<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K / A-2
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED):
MARCH 19, 1998
QUEEN SAND RESOURCES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
STATE OF DELAWARE 0-21179 75-2615565
(STATE OF INCORPORATION) (COMMISSION FILE NO.) (IRS EMPLOYER IDENTIFICATION NO.)
</TABLE>
3500 OAK LAWN
SUITE 380, LB #31
DALLAS, TEXAS 75219-4398
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (214) 521-9959
NO CHANGE
(FORMER NAME OR FORMER ADDRESS, IF CHANGE SINCE LAST REPORT)
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<PAGE> 2
This Current Report amends and restates in its entirety the Current
Report on Form 8-K dated March 19, 1998, as amended by Current Report on Form
8-K/A-1 dated April 27, 1998, as follows:
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On April 20, 1998, Queen Sand Resources, Inc. (the "Company")
consummated the acquisition of certain non-operated royalty and net profits
overriding royalty interests (the "Morgan Properties") from two commingled
pension trust funds for which Morgan Guaranty Trust Company of New York serves
as trustee (the "Morgan Property Acquisition"). The gross purchase price was
$150 million in cash subject to standard closing adjustments for net production
revenues since October 1, 1997 and capital expenditures incurred since that
date (the net purchase price, after adjustments, was approximately $133.3
million). The effective date of the transaction is October 1, 1997. Bank of
Montreal, Enron Capital & Trade Resources Corp. ("Enron") and an affiliate of
Enron provided $152 million in incremental financing to fund this acquisition.
The Company funded the Morgan Property Acquisition with a combination of three
debt facilities arranged through the Bank of Montreal. First, the Company
amended and restated its existing senior secured revolving credit facility (the
"Credit Agreement"). The Credit Agreement now provides for a maximum borrowing
amount of $96 million, subject to borrowing base limitations. This facility is
now a 364 day revolver and converts to a four year amortizing term facility
thereafter. An aggregate of $87 million was drawn (including $15 million
previously drawn to fund a down payment) under the Credit Agreement to finance
the Morgan Property Acquisition resulting in an aggregate of $92 million now
outstanding under the Credit Agreement. The Company also arranged a $30 million
senior secured single draw bullet term loan (the "Debt Bridge Facility") and a
$30 million secured single draw bullet term loan (the "Equity Bridge Facility"),
both of which were fully drawn to fund the Morgan Property Acquisition. Both
facilities are due six months after closing although if not then repaid, the
Debt Bridge Facility can be converted to a five year term bullet loan and the
Equity Bridge Facility can be converted to a six year term facility. The Company
is currently engaged in arranging both debt and equity financing to permanently
replace the bridge facilities and to repay a substantial portion of the
indebtedness outstanding under the Credit Agreement.
In connection with arrangement of the Equity Bridge Facility, the Company
granted contingent warrants to the lenders. The warrants provide that if any
portion of the Equity Bridge Facility is outstanding on (i) July 20, 1998, the
lenders would have a vested right to purchase at $.0015 per share Common Stock
in an amount equal to an aggregate of 2% of the then-outstanding shares of
Common Stock on a fully diluted basis ("fully diluted basis" meaning all then-
outstanding shares of Common Stock plus shares of Common Stock issuable upon
exercise of outstanding options or rights, whether or not vested) multiplied by
a fraction the numerator of which is the Equity Bridge Facility principal
amount then-outstanding and the denominator of which is $30 million, (ii)
August 20, 1998, the lenders would have a vested right to purchase an
additional 2% of the fully diluted outstanding Common Stock on the same terms
as described in clause (i) above and (iii) October 21, 1998, the lenders would
have a fully vested right to purchase an additional 10% of the fully diluted
Common Stock on the same terms as described in clause (i) above. The warrants
expire on April 20, 2001.
The acquisition encompasses interests in over 600 wells in
approximately 40 different fields located primarily in East Texas, South Texas
and the Mid-Continent area. The Company's independent engineers, Ryder Scott
Company, estimate that as of December 31, 1997, total proved reserves
aggregated approximately 124.1 billion cubic feet of natural gas and 3.6
million Bbls of oil. The reserves are estimated to be approximately 35% natural
gas, having an estimated reserve-to-production ration of over 10 years, and 76%
are classified by Ryder Scott Company as proved developed producing. The
non-operated royalty and net profits overriding royalty interests in the
various properties range from 2% to 80%.
