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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-SB/Amendment 1
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.
Delaware 75-2615565
(State or other jurisdiction- (I.R.S. Employer Identification No.)
of incorporation or organization)
3500 Oak Lawn, Suite 380, LB #31, Dallas, TX, 75219-4398
(Address or principal executive offices)
(214) 521-9959
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
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
TABLE OF CONTENTS
PART I
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ITEM 1. DESCRIPTION OF BUSINESS
General 1
Business Strategy 1
Company History 3
Risk Factors 4
Acquisition Risk 4
Acquisition Financing 5
Indebtedness 5
Reserve Replacement 7
Competition 7
Price Fluctuations 8
Marketability of Production 8
Government Regulations 8
Title to Properties 10
Significant Number of Authorized But Unissued Shares 10
Control by Two Stockholders and Management 10
Reserve Estimates and Future Net Revenue 10
Dependence on Key Officers and Employees 11
Operational Hazards and Insurability 11
Employees and Consultants 11
Glossary of Oil and Gas Terms 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 16
Selected Financial Data 16
The Three Months Ended September 30, 1996 Compared
to the Three Months Ended September 30, 1995 18
The Year Ended June 30, 1996 Compared To the Period from
August 9, 1994 (inception) to June 30, 1995 21
Liquidity and Capital Resources 24
Impact of Inflation and Changes In Oil & Gas Prices 27
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ITEM 3. DESCRIPTION OF PROPERTIES 27
Reserve Information 27
Exploratory and Developmental Acreage 29
Productive Wells 29
Crude Oil and Natural Gas Production and Sales Prices 30
Drilling Activities 31
Oil and Gas Producing Properties 32
Offices and Facilities 36
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 36
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS 38
ITEM 6. EXECUTIVE COMPENSATION 39
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 42
ITEM 8. DESCRIPTION OF SECURITIES 42
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND OTHER STOCKHOLDER MATTERS 44
ITEM 2. LEGAL PROCEEDINGS 45
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS 45
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES 45
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS 47
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PART F/S
Index to Financial Statements 48
Financial Statements F-1
PART III
ITEM 1. INDEX TO EXHIBITS AND DESCRIPTION OF EXHIBITS 50
Signature Page 51
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
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, 1996 the Company's proved reserves totaled 6.9 MMbbls of
oil and 13.0 Bcf of natural gas. Subsequently the Company acquired two more
properties which, as estimated at October 31, 1996, included proved reserves for
the Company totaling .2 MMbbls of crude oil and .3 Bcf of natural gas.
On November 6, 1996 the Company acquired from Janex Oil Company, Inc.
and its various affiliates, all of Dallas, Texas, eight gross productive wells
(three net productive wells), all located in various counties in Texas (the
"Frymire Purchase"). In consideration for these properties the Company paid
approximately $650,000 in cash, issued notes for $427,000 and issued 100,000
restricted shares of common stock.
On December 16, 1996 the Company acquired from Maljamar #1 Joint
Venture of Warner Robins, Georgia, 15 gross productive wells (15 net productive
wells), all located in New Mexico (the "Trigg Federal Purchase"). In
consideration, the Company paid $100,000 in cash and issued 92,000 restricted
shares of common stock.
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.
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The Company has signed a letter of intent with a group of associated
companies and family members related to Mr. David Robertson of Tickfaw,
Louisiana and Mr. Keith Robertson of Baton Rouge, Louisiana to acquire 60 gross
productive wells (48.4 net productive wells) and two developmental properties
all located in Texas, Louisiana and Mississippi (the "Robertson Acquisition").
Subject to both parties meeting conditions set out in the letter of intent
including due diligence requirements and the negotiation and execution of a
definitive purchase and sale agreement, it is anticipated that the closing date
for the acquisition will be on or before February 1, 1997. In consideration for
these properties the Company has agreed to pay on closing, subject to a final
valuation of the properties and standard industry adjustments, approximately
$4.8 million in cash and notes, and issue approximately 1,100,500 restricted
shares of the Company's common stock. The working interests in the properties
and associated production equipment to be acquired range from approximately
0.052% to 100%. No assurance can be given that this acquisition will be
concluded.
The Company has signed a letter of intent with Volute N.V. of
Georgetown, Grand Caymen, Caymen Islands, BWI to acquire three gross wells (1.0
net wells) and one development property, all located in Texas and Colorado (the
"Volute Acquisition"). Subject to both parties meeting conditions set out in the
letter of intent including due diligence requirements and the execution of the
closing documentation, it is anticipated that the closing date for the
acquisition will be on or before February 1, 1997. In consideration for these
properties the Company has agreed to pay on closing, subject to standard
industry adjustments, approximately $25,000 in cash, and issue 100,000
restricted shares of the Company's common stock. The working interests in the
properties to be acquired range from approximately 12.5% to 65.625%. No
assurance can be given that this acquisition will be concluded.
Except those described herein, the Company has no plans, negotiations
or agreements, written or oral, for any other acquisition at this time.
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 financings, equity offerings, debt
offerings and internally generated cash flows 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 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 also plans to selectively participate in the exploration
of new reserves of crude oil and natural gas. The Company has no plans to
participate in wildcat exploration activities. 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 it to maintain financial flexibility, reduce overhead and apply the
proceeds therefrom to activities that the Company believes to have a potentially
higher financial return.
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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 includes 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.
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.
In September 1994, the Company spent $579,518 in cash to obtain an
approximate 74% interest in the Norden Resources Joint Venture ("Norden
JV") which owned certain oil and gas properties located in Lea and Chaves
Counties, New Mexico. In March 1995, the Company purchased the remaining
interest in the Norden properties for approximately $309,000 in cash and the
assumption of $100,000 in liabilities, and entered into a capital lease with the
seller for the oil field service equipment.
In March 1995, the Company purchased from the Cleo Oil Company, Inc.,
of Olney, Texas, a 50% interest in oil and gas properties located in Archer and
Baylor Counties, Texas for approximately $1.0 million in cash and a note for
$600,000.
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In April 1995, the Company purchased from Janex Oil Company, Inc. of
Dallas, Texas, various 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 %.
On 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"). In consideration for
these properties the Company paid, subject to standard industry adjustments at
closing, approximately $4.25 million in cash, issued 470,000 restricted shares
of the Company's common stock which it valued, for purposes of this transaction,
at $0.18 per share ($84,600) and issued three notes, each in the amount of
$250,000 and bearing interest at 9% per annum. These notes were due 90, 180 and
270 days after closing. The Company has retired all three notes plus accrued
interest on July 10, October 7, 1996, and January 5, 1997 in accordance with its
obligations under those notes. The interests in the acquired properties plus
associated production equipment range from approximately 41.8% to 95.0%.
On November 6, 1996, the Company acquired from Janex Oil Company, Inc.
and its various affiliates, eight gross productive wells (three net productive
wells), all located in various counties in Texas (the "Frymire Purchase"). In
consideration for these properties the Company paid, subject to standard
industry adjustments at closing, approximately $650,000 in cash, issued two
notes bearing interest at 9%, each in the amount of $100,000, due in 90 and 180
days, respectively, and a third note in the amount of $227,500 also bearing
interest at 10% payable in equal monthly installments of approximately $10,500
over a 24 month period. In addition the Company issued 100,000 restricted shares
of its common stock which it valued, for purposes of this transaction, at $0.18
per share ($18,000). The interests in the acquired properties plus associated
production equipment range from 21.9% to 75%.
On December 16, 1996, the Company acquired from Maljamar #1 Joint
Venture of Warner Robins, Georgia, 15 gross productive wells (15 net productive
wells), all located in New Mexico (the "Trigg Federal Purchase"). In
consideration for these properties the Company paid $100,000 in cash and issued
92,000 restricted shares of the Company's common stock which it valued, for
purposes of this transaction, at $0.18 per share ($16,560). The Company acquired
a 100% working interest in the acquired properties and associated production
equipment.
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, other than
the Robertson Acquisition described above, 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
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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 fully assess 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.
ACQUISITION FINANCING
The Company does not have sufficient liquidity or capital to undertake
all of the acquisition prospects that it identifies 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 $15 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. On November 14, 1996 the Company received approval
from Comerica Bank to borrow up to $5,325,000 under this revolving loan facility
of which approximately $4.9 million was outstanding as of January 15, 1997. A
condition of the loan facility is that $390,000 be utilized by the Company on
improvements to existing producing properties. 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. The loan under this revolving credit
facility is due for
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renewal by Comerica Bank on December 1, 1997. 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 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 percent (9%). The notes are unsecured and subordinated to
the Comerica Bank indebtedness. The Company has retired all three notes plus
accrued interest on July 10, October 7, 1996, and January 5, 1997 in accordance
with its obligations under those notes.
On November 6, 1996, the Company completed the Frymire Purchase. The
Company paid approximately $630,000 in cash at closing and issued three notes to
the vendor. The first note is in the amount of $100,000, payable 90 days from
closing (February 4, 1997). The second note is in the amount of $100,000,
payable 180 days from closing (May 4, 1997). Both notes bear interest at nine
percent (9%). The third note is in the amount of $227,500, payable monthly with
principal and interest amortized over two years, bearing interest at ten percent
(10%). All three notes are unsecured and subordinated to the Comerica Bank
indebtedness. The Company has met all of its obligations under these notes to
January 15, 1997.
As of January 7, 1997 the Company had approximately $2.3 million of
indebtedness as a result of the sale of Deutschemark (DEM 3.55 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 Deutschemark bonds are unsecured, general
obligations
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of the Company 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 Deutschemarks (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
interest due on July 15, 1996 was paid in full at the time it came due. 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 in operations monthly. At
September 30, 1996 the Company had recorded unrealized exchange rate gains of
approximately $62,500. However, there are no assurances that the Company will
continue to realize gains related to favorable changes in the DEM:$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.
RESERVE REPLACEMENT
The Company's future success depends upon its ability to find, develop
or 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
additional proved reserves, or both. Therefore, in order to increase reserves
and production so as to replace depleted reserves, the Company must continue its
acquisition, development drilling and recompletion programs or undertake other
replacement activities. There can be no assurance 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 cost effective 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, development and production of oil and natural gas is
highly competitive. There is significant competition between oil and gas
companies and individuals for desirable oil and gas properties and for the
equipment, services, and labor required to develop and operate such properties.
The Company competes with numerous firms and individuals, 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
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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 which 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 resulting in curtailment of production,
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")
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
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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.
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 choose 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 focused 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 ("CERCLA"), 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 CERCLA 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
9
<PAGE> 14
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.
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 (27.827 million shares
were issued and outstanding as of January 15, 1997). (See "Part I, Item 8,
Description of Securities".)
CONTROL BY TWO STOCKHOLDERS AND MANAGEMENT
Two stockholders, Norden Investments Ltd. ("Norden") and Forseti
Investments Ltd., ("Forseti") each own 9,600,000 shares (approximately 35% each
as of January 15, 1997) 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, Security Ownership of Certain
Beneficial Owners and Management" and "Part I, Item 8, Description of
Securities".)
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
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<PAGE> 15
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
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, Executive Vice-President
and Secretary, 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.
The Company has not experienced any adverse incidents of a material
nature as a result of these hazards. The Company's executive, management and
technical staff are all trained and skilled in various disciplines and have many
years of experience in various facets of the oil and gas industry.
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 at the Caprock Field 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,
Executive Compensation" and "Part I, Item 7, Certain Relationships and Related
Transactions".)
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<PAGE> 16
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.
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.
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."
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 expenditures Costs associated with development and exploratory
drilling, leasehold acquisitions, producing property
acquisitions, and other miscellaneous capital
expenditures.
Condensate Liquid hydrocarbons that were gaseous while in the
reservoir.
Developed acreage Acres spaced or assigned to a Productive well.
Development well A well drilled within the proved area of crude oil 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.
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<PAGE> 17
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
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.
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<PAGE> 18
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 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 factor
estimated pre-tax of 10% per annum, after LOE and before income taxes.
future net revenues
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 recovered
producing reserves from existing completion intervals in existing wells.
Proved developed Include those reserves contained in geological
"behind-the-pipe" formations through which an behind-the-pipe existing
reserves well has been drilled but from which the well has not
yet produced. The reserves are said to be 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 from
reserves 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.
Reserves Natural gas and crude oil, condensate and natural gas
liquids, on a net revenue interest basis, found to be
commercially recoverable.
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<PAGE> 19
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 or
acreage 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 or 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.
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<PAGE> 20
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 for the three month periods ended September 30, 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 the financial position of the
Company. The results of operations for the three months ended September 30, 1996
will not necessarily be indicative of the operating results for the full fiscal
year ending June 30, 1997.
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<PAGE> 21
<TABLE>
<CAPTION>
Period from
Three Months Three Months August 9,
Ended Ended 1994
September September Year Ended (inception) to
30, 1996 30, 1995 June 30, 1996 June 30,1995
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
OPERATIONS DATA:
Oil and Gas Sales $813,433 $409,848 $2,079,413 $434,513
Oil & Gas Production Expenses 474,154 263,658 1,175,639 279,825
Net Oil and Gas Revenues 339,279 146,190 903,774 154,688
Depreciation, Depletion and Amortization 212,500 120,000 630,000 132,000
General and Administration Expense 219,750 225,918 1,113,146 293,658
Interest and Financing Expense 233,544 15,829 420,790 25,144
Reverse acquisition expenses -- -- -- 401,120
Interest and other income -- -- 71,629 10,041
Net loss (326,515) (215,557) (1,188,533) (687,193)
Net loss per common share (0.01) (0.01) (0.05) (0.06)
CASH FLOWS DATA:
Net cash used in operating activities (315,717) (20,026) (619,879) (303,210)
Net cash used in investing activities (296,272) (315,287) (5,502,460) (3,129,952)
Net cash provided by financing activities 846,678 524,000 6,559,985 3,532,609
Net increase in cash 234,689 188,687 500,174 99,447
BALANCE SHEET DATA (AT END OF PERIOD):
Total current assets $1,267,200 $ 595,195 $1,532,813 $806,924
Property and equipment, net 9,746,023 4,238,239 9,662,251 4,042,952
Total assets 11,100,972 4,833,434 11,282,813 4,849,876
Total current liabilities 976,843 968,317 1,449,727 770,706
Long-term obligations, net of current portion 7,267,119 877,098 6,670,441 875,592
Total stockholders' equity 2,857,010 2,988,019 3,162,645 3,203,578
</TABLE>
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<PAGE> 22
The following table sets forth certain operating information of the
Company for the periods presented.
<TABLE>
<CAPTION>
Three Months Three Months Period from
Ended Ended August 9, 1994
September 30, September 30, Year Ended (inception) to
1996 1995 June 30, 1996 June 30, 1995
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
AVERAGE SALES PRICE:
Gas ($/Mcf) 2.30 1.50 2.43 1.65
Oil ($/Bbl) 21.49 16.54 18.26 16.52
BOE ($/BOE) 18.99 16.22 16.22 16.32
PRODUCTION DATA:
Gas (MMcf) 96.282 6.513 153.833 4.678
Oil (Mbbls) 26.797 24.186 102.536 25.839
MBOE 42.844 25.272 128.175 26.619
AVERAGE COST ($/BOE) DATA:
Production and operating costs 11.06 10.43 9.17 10.51
Production and severance taxes 1.39 1.25 1.34 1.29
Depreciation, depletion and 4.96 4.75 4.92 4.96
amortization
</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 THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1995
RESULTS OF OPERATIONS
REVENUES: During the three months ended September 30, 1996 operating
revenue from crude oil and natural gas was $813,000. This consisted of 26,797
barrels of crude oil, at an average price per barrel of approximately $21.49,
and 96,282 McF of natural gas, at an average price per McF of $2.30 During the
three months ended September 30, 1995 the Company generated operating revenue of
$410,000 from crude oil and natural gas. This consisted of 24,186 barrels of
crude oil, at an average price per barrel of $16.54, and 6,513 McF of natural
gas, at an average price per McF of $1.50. The overall increase of 2,611 barrels
of oil production between the two periods is comprised of a decrease of 2,628
(11%) barrels from the properties that the Company owned during both periods and
an increase of 5,239 barrels from the properties comprising the East Texas
Purchase. The East Texas Purchase properties were not owned during the three
months ended September 30, 1995. The overall increase of 89,769 McF of natural
gas consists of a decrease of 2,127 Mcf from the properties that the Company
owned during both periods and an increase of 91,896 Mcf from the properties that
comprise the East Texas Purchase. The decrease in the volume of crude oil and
natural gas produced from properties that
18
<PAGE> 23
the Company owned during both periods is primarily the result of workover
activity and normal depletion.
COSTS AND EXPENSES: Operating costs and expenses for the three months
ended September 30, 1996 were $1,100,000. Of this total, lease operating costs
were $474,000 ($11.06 per BOE) and depletion, depreciation and amortization
costs were $212,500. General and administrative expenses for the three months
ended September 30, 1996 were $220,000. Interest and financing charges during
the period were $234,000. Operating costs and expenses for the three months
ended September 30, 1995 were $625,000. Of this total, lease operating costs
were $264,000 ($10.45 per BOE) and depletion, depreciation and amortization
costs were $120,000. General and administrative expenses for the three months
ended September 30, 1995 were $226,000 while interest charges were $16,000.
The increase in LOE's is a result of the increase in production that
the Company has demonstrated over the comparative periods. When LOE's are
compared on a cost per BOE basis, the cost of producing a BOE has increased by
$0.64 per BOE or 6%. The increase in LOE's per BOE is the result of lower LOE's
per BOE for properties acquired in the East Texas Purchase offset by higher
LOE's per BOE arising from significant workover expenses on properties acquired
in 1995. The increase in depletion, depreciation and amortization costs is a
result of the increased volume of crude oil and natural gas produced by the
Company. On a cost per BOE basis these costs rose by $0.24 per BOE or 4%. This
is primarily a reflection of the higher cost per BOE of reserves that the
Company acquired in the East Texas Purchase. The increased general and
administrative costs are a result of the increased management support
requirements of the Company as it starts the process of increasing production
from existing properties. The increase in interest expense is a function of the
increased debt the Company incurred between September 30, 1995 and September 30,
1996.
Since inception the Company has been growth oriented and has directed
its efforts at acquiring and developing oil and natural gas producing
properties. This activity requires additional personnel and outside consultants
thereby increasing general and administrative expenses. At the same time, the
Company believes that its general and administrative infrastructure is capable
of servicing a significantly larger revenue base than that which was in place at
September 30, 1996.
NET LOSS: The Company has incurred losses since its inception,
including $327,000 ($0.01/share) for the three months ended September 30,1996
compared to $216,000 ($0.01/share) for the three months ended September 30,
1995. These losses are a reflection of the start-up nature of the Company's oil
and natural gas production activities. The Company believes, but cannot assure,
that as a result of the November 1996 Frymire Purchase it is now in a position
that its revenues from crude oil and natural gas are sufficient to cover its
production costs and operating expenses, subject to the prevailing prices for
crude oil and natural gas and the volumes thereof produced by the Company. The
Company entered the 1997 fiscal year (July 1, 1996 to June 30, 1997) with a plan
to improve production from the properties it had acquired through June 1996 and
to acquire additional oil and natural gas producing properties to provide the
revenue base required to generate additional 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 additional properties
containing proved reserves or conducts successful exploration and development
activities.
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<PAGE> 24
CASH FLOW DATA
FROM OPERATIONS: During the three months ended September 30, 1996 the
Company used $316,000 from operations. In comparison, during the three months
ended September 30, 1995 the Company used $20,000 of cash from operations. The
increased use of cash from operations is a result of the increase in overall
operating costs resulting from the East Texas Purchase. The Company acquired the
properties in east Texas with the expectation of incurring, during the
short-term, higher LOE's as selected producing wells were reworked. The Company
expects, but cannot be assured, that the LOE's will decrease as selected
producing wells are re-worked.
INVESTING ACTIVITIES: During the three months ended September 30, 1996
the Company invested $296,000 to develop existing properties. An additional
$88,000 was expended in relation to an oil producing property that the Company
acquired in December 1996 (the Trigg Federal Purchase). During the three months
ended September 30, 1995 the Company invested $315,000 to develop existing
properties. The decrease of $19,000 in cash invested to develop existing
properties is within the normal range of operations.
FINANCING ACTIVITIES: During the three months ended September 30, 1996
the Company raised $847,000 of additional financing. This is comprised of a net
increase in debt of $347,000 and the collection of the $500,000 subscription
receivable that was outstanding at June 30, 1996. The major components of the
incremental debt were $146,000 of senior secured debt with Comerica bank and
$465,000 of unsecured, subordinated bonds (DEM 700,000 million). During the same
three month period the Company repaid a $250,000 note related to the East Texas
Purchase and $14,000 of its capital lease obligations. During the three months
ended September 30, 1995 the Company collected the $524,000 subscription
receivable that was outstanding at June 30, 1995. The increased activity in
arranging financing for the Company during the three months ended September 30,
1996 is a combination of the need to replace the short-term notes issued by the
Company as part of the East Texas Purchase with longer term sources of funds and
of the need to fund the Frymire Purchase.
BALANCE SHEET DATA
TOTAL ASSETS: At September 30, 1996 the Company had assets of $11.1
million, comprised primarily of current assets of $1.3 million, oil and gas
producing properties, net of accumulated depletion, depreciation and
amortization of $9.5 million and oil field and other equipment, net of
accumulated depreciation, of $207,000. At September 30, 1995 the Company has
assets of $4.8 million, comprised of current assets of $595,000, oil and gas
producing properties, net of accumulated depletion, depreciation and
amortization of $4.0 million and oil field and other equipment, net of
accumulated depreciation, of $236,000. The increase of $4.7 million in net oil
and gas producing properties from September 30, 1995 is comprised primarily of
$5.3 million invested in the East Texas Purchase less the depletion,
depreciation and amortization expenses incurred on all of the Company's
properties during the year between the comparative periods. As a result of the
Frymire and Trigg Federal Purchases in November 1996 and December 1996,
respectively, the Company's total oil and gas producing assets rose by $1.2
million.
STOCKHOLDERS' EQUITY: The Stockholders' Equity of the Company at
September 30, 1996 totaled $2.9 million. During the period the Company entered
into a subscription agreement to issue
20
<PAGE> 25
100,000 restricted common shares to a former officer of the Company as part of
the termination of his employment. The Company has valued these common shares at
$0.18/share ($2,880) for the purposes of this transaction. Additionally, the
Company entered into a subscription agreement to issue 16,000 restricted shares
of the Company's common stock, valued at $0.18/share for purposes of this
transaction, in partial payment of legal services rendered.
On November 5, 1996 the Company issued 100,000 common shares pursuant
to Regulation S for $2.50 per share for a total cash consideration of $250,000.
As a result of the Frymire Purchase on November 6, 1996 the Company issued
100,000 restricted common shares which it has valued at $0.18 ($18,000) for the
purposes of this transaction. As a result of the Trigg Federal Purchase on
December 16, 1996 the Company issued 92,000 restricted shares of common stock
which it has valued at $0.18 ($16,560) for the purposes of this transaction.
The Stockholders' Equity of the Company at September 30, 1995 was $3.0
million. There were no stock transactions during the three months ended
September 30, 1995.
THE YEAR ENDED JUNE 30, 1996 COMPARED TO THE PERIOD FROM AUGUST 9, 1994
(INCEPTION) TO JUNE 30, 1995
RESULTS OF OPERATIONS
REVENUES: During the year ended June 30, 1996 operating revenue from
crude oil and natural gas was $2.1 million. This consisted of 102,536 barrels of
crude oil, at an average price per barrel of $18.26, and 153,833 McF of natural
gas, at an average price per McF of $2.43 During the period from August 9, 1994
(inception) to June 30, 1995 the Company generated operating revenue of $435,000
from crude oil and natural gas. 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.
The two periods are not readily comparable because of the significant
growth that the Company has undergone since inception. During the period from
August 9, 1994 (inception) to June 30, 1995 the Company held significant
production interests effectively only for the last quarter (April, May and June
1995). Thus, virtually all of the 25,839 barrels of crude oil and 4,678 McF of
natural gas produced by the Company during the year ended June 30, 1995 was
generated over a three month period. During the year ended June 30, 1996 these
same properties produced 97,570 barrels of crude oil and 68,376 McF of natural
gas. In addition, the Company acquired the properties comprising the East Texas
Purchase on April 10, 1996. During the period April 10 to June 30, 1996 these
properties produced 4,966 barrels of crude oil and 85,457 McF of natural gas.
Since these East Texas properties were not owned by the Company during the
period August 9, 1994 (inception) to June 30, 1995 there is no comparable
production for that period.
COSTS AND EXPENSES: Operating costs and expenses for the year ended
June 30, 1996 were $3,340,000. Of this total, lease operating costs were
$1,176,000 ($9.17 per BOE) and depletion, depreciation and amortization costs
were $630,000. General and administrative expenses for the year were $1,113,000.
Interest and financing charges during the year were $421,000. The Company
generated a further $10,000 in interest income and $62,000 in unrealized gains
in foreign exchange. 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,
21
<PAGE> 26
depreciation and amortization costs were $132,000. General and administrative
expenses for the year were $294,000, with a further $401,000 associated with the
March 6, 1995 reverse acquisition of the Company. Interest charges during the
year were $25,000.
Since inception the Company has directed its efforts at acquiring and
developing oil and natural gas producing properties. This type of activity
requires a general and administrative infrastructure that is more extensive and
more expensive than that required by an organization that is not as
growth-oriented as the Company. At the same time, the Company believes that its
general and administrative infrastructure is capable of servicing a
significantly larger revenue base that that which was in place at June 30, 1996.
NET LOSS: The Company has incurred losses since its inception,
including $1,189,000 ($0.05/share) for the year ended June 30,1996 and $687,000
($0.06/share) for the period from August 9, 1994 (inception) to June 30, 1995.
These losses are a reflection of the start-up nature of the Company's oil and
natural gas production activities. The Company believes, but cannot assure, that
as a result of the November 1996 Frymire Purchase it is now in a position that
its revenues from crude oil and natural gas are sufficient to cover its
production costs and operating expenses, subject to the prevailing prices for
crude oil and natural gas and the volumes thereof produced by the Company. The
Company entered the 1997 fiscal year (July 1, 1996 to June 30, 1997) with a plan
to improve production from the properties it had acquired through June 1996 and
to acquire additional oil and natural gas producing properties to provide the
revenue base required to generate additional 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.
