrom. Such
estimates are not precise and are based on assumptions regarding a variety of
factors, many of which are variable and uncertain.
25
<PAGE> 30
The following table sets forth certain information regarding estimates
of the Company's crude oil, and natural gas reserves as of June 30, 1995, all
of which are located within the United States.
Estimated Proved Reserves
As of June 30, 1995
<TABLE>
<CAPTION>
Proved Proved Total
Developed Undeveloped Proved
--------- ----------- ------
<S> <C> <C> <C>
Crude Oil, Bbls. 1,817,197 4,533,358 6,350,555
Natural Gas, Mcf 312,509 0 312,509
</TABLE>
On April 10, 1996, the Company completed the East Texas Purchase. The
crude oil and natural gas reserves of the Company acquired in this subsequent
purchase have been estimated as of January 1, 1996 by Harper & Associates.
Estimates of the crude oil and natural gas reserves were determined based on
then current prices and costs. Reserve calculations involved the estimate of
future net revenues to be received therefrom. Such estimates are not precise
and are based on assumptions regarding a variety of factors, many of which are
variable and uncertain.
The following table sets forth certain information, as of January 1,
1996, regarding estimates of the Company's crude oil, and natural gas reserves
acquired in the East Texas Purchase, all of which are located within the United
States. The Company is not aware of any material changes in operations, in
production levels, in sales levels, in LOE's, in the number of productive wells
or in the acreage position during the period from January 1, 1996 to the
acquisition date of April 10, 1996 that might affect the reserve estimates
significantly. Average prices received per BOE did, however, improve in this
time period by approximately 6% which would have a positive impact on reserve
estimates as of the acquisition date.
Estimated Proved Reserves
of Subsequent Property Acquisition
As of January 1, 1996
<TABLE>
<CAPTION>
Proved Proved Total
Developed Undeveloped Proved
--------- ----------- ------
<S> <C> <C> <C>
Crude Oil, Bbls. 623,847 163,684 787,531
Natural Gas, Mcf 10,397,486 2,383,899 12,781,385
</TABLE>
There are numerous uncertainties inherent in estimating crude oil and
natural gas reserves and their estimated values, including many factors beyond
the control of the producer. The reserve data set forth herein represent only
estimates. Reserve engineering is a subjective process of estimating
underground accumulations of crude oil and natural gas that cannot be measured
in an exact manner. The accuracy of any reserve estimate is a function of the
quality of available data and of engineering and geological interpretation and
judgment. In addition, estimates of reserves are subject to revision by the
results of drilling, testing and production subsequent to the date of such
estimates. Accordingly, reserve estimates are often different from the
quantities of crude oil and natural gas that are ultimately
26
<PAGE> 31
recovered. The meaningfulness of such estimates is highly dependent upon the
accuracy of the assumptions upon which they are based. (See "Part I, Item 1,
Risk Factors, Reserve Estimates and Future Net Revenue")
In general, the volume of production from crude oil and natural gas
properties declines as reserves are depleted. Except to the extent the Company
acquires properties containing proved reserves or conducts successful
exploration and development activities, or both, the proved reserves of the
Company will decline as reserves are produced. The Company's future crude oil
and natural gas production is therefore highly dependent upon its level of
success in acquiring or finding additional reserves. (See "Part I, Item 1,
Risk Factors, Reserve Replacement")
EXPLORATORY AND DEVELOPMENTAL ACREAGE
The Company's principal crude oil and natural gas properties consist
of non-producing and producing crude oil and natural gas leases, including
reserves of crude oil and natural gas in place. The following table indicates
the Company's interest in developed and undeveloped acreage as of April 10,
1996, the date of the acquisition of the East Texas Purchase.
Developed and Undeveloped Acreage
As of April 10, 1996
<TABLE>
<CAPTION>
Developed Acreage Undeveloped Acreage
-------------------------------- --------------------------------
State Gross Acres Net Acres Gross Acres Net Acres
----- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Texas 22,856 18,024 21,505 11,255
New Mexico 12,600 12,515 -- --
Louisiana 1,351 234 -- --
----- --- -- --
Total 36,807 30,773 21,505 11,255
====== ====== ====== ======
</TABLE>
PRODUCTIVE WELLS
The following table sets forth the total gross and net productive
wells of the Company, expressed separately for crude oil and natural gas, as of
April 10, 1996, the date of the acquisition of the East Texas Purchase.:
27
<PAGE> 32
Productive Wells
As of April 10, 1996
<TABLE>
<CAPTION>
Crude Oil Natural Gas
------------------------- -------------------------
State Gross Wells Net Wells Gross Wells Net Wells
----- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Texas 74 40.6 20.0 15.8
New Mexico 58 57.4 -- --
Louisiana 12 3.1 3.0 0.1
-- --- --- ---
Total 144 101.1 23.0 15.9
=== ===== ==== ====
</TABLE>
CRUDE OIL, AND NATURAL GAS PRODUCTION AND SALES PRICES
The following table presents the net crude oil, net natural gas
liquids and net natural gas production for the Company, the average sales price
per Bbl of crude oil and natural gas liquids and per Mcf of natural gas
produced and the average cost of production per BOE of production sold, for the
year ended June 30, 1995 and the nine months ended March 31, 1996.
<TABLE>
<CAPTION>
Period From August Period from August
9, 1994 (inception) Nine months ended 9, 1994 (inception)
to June 30, 1995 March 31, 1996 to March 31, 1995
---------------- -------------- -----------------
<S> <C> <C> <C>
AVERAGE SALES PRICE:
Gas ($/Mcf) 1.65 2.22 --
Oil ($/Bbl) 16.52 19.18 16.31
BOE ($/BOE) 16.32 18.92 16.31
PRODUCTION DATA:
Gas (MMcf) 4,678 19,228 --
Oil (Mbbls) 25,839 70,847 1,619
MBOE 26,619 74,052 1,619
AVERAGE COST ($/BOE) DATA:
Production and operating costs 10.51 10.91 21.29
Production and severance taxes 1.29 1.38 1.30
Depreciation, depletion and 4.96 5.27 4.88
amortization
</TABLE>
28
<PAGE> 33
DRILLING ACTIVITIES
The following table sets forth the Company's gross and net working
interests in exploratory, development, and service wells drilled during the
indicated periods.
Drilling Activities
<TABLE>
<CAPTION>
Period From August 9, Period from August
1994 (inception) to Nine months ended 9, 1994 (inception)
June 30, 1995 March 31, 1996 to March 31, 1995
------------- ----------------- -----------------
Gross Net Wells Gross Net Wells Gross Net Wells
Wells Wells Wells
<S> <C> <C> <C> <C> <C> <C>
Exploratory
------------
Productive
Crude Oil 0 0 0 0 0 0
Natural Gas 0 0 0 0 0 0
Dry Holes 0 0 0 0 0 0
- - - - - -
Total 0 0 0 0 0 0
- - - - - -
Development
------------
Productive
Crude Oil 1.0 0.2 4.0 2.0 0 0
Natural Gas 0 0 0 0 0 0
Service 0 0 0 0 0 0
Dry Holes 0 0 2.0 1.0 0 0
- - --- --- - -
Total 1.0 0.2 6.0 3.0 0 0
=== === === === = =
</TABLE>
OIL AND GAS PRODUCING PROPERTIES
PARKEY RANCH, ARCHER AND BAYLOR COUNTIES, TEXAS
The Company has a 50% working interest in the Parkey Ranch leases
which include 59 gross oil wells and approximately 22,552 gross acres in Archer
and Baylor Counties, Texas. The main producing zones are the Mississippian
Lime, from 5,000 ft to 5,300 ft. and the Caddo Lime from 4,900 to 5,000 ft.
Additional shallower resources are in the Gunsite and the Strawn zones. The
Mississippian Lime is the deepest and also the most prolific formation in terms
of oil and gas production. Approximately 89% of the gross acreage is
undeveloped. Subject to cash availability, the Company plans to participate in
drilling a minimum of three new wells per year at an average cost to the
Company of $60,000 per well. The Parkey Ranch leases are operated by Troy
Rogers Drilling Company.
29
<PAGE> 34
ANDERSON #1, SHELBY COUNTY TEXAS
The Company has a 12.5% working interest in this single well and in
the surrounding lease of approximately 162 gross acres, located in the Center
Field of Shelby County, Texas. This oil well is producing from a depth of
1,900 feet from the Saratoga Chalk Formation. The Company is assessing the
feasibility of drilling an additional development well on this acreage.
Northland is the operator.
OAKS FIELD, LIMESTONE COUNTY, TEXAS
The Company has a 95% working interest in a single well gas unit which
holds approximately 636 gross acres in Limestone County, Texas. The Oaks Field
was discovered in 1978 and produces gas from the Travis Peak, the Cotton Valley
Sand, the Bossier Sand and the Cotton Valley Lime formations. This well was
completed in October, 1982, to produce gas from depths of about 11,300 feet in
the Lower Cotton Valley Sand formation. Several potential recompletion zones
may exist behind pipe. The Company is assessing the feasibility of drilling
additional development wells on this acreage. Big Run Production Co. is the
operator.
FAIRWAY (JAMES LIME) FIELD, ANDERSON COUNTY TEXAS
The Company has a 95% working interest in a single well which is part
of the Fairway Field located in Anderson, County, Texas. This well produces
oil from the James Lime formation at a depth of approximately 10,000 feet. The
Fairway Field was discovered in 1960 and is currently undergoing pressure
maintenance which should benefit the Company's well. Big Run Production Co. is
the operator.
ISSAC LINDSEY (PETTET) FIELD, ANDERSON COUNTY, TEXAS
The Company has a 95% working interest in a single oil well which is
part of the Issac Lindsey Field located in Anderson, County, Texas. This
field, discovered in 1962, produces oil from the Pettet formation at a depth of
approximately 8,500 feet. Big Run Production Co. is the operator.
CAROL JEAN (JAMES LIME) FIELD, ANDERSON COUNTY, TEXAS
The Company has a 90.3% and 91.2% working interests, respectively, in
two gross oil wells, holding approximately 336 gross acres located in Anderson
County, Texas. These wells are part of the Carol Jean Field which was
discovered in 1981 and produces oil from the James Lime formation at depths of
around 10,000 feet. Big Run Production Co. is the operator.
HALLSVILLE, N.E. FIELD, HARRISON COUNTY, TEXAS
The Company has varying working interests from 47.5% to 95.0% in nine
gross oil wells and one gross gas well holding approximately 9,000 gross acres
located in Harrison County, Texas. These wells are part of the Hallsville
Field which was discovered in 1952 and produces oil and gas from the Pettet
formation at around 6,900 feet. The Company anticipates increased production
through remedial work and putting shut-in wells back on production. Big Run
Production Co. is the operator.
HUGHEY (CRANE) FIELD, HARRISON COUNTY, TEXAS
The Company has a 91.9% working interest in five gross gas wells,
holding approximately 3,281 gross acres located in Harrison County, Texas.
Discovered in 1966, this field produces gas from
30
<PAGE> 35
the Crane zone of the Pettet formation at around 6,900 feet. The Company is
assessing possible increases in production by adding compression to the
gathering system and by putting several shut-in wells back on production. Big
Run Production Co. is the operator.
CARTHAGE, S.E. FIELD, PANOLA COUNTY, TEXAS
The Company has varying working interests from 66.8% to 72.1% in nine
gross gas wells holding approximately 5,760 gross acres located in Panola
County, Texas. The Carthage Field was discovered in the 1930's and produces
gas and oil from several formations. This portion of the field was discovered
in the 1950's and produces oil and gas from the Paluxy Sands, the Glen Rose
Limestone, the Rodessa "Hill" Sand, the Lower Pettet Limestone, the Travis Peak
and the Cotton Valley Sand. The Company anticipates that it will reactivate as
many as five shut-in wells. It may also be feasible to drill additional
development wells on this acreage. Big Run Production Co. is the operator.
CARTHAGE ( HILL, S.W.) FIELD, PANOLA COUNTY, TEXAS
The Company has varying working interests from 41.8% to 88.3% in eight
gross gas wells holding approximately 349 gross acres located in Panola County,
Texas. Discovered in 1971, this portion of the Carthage Field produces oil
from the Hill zone of the Rodessa formation at around 5,000 feet. The Company
is assessing well workover options to increase production. Big Run Production
Co. is the operator.
RAMERS ISLAND SOUTH FIELD, TYLER COUNTY, TEXAS
The Company has an 83.1% working interest in four gross oil wells,
holding approximately 400 gross acres located in Tyler County, Texas. The
Ramers Island South Field was discovered in 1973 and produces oil from the
Wilcox formation at around 8,200 feet. The Company anticipates increased
production through remedial work and putting shut-in wells back on production.
It may also be feasible to drill additional development wells on this acreage.
Big Run Production Co. is the operator.
CAPROCK FIELD, LEA AND CHAVES COUNTIES, NEW MEXICO
The Company has a 100% working interest in two operating units
(Drickey Queen Sand Unit and the Westcap Unit) and a 98.3% working interest in
a third operating unit (Rock Queen Unit). The three units are contiguous with
58 gross oil wells and covering approximately 12,600 gross acres within the
Caprock Oil Field in Chaves and Lea Counties of New Mexico. Oil was originally
discovered on these properties in 1940 and drilling and development, including
water flooding, continued through the 1960's. The primary reservoir is the
Queen Sand formation which is encountered at an average depth of 3,000 feet.
The net proved undeveloped reserves in these New Mexico properties represent
approximately 45% of the total reserves of the Company, on a BOE basis. To
exploit these reserves it will be necessary to implement a coordinated program
of workovers, water flooding and infill drilling. The Company, with the
assistance of independent engineering consultants, is evaluating alternate
development options. However, there can be no assurance that any proposed
development plan will result in the recovery of the undeveloped reserves nor
that the Company can obtain sufficient financing. Northland is the operator.
CECELIA FIELD, ST. MARTIN PARISH, LOUISIANA
31
<PAGE> 36
The Company has varying working interests from 11.1% to 86.3% in five
gross oil wells holding approximately 267 gross acres located in St. Martin
Parish, Louisiana. These wells are part of the Cecelia Field and produce from
the Marg Tex Sands at about 11,500 feet. In 1995, the Company participated in
drilling a successful development well on this acreage. Northland is the
operator.
SOUTH BELL CITY FIELD, CALCASIEU PARISH, LOUISIANA
The Company has a 79.1% working interest in a single oil well holding
approximately 80 gross acres located in Calcasieu Parish, Louisiana. This well
is part of the South Bell City Field and produces from the Camerina Sands at
about 10,800 feet. Northland is the operator.
EAST BELL CITY FIELD, CALCASIEU PARISH, LOUISIANA
The Company has a minor working interest of 2.6% in three gross oil
wells holding approximately 480 gross acres located in Calcasieu Parish,
Louisiana. These wells are part of the East Bell City Field and produce from
the Cam and the CIB Haz Sands at about 10,800 feet. Arbol Resources, Inc.
("Arbol") is the operator.
SHUTESTON FIELD, ST. LANDRY PARISH, LOUISIANA
The Company has minor varying working interests from 3.2% to 40% in
three gross gas wells holding approximately 485 gross acres located in St.
Landry Parish, Louisiana. These wells are part of the Shuteston Field and
produce from the Nodosaria, the Miller and the Boagni Sands at between 9,000 to
11,000 feet. Arbol is the operator.
HOLMWOOD FIELD, CALCASIEU PARISH, LOUISIANA
The Company has a minor working interest of 3.2% in a single oil well
holding approximately 40 gross acres located in Calcasieu Parish, Louisiana.
This well is part of the Holmwood Field and produces from the Marg Tex Sands at
about 9,875 feet. Arbol is the operator.
OFFICES AND FACILITIES
The primary executive offices of the Company are located at 3500 Oak
Lawn Drive, Dallas, Texas and consist of 3,000 square feet of office space
which it holds under a lease to November 30, 1999 at the rate of $10/sq. ft.
per annum. The Company sub-leases 1,200 sq. ft. of this space on a monthly
basis to Janex Oil Co.. These premises are shared by QSRN and Northland and
are rented on a monthly basis for $3,000. In addition, the Company maintains
an office at the offices of CHC at 60 Queen Street, Ottawa, Canada and a field
office on its New Mexico properties. It also stores equipment and materials on
site on various properties in which it has a working interest.
32
<PAGE> 37
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The following table sets forth, as of July 31, 1996 information with
respect to (1) any person known by the Company to own beneficially more than
five percent (5%) of the Company's Common Stock, (2) the shares of Common Stock
beneficially owned by each officer and director of the Company, and (3) the
total of the Company's Common Stock beneficially owned by the Company's
officers and directors as a group. Except as noted in the footnotes, it is
the belief of the Company that each stockholder listed below holds the sole
voting and investment power with regard to the shares owned beneficially by
such stockholder.
<TABLE>
<CAPTION>
Approximate
Name and Number of Shares Percent of
Address of Beneficially Common Stock
Beneficial Owner Owned Outstanding(1)
- ---------------- ------------------ --------------
<S> <C> <C> <C>
OFFICERS AND DIRECTORS
Edward J. Munden(2) 9,600,000 (3) 36%
60 Queen Street
Ottawa, Canada K1P 5Y7
Ronald I. Benn(2) 9,600,000 (3) 36%
60 Queen Street
Ottawa, Canada K1P 5Y7
Bruce I. Benn (2) 9,600,000 (3) 36%
60 Queen Street
Ottawa, Canada K1P 5Y7
Norden Investments Ltd. 9,600,000 (3) 36%
4651 Roswell Rd.
Suite B-105
Atlanta, GA 30342
All officers associated with
Norden as a group [3 persons plus Norden] 9,600,000 36%
Robert P. Lindsay (2) 0 0%
3500 Oak Lawn Drive
Suite 380, L.B. #31
Dallas, Texas 75219
</TABLE>
33
<PAGE> 38
<TABLE>
<S> <C> <C>
V. Ed Butler (2) 0 0
3500 Oak Lawn Drive
Suite 380, L.B. #31
Dallas, Texas 75219
Mitch Green (2) 0 0%
3500 Oak Lawn Drive
Suite 380, L.B. #31
Dallas, Texas 75219
All officers and directors
as a group
(6 persons) 9,600,000 36%
FIVE PERCENT STOCKHOLDERS
Forseti Investments Ltd. 9,600,000 36%
45 O'Connor St.
Suite 450
Ottawa, Canada
K1P 1A4
</TABLE>
(1) Based upon 27.02 million shares issued and outstanding as July 31,
1996.