The Company has implemented a comprehensive hedging strategy for its
natural gas production from the Morgan Properties over the next five years. The
Company has placed 25% of its expected proved developed producing natural gas
reserves ("PDP") into a swap with Enron at $2.40 per thousand cubic feet
("Mcf"). Ten percent of the Company's expected PDP has hedged 40% of its
expected PDP with a series of non-participating collars with ceilings that
escalate from $2.70 per Mcf to $2.90 per Mcf over time. The Company has not yet
hedged its oil production from the Morgan Properties due to current
unattractive prices but anticipated it will enter into such hedging
arrangements in the future if and when the prices are more attractive.
2
<PAGE> 3
The information in this Current Report on Form 8-K/A-2 includes
certain forward-looking statements that are based on assumptions that in the
future may prove not to have been accurate. These statements, and the
Company's business and prospects, are subject to a number of risks, including
production variances from expectations, uncertainties about estimates of
reserves, volatility of oil and natural gas prices, the need to develop and
replace its reserves, the substantial capital expenditures required to fund its
operations, environmental risks, drilling and operating risks, risks related to
exploratory and developmental drilling, competition, government regulation, and
the ability of the Company to implement its business strategy. These and other
risks are described in the Company's Annual Report on Form 10-KSB for the year
ended June 30, 1997, which report is available from the Company and the
Securities and Exchange Commission.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of businesses acquired. Set forth below.
(b) Pro Forma financial information. Set forth below.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying Unaudited Pro Forma Condensed Consolidated Financial
Statements reflect the historical financial position and results of operations
of the Company, adjusted to give effect to the Morgan Property Acquisition
(including the incurrence of indebtedness of approximately $92 million under the
Credit Agreement and $30 million each from the Debt and Equity Bridge
Facilities (collectively, the "Borrowings") and the application of the net
proceeds therefrom). The Unaudited Pro Forma Condensed Consolidated
Financial Statements are based on the historical financial statements of the
Company and the statements of net profits interests and royalty interests
revenues of the Morgan Properties.
The Unaudited Pro Forma Condensed Consolidated Balance Sheet as of March
31, 1998 assumes the acquisition of the Morgan Properties and the Borrowings had
been completed on that date. The Unaudited Pro Forma Condensed Consolidated
Statements of Operations for the nine months ended March 31, 1998 and the year
ended June 30, 1997 have been prepared assuming the acquisitions of the Morgan
Properties and the Borrowings had been completed on July 1, 1996.
The pro forma adjustments are based upon available information and
assumptions that management of the Company believes are reasonable. The
Unaudited Pro Forma Condensed Consolidated Financial Statements do not purport
to represent the financial position or results of operations which would have
occurred had such transactions been consummated on the dates indicated or the
Company's financial position or results of operations for any future date or
period. These Unaudited Pro Forma Condensed Consolidated Financial Statements
and notes thereto should be read in conjunction with the Company's historical
financial statements, and the notes thereto, and the statements of net profits
interests and royalty interests revenues of the Morgan Properties.
3
<PAGE> 4
QUEEN SAND RESOURCES, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1998
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS AS ADJUSTED
FOR THE FOR THE
MORGAN MORGAN
COMPANY PROPERTY PROPERTY
HISTORICAL ACQUISITION ACQUISITION
---------- ----------- -----------
<S> <C> <C> <C>
Current assets..................... $ 2,553 $ 127,500 (1) $ 11,803
(118,250)(1)
Deposit on oil and natural gas
properties....................... 15,000 (15,000)(1) --
Net property and equipment......... 30,466 133,250 (1) 142,716
(21,000)(2)
Other assets and deferred
charges.......................... 304 3,500 (1) 3,804
------- --------- --------
Total assets............. $48,323 $ 110,000 $158,323
======= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities................ $ 2,491 $ -- $ 2,491
Long-term obligations:
Credit Agreement................. 20,000 72,000 (1) 92,000
Bridge Facilities................ -- 60,000 (1) 60,000
Other, including current portion
of $120....................... 3,429 (1,000)(1) 2,429
------- --------- --------
Total liabilities........ 25,920 131,000 156,920
Stockholders' equity:
Preferred stock, $.01 par
value......................... 96 96
Common stock, $.0015 par value... 50 50
Additional paid-in capital....... 32,580 32,580
Accumulated deficit.............. (5,323) (21,000)(2) (26,323)
Treasury stock................... (5,000) (5,000)
------- --------- --------
Total stockholders'
equity................. 22,403 (21,000) 1,403
Total liabilities and
stockholders' equity... $48,323 $ 110,000 $158,323
======= ========= ========
</TABLE>
See accompanying notes to the unaudited pro forma condensed consolidated
financial statements.
