<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-21179
QUEEN SAND RESOURCES, INC.
(Exact Name of Small Business Issuer as specified in its charter)
DELAWARE 75-2615565
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3500 OAK LAWN, SUITE 380,
L.B. #31, DALLAS, TEXAS, 75219-4398
ISSUER'S TELEPHONE NUMBER: (214) 521-9959
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
YES [X] No [ ]
23,375,552 shares of the registrant's Common Stock were outstanding as of
November 11, 1997.
Transitional Small Business Disclosure Format: Yes [ ] NO [ X ]
<PAGE> 2
PART I - FINANCIAL INFORMATION
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Unaudited Consolidated Condensed Balance Sheets
<TABLE>
<CAPTION>
September 30 June 30
1997 1997
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash $ 722,514 $ 309,695
Other current assets 1,304,120 756,092
------------ ------------
Total current Assets 2,026,634 1,065,787
Net property and equipment 25,489,100 16,187,209
------------ ------------
$ 27,515,734 $ 17,252,996
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and other $ 1,212,272 $ 1,588,668
Current portion of long-term debt 2,113,434 2,080,897
------------ ------------
Total current liabilities 3,325,706 3,669,565
Long-term obligations, net of current portion 13,837,471 7,151,881
------------ ------------
Total liabilities 17,163,177 10,821,446
------------ ------------
Stockholders' equity:
Preferred stock, $.01 par value, authorized 50,000,000
shares: issued and outstanding 9,600,000 shares 96,000 96,000
Common stock, $.0015 par value, authorized 100,000,000
shares: issued and outstanding 22,375,552 and 20,825,552 47,960 45,635
shares at September 30 and June 30, 1997, respectively
Additional paid-in capital 19,176,210 14,474,844
Accumulated deficit (3,967,613) (3,184,929)
Treasury stock (5,000,000) (5,000,000)
------------ ------------
Total stockholders' equity 10,352,557 6,431,550
------------ ------------
$ 27,515,734 $ 17,252,996
============ ============
</TABLE>
Commitments
See accompanying notes to unaudited interim period condensed consolidated
financial statements.
Pg. 2
<PAGE> 3
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three months ended September 30
1997 1996
----------- -----------
<S> <C> <C>
Revenues - oil and gas sales $ 1,593,532 $ 813,433
Expenses:
Oil and gas production expenses 1,104,493 474,154
Depreciation, depletion and amortization 447,000 212,500
General and administrative 523,508 219,750
Interest and financing expense 301,215 233,544
----------- -----------
2,376,216 1,139,948
Net loss $ (782,684) $ (326,515)
=========== ===========
Loss per common share $ (.04) $ (.01)
=========== ===========
</TABLE>
See accompanying notes to unaudited interim period condensed consolidated
financial statements.
Pg. 3
<PAGE> 4
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Three months ended September 30
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net Loss ($ 782,684) ($ 326,515)
Depreciation, depletion and amortization 447,000 212,500
Issuance of common stock for services rendered -- 20,880
Net change in operating assets and liabilities (948,371) (222,582)
----------- -----------
Net cash used in operating activities (1,284,055) (315,717)
----------- -----------
Cash flows used in investing activities - additions to
Property and equipment (6,623,891) (296,272)
----------- -----------
Cash flows from financing activities:
Proceeds from long-term obligations 6,789,121 610,949
Payments on seller notes (28,868) (250,000)
Payments on capital lease obligations (18,179) (14,271)
Common stock and additional paid-in capital 1,578,691 --
Collection on subscriptions receivable -- 500,000
----------- -----------
Net cash provided by financing activities 8,320,765 846,678
----------- -----------
Net increase in cash 412,819 234,689
Cash at beginning of period 309,695 599,621
----------- -----------
Cash at end of period $ 722,514 $ 834,310
=========== ===========
</TABLE>
See accompanying notes to unaudited period condensed consolidated financial
statements.