CASH FLOW DATA
FROM OPERATIONS: During the year ended June 30, 1996 the Company used
$620,000 from operations. Of this, $258,000 represents an increase in accounts
receivable (a net consumption of cash from operations) while accounts payable
only rose by $188,000 (a net source of cash from operations). The difference,
$70,000, is indicative of the growth of the Company and the related increase in
demand for working capital. In comparison, during the period from August 9, 1994
(inception) to June 30, 1995 the Company consumed $303,000 of cash from
operations.
INVESTING ACTIVITIES: During the year ended June 30, 1996, the Company
invested a net $5.4 million in acquiring additional oil and gas producing
properties and developing existing properties. Of this amount, $4.25 million in
cash was expended on the East Texas Purchase. The remaining $900,000 was
expended on developing existing properties in Louisiana, New Mexico and Texas.
An additional $88,000 has been expended in relation to an oil producing property
(the Trigg Federal) that the Company acquired in December 1996. During the
period August 9, 1994 (inception) to June 30, 1995 the Company invested
$3,130,000 to acquire and develop properties.
FINANCING ACTIVITIES: During the year ended June 30, 1996, the Company
raised $7.5 million while repaying $918,000, thus netting $6.6 million of
incremental cash from financing activities. The major components were $4.6
million of senior secured debt with Comerica bank, $1.9 million of unsecured,
subordinated bonds (DEM 2.9 million) and $1 million from the issuance of 400,000
common
22
<PAGE> 27
shares. The Company repaid a $262,000 (DEM 300,000) revolving line of credit, a
$600,000 short-term note payable that arose from the acquisition of an oil
producing property and $56,000 of a capital lease. During the period from August
9, 1994 (inception) to June 30, 1995 the Company raised $3.3 million from the
issuance of common stock. Additionally, the Company received proceeds of
$263,000 (DEM 300,000) from a revolving line of credit. The Company also issued
a note payable of $600,000 to the vendor of an oil producing property. Finally
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 June 30, 1996, the Company had assets of $11.3
million, comprised of current assets of $1.5 million, investments in oil and gas
producing properties, net of accumulated depletion, depreciation and
amortization, of $9.5 million, and oil field and other equipment, net of
accumulated depreciation, of $210,000. 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. The increase in total assets is primarily
attributable to the acquisition of the East Texas properties and the development
of existing properties.
STOCKHOLDERS' EQUITY: At June 30, 1996 the Company had total
Stockholders' Equity of $3.2 million. During the year ended June 30, 1996 the
Company issued 470,000 restricted common shares pursuant to the East Texas
Purchase, which it valued at $0.18/share ($84,000) for purposes of that
transaction. Additionally, 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, with the remainder collected subsequent to the year end but before
September 30, 1996. At June 30, 1995 the Company had total Stockholders' Equity
of $3.2 million.
23
<PAGE> 28
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.
INDEBTEDNESS: The Company has secured a revolving loan facility of $15
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. On November 14, 1996 the Company
received approval from Comerica Bank to borrow up to $5,325,000 under this
revolving loan facility of which approximately $4.9 million was outstanding as
of January 15, 1997. A condition of the loan facility is that $390,000 be
utilized by the Company on improvements to existing producing properties. 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. The
loan under this revolving credit facility is due for renewal by Comerica Bank on
December 1, 1997. 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 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 that it will be able to comply with all
restrictive covenants in the future or obtain waivers from the bank with respect
to noncompliance.
24
<PAGE> 29
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 1997
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 January 15, 1997 the Company had issued bonds totaling DEM
3.55 million ($2.3 million). The Company is continuing its efforts to sell the
remaining portion of the issue. Proceeds from such sales will be available to
fund further development and acquisitions of oil and gas properties.
These bonds are denominated in Deutschemarks (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
interest payments due on July 15, 1996 and January 15, 1997 were paid in full at
the time they came due. 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 September 30, 1996 the Company had recorded unrealized
exchange rate gains of approximately $62,500 (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").
SUBORDINATED NOTES TO VENDORS: Pursuant to the East Texas Purchase, the
Company issued three notes, each bearing interest at 9% per annum and in the
amount of $250,000, payable 90, 180 and 270 days after closing. These notes are
fully subordinated to the Bank Loan. The Company has retired all three notes
plus accrued interest on July 10, October 7, 1996, and January 5, 1997 in
accordance with its obligations under those notes.. The funds to retire the
first two notes were raised from a portion of the proceeds of Regulation S Bonds
issued by the Company and from a portion of the proceeds of the Regulation D
Shares issued by the Company for cash. The Company used a portion of the
proceeds from the Regulation S Shares issued by the Company for cash on December
26, 1996 to retire the third note and related interest.
Pursuant to the Frymire Purchase, the Company issued three notes to the
vendor. The first note is in the amount of $100,000, payable 90 days from
closing (February 4, 1997). The second note is in the amount of $100,000,
payable 180 days from closing (May 4, 1997). Both notes bear interest at nine
percent (9%). The third note is in the amount of $227,500, payable monthly with
principal and interest amortized over two years, bearing interest at ten percent
(10%). These notes are fully subordinated to the Bank Loan. The Company intends
to use the proceeds from the Regulation S Shares to be issued by
25
<PAGE> 30
the Company for cash to retire these notes and related interest. The funds
required to redeem the first note on February 2, 1997 have already been raised.
However, there can be no assurances that the Company can raise additional funds
to redeem the note and related interest that matures on May 2, 1997.
REGULATION D SHARES: The Company issued 400,000 restricted shares of
common stock pursuant to Regulation D on June 20, 1996 for $2.50 per share
($1,000,000). In addition, the Company issued 470,000 restricted shares of
common stock pursuant to Regulation D on April 10, 1996 as partial consideration
for the East Texas Purchase, which it valued at $0.18 per share ($84,600) for
purposes of this transaction. The Company also issued 100,000 restricted common
shares pursuant to Regulation D in November 1996, as partial consideration for
the Frymire Purchase, which it valued at $0.18 per share ($18,000) for purposes
of this transaction, and 92,000 restricted common shares pursuant to Regulation
D in December 1996, which it valued at $0.18 per share ($16,560) for purposes of
this transaction, as partial consideration for the Trigg Federal Purchase.
Additionally, the Company issued 16,000 restricted common shares in October
1996, which it valued at $0.18 per share ($2,880) for purposes of this
transaction, in partial settlement of an outstanding account payable. Finally,
the Company issued 100,000 restricted common shares pursuant to Regulation D in
October 1996, which it valued at $0.18 per share ($18,000) as partial
consideration on the termination of a former officer of the Company.
REGULATION S SHARES: The Company issued 100,000 restricted shares of
common stock pursuant to Regulation S in November, 1996 for $2.50 per share
($250,000). The Company issued 400,000 restricted shares of common stock
pursuant to Regulation S on December 26, 1996 for $2.50 per share ($1,000,000).
The Company is continuing its efforts to raise an additional $3 million of
equity through the issue of restricted common shares pursuant to Regulation S. A
portion of these proceeds will be used to close the Robertson Acquisition.
However, there are no assurances that the Company can raise these funds and
therefore close the Robertson Acquisition.
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.
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<PAGE> 31
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, 1996, 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.
The following table sets forth certain information regarding estimates
of the Company's crude oil, and natural gas reserves as of June 30, 1996, all of
which are located within the United States.
ESTIMATED PROVED RESERVES
AS OF JUNE 30, 1996
<TABLE>
<CAPTION>
Proved Proved Total
Developed Undeveloped Proved
--------- ----------- ------
<S> <C> <C> <C>
Crude Oil, Bbls. 2,264,962 4,666,838 6,931,800
Natural Gas, Mcf 9,373,888 3,609,778 12,983,666
</TABLE>
The Company completed the Frymire and the Trigg Federal Purchases on
November 6, 1996 and December 16, 1996 respectively. The crude oil and natural
gas reserves of the Company acquired in this subsequent purchase have been
estimated as of October 31, 1996 by the Company. 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 October 31,
1996, regarding estimates of the Company's crude oil, and natural gas reserves
acquired in the Frymire and the Trigg Federal 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
27
<PAGE> 32
or in the acreage position during the period from October 31, 1996 to the
acquisition dates that might affect the reserve estimates materially.
ESTIMATED PROVED RESERVES
OF SUBSEQUENT PROPERTY ACQUISITION
AS OF OCTOBER 31, 1996
<TABLE>
<CAPTION>
Proved Proved Total
Developed Undeveloped Proved
--------- ----------- ------
<S> <C> <C> <C>
Crude Oil, Bbls. 183,532 -- 183,532
Natural Gas, Mcf 272,714 -- 272,714
</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 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")
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<PAGE> 33
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 December 16, 1996,
the date of the Company's most recent acquisition (the Trigg Federal Purchase).
DEVELOPED AND UNDEVELOPED ACREAGE
AS OF DECEMBER 16, 1996
<TABLE>
<CAPTION>
Developed Acreage Undeveloped Acreage
-------------------------- --------------------------
State Gross Acres Net Acres Gross Acres Net Acres
- ----- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Texas 24,124 20,244 22,526 11,795
New Mexico 14,200 14,116 0 0
Louisiana 1,351 234 0 0
------ ------ ------ ------
Total 39,575 34,694 22,526 11,795
====== ====== ====== ======
</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
December 16, 1996, the date of the Trigg Federal Purchase:
PRODUCTIVE WELLS
AS OF DECEMBER 16 , 1996
<TABLE>
<CAPTION>
Crude Oil Natural Gas
-------------------------- ------------------------
State Gross Wells Net Wells Gross Wells Net Wells
- ----- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Texas 80.0 42.8 21.0 16.6
New Mexico 69.0 68.4 0 0
Louisiana 12.0 3.1 3.0 0.1
----- ----- ---- ----
Total 161.0 114.0 24.0 16.7
===== ===== ==== ====
</TABLE>
29
<PAGE> 34
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 three months
ended September 30, 1996 and 1995 and the year ended June 30, 1996 and the
period from August 9, 1994 (inception) to June 30, 1995.
OIL AND GAS PRODUCTION AND PRICES
<TABLE>
<CAPTION>
Three Months Three Months Period from
Ended Ended August 9, 1994
September 30, September 30, Year Ended (inception) to
1996 1995 June 30, 1996 June 30, 1995
------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
AVERAGE SALES PRICE:
Gas ($/Mcf) 2.30 1.50 2.43 1.65
Oil ($/Bbl) 21.49 16.54 18.26 16.52
BOE ($/BOE) 18.99 16.22 16.22 16.32
PRODUCTION DATA:
Gas (MMcf) 96.282 6.513 153.833 4.678
Oil (Mbbls) 26.797 24.186 102.536 25.839
MBOE 42.844 25.272 128.175 26.619
AVERAGE COST ($/BOE) DATA:
Production and operating costs 11.06 10.43 9.17 10.51
Production and severance taxes 1.39 1.25 1.34 1.29
Depreciation, depletion and amortization 4.96 4.75 4.92 4.96
</TABLE>
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<PAGE> 35
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>
Three months Three months Period from August 9,
ended September ended September Year End 1994 (inception) to
30, 1996 30, 1995 June 30, 1996 June 30, 1995
-------- -------- ------------- -------------
Gross Net Gross Net Gross Net Gross Net
Wells Wells Wells Wells Wells Wells Wells Wells
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Exploratory
Productive
Crude Oil 0 0 1 0.5 4 2 0 0
Natural Gas 0 0 0 0 0 0 0 0
Dry Holes 0 0 0 0 2 1 0 0
Total 0 0 1 0.5 6 3 0 0
Development
Productive
Crude Oil 0 0 0 0 0 0 1 0.2
Natural Gas 0 0 0 0 0 0 0 0
Service 0 0 0 0 0 0 0 0
Dry Holes 0 0 0 0 0 0 0 0
- - - --- - - - ---
Total 0 0 0 0 0 0 1 0.2
</TABLE>
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<PAGE> 36
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.
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 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.
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<PAGE> 37
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 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.
LAKE TRAMMEL WEST (CANYON) FIELD, NOLAN COUNTY, TEXAS
The Company has a 32.7% working interest in the Frymire Waterflood Unit
consisting of seven producing oil wells, five water injection wells, two water
supply wells, and one salt water disposal well on 571 gross acres in Nolan
County, Texas. The Lake Trammel West Field was discovered in 1955. Production is
from the Canyon Sand at 5200 feet. Primary production was plugged and abandoned
in
33
<PAGE> 38
1967. Re-development began in 1978 and the waterflood began in 1994. An
engineering study identified that additional value may be added by converting
three wells to injection, re-entering two wells for injection, drilling one new
injection well, re-entering one well for production and drilling one new
producer. The property is operated by Northland.
BLOCKER (COTTON VALLEY) FIELD, HARRISON COUNTY, TEXAS
The Company has a 75.0% working interest in one gross gas well, holding
697.1 gross acres located in Harrison County, Texas. The Blocker Field produces
from the Lower Cotton Valley and Upper Cotton Valley formations at 10,000 feet
and 8,700 feet, respectively. The Company anticipates increases production
through development of the Upper Cotton Valley in the existing wellbore and the
drilling of a new well to the Lower Cotton Valley. Northland is the operator.
COTTONWOOD CREEK SOUTH FIELD, DEWITT COUNTY, TEXAS
The Company has a 21.9% working interest in one gross oil well holding
40 gross acres located in Dewitt County, Texas. The Cottonwood Creek South Field
produces from the Wilcox formation at approximately 7655 feet. Trans Pecos
Resources 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), a 98.3% working interest in a third
operating unit (Rock Queen Unit) and a 100% working interest in the Trigg and
Federal V leases. These properties are contiguous with 69 gross oil wells
covering approximately 14,200 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
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.
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<PAGE> 39
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.
35
<PAGE> 40
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. 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.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 20, 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>
OFFICERS AND DIRECTORS
Edward J. Munden(2) 9,600,000 (3) 35%
60 Queen Street
Ottawa, Canada K1P 5Y7
Ronald I. Benn(2) 9,600,000 (3) 35%
60 Queen Street
Ottawa, Canada K1P 5Y7
Bruce I. Benn (2) 9,600,000 (3) 35%
60 Queen Street
Ottawa, Canada K1P 5Y7
Norden Investments Ltd. 9,600,000 (3) 35%
4651 Roswell Rd.
Suite B-105
Atlanta, GA 30342
All officers associated with
Norden as a group [3 persons plus Norden] 9,600,000 35%
</TABLE>
36
<PAGE> 41
<TABLE>
<CAPTION>
<S> <C> <C>
Robert P. Lindsay (2) 0 0%
3500 Oak Lawn Drive
Suite 380, L.B. #31
Dallas, Texas 75219
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 35%
FIVE PERCENT STOCKHOLDERS
Forseti Investments Ltd. 9,600,000 35%
45 O'Connor St.
Suite 450
Ottawa, Canada
K1P 1A4
</TABLE>
(1) Based upon 27.827 million shares issued and outstanding as January 15, 1997.
(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.
37
<PAGE> 42
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.
The following table sets forth the name, age and position of each
director and executive officer of the Company:
<TABLE>
<CAPTION>
<S> <C> <C>
Name Age Position
- ---- --- --------
Edward J. Munden 45 President & Chief Executive Officer and Director
Robert P. Lindsay 54 Chief Operating Officer and Director
Ronald I. Benn* 42 Chief Financial Officer
Bruce I. Benn* 43 Executive Vice President, Secretary and Director
V. Ed Butler 41 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 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.
38
<PAGE> 43
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) 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 $387,000. There have been no awards of performance bonuses or of options
under the Incentive Stock Option Plan to any of the executive officers of the
Company.
39
<PAGE> 44
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
ANNUAL COMPENSATION AWARDS PAYOUTS
A B C D E F G H I
NAME AND YEAR SALARY BONUS BONUS OTHER RESTRICTED LTIP OTHER
PRINCIPAL ($) ($) ($) ANNUAL AWARD STOCK PAYOUTS COMPENSATION
POSITION COMPENS- ($) OPTIONS ($) ($)
ATION ($)
<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 an 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.
40
<PAGE> 45
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 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
exercise 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
41
<PAGE> 46
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.
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 operating 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 27.827 million shares were issued and
outstanding as of January 15, 1997. 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.
The Common Stock of the Company is not subject to calls or assessments.
42
<PAGE> 47
NOTES
The Company is authorized to issue 5.0 million Deutschemark 12% Notes
due July 15, 2000. These Notes are issued under the Regulation S exemption of
the U.S. Securities Act of 1933 and are therefore prohibited for sale or resale
in the U.S. or to U.S. persons unless pursuant to prior registration or to an
exemption. As of January 15, 1997 the Company had issued DEM 3.55 million ($2.3
million) of these Notes.
The Notes are unsecured, general obligations of the Company,
subordinated in right of payment to all existing and future senior indebtedness
and secured indebtedness of the Company. The Notes are also subordinated to all
existing and future indebtedness of the Company's subsidiaries. The Notes rank
pari passu in right of payment with any unsecured subordinated indebtedness of
the Company.
The Notes may be redeemed at the option of the Company, in whole or in
part, at any time prior to maturity on or after December 15, 1997 at 101% of
their principal amount, plus accrued interest to the redemption date.
TRANSFER AGENT
The Transfer Agent for the Company's Common Stock is Continental Stock
Transfer & Trust Company, 2 Broadway, New York, NY 10004.
43
<PAGE> 48
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON REGISTRANT'S COMMON EQUITY AND
OTHER STOCKHOLDER MATTERS MARKETING INFORMATION
The principal U.S. market in which the Company's Common Stock ($.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 January
15, 1997 the closing bid for the Company's common stock was $3.375 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
September 30, 1996 $2.125 $2.125
December 31, 1996 $3.375 $2.125
</TABLE>
HOLDERS
The approximate number of record holders of the Company's Common Stock
as of January 15, 1997 was 1,237 , 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 January 15,
1997 was 27.827 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.
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<PAGE> 49
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 independent auditor and retained KPMG Peat Marwick LLP ("KPMG")
as its independent auditor.
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 accounting 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.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES.
On September 3, 1993 the Company issued 2,200,000 (presplit) shares of
common stock to the stockholders of Notebook Center, Inc., a New York
corporation ("NCI"), in exchange for all of the issued and outstanding shares of
stock of NCI. The Company issued an additional 110,000 (presplit) shares of
common stock to other parties for services rendered in the NCI acquisition and
issued in escrow an additional 1,000,000 shares of common stock in the names of
NCI shareholders to be distributed to such holders upon the Company reaching
certain financial goals. The sale of these securities was exempt from
registration by reason of the exemption provided by Section 4(2) of the Act. By
agreement dated December 23, 1993, the NCI acquisition was rescinded and all but
approximately 183,700 (presplit) share were returned to the Company and retired.
In October 1993, the Company issued 1,330 (presplit) shares of common
stock to investors at a price of $5.00 per share. The sale of these securities
was exempt from registration by reason of the exemption provided by Section 3(b)
of the Act. This offering was conducted to raise funds for the Company's NCI
operations. As part of the rescission of the NCI acquisition, the 1,330 shares
were repurchased at the issue price and canceled.
45
<PAGE> 50
On March 3, 1995 the Company did a reverse split of all issued and
outstanding shares one-for-four. On May 26, 1995 the Company split all issued
and outstanding shares two-for-one. All stock transactions taking place on or
before these dates have been restated to reflect these splits, unless otherwise
indicated as presplit.
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. The sale
of the securities was exempt from registration by reason of the exemption
provided by Section 4(2) of the Act.
On April 4, 1995, the Company issued 492,000 shares of common stock to
a third party who had rendered services to the Company prior to or in connection
with the March 6, 1995 acquisition of QSRN. The sale of the securities was
exempt from registration by reason of the exemption provided by Section 4(2) of
the Act.
On April 4, 1996 the Company issued 1,100,000 shares of common stock to
a third party investor for $75,000 and 996,076 shares of common stock to other
third parties who assisted in the QSRN acquisition. The sales of the securities
were exempt from registration by reason of the exemption provided by Section
3(b) of the Act.
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. The sale of the securities were exempt from
registration by reason of the exemption provided by Section 3(b) of the Act.
On May 30, 1995, the Company issued 100,000 shares of common stock to a
third party investor for $17,000. The sale of the securities were exempt from
registration by reason of the exemption provided by Section 3(b) of the Act.
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. The sale of the securities were exempt from registration
by reason of the exemption provided by Section 4(2) of the Act. 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. The sale of the securities were
exempt from registration by reason of the exemption provided by Section 4(2) of
the Act.
On June 20, 1996, the Company issued 400,000 shares of common stock to
a third party investor for $1,000,000. The sale of the securities were exempt
from registration by reason of the exemption provided by Section 4(2) of the
Act.
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). The sale of the securities were exempt from
registration by reason of the exemption provided by Regulation S promulgated
under the Act.
46
<PAGE> 51
On July 8, 1996, the Company issued 16,000 shares of common stock to
Mr. Robert Donato as partial consideration of services rendered during the
period March 6, 1995 to June 30, 1996. The sale of the securities were exempt
from registration by reason of the exemption provided by Section 4(2) of the
Act.
On July 10, 1996, the Company issued 100,000 shares of common stock to
Mr. Mitch C. Green as partial consideration of the severance payment to him upon
his resignation as an officer of the Company as of July 10, 1996. The sale of
the securities were exempt from registration by reason of the exemption provided
by Section 4(2) of the Act.
On November 6, 1996, the Company issued 100,000 shares of common stock
to Ms. Jane Rather as partial consideration for certain oil and gas interests
which QSRN acquired from Janex Oil Company, Inc. and affiliates. The sale of the
securities were exempt from registration by reason of the exemption provided by
Section 4(2) of the Act.
On November 12, 1996, the Company issued 100,000 shares of common stock
to a third party investor for $250,000. The sale of the securities were exempt
from registration by reason of the exemption provided by Regulation S
promulgated under the Act.
On December 16, 1996, the Company issued 92,000 shares of common stock
to Mrs. Betty Lowe as partial consideration for certain oil and gas interests
which QSRN acquired in the Trigg Federal Purchase from the Maljamar #1 Joint
Venture. The sale of the securities were exempt from registration by reason of
the exemption provided by Section 4(2) of the Act.
On December 26, 1996 the Company issued 400,000 shares of common stock
to third party investors for $1,000,000. The sale 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.
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.
47
<PAGE> 52
PART F/S
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
STATEMENT OF QUEEN SAND RESOURCES, INC.................................................................. F1
Unaudited Pro Forma Condensed Consolidated Statement of Operations
for the year ended June 30, 1996......................................................................F2
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements.................................F3
HISTORICAL FINANCIAL STATEMENTS
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES:
Independent Auditors' Report.............................................................................F4
Consolidated Balance Sheets as of June 30, 1996 and 1995.................................................F5
Consolidated Statements of Operations for the year ended June 30, 1996 and the period
from August 9, 1994 (inception) to June 30, 1995......................................................F6
Consolidated Statements of Stockholders' Equity for the year ended June 30, 1996 and
for the period from August 9, 1994 (inception) to June 30, 1995..........................................F7
Consolidated Statements of Cash Flows for the year ended June 30, 1996 and the period
from August 9, 1994 (inception) to June 30, 1995......................................................F8
Notes to Consolidated Financial Statements...............................................................F9
Unaudited Condensed Consolidated Balance Sheet as of September 30, 1996.................................F22
Unaudited Condensed Consolidated Statements of Operations for the three months
ended September 30, 1996 and 1995....................................................................F23
Unaudited Condensed Consolidated Statements of Cash Flows for the three months
ended September 30, 1996 and 1995....................................................................F24
Notes to Unaudited Interim Period Condensed Consolidated Financial Statements...........................F25
</TABLE>
48
<PAGE> 53
<TABLE>
<CAPTION>
<S> <C>
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)............................................................................F29
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............................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....................F35
</TABLE>
49
<PAGE> 54
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Unaudited Pro Forma Condensed Consolidated Statement of Operations
The following unaudited pro forma condensed consolidated statement of operations
presents 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.
The unaudited pro forma condensed consolidated statement of operations for the
year ended June 30, 1996 gives effect to the East Texas Purchase, as if such
event occurred on July 1, 1995.
The pro forma condensed consolidated statement of operations 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 condensed consolidated statement of operations does not
purport to represent what the Company's results of operations actually would
have been had such events occurred on the dates specified, or to project the
Company's results of operations 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 statement of operations.
F1
<PAGE> 55
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Unaudited Pro Forma Condensed Consolidated Statement of Operations
For the year ended June 30, 1996
<TABLE>
<CAPTION>
Company East Texas Company
Historical Purchase Pro Forma
---------- -------- ---------
<S> <C> <C> <C>
Revenues:
Oil and gas sales $ 2,079,413 1,137,378 (A) 3,216,791
Interest and other 71,629 - 71,629
----------- ---------- ---------
2,151,042 1,137,378 3,288,420
----------- ---------- ---------
Expenses:
Oil and gas production expenses 1,175,639 512,588 (A) 1,688,227
Depreciation, depletion and amortization 630,000 302,773 (B) 932,773
General and administrative 1,113,146 - 1,113,146
Interest and financing expense 420,790 328,332 (C) 749,122
----------- ---------- ---------
3,339,575 1,143,693 4,483,268
----------- ---------- ---------
Net loss $(1,188,533) (6,315) (1,194,848)
=========== =========== =========
Loss per common share $(.05) (.05)
=== ===
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated statement
of operations.
F2
<PAGE> 56
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Notes to Unaudited Pro Forma Condensed Consolidated Statement of Operations
(A) Reflects the historical revenues and expenses of the oil and gas
properties acquired in the East Texas Purchase for the nine months
ended March 31, 1996.
(B) Reflects the incremental depletion expense of the oil and gas
properties acquired in the East Texas Purchase.
(C) Incremental interest expense based on prime plus 1.5%
(approximately 10% for the nine months ended March 31, 1996) on
the Revolving Credit Note, notes payable to seller (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. 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.
F3
<PAGE> 57
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Queen Sand Resources, Inc.:
We have audited the accompanying consolidated balance sheets of Queen Sand
Resources, Inc. and subsidiaries as of June 30, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year ended June 30, 1996 and 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 audits.