4
<PAGE> 5
QUEEN SAND RESOURCES, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION> PRO FORMA
ADJUSTMENTS AS ADJUSTED
FOR THE FOR THE
MORGAN MORGAN
COMPANY MORGAN PROPERTY PROPERTY
HISTORICAL HISTORICAL ACQUISITION ACQUISITION
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Oil and natural gas sales... $ 4,381 $ -- $ -- $ 4,381
Net profits interests and
royalty interests......... -- 31,953 -- 31,953
Interest and other.......... 300 -- -- 300
------- ------- -------- -------
Total revenues........ 4,681 31,953 -- 36,634
Expenses:
Production expenses......... 2,507 -- -- 2,507
Depreciation, depletion &
amortization.............. 982 -- 11,948 (3) 12,930
General and
administrative............ 1,452 -- 700 (4) 2,152
Interest and financing
costs..................... 878 -- 13,835 (5) 15,193
480 (6)
------- ------- -------- -------
Total expenses........ 5,819 -- 26,963 32,782
Net income (loss) before
extraordinary item and
income taxes................ (1,138) 31,953 (26,963) 3,852
Income taxes.................. -- -- 1,348 (7) 1,348
------- ------- -------- -------
Net income (loss) before
extraordinary item.......... $(1,138) $31,953 $(28,311) $ 2,504
======= ======= ======== =======
Net income (loss) before
extraordinary item per
common share:
Basic....................... $ (0.04) $ .09
======= =======
Diluted..................... N/A $ .09
=======
Shares used in computing net
income (loss) per common
share:
Basic....................... 26,964 26,964
======= =======
Diluted..................... N/A 28,541
=======
</TABLE>
See accompanying notes to the unaudited pro forma condensed consolidated
financial statements.
5
<PAGE> 6
QUEEN SAND RESOURCES, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS AS ADJUSTED
FOR THE FOR THE
MORGAN MORGAN
COMPANY MORGAN PROPERTY PROPERTY
HISTORICAL HISTORICAL ACQUISITION ACQUISITION
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Oil and natural gas sales....... $ 4,849 $ -- $ -- $ 4,849
Net profits interests and
royalty interests............. -- 23,460 -- 23,460
Interest and other.............. 80 -- -- 80
------- -------- -------- -------
Total revenues............ 4,929 23,460 -- 28,389
Expenses:
Productions expenses............ 3,183 -- -- 3,183
Depreciation, depletion and
amortization.................. 1,340 -- 9,923 (3) 11,263
General and administrative...... 1,646 -- 525 (4) 2,171
Interest and financing costs.... 898 -- 10,376 (5) 11,634
360 (6)
------- -------- -------- -------
Total expenses............ 7,067 -- 21,184 28,251
------- -------- -------- -------
Net income (loss) before income
taxes........................... (2,138) 23,460 (21,184) 138
Income taxes...................... -- -- 48 (7) 48
------- -------- -------- -------
Net income (loss)................. $(2,138) $ 23,460 $(21,232) $ 90
======= ======== ======== =======
Net income (loss) per common
share:
Basic........................... $ (0.07) $ .00
======= =======
Diluted......................... N/A $ .00
======= =======
Shares used in computing net
income (loss) per common share:
Basic........................... 27,205 27,205
======= =======
Diluted......................... N/A 39,297
======= =======
</TABLE>
See accompanying notes to the unaudited pro forma condensed consolidated
financial statements.