(2) Executive Officer and/or Director. Includes Mitch C. Green who
resigned as Vice President of the Company effective July 10,1996.
(3) Edward Munden, Ronald Benn and Bruce Benn have beneficial interests in
Norden. Accordingly, the 9,600,000 Shares owned of record by Norden
have been included as beneficially owned by each of the foregoing
individuals, and by all Officers and Directors as a group.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
------------------------------------------------------------
The Company's bylaws provide that Directors are to be elected by
simple majority vote and are to serve until the annual meeting next following
such election or a successor has been duly elected and qualified. Directors
may be removed with or without cause by a majority vote of the stockholders and
may be removed for cause by the Board. Vacancies on the board may be filled by
the remaining directors or by the stockholders. The executive officers of the
Company are elected by and serve at the discretion of the Board of Directors.
34
<PAGE> 39
The following table sets forth the name, age and position of each
director and executive officer of the Company as of July 31, 1996.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Edward J. Munden 45 President & Chief Executive Officer and Director
Robert P. Lindsay 53 Chief Operating Officer and Director
Ronald I. Benn* 41 Chief Financial Officer
Bruce I. Benn* 42 Executive Vice President, Secretary and Director
V. Ed Butler 40 Vice President
</TABLE>
* Ronald I. Benn and Bruce I. Benn are brothers.
EDWARD J. MUNDEN has been the President and a Director of the Company
since March 6, 1995. He was appointed as Chief Executive Officer in May, 1996.
Since 1989, he has been a director and co-founder of Capital House A Finance
and Investment Company ("CHC"), which is a Canadian venture capital firm
located in Ottawa. Since 1994, he has been a director of Capital House
International Ltd. ("CHIL"). CHIL was incorporated in Barbados in 1994. CHIL
became the original stockholder of QSRN and, for a time following the
acquisition, the majority stockholder of the Company). Mr. Munden has held
positions in the mining industry with Eldorado Nuclear Limited (1980 to 1989),
the manufacturing industry with Proctor and Gamble Company of Canada (1978 to
1980) and the oil and gas industry with Union Oil of Canada Limited (1974 to
1976). Mr. Munden is a professional geological engineer and holds a Bachelor
of Science in Engineering (1974) and a Masters of Business Administration
(1978) from Queens University in Kingston, Canada.
ROBERT P. LINDSAY joined the Company in 1994 as a part of the
Company's acquisition and expansion strategy and became Executive Vice-
President in September, 1995 and Chief Operating Officer in May, 1996. After
graduating from the University of Texas in 1965 with a B.A. in Accounting, Mr.
Lindsay joined Helmrich & Payne, an oil and gas drilling and exploration
company headquartered in Tulsa Oklahoma. He held increasingly senior positions
with that company until 1973 when he joined the family-owned Lin-mour Drilling
Co. as its Chief Executive Officer. With over 300 employees, Lin-mour was one
of the largest and oldest drilling companies in Wichita Falls.
V. ED BUTLER joined the Company in June 1996 as Vice-President. He
has over 18 years experience in oil field engineering and operations in Texas
including two years as Executive Vice-President of Echo Production Inc. and 10
years as operations manager with Triad Energy Corporation. Prior to joining
Triad in 1983, Mr. Butler held engineering positions with Blocker Exploration
Company and Texas Oil and Gas Corporation. Mr. Butler holds an M.B.A. (1988)
from University of Texas and a Bachelor of Science in Petroleum Engineering
(1978) from Texas A&M University.
RONALD I. BENN was appointed Chief Financial Officer of QSRN in 1994
and assumed the same position with the Company when it acquired QSRN in March,
1995. Since 1989, he has been a senior executive, director and co-founder of
CHC. In 1994, Mr. Benn became a director of CHIL. Mr. Benn is a Chartered
Accountant. From 1980 to 1985 he held positions in the auditing and insolvency
divisions of the accounting firm Clarkson Gordon Chartered Accountants (now
known as Ernst & Young Chartered Accountants). He also has experience in the
commercial banking industry and as a financial consultant to many start-up
companies. Mr. Benn holds a Bachelor of Science degree (1977)
35
<PAGE> 40
from Carleton University in Ottawa, Canada and a Bachelor of Commerce (1980)
from the University of Windsor, Canada.
BRUCE I. BENN has been an Executive Vice President, and Director of
the Company since March 1995. In 1989 he, together with his brother Ronald and
Edward Munden, founded CHC. In 1994, he co-founded CHIL and has held the
position of director since that time.. Mr. Benn is a specialist in merchant
banking and project finance. From 1985 to 1993, he was Vice President and
Director of Corporation House Ltd., where he acted as a financial consultant to
manufacturing, construction and resource development firms around the world.
He is an attorney and holds a Masters of Law degree (LL.M 1979) from the
University of London, England, a Baccalaureate of Laws (LL.B, 1978) from the
University of Ottawa, Canada and a Bachelor of Arts in Economics (1975) from
Carleton University in Ottawa, Canada.
ITEM 6. EXECUTIVE COMPENSATION
Commencing with the acquisition of QSRN in March 1995, the Company
entered into a management contract with CHC, a Canadian venture capital company
which is associated with CHIL, the then principal shareholder of the Company.
The agreement currently provides for a monthly payment of $40,000 in return for
the executive services of Bruce Benn, Edward Munden and Ronald Benn who are
shareholders, directors and executive officers of CHC. CHC pays a salary to
Bruce Benn, Edward Munden and Ronald Benn from the revenues generated by the
management agreement with the Company as well as others it has with other
unrelated organizations.
Mr. Lindsay is employed by the Company at a base salary of $120,000
plus customary benefits. Mr. Lindsay is entitled to participate in the Stock
Option Incentive Plan and may be entitled to performance bonuses as determined
by the Board of Directors of the Company on a periodic basis.
Mr. Butler is employed by the Company at a base salary of $100,000
plus customary benefits. Mr. Butler is entitled to participate in the Stock
Option Incentive Plan and may be entitled to performance bonuses as determined
by the Board of Directors of the Company on a periodic basis.
The following table shows all the cash compensation paid or to be paid
by the Company, as well as certain other non-cash compensation paid or accrued,
during the fiscal years indicated, to the Chief Executive Officer ("CEO") for
such period in all capacities in which he served. During the fiscal year ended
June 30, 1996, no Executive Officer received total annual salary and bonus in
excess of $100,000, except for Robert Lindsay. Total compensation paid to all
five executive officers as a group during the fiscal year ended June 30, 1996
was $387,000. There have been no awards of performance bonuses or of options
under the Incentive Stock Option Plan to any of the executive officers of the
Company.
36
<PAGE> 41
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
ANNUAL COMPENSATION AWARDS PAYOUTS
A B C D E F G H I
NAME AND YEAR SALARY BONUS BONUS OTHER RESTRICTED LTIP OTHER
PRINCIPAL ($) * ($) ANNUAL AWARD STOCK PAYOUTS COMPENSATION
POSITION ($) COMPEN- ($) OPTIONS ($) ($)
SATION ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Munden, E.J. 1995 $50,000 0 0 0 0 0 0 0
1996 65,000 0 0 0 0 0 0 0
0 0 0 0 0 0 0
Lindsay, Robert 1995 48,000 0 0 0 0 0 0 0
1996 108,000 0 0 0 0 0 0 0
0 0 0 0 0 0 0
</TABLE>
(Mr. Lindsay became an employee of the Company on July 1, 1995. All
compensation paid to Mr. Lindsay prior to that time was under a contract
arrangement).
Directors are not compensated for acting in their capacity as
Directors. Directors are reimbursed for their accountable expenses incurred in
attending meetings and conducting their duties.
In 1996, the Company adopted a Incentive Stock Option Plan (the
"Plan") which is intended to advance the interests of the Company by helping it
to attract and retain competent personnel and other employees by providing
incentives to such personnel to devote the utmost skill and effort to the
advancement and betterment of the Company by permitting them to participate in
the ownership of the Company and the enhancement of its value which they help
to produce.
The Plan is administered by a committee (the "Committee"), appointed
from time to time by the Board of Directors. Under the Plan, the Committee may
grant stock options, which may be incentive stock options ("ISO's") as defined
in the Internal Revenue Code (the "Code"), stock awards, or options which do
not qualify as ISO's to directors, officers and employees of the Company who,
in the opinion of the Committee, are expected to contribute materially to the
Company's future success. A maximum of 1,500,000 shares, subject to adjustment
for certain events of dilution, are available for grant under the Plan,
provided however, that the aggregate fair market value of shares of Common
Stock with respect to which an ISO is exercisable for the first time in any
calendar year may not exceed $100,000 per person.
The exercise price of the options granted under the Plan may not be
less than 100% of the fair market value of the common stock on the date the
option is granted in the case of ISO's (110% of the fair market value in the
case of 10% stockholders). All ISO's granted under the Plan shall expire not
later than ten years from the date of grant (5 years in the case of ISO's
granted to 10% stockholders), and all nonqualified options shall expire at such
date as the Committee shall determine. The option price may be paid in cash
or, at the discretion of the Committee, by delivery of common stock or options
already owned by the Optionee, (valued at the date of exercise), or a
combination thereof.
The aggregate number of shares of common stock with respect to which
options may be granted under the Plan, the number of shares covered by each
outstanding option, and the purchase price per share thereof in each such
option, shall be adjusted for any increase or decrease in the number of shares
of issued Common Stock of the Company resulting from a recapitalization,
reorganization, merger, consolidation, exchange of shares, stock dividend,
stock split, reverse stock split or other subdivision or consolidation of
shares or other increase or decrease in such shares effected without receipt of
consideration by the Company and approved by the Board of Directors of
37
<PAGE> 42
the Company, (an "Event of Dilution"), in amounts to prevent substantial
dilution or enlargement of rights granted to or available for eligible
employees. In the case of ISO's the ratio of the option price to the fair
market value of the stock subject to the option immediately after the change
must not be more favorable to the optionee on a share by share comparison than
the ratio of the old option price was to the fair market value of the stock
subject to the option immediately before such transaction. All such
adjustments shall be made by the Committee, whose good faith determination
shall be binding absent manifest error.
The Board of Directors of the Company may from time to time amend,
alter, suspend, or discontinue the Plan with respect to any shares of Common
Stock as to which options have not been granted. However, no such alteration
or amendment (unless approved by the stockholders) shall (a) increase (except
in the case of an Event of Dilution) the maximum number of shares for which
options may be granted under the Plan either in the aggregate or to any
eligible employee; (b) reduce (except in the case of an Event of Dilution) the
minimum option prices which may be established under the Plan; (c) extend the
period or periods during which the options may be granted or exercised; (d)
materially modify the requirements as to eligibility for participation under
the Plan; (e) change the provisions of the preceding paragraph with respect to
Events of Dilution; or (f) materially increase the benefits accruing to
eligible employees under the Plan.
An employee to whom an option is granted will not realize income at
the time of the grant. Upon exercise of the option, the excess of fair market
value of the stock at the date of exercise over the exercise price will be
taxable as ordinary income unless the option is qualified as an ISO in which
case there is no taxable income at the time of the exercise. The tax basis to
the optionee for the stock acquired is the exercise price plus the amount
recognized as income. The Company will be entitled to a deduction equal to the
amount of ordinary income realized by the optionee in the Company's tax year
which includes the end of the optionee's tax year in which he realizes the
ordinary income. When shares acquired pursuant to the exercise of an option
are disposed of, the holder will realize additional ordinary income or loss
equal to the difference between the sale proceeds and his tax basis in the
stock.
If an employee to whom an option is granted exercises that option by
payment of the exercise price in whole or in part with previously owned Common
Stock of the Company, the optionee will not realize income with respect to the
number of shares delivered by him. The optionee's tax basis for the delivered
shares will carry over to the optioned shares received. With regard to the
number of option shares received which exceeds the number of shares delivered
in payment, the optionee will realize ordinary income at the time of the
exercise; the optionee's tax basis in the additional optioned shares will equal
the exercises price plus the amount of ordinary income realized by the
optionee.
Under the terms of the Plan the Committee may grant stock awards which
may, at the discretion of the Committee, be subject to forfeiture under certain
conditions. Recipients of stock awards will realize ordinary income at the
time of the lapse of the forfeiture conditions equal to the fair market value
of the stock less any amount paid to the Company in connection with the
issuance of the stock (the Committee may require the payment of the par value
of the stock at the time of the grant). The Company will realize a
corresponding compensation deduction. The holder will have a tax basis equal
to any amount paid to the Company plus the amount of any ordinary income
recognized by the holder. Upon the sale of the stock, the holder will have a
gain or loss equal to the sale proceeds minus his tax basis in the stock.
38
<PAGE> 43
The Company has issued no options or stock awards under the Plan.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
In March 1995, the Company entered into a management contract with CHC
which was associated with CHIL. The agreement provides for a monthly payment
in return for the executive services of Bruce Benn, Edward Munden and Ronald
Benn who are shareholders, directors and executive officers of CHC. Edward
Munden and Bruce Benn are directors and executive officers of the Company.
Ronald Benn is an executive officer of the Company. The monthly payment under
the management contract is currently $40,000.
The Company owns 100% of the issued common stock of QSRN which in turn
owns 100% of the issued common stock of Northland. The Company holds all its
interests in oil and gas properties through QSRN. Northland was incorporated
to assume operatorship opportunities as they become available in oil and gas
properties in which QSRN has an interest.
In October 1995, CHIL transferred all of its 19,200,000 shares of
common stock in equal portions to CHIL's two stockholders - Norden and Forseti.
Edward Munden, Ronald Benn and Bruce Benn, have beneficial interests in Norden.
(See " Part I, Item 1, Risk Factors, Control by Two Stockholders and
Management")
ITEM 8. DESCRIPTION OF SECURITIES.
-------------------------
COMMON STOCK
The Company is authorized to issue 40,000,000 shares of Common Stock,
$.0015 par value per share, of which 27.02 million shares were issued and
outstanding as of July 31, 1996. Each outstanding share of Common Stock is
entitled to one vote, either in person or by proxy, on all matters that may be
voted upon by the owners thereof at meetings of the stockholders.
The holders of Common Stock (i) have equal ratable rights to dividends
from funds legally available therefor, when, and if declared by the Board of
Directors of the Company; (ii) are entitled to share ratably in all of the
assets of the Company available for distribution to holders of Common Stock
upon liquidation, dissolution or winding up of the affairs of the Company;
(iii) do not have preemptive, subscription or conversion rights, or redemption
or sinking fund provisions applicable thereto; and (iv) are entitled to one
non-cumulative vote per share on all matters on which stockholders may vote at
all meetings of stockholders.
TRANSFER AGENT
The Transfer Agent for the Company's Common Stock is Continental Stock
Transfer & Trust Company, 2 Broadway, New York, NY 10004.
39
<PAGE> 44
PART II
-------
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON REGISTRANT'S COMMON EQUITY AND OTHER
---------------------------------------------------------------------
STOCKHOLDER MATTERS
-------------------
MARKETING INFORMATION
The principal U.S. market in which the Company's Common Stock ($.0015
par value, all of which are one class) has been traded is the Over the Counter
market. The Company's common stock is quoted on the NASDAQ Electronic Bulletin
Board (Symbol: "QSRI").
The following table sets forth the range of high and low closing bid
prices for the Company's Common Stock on a quarterly basis since September 30,
1995 (first available quotation) as reported by the National Quotation Bureau,
Inc. (which reflect inter-dealer prices, without retail mark-up, mark-down, or
commission and may not necessarily represent actual transactions). As of
August 6, 1996 the closing bid for the Company's common stock was $2.125 per
share. The foregoing and following information should not be taken as an
indication of the existence of an established public trading market for the
Company's Common Stock.
<TABLE>
<CAPTION>
Bid Prices
Quarter Ended High Low
<S> <C> <C>
September 30, 1995 $2.000 $2.000
December 31, 1995 $2.000 $1.500
March 31, 1996 $2.125 $2.000
June 30, 1996 $2.250 $2.000
</TABLE>
40
<PAGE> 45
HOLDERS
The approximate number of record holders of the Company's Common Stock
as of August 6, 1996 was 1,185, inclusive of those brokerage firms and/or
clearing houses holding the Company's common shares for their clientele (with
each such brokerage house and/or clearing house being considered as one
holder). The aggregate number of shares of Common Stock outstanding as of July
31, 1996 was 27.02 million shares, of which 6.1 million are free trading
shares.
DIVIDENDS
Current management believes that the Company has not declared any cash
dividends on its Common Stock since its inception in 1989. The Company has not
declared any cash dividends on its Common Stock since current management
assumed their positions in March, 1995 and has no present intention of paying
any cash dividends on its Common Stock in the foreseeable future.
ITEM 2. LEGAL PROCEEDINGS.
-----------------
The Company is not presently a party to any material litigation not in
the regular course of its business, nor to the Company's knowledge is such
litigation threatened.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
---------------------------------------------
Except as set forth below, there have been no changes in or
disagreements with accountants with respect to accounting and/or financial
disclosure.
In August, 1995, the Company terminated Stewart W. Robinson. C.P.A.
("SWR") as its certifying accountant and retained KPMG Peat Marwick LLP
("KPMG") as its certifying accountant.
In connection with the audits of the financial statements of the
Company for the fiscal years ended April 30, 1994, and 1993 and the eight month
period ended December 31, 1994, and during the period commencing January 1,
1995 through August 30, 1995 (the fiscal year was changed to June 30 by
resolution of the Board dated June 15, 1995) there were no disagreements with
SWR on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements, if not
resolved to the satisfaction of SWR, would have caused him to make reference to
the subject matter of the disagreement in his report.
Except for an explanatory paragraph concerning the Company's ability
to continue as a going concern, SWR's reports on the Company's financial
statements for the fiscal years ended April 30, 1994 and 1993 and the eight
months ended December 31, 1994 did not contain an adverse opinion or disclaimer
of opinion, nor were they qualified as to uncertainty, audit scope or acconting
principles.
The decision to engage KPMG as set forth above and to dismiss SWR was
made by the new Board of Directors of the Company subsequent to the Company's
acquisition of QSRN.
41
<PAGE> 46
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES.
---------------------------------------
On May 26, 1995 the Company split all issued and outstanding shares
two-for-one. All stock transactions taking place on or before this date have
been restated to reflect this split.