We conducted our audits 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 audits provide 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, 1996 and 1995, and the results
of their operations and their cash flows for the year ended June 30, 1996 and
the period from August 9, 1994 (inception) to June 30, 1995, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Dallas, Texas
August 30, 1996, except as to the fourth paragraph
of note 5, which is as of September 30, 1996, the
first paragraph of note 10, which is as of
November 6, 1996, the second paragraph of note 10,
which is as of November 12, 1996, and the second
paragraph of note 5, which is as of November 14,
1996
F4
<PAGE> 58
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 1996 and 1995
<TABLE>
<CAPTION>
Assets 1996 1995
------ ---- ----
<S> <C> <C>
Current assets:
Cash $ 599,621 99,447
Accounts receivable - oil and gas sales 428,259 170,593
Accounts receivable from stockholders (note 4) 500,000 524,000
Other 4,933 12,884
------------ ------------
Total current assets 1,532,813 806,924
------------ ------------
Property and equipment, at cost (notes 3 and 5):
Oil and gas properties, based on full cost
accounting method 10,158,954 3,923,855
Other equipment 265,297 251,097
------------ ------------
10,424,251 4,174,952
Less accumulated depreciation, depletion
and amortization 762,000 132,000
------------ ------------
Net property and equipment 9,662,251 4,042,952
Other assets 87,749 --
------------ ------------
$ 11,282,813 4,849,876
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable - trade $ 431,321 152,471
Accounts payable - related party (note 8) -- 66,447
Accrued liabilities 208,396 232,902
Notes payable (note 5) 750,000 --
Revolving credit facility (note 5) -- 262,610
Current portion of capitalized lease obligation (note 6) 60,010 56,276
------------ ------------
Total current liabilities 1,449,727 770,706
Long-term obligations, net of current portion (notes 5 and 6) 6,670,441 875,592
------------ ------------
Total liabilities 8,120,168 1,646,298
------------ ------------
Stockholders' equity (notes 4 and 5):
Common stock, $.0015 par value, authorized 40,000,000
shares; issued and outstanding 27,020,000 and
25,800,000 shares in 1996 and 1995, respectively 40,530 38,700
Additional paid-in capital 4,997,841 3,852,071
Accumulated deficit (1,875,726) (687,193)
------------ ------------
Total stockholders' equity 3,162,645 3,203,578
Commitments (notes 10 and 11)
------------ ------------
$ 11,282,813 4,849,876
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F5
<PAGE> 59
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the year ended June 30, 1996 and the period
from August 9, 1994 (inception) to June 30, 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Revenues:
Oil and gas sales $ 2,079,413 434,513
Interest and other (note 1(k)) 71,629 10,041
----------- -----------
2,151,042 444,554
----------- -----------
Expenses:
Oil and gas production expenses 1,175,639 279,825
Depreciation, depletion and amortization 630,000 132,000
General and administrative (note 8) 1,113,146 293,658
Interest and financing costs 420,790 25,144
Reverse acquisition expenses (note 2) -- 401,120
----------- -----------
3,339,575 1,131,747
----------- -----------
Net loss $(1,188,533) (687,193)
=========== ===========
Loss per common share $ (.05) (.06)
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F6
<PAGE> 60
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
For the year ended June 30, 1996 and 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>
Issuance 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
Issuance 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
Issuance of common stock
for services (note 4) 350,000 525 62,475 - 63,000
Issuance of common stock
for oil and gas properties
(note 4) 470,000 705 83,895 - 84,600
Issuance of common stock
(note 4) 400,000 600 999,400 - 1,000,000
Net loss - - - (1,188,533) (1,188,533)
------------ -------- ----------- --------- ---------
Balance at June 30, 1996 27,020,000 $ 40,530 4,997,841 (1,875,726) 3,162,645
========== ====== ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F7
<PAGE> 61
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the year ended June 30, 1996 and the period
from August 9, 1994 (inception) to June 30, 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,188,533) (687,193)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation, depletion and amortization 630,000 132,000
Foreign currency translation gains (62,528) --
Reverse acquisition expenses - issuance of common
stock for services rendered -- 83,640
Issuance of common stock for services rendered 63,000 --
Changes in operating assets and liabilities:
Accounts receivable - oil and gas sales (257,666) (170,593)
Other assets 7,951 (12,884)
Accounts payable and accrued liabilities 187,897 351,820
----------- -----------
Net cash used in operating activities (619,879) (303,210)
----------- -----------
Cash flows from investing activities:
Additions to property and equipment (5,414,711) (3,129,952)
Additions to other assets (87,749) --
----------- -----------
Net cash flows used in investing activities (5,502,460) (3,129,952)
----------- -----------
Cash flows from financing activities:
Proceeds from revolving credit facility -- 262,610
Payments made on revolving credit facility (262,610) --
Proceeds from revolving line of credit 4,582,011 --
Proceeds from private debt offerings 1,872,860 --
Payments made on note payable (600,000) --
Proceeds from the sale of common stock 1,024,000 3,283,131
Payments made on capital lease obligation (56,276) (13,132)
----------- -----------
Net cash provided by financing activities 6,559,985 3,532,609
----------- -----------
Effect of foreign currency exchange rate changes on cash 62,528 --
----------- -----------
Net increase in cash 500,174 99,447
Cash at beginning of period 99,447 --
----------- -----------
Cash at end of period $ 599,621 99,447
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F8
<PAGE> 62
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1996 and 1995
(1) Summary of Significant Accounting Policies
(a) General
Queen Sand Resources, Inc. ("QSRI" or the "Company") is engaged
in, and its only industry segment is acquisitions, exploration,
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 the issuance of additional shares 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
A majority of the Company's proved oil and gas reserves are
undeveloped which are expected to require approximately
$30,100,000 (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 anticipated to be provided from future operations and
future equity offerings 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 12).
The Company had negative cash flows from operations for the year
ended June 30, 1996 and the period from August 9, 1994 (inception)
to June 30, 1995. In the event of future cash flow deficiencies,
management believes that sufficient liquidity will be provided
through a combination of common stock sales, private debt
offerings, and acquisitions of oil and gas properties with
positive cash flows.
(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.
F9
<PAGE> 63
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 $231,750 and $294,385 for the year ended
June 30, 1996 and the period from August 9, 1994 (inception) to
June 30, 1995, respectively. 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 $4.60 and $4.59 per equivalent barrel of oil and
gas produced for the year ended June 30, 1996 and the period from
August 9, 1994 (inception) to June 30, 1995, respectively. 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 depreciation, depletion and
amortization, 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 depreciation, depletion and amortization
expense. The Company has not recorded any write-downs of
capitalized costs as a result of this limitation.
Depreciation, depletion and amortization 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.
F10
<PAGE> 64
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(e) Revenue Recognition
The Company uses the sales method of accounting for oil and gas
revenues. Under the sales method, revenues are recognized based on
actual volumes of oil and gas sold to purchasers.
(f) Environmental Matters
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 $168,870 and $9,378 for the year ended
June 30, 1996 and for the period from August 9, 1994 (inception)
to June 30, 1995, respectively. No federal or state income taxes
were paid during these periods due to net operating losses.
In 1996, in connection with the purchase of certain interests in
oil and gas properties located in Texas, the Company entered into
notes payable with the seller for $750,000 and issued 470,000
shares of common stock valued at $84,600 ($.18 per share) (see
notes 3 and 4).
In 1996, in connection with the sale of 400,000 shares of common
stock for $1,000,000, the Company recorded accounts receivable
from stockholders in the amount of $500,000. The receivables were
collected in September 1996 (see note 4).
In 1996, in connection with certain promotional services rendered
by an unrelated party, the Company issued 350,000 shares of common
stock valued at $63,000 ($.18 per share) (see note 4).
In 1995, 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).
F11
<PAGE> 65
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In 1995, in connection with the reverse acquisition (see note 2),
the Company issued 492,000 shares of common stock, valued at
$83,640 ($.17 a common share) to an unrelated party for investment
advisory services.
In 1995, 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 and the
remainder in fiscal 1996 (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 outstanding (26,003,479 and 12,275,031 for the year
ended June 30, 1996 and the period from August 9, 1994 (inception)
to June 30, 1995, respectively).
(j) Concentrations of Credit Risk
For the year ended June 30, 1996, five oil and gas companies
accounted for 15%, 15%, 17%, 21% and 24%, respectively, of the
Company's oil and gas sales. 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, 1996
and 1995.
(k) Foreign Currency
Foreign currency transactions are translated to U.S. dollars at
the rate of exchange on the date of the transaction. Amounts
payable and receivable in foreign currency are translated at the
exchange rate at the balance sheet date. Translation gains of
$62,528 were recognized during the year ended June 30, 1996 and
are included in interest and other in the accompanying
consolidated statements of operations.
F12
<PAGE> 66
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(l) Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the
reported amounts of revenue and expenses during the reporting
period. Because of the use of estimates inherent in the financial
reporting process, actual results could differ from those
estimates.
(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),
an unrelated third party, which owned certain oil and gas properties
located in Lea and Chaves 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 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).
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 April 1996, the Company purchased interests in oil and gas properties
located in East Texas for $4,250,000 in cash, $750,000 in notes payable
and 470,000 common shares valued at $84,600 ($.18 per share).
The consolidated financial statements include the results of operations
of the acquired interests in oil and gas properties from their respective
acquisition dates.
F13
<PAGE> 67
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 year ended June 30, 1996 and 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 unaudited 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.
1996 1995
---- ----
Revenues $ 3,288,420 2,560,921
========= =========
Net loss $(1,194,848) (1,075,438)
========= =========
Loss per common share $(.05) (.08)
=== ===
(4) Common Stock
In May 1995, the Company sold 3,200,000 shares of common stock for $.17
per share. At June 30, 1995, receivables of $524,000 remained outstanding
from these stock sales which were collected in 1996.
On May 10, 1995, the Board of Directors effected a two-for-one stock
split, with a May 26, 1995 record date. All share and per share amounts
in the accompanying consolidated financial statements and notes thereto
have been restated to reflect the stock split.
In March 1996, the Company issued 350,000 shares of common stock valued
at $.18 per share in connection with certain promotional services
rendered by an unrelated party.
In April 1996, the Company issued 470,000 shares of common stock valued
at $.18 per share in connection with the acquisition of oil and gas
properties (see note 3).
In June 1996, the Company sold 400,000 shares of common stock for $2.50
per share. At June 30, 1996, a receivable of $500,000 remained
outstanding from this stock sale. The receivable was subsequently
collected by the Company in September 1996.
F14
<PAGE> 68
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) Current and Long-term Debt
A summary of current and long-term debt follows:
<TABLE>
<CAPTION>
June 30
--------------------------
1996 1995
---- ----
<S> <C> <C>
Prime plus 1.5% revolving credit note, due in December 1997
$ 4,582,011 -
12% unsecured DEM notes, due in July 2000 1,872,860 -
9% notes to seller, due in July and October 1996 and January
1997 750,000 -
9% note to seller, repaid in 1996 - 600,000
5.625% bank note, repaid in 1996 - 262,610
Capital lease obligations (note 6) 275,580 331,868
--------- ---------
7,480,451 1,194,478
Less portion of debt classified as current 750,000 262,610
Less portion of capitalized lease obligation
classified as current 60,010 56,276
----------- ---------
Total long-term obligations $ 6,670,441 875,592
========= =========
</TABLE>
On December 1, 1995, the Company entered into a credit agreement
("Revolving Credit Note") with a bank to provide a revolving line of
credit up to $10,000,000. The borrowing base is established by the bank
based on oil and gas reserve values and was $1,250,000 at January 30,
1996. On November 14, 1996, the revolving credit note was amended to
increase the line of credit to $15,000,000, increase the borrowing base
to $5,325,000 and extend the due date to December 1, 1997. Borrowings are
secured by substantially all the Company's interests in oil and gas
properties.
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 of April 30, 1996.
The Company was in compliance with all restrictive covenants at June 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.
F15
<PAGE> 69
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In July 1995, the Company initiated a private debt offering whereby it
may issue up to a maximum of 5,000,000 Deutschmark (DEM) denominated 12%
notes due on July 15, 2000, of which DEM 2,850,000 was outstanding at
June 30, 1996. The Company issued additional notes aggregating DEM
200,000, DEM 50,000 and DEM 450,000 in July, August and September 1996,
respectively. 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 other existing indebtedness.
The note agreement contains covenants which place limitations on
dividends and liens.
In April 1996, in connection with the acquisition of certain interests in
oil and gas properties (see note 3), the Company entered into three notes
of $250,000 each.
The aggregate maturities of current and long-term debt for the five years
ending June 30, 2001 are as follows: 1997 - $750,000, 1998 - $4,582,011;
1999 through 2000 - $-0-; and 2001 - $1,872,860.
(6) Capital Lease Obligation
In 1995, in connection with the purchase of interests 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 cost of oil
and gas properties. The cost and related accumulated depreciation of the
capital equipment at June 30, 1996 is $200,000 and $50,000, respectively.
At June 30, 1996, minimum lease payments required under the capital lease
follow:
<TABLE>
<S> <C>
1997 $ 90,000
1998 90,000
1999 90,000
2000 67,500
-------
Total minimum lease payments 337,500
Less amount representing interest (at 11%) (61,920)
-------
Present value of minimum lease payments 275,580
Less current installments of obligation under capital lease 60,010
-------
Obligation under capital lease, excluding
current installments $ 215,570
=======
</TABLE>
(7) Fair Value of Financial Instruments
The Company defines the fair value of a financial instrument as the
amount at which the instrument could be exchanged in a current
transaction between willing parties. The carrying value of cash, accounts
receivable, accounts payable and accrued liabilities approximates fair
value because of the short maturity of those instruments. The estimated
fair value of the Company's long-term obligations is estimated based on
the current rates offered to the Company for similar maturities. At June
30, 1996 and 1995, the carrying value of long-term obligations
approximates fair value.
F16
<PAGE> 70
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) 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 $480,000 and $409,000 for the year ended June 30, 1996
and the period from August 9, 1994 (inception) to June 30, 1995,
respectively. Effective May 1995, the monthly fee was set at $50,000 per
month and was reduced to $40,000 per month effective 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 $163,772 and $90,908 for such costs
for the year ended June 30, 1996 and the period from August 9, 1994
(inception) to June 30, 1995, respectively. The Company capitalized
$128,717 and $294,385 of the management fees and general and
administrative costs paid to Capital House which were directly associated
with oil and gas property acquisitions, exploration and development for
the year ended June 30, 1996 and the period from August 9, 1994
(inception) to June 30, 1995, respectively.
(9) 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, 1996 and 1995 follow:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred income tax assets:
Reverse acquisition costs $ 127,343 126,371
Net operating loss carryforwards 457,985 147,186
Statutory depletion carryforward 11,412 1,360
Oil and gas properties, principally due to
differences in depreciation, depletion and
amortization 40,499 -
------- --------
637,239 274,917
Less valuation allowance (637,239) (235,006)
------- -------
Net deferred income tax asset - 39,911
Deferred income tax liability - oil and gas properties,
principally due to differences in depreciation, depletion
and amortization - (39,911)
--------- -------
$ - -
========= ========
</TABLE>
The net changes in the total valuation allowance for the year ended June
30, 1996 and the period from August 9, 1994 (inception) to June 30, 1995
were increases of $402,233 and $235,006, respectively. The Company has
$1,347,016 of tax net operating loss carryforwards which expire in 2010
and 2011. The Company also has approximately $35,000 of statutory
percentage depletion carryforwards.
F17
<PAGE> 71
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(10) Other Subsequent Events
On November 6, 1996, the Company entered into an agreement to purchase
interests in oil and gas properties located in various counties in Texas
for approximately $1,063,000 in cash and notes payable and 100,000 shares
of common stock.
On November 12, 1996, the Company entered into an agreement to sell
100,000 shares of common stock to an unrelated party for $2.50 per share.
(11) Commitments
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. Five wells have been drilled in satisfaction of
these commitments as of June 30, 1996.
F18
<PAGE> 72
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(12) 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 year ended June 30, 1996 and the period from August 9, 1994
(inception) to June 30, 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Oil and gas sales $ 2,079,413 434,513
Production expenses (1,175,639) (279,825)
Depreciation, depletion and amortization (590,000) (122,000)
--------- -------
Results of operations (excludes corporate
overhead and interest expense) $ 313,774 72,688
========= =======
</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, 1996 and
1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Oil and gas properties - proved $ 10,158,954 3,923,855
Accumulated depreciation, depletion and amortization
(712,000) (122,000)
---------- ---------
Net capitalized costs $ 9,446,954 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 year ended June 30, 1996 and the period from
August 9, 1994 (inception) to June 30, 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Property acquisition costs $ 5,057,292 3,232,988
========= =========
Development costs $ 1,177,807 690,867
========= =========
</TABLE>
F19
<PAGE> 73
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 6,215,735 424,533
Production (25,839) (4,678)
--------- ----------
Balance at June 30, 1995 6,189,896 419,855
Purchase of reserves in place 787,531 12,781,385
Revisions in previous estimates and other 56,909 (63,741)
Production (102,536) (153,833)
--------- ----------
Balance at June 30, 1996 6,931,800 12,983,666
========= ==========
Proved developed reserves:
Balance at June 30, 1995 1,817,100 312,500
========= ==========
Balance at June 30, 1996 2,264,962 9,373,888
========= ==========
</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> 74
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, 1996 and
1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Future cash inflows $ 167,229,130 104,659,297
Future costs and expenses:
Production expenses (62,264,762) (43,317,046)
Development costs (32,208,222) (24,926,908)
Future income taxes (21,525,125) (11,038,669)
----------- -----------
Future net cash flows 51,231,021 25,376,674
10% annual discount for estimated timing of
cash flows (27,260,416) (14,501,003)
----------- -----------
Standardized measure of discounted future net
cash flows $ 23,970,605 10,875,671
=========== ===========
</TABLE>
Changes in the Standardized Measure of discounted future net cash
flows relating to proved oil and gas reserves for the year ended
June 30, 1996 and the period from August 9, 1994 (inception) to
June 30, 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Beginning balance $ 10,875,671 -
Purchases of minerals in place 12,247,552 11,030,359
Developed during the period 232,685 -
Net change in prices and costs 9,356,834 -
Revisions of previous estimates (5,369,349) -
Accretion of discount 1,444,413 -
Net change in income taxes (3,913,427) -
Sales of oil and gas produced, net of
production expenses (903,774) (154,688)
---------- ----------
Balance at June 30, 1996 and 1995 $ 23,970,605 10,875,671
========== ==========
</TABLE>
The future cash flows shown above include amounts attributable to
proved undeveloped reserves requiring approximately $30,100,000 of
future development costs. If these reserves are not developed, the
standardized measure of discounted future net cash flows as of
June 30, 1996 shown above would be reduced by approximately
$9,400,000.
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> 75
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Balance Sheet
September 30, 1996
<TABLE>
<CAPTION>
Assets
------
<S> <C>
Current assets:
Cash $ 834,310
Other current assets 432,890
------------
Total current assets 1,267,200
Net property and equipment 9,746,023
Other assets 87,749
------------
$ 11,100,972
------------
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable and other $ 416,833
Notes payable 500,000
Current portion of capitalized lease obligation 60,010
------------
Total current liabilities 976,843
Long-term obligations, net of current portion 7,267,119
------------
Total liabilities 8,243,962
------------
Stockholders' equity:
Common stock, $.0015 par value, authorized 40,000,000
shares; issued and outstanding 27,136,000 shares 40,704
Additional paid-in capital 5,018,547
Accumulated deficit (2,202,241)
------------
Total stockholders' equity 2,857,010
Commitments ------------
$ 11,100,972
============
</TABLE>
See accompanying notes to unaudited interim period condensed consolidated
financial statements.
F22
<PAGE> 76
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three months ended September 30
-------------------------------
1996 1995
---- ----
<S> <C> <C>
Revenues - oil and gas sales $ 813,433 409,848
--------- -------
Expenses:
Oil and gas production expenses 474,154 263,658
Depreciation, depletion and amortization 212,500 120,000
General and administrative 219,750 225,918
Interest and financing expense 233,544 15,829
--------- -------
1,139,948 625,405
--------- -------
Net loss $ (326,515) (215,557)
========= =======
Loss per common share $(.01) (.01)
=== ===
</TABLE>
See accompanying notes to unaudited interim period condensed consolidated
financial statements.
F23
<PAGE> 77
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Three months ended
------------------
September 30, September 30,
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $(326,515) (215,557)
Depreciation, depletion and amortization 212,500 120,000
Issuance of common stock for services rendered 20,880 --
Net change in operating assets and liabilities (222,582) 75,531
--------- ---------
Net cash used in operating activities (315,717) (20,026)
--------- ---------
Cash flows from investing activities - additions to
property and equipment (296,272) (315,287)
--------- ---------
Cash flows from financing activities:
Proceeds from long-term obligations 610,949 --
Payments on seller notes (250,000) --
Payments on capital lease obligations (14,271) --
Collection of subscriptions receivable 500,000 524,000
--------- ---------
Net cash provided by financing activities 846,678 524,000
--------- ---------
Net increase in cash 234,689 188,687
Cash at beginning of period 599,621 99,447
--------- ---------
Cash at end of period $ 834,310 288,134
========= =========
</TABLE>
See accompanying notes to unaudited interim period condensed consolidated
financial statements.
F24
<PAGE> 78
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Notes to Unaudited Interim Period Condensed Consolidated Financial Statements
September 30, 1996 and 1995
(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 the three
months ended September 30, 1996 are not necessarily indicative of the
operating results for the full fiscal year ending June 30, 1997. The
notes to the consolidated financial statements for the year ended June
30, 1996 on pages F9 through F21 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 common
shares outstanding (27,125,000 and 25,800,000 for the three months ended
September 30, 1996 and 1995, respectively).
During the three months ended September 30, 1996, the Company issued
16,000 common shares valued at $2,880 ($.18 per share) to an unrelated
party in partial payment for legal services rendered and 100,000 common
shares as a severance payment to a former officer valued at $18,000 ($.18
per share).
(3) Obligations
During the three months ended September 30, 1996, the Company issued
700,000 ($464,798) Deutschmark (DEM) denominated 12% notes. At September
30, 1996 there were DEM 3,550,000 ($2,337,658) in notes outstanding due
on July 15, 2000.
At September 30, 1996 $4,728,162 was outstanding against a borrowing base
of $5,600,000 in connection with a credit agreement with a bank
("Revolving Credit Note"). 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 covenants 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 of 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.
F25
<PAGE> 79
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Notes to Unaudited Interim Period Condensed Consolidated Financial Statements
(4) Acquisitions
In April 1996, the Company purchased interests in oil and gas properties
located in East Texas for $4,250,000 in cash, $750,000 in notes payable
and 470,000 common shares valued at $84,600 ($.18 per share).
The following unaudited pro forma summary of the Company's consolidated
results of operations for the three-months ended September 30, 1995 was
prepared as if the acquisition had occurred on July 1, 1995. The
unaudited 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 acquisition had been made on July 1, 1995.
Revenues $ 711,663
=======
Net loss $(282,234)
-------
Loss per common share $(.01)
===
(5) Subsequent Events
On November 6, 1996, the Company acquired interests in certain oil and
gas properties located in Texas for approximately $1.1 million. The
purchase price consisted of cash paid to the seller of $627,500, two
notes payable to the seller of $100,000 each, a third note for $227,000
and 100,000 shares of the Company's common stock (valued at $18,000). The
principal and accrued interest on each of the $100,000 notes are payable
on February 4 and May 4, 1997, respectively. Each note, in the principal
amount of $100,000, bears interest at 9%. The third note, in the
principal amount of $227,500, bears interest at 10%. It is to be repaid
in blended payments of $10,500 per month over a 24 month period. The
notes are unsecured and subordinated to the Revolving Credit Note. The
cash paid to the Seller of $627,500 was provided by additional borrowings
of $127,500 under the Company's Revolving Credit Note (see note 3) and
utilization of certain amounts of cash provided by the sale of DEM 12%
notes during the three months ended September 30, 1996.
In November 1996, the Company sold 100,000 shares of the Company's common
stock for $2.50 per share. Subsequently, the Company received payment in
full relating to the issuance of this common stock.
In December 1996, the Company sold 400,000 shares of the Company's common
stock for $2.50 per share.
In December 1996, the Company signed a letter of intent to acquire
interests in producing and undeveloped oil and gas properties in Texas,
Louisiana and Mississippi. The Company has agreed to pay approximately
$4.8 million in cash and notes and to issue approximately 1,100,500
restricted shares of the Company's common stock. The closing date for the
acquisition should be on or before February 1, 1997.
F26
<PAGE> 80
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> 81
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Statements of Revenues and Direct Operating Expenses
of Oil and Gas Properties Acquired
<TABLE>
<CAPTION>
Year ended
Nine months ended 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> 82
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> 83
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> 84
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> 85
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> 86
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> 87
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Combined Statement of Revenues and Direct Operating Expenses
of Oil and Gas Properties Acquired
<TABLE>
<CAPTION>
Period from
July 1, 1994 to
acquisition dates
-----------------
<S> <C>
Oil and gas sales $ 1,058,653
Direct operating expenses 1,110,667
Excess of direct operating expenses over revenues $ (52,014)
=========
</TABLE>
See accompanying notes to combined statement of revenues and direct operating
expenses.
F34
<PAGE> 88
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Notes to Combined Statement of Revenues and Direct Operating
Expenses of Oil and Gas Properties Acquired
Period from July 1, 1994 to the Acquisition Dates
(1) Basis of Presentation
The accompanying financial statement presents 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. 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 for the year ended June 30, 1996 and
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 Company's
audited consolidated financial statements for the period from inception
(August 9, 1994) to June 30, 1995 included herein.
The accompanying combined statement of revenues and direct operating
expenses of the Properties does 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 statement of
revenues and direct operating expenses of the Properties is 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 statement of revenues and direct
operating expenses are recognized on the sales method. Direct operating
expenses are recognized on the accrual basis.
F35
<PAGE> 89
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Notes to Combined Statement 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 $ 6,277,279 438,567
Production July 1, 1995 (61,544) (14,034)
--------- -------
Balance at acquisition dates $ 6,215,735 424,533
========= =======
Proved developed reserves 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.
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.
F36
<PAGE> 90
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Notes to Combined Statement of Revenues and Direct Operating
Expenses of Oil and Gas Properties Acquired
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
dates
-----------------------
<S> <C>
Future cash inflows $ 105,093,810
Future costs and expenses:
Production expenses (43,596,871)
Development costs (25,617,775)
Future income taxes (10,876,136)
----------
Future net cash flows 25,003,028
10% annual discount for estimated timing of cash flows
(14,287,480)
----------
Standardized measure of discounted future net cash flows
$ 10,715,548
==========
</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 acquisition
dates
---------------------
<S> <C>
Balance at beginning of period $ 10,700,013
Sales of oil and gas produced, net of
production expenses 52,014
Changes in production rates (timing)
and other (36,479)
----------
Balance at end of period $ 10,715,548
==========
</TABLE>
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.