6
<PAGE> 7
QUEEN SAND RESOURCES, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE A -- GENERAL
On April 20, 1998, the Company acquired the Morgan Properties for gross
cash consideration of approximately $150.0 million (approximately $133.3
million after adjustments for net profits interests and royalty interest
revenues and capital expenditures since October 1, 1997, the effective date of
the purchase). The acquisition was financed with borrowings under the Company's
existing senior secured revolving credit facility (the "Credit Agreement") of
approximately $92.0 million and two $30.0 million Bridge Facilities (the
"Bridge Facilities") arranged by Bank of Montreal (collectively, the
"Borrowings").
NOTE B -- UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
The accompanying Unaudited Pro Forma Condensed Consolidated Balance Sheet
has been prepared as if the acquisition of the Morgan Properties and the
Borrowings were consummated on March 31, 1998 and reflects the following
adjustments:
(1) To record the acquisition of the Morgan Properties for net consideration of
approximately $133.3 million after adjustments for net profits interests
and royalty interests revenues and capital expenditures since October 1,
1997, the effective date of the purchase, and the related Borrowings of
$152.0 million, including costs of issuance of approximately $3.5 million.
A portion of the Borrowings were also used for repayments of other
indebtedness.
(2) To adjust the carrying value of proved oil and natural gas properties
pursuant to the full cost method of accounting. Under the full cost method
of accounting, the carrying value of oil and natural gas properties (net of
related deferred taxes) is generally not permitted to exceed the sum of the
present value (10% discount rate) of estimated future net cash flows from
proved reserves, based on current prices and costs, plus the lower of cost
or estimated fair value of unproved properties (the "full cost ceiling").
Based upon the pro forma combined supplemental oil and gas reserve and
standardized measure information (See Note E -- Unaudited Pro Forma
Combined Supplemental Oil and Natural Gas Reserve and Standardized Measure
Information) and the net purchase price of the Morgan Properties of $133.3
million, the amount of the full cost pool would be in excess of the full
cost ceiling by approximately $21.0 million, which would require a
writedown that would be included in the results of operations in the period
in which the acquisition is completed. The amount of the writedown, if any,
which will be recorded will be largely dependent upon the prevailing market
prices of oil and natural gas at June 30, 1998.
7
<PAGE> 8
QUEEN SAND RESOURCES, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
NOTE C -- UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying Unaudited Pro Forma Condensed Consolidated Statements of
Operations have been prepared as if the acquisition of the Collins and Ware,
NASGAS and Morgan Properties and the Borrowings and reflect the following
adjustments:
(3) To record incremental depletion expense for the Morgan Properties.
(4) To record estimated incremental general and administrative expenses
relating to administration of the Morgan Properties. The pro forma
adjustment for the nine months ended March 31, 1998 represents 75% of the
estimated annual incremental expenses of $700,000.
(5) To record interest expense relating to the borrowings by the Company of
$152.0 million under the Borrowings.
Interest on borrowings under the Credit Agreement and the Debt and Equity
Bridge Facilities is based on estimated interest rates of 8.125%, 9.6% and
11.6%, respectively. Interest expense on these borrowings will fluctuate
based on changes in LIBOR. The effect of a 1/8th of a percentage point
change in the LIBOR rate would change interest expense by approximately
$190,000 per year.
(6) To record amortization, calculated on a straight line basis, of the
issuance costs of the Borrowings.
(7) To record a provision for income taxes for the changes in financial taxable
income as a result of the Morgan acquisition and the effects of entries
(3), (4), (5), and (6). This does not consider the effects of existing
net operating loss carryforwards or tax credits available to the Company.
NOTE D -- UNAUDITED PRO FORMA NET INCOME (LOSS) PER COMMON SHARE
The unaudited pro forma basic net income (loss) per common share is
computed by dividing pro forma net income by the weighted average number of
common shares of the Company outstanding during the period.
8
<PAGE> 9
QUEEN SAND RESOURCES, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
Unaudited pro forma diluted net income (loss) per common share is computed by
dividing pro forma net income (loss) by the number of shares used in the basic
calculation, as adjusted for the dilutive effect of stock options and warrants
of the Company outstanding during the period.