Pg. 4
<PAGE> 5
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Stockholders' Equity
For the three months ended September 30, 1997
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL
------------------- -------------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL TREASURY DEFICIT EQUITY
--------- ------- ---------- ------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1997 9,600,000 $96,000 20,825,552 $45,635 $14,474,844 $(5,000,000) $(3,184,929) $6,431,550
Issuance of common stock 550,000 825 1,589,925 1,590,750
for cash
Issuance of common stock 1,000,000 1,500 3,111,441 3,112,941
for oil and gas properties
Net loss (782,684) (782,684)
--------- ------- ---------- ------- ----------- ----------- ----------- ----------
Balance at September 30, 1997 9,600,000 $96,000 22,375,552 $47,960 $19,176,210 $(5,000,000) $(3,967,613) $10,352,557)
========= ======= ========== ======= =========== =========== =========== ==========
</TABLE>
See accompanying notes to unaudited period condensed consolidated financial
statements.
Pg. 5
<PAGE> 6
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
September 30, 1997
(unaudited)
(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
ended September 30, 1997 are not necessarily indicative of the operating
results for the full fiscal year ending June 30, 1998. Moreover, these
financial statements do not purport to contain complete disclosure in
conformity with generally accepted accounting principles and should be
read in conjunction with the Company's audited financial statements at,
and for the fiscal year ended June 30, 1997.
In June 1997, the FASB issued Statement of Financial Account Standards No.
130, Reporting Comprehensive Income ("SFAS 130"). SFAS 130 establishes
standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. SFAS 130
is effective for fiscal years beginning after December 15, 1997. The
adoption of SFAS 130 will require additional disclosures in the Company's
financial statements, but the Company believes that it will not have any
impact on the financial position or results of operations of the Company.
(2) Common Stock
Loss per common share is based on the weighted average number of common
shares outstanding (21,560,335 for the three months ended September 30,
1997; 27,123,739 for the three months ended September 30, 1996).
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share,"
("SFAS 128") which is required to be adopted on June 30, 1998. At that
time, the Company will be required to change the method currently used to
compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive
effect of warrants and the convertible preferred stock, will be excluded.
Adoption of SFAS 128 will not impact primary earnings per share for the
three months ended September 30, 1997 and 1996 because either no dilutive
securities were outstanding or the effect of outstanding warrants and
convertible preferred stock was antidilutive. The impact of SFAS 128 on
the calculation of fully diluted earnings per share is not expected to be
significant.
During the three months ended September 30, 1997 the Company issued
350,000 and 200,000 restricted shares of common stock pursuant to
Regulation S for $1,067,500 and $700,000 ($3.05 per share and $3.50 per
share), respectively, less commissions and other costs of $176,750.
Additionally, the Company issued 1,000,000 shares of common stock valued
at $3,125,000 ($3.125 per share) as partial consideration for the
acquisition of oil and natural gas producing properties in New Mexico,
Oklahoma and Texas (See Note 3).
(3) Acquisitions
On August 1, 1997, the Company acquired from Collins & Ware, Inc. 77
productive wells (12.35 net productive wells) located in various counties
in New Mexico, Oklahoma and Texas. In consideration for these properties
the Company paid, subject to standard industry adjustments at
Pg. 6
<PAGE> 7
closing, approximately $6,000,000 in cash and issued 1,000,000 restricted
shares of its common stock which it valued, for purposes of this
transaction, at $3.125 per share ($3,125,000).
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
All statements in this document concerning the Company other than purely
historical information (collectively "Forward-Looking Statements") reflect the
current expectation of management and are based on the Company's historical
operating trends, estimates of proved reserves and other information currently
available to management. These statements assume, among other things, (i) that
no significant changes will occur in the operating environment for the Company's
oil and gas properties, gas plants and gathering systems, and (ii) that there
will be no material acquisitions or divestitures. The Company cautions that the
Forward-Looking Statements are subject to all the risks and uncertainties
incident to the acquisition, development and marketing of, and exploration for,
oil and gas reserves. These risks include, but are not limited to, commodity
price risk, environmental risk, drilling risk, reserve, operations, and
production risks, regulatory risks and counterparty risk. Many of these risks
are described in the Company's Annual Report on Form 10-KSB for the fiscal year
ended June 30, 1997 filed with the Securities and Exchange Commission in
September 1997. The Company may make material acquisitions or dispositions,
enter into new or terminate existing oil and gas sales or hedging contracts, or
enter into financing transactions. None of these can be predicted with any
certainty and, accordingly, are not taken into consideration in the
Forward-Looking Statements made herein. For all of the foregoing reasons, actual
results may vary materially from the Forward-Looking Statements and there is no
assurance that the assumptions used are necessarily the most likely.