F37
<PAGE> 91
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*
10.k Janex Purchase and Sale Agreement
10.l Trigg Federal Purchase and Sale Agreement
16(a) Letter on change in certifying accountant. *
21.a List of Subsidiaries *
27.a Financial data schedule
* Denotes Previously filed.
P Denotes filing in paper in accordance with rule 202 of regulation s-t
pursuant to a continuing hardship exemption.
50
<PAGE> 92
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: January __________, 1997 By: ___________________________________
Edward J. Munden,
President & Chief Executive Officer
51
<PAGE> 93
EXHIBIT INDEX
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*
10.k Janex Purchase and Sale Agreement
10.l Trigg Federal Purchase and Sale Agreement
16(a) Letter on change in certifying accountant. *
21.a List of Subsidiaries *
27.a Financial data schedule
* Denotes Previously filed.
P Denotes filing in paper in accordance with rule 202 of regulation s-t
pursuant to a continuing hardship exemption.
52
<PAGE> 1
EXHIBIT 10.k
PURCHASE AND SALE AGREEMENT
THIS PURCHASE AND SALE AGREEMENT (hereinafter referred to as the
"Agreement") is made and entered into as of the 6th day of November, 1996, by
and between Enexco, Inc., a Texas corporation ("Enexco"), N & R Resources, Inc.
("N & R"), C. Noell Rather, Ralph E. Rather, Michael Rather, Jane E. Rather, and
C. David Rather (hereinafter collectively referred to as the "Sellers"), and
Queen Sand Resources, Inc., a Nevada corporation (the "Purchaser"), (Sellers and
Purchaser hereinafter individually referred to as "Party" and collectively as
"Parties").
RECITALS
WHEREAS, Sellers desire to sell and convey, and Purchaser desires to
purchase and receive certain rights and interests in and to various oil and gas
properties.
WHEREAS, the parties hereto have entered that certain letter of intent
dated August 12, 1996, from Purchaser to Sellers, covering the oil and gas
properties, which letter of intent is superseded and replaced by this Agreement.
NOW, THEREFORE, for and in consideration of the mutual agreements
herein contained, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged and confessed, Sellers and
Purchaser hereby agree as follows:
1. Definitions. For the purpose of this Agreement, the following
terms shall have the following meanings:
"LEASES" shall mean the oil, gas, and mineral leases and
properties and interests described in Exhibits "A-1" through "A-7"
attached hereto and made a part hereof, including, but not limited to,
leasehold, fee, mineral, royalty, and overriding royalty interests and
payments out of or measured by production (hereinafter defined), and
including the units, pooled acreage, spacing or proration units, or
other allocation of acreage, and all rights associated therewith, which
are applicable to such leases, properties, and interests and have been
established by or in accordance with (a) applicable contractual
provisions regarding unitization, communitization, pooling, spacing or
proration, or (b) applicable state or federal law.
"PRODUCTION" shall mean all oil, gas, casinghead gas,
condensate, distillate, and other liquid or gaseous hydrocarbons, and
other minerals which are in, under, upon, and produced from or
allocable (or to be produced from and allocable) to the Leases, after
the Effective Date (defined herein), including "line fill" and
inventory, or the proceeds from the sale of such production.
"WELLS" shall mean and refer to all wells located on the
Leases, whether productive or non-productive, active or inactive, used
for production or injection, and wells used for water production.
"EQUIPMENT" shall mean and refer to all personal property of
every kind or character located on the Leases or used in the operation
thereof, including, without limitation, wells, compressors, well
equipment, casing, tanks, machinery, gathering lines and systems,
treatment facilities, pipelines and other appurtenances, and any other
personal property situated thereon.
"RIGHTS OF WAY AND PERMITS" shall mean and refer to all
rights, privileges, benefits, permissions, and authorizations
(including, without limitation, permits, licenses, servitudes,
easements, and rights of way) in respect of the use and occupation of
the surface of the Leases, and the subsurface depths under the land and
premises covered by and benefiting such Leases.
"CONTRACTS" shall mean and refer to all of the orders, gas
purchase and sale contracts (wherein Sellers are a selling party),
crude purchase and sale agreements (wherein Sellers are
PURCHASE AND SALE AGREEMENT - PAGE 1
<PAGE> 2
a selling party), surface leases, farm-in agreements, farmout
agreements, bottom hole agreements, acreage contribution agreements,
operating agreements, unit agreements, area of mutual interest
agreements, processing agreements, options, leases of equipment or
facilities, and other contracts, agreements, and rights, which are
owned by Sellers, in whole or in part and are (i) appurtenant to the
Leases or (ii) used or held for use in connection with the ownership or
operation of the Leases or with the Production, treatment on the
Leases, sale or disposal of water, hydrocarbons, or associated
substances.
"RECORDS" shall mean and refer to all files, records, and data
in the possession of Sellers relating to the Leases, Production, Wells,
and Equipment, including, without limitation, lease files, title
records (including abstracts of title, title opinions, and title
curative documents), contracts, correspondence, originals, or copies of
geological, geophysical, and seismic records, data, and information,
and originals and copies of production records, electric logs, core
data, pressure data, and decline curves and graphical production
curves, and all related matters.
2. Sale and Purchase. Sellers agree to sell and convey to
Purchaser, and Purchaser agrees to purchase and pay for:
(a) All of Sellers' right, title, and interest in and to the
Leases described in Exhibit "A-1" attached hereto, commonly referred to
as the "Enexco, Inc. - Frymire Unit," and in and to the Leases
described in Exhibit "A-2" attached hereto, commonly referred to as the
"Krueger Well," together with all of Sellers' right, title, and
interest in and to Production, Wells, Equipment, Contracts, and Records
relating to, and attributable to, such Leases.
(b) An undivided seventy-five percent (75%) of all of Sellers'
right, title, and interest in and to the Leases described in Exhibit
"A-3" attached hereto, commonly referred to as the "Jenkins #2 Well,"
and in and to the Leases described in Exhibit "A-4" attached hereto,
commonly referred to as the "Blocker Field Prospect," and in and to the
Leases described in Exhibit "A-5" attached hereto, commonly referred to
as the "Meeks #1 Well," together with an undivided seventy-five percent
(75%) of all of Sellers' right, title, and interest in and to
Production, Wells, Equipment, Contracts, and Records relating to, and
attributable to, such Leases.
(c) An undivided fifty percent (50%) of all of Sellers' right,
title, and interest in and to the Leases described in Exhibit "A-6"
attached hereto, commonly referred to as the "Juboncillo Prospect," and
in and to the Leases described in Exhibit "A-7" attached hereto,
commonly referred to as the "E. M. Goff Prospect," together with an
undivided fifty percent (50%) of all of Sellers' right, title, and
interest in and to Production, Wells, Equipment, Contracts, and Records
relating to, and attributable to, such Leases.
Exhibit "B-1" attached hereto and made a part hereof sets forth the
undivided interests of Sellers being acquired by Purchaser under this Agreement
in the Leases, and the revenue attributable thereto. This Agreement covers and
pertains to the rights, titles, and interests of Sellers in the Leases,
Production, Wells, Equipment, and Rights of Way, as set forth in subparagraphs
(a), (b), and (c) above, even if the undivided interests being conveyed by
Sellers in any such property or property rights should be incorrectly described
in Exhibit "B-1."
The Leases, Production, Wells, Equipment, Rights of Way and Permits,
Contracts, and Records to the extent being purchased by Purchaser, are
hereinafter sometimes referred to individually and collectively as "Property."
3. Purchase Price. The "Purchase Price" for the Property payable
by Purchaser shall be subparagraphs (a) through (g) as follows:
(a) Five Hundred Thousand Dollars ($500,000) payable at
Closing to Kurt M. Daniel, as escrow agent, as further described below;
and
PURCHASE AND SALE AGREEMENT - PAGE 2
<PAGE> 3
(b) A promissory note in the sum of One Hundred Thousand
Dollars ($100,000) payable by Purchaser, bearing interest at the rate
of nine percent (9%) per annum, payable on or before the ninetieth
(90th) day following the date of Closing; and
(c) A promissory note in the sum of One Hundred Thousand
Dollars ($100,000) payable by Purchaser, bearing interest at the rate
of nine percent (9%) per annum, payable on or before the one hundred
and eightieth (180th) day following the date of Closing; and
(d) A promissory note in the sum of Two Hundred Twenty-Seven
Thousand Five Hundred Dollars ($227,500) payable by Purchaser, bearing
interest at the rate of ten percent (10%) per annum, which shall begin
to accrue on the date of Closing, payable in twenty-four (24) equal
monthly installments of principal and interest, with the first
installment due on December 1, 1996; and
(e) One hundred thousand (100,000) shares of the common stock
of Queen Sand Resources, Inc., a Delaware corporation ("QSR"), who is
the parent corporation of Purchaser (the "QSR Shares"), which shares
are to be issued to Jane E. Rather. For purposes of this transaction
said shares are deemed to have a value of Two Hundred Fifty Thousand
Dollars ($250,000). The Sellers acknowledge that the QSR Shares being
acquired pursuant to this Agreement have not been, and except as
provided for in paragraph 18 herein, will not be, registered under the
Securities Act of 1933 as amended (the "Securities Act") or qualified
under applicable state securities law and that the transferability
thereof is restricted by the registration provisions of the Securities
Act as well as such state laws. Based upon the representation and
agreements being made by it herein, the QSR Shares will be issued
hereunder pursuant to an exemption from such registration provided by
Section 4(2) of the Securities Act and applicable state securities law
qualification exemptions. The Sellers represent that they are acquiring
the QSR Shares for their own account, for investment purposes only, and
not with a view to resale or other distribution thereof, nor with the
intention of selling, transferring, or otherwise disposing of all or
any part of such securities for any particular event or circumstance,
except selling, transferring, or disposing of them upon full compliance
with all applicable provisions of the Securities Act, the Securities
and Exchange Act of 1934 amended, the Rules and Regulations promulgated
by the United States Securities and Exchange Commission thereunder, and
any applicable state securities laws. The Sellers further understand
and agree that (i) the securities may be sold only if they are
subsequently registered under the Securities Act and qualified under
any applicable state securities laws or, in the opinion of counsel
acceptable to the Purchaser, an exemption from such registration and
qualification is available; (ii) except as otherwise provided for
herein, the Purchaser will be under no obligation to register or
qualify the QSR Shares or effect compliance with any exemption from
such registration or qualification; and (iii) any routine sales of
securities made in reliance upon Rule 144 promulgated by the Commission
can be made only in the amounts set forth in and pursuant to the other
terms and conditions of that Rule. Purchaser shall deliver at Closing a
letter of instruction from QSR to its transfer agent authorizing the
delivery to Jane E. Rather of the QSR Shares.
The Sellers agree that each certificate representing the QSR
Shares will bear on its face a legend in substantially the following
form:
These securities have not been registered under the
Securities Act of 1933 or qualified under any state securities
laws. They may not be sold or transferred in the absence of an
effective registration statement under that Act or
qualification under applicable state securities laws without
an opinion of counsel satisfactory to the Company that such
registration and qualification are not required.
(f) Purchaser shall pay at Closing the entire indebtedness
outstanding as of October 20, 1996, plus interest thereafter accrued
under that certain Promissory Note dated July 25, 1995, from C. Noell
Rather and Ralph E. Rather, as makers, to Texas Central Bank, as payee,
in the original principal sum of $125,000.00, as renewed and extended
by Renewal Promissory Note dated May 20, 1996, in the original
principal sum of $157,785.00; provided, however, Purchaser shall not
pay any such indebtedness to the extent same exceeds
PURCHASE AND SALE AGREEMENT - PAGE 3
<PAGE> 4
at the date of Closing the sum of $130,000.00. Subject to the foregoing
limitation, if any of such indebtedness is paid by Sellers to Texas
Central Bank prior to date of Closing, the Purchaser shall reimburse
Sellers at Closing for any such payments made.
It is expressly understood that Purchaser does not agree to
pay a second promissory note dated August 24, 1991, payable by C. Noell
Rather and Ralph E. Rather to Texas Central Bank, in the principal sum
of $50,000.00, which indebtedness is also secured by the oil, gas, and
mineral properties described in Exhibits "A-1" and "A-2," and which
security interest is to be released on or prior to closing.
(g) Purchaser shall pay at Closing to Sellers, or directly to
Sellers' counsel, one-half of the attorney's fees incurred by Sellers
in connection with this transaction.
The Purchase Price shall be allocated among the various properties
being acquired under this Agreement as set forth in Exhibit "B-2" attached
hereto and made a part hereof.
The ownership interest of each particular Seller in the various oil and
gas properties is also set forth and described in Exhibit "B-2" attached hereto.
The share of the Purchase Price to be delivered to a particular Seller shall be
based upon such Seller's ownership share, as reflected in Exhibit "B-2," of each
particular property being purchased, and shall be based upon the purchase value
of each particular property, as reflected in Exhibit "B-2."
The cash payment to be tendered under subparagraph (a) above, as such
sum may be adjusted pursuant to the terms herein, shall be delivered at closing
to Kurt M. Daniel, as Escrow Agent, under an agreement executed simultaneously
with this Agreement by Purchaser, Sellers, and Janex Oil Co., Inc. The
distribution of such funds by the Escrow Agent, pursuant to the terms of such
Escrow Agreement, is for the purposes expressed in such Escrow Agreement, which
purposes have been agreed by the parties to such Escrow Agreement, which
purposes include matters unrelated to the sale and conveyance covered by this
Agreement. Therefore, the delivery of the cash sums to Kurt M. Daniel, as Escrow
Agent, at Closing hereunder, shall constitute a complete tender and delivery of
such sums to Sellers for purposes of this Agreement.
Prior to Closing, the Sellers shall deliver to Purchaser a joint
directive advising Purchaser of the manner in which Sellers have apportioned
between themselves, based upon their respective share of the Purchase Price.
Purchaser shall deliver said promissory notes according to such joint directive.
The promissory notes described in subparagraphs (b), (c), and (d) above
shall be tendered and delivered at Closing to the particular Sellers who shall
be payees of the particular note, per the joint directive received by Purchaser
from Sellers, utilizing the form of promissory notes attached hereto as Exhibits
"C-1," "C-2," and "C-3." At the request of Sellers, each note referenced in
subparagraphs (b), (c), and (d) above may be separated into multiple separate
notes, with such separate note being payable to the particular Seller sharing in
the payments, and with each such separate note covering that portion of the
principal sum due to be paid to a particular sharing Seller. If any of the notes
described in subparagraphs (b), (c), and (d) are divided into multiple separate
notes, each such separate note created by such division shall be based upon the
forms of notes attached as Exhibits "C-1," "C-2," and "C-3, " with each such
separate note created by such division differing from the form as to payee and
the principal sum.
At Closing a Subscription Agreement shall be executed in counterpart
copy by Jane E. Rather, being the Seller receiving the QSR Shares. At Closing
Purchaser shall cause to be delivered to such Seller an instruction letter from
QSR to its transfer agent which authorizes the issuance of the QSR Shares to
such Seller.
All cash payments to be tendered by Purchaser, either before or after
Closing, shall be made by wire transfer or shall be made by certified funds.
The Purchase Price shall be subject to adjustment as hereinafter
provided.
PURCHASE AND SALE AGREEMENT - PAGE 4
<PAGE> 5
4. Closing and Effective Date.
(a) The closing of the sale and purchase of the Property shall
take place on or before November 5, 1996, (the "Closing") at the
offices of Enexco, or at such other time, place, or manner as may be
mutually agreeable to the Parties. The sale of the Property shall be
effective as of 7:00 a.m. Central Standard Time on October 1, 1996 (the
"Effective Date").
(b) At the Closing, the Property shall be conveyed and
transferred by Sellers to Purchaser by the execution and delivery of
the following:
(1) An Assignment and Bill of Sale in the form
attached hereto as Exhibit "D-1" conveying the properties
described in Exhibits "A-1" and "A-2"; and
(2) An Assignment and Bill of Sale in the form
attached hereto as Exhibit "D-2" to be used for the properties
described in Exhibits "A-3" and "A-4"; and
(3) A Bill of Sale in the form attached hereto as
Exhibit "D-3" to be used for the properties described in
Exhibit "A-5"; and
(4) An Assignment and Bill of Sale in the form
attached hereto as Exhibit "D-4" to be used for the properties
described in Exhibits "A-6" and "A-7"; and
(5) Such other instruments of conveyance as may be
reasonably requested by Purchaser.
Such documents to be delivered at Closing shall hereinafter be
referred to as the "Assignments."
(c) Purchaser shall be subject to the duties and obligations
attendant with ownership of the Property for the period from and after
the Effective Date. For the period prior to the Effective Date, Sellers
shall be entitled to all of the rights (including, without limitation,
the rights to all of Sellers' share of Production and proceeds of
Production) appurtenant and attributable to the Property and shall be
subject to the duties and obligations attendant with ownership of the
Property.
5. Adjustments to Purchase Price. The Purchase Price shall be
adjusted (the "Adjusted Purchase Price") at the Closing, by the "Interim
Settlement Statement" (hereinafter defined in this paragraph and in paragraph 10
below), and, subsequent to Closing, by the "Final Settlement Statement"
(hereinafter defined in paragraph 14 below), as follows:
(a) The Purchase Price shall be increased by the following:
(1) the value of all merchantable allowable oil or
other liquid hydrocarbons in storage owned by Sellers in the
tanks or above the pipeline connection at the Effective Date,
and not previously sold by Sellers, that is credited to the
share of the Property being acquired hereunder, valued at the
contract price thereto, or if none, the actual price received
by Purchaser, less taxes or gravity adjustments deducted by
the purchaser of such oil or other liquid hydrocarbons;
(2) the amount of all reasonable expenditures made in
connection with the ownership, operation, and maintenance of
the share of the Property being acquired hereunder, (including
royalties and rentals) and in accordance with generally
accepted accounting principles and prudent operations,
attributable solely to the period from and after the Effective
Date and which are paid by or on behalf of Sellers after the
Effective Date;
(3) an amount equal to all prepaid expenses,
attributable to the ownership, operation, and maintenance of
the share of the Property being acquired hereunder that are
paid by or on behalf of Sellers after the Effective Date and
prior to the Closing
PURCHASE AND SALE AGREEMENT - PAGE 5
<PAGE> 6
Date and that are, in accordance with generally accepted
accounting principles, attributable solely to the period from
and after the Effective Date;
(4) any other amount agreed upon by Purchaser and
Sellers.
(b) The Purchase Price shall be decreased by the following:
(1) the amount of any proceeds from the sale of
Production attributable to the share of the Property being
acquired hereunder attributable to the period on or after the
Effective Date (net of production, severance, and similar
taxes and assessments measured by or payable out of
production) actually received or accrued by or on behalf of
Sellers;
(2) an amount equal to all unpaid ad valorem,
property, production, profit, severance, and similar taxes and
assessments based upon or measured by the ownership of the
share of the Property being acquired hereunder or the
production of oil, gas, or other minerals therefrom or the
receipt of proceeds attributable thereto, which accrue to or
are chargeable against such share of the Property (in
accordance with generally accepted accounting principles) and
which are attributable to the period prior to the Effective
Date, which amount shall, to the extent not actually assessed,
be computed based upon such taxes and assessments for the
immediately-preceding calendar year, or if such taxes or
assessments are assessed on other than a calendar-year basis,
for the tax period last ended;
(3) any amounts received by Sellers (whether prior to
or subsequent to the Effective Date) pursuant to
"take-or-pay," advance payment, or similar provisions of any
production sales contract, any gas balancing agreement, or any
other agreement, to the extent any purchaser has the right to
apply any such amounts to Purchaser's share of Production
delivered after the Effective Date;
(4) any reduction in the value of the share of the
Property being acquired hereunder resulting from the existence
of a Defect (herein defined in Section 5(d)) which is not
cured or waived prior to Closing;
(5) any other amount agreed upon by Purchaser and
Sellers.
(c) The "Interim Settlement Statement" shall be prepared by
Sellers prior to Closing, which statement shall set forth the
adjustments to the Purchase Price, per the adjustments set forth in
this paragraph 5, which are or may be determined at or prior to
Closing. Such statement shall be prepared according to generally
accepted accounting principles and shall show the calculation of all
such adjustments. Upon the approval of such Interim Settlement
Statement by Purchaser, the Purchase Price shall be adjusted according
to such statement. Upon Purchaser's request, Sellers shall make
available to Purchaser all information relied upon by Sellers for the
adjustments requested in order to aid and facilitate Purchaser's
approval of such statement. In the event the net effect of such
statement is to reduce the Purchase Price payable to Sellers, such
reduction shall be made from the sum of money to be tendered to Sellers
at Closing, which sum is referenced in paragraph 3(a) above. In the
event the net effect of such statement is to increase the Purchase
Price payable to Sellers, such increase shall be made to the sum of
money to be tendered to Sellers at Closing, which sum is referenced in
paragraph 3(a) above. After Closing the Purchase Price may further be
adjusted, pursuant to the adjustments set forth in this paragraph, with
the "Final Settlement Statement" in the manner further described in
paragraph 14 below.
(d) All monies received by either Party hereto which, under
the terms of this Agreement or otherwise, belong to the other Party,
shall be received in trust by the Party receiving such funds, and shall
monthly, upon receipt, be paid over to the other Party. The Parties
agree, in this regard, to cooperate fully and to execute, endorse, and
deliver as expeditiously as practicable such papers, checks, and
documents as are needed promptly to complete the transfer of such
payments;
PURCHASE AND SALE AGREEMENT - PAGE 6
<PAGE> 7
(e) After the Closing, if an invoice or other evidence of an
obligation relating to the share of the Property acquired by Purchaser
is received which is applicable to periods both prior to and after the
Effective Date, and is partly the obligation of Sellers and partly the
obligation of Purchaser, then each Party shall pay its respective
portion of such obligation to the obligee, prorated between the Parties
as of the Effective Date;
(f) At and after the Closing, Purchaser and Sellers will
cooperate fully in notifying all applicable third parties (including
the execution by Sellers of such transfer orders, letters in lieu,
change of operator, etc., as may be requested by Purchaser) so that
notices, proceeds, and invoices from such third parties may take into
account the fact that Purchaser has acquired the Property as of the
Effective Date;
(g) The parties hereto agree to exercise diligence and good
faith in attempting to resolve any disagreements or disputes which may
arise from the adjustments to the Purchase Price to be made in
accordance with this paragraph.
(h) The provisions of this Section 5 shall survive the Closing
hereof.
6. Property Conditions, Title Review, Property Information, and
Casualty Losses.
(a) Property Conditions. THIS SALE OF THE EQUIPMENT AND ALL
OTHER PERSONAL PROPERTY THAT IS A PART OF THE PROPERTY IS MADE ON AN
"AS IS," "WHERE IS" BASIS WITH ALL FAULTS AS TO ITS CONDITION, AND
SELLERS EXPRESSLY DISCLAIM ALL WARRANTIES AS TO THE CONDITION OF THE
EQUIPMENT (NOTE, HOWEVER, THERE ARE CERTAIN WARRANTIES AS TO TITLE AS
HEREIN SET FORTH) INCLUDING, WITHOUT LIMITATIONS, THE IMPLIED
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR ANY PARTICULAR PURPOSE.
Sellers agree that for a period of time commencing with the date of the
letter of intent dated August 13, 1996, and continuing until five (5)
business days before Closing (the "Review Period"), Purchaser,
personally or through its authorized agents or representatives, shall
have the right to make any and all physical inspections of the Property
which Purchaser may desire to make or to have made and to make all such
other inspections, surveys, tests, or other studies (including, but not
limited to, environmental assessments and evaluations) as Purchaser
deems necessary or desirable. Upon reasonable notice to Sellers,
Purchaser, and its authorized agents and representatives, at
Purchaser's sole risk, may enter upon the Property for the purpose of
conducting those inspections, surveys, tests, and studies. If Purchaser
shall determine that the condition of the Property is not in
substantial compliance with any governmental regulations (including
environmental regulations), then upon discovery Purchaser must promptly
give written notice to Sellers of such condition ("Condition"). Upon
receipt of such notice, Sellers shall have the option, but not the
obligation, to (a) cure or remedy such Condition to the reasonable
satisfaction of Purchaser (if current remediation of such Condition is
required by a governmental agency, Sellers agree that the Condition
shall be remedied in accordance with and to the satisfaction of the
appropriate agency's requirements); or (b) agree with Purchaser on a
reduction to the Purchase Price which reduction shall reflect
Purchaser's anticipated reasonable cost to remedy such Condition. If
the Condition cannot be cured or remedied to Purchaser's reasonable
satisfaction, and if agreement cannot be reached on reduction to the
Purchase Price, then the affected Property may be excluded by Purchaser
from the Property to be acquired by Purchaser hereunder, and the
Parties hereto shall in good faith attempt to agree upon a reduction of
the Purchase Price on account of the excluded Property. In the event
the Parties fail to agree upon the implementation of either Subclause
(a) or (b) prior to Closing, and if a reduction of more than
twenty-five percent (25%) in the Purchase Price results from the
exclusion by Purchaser of the affected Property, either Party may
terminate this Agreement by delivery of written notice so indicating to
the other Party, in which event this Agreement shall terminate, and the
"Escrow Deposit" (as defined herein) (plus accrued interest) shall be
returned to Purchaser, and the Parties hereto shall have no further
rights or obligations under this Agreement;
(b) Review of the Records. During the Review Period, and upon
reasonable notice from Purchaser, Sellers shall provide Purchaser,
personally or through their authorized
PURCHASE AND SALE AGREEMENT - PAGE 7
<PAGE> 8
agents or representatives, full access during normal business hours to
Sellers' offices and premises to review and inspect all Records,
including, but not limited to, all abstracts of title, lease files,
unit files, production and marketing files, title opinions, title
files, title records, geologic, engineering, and other files or
information in Sellers' possession or to which they have access which
relate to the Property and the status of Sellers' title thereto, and
Purchaser at its expense, shall have the right to make and retain
copies of any of such Records; provided, however, if the transactions
contemplated hereby do not close for any reason, Purchaser shall return
any Records and copies thereof to Sellers forthwith. Without limiting
the generality of the foregoing, Purchaser shall also be given access
to reserve reports, geological and geophysical reports (including, but
not limited to well records, log films, proprietary or joint venture
seismic data or other seismic data which Sellers are not contractually
restricted from disclosing), contracts (including, but not limited to,
gas contracts), operating agreements, operating statements and reports;
(c) Notice of Defect. If during the Review Period, Purchaser
determines that the Property is subject to a "Defect" (as defined
herein in Section 6(d)), the Purchaser must give written notice to
Sellers of such Defect, the nature of the Defect, and furnish Sellers
with Purchaser's basis for the assertion of such Defect. As soon as
practical after such written notice, Sellers shall use reasonable
diligence to cure any such Defects. If Sellers cannot cure any such
Defects to the reasonable satisfaction of Purchaser, then Sellers shall
so notify Purchase in writing. Thereafter, Sellers and Purchaser shall
use a good faith effort to agree on the Purchase Price adjustment for
any such Defect which cannot be cured. If the Sellers and Purchaser
cannot agree in good faith on the amount of such a Purchase Price
adjustment, such amount shall be determined in accordance with the
following guidelines:
(1) If the Defect is that Sellers' Net Revenue
Interest ("NRI") for any Property is less than the NRI for
such Property as set forth in Exhibit "B-1," then the portion
of the Purchase Price which Sellers and Purchaser may agree to
be allocated to such Property, shall be adjusted in the same
proportion that the actual NRI for such property bears to the
NRI shown in Exhibit "B-1."