NOTE E -- UNAUDITED PRO FORMA COMBINED SUPPLEMENTAL OIL AND NATURAL GAS RESERVE
AND STANDARDIZED MEASURE INFORMATION
RESERVE QUANTITY INFORMATION
The following table presents the Company's pro forma estimate of proved oil
and natural gas reserves at March 31, 1998. The Company emphasizes that reserve
estimates are inherently imprecise and that estimates of new discoveries are
more imprecise than those of producing oil and natural gas properties.
Accordingly, the estimates are expected to change as future information becomes
available. The data have been derived from estimates prepared by independent
petroleum reservoir engineers.
<TABLE>
<CAPTION>
OIL NATURAL GAS
(BBLS) (MCF)
------ -----------
(IN THOUSANDS)
<S> <C> <C>
Proved reserves........................................ 10,481 177,979
Proved developed reserves.............................. 5,342 120,749
</TABLE>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL
AND NATURAL 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 pro forma Standardized Measure does not purport to be, nor should it be
interpreted to present, the pro forma fair value of the oil and natural gas
reserves of the Company. 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
period-end prices, adjusted for fixed and determinable escalations, to the
estimated future production of year-end proved reserves. Future cash flows are
reduced by estimated future production costs, based on period-end costs,
projected future development costs and projected future income taxes to
determine net cash inflows. Future net cash flows are discounted using a 10%
annual discount rate to arrive at the Standardized Measure.
The pro forma Standardized Measure of discounted future net cash flows
relating to proved oil and natural gas reserves of the Morgan Properties at
March 31, 1998 follows:
<TABLE>
<CAPTION>
(THOUSANDS)
-----------
<S> <C>
Future cash inflows......................................... $ 576,301
Future costs and expenses:
Production expenses....................................... (202,087)
Development expenses...................................... (39,531)
Income taxes.............................................. (59,101)
---------
Future net cash flows....................................... 275,582
10% annual discount......................................... (132,866)
---------
Standardized Measure........................................ $ 142,716
=========
</TABLE>
9
<PAGE> 10
QUEEN SAND RESOURCES, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
Estimates of economically recoverable oil and natural gas 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 natural gas and oil may differ materially from the
amounts estimated.
10
<PAGE> 11
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Queen Sand Resources, Inc.
We have audited the accompanying statements of net profits interests and
royalty interests revenues of certain oil and gas producing properties acquired
from pension funds managed by J.P. Morgan Investments (the "Morgan Properties")
by Queen Sand Resources, Inc. (the "Company") for the years ended June 30, 1997,
1996 and 1995. These statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these 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 audits to obtain
reasonable assurance about whether the accompanying statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the accompanying statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
The accompanying statements were prepared for the purpose of complying with
the rules and regulations of the Securities and Exchange Commission and are not
intended to be a complete presentation of the revenues and expenses of certain
oil and gas producing properties acquired from pension funds managed by J.P.
Morgan Investments.
In our opinion, the statements referred to above present fairly, in all
material respects, the net profits interests and royalty interest revenues of
the Morgan Properties for the years ended June 30, 1997, 1996 and 1995 in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Dallas, Texas
April 17, 1998
11
<PAGE> 12
CERTAIN OIL AND GAS PRODUCING PROPERTIES
ACQUIRED FROM PENSION FUNDS MANAGED BY J.P. MORGAN INVESTMENTS
STATEMENTS OF NET PROFITS INTERESTS AND ROYALTY INTERESTS REVENUES
($ THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
NINE MONTHS ENDED ---------------------------
MARCH 31,1998 1997 1996 1995
----------------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net profits interests and royalty interests
revenues..................................... $23,460 $31,953 $21,759 $18,657
======= ======= ======= =======
</TABLE>
See accompanying notes
12
<PAGE> 13
CERTAIN OIL AND GAS PRODUCING PROPERTIES
ACQUIRED FROM PENSION FUNDS MANAGED BY J.P. MORGAN INVESTMENTS
NOTES TO STATEMENTS OF NET PROFITS INTERESTS
AND ROYALTY INTERESTS REVENUES
NOTE A -- BASIS OF PRESENTATION
In April, 1998, the Queen Sand Resources, Inc. (the "Company") completed
the acquisition of certain oil and natural gas producing properties, primarily
located in East and South Texas and the Mid-Continent region of the United
States, from pension funds managed by J.P. Morgan Investments (the "Morgan
Properties"). The Company's interest in the Morgan Properties primarily takes
the form of non-operated net profits overriding royalty interests, whereby the
Company is entitled to a percentage of the net profits from the operations of
the properties.
