<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 21, 2000
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM S-2
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
---------------------------
QUEEN SAND RESOURCES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 1311 75-2615565
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Numbers) Identification No.)
</TABLE>
---------------------------
13760 NOEL ROAD, SUITE 1030
DALLAS, TEXAS 75240-7336
(972) 233-9906
(Address, including zip code, and telephone
number, including area code, of
registrant's principal executive offices)
------------------------------------
ROBERT P. LINDSAY
CHIEF OPERATING OFFICER
13760 NOEL ROAD, SUITE 1030
DALLAS, TEXAS 75240-7336
TELEPHONE: (972) 233-9906
FAX: (972) 233-9575
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------------------
Copies to:
WILLIAM L. BOEING KENNETH L. STEWART
HAYNES AND BOONE, LLP FULBRIGHT & JAWORSKI L.L.P.
1600 N. COLLINS BLVD., SUITE 2000 2200 ROSS AVENUE, SUITE 2800
RICHARDSON, TEXAS 75080 DALLAS, TEXAS 75201
TELEPHONE: (972) 680-7550 TELEPHONE: (214) 855-8000
FAX: (972) 680-7551 FAX: (214) 855-8200
---------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legal facsimile thereof, pursuant to Item 11(a)(1) of
this Form, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
Proposed Maximum Maximum
Title of Each Class of Amount to be Aggregate Offering Aggregate Offering Amount
Securities to be Registered Registered (1) Price Per Share (2) Price (2) of Registration Fee
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $0.234 per share (3)..... 11,500,000 $8.00 $92,000,000 $24,288
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 1,500,000 shares of common stock issuable upon exercise of the
underwriters' over-allotment option.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(o) of the Securities Act of 1933, as
amended.
(3) We intend to complete a 156 to 1 reverse stock split of our common stock
immediately before the completion of this offering. The shares being
offered in this offering will be post-reverse split shares of common stock.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED JULY 21, 2000
PROSPECTUS
10,000,000 SHARES
[QUEEN SAND RESOURCES, INC. LOGO]
COMMON STOCK
--------------------
We are selling 10,000,000 shares of our common stock. This is an initial
public offering of our common stock. Our common stock is quoted on the OTC
Bulletin Board under the symbol "QSRI." Although our common stock is quoted on
the OTC Bulletin Board, the public offering price of the common stock in this
offering is not based on the market price of our common stock but was determined
by negotiations between us and the underwriters based on factors described in
"Underwriting." It is currently estimated that the public offering price per
share will be between $7.00 and $9.00.
You should read this prospectus carefully before you invest.
<TABLE>
<CAPTION>
PER SHARE TOTAL
-------------------- ----------------------
<S> <C> <C>
Public offering price.................................................. $ $
Underwriting discounts and commissions................................. $ $
Proceeds, before expenses, to us....................................... $ $
</TABLE>
The underwriters may purchase up to an additional 1,500,000 shares of
common stock from us at the public offering price less the underwriting
discount, to cover over-allotments. The underwriters expect to deliver the
shares against payment in Arlington, Virginia on or about , 2000.
YOU SHOULD READ THE SECTION ENTITLED "RISK FACTORS" BEGINNING ON PAGE 11
FOR A DISCUSSION OF CERTAIN FACTORS YOU SHOULD CONSIDER BEFORE BUYING OUR COMMON
STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Friedman, Billings, Ramsey & Co., Inc.
Prospectus dated , 2000
<PAGE> 3
[Map of the United States with the Company's name and the following areas
highlighted: the Appalachian Basin, the Mid-Continent, East Texas, the Gulf
Coast, the Permian Basin and South Texas]
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<PAGE> 4
SUMMARY
This summary highlights selected information from this prospectus. This
summary is not complete and may not contain all of the information that you
should consider before investing in our common stock. You should carefully read
the entire prospectus before making an investment decision. Unless otherwise
indicated, this prospectus reflects no exercise of the underwriters'
over-allotment option. Unless otherwise indicated, this prospectus assumes that
the recapitalization described below, including the reverse stock split of every
156 outstanding shares of common stock into one share, has occurred. We have
provided definitions for some of the oil and gas industry terms used in this
prospectus in the "Glossary" beginning on page 87.
In this prospectus, we refer to Queen Sand Resources, Inc. and its
subsidiaries as "Queen Sand Resources," "we," "our" or "our company." Our fiscal
year end is June 30.
THE COMPANY
We are an independent energy company engaged in the exploration,
development, exploitation and acquisition of on-shore oil and natural gas
properties in conventional producing areas of North America. To date, we have
grown almost exclusively through acquisitions of properties. As a result of our
acquisitions we own a diverse property base concentrated in six producing areas
or basins. Approximately one-half of our proved reserves are concentrated in
south and east Texas. Our assets are primarily long-lived natural gas properties
exhibiting low operating costs.
At March 31, 2000, we owned proved reserves of approximately 140 Bcf of
natural gas and 4.4 MMBbls of oil aggregating to approximately 166 Bcfe with an
SEC PV-10 value of $166 million and a reserve life index of 13.7 years.
Approximately 61% of our proved reserves were classified as proved developed and
approximately 84% of our proved reserves were natural gas. Our average daily net
production for the three months ending March 31, 2000, was 32.1 MMcfe. At March
31, 2000, we had interests in 650 wells, including 83 service wells.
Assuming completion of the Recapitalization and this offering, we
expect to be able to execute an annual capital expenditure program of
approximately $20 million. As part of this program, we plan to increase our
exploration expenditures and are currently having discussions with potential
exploration joint venture partners. We expect our cash flow to increase as a
result of the $10.8 million decrease in annual interest expense that we
anticipate from the completion of the Recapitalization. Upon completion of this
offering, the indenture governing our 12 1/2 % senior notes will be amended to
allow us to increase the level of permitted borrowings under our credit facility
to $60 million. We anticipate that we can fund our capital expenditure program
through a combination of working capital, operating cash flow and additional
borrowings under our credit facility.
Our executive offices and mailing address are 13760 Noel Road, Suite
1030, Dallas, Texas 75240-7336 and our telephone number at that address is
972-233-9906.
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<PAGE> 5
BUSINESS STRATEGY
Our goal is to enhance shareholder value by expanding our oil and
natural gas reserves, production levels and cash flow, focusing on return on
capital. Our strategy to achieve these goals consists of these elements:
o Recapitalizing the company through a significant reduction of
debt, a corresponding increase of equity and the elimination
of all preferred securities;
o Pursuing managed asset growth through:
-- actively developing and exploiting our existing
higher potential oil and natural gas properties,
particularly in south and east Texas;
-- selective acquisitions of high potential oil and
natural gas assets that complement our existing
properties, coupled with routine dispositions of
non-core and lower potential properties;
-- an increased emphasis on exploration activities; and
-- targeted merger(s) where the consolidation with other
companies will give access to quality reserves within
our core areas;
o Maintaining a capital and financial structure with prudent
debt to equity ratios that will allow us to use cash generated
from operations to fund growth in our production and reserves;
and
o Enhancing our board of directors and management team through
the addition of new industry senior executives to assist the
company in enhancing and expanding our operating capacity and
exploration activities.
THE RECAPITALIZATION. Simultaneously with the closing of this offering,
we will complete a recapitalization (the "Recapitalization") which includes: (a)
a reverse stock split of one common share for every 156 shares of our common
stock; (b) the exchange or exercise of all preferred stock, all warrants
exercisable for shares of common stock and all remaining unexercised common
stock repricing rights for 732,500 shares of post reverse-split common stock;
and (c) the repurchase of $75 million face value of our 12 1/2% senior notes for
approximately $49 million. At our stockholders meeting on ___________ ___, 2000,
our stockholders approved the Recapitalization.
When the Recapitalization and this offering are complete, our company
will:
o obtain a discount on the repurchase of at least $75 million of
our senior notes, thereby creating more than $25 million of
additional equity value for our stockholders;
o reduce our debt by $75 million, thereby increasing annual cash
flow available to fund growth by $10.8 million and reducing
our interest cost per Mcfe by nearly 60%;
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<PAGE> 6
o reduce our long-term debt to $50 million, which approximates
30% of our March 31, 2000 SEC PV-10 of $166 million;
o eliminate all outstanding preferred stock;
o eliminate the dilutive effects of current market price
conversion and repricing rights held by some of our
stockholders;
o improve our liquidity by using a portion of the net proceeds
of this offering to pay down our senior working capital
facility and modifying the indenture governing our
senior notes to permit us to increase our senior working
capital facility from $35 million to $60 million; and
o be in a position to satisfy the listing requirements of the
Nasdaq National Market with a goal of improving the visibility
and liquidity of our common stock.
Upon completion of the Recapitalization and this offering, there will
be outstanding 11,250,000 shares of our common stock, no shares of preferred
stock and no repricing rights. The closing of this offering is a condition to
the completion of the Recapitalization, and the completion of the
Recapitalization is a condition to the completion of this offering.
DEVELOPMENT AND EXPLOITATION OF EXISTING PROPERTIES. We have identified
over 407 potential development locations and exploitation opportunities on our
properties. We have prioritized these opportunities to concentrate on those
higher impact projects that have the potential to replace and grow our reserves
while maximizing the long-term return on our capital. Our opportunities include:
o additional exploration of well-defined locations on existing
properties such as in the J.C. Martin field in south Texas;
o infill drilling on our producing properties such as in the
Gilmer field in east Texas;
o recompletion of existing wells in behind-pipe intervals such
as in the Lopeno/Volpe field in south Texas; and
o developing proved undeveloped reserves by drilling low risk,
long lived natural gas wells in the shallow New Albany Shale
formation in Kentucky.
PROPERTY ACQUISITIONS AND DIVESTITURES. We will diligently pursue the
acquisition of oil and natural gas properties that we believe will provide us
with a combination of increased production, reserve growth and exploration
potential. Our focus will be on only those properties that can be acquired at
prices that will enhance our overall return on capital. Although we are
currently weighted towards gas reserves, we anticipate that we may return to a
more even oil to natural gas ratio. While the acquisition market is currently
very competitive, we believe that there are opportunities to acquire high
quality oil and natural gas properties with these characteristics in the
mid-continent and southwest regions of the United States, where we have
established core areas. In all property acquisitions the company will be seeking
to become the operator. We will also continue to routinely evaluate our
portfolio of properties and periodically divest non-core or low potential
properties.
EXPLORATION. The acquisition market is currently very competitive,
especially for transactions that exceed $50 million. These properties are
generally sold on a tender bid basis which has the effect of bidding
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<PAGE> 7
up the price and maximizing the return to the seller. As a result, we have
determined that it is no longer prudent to rely solely on acquisitions for asset
growth. Our growth strategy has evolved from being primarily acquisition driven
to a more balanced approach with an increased emphasis on exploration
opportunities. We believe that this balanced approach will provide for a lower
average reserve replacement cost, thereby improving our return on capital. In
order to diversify our exposure, we generally acquire larger interests in
company-operated, low risk projects and smaller interests in higher risk/high
impact exploration properties. Our plan is for much of our exploration effort to
be conducted with partners who bring a unique experience, expertise or ownership
position in the prospect area of interest and have a successful track record.
MERGER OPPORTUNITIES. With our substantially de-leveraged balance sheet
and stronger cash flow following the Recapitalization and our long-life
reserves, we expect to be able to attract other small capitalization oil and
natural gas companies as merger or consolidation partners. We will be in an
excellent position to make accretive acquisitions of other companies and,
through this process, to use our strong balance sheet and cash flow to effect
the recapitalization of suitable merger candidates that otherwise may not have
access to capital.
CAPITAL AND FINANCIAL STRUCTURE. Our objective is to use a portion of
the net proceeds of this offering and internally generated cash flow to fund our
exploration, development and exploitation programs. We believe that we can
finance our acquisition opportunities at attractive prices with a combination of
equity and debt.
MANAGEMENT TEAM. With completion of the Recapitalization, we will have
the financial capability to pursue our strategy of increased focus on operating
those properties that we own and on exploration as a means to grow our assets.
We intend to continue restructuring our management team to add to our
engineering, geology and geophysical personnel. We also intend to add seasoned
senior oil and gas industry executives with experience in building stockholder
value and in the management of exploration and development projects.
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<PAGE> 8
<TABLE>
THE OFFERING
<S> <C>
Common stock offered................................... 10,000,000 shares(1)
Common stock to be outstanding after this
offering............................................... 11,250,000 shares(2)
Use of proceeds........................................ To repurchase $75 million in aggregate principal
amount of our 12 1/2% senior notes for approximately
$49 million, to repay approximately $13.5 million
outstanding under our credit agreement and the
balance for future acquisitions and other general
corporate working capital purposes.
OTC Bulletin Board Symbol.............................. QSRI
</TABLE>
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(1) 11,500,000 shares if the underwriters' over-allotment option is
exercised in full.
(2) 12,750,000 shares if the underwriter's over-allotment is exercised in
full. Includes the 1,250,000 shares to be issued in the
Recapitalization.
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<PAGE> 9
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following table presents some of our historical and unaudited pro
forma consolidated financial data. We completed significant acquisitions of
producing oil and natural gas properties during some of the periods presented
which affects the comparability of the historical financial and operating data
for the periods presented. The financial data for the three years ended June 30,
1999 are derived from our audited consolidated financial statements. The
financial data for the nine month periods ended March 31, 1999 and 2000 are
derived from unaudited financial statements. The unaudited financial statements
include all adjustments, consisting of normal recurring accruals, which we
consider necessary for a fair presentation of the financial position and the
results of operations for these periods. The pro forma financial data are
derived from our pro forma financial statements. The financial data are not
necessarily indicative of our future performance. You should read the following
data in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," our consolidated financial statements and
the notes to those financial statements as well as the "Unaudited Pro Forma
Condensed Consolidated Financial Statements" included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
---------------------------------------------- ----------------------
NINE MONTHS NINE MONTHS
ENDED YEAR ENDED ENDED
YEAR ENDED JUNE 30, MARCH 31, JUNE 30, MARCH 31,
-------------------------------- ----------- ---------- -----------
1997 1998 1999 2000 1999 2000
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS DATA:
Oil and natural gas sales(1) ....................... $ 4,381 $ 12,665 $ 33,783 $ 23,009 $ 33,783 $ 23,009
Oil and natural gas production expenses (1) ......... 2,507 6,333 9,127 5,216 9,127 5,216
-------- -------- -------- -------- -------- ---------
Net oil and natural gas revenues .................... 1,874 6,332 24,656 17,793 24,656 17,793
General and administrative expenses ................. 1,452 2,259 3,534 2,222 3,534 2,222
-------- -------- -------- -------- -------- ---------
EBITDA(2) .......................................... 422 4,073 21,122 15,571 21,122 15,571
Interest and financing costs(3) .................... 878 3,957 17,003 12,720 6,165 4,533
Depletion, depreciation, and amortization(4) ........ 982 4,809 13,354 7,791 13,354 7,791
Hedge contract termination costs(5) ................ -- -- -- 3,328 -- 3,328
Ceiling test write-down(6) ......................... -- 28,166 35,033 -- 35,033 --
Interest and other income ........................... (300) (105) (326) (150) (326) (150)
-------- -------- -------- -------- -------- ---------
Net income (loss) before extraordinary item ......... (1,138) (32,754) (43,942) (8,118) $(33,104) $ 69
-------- -------- -------- -------- ======== =========
Extraordinary item(7) .............................. 171 -- 3,549 1,130
-------- -------- -------- --------
Net income (loss) ................................... $ (1,309) $(32,754) $(47,491) $ (9,248)
======== ======== ======== ========
Net income (loss) per common share
before extraordinary item.......................... $ (0.05) $ (1.44) $ (1.51) $ (0.21) $ (1.51) $ --
</TABLE>
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------------------------------ ------------
AT JUNE 30, AT MARCH 31, AT MARCH 31,
-------------------------------- ------------ ------------
1997 1998 1999 2000 2000
------- -------- -------- ------------ ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT END OF PERIOD):
Total current assets...................... $ 1,066 $ 6,411 $ 14,019 $ 6,922 $ 18,672
Property and equipment, net............... 16,187 142,467 97,198 95,506 95,506
Deferred assets........................... -- 4,797 7,993 8,110 4,540
Total assets.............................. 17,253 153,675 119,210 110,538 118,718
Total current liabilities................. 3,670 6,836 11,142 7,070 4,733
Long-term obligations, net of
current portion......................... 7,152 153,619 133,852 138,500 50,000
Total stockholders' equity (deficit)...... 6,431 (6,780) (25,784) (35,032) 63,985
</TABLE>
(1) Oil and natural gas sales and production expenses related to net profits
interests have been presented as if the net profits interests were working
interests. Oil and natural gas sales include revenues relating to the net
profits interests of $6,219,000 for the year ended June 30, 1998,
$29,071,000 for the year ended June 30, 1999, and $21,263,000 for the nine
months ended March 31, 2000. Oil and natural gas production expenses
include expenses relating to the net profits interests of $1,787,000 for
the year ended June 30, 1998, $5,931,000 for the year ended June 30,1999,
and $4,365,000 for the nine months ended March 31, 2000.
(2) EBITDA represents earnings before interest expense, income taxes,
depreciation, depletion and amortization expense, write down of oil and
natural gas properties and extraordinary items and excludes interest and
other income. EBITDA is not a measure of income or cash flows in
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<PAGE> 10
accordance with generally accepted accounting principles, but is presented
as a supplemental financial indicator as to our ability to service or incur
debt. EBITDA is not presented as an indicator of cash available for
discretionary spending or as a measure of liquidity. EBITDA may not be
comparable to other similarly titled measures of other companies. Our
credit agreement requires the maintenance of specified EBITDA ratios.
EBITDA should not be considered in isolation or as a substitute for net
income, operating cash flow or any other measure of financial performance
prepared in accordance with generally accepted accounting principles or as
a measure of our profitability or liquidity.
(3) Interest charges payable on outstanding debt obligations.
(4) Depreciation, depletion and amortization includes $22,000 of amortized
deferred charges related to our natural gas price hedging program for the
year ended June 30, 1998, amortized deferred charges related to debt
obligations of $1.3 million for the year ended June 30, 1999, and $120,000
of amortized deferred charges related to our natural gas price hedging
program for the year ended June 30, 1999. Depreciation, depletion and
amortization includes $1,191,000 of amortized deferred charges related to
debt obligations for the nine months ended March 31, 2000, and $76,000 of
amortized deferred charges related to our natural gas price hedging program
for the nine months ended March 31, 2000.
(5) In conjunction with the execution of our restated credit agreement in
October 1999, we terminated the ceiling portion of a natural gas hedging
contract at a cost of $3,328,000.
(6) In accordance with the full cost method of accounting, the results of
operations for the year ended June 30, 1998 include a writedown of oil and
natural gas properties of $28,166,000 and for the year ended June 30, 1999
include a writedown of $35,033,000.
(7) During February 1997, we recognized a loss of $171,000 in connection with
restructuring a debt obligation. During July 1998, we terminated a LIBOR
interest rate swap agreement at a cost of $3,549,000. During October 1999,
we retired borrowings under our old credit agreement and entered into a
restated credit agreement with a new lender. As a result, we wrote off
$1,130,000 of deferred costs relating to the old credit agreement.
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<PAGE> 11
SUMMARY OPERATING AND RESERVE DATA
The following table presents some of our operating and reserve data. You
should read the following data in conjunction with "Risk Factors -- Our
profitability is highly dependent on the prices for oil and natural gas, which
can be extremely volatile," "-- Any negative variance in our estimates of proved
reserves and future net revenues could affect the carrying value of our assets,
our income and our ability to borrow funds," and "Business -- Oil and natural
gas reserves" included elsewhere in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
OPERATING DATA:
Production volumes:
Natural gas (MMcf) .............................. 546 3,368 12,962
Oil (MBbl) ...................................... 151 325 500
Total (MMcfe) ................................. 1,450 5,318 15,960
Average sales price:
Natural gas (per Mcf) ........................... $ 2.31 $ 2.27 $ 2.13
Oil (per Bbl) ................................... 20.73 15.52 12.37
Natural gas equivalent (per Mcfe) ............... 3.02 2.39 2.12
Selected expenses (per Mcfe):
Lease operating expense ......................... $ 1.52 $ 1.07 $ 0.49
Production taxes ................................ 0.21 0.12 0.08
General and administrative ...................... 1.00 0.43 0.22
Depreciation, depletion and amortization(1) ..... 0.68 0.91 0.74
Interest expense ................................ 0.61 0.74 1.15
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
-------------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
PROVED RESERVE DATA (END OF PERIOD):
Proved reserves:
Natural gas (MMcf).................... 20,973 176,095 137,561
Oil (MBbl)............................ 6,709 7,949 4,624
Total (MMcfe)......................... 61,224 223,788 165,299
Percent of proved developed reserves...... 41.7% 68.3% 65.0%
Percent of natural gas reserves........... 34.3% 78.7% 83.2%
Reserve Life Index (years)(2)............. 42.2 11.4 10.4
Estimated future net cash flows before
income taxes (in thousands)............. $ 80,596 $ 318,663 $ 271,993
SEC PV-10 (in thousands).................. $ 41,218 $ 165,120 $ 130,726
</TABLE>
----------
(1) Represents depreciation, depletion and amortization of oil and natural gas
properties only.
(2) The Reserve Life Index at June 30, 1998 was calculated using pro forma
production of 19,654 MMcfe for the year ended June 30, 1998.
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<PAGE> 12
RISK FACTORS
You should carefully consider the following risks before making an
investment decision. The trading price of our common stock could decline due to
any of these risks, and you could lose all or part of your investment. You also
should refer to the other information set forth in this prospectus, including
our financial statements and the related notes thereto.
RISKS RELATED TO OUR BUSINESS
WE HAVE IN THE PAST EXPERIENCED NET LOSSES AND WE MAY EXPERIENCE NET LOSSES IN
THE FUTURE, WHICH COULD MATERIALLY ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
Since beginning operations in 1995, we have not been profitable on an
annual or quarterly basis. We experienced a net loss of approximately $32.8
million for the year ended June 30, 1998, a net loss of approximately $47.5
million for the year ended June 30, 1999 and a net loss of approximately $9.2
million for the nine months ended March 31, 2000. We may experience net losses
in the future as we continue to incur significant operating expenses and to make
capital expenditures. Even if we do become profitable, we may not sustain or
increase profitability on a quarterly or annual basis in the future. At March
31, 2000, we had an accumulated deficit of approximately $93.1 million.
OUR PROFITABILITY IS HIGHLY DEPENDENT ON THE PRICES FOR OIL AND NATURAL GAS,
WHICH CAN BE EXTREMELY VOLATILE.
Our revenues, profitability and future growth substantially depend on
prevailing prices for oil and natural gas. Prices for oil and natural gas can be
extremely volatile. Among the factors that can cause this volatility are:
o weather conditions;
o the level of consumer product demand;
o domestic and foreign governmental regulations;
o the price and availability of alternative fuels;
o political conditions in oil and natural gas producing regions;
o the domestic and foreign supply of oil and natural gas;
o the availability, proximity and capacity of gathering systems of
natural gas;
o the price of foreign imports; and
o overall economic conditions.
Prices for oil and natural gas affect the amount of cash flow available to
us for capital expenditures and the repayment of our outstanding debt. Our
ability to maintain or increase our borrowing capacity and to obtain additional
capital on attractive terms is also substantially dependent upon oil and natural
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<PAGE> 13
gas prices. In addition, because we currently produce more natural gas than oil,
we face more risk with fluctuations in the price of natural gas than oil. We
have used hedging contracts to reduce our exposure to price changes.
HEDGING OUR PRODUCTION MAY CAUSE US TO FOREGO FUTURE PROFITS.
To reduce our exposure to changes in the prices of oil and natural gas, we
have entered into and may in the future enter into hedging arrangements for a
portion of our oil and natural gas production. The hedges that we have entered
into generally provide a "floor" or "cap and floor" on the prices paid for our
oil and natural gas production over a period of time. Hedging arrangements may
expose us to the risk of financial loss in some circumstances, including the
following:
o the other party to the hedging contract defaults on its contract
obligations or
o there is a change in the expected differential between the underlying
price in the hedging agreement and actual prices received.
Reduced revenues resulting from our hedging activities could have an
adverse effect on our financial condition and operations. For the nine months
ended March 31, 2000, our revenues were reduced by $867,000 as a result of our
existing hedge contracts. We may have to make additional payments under these
contracts in the future depending on the difference between actual and hedged
prices of oil and natural gas. In addition, these hedging arrangements may limit
the benefit we would otherwise receive from increases in the prices for oil and
natural gas.
Some of our hedging arrangements contain a "cap" whereby we must pay the
counter-party if oil or natural gas prices exceed the price specified in the
contract. We are required to maintain letters of credit with our
counter-parties, and we may be required to provide additional letters of credit
if prices for oil and natural gas futures increase above the "cap" prices. The
amount of these letters of credit is a function of the market value of oil and
natural gas prices and the volumes of oil and natural gas subject to the
contract. As a result, the value of these letters of credit will fluctuate with
the market prices of oil and natural gas. These letters of credit are issued
pursuant to our credit agreement and as a result utilize some of our borrowing
capacity, reducing funds available to be borrowed under our credit agreement.
IF WE ARE NOT ABLE TO REPLACE DEPLETED RESERVES, OUR FUTURE RESULTS OF
OPERATIONS WILL BE ADVERSELY AFFECTED.
The rate of production from oil and natural gas properties declines as
reserves are depleted. Our proved reserves will decline as reserves are produced
unless we acquire additional properties containing proved reserves, conduct
successful exploration, development and exploitation activities on new or
currently leased properties or identify additional formations with primary or
secondary reserve opportunities on our properties. If we are not successful in
expanding our reserve base, our future oil and natural gas production, the
primary source of our revenues, will be adversely affected. The level of our
future oil and natural gas production and our results of operations are
therefore highly dependent on the level of our success in finding and acquiring
additional reserves. Our ability to find and acquire additional reserves depends
on our generating sufficient cash flow from operations and other sources of
capital, including borrowings under our credit agreement. We cannot assure you
that we will have sufficient cash flow or cash from other sources to expand our
reserve base. Our ability to continue acquiring producing properties or
companies that own producing properties assumes that major
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<PAGE> 14
integrated oil companies and independent oil companies will continue to divest
many of their oil and natural gas properties. We cannot assure you that these
divestitures will continue or that we will be able to acquire producing
properties at acceptable prices.
WE MAY HAVE DIFFICULTY FINANCING OUR PLANNED GROWTH AND CAPITAL EXPENDITURES.
We have experienced and expect to continue to experience substantial
capital expenditure and working capital needs as a result of our exploration,
development, exploitation and acquisition strategy. In the future, we may
require financing, in addition to cash generated from our operations and this
offering, to fund our planned growth and capital expenditures. Over the past two
years, we have experienced constraints on our ability to arrange additional
capital to fund our business plan.
Although we were able to borrow an additional $8 million under our credit
agreement as of July 5, 2000, our lenders could reduce our borrowing limit. If
additional capital resources are unavailable, we will be unable to grow our
business and we may curtail our drilling, development and other activities or be
forced to sell some of our assets on an untimely or unfavorable basis.
OUR LEVEL OF DEBT MAY NOT ALLOW US PROPERLY TO PLAN FOR FUTURE OPPORTUNITIES OR
TO COMPETE EFFECTIVELY.
After completion of this offering and the Recapitalization, we will have
debt of approximately $50 million. As of March 31, 2000, our ratio of total
indebtedness to total capitalization was 134% and our consolidated total
interest coverage ratio was 1.2 to 1. Assuming the completion of the
Recapitalization and this offering with net proceeds to us of at least $74
million and the application of the net proceeds of this offering as described in
this prospectus, our ratio of total indebtedness to total capitalization would
be 44% and our consolidated total interest coverage ratio would be 3.4 to 1. In
addition, we may borrow more money in the future to fund our business strategy.
This level of debt could:
o increase our vulnerability to general adverse economic and industry
conditions, especially declines in oil and natural gas prices;
o limit our ability to fund future acquisitions, capital expenditures
and other general corporate requirements;
o require us to dedicate a material portion of our cash flow from
operations to payments on our debt;
o limit our flexibility in planning for or reacting to, changes in our
business and industry; and
o limit our ability to, among other things, borrow additional funds,
sell assets and pay dividends.
RESTRICTIVE DEBT COVENANTS LIMIT OUR ABILITY TO FINANCE OUR OPERATIONS, FUND OUR
CAPITAL NEEDS AND ENGAGE IN OTHER BUSINESS ACTIVITIES THAT MAY BE IN OUR
INTEREST.
Our credit agreement and the indenture governing our 12 1/2% senior notes
due 2008 contain significant covenants that, among other things, restrict our
ability to:
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<PAGE> 15
o dispose of assets;
o incur additional indebtedness;
o repay other indebtedness;
o pay dividends;
o enter into specified investments or acquisitions;
o repurchase or redeem capital stock;
o merge or consolidate; or
o engage in specified transactions with subsidiaries and affiliates and
our other corporate activities.
Also, our credit agreement requires us to maintain compliance with the financial
ratios included in that agreement. Our ability to comply with these ratios may
be affected by events beyond our control. A breach of any of these covenants or
our inability to comply with the required financial ratios could result in a
default under our credit agreement.
We have in the past been in default of some covenants under our previous
credit agreement. All of these defaults were waived by the lenders. However, if
we default under our current credit agreement, our lender may declare all
amounts borrowed under the credit agreement, together with accrued interest, to
be due and payable. If we do not repay the indebtedness promptly, our lender
could then foreclose against any collateral securing the payment of the
indebtedness. Substantially all of our oil and natural gas interests secure our
credit agreement.
OUR ABILITY TO GENERATE SUFFICIENT CASH TO SERVICE OUR DEBT AND REPLACE OUR
RESERVES DEPENDS ON MANY FACTORS BEYOND OUR CONTROL.
We rely on cash from our operations to pay the principal and interest on
our debt. Our ability to generate cash from operations depends on the level of
production from our properties, general economic conditions, including the
prices paid for oil and natural gas, success in our exploration, development and
exploitation activities, and legislative, regulatory, competitive and other
factors beyond our control. Our operations may not generate enough cash to pay
the principal and interest on our debt.
WE CANNOT ASSURE YOU THAT WE WILL BE SUCCESSFUL IN MANAGING OUR GROWTH.
The success of our future growth will depend on a number of factors,
including:
o our ability to timely explore, develop and exploit acquired
properties;
o our ability to continue to attract and retain skilled personnel;
o our ability to continue to expand our technical, operational and
administrative resources; and
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<PAGE> 16
o the results of our drilling program.
Our growth could strain our financial, technical, operational and
administrative resources. Our failure to successfully manage our growth could
adversely affect our operations and net revenues through increased operating
costs and revenues that do not meet our expectations.
WE MAY PURCHASE OIL AND NATURAL GAS PROPERTIES WITH LIABILITIES OR RISKS WE DID
NOT KNOW ABOUT OR THAT WE DID NOT CORRECTLY ASSESS, AND, AS A RESULT, WE COULD
BE SUBJECT TO LIABILITIES THAT COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
We evaluate and pursue acquisition opportunities, primarily in the
mid-continent and southwest regions of the United States. Before acquiring oil
and natural gas properties, we estimate the recoverable reserves, future oil and
natural gas prices, operating costs, potential environmental and other
liabilities and other factors relating to the properties. We believe our method
of review is generally consistent with industry practices. However, our review
involves many assumptions and estimates, and their accuracy is inherently
uncertain. As a result, we may not discover all existing or potential problems
associated with the properties we buy. We may not become sufficiently familiar
with the properties to fully assess their deficiencies and capabilities. We do
not generally perform inspections on every well, and we may not be able to
observe mechanical and environmental problems even when we conduct an
inspection. Even if we identify problems, the seller may not be willing or
financially able to give contractual protection against these problems, and we
may decide to assume environmental and other liabilities in connection with
acquired properties. If we acquire properties with risks or liabilities we did
not know about or that we did not correctly assess, our financial condition and
results of operations could be adversely affected.
THE OIL AND GAS BUSINESS INVOLVES MANY OPERATING RISKS THAT COULD CAUSE
SUBSTANTIAL LOSSES.
Drilling activities involve the risk that no commercially productive oil or
natural gas reservoirs will be found or produced. We may drill or participate in
new wells that are not productive. We may drill wells that are productive but
that do not produce sufficient net revenues to return a profit after drilling,
operating and other costs. Whether a well is productive and profitable depends
on a number of factors, including the following, many of which are beyond our
control:
o general economic and industry conditions, including the prices
received for oil and natural gas;
o mechanical problems encountered in drilling wells or in production
activities;
o problems in title to our properties;
o weather conditions which delay drilling activities or cause producing
wells to be shut down;
o compliance with governmental requirements; and
o shortages in or delays in the delivery of equipment and services.
If we do not drill productive and profitable wells in the future, our financial
condition and results of operations could be materially and adversely affected
due to decreased cash flow and net revenues.
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<PAGE> 17
In addition to the substantial risk that we may not drill productive and
profitable wells, the following hazards are inherent in oil and natural gas
exploration, development, exploitation, production and gathering, including:
o unusual or unexpected geologic formations;
o unanticipated pressures;
o mechanical failures;
o blowouts where oil or natural gas flows uncontrolled at a wellhead;
o cratering or collapse of the formation;
o explosions;
o pollution; and
o environmental accidents such as uncontrollable flows of oil, natural
gas or well fluids into the environment, including groundwater
contamination.
We could suffer substantial losses from these hazards due to injury and loss of
life, severe damage to and destruction of property and equipment, pollution and
other environmental damage and suspension of operations. We carry insurance that
we believe is in accordance with customary industry practices for companies of
our size. However, we do not fully insure against all risks associated with our
business either because this insurance is not available or because we believe
the cost is prohibitive. The occurrence of an event that is not covered, or not
fully covered by insurance, could have a material adverse effect on our
financial condition and results of operations.
OUR EXPLORATION ACTIVITIES INVOLVE A HIGH DEGREE OF RISK AND MAY NOT BE
COMMERCIALLY SUCCESSFUL.
Oil and natural gas exploration involves a high degree of risk that
hydrocarbons will not be found, that they will not be found in commercial
quantities, or that their production will be insufficient to recover drilling,
completion and operating costs. The 3-D seismic data and other technologies we
may use do not allow us to know conclusively prior to drilling a well that oil
or natural gas is present or economically producible. The cost of drilling,
completing and operating a well is often uncertain, and cost factors can
adversely affect the economics of a project. Furthermore, completion of a well
does not guarantee that it will be profitable or even that it will result in
recovery of drilling, completion and operating costs. Therefore, we may not earn
revenues with respect to, or recover costs spent on, our exploration activities.
OUR SECONDARY RECOVERY PROJECTS REQUIRE SIGNIFICANT CAPITAL EXPENDITURES AND MAY
NOT BE COMMERCIALLY SUCCESSFUL.
We face the risk that we will spend a significant amount of money on
secondary recovery operations, such as waterflooding projects, without any
increase in production. Although waterflooding requires significant capital
expenditures, the total amount of reserves that can be recovered though
waterflooding is uncertain. In addition, there is generally a delay between the
initiation of water injection
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<PAGE> 18
into a formation containing hydrocarbons and any increase in production that may
result from the injection. The degree of success, if any, of any secondary
recovery program depends on a large number of factors, including the porosity,
permeability and heterogeneity of the formation, the technique used and the
location of injection wells.
WE CANNOT CONTROL THE DEVELOPMENT OF A SUBSTANTIAL PORTION OF OUR PROPERTIES
BECAUSE OUR INTERESTS ARE IN THE FORM OF NON-OPERATED NET PROFITS INTERESTS AND
OVERRIDING ROYALTY INTERESTS.
A substantial portion of our oil and natural gas property interests are
in the form of non-operated, net profits interests and royalty interests. As the
owner of non-operated net profits interests and royalty interests, we do not
have the direct right to drill or operate wells or to cause third parties to
propose or drill wells on the underlying properties. As a result, the success
and timing of our drilling and development activities on those properties
operated by others depend upon a number of factors outside of our control,
including:
o the timing and amount of capital expenditures;
o the operator's expertise and financial resources;
o the approval of other participants in drilling wells; and
o the selection of suitable technology.
If the operators of these properties do not conduct drilling and development
activities on these properties, then our results of operations may be adversely
affected.
WE MAY LOSE TITLE TO OUR ROYALTY INTEREST IN THE J.C. MARTIN FIELD AS A RESULT
OF LITIGATION OVER TITLE TO THE ROYALTY INTEREST.
A portion of our landowner royalty on the J.C. Martin field, which
comprises approximately 7.5% of our total SEC PV-10 value as of March 31, 2000,
is currently subject to a lawsuit that may create uncertainty as to the title to
our royalty interest. A favorable order of summary judgment has been rendered in
favor of the pension funds managed by the entity that sold us the properties.