(2) If the Defect is a lien, encumbrance, or other
charge upon the Property which is liquidated in amount, then
the adjustment shall be the sum necessary to be paid to the
obligee to remove the Defect from the Property;
(3) If the Defect is curable, but not cured by
Closing, and Sellers desire to continue to attempt to cure
such Defect, the Parties shall attempt to agree upon an amount
to instruct the Escrow Agent (defined herein) to withhold at
Closing, pursuant to the Escrow Agreement (defined herein);
(4) If the Purchase Price adjustment for any such
Defect cannot be determined, and the Sellers and Purchaser
cannot agree in good faith on the amount of the adjustment to
the Purchase Price, the Purchaser may (a) waive the Defect and
proceed with Closing or (b) exclude the affected Property and
reduce the Purchase Price based upon the value of the affected
Property, as such value may be agreed upon by Sellers and
Purchaser in good faith. In the further event the Parties are
unable to agree in good faith upon the value of the affected
Property, then either party hereto, upon written notice to the
other, may elect to terminate this Agreement. In the event
exclusion of any affected Property or adjustment due to Defect
results in a reduction of more than twenty-five percent (25%)
of the Purchase Price, either Party may terminate this
Agreement by delivery of written notice so indicating to the
other Party. In the event this Agreement shall be so
terminated, the Escrow Deposit (plus accrued interest) shall
be returned to Purchaser, and the Parties hereto shall have no
further rights or obligations under this Agreement.
(d) Definition of Defect. For the purpose of this Agreement, a
"Defect" shall be defined as:
(1) Any material encumbrance, lien, mortgage, breach
of representation or warranty, production payment, pledge,
claim, charge, call on production, default,
PURCHASE AND SALE AGREEMENT - PAGE 8
<PAGE> 9
defect, Condition, unleased mineral interest, preferential
right, or requirement for consent to assignment affecting the
Property;
(2) Sellers' NRI in any Property is less than the NRI
for such Property which is set forth in Exhibit "B-1," or
Sellers' gross working interest ("GWI") in any Property is
less than the working interest shown in Exhibit "B-1," or
Sellers' GWI in any Property is greater than the working
interest shown in Exhibit "B-1" without a corresponding
increase in the NRI in such Property.
(e) Other Property Information. If, based upon Purchaser's
examination of the Records according to paragraph 6(b) hereof,
Purchaser shall determine that any information, statement, or data
contained in any information, reports, statement, or data furnished to
Purchaser or used in its economic analysis of the Property is not true
or correct in any material respect, upon discovery of any incorrect
information, Purchaser may give written notice to Sellers of such
inaccuracy or misstatement. Any such notice must be provided in writing
during the Review Period, or it will be deemed to be waived. Such
notice shall provide a summary of such inaccuracy or misstatement. Upon
receipt of such notice, Sellers shall have the option, but not the
obligation, to (a) cure or remedy such inaccuracy or misstatement to
the reasonable satisfaction of Purchaser; or (b) agree with Purchaser
on a reduction to the Purchase Price which reduction shall reflect
Purchaser's reasonably anticipated cost to remedy such inaccuracy or
misstatement. If the inaccuracy or misstatement cannot be cured or
remedied to Purchaser's reasonable satisfaction, and if agreement
cannot be reached on reduction to the Purchase Price, then the affected
Property shall be excluded from the Property to be acquired by
Purchaser hereunder, and the Purchase Price shall be reduced by the
value of the affected Property (or that portion of such Property so
affected) as may be agreed upon by Sellers and Purchaser in good faith.
In the event the Parties fail to agree upon the implementation of
either Subclause (a) or (b) prior to Closing, and if a reduction of
more than twenty-five percent (25%) in the Purchase Price results from
the exclusion by Purchaser of the affected Property, Purchaser may
terminate this Agreement by delivery of written notice so indicating to
the Sellers, in which event this Agreement shall terminate, and the
Escrow Deposit (plus accrued interest) shall be returned to Purchaser,
and the Parties hereto shall have no further rights or obligations
under this Agreement;
(f) Casualty Loss. If, prior to Closing, any Property is
substantially damaged or destroyed by fire or other casualty ("Casualty
Defect"), Sellers shall notify Purchaser promptly after Sellers learn
of such event. Sellers shall have the right, but not the obligation, to
cure any such Casualty Defect by repairing such damage or, in the case
of personal property, fixtures, replacing the Property affected thereby
with equivalent items, no later than the date of Closing. If any
Casualty Defects exist at Closing, Purchaser may proceed to purchase
the Property affected thereby, and the Purchase Price shall be reduced
by the aggregate reduction in the value of such Property on account of
such Casualty Defects, as determined by the mutual agreement of the
Parties, or if the Parties are unable to agree on such amount prior to
Closing, then such determination shall be made by an appraiser chosen
by the Parties (acting in good faith) and knowledgeable in the field to
determine such value. Notwithstanding anything to the contrary
contained herein, Sellers shall be entitled to retain all insurance
proceeds and claims against other Parties in respect of any such
Casualty Defect which occurs prior to closing unless no reduction is
made in the Purchase Price as a result of such Casualty Defect, in
which event Purchaser shall be entitled to the insurance proceeds and
claims against other Parties arising from such Casualty Defect.
Provided, however, if any Casualty Defect materially and adversely
affects the value of the Property as a whole by more than twenty-five
percent (25%) of the Adjusted Purchase Price, then Purchaser may
terminate this Agreement, in which event the Escrow Deposit (plus
accrued interest) shall be returned to Purchaser.
(g) Reduction of Purchaser's Notes. In the event of any
downward adjustment of the Purchase Price under this paragraph 6, then,
unless the parties agree otherwise in writing, the amount of the
promissory note described in paragraph 3(d) hereof shall be reduced by
such downward adjustment, provided, if such note is not sufficient to
absorb such downward adjustment, then the promissory note described in
paragraph 3(c) shall be reduced by the amount of the downward
adjustment which exceeds the amount of the promissory
PURCHASE AND SALE AGREEMENT - PAGE 9
<PAGE> 10
note described in paragraph 3(d). If the promissory note in paragraph
3(c) is not sufficient to handle such downward adjustment, then the
promissory note described in paragraph 3(b) shall be reduced by the
amount of the downward adjustment which exceeds the total amount of the
promissory notes described in paragraphs 3(d) and 3(c). If such note is
not sufficient to handle such downward adjustment, then the cash
portion of the Purchase Price described in paragraph 2(a) shall be
reduced by the amount of the downward adjustment which exceeds the
total amounts of the promissory notes described in paragraphs 3(d),
3(c), and 3(b).
7. Sellers' Covenants, Representations, and Warranties. Sellers
represent and warrant to Purchaser that:
(a) Enexco is a corporation duly organized, validly existing,
and in good standing under the laws of the State of Texas; (ii) Enexco
is duly qualified to transact business in each jurisdiction where the
nature and extent of its business and properties require the same in
order for it to perform its obligations under this Agreement; (iii)
Enexco possesses all requisite authority, power, licenses, permits, and
franchises to conduct its business and execute, deliver, and comply
with the terms and provisions of this Agreement and any other document,
instrument, or agreement provided for herein, including the Assignment,
all of which have been duly authorized and approved by all necessary
corporate action and for which no further approval or consent is
required;
(b) N & R Resources is a corporation duly organized, validly
existing, and in good standing under the laws of the State of Texas;
(ii) N & R Resources is duly qualified to transact business in each
jurisdiction where the nature and extent of its business and properties
require the same in order for it to perform its obligations under this
Agreement; (iii) N & R Resources possesses all requisite authority,
power, licenses, permits, and franchises to conduct its business and
execute, deliver, and comply with the terms and provisions of this
Agreement and any other document, instrument, or agreement provided for
herein, including the Assignment, all of which have been duly
authorized and approved by all necessary corporate action and for which
no further approval or consent is required;
(c) This Agreement has been duly executed and delivered on
behalf of Sellers and is binding and enforceable against Sellers in
accordance with its terms and at the Closing. All documents and
instruments required hereunder to be executed and delivered by Sellers
shall have been duly executed and delivered at Closing, and the
execution, delivery, and performance of this Agreement by Sellers and
the consummation of transactions contemplated hereby will not
constitute a breach of, an event of default under, a violation of, or a
conflict with any agreement or other instrument to which Sellers is a
party (except to the extent such instrument may be released at the
Closing), nor will the same cause Sellers to be in violation of their
Articles of Incorporation or Bylaws, as the case may be, or any
applicable laws or regulations or any order of any court or
governmental agency having jurisdiction;
(d) All ad valorem, property, production, severance, excise,
and similar taxes and assessments based on or measured by the ownership
of the Property or the Production or the receipt of proceeds therefrom,
which have become due and payable prior to the date hereof with respect
to the Property have been properly paid, and Sellers' allocable share
of such taxes and assessments which become due and payable prior to the
Closing shall be properly paid by Sellers, and all royalties,
overriding royalties and payments to any third parties which have
become due and payable prior to the date hereof with respect to
production from the Property, have been properly paid, and will be
hereafter properly paid for the period prior to Closing.
(e) Sellers have incurred no liability, contingent or
otherwise, for brokers' or finders' fees in respect of this transaction
for which Purchaser shall have any responsibility whatsoever;
(f) Prior to the Closing, Sellers will pay or cause to be paid
all costs and expenses incurred in connection with the Property and
will comply with all contracts or other agreements relating to the
Property incurred while owned by Sellers;
PURCHASE AND SALE AGREEMENT - PAGE 10
<PAGE> 11
(g) To the best of Sellers' information and belief, all laws,
regulations, and orders of all governmental agencies having
jurisdiction over the Property have been and shall continue to be
complied with until the Closing;
(h) There are no first rights of refusal, consents,
authorizations, preferential rights, options, or claims of a similar
nature affecting the Property, other than those listed in Exhibit "E,"
said listed consents defined herein as "Consents";
(i) Sellers shall, upon request, subrogate Purchaser to any
claim which Sellers may have against any third party, prior owner,
vendor, or assignor with respect to the share of the Property acquired
by Purchaser, or the title thereto;
(j) There are no "imbalances" which allow any other party to
make up production at any time after the Effective Date, under any
operating agreement, gas balancing agreement and storage agreement, gas
transportation agreement, gas processing or dehydration agreement, or
other similar agreement relating to the Property;
(k) Sellers have not directly or indirectly reserved or
retained any recorded or unrecorded interest or rights in any of the
Property, and Sellers shall not reserve any recorded or unrecorded
executory interest or rights relating to the Property;
(1) The Assignment to Purchaser shall contain a special
warranty as to its right, title, and interest as described in the
exhibits attached hereto, by, through, and under Sellers, but not
otherwise; and the Assignment shall contain a warranty by Sellers that
the Property is free and clear of all encumbrances, liens, and
mortgages created by, through, or under Sellers, save and except such
encumbrances expressly set forth in the exhibits attached hereto, and
further save and except liens for taxes not yet due and payable;
(m) Except as set forth in Exhibit "F" attached hereto, the
Property is not subject to any restriction, reservation, reversionary
interest, drilling or development obligation, or other material
obligation or burden on the operation or the disposition of Production
attributable to the Property;
(n) No part of any of the Property is affected by any
prepayment arrangement under any contract for the sale of oil or gas,
or by any production payment or any other arrangement for delivery of
oil or gas produced from any of the Property at some future time
without Purchaser then or thereafter receiving full payment therefor,
and no third party now has or at Closing will have any right to take
makeup gas for which it has already paid. As of the Effective Date,
there are no volumes of makeup gas owing, or accumulated transportation
credits due, to gas purchasers on account of any "take-or-pay" or other
provisions of any contract, and Sellers have not produced or sold more
than their pro-rata share of the gas from any Wells included in the
Property;
(o) Except as may be set forth in Exhibit "G" attached hereto,
there are no gas purchase or sale agreements, and no gas gathering or
transportation agreements, affecting the Property that cannot be
terminated upon ninety (90) days' written notice;
(p) Without the prior written consent of Purchaser, Sellers
(i) shall not enter into any new agreements or commitments affecting
the Property which extend beyond the Closing, and (ii) will not modify
or terminate any agreements affecting any of the Property, including,
without limitation, any oil and gas leases, unitization or pooling
agreements, operating agreements, pipeline agreements, processing
agreements, and hydrocarbon sales contracts, and (iii) will not further
encumber, sell, mortgage, release, abandon, or otherwise dispose of any
of the Property or any interests therein;
(q) There is not any suit, action, or other proceeding pending
or threatened which affects or relates to the Property, or seeks to
restrain or prohibit Sellers from selling or conveying to Purchaser the
share of the Property to be purchased herein. Sellers shall promptly
notify Purchaser of any such proceedings which may arise or be
threatened prior to Closing;
PURCHASE AND SALE AGREEMENT - PAGE 11
<PAGE> 12
(r) There are no operating agreements with third parties
affecting the Property except those set forth in Exhibit "H" attached
hereto;
(s) Sellers have no knowledge and have not received any notice
of any claimed default (or any event which, with the giving of notice
or the passage of time, or both, would constitute a default) under (i)
the Leases, (ii) any order, writ, injunction, or decree of any court,
commission, or administrative agency affecting the Property or (iii)
any other agreement affecting the Property. Sellers shall promptly
notify Purchaser of any such notice hereafter received by Sellers and
the occurrence of any such event of which Sellers become aware prior to
Closing;
(t) There are no tax partnerships affecting any of the
Property;
(u) To the best of Sellers' information and belief, no
Production from any Well on the Property has occurred in excess of that
permitted by law, orders, or regulations;
(v) To the best of Sellers' information and belief, there has
been no material injury or damage to any of the Property which has not
been fully repaired, replaced, or rebuilt;
(w) Except for depletion due to continued production, there
has been no substantial and material change in condition of the
Property between the date hereof and Closing;
(x) To the best of Sellers' information and belief, all
easements, rights of way, permits, crossing agreements, and surface
rights included in the Property are in full force and effect and are
valid and subsisting, and freely assignable, and all rentals and other
payments due thereunder have been properly and timely paid and all
conditions necessary to keep them in force have been duly performed;
(y) From and after the effective date of its acquisition of
its ownership in the Leases, the Sellers have performed all obligations
required to be performed under such Leases, or any other instruments
and agreements relating to the Properties, and is not in default
thereunder, and to the best of Sellers' information and belief, each of
the Leases to be conveyed is valid and in full force and effect;
(z) To the best of Sellers' knowledge, Sellers own each Lease
and Property in the undivided share reflected by the "Working Interest"
described and set forth in Exhibit "B-1" for each particular Lease and
Property, and Sellers own for each Lease and Property the share of
Production reflected as "Net Revenue Interest" in Exhibit "B-1"
attached hereto. Sellers are being paid not less than the fractional
"Net Revenue Interest" for each Property as reflected in Exhibit "B-1"
hereto, and, for expenses and costs for each Property Sellers are not
paying more than the fractional interest specified under "Working
Interest" for each Property in Exhibit "B-1" hereto;
(aa) To the best of Sellers' information and belief, all
rentals and bonuses have been timely and fully paid and discharged, and
all conditions necessary to keep the Leases in full force have been
performed and that no proceeds from the sale of Production attributable
to the Property are currently being held in suspense by any purchaser
thereof;
(bb) The Sellers have not collected any proceeds from the sale
of Production attributable to the Property which are subject to refund,
or if so, that any such refund, if not otherwise accounted for under
this Agreement, shall be the sole responsibility of the Sellers;
(cc) Except as listed in Exhibit "I" attached hereto, to the
best of Sellers' information and belief, there are no Wells located on
the Property that Sellers are obligated by law or contract to plug and
abandon, that Sellers will be obligated by law or contract to plug and
abandon at the present time, and with the lapse of time or notice, or
both, because the well is not currently capable of producing production
in commercial quantities, or
PURCHASE AND SALE AGREEMENT - PAGE 12
<PAGE> 13
because the Well is subject to exceptions to a requirement to plug and
abandon issued by a regulatory authority having jurisdiction over the
Property;
(dd) To the best of Sellers' information and belief, there are
no presently existing Conditions (as defined herein and by existing
federal or state regulations) affecting the Property, which might give
rise to a cause of action on behalf of any governmental agency or third
party, against either Purchaser or Sellers;
(ee) All information and data provided to Purchaser concerning
the Property is true and correct to the best of Sellers' information,
knowledge, and belief;
(ff) The Sellers represent and agree that (i) Sellers'
acquisition of QSR Shares will not be made with a view toward the
"distribution" of such shares, as defined in the securities Act of
1933, as amended (the "1933 Act"); (ii) such shares may not be
transferred or hypothecated unless, in the opinion of counsel to the
corporation, such transfer or hypothecation would be in compliance with
the registration provisions of the 1933 Act or pursuant to an exemption
therefrom; and (iii) the Seller who shall acquire such shares agrees to
sign an agreement to such effect at the time of Closing and agrees that
the certificate for the shares so acquired may be inscribed with a
legend to ensure compliance with the 1933 Act. Sellers understands that
the shares will not, subject to paragraph 18 below, be registered under
the 1933 Act, or under the laws of any jurisdiction. The Sellers,
themselves, or through their advisers, are sophisticated and
experienced in financial business and investment matters, and as a
result, the Sellers are in a position to evaluate the merits and risks
of an investment in Queen Sand Resources, Inc., a Delaware corporation;
(gg) Environmental Current Status. To the best of Sellers'
knowledge, the Property and Sellers are not in violation of or subject
to any existing, pending, or threatened investigation or inquiry by any
governmental authority or to any remedial obligations under any
applicable laws pertaining to health or the environment (such laws as
they now exist or are hereafter enacted and/or amended hereinafter
sometimes collectively called "Applicable Environmental Laws"),
including without limitation the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended by the Superfund
Amendments and Reauthorization Act of 1986 (as amended, hereinafter
called "CERCLA"), the Resource Conservation and Recovery Act of 1976,
as amended by the Used Oil Recycling Act of 1980, the Solid Waste
Disposal Act Amendments of 1980, and the Hazardous and Solid Waste
Amendments of 1984 (as amended, hereinafter called "RCRA"), the Texas
Water Code and the Texas Solid Waste Disposal Act, and this
representation will continue to be true and correct following
disclosure to the applicable governmental authorities of all relevant
facts, conditions, and circumstances, if any, pertaining to the
Property and Sellers. The terms "hazardous substance" and "release" as
used in this Agreement shall have the meanings specified in CERCLA, and
the terms "solid waste" and "disposal" (or "disposed") shall have the
meanings specified in RCRA; provided, in the event either CERCLA or
RCRA is amended so as to broaden the meaning of any term defined
thereby, such broader meaning shall apply subsequent to the effective
date of such amendment and provided further, to the extent that the
laws of the State of Texas establish a meaning for "hazardous
substance," "release," "solid waste," or "disposal" which is broader
than that specified in either CERCLA or RCRA, such broader meaning
shall apply.
(hh) Jane E. Rather warrants and represents that she is
a) a natural person whose individual net worth, or
joint net worth with her spouse, at the time of this purchase
exceeds $1 million; or
b) a natural person who had an individual income in
excess of $200,000.00 in each of the two most recent years or
joint income with her spouse in excess of $300,000.00 in each
of those years and has a reasonable expectation of reaching
the same income level in the current year.
(ii) The sum of $158,019.30 was the unpaid principal
indebtedness as of October 4, 1996, under that certain Promissory Note
dated January 27, 1994, from Enexco,
PURCHASE AND SALE AGREEMENT - PAGE 13
<PAGE> 14
Inc., as maker, to Oak Lawn Investments, Inc., as payee, and the
interest has been paid current under the note.
(jj) On or after Closing, Sellers shall cause to be delivered
to Purchaser a stipulation, or other document, in a form acceptable to
Purchaser, (i) which shall be executed by all parties, or their
respective successors and assigns, to the following contract:
Agreement for Assignment between Oak Lawn
Investments, Inc., and Enexco, Inc., dated July 28, 1994.
(ii) by which document the parties stipulate and agree that the funds
remaining to be recovered, to effect payout, and reversion, under such
contract, shall not be more than $158,019.30, and (iii) which document
shall be in recordable form to provide notice of the rights to
Purchaser upon payout.
(kk) The provisions of this paragraph 7 shall survive Closing
for a period of four (4) years from the date of Closing.
8. Purchaser's Representations and Warranties. Purchaser
represents and warrants to Sellers that:
(a) Purchaser: (i) is a corporation duly organized, validly
existing, and in good standing under the laws of the State of Nevada;
(ii) is duly qualified to transact business in each jurisdiction where
the nature and extent of its business and properties require the same
in order for it to perform its obligations under this Agreement; and
(iii) possesses all requisite authority, power, licenses, permits, and
franchises to conduct its business and execute, deliver, and comply
with the terms and provisions of this Agreement and any other document,
instrument, or agreement provided for herein, all of which have been
duly authorized and approved by all necessary corporate action and for
which no further approval or consent is required;
(b) The consummation of the transactions contemplated by this
Agreement will not violate, or be in conflict with (i) any agreement or
instrument to which Purchaser is a party; or (ii) any judgment or
decree applicable to Purchaser as a party in interest with respect
thereto;
(c) This Agreement has been duly executed and delivered on
behalf of Purchaser, and at the Closing, all documents and instruments
required hereunder to be executed and delivered by Purchaser (or its
assignees) shall have been duly executed and delivered;
(d) Subject to the conditions herein, Purchaser has or will
have at Closing (i) the financial capability or (ii) commitments from
responsible financial institutions to provide the funds required by
Purchaser, to pay the Purchase Price and consummate the transaction
contemplated hereby within the time period contemplated herein;
(e) Purchaser either has performed, or prior to closing will
perform, whatever inspection of the Property and Sellers' title thereto
that Purchaser deems appropriate and knows the condition thereof and is
purchasing the Property as a result of such inspections and not because
of, or in reliance on, any representation or warranty made by Sellers
other than those expressly set forth in this Agreement;
(f) In the event the Purchase Price is adjusted down at
Closing, based upon any unpaid taxes as set forth in paragraph 5(b)(2)
hereof (the "Tax Adjustment"), Purchaser agrees to timely make payment
(equivalent to the Tax Adjustment) to such taxing authorities as may be
appropriate;
(g) The provisions of this Paragraph 8 shall survive Closing
for a period of four (4) years from the date of Closing.
PURCHASE AND SALE AGREEMENT - PAGE 14
<PAGE> 15
9. Conditions to Obligations of Purchaser. The obligations of
Purchaser to consummate the transaction provided for herein are subject, at the
option of Purchaser, to the fulfillment on or prior to Closing, of each of the
following conditions:
(a) Representations. The representations and warranties of
Sellers herein contained shall be true and correct in all material
respects at Closing as though made on and as of such date (unless
appropriate adjustments or remediation has been made in accordance with
paragraph 6 hereof);
(b) Performance. Sellers shall have performed all obligations,
covenants, and agreements hereunder and shall have complied with all
covenants and conditions contained in this Agreement to be performed or
complied with by it at or prior to the Closing;
(c) Pending Matters. No suit, action, or other proceedings
shall be pending or threatened (a) against Sellers before any court or
governmental agency which might result in impairment or loss of value
as to Sellers' title to any part of the Property; or (b) which seeks to
restrain, enjoin or otherwise prohibit the consummation of the
transactions contemplated by this Agreement;
(d) Liability. No liability which affects, in a materially
adverse manner, the Property or Purchaser's ability to receive the
economic benefits therefrom has been or is threatened to be asserted
with respect to the Property;
(e) Defects. No Defects shall be present, which are not cured
by Sellers or waived by Purchaser as provided herein;
(f) Records and Access. Sellers shall have afforded Purchaser
and its officers, employees, and representatives timely and reasonable
access to the Records as required herein;
(g) Title Records. If (i) after the review of Sellers' Records
relating to the Property, Purchaser and/or Purchaser's lender fail or
refuse in their respective discretion, to approve title to the
Property, or to any particular property of the Property, on account of
the Sellers' lack of sufficient or comprehensive title information
which assure Purchaser or Purchaser's lender that the title is good and
indefeasible and (ii) to approve such title, Purchaser or Purchaser's
lender, or either or them, determine in their discretion that the costs
to them, or either of them, of title examination are more than they, or
either of them, desire to absorb and pay in order to approve the title,
then Purchaser shall promptly notify Sellers, and in such event, this
Agreement shall be terminated and shall be without further force and
effect, in which event Purchaser shall be entitled to the return of the
Escrow Deposit (plus accrued interest).
10. Sellers' Obligations at Closing. At the Closing, Sellers shall
deliver to Purchaser the following items; however, item (e) will be delivered as
soon prior to Closing as reasonably practical:
(a) The Assignments, duly executed and acknowledged by
Sellers;
(b) Duly executed and acknowledged releases of all liens and
burdens on the Property or on Production therefrom or attributable
thereto;
(c) Executed transfer orders (or letters in lieu thereof)
addressed to all purchasers of production from the Property;
(d) Any other executed documents or instruments which may be
reasonably required to consummate the transactions contemplated herein
and to fully vest Purchaser with operations and title to the Property
as contemplated hereby;
(e) The "Interim Settlement Statement," which shall set forth
the Purchase Price and adjustments thereto provided for in this
Agreement which are or may be determined at
PURCHASE AND SALE AGREEMENT - PAGE 15
<PAGE> 16
or prior to the Closing, which statement shall be delivered to
Purchaser as soon as reasonably practical prior to Closing for
Purchaser's review and approval;
(f) A copy of the Form P-4 for each Property, save and except
the Kruger Well, duly executed by the current operator, transferring
operations to Purchaser, or the designee of Purchaser;
(g) All consents required of third parties, who are identified
in Exhibit "E" attached, properly executed and in form approved by
Purchaser; and
(h) All releases of current liens of lenders and any other
lien holders, including holders of any judgment liens, encumbering all
or any part of the Property, properly executed in form acceptable by
Purchaser.