SELECTED FINANCIAL DATA
The following tables set 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, 1997 and 1996 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, 1997
will not necessarily be indicative of the operating results for the full fiscal
year ending June 30, 1998.
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
September 30, September 30,
1997 1996
----------- -----------
<S> <C> <C>
OPERATIONS DATA:
Oil and Gas Sales $ 1,593,532 $ 813,433
Oil & Gas Production Expenses 1,104,493 474,154
----------- -----------
Net Oil and Gas Revenues 489,039 339,279
Depreciation, Depletion and Amortization 447,000 212,500
General and Administration Expense 523,508 219,750
Interest and Financing Expense 302,957 233,544
Interest and other income (1,742) --
----------- -----------
Net loss (782,684) (326,515)
Net loss per common share (0.04) (0.01)
</TABLE>
Pg. 7
<PAGE> 8
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
September 30, September 30,
1997 1996
------------- -------------
<S> <C> <C>
AVERAGE SALES PRICE:
Gas ($/Mcf) 2.07 2.30
Oil ($/Bbl) 17.96 21.49
BOE ($/BOE) 15.74 18.99
PRODUCTION DATA:
Gas (MMcf) 244.370 96.282
Oil (Mbbls) 60.531 26.797
MBOE 101.259 42.844
AVERAGE COST ($/BOE) DATA:
Production and operating costs 9.83 11.06
Production and severance taxes 1.08 1.39
Depreciation, depletion and amortization 4.41 4.96
General and administrative expenses 5.17 5.13
Interest and financing charges 2.97 5.45
</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, 1997 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1996
RESULTS OF OPERATIONS
REVENUES: The Company's total revenues rose by $780,000 (96%) to $1,594,000 for
the three months ended September 30, 1997, from $813,000 during the comparable
period in 1996. This increase is a result of increased production offset by
reduced selling prices.
The Company produced 60,531 barrels of crude oil during the three months ended
September 30, 1997, an increase of 33,734 barrels (126%) over the 26,797 barrels
produced during the comparable period in 1996. This increase was comprised of a
decrease of 2,040 (8%) barrels from the properties that the Company owned during
both periods and an increase of 35,774 barrels from the properties acquired
during the period October 1, 1996 to June 30, 1997. The decrease in production
of crude oil from the properties owned during the comparative quarters is
primarily a reflection of natural depletion of the crude oil producing
reservoirs, offset by the successful drilling of one new well and the effects of
the re-development of certain producing and non-producing wells.
The Company produced 244,370 Mcf of natural gas during the three months ended
September 30, 1997, an increase of 148,088 Mcf (154%) over the 96,282 Mcf
produced during the comparable period in 1996. This increase consists of an
increase of 23,850 Mcf from the properties that the Company owned during both
periods and an increase of 124,238 Mcf from the properties acquired during the
last year. The increase in production from the properties owned during the
comparative quarters is a result of the successful drilling of four new wells,
the re-development of certain producing and non-producing wells, off-set by the
natural depletion of the natural gas producing reservoirs.
On a barrel of oil equivalent ("BOE") basis, production for the three months
ended September 30, 1997 was 101,259 BOE, up 58,415 (136%) over the 42,844 BOE
produced during the comparable period in 1996.
Pg. 8
<PAGE> 9
The increase in revenues arising from the increased production has been buffered
by the industry wide decline in oil and natural gas prices. The average price
per barrel of crude oil sold by the Company during the three months ended
September 30, 1997 was $17.96, a decrease of $3.53 per barrel (16%) from the
$21.49 per barrel during the three months ended September 30, 1996. The average
price per Mcf of natural gas sold by the Company was $2.07 during the three
months ended September 30, 1997, a decrease of $0.23 per Mcf (10%) from the
$2.30 per Mcf during the comparable period in 1996. Crude oil and natural gas
prices have increased subsequent to September 30, 1977.
The Company entered into agreements with Enron Capital & Trade Resources Corp.