On March 6, 1995, the Company acquired all of the outstanding common
stock of QSRN in exchange for 19,200,000 common shares of the Company.
On April 4, 1995, the Company issued 492,000 shares of common stock to
certain parties who had rendered services to the Company prior to or in
connection with the March 6, 1995 acquisition of QSRN and 550,000 shares to a
third party investor for $75,000.
On May 11, 1995, the Company increased its authorized stock from 20
million to 40 million common shares.
On May 12, 1995, the Company issued 3,100,000 shares of common stock
to a third party investor for $527,000.
On May 30, 1995, the Company issued 100,000 shares of common stock to
a third party investor for $17,000.
On March 31, 1996, the Company issued 350,000 shares of common stock
to Ocean Marketing in consideration of services rendered during the period
March 6, 1995 to March 31, 1996.
On April 10, 1996, the Company issued 470,000 shares of common stock
to Mr. Eli Rebich as partial consideration for certain oil and gas interests
which QSRN acquired from Mr. Eli Rebich and a company controlled by him.
On June 20, 1996, the Company issued 400,000 shares of common stock to
a third party investor for $1,000,000.
Between July 1995 and June 30, 1996, the Company issued an aggregate
of Deutschemarks ("DEM") 2.9 million (approximately $1.9 million principal
amount of 12% unsecured Notes).
(1) The sales of the securities were exempt from registration by reason of
the exemption provided by Section 4(2) of the Act.
(2) The sales of the securities were exempt from registration by reason of
the exemption provided by Section 3(b) of the Act.
(3) The sales of the securities were exempt from registration by reason of
the exemption provided by Regulation S promulgated under the Act.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
-----------------------------------------
42
<PAGE> 47
The General Corporation Law of the State of Delaware contains
provisions entitling directors and officers of the Company to indemnification
by the Company for liability arising out of certain actions. Additionally, the
Company's Certificate of Incorporation provides for indemnification of
Directors and Officers to the fullest extent permitted by the Delaware General
Corporation Law. Insofar as indemnification for liabilities arising under the
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
PART F/S
--------
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS OF QUEEN SAND RESOURCES, INC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . F1
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of March 31, 1996 . . . . . . . . . . . F2
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the nine
months ended March 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F3
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the period
from August 9, 1994 (inception) to June 30, 1995 . . . . . . . . . . . . . . . . . . . . . . . . F4
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements . . . . . . . . . . . . . . F5
</TABLE>
43
<PAGE> 48
<TABLE>
<CAPTION>
HISTORICAL FINANCIAL STATEMENTS
<S> <C>
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES:
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F6
Consolidated Balance Sheet as of June 30, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . F7
Consolidated Statement of Operations for the period from August 9, 1994 (inception)
to June 30, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F8
Consolidated Statement of Stockholders' Equity for the period from August 9, 1994
(inception) to June 30, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F9
Consolidated Statement of Cash Flows for the period from August 9, 1994 (inception)
to June 30, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F10
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . F11
Unaudited Condensed Consolidated Balance Sheet as of March 31, 1996 . . . . . . . . . . . . . . . F22
Unaudited Condensed Consolidated Statements of Operations for the nine months
ended March 31, 1996, for the period from August 9, 1994 (inception) to
March 31, 1995, for the three months ended March 31, 1996, and for the
three months ended March 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F23
Unaudited Condensed Consolidated Statements of Cash Flows for the nine months
ended March 31, 1996 and for the period from August 9, 1994 (inception) to
March 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F24
Notes to Unaudited Interim Period Condensed Consolidated Financial Statements . . . . . . . . . . F25
ACQUIRED OIL AND GAS PROPERTIES FROM SOUTHERN EXPLORATION COMPANY OF TYLER, TEXAS:
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F27
Statements of Revenues and Direct Operating Expenses of Oil and Gas Properties
Acquired for the nine months ended March 31, 1996 and for the year ended June 30,
1995 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F28
Notes to Statements of Revenues and Direct Operating Expenses of Oil and Gas
Properties Acquired for the nine months ended March 31, 1996 and the year ended
June 30, 1995 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F31
ACQUIRED OIL AND GAS PROPERTIES FROM VARIOUS PREDECESSOR OWNERS:
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F33
Combined Statements of Revenues and Direct Operating Expenses of Oil and Gas
Properties Acquired for the period from July 1, 1994 to acquisition dates and for the year
ended June 30, 1994 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F34
Notes to Combined Statements of Revenues and Direct Operating Expenses of Oil and
Gas Properties Acquired for the period from July 1, 1994 to the acquisition dates and for
the year ended June 30, 1994 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . F35
</TABLE>
44
<PAGE> 49
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Unaudited Pro Forma Condensed Consolidated Financial Statements
The following unaudited pro forma condensed consolidated financial statements
present pro forma financial information of the Company with respect to the
acquisition of certain East Texas oil and gas properties ("East Texas
Purchase") on April 10, 1996 and certain acquisitions of oil and gas properties
during late 1994 and early 1995 ("Fiscal 1995 Purchases").
The unaudited pro forma condensed consolidated balance sheet as of March 31,
1996 gives effect to the April 10, 1996 East Texas Purchase as if such
acquisition occurred on March 31, 1996. The unaudited pro forma condensed
consolidated statements of operations for the nine months ended March 31, 1996
and for the period from August 9, 1994 (inception) to June 30, 1995 gives
effect to the East Texas Purchase and the Fiscal 1995 Purchases, as if such
events occurred on August 9, 1994.
The pro forma condensed consolidated financial statements and accompanying
notes should be read in conjunction with the Company's consolidated financial
statements (including notes thereto) appearing elsewhere in the Registration
Statement. The pro forma financial statements do not purport to represent what
the Company's results of operations or financial position actually would have
been had such events occurred on the dates specified, or to project the
Company's results of operations or financial position for any future period or
date. The pro forma adjustments are based upon available information and
certain adjustments that management believes are reasonable. In the opinion of
management, all adjustments have been made that are necessary to present fairly
the pro forma condensed consolidated financial statements.
F1
<PAGE> 50
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Unaudited Pro Forma Condensed Consolidated Balance Sheet
March 31, 1996
Assets
------
<TABLE>
<CAPTION>
Company East Texas Company
Assets Historical Purchase Pro Forma
------ ---------- -------- ---------
<S> <C> <C> <C>
Current assets:
Cash $ 986,477 (785,000)(B) 201,477
Other current assets 254,481 45,441 (A) 299,922
---------- ---------- ----------
Total current assets 1,240,958 (739,559) 501,399
Net property and equipment 4,424,755 5,289,159 (A) 9,713,914
---------- ---------- ----------
$5,665,713 4,549,600 10,215,313
========== ========== ==========
Liabilities and Stockholders' Equity
------------------------------------
Other current liabilities $ 512,910 $ 90,000 (A) 602,910
Revolving credit facility 857,011 3,625,000 (B) 4,482,011
Notes payable - 500,000 (A) 500,000
Current installments of long-term
obligations 54,770 - 54,770
---------- ---------- ----------
Total current liabilities 1,424,691 4,215,000 5,639,691
Long-term obligations, net of current
portion 1,930,694 250,000 (A) 2,180,694
---------- ---------- ----------
Total liabilities 3,355,385 4,465,000 7,820,385
Stockholders' equity 2,310,328 84,600 (A) 2,394,928
---------- ---------- ----------
$5,665,713 4,549,600 10,215,313
========== ========== ==========
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
statements.
F2
<PAGE> 51
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Unaudited Pro Forma Condensed Consolidated Statement of Operations
For the nine months ended March 31, 1996
<TABLE>
<CAPTION>
Company East Texas Company
Historical Purchase Pro Forma
---------- -------- ---------
<S> <C> <C> <C>
Revenues:
Oil and gas sales $ 1,401,102 1,017,704(C) 2,418,806
Expenses:
Oil and gas production expenses 880,010 402,015(C) 1,282,025
Depreciation, depletion and amortization 390,000 226,725(D) 616,725
General and administrative 946,625 - 946,625
Interest expense 140,717 400,163(E) 540,880
---------- ---------- ----------
2,357,352 1,028,903 3,386,255
--------- --------- ---------
Net loss $ (956,250) (11,199) (967,449)
========= ========== =========
Loss per common share $(.04) (.04)
=== ===
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
statements.
F3
<PAGE> 52
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Unaudited Pro Forma Condensed Consolidated Statement of Operations
For the period from August 9, 1994 (inception) to June 30, 1995
<TABLE>
<CAPTION>
Company Fiscal 1995 East Texas Company Pro
Historical Purchases Purchase Forma
---------- --------- -------- -----
<S> <C> <C> <C> <C>
Revenues:
Oil and gas sales $ 434,513 958,646(F) 1,157,721(C) 2,550,880
Interest income 10,041 - - 10,041
------------ --------- --------- ---------
444,554 958,646 1,157,721 2,560,921
------------ --------- --------- ---------
Expenses:
Oil and gas production expenses 279,825 981,197(F) 434,316(C) 1,695,338
Depreciation, depletion and
amortization 132,000 239,594(G) 307,427(D) 679,021
General and administration 293,658 - - 293,658
Interest expense 25,144 77,053(H) 465,025(E) 567,222
Reverse acquisition expenses 401,120 - - 401,120
------------ --------- --------- ---------
1,131,747 1,297,844 1,206,768 3,636,359
------------ --------- --------- ---------
Net loss $ (687,193) (339,198) (49,047) (1,075,438)
============ ========= ========= =========
Loss per common share $(.06) (.08)
=== ===
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
statements.
F4
<PAGE> 53
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
(A) To record the fair value of oil and gas properties acquired in
the East Texas Purchase. Consideration paid consisted of
$4,250,000 in cash, 470,000 unrestricted shares of the
Company's common stock (valued at $.18 per share with a total
value of $84,600) and $750,000 in notes payable to Predecessor
Owners ("Predecessor Notes"), of which $250,000 is classified
as a long- term obligation. The Company also incurred
$250,000 ($160,000 paid at closing) in broker fees and
transactions costs related to the acquisition. The
consideration paid was subsequently reduced $45,441 for
certain post closing adjustments for an aggregate purchase
price of $5,289,159.
(B) Reflects $3,625,000 borrowings under a Revolving Credit Note
with a bank (subject to bank renewal on December 1, 1996) and
utilization of certain amounts of cash on hand to fund the
East Texas Purchase.
(C) Reflects the historical revenues and expenses of the oil and
gas properties acquired in the East Texas Purchase.
(D) Reflects the incremental depletion expense of the oil and gas
properties acquired in the East Texas Purchase.
(E) Incremental interest expense based on prime plus 1.5%
(approximately 10% for the nine months ended March 31, 1996
and approximately 10% for the period from August 9, 1994
(inception) to June 30, 1995) on the Revolving Credit Note,
Predecessor Notes (9%) and privately placed Deutschemark (DEM)
12% notes due on July 15, 2000 . Proceeds from the DEM notes
sold in early 1996 were used to partially fund the East Texas
purchase (see note B). The DEM Notes may be redeemed at the
option of the Company, in whole or in part, at any time prior
to maturity date on or after December 15, 1997 at 101% of the
principal amount, plus accrued interest to the redemption
date.
(F) Reflects the historical revenues and expenses of the oil and
gas properties acquired during the period from August 9, 1994
(inception) to the respective closing dates of the Fiscal 1995
Purchases.
(G) Reflects the incremental depletion expense of the oil and gas
properties acquired during the period from August 9, 1994
(inception) to the respective closing dates of the Fiscal 1995
Purchases.
(H) Reflects incremental interest expense related to capital lease
and debt incurred in connection with Fiscal 1995 Purchases.
F5
<PAGE> 54
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors
Queen Sand Resources, Inc.:
We have audited the accompanying consolidated balance sheet of Queen Sand
Resources, Inc. and subsidiaries as of June 30, 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the period from August 9, 1994 (inception) to June 30, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Queen Sand
Resources, Inc. and subsidiaries as of June 30, 1995, and the results of their
operations and their cash flows for the period from August 9, 1994 (inception)
to June 30, 1995, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
December 22, 1995, except as to the third
paragraph of note 5, which is as of
January 30, 1996
F6
<PAGE> 55
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
June 30, 1995
Assets
------
<TABLE>
<S> <C>
Current assets:
Cash $ 99,447
Accounts receivable - oil and gas sales 170,593
Accounts receivable from stockholders (note 4) 524,000
Other 12,884
---------
Total current assets 806,924
---------
Property and equipment, at cost (notes 3 and 5):
Oil and gas properties, based on full cost accounting method 3,923,855
Other equipment 251,097
---------
4,174,952
Less accumulated depreciation, depletion and amortization (132,000)
---------
Net property and equipment 4,042,952
---------
$ 4,849,876
=========
</TABLE>
Liabilities and Stockholders' Equity
------------------------------------
<TABLE>
<S> <C>
Current liabilities:
Accounts payable - trade $ 152,471
Accounts payable - related party (note 7) 66,447
Accrued liabilities 232,902
Revolving credit facility (note 5) 262,610
Current portion of capitalized lease obligation (note 6) 56,276
---------
Total current liabilities 770,706
Long-term obligations, net of current portion (notes 5 and 6) 875,592
---------
Total liabilities 1,646,298
Stockholders' equity:
Common stock, $.0015 par value, authorized 40,000,000 shares;
issued and outstanding 25,800,000 shares 38,700
Additional paid-in capital 3,852,071
Accumulated deficit (687,193)
---------
Total stockholders' equity 3,203,578
Commitments (note 9)
---------
$ 4,849,876
=========
</TABLE>
See accompanying notes to consolidated financial statements.
F7
<PAGE> 56
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Consolidated Statement of Operations
For the period from August 9, 1994 (inception) to June 30, 1995
<TABLE>
<S> <C>
Revenues:
Oil and gas sales $ 434,513
Interest income 10,041
---------
444,554
---------
Expenses:
Oil and gas production expenses 279,825
Depreciation, depletion and amortization 132,000
General and administrative (note 7) 293,658
Interest expense 25,144
Reverse acquisition expenses (note 2) 401,120
---------
1,131,747
---------
Net loss $ (687,193)
=========
Loss per common share $(.06)
===
</TABLE>
See accompanying notes to consolidated financial statements.
F8
<PAGE> 57
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
For the period from August 9, 1994 (inception) to June 30, 1995
<TABLE>
<CAPTION>
Common Stock Additional Total
------------ paid-in Accumulated stockholders'
Shares Amount capital deficit equity
------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C>
Issuances of common stock
to CHIL 19,200,000 $ 28,801 3,234,330 - 3,263,131
Reverse acquisition (note 2) 3,400,000 5,099 78,541 - 83,640
Issuances of common stock
(note 4) 3,200,000 4,800 539,200 - 544,000
Net loss -- -- -- (687,193) (687,193)
---------- -------- --------- --------- ---------
Balance at June 30, 1995 25,800,000 $ 38,700 3,852,071 (687,193) 3,203,578
========== ======== ========= ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F9
<PAGE> 58
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
For the period from August 9, 1994 (inception) to June 30, 1995
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss $ (687,193)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation, depletion and amortization 132,000
Reverse acquisition expenses - issuance of common stock
for services rendered 83,640
Changes in operating assets and liabilities:
Accounts receivable (170,593)
Other assets (12,884)
Accounts payable 118,918
Accrued liabilities 232,902
---------
Net cash used in operating activities (303,210)
---------
Cash flows from investing activities - additions to
property and equipment (3,129,952)
---------
Cash flows from financing activities:
Proceeds from revolving credit facility 262,610
Proceeds from the sale of common stock 3,283,131
Payments made on capital lease obligation (13,132)
---------
Net cash provided by financing activities 3,532,609
---------
Net increase in cash 99,447
Cash at beginning of period -
---------
Cash at end of period $ 99,447
=========
</TABLE>
See accompanying notes to consolidated financial statements.
F10
<PAGE> 59
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1995
(1) Summary of Significant Accounting Policies
------------------------------------------
(a) General
-------
Queen Sand Resources, Inc. ("QSRI" or the "Company") is
primarily engaged in, and its only industry segment, the
acquisition of, and the exploration for, development,
production and sale of crude oil and natural gas. The
Company's business activities are carried out primarily in
Texas, New Mexico and Louisiana.
The Company was formed on August 9, 1994 as a wholly-owned
subsidiary of Capital House International Limited ("CHIL"), a
Barbados corporation. After the March 1995 reverse
acquisition (discussed in note 2) and additional shares issued
in May 1995, CHIL owned 74.4% of the Company's common stock at
June 30, 1995. In October 1995 CHIL conveyed 9,600,000 shares
each to Norden Investments, Ltd. ("Norden"), of which certain
officers of the Company have beneficial interests, and Forseti
Investments Ltd. ("Forseti"), both of which are Barbados
corporations. As a result of this transaction, CHIL no longer
owns any shares of the Company. Norden and Forseti each own
50% of CHIL.
(b) Liquidity
---------
Substantially all the Company's proved oil and gas reserves
are undeveloped which are expected to require approximately
$24,900,000 (unaudited) of development costs over the next 10
years. Accordingly, the Company will need to obtain
substantial amounts of funds in the future to finance
development of these undeveloped reserves. The Company plans
to fund these obligations using cash provided from operations
and future equity and debt financings. However, there is no
assurance funds will be available when needed. Failure to
fund these capital expenditures would substantially diminish
the value of the Company's oil and gas reserves (see note 10).
(c) Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries.
All significant intercompany balances and transactions have
been eliminated in consolidation.
F11
<PAGE> 60
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(d) Property and Equipment
----------------------
The Company follows the full cost method of accounting for its
oil and gas activities under which all costs, including direct
general and administrative expenses associated with property
acquisition, exploration and development activities, are
capitalized. Capitalized general and administrative expenses
directly associated with acquisitions, exploration and
development of oil and gas properties were $294,385 for the
period from August 9, 1994 (inception) to June 30, 1995.
Capitalized costs are depleted by the unit-of-production
method using independent engineer estimates of unrecovered
proved oil and gas reserves. The costs of unproved properties
are excluded from depletion until the properties are
evaluated. Depreciation, depletion and amortization of oil
and gas properties was $4.59 per equivalent barrel of oil and
gas produced for the period from August 9, 1994 to June 30,
1995. Sales of oil and gas properties are accounted for as
adjustments to the capitalized cost center unless such sales
significantly alter the relationship between capitalized costs
and proved reserves of oil and gas attributable to the cost
center, in which case a gain or loss is recognized.