The order has been appealed. Eight million dollars of the purchase price we paid
for the Morgan Properties, which include our royalty interest in the J.C. Martin
field, are currently in escrow pending the resolution of this lawsuit. If the
summary judgment is overturned and a final judgment is later entered against the
entity who sold us this property and that judgment unwinds the original
transaction in which the entity acquired its interest in the J.C. Martin field,
the escrowed monies would be returned to us and we would be required to convey
our royalty interest in the J.C. Martin field to the plaintiff retroactive to
the date we acquired the interest.
IF A BANKRUPTCY COURT TREATS ANY OF OUR NET PROFITS INTERESTS AS CONTRACT RIGHTS
INSTEAD OF REAL PROPERTY INTERESTS, WE COULD LOSE ALL OF THE VALUE OF THOSE
INTERESTS.
We cannot assure you whether a court in the states of Kansas and
Oklahoma would treat the net profits interests as contract rights or real
property interests. Our net profits interests in these states comprise 12.7% of
our SEC-PV-10 as of March 31, 2000. If any of the assignors become involved in
bankruptcy proceedings in these states, we face the risk that our net profits
interests might be treated by a
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<PAGE> 19
bankruptcy court as contract rights instead of real property interests. If the
bankruptcy court treats our net profits interests as contract rights, then we
would be treated as an unsecured creditor in the bankruptcy, and under the terms
of the bankruptcy plan, we could lose all of the value of the net profits
interests. If the bankruptcy court treats the net profits interests as real
property interests, then our interests should not be materially affected.
ANY NEGATIVE VARIANCE IN OUR ESTIMATES OF PROVED RESERVES AND FUTURE NET
REVENUES COULD AFFECT THE CARRYING VALUE OF OUR ASSETS, OUR INCOME AND OUR
ABILITY TO BORROW FUNDS.
There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting future rates of production and the timing of
development expenditures, including many factors beyond our control. The reserve
data included in this prospectus represent only estimates. In addition, the
estimates of future net revenue from proved reserves and their present value are
based on assumptions about future production levels, prices and costs that may
not prove to be correct over time. In particular, estimates of oil and natural
gas reserves, future net revenue from proved reserves and the present value of
proved reserves for the oil and natural gas properties described in this
prospectus are based on the assumption that future oil and natural gas prices
remain the same as oil and natural gas prices at March 31, 2000. The NYMEX
prices as of March 31, 2000, used for purposes of our estimates were $26.90 per
Bbl of oil and $2.87 per MMbtu of natural gas. Any significant variance in
actual results from these assumptions could also materially affect the estimated
quantity and value of our reserves.
WE MAY BE REQUIRED TO WRITE DOWN THE CARRYING VALUE OF OUR PROVED PROPERTIES
UNDER ACCOUNTING RULES AND THESE WRITEDOWNS COULD ADVERSELY AFFECT OUR FINANCIAL
CONDITION.
There is a risk that we will be required to write-down the carrying
value of our oil and natural gas properties when oil and natural gas prices are
low. In addition, write-downs may occur if we have:
o downward adjustments to our estimated proved reserves,
o increases in our estimates of development costs or
o deterioration in our exploration and exploitation results.
We periodically review the carrying value of our oil and natural gas
properties under the full cost accounting rules of the Securities and Exchange
Commission. Under these rules, the net capitalized costs of oil and natural gas
properties may not exceed a ceiling limit that is based on the present value,
based on flat prices at a single point in time, of estimated future net revenues
from proved reserves, discounted at 10%. If net capitalized costs of oil and
natural gas properties exceed the ceiling limit, we must charge the amount of
this excess to earnings in the quarter in which the excess occurs. At June 30,
1998, we were required to write down the carrying value of our oil and natural
gas properties by $28.2 million. At December 31, 1998, we were required to write
down the carrying value of our oil and natural gas properties by an additional
$35 million. We may not reverse write-downs even if prices increase in
subsequent periods. A write-down does not affect cash flow from operating
activities, but it does reduce the book value of our net tangible assets and
stockholders' equity.
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<PAGE> 20
IF WE ARE UNABLE TO COMPETE EFFECTIVELY AGAINST OTHER OIL AND GAS COMPANIES, WE
MAY BE UNABLE TO ACQUIRE NEW PROPERTIES AT ATTRACTIVE PRICES OR TO SUCCESSFULLY
DEVELOP OUR PROPERTIES.
We encounter strong competition from other oil and gas companies in
acquiring properties and leases for the exploration, exploitation and production
of oil and natural gas. Many of our competitors have financial resources, staff
and facilities substantially greater than ours. Our competitors may be able to
pay more for desirable leases and to evaluate, bid for and purchase a greater
number of properties or prospects than our financial or personnel resources will
permit. As a result, we may not be able to buy properties at affordable prices
or to successfully develop our properties. Our ability to explore, develop and
exploit oil and natural gas reserves and to acquire additional properties in the
future will depend on our ability to conduct operations, to evaluate and select
suitable properties and to consummate transactions in this highly competitive
environment.
WE ARE SUBJECT TO GOVERNMENT REGULATION AND LIABILITY, INCLUDING ENVIRONMENTAL
LAWS, THAT COULD REQUIRE SIGNIFICANT EXPENDITURES AND COULD MATERIALLY DECREASE
OUR NET INCOME.
The exploration, development, exploitation, production and sale of oil
and natural gas in the U.S. are subject to many federal, state and local laws
and regulations, including environmental laws and regulations. Under these laws
and regulations, we may be required to make large expenditures that could
materially adversely affect our results of operations. These expenditures could
include payments for personal injuries, property damage, oil spills, the
discharge of hazardous materials, remediation and clean-up costs and other
environmental damages. While we maintain insurance coverage for our operations,
we do not believe that full insurance coverage for all potential environmental
damages is available at a reasonable cost. Failure to comply with these laws and
regulations also may result in the suspension or termination of our operations
and subject us to administrative, civil and criminal penalties. Laws and
regulations protecting the environment have become increasingly stringent in
recent years and may impose liability on us for environmental damage and
disposal of hazardous materials even if we were not negligent or at fault. We
may also be liable for the conduct of others or for our own acts even if our
acts complied with applicable laws at the time we performed those acts.
RISKS RELATING TO THE OFFERING AND OUR COMMON STOCK
IF WE DO NOT MAINTAIN THE LISTING OF OUR COMMON STOCK ON THE NASDAQ NATIONAL
MARKET OR ANY OTHER STOCK EXCHANGE, THE PRICE OF THE COMMON STOCK MAY BE
DEPRESSED AND YOU MAY HAVE DIFFICULTIES RESELLING THE STOCK.
On November 11, 1999, Nasdaq delisted our common stock from trading on
the Nasdaq SmallCap Market because of our failure to meet the minimum net
tangible asset base, the minimum market capitalization and the minimum trading
price thresholds. This has resulted in our common stock being quoted on the OTC
Bulletin Board. Many institutional and other investors refuse to invest in
stocks that are traded at levels below the Nasdaq SmallCap Market which could
make our efforts to raise capital more difficult. In addition, the firms that
currently make a market for our common stock could discontinue that role. OTC
Bulletin Board stocks are often lightly traded or not traded at all on any given
day. Our inability to maintain the listing of the common stock on the Nasdaq
National Market or any other stock exchange will negatively affect the liquidity
and marketability of the common stock.
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<PAGE> 21
IF THERE IS A CHANGE OF CONTROL OF THE COMPANY, WE WOULD BE IN DEFAULT UNDER OUR
CREDIT AGREEMENT AND WE COULD BE REQUIRED TO REPURCHASE OUR SENIOR NOTES.
If there is a change of control of our company as defined in our credit
agreement, we would be in default under our credit agreement. In addition, the
indenture governing our senior notes contains provisions that, under some
circumstances, will cause our senior notes to become due upon the occurrence of
a change of control as defined in the indenture. If a change of control occurs,
we may not have the financial resources to repay this indebtedness and would be
in default under the indenture. These provisions could also make it more
difficult for a third party to acquire control of us, even if that change of
control might benefit our stockholders.
OUR CERTIFICATE OF INCORPORATION CONTAINS PROVISIONS THAT COULD DISCOURAGE AN
ACQUISITION OR CHANGE OF CONTROL OF OUR COMPANY.
Our certificate of incorporation authorizes our board of directors to
issue preferred stock without stockholder approval. Provisions of our
certificate of incorporation, such as the provision allowing our board of
directors to issue preferred stock with rights more favorable than our common
stock, could make it more difficult for a third party to acquire control of us,
even if that change of control might benefit our stockholders.
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<PAGE> 22
FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this document that are
subject to risks and uncertainties. These forward-looking statements include
information about possible or assumed future results of our operations. Also,
when we use any of the words "believes," "expects," "intends," "anticipates" or
similar expressions, we are making forward-looking statements. Examples of types
of forward-looking statements include statements on:
o our oil and natural gas reserves;
o future acquisitions;
o future drilling and operations;
o future capital expenditures;
o future production of oil and natural gas; and
o future net cash flow.
You should understand that the following important factors, in addition to those
discussed elsewhere in this prospectus, could affect our future financial
results and performance and cause our results or performance to differ
materially from those expressed in our forward-looking statements:
o the timing and extent of changes in prices for oil and natural
gas;
o the need to acquire, develop and replace reserves;
o our ability to obtain financing to fund our business strategy;
o environmental risks;
o drilling and operating risks;
o risks related to exploration, development and exploitation
projects;
o competition;
o government regulation; and
o our ability to meet our stated business goals.
We claim the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995 for
these statements.
You should consider these risks when you purchase our common stock and
the risks discussed in "Risk Factors" beginning on page 11.
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<PAGE> 23
THE RECAPITALIZATION
INTRODUCTION
Simultaneously with the closing of this offering, we will complete the
Recapitalization which includes the following:
o a reverse stock split of every 156 shares of our common stock
into one share;
o the exchange of 9,600,000 outstanding shares of our Series A
preferred stock for 212,500 shares of post reverse-split
common stock;
o the exchange of 2,173 outstanding shares of our Series C
preferred stock and warrants exercisable for 340,153 shares of
common stock for 120,000 shares of post reverse-split common
stock;
o the exercise and exchange of the 1,593,417 remaining
unexercised common stock repricing rights and warrants
exercisable for 655,000 shares of common stock for 400,000
shares of post reverse-split common stock; and
o the repurchase of $75 million face value of our senior notes
for approximately $49 million.
At our stockholders meeting on ___________ ___, 2000, our stockholders
approved the first four elements of the Recapitalization. The repurchase of our
senior notes does not require stockholder approval.
Our board of directors believes that the Recapitalization will have the
following positive effects:
o the Recapitalization will significantly improve our chances to
access the equity capital markets and pursue our growth
strategy;
o our stockholders' equity will increase after the
Recapitalization because the amount of our indebtedness will
be reduced at a discount;
o the termination of the dilutive share issuance rights, coupled
with the reverse stock split, will lessen the depressive
effects on the market price of the common stock;
o there will no longer be any outstanding shares of preferred
stock having dividend or liquidation preferences over common
stock; and
o no stockholder will have rights to require us to repurchase
their stock.
Upon completion of the Recapitalization and this offering, there will be
outstanding 11,250,000 shares of our common stock, no shares of preferred stock
and no repricing rights. The closing of this offering is a condition to the
completion of the Recapitalization, and the completion of the Recapitalization
is a condition to the completion of this offering.
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<PAGE> 24
BACKGROUND
Dilutive effect of convertible securities. One of the purposes of the
Recapitalization is to eliminate the overhang on our common stock resulting from
the dilutive effects of our outstanding shares of Series A preferred stock,
Series C preferred stock and common stock repricing rights. We issued 9,600,000
shares of Series A preferred stock in May 1997 for total gross proceeds of
$5,000,000. We issued 10,400 shares of Series C preferred stock in December 1997
for total gross proceeds of $10,400,000. We issued 3,428,573 shares of common
stock with repricing rights attached in July 1998 for total gross proceeds of
$24,000,000 and we issued an additional 416,667 shares of common stock with
repricing rights attached in November 1998 for total gross proceeds of
$2,500,000.
While each share of Series A preferred stock is convertible into one
share of pre-split common stock, the number of shares of common stock issuable
upon conversion of the Series C preferred stock and upon the exercise of
repricing rights increases as the bid price of our common stock decreases. If
the relevant common stock bid price is $2.00, a share of Series C preferred
stock would be convertible into 500 shares of common stock, a July 1998
repricing right would be convertible into 3.48 shares of common stock and a
November 1998 repricing right would be convertible into 2.84 shares of common
stock. If the relevant bid price is $0.20, a share of Series C preferred stock
would be convertible into 5,000 shares of common stock, a July 1998 repricing
right would be convertible into 43.8 shares of common stock and a November 1998
repricing right would be convertible into 37.4 shares of common stock. As of
June 16, 2000, there were 9,600,000 shares of Series A preferred stock, 2,173
shares of Series C preferred stock and 1,593,417 repricing rights outstanding.
At that time the relevant bid price of our common stock for the purposes of
conversion of Series C preferred stock or exercise of repricing rights was $0.11
per share. At that price, we would have been obligated to issue 156,750,788
shares of common stock if all outstanding shares of preferred stock and
repricing rights had been converted into shares of common stock.
Issuance of senior notes. In July 1998 we issued $125 million of
12 1/2% senior notes due 2008. We used the net proceeds of the sale of these
notes to retire a portion of the Bank of Montreal/Enron bridge facility that we
put in place to complete the purchase of the Morgan Properties. We originally
issued these senior notes in a Rule 144A private placement. These notes have
traded at increasing discounts to face value since they were issued.
THE RECAPITALIZATION
Reverse stock split. Simultaneously with the completion of this
offering, we will effect a reverse stock split of every 156 shares of our common
stock into one share. The shares being issued in this offering are post-reverse
stock split shares.
Recapitalization agreement. Under the terms of a recapitalization
agreement, the holders of our Series A preferred stock, our Series C preferred
stock and all unexercised common stock repricing rights will exchange their
respective holdings for the following numbers of post-split common stock:
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<PAGE> 25
<TABLE>
<CAPTION>
Number of Shares of
Class of Holders Post-Split Common Stock to be Issued
------------------------ ------------------------------------
<S> <C>
Series A preferred stock 212,500
Series C preferred stock 120,000
Repricing rights 400,000
</TABLE>
These shares of post-reverse stock split common stock will be divided
pro rata among the holders of the Series C preferred stock and the common stock
repricing rights, as the case may be. Each holder has also agreed, pending
completion of the Recapitalization, not to submit any additional demands for the
conversion of their holdings into shares of common stock nor take any other
action to pursue any other rights or remedies to which they may be entitled. All
securities purchase agreements, registration rights agreements, warrants and
other ancillary agreements between the company and the various holders will be
terminated upon completion of the Recapitalization.
The closing under the recapitalization agreement is subject to the
following:
o stockholder approval of the Recapitalization Proposal and the
reverse split proposal, which was obtained at our stockholders
meeting on ___________ ___, 2000;
o we must deliver the common stock without any restrictive
legend or stop transfer orders, except as otherwise provided
in the recapitalization agreement;
o not later than October 31, 2000, we must have closed an equity
financing generating net proceeds to us of at least $50
million, which condition will be satisfied by the completion
of this offering;
o not later than October 31, 2000, we must have repurchased not
less than $75 million in original principal amount of our
12.5% senior notes, which condition will be satisfied upon the
application of net proceeds of this offering; and
o the representations and warranties contained in the
recapitalization agreement must be true as of the date of the
agreement and the date of delivery of shares of common stock
to the Series A preferred stock, the Series C preferred stock
and the repricing rights holders.
From and after the closing under the recapitalization agreement, the
holders of Series A preferred stock, Series C preferred stock and the repricing
rights agreed to release us from any claims that existed before the closing,
other than claims arising out of the recapitalization agreement.
Repurchase of our senior notes. We have executed a binding
participation agreement with the holders of $94 million of our senior notes
pursuant to which we agreed to make a tender or exchange offer to all holders of
our senior notes to repurchase not less than $75 million of our senior notes for
a purchase price of $48.75 million. The offer must close no later than 5:00
p.m., Eastern time, October 31, 2000. The offer is conditioned on:
o the tender or exchange of not less than $110 million
of senior notes;
o the receipt of all necessary regulatory approvals;
and
-24-
<PAGE> 26
o the receipt by us of at least $50 million net
proceeds from a public offering or private placement
of equity, which condition will be satisfied upon the
completion of this offering.
Each holder who has signed the participation agreement has agreed to
tender or exchange its pro rata portion of all of the senior notes tendered
pursuant to the offer described above. If the offer is an exchange offer, then
any new notes or debt instruments to be issued in the exchange must be on
substantially the same terms and subject to an indenture on substantially the
same terms as the senior notes and the indenture governing the senior notes, as
amended in accordance with the participation agreement. The holders of senior
notes who executed the participation agreement also agreed to vote to amend the
indenture to increase the amount of permitted indebtedness.
The effect of a repurchase of the senior notes and the repayment of the
debt under our credit agreement would be to reduce the company's annual interest
costs from $18 million to approximately $7.5 million. In addition EBITDA to
interest coverage would increase to approximately 3:1. As a result, the company
will have additional borrowing capacity under its indenture governing the senior
notes and its credit agreement with Ableco Finance LLC with which to carry out
its redevelopment program and finance future acquisitions.
-25-
<PAGE> 27
PRICE RANGE OF COMMON STOCK; DIVIDEND HISTORY
Our common stock currently is quoted on the OTC Bulletin Board under
the symbol "QSRI." On July 18, 2000, the last price at which our common stock
was quoted on the OTC Bulletin Board was $0.24. Our common stock was quoted on
the Nasdaq SmallCap Market under the symbol "QSRI" from May 1997 to November 11,
1999. On November 11, 1999, Nasdaq delisted our common stock for failing to meet
the net tangible asset test, the minimum market capitalization requirement and
the minimum bid price requirements. The following table sets forth the high and
low closing bid prices for our common stock as reported on Nasdaq and quoted on
the OTC Bulletin Board for the periods indicated. The market prices reported
below have been adjusted to give retroactive effect to the 156 to 1 reverse
stock split.
<TABLE>
<CAPTION>
AS ADJUSTED FOR
HISTORICAL REVERSE-STOCK-SPLIT
---------------------- ------------------------
FISCAL YEAR ENDED JUNE 30, 1999 HIGH LOW HIGH LOW
<S> <C> <C> <C> <C>
First Quarter....................... $ 8.000 $ 6.500 $ 1,248.000 $ 1,014.000
Second Quarter...................... 7.000 3.375 1,092.000 526.500
Third Quarter....................... 4.125 1.125 643.500 175.500
Fourth Quarter...................... 1.469 0.937 229.164 146.172
FISCAL YEAR ENDING JUNE 30, 2000 HIGH LOW HIGH LOW
First Quarter....................... $ 0.938 $ 0.281 $ 146.328 $ 43.836
Second Quarter...................... 0.594 0.281 92.664 43.836
Third Quarter....................... 0.530 0.281 82.680 43.836
Fourth Quarter...................... 0.406 0.094 63.336 14.664
</TABLE>
As of April 7, 2000, we had approximately 4,600 record holders of our
shares of common stock.
We have filed an application to designate our common stock on the
Nasdaq National Market subject to issuance. However, we cannot assure you that
we will be able to designate or list our common stock on the Nasdaq National
Market or any other market or exchange, or, if we are able to designate or list
our common stock, that we will be able to continue that designation or listing.
We have never declared or paid any dividends on our common stock. We
currently intend to retain future earnings, if any, for the operation and
development of our business and do not intend to pay any dividends on our common
stock in the foreseeable future. Because Queen Sand Resources, Inc. is a holding
company, our ability to pay dividends depends on the ability of our subsidiaries
to pay cash dividends or make other cash distributions. Our credit agreement
prohibits us from paying cash dividends on our common stock and the senior notes
indenture restricts our payment of dividends on common stock. Our board of
directors has sole discretion over the declaration and payment of future
dividends subject to Delaware corporate law. Any future dividends may also be
restricted by any loan agreements which we may enter into from time to time and
will depend on our profitability, financial condition, cash requirements, future
prospects, general business conditions, the terms of our debt agreements and
other factors our board of directors believes relevant.
-26-
<PAGE> 28
USE OF PROCEEDS
We estimate that we will receive net proceeds of approximately $74
million, or $84.5 million if the underwriters exercise their over-allotment
option in full, from the sale of the shares of common stock offered by this
prospectus, after deducting underwriting discounts and commissions and estimated
offering expenses. This estimate assumes a public offering price of $8.00 per
share.
We intend to use the net proceeds as follows:
o approximately $49 million to purchase up to $75 million in
aggregate original principal amount of our 12 1/2% senior
notes at a discount;
o approximately $13.5 million to repay debt outstanding under
our credit agreement; and
o any remainder to fund future acquisitions of oil and natural
gas properties consistent with our business strategy and to
fund other general corporate working capital requirements
including drilling and workover projects and other
exploitation and development activities.
Other than as described in this prospectus, we do not have any
agreements or understandings regarding acquisitions. We believe that the
availability of the remaining net proceeds will enhance our ability to compete
for and complete additional acquisitions, but we cannot assure you that even if
proceeds are available for acquisitions that we will be able to buy properties
at attractive prices.
<TABLE>
<CAPTION>
AMOUNTS
(in thousands)
SOURCES
<S> <C>
Common stock.................................... $ 80,000(1)
Less offering expenses.......................... $ 6,000
---------------
Net proceeds.............................. $ 74,000
===============
USES
Repurchase of 12 1/2% senior notes (2).......... $ 48,750
Repayment of debt under our credit
agreement (3)................................ 13,500
Working capital (4)............................. 11,750
---------------
Total..................................... $ 74,000
===============
</TABLE>
----------
(1) If the underwriters' over-allotment is exercised in full, the gross
proceeds will be $92 million.
(2) We borrowed the $125 million aggregate original principal amount under
our 12 1/2% senior notes to acquire net profits interests and
overriding royalty interests in oil and natural gas properties. The
interest rate on our senior notes is 12 1/2% per annum, and the
maturity date is July 1, 2008.
-27-
<PAGE> 29
(3) As of March 31, 2000, we had $13.5 million debt outstanding under our
credit agreement. The interest rate under our credit agreement is
currently 11.5% per annum, and the maturity date is October 22, 2001.
(4) These remaining net proceeds will be available to us to fund the
exploration, development, exploitation or acquisition of oil and
natural gas properties. While we regularly evaluate potential
acquisition opportunities, we do not have any agreements or
understandings with respect to any acquisitions.
-28-
<PAGE> 30
CAPITALIZATION
The following table presents our capitalization as of March 31, 2000 on an
actual basis and on a pro forma basis giving effect to the Recapitalization and
this offering, assuming that it yields net proceeds to us of $74 million.
You should read this table in conjunction with our consolidated financial
statements and our unaudited pro forma condensed consolidated financial
statements included in this prospectus.
<TABLE>
<CAPTION>
AT MARCH 31, 2000
----------------------
(IN THOUSANDS)
HISTORICAL PRO FORMA
---------- -----------
<S> <C> <C>
Total long-term indebtedness (including current portion):
Credit Agreement ............................................ $ 13,500 $ --
12 1/2% Senior Notes due 2008 ............................... 125,000 50,000
Other ....................................................... 593 593
--------- ---------
Total long-term indebtedness ............................ 139,093 50,593
Stockholders' equity:
Preferred Stock:
Series A Participating Convertible Preferred Stock,
$0.01 par value; 9,600,000 shares authorized;
9,600,000 shares issued and outstanding ............... 96 --
Series B Participating Convertible Preferred Stock,
$0.01 par value; 9,600,000 shares authorized;
no shares issued or outstanding ....................... -- --
Series C Convertible Preferred Stock, $0.01 par value;
10,400 shares authorized; 2,565 shares issued and
outstanding ........................................... -- --
Common Stock ................................................ 111 2,633
Additional paid-in capital .................................. 65,087 129,410
Accumulated deficit ......................................... (93,075) (68,058)
Treasury stock, 9,600,000 shares, at cost ................... (7,251) --
--------- ---------
Total stockholders' equity (net capital deficiency) ..... (35,032) 63,985
--------- ---------
Total capitalization ............................................ $ 104,061 $ 114,578
========= =========
</TABLE>
-29-
<PAGE> 31
DILUTION
Our pro forma net tangible book value per share of common stock as of March
31, 2000 was zero due to a shareholders' deficit of approximately $35 million.
Pro forma net tangible book value per share before this offering represents the
amount of our total tangible assets reduced by the amount of our total
liabilities and divided by the total number of shares of common stock
outstanding assuming that the reverse stock split and the exchange of shares by
the Series A preferred stockholder, the Series C preferred stockholders and the
repricing rights holders have been completed. After giving effect to the entire
Recapitalization and the sale of 10,000,000 shares of common stock offered by us
at an assumed initial public offering price of $8.00 per share, and after
deducting the underwriting discount and estimated offering expenses payable by
us, our pro forma net tangible book value at March 31, 2000 would have been
approximately $59.4 million or $5.28 per share of common stock. This represents
an immediate increase in pro forma net tangible book value of $5.28 per share to
existing stockholders and an immediate dilution of $2.72 per share to new
investors purchasing common stock in this offering. Dilution in pro forma net
tangible book value per share represents the difference between the amount per
share paid by purchasers of common stock in this offering and the pro forma net
tangible book value per share of common stock immediately after the completion
of this offering and the Recapitalization. The following table illustrates this
dilution:
<TABLE>
<S> <C> <C>
Assuming public offering price per share............... $ 8.00
Pro forma net tangible book value per share as of
March 31, 2000 before the offering................ $ 0
Increase per share attributable to new
investors......................................... $ 5.28
Pro forma net tangible book value per share after
the offering and the Recapitalization............. $ 5.28
Pro forma net tangible book value after the
offering and the Recapitalization...................... $ 59,445,000
Dilution per share to new investors.................... $ 2.72
=============
</TABLE>
-30-
<PAGE> 32
The following table summarizes on a pro forma basis, after giving effect to
this offering, as of March 31, 2000, the differences between the existing
stockholders and the new investors with respect to the number of shares of
common stock purchased from us, the total consideration paid to us and the
average price per share paid based upon an assumed initial public offering price
of $8.00 per share and before deducting the underwriting discounts and
commissions and our estimated offering expenses:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------- -------------------------------------
NUMBER PERCENT AMOUNT PERCENT
---------- ------- ----------------- -------
<S> <C> <C> <C> <C>
Existing stockholders......................... 1,250,000 11% $ 58,043,000 42%
New investors................................. 10,000,000 89% $ 80,000,000 58%
---------- --- ----------------- ---
Total:............. 11,250,000 100% $ 138,043,000 100%
</TABLE>
The preceding tables assume no exercise of the underwriters' over-allotment
option. To the extent these options are exercised, there will be further
dilution to new investors. See note 5 of our notes to consolidated financial
statements included in this prospectus.
-31-
<PAGE> 33
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth our selected consolidated financial data for
each of the periods indicated. The financial data for the five years ended June
30, 1999 are derived from our audited consolidated financial statements. The
financial data for the nine month periods ended March 31, 2000 are derived from
unaudited financial statements. The unaudited financial statements include all
adjustments, consisting of normal recurring accruals, which we consider
necessary for a fair presentation of the financial position and the results of
operations for these periods. Operating results for the nine months ended March
31, 2000 are not necessarily indicative of the results that may be expected for
the entire year ending June 30, 2000. You should read this information along
with our consolidated financial statements and the notes to those financial
statements included in this prospectus. For further discussion of our
consolidated financial statements, see "Management's Discussion and Analysis of
Financial Condition and Results and Operations."
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
AUGUST 9, 1994 NINE MONTHS
(INCEPTION) TO YEAR ENDED JUNE 30, ENDED
JUNE 30, ------------------------------------------------ MARCH 31,
1995 1996 1997 1998 1999 2000
-------------- --------- --------- --------- --------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS DATA:
Oil and natural gas sales (1) .................... $ 435 $ 2,079 $ 4,381 $ 12,665 $ 33,783 $ 23,009
Oil and natural gas production expenses (1) ...... 280 1,175 2,507 6,333 9,127 5,216
--------- --------- --------- --------- --------- ---------
Net oil and natural gas revenues ................. 155 904 1,874 6,332 24,656 17,793
General and administrative expenses .............. 294 1,113 1,452 2,259 3,534 2,222
--------- --------- --------- --------- --------- ---------
EBITDA(2) ........................................ (139) 209 422 4,073 21,122 15,571
Interest and financing costs (3) ................. 25 421 878 3,957 17,003 12,720
Depletion, depreciation, and amortization (4) .... 132 630 982 4,809 13,354 7,791
Hedge contract termination costs(5) .............. -- -- -- -- -- 3,328
Ceiling test write-down(6) ....................... -- -- -- 28,166 35,033 --
Interest and other income ........................ (10) (71) (300) (105) (326) (150)
Reverse acquisition costs ........................ 401 -- -- -- -- --
Extraordinary item(7) ............................ -- -- 171 -- 3,549 1,130
--------- --------- --------- --------- --------- ---------
Net loss ......................................... $ (687) $ (1,189) $ (1,309) $ (32,754) $ (47,491) $ (9,248)
========= ========= ========= ========= ========= =========
Net loss per common share ........................ $ (0.04) $ (0.05) $ (0.05) $ (1.44) $ (1.51) $ (0.24)
CASH FLOWS DATA:
Net cash provided by (used in) operating
activities ....................................... $ (303) $ (620) $ 263 $ 1,041 $ 9,504 $ (5,964)
Net cash used in investing activities ............ (3,130) (5,502) (4,305) (154,342) (1,611) (4,832)
Net cash provided by financing activities ........ 3,532 6,622 3,752 154,021 444 2,738
Net increase (decrease) in cash .................. 99 500 (290) 720 8,337 (8,058)
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, AT MARCH 31,
-------------------------------------------------------- ------------
1995 1996 1997 1998 1999 2000
-------- --------- ---------- --------- ---------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT END OF PERIOD):
Total current assets........................... $ 807 $ 1,533 $ 1,066 $ 6,411 $ 14,019 $ 6,922
Property and equipment, net.................... 4,043 9,662 16,187 142,467 97,198 95,506
Deferred assets................................ -- 88 -- 4,797 7,993 8,110
Total assets................................... 4,850 11,283 17,253 153,675 119,210 110,538
Total current liabilities...................... 771 1,450 3,670 6,836 11,142 7,070
Long-term obligations, net of current portion.. 876 6,670 7,152 153,619 133,852 138,500
Total stockholders' equity (deficit)........... 3,203 3,163 6,431 (6,780) (25,784) (35,032)
</TABLE>
-32-
<PAGE> 34
----------
(1) Oil and natural gas sales and production expenses related to net profits
interests have been presented as if the net profits interests were working
interests. Oil and natural gas sales include revenues relating to the net
profits interests of $6,219,000 for the year ended June 30, 1998,
$29,071,000 for the year ended June 30, 1999, and $21,263,000 for the nine
months ended March 31, 2000. Oil and natural gas production expenses
include expenses relating to the net profits interests of $1,787,000 for
the year ended June 30, 1998, $5,931,000 for the year ended June 30, 1999,
and $4,365,000 for the nine months ended March 31, 2000.
(2) EBITDA represents earnings before interest expense, income taxes,
depreciation, depletion and amortization expense, write down of oil and
natural gas properties and extraordinary items and excludes interest and
other income. EBITDA is not a measure of income or cash flows in accordance
with generally accepted accounting principles, but is presented as a
supplemental financial indicator as to our ability to service or incur
debt. EBITDA is not presented as an indicator of cash available for
discretionary spending or as a measure of liquidity. EBITDA may not be
comparable to other similarly titled measures of other companies. Our
credit agreement requires the maintenance of specified EBITDA ratios.
EBITDA should not be considered in isolation or as a substitute for net
income, operating cash flow or any other measure of financial performance
prepared in accordance with generally accepted accounting principles or as
a measure of our profitability or liquidity.
(3) Interest charges payable on outstanding debt obligations.
(4) Depreciation, depletion and amortization includes $22,000 of amortized
deferred charges related to our natural gas price hedging program for the
year ended June 30, 1998, amortized deferred charges related to debt
obligations of $1.3 million for the year ended June 30, 1999, and $120,000
of amortized deferred charges related to our natural gas price hedging
program for the year ended June 30, 1999. Depreciation, depletion and
amortization includes $1,191,000 of amortized deferred charges related to
debt obligations for the nine months ended March 31, 2000, and $76,000 of
amortized deferred charges related to our natural gas price hedging program
for the nine months ended March 31, 2000.
(5) In conjunction with the execution of our restated credit agreement in
October 1999, we terminated the ceiling portion of a natural gas hedging
contract at a cost of $3,328,000.
(6) In accordance with the full cost method of accounting, the results of
operations for the year ended June 30, 1998 include a writedown of oil and
natural gas properties of $28,166,000 and for the year ended June 30, 1999
include a writedown of $35,033,000.
(7) During February 1997, we recognized a loss of $171,000 in connection with
restructuring a debt obligation. During July 1998, we terminated a LIBOR
interest rate swap agreement at a cost of $3,549,000. During October 1999,
we retired borrowings under our old credit agreement and entered into a
restated credit agreement with a new lender. As a result, we wrote off
$1,130,000 of deferred costs relating to the old credit agreement.
We did not pay dividends in any of the periods presented.
-33-
<PAGE> 35
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated financial
statements present the effects of: the Recapitalization, including the reverse
stock split, the receipt of $74 million of net proceeds from this offering, the
acquisition of $75 million original face value of our senior notes for
approximately $49 million and the repayment of the borrowings under our credit
facility.
The unaudited pro forma condensed consolidated balance sheet presents the
financial position of the company as of March 31, 2000 assuming the proposed
transactions had occurred as of March 31, 2000. This pro forma information is
based upon the historical March 31, 2000 balance sheet of the company included
elsewhere in this prospectus.
The unaudited pro forma condensed consolidated statements of operations
give effect to the proposed transactions as if such transactions had been
entered into on July 1, 1998. This pro forma information is based upon the
historical results of operations of the company for the year ended June 30, 1999
and the nine months ended March 31, 2000, included elsewhere in this prospectus.
The unaudited pro forma condensed consolidated financial statements are
based upon available information and assumptions that management of the company
believes are reasonable. The unaudited pro forma condensed consolidated
financial data do not purport to represent the financial position or results of
operations which would have occurred if these transactions had been completed on
the dates indicated or the company's financial position or results of operations
for any future date or period. You should read this unaudited pro forma
condensed consolidated financial data together with the company's historical
financial statements and the notes to those financial statements included in
this prospectus.
-34-
<PAGE> 36
QUEEN SAND RESOURCES, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2000
AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Current assets
Cash.................................................. $ 1,309 $ 74,000 (3) $ 13,059
(48,750) (4)
(13,500) (5)
Other current assets.................................. 5,613 5,613
----------- ----------- ------------
Total current assets..................................... 6,922 11,750 18,672
Net property & equipment................................. 95,506 95,506
Other assets............................................. 8,110 (3,570) (4) 4,540
----------- ----------- ------------
Total assets............................................. $ 110,538 $ 8,180 $ 118,718
=========== =========== ============
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable and accrued liabilities.............. $ 6,477 $ (2,337) (4) $ 4,140
Current portion of long-term debt..................... 593 593
----------- ----------- ------------
Total current liabilities................................ 7,070 (2,337) 4,733
(13,500) (5)
Long-term obligations, net of current portion............ 138,500 (75,000) (4) 50,000
----------- ----------- ------------
Total liabilities........................................ 145,570 (90,837) 54,733
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock....................................... 96 (96) (1) --
Common stock.......................................... 111 182 (1) 2,633
2,340 (3)
Additional paid-in capital............................ 65,087 (86) (1) 129,410
71,660 (3)
(7,251) (1) --
Accumulated Deficit................................... (93,075) 25,017 (4) (68,058)
Treasury stock........................................ (7,251) 7,251 (1) --
----------- ----------- ------------
Total stockholders' equity (deficit)..................... (35,032) 99,017 63,985
----------- ----------- ------------
Total liabilities and stockholders' equity (deficit) 110,538 $ 8,180 $ 118,718
=========== ----------- ============
SHARE INFORMATION
SHARES AUTHORIZED:
Preferred Stock....................................... 50,000,000 -- 50,000,000
Common Stock.......................................... 100,000,000 -- 100,000,000
Shares Issued and Outstanding
Preferred Stock....................................... 9,602,565 (9,602,565) (1) --
Common Stock.......................................... 55,349,985 732,500 (1) 11,250,000
(54,832,485) (2)
10,000,000 (3)
</TABLE>
See accompanying notes.