("Enron"), an affiliate of Joint Energy Developments, Inc. ("JEDI"), the holder
of 9.6 million shares of the Company's Preferred Stock, to hedge 50,000 MMBtu of
natural gas production and 10,000 barrels of oil production monthly. The
agreements, which are effective September 1, 1997, and terminate August 31,
1998, call for a gas and oil ceiling and floor price of $2.66 and $1.90 per
MMBtu and $20.40 and $18.00 per barrel, respectively. If the average market
price of oil and gas per month, as defined in the agreements, exceeds the
ceiling price, the Company must pay Enron an amount equal to one-half of the
amount of the hedged quantities multiplied by the difference between the ceiling
price and the market price. If the average market price, as defined, falls below
the floor price, Enron will pay the Company an amount equal to the amount of the
hedged quantities multiplied by the difference in the floor price and the market
price. Pursuant to these hedging agreements, the Company paid Enron $14,000 and
$22,000 for September and October respectively, as a result of crude oil and
natural gas prices exceeding the ceiling prices in the agreements.
PRODUCTION EXPENSES: The Company's lease operating expenses ("LOE's") rose to
$995,000 for the three months ended September 30, 1997, an increase of $581,000
(140%) over the $415,000 incurred during the comparable period in 1996. This
increase is a result of the increased production of crude oil and natural gas
by the Company. Recurring LOE's, those costs incurred in the normal operations
of the Company, were $753,000 during the three months ended September 30, 1997,
or $7.44 per BOE, as compared to $395,000, or $9.23 per BOE, during the
comparable period in 1996. This represents a $1.79 per BOE (20%) improvement.
This improvement is a result of improved efficiencies at an operating level and
the acquisition of properties with lower average operating costs per BOE than
those the Company has owned during the preceding years. Non-recurring LOE's,
which are costs incurred to increase production from existing producing
reservoirs and thus are arguably more capital in nature, but must be treated as
expenses under the Securities and Exchange Commission accounting rules, were
$242,000 ($2.39 per BOE) during the three months ended September 30, 1997, as
compared to only $19,000 ($0.45 per BOE) during the comparable period in 1996.
This $223,000 (153%) increase in non-recurring LOE's is consistent with the
Company's strategy of redeveloping its properties to increase production.
SEVERANCE AND PRODUCTION TAXES: Severance and production taxes were $109,000
($1.08 per BOE) during the three months ended September 30, 1997, as compared
to $60,000 ($1.39 per BOE) during the comparable period in 1996. The increase
of $49,000 (83%) is a result of the 136% increase in BOE production, buffered
by the shift in the ratio of oil:gas revenues from .71:.29 during the three
months ended September 30, 1996 to .68:.32 during the three months ended
September 30, 1997. In the states where the Company produces crude oil and
natural gas, the severance and production taxes on revenues are less onerous
for natural gas as compared to crude oil.
DEPLETION, DEPRECIATION AND AMORTIZATION EXPENSE: Depletion, depreciation and
amortization costs were $447,000 ($4.41 per BOE) during the three months ended
September 30, 1997, an increase of $235,000 (110%) over the $212,000 charged to
income during the comparable period in 1996. The increase in the amount
expensed is a result of the 136% BOE increase in production. However, on a cost
per BOE basis, the decrease of $0.55 per BOE (11%) is primarily the result of a
reduction in the expected future capital costs required to bring the Company's
reserves into production.
GENERAL AND ADMINISTRATIVE EXPENSES: The increase of $304,000 in general and
administrative costs are a result of the increased management support
requirements of the Company as it continues to acquire new properties, redevelop
existing properties and raise the funds necessary to accomplish these
activities. Since inception the Company has been growth oriented and has
directed its efforts at acquiring and developing oil
Pg. 9
<PAGE> 10
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, 1997.
INTEREST EXPENSE: The increase of $68,000 in interest expense, to $301,000 for
the three months ended September 30, 1997, as compared to $234,000 for the
comparable period in 1996 is a function of the increased debt the Company
incurred between September 30, 1996 and September 30, 1997.