The Company limits the capitalized costs of oil and gas
properties, net of accumulated depletion, to the estimated
future net revenues from proved oil and gas reserves less
estimated future development and production expenditures
discounted at 10%, plus the lower of cost or estimated fair
value of unproved properties as adjusted for related tax
effects. If capitalized costs exceed this limit, the excess
is charged to depletion expense. The Company has not recorded
any write-downs of capitalized costs as a result of this
limitation.
Depletion expense and limits to capitalized costs are based on
estimates of oil and gas reserves which are inherently
imprecise. Accordingly, it is reasonably possible that such
estimates could differ materially in the near term from
amounts currently estimated.
Depreciation and amortization of other property and equipment
is provided principally by the straight-line method over the
estimated service lives of the related assets. Equipment
under capital lease is recorded at the lower of fair value or
the present value of future minimum lease payments and are
depreciated over the lease term.
Costs incurred to operate, repair and maintain wells and
equipment are generally expensed as incurred.
The Company's exploration and development activities are
conducted jointly with others and, accordingly, the financial
statements reflect only the Company's proportionate interest
in such activities.
The Company does not expect future costs for site restoration,
dismantlement and abandonment, postclosure and other exit
costs which may occur in the sale, disposal, or abandonment of
a property to be material.
F12
<PAGE> 61
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(e) Revenue Recognition
-------------------
The Company uses the sales method of accounting for crude oil
revenues. To the extent that crude oil is produced but not
sold, the oil in tanks is not recorded as inventory on the
financial statements. The oil in tanks at June 30, 1995 was
not material.
The Company uses the sales method of accounting for natural
gas revenues. Under this method, revenues are recognized
based on actual volumes of gas sold to purchasers.
(f) Environmental
-------------
The Company is subject to extensive federal, state and local
environmental laws and regulations. These laws, which are
constantly changing, regulate the discharge of materials into
the environment and may require the Company to remove or
mitigate the environmental effects of the disposal or release
of petroleum or chemical substances at various sites.
Environmental expenditures are expensed or capitalized
depending on their future economic benefit. Expenditures that
relate to an existing condition caused by past operations and
that have no future economic benefits are expensed.
Liabilities for expenditures of a noncapital nature are
recorded when environmental assessment and/or remediation is
probable, and the costs can be reasonably estimated.
(g) Income Taxes
------------
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period
that includes the enactment date.
(h) Statement of Cash Flows
-----------------------
The Company considers all highly liquid investments purchased
with an original maturity of three months or less to be cash
equivalents.
Payments of interest were $9,378 in the period from August 9,
1994 (inception) to June 30, 1995. No federal or state income
taxes were paid during this period due to net operating
losses.
F13
<PAGE> 62
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In connection with the purchase of interests in oil and gas
properties located in Texas, the Company entered into a note
payable for $600,000 (see note 3).
In connection with the reverse acquisition (see note 2), the
Company issued 492,000 common shares, valued at $83,640 ($.17
a common share) to an unrelated party for investment advisory
services.
In connection with the sale of 3,200,000 shares of common
stock, the Company recorded a receivable in the amount of
$544,000, $20,000 of which was received by June 30, 1995 (see
note 4).
In connection with the purchase of interests in oil and gas
properties located in New Mexico, the Company entered into a
capitalized lease obligation in the amount of $345,000
(present value of future minimum lease payments (see note 6))
and assumed certain liabilities of the seller of $100,000.
(i) Loss Per Common Share
---------------------
Loss per common share is based upon the weighted average
number of common shares (12,275,031) outstanding during the
period.
(j) Concentrations of Credit Risk
-----------------------------
During the period from August 9, 1994 (inception) to June 30,
1995, four oil and gas companies accounted for 30%, 27%, 26%
and 14%, respectively, of the Company's oil and gas sales.
Because oil and gas sales are made to large, well-established
companies, the Company does not believe that this
concentration of sales and credit risks represents a material
risk of loss with respect to its financial position as of June
30, 1995.
(k) Use of Estimates
----------------
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and
liabilities to prepare these financial statements in
conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
F14
<PAGE> 63
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2) Reverse Acquisition
-------------------
On March 6, 1995, Queen Sand Resources, Inc., a Delaware Corporation
("QSRI") formerly Universal Biotechnologies, Inc. ("UBTI") acquired
all of the outstanding common stock of Queen Sand Resources, Inc. a
Nevada corporation ("QSRN") in exchange for 19,200,000 common shares
of QSRI. For accounting purposes the acquisition has been treated as
a recapitalization of QSRN with QSRN as the acquirer (reverse
acquisition). The combined entity retained the name Queen Sand
Resources, Inc. The historical financial statements prior to March 6,
1995 are those of QSRN, which have been retroactively restated for the
equivalent number of shares received in the merger. In connection
with the reverse acquisition the shareholders of UBTI received
2,908,000 shares for UBTI shares outstanding prior to the acquisition.
Costs of $401,120, including 492,000 common shares issued to an
unrelated party for investment advisory services (valued at $.17 per
share), incurred in connection with the reverse acquisition have been
charged to expense as UBTI at the time of the reverse acquisition had
no net tangible assets.
Pro forma information giving effect to the transaction is not
presented because the acquisition is not a business combination and
the operations of QSRI prior to the acquisition were nominal.
(3) Oil and Gas Property Acquisitions
---------------------------------
In September 1994, the Company paid $579,518 in cash for approximately
74% interest in the Norden Resources Company Joint Venture (Norden JV)
which owned certain oil and gas properties located in Lea and Chavez
counties, New Mexico. In March 1995, the Company purchased the
remaining interest in the Norden JV for approximately $309,000 in cash
and the assumption of $100,000 in liabilities and entered into a
capital lease with the seller for oilfield service equipment (see note
6).
In April 1995, the Company purchased interests in oil and gas
properties located in Calcasieu, Cameron, St. Landry and St. Martin
Parishes, Louisiana for approximately $396,000 in cash. The interests
in the acquired properties plus associated production equipment range
from approximately 2.1% to 86.2%.
In March 1995, the Company purchased a 50% interest in oil and gas
properties located in Archer and Baylor Counties, Texas, for
approximately $1.0 million in cash and a $600,000 note (see note 5).
The consolidated financial statements include the results of
operations of the acquired interests in oil and gas properties from
their respective acquisition dates.
F15
<PAGE> 64
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following unaudited pro forma summary of the Company's
consolidated results of operations for the period from August 9, 1994
(inception) to June 30, 1995 was prepared as if the purchases of the
above mentioned properties had occurred on August 9, 1994 (inception).
The pro forma data is based on numerous assumptions and is not
necessarily indicative of future operations or of results which would
actually have occurred if the acquisitions had been made on August 9,
1994.
<TABLE>
<S> <C>
Revenues $ 1,403,200
=========
Net loss $(1,026,391)
=========
Loss per common share $ (.08)
===
</TABLE>
(4) Common Stock
------------
In May 1995, the Company sold 3,200,000 shares of common stock for
$0.17 per share. At June 30, 1995, receivables of $524,000 remained
outstanding from these stock sales. The receivable was subsequently
collected by the Company.
On May 10, 1995, the Board of Directors effected a two-for-one stock
split, with a May 26, 1995 record date. Share and per share amounts
in the accompanying consolidated financial statements and notes
thereto have been restated to reflect the stock split.
(5) Current and Long-term Debt
--------------------------
At June 30, 1995, the Company had a $600,000 note payable to a third
party resulting from the purchase of interests in oil and gas
properties (note 3). The principal and interest balance are due on or
before March 31, 1996. The note bears interest at 9% and is secured
by the Company's interest in certain oil and gas properties. The
Company intends to use borrowings under a long-term revolving credit
note with a bank (discussed below) to finance repayment of this note
and has classified the borrowing as long-term debt at June 30, 1995.
The Company was able to borrow under a revolving credit agreement
(denominated in German Duetche Marks) (DEM) between CHIL and a bank.
This credit agreement was secured by the assets of CHIL. The credit
facility was payable on demand, bearing interest at a fixed rate of
5.625%. As of June 30, 1995, $262,610 was outstanding, against a
total availability of $300,000. The loan was subsequently repaid,
using $180,000 from the proceeds from the subscription receivable (see
note 4) with CHIL lending the Company the remainder ($82,610) at the
same terms and conditions as the bank. The credit facility from the
bank is no longer available to the Company.
F16
<PAGE> 65
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On December 1, 1995, the Company entered into a credit agreement
("Revolving Credit Note") with a bank to provide a revolving line of
credit of up to $10,000,000. The borrowing base was $1,250,000 at
January 30, 1996. Borrowings are secured by interests in oil and gas
properties, bear interest at prime plus 1.5% and are payable in full
on December 1, 1996. The credit agreement contains provisions that
restrict asset sales, loans and advances and payment of dividends.
In July 1995, the Company initiated a private debt offering whereby it
may issue up to a maximum of 5,000,000 DEM denominated 12% notes
due on July 15, 2000. The notes may be redeemed at the
option of the Company, in whole or in part, at any time prior to
maturity date on or after December 15, 1997 at 101% of the principal
amount, plus accrued interest to the redemption date. The notes are
unsecured, general obligations of the Company, subordinated in right
of payment to any senior and secured indebtedness of the Company
including all existing and future indebtedness. The note agreement
contains covenants which place limitations on future indebtedness,
dividends and liens. Notes aggregating 700,000 DEM ($487,363) were
sold and outstanding at December 22, 1995.
(6) Capital Lease Obligation
------------------------
In connection with the purchases of an interest in certain oil and gas
properties (see note 3), the Company entered into a capital lease with
the seller for oil field service equipment. The excess ($145,000) of
the present value of future lease rentals ($345,000) over the fair
value of the equipment has been treated as part of the acquisition of
oil and gas properties. The cost and related accumulated depreciation
of the capital equipment at June 30, 1995 is $200,000 and $10,000,
respectively. At June 30, 1995, minimum lease payments required under
the capital lease follow:
<TABLE>
<S> <C>
1996 $ 90,000
1997 90,000
1998 90,000
1999 90,000
2000 67,500
--------
Total minimum lease payments 427,500
Less amount representing interest (at 11%) (95,632)
--------
Present value of minimum lease payments 331,868
Less current installments of obligation
under capital lease 56,276
--------
Obligation under capital lease,
excluding current installments $275,592
========
</TABLE>
F17
<PAGE> 66
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(7) Related Party Transactions
--------------------------
The Company is charged a monthly fee by Capital House A Finance and
Investment Corporation ("Capital House") (owned by certain officers of
the Company) for general and administrative costs. Such fee covers
the services provided to the Company by certain employees of Capital
House and amounted to $409,000 for the period from August 9, 1994
(inception) to June 30, 1995. Effective May 1995, the monthly fee was
set at $50,000 per month, reduced to $40,000 per month commencing in
July 1995. The Company also reimburses Capital House for certain
direct general and administrative costs incurred by Capital House on
behalf of the Company. The Company reimbursed Capital House $90,908
for such costs during the period from August 9, 1994 (inception) to
June 30, 1995. The Company capitalized $294,385 of the general and
administrative costs paid to Capital House which were directly
associated with oil and gas property acquisitions, exploration and
development.
(8) Income Taxes
------------
The Company's effective tax rate differs from the U.S. statutory rate
due to losses without tax benefit. The tax effects of the primary
temporary differences giving rise to the deferred federal income tax
assets and liabilities as determined under Statement of Accounting
Standards No. 109 "Accounting for Income Taxes" at June 30, 1995
follows:
<TABLE>
<S> <C>
Deferred income tax assets:
Reverse acquisition costs $ 126,371
Net operating loss carryforwards 147,186
Statutory depletion carryforward 1,360
-------
274,917
Less valuation allowance (235,006)
-------
Net deferred income tax asset 39,911
Deferred income tax liability - oil and gas properties,
principally due to differences in depletion (39,911)
-------
$ -
========
</TABLE>
The Company has $432,901 of tax net operating loss carryforwards which
expire in 2010. The Company also has approximately $4,000 of
statutory percentage depletion carryforwards.
(9) Commitments
-----------
In connection with the Norden JV acquisition, the Company is committed
to provide $250,000 for development of the oil and gas properties
between April 1, 1995 and March 31, 1996. At June 30, 1995, the
Company had incurred $143,171 of the development costs relating to
this commitment.
F18
<PAGE> 67
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In connection with the acquisition of oil and gas properties located
in Archer and Baylor Counties, Texas, the Company is committed to
drill three new wells by January 28, 1997 and three additional new
wells in each of the following two years for a total of nine wells by
January 28, 1999. The Company's 50% share of the cost of each
additional well is approximately $60,000.
(10) Supplementary Oil and Gas Data (Unaudited)
------------------------------------------
The following tables set forth supplementary disclosures for oil and
gas producing activities in accordance with Statement of Financial
Accounting Standards No. 69.
(a) Results of Operations for Producing Activities
----------------------------------------------
The following sets forth certain information with respect to
results of operations from oil and gas producing activities
for the period August 9, 1994 (inception) to June 30, 1995:
<TABLE>
<S> <C>
Oil and gas sales $ 434,513
Production expenses (279,825)
Depreciation, depletion and amortization (122,000)
---------
Results of operations (excludes corporate overhead
and interest expense) $ 32,688
=========
</TABLE>
(b) Capitalized Costs
-----------------
The following table summarizes capitalized costs relating to
oil and gas producing activities and related amounts of
accumulated depreciation, depletion and amortization at June
30, 1995:
<TABLE>
<S> <C>
Oil and gas properties - proved $ 3,923,855
Accumulated depreciation, depletion and amortization (122,000)
-----------
Net capitalized costs $ 3,801,855
===========
</TABLE>
(c) Costs Incurred
--------------
The following sets forth certain information with respect to
costs incurred, whether expensed or capitalized, in oil and gas
activities for the period from August 9, 1994 (inception) to
June 30, 1995:
<TABLE>
<S> <C>
Property acquisition costs $ 3,232,988
===========
Development costs $ 690,867
===========
</TABLE>
F19
<PAGE> 68
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(d) Reserve Quantity Information
----------------------------
The following table presents the Company's estimate of its
proved oil and gas reserves, all of which are located in the
United States. The Company emphasizes that reserve estimates
are inherently imprecise and that estimates of new discoveries
are more imprecise than those of producing oil and gas
properties. Accordingly, the estimates are expected to change
as future information becomes available. The estimates have
been prepared by independent petroleum reservoir engineers.
<TABLE>
<CAPTION>
Oil Gas
(Bbls) (Mcf)
------ ------
<S> <C> <C>
Proved reserves:
Balance at August 9, 1994 (inception) - -
Purchases of reserves in place 6,376,394 317,187
Production (25,839) (4,678)
--------- -------
Balance at June 30, 1995 6,350,555 312,509
========= =======
Proved developed reserves:
Balance at June 30, 1995 1,817,197 312,509
========= =======
</TABLE>
(e) Standardized Measure of Discounted Future Net Cash Flows Relating
to Proved Oil and Gas Reserves (Unaudited)
-----------------------------------------------------------------
The Standardized Measure of Discounted Future Net Cash Flows
Relating to Proved Oil and Gas Reserves ("Standardized
Measure") is a disclosure requirement under Statement of
Financial Accounting Standards No. 69.
The Standardized Measure of discounted future net cash flows
does not purport to be, nor should it be interpreted to
present, the fair value of the Company's oil and gas reserves.
An estimate of fair value would also take into account, among
other things, the recovery of reserves not presently
classified as proved, the value of unproved properties, and
consideration of expected future economic and operating
conditions.
Under the Standardized Measure, future cash flows are
estimated by applying year-end prices, adjusted for fixed and
determinable escalations, to the estimated future production
of year-end proved reserves. Future cash inflows are reduced
by estimated future production and development costs based on
period-end costs to determine pretax cash inflows. Future
income taxes are computed by applying the statutory tax rate
to the excess of pretax cash inflows over the Company's tax
basis in the associated properties. Tax credits and permanent
differences are also considered in the future tax calculation.
Future net cash inflows after income taxes are discounted
using a 10% annual discount rate to arrive at the Standardized
Measure.
F20
<PAGE> 69
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Standardized Measure of discounted future net cash flows
relating to proved oil and gas reserves as of June 30, 1995
are as follows:
<TABLE>
<S> <C>
Future cash inflows $104,659,297
Future costs and expenses:
Production expenses (43,317,046)
Development costs (24,926,908)
Future income taxes (11,038,669)
------------
Future net cash flows 25,376,674
10% annual discount for estimated timing of cash flows (14,501,003)
------------
Standardized measure of discounted future net cash flows $ 10,875,671
============
</TABLE>
Changes in the Standardized Measure of discounted future net
cash flows relating to proved oil and gas reserves for the
period from August 9, 1994 (inception) to June 30, 1995 are as
follows:
<TABLE>
<S> <C>
Balance at August 9, 1994 (inception) $ -
Purchases of minerals in place 11,030,359
Sales of oil and gas produced, net of production expenses (154,688)
-----------
Balance at June 30, 1995 $10,875,671
===========
</TABLE>
The future cash flows shown above include amounts attributable
to proved undeveloped reserves requiring approximately $24.9
million of future development costs. If these reserves are
not developed, the standardized measure of discounted future
net cash flows as of June 30, 1995 shown above would be
reduced by approximately $5.4 million.
Estimates of economically recoverable gas and oil reserves and
of future net revenues are based upon a number of variable
factors and assumptions, all of which are to some degree
speculative and may vary considerably from actual results.
Therefore, actual production, revenues, taxes, development and
operating expenditures may not occur as estimated. The
reserve data are estimates only, are subject to many
uncertainties and are based on data gained from production
histories and on assumptions as to geologic formations and
other matters. Actual quantities of gas and oil may differ
materially from the amounts estimated.