-35-
<PAGE> 37
QUEEN SAND RESOURCES, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 2000
AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ----------
<S> <C> <C> <C>
Revenues
Oil and natural gas revenues.............. $ 2,689 $ -- $ 2,689
Net profits and royalties interests....... 16,030 16,030
Interest and other income................. 150 150
---------- ----------
Total revenues............................... 18,869 18,869
Expenses:
Oil and natural gas production expenses... 851 851
General and administrative expenses....... 2,222 2,222
Interest and financing costs.............. 13,910 (7,341) (6) 5,723
(846) (7)
Hedge contract termination costs.......... 3,328 3,328
Depreciation, depletion and amortization.. 6,676 6,676
---------- ----------- ----------
26,987 (8,187) 18,800
Net income (loss) before extraordinary loss.. $ (8,118) $ 8,187 $ 69
========== =========== ==========
Net income (loss) before extraordinary
loss per common share, basic and diluted.... $ (0.21) $ 0.01
========== ==========
Weighted average shares of common stock
outstanding during the period............... 38,105,000 732,500 (8) 10,976,763
(37,860,737) (9)
(10,000,000) (10)
</TABLE>
See accompanying notes.
-36-
<PAGE> 38
QUEEN SAND RESOURCES, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1999
AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- -----------
<S> <C> <C> <C>
Revenues
Oil and natural gas revenues.................. $ 4,591 $ -- $ 4,591
Net profits and royalties interests........... 23,140 23,140
Interest and other income..................... 326 326
----------- ------------ -----------
Total revenues................................... 28,057 28,057
Expenses:
Oil and natural gas production expenses....... 3,196 3,196
General and administrative expenses........... 3,533 3,533
Interest and financing costs.................. 18,352 (9,842) (6) 7,514
(996) (7)
Depreciation, depletion and amortization...... 11,885 11,885
Write-down of oil and natural gas properties.. 35,033 35,033
----------- ------------ -----------
71,999 (10,838) 61,161
Net loss before extraordinary loss............... $ (43,942) $ 10,838 $ (33,104)
=========== ============ ===========
Net loss before extraordinary loss per common
share......................................... $ (1.40) $ (3.03)
=========== ===========
Weighted average shares of common stock
outstanding during the period................. 31,434,465 732,500 (8) 10,934,003
(31,232,962) (9)
10,000,000 (10)
</TABLE>
See accompanying notes.
-37-
<PAGE> 39
QUEEN SAND RESOURCES, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
NOTE A. GENERAL
Simultaneously with the closing of this offering, we will complete a
recapitalization (the "Recapitalization") which includes the following:
o a reverse stock split of every 156 shares of our common stock into one
share;
o the exchange of 9,600,000 outstanding shares of our Series A preferred
stock for 212,500 shares of post reverse-split common stock;
o the exchange of 2,565 outstanding shares of our Series C preferred
stock and warrants exercisable for 340,153 shares of common stock for
120,000 shares of post reverse-split common stock;
o the exercise and exchange of the 1,593,417 remaining unexercised
common stock repricing rights and warrants exercisable for 655,000
shares of common stock for 400,000 shares of post reverse-split common
stock.
o the repurchase of $75 million face value of our senior notes for
approximately $49 million.
At our stockholders meeting on , 2000, our stockholders approved the first
four elements of the Recapitalization. The repurchase of our senior notes does
not require stockholder approval.
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<PAGE> 40
NOTE B. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
The accompanying unaudited pro forma condensed consolidated balance sheet
assumes the transactions discussed in Note A above were entered into on March
31, 2000 and reflects the following pro forma adjustments:
(1) To record the effects of the following recapitalization transactions:
o the exchange of the 9,600,000 outstanding shares of Series A
preferred stock for 212,500 shares of post reverse-split common
stock;
o the exchange of the 2,565 outstanding shares of Series C
preferred stock and warrants exercisable for 340,153 shares of
common stock for 120,000 shares of post reverse-split common
stock;
o the exercise and exchange of the 1,593,417 remaining unexercised
common stock repricing rights and warrants exercisable for
655,000 shares of common stock for 400,000 shares of post
reverse-split common stock; and
o the cancellation of existing treasury stock.
(2) To record a proposed reverse stock split of our common stock whereby
every 156 shares of common stock outstanding will be reverse split
into one share outstanding.
(3) To record the net proceeds from this offering of approximately $74
million in cash.
(4) To record the retirement at a discount of $75 million original face
value of our outstanding senior notes for approximately $49 million,
including the writeoff of unamortized debt issuance costs and accrued
interest payable.
(5) To record repayment of the borrowings under our credit facility.
NOTE C. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying unaudited pro forma condensed consolidated statements of
operations assume the transactions discussed in Note A above were entered into
on July 1, 1998 and reflect the following pro forma adjustments:
(6) To record a reduction in interest expense related to the retirement of
$75 million original face value of our outstanding senior notes.
(7) To record reduction in interest expense related to repayment of the
borrowings under our credit facility.
(8) To record the effects of the number of post reverse stock split common
shares issued to holders of Series A and C preferred stock and stock
repricing rights and warrants in the recapitalization.
(9) To record the effects of the proposed reverse stock split on the
number of weighted average shares outstanding during the period
presented.
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(10) To record the shares of common stock issued in conjunction with this
offering of approximately $74 million.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
We are an independent energy company engaged in the exploration,
development, exploitation and acquisition of oil and natural gas properties in
on-shore, known producing areas, using conventional recovery techniques.
Our goal is to expand our reserve base, cash flow and net income and to
generate an attractive return on capital. Our strategy to achieve these goals
consists of these elements:
o develop, exploit and explore our existing oil and natural gas
properties;
o identify acquisition opportunities that complement our existing
properties; and
o utilize a well balanced financial structure that will allow us to
direct the cash generated from operations to fund production and
reserve growth without having to be overly reliant on the capital
markets.
We use the full cost method of accounting for our investment in oil and
natural gas properties. Under this method, we capitalize all acquisition,
exploration and development costs incurred for the purpose of finding oil and
natural gas reserves, including salaries, benefits and other related general and
administrative costs directly attributable to these activities. We capitalized
general and administrative costs of $0.3 million in the fiscal year ended June
30, 1997, $0.7 million in the fiscal year ended June 30, 1998 and $0.9 million
in the fiscal year ended June 30, 1999. We expense costs associated with
production and general corporate activities in the period incurred. We
capitalize interest costs related to unproved properties and properties under
development. Sales of oil and natural gas properties are accounted for as
adjustments of capitalized costs, with no gain or loss recognized, unless these
adjustments would significantly alter the relationship between capitalized costs
and proved reserves of oil and natural gas.
The following discussion and analysis reflects the operating results as if
the net profits interests were working interests. We believe that this will
provide the readers of the report with a more meaningful understanding of the
underlying operating results and conditions for the period.
THE NINE MONTHS ENDED MARCH 31, 2000 COMPARED TO THE NINE MONTHS ENDED MARCH 31,
1999
Revenues. Our total revenues fell by $3.2 million, or 12%, to $23.0 million
for the nine months ended March 31, 2000, from $26.2 million during the
comparable period in 1999.
We produced 171,000 barrels of oil during the nine months ended March 31,
2000, a decrease of 227,000 barrels, or 57%, from the 398,000 barrels produced
during the comparable period in 1999. This decrease was comprised of a decrease
of 72,000 barrels, or 29%, from the properties that we owned during both periods
and a decrease of 155,000 barrels from the properties we sold at the end of June
1999. The decrease in production of oil from the properties owned during the
comparative quarters is comprised of three approximately equal components:
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o One of our fields has not been meeting production expectations. This
under performance represents approximately 30% of the overall decrease
in production. Remedial action is being taken to rehabilitate this
field.
o During March 1999 we shut in substantially all of the wells in the
Caprock field in New Mexico in response to low oil prices. As oil
prices recovered, we resumed production of those wells that produce
economically. In addition, we are in the early stages of a
redevelopment program in the Caprock field to enhance production. We
have drilled four single lateral injection wells and one dual-lateral
producing well. These five wells along with the production facilities
and a water injection plant constitute phase one of a comprehensive
redevelopment program. Phase one covers 640 acres out of the
approximate 20,000 acres we control in the Caprock field.
o The final component of this decline is the result of the natural
depletion of our oil reservoirs.
We produced 8.1 Bcf of natural gas during the nine months ended March 31,
2000, a decrease of 2.0 Bcf, or 20%, from the 10.2 Bcf produced during the
comparable period in 1999. This decrease consists of a decrease of 1.3 Bcf , or
14%, from the properties that we owned during both periods and a decrease of
777,000 Mcf from the properties we sold at the end of June 1999. The decrease in
production from the properties owned during the comparative quarters is
comprised of three components:
o One of our fields has experienced production declines in excess of
what was expected. The operator of the property has commenced drilling
and completion efforts on the first two of a series of proposed
infield wells to increase production.
o Our successful development and exploitation program in south Texas
resumed in August 1999 and seven new wells have been drilled through
the end of March. However, no wells were drilled and put online
between November 1998 and September 1999. These wells have high
initial production rates and significant initial decline rates.
Approximately half of a well's total reserves are produced during the
first year.
o The final component of this decline is the result of the natural
depletion of our natural gas reservoirs.
Production for the nine months ended March 31, 2000 was 9.1 Bcfe, down 3.4
Bcfe, or 27%, from the 12.5 Bcfe produced during the comparable period in 1999.
Production from properties that we owned during both periods was down 1.7 Bcfe,
or 16%, during the nine months ended March 31, 2000 when compared to production
during the nine months ended March 31, 1999.
The decrease in revenues resulting from lower production volumes was offset
by the significant industry-wide increase in oil and natural gas prices. The
average price per barrel of oil sold by us during the nine months ended March
31, 2000 was $20.73, an increase of $9.21 per barrel, or 80%, from the $11.52
per barrel during the nine months ended March 31, 1999. The average price per
Mcf of natural gas sold by us was $2.40 during the nine months ended March 31,
2000, an increase of $0.27 per Mcf, or 13%, from the $2.13 per Mcf during the
comparable period in 1999. Oil prices have remained at these elevated levels
since March 31, 2000. Natural gas prices were volatile throughout the quarter,
and have remained so since March 31, 2000. On an Mcfe basis, the average price
received by us during the nine months ended March 31, 2000 was $2.52, a $0.43
increase, or 21% from the $2.09 we received during the comparable period in
1999.
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During the nine months ended March 31, 2000 we paid $450,000 in cash
settlements pursuant to our oil price-hedging program. The effect on the average
oil prices we received during the period was a decrease of $2.62 per barrel, or
11%. During the nine months ended March 31, 2000 we paid $417,000 in cash
settlements and amortized $76,000 of deferred hedging costs regarding our
natural gas price- hedging program. The net negative effect on the average
natural gas prices we received during the period was $0.06, or 2%. During the
comparable period in 1999 we received $1,446,000 in cash settlements and
amortized $94,000 of deferred hedging costs regarding our natural gas
price-hedging program. The net positive effect on the average natural gas prices
we received during the period was $0.13 per Mcf, or 7%. We received an
additional $133,000 on our oil price-hedging program during the nine months
ended March 31, 1999, representing a positive effect on the average oil prices
we received during the period of $0.33 per barrel, or 3%.
Severance and Production Taxes. Severance and production taxes, which are
based on the revenues derived from the sale of oil and natural gas, were
$957,000 during the nine months ended March 31, 2000, as compared to $1.1
million during the comparable period in 1999, a decrease of $161,000, or 14%.
Revenues decreased 12% during the comparable periods. While wellhead revenues
decreased only 3%, the impact of our commodity hedging contracts caused further
reductions in our revenues. Severance taxes are applied only to wellhead
revenues. Our commodity hedge results were the primary cause for our severance
and production taxes decreasing, on a percentage basis, more significantly than
revenues.
On a cost per Mcfe basis, severance taxes were $0.10 per Mcfe for the nine
months ended March 31, 2000 compared to $0.09 per Mcfe for the comparable period
ending March 31, 1999, an increase of 17%. Average wellhead prices rose by 33%,
from $1.96 per Mcfe during the nine months ended March 31, 1999 to $2.61 per
Mcfe during the nine months ended March 31, 2000.
Production Expenses. The Company's lease operating expenses fell to $4.3
million for the nine months ended March 31, 2000, a decrease of $2.6 million, or
38%, from the $6.8 million incurred during the comparable period in 1999. This
decrease is primarily the result of reduced costs from comparable properties and
the elimination of costs from the properties we sold at the end of June 1999.
Lease operating expenses were $0.47 per Mcfe during the nine months ended March
31, 2000, a decrease of $0.08, or 15%, from the $0.55 per Mcfe incurred during
the comparable period in 1999. This improvement is primarily the result of the
sale of properties at the end of June 1999. The properties we sold had higher
operating costs per Mcfe than the properties we currently own.
Depletion, Depreciation and Amortization Expense. Depletion and oil field
equipment related depreciation costs were $6.5 million, or $0.71 per Mcfe,
during the nine months ended March 31, 2000, a decrease of $2.8 million, or 30%,
from the $9.3 million, or $0.75 per Mcfe, charged to income during the
comparable period in 1999. On a cost per Mcfe basis, the decrease of $0.04 per
Mcfe, or 4%, is primarily the result of the $28 million non-cash write-down of
oil and natural gas property carrying values we recorded at June 30, 1998 and
the $35 million non-cash write-down we recorded at December 31, 1998. We were
not required to record a similar write-down at December 31, 1999.
General and Administrative Expenses. The increase of $20,000, or 1%, in
general and administrative costs for the nine months ended March 31, 2000,
compared to the same period for 1999, is reflective of the normal fluctuations
in our activities.
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Interest Expense. Interest expense was $13.9 million for the nine months
ended March 31, 2000, an increase of $305,000 over the $13.6 million incurred
during the nine months ended March 31, 1999. The interest expense of $13.9
million is comprised of $12.7 million in cash interest charges and $1.2 million
in amortized deferred debt issuance costs as compared to $12.6 million in cash
interest charges and $1.0 million of amortized deferred debt issuance costs for
the nine months ended March 31, 1999. The increase of $200,000 in amortized
deferred debt issuance costs arose as a result of replacing our old credit
agreement with our new credit agreement.
Extraordinary Loss. In October 1999 we replaced our old credit agreement
with our new credit agreement. As a result, we wrote off $1,130,000 in
unamortized deferred debt issuance costs associated with the old credit
agreement. In July 1998 we unwound a LIBOR interest rate swap at a cost of
$3,549,000.
Net Loss. We have incurred losses since inception, including $9.2 million,
or $0.24 per common share, for the nine months ended March 31, 2000 compared to
$45.3 million, or $1.47 per common share for the nine months ended March 31,
1999. The decline in oil and natural gas prices between December 31, 1997 and
December 31, 1998 caused us to record non-cash write-downs of oil and natural
gas properties of $28 million during the year ended June 30, 1998 and $35
million during the nine months ended March 31, 1999. Future declines in oil and
natural gas prices could lead to additional non-cash write-downs of our oil and
natural gas properties.
THE YEAR ENDED JUNE 30, 1999 COMPARED TO THE YEAR ENDED JUNE 30, 1998
Revenues. Total revenues during the year ended June 30, 1999 were $33.8
million, an increase of $21.1 million over the $12.7 million for the year ended
June 30, 1998. Our revenues were derived from the sale of 13.0 Bcf of natural
gas at an average price per Mcf of $2.13 and 500,000 barrels of oil at an
average price per barrel of $12.37. During the year ended June 30, 1998 our
revenues were derived from the sale of 3.4 Bcf of natural gas, at an average
price per Mcf of $2.27, and 325,000 barrels of oil, at an average price per
barrel of $15.52.
The two periods are not readily comparable because of our significant
growth during the year ended June 30, 1998, primarily resulting from the April
1998 acquisition of the Morgan Properties. Production from properties owned
throughout both periods was 1.0 Bcf of natural gas and 223,000 barrels of oil
during the year ended June 30, 1999. This represents an increase of 0.1 Bcf, or
14%, over the 0.9 Bcf of natural gas, and a decrease of 26,000 barrels, or 11%,
from the 250,000 barrels of oil produced during the year ended June 30, 1998.
The increase in natural gas production is a reflection of our successful
exploitation and development programs implemented during the year ended June 30,
1999, offset by the natural rate of depletion of the reservoirs associated with
these properties. The decrease in oil production is a combination of the
decision to temporarily reduce production from some producing areas with
relatively high production costs, due to the low price of oil received during
the year combined with the natural rate of depletion of the reservoirs
associated with these properties. The production of oil from those properties
temporarily shut in during the period of low oil prices was restored following
the return of oil prices to their currently higher levels. Production from
properties acquired during 1998 was 11.9 Bcf of natural gas and 276,000 barrels
of oil during 1999 as compared to 2.4 Bcf of natural gas and 75,000 barrels of
oil during 1998.
Costs and expenses. Operating costs and expenses for the year ended June
30, 1999, exclusive of a non-cash ceiling test write-down of $35.0 million and
an extraordinary charge of $3.5 million, were
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$43.0 million. Of this total, lease operating expenses and production taxes were
$9.1 million, general and administrative expenses were $3.5 million, interest
charges were $18.3 million and depletion, depreciation and amortization costs
were $11.9 million. Operating costs and expenses for the year ended June 30,
1998, exclusive of a non-cash ceiling test write-down of $28.2 million, were
$17.4 million. Of this total, lease operating expenses and production taxes were
$6.3 million, general and administrative costs were $2.3 million, interest
charges were $4.0 million, and depletion, depreciation and amortization costs
were $4.8 million.
The increase in lease operating expenses and production taxes is a result
of our increased levels of oil and natural gas production. When lease operating
expenses and production taxes are compared on a cost per unit basis, the cost of
producing an Mcfe during the year ended June 30, 1999 decreased by $0.62 per
Mcfe, or 52%, to $0.57 from the $1.19 per Mcfe achieved during the year ended
June 30, 1998. This decrease in production costs per unit is primarily the
result of acquiring properties in April 1998 with lower operating costs per unit
than our other properties.
General and administrative expenses have increased by $1.3 million as a
result of our increased size requiring additional employees and incremental
costs; however, on a per unit basis, general and administrative expenses for the
year ended June 30, 1999 were $0.22 per Mcfe, a decrease of $0.21 per Mcfe, or
49%, from the $0.43 per Mcfe incurred during the year ended June 30, 1998. This
per unit decline in general and administrative expenses is a result of our
increased level of oil and natural gas production.
Interest expense for the year ended June 30, 1999 was $18.3 million. This
is comprised of $17.0 million paid or payable in cash and $1.3 million of
amortized deferred costs incurred at the time that the related debt obligations
were incurred. During the year ended June 30, 1998 total interest expense was
$4.0 million, which was comprised of $3.9 million paid or payable in cash and
$0.1 million of amortized deferred costs incurred at the time that the related
debt obligations were incurred. The increase of $14.3 million in interest
expense is due to an increase in the average interest bearing debt outstanding.
During the year ended June 30, 1999 we had average interest bearing debt
outstanding of $139.3 million, as compared to $48.5 million during the year
ended June 30, 1998. On a per unit basis, cash interest expense for the year
ended June 30, 1999 was $1.06 per Mcfe, as compared to $0.75 per Mcfe during the
year ended June 30, 1998.
The increase in depletion, depreciation and amortization costs of $7.1
million is a result of the increased volume of oil and natural gas produced by
us and the higher per unit cost of acquisition of the properties acquired during
the year ended June 30, 1998. On a cost per Mcfe of reserves the depletion,
depreciation and amortization costs decreased by $0.17 per Mcfe, or 29%,
primarily due to the effects of the non-cash writedowns of $35.0 million
recorded at December 31, 1998 and $28.2 million recorded at June 30, 1998 to
reflect the impact of lower oil and natural gas prices at those two dates. In
accordance with generally accepted accounting principles, at a point in time
coinciding with the quarterly and annual reporting periods, we must test the
carrying value of our oil and natural gas properties, net of related deferred
taxes, against the "cost center ceiling." The "cost center ceiling" is a
calculated amount based on estimated reserve volumes valued at then-current
realized prices held flat for the life of the properties discounted at 10% per
annum plus the lower of cost or estimated fair value of unproved properties. If
the carrying value exceeds the cost center ceiling, the excess must be expensed
in that period and the carrying value of the oil and natural gas reserves
lowered accordingly. Amounts required to be written off may not be reinstated
for any subsequent increase in the cost center ceilings.
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Extraordinary loss. As a result of the placement of the $125 million of
12 1/2% senior notes in July, 1998 we unwound an interest rate hedge contract
related to existing floating interest rate bridge loans at a cost of
approximately $3.5 million. As the debt hedged was retired using the proceeds
from the issuance of the senior notes, the costs of terminating the hedge was
recognized as an extraordinary loss.
Net loss. We have incurred losses since inception, including $47.5 million,
or $1.51 per common share, for the year ended June 30, 1999, compared to $32.8
million, or $1.44 per share, for the year ended June 30, 1998. These losses are
a reflection of the low oil and natural gas prices experienced during the year
ended June 30, 1999 combined with our high leverage position.
COMPARISON OF THE YEARS ENDED JUNE 30, 1998 AND 1997
Revenues. Total revenues during the year ended June 30, 1998 were $11.0
million, an increase of $6.3 million over 1997. Operating revenue from the sale
of natural gas and oil was $6.5 million in 1998, while revenues from net profits
interests and royalty interests acquired during 1998 provided additional
revenues of $4.4 million. Our revenues were derived from the sale of 3.4 Bcf of
natural gas, at an average price per Mcf of $2.27, and 324,557 barrels of oil,
at an average price per barrel of $15.52. During the year ended June 30, 1997 we
generated operating revenue of $4.4 million from the sale of natural gas and
oil. The natural gas and oil revenues for the year ended June 30, 1997 were
derived from the sale of 546.3 MMcf of natural gas, at an average price per Mcf
of $2.31, and 150,546 barrels of oil, at an average price per barrel of $20.73.
The two periods are not readily comparable because of our significant
growth during the years ended June 30, 1998 and 1997. Production from properties
owned throughout both periods was 467.2 MMcf of natural gas and 86,295 barrels
of oil during the year ended June 30, 1998. This represents an increase of 60.3
MMcf, or 15%, over the 407.1 MMcf of natural gas, and a decrease of 17,682
barrels, or 17%, from the 103,977 barrels of oil produced during the year ended
June 30, 1997. The increase in natural gas production is a reflection of the
successful exploitation and development programs implemented by us during the
year ended June 30, 1998. The decrease in oil production is a combination of the
natural rate of depletion of the reservoirs associated with these properties and
the temporary reductions in production as some properties were worked over.
Production from properties acquired during the 1997 and 1998 periods was 2.9 Bcf
of natural gas and 238,262 barrels of oil during 1998 as compared to 139.2 MMcf
of natural gas and 46,569 barrels of oil during 1997.
Costs and expenses. Operating costs and expenses for the year ended June
30, 1998, exclusive of a non-cash ceiling test write-down of $28.2 million, were
$15.6 million. Of this total, lease operating expenses and production taxes were
$4.5 million, general and administrative costs were $2.3 million, interest
charges were $4.0 million, and depletion, depreciation and amortization costs
were $4.8 million. Operating costs and expenses for the year ended June 30, 1997
were $5.8 million. Of this total, lease operating expenses and production taxes
were $2.5 million, general and administrative expenses were $1.5 million,
interest and financing charges were $878,000, and depletion, depreciation and
amortization costs were $982,000.
The increase in lease operating expenses is a result of our increased
levels of oil and natural gas production. When lease operating expenses are
compared on a cost per unit basis, the cost of producing an Mcfe, including
production taxes, decreased by $0.54 per Mcfe, or 42%, to $1.19. This decrease
in lease operating costs per unit is primarily the result of the acquisition of
properties with lower operating costs per unit during the comparable periods.
General and administrative expenses have increased by
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$806,000 as a result of our increased size requiring additional employees;
however, on a per unit basis, general and administrative expenses for the year
ended June 30, 1998 were $0.43 per Mcfe, a decrease of $0.57 per Mcfe, or 57%.
This per unit decline in general and administrative expenses is a result of our
increased level of oil and natural gas production. The increase in depletion,
depreciation and amortization costs of $3.8 million is a result of the increased
volume of oil and natural gas produced by us and the higher per unit cost of
acquisition of the properties acquired during the year ended June 30, 1998. On a
cost per Mcfe of reserves the depletion, depreciation and amortization costs
increased by $0.21 per Mcfe, or 31%.
Pursuant to SEC regulations, we recorded a $28.2 million non-cash
write-down of the carrying value of our oil and natural gas properties to
reflect the impact of lower oil and natural gas prices at June 30, 1998. We were
not required to record a similar write-down at June 30, 1997.
Net loss. We have incurred losses since our inception, including $32.8
million, or $1.44 per common share, for the year ended June 30, 1998, compared
to $1.3 million, or $0.05 per common share, for the year ended June 30, 1997.
These losses are a reflection of the start-up nature of our oil and natural gas
production activities.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
Consistent with our strategy of acquiring and developing reserves, we have
an objective of maintaining as much financing flexibility as is practicable.
Since we commenced our oil and natural gas operations, we have utilized a
variety of sources of capital to fund our acquisitions, development and
exploitation programs and our operations.
Our general financial strategy is to use cash flow from operations, debt
financings and the issuance of equity securities to service interest on our
indebtedness, to pay ongoing operating expenses, and to contribute toward
further development of our existing proved reserves as well as additional
acquisitions. Historically cash from operations has not been sufficient to fund
the further development of our existing proved reserves or to fund additional
acquisitions. There can be no assurance that cash from operations will be
sufficient in the future to cover all of these needs.
We have planned development and exploitation activities for all of our
major operating areas. In addition, we are continuing to evaluate oil and
natural gas properties for future acquisition. Historically, we have used the
proceeds from the sale of our securities in the private equity market and
borrowings under our credit facilities to raise cash to fund acquisitions or
repay indebtedness previously incurred for acquisitions. We have also used our
securities as a medium of exchange for other companies' assets in connection
with acquisitions. However, there can be no assurance that these sources will be
available to us to meet our budgeted capital spending. Furthermore, our ability
to borrow other than under the restated credit agreement dated as of October 22,
1999 with Ableco Finance LLP and Foothill Capital Corporation is subject to
restrictions imposed by our credit agreement. If we cannot secure additional
funds for our planned development and exploitation activities, then we will be
required to delay or reduce substantially our development and exploitation
efforts.
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SOURCES OF CAPITAL
Our principal sources of capital for funding our business activities have
been cash flow from operations, debt financings and the issuance of equity
securities. Historically, our sources of funds from debt financings have
included funds available under the old credit agreement, the DEM denominated
bonds issued to European investors, and our 12 1/2% senior notes.
Credit agreement. On October 22, 1999, we entered into a restated credit
agreement with Ableco and Foothill. The restated credit agreement, in which we
provide a first secured lien on all of our assets, allows for borrowings of up
to $50 million, subject to borrowing base limitations, to fund, among other
things, development and exploitation expenditures, acquisitions and general
working capital. The restated credit agreement matures on October 22, 2001.
There are no scheduled principal repayments. The restated credit agreement bears
interest as follows:
o when the borrowings are less than $25 million, bank prime plus 2%;
o when the borrowings are $25 million or greater, bank prime plus 4.5%;
and
o on amounts securing letters of credit issued on our behalf, 3%.
The interest rate as of July 5, 2000 under this agreement was 11.50% per annum.
As of July 5, 2000, the maximum amount available to us under the credit
agreement was $30 million, of which $16 million was outstanding as of July 5,
2000. The funds available under our secured credit agreement are limited to the
lesser of:
o $50 million;
o the borrowing base calculation, which is the sum of: (1) 65% of proved
developed producing, (2) 45% of proved developed non-producing and (3)
40% of proved undeveloped from our reserve reports, updated monthly
using the 5 year NYMEX strip price for crude oil and natural gas; and
o the maximum amount of secured debt available under the senior notes
indenture, which is currently $35 million;
minus $5 million.
Under the credit agreement we must obtain a release of the security
interest held by our secured lenders before we can sell any of our oil or
natural gas properties. In addition, we are limited to making capital
expenditures of not more than $12 million in any 12 month period and not more
than $18 million between July 1, 1999 and October 22, 2001, the maturity date of
the credit agreement. As of March 31, 2000 we had recorded capital expenditures
totaling $5 million against this limitation.
Senior notes. On July 8, 1998, we completed a private placement of $125
million principal amount of 12 1/2% senior notes due 2008. In addition, on July
8, 1998 and July 20, 1998, we completed the private placement of $31.0 million
of common stock. Pursuant to the note placement, we issued and sold the notes to
institutional buyers pursuant to Rule 144A and Regulation D promulgated under
the
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Securities Act of 1933. The notes mature on July 1, 2008, and interest on the
notes is payable semiannually on January 1 and July 1 of each year, commencing
January 1, 1999 at the rate of 12 1/2% per annum. The payment of the notes is
guaranteed by the parent company's three operating subsidiaries.
Our 12 1/2% senior notes limit our ability to incur indebtedness.
Currently, our maximum permitted indebtedness is limited to $50 million, of
which $35 million may be secured in priority to the 12 1/2% senior notes. To
incur indebtedness in excess of $50 million, we must be able to demonstrate that
we have, on a pro-forma basis over the last 12 months, an interest coverage
ratio (EBITDA divided by cash interest expense) of greater than 2.5 times.
Our senior notes indenture also provides that our senior secured debt,
including the debt under our credit agreement, may exceed $35 million if the
amount over $35 million is incurred pursuant to the acquisition of additional
assets and the terms of the financing of that acquisition require that we
provide a security interest on the acquired assets.
As part of the Recapitalization, we are seeking an amendment to the senior
notes indenture to the permitted indebtedness limitations of the indenture. This
amendment would provide for a dollar for dollar increase in the maximum
permitted indebtedness to the extent that the equity raised pursuant to the
Recapitalization and thereafter, exceeds $50 million, net of all costs related
to the equity issuance. The permitted amount of senior secured indebtedness
would increase in the same manner as the maximum permitted indebtedness.
Hedging arrangements and letters of credit. Some of our hedging
arrangements contain a "cap" whereby we must pay the counter-party if oil or
natural gas prices exceed the specified price in the contract. We are required
to maintain letters of credit with our counter-parties, and we may be required
to provide additional letters of credit if prices for oil and natural gas
futures increase above the "cap" prices. The amount of letters of credit
required under the hedging arrangements is a function of the market value of oil
and natural gas prices and the volumes of oil and natural gas subject to the
hedging contract. As a result, the amount of the letters of credit will
fluctuate with the market prices of oil and natural gas. These letters of credit
are issued pursuant to our credit agreement and as a result utilize some of our
borrowing capacity, reducing our remaining available funds under our credit
agreement. As of July 5, 2000, we have provided $6.2 million in letters of
credit to Enron, the counter-party to our hedge contracts containing "caps." As
of July 5, 2000, we had an additional $16 million in outstanding loans and an
unused availability of $7.8 million.
DEM bonds. At July 5, 2000 we had DEM1.2 million ($593,000) of unsecured
12% bonds outstanding. We paid these bonds on their maturity date on July 15,
2000.
Equity capital. From inception through March 31, 2000 we have raised in
excess of $58 million, net of $7.3 million in treasury stock, in equity. After
completing the Recapitalization, there will be 1,250,000 shares of our common
stock outstanding in addition to the shares of common stock issued in this
offering. The equity offering contemplated by this prospectus involves raising
an additional $74 million, net of costs, for 10,000,000 shares of our common
stock. As a result, after completion of this offering and the Recapitalization,
we expect to have 11,250,000 shares of our common stock outstanding.
Dividends. Because Queen Sand Resources, Inc. is a holding company, our
ability to pay dividends depends on the ability of our subsidiaries to pay cash
dividends or make other cash distributions. Our
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<PAGE> 51
credit agreement prohibits us from paying cash dividends on our common stock and
the senior notes indenture restricts our payment of dividends on common stock.
USES OF CAPITAL
Since commencing our oil and natural gas operations in August 1994 we have
completed 19 acquisitions of oil and natural gas properties. Through March 31,
2000, we have expended a total of $194 million in acquiring, developing and
exploiting oil and natural gas producing properties. Initially, our operations
represented a net use of funds. As demonstrated in the operating results for the
year ended June 30, 1999 and the nine months ended March 31, 2000, we currently
generate positive earnings before non-cash charges. During the three and nine
months ended March 31, 2000, we spent $5.0 million on developing and exploiting
our oil and natural gas producing properties. We expect to spend an additional
$11.7 million on discretionary capital expenditures through June 2001 for
exploration, development and exploitation projects. As of May 9, 2000, we are
contractually obligated to fund $1.0 million in capital expenditures. We plan to
fund our discretionary and contractual capital expenditures using operating cash
flows and borrowings under our restated credit agreement. During the nine months
ended March 31, 2000 we incurred debt issuance and other deferred costs of $2.4
million.
The equity offering contemplated by this prospectus seeks to raise an
additional $74 million, net of costs, for 10,000,000 shares of our common stock.
We will use approximately $49 million to acquire $75 million of our 12 1/2%
senior notes at a discount. As a result, we will have $50 million outstanding on
these 12 1/2% senior notes, with a maturity date of July 1, 2008. We will write
down the unamortized deferred assets associated with these 12 1/2% senior notes
by $3.6 million, resulting in a net gain on retirement of debt of $25 million.
The indenture governing our senior notes will be amended to permit additional
indebtedness to increase from $35 million of secured debt to $60 million of
secured debt.
In addition to reducing the principal amount outstanding under our 12 1/2%
senior notes, we will pay down the outstanding balance on our credit agreement,
which at July 5, 2000 was $16 million. We will, however, continue to have an
availability of $30 million under our credit agreement.
We continue to evaluate acquisition opportunities; however, there are no
existing agreements regarding any acquisitions. An acquisition may require the
issuance of additional debt and or equity securities. There are no assurances
that we will be able to obtain additional financing, or that any financing, if
obtained, will be on terms favorable to us.
INFLATION
During the past several years, we have experienced moderate increases in
property acquisition and development costs. During the fiscal year ended June
30, 1999 we received somewhat lower commodity prices for the natural resources
produced from our properties. Oil and natural gas prices have increased during
the nine months ended March 31, 2000. Our results of operations and cash flow
have been, and will continue to be, affected somewhat by the volatility in oil
and natural gas prices. If we experience a significant increase in oil and
natural gas prices that is sustained over a prolonged period, we could expect
that there would also be a corresponding increase in oil and natural gas finding
and development costs, lease acquisition costs and operating expenses.
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<PAGE> 52
CHANGES IN PRICES AND HEDGING ACTIVITIES
Annual average oil and natural gas prices have fluctuated significantly
over the last two years. During the period from July 1, 1998 through June 30,
2000, West Texas Intermediate spot crude oil prices averaged $20.22 per barrel
and traded between a low of $10.73 per barrel and a high of $34.65 per barrel.
During the same period, Henry Hub spot natural gas prices averaged $2.41 per Mcf
and traded between a low of $1.04 per Mcf and a high of $4.59 per Mcf.
The tables below set out our weighted average price per barrel of oil, the
weighted average price per Mcf of natural gas, the impact of our hedging
programs and the related NYMEX indices.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30, MARCH 31,
------------------------------------- ------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
NATURAL GAS (PER MCF):
Average price received at wellhead................ $ 2.31 $ 2.24 $ 2.00 $ 2.00 $ 2.46
Effect of hedge contracts on average price........ -- 0.03 0.13 0.13 (0.06)
----------- ----------- ----------- ----------- -----------
Average price received, including hedge
contracts........................................ $ 2.31 $ 2.27 $ 2.13 $ 2.13 $ 2.40
Average NYMEX Henry Hub........................... $ 2.52 $ 2.46 $ 2.01 $ 1.97 $ 2.57
Average basis differential including hedge
contracts........................................ (0.21) (0.19) 0.12 0.16 (0.17)
Average basis differential excluding hedge
contracts........................................ $ (0.21) $ (0.22) $ (0.01) $ 0.03 $ (0.11)
OIL (PER BARREL):
Average price received at wellhead................ $ 20.73 $ 15.07 $ 12.37 $ 11.19 $ 23.35
Average effect of hedge contract.................. -- 0.45 0.00 0.33 (2.62)
----------- ----------- ----------- ----------- -----------
Average price received, including hedge
contracts........................................ $ 20.73 $ 15.52 $ 12.37 $ 11.52 $ 20.73
Average NYMEX Sweet Light Oil..................... $ 22.40 $ 17.62 $ 14.45 $ 13.38 $ 24.99
Average basis differential including hedge
contracts........................................ (1.67) (2.10) (2.08) (1.86) (4.26)
Average basis differential excluding hedge
contracts........................................ $ (1.67) $ (2.55) $ (2.08) $ (2.19) $ (1.64)
</TABLE>
The operator of a significant natural gas producing property in which we
hold a net profits interest sold natural gas under a fixed price contract for
the period January 1 through early October 1999. Retrospectively, the prices for
this contract, when compared to Henry Hub prices, were favorable during the
three months ended March 31, 1999 but became unfavorable for the following six
months. The fixed prices under this contract reduced the average wellhead price
we received during the nine months ended March 31, 2000 by approximately $0.08
per Mcf. This fixed price contract expired during October 1999.
We had a contract with an affiliate of Enron involving the hedging of a
portion of our future natural gas production involving floor and ceiling prices
as set out in the table below. We shared 50% of the price of NYMEX Henry Hub in
excess of the ceiling price. This contract has expired. The volumes presented in
this table are divided equally over the months during the period.