NET LOSS: The Company has incurred losses since its inception, including
$783,000 ($0.04 per common share) for the three months ended September 30,1997
compared to $327,000 ($0.01/share) for the three months ended September 30,
1996. These losses are a reflection of the start-up nature of the Company's oil
and natural gas production activities and the ongoing process of redeveloping
the Company's crude oil and natural gas properties. The Company believes, but
cannot assure, that as a result of the August 1997 acquisition of properties
from Collins & Ware Inc. that 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, provided that to the prevailing prices for crude oil and
natural gas do not incline and production volume is maintained. The Company
entered the 1998 fiscal year (July 1, 1997 to June 30, 1998) with a plan to
improve production from the properties it had acquired through June 1997 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.
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 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 to cover all of these 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 activities.
CASH FLOWS: During the three months ended September 30, 1997 the Company
generated $413,000 in its activities, as compared to $235,000 during the
comparable period in 1996.
During the three months ended September 30, 1997 the Company used $1,284,000 in
operations. In comparison, during the three months ended September 30, 1996 the
Company used $316,000 in operations. The increased use of cash from operations
is a result of the increased demand on working capital arising from the
acquisition of properties from Collins & Ware, Inc. In addition, the Company had
extended its payment terms to its vendors during the three months ended June 30,
1997 as it accumulated funds to acquire the properties from Collins & Ware, Inc.
During the three months ended September 30, 1997 the Company brought these
accounts to a more current status.
During the three months ended September 30, 1997 the Company invested $6,000,000
and 1,000,000 shares of its common stock to acquire crude oil and natural gas
producing properties in August, 1997. In addition, it invested a further
$624,000 to develop existing properties and evaluate other properties to
determine whether they were suitable for acquisition. During the three months
ended September 30, 1996 the Company invested $296,000 to develop existing
properties, with an additional $88,000 expended in relation to an oil producing
property it acquired in December 1996.
During the three months ended September 30, 1997 the Company raised $8,321,000
of additional financing. The major components included the issuance of 550,000
shares of common stock for net cash
Pg. 10
<PAGE> 11
proceeds of $1,579,000, the replacement of $4,858,000 of debt owed to Comerica
Bank with $11,500,000 of term debt due to the Bank of Montreal; the repayment of
$29,000 of unsecured notes payable, and the repayment of $18,000 of its capital
lease obligations. During the three months ended September 30, 1996 the Company
collected the $500,000 subscription receivable that was outstanding at June 30,
1996. The increased activity in arranging financing for the Company during the
three months ended September 30, 1997 is a reflection of the assembling of the
funds required to close the August 1997 acquisition of producing properties from
Collins & Ware, Inc.
INDEBTEDNESS: On August 1, 1997 the Company arranged a revolving loan facility
of $75 million with the Bank of Montreal to, among other things, refinance the
indebtedness outstanding under the Company's prior credit facility, fund working
capital and make additional acquisitions as and if appropriate opportunities are
identified. The Company has received approval from the Bank of Montreal to
borrow up to $16 million under this revolving loan facility. As of September 30,
1997 the Company had borrowed $11.5 million (as of November 11, 1997 $11.5
million). In addition, the Bank of Montreal has issued two letters of credit on
behalf of the Company totaling $2 million. These letters of credit are secured
under this loan facility. The outstanding balances under the loan facility are
secured by pledges on assets of the Company representing approximately 80% of
the total assets of the Company.
The Bank of Montreal credit facility is subject to payment of interest
calculated on a floating rate basis. The Company has the option of borrowing
funds based on London InterBank Offering Rate ("LIBOR") or the Bank of Montreal
base lending rate. The Company is charged a premium over each of these bases,
depending on the percent utilization of the approved borrowing base. The Company
is currently being charged interest based on the Bank of Montreal base lending
rate. The rate of interest being charged has been 8.5% from August 1 to November
11, 1997.
The loan facility is due on July 31, 2003. For the period August 1, 1997 to July
31, 1999 the loan facility will be of a revolving nature. For the period August
1, 1999 to July 31, 2003 the loan facility will be repaid in 48 equal monthly
installments, based on the principal outstanding on July 31, 1999.