11. Purchaser's Obligations at Closing. At the Closing, Purchaser
shall:
(a) Deliver the Adjusted Purchase Price in the manner
described in paragraph 5, in cash or other immediately available funds
(which shall be subject to a subsequent accounting between Sellers and
Purchaser pursuant to this Agreement); and
(b) Execute and deliver to Sellers the promissory notes
described in paragraph 3(b), (c), and (d) hereof; and
(c) Deliver to Sellers a counterpart copy of the Subscription
Agreement, executed by Sellers and QSR, covering the QSR Shares, along
with the instruction letter to the transfer agent, Continental Stock
Transfer & Trust Co., authorizing and directing the delivery of the QSR
Shares to Jane E. Rather; and
(d) Deliver payment to Texas Central Bank of the sums agreed
to be paid by Purchaser pursuant to Paragraph 3(f); and
(e) Deliver payment to Sellers' counsel of one-half of
Sellers' attorney's fees; and
(f) Execute and deliver any other documents or instruments
which may be required to consummate the transactions contemplated
herein.
12. Notices. All notices, demands, and requests which may be given or
which are required to be given by either Party to the other shall be in writing.
Any notice, demand, or communication required or permitted hereunder shall be
deemed to be delivered on actual receipt or three (3) days after being sent by
overnight courier or Certified U.S. Mail to Sellers or Purchaser, whichever
occurs first, respectively, as follows:
<TABLE>
<CAPTION>
Sellers: PURCHASER:
<S> <C>
Enexco, Inc., N & R Resources, Inc., Queen Sand Resources, Inc.
C. Noell Rather, Ralph E. Rather, Suite 380, Lock Box 31
Michael Rather, Jane E. Rather, 3500 Oak Lawn Avenue
C. David Rather Dallas, Texas 75219-4398
Suite 380, Lock Box 31 Attn.: Edward Munden
3500 Oak Lawn Avenue President
Dallas, Texas 75219-4398 Telephone: 214-521-9959
Telephone: 214-522-1975 Facsimile: 214-521-9960
Facsimile: 214-520-1804
</TABLE>
or such other address as Purchaser or Sellers may, from time to time, designate
pursuant to the terms hereof. A facsimile transmission shall be considered an
original document for purposes of providing notice under this section.
PURCHASE AND SALE AGREEMENT - PAGE 16
<PAGE> 17
13. Furnishing Data and Information. The Sellers also agree to
promptly cooperate in all reasonable requests by Purchaser in furnishing copies,
at Purchaser's expense, of all Records necessary for Purchaser to conduct its
due diligence under the terms of this Agreement.
14. Post-Closing Adjustments.
(a) As soon as practicable after the closing, and in any event
within sixty (60) days after Closing, Sellers shall prepare and deliver
to Purchaser, in accordance with this Agreement and generally accepted
accounting principles, a statement (the "Final Settlement Statement")
setting forth each adjustment or payment pursuant to paragraph 5 hereof
that was not finally determined as of the Closing ("Post-Closing
Adjustments") and showing the calculation of such Post-Closing
Adjustments and the aggregate amount thereof. Within ten (10) business
days after receipt of the Final Settlement Statement, Purchaser shall
deliver to Sellers a written report containing any changes that
Purchaser proposes be made to the Final Settlement Statement. The
Parties undertake to agree with respect to the amounts of such
Post-Closing Adjustments no later than ninety (90) days after the
Closing Date. The date upon which such agreement is reached or upon
which the aggregate amount of the adjustments are finally established
shall be herein called the "Final Settlement Date." Sellers shall pay
to Purchaser, or vice versa, as the case may be, within ten (10)
business days after the Final Settlement Date the amount of such
adjustments (as finally established), by means of wire transfer in
immediately available funds or by means of a certified bank check;
(b) The provisions of this paragraph 14 shall survive the
Closing.
15. Failure to Perform/Termination of Agreement. If the Sellers
should fail to fully and timely perform any of its obligations hereunder, or
should fail to consummate the sale of the Property, except due to the
Purchaser's default, the Purchaser may, at its option, enforce specific
performance of this Agreement, or terminate this Agreement. If Purchaser should
fail to fully and timely perform any of its obligations hereunder, and fail to
consummate the purchase of the Property, except due to the Sellers' default or
other provisions in this Agreement that permit Purchaser to terminate this
Agreement, the Sellers shall have all remedies to which it is entitled as a
matter of law.
16. Indemnification by Sellers.
(a) Each Seller agrees to indemnify and save and hold harmless
Purchaser against and from any loss, damage, or expense sustained by
Purchaser arising out of or resulting from any breach by such Seller of
any of the representations and warranties made hereunder and not waived
by Purchaser;
(b) Each Seller agrees to indemnify and save and hold harmless
Purchaser against all claims, liabilities, costs, expenses, taxes, and
liability arising out of the ownership or operation of the interest in
the Property owned by such Seller and acquired by Purchaser hereunder,
and based upon the occurrence of events, the accrual of obligations or
liabilities, or the existence of conditions prior to the Effective
Date;
(c) If any claims for brokerage fees are asserted against
Purchaser in connection with this transaction based upon alleged
commitments made by Sellers, Sellers shall indemnify Purchaser against
all such claims and reimburse Purchaser for all reasonable expenses
incurred in responding to such claims, including reasonable attorney's
fees;
(d) Notwithstanding anything to the contrary contained herein,
each Seller agrees to indemnify and save and hold harmless Purchaser
for such Seller's gross negligence or willful misconduct for that
period of time between the Effective Date and Closing;
(e) The provisions of this paragraph 16 shall survive Closing
for a period of four (4) years from the date of Closing, and Purchaser
shall not be entitled to assert any right of indemnification hereunder
after such date.
PURCHASE AND SALE AGREEMENT - PAGE 17
<PAGE> 18
17. Indemnification by Purchaser.
(a) Purchaser agrees to indemnify and save and hold harmless
Sellers against and from any loss, damage, or expense sustained by
Sellers arising out of or resulting from any breach of any of the
representations and warranties made hereunder and not waived by
Sellers;
(b) Purchaser shall assume and hereby agrees to pay, honor,
discharge, and perform fully and timely, the obligations and
liabilities directly associated with the Sellers' interest in the share
of the Property acquired by Purchaser hereunder, which are attributable
to the period of time from and after the Effective Date;
(c) Purchaser agrees to indemnify and save and hold harmless
Sellers against all claims, costs, expenses, and liabilities arising
out of the ownership or operation of the share of the Property acquired
by Purchaser hereunder and based upon the occurrence of events, the
accrual of obligations or liabilities, or the existence of conditions
on and subsequent to the Effective Date (but not including the costs
and expenses incurred with respect to this Agreement and the purchase
of Sellers' interest in the Property or the negotiations leading to
such purchase);
(d) If any claims for brokerage fees are asserted against
Sellers in connection with this transaction based upon alleged
commitments made by Purchaser, Purchaser shall indemnify Sellers
against all such claims and reimburse Sellers for all reasonable
expenses incurred in responding to such claims, including reasonable
attorney's fees;
(e) The provisions of this paragraph 17 shall survive Closing
for a period of four (4) years from the date of Closing, and Sellers
shall not be entitled to assert any right of indemnification hereunder
after such date.
18. Registration Rights. If Queen Sand Resources, Inc., a Delaware
corporation, shall at any time after Closing determine in its discretion to
proceed with the actual preparation and filing of a registration statement under
the Securities and Exchange Act of 1933 as amended in connection with the
proposed offer and sale for cash of any of its securities by it or any of its
security holders (other than a future Form S-8 or similar registration
statement), the Purchaser will give written notice of its determination to the
particular Seller or Sellers receiving the QSR Shares under this Agreement (the
"Share Owners"). Upon the written request of the Sellers given within thirty
(30) days after receipt of any such notice from the Purchaser, the Purchaser
will, except as herein provided, cause all of the QSR Shares issued to the Share
Owners pursuant hereto, or to the extent requested by Sellers, to be included in
such registration statement, and to be so registered, all to the extent
requisite to permit the sale or other disposition by the Share Owners; provided
however, that nothing herein shall prevent Queen Sand Resources, Inc., a
Delaware corporation, from, at any time, in its discretion, abandoning or
delaying any registration. If any registration pursuant to this paragraph shall
be underwritten in whole or in part, the Purchaser may require that the QSR
Shares requested for inclusion pursuant to this paragraph 18 be included in the
underwriting on the same terms and conditions as the securities otherwise being
sold through the underwriters. In the event that, in the good faith judgment of
the managing underwriter of such public offering, the inclusion of all of the
QSR Shares originally covered by a request for registration would materially
adversely interfere with the distribution of the shares of stock offered by the
Purchaser, the number of shares issued pursuant hereto and otherwise to be
included in the underwritten public offering may be reduced. In connection with,
and as a condition to, any such registration, the Share Owners shall enter into
an indemnification agreement, in form and substance satisfactory to the
Purchaser relating to such registration. All federal and state registration fees
and fees of the National Association of Securities Dealers, Inc., relating to
any such registration of such shares shall be borne by the Sellers. All other
expenses relating to such registration will be borne by the Purchaser.
19. Operations. All of the properties covered by this Agreement
are operated by Sellers, save and except the Krueger Well (the "Operated
Properties"). Regarding operations, the Parties agree as follows:
PURCHASE AND SALE AGREEMENT - PAGE 18
<PAGE> 19
(a) At Closing there shall be delivered to Purchaser a Texas
Railroad Commission Form P-4 for each of the Operated Properties, duly
executed by the current operator for the transfer of operations. As to
the Operated Properties in which Sellers, or any of them, retain an
interest, by their signatures hereto, Sellers hereby irrevocably
appoint Purchaser their agent and attorney in-fact to cast the ballot
of Sellers in the selection of a successor operator hereafter, in the
event of any election hereafter of a successor operator of a particular
Operated Property occurs by reason of the sale and conveyance under
this Agreement under and pursuant to the terms of any operating
agreements which may cover the particular Operated Property.
(b) Sellers shall notify any third party non-operating joint
owners of the resignation of Seller as operator and with reasonable
diligence and in good faith, shall assist Purchaser in acquiring the
consents of any such owners to the selection of Purchaser's designated
operator as the successor operator of the Operated Properties.
(c) It is understood and agreed that the ability of Purchaser
to select an operator of its choice is a very material consideration to
Purchaser in this Agreement, and, as to the Operated Properties in
which any of the Sellers retain an interest, the Sellers shall take no
action to thwart or hinder Purchaser in its attempt to designate an
operator of its choice as the operator of any of the properties.
Sellers agree to cast their ballot for the operator of Purchaser's
choice in the event of any elections hereafter of the operator on any
of the properties, including both the Operated and Non-Operated
Properties, and shall otherwise assist Purchaser in its efforts to have
the properties operated by an operator of Purchaser's choice. Sellers
shall not seek the operations of any property without the express
written consent of Purchaser.
20. Confidentiality. Prior to Closing, the Sellers shall be
furnishing to Purchaser various information relating to Sellers and the
Property, and Sellers' business activities, assets, finances, costs, revenues,
rights, obligations, liabilities, and strategies. In consideration of the
Sellers furnishing this information to Purchaser, Purchaser agrees that prior to
Closing (a) that such information is confidential and/or proprietary to Sellers,
and such information shall be entitled to and shall receive treatment as such by
Purchaser; (b) Purchaser shall use its best efforts, and will advise all of its
employees, representatives, agents, and advisors who have access to such
information, to use their best efforts to hold in confidence, not to disclose to
others, and not to use (except in respect of the transaction contemplated by
this Agreement) any such information; and (c) if Closing does not occur, all
such information, unless otherwise specified in writing, shall remain the
property of Sellers, and shall be returned to Sellers together with any copies
made thereof. Prior to Closing, Purchaser shall provide such information only to
its employees, representatives, agents, and advisors who have need to know such
information in connection with this Agreement.
21. Subordination of Debt. Purchaser contemplates a loan from
Comerica Bank - Texas to acquire certain financing which shall be necessary for
closing hereunder. The following terms of subordination are required by Comerica
Bank - Texas as a condition to its loan to Purchaser:
(a) The payment of all indebtedness now or at any time
hereafter owing by Purchaser to Sellers, of whatever nature and however
arising, shall be subject, subordinate, and inferior to the prior
payment of all indebtedness now or hereafter owing by Purchaser to
Comerica Bank - Texas, whether now existing or hereafter arising
("Senior Indebtedness"). Provided, however, that so long as there has
not occurred, or will not occur as a result of such a payment, an Event
of Default, or there does not constitute a condition which, with lapse
of time or notice, will constitute an Event of Default under the Credit
Agreement dated December 1, 1995, as amended, between Purchaser and
Comerica Bank - Texas, or under any security instrument executed and
delivered to secure indebtedness owing by Purchaser to Comerica Bank -
Texas, Purchaser may pay to Sellers from the income realized by it from
its business and operations such amount or amounts as may be required
to discharge the indebtedness of Purchaser to said Sellers.
(b) Until the payment in full of the Senior Indebtedness,
Sellers will not receive, accept, or collect any sum or asset for
application on the indebtedness owing by Purchaser to Sellers, except
as provided in subparagraph (a) above.
PURCHASE AND SALE AGREEMENT - PAGE 19
<PAGE> 20
(c) If Sellers receive any sum or asset for application on
indebtedness owing to them by Purchaser other than in compliance with
subparagraph (a), the same shall be received by them in trust for the
benefit and account of the holder of the Senior Indebtedness and shall
promptly be remitted and paid by it to such holder, in the form
received.
(d) In the event of any proceedings pursuant to any debtor
relief laws involving Purchaser, said Sellers will at the request of
the holder of the Senior Indebtedness file any claims, proof of claims,
or other instruments of similar character and do and perform such other
acts and things as are necessary and proper to enforce the obligations
of Purchaser to said Sellers and will receive, hold, and remit pursuant
to subparagraph (c) above any and all sums, assets, or dividends
received in such proceedings on account of indebtedness of Purchaser to
Sellers.
(e) Comerica Bank - Texas may at any time and from time to
time, without the consent of or notice to Sellers, without incurring
responsibility to Sellers, and without impairing or releasing any of
said Bank's rights or any of the obligations of Sellers hereunder;
(i) change the amount, manner, place, or terms of
payment or change or extend the time of payment of or renew or
alter all or any part of the Senior Indebtedness;
(ii) release or otherwise deal with all or any part
of any property at any time pledged, mortgaged, or otherwise
encumbered to secure all or any part of the Senior
Indebtedness;
(iii) release any party liable or becoming liable in
any manner for the payment or collection of all or any part of
the Senior Indebtedness;
(iv) exercise or refrain from exercising any rights
against Purchaser and others, including but not limited to
Sellers; and
(v) apply any sums, by whomsoever paid or however
realized, to the Senior Indebtedness.
22. The lands contained within one statute mile from the boundary
line of each of the properties contained within the Property shall constitute an
area of mutual interest between the parties hereto. For a period extending for
three (3) years from the date hereof and for so long thereafter as any of the
leases described in the Exhibits attached to this contract shall remain in
effect, should any party who is a Seller under this agreement acquire an
interest in any oil and gas lease or leases, or rights to acquire any interest
in any such lease or leases, which cover any of the land covering any of any
such area of mutual interest, such acquiring Seller shall offer any such
interests to the Purchaser, insofar as such interests cover the area of mutual
interest, and shall cover an undivided share of the interests which is
equivalent to the undivided share of the abutting properties acquired by
Purchaser under this agreement. In this regard, (i) if the newly acquired
interests cover the area of mutual interest applicable to the properties
described in Exhibits "A-1" and "A-2," then the particular Seller shall offer
Purchaser the entire (100%) interests acquired by the particular Seller, and
(ii) if the newly acquired interests cover the area of mutual interest
applicable to the properties described in Exhibits "A-3," "A-4," and "A-5," then
the particular Seller shall offer Purchaser an undivided seventy-five percent
(75%) of the interests acquired by the particular Seller, and (iii) if the newly
acquired interests cover the area of mutual interest applicable to the
properties described in Exhibits "A-6" and "A-7," then the particular Seller
shall offer Purchaser an undivided fifty percent (50%) of the interest acquired
by the particular Seller. In like manner, if Purchaser should acquire any such
interest covering an area of mutual interest applicable to the properties
described in Exhibits "A-3," "A-4," and "A-5," then Purchaser shall offer to the
particular Seller or Sellers owning an interest in the abutting property an
undivided twenty-five percent (25%) of the interest acquired. Further, if
Purchaser should acquire any such interest covering an area of mutual interest
applicable to the properties described in Exhibits "A-6" and "A-7," then
Purchaser shall offer to the particular Seller or Sellers owning an interest in
the abutting property an undivided fifty percent (50%) of the interest acquired.
All interests offered under this agreement shall be at actual
PURCHASE AND SALE AGREEMENT - PAGE 20
<PAGE> 21
direct cost, and allocated to the undivided share purchased, and subject to no
additional burdens. Any party acquiring any such interest within the area of
mutual interest shall furnish the other party or parties to whom an offer is
extended per the terms of this paragraph actual copies of (i) the lease, leases,
or rights to acquire an interest in a lease or leases, (ii) the documents
whereby the acquiring party acquired its interest, (iii) the instruments
sufficient to verify the actual consideration paid, (iv) a plat or exact
description of the location of the interest, and (v) any other documents which
may be pertinent to the other party's evaluating the acquiring party's interest.
The party or parties to whom the offer is tendered per this paragraph shall
thereafter have thirty (30) days from receipt of such notice to notify the
acquiring party of its election to acquire the interest offered per this
paragraph.
23. Miscellaneous.
(a) If any term or provision of this Agreement is held to be
illegal, invalid, or unenforceable, the legality, validity, and
enforceability of the remaining terms and provisions of this Agreement
shall not be affected thereby, and in lieu of each such illegal,
invalid, or unenforceable term or provision, there shall be added
automatically to this Agreement a legal, valid, and enforceable term or
provision as similar as possible to the term or provision declared
illegal, invalid, or unenforceable;
(b) Either Sellers or Purchaser shall have the right to waive
any requirement contained in this Agreement, which is intended for the
waiving Party's benefit, but except as otherwise specifically provided
herein, such waiver shall be effective only if in writing and executed
by the Party for whose benefit such requirement is intended; provided
however, that any such waiver shall not be construed as a waiver of any
other benefit accruing to the waiving Party hereunder;
(c) The captions used in connection with this Agreement are
for convenience only and shall not be deemed to expend or limit the
meaning of the language of this Agreement;
(d) Words of any gender used in this Agreement shall be held
and construed to include any other gender, and words in the singular
shall be held to included the plural, unless the context otherwise
requires;
(e) Sellers agree that, on or before the Closing, it will not
carry on any negotiations with any third party, for the sale or
transfer of any interest in any of the Property, without the prior
written consent of Purchaser. Thereafter, Sellers may negotiate with
third parties if this Agreement has been terminated;
(f) THIS AGREEMENT AND ALL OF THE TRANSACTIONS CONTEMPLATED
HEREIN SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS
OF THE STATE OF TEXAS;
(g) This Agreement embodies the entire agreement between
Sellers and Purchaser with respect to the subject matter hereof and
supersedes all prior agreements, whether written or oral;
(h) Except as otherwise specifically provided herein, this
Agreement may not be amended except by an agreement in writing executed
by both Sellers and Purchaser;
(i) This Agreement shall be binding upon and inure to the
benefit of Sellers and Purchaser and their respective legal
representatives, successors, and assigns. It is expressly understood
and agreed that Purchaser's rights under this Agreement may not be
assigned prior to Closing. Provided however, any interest acquired
hereunder shall be freely assignable by Purchaser after Closing;
(j) This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, and all
of which shall be deemed to be one and the same instrument;
PURCHASE AND SALE AGREEMENT - PAGE 21
<PAGE> 22
(k) In addition to the acts and deeds recited herein and
contemplated to be performed, both Sellers and Purchaser hereby agree
to perform, execute, and/or deliver at and after Closing any and all
such further reasonable acts, deeds, and assurances as may be
reasonably required to consummate the transactions contemplated by this
Agreement;
(l) This Agreement supersedes any and all other agreements,
either oral or in writing, between the Parties hereto with respect to
the subject matter hereof and contains all of the covenants and
agreements between the Parties with respect to said matter. Each Party
to this Agreement acknowledges that no representations, inducements,
promises, or agreements, orally or otherwise, have been made by any
Party, or anyone acting on behalf of any Party, which are not embodied
herein, and that no other agreement, statement, or promise not
contained in this Agreement shall be valid or binding;
(m) In the event of any dispute occurring under this
Agreement, the prevailing Party shall be entitled to be reimbursed by
the other Party for its reasonable and necessary attorney's fees;
(n) Any failure by either Party to insist, or any election by
either Party not to insist, upon strict performance by the other Party
of any of the terms, provisions, or conditions of this Agreement shall
not be deemed to be a waiver of the same or of any other term,
provision, or condition hereof, and either Party may at any time or
times thereafter insist upon strict performance by the other Party of
any and all of such terms, provisions, and conditions. No waiver by
either Party of any right, remedy, power, or privilege hereunder shall
be construed as a waiver of, or operate to impair, any subsequent
right, remedy, power, or privilege nor shall any single or partial
exercise of any such right, remedy, power, or privilege exhaust the
same or preclude other or further exercise thereof.
EXECUTED as of the day and year shown below.
PURCHASER:
QUEEN SAND RESOURCES, INC.,
a Nevada corporation
By: /s/ Robert P. Lindsay
-------------------------------------
Robert P. Lindsay, Vice President
SELLERS:
ENEXCO, INC.,
a Texas corporation
By: /s/ C. Noell Rather
-------------------------------------
C. Noell Rather, President
N & R RESOURCES, INC.
By: /s/ C. Noell Rather
-------------------------------------
C. Noell Rather, President
/s/ C. Noell Rather
-------------------------------------
C. Noell Rather
PURCHASE AND SALE AGREEMENT - PAGE 22
<PAGE> 23
/s/ Ralph E. Rather
-------------------------------------
Ralph E. Rather
/s/ Michael Rather
-------------------------------------
Michael Rather
/s/ Jane E. Rather
-------------------------------------
Jane E. Rather
/s/ C. David Rather
-------------------------------------
C. David Rather
ACKNOWLEDGMENTS
STATE OF TEXAS
COUNTY OF DALLAS
The foregoing instrument was acknowledged before me this 6th day of
November, 1996, by Robert P. Lindsay, Vice President of QUEEN SAND RESOURCES,
INC., a Nevada corporation, for said corporation.
[NOTARY SEAL] PAMELA J. BUNCH
Notary Public /s/ Pamela J. Bunch
STATE OF TEXAS -------------------------------------
Commission Expires 11/10/98 Notary Public
STATE OF TEXAS
COUNTY OF DALLAS
The foregoing instrument was acknowledged before me this 6th day of
November, 1996, by C. Noell Rather, President of ENEXCO, INC., a Texas
corporation, for said corporation.
[NOTARY SEAL] PAMELA J. BUNCH
Notary Public /s/ Pamela J. Bunch
STATE OF TEXAS -------------------------------------
Commission Expires 11/10/98 Notary Public
STATE OF TEXAS
COUNTY OF DALLAS
The foregoing instrument was acknowledged before me this 6th day of
November, 1996, by C. Noell Rather, President of N & R RESOURCES, INC., a Texas
corporation, for said corporation.
[NOTARY SEAL] PAMELA J. BUNCH
Notary Public /s/ Pamela J. Bunch
STATE OF TEXAS -------------------------------------
Commission Expires 11/10/98 Notary Public
PURCHASE AND SALE AGREEMENT - PAGE 23
<PAGE> 24
STATE OF TEXAS
COUNTY OF DALLAS
The foregoing instrument was acknowledged before me this 6th day of
November, 1996, by C. Noell Rather.
[NOTARY SEAL] PAMELA J. BUNCH
Notary Public /s/ Pamela J. Bunch
STATE OF TEXAS -------------------------------------
Commission Expires 11/10/98 Notary Public
STATE OF TEXAS
COUNTY OF DALLAS
The foregoing instrument was acknowledged before me this 6th day of
November, 1996, by Ralph E. Rather.
[NOTARY SEAL] PAMELA J. BUNCH
Notary Public /s/ Pamela J. Bunch
STATE OF TEXAS -------------------------------------
Commission Expires 11/10/98 Notary Public
STATE OF TEXAS
COUNTY OF DALLAS
The foregoing instrument was acknowledged before me this 6th day of
November, 1996, by Michael Rather.
[NOTARY SEAL] PAMELA J. BUNCH
Notary Public /s/ Pamela J. Bunch
STATE OF TEXAS -------------------------------------
Commission Expires 11/10/98 Notary Public
STATE OF TEXAS
COUNTY OF DALLAS
The foregoing instrument was acknowledged before me this 6th day of
November, 1996, by Jane E. Rather.
[NOTARY SEAL] PAMELA J. BUNCH
Notary Public /s/ Pamela J. Bunch
STATE OF TEXAS -------------------------------------
Commission Expires 11/10/98 Notary Public
STATE OF TEXAS
COUNTY OF DALLAS
The foregoing instrument was acknowledged before me this 6th day of
November, 1996, by C. David Rather.