The net profits interests and royalty interests revenues presented herein
relate only to the interests in the certain oil and gas producing properties
acquired and do not represent all of the costs of oil and gas operations of the
acquired interests. In determining the net profits interest and royalty
interests revenues, revenues are recognized on the sales method and production
expenses are recognized on the accrual method. Presentation of complete
historical financial statements is not practicable because these properties were
not accounted for as a separate entity during the past three years. The net
profits interests and royalty interests revenues for the periods presented may
not be indicative of the results of future operations of the acquired interests.
Presented below are the oil and natural gas sales and associated production
expenses from which the overriding royalties and net profits interests revenues
presented in the accompanying statements are derived:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
NINE MONTHS ENDED ---------------------------
MARCH 31, 1998 1997 1996 1995
----------------- ------- ------- -------
(UNAUDITED) ($ THOUSANDS)
<S> <C> <C> <C> <C>
Oil and natural gas sales............. $30,747 $43,243 $35,283 $28,569
Production expenses................... 7,287 11,290 13,524 9,912
------- ------- ------- -------
Net profits interests and royalty
interests revenues.................. $23,460 $31,953 $21,759 $18,657
======= ======= ======= =======
</TABLE>
NOTE B -- SUPPLEMENTARY OIL AND NATURAL GAS DATA (UNAUDITED)
OIL AND NATURAL GAS OPERATIONS
During the years ended June 30, 1997, 1996 and 1995, development costs of
$8.2 million, $14.9 million and $19.2 million, respectively, were incurred. No
exploration or incremental general and administrative costs were incurred.
RESERVE QUANTITY INFORMATION
The following table presents the Company's estimate of the proved oil and
natural gas reserves of the Morgan Properties, 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 natural gas properties. Accordingly, the estimates are
expected to change as future
13
<PAGE> 14
CERTAIN OIL AND GAS PRODUCING PROPERTIES
ACQUIRED FROM PENSION FUNDS MANAGED BY J.P. MORGAN INVESTMENTS
NOTES TO STATEMENTS OF NET PROFITS INTERESTS
AND ROYALTY INTERESTS REVENUES -- (CONTINUED)
information becomes available. The estimates have been prepared by independent
petroleum reservoir engineers.
<TABLE>
<CAPTION>
OIL NATURAL
(BBLS) GAS (MCF)
------ ---------
(IN THOUSANDS)
<S> <C> <C>
Proved reserves:
Balance at July 1, 1994................................... 3,680 157,934
Acquisitions of reserves.................................. 1,362 --
Development and revisions of previous estimates........... 157 (1,620)
Production................................................ (473) (12,808)
------ -------
Balance at June 30, 1995.................................. 4,726 143,506
Sales of reserves in place................................ (46) --
Development and revisions of previous estimates........... (1,069) 12,662
Production................................................ (490) (13,714)
------ -------
Balance at June 30, 1996.................................. 3,121 142,454
Sales of reserves in place................................ (16) (2,694)
Development and revisions of previous estimates........... 960 (2,445)
Production................................................ (475) (13,188)
------ -------
Balance at June 30, 1997.................................. 3,590 124,127
====== =======
Proved developed reserves:
Balance at June 30, 1995.................................. 4,227 121,934
====== =======
Balance at June 30, 1996.................................. 2,960 118,950
====== =======
Balance at June 30, 1997.................................. 3,220 115,915
====== =======
</TABLE>
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 Natural Gas Reserves ("Standardized Measure") is a disclosure
requirement under Statement of Financial Accounting Standards No. 69.
The Standardized Measure does not purport to be, nor should it be
interpreted to present, the fair value of the oil and gas reserves of the Morgan
Properties. 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 flows are
reduced by estimated future production costs, based on period-end costs, and
projected future development costs to determine net cash inflows. The Morgan
Properties are not a separate tax paying entity. Accordingly, the Standardized
Measure for the Morgan Properties is presented before deduction of income taxes.