If the Bank of Montreal does not renew the loan or if the Bank of Montreal
indebtedness is not repaid when due, the Bank of Montreal would have the right
to obtain possession of and sell the pledged properties, including any
equipment, new wells, or other improvements placed on the properties by the
Company. 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 payment of dividends, restrictions on changes in the nature of
the business, and maintenance of minimum cash flow and operating ratios. The
loan agreement also contains usual and customary events of default and provides
remedies to the Bank of Montreal 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. As of September 30, 1997
the Company was not in compliance with its interest coverage ratio. The Bank of
Montreal provided the Company with a letter waiving this covenant violation
solely with respect to this specific default. 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.
Until August 1, 1997 the Company had a revolving loan facility of $15 million
with Comerica Bank-Texas ("Comerica Bank") to, among other things, fund working
capital and make additional acquisitions as and if appropriate opportunities are
identified. This loan was repaid in full on August 1, 1997 from a portion of the
proceeds of the Bank of Montreal loan facility. A letter of credit in the amount
of $54,000 is currently secured by a cash deposit with Comerica Bank.
Pg. 11
<PAGE> 12
UNSECURED BONDS: At September 30, 1997 the Company had outstanding approximately
$2.2 million (DEM 3.9 million) of indebtedness as a result of the sale of
Deutschemark denominated 12% Promissory Notes (as of November 11, 1997 $2.2
million, DEM 3.9 million). The Bonds are unsecured, general obligations of the
Company and are subordinated in right of payment to all existing and future
secured indebtedness of the Company.
The 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
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 the 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. During the year
ended of June 1997 the Company had recorded unrealized exchange rate gains of
approximately $300,000. However, there are no assurances that the Company will
continue to realize gains related to favorable changes in the DEM:$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.
SUBORDINATED NOTES TO VENDORS: Pursuant to the acquisition of certain crude oil
and natural gas producing properties primarily located in west Texas on November
6, 1996 (the "Frymire Acquisition") the Company issued three notes to the
vendor. The first two notes were repaid as they came due. The third note was in
the amount of $227,500, payable monthly with principal and interest amortized
over two years, bearing interest at 10%. This note is fully subordinated to the
Bank of Montreal loan facility. The funds to service the monthly payments of
$10,497 on the third note have come from operations. The Company believes it
will be able to continue to service this note with funds generated from
operations.
Pursuant to the acquisition of certain crude oil and natural gas producing
properties located in Louisiana, Mississippi and Texas in February 1997, the
Company issued four notes payable, with a face value of $2.4 million. The first
two of these notes were repaid as they came due. The remaining two notes, which
are secured by letters of credit from the Bank of Montreal, are carried at a
discounted amount of $1,940,000. These notes will mature at a face value of $2
million in January 1998. The funds to repay these notes will come from the Bank
of Montreal credit facility.
ISSUANCE OF EQUITY SECURITIES: From time to time the Company privately issues
restricted shares of its Common Stock in connection with the acquisition of
properties. Typically these issuances are priced at a discount to the then
existing trading price of the Common Stock in the U.S. to reflect the
restrictions on resale pursuant to the regulations under which they are issued.
The Company issued 1,000,000 restricted shares of its Common Stock in August
1997, which it valued at $3.125 per share ($3,125,000) for purposes of this
transaction, as partial consideration for the acquisition of certain crude oil
and natural gas producing properties in New Mexico, Oklahoma and Texas.
The Company has engaged in a series of placements of its Common Stock in
overseas markets to raise equity capital. Typically these issuances are priced
at a discount to the then existing trading price of the Common Stock in the U.S.
to reflect the restrictions on resale back into the U.S. and the lack of an
established trading market for the Company's Common Stock overseas. The Company
issued 100,000 shares of Common Stock pursuant to Regulation S in July 1997 for
$3.05 per share ($305,000). The Company issued 250,000 shares of Common Stock
pursuant to Regulation S in September 1997 for $3.05 per share ($762,500). The
Company issued 200,000 shares of Common Stock pursuant to Regulation S in
September 1997 for $3.50 per share ($700,000). The Company paid a commission of
ten percent (10%), including third party costs, on each of these transactions.