[NOTARY SEAL] PAMELA J. BUNCH
Notary Public /s/ Pamela J. Bunch
STATE OF TEXAS -------------------------------------
Commission Expires 11/10/98 Notary Public
PURCHASE AND SALE AGREEMENT - PAGE 24
<PAGE> 25
SCHEDULE OF EXHIBITS
Exhibit A-1 Enexco, Inc. - Frymire Unit
Exhibit A-2 Krueger Well
Exhibit A-3 Jenkins #2 Well
Exhibit A-4 Blocker Field Prospect
Exhibit A-5 Meeks No. 1 Well
Exhibit A-6 Juboncillo Prospect
Exhibit A-7 E. M. Goff Prospect
Exhibit B-1 Paragraph 2 Paragraph Working Interest and Net Revenue
Interest in each property being acquired
by Queen Sand
Exhibit B-2 Paragraph 3 Allocation of Purchase Price to the various
properties
Exhibit C-1 Paragraph 3 Form of Promissory Note
Exhibit C-2 Paragraph 3 Form of Promissory Note
Exhibit C-3 Paragraph 3 Form of Promissory Note
Exhibit D-1 Paragraph 4 Form of Assignment and Bill of Sale
Exhibit D-2 Paragraph 4 Form of Assignment and Bill of Sale
Exhibit D-3 Paragraph 4 Form of Assignment and Bill of Sale
Exhibit D-4 Paragraph 4 Form of Assignment and Bill of Sale
Exhibit E Paragraph 7(h) Schedule of preferential rights, rights
of first refusal, options, or claims
of a similar nature
Exhibit F Paragraph 7(m) Schedule of material obligations
covering any of the properties
Exhibit G Paragraph 7(o) Schedule of gas purchase and sales
contracts
Exhibit H Paragraph 7(r) Schedule of operating agreements
Exhibit I Paragraph 7(cc) Schedule of non-producing wells
<PAGE> 1
Ex.10.L
PURCHASE AND SALE AGREEMENT
THIS PURCHASE AND SALE AGREEMENT ("Agreement"), dated as of November
29, 1996, is entered into by and between MALJAMAR NO. 1 JOINT VENTURE, a Georgia
joint venture, party of the first part, hereinafter referred to as "Seller", and
QUEEN SAND RESOURCES, INC., a Nevada corporation, party of the second part,
hereinafter referred to as "Buyer".
RECITALS:
A. Seller is the record owner of 100% working interest (and not less
than a 78% net revenue interest) in the oil, gas and mineral leases more
particularly described in Exhibit "A" hereto, together with identical interests
in and to all property and rights incident thereto or derived therefrom,
including, without limitation, all wells, materials, equipment, personal
property and fixtures located thereon or used in connection therewith and all
agreements, operating agreements, unitization agreements, communitization
agreements, leases, permits, rights-of-way, easements, licenses, options, orders
and other agreements in any way relating thereto (collectively, the
"Properties").
B. For all periods of Seller's ownership of the Properties, Q.S.& S.
Exploration Co., Inc. ("QSS"), and Northland Operating Company ("Northland")
have operated the Properties pursuant to that Operating Agreement dated August
1, 1994, by and between QSS, as operator, and Seller, as non-operator (the
"Operating Agreement"), and the understandings effective February 1, 1996, by
and between Northland, as operator, and the Seller, as non-operator (the
"Northland Agreement"
C. The Operating Agreement and Northland Agreement shall,
contemporaneous with consummation of the transactions contemplated hereby, be
terminated by Seller and QSS and Seller and Northland, each pursuant to a
Termination Agreement in substantially the form attached hereto as Exhibit "B"
(the "Termination Agreement").
D. Buyer desires to purchase and Seller desires to sell the Properties,
upon and subject to the further terms and conditions and for the consideration
set forth herein.
NOW, THEREFORE, in consideration of the premises, the covenants set
forth herein and the benefits to be derived hereunder, the parties hereby agree
as follows:
ARTICLE I
DEFINITIONS
1.01 The following terms shall have the following meanings:
"Affiliate" shall mean any entity, excluding Seller and Buyer, that
directly, or indirectly through one or more intermediaries, controls or is
controlled by or is under common control with either the Seller or Buyer, as
applicable.
<PAGE> 2
"Assignment" shall mean the assignment, conveyance and bill of sale
covering the Properties in the form attached hereto as Exhibit "C".
"Closing" shall mean the closing of the transactions contemplated
herein as provided in Article III hereof.
"Closing Date" shall mean the date on which Closing occurs as provided
in Section 3.01.
"Federal and State Leases" shall have the meaning ascribed to such term
in Section 6.05 hereof.
"Losses" shall mean, for purposes of Section 10.02 hereof, any and all
direct or indirect demands, claims, payments, obligations, actions or causes of
action, assessments, liabilities (including, without limitation, environmental
liabilities), costs and expenses paid or incurred or diminutions in value of any
kind or character (whether or not known or asserted prior to the date hereof,
fixed or unfixed, conditional or unconditional, choate or inchoate, liquidated
or unliquidated, secured or unsecured, accrued, absolute, contingent or
otherwise), including without limitation, penalties, interest on any amount
payable to a third party as a result of the foregoing and any legal or other
expenses reasonably incurred in connection with investigating or defending any
claims or actions, whether or not resulting in any liability, and all amounts
paid in settlement of claims or actions arising under Section 10.02 hereof.
"Permitted Encumbrances" shall mean any and all of the following liens,
charges, defects and encumbrances affecting the Properties:
(a) The terms, conditions, restrictions, exceptions,
reservations, limitations and other matters contained in the
agreements, instruments and other documents which create or reserve to
Seller its interest in any of the Properties, provided that the same do
not reduce the net revenue interest (or increase the working interest
without proportionately increasing the net revenue interest) of Seller
in the Property affected thereby below 78%.
(b) Royalties, overriding royalties, division orders,
reversionary interests, production payments, net profits interests and
similar burdens affecting any Property if the net cumulative effect of
such burdens does not operate to reduce the net revenue interest (or
increase the working interest without proportionately increasing the
net revenue interest) of Seller in the Property affected thereby to
less than 78%;
(c) Any obligations or duties affecting the Properties to any
municipality or public authority with respect to any franchise, grant,
license or permit and all applicable laws, rules and orders of any
governmental authority;
(d) All rights to consent by, required notices to, filings
with or other actions by governmental entities in connection with the
sale or conveyance to Buyer of the
2
<PAGE> 3
Properties, if the same are customarily obtained contemporaneously with
or subject to such sale or conveyance;
(e) Existing operating agreements, unit agreements, gas
purchase or sale contracts and any and all other agreements which are
customary in the oil and gas exploration, development, production or
extraction business or in the business of processing of gas and gas
condensate of production for the extraction of proper products
therefrom, which will not reduce the net revenue interest (or increase
the working interest without proportionately increasing the net revenue
interest) of Seller in the Property affected thereby below 78%;
(f) Any rights in the Properties existing in favor of third
parties, to the extent that the interests of such third parties,
whether presently or when transferred to such third parties in
accordance with the rights of such parties, will not reduce the net
revenue interest (or increase the working interest without
proportionately increasing the net revenue interest) of Seller in the
Property affected thereby below 78%;
(g) Any encumbrance, title defect or other matter (whether or
not constituting a Title Defect) waived or deemed waived by Buyer
pursuant to Article V hereof;
(h) Any lien, charge, defect and encumbrances specifically
enumerated in Exhibit "D".
"Properties" shall have the meaning ascribed to such term in Recital
No. 1 above.
"Purchase Price" shall mean the price set forth in Section 2.02.
"Closing Statement" shall have the meaning ascribed to such term in
Section 2.03.
"Records" shall mean and include all original, or photocopies of
original, agreements, documents, geological computer programs, logs, tapes,
maps, books, files and any other information in the possession of Seller
relating to the Properties.
"Title Defect" shall mean that Seller's title to a Property shall be
subject to one or more of the following conditions:
(a) Seller's title shall be subject to an outstanding
mortgage, deed of trust, pledge, enforceable lien or encumbrance (other
than a "Permitted Encumbrance") or other adverse claim, deficiency or
uncertainty which would cause Seller's title to be less than
"defensible"; that is, capable of being defended against any claims or
encumbrances;
(b) Seller shall, as of the Effective Date, own less than a
78% net revenue interest with respect to a Property;
3
<PAGE> 4
(c) Seller's rights and interests in a Property shall be
subject to being reduced by virtue of the exercise by a third party of
reversionary, back-in or similar rights not reflected in the
calculation of Seller's 78% net revenue interest; or
(d) Seller shall be in default (and such default shall be
continuing) under any provision of a lease, farmout agreement or other
agreement affecting a Property, which default adversely affects the
value of said Property.
"Title Review Period" shall have the meaning ascribed to such term in
Section 5.01(a) hereof.
ARTICLE II
PURCHASE AND SALE
2.01 Sale of Properties. Subject to and upon the terms and conditions
hereinafter set forth, Seller shall, effective as of January 1, 1996 at 7:00
A.M. in the locality where the Properties are situated (the "Effective Date"),
sell, transfer, assign and convey unto Buyer, and Buyer shall purchase and
acquire from Seller, all of Seller's right, title and interest in and to the
Properties pursuant to an assignment, conveyance and bill of sale in the form
attached hereto as Exhibit "C" (the "Assignment").
2.02 Purchase Price. The purchase price for the Properties shall be the
sum of the following (the "Purchase Price"):
(a) Cash at Closing. $100,000 payable at Closing by wire
transfer or certified funds, less such amounts due and payable to Buyer
pursuant to Section 2.03 of this Agreement; and
(b) Shares of Buyer. 92,000 shares of common stock in Buyer's
parent, QUEEN SAND RESOURCES, INC. (the "Issuer"), a Delaware
corporation (the "Shares").
(i) Shares Not Currently Registered; Limitations on
Transferability. The Seller acknowledges that the Shares it is
acquiring pursuant to this Agreement have not been, and except
as provided for in Section 2.02(b)(iv) herein, will not be,
registered under the Securities Act of 1933 as amended (the
"Securities Act") or qualified under applicable state
securities law and that the transferability thereof is
restricted by the registration provisions of the Securities
Act as well as such state laws. Based upon the representation
and agreements being made by it herein, the Shares will be
issued to and individual designated by the Seller pursuant to
an exemption from such registration provided by Section 4(2)
of the Securities Act and applicable states securities law
qualification exemptions.
4
<PAGE> 5
(ii) Acquisition for Investment Purposes. The Seller
represents that it is acquiring the Shares for its own
account, for investment purposes only, and not with a view to
resale or other distribution thereof, nor with the intention
of selling, transferring, or otherwise disposing of all or any
part of such securities for any particular event or
circumstance, except selling, transferring, or disposing of
them upon full compliance with all applicable provisions of
the Securities Act, the Securities and Exchange Act of 1934 as
amended, the Rules and Regulations promulgated by the United
States Securities and Exchange Commission thereunder, and any
applicable state securities laws. The Seller further
understands and agrees that (i) the securities may be sold
only if they are subsequently registered under the Securities
Act and qualified under any applicable state securities laws
or, in the opinion of counsel acceptable to Buyer, an
exemption from such registration and qualification is
available; (ii) except as otherwise provided for herein, the
Buyer will be under no obligation to register or qualify the
Shares or effect compliance with any exemption from such
registration or qualification; and (iii) any routine sales of
securities made in reliance upon Rule 144 promulgated by the
Commission can be made only in the amounts set forth in and
pursuant to the other terms and conditions of that Rule.
(iii) Share Legend. The Seller agrees that each
certificate representing the Shares will bear on its face a
legend in substantially the following form:
These securities have not been registered under the
Securities Act of 1933 or qualified under any state
securities laws. They may not be sold or transferred
in the absence of an effective registration statement
under that Act or qualification under applicable
state securities laws without an opinion of counsel
satisfactory to the Company that such registration
and qualification are not required.
(iv) Registration Rights. If Queen Sand Resources,
Inc., a Delaware corporation, shall at any time after Closing
determine in its discretion to proceed with the actual
preparation and filing of a registration statement under the
Securities and Exchange Act of 1933 as amended in connection
with the proposed offer and sale for cash of any of its
securities by it or any of its security holders (other than a
future Form S-8 or similar registration statement), the Buyer
will give written notice of its determination to Seller. Upon
the written request of the Seller given within thirty (30)
days after Seller's receipt of any such notice from the Buyer,
the Buyer will, except as herein provided, cause all of the
Shares issued to Seller (or Seller's assignee as herein
provided) pursuant hereto, or to the extent requested by
Seller, to be included in such registration statement, and to
be so registered, all to the extent requisite to permit the
sale or other disposition by Seller; provide, however, that
nothing herein shall prevent Buyer from, at any time, in its
discretion, abandoning or delaying any registration. If any
registration pursuant to this paragraph shall be underwritten
in whole or in part, the
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Buyer may require that the Shares requested for inclusion
pursuant to this paragraph be included in the underwriting on
the same terms and conditions as the securities otherwise
being sold through the underwriters. In the event that, in the
good faith judgment of the managing underwriter of such public
offering, the inclusion of all of the Shares originally
covered by a request for registration would materially
adversely interfere with the distribution of the shares of
stock offered by the Buyer, the number of shares issued
pursuant hereto and otherwise to be included in the
underwritten public offering may be reduced. In connection
with, and as a condition to, any such registration, Seller
shall enter into an indemnification agreement, in form and
substance satisfactory to the Buyer relating to such
registration. All federal and state registration fees and fees
of the National Association of Securities Dealers, Inc.,
relating to any such registration of such shares shall be
borne by the Seller. All other expenses relating to such
registration will be borne by the Buyer.
2.03 Closing Adjustments to Purchase Price. The cash portion of the
Purchase Price due at Closing shall be adjusted as follows:
(a) Downward Adjustments. The initial installment of the
Purchase Price shall be decreased by an amount equal to the sum of the
following:
(i) Accrued and unpaid operating expenses advanced by
Buyer to QSS for its operations of the Properties for periods
prior to the Effective Date, as substantiated through
outstanding invoices received by Seller from QSS for periods
prior to the Effective Date.
(ii) An amount equal to the sum of all royalties and
revenues received by the Seller for periods subsequent to the
Effective Date.
(iii) An amount equal to the sum of all adjustments
to the Purchase Price due to Title Defects asserted and agreed
to pursuant to Article V hereof.
(iv) An amount equal to the sum of all other expenses
pertaining to the operation and maintenance of the Properties
incurred on or before the Effective Date and remaining unpaid
at Closing.
(v) Any other amount proposed by Buyer which is
authorized by the terms of this Agreement.
(b) Upward Adjustments. The initial Purchase Price installment
due at Closing shall be increased by an amount equal to the sum of the
following:
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(i) An amount equal to all proceeds of production
from the Properties accrued with respect to periods of
production prior to the Effective Date but not yet received by
Seller as of Closing.
(ii) An amount equal to the sum of all expenses
pertaining to operation or maintenance of the Properties
incurred on or after the Effective Date, to the extent such
expenses have been paid by or on behalf of Seller on or before
Closing.
(iii) An amount equal to the value of all oil in
storage facilities on, or utilized in connection with, the
Properties, together with an amount equal to the value of gas
pipeline fill as of the Effective Date. The production in such
storage facilities or through such meters on the gas pipelines
as of the Effective Date shall be gauged, strapped or metered
by Seller as of the Effective Date and shall belong to Seller.
Production placed in such storage facilities after the
Effective Date and production upstream of any and all meters
on the pipeline shall belong to Buyer. For purposes of
determining value, oil in storage shall be deemed sold at the
last actual price received by Seller for oil produced from
each Property during the calendar month within which the
Effective Date occurred.
(iv) Any other amount proposed by Seller which is
authorized by the terms of this Agreement.
ARTICLE III
THE CLOSING
3.01 Time and Place of Closing. Closing shall occur at a place mutually
agreed to by the parties. The Closing will be held at 10:00 a.m., C.D.S.T., on a
date as soon as practicable, which date shall be not later than the 5th business
day after satisfaction or waiver of the conditions set forth in Sections 3.03
and 3.04, but in any case not later than December 16, 1996 (the "Closing Date").
3.02 Deliveries at Closing. At Closing, the following shall occur:
(a) Seller and Buyer shall execute, acknowledge and deliver
the (i) Assignment in the form of Exhibit "C" hereto.
(b) Seller shall deliver duly executed and acknowledged
releases of all liens and burdens on the Properties or on production
therefrom or attributable thereto, except the Permitted Encumbrances.
(c) Seller shall deliver executed transfer orders (or letters
in lieu thereof) addressed to all purchasers of production from the
Property.
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(d) Seller, Northland and QSS shall execute the Termination
Agreement contemplated in Recital C hereof.
(e) Chaves Investors, L.L.C. ("Chaves") and Omnicor Energy,
Inc. ("Omnicor"), co-venturers of Seller, shall execute a closing
acknowledgment in the form attached as Exhibit "E" hereto (the "Closing
Acknowledgment"), whereby such parties stipulate that the entirety of
the Purchase Price can be distributed by Seller to Chaves pursuant to
that Joint Venture Agreement dated August 23, 1994, and effective
August 1, 1994, pursuant to which Seller was legally formed.
(f) Seller and Issuer shall deliver duly executed and
acknowledged counterpart copy of the Subscription Agreement covering
the Shares, along with the instruction letter to the transfer agent,
Continental Stock Transfer & Trust Co., authorizing and directing the
delivery of the Shares to Seller's designee.
(g) Buyer shall deliver to Seller the cash portion of the
Purchase Price, subject to any adjustments as provided herein, by wire
transfer or in immediately available funds.
(h) Seller and Buyer shall execute any and all forms required
by any governmental agency in connection with the transfer of ownership
of the Properties, which forms shall be prepared by Seller, and Seller
shall file the same promptly following Closing.
(i) Seller shall, subject to the terms of any applicable
agreements and to the other provisions hereof, deliver to Buyer
exclusive possession of the Properties, effective as of the Effective
Date.
(j) Seller's designee to receive the Shares (the "Designee")
shall have executed and delivered to the Issuer a Subscription
Agreement, Investor Questionnaire or other appropriate documents or
instrument, wherein he or she warrants and represents that he or she
is:
(i) A natural person whose individual net worth, or
joint net worth with his or her spouse, at the time of his
acquisition of such shares exceeds $1,000,000.00; or
(ii) A natural person who had an individual income in
excess of $200,000.00 in each of the two most recent years or
joint income with his or her spouse in excess of $300,000.00
in each of those years and has a reasonable expectation of
reaching the same income level in the current year; and,
(iii) That the Designee, himself or herself, or
through his or her advisers, is sophisticated and experienced
in financial business and investment
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matters, and as a result, the Designee is in a position to
evaluate the merits and risks of an investment in Queen Sand
Resources, Inc., a Delaware corporation;
(iv) That the acquisition of the Shares will not be
made with a view toward the "distribution" of such Shares, as
defined in the securities Act of 1933, as amended (the "1933
Act");
(v) That such Shares may not be transferred or
hypothecated unless, in the opinion of counsel to the Issuer,
such transfer or hypothecation would be in compliance with the
registration provisions of the 1933 Act or pursuant to an
exemption therefrom;
(vi) That the Designee agrees to sign an agreement to
such effect at the time of Closing and agrees that the
certificate for the Shares so acquirecd may be inscribed with
a legend to ensure compliance with the 1933 Act; and,
(vii) That the Designee understands that the Shares
will not, subject to the further provisions of Secton
2.02(b)(iv) supra, be registered under the 1933 Act, or under
the laws of any jurisdiction.
3.03 Conditions to the Obligations of Buyer to Close. The obligations
of Buyer to proceed with the Closing are subject to the fulfillment (or waiver
in writing by Buyer), at the time of Closing, of each of the following
conditions:
(a) Representations and Warranties True. The representations
and warranties of Seller contained in Article IV shall be true on and
as of the Closing Date.
(b) Compliance with Obligations and Covenants. Seller shall
have substantially performed, in all material respects, all of its
obligations under this Agreement and substantially complied with its
material covenants hereunder.
(c) Absence of Litigation. There shall be no action, suit or
governmental proceeding (excluding any such matter initiated by Buyer)
pending, or threatened in writing to be instituted, before any court or
governmental agency seeking to restrain, prohibit or obtain damages or
other relief in connection with this Agreement or the consummation of
the transactions contemplated hereby.
(d) Closing Deliveries. All papers, documents, agreements and
other items required to be delivered at Closing pursuant to Section
3.02 shall have been delivered at the Closing.
(e) Title Defect Adjustments. The aggregate of all reductions
to the Purchase Price for Title Defects asserted by Buyer in good
faith, and agreed to by Seller, pursuant to Article V shall not exceed
ten percent (10%) of the Purchase Price.
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3.04 Conditions to the Obligation of Seller to Close. The obligations
of Seller to proceed with the Closing are subject to the fulfillment (or waiver
in writing by Seller), at the time of Closing, of each of the following
conditions:
(a) Representations and Warranties True. The representations
and warranties of Buyer contained in Article VI shall be true on and as
of the Closing Date.
(b) Compliance with Obligations and Covenants. Buyer shall
have substantially performed, in all materials respects, all of its
obligations under this Agreement and substantially complied with its
material covenants hereunder.
(c) Absence of Litigation. There shall be no suit, action or
other proceeding (excluding any such matter initiated by Seller)
pending, or threatened in writing to be instituted, before any court or
governmental agency seeking to restrain, prohibit or obtain damages or
other relief in connection with this Agreement or the consummation of
the transactions contemplated hereby.
(d) Closing Deliveries. All papers, documents, agreements and
other items required to be delivered at Closing pursuant to Section
3.02 shall have been delivered at the Closing.
(e) Title Defect Adjustments. The aggregate of all reductions
to the Purchase Price for Title Defects asserted by Buyer in good
faith, and agreed to by Seller, pursuant to Article V shall not exceed
ten percent (10%) of the Purchase Price.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller represents and warrants to Buyer as set forth below.
4.01 Existence. Seller is, and until Closing shall continue to be, a
joint venture (a) duly organized, validly existing and in good standing under
the laws of the State of Georgia, (b) with full legal power and right to carry
on its business as such is now being conducted, and (c) duly qualified to do
business and in good standing in each jurisdiction in which the Properties are
located, to the extent qualification to do business is required for ownership of
the Properties.
4.02 Legal Power. Seller has the legal power and right to enter into
and perform this Agreement and the transactions contemplated herein. The
consummation of the transactions contemplated by this Agreement will not
violate, nor be in conflict with: (a) any provision of the joint venture
agreement of Seller; (b) any agreement or instrument to which Seller is a party
or by which Seller or any of the Properties is bound; or (c) any judgment,
order, ruling or decree applicable to Seller as a party in interest or any law,
rule or regulation applicable to Seller's ownership of the Properties.
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4.03 Execution. The execution, delivery and performance by Seller of
this Agreement and the transactions contemplated by this Agreement are within
the power and authority of Seller, have been duly and validly authorized by all
requisite action on the part of Seller and will not result in any breach of the
terms and conditions of, or constitute a default or require the further consent
of any person under, any provision of the joint venture agreement or
incorporation documents (as applicable and as amended) or under applicable law
or regulation. This Agreement has been (and all documents and instruments
required under this Agreement to be executed and delivered by Seller at Closing
shall have been) duly executed and delivered on behalf of Seller. This Agreement
does, and such documents and instruments shall, constitute legal, valid and
binding obligations of Seller generally enforceable in accordance with their
terms; subject, however, to the effects of bankruptcy, insolvency and similar
laws from time to time in effect relating to the rights and remedies of
creditors generally, and by equitable principles which may limit the
availability of certain remedies under certain circumstances.
4.04 Bankruptcy or Insolvency Actions. There are no bankruptcy,
reorganization or similar proceedings pending, being contemplated by, or to the
best knowledge of Seller without investigation, threatened against Seller.
4.05 Conveyance of Properties. The Properties are free and clear of all
liens, charges, defects and encumbrances, by, through and under Seller, but not
otherwise.
4.06 Litigation. To the best of Seller's knowledge without
investigation, there are no actions, suits or governmental proceedings pending
against Seller, or against any portion of the Properties (a) seeking to prevent
the consummation of the transactions contemplated hereby, (b) which would,
singly or in the aggregate, if decided adversely to Seller, result in an
impairment or loss of Seller's title to any part of the Properties or the value
thereof, or (c) which might, if decided adversely to Seller, hinder or impede
the development or operation of the Properties.
4.07 No Survival. Except as may be separately set forth in the
Assignment, Buyer acknowledges that Seller's representations and warranties
under this Article IV shall not survive Closing. Buyer's sole remedies for
Seller's breach of Article IV representations and warranties shall be to sue for
specific performance or to terminate this Agreement pursuant to Sections
3.03(a), 12.01(d) and 12.02 hereof.
4.08 Governmental and Third-Party Approvals. All government and third
party approvals and consents necessary to Seller's performance of its
obligations hereunder will have been obtained on or before Closing.
4.09 Compliance. Seller has operated the Properties in accordance with
all applicable rules and regulations and the leases, assignments or contracts
under which Seller acquired their interests.
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4.10 Leases, Assignments and Contracts. All leases, assignments or
contracts with respect to any of the Properties to which Seller is a party and
are necessary to the acquisition of Seller's interest in the Properties by Buyer
remain in full force and effect.
4.11 No Undisclosed Interests. Seller is aware of no royalties,
overriding royalties, working interests, liens, reversionary interests,
production contracts, assignments or other burdens on or pertaining to the
Properties except as listed in Exhibit "A".
4.12 Seller's Receipt of Revenues. Seller is receiving the Working
Interests and Net Revenue Interests set out in Exhibit "A" in respect of all
oil, gas and associated hydrocarbons produced, saved or marketed from the
Properties.
4.13 Seller Payments. All rentals, royalties, overriding royalties, ad
valorem or other taxes and assessments or other payments due by Seller with
respect to the Properties have been paid, subject to the adjustments to the
Purchase Price provided for in Section 2.03 hereof and through to the Effective
Date.
4.14 Expenses Prior to Effective Date. Seller will pay or cause to be
paid all costs and expenses incurred in connection with the Properties, subject
to the adjustments to the Purchase Price provided for in Section 2.03 hereof
through to the Effective Date, and will comply with all contracts or other
agreements relating to the Properties incurred while owned by Seller.
4.15 No Options, etc. There are no first rights or refusal, consents,
authorizations, preferential rights, options or claims of a similar nature
affecting the Properties, except any rights of QS&S Explorations and Omnicor
Energy, Inc.
4.16 "NORM". To the best of Seller's knowledge, Seller is not aware of
the presence of any Naturally Occurring Radioactive Materials ("NORM") or other
environmental condition on the Properties which may materially affect or
interfere with the operation, use, ownership or value of such Properties.
ARTICLE V
TITLE REVIEW; ADJUSTMENTS FOR TITLE DEFECTS
5.01 Title Review.
(a) Review Period. Immediately upon execution by the parties
hereto of this Agreement, Buyer shall, at Buyer's sole cost and
expense, commence and pursue such examination of title to the
Properties as it deems necessary or proper. Buyer shall conduct such
review during Seller's normal business hours, employing such persons or
entities as it may choose. Subject to the other provisions of this
Agreement, including, without limitation, Section 7.05 hereof, Buyer
shall have access to or copies of all documents and materials in
Seller's possession in order to assist Buyer in determining
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the validity of Seller's title in and to the Properties. Buyer will
conclude its title review and give written notice to Seller of any
asserted Title Defects not later than 7 business days prior to Closing
(the period from the date hereof until 7 business days prior to Closing
being herein called the "Title Review Period"). Without in any manner
affecting or diminishing Seller's special warranty of title granted in
the Assignment, all Title Defects with respect to which notice to
Seller has not been given on or before the expiration of the Title
Review Period shall be deemed conclusively waived by Buyer. All notices
of Title Defects given by Buyer to Seller on or before the expiration
of the Title Review Period shall be governed by Section 5.02 below.