Future net cash flows are discounted using a 10% annual discount rate to arrive
at the Standardized Measure.
14
<PAGE> 15
CERTAIN OIL AND GAS PRODUCING PROPERTIES
ACQUIRED FROM PENSION FUNDS MANAGED BY J.P. MORGAN INVESTMENTS
NOTES TO STATEMENTS OF NET PROFITS INTERESTS
AND ROYALTY INTERESTS REVENUES -- (CONTINUED)
The Standardized Measure of discounted future net cash flows relating to
proved oil and gas reserves of the Morgan Properties at June 30, 1997, 1996 and
1995 follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
($ THOUSANDS)
<S> <C> <C> <C>
Future cash inflows............................... $ 358,833 $ 380,027 $ 324,223
Future costs and expenses:
Production expenses............................. (123,525) (121,690) (115,797)
Development expenses............................ (9,012) (9,572) (9,209)
--------- --------- ---------
Future net cash flows............................. 226,296 248,765 199,217
10% annual discount............................... (99,400) (119,838) (103,611)
--------- --------- ---------
Standardized measure.............................. $ 126,896 $ 128,927 $ 95,606
========= ========= =========
</TABLE>
The weighted average prices of oil and natural gas at June 30, 1997, 1996
and 1995 used in the calculation of the Standardized Measure were $19.26, $18.48
and $18.59 per barrel and $2.32, $2.26 and $1.65 per Mcf, respectively.
Changes in the Standardized Measure of discounted future net cash flows
relating to proved oil and gas reserves for the years ended June 30, 1997, 1996
and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
($ THOUSANDS)
<S> <C> <C> <C>
Balance beginning of year............................ $128,927 $ 95,606 $123,935
Sales of minerals in place......................... (2,510) (133) --
Net change in prices and costs..................... (4,567) 73,425 (63,781)
Accretion of discount.............................. 9,697 7,385 10,528
Sales of oil and gas produced, net of production
expenses........................................ (31,953) (21,759) (18,657)
Development and revisions of previous estimates.... 27,302 (25,597) 43,581
-------- -------- --------
Balance end of year.................................. $126,896 $128,927 $ 95,606
======== ======== ========
</TABLE>
Estimates of economically recoverable oil and gas 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.
15
<PAGE> 16
(c). Exhibits
10.1 Purchase and Sale Agreement among Morgan Guaranty Trust
Company of New York, as Trustee under Declaration of Trust dated November 10,
1982, as amended, for the Commingled Pension Trust Fund (Petroleum), Morgan
Guaranty Trust Company of New York, as Trustee under Declaration of Trust dated
November 10, 1982, as amended, for the Commingled Pension Trust Fund (Petroleum
II), Investment Royalty Corporation, Milam Royalty Corporation and Queen Sand
Resources, Inc., a Nevada corporation, previously filed.
23.1 Consent of Ernst & Young, LLP.
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
QUEEN SAND RESOURCES, INC.
Date: June 4, 1998 By: /s/ Robert P. Lindsay
------------------------------------
Name: Robert P. Lindsay
Title: Executive Vice President and
Chief Operating Officer
17
<PAGE> 18
Index to Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
10.1 Purchase and Sale Agreement among Morgan Guaranty Trust
Company of New York, as Trustee under Declaration of Trust dated
November 10, 1982, as amended, for the Commingled Pension Trust
Fund (Petroleum), Morgan Guaranty Trust Company of New York, as
Trustee under Declaration of Trust dated November 10, 1982, as
amended, for the Commingled Pension Trust Fund (Petroleum II),
Investment Royalty Corporation, Milam Royalty Corporation and
Queen Sand Resources, Inc., a Nevada corporation, previously
filed.
23.1 Consent of Ernst & Young, LLP.
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP
We consent to the incorporation by reference in the Registration Statement (Form
S-3 No. 333-47577) of Queen Sand Resources, Inc. and in the related Prospectus
of our report dated April 17, 1998, with respect to the statements of net
profits interests and royalty interests revenues of certain oil and gas
producing properties acquired from pension funds managed by J.P. Morgan
Investments for the years ended June 30, 1997, 1996 and 1995.
/s/ Ernst & Young LLP
June ____, 1998