F21
<PAGE> 70
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Balance Sheet
March 31, 1996
<TABLE>
<S> <C>
Assets
------
Current assets:
Cash $ 986,477
Other current assets 254,481
-----------
Total current assets 1,240,958
Net property and equipment 4,424,755
-----------
$ 5,665,713
===========
Liabilities and Stockholder's Equity
------------------------------------
Accounts payable and other $ 512,910
Bank revolving credit facility obligation 857,011
Current portion of capitalized lease obligation 54,770
-----------
Total current liabilities 1,424,691
Long-term obligations, net of current portion 1,930,694
-----------
Total liabilities 3,355,385
Stockholders' equity:
Common stock, $.0015 par value, authorized 40,000,000
shares; issued and outstanding 26,150,000 shares 39,225
Additional paid-in capital 3,914,546
Accumulated deficit (1,643,443)
-----------
Total stockholders' equity 2,310,328
-----------
$ 5,665,713
===========
</TABLE>
See accompanying notes to unaudited interim period condensed consolidated
financial statements.
F22
<PAGE> 71
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations
<TABLE>
<CAPTION>
Period
Nine from August 9, Three Three
months ended 1994 (inception) months ended months ended
March 31, to March 31, March 31, March 31,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Oil and gas sales $1,401,102 26,401 498,125 20,444
Interest income - 9,479 - 3,100
---------- ------- ------- -------
1,401,102 35,880 498,125 23,544
Expenses:
Oil and gas production
expenses 880,010 34,475 297,249 25,021
Depreciation, depletion and
amortization 390,000 7,900 145,000 6,100
General and administrative 946,625 75,000 368,519 75,000
Interest expense 140,717 - 83,266 -
Reverse acquisition expenses - 401,120 - 401,120
---------- ------- ------- -------
2,357,352 518,495 894,034 507,241
---------- ------- ------- -------
Net loss $ (956,250) (482,615) (395,909) (483,697)
========== ======= ======= =======
Loss per common share $(.04) (.06) (.02) (.03)
=== === === ===
</TABLE>
See accompanying notes to unaudited interim period condensed consolidated
financial statements.
F23
<PAGE> 72
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Period
Nine from August 9,
months ended 1994 (inception)
March 31, to March 31,
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (956,250) (482,615)
Depreciation, depletion and amortization 390,000 7,900
Issuance of common stock for services rendered 63,000 83,640
Net change in operating assets and liabilities 514,086 222,304
---------- ----------
Net cash provided (used) in
operating activities 10,836 (168,771)
---------- ----------
Cash flows used in investing activities - additions to
property and equipment (771,803) (2,417,475)
---------- ----------
Cash flow from financing activities:
Proceeds from long-term obligations 1,690,440 -
Payments on capital lease obligations (42,443) -
Proceeds from the sale of common stock - 3,262,131
---------- ----------
Net cash provided by
financing activities 1,647,997 3,262,131
---------- ----------
Net increase in cash 887,030 675,885
Cash at beginning of period 99,447 -
---------- ----------
Cash at end of period $ 986,477 675,885
========== ==========
Supplemental cash flow information - noncash investing
and financing activities:
Acquisition of oil and gas properties in exchange
for note payable $ - 600,000
========== ==========
Liabilities assumed in acquisition of oil and gas
properties $ - 100,000
========== ==========
</TABLE>
See accompanying notes to unaudited interim period condensed consolidated
financial statements.
F24
<PAGE> 73
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Notes to Unaudited Interim Period Condensed Consolidated Financial Statements
March 31, 1996
(1) General
-------
The information furnished reflects all adjustments which are, in the
opinion of management, necessary to a fair presentation of the results
of the interim periods presented. The results of operations for nine
and three months ended March 31, 1996 are not necessarily indicative
of the operating results for the full fiscal year ending June 30,
1996. The notes to the consolidated financial statements for the
period from August 9, 1994 (inception) to June 30, 1995 on pages 51
through 60 are an integral part of these condensed consolidated
financial statements.
(2) Common Stock
------------
Loss per common share is based on the weighted average number of
outstanding shares. On May 10, 1995, the Board of Directors declared
a two-for-one stock split with a record date of May 26, 1995. Share
and per share amounts in the accompanying condensed consolidated
financial statements have been adjusted retroactively to reflect the
stock split. The weighted average number of outstanding shares was
25,801,296 and 7,638,538 for the nine months ended March 31, 1996 and
the period from August 9, 1994 (inception) to March 31, 1995,
respectively. The weighted average number of outstanding shares was
25,803,889 and 18,151,822 for the three-month periods ended March 31,
1996 and 1995, respectively.
During the nine months ended March 31, 1996, the Company issued
350,000 common shares valued at $63,000 ($.18 per share) to an
unrelated party for marketing and promotional services rendered.
During the period from August 9, 1994 (inception) to March 31, 1995,
the Company issued 492,000 common shares valued at $83,640 ($.17 per
share) to an unrelated party for investment advisory services
rendered.
(3) Obligations
-----------
During the nine months ended March 31, 1996, the Company sold
2,500,000 Deutschmark (DEM) denominated ($1,696,039) 12% notes, due on
July 15, 2000.
On December 1, 1995, the Company entered into a credit agreement
("Revolving Credit Note") with a bank to provide a revolving line of
credit of up to $10,000,000. Borrowings are secured by interests in
oil and gas properties and bear interest at prime plus 1.5%. At March
31, 1996, the borrowing base was $1,250,000 (increased to $5,600,000
in connection with the April 1996 oil and gas property purchase
discussed in note 4) and $857,000 was outstanding. The Revolving
Credit Note is payable in full on December 1, 1996, or extended on an
annual basis at the option of the bank. Accordingly, outstanding
borrowings at March 31, 1996 are classified as current in the
accompanying condensed consolidated balance sheet. The Company
intends to request extension of the maturity of the Revolving Credit
Note to meet its financing requirements.
F25
<PAGE> 74
The revolving credit agreement contains, among other items,
restrictive covenants relating to asset sales, loans and advances,
payment of dividends, minimum working capital, and minimum tangible
net worth. At March 31, 1996 and April 30, 1996, the Company was not
in compliance with the restrictive covenant relating to maintenance of
minimum tangible net worth and minimum working capital, respectively.
The bank subsequently waived compliance with the minimum tangible net
worth covenant as of March 31, 1996 and minimum working capital
covenant as April 30, 1996. The Company believes it will be able to
comply with all restrictive covenants in the future or obtain waivers
from the bank with respect to noncompliance. Should the Company in
the future not be able to comply with any of the covenants and is
unable to obtain a waiver from the bank with respect to its
noncompliance, an event of default will occur and the bank may require
immediate repayment of the outstanding balance plus accrued interest
of the Revolving Credit Note. Should immediate repayment be required,
the Company does not presently have and may not in the future have
financial resources available to meet such a demand.
(4) Subsequent Events
-----------------
On April 10, 1996, the Company acquired interests in certain oil and
gas properties located in East Texas from Southern Exploration Company
of Tyler, Texas (Seller) for approximately $5.3 million. The purchase
price consisted of cash paid to the seller of $4,250,000, three notes
payable to the Seller of $250,000 each and 470,000 shares of the
Company's common stock valued at $84,600 ($.18 per share). The
principal and accrued interest on each of the these notes are payable
on July 10, 1996, October 10, 1996 and January 10, 1997, respectively.
Proceeds from the June 1996 stock sale (see note 2) were used to repay
the July 10, 1996 note. Each note bears interest at 9%. The notes
are unsecured and subordinated to the Revolving Credit Note. The
Company also incurred $250,000 broker fees and transaction costs
related to the acquisition. The cash paid to the Seller of $4,250,000
was provided by additional borrowings of $3,625,000 under the
Company's Revolving Credit Note in April 1996 (see note 3), and
utilization of certain amounts of cash provided by the sale of DEM 12%
notes during the nine months ended March 31, 1996.
In June 1996, the Company entered into an agreement with Volute
Limited, N.V. to sell 400,000 shares of the Company's common stock for
$2.50 per share. The Company has received payment of $500,000
relating to the sale of common stock and expects to receive the
remaining $500,000 in the first quarter of fiscal year 1997.
F26
<PAGE> 75
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors
Queen Sand Resources, Inc.:
We have audited the accompanying statement of revenues and direct operating
expenses of the oil and gas properties acquired by Queen Sand Resources, Inc.
and subsidiaries for the nine months ended March 31, 1996. This financial
statement is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statement of revenues and direct
operating expenses is free of material misstatement. An audit of a statement
of revenues and direct operating expenses includes examining, on a test basis,
evidence supporting the amounts and disclosures in that financial statement.
An audit of a statement of revenues and direct operating expenses also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit of the statement of revenues and direct operating
expenses provides a reasonable basis for our opinion.
The accompanying statement of revenues and direct operating expenses was
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission and excludes material expenses, described in
note 1 to the financial statement, that would not be comparable to those
resulting from the proposed future operations of the oil and gas properties
acquired.
In our opinion, the statement of revenues and direct operating expenses
referred to above presents fairly, in all material respects, the revenues and
direct operating expenses of the oil and gas properties acquired by Queen Sand
Resources, Inc. and subsidiaries for the nine months ended March 31, 1996 in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Dallas, Texas
May 31, 1996
F27
<PAGE> 76
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Statements of Revenues and Direct Operating Expenses
of Oil and Gas Properties Acquired
<TABLE>
<CAPTION>
Nine months Year ended
emded June 30,
March 31, 1996 1995
-------------- -----------
(Unaudited)
<S> <C> <C>
Oil and gas sales $ 1,017,704 1,335,453
Direct operating expenses 402,015 497,800
--------- ---------
Excess of revenues over direct operating expenses $ 615,689 837,653
========= =========
</TABLE>
See accompanying notes to statements of revenues and direct operating expenses.
F28
<PAGE> 77
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Notes to Statements of Revenues and Direct Operating
Expenses of Oil and Gas Properties Acquired
Nine months ended March 31, 1996 and
Year ended June 30, 1995 (Unaudited)
(1) Basis of Presentation
---------------------
The accompanying financial statements present the revenues and direct
operating expenses of certain oil and gas properties ("Properties")
purchased by Queen Sand Resources, Inc. ("Company") from Southern
Exploration Company of Tyler, Texas ("Predecessor Owner") on April 10,
1996 for approximately $5.3 million. The Properties consist of
revenue and working interests in producing oil and gas properties
located in East Texas.
The financial statements include the revenues and direct operating
expenses of the Properties from July 1, 1995 to March 31, 1996 and
from July 1, 1994 to June 30, 1995 (unaudited). Oil and gas sales and
direct operating expenses of the Properties from April 1, 1996 to
April 10, 1996 (closing date of the acquisition) of approximately
$40,000 and $14,500, respectively, are not significant and, therefore,
are excluded from the accompanying financial statement.
The accompanying statements of revenues and direct operating expenses
of the Properties do not include general and administrative expenses,
interest expense, a provision for depreciation, depletion and
amortization, or any provision for income taxes since historical
expenses of this nature incurred by the Predecessor Owner are not
necessarily indicative of the costs to be incurred by the Company.
Lease operating expenses include monthly administrative overhead
costs, production taxes, and other direct costs of operating the
Properties which were charged to the joint account of working interest
owners by the operator of the wells.
Historical financial information reflecting financial position,
results of operations, and cash flows of the Properties are not
presented because the purchase price was assigned to the oil and gas
property interests acquired. Other assets acquired and liabilities
assumed were not material. Accordingly, the historical statements of
revenues and direct operating expenses of the Properties are presented
in lieu of the financial statements required under Item 310, note 3(c)
of Securities and Exchange Commission Regulation S-B.
Revenues in the accompanying statements of revenues and direct
operating expenses are recognized on the sales method. Direct
operating expenses are recognized on an accrual basis.
The financial information for the year ended June 30, 1995, is
unaudited. However, in the opinion of management, the statement of
revenues and direct operating expenses for the year ended June 30,
1995 includes all the necessary adjustments to fairly present the
results of the year.
F29
<PAGE> 78
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Notes to Statements of Revenues and Direct Operating
Expenses of Oil and Gas Properties Acquired
(2) Supplementary Financial Information for Oil and Gas Producing
Activities (Unaudited)
-------------------------------------------------------------
(a) Reserve Quantity Information
----------------------------
The following table presents the Company's estimate of its
proved oil and gas reserves, all of which are located in the
United States. The Company emphasizes that reserve estimates
are inherently imprecise and that estimates of new discoveries
are more imprecise than those of producing oil and gas
properties. Accordingly, the estimates are expected to change
as future information becomes available. The estimates have
been prepared by independent petroleum reservoir engineers.
<TABLE>
<CAPTION>
Oil Gas
(Bbls) (Mcf)
------ ------
<S> <C> <C>
Proved reserves:
Balance at June 30, 1994 825,793 13,476,450
Production (25,220) (467,779)
------- ----------
Balance at June 30, 1995 800,573 13,008,671
Production (19,200) (347,033)
------- ----------
Balance at March 31, 1996 781,373 12,661,638
======= ==========
Proved developed reserves:
Balance at June 30, 1995 636,889 10,624,772
======= ==========
Balance at March 31, 1996 617,689 10,277,739
======= ==========
</TABLE>
(b) Standardized Measure of Discounted Future Net Cash
Flows Relating to Proved Oil and Gas Reserves
The Standardized Measure of Discounted Future Net Cash Flows
Relating to Proved Oil and Gas Reserves ("Standardized
Measure") is a disclosure requirement under Statement of
Financial Accounting Standards No. 69.
The Standardized Measure of discounted future net cash flows
does not purport to be, nor should it be interpreted to
present, the fair value of the Company's oil and gas reserves.
An estimate of fair value would also take into account, among
other things, the recovery of reserves not presently
classified as proved, the value of unproved properties, and
consideration of expected future economic and operating
conditions.
F30
<PAGE> 79
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Notes to Statements of Revenues and Direct Operating
Expenses of Oil and Gas Properties Acquired
Under the Standardized Measure, future cash flows are
estimated by applying year-end prices, adjusted for fixed and
determinable escalations, to the estimated future production
of year-end proved reserves. Future cash inflows are reduced
by estimated future production and development costs based on
period-end costs to determine pretax cash inflows. Future
income taxes are computed by applying the statutory tax rate
to the excess of pretax cash inflows over the Company's tax
basis in the associated properties. Tax credits and permanent
differences are also considered in the future tax calculation.
Future net cash inflows after income taxes are discounted
using a 10% annual discount rate to arrive at the Standardized
Measure.
The Standardized Measure of discounted future net cash flows
relating to proved oil and gas reserves at March 31, 1996 and
June 30, 1995 follows:
<TABLE>
<CAPTION>
March 31, June 30,
1996 1995
---- ----
<S> <C> <C>
Future cash inflows $ 39,820,802 40,838,506
Future costs and expenses:
Production expenses (9,835,589) (10,237,604)
Development costs (3,280,621) (3,280,621)
Future income taxes (7,314,961) (7,483,611)
---------- ----------
Future net cash flows 19,389,631 19,836,670
10% annual discount for estimated timing of
cash flows (9,654,943) (9,877,543)
---------- ----------
Standardized measure of discounted future net
cash flows before tax $ 9,734,688 9,959,127
========== ==========
</TABLE>
Changes in the Standardized Measure of discounted future net
cash flows are as follows:
<TABLE>
<CAPTION> Year ended
Nine months ended June 30,
March 31, 1996 1995
-------------- ----
<S> <C> <C>
Beginning balance $ 9,959,127 10,264,478
Sales of oil and gas produced, net of production
expenses (615,689) (837,653)
Changes in production rates (timing) and other 391,250 532,302
--------- ----------
Balance at end of period $ 9,734,688 9,959,127
========= ==========
</TABLE>
F31
<PAGE> 80
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Notes to Statements of Revenues and Direct Operating
Expenses of Oil and Gas Properties Acquired
Estimates of economically recoverable gas and oil reserves and
of future net revenues are based upon a number of variable
factors and assumptions, all of which are to some degree
speculative and may vary considerably from actual results.
Therefore, actual production, revenues, taxes, development and
operating expenditures may not occur as estimated. The
reserve data are estimates only, are subject to many
uncertainties and are based on data gained from production
histories and on assumptions as to geologic formations and
other matters. Actual quantities of gas and oil may differ
materially from the amounts estimated.
F32
<PAGE> 81
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors
Queen Sand Resources, Inc.:
We have audited the accompanying combined statement of revenues and direct
operating expenses of the oil and gas properties acquired by Queen Sand
Resources, Inc. and subsidiaries for the period from July 1, 1994 to the
acquisition dates of the properties. This combined financial statement is the
responsibility of the Company's management. Our responsibility is to express
an opinion on this combined financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the combined statement of revenues
and direct operating expenses is free of material misstatement. An audit of a
combined statement of revenues and direct operating expenses includes
examining, on a test basis, evidence supporting the amounts and disclosures in
that financial statement. An audit of a combined statement of revenues and
direct operating expenses also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit of the
combined statement of revenues and direct operating expenses provides a
reasonable basis for our opinion.
The accompanying combined statement of revenues and direct operating expenses
was prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission and excludes material expenses, described in
note 1 to the financial statement, that would not be comparable to those
resulting from the proposed future operations of the oil and gas properties
acquired.
In our opinion, the combined statement of revenues and direct operating
expenses referred to above presents fairly, in all material respects, the
revenues and direct operating expenses of the oil and gas properties acquired
by Queen Sand Resources, Inc. and subsidiaries for the period from July 1, 1994
to the acquisition dates of the properties in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Dallas, Texas
December 15, 1995
F33
<PAGE> 82
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Combined Statements of Revenues and Direct Operating Expenses
of Oil and Gas Properties Acquired
<TABLE>
<CAPTION>
Period from Year ended
July 1, 1994 to June 30,
acquisition dates 1994
----------------- ----
(Unaudited)
<S> <C> <C>
Oil and gas sales $ 1,058,653 1,321,364
Direct operating expenses 1,110,667 1,546,529
--------- ---------
Excess of direct operating expenses over revenues $ (52,014) (225,165)
========= =========
</TABLE>
See accompanying notes to combined statements of revenues and direct operating
expenses.
F34
<PAGE> 83
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Notes to Combined Statements of Revenues and Direct Operating
Expenses of Oil and Gas Properties Acquired
Period from July 1, 1994 to the Acquisition Dates and
Year ended June 30, 1994 (Unaudited)
(1) Basis of Presentation
---------------------
The accompanying financial statements present the combined revenues
and direct operating expenses of oil and gas properties and related
equipment ("Properties") purchased for approximately $3.5 million by
Queen Sand Resources, Inc. ("Company") from various predecessor owners
("Predecessor Owners") for the period from July 1, 1994 to the closing
dates of the purchases and for the year ended June 30, 1994
(unaudited). The Properties consist of revenue and working interests
in producing oil and gas properties located in New Mexico, Texas and
Louisiana. The acquisitions closed at various dates in September
1994, March 1995 and April 1995 (see note 3 to the audited
consolidated financial statements of the Company as of June 30, 1995
and for the period from inception (August 9, 1994) to June 30, 1995
included herein). The results of operations for the period from the
acquisition dates of the properties to June 30, 1995 are included in
the QSRI audited consolidated financial statements for the period from
inception (August 9, 1994) to June 30, 1995 included herein.