<TABLE>
<CAPTION>
VOLUME FLOOR CEILING
PERIOD BEGINNING PERIOD ENDING (MMBTU) PRICE PRICE
----------------- --------------- ------- ------- ----------
<S> <C> <C> <C> <C>
September 1, 1997 August 31, 1998 600,000 $ 1.90 $ 2.66
</TABLE>
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<PAGE> 53
We had a contract with an affiliate of Enron involving the hedging of a
portion of our future oil production involving floor and ceiling prices as set
out in the table below. We shared 50% of the price of NYMEX Henry Hub in excess
of the ceiling price. This contract has expired. The volumes presented in this
table are divided equally over the months during the period.
<TABLE>
<CAPTION>
VOLUME FLOOR CEILING
PERIOD BEGINNING PERIOD ENDING (MMBTU) PRICE PRICE
----------------- --------------- ------- ------- ---------
<S> <C> <C> <C> <C>
September 1, 1997 August 31, 1998 120,000 $ 18.00 $ 20.40
</TABLE>
Effective May 1, 1998 through October 31, 1999 we had a contract with Bank
of Montreal involving the hedging of a portion of our future natural gas
production involving floor and ceiling prices as set out in the table below. The
volumes presented in this table are divided equally over the months during the
period.
<TABLE>
<CAPTION>
VOLUME FLOOR CEILING
PERIOD BEGINNING PERIOD ENDING (MMBTU) PRICE PRICE
----------------- ---------------- --------- ------- ----------
<S> <C> <C> <C> <C>
January 1, 1999 October 31, 1999 3,608,333 $ 2.00 $ 2.70
</TABLE>
Effective November 1, 1999 we unwound the ceiling price limitation on our
natural gas price hedging contract with Bank of Montreal at a cost of $3.3
million. The table below sets out the volume of natural gas that remains under
contract with the Bank of Montreal at a floor price of $2.00 per MMBTU. The
volumes set out in this table are divided equally over the months during the
period:
<TABLE>
<CAPTION>
VOLUME
PERIOD BEGINNING PERIOD ENDING (MMBTU)
---------------- ----------------- ---------
<S> <C> <C>
November 1, 1999 December 31, 1999 721,667
January 1, 2000 December 31, 2000 3,520,000
January 1, 2001 December 31, 2001 2,970,000
January 1, 2002 December 31, 2002 2,550,000
January 1, 2003 December 31, 2003 2,250,000
</TABLE>
The table below sets out the volume of natural gas hedged with a floor
price of $1.90 per MMBtu with Enron. The volumes presented in this table are
divided equally over the months during the period:
<TABLE>
<CAPTION>
VOLUME
PERIOD BEGINNING PERIOD ENDING (MMBTU)
---------------- ----------------- ---------
<S> <C> <C>
May 1, 1998 December 31, 1998 885,000
January 1, 1999 December 31, 1999 1,080,000
January 1, 2000 December 31, 2000 880,000
January 1, 2001 December 31, 2001 740,000
January 1, 2002 December 31, 2002 640,000
January 1, 2003 December 31, 2003 560,000
</TABLE>
The table below sets out the volume of natural gas hedged with a swap at
$2.40 per MMBtu with Enron. The volumes presented in this table are divided
equally over the months during the period:
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<PAGE> 54
<TABLE>
<CAPTION>
VOLUME
PERIOD BEGINNING PERIOD ENDING (MMBTU)
---------------- ----------------- ---------
<S> <C> <C>
January 1, 1999 December 31, 1999 2,710,000
January 1, 2000 December 31, 2000 2,200,000
January 1, 2001 December 31, 2001 1,850,000
January 1, 2002 December 31, 2002 1,600,000
January 1, 2003 December 31, 2003 1,400,000
</TABLE>
As of March 31, 2000, the fair value of this swap was $2.5 million. As of March
31, 2000, a 10% increase in natural gas prices would have resulted in an
unfavorable change in the fair value of our $2.40 swap of $1.6 million, and a
10% decrease in natural gas prices would have resulted in a favorable change in
the fair value of our $2.40 swap of $1.6 million. The fair value of our $2.40
swap was determined based on brokers' forward price quotes and NYMEX futures
price quotes as of March 31, 2000.
The table below sets out the volume of oil hedged with a swap with Enron.
All of these contracts have expired. The volumes presented in this table are
divided equally over the months during the period:
<TABLE>
<CAPTION>
VOLUME PRICE PER
PERIOD BEGINNING PERIOD ENDING (BARRELS) BARREL
---------------- ------------------ --------- ---------
<S> <C> <C> <C>
March 1, 1999 August 31, 1999 60,000 $ 13.50
April 1, 1999 September 30, 1999 30,000 $ 14.35
April 1, 1999 September 30, 1999 30,000 $ 14.82
</TABLE>
The table below sets out the volume of oil hedged with a contract with
Enron involving floor and ceiling prices as set out in the table below. The
volumes presented in this table are divided equally over the months during the
period.
<TABLE>
<CAPTION>
CEILING
VOLUME FLOOR PRICE PRICE PER
PERIOD BEGINNING PERIOD ENDING (BARRELS) PER BARREL BARREL
---------------- ----------------- --------- ----------- -----------
<S> <C> <C> <C> <C>
December 1, 1999 March 31, 2000 40,000 $ 22.90 $ 25.77
April 1, 2000 June 30, 2000 15,000 $ 23.00 $ 28.16
July 1, 2000 December 31, 2000 30,000 $ 22.00 $ 28.63
</TABLE>
INTEREST RATE HEDGING
We entered into a forward LIBOR interest rate swap effective for the period
June 30, 1998 through June 29, 2009 at a rate of 6.30% on $125.0 million. We
entered into this interest rate swap at a time when interest rates were rising.
Our objective was to mitigate the risk of our having to pay higher than expected
interest rates on what eventually became our 12 1/2% senior notes due 2008. The
swap would have also served as an interest rate hedge on our indebtedness under
the credit agreement and short term loans used to finance the April 1998
acquisition of our net profit and royalty interests if we failed to complete the
private placement of the unsecured notes. Once the private placement of the
12 1/2% senior notes was completed, we no longer had the variable rate debt
required to offset the interest rate hedge position. On July 9, 1998, we unwound
this swap at a cost to us of approximately $3.5 million, using a
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<PAGE> 55
portion of the proceeds from the placement of our senior notes. This cost was
expensed as an extraordinary loss during the three months ended September 30,
1998.
-54-
<PAGE> 56
BUSINESS
GENERAL
We are an independent energy company engaged in the exploration,
development, exploitation and acquisition of on-shore oil and natural gas
properties in conventional producing areas of North America. To date, we have
grown almost exclusively through acquisitions of properties. As a result of our
acquisitions we own a diverse property base concentrated in six producing areas
or basins. Approximately one-half of our proved reserves are concentrated in
south and east Texas. Our assets are primarily long-lived natural gas properties
exhibiting low operating costs.
At March 31, 2000, we owned proved reserves of approximately 140 Bcf of
natural gas and 4.4 MMBbls of oil aggregating to approximately 166 Bcfe with an
SEC PV-10 value of $166 million and a reserve life index of 13.7 years.
Approximately 61% of our proved reserves were classified as proved developed and
approximately 84% of our proved reserves were natural gas. Our average daily net
production for the three months ending March 31, 2000, was 32.1 MMcfe. At March
31, 2000, we had interests in 650 wells, including 83 service wells.
Assuming completion of the Recapitalization and this offering, we expect to
be able to execute an annual capital expenditure program of approximately $20
million. As part of this program, we plan to increase our exploration
expenditures and are currently having discussions with potential exploration
joint venture partners. We expect our cash flow to increase as a result of the
$10.8 million decrease in annual interest expense that we anticipate from the
completion of the Recapitalization. Upon completion of this offering, the
indenture governing our 12 1/2 % senior notes will be amended to allow us to
increase the level of permitted borrowings under our credit facility to $60
million. We anticipate that we can fund our capital expenditure program through
a combination of working capital, operating cash flow and additional borrowings
under our credit facility.
Our properties are diversified over 6 asset areas located principally in
the southwestern United States. Our interests in east and south Texas represent
approximately 52% of our proved reserves on an SEC PV-10 basis at March 31,
2000. In addition, we own substantial properties in Kentucky, New Mexico and
Oklahoma. At March 31, 2000 we had interests in leases covering approximately
169,400 gross, or 69,200 net, acres.
We were incorporated under the laws of Delaware in 1989. The parent company
is principally a holding company, holding the stock of its subsidiaries that own
our assets and conduct our operations. Our principal executive offices and
mailing address are 13760 Noel Road, Suite 1030, Dallas, Texas 75240-7336 and
our telephone number at that address is 972-233-9906.
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<PAGE> 57
================================================================================
BUSINESS STRATEGY
Our goal is to enhance shareholder value by expanding our oil and natural
gas reserves, production levels and cash flow, focusing on return on capital.
Our strategy to achieve these goals consists of these elements:
o Recapitalizing the company through a significant reduction of debt, a
corresponding increase of equity and the elimination of all preferred
securities;
o Pursuing managed asset growth through:
-- actively developing and exploiting our existing higher
potential oil and natural gas properties, particularly in
south and east Texas;
-- selective acquisitions of high potential oil and natural gas
assets that complement our existing properties, coupled with
routine dispositions of non-core and lower potential
properties;
-- an increased emphasis on exploration activities; and
-- targeted merger(s) where the consolidation with other
companies will give access to quality reserves within our
core areas;
o Maintaining a capital and financial structure with prudent debt to
equity ratios that will allow us to use cash generated from operations
to fund growth in our production and reserves; and
o Enhancing our board of directors and management team through the
addition of new industry senior executives to assist the company in
enhancing and expanding our operational capacity and exploration
activities.
THE RECAPITALIZATION. Simultaneously with the closing of this
offering, we will complete a recapitalization (the "Recapitalization") which
includes: (a) a reverse stock split of one common share for every 156 shares of
our common stock; (b) the exchange or exercise of all preferred stock, all
warrants exercisable for shares of common stock and all remaining unexercised
common stock repricing rights for 732,500 shares of post reverse-split common
stock; and (c) the repurchase of $75 million face value of our senior notes for
approximately $49 million. At our stockholders meeting on , 2000, our
stockholders approved the first two elements of the Recapitalization. The
repurchase of our 12 1/2% senior notes does not require stockholder approval.
When the Recapitalization and this offering are complete, our company will:
o obtain a discount on the repurchase of at least $75 million of
our senior notes, thereby creating more than $25 million of
additional equity value for our stockholders;
o reduce our debt by $75 million, thereby increasing annual cash
flow available to fund growth by $10.8 million and reducing our
interest cost per Mcfe by nearly 60%;
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<PAGE> 58
o reduce our long-term debt to $50 million, which approximates 30%
of our March 31, 2000 SEC PV-10 of $166 million;
o eliminate all outstanding preferred stock;
o eliminate the dilutive effects of current market price conversion
and repricing rights held by some of our stockholders;
o improve our liquidity by using a portion of the net proceeds of
this offering to pay down our senior working capital facility and
by modifying the indenture governing our senior notes to permit
us to increase our senior working capital facility from $35
million to $60 million; and
o be in a position to satisfy the listing requirements of the
Nasdaq National Market with a goal of improving the visibility
and liquidity of our common stock.
Upon completion of the Recapitalization and this offering, there will
be outstanding 11,250,000 shares of our common stock, no shares of preferred
stock and no repricing rights. The closing of this offering is a condition to
the completion of the Recapitalization, and the completion of the
Recapitalization is a condition to the completion of this offering.
DEVELOPMENT AND EXPLOITATION OF EXISTING PROPERTIES. We have identified
over 407 potential development locations and exploitation opportunities on our
properties. We have prioritized these opportunities to concentrate on those
higher impact projects that have the potential to replace and grow our reserves
while maximizing the long-term return on our capital. Our opportunities include:
o additional exploration of well-defined locations on existing
properties such as in the J.C. Martin field in south Texas;
o infill drilling on our producing properties such as in the Gilmer
field in east Texas;
o recompletion of existing wells in behind-pipe intervals such as
in the Lopeno/Volpe field in south Texas; and
o developing proved undeveloped reserves by drilling low risk, long
lived natural gas wells in the shallow New Albany Shale formation
in Kentucky.
PROPERTY ACQUISITIONS AND DIVESTITURES. We will diligently pursue the
acquisition of oil and natural gas properties that we believe will provide us
with a combination of increased production, reserve growth and exploration
potential. Our focus will be on only those properties that can be acquired at
prices that will enhance our overall return on capital. Although we are
currently weighted towards gas reserves, we anticipate that we may return to a
more even oil to natural gas ratio. While the acquisition market is currently
very competitive, we believe that there are opportunities to acquire high
quality oil and natural gas properties with these characteristics in the
mid-continent and southwest regions of the United States, where we have
established core areas. In all property acquisitions the company will be seeking
to become the operator. We will also continue to routinely evaluate our
portfolio of properties and periodically divest non-core or low potential
properties.
EXPLORATION. The acquisition market is currently very competitive,
especially for transactions that exceed $50 million. These properties are
generally sold on a tender bid basis which has the effect of bidding
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<PAGE> 59
up the price and maximizing the return to the seller. As a result, we have
determined that it is no longer prudent to rely solely on acquisitions for asset
growth. Our growth strategy has evolved from being primarily acquisition driven
to a more balanced approach with an increased emphasis on exploration
opportunities. We believe that this balanced approach will provide for a lower
average reserve replacement cost, thereby improving our return on capital. In
order to diversify our exposure, we generally acquire larger interests in
company-operated, low risk projects and smaller interests in higher risk/high
impact exploration properties. Our plan is for much of our exploration effort to
be conducted with partners who bring a unique experience, expertise or ownership
position in the prospect area of interest and have a successful track record.
MERGER OPPORTUNITIES. With our substantially de-leveraged balance sheet
and stronger cash flow following the Recapitalization and our long-life
reserves, we expect to be able to attract other small capitalization oil and
natural gas companies as merger or consolidation partners. We will be in an
excellent position to make accretive acquisitions of other companies and,
through this process, to use our strong balance sheet and cash flow to effect
the recapitalization of suitable merger candidates that otherwise may not have
access to capital.
CAPITAL AND FINANCIAL STRUCTURE. Our objective is to use a portion of
the net proceeds of this offering and internally generated cash flow to fund our
exploration, development and exploitation programs. We believe that we can
finance our acquisition opportunities at attractive prices with a combination of
equity and debt.
MANAGEMENT TEAM. With completion of the Recapitalization, we will have
the financial capability to pursue our strategy of increased focus on operating
those properties that we own and on exploration as a means to grow our assets.
We intend to continue restructuring our management team to add to our
engineering, geology and geophysical personnel. We also intend to add seasoned
senior oil and gas industry executives with experience in building stockholder
value and in the management of exploration and development projects.
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<PAGE> 60
PRINCIPAL OIL AND NATURAL GAS PROPERTIES
The following table summarizes information with respect to each of our
principal areas of operation at June 30, 1999.
<TABLE>
<CAPTION>
TOTAL GROSS TOTAL PERCENT OF PERCENT OF
OIL & NATURAL PROVED TOTAL TOTAL
NATURAL OIL GAS RESERVES PROVED SEC PV-10 SEC
GAS WELLS (MBbLs) (MMcf) (Bcfe)(1) RESERVES ($000S) PV-10(1)
---------- -------- -------- ----------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
East Texas
Gilmer Field ........... 40 373 48,572 50.8 31% $ 47,866 37%
--------- --------- --------- --------- --------- --------- ---------
South Texas
J.C. Martin Field ...... 51 -- 11,720 11.7 7 12,806 10
Lopeno and Volpe
Fields .............. 14 2 16,800 16.8 10 12,517 10
Other South Texas ...... 126 238 2,679 4.1 3 3,321 2
--------- --------- --------- --------- --------- --------- ---------
Total South Texas ... 191 240 31,199 32.6 20 28,644 22
Kentucky (Appalachian Basin)
Nasgas Field ........... 30 -- 35,394 35.4 21 10,709 8
--------- --------- --------- --------- --------- --------- ---------
Permian Basin
Caprock (Queen)
Field ............... 57 2,500 -- 15.0 9 7,806 6
Other Permian Basin .... 15 559 305 3.7 2 4,100 3
--------- --------- --------- --------- --------- --------- ---------
Total Permian Basin ... 72 3,059 305 18.7 11 11,906 9
Mid-Continent (25 fields) ....... 169 403 14,743 17.1 10 18,363 14
Other ........................... 44 548 7,348 10.7 7 13,238 10
--------- --------- --------- --------- --------- --------- ---------
Total ........................... 546 4,623 137,561 165.3 100% $ 130,726 100%
</TABLE>
----------
(1) The proved reserves and SEC PV-10 with respect to the Morgan Properties
were estimated by Ryder Scott Company. The proved reserves and SEC PV-10
other than with respect to the Morgan Properties were estimated by H.J.
Gruy and Associates, Inc.
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<PAGE> 61
The following is an overview of our major fields, by area.
EAST TEXAS
GILMER FIELD. The Gilmer field consists of 40 natural gas wells that cover
approximately 13,000 gross acres in Upshur County, in East Texas. The wells
produce from the Cotton Valley Lime formation at a depth of approximately 11,500
feet to 12,000 feet.
Goldston Oil Corporation, or Goldston, has an 80% working interest in, and
is the operator of, our wells, which are in the heart of the Gilmer field. We
own a 47.5% net profits interest in Goldston's working interest.
The Gilmer field is located on the northwestern flank of the Sabine Uplift.
The initial well in the field was drilled in 1986 and the field was delineated
over the following ten years, eventually expanding to 21 natural gas units. The
reservoirs are characterized by low permeability, depletion drive mechanisms and
require stimulation. Well spacing is currently four wells per 640 acre block for
most of the units in the field. A field dedicated treating plant and centralized
compression system provides the operator control in marketing the natural gas.
At March 31, 2000, the Gilmer field contained 48.8 Bcfe of proved reserves,
which represented approximately 29.4% of our total proved reserves and 28.5% of
our SEC PV-10. Our average daily net production from the Gilmer field in March
2000 was approximately 8.3 MMcf of natural gas and 100 Bbls, aggregating 8.9
MMcfe.
One new well was drilled in June 2000, a second well is being drilled and
one additional proved undeveloped location is scheduled to be drilled this year,
which management believes will allow the operator to assess the need for further
down spacing. Depending upon economic conditions, the property's value could be
increased by accelerating production through additional down spacing.
SOUTH TEXAS
J.C. Martin field. The J.C. Martin field consists of 81 producing natural
gas wells that cover approximately 8,300 gross acres in Zapata County, Texas on
the Mexican border. The field primarily produces from the Lobo 1, 3 and 6 series
of sands in the Wilcox formation at depths of approximately 8,000 feet to 10,000
feet.
Our interests consist of (a) a 13.33% perpetual, non-participating mineral
royalty interest covering the Mecom family ranch and (b) an 80% net profits
interest in Devon Energy Corporation's, or Devon's, 20% working interest in the
ranch. Coastal Oil Corporation, or Coastal, operates all of the wells. The
reservoirs are low permeability, producing through pressure depletion and
requiring fracture stimulations. A portion of our royalty interest in this
property is the subject of litigation involving the predecessor owner. For
further description of this litigation, see "Business - Legal Proceedings."
At March 31, 2000, the J.C. Martin field contained 15.5 Bcfe of proved
reserves, which represented approximately 9.3% of our total proved reserves and
approximately 13.0% of our SEC PV-10. Our average daily net production from the
J.C. Martin field in March 2000 was 10.4 MMcfe.
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<PAGE> 62
Some wells drilled since 1998 in this field tested natural gas from a
deeper Cretaceous zone, the Navarro. This zone previously had not produced on
the lease but had produced significant volumes to the north. We believe that
there may be additional potential on the Mecom Ranch for this zone as only six
wells have actually penetrated the Cretaceous zone. We also believe that
potential exists for reserves in the Middle Wilcox zones at approximately 5,000
feet to 6,000 feet.
LOPENO AND VOLPE FIELDS. The Lopeno and Volpe fields are located in Zapata
County, Texas. These fields consist of 13 wells with 16 separate completions.
All of the wells produce from multiple reservoirs in the Upper Wilcox formation.
Choctaw II Oil & Gas Ltd., or Choctaw, is the operator of 10 of the 13 wells
with CNG Producing Company operating the remainder.
The Lopeno field covers over 6,000 acres and is an extension of a field
originally discovered in 1952. Over 20 sands have produced in the field at
depths ranging from 6,500 feet to 12,000 feet. Typical of the numerous Upper
Wilcox fields along the Texas Gulf Coast, the Lopeno field is highly faulted and
overpressured. The Volpe field is also a Wilcox field located 8 miles north of
Lopeno, Texas. A well was drilled directionally along the trapping fault and is
producing from the Middle Wilcox formation. Multiple Upper Wilcox zones are
classified behind the pipe. Nine proved undeveloped locations have been
identified in these fields.
Until June 30, 2000, we owned a 66.66% net profits interest in Choctaw's
working interests. Choctaw's working interests vary from 15.7% to 75%. Effective
June 30, 2000, we sold our net profits interests in the Lopeno and Volpe fields,
and we purchased primarily working interests in these properties as well as some
additional interests in the Lopeno and Volpe area. As a result of this sale, our
economic interest in the Lopeno-Volpe properties has been reduced by
approximately one-half and we have converted substantially all of the remaining
economic interest from net profits interests to working interests.
At March 31, 2000, the Lopeno and Volpe fields contained an estimated 14.7
Bcfe of proved reserves, which represented approximately 8.9% of our total
proved reserves and approximately 8.1% of our SEC PV-10. Our average daily net
production from the fields in March 2000 was 1.3 MMcf/d of natural gas.
We believe that the production in these fields can be enhanced through
workovers and accelerated drilling for the shallow, behind-the-pipe reserves.
KENTUCKY
Nasgas field. We have a 60% working interest in approximately 42,000 gross
acres in Meade, Hardin and Breckinridge Counties, Kentucky. There are currently
32 gross producing natural gas wells located on our leases in Meade County. We
drilled 12 wells in this field in the fiscal year ended June 30, 1999. These
wells produce from the New Albany Shale formation at depths of approximately 850
feet. The shale zone has two porosity members and averages 80 feet in thickness.
In addition to the natural gas wells, we also own an interest in two salt-water
disposal wells and a related natural gas gathering system.
At March 31, 2000, these properties contained 39.0 Bcfe of net proved
reserves, which represents approximately 23.5% of our total proved reserves and
approximately 12.1% of our SEC PV-10. We acquired these properties because we
believe they have significant low risk development potential from relatively
shallow formations. Natural gas reserves in the New Albany Shale formation are
long-lived reserves, generally lasting over 40 years. Our average daily net
production from the Nasgas field in March 2000 was 500 Mcf.
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<PAGE> 63
NEW MEXICO
Caprock (Queen) field. The Caprock (Queen) field was our first acquisition
and consists of 28 oil wells, 57 water injection wells, 57 shut-in wells and 76
temporarily abandoned wells on approximately 14,200 gross acres located in Lea
and Chaves Counties, New Mexico. The Caprock field produces from the "Artesia
Red Sand" or Queen sandstone of Permian age at a depth of approximately 3,000
feet. Discovery and delineation wells were drilled from 1940 through 1949.
Development wells were drilled between 1954 and 1956 within the productive
limits of the field, which is approximately twenty miles long and three miles
wide. Primary production was established on 40-acre spacing. Initial waterflood
operations began in 1959 and 1960.
We have a 100% working interest and an 82.6% revenue interest in two
operating units, the Drickey Queen Sand Unit and the Westcap Unit, a 98.3%
working interest and a 79.3% revenue interest in a third operating unit, the
Rock Queen Unit, and a 100% working interest and a 90% revenue interest in the
Trigg and Federal V leases. Our working interest partner, Texican, Inc., or
Texican, owns 25% of our interest in 640 acres of the Drickey Queen Sand Unit
and has an option to participate for 25% of our interest in future development
activities in all of our units except for the Rock Queen Unit. These five
properties comprise the central 14,200 acres of the approximately 26,000
productive acres that contain nine contiguous development units. We have an
option on an additional 5,920 acres within the 26,000 productive acres.
At March 31, 2000, the Caprock field contained an estimated 2,398 MBbls, or
14.4 Bcfe, of net proved reserves, which represented approximately 8.7% of our
total proved reserves and 10.5% of our SEC PV-10, assuming Texican does not
elect to participate in future development activities.
We temporarily shut the field in due to significantly low oil prices in
late 1998 and early 1999. The field was returned to production in October 1999.
Phase I of the program toward redeveloping the waterflood pattern has been
implemented. This program consisted of drilling four single lateral water
injection wells and one dual-lateral producing well. These five wells along with
the production facilities and water injection plant constitute Phase I of the
redevelopment program. Phase I incorporates 640 acres out of the approximate
20,000 acres we control in the Caprock field. We are the operator of this
project.
MID-CONTINENT
We own interests in oil and gas assets located in the Texas panhandle,
Oklahoma and Kansas, collectively referred to as the mid-continent assets. The
mid-continent assets include 189 wells in 25 fields. These reserves are
concentrated in high quality fields with the value evenly distributed over
diverse, well-known reservoirs with long production histories supported by
stable production declines. These reserves are long-lived assets with a
productive life of 40 years and a reserves-to-production ratio of six years. An
experienced production company operates each of these properties with focused
operations in their respective areas. We own net profits overriding royalty
interests in each of these properties.
The net daily production from these properties in March 2000 was 127 BOPD
and 6,022 Mcf, or 6.8 MMcfe. At March 31, 2000, the net proven reserves are
estimated to be 16.6 Bcfe, which represented approximately 10% of our total
proved reserves and 13.7% of our SEC PV-10.
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<PAGE> 64
EXPLORATION, DEVELOPMENT AND EXPLOITATION ACTIVITIES
Our development drilling program is generated largely through our internal
technical evaluation efforts and as a result of our obtaining undeveloped
acreage in connection with producing property acquisitions. In addition, there
are numerous opportunities for infill drilling on our leases currently producing
oil and natural gas. We intend to continue to pursue development drilling
opportunities which offer potentially significant returns to us. Our
exploitation activities consist of the evaluation of additional reserves through
workovers, behind-the-pipe recompletions and secondary recovery operations.
The objective of our overall development and exploitation strategy is to
achieve a balance between low risk workover and recompletion activities and
moderate risk infill and extensional development wells. This
exploitation/development strategy is intended to increase reserves while
minimizing the risk of uneconomic projects. We have budgeted through the fiscal
year ending June 30, 2001 approximately $2.4 million for exploratory drilling
projects.
During the nine months ended March 31, 2000, we participated in drilling 12
gross, or 3.2 net, wells, of which 11 gross, or 2.4 net, were productive.
However, we cannot assure you that this past rate of drilling success will
continue in the future. We are currently pursuing development drilling projects
on 7 different fields and anticipate continued growth in drilling activities.
At March 31, 2000, we had identified approximately 145 development
locations and exploitation projects on our acreage. We expect to spend
approximately $9.3 million on development locations and exploitation projects
during the fiscal year ending June 30, 2001, depending on the availability of
drilling capital.
The following is a brief discussion of our primary areas of development and
exploitation activity:
EAST TEXAS
Segno field. During April 1999, with an effective date of November 1, 1998,
we converted our 80% net profits interest in Prime Energy's working interest to
an 80% working interest in the proved developed wells and a 50% working interest
in all other proved and unproved locations. We believe this was necessary to
encourage Prime Energy to take steps to develop the field more fully.
We intend to continue participating with the operator, Prime Energy, in the
development of the Segno field. Recent activity includes recompleting several
wells and drilling a new well targeting reserves not yet produced from the Yegua
and Wilcox formations. The operator continues to return wells that are off
production back to service and to improve the field's facilities infrastructure.
Several significant new prospects have been identified utilizing 2-D seismic
data. We are participating in developing options to exploit these prospects. We
have recently agreed to farm out the rights to drill a Middle Wilcox test in
which we will retain a carried interest and a back in after payout.
SOUTH TEXAS
J.C. Martin field. The J.C. Martin field produces from the Lobo Trend.
Intense faulting has created many separate reservoirs that are over-pressured
and highly faulted with numerous stacked sands. A 3D seismic study over the
field has identified multiple new locations and initiated a new round of
drilling. Since we acquired our interest in 1998, 21 wells have been drilled,
five of which have been drilled in 2000. In addition to the Lobo reservoirs
evaluated in the reserve report, we believe upside potential exists in the
Navarro and Middle Wilcox zones. We recently recompleted one well in the Middle
Wilcox. The deeper
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<PAGE> 65
Cretaceous formation, the Navarro zone, also produces in this field. We expect
11 additional wells to be drilled before June 30, 2001.
Lopeno/Volpe fields. We believe significant potential exists in the
Lopeno/Volpe fields to increase production. Over twenty sands have produced in
the Lopeno field and most wells have multiple behind-the-pipe zones. Accelerated
drilling for some of the shallower zones may be justified, improving their
present value. Four proved undeveloped locations have been identified in the
Volpe field that would develop Upper Wilcox sands. We are currently working with
the operator to pursue the necessary workovers and additional drilling. We
anticipate our share of capital expenditures in the Lopeno/Volpe fields will be
approximately $1.8 million through June 2001.
KENTUCKY
Nasgas field. We believe that the Nasgas field presents opportunities for
low cost developmental drilling at depths of less than 1,000 feet. We expect
that the field will be developed in five phases. The first phase, consisting of
20 wells, was completed in 1996. The second phase, consisting of 12 wells, was
completed in 1998. The remaining development drilling is scheduled to occur
between 2000 and 2001 in 25 well tranches. We expect to develop a total of 91
wells at an average cost to us of $56,250 per well.
NEW MEXICO
Caprock (Queen) field. Exploitation efforts at the Caprock (Queen) field
consist primarily of a waterflood redevelopment project. We, with the assistance
of independent engineering consultants, have evaluated several alternate
development options. We plan to redevelop the Drickey Queen/Westcap Units using
a line drive waterflood pattern. A total of five dual lateral horizontal
producers will be drilled and 14 single lateral horizontal injection wells are
slated to be drilled. Phase I of the program consists of four horizontal water
injection wells and one dual lateral horizontal producer with an associated
water injection plant and production facility and was recently implemented.
Phase I fully developed one 640 acre section of the Drickey Queen Unit. We have
entered into an agreement with Texican regarding Phase I. The agreement requires
Texican to fund 50% of the first $2.0 million of the cost of Phase I. In
consideration of this, Texican will earn a 25% working interest in Phase I in
the Drickey Queen Unit. The Phase I program was implemented in the first quarter
of 2000 and our share of the program cost $1.6 million. We have just begun
injection and production operations in Phase I and do not have definitive
results.
MARKETING
Our oil and natural gas production is sold to various purchasers typically
in the areas where the oil or natural gas is produced. We do not refine or
process any of the oil and natural gas we produce. We are currently able to
sell, under contract or in the spot market, all of the oil and the natural gas
we are capable of producing at current market prices. Substantially all of our
oil and natural gas is sold under short term contracts or contracts providing
for periodic adjustments or in the spot market; therefore, our revenue streams
are highly sensitive to changes in current market prices. Our market for natural
gas is pipeline companies as opposed to end users. For a description of the
risks of changes in the prices for oil and natural gas, see "Risk Factors -- Our
profitability is highly dependent on the prices for oil and natural gas, which
can be extremely volatile."
In an effort to reduce the effects of the volatility of the price of oil
and natural gas on our operations and cash flow, we adopted a policy of hedging
oil and natural gas prices whenever market prices are in excess
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<PAGE> 66
of the prices anticipated in our operating budget and financial plan through the
use of commodity futures, options and swap agreements. We do not engage in
speculative trading. For further description of our hedging strategy, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Changes in prices and hedging activities."
For the year ended June 30, 1999, Goldston Oil Corporation accounted for
approximately 30% of our oil and natural gas sales, Coastal Oil and Gas, Inc.
accounted for approximately 12% of our oil and natural gas sales, Petrocorp,
Inc. accounted for approximately 11% of our oil and natural gas sales, and Devon
Energy Corporation accounted for approximately 9% of our oil and natural gas
sales. We do not believe that the loss of any of these buyers would have a
material effect on our business or results of operations as we believe we could
readily locate other buyers. However, short term disruptions could occur while
we seek alternative buyers or while lines were being connected to other
pipelines.
The market for our oil and natural gas depends on factors beyond our
control, including the:
o price of imports of oil and natural gas;
o the extent of domestic production and imports of oil and natural gas;
o the proximity and capacity of natural gas pipelines and other
transportation facilities;
o weather;
o demand for oil and natural gas;
o the marketing of competitive fuels; and
o the effects of state and federal regulations.
The oil and natural gas industry also competes with other industries in
supplying the energy and fuel requirements of industrial, commercial and
individual consumers.
OIL AND NATURAL GAS RESERVES
The following tables summarize information regarding our estimated proved
oil and natural gas reserves as of June 30, 1997, 1998 and 1999. All of these
reserves are located in the United States. The estimates relating to our proved
oil and natural gas reserves and future net revenues of oil and natural gas
reserves at June 30, 1998 and 1999 with respect to the Morgan Properties
included in this prospectus are based upon reports prepared by Ryder Scott
Company. The estimates at June 30, 1997 and, other than with respect to the
Morgan Properties, at June 30, 1998 and 1999 included in this prospectus are
based upon reports prepared by H.J. Gruy and Associates, Inc. In accordance with
guidelines of the SEC, the estimates of future net cash flows from proved
reserves and their SEC PV-10 are made using oil and natural gas sales prices in
effect as of the dates of the estimates and are held constant throughout the
life of the properties. Our estimates of proved reserves, future net cash flows
and SEC PV-10 were estimated using the following weighted average prices, before
deduction of production taxes:
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<PAGE> 67
JUNE 30,
-----------------------------------------
1997 1998 1999
---------- ----------- -----------
Natural Gas (per Mcf) $ 2.25 $ 2.40 $ 2.32
Oil (per Bbl) $ 17.43 $ 12.80 $ 19.28
Reserve estimates are imprecise and may be expected to change, as
additional information becomes available. Furthermore, estimates of oil and
natural gas reserves, of necessity, are projections based on engineering data,
and there are uncertainties inherent in the interpretation of this data as well
as the projection of future rates of production and the timing of development
expenditures. Reservoir engineering is a subjective process of estimating
underground accumulations of oil and natural gas that cannot be measured in an
exact way, and the accuracy of any reserve estimate is a function of the quality
of available data and of engineering and geological interpretation and
judgement. Reserve reports of other engineers might differ from the reports
contained herein. Results of drilling, testing, and production subsequent to the
date of the estimate may justify revision of this estimate. Future prices
received for the sale of oil and natural gas may be different from those used in
preparing these reports. The amounts and timing of future operating and
development costs may also differ from those used. Accordingly, we cannot assure
you that the reserves set forth herein will ultimately be produced nor can there
be assurance that the proved undeveloped reserves will be developed within the
periods anticipated. The discounted future net cash inflows should not be
construed as representative of the fair market value of the proved oil and
natural gas properties, since discounted future net cash inflows are based upon
projected cash inflows which do not provide for changes in oil and natural gas
prices nor for escalation of expenses and capital costs. The meaningfulness of
these estimates is highly dependent upon the accuracy of the assumptions upon
which they were based.
All reserves are evaluated at constant temperature and pressure, which can
affect the measurement of natural gas reserves. Operating costs, development
costs and some production-related and ad valorem taxes were deducted in arriving
at the estimated future net cash flows. No provision was made for income taxes,
and the estimates were based on operating methods and existing conditions at the
prices and operating costs prevailing at the dates indicated above. The
estimates of the SEC PV-10 from future net cash flows differ from the
Standardized Measure set forth in the notes to our consolidated financial
statements, which is calculated after provision for future income taxes. We
cannot assure you that these estimates are accurate predictions of future net
cash flows from oil and natural gas reserves or their present value.
For additional information concerning our oil and natural gas reserves and
estimates of future net revenues attributable thereto, see note 10 of the notes
to consolidated financial statements included in this prospectus.
COMPANY RESERVES
The following tables set forth our proved reserves of oil and natural gas
and the SEC PV-10 thereof on an actual basis for each year in the three-year
period ended June 30, 1999.