Pg. 12
<PAGE> 13
The Company is continuing its efforts to raise an additional $3.26 million of
equity to meet its covenants to JEDI pursuant to the Series A Preferred Stock
transaction dated May 6, 1997 and its covenants to the Bank of Montreal,
pursuant to the loan agreement of August 1, 1997. However, there are no
assurances that the Company can raise these funds and therefore meet its
obligations to JEDI and the Bank of Montreal by December 31, 1997. If the
Company fails to raise the funds it most likely would have a materially adverse
effect on the Company's liquidity and would cause the Company to be in breach of
its covenants to the Bank of Montreal and JEDI
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 regarding certain of its projects to
date, there can be no assurance that it will continue to be able to do so.
Alternatively, as it has done in the past, 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 the availability of cash from outside sources such as bank debt or the sale
of securities or properties. During the period July 1, 1997 and November 11,
1997 the Company raised $1.6 million in equity. These funds were arranged by the
private placement of 550,000 shares of Common Stock pursuant to Regulation S.
The Company believes that this additional equity, in addition to the $2.5
million of unutilized borrowing capacity available under the Bank of Montreal
loan facility, provides the Company with the funds required to undertake a
significant capital expenditure program on its existing properties. This capital
expenditure program is expected to significantly increase production and improve
the reserves of the Company.
SERIES A PARTICIPATING CONVERTIBLE PREFERRED STOCK: Upon the occurrence of an
Event of Default (as defined in the Company's Certificate of Incorporation)
resulting from the failure to comply with certain covenants, each holder of
shares of Series A Participating Convertible Preferred Stock will have the
right, by written notice to the Company, to require the Company to repurchase,
out of funds legally available therefor, such holder's shares of Series A
Participating Convertible Preferred Stock for an amount in cash equal to (i) an
amount per share equal to the lesser of (A) $1.50 and (B) the sum of (x) $0.521
and (v) the quotient obtained by dividing (1) the aggregate amount of all
payments made, as of the date of the liquidation, dissolution or winding up, to
the Company by JEDI pursuant to the Earn Up Agreement dated May 6, 1997 between
the Company and JEDI by (2) 9,600,000, plus (ii) all accrued and unpaid
dividends thereon.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
On August 1, 1997 the Company issued 1,000,000 shares of its Common
Stock to Collins & Ware, Inc. as partial consideration for certain oil
and gas interests which the Company acquired. The issuance of these
securities was exempt from registration by reason of the exemption
provided by Section 4(2) of the Act.
Pg. 13
<PAGE> 14
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
[A] Exhibits
Exhibit 27 - Financial Data Schedule
[B] Reports on Form 8-K
(i) Current Report on Form 8-K dated July 21, 1997 reporting
under Item 9 (Sales of Equity Securities Pursuant to
Regulation S).
(ii) Current Report on Form 8-K dated August 14, 1997 reporting
under Item 2 (Acquisition or Disposition of Assets) and
Item 7(Financial Statements, Pro Forma Financial
Statements and Exhibits).
(iii) Current Report on Form 8-K dated September 11, 1997
reporting under Item 9 (Sales of Equity Securities
Pursuant to Regulation S).
Pg. 14
<PAGE> 15
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has duly
caused this report to be signed by the undersigned, thereunto duly authorized.
QUEEN SAND RESOURCES, INC.
By: /s/Edward J. Munden
---------------------------------
Edward. J. Munden
President and Chief Executive Officer
By: /s/Ronald Benn
---------------------------------
Ronald Benn
Chief Financial Officer
Date: November 13, 1997
Pg. 15
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 722,514
<SECURITIES> 0
<RECEIVABLES> 1,304,120
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,026,634
<PP&E> 25,489,100
<DEPRECIATION> 0
<TOTAL-ASSETS> 27,515,734
<CURRENT-LIABILITIES> 3,325,706
<BONDS> 13,837,471
0
96,000
<COMMON> 47,960
<OTHER-SE> 10,208,597
<TOTAL-LIABILITY-AND-EQUITY> 27,515,734
<SALES> 1,593,532
<TOTAL-REVENUES> 1,593,532
<CGS> 0
<TOTAL-COSTS> 1,104,493
<OTHER-EXPENSES> 1,271,723
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 301,215
<INCOME-PRETAX> (782,684)
<INCOME-TAX> 0
<INCOME-CONTINUING> (782,684)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (782,684)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> 0
</TABLE>