(b) Notices. To be effective, Buyer's written notice of a
Title Defect must include (i) a brief description of the matter
constituting the asserted Title Defect, including Buyer's proposed
adjustment to the Purchase Price, and (ii) supporting documents
reasonably necessary for Seller (or a title attorney or examiner
retained by Seller) to verify the existence of such asserted Title
Defect. Should the title opinions or other information obtained by
Buyer indicate that a Seller has a higher net revenue interest with
respect to a Property than 90%, Buyer shall inform Seller of the same
as promptly as possible, and in any event prior to the expiration of
the Title Review Period.
5.02 Closing Title Adjustment Provisions. Upon receipt of a notice set
forth in Section 5.01 above on or before the expiration date of the Title Review
Period, Seller shall have the right, prior to Closing, to cure all or any
portion of the undisputed asserted Title Defects at its cost and expense. In the
event Seller is unable or unwilling to cure any undisputed Title Defect prior to
Closing, the following remedies shall be available to Buyer:
(a) If a Title Defect is based upon a determination that
Seller's net revenue interest in the Properties is more than 90% or
less than 78%, the Purchase Price shall be adjusted (upward or
downward) in the same proportion that the actual net revenue interest
bears to Seller's represented minimum net revenue interest of 78% and
maximum net revenue interest of 90%.
(b) If a Title Defect involves a claim or question as to
Seller's title to the Properties, or involves a lien, encumbrance or
other charge upon the Properties, which cannot be cured or released
prior to Closing, the parties shall endeavor to negotiate a mutually
acceptable reduction in the Purchase Price for such defect(s), and in
the event of such an agreed reduction in the Purchase Price, the
Properties shall be conveyed to Buyer subject to such defect(s). If the
parties are unable to agree upon an adjustment and Buyer elects not to
waive the Title Defect, either party may terminate this Agreement and
neither party shall thereafter have any remedies or claims with respect
to the other.
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ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Seller as set forth below:
6.01 Existence. Buyer is, and until Closing shall continue to be, a
corporation (a) duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation, (b) with full legal power and
right to carry on its business as such is now being conducted, and (c) duly
qualified to do business and in good standing in each jurisdiction in which the
Properties are located, to the extent qualification to do business is required
for ownership of the Properties.
6.02 Legal Power. Buyer has the legal power and right to enter into and
perform this Agreement and the transactions contemplated by this Agreement. The
consummation of the transactions contemplated by this Agreement will not
violate, nor be in conflict with (a) any provision of the certificate of
incorporation or bylaws of Buyer, or (b) any judgment, order, rule and/or decree
applicable to Buyer as a party in interest or any law, rule or regulation which
would have an adverse effect on Buyer's ability to own or operate the Properties
after Closing.
6.03 Execution. The execution, delivery and performance by Buyer of
this Agreement and the transactions contemplated herein are within the corporate
power and authority of Buyer, have been duly and validly authorized by all
requisite corporate action on the part of Buyer (including, without limitation,
all requisite actions of the shareholders and directors of Buyer), and will not
result in any breach of the terms and conditions of, or constitute a default or
require the further consent of any person under, any provision of applicable law
or regulation. This Agreement has been (and all documents and instruments
required under this Agreement to be executed and delivered by Buyer at Closing
shall have been) duly executed and delivered on behalf of Buyer. This Agreement
does, and such documents and instruments shall, constitute legal, valid and
binding obligations of Buyer generally enforceable in accordance with their
terms; subject, however, to the effects of bankruptcy, insolvency and similar
laws from time to time in effect relating to the rights and remedies of
creditors generally, and by equitable principles which may limit the
availability of certain equitable remedies under certain circumstances.
6.04 Bankruptcy or Insolvency Actions. There are no bankruptcy,
reorganization or similar proceedings pending, being contemplated by, or to the
best knowledge of Buyer without investigation, threatened against Buyer.
6.05 Qualification to Hold Leases on Public Lands. Buyer is now, or
prior to Closing will be, qualified to own all Federal and State Leases
constituting a portion of the Properties, and the consummation of the
transactions contemplated hereby will not cause Buyer to be disqualified to own
Federal or State Leases in the jurisdiction in which any portion of the
Properties is located or to exceed any acreage limitation imposed by any law,
statute, rule or
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regulation. As used herein, the term "Federal and State Leases" shall refer to
all oil and gas leases secured (a) from the United States government or agencies
thereof, (b) from or on behalf of any Indian tribes, and (c) from any state
governmental authority or agency or any county, municipal or local governmental
authority.
6.06 Litigation. To the best of Buyer's knowledge without
investigation, there are no actions, suits or governmental proceedings pending
or threatened against Buyer or any of its Affiliates or their respective
properties, assets, operations or businesses seeking to prevent the consummation
of the transactions contemplated hereby.
6.07 Independent Investigation. Buyer is an experienced and
knowledgeable investor in the oil and gas business. Prior to entering into this
Agreement, Buyer was advised by and has relied solely on its own legal, tax and
other professional counsel concerning this Agreement, the Properties and the
value thereof.
6.08 No Survival. Seller acknowledges that Buyer's representations and
warranties under this Article VI shall not survive Closing. Seller's sole
remedies for Buyer's breach of Article VI representations and warranties shall
be to sue for specific performance or to terminate this Agreement pursuant to
Sections 3.04(a), 12.01(d) and 12.02 hereof.
ARTICLE VII
ADDITIONAL AGREEMENTS AND COVENANTS OF SELLER
From and after the date of execution of this Agreement and until
Closing, except as otherwise consented to by Buyer, and subject further to the
constraints of any applicable operating or other agreements, Seller covenants
and agrees that:
7.01 Insurance Coverage. Seller will maintain in full force and effect
all policies of insurance covering the Properties now maintained by Seller (or
policies with substantially similar coverage), but shall not be obligated to
secure any additional insurance, regardless of the extent or nature of insurance
now maintained by Seller.
7.02 Other Filings and Authorizations. Seller, as promptly as
practicable, shall make all such filings and submissions under such laws, rules
and regulations applicable to Seller as may be required for the consummation of
the transactions contemplated hereby.
7.03 Sale or Encumbrance of Properties. Seller will not surrender,
abandon, release, mortgage, encumber, sell, transfer, assign or otherwise
dispose of or place (or permit to be placed) any security interest, mortgage,
lien or other encumbrance upon the Properties, or any tangible or intangible
assets which constitute oil and gas assets.
7.04 Limitations on Covenants of Seller. Notwithstanding any other
provisions of this Article VII, (a) Seller may take any of the foregoing actions
otherwise prohibited by the
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provisions of any relevant section if reasonably necessary under emergency
circumstances, provided Buyer is notified as soon as practicable thereafter; (b)
except to the extent provided in Article V relating to any Title Defect
resulting therefrom, Seller shall have no liability to Buyer (but shall remain
liable to the obligee) for any incorrect payment of delay rentals, royalties,
shut- in royalties or similar payments or for any failure to make any such
payments through mistake or oversight including, without limitation, Seller's
negligence; and (c) Buyer's sole remedy for Seller's breach or failure to comply
with the requirements of this Article 7 shall be terminate this Agreement and
such remedy shall be available to Buyer only if Seller's breaches or instances
of noncompliance are, in the aggregate, material.
7.05 Information and Access.
(a) Immediately upon execution by the parties to this
Agreement, Seller shall make a good faith effort to give Buyer and
Buyer's authorized representatives, upon reasonable notice and at any
reasonable time before Closing, access to (i) the Properties, at
Buyer's sole risk, cost and expense, for the purpose of inspecting the
same, and (ii) all production, engineering and other technical data and
records, and to all contract, land and lease records in Seller's
possession which relate to the Properties; provided, however, that
Seller shall have no obligation to provide Buyer such access to any
data or information to which access cannot be legally provided to Buyer
because of third party restrictions on Seller. Buyer assumes all risk
of any change in the condition of the Properties from and after the
Effective Date until Closing, except to the extent such change may be
attributed, in whole or in part, to the gross negligence (but not
ordinary negligence) or willful misconduct of Seller. Buyer shall
repair any damage to the Properties resulting from any inspection by
Buyer thereof and Buyer does hereby agree to defend, indemnify and hold
Seller harmless from and against any and all losses, costs, damages,
obligations, claims, liabilities, expenses or causes of action arising
from Buyer's inspection of the Properties; including, without
limitation, claims for personal injuries, property damage and
attorneys' fees relating thereto, regardless of whether the same may
result from the negligence of Seller, unless the same is the direct
result of Seller's gross negligence or willful misconduct.
(b) Seller will exercise reasonable diligence in safeguarding
all engineering, geological and geophysical data, reports and maps and
all other confidential data in its possession relating to the
Properties.
(c) Except as otherwise provided in Section 4.04 hereof,
Seller makes no representation or warranty, express or implied, with
respect to the accuracy or completeness of (i) any information
furnished or otherwise made available to Buyer, whether oral or
written, (ii) any records or data, whether oral or written, now,
heretofore or hereafter furnished or otherwise made available to Buyer,
or (iii) any other material furnished (or otherwise made available) to
Buyer by Seller or by Seller's agents or representatives in connection
with the transactions contemplated hereby, including, without
limitation, any description of the Properties, any title opinions, data
or information pertaining thereto,
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or any pricing assumptions or potential for production of hydrocarbons
from the Properties.
7.06 Reasonable Efforts. Seller will use all reasonable efforts to
obtain the satisfaction of the conditions to Closing set forth in Section 3.03
hereof.
ARTICLE VIII
ADDITIONAL AGREEMENTS AND COVENANTS OF BUYER
8.01 Other Filings and Authorizations. Buyer, as promptly as
practicable, shall make or cause to be made, all such filings and submissions
under such laws, rules and regulations applicable to it as may be required for
the consummation of the transactions contemplated hereby.
8.02 Reasonable Efforts. Buyer will use all reasonable efforts to
obtain the satisfaction of the conditions to Closing set forth in Section 3.04.
ARTICLE IX
ADDITIONAL COVENANTS OF THE PARTIES
9.01 Further Assurances. Seller and Buyer will use all reasonable
efforts to take, or cause to be taken, all action, and to do, or cause to be
done, all things necessary, proper or advisable to carry out their respective
obligations under this Agreement and to consummate and make effective the
purchase and sale of the Properties pursuant hereto. The parties agree that
should the Assignments delivered at Closing fail to transfer and convey to Buyer
the entirety of the Properties, the parties will, as promptly as practicable on
learning of the existence of portions of the Properties not conveyed to Buyer,
execute such additional Assignments as may be necessary to accomplish the
transfer of the Properties as contemplated herein. At Closing and thereafter,
Seller shall execute and deliver to Buyer all documents necessary or appropriate
to effect a change in ownership, such as letters in lieu of division orders,
transfer orders or the like, or cause the same to be delivered to each purchaser
of production from the Properties, instructing the purchaser to make all future
payments directly to Buyer from and after the Effective Date.
9.02 Post-Closing Matters. The provisions of this Section 9.03 shall
apply after Closing:
(a) Seller's responsibility for conducting the accounting for
the Properties shall cease with production attributable to the calendar
month during which Closing occurs, and Buyer shall thereafter be
responsible for conducting such accounting; provided, however, that if
Closing occurs on the first day of a month, it shall be deemed, for
purposes of this subparagraph, that Closing occurred on the last day of
the preceding
17
<PAGE> 18
month. Seller shall provide Buyer with a statement of accounting
covering the period from the Closing Date through the end of the
calendar month in which Closing occurs.
(b) Should Buyer receive any proceeds of production or any
invoices for any expenses attributable to production from the
Properties prior to the Effective Date, Buyer shall promptly remit the
same to Seller.
(c) Should Seller receive any proceeds of production or any
invoices for any expenses attributable to production from the
Properties after the Effective Date, Seller shall promptly forward the
same to Buyer.
9.03 Seller's Right to Records. Seller shall be entitled to retain the
following Records respecting the Properties and shall be permitted access, as
hereinbelow set forth, to the Records delivered by Seller hereunder with respect
to the Properties:
(a) Buyer recognizes that certain Records of Seller may
contain only incidental information relating to the Properties and that
Seller may, after review by Buyer, retain such Records;
(b) Seller may retain (i) one copy of all Records, and (ii)
all originals and copies of all documents prepared or received by
Seller in connection with the transaction and sale of the Properties
contemplated herein;
(c) Seller may retain all financial information, tax records
and all other accounting data prepared or used in connection with the
financial statements prepared by Seller and made available to Buyer
hereunder;
(d) Seller shall be permitted reasonable access, for a period
of 5 years after Closing, to Records relating to the Properties for tax
and financial accounting purposes. For this purpose, Buyer agrees to
retain and preserve the Records for such 5-year period following
Closing.
ARTICLE X
ASSUMPTION BY BUYER
Buyer shall, from and after the Closing Date, accept and assume the
Properties "AS IS, WHERE IS and with all faults." In this regard, Buyer
expressly acknowledges and agrees that Seller's representations under Article IV
and Seller's covenants under Article VII will expire at Closing; and, that
Seller's representations and covenants under Articles IV and VII, respectively,
entitle Buyer only to sue for specific performance or terminate this Agreement
under Sections 3.03(a) and (b), 12.01(d) and 12.02 in the event of Seller's
material breach of one or more of such representations and/or covenants.
Similarly, Seller acknowledges and agrees that Buyer's representations under
Article VI above shall expire at Closing and that Seller's sole remedies
18
<PAGE> 19
in the event of Buyer's material breach of any such Article VI representation(s)
are to sue for specific performance or to terminate this Agreement pursuant to
Sections 3.04(a), 12.01(d) and 12.02 hereof.
ARTICLE XI
TAX MATTERS
11.01 Allocation of Tax Liability. The obligations of the parties with
respect to ad valorem and property taxes relating to the Properties shall be
allocated based upon the Effective Date. Seller is responsible for payment of
all ad valorem and property taxes allocable to periods prior to the Effective
Date. Buyer is responsible for payment of all ad valorem and property taxes
allocable to the Properties for periods from and after the Effective Date.
11.02 Sales and Transfer Tax Liability. The Purchase Price provided for
hereunder excludes any sales taxes or other taxes in connection with the sale of
the Properties pursuant to the Agreement. If a determination is ever made that a
sales tax or other transfer tax applies, Buyer shall be solely liable for all of
such taxes, as well as for any applicable conveyance, transfer and recording
fees, real estate transfer stamps or taxes imposed on the transfer of property
to Buyer pursuant to this Agreement. Buyer shall defend, indemnify and hold
Seller harmless with respect to payment of all such taxes, if any, including any
interest or penalties assessed thereon.
ARTICLE XII
TERMINATION
12.01 Grounds for Termination. This Agreement may be terminated at any
time prior to the Closing Date:
(a) by the mutual written agreement of Seller and Buyer;
(b) by Seller or by Buyer if the Closing shall not have occurred
by December 16, 1996 (or such other date, if any, as Seller and Buyer
shall have agreed in writing) provided the failure to close on or
before such date is not caused by any breach of this Agreement by the
party electing to terminate pursuant to this Section 12.01(b);
(c) by Seller or by Buyer if the purchase and sale of the
Properties would violate any nonappealable final order, decree or
judgment of any court or governmental body having competent
jurisdiction; or
(d) by Seller or Buyer in the event of a material breach hereunder
(as contemplated in Sections 3.03(a) and (b) and 13.04(a) and (b))
which remains uncured after 20 days written notice from the
non-breaching party.
19
<PAGE> 20
12.02 Effect of Termination. If this Agreement is terminated by Seller
and Buyer, or by either of them, as permitted under Section 12.01(a)-(c) hereof,
such termination shall be without liability of either party to the other party,
or to any of their respective partners, shareholders, directors, officers,
employees, agents, consultants, beneficiaries or representatives. If such
termination shall result from the willful failure of a party to fulfill a
condition to the performance of the other party or from a willful breach by a
party pursuant to Section 12.01(d) hereof (a "default"), the non-breaching party
shall make written demand upon the breaching party pursuant to Section 12.01(d)
above and, if such default remains uncured 20 days thereafter, the non-
breaching party's sole remedies shall be either to (i) initiate legal
proceedings to specifically enforce the provisions of this Agreement, or (ii)
terminate this Agreement.
12.03 Cooperation by Parties on Termination of Agreement. In the event
of a termination of this Agreement (other than as a result of Seller's failure
or refusal to close the transactions contemplated hereby under circumstances in
which all conditions precedent to Seller's obligation as set forth in Section
3.04 have been performed or satisfied, or as a result of Buyer's failure or
refusal to close the transactions contemplated hereby under circumstances in
which all conditions precedent to Buyer's obligation as set forth in Section
3.03 have been performed or satisfied), Seller shall be free to sell the
Properties to any third party without any limitation under or by reason of this
Agreement. Buyer shall cooperate with Seller in effectuating any such sale and
shall promptly execute any instrument evidencing the termination of Buyer's
right to acquire the Properties as may be reasonably requested by Seller. And,
in such instance, Seller shall cooperate with Northland in facilitating
Northland's resignation as operator with the Seller, or Seller's designated
operator, assuming the operator's liabilities with respect to the Properties.
ARTICLE XIII
EXTENT OF REPRESENTATIONS,
WARRANTIES, COVENANTS AND AGREEMENTS
13.01 Scope of Representations of Seller. Except as and to the extent
set forth in Articles IV, VII and IX hereof, Seller makes no representations or
warranties whatsoever and disclaims all liability and responsibility for any
other representation, warranty, statement or information made or communicated
(orally or in writing) to Buyer including, but not limited to, any information
or advice which may have been provided to Buyer by any employee, agent,
consultant or representative of Seller, their corporate parent, or any of their
Affiliates, or by any engineer or engineering firm, or any other agent,
consultant or representative. Without limiting the generality of the foregoing,
Seller makes no representation or warranty as to (i) title to the Properties, or
any part thereof, except as provided in Section 4.04 or in the Assignment, (ii)
the validity of any concessions, licenses, production sharing contracts, leases
or other similar interests of Seller relative to the Properties, (iii) the
amounts, quality or deliverability of petroleum, natural gas or other reserves
attributable to the Properties, or (iv) any geological or other interpretations
or economic evaluations.
20
<PAGE> 21
13.02 Scope of Representations of Buyer. Except as and to the extent
set forth in Articles VI and VIII hereof, Buyer makes no representations or
warranties whatsoever and disclaims all liability and responsibility for any
other representation, warranty, statement or information made or communicated
(orally or in writing) to Seller including, but not limited to, any information
or advice which may have been provided to Seller by any employee, agent,
consultant or representative of Buyer or any of their Affiliates, or by any
engineer or engineering firm, or any other agent, consultant or representative.
13.03 Buyer's Acknowledgment of Access. Buyer acknowledges and affirms
that, by Closing the transactions contemplated hereunder, it has had, or shall
have had, full access to Seller's files, records and other data as provided in
Section 7.05 above. Buyer further acknowledges that its exercise of its access
rights included all reasonable opportunity to inspect, and to call for further
information, to make on site field inspections, if requested, and to question
appropriate personnel of Seller where it felt such information and inquiries to
be necessary or appropriate to its evaluation of the Properties. In this regard,
Buyer represents that it has received all additional information so requested.
Notwithstanding Buyer's access to and use of information obtained from Seller
(or information otherwise communicated by Seller's personnel to Buyer), Buyer
represents that it has made its own independent investigation, analysis,
evaluation and verification of the Properties (including Buyer's own estimate
and appraisal of the extent and value of the petroleum, natural gas and other
reserves allocable to the Seller's interest in the Properties) and that, by
Closing the transactions contemplated hereunder, Buyer shall have accepted and
assumed the Properties "AS IS, WHERE IS and with all faults."
ARTICLE XIV
BROKERS AND EXPENSES
All fees or commissions arising in favor of third parties in connection
with the transactions contemplated by this Agreement (including, without
limitation, broker's or attorney's fees) shall be borne solely by the party
hereunder who engages the services of such third parties.
ARTICLE XV
NOTICES
All notices and other communications hereunder shall be in writing and
shall be deemed given (i) when received if delivered personally, (ii) when sent
if by facsimile transmission and a confirmation is received, (iii) when sent if
by telex and an answer back is received, (iv) two business days after deposit
with an express courier if carried on an internationally recognized express
courier, or (v) three business days after deposit with the United States mail
service if mailed by registered or certified mail (return receipt requested),
postage prepaid. All notices to the parties shall be at the following addresses
(or at such other address for a party as shall
21
<PAGE> 22
be specified by like notice, provided that notices of a change of address shall
be effective only upon receipt thereof):
(i) To Seller as follows:
Maljamar No. 1 Joint Venture
Post Office Box 1501
600 Park Drive
Warner Robins, Georgia 31099-1501
Attn: Mr. R. Wayne Lowe
Fax: (912) 923-5063
With Copy to:
H. David Moore, Esq.
Post Office Drawer 8269
108 Olympia Drive - Suite 100
Warner Robins, Georgia 31095-8269
Fax: (912) 922-2160
(ii) To Buyer as follows:
Queen Sand Resources, Inc.
3500 Oak Lawn
Suite 380 L.B. #31
Dallas, TX 75219-4398
Attn: Mr. Edward J. Munden
Fax: (214) 521-9960
ARTICLE XVI
MISCELLANEOUS
16.01 Casualty Loss and Condemnation. If, after the Effective Date and
prior to Closing, any part of the Properties shall be destroyed by fire or other
casualty or if any part of the Properties shall be taken in condemnation or
under the right of eminent domain or if proceedings for such purposes shall be
pending or threatened, this Agreement shall remain in full force and effect
notwithstanding any such destruction, taking or proceeding or the threat
thereof. To the extent the insurance proceeds, condemnation awards or other
payments are not committed, used or applied by Seller prior to the Closing Date
to repair, restore or replace such damaged or taken Properties, Seller shall pay
to Buyer at Closing all sums paid to Seller (if any) by reason of such
destruction or taking, less any costs and expenses incurred by Seller in
collecting same. In addition and to the extent such proceeds, awards or payments
have not been committed, used or applied by Seller in repair, restoration or
replacement as aforesaid, Seller
22
<PAGE> 23
shall assign, transfer and set over unto Buyer, without recourse against Seller,
all of the right, title and interest of Seller in and to any claims against
third parties with respect to (a) the event or circumstance causing such loss,
and (b) any unpaid insurance proceeds, condemnation awards or other payments
arising out of such destruction or taking, less any costs and expenses incurred
by Seller in collecting same. Any such funds which have been committed by Seller
for repair, restoration or replacement as aforesaid shall be paid by Seller for
such purposes or, at Seller's option, delivered to Buyer upon Seller's receipt
from Buyer of adequate assurance and indemnity from Buyer that Seller shall
incur no liability or expense as a result of such commitment.
16.02 Reservations and Exceptions. The sale and purchase of the
Properties is made subject to all reservations, exceptions, limitations,
contracts and other burdens or instruments which are of record or of which Buyer
has actual or constructive notice, including any matter included or referenced
in the materials made available by Seller to Buyer.
16.03 Disclaimer of Warranties.
(a) By Seller. Except as provided in the Assignment, the
express representations of Seller contained in Article IV of this
Agreement are exclusive and are in lieu of all of the representations
and warranties, express, implied or statutory. Without limitation of
the foregoing, FROM AND AFTER CLOSING, THIS AGREEMENT OR ANY OTHER
INSTRUMENT EXECUTED BY SELLER IN CONNECTION HEREWITH ARE (AND SHALL BE)
EXECUTED WITHOUT ANY EXPRESS OR IMPLIED WARRANTY OR REPRESENTATION AS
TO THE MERCHANTABILITY OF ANY OF THE EQUIPMENT OR ITS FITNESS FOR ANY
PURPOSE, AND WITHOUT ANY OTHER EXPRESS OR IMPLIED WARRANTY OR
REPRESENTATION WHATSOEVER.
(b) By Buyer. Except as provided in the Assignment, the
express representations of Seller contained in Article VI of this
Agreement are exclusive and are in lieu of all of the representations
and warranties, express, implied or statutory.
16.04 Entire Agreement. This Agreement, together with its exhibits,
supersedes all prior agreements between the parties (written or oral), and is
intended as a complete and exclusive statement of the terms of the agreement
between the parties. This Agreement may be amended only by a written instrument
duly executed by the parties.
16.05 Governing Law. This Agreement shall be governed by and construed
in accordance with laws of the State of New Mexico.
16.06 Headings. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
16.07 Assignability. No party hereto shall assign this Agreement or any
part hereof without the prior written consent of the other party; provided,
however, that Buyer agrees that
23
<PAGE> 24
Seller may assign its rights hereunder to Chaves contemporaneous with Closing.
Except as otherwise provided herein, this Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
permitted assigns.
16.08 No Third Party Beneficiaries. Except as expressly provided
herein, nothing in this Agreement shall entitle any person other than Seller or
Buyer or their respective successors and permitted assigns, to any claim, cause
of action, remedy or right of any kind.
16.09 Severability. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable in such jurisdiction the remaining terms and
provisions of this Agreement and without rendering invalid or unenforceable any
terms and provisions of this Agreement in any other jurisdiction. If any
provision of this Agreement is so broad as to be unenforceable, such provision
shall be interpreted to be only so broad as is enforceable.
16.10 Counterparts. This Agreement may be executed in any number of
counterparts, no one of which needs to be executed by both parties, and, when so
executed, this Agreement shall be binding upon both parties with the same force
and effect as if both parties had signed the same document, and each such signed
counterpart shall constitute an original of this Agreement.
16.11 Attorney Fees. In any litigation arising under or resulting from
this Agreement, the prevailing party shall be entitled to receive reasonable
attorney's fees and costs.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized officers as of the date first above written.
"SELLER"
MALJAMAR NO. 1 JOINT VENTURE
By: CHAVES INVESTORS, LLC, a Georgia
limited liability company, as its
Managing Venturer
By: /s/ R. WAYNE LOWE
-----------------------------------
R. WAYNE LOWE, Manager
[BUYER'S SIGNATURES CONTINUED TO NEXT PAGE]
24
<PAGE> 25
"BUYER"
QUEEN SAND RESOURCES, INC.,
a Nevada corporation
By: /s/ EDWARD J. MUNDEN
-------------------------------------
EDWARD J. MUNDEN
President & Chief Executive Officer
25
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