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<PAGE> 68
PROVED OIL AND NATURAL GAS RESERVES(1)
<TABLE>
<CAPTION>
JUNE 30,
-------------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Natural gas reserves (MMcf):
Proved Developed Reserves ....... 12,412 120,998 94,614
Proved Undeveloped Reserves ..... 8,561 55,097 42,947
------- ------- -------
Total Proved Reserves of
natural gas ................... 20,973 176,095 137,561
Oil reserves (MBbl):
Proved Developed Reserves ....... 2,188 5,298 2,138
Proved Undeveloped Reserves ..... 4,521 2,651 2,486
------- ------- -------
Total Proved Reserves of
oil ........................... 6,709 7,949 4,624
Total Proved Reserves (MMcfe): ........... 61,224 223,788 165,299
</TABLE>
SEC PV-10 OF PROVED RESERVES(1)
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
SEC PV-10 ($,000) (2):
Proved Developed Reserves ....... $ 21,660 $131,200 $ 99,650
Proved Undeveloped Reserves ..... 19,558 33,920 31,076
-------- -------- --------
Total SEC PV-10 ...... $ 41,218 $165,120 $130,726
</TABLE>
----------
(1) The data shown at June 30, 1997, June 30, 1998 and June 30, 1999, excluding
data with respect to the Morgan Properties at June 30, 1998 and June 30,
1999, is based upon reports prepared by H.J. Gruy and Associates, Inc. The
data included with respect to the Morgan Properties at June 30, 1998 and
June 30, 1999 is based upon reserve reports prepared by Ryder Scott
Company.
(2) SEC PV-10 differs from the Standardized Measure set forth in the notes to
our consolidated financial statements, which is calculated after provision
for future income taxes.
Except for the effect of changes in oil and natural gas prices no major
discovery or other favorable or adverse event is believed to have caused a
significant change in these estimates of our reserves since June 30, 1999.
Except for Form EIA 23, "Annual Survey of Domestic Oil and Gas Reserves,"
filed with the United States Department of Energy, no other estimates of total
proven net oil and natural gas reserves have been filed by us with, or included
in any report to, any United States authority or agency pertaining to our
individual reserves since the beginning of our last fiscal year. Reserves
reported on Form EIA 23 are comparable to the reserves reported by us herein.
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<PAGE> 69
OPERATIONS DATA
Productive wells
The following table sets forth the number of total gross and net productive
wells in which we owned an interest as of June 30, 1999.
<TABLE>
<CAPTION>
GROSS NET
NATURAL NATURAL
--------------------------- ----------------------------
OIL GAS TOTAL OIL GAS TOTAL
------- -------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Texas 160 113 273 41.0 29.4 70.3
New Mexico 57 - 57 56.0 - 56.0
Louisiana 1 - 1 1.0 - 1.0
Oklahoma - 140 140 0.0 18.0 18.0
Kentucky - 30 30 - 20.2 20.2
Other (1) 1 44 45 0.3 8.7 9.0
Total 219 327 546 98.3 76.3 174.5
</TABLE>
----------
(1) Represents wells located in Kansas, Alabama and Wyoming.
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<PAGE> 70
Production economics
The following table sets forth operating information for the periods presented.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------
1997 1998 1999
-------- --------- ---------
<S> <C> <C> <C>
OPERATING DATA
PRODUCTION VOLUMES:
Natural gas (MMcf) ........ 546 3,368 12,962
Oil (MBbl) ................. 151 325 500
Total (MMcfe) .......... 1,450 5,318 15,960
AVERAGE SALES PRICE:
Natural gas (per Mcf) ...... $ 2.31 $ 2.27 $ 2.13
Oil (per Bbl) .............. 20.73 15.52 12.37
SELECTED EXPENSES (PER Mcfe):
Production taxes ........... $ 0.21 $ 0.12 $ 0.08
Lease operating expense .... 1.52 1.07 0.49
General and administrative.. 1.00 0.43 0.22
Depreciation, depletion and
amortization (1) .......... 0.68 0.91 0.74
</TABLE>
(1) Represents depreciation, depletion and amortization of oil and natural gas
properties only.
DRILLING ACTIVITY
The following table sets forth our gross and net working interests in
exploratory and development wells, but excluding injection or service wells,
drilled during the indicated periods.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------------------------------------
1997 1998 1999
----------------- ----------------- -----------------
GROSS NET GROSS NET GROSS NET
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
EXPLORATORY:
Oil 1 0.5 1 0.0 0 0.0
Natural gas 0 0.0 1 0.3 0 0.0
Dry 0 0.0 1 0.7 1 1.0
------ ------ ------ ------ ------ ------
Total 1 0.5 3 1.0 1 1.0
DEVELOPMENT:
Oil 0 0.0 5 2.1 1 0.2
Natural gas 0 0.0 10 2.6 26 9.9
Dry 0 0.0 1 0.4 1 0.7
------ ------ ------ ------ ------ ------
Total 0 0.0 16 5.1 28 10.8
TOTAL:
Oil 1 0.5 6 2.1 1 0.2
Natural gas 0 0.0 11 2.9 26 9.9
Dry 0 0.0 2 1.1 2 1.7
------ ------ ------ ------ ------ ------
Total 1 0.5 19 6.1 29 11.8
</TABLE>
Since June 30, 1999, we have successfully drilled 18 gross, 5.0 net, wells,
of which 3 gross, 1.8 net, were dry holes. We are in the process of drilling 2
gross, 0.76 net, natural gas development wells.
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<PAGE> 71
DEVELOPED AND UNDEVELOPED ACREAGE
The following table sets forth the approximate gross and net acres in which
we owned an interest as of June 30, 1999.
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED
-------------------- ------------------
GROSS NET GROSS NET
------- ------- ------- -------
<S> <C> <C> <C> <C>
Texas ................. 42,631 13,561 7,207 1,441
New Mexico ............ 14,280 14,136 0 0
Louisiana ............. 302 302 6,366 4,802
Oklahoma .............. 37,440 5,335 0 0
Kentucky .............. 604 395 60,817 42,572
Other (1) ............. 20,510 5,190 0 0
------- ------- ------- -------
Total......... 115,767 38,919 74,390 48,815
</TABLE>
----------
(1) Represents acreage located in Colorado, Kansas, Alabama and Wyoming.
MARKETS AND COMPETITION
The oil and natural gas industry is highly competitive. Our competitors
include major oil companies, other independent oil and natural gas concerns and
individual producers and operators, many of which have financial resources,
staffs and facilities substantially greater than ours. In addition, we encounter
substantial competition in acquiring oil and natural gas properties, marketing
oil and natural gas and hiring trained personnel. When possible, we try to avoid
open competitive bidding for acquisition opportunities. The principal means of
competition with respect to the sale of oil and natural gas production are
product availability and price. While it is not possible for us to state
accurately our position in the oil and natural gas industry, we believe that we
represent a minor competitive factor.
The market for our oil and natural gas production depends on factors beyond
our control, including domestic and foreign political conditions, the overall
level of supply of and demand for oil and natural gas, the price of imports of
oil and natural gas, gas pipelines and other transportation facilities and
overall economic conditions. The oil and gas industry also competes with other
industries in supplying the energy and fuel requirements of industrial,
commercial and individual consumers.
TITLE TO OIL AND NATURAL GAS PROPERTIES
We have acquired interests in producing and non-producing acreage in the
form of working interests, royalty interests, overriding royalty interests and
net profits interests. Substantially all of our property interests, and the
assignors' interests in the working or other interests in the underlying
properties, are held pursuant to leases from third parties. The leases grant the
lessee the right to explore for and extract oil and natural gas from specified
areas. Consideration for these leases usually consists of a lump sum payment,
such as a bonus, and a fixed annual charge, such as a delay rental, prior to
production unless the lease is paid up and, once production has been
established, a royalty based generally upon either the proceeds from the sale
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<PAGE> 72
of oil and natural gas or the market value of oil and natural gas produced. Once
wells are drilled, a lease generally continues so long as production of oil and
natural gas continues. In some cases, leases may be acquired in exchange for a
commitment to drill or finance the drilling of a specified number of wells to
predetermined depths. Some of our non-producing acreage is held under leases
from mineral owners or governmental entities which expire at varying dates. We
are obligated to pay annual delay rentals to the lessors of some properties in
order to prevent the leases from terminating. Title to leasehold properties is
subject to royalty, overriding royalty, carried, net profits and other similar
interests and contractual arrangements customary in the oil and natural gas
industry, and to liens incident to operating agreements, liens relating to
amounts owed to the operator, liens for current taxes not yet due and other
encumbrances.
As is customary in the industry, we generally acquire oil and natural gas
acreage without any warranty of title except as to claims made by, through or
under the transferor. Although we have title examined prior to acquisition of
developed acreage in those cases in which the economic significance of the
acreage justifies the cost, there can be no assurance that losses will not
result from title defects or from defects in the assignment of leasehold rights.
In many instances, title opinions may not be obtained if in our judgment it
would be uneconomical or impractical to do so.
The underlying properties are typically subject, in one degree or another,
to one or more of the following:
o royalties and other burdens and obligations, expressed and implied,
under oil and gas leases;
o overriding royalties and other burdens created by the assignor or its
predecessors in title;
o a variety of contractual obligations, including, in some cases,
development obligations, arising under operating agreements, farmout
agreements, production sales contracts and other agreements that may
affect the properties or their titles;
o liens that arise in the normal course of operations, such as those for
unpaid taxes, statutory liens securing unpaid suppliers and
contractors and contractual liens under operating agreements;
o pooling, unitization and communitization agreements, declarations and
orders; and
o easements, restrictions, rights-of-way and other matters that commonly
affect property.
To the extent that these burdens and obligations affect assignor's rights
to production and the value of production from the underlying properties, they
have been taken into account in calculating our interests and in estimating the
size and value of the reserves attributable to our net profits interests and
royalty interests.
A substantial portion of our oil and natural gas property interests are in
the form of non-operated, net profits interests and royalty interests. The net
profits interests were conveyed to us by various assignors from the assignor's
net revenue interests in the oil and natural gas properties burdened by the net
profits interests and royalty interests (the "underlying properties"). The
assignors' net revenue interests are generally leasehold working interests less
lease burdens.
Net profits interests. As the owner of net profits interests, we do not
have the direct right to drill or operate wells or to cause third parties to
propose or drill wells on the underlying properties. If an assignor or any other
working interest owner proposes to drill wells on one of the underlying
properties, then that assignor must give us notice of the proposal. Under an
agreement covering the underlying property, we have
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<PAGE> 73
the option to pay a specified percentage of the assignor's working interest
share of the expenses of the well that is proposed. We would then become
entitled to a net profits interest equal to the specified percentage multiplied
by the assignor's net revenue interest in that well. However, if an assignor
elects not to participate in the drilling of a well, we will not be able to
participate in that well. Moreover, if an assignor owns less than a 100% working
interest in a proposed well, and the other owners of working interests in that
well elect not to participate in the well, the well will not be drilled unless
the money to pay the costs allocable to the working interest owners who do not
elect to participate in the well is obtained. The financial strength and the
competence of the various assignors, and to a lesser extent the financial
strength and the competence of other parties owning working interests in the
underlying properties, may have an effect on when and whether wells get drilled
on the underlying properties, and on whether operations are conducted in a
prudent and competent manner.
Royalty interests. The royalty interests are generally in the form of term
royalty interests. The duration of these interests is the same as the underlying
oil and natural gas lease. Some of the royalty interests are perpetual royalty
interests which entitle the owner to a share of production from the underlying
properties under both the current oil and natural gas lease and any replacement
or successor oil and natural gas lease. In all cases, the royalty interests are
non-operating interests, have little or no influence over oil and natural gas
development or operation on the lands they burden but have limited cost bearing
responsibilities.
Sale and abandonment of underlying properties. An assignor has the right to
abandon any well or working interest included in the underlying properties if,
in its opinion, the well or property ceases to produce or is not capable of
producing oil or natural gas in commercially paying quantities. We may not
control the timing of plugging and abandoning wells. The conveyances provide
that the assignor's working interest share of the costs of plugging and
abandoning uneconomic wells are deducted in calculating our net cash flow from
the underlying property.
The assignor can sell the underlying properties, subject to and burdened by
the royalty interests, without our consent. Accordingly, the underlying
properties could be transferred to a party with a weaker financial profile.
REGULATION
General federal and state regulation
Our oil and natural gas exploration, production and related operations are
subject to extensive rules and regulations promulgated by federal and state
agencies. Failure to comply with these rules and regulations can result in
substantial penalties. The regulatory burden on the oil and natural gas industry
increases our cost of doing business and affects our profitability. Because
these rules and regulations are frequently amended or reinterpreted, we are
unable to predict the future cost or impact of complying with these laws.
The State of Texas and many other states require permits for drilling
operations, drilling bonds and reports concerning operations and impose other
requirements relating to the exploration and production of oil and natural gas.
Many states also have statutes or regulations addressing conservation matters,
including provisions for the unitization or pooling of oil and natural gas
properties, the establishment of maximum rates of production from wells, and the
regulation of spacing, plugging and abandonment of these wells. Many states
restrict production to the market demand for oil and natural gas. Some states
have enacted statutes prescribing ceiling prices for natural gas sold within
their boundaries.
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The Federal Energy Regulatory Commission, or FERC, regulates interstate
natural gas transportation rates and service conditions, which affect the
revenues received by us for sales of our production. Since the mid-1980s, FERC
has issued a series of orders, culminating in Order Nos. 636, 636-A and 636-B,
or Order 636, that have significantly altered the marketing and transportation
of natural gas. Order 636 mandates a fundamental restructuring of interstate
pipeline sales and transportation service, including the unbundling by
interstate pipelines of the sale, transportation, storage and other components
of the city-gate sales services the pipelines previously performed. One of
FERC's purposes in issuing the orders is to increase competition within all
phases of the natural gas industry. Order 636 and subsequent FERC orders on
rehearing have been appealed and are pending judicial review. Because these
orders may be modified as a result of the appeals, it is difficult to predict
the ultimate impact of the orders on us. Generally, Order 636 has eliminated or
substantially reduced the traditional role of intrastate pipelines as
wholesalers of natural gas, and has substantially increased competition and
volatility in natural gas markets.
The price we receive from the sale of oil and natural gas liquids is
affected by the cost of transporting products to market. Effective January 1,
1995, FERC implemented regulations establishing an indexing system for
transportation rates for oil pipelines, which, generally, would index these
rates to inflation, subject to some conditions and limitations. The Railroad
Commission of the State of Texas is considering adopting rules to prevent
discriminatory transportation practices by intrastate natural gas gatherers and
transporters by requiring the disclosure of rate information under varying
conditions of service. We are not able to predict with certainty the effects, if
any, of these regulations on our operations. However, the regulations may
increase transportation costs or reduce wellhead prices for oil and natural gas
liquids.
Finally, from time to time regulatory agencies have imposed price controls
and limitations on production by restricting the rate of flow of oil and natural
gas wells below natural production capacity in order to conserve supplies of oil
and natural gas.
ENVIRONMENTAL REGULATION
The exploration, development and production of oil and natural gas,
including the operation of saltwater injection and disposal wells, are subject
to various federal, state and local environmental laws and regulations. These
laws and regulations can increase the costs of planning, designing, installing
and operating oil and natural gas wells. Our domestic activities are subject to
a variety of environmental laws and regulations, including but not limited to,
the Oil Pollution Act of 1990, or OPA, the Clean Water Act, or CWA, the
Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA,
the Resource Conservation and Recovery Act, or RCRA, the Clean Air Act, or CAA,
and the Safe Drinking Water Act, or SDWA, as well as state regulations
promulgated under comparable state statutes. We are also subject to regulations
governing the handling, transportation, storage and disposal of naturally
occurring radioactive materials that are found in our oil and natural gas
operations. Civil and criminal fines and penalties may be imposed for
non-compliance with these environmental laws and regulations. Additionally,
these laws and regulations require the acquisition of permits or other
governmental authorizations before undertaking some activities, limit or
prohibit other activities because of protected areas or species, and impose
substantial liabilities for cleanup of pollution.
Under the OPA, a release of oil into water or other areas designated by the
statute could result in our being held responsible for the costs of remediating
the release, OPA specified damages, and natural resource damages. The extent of
that liability could be extensive, as set forth in the statute, depending on the
nature of the release. A release of oil in harmful quantities or other materials
into water or other specified areas
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could also result in our being held responsible under the CWA for the costs of
remediation, and any civil and criminal fines and penalties.
CERCLA and comparable state statutes, also known as "Superfund" laws, can
impose joint and several retroactive liability, without regard to fault or the
legality of the original conduct, on specified classes of persons for the
release of a "hazardous substance" into the environment. In practice, cleanup
costs are usually allocated among various responsible parties. Potentially
liable parties include site owners or operators, past owners or operators under
certain conditions, and entities that arrange for the disposal or treatment of,
or transport hazardous substances found at the site. Although CERCLA, as
amended, currently exempts petroleum, including but not limited to, oil, natural
gas and natural gas liquids from the definition of hazardous substance, our
operations may involve the use or handling of other materials that may be
classified as hazardous substances under CERCLA. Furthermore, there can be no
assurance that the exemption will be preserved in future amendments of CERCLA,
if any.
RCRA and comparable state and local requirements impose standards for the
management, including treatment, storage, and disposal of both hazardous and
nonhazardous solid wastes. We generate hazardous and nonhazardous solid waste in
connection with our routine operations. From time to time, proposals have been
made that would reclassify certain oil and natural gas wastes, including wastes
generated during pipeline, drilling, and production operations, as "hazardous
wastes" under RCRA which would make these solid wastes subject to much more
stringent handling, transportation, storage, disposal, and clean-up
requirements. This development could have a significant impact on our operating
costs. While state laws vary on this issue, state initiatives to further
regulate oil and natural gas wastes could have a similar impact.
Oil and natural gas exploration and production, and possibly other
activities, have been conducted at some of our properties by previous owners and
operators. Materials from these operations remain on some of the properties and
in some instances require remediation. In addition, we have agreed to indemnify
sellers of producing properties from whom we have acquired reserves against
certain liabilities for environmental claims associated with these properties.
While we do not believe that costs to be incurred by us for compliance with
environmental regulations and remediating previously or currently owned or
operated properties will be material, there can be no guarantee that these costs
will not result in material expenditures.
Additionally, in the course of our routine oil and natural gas operations,
surface spills and leaks, including casing leaks, of oil or other materials
occur, and we incur costs for waste handling and environmental compliance.
Moreover, we are able to control directly the operations of only those wells for
which we act as the operator. Notwithstanding our lack of control over wells
owned by us but operated by others, the failure of the operator to comply with
the applicable environmental regulations may, in certain circumstances, be
attributable to us.
Is it not anticipated that we will be required in the near future to expend
amounts that are material in relation to our total capital expenditures program
by reason of environmental laws and regulations, but inasmuch as these laws and
regulations are frequently changed, we are unable to predict the ultimate cost
of compliance. There can be no assurance that more stringent laws and
regulations protecting the environment will not be adopted or that we will not
otherwise incur material expenses in connection with environmental laws and
regulations in the future. See "Risk Factors."
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EMPLOYEES
As of June 1, 2000, we had 18 full-time employees consisting of 8 officers
and 10 support staff. Four of the employees are in Ottawa, Canada, 13 of the
employees are located in the Dallas office, and 1 is on site in Kentucky. In
addition, we regularly engage technical consultants and independent contractors
to provide specific advice or to perform administrative or technical functions.
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MANAGEMENT
The following sets forth the names, ages and positions of our officers and
directors.
<TABLE>
<CAPTION>
NAME AGE CURRENT POSITION WITH COMPANY
----------------------------- ----- --------------------------------------
<S> <C> <C>
Edward J. Munden ............ 49 Chairman of the Board, Chief Executive
Officer, President and Director
Bruce I. Benn ............... 46 Executive Vice President and Director
Robert P. Lindsay ........... 57 Chief Operating Officer, Executive
Vice President and Director
Ronald I. Benn .............. 45 Chief Financial Officer
V. Ed Butler ................ 44 Vice President, Asset Management
Ronald Idom ................. 45 Vice President, Acquisitions
William W. Lesikar .......... 47 Vice President, Finance
William A. Williamson ....... 44 Vice President, Land
</TABLE>
We intend to initiate a search for two additional outside, non-employee
directors to be appointed by the three elected members of the board following
completion of the Recapitalization and this offering. We anticipate that those
persons would also be appointed to the board's compensation committee and the
audit committee.
The following biographies describe the business experience of our executive
officers and directors.
Edward J. Munden has been the President and a director of Queen Sand
Resources since March 6, 1995. He was appointed Chief Executive Officer in May
1996 and was appointed Chairman of the Board in October 1997. Since 1989, he has
been a director and co-founder of Capital House Corporation, or CHC, which is a
Canadian venture capital firm located in Ottawa, Canada. Mr. Munden has held
positions in the mining industry with Eldorado Nuclear Limited from 1980 to
1989, the manufacturing industry with Proctor and Gamble Company of Canada from
1978 to 1980, and the oil and natural gas industry with Union Oil of Canada
Limited from 1974 to 1976. Mr. Munden is a professional geological engineer and
holds a Bachelor of Science degree in Engineering and a Masters of Business
Administration from Queens University in Kingston, Canada.
Bruce I. Benn has been an Executive Vice President and a director of Queen
Sand Resources since March 1995. In 1989, he, together with Ronald I. Benn and
Edward J. Munden, founded CHC and has been a director since then. From 1985 to
1993, he was Vice President and director of Corporation House Ltd., where he
acted as an investment banker and a financial advisor to resource development,
manufacturing and construction firms around the world. He is an attorney and
holds a Masters of Law degree from the University of London, England, a
Baccalaureate of Laws from the University of Ottawa, Canada, and a Bachelor of
Arts in Economics from Carleton University in Ottawa, Canada. Ronald I. Benn,
the Chief Financial Officer of the Company, is the brother of Bruce I. Benn.
Robert P. Lindsay joined Queen Sand Resources in 1994 and became Executive
Vice President in September 1995 and Chief Operating Officer in May 1996. From
1973 until 1995 Mr. Lindsay was Chief Executive Officer of Lin-mour Drilling
Company. Mr. Lindsay joined Helmerich & Payne, an oil and natural gas drilling
and exploration company headquartered in Tulsa, Oklahoma, in 1965 and held
increasingly senior
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positions with that company until 1973. Mr. Lindsay holds a Bachelor of Arts
degree in Accounting from the University of Texas.
Ronald I. Benn was appointed Chief Financial Officer of the predecessor to
Queen Sand Resources in 1994 and assumed the same position with Queen Sand
Resources in March 1995. Since 1989, he has been a senior executive, director
and co-founder of CHC. From 1980 to 1985, Mr. Benn, a Chartered Accountant, held
positions in the auditing division, in management consulting as a turnaround
specialist, and the insolvency division of the accounting firm of Clarkson
Gordon Chartered Accountants, now known as Ernst & Young Chartered Accountants.
From 1985 to 1986 he also had experience in the commercial banking industry and
as senior financial officer to certain start-up companies. Mr. Benn holds a
Bachelor of Science degree from Carleton University in Ottawa, Canada and a
Bachelor of Commerce (Honours) from the University of Windsor, Canada. Ronald I.
Benn is the brother of Bruce I. Benn.
V. Ed Butler joined Queen Sand Resources in June 1996 as Vice President,
Operations. He has 22 years of experience in oil field engineering and
operations. From 1993 to 1995, he was Executive Vice President for Echo
Production, Inc. From 1982 to 1993 he held the position of Operations Manager
for Triad Energy Corporation. He has also been a staff engineer for Blocker
Exploration Company from 1980 to 1982 and an area production engineer for Texas
Oil and Gas Corporation from 1978 to 1980. Mr. Butler holds an M.B.A. from the
University of Texas, and a Bachelor of Science in Petroleum Engineering from
Texas A&M University.
Ronald Idom joined Queen Sand Resources in January 1998 as Vice President,
Acquisitions. He has over 24 years of experience in reservoir engineering and
management. From 1991 to 1997, he was Manager Gas Supply for Delhi Gas Pipeline
Corporation and Manager Engineering/Project Development from 1988 to 1991. From
1985 to 1988 he held the position of Chief Reservoir Engineer for TXO Production
Corp. Both Delhi Gas Pipeline and TXO Production Corp. were subsidiaries of
USX/Texas Oil & Gas Corporation. He also served as acquisition engineer for NRM
Petroleum from 1983 to 1985; a self-employed petroleum consultant from 1980 to
1983 and held various engineering positions with Texas Oil and Gas Corporation
from 1976 to 1980. Mr. Idom graduated from Texas A&M University in 1976 with a
Bachelor of Science in Petroleum Engineering.
William W. Lesikar joined Queen Sand Resources in June 1998 as Vice
President, Finance. Mr. Lesikar, a Certified Public Accountant, has 24 years of
experience in finance and accounting with nearly 19 years in the oil and gas
industry. From 1981 to 1998, Mr. Lesikar held increasing positions of authority
with Lyco Energy Corporation of Dallas, Texas including Controller from 1981 to
1983, and Chief Financial Officer and Executive Vice President from 1988 to
1998. From 1978 to 1981, Mr. Lesikar was an audit manager and senior auditor
with Arthur Young & Company, now known as Ernst & Young LLP. From 1976 to 1978,
Mr. Lesikar was an auditor with Haskins & Sells, now known as Deloitte & Touche
LLP. Mr. Lesikar holds a Masters of Business Administration from Southern
Methodist University and a Bachelor of Business Administration from University
of Texas at Austin.
William A. Williamson joined Queen Sand Resources in March 1998 as Vice
President, Land. He has over 20 years of experience in petroleum land
management. From 1989 to 1998, he served as President of BAW Energy, Inc. BAW
Energy, Inc. was formed primarily to provide oil and gas asset management from a
land and legal perspective to independent oil and gas companies. Clients of BAW
Energy, Inc. included INCO Oil Corporation, Janex Oil Co., Inc., Walter
Exploration, Inc. and Queen Sand Resources. From 1979 to 1989, he was
self-employed as an independent Petroleum Landman. Mr. Williamson holds a
Bachelor of Business Administration in Finance from Texas A&M University.
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<PAGE> 79
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the number of
shares of common stock beneficially owned as of the completion of this offering
and the Recapitalization, by:
o all holders of shares of common stock known by the company to own
beneficially more than 5% of the outstanding shares of any class of
the voting stock;
o our executive officers of the company;
o each director of the company; and
o all directors and executive officers of the company as a group.
<TABLE>
<CAPTION>
PRO FORMA
PERCENTAGE OF
NAME AND ADDRESS AMOUNT AND NATURE OF VOTING STOCK
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OWNED AFTER THE RECAPITALIZATION(1)
------------------- -------------------- ----------------------------------
<S> <C> <C>
Officers and Directors:
Edward J. Munden(2) 42,308(3) *
30 Metcalfe Street, Suite 620
Ottawa, Canada
K1P 5L4
Bruce I. Benn(2) 42,308(3) *
30 Metcalfe Street, Suite 620
Ottawa, Canada
K1P 5L4
Robert P. Lindsay(2) 42,399(3)(4) *
3500 Oak Lawn Drive
Suite 380, L.B. #31
Dallas, Texas 75219
Ronald I. Benn(2) 42,309(3) *
30 Metcalfe Street, Suite 620
Ottawa, Canada
K1P 5L4
All executive officers and
directors as a group (4 persons) 42,399(3)(4) *
</TABLE>
----------
* Less than one percent
(1) Assumes that the Recapitalization, including the reverse stock split, and
this offering have been completed.
(2) Executive officer and/or director.
(3) Edward J. Munden, Ronald I. Benn and Bruce I. Benn have a beneficial
interest in the shares of common stock owned by EIBOC Investments Ltd., or
EIBOC. In addition, EIBOC has granted an irrevocable proxy to Messrs.
Munden, Benn, Benn and Lindsay to vote the shares owned of record by EIBOC.
Accordingly, the shares owned of record by EIBOC have been included as
beneficially owned by each of the foregoing individuals, and by all
executive officers and directors as a group.
(4) Mr. Lindsay acquired 92 shares of common stock in the name of his children
and disclaims any beneficial interest in these shares.
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<PAGE> 80
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 100,000,000 shares of common stock
and 50,000,000 shares of preferred stock. Immediately after this offering, we
will have 11,250,000 shares of common stock outstanding and no shares of
preferred stock outstanding.
COMMON STOCK
The holders of shares of common stock have full voting power for the
election of directors and for all other purposes. Each holder of common stock
has one vote for each share. The shares of common stock do not have cumulative
voting rights.
Subject to the rights of holders of any outstanding shares of preferred
stock, holders of common stock are entitled to dividends in the amounts and at
the times declared by our board of directors in its discretion out of funds
legally available for the payment of dividends. Holders of common stock have no
subscription, redemption, sinking fund, conversion or preemptive rights. The
outstanding shares of common stock are fully paid and nonassessable. After
payment is made in full to the holders of any outstanding shares of preferred
stock in the event of any liquidation, our remaining assets and funds will be
distributed to the holders of common stock according to their respective shares.
PREFERRED STOCK
At the direction of our board, we may issue shares of preferred stock from
time to time. Our board of directors may, without any action by holders of the
common stock:
o adopt resolutions to issue preferred stock in one or more classes or
series;
o fix or change the number of shares constituting any class or series of
preferred stock; and
o establish or change the rights of the holders of any class or series
of preferred stock.
The rights any class or series of preferred stock may evidence may include:
o general or special voting rights;
o preferential liquidation or preemptive rights;
o preferential cumulative or noncumulative dividend rights;
o redemption or put rights; and
o conversion or exchange rights.
We may issue shares of, or rights to purchase, preferred stock the terms of
which might:
o adversely affect voting or other rights evidenced by, or amounts
otherwise payable with respect to, the common stock;
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o discourage an unsolicited proposal to acquire us; or
o facilitate a particular business combination involving us.
Any of these actions could discourage a transaction that some or a majority
of our stockholders might believe to be in their best interests or in which our
stockholders might receive a premium for their stock over its then market price.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is Continental Stock
Transfer and Trust Company, 2 Broadway, New York, New York 10004.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering and the Recapitalization, we will have
outstanding 11,250,000 shares of common stock, assuming no exercise of the
underwriter's over-allotment option. Of the shares of common stock that will be
outstanding after this offering, 11,206,312 shares will be freely tradable
without restriction or further registration under the Securities Act except that
any shares purchased by our "affiliates," as that term is defined in Rule 144
under the Securities Act, generally may be sold only in compliance with the
limitations of Rule 144 described below and the shares acquired by some of our
stockholders in the Recapitalization will be subject to transfer restrictions
described below in "Underwriting -- Future sales." All of the remaining 43,688
shares of common stock will be "restricted" securities as that term is defined
in Rule 144. The "restricted" securities may not be resold unless they are
registered under the Securities Act or are sold pursuant to an available
exemption from registration, including Rule 144 under the Securities Act. Upon
expiration of the lock-up agreements described below, 43,688 of the restricted
shares will be eligible for resale at various times thereafter upon expiration
of applicable holding periods. Restricted securities may be sold in the public
market only if they qualify for an exemption from registration under Rule 144,
including Rule 144(k), or Rule 701 under the Securities Act.
RULE 144
In general, under Rule 144 as currently in effect, commencing 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year is entitled to sell within any three-month
period a number of shares that does not exceed the greater of:
o 1% of the number of shares of common stock then outstanding, which is
expected to be approximately 112,500 shares upon completion of this
offering, assuming no exercise of the underwriters' over-allotment
option or
o the average weekly trading volume of the common stock on the OTC
Bulletin Board during the four calendar weeks preceding the filing of
a notice on Form 144 with respect to the sale, subject to the
restrictions specified in Rule 144.
Sales under Rule 144 are also subject to manner of sale provisions and notice
requirements and to the availability of current public information about us.
RULE 144(k)
Under Rule 144(k), a person who is not one of our affiliates at any time
during the three months preceding a sale and who has beneficially owned the
shares proposed to be sold for at least two years is entitled to sell the shares
under Rule 144(k) without complying with the manner of sale, public information,
volume limitation or notice provisions of Rule 144. Therefore, unless otherwise
restricted, Rule 144(k) shares may be sold immediately upon completion of this
offering.
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<PAGE> 83
UNDERWRITING
Subject to the terms and conditions of an underwriting agreement, the
underwriters named below are acting through their representative, Friedman,
Billings, Ramsey & Co., Inc. The underwriters have agreed with us, subject to
the terms and conditions of the underwriting agreement, to purchase from us the
number of shares of common stock shown opposite their names below. Other than
the shares covered by the over-allotment option, the underwriters are obligated
to purchase and accept delivery of all the shares of common stock if any are
purchased.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
Friedman, Billings, Ramsey & Co., Inc......................................
Total............................................................. 10,000,000
==========
</TABLE>
The underwriters propose initially to offer the shares of common stock in
part directly to the public at the initial public offering price shown on the
cover page of this prospectus and in part to dealers, including the
underwriters, at this price less a discount not in excess of $___ per share. The
underwriters may allow, and such dealers may re-allow other dealers, a discount
not in excess of $___ per share.
The following table shows the underwriting discounts and commissions to be
paid to the underwriters by us. These amounts represent the public offering
price per share minus the amount paid by the underwriters per share and are
shown assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares of common stock. The underwriters' compensation was
determined through negotiations between their representatives and us. The table
also includes other expenses we expect to incur in connection with this
offering. All these other expenses, other than the SEC registration fee and the
NASD filing fee are estimates.
<TABLE>
<CAPTION>
EXERCISE NO EXERCISE FULL EXERCISE
-------- ----------- --------------
<S> <C> <C>
Total underwriting fees.....................................$ $
Underwriting fees per share...........$ $
Other offering expenses:
SEC registration fee................................$ 24,288 $ 24,288
NASD filing fee.....................................$ 9,700 $ 9,700
Nasdaq listing fee..................................$ $
Legal fees and expenses.............................$ $
Accounting fees and expenses........................$ $
Printing and engraving..............................$ 200,000 $ 200,000
Blue sky fees and expenses..........................$ 25,000 $ 25,000
Transfer agent fees.................................$ 1,000 $ 1,000
Miscellaneous.......................................$ $
Total other offering expenses...............................$ $
Other offering expenses per share..................$ $
</TABLE>
Over-allotment. The underwriters have an option, exercisable within 30 days
after the date of this prospectus, to purchase up to an aggregate of 1,500,000
additional shares of common stock at the public
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<PAGE> 84
offering price less the underwriting discounts and commissions. The underwriters
may exercise this option solely to cover over-allotments, if any, made in this
offering. If the underwriters exercise this option, each underwriter will
purchase shares in approximately the same proportion as indicated in the table
above.
Indemnity. Queen Sand Resources has agreed to indemnify the underwriters
against some types of liabilities, including liabilities under the Securities
Act. These parties have also agreed to contribute to payments that the
underwriters may be required to make with respect to any of those liabilities.
In addition, we have agreed to make the underwriters insured parties under our
directors and officers insurance policy prior to the consummation of the
offering.
Future Sales. Queen Sand Resources, its officers and directors have agreed
not to offer, pledge, sell, hedge or otherwise transfer or dispose of, directly
or indirectly, any shares of common stock or any securities convertible into or
exercisable or exchangeable for common stock for a period of 180 days from the
date of this prospectus. Transfers or dispositions can be made sooner with the
prior written consent of Friedman, Billings, Ramsey & Co., Inc., which may be
given at any time without public notice. During this 180-day period, we have
agreed not to file any registration statement with respect to any shares of our
common stock. In addition, the Series A preferred stockholder, each Series C
preferred stockholder and each repricing rights holder has agreed in the
recapitalization agreement signed as part of the Recapitalization not to sell,
on any given trading day during the six month period immediately following the
closing date of this offering, more than the percentage of total shares received
by the holder equal to the percentage that the holder's shares comprise of the
total number of all post reverse-split common shares outstanding immediately
after the close of this offering. For example, a holder that ends up with 1% of
our total shares outstanding after this offering shall be permitted to sell only
up to 1% of the shares the holder owns on any given day within the six-month
period after the closing of this offering.
Offers in Other Jurisdictions. Neither we nor the underwriters have taken
any action that would permit a public offering of the shares of common stock
offered by this prospectus in any jurisdiction other than the United States
where action for that purpose is required. The shares of common stock offered by
this prospectus may not be offered or sold, directly or indirectly, nor may this
prospectus or any other offering material or advertisements related to the offer
and sale of these shares of common stock be distributed or published, in any
jurisdiction, except under circumstances that will result in compliance with the
applicable rules and regulations of such jurisdiction. This prospectus is not an
offer to sell or a solicitation of an offer to buy any shares of common stock
offered hereby in any jurisdiction in which such an offer or solicitation is
unlawful.
Discretionary Account Sales. Friedman, Billings, Ramsey & Co., Inc. has
advised us that the underwriters do not expect discretionary sales by the
underwriters to exceed five percent of the shares offered by this prospectus.
Stabilization. In connection with this offering, the underwriters may
engage in transactions in the over-the-counter market or otherwise that
stabilize, maintain or otherwise affect the price of the common stock.
Specifically, the underwriters may over allot this offering, creating a
syndicate short position. In addition, the underwriters may bid for and purchase
shares of common stock. In addition, Friedman, Billings Ramsey & Co., Inc., on
behalf of the underwriters, may reclaim selling concessions allowed to an
underwriter or dealer for distributing the common stock in the offering if the
syndicate repurchases previously distributed shares of common stock to cover
syndicate short positions, in stabilizing transactions or otherwise. These
activities may stabilize or maintain the market price of the common stock above
independent market levels.