The accompanying combined statements of revenues and direct operating
expenses of the Properties do not include general and administrative
expenses, interest expense, a provision for depreciation, depletion
and amortization, or any provision for income taxes since historical
expenses of this nature incurred by Predecessor Owners are not
necessarily indicative of the costs to be incurred by the Company.
Lease operating expenses include monthly administrative overhead
costs, production taxes, and other direct costs of operating the
Properties which were charged to the joint account of working interest
owners by the operators of the wells.
Historical financial information reflecting financial position,
results of operations, and cash flows of the Properties are not
presented because the purchase price was assigned to the oil and gas
property interests and related equipment acquired. Other assets
acquired and liabilities assumed were not material. Accordingly, the
historical combined statements of revenues and direct operating
expenses of the Properties are presented in lieu of the financial
statements required under Item 310, note 3(c) of Securities and
Exchange Commission Regulation S-B.
Revenues in the accompanying combined statements of revenues and
direct operating expenses are recognized on the sales method. Direct
operating expenses are recognized on the accrual basis.
The financial information for the year ended June 30, 1994, is
unaudited. However, in the opinion of management, the combined
statement of revenues and direct operating expenses for the year ended
June 30, 1994 includes all the necessary adjustments to fairly present
the results of the year.
F35
<PAGE> 84
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Notes to Combined Statements of Revenues and Direct Operating
Expenses of Oil and Gas Properties Acquired
(2) Supplementary Financial Information for Oil and Gas Producing
Activities (Unaudited)
-------------------------------------------------------------
(a) Reserve Quantity Information
----------------------------
The following table presents the Company's estimate of its
proved oil and gas reserves, all of which are located in the
United States. The Company emphasizes that reserve estimates
are inherently imprecise and that estimates of new discoveries
are more imprecise than those of producing oil and gas
properties. Accordingly, the estimates are expected to change
as future information becomes available. The estimates have
been prepared by independent petroleum reservoir engineers.
<TABLE>
<CAPTION>
Oil Gas
(Bbls) (Mcf)
------ -----
<S> <C> <C>
Proved reserves:
Balance at June 30, 1993 6,353,996 457,279
Production (76,717) (18,712)
--------- -------
Balance at June 30, 1994 6,277,279 438,567
Production (61,544) (14,034)
--------- -------
Balance at acquisition dates 6,215,735 424,533
========= =======
Proved developed reserves:
Balance at June 30, 1994 1,904,483 331,212
========= =======
Balance at acquisition dates 1,842,939 317,178
========= =======
</TABLE>
(b) Standardized Measure of Discounted Future Net Cash Flows
Relating to Proved Oil and Gas Reserves
--------------------------------------------------------
The Standardized Measure of Discounted Future Net Cash Flows
Relating to Proved Oil and Gas Reserves ("Standardized
Measure") is a disclosure requirement under Statement of
Financial Accounting Standards No. 69.
The Standardized Measure of discounted future net cash flows
does not purport to be, nor should it be interpreted to
present, the fair value of the Company's oil and gas reserves.
An estimate of fair value would also take into account, among
other things, the recovery of reserves not presently
classified as proved, the value of unproved properties, and
consideration of expected future economic and operating
conditions.
F36
<PAGE> 85
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Notes to Combined Statements of Revenues and Direct Operating
Expenses of Oil and Gas Properties Acquired
Under the Standardized Measure, future cash flows are
estimated by applying year-end prices, adjusted for fixed and
determinable escalations, to the estimated future production
of year-end proved reserves. Future cash inflows are reduced
by estimated future production and development costs based on
period-end costs to determine pretax cash inflows. Future
income taxes are computed by applying the statutory tax rate
to the excess of pretax cash inflows over the Company's tax
basis in the associated properties. Tax credits and permanent
differences are also considered in the future tax calculation.
Future net cash inflows after income taxes are discounted
using a 10% annual discount rate to arrive at the Standardized
Measure.
The Standardized Measure of discounted future net cash flows
relating to proved oil and gas reserves at the acquisition
dates of the Properties and June 30, 1994 follows:
<TABLE>
<CAPTION>
Acquisition June 30,
dates 1994
----------- --------
<S> <C> <C>
Future cash inflows $ 105,093,810 106,152,463
Future costs and expenses:
Production expenses (43,596,871) (44,707,538)
Development costs (25,617,775) (25,617,775)
Future income taxes (10,876,136) (10,860,369)
---------- ----------
Future net cash flows 25,003,028 24,966,781
10% annual discount for estimated timing of
cash flows (14,287,480) (14,266,768)
---------- ----------
Standardized measure of discounted future net
cash flows $ 10,715,548 10,700,013
========== ==========
</TABLE>
Changes in the Standardized Measure of discounted future net
cash flows relating to proved oil and gas reserves are as
follows:
<TABLE>
<CAPTION>
Period from July
1, 1994 to Year ended June
acquisition dates 30, 1994
----------------- ---------------
<S> <C> <C>
Balance at beginning of period $ 10,700,013 10,474,848
Sales of oil and gas produced, net of
production expenses 52,014 225,165
Changes in production rates (timing)
and other (36,479) -
---------- ------------
Balance at end of period $ 10,715,548 10,700,013
========== ==========
</TABLE>
F37
<PAGE> 86
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Notes to Combined Statements of Revenues and Direct Operating
Expenses of Oil and Gas Properties Acquired
Estimates of economically recoverable gas and oil reserves and
of future net revenues are based upon a number of variable
factors and assumptions, all of which are to some degree
speculative and may vary considerably from actual results.
Therefore, actual production, revenues, taxes, development and
operating expenditures may not occur as estimated. The
reserve data are estimates only, are subject to many
uncertainties and are based on data gained from production
histories and on assumptions as to geologic formations and
other matters. Actual quantities of gas and oil may differ
materially from the amounts estimated.
F38
<PAGE> 87
PART III
--------
ITEMS 1 & 2. INDEX TO EXHIBITS AND DESCRIPTION OF EXHIBITS
---------------------------------------------
3.a Articles of Incorporation
3. b Amendments to articles of Incorporation
3.c By-laws
4.a Form of 12% Notes due July 15, 2001
10.a UBTI/QSRN Purchase and Sale -P*
10.b Janex Purchase and Sale -P*
10.c Norden Joint Venture -P*
10.d Norden Restructuring -P*
10.e Cleo Purchase and Sale -P*
10.f Rebich/Southern Purchase and Sale -P*
10.g CHC Management Services Agreement -P*
10.h Stock Option Agreement -P*
10.i Loan Agreement, Mortgages and Security Agreements
with Comerica Bank -P*
10.j Equipment Rental and Lease Agreement -P*
16(a) Letter on change in certifying accountant.
21.a List of Subsidiaries
27.a Financial data schedule
* P denotes filing in paper. IN ACCORDANCE WITH RULE 202 OF REGULATION
S-T PURSUANT TO A CONTINUING HARDSHIP EXEMPTION.
45
<PAGE> 88
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the Company caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
QUEEN SAND RESOURCES, INC.
Dated: August 9, 1996 By: /s/ Edward J. Munden
-----------------------------------
Edward J. Munden,
President & Chief Executive Officer
46
<PAGE> 89
INDEX TO EXHIBITS AND DESCRIPTION OF EXHIBITS
---------------------------------------------
3.a Articles of Incorporation
3.b Amendments to articles of Incorporation
3.c By-laws
4.a Form of 12% Notes due July 15, 2001
10.a UBTI/QSRN Purchase and Sale -P*
10.b Janex Purchase and Sale -P*
10.c Norden Joint Venture -P*
10.d Norden Restructuring -P*
10.e Cleo Purchase and Sale -P*
10.f Rebich/Southern Purchase and Sale -P*
10.g CHC Management Services Agreement -P*
10.h Stock Option Agreement -P*
10.i Loan Agreement, Mortgages and Security Agreements
with Comerica Bank -P*
10.j Equipment Rental and Lease Agreement -P*
16(a) Letter on change in certifying accountant.
21.a List of Subsidiaries
27.a Financial data schedule
* P denotes filing in paper. IN ACCORDANCE WITH RULE 202 OF REGULATION
S-T PURSUANT TO A CONTINUING HARDSHIP EXEMPTION.
<PAGE> 1
EXHIBIT 3.a and 3.b
PAGE 1
STATE OF DELAWARE
OFFICE OF THE SECRETARY OF STATE
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
INCORPORATION OF "PARK AVENUE CAPITAL, INC.", FILED IN THIS OFFICE ON THE
ELEVENTH DAY OF MAY, A.D. 1989, AT 9 O'CLOCK A.M.
[SEAL] /s/ Edward J. Freel
------------------------------
Edward J. Freel, Secretary of State
2196071 8100 AUTHENTICATION: 7516416
950115178 DATE: 05-24-95
<PAGE> 2
CERTIFICATE OF INCORPORATION
OF
PARK AVENUE CAPITAL, INC.
THE UNDERSIGNED, in order to form a corporation for the purposes
hereinafter stated, and pursuant to the General Corporation Law of the State of
Delaware, does hereby certify as follows:
FIRST: Name. The name of the corporation is PARK AVENUE CAPITAL, INC.
SECOND: Registered Office. The registered office of the corporation is
to be located at 229 South State Street, County of Kent, Dover, Delaware, 19901.
The name of the corporation's registered agent at such address is The Prentice-
Hall Corporation System, Inc.
THIRD: Purpose. The purpose of the corporation is to purchase, own and
sell the stock, securities and/or assets of various businesses, and to engage in
any lawful act or activity for which corporations may be organized under the
General Corporation Law of Delaware.
<PAGE> 3
FOURTH: Power. The corporation shall have every power which a
corporation now or hereafter organized under the General Corporation Law or
successor statutes of Delaware may have.
FIFTH: Capital Stock. The total number of shares of capital stock
which the corporation is authorized to issue is five hundred million
(500,000,000) shares of common stock with a par value of one tenth of a mill
($.0001) per share.
SIXTH: Incorporator. The name and mailing address of the incorporator
is as follows:
<TABLE>
<CAPTION>
NAME ADDRESS
<S> <C> <C>
Carl R. Hollander c/o Murray & Hollander
400 Park Avenue
New York, New York 10022
</TABLE>
SEVENTH: By-Laws.
(a) Adoption and Amendment of By-Laws. The board of directors
and stockholders of the corporation shall have the authority to adopt, amend, or
repeal the by-laws of the corporation. The by-laws of the corporation may
contain provisions relating to the adoption, amendment, and repeal of the
by-laws.
(b) Ballot in Elections. Election of directors need not be by
ballot unless the by-laws so provide.
-2-
<PAGE> 4
EIGHTH: Compromise. Whenever a compromise or arrangement is proposed
between this corporation and its creditors or any class of them and/or between
this corporation and its stockholders or any class of them, any court of
equitable jurisdiction within the State of Delaware may, on the application in a
summary way of this corporation or of any creditor or stockholder thereof or on
the application of any receiver or receivers appointed for this corporation
under the provisions of section 291 of Title 8 of the Delaware Code or on the
application or trustees in dissolution or of any receiver or receivers appointed
for this corporation under the provisions of Section 279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority in
number representing three fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this corporation as consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court in which the said application has been made,
be binding on all the creditors
-3-
<PAGE> 5
or class of creditors, and/or on all the stockholders or class of stockholders,
of this corporation, as the case may be, and also on this corporation.
NINTH: Limitation of Director Liability. No director of the corporation
shall have any personal liability to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director except for acts or
omissions for which such liability may not be eliminated under subsection (7) of
Section 102 of Title 8 of the Delaware Code.
TENTH: Advancement of Litigation Expenses. The corporation shall pay in
advance of final disposition all expenses incurred by any officer or director in
defending any civil or criminal action suit or proceeding, to the full extent
permitted by and subject to the conditions specified in subsection (e) of
Section 145 of Title 8 of the Delaware Code.
ELEVENTH: Amendment of Certificate. The corporation reserves the right
to amend, alter, change or repeal any provision contained in this Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, and all
rights conferred upon stockholders herein are granted subject to this
reservation.
-4 -
<PAGE> 6
THE UNDERSIGNED, being the sole incorporator, for the purpose
of forming a corporation pursuant to the General Corporation Law of the State of
Delaware, does make this certificate, hereby declaring that the facts herein
stated are true and accordingly have hereunto set my hand this 9th day of May,
1989
/s/ Carl R. Hollander
----------------------------------------
Carl R. Hollander
-5-
<PAGE> 7
PAGE 1
STATE OF DELAWARE
OFFICE OF THE SECRETARY OF STATE
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
AMENDMENT OF "PARK AVENUE CAPITAL, INC.", FILED IN THIS OFFICE ON THE SIXTH DAY
OF JUNE, A.D. 1989, AT 9 O'CLOCK A.M.
[SEAL] /s/ Edward J. Freel
------------------------------
Edward J. Freel, Secretary of State
2196071 8100 AUTHENTICATION: 7516417
950115178 DATE: 05-24-95
<PAGE> 8
CERTIFICATE OF AMENDMENT OF
CERTIFICATE OF INCORPORATION
BEFORE PAYMENT OF ANY PART
OF THE CAPITAL
OF
PARK AVENUE CAPITAL, INC.
THE UNDERSIGNED, pursuant to the General Corporation Law of the State
of Delaware, does hereby certify as follows:
1. The name of the corporation (hereinafter called the "corporation")
is Park Avenue Capital, Inc.
2. The corporation has not received any payment for any of its stock.
3. The certificate of incorporation of the corporation is hereby
amended by striking out Article FIFTH thereof and by substituting in lieu of
said Article the following new Article FIFTH:
"FIFTH: Capital Stock. The total number
of shares of Capital Stock which the
corporation is authorized to issue is fifteen
million (15,000,000) shares of common stock
with a par value of one mill ($.001) per
share."
4. The amendment of the certificate of incorporation of the corporation
herein certified was duly adopted, pursuant to the provisions of Section 241 of
the General Corporation Law of the State of Delaware, by the sole incorporator,
no directors having been named in the certificate or incorporation and no
directors having been elected.
THE UNDERSIGNED, being the sole incorporator, for the purpose of
amending the certificate of incorporation pursuant to the General Corporation
Law of the State of Delaware, does make this Certificate, hereby declaring that
the facts herein stated are true and accordingly has hereunto set my hand as of
this 15th day of May, 1989.
/s/ Carl R. Hollander
--------------------------
Carl R. Hollander
<PAGE> 9
PAGE 1
State of Delaware
Office of the Secretary of State
I, EDWARD J FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
AMENDMENT OF "PARK AVENUE CAPITAL, INC.", FILED IN THIS OFFICE ON THE NINTH DAY
OF AUGUST. A.D. 1991, AT 9 O'CLOCK A.M.
/s/ Edward J. Freel
-------------------------
[SEAL] Edward J. Freel,
Secretary of State
2196071 8100 AUTHENTICATION: 7461510
950072226 DATE: 04-04-95
<PAGE> 10
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
PARK AVENUE CAPITAL, INC.
Under Section 242 of the
Corporation Law of the State of Delaware
PARK AVENUE CAPITAL, INC. (the "Corporation"), a corporation organized
and existing under and by virtue of the General Corporation Law of the State of
Delaware, DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of said corporation, by written
unanimous consent filed with the minutes of the board, adopted the
following resolutions proposing and declaring advisable the
following amendments to the Certificate of Incorporation of said
corporation:
"1. That Article 'FIFTH' of the Certificate of Incorporation be amended
and, as amended, reads as follows:
'FIFTH. The Corporation shall be authorized to issue the
following shares:
<TABLE>
<CAPTION>
Class Number of Shares Par Value
<S> <C> <C>
Common 5,000,000 $.003' "
</TABLE>
SECOND: That the aforesaid amendments were duly adopted in accordance with the
applicable provisions of section 242 of the General Corporation Law of the State
of Delaware.
THIRD: Prompt notice of the taking of this corporate action is being given to
all stockholders who did not consent in writing, in accordance with Section 228
of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the corporation has caused this certificate to be
signed by Peter Rosen, its President, and attested by Nuram Matoesian, its
Secretary, this 15th day of July, 1991.
PARK AVENUE CAPITAL, INC.
By: /s/ Peter Rosen
--------------------------------
Peter Rosen, President
ATTEST:
By: /s/ Nuram Matoesian
--------------------------------
Nuram Matoesian, Secretary
<PAGE> 11
PAGE 1
State of Delaware
Office of the Secretary of State
I, WILLIAM T. QUILLEN, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
AMENDMENT OF "PARK AVENUE CAPITAL, INC." FILED IN THIS OFFICE ON THE
TWENTY-SEVENTH DAY OF AUGUST, A.D. 1993, AT 9 O'CLOCK A.M.
A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO NEW CASTLE
COUNTY RECORDER OF DEEDS ON THE TWENTY-SEVENTH DAY OF AUGUST, A.D. 1993 FOR
RECORDING.
* * * * * * * * *
/s/ William T. Quillen
-------------------------
[SEAL] William T. Quillen,
Secretary of State
932395068 AUTHENTICATION: 4034878
DATE: 08/27/1993
<PAGE> 12
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
PARK AVENUE CAPITAL, INC.
Under Section 242 of the
Corporation Law of the State of Delaware
PARK AVENUE CAPITAL, INC. (the "Corporation"), a corporation
organized and existing under and by virtue of the General Corporation Law of the
State of Delaware, DOES HEREBY CERTIFY;
FIRST: That the Board of Directors of said corporation, by written consent filed
with the minutes of the Board, adopted the following resolutions proposing and
declaring advisable the following amendments to the Certificate of Incorporation
of said corporation:
"1. That Article FIRST of the Certificate of Incorporation be
amended and, as amended, read as follows:
'FIRST; The name of the corporation is NOTEBOOK CENTER,
INC.' "
"2. That Article FOURTH of the CertifIcate of Incorporation be
amended and, as amended, read as follows:
'FOURTH. The Corporation is authorized to issue 10,000,000
shares of voting Common Stock, with a par value of $.0015 per share. ' "
SECOND: That the aforesaid amendments were duly adopted in accordance with the
applicable provisions of section 242 of the General Corporation Law of the State
of Delaware.