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<PAGE> 85
The underwriters are not required to engage in these activities and may
discontinue any of these activities at any time.
Determination of Offering Price. Though our common stock is quoted on the
OTC Bulletin Board, the public offering price of the common stock in this
offering is not based on the market price of our common stock but was determined
by negotiations between us and the underwriters. Among the factors considered in
determining the public offering price were:
o prevailing market conditions,
o our results of operations in recent periods,
o the present stage of our development,
o the market capitalizations and development stages of other companies
that we and the underwriters believe to be comparable to us, and
o estimates of our growth potential.
LEGAL MATTERS
The validity of the issuance of the shares of common stock offered by this
prospectus will be passed on for us by Haynes and Boone, LLP. Certain legal
matters relating to the common stock offered by this prospectus will be passed
on by Fulbright & Jaworski L.L.P., as counsel for the underwriters.
ENGINEERS
The estimates relating to our proved oil and natural gas reserves and
future net revenues of oil and natural gas reserves as of June 30, 1997, 1998
and 1999 (other than with respect to the Morgan Properties) included in this
prospectus and incorporated in this prospectus by reference to our Annual Report
on Form 10-K for the year ended June 30, 1999 are based upon estimates of the
reserves prepared by H.J. Gruy in reliance upon its reports and upon the
authority of H.J. Gruy as experts in petroleum engineering.
The estimates relating to our proved oil and natural gas reserves and
future net revenues of oil and natural gas reserves at June 30, 1998 and 1999
with respect to the Morgan Properties included in this prospectus and
incorporated in this prospectus by reference to our Annual Report on Form 10-K
for the year ended June 30, 1999 are based upon estimates of the reserves
prepared by Ryder Scott, independent consulting petroleum engineers, in reliance
upon its report and upon the authority of Ryder Scott as experts in petroleum
engineering.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at June 30, 1999 and 1998, and for each of the three years
in the period ended June 30, 1999, as set forth in their report. We have
included our financial statements in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on their
authority as experts in accounting and auditing.
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<PAGE> 86
WHERE YOU CAN FIND MORE INFORMATION
This prospectus is part of a registration statement we have filed with the
SEC relating to our common stock. As permitted by SEC rules, this prospectus
does not contain all of the information we have included in the registration
statement and the accompanying exhibits and schedules we filed with the SEC. You
may refer to the registration statement, exhibits and schedules for more
information about us and our common stock. In addition, we are required to file
current reports, quarterly reports, annual reports, proxy statements and other
information with the SEC. You can read and copy the registration statement,
exhibits and schedules and other filings at the SEC's Public Reference Room at
450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's regional
offices located at 7 World Trade Center, 13th Floor, New York, New York 10048,
and at Suite 1400, 500 West Madison Street, Chicago, Illinois 60661. You can
obtain information about the operation of the SEC's Public Reference Room by
calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC. The address for that
site on the world wide web is sec.gov. Our Internet site on the world wide web
is qsri.com. Neither the information on our web site nor the SEC's web site is
part of this prospectus and references in this prospectus to our web site or any
other web site are inactive textual references only.
Our common stock is traded on the OTC Bulletin Board under the symbol
"QSRI."
INCORPORATION BY REFERENCE
The SEC allows us to "incorporate by reference" the information we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
an important part of this prospectus. We incorporate by reference the documents
listed below and filed with the SEC under Sections 13(a), 13(c), 14 or 15(d) of
the Securities Exchange Act of 1934:
o Annual Report on Form 10-K for the year ended June 30, 1999, as
amended by Form 10-K/A No. 1;
o Quarterly Report on Form 10-Q for the quarter ended September 30,
1999;
o Quarterly Report on Form 10-Q for the quarter ended December 31, 1999;
o Quarterly Report on Form 10-Q for the quarter ended March 31, 2000;
and
o The description of our common stock contained in our registration
statement filed under Section 12 of the Securities Exchange Act of
1934.
We will provide these filings to any person, including any beneficial
owner, to whom this prospectus is delivered, at no cost, upon written or oral
request to us as follows:
13760 Noel Road, Suite 1030
Dallas, Texas 75240-7336
Attn: William W. Lesikar
You should rely only on the information incorporated by reference or
provided in this prospectus. We have not authorized anyone else to provide you
with different information. We are not making an offer of these securities in
any state where the offer is not permitted. You should not assume
-85-
<PAGE> 87
that the information in this prospectus is accurate as of any date other than
the date on the front of those documents.
-86-
<PAGE> 88
GLOSSARY
The terms defined in this glossary are used throughout this prospectus.
"average NYMEX price." The average of the NYMEX closing prices for the near
month.
Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein
in reference to crude oil or other liquid hydrocarbons.
Bbl/d. Bbl per day.
Bcf. One billion cubic feet of natural gas.
Bcfe. One billion cubic feet of natural gas equivalents, converting one Bbl
of oil to six Mcf of gas.
"behind-the-pipe." Hydrocarbons in a potentially producing horizon
penetrated by a well bore the production of which has been postponed pending the
production of hydrocarbons from another formation penetrated by the well bore.
The hydrocarbons are classified as proved but non-producing reserves.
"development well." A well drilled within the proved boundaries of an oil
or natural gas reservoir with the intention of completing the stratigraphic
horizon known to be productive.
"dry well." A development or exploratory well found to be incapable of
producing either oil or natural gas in sufficient quantities to justify
completion as an oil or natural gas well.
"exploratory well." A well drilled to find oil or natural gas in an
unproved area, to find a new reservoir in a field previously found to be
productive of oil or natural gas in another reservoir, or to extend a known
reservoir.
"gross acres" or "gross wells." The total number of acres or wells, as the
case may be, in which a working interest is owned.
MBbl. One thousand barrels of crude oil or other liquid hydrocarbons.
Mcf. One thousand cubic feet of natural gas.
Mcf/d. Mcf per day.
Mcfe. One thousand cubic feet of natural gas equivalents, converting one
Bbl of oil to six Mcf of gas.
MMBbl. One million barrels of crude oil or other liquid hydrocarbons.
MMcfe. One million cubic feet of natural gas equivalents, converting one
Bbl of oil to six Mcf of gas.
-87-
<PAGE> 89
MMcf. One million cubic feet of natural gas.
"Morgan Properties" means the net profits interests and royal interest
revenues we purchased in April 1998 from pension funds managed by J.P. Morgan
Investments.
"net acres" or "net wells." The sum of the fractional working interests
owned in gross acres or gross wells.
"net profits interest." A share of the gross oil and natural gas production
from a property, measured by net profits from the operation of the property,
that is carved out of the working interest. This is a non-operating interest.
"non-producing reserves." Non-producing reserves consist of (i) reserves
from wells that have been completed and tested but are not yet producing due to
lack of market or minor completion problems that are expected to be corrected,
and (ii) reserves currently behind-the-pipe in existing wells which are expected
to be productive due to both the well log characteristics and analogous
production in the immediate vicinity of the well.
NYMEX. New York Mercantile Exchange.
"producing well," "production well" or "productive well." A well that is
producing oil or natural gas or that is capable of production.
"proved developed producing." Proved developed producing reserves are
proved developed reserves which are currently capable of producing in commercial
quantities.
"proved developed reserves." Proved developed reserves are oil and natural
gas reserves that can be expected to be recovered through existing wells with
existing equipment and operating methods. Additional oil and natural gas
expected to be obtained through the application of fluid injection or other
improved recovery techniques for supplementing the natural forces and mechanisms
of primary recovery should be included as "proved developed reserves" only after
testing by a pilot project or after the operation of an installed program has
confirmed through production response that increased recovery will be achieved.
"proved reserves." The estimated quantities of crude oil, natural gas and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions.
"proved undeveloped reserves" or PUD. Proved undeveloped reserves are oil
and natural gas reserves that are expected to be recovered from new wells on
undrilled acreage, or from existing wells where a relatively major expenditure
is required for recompletion. Reserves on undrilled acreage shall be limited to
those drilling units offsetting productive units that are reasonably certain of
production when drilled. Proved reserves for other undrilled units can be
claimed only where it can be demonstrated with certainty that there is
continuity of production from the existing productive formation. Under no
circumstances should estimates for proved undeveloped reserves be attributable
to any acreage for which an application of fluid injection or other improved
recovery techniques is contemplated, unless such techniques have been proved
effective by actual tests in the area and in the same reservoir.
"recompletion." A recompletion is an operation to abandon the production of
oil and/or natural gas from a well in one zone within the existing wellbore and
to make the well produce oil and/or natural gas from a different, separately
producible zone within the existing wellbore.
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<PAGE> 90
"Reserve Life Index." The estimated productive life of a proved reservoir
based upon the economic limit of such reservoir producing hydrocarbons in paying
quantities assuming certain price and cost parameters. For purposes of this
prospectus, reserve life is calculated by dividing the proved reserves (on a
Mcfe basis) at the end of the period by production volumes for the previous 12
months.
"royalty interest." An interest in an oil and natural gas property
entitling the owner to a share of oil and natural gas production free of costs
of production.
"SEC PV-10." The present value of proved reserves is an estimate of the
discounted future net cash flows from each of the properties at June 30, 1999,
or as otherwise indicated. Net cash flow is defined as net revenues less, after
deducting production and ad valorem taxes, future capital costs and operating
expenses, but before deducting federal income taxes. As required by rules of the
Commission, the future net cash flows have been discounted at an annual rate of
10% to determine their "present value." The present value is shown to indicate
the effect of time on the value of the revenue stream and should not be
construed as being the fair market value of the properties. In accordance with
Commission rules, estimates have been made using constant oil and natural gas
prices and operating costs, at June 30, 1999, or as otherwise indicated.
"secondary recovery." A method of oil and natural gas extraction in which
energy sources extrinsic to the reservoir are utilized.
"service well." A well used for water injection in secondary recovery
projects or for the disposal of produced water.
"Standardized Measure." 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, net operating loss carryforwards, 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.
"undeveloped acreage." Lease acreage on which wells have not been drilled
or completed to a point that would permit the production of commercial
quantities of oil and natural gas regardless of whether such acreage contains
proved reserves.
"working interest." The operating interest which gives the owner the right
to drill, produce and conduct operating activities on the property and a share
of production, subject to all royalties, overriding royalties and other burdens
and to all costs of exploration to, development and operations and all risks in
connection therewith.
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<PAGE> 91
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.................................................. F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of June 30, 1999 and 1998........................................ F-3
Consolidated Statements of Operations for the
Years ended June 30, 1999, 1998, and 1997..................................................... F-4
Consolidated Statements of Stockholders' Equity (Net Capital
Deficiency) for the Years ended June 30, 1999, 1998, and 1997................................. F-5
Consolidated Statements of Cash Flows for the
Years ended June 30, 1999, 1998, and 1997..................................................... F-7
Notes to Consolidated Financial Statements...................................................... F-8
Consolidated Condensed Financial Statements (unaudited):
Consolidated Condensed Balance Sheets as of March 31, 2000 and 1999............................. F-36
Consolidated Condensed Statement of Operations for the
Nine Months ended March 31, 2000 and 1999..................................................... F-37
Consolidated Condensed Statement of Cash Flows for the
Nine Months ended March 31, 2000 and 1999..................................................... F-38
Notes to Consolidated Condensed Financial Statements............................................ F-39
</TABLE>
F-1
<PAGE> 92
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Queen Sand Resources, Inc.
We have audited the accompanying consolidated balance sheets of Queen Sand
Resources, Inc. and subsidiaries as of June 30, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity (net capital
deficiency) and cash flows for each of the three years in the period ended June
30, 1999. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Queen Sand
Resources, Inc. and subsidiaries as of June 30, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended June 30, 1999, in conformity with accounting principles generally
accepted in the United States.
/s/ Ernst & Young LLP
Dallas, Texas
September 1, 1999,
except for Note 3, as to which
the date is October 13, 1999
F-2
<PAGE> 93
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 9,367,000 $ 1,030,000
Accounts receivable 4,499,000 5,252,000
Note receivable from employee 79,000 73,000
Other 74,000 56,000
------------- -------------
Total current assets 14,019,000 6,411,000
------------- -------------
Property and equipment, at cost (Notes 1, 2, 3, 9 and 10):
Oil and gas properties, based on full cost accounting method 178,421,000 176,943,000
Other equipment 392,000 221,000
------------- -------------
178,813,000 177,164,000
Less accumulated depreciation and amortization (81,615,000) (34,697,000)
------------- -------------
Net property and equipment 97,198,000 142,467,000
Other assets 7,993,000 4,797,000
------------- -------------
$ 119,210,000 $ 153,675,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,419,000 $ 5,493,000
Accrued liabilities 9,681,000 1,258,000
Current portion of long-term obligations (Note 3) 42,000 85,000
------------- -------------
Total current liabilities 11,142,000 6,836,000
Long-term obligations, net of current portion (Note 3) 133,852,000 153,620,000
Commitments (Note 5)
Stockholders' equity (net capital deficiency) (Notes 2 and 5):
Preferred stock, $.01 par value:
Authorized shares - 50,000,000 at June 30, 1999 and 1998
Issued and outstanding shares - 9,604,698 and 9,610,400 at June 30,
1999 and 1998, respectively 96,000 96,000
Aggregate liquidation preference - $5,000,000
Common stock, $.0015 par value:
Authorized shares - 100,000,000 at June 30, 1999 and 1998
Issued and outstanding shares - 33,442,210 and 24,323,767
at June 30, 1999 and 1998, respectively 65,000 51,000
Additional paid-in capital 64,912,000 34,011,000
Accumulated deficit (83,606,000) (35,939,000)
Treasury stock, at cost (7,251,000) (5,000,000)
------------- -------------
Total stockholders' equity (net capital deficiency) (25,784,000) (6,781,000)
------------- -------------
Total liabilities and stockholders' equity $ 119,210,000 $ 153,675,000
============= =============
</TABLE>
See accompanying notes.
F-3
<PAGE> 94
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Oil and gas sales $ 4,591,000 $ 6,446,000 $ 4,381,000
Net profits and royalty interests (Note 2) 23,140,000 4,432,000 --
Interest and other (Note 1) 326,000 105,000 300,000
------------ ------------ ------------
28,057,000 10,983,000 4,681,000
Expenses:
Production expenses 3,196,000 4,547,000 2,507,000
Depreciation and amortization (Note 1) 11,885,000 4,809,000 982,000
Writedown of oil and gas properties (Note 1) 35,033,000 28,166,000 --
General and administrative (Notes 1 and 7) 3,533,000 2,259,000 1,452,000
Interest and financing costs 18,352,000 3,956,000 878,000
------------ ------------ ------------
71,999,000 43,737,000 5,819,000
------------ ------------ ------------
Loss before extraordinary item (43,942,000) (32,754,000) (1,138,000)
Extraordinary loss (Note 4) 3,549,000 -- 171,000
------------ ------------ ------------
Net loss $(47,491,000) $(32,754,000) $ (1,309,000)
============ ============ ============
Loss before extraordinary item per common share $ (1.40) $ (1.44) $ (.04)
============ ============ ============
Net loss per common share $ (1.51) $ (1.44) $ (.05)
============ ============ ============
Weighted average common shares outstanding 31,434,465 22,719,177 26,964,334
============ ============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE> 95
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
--------------------------- -------------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL TREASURY
------------ ------------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1996 -- $ -- 27,020,000 $ 41,000 $ 4,997,000 $ --
Issuance of common
stock for services -- -- 116,052 -- 21,000 --
Issuance of common
stock for oil and
gas properties -- -- 1,529,500 2,000 639,000 --
(Note 2)
Issuance of common
stock for cash
(Note 5) -- -- 1,760,000 3,000 4,056,000 --
Issuance of
convertible
preferred stock and
warrants to purchase
common stock for 9,600,000 96,000 -- -- 4,904,000 --
cash (Note 5)
Repurchase of common
stock (Note 5) -- -- (9,600,000) -- (143,000) (5,000,000)
Net loss -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance at June 30, 1997 9,600,000 96,000 20,825,552 46,000 14,474,000 (5,000,000)
Issuance of common
stock for services -- -- 150,000 -- 300,000 --
Issuance of common
stock for oil and
gas properties -- -- 1,337,500 2,000 4,810,000 --
(Note 2)
Issuance of common
stock for cash
(Note 5) -- -- 2,010,715 3,000 4,883,000 --
Issuance of
convertible
preferred stock and
warrants to purchase
common stock for 10,400 -- -- -- 9,544,000 --
cash (Note 5)
Net loss -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance at June 30, 1998 9,610,400 $ 96,000 24,323,767 $ 51,000 $ 34,011,000 $ (5,000,000)
<CAPTION>
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
------------- -------------
<S> <C> <C>
Balance at June 30, 1996 $ (1,876,000) $ 3,162,000
Issuance of common
stock for services -- 21,000
Issuance of common
stock for oil and
gas properties -- 641,000
(Note 2)
Issuance of common
stock for cash
(Note 5) -- 4,059,000
Issuance of
convertible
preferred stock and
warrants to purchase
common stock for -- 5,000,000
cash (Note 5)
Repurchase of common
stock (Note 5) -- (5,143,000)
Net loss (1,309,000) (1,309,000)
------------ ------------
Balance at June 30, 1997 (3,185,000) 6,431,000
Issuance of common
stock for services -- 300,000
Issuance of common
stock for oil and
gas properties -- 4,812,000
(Note 2)
Issuance of common
stock for cash
(Note 5) -- 4,886,000
Issuance of
convertible
preferred stock and
warrants to purchase
common stock for -- 9,544,000
cash (Note 5)
Net loss (32,754,000) (32,754,000)
------------ ------------
Balance at June 30, 1998 $(35,939,000) $ (6,781,000)
</TABLE>
See accompanying notes.
F-5
<PAGE> 96
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY) (CONTINUED)
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
--------------------------- --------------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL TREASURY
----------- ------------ ------------ ------------ ------------ -----------
Issuance of common
stock for oil and
gas properties (Note 1) -- $ -- 8,740 $ -- $ 65,000 $ --
Issuance of common
stock for cash
(Note 5) -- -- 3,845,241 6,000 23,668,000 --
Issuance of common
stock upon exercise
of warrants (Note 5) -- -- 2,474,236 4,000 6,996,000 --
Issuance of common
stock pursuant to
repricing rights
(Note 5) -- -- 1,384,016 2,000 (2,000) --
Issuance of common
stock on conversion
of convertible
preferred stock
(Note 5) (3,550) -- 1,328,639 2,000 (2,000) --
Issuance of common
stock as stock
dividend (Note 5) -- -- 77,571 -- 176,000 --
Repurchase of
convertible
preferred stock (2,152) -- -- -- -- (2,251,000)
(Note 5)
Net loss -- -- -- -- -- --
----------- ------------ ------------ ------------ ------------ ------------
Balance at June 30, 1999 9,604,698 $ 96,000 33,442,210 $ 65,000 $ 64,912,000 $ (7,251,000)
=========== ============ ============ ============ ============ ============
<CAPTION>
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
------------- -------------
<S> <C> <C>
Issuance of common
stock for oil and
gas properties (Note 1) $ -- $ 65,000
Issuance of common
stock for cash
(Note 5) -- 23,674,000
Issuance of common
stock upon exercise
of warrants (Note 5) -- 7,000,000
Issuance of common
stock pursuant to
repricing rights
(Note 5) -- --
Issuance of common
stock on conversion
of convertible
preferred stock
(Note 5) -- --
Issuance of common
stock as stock
dividend (Note 5) (176,000) --
Repurchase of
convertible
preferred stock -- (2,251,000)
(Note 5)
Net loss (47,491,000) (47,491,000)
------------- -------------
Balance at June 30, 1999 $ (83,606,000) $ (25,784,000)
============= =============
</TABLE>
See accompanying notes.
F-6
<PAGE> 97
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
-----------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (47,491,000) $ (32,754,000) $ (1,309,000)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Extraordinary loss 3,549,000 -- 171,000
Depreciation and amortization 13,354,000 4,809,000 982,000
Writedown of oil and gas properties 35,033,000 28,166,000 --
Unrealized foreign currency translation gains (19,000) (18,000) (300,000)
Issuance of common stock for services -- 300,000 21,000
Accretion of debt discount -- -- 72,000
Changes in operating assets and liabilities:
Accounts receivable 747,000 (4,580,000) (317,000)
Other assets (18,000) (45,000) (6,000)
Accounts payable and accrued liabilities 4,349,000 5,163,000 949,000
------------- ------------- -------------
Net cash provided by operating activities 9,504,000 1,041,000 263,000
INVESTING ACTIVITIES
Additions to oil and gas properties (11,474,000) (154,242,000) (4,180,000)
Proceeds from sales of oil and gas properties 10,024,000 -- --
Net additions to other property and equipment (161,000) (100,000) (125,000)
------------- ------------- -------------
Net cash used in investing activities (1,611,000) (154,342,000) (4,305,000)
FINANCING ACTIVITIES
Proceeds from revolving credit facilities 12,300,000 103,000,000 276,000
Proceeds from bridge financing facilities -- 60,000,000 --
Repayments of borrowing from bridge financing facilities (58,860,000) (1,140,000) --
Debt issuance costs (4,665,000) (4,898,000) --
Termination of LIBOR swap agreement (3,549,000) -- --
Payments on revolving credit facilities (96,800,000) (15,358,000) --
Proceeds from issuance of 12 1/2% Senior Notes 125,000,000 121,000 526,000
Payments on notes payable (1,325,000) (2,064,000) (1,408,000)
Collection of stock subscription -- -- 500,000
Proceeds from sale of convertible preferred stock and
warrants to purchase common stock -- 9,544,000 5,000,000
Proceeds from the issuance of common stock 30,674,000 4,886,000 4,059,000
Repurchase of common and preferred stock (2,251,000) -- (5,143,000)
Payments on capital lease obligation (80,000) (70,000) (58,000)
------------- ------------- -------------
Net cash provided by financing activities 444,000 154,021,000 3,752,000
Net increase (decrease) in cash 8,337,000 720,000 (290,000)
Cash at beginning of year 1,030,000 310,000 600,000
------------- ------------- -------------
Cash at end of year $ 9,367,000 $ 1,030,000 $ 310,000
============= ============= =============
</TABLE>
See accompanying notes.
F-7
<PAGE> 98
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
Queen Sand Resources, Inc. (QSRI or the Company) was formed on August 9, 1994,
under the laws of the State of Delaware. At June 30, 1999, EIBOC Investments
Ltd. (EIBOC) held approximately 6,600,000 shares of the Company's common stock,
par value $.0015 (Common Stock), representing approximately 7% of the Company's
outstanding shares of Common Stock on a fully diluted basis. Certain officers of
the Company have beneficial interests in EIBOC (see Note 5). Joint Energy
Development Investments Limited Partnership (JEDI), an affiliate of Enron Corp.
(Enron), holds approximately 28% of the Company's voting capital stock on a
fully diluted basis.
The Company is engaged in one industry segment, the acquisition, exploration,
development, production, and sale of crude oil and natural gas. The Company's
business activities are carried out primarily in Kentucky, Louisiana, New
Mexico, Oklahoma and Texas.
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.
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 approximately $931,000, $721,000, and $316,000 for the years
ended June 30, 1999, 1998, and 1997, respectively. Capitalized costs are
amortized by the unit-of-production method using estimates of proved oil and gas
reserves prepared by independent engineers. The costs of unproved properties are
excluded from amortization until the properties are evaluated. 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.
F-8
<PAGE> 99
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company limits the capitalized costs of oil and gas properties, net of
accumulated 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 estimated future tax effects. If capitalized
costs exceed this limit (the full cost ceiling), the excess is charged to
depreciation and amortization expense. During the years ended June 30, 1999 and
1998, the Company recorded full cost ceiling writedowns of $35,033,000 and
$28,166,000, respectively.
Amortization of the capitalized costs of oil and gas properties 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 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 charged
to expense as incurred.
The Company's oil and gas 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.
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-9
<PAGE> 100
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
INCOME TAXES
Income taxes are accounted for under the asset and liability method, under which
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. 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. The measurement of deferred tax assets
is adjusted by a valuation allowance, if necessary, to recognize the extent to
which based on available evidence, the future tax benefits more likely than not
will be realized.
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.
During 1999, 1998, and 1997, the Company issued an aggregate of 8,740,
1,337,500, and 1,529,500 shares of Common Stock, respectively, valued at
$65,000, $4,812,000, and $641,000, respectively, in connection with the
acquisitions of certain interests in oil and gas properties. In 1998, in
connection with certain promotional services rendered by an unrelated party, the
Company issued 150,000 shares of Common Stock valued at $300,000. In 1997, in
connection with the acquisitions of oil and gas properties, the Company issued
notes payable to the sellers of the properties which were recorded at
$2,473,000, net of issuance discount of $354,000.
F-10
<PAGE> 101
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER COMMON SHARE
Net loss per common share is presented in accordance with Statement of Financial
Accounting Standards No. 128, Earnings per Share. As the Company incurred net
losses during each of the years ended June 30, 1999, 1998 and 1997, the loss per
common share data is based on the weighted average common shares outstanding.
STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25) in accounting for its employee
stock options. Under APB 25, if the exercise price of an employee's stock
options equals or exceeds the market price of the underlying stock on the date
of grant and certain other plan conditions are met, no compensation expense is
recognized.
CONCENTRATIONS OF CREDIT RISK
For the year ended June 30, 1999, four oil and gas companies accounted for 30%,
12%, 11%, and 9%, respectively, of the Company's oil and gas sales. For the year
ended June 30, 1998, two oil and gas companies accounted for 17% and 13%,
respectively, of the Company's oil and gas sales. For the year ended June 30,
1997, five oil and gas companies accounted for 32%, 14%, 17%, 10% and 9%,
respectively, of the Company's oil and gas sales. The Company does not believe
that the loss of any of these buyers would have a material effect on the
Company's business or results of operations as it believes it could readily
locate other buyers. The Company's receivables are generally unsecured.
FOREIGN CURRENCY
Foreign currency transactions are translated into 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.
Unrealized translation gains of $19,000, $18,000, and $300,000 were recognized
during the years ended June 30, 1999, 1998, and 1997, respectively, and are
included in interest and other income in the accompanying consolidated
statements of operations.
F-11
<PAGE> 102
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
DERIVATIVES
The Company utilizes certain derivative financial instruments to hedge future
oil and gas prices and interest rate risk (see Note 4). Gains and losses arising
from the use of the instruments are deferred until realized. Gains and losses
from hedges of oil and gas prices are reported as oil and gas sales. Gains and
losses from interest rate hedges are reported in interest expense.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities, which is required to be adopted in years beginning after
June 15, 2000. The Statement permits early adoption as of the beginning of any
fiscal quarter after its issuance. The Company expects to adopt the new
Statement effective July 1, 2000. The Statement will require the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. The Company has not yet determined what the effect of
Statement 133 will be on the earnings and financial position of the Company.
COMPREHENSIVE INCOME
As of July 1, 1998, the Company adopted Financial Accounting Standards Board
Statement No. 130, Reporting Comprehensive Income. Comprehensive income is
defined as the change in equity of a business enterprise during a period from
transactions and other events and circumstances from non-owner sources.
Statement 130 establishes rules for the reporting and display of comprehensive
income and its components. For 1998, 1997 and 1996, there were no differences
between net earnings and total comprehensive income.
2. ACQUISITIONS
The consolidated financial statements include the results of operations of the
acquired interests in oil and gas properties from their respective acquisition
dates.
F-12
<PAGE> 103
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
On November 6, 1996, the Company acquired 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 shares of Common
Stock valued at $18,000.
On December 16, 1996, the Company acquired 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 shares of
Common Stock valued at approximately $16,000.
On February 5, 1997, the Company acquired 60 gross productive wells (48.4 net
productive wells) and two developmental properties located in Mississippi,
Louisiana, and Texas (the Core Properties). The adjusted purchase price
consisted of cash of approximately $1,700,000, four notes payable totaling
$2,400,000, and 659,000 shares of Common Stock valued at approximately $330,000.
On March 13, 1997, the Company acquired one gross productive well (0.3375 net
productive well) located in Louisiana (the Intercoastal Property). The purchase
price consisted of cash of $562,500 and 578,500 shares of Common Stock valued at
approximately $289,000. The cash portion of these acquisitions was funded
through sales of 1,060,000 shares of Common Stock pursuant to Regulation S,
resulting in net proceeds to the Company of $2,385,000 (the Equity Private
Placements).
The following unaudited pro forma summary of the Company's consolidated results
of operations for the year ended June 30, 1997, was prepared as if the
acquisitions of the Core Properties, the Intercoastal Property, and the Equity
Private Placements had occurred on July 1, 1996. The historical results of the
Frymire Purchase and the Trigg Federal Purchase were not significant. 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 and the Equity Private Placements had been made on July 1,
1996.
<TABLE>
<CAPTION>
1997
-----------
<S> <C>
Revenues $ 6,318,000
===========
Net loss $ (506,000)
===========
Loss per common share $ (.02)
===========
</TABLE>
F-13
<PAGE> 104
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
On August 1, 1997, the Company acquired 77 productive wells (12.35 net
productive wells) located in New Mexico, Oklahoma, and Texas (the Collins and
Ware Properties). In consideration for these properties, the Company paid
$6,000,000 in cash and issued 1,000,000 shares of Common Stock valued at
$3,125,000. The cash portion of these acquisitions was funded with borrowings
under the Company's credit facility.
On March 9, 1998, the Company purchased certain operated natural gas properties
in western Kentucky for net cash consideration of $450,000 and 337,500 shares of
the Company's Common Stock valued at approximately $1,687,000 (the NASGAS
Property Acquisition). The acquired properties are comprised of interests in 21
gross wells (12.6 net) and 61,421 gross acres (36,858 net) (the NASGAS
Properties).
On April 20, 1998, the Company acquired certain non-operated, net profits
interests (NPIs) and royalty interests (RIs; together with the NPIs, the Morgan
Properties) for net cash consideration of approximately $137.9 million from
pension funds managed by J.P. Morgan Investments (the Morgan Property
Acquisition). The Morgan Property Acquisition was financed with borrowings under
the Credit Agreement and two subordinated bridge credit facilities (see Note 3).
The Company's interest in the Morgan Properties primarily takes the form of
nonoperated net profits overriding royalty interests, whereby the Company is
entitled to a percentage of the net profits from the operations of the
properties. The oil and gas properties burdened by the Morgan Properties are
primarily located in East Texas, South Texas, and the mid-continent region of
the United States.
Presented below are the oil and gas sales and associated production expenses
associated with the Morgan Properties, which are presented in the accompanying
consolidated statements of operations for the years ended June 30, 1999 and
1998, respectively, as net profits and royalty interests revenues:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
----------------------------
1999 1998
------------ -----------
<S> <C> <C>
Oil and gas sales $ 29,071,000 $ 6,219,000
Production expenses 5,931,000 1,787,000
------------ -----------
Net profits and royalty interests $ 23,140,000 $ 4,432,000
============ ===========
</TABLE>
F-14
<PAGE> 105
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
The following unaudited pro forma summary of the Company's consolidated results
of operations for the years ended June 30, 1998 and 1997 was prepared as if the
acquisitions of the Collins and Ware Properties, the NASGAS Properties and the
Morgan Properties, including related borrowings, had occurred on July 1, 1996.
The unaudited pro forma data is based on numerous assumptions and is not
necessarily indicative of future operations or of results which would have
actually occurred if the acquisitions and related borrowings had been made on
July 1, 1996.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
----------------------------
1998 1997
------------- ------------
<S> <C> <C>
Revenues $ 34,635,000 $ 42,052,000
============= ============
Net income (loss) $ (31,528,000) $ 2,316,000
============= ============
Income (loss) per common share:
Basic $ (1.38) $ 0.08
============= ============
Diluted N/A $ 0.08
============= ============
</TABLE>
3. CURRENT AND LONG-TERM DEBT
A summary of current and long-term debt follows:
<TABLE>
<CAPTION>
JUNE 30
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
12 1/2% Senior Notes, due July 2008 $125,000,000 $ --
12% unsecured DEM bonds, due July 2000 852,000 2,196,000
Bank of Montreal Revolving Credit Agreement 8,000,000 92,500,000
Variable Rate Senior Third Secured Equity Bridge Note Purchase Agreement -- 28,860,000
Variable Rate Senior Second Secured Note Purchase Agreement -- 30,000,000
Capital lease obligations 42,000 149,000
------------ ------------
133,894,000 153,705,000
Less current portion of debt and capitalized lease obligation 42,000 85,000
------------ ------------
Total long-term obligations $133,852,000 $153,620,000
============ ============
</TABLE>
Effective August 1, 1997, the Company entered into a credit agreement with Bank
of Montreal. This agreement provided for an initial borrowing base of
$17,000,000 to be redetermined from time to time by Bank of Montreal based on
engineering reports of oil and gas reserves. The Company was required to pay a
commitment fee annually of .35% of the unused portion of the borrowing base.
F-15
<PAGE> 106
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. CURRENT AND LONG-TERM DEBT (CONTINUED)
On April 17, 1998, the Company entered into an amended and restated credit
agreement with Bank of Montreal and certain affiliates of JEDI. The amended and
restated agreement (the Credit Agreement) provides for borrowings up to
$125,000,000 (subject to borrowing base limitations). As of June 30, 1999 and
1998, $8,000,000 and $92,500,000, respectively, were outstanding under the
Credit Agreement. As of June 30, 1999, no additional borrowing capability was
available to the Company under the terms of the Credit Agreement. The loan under
the Credit Agreement matures on October 1, 2000.
Indebtedness incurred under the Credit Agreement generally bears interest under
various interest rate pricing options based upon a Federal Funds rate (plus
.5%), Prime Rate or LIBOR rate options. LIBOR rate loans bear an applicable
margin over the LIBOR rate of (i) 2.25%, if greater than 90% of the available
Borrowing Base has been drawn, (ii) 2%, if greater than 75% and not more than
90% of the available Borrowing Base has been drawn, (iii) 1.5%, if greater than
40% but not more than 75% of the available Borrowing Base has been drawn, and
(iv) 1%, if not more than 40% of the available Borrowing Base has been drawn. On
May 14, 1999 the Credit Agreement was amended to reflect an interest rate
pricing of Base Rate plus 2.00%. The interest rate at June 30, 1999 and 1998 was
9.75% and 8.50%, respectively.
The loan under the Credit Agreement is secured by a first lien on the oil and
gas properties of the Company. Pursuant to the Credit Agreement, the Company is
subject to certain affirmative and negative financial and operating covenants
that are usual and customary for transactions of this nature. On September 30,
1997, December 31, 1997, September 30, 1998, December 31, 1998 and March 31,
1999 the Company was not in compliance with its interest coverage ratio
covenant. Bank of Montreal waived these covenant violations solely with respect
to these specific defaults. At June 30, 1999, the Company was in default of its
tangible net worth covenant which required the Company to maintain an aggregate
tangible net worth of not less than $40.0 million. At June 30, 1999, the
Company's aggregate tangible net worth, as calculated under the terms of the
Credit Agreement, was $37.4 million. The Credit Agreement was amended on October
13, 1999 to reset the minimum aggregate tangible net worth covenant to $33
million. The Company believes, but cannot assure, that it will be able to comply
with all restrictive covenants in the future or obtain waivers from the bank
with respect to noncompliance.
F-16
<PAGE> 107
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. CURRENT AND LONG-TERM DEBT (CONTINUED)
Also in April 1998, in connection with the acquisition of the Morgan Properties,
the company entered into a Variable Rate Senior Second Secured Note Purchase
Agreement (the Debt Bridge Facility) in the amount of $30,000,000 and a Variable
Rate Senior Third Secured Equity Bridge Note Purchase Agreement (the Equity
Bridge Facility and collectively the Bridge Facilities), also in the amount of
$30,000,000, with Bank of Montreal, Enron, and an affiliate of Enron. As of June
30, 1998, an aggregate of $58,860,000 was outstanding under the Bridge
Facilities.
The Debt Bridge Facility bore interest at a rate of LIBOR plus 4% per annum (10%
at June 30, 1998). The Equity Bridge Facility bore interest at a rate of LIBOR
plus 6% per annum (12% at June 30, 1998).
On July 8, 1998, the Bridge Facilities were retired and approximately
$82,200,000 of borrowings under the Credit Agreement were repaid, and the
borrowing base of the Credit Agreement was revised to $25,000,000. The Credit
Agreement was amended during the year ended June 30, 1999 to provide for a
borrowing base of $8,000,000 as of June 30, 1999.
On July 8, 1998, the Company completed a private placement of $125,000,000
principal amount of 12 1/2% Senior Notes (the Notes) due July 1, 2008. Interest
on the Notes is payable semiannually on January 1 and July 1 of each year,
commencing January 1, 1999, at the rate of 12 1/2% per annum. The Notes are
senior unsecured obligations of the Company and rank pari passu with any
existing and future unsubordinated indebtedness of the Company. The Notes rank
senior to all unsecured subordinated indebtedness of the Company. The Notes
contain normal covenants that limit the Company's ability to incur additional
debt, pay dividends, and sell assets of the Company. Substantially all of the
proceeds from issuance of the Notes were used to retire the Bridge Facilities
and repay borrowings under the Credit Agreement.
Effective December 29, 1997, the Company established the ECT Revolving Credit
Agreement with ECT, an affiliate of Enron, to fund capital costs incurred with
future development projects and to fund future acquisitions. The ECT Revolving
Credit Agreement is subordinate to the Credit Agreement. The ECT Revolving
Credit Agreement provides for borrowing up to $10.0 million, on a revolving
basis and subject to borrowing base limitations, which has initially been set at
an amount equal to 40% of the borrowing base established from time to time under
the Credit Agreement. This facility is designed to provide bridge financing for
development projects and acquisitions to be completed on relatively short notice
or until the affected assets are eligible to be included in the borrowing base
for the Credit Agreement or financed with longer-term indebtedness or equity
capital; provided, that the availability for acquisitions under the facility is
limited to the lesser of $5.0 million or 50% of the borrowing base as in effect
from time to time. No indebtedness was outstanding under this facility as of
June 30, 1999 and 1998. Borrowings in excess of certain amounts under the ECT
Revolving Credit Agreement will reduce the available borrowing base under the
Credit Agreement. The loan is secured by a second priority lien and security
interest (behind the first lien position of the Credit Agreement) in
substantially all of the oil and gas properties of the Company.
F-17
<PAGE> 108
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. CURRENT AND LONG-TERM DEBT (CONTINUED)
The ECT Revolving Credit Agreement is subject to payment of interest at a
fluctuating rate per annum equal to (i) the rate of 1% above the then highest
rate of interest being paid on any portion of the indebtedness owed under the
Credit Agreement or (ii) 15%, under certain circumstances described in the
agreement.
The maturity date for the ECT Revolving Credit Agreement is the earlier of
December 30, 2002 or the date that is 60 days after the Company receives written
notice that Enron and its affiliates beneficially own in the aggregate less than
10% of the capital through the maturity date. From March 31, 1998 the Company
will pay interest on the outstanding loans at quarterly intervals, on the last
business day of every March, June, September, and December. In addition, the ECT
Revolving Credit Agreement provides for certain voluntary prepayments and
certain mandatory prepayments of amounts borrowed under the facility.
The ECT Revolving Credit Agreement also provides that, commencing January 1999,
during certain periods any indebtedness of the Company under the agreement may
be exchanged for shares of the Company's Common Stock. The exchange ratio is
based on a formula that is a function of the market price of the Common Stock at
the time of exchange.
The Company is subject to various covenants under the ECT Revolving Credit
Agreement, which covenants are substantially similar to the covenants described
above with respect to the Credit Agreement. In addition to the covenants, the
ECT Revolving Credit Agreement contains representations, warranties, covenants,
and default provisions customary for a facility of this type.
The Company paid ECT a fee of $200,000 during 1998 in connection with the
arrangement of the ECT Revolving Credit Agreement. In addition, commencing March
31, 1998, and on each payment date thereafter, the Company is obligated to pay
ECT, for the account of each lender under the ECT Revolving Credit Agreement, a
fee of 3/8% per annum on the daily average of the unadvanced portion of the
facility for the period since January 12, 1998 or the previous payment date to
such payment date. Payment of this fee has been waived by ECT indefinitely since
April 12, 1998.
Beginning July 1995, the Company initiated private debt offerings 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 3,950,000 was outstanding at June 30, 1998. On
July 15, 1998, the Company redeemed notes totaling DEM 2,350,000 for
approximately $1,300,000. At June 30, 1999, DEM 1,600,000 was outstanding. 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 February 1997, in connection with the acquisition of certain oil and gas
properties, the Company issued four notes totaling $2,400,000 (the Acquisition
Notes) secured by a first lien on the acquired properties. Two of these notes,
totaling $400,000, bore no interest and were retired prior to June 30, 1997. The
F-18
<PAGE> 109
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. CURRENT AND LONG-TERM DEBT (CONTINUED)
remaining two notes, totaling $2,000,000, were originally payable no later than
February 4, 2000, and bore no interest for the first two years and 9% for the
final year, payable in Common Stock of the Company. The terms of the remaining
two notes were renegotiated, with the seller surrendering the first lien on the
Core Properties in exchange for a note requiring a payment of $2,000,000 on
January 31, 1998. As a result of the modification of the debt terms, in 1997 the
Company recognized an extraordinary loss on modification of $171,000, the
difference between the carrying value of the original notes (including accreted
discount of approximately $72,000) and the present value of the new note. This
note was retired during 1998.
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 do so; 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.
During 1999, 1998, and 1997, the Company made cash payments of interest totaling
approximately $9,105,000; $3,946,000; and $765,000, respectively.
4. HEDGING ACTIVITIES
The Company had agreements with an affiliate of JEDI to hedge 50,000 MMBtu of
natural gas production and 10,000 barrels of oil production monthly. The
agreements, effective September 1, 1997, and terminating August 31, 1998, called
for a natural 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 the counterparty an amount equal to one-half 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, the counterparty 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. During the years ended June 30, 1999 and 1998, the Company
recognized net hedging gains of approximately $85,000 and $120,000,
respectively, relating to these agreements, which are included in oil and gas
sales.
The Company has implemented a comprehensive hedging strategy for its natural gas
production over the next few years. The table below sets out volumes of natural
gas hedged with a floor price of $1.90 per MMBtu with Enron, an affiliate of
JEDI, which received a fee of $478,000 during the year ended June 30, 1998 for
entering into this agreement. The volumes presented in this table are divided
equally over the months during the period:
F-19
<PAGE> 110
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. HEDGING ACTIVITIES (CONTINUED)
<TABLE>
<CAPTION>
Volume
Period Beginning Period Ending (MMBtu)
--------------------------------------- -------------------------- ------------------
<S> <C> <C>
May 1, 1998........................... December 31, 1998 885,000
January 1, 1999....................... December 31, 1999 1,080,000
January 1, 2000....................... December 31, 2000 880,000
January 1, 2001....................... December 31, 2001 740,000
January 1, 2002....................... December 31, 2002 640,000
January 1, 2003....................... December 31, 2003 560,000
</TABLE>
The table below sets out volume of natural gas hedged with a swap at $2.40 per
MMBtu with Enron. The volumes presented in this table are divided equally over
the months during the period:
<TABLE>
<CAPTION>
Volume
Period Beginning Period Ending (MMBtu)
--------------------------------------- -------------------------- ------------------
<S> <C> <C>
May 1, 1998........................... December 31, 1998 2,210,000
January 1, 1999....................... December 31, 1999 2,710,000
January 1, 2000....................... December 31, 2000 2,200,000
January 1, 2001....................... December 31, 2001 1,850,000
January 1, 2002....................... December 31, 2002 1,600,000
January 1, 2003....................... December 31, 2003 1,400,000
</TABLE>
Effective May 1, 1998 through December 31, 2003, the Company has a contract
involving the hedging of a portion of its future natural gas production
involving floor and ceiling prices as set out in the table below. The volumes
presented in this table are divided equally over the months during the period.
<TABLE>
<CAPTION>
Volume Floor Ceiling
Period Beginning Period Ending (MMBtu) Price Price
----------------------------------------- ---------------------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
May 1, 1998.......................... December 31, 1998 3,540,000 $2.00 $2.70
January 1, 1999...................... December 31, 1999 4,330,000 2.00 2.70
January 1, 2000...................... December 31, 2000 3,520,000 2.00 2.70
January 1, 2001...................... April 30, 2001 990,000 2.00 2.70
May 1, 2001.......................... December 31, 2001 1,980,000 2.00 2.80
January 1, 2002...................... April 30, 2002 850,000 2.00 2.80
May 1, 2002.......................... December 31, 2002 1,700,000 2.00 2.90
January 1, 2003...................... December 31, 2003 2,250,000 2.00 2.90
</TABLE>
F-20
<PAGE> 111
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. HEDGING ACTIVITIES (CONTINUED)
During the years ended June 30, 1999 and 1998, the Company recognized hedging
gains of approximately $1,690,000 and $122,000, respectively, relating to these
agreements, which are included in net profits and royalty interests revenues.
During the year ended June 30, 1999, the Company entered into a swap agreement
with an affiliate of JEDI to hedge 12,000 barrels of oil production monthly at
$17.00 per barrel, for the months of October, November and December 1998. The
Company recognized hedging gains of approximately $147,000 relating to this
agreement which are included in net profits and royalty interests revenues.
During the year ended June 30, 1999, the Company entered into a swap agreement
with an affiliate of JEDI to hedge 10,000 barrels of oil production monthly at
$13.50 per barrel for the six months March through August, 1999, and for 5,000
barrels of oil production monthly at $14.35 per barrel, and for 5,000 barrels of
oil production monthly at $14.82 per barrel for the six months April through
September 1999. The Company recognized hedging losses of approximately $231,000
relating to this agreement which are included in net profits and royalty
interests revenues.
The Company entered into a forward LIBOR interest rate swap effective for the
period June 30, 1998 through June 29, 2009 at a rate of 6.30% on $125.0 million,
which could be unwound at any time at the option of the Company. On July 9,
1998,as a result of the retirement of the Bridge Facilities and borrowings under
the Credit Agreement, the Company terminated the agreement at a cost of
$3,549,000. The cost of termination has been reflected as an extraordinary loss
in the accompanying consolidated statement of operations for the year ended June
30, 1999.
5. STOCKHOLDERS' EQUITY
GENERAL
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.
During 1997, the Company's Certificate of Incorporation was amended to (i)
authorize the issuance of 50,000,000 shares of preferred stock of the Company,
par value $.01 per share (the Preferred Stock), of which 9,600,000 shares have
been designated as Series A Preferred Stock, 9,600,000 shares have been
designated as Series B Preferred Stock, and (ii) increase the number of
authorized shares of Common stock from 40,000,000 shares to 100,000,000 shares.
During 1998, 10,400 shares of Preferred Stock were designated and issued as
Series C Preferred Stock.
Any authorized but unissued or unreserved Common Stock and undesignated
Preferred Stock is available for issuance at any time, on such terms and for
such purposes as the Board of Directors may deem advisable in the future without
further action by stockholders of the Company, except as may be required by law
or the Series A Certificate of Designation. The Board of Directors of the
Company has the authority to fix the rights, powers, designations, and
preferences of the undesignated Preferred Stock and to provide for one or more
series of undesignated Preferred Stock. The authority will include, but not be
F-21
<PAGE> 112
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
limited to, determination of the number of shares to be included in the series;
dividend rates and rights; voting rights, if any; conversion privileges and
terms; redemption conditions; redemption values; sinking funds; and rights upon
involuntary or voluntary liquidation.
CAPITAL STOCK PURCHASE AGREEMENTS
In March 1997, the Company entered into a Securities Purchase Agreement (the
JEDI Purchase Agreement) with Joint Energy Development Investments Limited
Partnership (JEDI), an affiliate of Enron Finance Corp. (EFC), and a Securities
Purchase Agreement (the Forseti Purchase Agreement) with Forseti Investments
Ltd. (Forseti).
Pursuant to the JEDI Purchase Agreement, in May 1997, JEDI acquired 9,600,000
shares of Series A Participating Convertible Preferred Stock, par value $0.01
per share, of the Company (the Series A Preferred Stock), certain warrants to
purchase Common Stock and nondilution rights as in regard to future stock
issuances. The aggregate consideration received by the Company consisted of
$5,000,000 ($0.521 per share).
The JEDI nondilution rights resulted in JEDI receiving warrants, with a one year
term, in connection with certain Company stock issuances prior to December 31,
1998. The exercise price of such warrants equals the price per share of the
issuances.
In connection with the issuance of the Series A Preferred Stock, the Company
granted JEDI certain maintenance rights and certain demand and piggyback
registration rights with respect to the shares of Common Stock issuable upon
conversion of the Series A Preferred Stock and the shares of Common Stock
issuable upon exercise of the warrants.
Pursuant to the terms of the Series A Preferred Stock, JEDI may designate a
number of directors to the Company's Board of Directors, such that the
percentage of the number of directors that JEDI may designate approximates the
percentage voting power JEDI has with respect to the Company's Common Stock. In
addition, upon certain events of default (as defined in the Series A Certificate
of Designation), JEDI will have the right to elect a majority of the directors
of the Company and an option to sell the Series A Preferred Stock to the
Company.
Pursuant to the Forseti Purchase Agreement, in May 1997, the Company repurchased
9,600,000 shares of Common Stock owned by Forseti in exchange for (i) $5,000,000
($0.521 per share) cash, (ii) the issuance by the Company of Class A Common
Stock Purchase Warrants to purchase 1,000,000 shares of Common Stock at an
initial exercise price of $2.50 per share (the Class A Warrants) and Class B
Common Stock Purchase Warrants to purchase 2,000,000 shares of Common Stock at
an initial exercise price of $2.50 per share (the Class B Warrants, and together
with the Class A Warrants, the Forseti Warrants), and (iii) certain contingent
payments. Forseti had the option of either selling or exercising the Forseti
Warrants or receiving the contingent payments. During the year ended June 30,
1998, Forseti elected to sell the warrants to a third party and thus lost the
rights to receive any contingent payments.
F-22
<PAGE> 113
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
The JEDI Purchase Agreement contains certain positive and negative covenants.
The Company was in compliance with all of the applicable covenants at June 30,
1999 and 1998.
Pursuant to the JEDI Purchase Agreement, JEDI, EIBOC, and certain officers of
the Company (Management Stockholders) entered into a Stockholders Agreement
whereby JEDI, EIBOC, and the Management Stockholders agreed to certain
restrictions on the transfer of shares of Common Stock held by EIBOC and the
transfer of shares of Common Stock or securities convertible, exercisable, or
exchangeable for shares of Common Stock held by JEDI. The Stockholders Agreement
will terminate on the earlier of (i) the fifth anniversary of the date of the
Stockholders Agreement or (ii) the date on which JEDI and its affiliates
beneficially own in the aggregate less than 10% of the voting power of the
Company's capital stock.
SERIES A PREFERRED STOCK
The holders of shares of Series A Preferred Stock are generally entitled to vote
(on an as-converted basis) as a single class with the holders of the Common
Stock, together with all other classes and series of stock of the Company that
are entitled to vote as a single class with the Common Stock, on all matters
coming before the Company's stockholders.
For so long as at least 960,000 shares of Series A Preferred Stock are
outstanding, the following matters require the approval of the holders of shares
of Series A Preferred Stock, voting together as a separate class:
(i) the amendment of any provision of the Company's Certificate of
Incorporation or the bylaws;
(ii) the creation, authorization, or issuance of, or the increase in the
authorized amount of, any class or series of shares ranking on a parity
with or prior to the Series A Preferred Stock either as to dividends or
upon liquidation, dissolution, or winding up;
(iii) the merger or consolidation of the Company with or into any other
corporation or other entity or the sale of all or substantially all of
the Company's assets; or
(iv) the reorganization, recapitalization, or restructuring or similar
transaction that requires the approval of the stockholders of the
Company.
The holders of shares of Series A Preferred Stock have the right, acting
separately as a class, to elect a number of members to the Company's Board of
Directors. The number shall be a number such that the quotient obtained by
dividing such number by the maximum authorized number of directors is as close
as possible to being equal to the percentage of the outstanding voting power of
the Company entitled to vote generally in the election of directors represented
by the outstanding shares of Series A Preferred Stock at the relevant time.
F-23
<PAGE> 114
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
A holder of shares of Series A Preferred Stock has the right, at the holder's
option, to convert all or a portion of its shares into shares of Common Stock at
any time at an initial rate of one share of Series A Preferred Stock for one
share of Common Stock.
The Series A Certificate of Designation provides for customary adjustments to
the number of shares issuable upon conversion in the event of certain dividends
and distributions to holders of Common Stock, certain reclassifications of the
Common Stock, stock splits, and combinations and mergers and similar
transactions.
The holders of the shares of Series A Preferred Stock are entitled to receive
dividends (other than a dividend or distribution paid in shares of, or warrants,
rights, or options exercisable for or convertible into or exchangeable for,
Common Stock) when and if declared by the Board of Directors on the Common Stock
in an amount equal to the amount each such holder would have received if such
holder's shares of Series A Preferred Stock had been converted into Common
Stock. The holders of Series A Preferred Stock will also have the right to
certain dividends upon and during the continuance of an Event of Default.
Upon the liquidation, dissolution, or winding up of the Company, the holders of
the shares of Series A Preferred Stock, before any distribution to the holders
of Common Stock, are entitled to receive an amount per share equal to $.521 plus
all accrued and unpaid dividends thereon (Liquidation Preference). The holders
of the shares of Series A Preferred Stock will not be entitled to participate
further in the distribution of the assets of the Company.
The Series A Certificate of Designation provides that an Event of Default will
be deemed to have occurred if the Company fails to comply with any of its
covenants in the JEDI Purchase Agreement, provided that the Company will have a
30-day cure period with respect to the non-compliance with certain covenants.
Upon the occurrence but only during the continuance of an Event of Default, the
holders of Series A Preferred Stock are entitled to receive, in addition to
other dividends payable to holders of Series A Preferred Stock, when and if
declared by the Board of Directors, cumulative preferential cash dividends
accruing from the date of the Event of Default in an amount per share per annum
equal to 6% of the Liquidation Preference in effect at the time of accrual of
such dividends, payable quarterly in arrears on or before the 15th day after the
last day of each calendar quarter during which such dividends are payable.
Unless full cumulative dividends accrued on shares of Series A Preferred Stock
have been or contemporaneously are declared and paid, no dividend may be
declared or paid or set aside for payment on the Common Stock or any other
junior securities (other than a dividend or distribution paid in shares of, or
warrants, rights, or options exercisable for or convertible into or exchangeable
for, Common Stock or any other junior securities), nor shall any Common Stock
nor any other junior securities be redeemed, purchased, or otherwise acquired
for any consideration, nor may any monies be paid to or made available for a
sinking fund for the redemption of any shares of any such securities.
Upon the occurrence and during the continuance of an Event of Default resulting
from the failure to comply with certain covenants, the holders of shares of
Series A Preferred Stock have the right, acting
F-24
<PAGE> 115
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
separately as a class, to elect a number of persons to the Board of Directors of
the Company that, along with any members of the Board of Directors who are
serving at the time of such action, will constitute a majority of the Board of
Directors.
Upon the occurrence of an Event of Default resulting from the failure to comply
with certain covenants, each holder of shares of Series A Preferred Stock has
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 Preferred Stock for an amount in cash equal to the Liquidation
Preference in effect at the time of the Event of Default.
Concurrently with the transfer of any shares of Series A Preferred Stock to any
person (other than a direct or indirect affiliate of JEDI or other entity
managed by Enron Corp. or any of its affiliates), the shares of Series A
Preferred Stock so transferred will automatically convert into a like number of
shares of Series B Preferred Stock.
SERIES B PREFERRED STOCK
The Series B Certificate of Designation authorizes the issuance of up to
9,600,000 shares of Series B Preferred Stock. The terms of the Series B
Preferred Stock are substantially similar to those of the Series A Preferred
Stock, except that the holders of Series B Preferred Stock will not (i) have
class voting rights except as required under Delaware corporate law, (ii) be
entitled to any remedies upon an event of default, or (iii) be entitled to elect
any directors of the Company, voting separately as a class.
SERIES C PREFERRED STOCK
The holders of shares of Series C Preferred Stock are not entitled to vote with
the holders of the Common Stock except as required by law or as set forth below.
For so long as any shares of Series C Preferred Stock are outstanding, the
following matters will require the approval of the holders of at least
two-thirds of the then outstanding shares of Series C Preferred Stock, voting
together as a separate class:
(i) alter or change the rights, preferences or privileges of the Series C
Preferred Stock or any other capital stock of the Company so as to
affect adversely the Series C Preferred Stock;
(ii) create any new class or series of capital stock having a preference
over or ranking pari passu with the Series C Preferred Stock as to
redemption, the payment of dividends or distribution of assets upon a
Liquidation Event (as defined in the Series C Certificate of
Designation) or any other liquidation, dissolution or winding up of the
Company;
(iii) increase the authorized number of shares of Preferred Stock of the
Company;
(iv) re-issue any shares of Series C Preferred Stock which have been
converted in accordance with the terms hereof;
F-25
<PAGE> 116
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
(v) issue any Senior Securities (other than the Company's Series B
Preferred Stock pursuant to the terms of the Company's Series A
Preferred Stock) or Pari Passu Securities (each, as defined in the
Series C Certificate of Designation); or
(vi) declare, pay or make any provision for any dividend or distribution
with respect to the Common Stock or any other capital stock of the
Company ranking junior to the Series C Preferred Stock as to dividends
or as to the distribution of assets upon liquidation, dissolution or
winding up of the Company.
The holders of at least two-thirds (2/3) of the then outstanding shares of
Series C Preferred Stock can agree to allow the Company to alter or change the
rights, preferences or privileges of the shares of Series C Preferred Stock.
Holders of the Series C Preferred Stock that did not agree to such alteration or
change shall have the right for a period of thirty (30) days following such
change to convert their Series C Preferred Stock to Common Stock.
A holder of shares of Series C Preferred Stock has the right, at the holder's
option, to convert all or a portion of its shares into shares of Common Stock at
any time. The number of shares of Common Stock into which a share of Series C
Preferred Stock may be converted will be determined as of the conversion date
according to a formula set forth in the Series C Certificate of Designation.
Generally, the conversion rate is equal to the aggregate stated value of the
shares to be converted divided by a floating conversion price that may not
exceed $7.35 per share. On December 24, 2001, all shares of Series C Preferred
Stock that are then outstanding shall be automatically converted into shares of
Common Stock.
The Series C Certificate of Designation provides for customary adjustments to
the number of shares issuable upon conversion in the event of certain dividends
and distributions to holders of Common Stock, certain reclassifications of the
Common Stock, stock splits, combinations and mergers, and similar transactions
and certain changes of control.
The holders of the shares of Series C Preferred Stock are entitled to receive
cumulative dividends, when and if declared by the Board of Directors, subject to
the prior payment of any accumulated and unpaid dividends to holders of Senior
Securities, but before payment of dividends to holders of Junior Securities (as
defined in the Series C Certificate of Designation), on each share of Series C
Preferred Stock in an amount equal to the stated value of such share multiplied
by 5%.
Upon the liquidation, dissolution or winding up of the Company, the holders of
the shares of Series C Preferred Stock, before any distribution to the holders
of Junior Securities, and after payments to holders of Senior Securities, will
be entitled to receive an amount equal to the stated value of the Series C
Preferred Stock (subject to ratable adjustment in the event of reclassification
of the Series C Preferred Stock or other similar event) plus any accrued and
unpaid dividends thereon.
The Company has the right to redeem all of the outstanding Series C Preferred
Stock under certain conditions. Holders of Series C Preferred Stock have the
right to tender shares for redemption upon the occurrence of certain events,
which are in the control of management. During fiscal year 1999, the Company
repurchased 2,152 shares of Series C Preferred Stock at a cost of $2,251,000.
F-26
<PAGE> 117
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
During fiscal year 1999, 3,550 shares of Series C Preferred Stock were converted
into 1,328,639 shares of Common Stock. Additionally, 77,571 shares of Common
Stock, representing accrued but unpaid dividends due to the converting Series C
Preferred Stock holders, were issued upon conversion.
COMMON STOCK
During July 1998, the Company completed the private placement of an aggregate of
3,428,574 shares of the Company's Common Stock at $7 per share (the July Equity
Offerings) which included certain repricing rights (the Repricing Rights) to
acquire additional shares of Common Stock (Repricing Common Shares) and warrants
(the Warrants) to purchase an aggregate of up to 1,085,000 shares of Common
Stock (Warrant Common Shares). Additionally, JEDI exercised warrants to acquire
an aggregate of 980,935 shares of Common Stock at $3.33 per share and
nondilution rights to purchase 693,301 shares of the Company's Common Stock at
$2.50 per share and another entity exercised warrants to acquire an aggregate of
800,000 shares of Common Stock at $2.50 per share (collectively, the Warrant
Exercises).
During November 1998, the Company completed the private placement of an
aggregate of 416,667 shares of the Company's Common Stock at $6 per share (the
November Equity Offerings) which included certain repricing rights (the
Repricing Rights) to acquire additional shares of Common Stock (Repricing Common
Shares) and warrants (the Warrants) to purchase an aggregate of up to 206,340
shares of Common Stock (Warrant Common Shares).
The Repricing Rights allows the purchasers of the Common Shares under the Equity
Offerings to receive Repricing Common Shares based on the following formula:
(Repricing Price - Market Price) X Common Shares
--------------------------------
Market Price
The Repricing Price is a percentage increase in the purchase price paid for the
Common Shares (up to 128% over the following 8 months). The Repricing Rights can
only be exercised one time and the Company can repurchase the Repricing Rights
under certain conditions. During the year ended June 30, 1999, 1,384,016 shares
of Common Stock were issued upon exercise of Repricing Rights.
Each holder of Repricing Common Shares or Repricing Rights has the right to
require the Company to repurchase all or a portion of such holder's Repricing
Common Shares or Repricing Rights upon the occurrence of a Major Transaction or
a Triggering Event, both of which are under the control of management of the
Company.
The Warrants are exercisable for three years commencing July 8, 1998 and
November 23, 1998 at an exercise price equal to 110% of the Purchase Price. The
Warrants provide for customary adjustments to the exercise price and number of
shares to be issued in the event of certain dividends and distributions to
holders of Common Stock, stock splits, combinations and mergers. The Warrants
also include customary
F-27
<PAGE> 118
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
provisions with respect to, among other things, transfer of the Warrants,
mutilated or lost warrant certificates, and notices to holder(s) of the
Warrants.
WARRANTS
As of June 30, 1999, JEDI held warrants to purchase an aggregate of 2,569,746
shares of Common Stock at prices ranging from $3.54 to $7.44. The warrants held
by JEDI expire at various times from August 19, 1999 through December 22, 1999.
In addition, certain institutional investors hold warrants to purchase an
aggregate of 4,275,138 shares of Common Stock at prices ranging from $1.50 to a
floating rate based on market price at the time of exercise. The warrants held
by the institutional investors expire at various times from September 30, 1999
through December 24, 2001.
RIGHTS
As of June 30, 1999, JEDI held rights to purchase an aggregate of 201,366 shares
of Common Stock at $0.625. These rights expired unexercised during July 1999.
STOCK OPTIONS
Employee stock option activity for the years ended June 30, 1999,1998 and 1997
is as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
--------------------------------------------------------------------------------
1999 1998 1997
------------------------- -------------------------- ---------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
-------------------------- ------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at July 1 173,000 $ 5.25 --- $ --- --- $ ---
Granted 590,500 7.34 173,000 5.25 --- ---
Exercised --- --- --- --- --- ---
Canceled --- --- --- --- --- ---
-------------- ------------- -------------
Outstanding at June 30 763,500 $ 6.87 173,000 $ 5.25 --- $ ---
============== ============= =============
Exercisable options outstanding
at June 30 96,500 $ 5.25 --- $ --- --- $ ---
============== ============= =============
</TABLE>
The weighted-average grant date fair value of stock options granted during
1999 and 1998 were $6.23 and $3.22, respectively. The grant date fair values
were estimated at the date of grant using the Black-Scholes option pricing
model. As of June 30, 1999, the weighted average remaining contractual life of
outstanding stock options was 8.4 years.
Statement of Financial Accounting Standards No. 123, Accounting for Stock Based
Compensation, (SFAS 123) requires the disclosure of pro forma net income and
earnings per share information computed as if the Company had accounted for its
employee stock options under the fair value method set forth in SFAS 123. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option
F-28
<PAGE> 119
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
pricing model with the following weighted-average assumptions, respectively: a
risk-free interest rate of 6.00% and 5.88% during 1999 and 1998,respectively; a
dividend yield of 0%; and a volatility factor of .792 and .51 during 1999 and
1998, respectively. In addition, the fair value of these options was estimated
based on an expected weighted average life of 10 years and 7.5 years during 1999
and 1998, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Pro forma net loss $ (48,917,000) $ (32,928,000)
============= =============
Loss per common share $ (1.56) $ (1.45)
============= =============
</TABLE>
6. 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 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, 1999 and 1998, the carrying value of long-term
obligations approximates their fair values.
7. RELATED PARTY TRANSACTIONS
During 1997, the Company was 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 covered the services
provided to the Company by certain employees of Capital House and amounted to
$440,000 for the year ended June 30, 1997. The Company also reimbursed Capital
House for certain direct general and administrative costs incurred by Capital
House on behalf of the Company. The Company reimbursed Capital House
approximately $129,000 for such costs for the year ended June 30, 1997. The
Company capitalized $120,000 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, 1997. The agreement with Capital House was terminated effective
May 31, 1997, at which time the Company purchased all existing assets of Capital
House.
The Company has entered into various hedging arrangements with affiliates of
Enron. (see Note 4).
F-29
<PAGE> 120
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company has entered into a revolving credit facility with ECT, an affiliate
of Enron. (see Note 3). During the year ended June 30, 1998, commitment fees of
approximately $200,000 and interest totaling approximately $9,000 was paid to
ECT in connection with this facility.
Enron, through its affiliates, participated in the Bridge Facilities and the
Credit Agreement (see Note 3). During the years ended June 30, 1999 and 1998,
Enron received fees of approximately $0 and $460,000, respectively, and interest
payments of approximately $365,000 and $542,000, respectively, from the Company
relating to its participation in these facilities.
The Company paid Enron approximately $100,000 during both of the years ended
June 30, 1999 and 1998 under the terms of an agreement which allows the Company
to consult, among other things, with Enron's engineering staff.
During the years ended June 30, 1999 and 1998, the Company paid approximately
$38,000 and $26,000, respectively, to a company affiliated with a director of
the Company for operating certain of the Company's properties.
8. INCOME TAXES
The Company's effective tax rate differs from the U.S. statutory rate for each
of the years ended June 30, 1999, 1998, and 1997 due to losses for which no
deferred tax benefit was recognized. 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, 1999 and 1998, follow:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Deferred income tax assets (liabilities):
Reverse acquisition costs $ 43,000 $ 66,000
Net operating loss carryforwards 10,965,000 2,823,000
Statutory depletion carryforward 126,000 126,000
Oil and gas properties, principally due to differences in
depreciation and amortization 16,902,000 9,219,000
Other (146,000) (21,000)
------------ ------------
27,890,000 12,213,000
Less valuation allowance (27,890,000) (12,213,000)
------------ ------------
Net deferred income tax asset
$ -- $ --
============ ============
</TABLE>
The net changes in the total valuation allowance for the years ended June 30,
1999 and 1998, were increases of $15,677,000 and $11,133,000, respectively. The
Company's net operating loss carryforwards begin expiring in 2010.
F-30
<PAGE> 121
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. OIL AND GAS PRODUCING ACTIVITIES
The following tables set forth supplementary disclosures for oil and gas
producing activities in accordance with Statement of Financial Accounting
Standards No. 69.
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 years ended June 30,
1999 1998, and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Oil and gas sales $ 4,591,000 $ 6,446,000 $ 4,381,000
Net profits and royalty interests revenues 23,140,000 4,432,000 --
Production expenses (3,196,000) (4,547,000) (2,507,000)
Depreciation and amortization (11,803,000) (4,736,000) (915,000)
Writedown of oil and gas properties (35,033,000) (28,166,000) --
------------ ------------ ------------
Results of operations (excludes corporate
overhead and interest expense) $(22,301,000) $(26,571,000) $ 959,000
============ ============ ============
</TABLE>
Depreciation and amortization of oil and gas properties was $.74, $.89 and $.68
per Mcfe produced for the years ended June 30, 1999, 1998, and 1997,
respectively.
The following table summarizes capitalized costs relating to oil and gas
producing activities and related amounts of accumulated depreciation and
amortization at June 30, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Oil and gas properties - proved $ 178,421,000 $ 176,943,000
Accumulated depreciation and amortization
(81,469,000) (34,628,000)
------------- -------------
Net capitalized costs $ 96,952,000 $ 142,315,000
============= =============
</TABLE>
COSTS INCURRED
The following sets forth certain information with respect to costs incurred,
whether expensed or capitalized, in oil and gas activities for the years ended
June 30, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------- -----------
<S> <C> <C> <C>
Property acquisition costs $ 580,000 $ 153,196,000 $ 7,382,000
============ ============= ===========
Development costs $ 10,340,000 $ 6,031,000 $ 1,238,000
============ ============= ===========
</TABLE>
F-31
<PAGE> 122
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SUPPLEMENTARY OIL AND GAS DATA (UNAUDITED)
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 (Bbls) GAS (Mcf)
------------ ------------
<S> <C> <C>
Proved reserves:
Balance at June 30, 1996 6,932,000 12,984,000
Purchases of minerals in place 916,000 7,730,000
Revisions of previous estimates and other (988,000) 805,000
Production (151,000) (546,000)
------------ ------------
Balance at June 30, 1997 6,709,000 20,973,000
Purchases of minerals in place 4,301,000 158,528,000
Revisions of previous estimates and other (2,736,000) (38,000)
Production (325,000) (3,368,000)
------------ ------------
Balance at June 30, 1998 7,949,000 176,095,000
Sales of minerals in place (2,735,000) (18,243,000)
Revisions of previous estimates and other (90,000) (7,329,000)
Production (500,000) (12,962,000)
------------ ------------
Balance at June 30, 1999 4,624,000 137,561,000
============ ============
Proved developed reserves:
Balance at June 30, 1997 2,188,000 12,412,000
============ ============
Balance at June 30, 1998 5,298,000 120,998,000
============ ============
Balance at June 30, 1999 2,138,000 94,614,000
============ ============
</TABLE>
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.
F-32
<PAGE> 123
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SUPPLEMENTARY OIL AND GAS DATA (UNAUDITED) (CONTINUED)
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, net operating
loss carryforwards, 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 as of June 30, 1999 and 1998, are as follows:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Future cash inflows $ 415,013,000 $ 524,585,000
Future costs and expenses:
Production expenses (124,209,000) (176,633,000)
Development costs (18,811,000) (29,289,000)
Future income taxes (33,933,000) (43,938,000)
------------- -------------
Future net cash flows 238,060,000 274,725,000
10% annual discount for estimated
timing of cash flows (123,642,000) (132,410,000)
------------- -------------
Standardized measure of discounted
future net cash flows $ 114,418,000 $ 142,315,000
============= =============
</TABLE>
The weighted average price of oil and gas at June 30, 1999 and 1998, used in
calculating the Standardized Measure were $17.11 and $12.80 per barrel,
respectively, and $2.44 and $2.40 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, 1999, 1998, and
1997, are as follows:
F-33
<PAGE> 124
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SUPPLEMENTARY OIL AND GAS DATA (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Beginning balance $ 142,315,000 $ 30,146,000 $ 23,971,000
Purchases of minerals in place -- 139,292,000 14,531,000
Sales of minerals in place (16,035,000) -- --
Developed during the period 10,340,000 6,031,000 1,238,000
Net change in prices and costs 2,187,000 (15,593,000) 5,055,000
Revisions of previous estimates (22,121,000) (13,784,000) (13,405,000)
Accretion of discount 14,232,000 3,015,000 2,397,000
Net change in income taxes 6,452,000 (461,000) (1,767,000)
Sales of oil and gas produced, net of
production expenses (22,952,000) (6,331,000) (1,874,000)
------------- ------------- -------------
Balance at June 30 $ 114,418,000 $ 142,315,000 $ 30,146,000
============= ============= =============
</TABLE>
The future cash flows shown above include amounts attributable to proved
undeveloped reserves requiring approximately $18,811,000 of future development
costs. If these reserves are not developed, the future net cash flows shown
above would be significantly reduced.
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.
11. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
Subsequent to March 31, 1999, the Company determined that the costs associated
with the termination of the LIBOR interest rate swap agreement in the first
quarter of fiscal year 1999 should have been expensed upon termination. The
following interim financial information has been restated from the information
contained in the Company's Form 10-Q's as filed with the Securities and Exchange
Commission as if the costs of the LIBOR interest rate swap termination were
expensed during the first quarter:
F-34
<PAGE> 125
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. QUARTERLY FINANCIAL RESULTS (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1999:
Total revenues $ 7,353,000 $ 6,984,000 $ 6,734,000 $ 6,986,000
Writedowns of oil and gas
properties -- $(35,033,000) -- --
Operating income $ 6,188,000 $ 6,295,000 $ 6,015,000 $ 6,363,000
Loss before extraordinary item $ (2,104,000) $(37,678,000) $ (1,977,000) $ (2,183,000)
Extraordinary loss $ (3,549,000) -- -- --
Net loss $ (5,653,000) $(37,678,000) $ (1,977,000) $ (2,183,000)
Loss before extraordinary item
per common share $ (0.07) $ (1.25) $ (0.06) $ (0.07)
Net loss per common share $ (0.19) $ (1.25) $ (0.06) $ (0.07)
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1998:
Total revenues $ 1,619,000 $ 1,763,000 $ 1,572,000 $ 6,029,000
Writedowns of oil and gas
properties -- -- -- $(28,166,000)
Operating income $ 515,000 $ 794,000 $ 464,000 $ 4,664,000
Net loss $ (783,000) $ (662,000) $ (693,000) $(30,616,000)
Net loss per common share $ (0.04) $ (0.02) $ (0.03) $ (1.30)
</TABLE>
F-35
<PAGE> 126
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS MARCH 31, JUNE 30,
2000 1999
------------- -------------
<S> <C> <C>
Current assets:
Cash $ 1,309,000 $ 9,367,000
Other current assets 5,613,000 4,652,000
------------- -------------
Total current assets 6,922,000 14,019,000
Net property and equipment 95,506,000 97,198,000
Other assets 8,110,000 7,993,000
------------- -------------
$ 110,538,000 $ 119,210,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 6,477,000 $ 11,100,000
Current portion of long-term debt 593,000 42,000
------------- -------------
Total current liabilities 7,070,000 11,142,000
Long-term obligations, net of current portion 138,500,000 133,852,000
Commitments
Stockholders' deficit (Note 3):
Preferred stock, $.01 par value, authorized 50,000,000 shares:
issued and outstanding 9,602,565 and 9,604,698 shares at
March 31, 2000 and June 30, 1999, respectively 96,000 96,000
Common stock, $.0015 par value, authorized 100,000,000 shares:
issued and outstanding 55,349,985 and 33,442,210 shares at
March 31, 2000 and June 30, 1999, respectively 111,000 65,000
Additional paid-in capital 65,087,000 64,912,000
Accumulated deficit (93,075,000) (83,606,000)
Treasury stock (7,251,000) (7,251,000)
------------- -------------
Total stockholders' deficit (35,032,000) (25,784,000)
------------- -------------
$ 110,538,000 $ 119,210,000
============= =============
</TABLE>
See accompanying notes to unaudited interim period
consolidated condensed financial statements.
F-36
<PAGE> 127
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
2000 1999
------------ ------------
<S> <C> <C>
Revenues:
Oil and gas revenues $ 2,689,000 $ 3,533,000
Net profits and royalties interests 16,030,000 17,333,000
Interest and other income 150,000 197,000
------------ ------------
Total revenues 18,869,000 21,063,000
Expenses:
Oil and gas production expenses 851,000 2,573,000
General and administrative expenses 2,222,000 2,242,000
Interest and financing costs 13,910,000 13,346,000
Hedge contract termination costs (Note 4) 3,328,000 --
Depreciation, depletion and amortization 6,676,000 9,628,000
Write-down of oil and gas properties -- 35,033,000
------------ ------------
Net loss from operations (8,118,000) (41,759,000)
Extraordinary losses (Note 5) (1,130,000) (3,549,000)
------------ ------------
Net loss $ (9,248,000) $(45,308,000)
============ ============
Net loss before extraordinary losses per common share $ (0.21) $ (1.35)
============ ============
Net loss per common share $ (0.24) $ (1.47)
============ ============
Weighted average shares of common stock
outstanding during the period 38,105,000 30,829,000
============ ============
</TABLE>
See accompanying notes to unaudited interim period
consolidated condensed financial statements.
F-37
<PAGE> 128
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended March 31,
2000 1999
------------- -------------
<S> <C> <C>
Operating activities:
Net loss
Extraordinary loss $ (9,248,000) $ (45,308,000)
Depletion, depreciation, amortization of oil and gas assets 1,130,000 3,549,000
and write-down of oil and gas properties
Amortization of deferred charges 6,524,000 44,474,000
Unrealized gains on foreign exchange obligations 1,267,000 860,000
Net changes in operating assets and liabilities (53,000) (85,000)
Net cash provided by (used in) operating activities (5,584,000) 664,000
------------- -------------
(5,964,000) 4,154,000
------------- -------------
Investing activities:
Additions to property and equipment
Proceeds from sale of property and equipment (5,044,000) (9,950,000)
Net cash used in investing activities 212,000 --
------------- -------------
(4,832,000) (9,950,000)
------------- -------------
Financing activities:
Increase in deferred assets
Termination of LIBOR swap agreement (2,514,000) (4,384,000)
Proceeds from long-term obligations -- (3,549,000)
Payments on long-term obligations 19,292,000 132,000,000
Payments on capital lease obligations (13,998,000) (142,385,000)
Proceeds from the sale of preferred and common stock (42,000) (56,000)
Repurchase of Series C Preferred Stock for Treasury -- 30,803,000
Net cash provided by financing activities -- (2,251,000)
------------- -------------
2,738,000 10,178,000
------------- -------------
Net increase (decrease) in cash
(8,058,000) 4,382,000
Cash at beginning of period
9,367,000 1,029,000
------------- -------------
Cash at end of period
$ 1,309,000 $ 5,411,000
============= =============
</TABLE>
See accompanying notes to unaudited interim period
consolidated condensed financial statements.
F-38
<PAGE> 129
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
(1) Basis of Presentation
The accompanying consolidated financial statements include the accounts
of Queen Sand Resources, Inc. and its wholly owned subsidiaries
(collectively, the "Company") after elimination of all significant
intercompany balances and transactions. The financial statements have
been prepared in conformity with generally accepted accounting principles
which require management to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying notes.
While management has based its assumptions and estimates on the facts and
circumstances currently known, final amounts may differ from such
estimates.
The interim financial statements contained herein are unaudited but, in
the opinion of management, include all adjustments (consisting only of
normal recurring entries) necessary for a fair presentation of the
financial position and results of operations of the Company for the
periods presented. The results of operations for the nine months ended
March 31, 2000 are not necessarily indicative of the operating results
for the full fiscal year ending June 30, 2000. 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 consolidated financial statements and
notes thereto for the fiscal year ended June 30, 1999.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("FAS") No. 130, "Reporting
Comprehensive Income" ("FAS 130"), which established standards for
reporting and display of comprehensive income and its components in a
full set of general-purpose financial statements. Comprehensive income is
defined as the change in equity of a business enterprise during a period
from transactions and other events and circumstances from non-owner
sources. For the nine months ended March 31, 2000, the Company's net
income and comprehensive income were the same.
In June 1998, the FASB issued FAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133") which established
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for
hedging activities. FAS 133 requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The Company will
adopt the provisions of FAS 133 beginning July 1, 2000. The Company has
not yet determined what the effect of FAS 133 will be on the earnings and
financial position of the Company.
(2) Debt Issuance
During October 1999, the Company amended and restated its credit
agreement (the "Restated Credit Agreement") and new lenders were
substituted for the previous lending group led by Bank of Montreal (the
"Old Credit Agreement"). The Restated Credit Agreement allowed the
Company to borrow up to $25 million until March 31, 2000 and $30 million
thereafter. The loan bears interest at prime plus 2% on loan balances
under $25 million and prime plus 4.5% on the loan balance if the amount
outstanding is $25 million or greater. The Restated Credit Agreement
matures on October 22, 2001.
F-39
<PAGE> 130
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
(UNAUDITED)
Pursuant to the Restated Credit Agreement, we are subject to certain
affirmative and negative financial and operating covenants that are usual
and customary for transactions of this nature including maintaining a
minimum interest coverage ratio of 1.0x, based on the last 12 months
operating results. At March 31, 2000, the Company was in compliance with
these covenants. At March 31, 2000, there were $13.5 million outstanding
($12.0 million at May 9, 2000) under the Restated Credit Agreement.
(3) Common Stock Issuance
During the nine months ended March 31, 2000 the Company issued 16,095,029
shares of its common stock pursuant to the repricing rights held by
certain stockholders. In addition, certain holders of the Company's
Series `C' preferred stock converted 2,133 shares of the Series `C'
preferred stock into 5,263,934 shares of the Company's common stock. A
further 548,812 shares of the Company's common stock were issued in
payment of accrued cumulative dividends in conjunction with this
conversion.
(4) Hedging Activities
During the nine months ended March 31, 2000 the Company paid $450,000 in
cash settlements on its crude oil hedges and $417,000 in cash settlements
on its natural gas hedges and amortized $76,000 of deferred natural gas
hedging costs. In conjunction with the execution of the Restated Credit
Agreement in October 1999 (see note 2), the Company terminated the
ceiling portion of one of its natural gas hedge contracts at a cost of
$3.3 million. At March 31, 2000 the Company had a letter of credit in the
amount of $3.1 million outstanding ($6.2 million at June 20, 2000) to
secure a swap exposure.
(5) Extraordinary Losses
During October 1999 the Company retired the borrowings under the Old
Credit Agreement and entered into the Restated Credit Agreement with
another lender. As a result, the Company wrote off the remaining
$1,130,000 of deferred costs related to the Old Credit Agreement.
During July 1998 the Company terminated a LIBOR interest rate swap
agreement at a cost of $3,549,000.
F-40
<PAGE> 131
================================================================================
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus is
an offer to sell only the shares offered hereby, but only under circumstances
and in jurisdictions where it is lawful to do so. The information contained in
this prospectus is current only as of its date.
TABLE OF CONTENTS
Summary.....................................................................3
Risk Factors...............................................................11
Forward Looking Statements.................................................21
The Recapitalization.......................................................22
Price Range for Common Stock; Dividend Policy..............................26
Use of Proceeds............................................................27
Capitalization.............................................................29
Dilution...................................................................30
Selected Consolidated Financial Information................................32
Unaudited Pro Forma Condensed Consolidated Financial Statements............34
Management's Discussion and Analysis of
Financial Condition and Results of Operations............................41
Business...................................................................55
Management.................................................................76
Security Ownership of Certain Beneficial Owners and Management ............78
Description of Capital Stock...............................................79
Shares Eligible for Future Sale............................................81
Underwriting...............................................................82
Legal Matters..............................................................84
Engineers..................................................................84
Experts....................................................................84
Where You Can Find More Information........................................85
Incorporation by Reference.................................................85
Glossary...................................................................87
Index to Financial Statements.............................................F-1
================================================================================
================================================================================
10,000,000 Shares
Common Stock
QUEEN SAND RESOURCES, INC.
---------------
Prospectus
---------------
Friedman, Billings, Ramsey & Co. , Inc.
================================================================================
<PAGE> 132
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses of this offering are estimated to be as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee........... $ 24,288
NASD filing fee............................................... 9,700
Nasdaq National Market fee....................................
Legal fees and expenses.......................................
Accounting fees and expenses..................................
Engineering fees and expenses................................. 5,000
Blue Sky fees and expenses (including legal fees)............. 25,000
Printing expenses............................................. 200,000
Transfer Agent fees........................................... 1,000
Miscellaneous.................................................
---------
Total:....................
---------
</TABLE>
All of these expenses, except for the Securities and Exchange Commission
registration fee, the Nasdaq National Market fee and the NASD filing fee,
represent estimates only. We will pay all of the expenses of the offering.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Restated Certificate of Incorporation, as amended (the
"Certificate of Incorporation"), provides that no director of the Company will
be personally liable to the Company or any of its stockholders for monetary
damages arising from the director's breach of fiduciary duty as a director.
However, this does not apply with respect to any action in which the director
would be liable under Section 174 of the General Corporation Law of the State of
Delaware ("Delaware Code") nor does it apply with respect to any liability in
which the director (i) breached his duty of loyalty to the Company or its
stockholders; (ii) did not act in good faith or, in failing to act, did not act
in good faith; (iii) acted in a manner involving intentional misconduct or a
knowing violation of law or, in failing to act, shall have acted in a manner
involving intentional misconduct or a knowing violation of law; or (iv) derived
an improper personal benefit.
The Certificate of Incorporation of the Company provides that the
Company shall indemnify its directors and officers and former directors and
officers to the fullest extent permitted by the Delaware Code. Pursuant to the
provisions of Section 145 of the Delaware Code, the Company has the power to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending, or completed action, suit, or proceeding (other than
an action by or in the right of the Company) by reason of the fact that he is or
was a director, officer, employee, or agent of the Company, against any and all
expenses, judgments, fines and amounts paid in settlement actually and
reasonably incurred in connection with such action, suit, or proceeding. The
power to indemnify applies only if such person acted in good faith and in a
manner he reasonably believed to be in the best interest, or not opposed to the
II-1
<PAGE> 133
best interest, of the Company and with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
The power to indemnify applies to actions brought by or in the right of
the Company as well, but only to the extent of defense and settlement expenses
and not to any satisfaction of a judgment or settlement of the claim itself and
with the further limitation that in such actions no indemnification shall be
made in the event of any adjudication of negligence or misconduct unless the
court, in its discretion, believes that in light of all the circumstances
indemnification should apply.
The statute further specifically provides that the indemnification
authorized thereby shall not be deemed exclusive of any other rights to which
any such officer or director may be entitled under any bylaws, agreements, vote
of stockholders or disinterested directors, or otherwise.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been advised that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
ITEM 16. EXHIBITS.
(a) Exhibits:
1.1 + Form of Underwriting Agreement to be entered into among
Queen Sand Resources, Inc., Friedman, Billings, Ramsey &
Co., Inc. and the other underwriters of this offering.
3.1 Restated Certificate of Incorporation of the Company,
filed as Exhibit 4.5 to the Company's Registration
Statement on Form S-3 (No. 333-47577) filed with the
Securities and Exchange Commission on March 9, 1998, which
Exhibit is incorporated herein by reference.
3.2 Certificate of Designation of Series C Convertible
Preferred Stock of the Company, filed as an Exhibit to the
Company's Current Report on Form 8-K dated December 24,
1997, which Exhibit is incorporated herein by reference.
3.3 + Form of Amendment to Restated Certificate of
Incorporation of the Company.
3.4 Amended and Restated Bylaws of the Company, filed as an
Exhibit to the Company's Current Report on Form 8-K dated
March 27, 1997, which Exhibit is incorporated herein by
reference.
4.1 Stockholders' Agreement dated as of May 6, 1997, among the
Company, Bruce I. Benn, Edward J. Munden, Ronald I. Benn,
Robert P. Lindsay, EIBOC Investments Ltd. and Joint Energy
Development Investments Limited Partnership ("JEDI"),
filed as an Exhibit to the Company's Current Report on
Form 8-K dated May 6, 1997, which Exhibit is incorporated
herein by reference.
4.2 Indenture, dated July 1, 1998, in regard to 12 1/2% Senior
Notes due 2008 by and among the Company and certain of its
subsidiaries and Harris Trust and Savings Bank, as
Trustee, filed as an Exhibit to the Company's Current
Report on Form 8-K dated July 8, 1998, which Exhibit is
incorporated herein by reference.
II-2
<PAGE> 134
4.3 Form of 12% Notes due July 15, 2001, filed as an Exhibit
to the Company's Registration Statement on Form 10-SB
filed with the Securities and Exchange Commission on
August 12, 1996, which Exhibit is incorporated herein by
reference.
4.4 Form of Common Stock Purchase Warrant dated December 24,
1997 and issued to certain institutional investors, filed
as an Exhibit to the Company's Current Report on Form 8-K
dated December 24, 1997, which Exhibit is incorporated
herein by reference.
4.5 Form of Common Stock Purchase Warrant issued to certain
investors effective July 8, 1998, filed as an Exhibit to
the Company's Current Report on Form 8-K dated July 8,
1998, which Exhibit is incorporated herein by reference.
4.6 Registration Rights Agreement among the Company and
certain institutional investors named therein, dated
December 24, 1997, filed as an Exhibit to the Company's
Current Report on Form 8-K dated December 24, 1997, which
Exhibit is incorporated herein by reference.
4.7 Registration Rights Agreement by and between the Company
and JEDI dated May 6, 1997, filed as an Exhibit to the
Company's Current Report on Form 8-K dated May 6, 1997,
which Exhibit is incorporated herein by reference.
4.8 Registration Rights Agreement dated as of July 8, 1998
among the Company and the buyers signatory thereto, filed
as an Exhibit to the Company's Current Report on Form 8-K
dated July 8, 1998, which Exhibit is incorporated herein
by reference.
4.9 Registration Rights Agreement dated November 10, 1998
among Queen Sand Resources, Inc. and the buyers signatory
thereto, filed as an Exhibit to the Company's Current
Report on Form 8-K dated November 24, 1998, which Exhibit
is incorporated herein by reference.
4.10 Form of Common Stock Purchase Warrant issued to certain
investors as of November 10, 1998, filed as an Exhibit to
the Company's Current Report on Form 8-K dated November
24, 1998, which Exhibit is incorporated herein by
reference.
4.11 Form of Common Stock Purchase Warrant issued to Northern
Tier Asset Management, Inc. issued by the Company on April
9, 1999 and filed as an exhibit to the Company's
Registration Statement on form S-3 (No. 333-78001) which
Exhibit is incorporated by reference.
4.12 Registration Rights Agreement dated as of April 9, 1999
between the Company and Northern Tier Asset Management,
Inc. and filed as an exhibit to the Company's Registration
Statement on form S-3 (No. 333-78001) which Exhibit is
incorporated by reference.
4.13 ++ Settlement Agreement dated as of July 17, 2000 among the
Company and the stockholders named therein.
4.14 ++ Participation Agreement dated as of July 17, 2000 among
the Company and the holders of its 12 1/2% senior notes
named therein.
5.1 + Opinion of Haynes and Boone, LLP, regarding legality of
the common stock issued.
II-3
<PAGE> 135
10.1 Purchase and Sale Agreement between Eli Rebich and
Southern Exploration Company, a Texas corporation, and
Queen Sand Resources, Inc., a Nevada corporation, dated
April 10, 1996, filed as an Exhibit to the Company's
Registration Statement on Form 10-SB filed with the
Securities and Exchange Commission on August 12, 1996,
which Exhibit is incorporated herein by reference.
10.2 Purchase and Sale Agreement dated March 19, 1998 among the
Morgan commingled pension funds and Queen Sand Resources,
Inc., a Nevada corporation, filed as an Exhibit to the
Company's Current Report on Form 8-K dated March 19, 1998,
which Exhibit is incorporated herein by reference.
10.3 Securities Purchase Agreement dated as of March 27, 1997
between JEDI and the Company, filed as an Exhibit to the
Company's Current Report on Form 8-K dated March 27, 1997,
which Exhibit is incorporated herein by reference.
10.4 Securities Purchase Agreement among the Company and
certain institutional investors named therein, dated
December 22, 1997, filed as an Exhibit to the Company's
Current Report on Form 8-K dated December 24, 1997, which
Exhibit is incorporated herein by reference.
10.5 Queen Sand Resources 1997 Incentive Equity Plan, filed as
an Exhibit to the Company's Registration Statement on Form
S-4 filed with the Securities and Exchange Commission on
August 13, 1998, which Exhibit is incorporated herein by
reference.
10.6 Employment Agreement dated December 15, 1997 between the
Company and Robert P. Lindsay, filed as an Exhibit to the
Company's Registration Statement on Form S-4 filed with
the Securities and Exchange Commission on August 13, 1998
(No. 333-61403) which Exhibit is incorporated herein by
reference.
10.7 Employment Agreement dated December 15, 1997 among the
Company, Queen Sand Resources (Canada) Inc. and Bruce I.
Benn, filed as an Exhibit to the Company's Registration
Statement on Form S-4 filed with the Securities and
Exchange Commission on August 13, 1998 (No. 333-61403)
which Exhibit is incorporated herein by reference.
10.8 Employment Agreement dated December 15, 1997 among the
Company, Queen Sand Resources (Canada) Inc. and Ronald
Benn, filed as an Exhibit to the Company's Registration
Statement on Form S-4 filed with the Securities and
Exchange Commission on August 13, 1998 (No. 333-61403)
which Exhibit is incorporated herein by reference.
10.9 Employment Agreement dated December 15, 1997 among the
Company, Queen Sand Resources (Canada) Inc. and Edward J.
Munden, filed as an Exhibit to the Company's Registration
Statement on Form S-4 filed with the Securities and
Exchange Commission on August 13, 1998 (No. 333-61403)
which Exhibit is incorporated herein by reference.
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<PAGE> 136
10.10 Directors' Non-Qualified Stock Option Plan filed as
Appendix A to the Company's Definitive Proxy Statement on
Schedule 14A dated October 23, 1998, which Exhibit is
incorporated herein by reference.
10.11 Amended and Restated Securities Purchase Agreement dated
as of July 8, 1998 among the Company and the buyers
signatory thereto, filed as an Exhibit to the Company's
Current Report on Form 8-K dated July 8, 1998, as amended
by the Current Report on Form 8-K/A-1 dated July 8, 1998,
which Exhibit is incorporated herein by reference.
10.12 Securities Purchase Agreement dated as of November 10,
1998 among the Company and the buyers signatory thereto,
filed as an Exhibit to the Company's Current Report on
Form 8-K dated November 24, 1998.
10.13 Amended and Restated Credit Agreement among the Company,
Queen Sand Resources, Inc., a Nevada corporation, Ableco
Finance LLC, as Collateral Agent, and the lenders
signatory thereto, effective as of October 22, 1999, filed
as an Exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1999.
10.14 Second Amended And Restated Guaranty Agreement dated as of
October 22, 1999 by Queen Sand Resources, Inc. as
Guarantor in favor of Ableco Finance LLC, as Collateral
Agent for the lender group and the lenders signatory
thereto, filed as an Exhibit to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1999.
10.15 Second Amended And Restated Guaranty Agreement dated as of
October 22, 1999 by Queen Sand Operating Co., as
Guarantor, in favor of Ableco Finance LLC, as Collateral
Agent for the lender group, and the lenders signatory
thereto, filed as an Exhibit to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1999.
10.16 Second Amended And Restated Guaranty Agreement dated as of
October 22, 1999 by Corrida Resources, Inc. as Guarantor,
in favor of Ableco Finance LLC, as Collateral Agent for
the lender group, and the lenders signatory thereto, filed
as an Exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1999.
10.17 Security Agreement dated as of October 22, 1999, by and
among the Company, Queen Sand Resources, Inc. (Nevada),
Queen Sand Operating Co., Corrida Resources, Inc. and
Ableco Finance LLC, as collateral agent for the lender
group, and the lenders signatory thereto, filed as an
Exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1999.
10.18 Second Amended and Restated Pledge and Security Agreement
dated as of October 22, 1999, by Queen Sand Resources,
Inc., a Nevada corporation in favor of Ableco Finance LLC,
as Collateral Agent for the lender group, and the lenders
signatory thereto, filed as an Exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999.
II-5
<PAGE> 137
10.19 Second Amended and Restated Pledge and Security Agreement
dated as of October 22, 1999, by Queen Sand Resources,
Inc., a Delaware corporation, in favor of Ableco Finance
LLC, as Collateral Agent for the lender group, and the
lenders signatory thereto, filed as an Exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999.
10.20 ++ Amendment No. 1 to Credit Agreement dated as of May 2000
among the Company, Queen Sand Resources, Inc., a Nevada
corporation, Ableco Finance LLC, as Collateral Agent, and
the lenders signatory thereto.
10.21 ++ Amendment No. 2 to Credit Agreement dated as of June 30,
2000 among the Company, Queen Sand Resources, Inc., a
Nevada corporation, Ableco Finance LLC, as Collateral
Agent, and the lenders signatory thereto.
21.1 List of the subsidiaries of the registrant filed as an
Exhibit to the Company's Registration Statement on Form
S-4 filed with the Securities and Exchange Commission on
August 13, 1999 (No. 333-61403) which Exhibit is
incorporated by reference.
23.1 ++ Consent of Ernst & Young LLP.
23.2 + Consent of Haynes and Boone, LLP (contained in legal
opinion filed as Exhibits 5.1).
23.3 ++ Consent of Ryder Scott Company.
23.4 ++ Consent of H.J. Gruy and Associates, Inc.
24.1 ++ The power of attorney of officers and directors of the
Company (found on signature page).
----------
+ To be filed by amendment.
++ Filed herewith.
(b) II Financial Statement Schedule and Auditors' Report on Schedule:
No schedules filed
No other financial statement schedules are filed as part of this
Registration Statement since the required information is included in the
financial statements, including the notes thereto, or circumstances requiring
the inclusion of such schedules are not present.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under
II-6
<PAGE> 138
the Securities Act shall be deemed to be part of this registration statement as
of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
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 Registrant 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 whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-7
<PAGE> 139
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dallas, State of Texas,
on the 21st day of July, 2000.
QUEEN SAND RESOURCES, INC.,
a Delaware corporation
By: /s/ Edward J. Munden
--------------------------------------
Name: Edward J. Munden
Title: Chief Executive Officer, President
and Chairman of the Board
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints each of Robert P. Lindsay and William W. Lesikar
his or her true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him or her and in his or her name, place
and stead, in any and all capacities, to sign, execute and file with the
Securities and Exchange Commission and any state securities regulatory board or
commission any documents relating to the proposed issuance and registration of
the securities offered pursuant to this Registration Statement on Form S-2 under
the Securities Act of 1933, as amended, including any amendment or amendments
relating thereto (and, in addition, any Registration Statement filed pursuant to
Rule 462(b) under the Securities Act of 1933, as amended, for the offering to
which this Registration Statement relates), with all exhibits and any and all
documents required to be filed with respect thereto with any regulatory
authority, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises in order to
effectuate the same as fully to all intents and purposes as he or she might or
could do if personally present, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or either of them, or their or his substitute or
substitutes, may lawfully do or cause to be done.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-2 has been signed on the 21st day of July, 2000
by the following persons on behalf of the Registrant in the capacities and on
the dates indicated:
Signature Title
/s/ Edward J. Munden Chairman of the Board, President,
---------------------- Chief Executive Officer and Director
Edward J. Munden (principal executive officer)
/s/ Bruce I. Benn Executive Vice President, Secretary
---------------------- and Director
Bruce I. Benn
II-8
<PAGE> 140
/s/ Ronald I. Benn Chief Financial Officer (principal
---------------------- financial officer and
Ronald I. Benn accounting officer)
/s/ Robert P. Lindsay Chief Operating Officer, Executive Vice
---------------------- President and Director
Robert P. Lindsay
II-9
<PAGE> 141
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
<S> <C>
1.1 + Form of Underwriting Agreement to be entered into among
Queen Sand Resources, Inc., Friedman, Billings, Ramsey &
Co., Inc. and the other underwriters of this offering.
3.1 Restated Certificate of Incorporation of the Company,
filed as Exhibit 4.5 to the Company's Registration
Statement on Form S-3 (No. 333-47577) filed with the
Securities and Exchange Commission on March 9, 1998, which
Exhibit is incorporated herein by reference.
3.2 Certificate of Designation of Series C Convertible
Preferred Stock of the Company, filed as an Exhibit to the
Company's Current Report on Form 8-K dated December 24,
1997, which Exhibit is incorporated herein by reference.
3.3 + Form of Amendment to Restated Certificate of
Incorporation of the Company.
3.4 Amended and Restated Bylaws of the Company, filed as an
Exhibit to the Company's Current Report on Form 8-K dated
March 27, 1997, which Exhibit is incorporated herein by
reference.
4.1 Stockholders' Agreement dated as of May 6, 1997, among the
Company, Bruce I. Benn, Edward J. Munden, Ronald I. Benn,
Robert P. Lindsay, EIBOC Investments Ltd. and Joint Energy
Development Investments Limited Partnership ("JEDI"),
filed as an Exhibit to the Company's Current Report on
Form 8-K dated May 6, 1997, which Exhibit is incorporated
herein by reference.
4.2 Indenture, dated July 1, 1998, in regard to 12 1/2% Senior
Notes due 2008 by and among the Company and certain of its
subsidiaries and Harris Trust and Savings Bank, as
Trustee, filed as an Exhibit to the Company's Current
Report on Form 8-K dated July 8, 1998, which Exhibit is
incorporated herein by reference.
</TABLE>
<PAGE> 142
<TABLE>
<S> <C>
4.3 Form of 12% Notes due July 15, 2001, filed as an Exhibit
to the Company's Registration Statement on Form 10-SB
filed with the Securities and Exchange Commission on
August 12, 1996, which Exhibit is incorporated herein by
reference.
4.4 Form of Common Stock Purchase Warrant dated December 24,
1997 and issued to certain institutional investors, filed
as an Exhibit to the Company's Current Report on Form 8-K
dated December 24, 1997, which Exhibit is incorporated
herein by reference.
4.5 Form of Common Stock Purchase Warrant issued to certain
investors effective July 8, 1998, filed as an Exhibit to
the Company's Current Report on Form 8-K dated July 8,
1998, which Exhibit is incorporated herein by reference.
4.6 Registration Rights Agreement among the Company and
certain institutional investors named therein, dated
December 24, 1997, filed as an Exhibit to the Company's
Current Report on Form 8-K dated December 24, 1997, which
Exhibit is incorporated herein by reference.
4.7 Registration Rights Agreement by and between the Company
and JEDI dated May 6, 1997, filed as an Exhibit to the
Company's Current Report on Form 8-K dated May 6, 1997,
which Exhibit is incorporated herein by reference.
4.8 Registration Rights Agreement dated as of July 8, 1998
among the Company and the buyers signatory thereto, filed
as an Exhibit to the Company's Current Report on Form 8-K
dated July 8, 1998, which Exhibit is incorporated herein
by reference.
4.9 Registration Rights Agreement dated November 10, 1998
among Queen Sand Resources, Inc. and the buyers signatory
thereto, filed as an Exhibit to the Company's Current
Report on Form 8-K dated November 24, 1998, which Exhibit
is incorporated herein by reference.
4.10 Form of Common Stock Purchase Warrant issued to certain
investors as of November 10, 1998, filed as an Exhibit to
the Company's Current Report on Form 8-K dated November
24, 1998, which Exhibit is incorporated herein by
reference.
4.11 Form of Common Stock Purchase Warrant issued to Northern
Tier Asset Management, Inc. issued by the Company on April
9, 1999 and filed as an exhibit to the Company's
Registration Statement on form S-3 (No. 333-78001) which
Exhibit is incorporated by reference.
4.12 Registration Rights Agreement dated as of April 9, 1999
between the Company and Northern Tier Asset Management,
Inc. and filed as an exhibit to the Company's Registration
Statement on form S-3 (No. 333-78001) which Exhibit is
incorporated by reference.
4.13 ++ Settlement Agreement dated as of July 17, 2000 among the
Company and the stockholders named therein.
4.14 ++ Participation Agreement dated as of July 17, 2000 among
the Company and the holders of its 12 1/2% senior notes
named therein.
</TABLE>
<PAGE> 143
<TABLE>
<S> <C>
5.1 + Opinion of Haynes and Boone, LLP, regarding legality of
the common stock issued.
10.1 Purchase and Sale Agreement between Eli Rebich and
Southern Exploration Company, a Texas corporation, and
Queen Sand Resources, Inc., a Nevada corporation, dated
April 10, 1996, filed as an Exhibit to the Company's
Registration Statement on Form 10-SB filed with the
Securities and Exchange Commission on August 12, 1996,
which Exhibit is incorporated herein by reference.
10.2 Purchase and Sale Agreement dated March 19, 1998 among the
Morgan commingled pension funds and Queen Sand Resources,
Inc., a Nevada corporation, filed as an Exhibit to the
Company's Current Report on Form 8-K dated March 19, 1998,
which Exhibit is incorporated herein by reference.
10.3 Securities Purchase Agreement dated as of March 27, 1997
between JEDI and the Company, filed as an Exhibit to the
Company's Current Report on Form 8-K dated March 27, 1997,
which Exhibit is incorporated herein by reference.
10.4 Securities Purchase Agreement among the Company and
certain institutional investors named therein, dated
December 22, 1997, filed as an Exhibit to the Company's
Current Report on Form 8-K dated December 24, 1997, which
Exhibit is incorporated herein by reference.
10.5 Queen Sand Resources 1997 Incentive Equity Plan, filed as
an Exhibit to the Company's Registration Statement on Form
S-4 filed with the Securities and Exchange Commission on
August 13, 1998, which Exhibit is incorporated herein by
reference.
10.6 Employment Agreement dated December 15, 1997 between the
Company and Robert P. Lindsay, filed as an Exhibit to the
Company's Registration Statement on Form S-4 filed with
the Securities and Exchange Commission on August 13, 1998
(No. 333-61403) which Exhibit is incorporated herein by
reference.
10.7 Employment Agreement dated December 15, 1997 among the
Company, Queen Sand Resources (Canada) Inc. and Bruce I.
Benn, filed as an Exhibit to the Company's Registration
Statement on Form S-4 filed with the Securities and
Exchange Commission on August 13, 1998 (No. 333-61403)
which Exhibit is incorporated herein by reference.
10.8 Employment Agreement dated December 15, 1997 among the
Company, Queen Sand Resources (Canada) Inc. and Ronald
Benn, filed as an Exhibit to the Company's Registration
Statement on Form S-4 filed with the Securities and
Exchange Commission on August 13, 1998 (No. 333-61403)
which Exhibit is incorporated herein by reference.
10.9 Employment Agreement dated December 15, 1997 among the
Company, Queen Sand Resources (Canada) Inc. and Edward J.
Munden, filed as an Exhibit to the Company's Registration
Statement on Form S-4 filed with the Securities and
Exchange Commission on August 13, 1998 (No. 333-61403)
which Exhibit is incorporated herein by reference.
</TABLE>
<PAGE> 144
<TABLE>
<S> <C>
10.10 Directors' Non-Qualified Stock Option Plan filed as
Appendix A to the Company's Definitive Proxy Statement on
Schedule 14A dated October 23, 1998, which Exhibit is
incorporated herein by reference.
10.11 Amended and Restated Securities Purchase Agreement dated
as of July 8, 1998 among the Company and the buyers
signatory thereto, filed as an Exhibit to the Company's
Current Report on Form 8-K dated July 8, 1998, as amended
by the Current Report on Form 8-K/A-1 dated July 8, 1998,
which Exhibit is incorporated herein by reference.
10.12 Securities Purchase Agreement dated as of November 10,
1998 among the Company and the buyers signatory thereto,
filed as an Exhibit to the Company's Current Report on
Form 8-K dated November 24, 1998.
10.13 Amended and Restated Credit Agreement among the Company,
Queen Sand Resources, Inc., a Nevada corporation, Ableco
Finance LLC, as Collateral Agent, and the lenders
signatory thereto, effective as of October 22, 1999, filed
as an Exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1999.
10.14 Second Amended And Restated Guaranty Agreement dated as of
October 22, 1999 by Queen Sand Resources, Inc. as
Guarantor in favor of Ableco Finance LLC, as Collateral
Agent for the lender group and the lenders signatory
thereto, filed as an Exhibit to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1999.
10.15 Second Amended And Restated Guaranty Agreement dated as of
October 22, 1999 by Queen Sand Operating Co., as
Guarantor, in favor of Ableco Finance LLC, as Collateral
Agent for the lender group, and the lenders signatory
thereto, filed as an Exhibit to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1999.
10.16 Second Amended And Restated Guaranty Agreement dated as of
October 22, 1999 by Corrida Resources, Inc. as Guarantor,
in favor of Ableco Finance LLC, as Collateral Agent for
the lender group, and the lenders signatory thereto, filed
as an Exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1999.
10.17 Security Agreement dated as of October 22, 1999, by and
among the Company, Queen Sand Resources, Inc. (Nevada),
Queen Sand Operating Co., Corrida Resources, Inc. and
Ableco Finance LLC, as collateral agent for the lender
group, and the lenders signatory thereto, filed as an
Exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1999.
10.18 Second Amended and Restated Pledge and Security Agreement
dated as of October 22, 1999, by Queen Sand Resources,
Inc., a Nevada corporation in favor of Ableco Finance LLC,
as Collateral Agent for the lender group, and the lenders
signatory thereto, filed as an Exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999.
</TABLE>
<PAGE> 145
<TABLE>
<S> <C>
10.19 Second Amended and Restated Pledge and Security Agreement
dated as of October 22, 1999, by Queen Sand Resources,
Inc., a Delaware corporation, in favor of Ableco Finance
LLC, as Collateral Agent for the lender group, and the
lenders signatory thereto, filed as an Exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999.
10.20 ++ Amendment No. 1 to Credit Agreement dated as of May 2000
among the Company, Queen Sand Resources, Inc., a Nevada
corporation, Ableco Finance LLC, as Collateral Agent, and
the lenders signatory thereto.
10.21 ++ Amendment No. 2 to Credit Agreement dated as of June 30,
2000 among the Company, Queen Sand Resources, Inc., a
Nevada corporation, Ableco Finance LLC, as Collateral
Agent, and the lenders signatory thereto.
21.1 List of the subsidiaries of the registrant filed as an
Exhibit to the Company's Registration Statement on Form
S-4 filed with the Securities and Exchange Commission on
August 13, 1999 (No. 333-61403) which Exhibit is
incorporated by reference.
23.1 ++ Consent of Ernst & Young LLP.
23.2 + Consent of Haynes and Boone, LLP (contained in legal
opinion filed as Exhibits 5.1).
23.3 ++ Consent of Ryder Scott Company.
23.4 ++ Consent of H.J. Gruy and Associates, Inc.
24.1 ++ The power of attorney of officers and directors of the
Company (found on signature page).
</TABLE>
---------
+ To be filed by amendment.
++ Filed herewith.