THIRD: Prompt notice of the taking of this corporate action is being given to
all stockholders who did not consent in writing, in accordance with Section 228
of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the corporation has caused this
certificate to be signed by Peter Rosen, its President, and attested by Nuran
Mateosian, its Secretary, this 18th day of August, 1993.
PARK AVENUE CAPITAL, INC.
By: /s/ Peter Rosen, President
-------------------------------------
Peter Rosen, President
ATTEST:
By: /s/ Nuran Mateosian
-------------------------------
Nuran Mateosian, Secretary
<PAGE> 13
State of Delaware
PAGE 1
Office of the Secretary of State
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
AMENDMENT OF "NOTEBOOK CENTER, INC.", CHANGING ITS NAME FROM "NOTEBOOK CENTER,
INC." TO "UNIVERSAL BIOTECHNOLOGIES, INC.", FILED IN THIS OFFICE ON THE
TWENTY-EIGHTH DAY OF JANUARY, A.D. 1994, AT 9 O'CLOCK A.M.
[SEAL] /s/ Edward J. Freel
------------------------------
Edward J. Freel, Secretary of State
2196071 8100 AUTHENTICATION: 7517720
950115178 DATE: 05-25-95
<PAGE> 14
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
NOTEBOOK CENTER, INC.
Under Section 242 of the
Corporation Law of the State of Delaware
NOTEBOOK CENTER, INC. (the "Corporation"), a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware, DOES HEREBY CERTIFY:
FIRST: That the Board of Directors at said corporation, by written consent filed
with the minutes of the Board, adopted the following resolution proposing and
declaring advisable the following amendment to the Certificate of Incorporation
of said corporation:
"1. That Article FIRST of the Certificate of Incorporation be amended
and, as amended, read as follows:
'FIRST: The name of the corporation is UNIVERSAL BIOTECHNOLOGIES,
INC.'"
SECOND: That the aforesaid amendments were duly adopted in accordance with the
applicable provisions of section 242 of the General Corporation Law of the State
of Delaware.
THIRD: Prompt notice of the taking of this corporate action is being given to
all stockholders who did not consent in writing, in accordance with Section 228
of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the corporation has caused this certificate to be
signed by Stephen Forem, its president, and attested by Stephen Forem, its
Secretary, this 24 day of January, 1994.
NOTEBOOK CENTER, INC.
By; /s/ Stephen Forem 1/21/94
-----------------------------
ATTEST: Stephen Forem, President
By: /s/ Stephen Forem 1/21/94
----------------------------
Stephen Forem, Secretary
<PAGE> 15
State of Delaware
PAGE 1
Office of the Secretary of State
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY "UNIVERSAL BIOTECHNOLOGIES, INC." IS DULY INCORPORATED UNDER THE
LAWS OF THE STATE OF DELAWARE AND IS IN GOOD STANDING AND HAS A LEGAL CORPORATE
EXISTENCE SO FAR AS THE RECORDS OF THIS OFFICE SHOW, AS OF THE NINTH DAY OF
MARCH, A.D. 1995.
[SEAL] /s/ Edward J. Freel
------------------------------
Edward J. Freel, Secretary of State
2196071 8300 AUTHENTICATION: 7433289
950051421 DATE: 03-09-95
<PAGE> 16
CERTIFICATE FOR
RENEWAL AND REVIVAL OF CHARTER
UNIVERSAL BIOTECHNOLOGIES, INC. , a corporation organized under the laws of the
State of Delaware, the charter of which was voided for non-payment at taxes, now
desires a restoration, renewal and revival of its charter, and hereby certifies
as follows:
1. The name of this corporation is UNIVERSAL BIOTECHNOLOGIES, INC.
2. Its registered office in the State of Delaware is located at Three
Christina Centre, 201 N. Walnut Street, Wilmington, DE 19801, County of New
Castle. The name and address of its registered agent is The Company Corporation,
address "same as above".
3. The date of filing of the original Certificate of Incorporation in Delaware
was 05-11-89
4. The date when restoration, renewal, and revival of the charter of this
company is to commence is the 28th day of FEBRUARY, 1994, same being prior to
the date of the expiration of the charter. This renewal and revival of the
charter of this corporation is to be perpetual.
5. This corporation was duly organized and carried out the business authorized
by its charter until the 1st day of March, 1994 at which time its charter
became Inoperative and void for non-payment of taxes and this certificate for
renewal and revival is filed by authority of the duly elected directors of the
corporation in accordance with the laws of the State of Delaware.
IN TESTIMONY WHEREOF, and in compliance with the provisions of Section 312 of
the General Corporation Law of the State of Delaware, as amended, providing for
the renewal, extension and restoration of Charters, NURAN MATEOSIAN its
authorized officer has hereunto set his hand to this certificate this 8th day of
MARCH 1995
/s/
----------------------------------------------
Authorized Officer, Title
<PAGE> 17
PAGE 1
State of Delaware
Office of the Secretary of State
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
AMENDMENT OF "UNIVERSAL BIOTECHNOLOGIES, INC.", CHANGING ITS NAME FROM
"UNIVERSAL BIOTECHNOLOGIES, INC." TO "QUEEN SAND RESOURCES, INC.", FILED IN THIS
OFFICE ON THE NINTH DAY OF MARCH, A.D. 1995, AT 9 O'CLOCK A.M.
/s/ Edward J. Freel
-------------------------
[SEAL] Edward J. Freel,
Secretary of State
2196071 8100 AUTHENTICATION: 7461512
950072226 DATE: 04-04-95
<PAGE> 18
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
UNIVERSAL BIOTECHNOLOGIES, INC.
Under Section 242 of the
Corporation Law of the State of Delaware
UNIVERSAL BIOTECHNOLOGIES, INC. (the "Corporation"), a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware:
FIRST: That the Board of Directors of the Corporation, by written consent filed
with the minutes of the Board, adopted the following resolutions proposing and
declaring advisable the following amendments to the Certificate of Incorporation
of the Corporation:
1. That Article FIRST of the Certificate of Incorporation be amended
and, as amended, read as follows:
"FIRST: The name of the Corporation is QUEEN SAND RESOURCES, INC,'
2. That Article FOURTH of the Certificate of Incorporation be amended
and, as amended, read as follows:
"FOURTH: The Corporation is authorized to issue 20,000,000 shares of
voting common stock, with a par value of $0.0015 per share,"
SECOND: That the aforesaid amendments were duly adopted in accordance with the
applicable provisions of Section 242 or the General Corporation Law of the
State of Delaware.
THIRD: Prompt notice of the taking of this corporate action is being given to
all stockholders who did not consent in writing, in accordance with Section 228
of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be signed by
Nuran Mateosian, its President, and attested by Peter Rosen, its Secretary, this
6th day of March, 1995.
UNIVERSAL BIOTECHNOLOGIES, INC.
By: /s/ Nuran Mateosian
-------------------------------------
Nuran Mateosian, President
ATTEST:
By: /s/ Peter Rosen
-------------------------------
Peter Rosen, Secretary
<PAGE> 19
State of Delaware PAGE 1
Office of the Secretary of State
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF
DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE
CERTIFICATE OF CHANGE OF REGISTERED AGENT OF "QUEEN SAND RESOURCES, INC.", FILED
IN THIS OFFICE ON THE FIFTEENTH DAY OF MAY, A.D. 1995, AT 9:30 O'CLOCK A.M.
A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE
NEW CASTLE COUNTY RECORDER OF DEEDS FOR RECORDING.
/s/ Edward J. Freel
-------------------------
[SEAL] Edward J. Freel,
Secretary of State
AUTHENTICATION: 7506753
DATE: 05-16-95
<PAGE> 20
QUEEN SAND RESOURCES, INC.
CERTIFICATE OF CHANGE OF REGISTERED OFFICE
AND
REGISTERED OFFICE
QUEEN SAND RESOURCES, INC. a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware, DOES HEREBY
CERTIFY:
The present registered agent of the corporation is The Company Corporation and
the present registered office of the corporation is in the county of New Castle,
Delaware.
The Board of Directors of QUEEN SAND RESOURCES, INC. adopted the following
resolution on the 10th day of May 1995:
RESOLVED that the registered office of QUEEN SAND RESOURCES, INC. in
the State of Delaware be and it is hereby changed to Corporation Trust
Centre, 1209 Orange Street, in the City of Wilmington County of New
Castle and the authorization of the present registered agent is hereby
withdrawn, and THE CORPORATION TRUST COMPANY shall be and is hereby
constituted and appointed the registered office of the corporation at
the address of its registered office.
IN WITNESS WHEREOF, QUEEN SAND RESOURCES, INC. has caused this statement to be
signed by Edward J. Munden, President, this 11th day of May, 1995
/s/ Edward J. Munden
----------------------------------------
Edward J. Munden,
President of Queen Sand Resources, Inc.
<PAGE> 21
State of Delaware PAGE 1
Office of the Secretary of State
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF
DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE
CERTIFICATE OF AMENDMENT OF "QUEEN SAND RESOURCES, INC.", FILED IN THIS OFFICE
ON THE TWELFTH DAY OF JUNE, A.D. 1995, AT 4:30 O'CLOCK P.M.
A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE
NEW CASTLE COUNTY RECORDER OF DEEDS FOR RECORDING.
/s/ Edward J. Freel
[SEAL] ----------------------------------------
Edward J. Freel, Secretary of State
AUTHENTICATION: 7538342
DATE: 06-14-95
<PAGE> 22
CERTIFICATE OF AMENDMENT OF THE
CERTIFICATE OF INCORPORATION OF
QUEEN SAND RESOURCES, INC.
Under Section 242 of the Corporations Law of the State of Delaware
Queen Sand Resources, Inc. (the "Corporation") , a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware:
FIRST: that the Board of Directors of the Corporation, by written consent filed
with the minutes of the Board, adopted the following resolutions proposing and
declaring advisable the following amendments to the Certificate of Incorporation
of the Corporation:
RESOLVED, The article FIFTH of the Certificate of Incorporation be
amended and, as amended, read as follows:
"FIFTH: Capital Stock The Corporation is authorized to issue
40,000,000 shares of voting common stock, with a par value of
$0.0015 per share."
SECOND: That the aforesaid amendment was duly adopted by a majority of the
Corporation's shareholders in accordance with the applicable provisions of
Section 242 of the General Corporation Law of the state of Delaware.
THIRD: Prompt notice of the taking of this corporate action is being given to
all stockholders who did not consent in writing in accordance with Section 228
of the General Corporation Law of the state of Delaware.
IN WITNESS WHEREOF the Corporation has caused this certificate to be signed by
Edward J, Munden, its President and Bruce I. Benn, its Secretary this 11th day
of May, 1995.
QUEEN SAND RESOURCES, INC
/s/ Edward J. Munden
----------------------------------------
Edward J. Munden, President
ATTEST:
/s/ Bruce I. Benn
- ----------------------------------
Bruce I. Benn, Secretary
<PAGE> 1
Exhibit 3.c
BY-LAWS
OF
PARK AVENUE CAPITAL, INC.
The corporation shall have offices at such places both within
and without the State of Delaware as the board of directors may from time to
time determine or the business of the corporation may require.
ARTICLE II
STOCKHOLDERS
Section 1. Annual Meetings: Annual meetings of stockholders
shall be held on a date and at a time at such place, within or without the State
of Delaware, as the board of directors shall determine. At the annual meeting of
stockholders, directors shall be elected and there shall be transacted such
other business as may properly come before said meeting.
Section 2. Special Meetings: Special meetings of stockholders,
unless otherwise prescribed by law, may be called for any purpose or purposes at
any time by the President or the order of the board of directors or by the
President or Secretary or an Assistant Secretary whenever requested in writing
to do so by stockholders owning not less than one-third of all the outstanding
shares of the corporation entitled to vote for directors as of the date of such
request. Such request shall state the purpose or purposes of the proposed
special meeting. Such meetings shall be held at such place and on a date and at
such time as may be designated in the notice thereof by the officer of the
corporation calling any such meeting.
Section 3. Notice of Meetings: Except as otherwise provided by
law, notice of the time and place and, in the case of special meetings, the
purpose or purposes, of every meeting of stockholders shall be mailed at least
ten days previous thereto to each stockholder of record entitled to such notice
at the address of such person which appears on the books of the corporation or
to such other address as any stockholder shall have furnished in writing to the
Secretary of the corporation for such purpose.
Section 4. Quorum: Except as otherwise expressly provided by
law, the holders of a majority of the stock of the corporation entitled to vote
at any meeting of stockholders
<PAGE> 2
must be present in person or by proxy at such meeting to constitute a quorum.
Less than such quorum, however, shall have the power to adjourn any meeting from
time to time without notice.
Section 5. Voting: It a quorum is present, and except as otherwise
expressly provided by law, the vote of a majority of the shares of stock
represented at the meeting shall be the act of the stockholders. At any meeting
of stockholders, each stockholder entitled to vote any shares on any matter to
be voted upon at such meeting shall be entitled to one vote on such matter for
each such share, and may exercise such voting right either in person or by
proxy.
Section 6. Fixing of Record Date: The board of directors may fix a day,
not more than sixty (60) nor fewer than ten (10) days prior to the day of
holding any meeting of stockholders, as the day as of which stockholders
entitled to notice of and to vote at such meeting shall be determined, and only
stockholders of record at the close of business on such day shall be entitled to
notice of or to vote at such meeting. The board of Directors may fix a time not
exceeding sixty (60) days preceding the date fixed for the payment of any
dividend, the making of any distribution, the allotment or exercise of any
rights or the taking of any other action as a record time for the determination
of the stockholders entitled to receive any such dividend, distribution or
allotment, or for the purpose of such other action.
ARTICLE III
DIRECTORS
Section 1. Number: The affairs, business and property of the
corporation shall be managed by a board of directors to consist of one or more
directors. The number of directors may be determined either by the vote of a
majority of the entire board or by vote of the stockholders and initially shall
be one. A director need not be a stockholder of the corporation.
Section 2. How Elected: Except as otherwise provided by law or Section
4 of this Article, the directors of the corporation, other than the first board
of directors elected by the incorporator, shall be elected by the stockholders.
Each director shall be elected to serve until the next annual meeting of
stockholders and until his successor shall have been duly elected and qualified,
except in the event of his death, resignation, removal or the earlier
termination of his term of office.
-2-
<PAGE> 3
Section 3. Removal: Any or all of the directors may be
removed, with or without cause, by a vote of the stockholders. Any director may
be removed for cause by action of the board of directors.
Section 4. Vacancies: Vacancies in the board of directors
occurring by death, resignation, creation of new directorships, failure of the
stockholders to elect the whole board at any annual election of directors or for
any other reason, including removal of directors for or without cause, may be
filled either by the affirmative vote of a majority of the remaining directors
then in office, although less than a quorum, at any special meeting called for
that purpose or at any regular meeting of the board, or by the stockholders.
Section 5. Regular Meetings: Regular meetings of the board of
directors may be held at such time and place as may be determined by resolution
of the board of directors and no notice shall be required for any regular
meeting. Except as otherwise provided by law, any business may be transacted at
any regular meeting.
Section 6. Special Meetings: Special meetings of the board of
directors may, unless otherwise prescribed by law, be called from time to time
by the President, or the Chairman of the Board or any other officer of the
corporation who is a member of the board. The President or the secretary shall
call a special meeting of the board upon written request directed to either of
them by any two directors stating the time, place and purposes of such special
meeting. Special meetings of the board shall be held on a date and at such time
and at such place as may be designated in the notice thereof by the officer
calling the meeting.
Section 7. Notice of Special Meetings: Notice of the date,
time and place of each special meeting of the board of directors shall be given
to each director at least forty-eight hours prior to such meeting, unless the
notice is given orally or delivered in person, in which case it shall be given
at least twenty-four hours prior to such meeting. For the purpose of this
section, notice will be deemed to be duly given to a director if given to him
orally (including by telephone) or if such notice be delivered to such director
in person or be mailed, telegraphed, cabled, telexed, photocopied or otherwise
delivered by facsimile transmission, to his last known address.
Section 8. Quorum: At any meeting of the board of directors,
one-third of the entire board shall constitute a quorum (except as provided in
Section 4 of this Article III), but less than a quorum may adjourn a meeting.
Except as otherwise provided by law or in these by-laws provided, any
-3-
<PAGE> 4
action taken by a majority of the directors present at a meeting of the board of
directors at which a quorum is present shall be the action of the board of
directors.
Section 9. Conference Telephone: Members of the board of
directors or any committee of the board of directors may participate in a
meeting of such board or committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and such participation shall constitute presence in
person at such meeting.
Section 10. Compensation of Directors and Members of
Committees: The board may from time to time, in its discretion, fix the amounts
which shall be payable to members of the board of directors and to members of
any committee, for attendance at the meetings of the board or of such committee
and for services rendered to the corporation.
Section 11. Reliance Upon Financial Statements: In discharging
their duties, directors and officers, when acting in good faith, may rely upon
financial statements of the corporation represented to them to be correct by the
President or the officer of the corporation having charge of its books of
accounts, or stated in a written report by an independent public or certified
public accountant or firm of such accountants fairly to reflect the financial
condition of the corporation.
ARTICLE IV
COMMITTEES
The board of directors may, by resolution or resolutions
passed by majority of the entire board, designate from among its members an
executive committee and other committees each to consist of one or more of the
directors of the corporation, each of which, to the extent provided in said
resolution or resolutions, or in these by-laws, shall have and may exercise, to
the extent permitted by law, the powers of the board of directors in the
management of the business and affairs of the corporation and may have powers to
authorize the seal of the corporation to be affixed to all papers which may
require it, to declare dividends and to authorize the issuance of stock. Members
of such committees shall hold office for such period as may be prescribed by the
vote of a majority of the entire board of directors, subject, however, to
removal at any time by the board of directors. Vacancies in membership of such
committees shall be filled by the board of directors. Committees may adopt their
own rules of procedure and may meet at a stated time or on such notice as they
may determine. Each committee shall keep a record of its proceedings and report
the same to the board when required.
-4-
<PAGE> 5
ARTICLE V
OFFICERS
Section 1. Number and Designation: The board of directors may
elect a Chairman, a Chief Executive Officer, a Chief Operating Officer, a
President, one or more Vice-Presidents, a Secretary, a Treasurer, assistant
Secretaries, Assistant Treasurers, and such other officers as it may deem
necessary. Any two or more offices may be held by the same person.
The officers shall be elected by the board of directors. The
salaries of officers and any other compensation paid to them shall be fixed from
time to time by the board of directors. The board of directors may at any
meeting elect additional officers. Each officer shall hold office until the
first meeting of the board of directors following the next annual election of
directors and until his successor shall have been duly elected and qualified,
except in the event of the earlier termination of his term of office through
death, resignation, removal or otherwise. Any officer may be removed by the
board at anytime with or without cause. Any vacancy in an office may be filled
for the unexpired portion of the term of such office by the board of directors
at any regular or special meeting.
Section 2. Chairman of the Board: The Chairman shall preside
at all meetings of stockholders and directors at which he is present and shall
have such other powers and perform such other duties as may be assigned to him
by the board of directors.
Section 3. Chief Operating Officer: The chief operating
officer of the corporation shall be responsible for the general management of
the affairs of the corporation, shall have the powers and duties usually
incident to the office of President, except as specifically limited by
appropriate resolution of the board of directors, and shall have such other
powers and perform such other duties as may be assigned by the board of
directors. In the absence of the Chairman, or if the office of Chairman is
vacant, the Chief Operating Officer shall preside at all meetings of
stockholders.
Section 4. Vice-Presidents: In the absence or inability to act
of the Chief Operating Officer, any Vice-President, unless otherwise determined
by the board, shall perform all the duties and may exercise all the powers of
the Chief Operating Officer. Each Vice-President shall have such other powers
and shall perform such other duties as may be assigned to him by the board of
directors or the Chairman or the Chief Operating Officer.
-5-
<PAGE> 6
Section 5. Treasurer: The Treasurer shall have general
supervision over the care and custody of the funds, securities, and other
valuable effects of the corporation and shall deposit the same or cause the same
to be deposited in the name of the corporation in such depositories as the board
of directors may designate, shall disburse the funds of the corporation as may
be ordered by the board of directors, shall have supervision over the accounts
of all receipts and disbursements of the corporation, shall, whenever required
by the board, render or cause to be rendered financial statements of the
corporation, shall have the power and perform the duties usually incident to the
office of Treasurer, and shall have such other powers and perform such other
duties as may be assigned to him by the board of directors or the chairman or
Chief Operating Officer.
Section 6. Secretary: The Secretary shall act as Secretary of
all meetings of the stockholders and of the board of directors at which he is
present, shall have supervision over the giving and serving of notices of the
corporation, shall be the custodian of the corporate records and of the
corporate seal of the corporation, shall exercise the powers and perform the
duties usually incident to the Office of Secretary, and shall exercise such
other powers and perform such other duties as may be assigned to him by the
board of directors or the Chairman or the Chief Operating Officer.
Section 7. Assistant Secretaries and Assistant Treasurers: An
Assistant Secretary acting as such shall perform, in the absence of the
Secretary, all the functions of the Secretary and shall exercise such other
powers and perform such other duties as may be assigned to him by the board of
directors or the Chairman or Chief Operating Officer.
An Assistant Treasurer acting as such shall perform, in the
absence of the Treasurer, all the functions of the Treasurer and shall exercise
such other powers and perform such other duties as may be assigned to him by the
board of directors or the Chairman or Chief Operating Officer.
Section 8. Other Officers: Officers other than those listed
and described in Sections 2 through 7 of this Article V shall exercise such
powers and perform such duties as may be assigned to them by the board of
directors or the Chairman or Chief Operating Officer.
Section 9. Delegation of Duties of Officers: The board of
directors may delegate the duties and powers of any officer, agent or employee
of the corporation to any other officer, agent or employee or director for a
specified time during the absence of any such person or for any other reason
that the board of directors may deem sufficient.
-6-
<PAGE> 7
Section 10. Bond: The board of directors shall have power, to
the extent permitted by law, to require any officer, agent or employee of the
corporation to give bond for the faithful discharge of his duties in such form
and with such surety or sureties as the board of directors may deem advisable.
ARTICLE VI
CERTIFICATES FOR SHARES
Section 1. Form and Issuance: The shares of the corporation
shall be represented by certificates in form meeting the requirements of law and
approved by the board of directors. Certificates shall be signed by the
Chairman, or the President or the Chief Operating Officer or a Vice-President,
and by the Secretary or an Assistant Secretary or the Treasurer or an Assistant
Treasurer. These signatures may be facsimiles if the certificate is
countersigned by a transfer agent or registered by a registrar other than the
corporation itself or its employees.
Section 2. Transfer: The board of directors shall have power
and authority to make such rules and regulations as they deem expedient
concerning the issuance, registration and transfer of certificates representing
shares of the corporation's stock, and may appoint transfer agents and
registrars thereof.
Section 3. Lost stock Certificates. Any person claiming that a
stock certificate has been lost, destroyed or stolen shall make an affidavit or
affirmation of that fact setting forth the circumstances in connection with such
loss, destruction or theft and shall furnish to the corporation and to the
Transfer Agents and Registrars of the stock of the corporation, if any, such
indemnity as shall be satisfactory to them and each of them, whereupon, upon
authorization given to the appropriate officers or agents of the corporation or
the transfer agent for such stock by the President of the corporation or by any
of such other officers of the corporation, as the board of directors may
designate to give such authorization, a new certificate may be issued of the
same tenor and for the same number of shares as the one alleged to be lost,
destroyed or stolen.
Section 4. Holders of Record: The corporation shall be
entitled to treat the holder of record of any share or shares of stock as the
holder in fact thereof, and, accordingly, shall not be bound to recognize any
equitable or other claims to or interest in such shares on the part of any other
person, whether or not it shall have express or other notice thereof, except as
otherwise provided by law.
-7-
<PAGE> 8
ARTICLE VII
DIVIDENDS
Section 1. Declaration and Form: Dividends may be declared in
conformity with law by, and at the discretion of, the board of directors at any
regular or special meeting. Dividends may be declared and paid in cash, shares
or evidences of indebtedness of the corporation, or any property of the
corporation, including the shares or evidences of indebtedness of any other
corporation.
ARTICLE VIII
CORPORATE SEAL
The seal of the corporation shall be circular in form, with
the name of the corporation in the circumference and the words and figures
"Corporate Seal - 1989 - Delaware" in the Center. Any officer, director, or
attorney-in-fact of the corporation may affix the seal of the corporation to any
document.
ARTICLE IX
FISCAL YEAR
The fiscal year of the corporation shall be such period of
twelve consecutive months as the board of directors may be resolution designate.
ARTICLE X
WAIVER OF NOTICE
Whenever any notice is required to be given under the
provisions of these by-laws, the certificate of incorporation or any of the laws
of the State of Delaware, a waiver thereof, in writing, signed by the person or
persons entitled to such notice, whether before or after the time stated
therein, shall be deemed equivalent thereto.
ARTICLE XI
CONSENTS
Section 1. Stockholders: Unless otherwise provided in the
certificate of incorporation or by law, any action required to be taken at any
annual or special meeting of stockholders or any action which may be taken at
any annual or special meeting of such stockholders, may be taken without a
meeting, without prior notice and without a vote, if a consent in writing,
setting forth the action so taken, shall be signed
-8-
<PAGE> 9
by holders of outstanding stock having not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote thereon were present and voted.
Prompt notice of the undertaking of the corporation action
without a meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing.
Section 2. Directors: Unless otherwise restricted by the
certificate of incorporation or by law, any action required or permitted to be
taken at any meeting of the board of directors, or of any committee thereof, may
be taken without a meeting if all members of the board or committee, as the case
may be, consent thereto in writing, and the writing or writings are filed with
the minutes of proceedings of the board or committee.
ARTICLE XII
AMENDMENTS
Section 1. By the Stockholders: These by-laws may be amended,
added to, altered or repealed, or new by-laws may be adopted, at any meeting of
stockholders of the corporation by the affirmative vote of the holders of a
majority of the stock present and voting at such meeting.
Section 2. By the Directors; These by-laws may be amended,
added to, altered or repealed, or new by-laws may be adopted, at any regular or
special meeting of the board of directors by the affirmative vote of a majority
or the entire board.
-9-
<PAGE> 1
DEM 50,000.00 Series Certif. Number
71595150
QUEEN SAND RESOURCES, INC.
SERIES A
DEM 5,000,000.00
12 per cent NOTES due 2000
[QUEEN SAND RESOURCES LOGO]
The issue of the Notes was authorised by a resolution of the Board of Directors
of Queen Sand Resources, Inc., a Delaware corporation (the "Company") passed on
15th July 1995.
The Note forms one of a series of Notes issued in bearer form
with Coupons for interest attached.
The Company, for value received, hereby promises to pay to the bearer
on 15th July, 2000 the principal sum of
FIFTY THOUSAND DEUTSCHE MARKS
(DEM 50,000.00)
together with interest thereon at the rate of 12 per cent per annum payable
semi-annually in arrears on 15th January and 15th July in each year and
together with such other amounts as may be payable, all subject to and in
accordance with the Conditions endorsed hereon including a right of
redemption by the Company on July 15 in any year hereafter at 103% of face
value.
IN WITNESS WHEREOF the Company has caused this Note and the Coupons
appertaining hereto to be executed manually or by the facsimile signatures of
Edward J. Munden, President and Bruce I. Benn, Corporate Secretary.
Dated 15th July, 1995
QUEEN SAND RESOURCES, INC.
By:
------------------------ ------------------------
Edward J. Munden Bruce I. Benn
President Corporate Secretary
The Notes offered hereby are issued pursuant to Regulation S of the U.S.
Securities Act of 1933 and are therefore prohibited for sale or resale to U.S.
citizens or to U.S. residents unless pursuant to prior registration or to
exemption.
- -------------------------------------------------------------------------------
(unless the Note shall have been duly redeemed
at a prior date and provision for payment of the
redemption price duly made) Queen Sand Resources,
Inc. a Delaware corporation will pay to the DUE
direction of the bearer the sum of THREE THOUSAND JANUARY 15, 2000
DEM 0/100 DEUTSCHE MARKS (DEM 3,000.00) upon
presentation and surrender of this coupon being DEM 3,000.00
six months interest then due on its Series A NO. 9
Note Due 15th July 2000. Series Certif. Number
71595150
Queen Sand Resources, Inc.
By:
---------------------------------- ----------------------------------
Edward J. Munden Bruce I. Benn
President Corporate Secretary
- -------------------------------------------------------------------------------
(unless the Note shall have been duly redeemed
at a prior date and provision for payment of the
redemption price duly made) Queen Sand Resources,
Inc. a Delaware corporation will pay to the DUE
direction of the bearer the sum of THREE THOUSAND JANUARY 15, 1999
DEM 0/100 DEUTSCHE MARKS (DEM 3,000.00) upon
presentation and surrender of this coupon being DEM 3,000.00
six months interest then due on its Series A NO. 7
Note Due 15th July 2000. Series Certif. Number
71595150
Queen Sand Resources, Inc.
By:
---------------------------------- ----------------------------------
Edward J. Munden Bruce I. Benn
President Corporate Secretary
- -------------------------------------------------------------------------------
(unless the Note shall have been duly redeemed
at a prior date and provision for payment of the
redemption price duly made) Queen Sand Resources,
Inc. a Delaware corporation will pay to the DUE
direction of the bearer the sum of THREE THOUSAND JULY 15, 2000
DEM 0/100 DEUTSCHE MARKS (DEM 3,000.00) upon
presentation and surrender of this coupon being DEM 3,000.00
six months interest then due on its Series A NO. 10
Note Due 15th July 2000. Series Certif. Number
71595150
Queen Sand Resources, Inc.
By:
---------------------------------- ----------------------------------
Edward J. Munden Bruce I. Benn
President Corporate Secretary
- -------------------------------------------------------------------------------
(unless the Note shall have been duly redeemed
at a prior date and provision for payment of the
redemption price duly made) Queen Sand Resources,
Inc. a Delaware corporation will pay to the DUE
direction of the bearer the sum of THREE THOUSAND JULY 15, 1999
DEM 0/100 DEUTSCHE MARKS (DEM 3,000.00) upon
presentation and surrender of this coupon being DEM 3,000.00
six months interest then due on its Series A NO. 8
Note Due 15th July 2000. Series Certif. Number
71595150
Queen Sand Resources, Inc.
By:
---------------------------------- ----------------------------------
Edward J. Munden Bruce I. Benn
President Corporate Secretary
- -------------------------------------------------------------------------------
<PAGE> 2
- -------------------------------------------------------------------------------
(unless the Note shall have been duly redeemed
at a prior date and provision for payment of the
redemption price duly made) Queen Sand Resources,
Inc. a Delaware corporation will pay to the DUE
direction of the bearer the sum of THREE THOUSAND JAN. 15, 1998
DEM 0/100 DEUTSCHE MARKS (DEM 3,000.00) upon
presentation and surrender of this coupon being DEM 3,000.00
six months interest then due on its Series A NO. 5
Note Due 15th July 2000. Series Certif. Number
71595150
Queen Sand Resources, Inc.
By:
---------------------------------- ----------------------------------
Edward J. Munden Bruce I. Benn
President Corporate Secretary
- -------------------------------------------------------------------------------
(unless the Note shall have been duly redeemed
at a prior date and provision for payment of the
redemption price duly made) Queen Sand Resources,
Inc. a Delaware corporation will pay to the DUE
direction of the bearer the sum of THREE THOUSAND JAN. 15, 1997
DEM 0/100 DEUTSCHE MARKS (DEM 3,000.00) upon
presentation and surrender of this coupon being DEM 3,000.00
six months interest then due on its Series A NO. 3
Note Due 15th July 2000. Series Certif. Number
71595150
Queen Sand Resources, Inc.
By:
---------------------------------- ----------------------------------
Edward J. Munden Bruce I. Benn
President Corporate Secretary
- -------------------------------------------------------------------------------
(unless the Note shall have been duly redeemed
at a prior date and provision for payment of the
redemption price duly made) Queen Sand Resources,
Inc. a Delaware corporation will pay to the DUE
direction of the bearer the sum of THREE THOUSAND JAN. 15, 1996
DEM 0/100 DEUTSCHE MARKS (DEM 3,000.00) upon
presentation and surrender of this coupon being DEM 3,000.00
six months interest then due on its Series A NO. 1
Note Due 15th July 2000. Series Certif. Number
71595150
Queen Sand Resources, Inc.
By:
---------------------------------- ----------------------------------
Edward J. Munden Bruce I. Benn
President Corporate Secretary
- -------------------------------------------------------------------------------
(unless the Note shall have been duly redeemed
at a prior date and provision for payment of the
redemption price duly made) Queen Sand Resources,
Inc. a Delaware corporation will pay to the DUE
direction of the bearer the sum of THREE THOUSAND JULY 15, 1998
DEM 0/100 DEUTSCHE MARKS (DEM 3,000.00) upon
presentation and surrender of this coupon being DEM 3,000.00
six months interest then due on its Series A NO. 6
Note Due 15th July 2000. Series Certif. Number
71595150
Queen Sand Resources, Inc.
By:
---------------------------------- ----------------------------------
Edward J. Munden Bruce I. Benn
President Corporate Secretary
- -------------------------------------------------------------------------------
(unless the Note shall have been duly redeemed
at a prior date and provision for payment of the
redemption price duly made) Queen Sand Resources,
Inc. a Delaware corporation will pay to the DUE
direction of the bearer the sum of THREE THOUSAND JULY 15, 1997
DEM 0/100 DEUTSCHE MARKS (DEM 3,000.00) upon
presentation and surrender of this coupon being DEM 3,000.00
six months interest then due on its Series A NO. 4
Note Due 15th July 2000. Series Certif. Number
71595150
Queen Sand Resources, Inc.
By:
---------------------------------- ----------------------------------
Edward J. Munden Bruce I. Benn
President Corporate Secretary
- -------------------------------------------------------------------------------
(unless the Note shall have been duly redeemed
at a prior date and provision for payment of the
redemption price duly made) Queen Sand Resources,
Inc. a Delaware corporation will pay to the DUE
direction of the bearer the sum of THREE THOUSAND JULY 15, 1996
DEM 0/100 DEUTSCHE MARKS (DEM 3,000.00) upon
presentation and surrender of this coupon being DEM 3,000.00
six months interest then due on its Series A NO. 2
Note Due 15th July 2000. Series Certif. Number
71595150
Queen Sand Resources, Inc.
By:
---------------------------------- ----------------------------------
Edward J. Munden Bruce I. Benn
President Corporate Secretary
- -------------------------------------------------------------------------------
<PAGE> 1
Exhibit 16.a
[STEWART W. ROBINSON LETTERHEAD]
August 7, 1996
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Re: Queensand Resources, Inc.
Dear Sir or Madam:
I have read Part II, Item 3 of the Registration Statement on Form 10-SB of
Queensand Resources, Inc. dated August 7, 1996, and agree with the statements
contained therein.
Sincerely,
/s/ Stewart W. Robinson
- --------------------------------
Stewart W. Robinson CPA
<PAGE> 1
Exhibit 21.a
LIST OF SUBSIDIARIES
Queen Sand Resources, Inc.
3500 Oak Lawn
Suite 380, L.B. #31
Dallas, Texas
75219-4398
Northland Operating Inc.
3500 Oak Lawn
Suite 380, L.B. #31
Dallas, Texas
75219-4398
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<PERIOD-START> JUL-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 986,477
<SECURITIES> 0
<RECEIVABLES> 254,481
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<INVENTORY> 0
<CURRENT-ASSETS> 1,240,958
<PP&E> 4,946,755
<DEPRECIATION> 522,000
<TOTAL-ASSETS> 5,665,713
<CURRENT-LIABILITIES> 1,424,691
<BONDS> 1,969,039
0
0
<COMMON> 39,225
<OTHER-SE> 2,271,103
<TOTAL-LIABILITY-AND-EQUITY> 5,665,713
<SALES> 1,401,102
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<CGS> 880,010
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<INTEREST-EXPENSE> 140,717
<INCOME-PRETAX> (956,250)
<INCOME-TAX> 0
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<NET-INCOME> (956,250)
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0
0
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