1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___ TO ___
Commission File No. 0-21179
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QUEEN SAND RESOURCES, INC.
QUEEN SAND RESOURCES, INC.
QUEEN SAND OPERATING CO.
CORRIDA RESOURCES, INC.
(Exact name of registrants as specified in their charter)
DELAWARE 75-2615565
NEVADA 75-2564071
NEVADA 75-2593510
NEVADA 75-2691594
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Nos.)
13760 NOEL ROAD, SUITE 1030
L.B. #31, DALLAS, TEXAS 75240-7336
(Address of principal executive offices)(Zip code)
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(REGISTRANTS' TELEPHONE NUMBER, INCLUDING AREA CODE) (972) 233-9906
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES [X] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of each of the issuer's classes of common stock, as of November 10, 1999:
34,089,901
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
September 30, June 30,
1999 1999
------------- -------------
Assets
Current assets:
Cash $ 3,577,000 $ 9,367,000
Other current assets 4,008,000 4,652,000
------------- -------------
Total current assets 7,585,000 14,019,000
Net property and equipment 95,367,000 97,198,000
Other assets 8,208,000 7,993,000
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$ 111,160,000 $ 119,210,000
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and other $ 5,283,000 $ 11,100,000
Current portion of long-term debt 903,000 42,000
------------- -------------
Total current liabilities 6,186,000 11,142,000
Long-term obligations, net of current portion 133,000,000 133,852,000
Commitments
Stockholders' deficit:
Preferred stock, $.01 par value, authorized 50,000,000 shares:
issued and outstanding 9,604,288 and 9,604,698 shares at 96,000 96,000
September 30 and June 30, 1999, respectively Common stock, $.0015 par value,
authorized 100,000,000 shares:
issued and outstanding 34,729,283 and 33,442,210 shares at 66,000 65,000
September 30 and June 30, 1999, respectively
Additional paid-in capital 64,945,000 64,912,000
Accumulated deficit (85,882,000) (83,606,000)
Treasury stock (7,251,000) (7,251,000)
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Total stockholders' deficit (28,026,000) (25,784,000)
------------- -------------
$ 111,160,000 $ 119,210,000
============= =============
See accompanying notes to unaudited interim period consolidated condensed
financial statements.
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QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended September 30,
---------------------------------
1999 1998
------------ ------------
Oil and gas sales $ 360,000 $ 1,354,000
Net profits and royalties interests 5,162,000 5,925,000
Interest and other income 21,000 74,000
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5,543,000 7,353,000
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Expenses:
Oil and gas production expenses 158,000 1,165,000
Depreciation, depletion and amortization 2,270,000 3,036,000
General and administrative 720,000 670,000
Interest and financing expense 4,637,000 4,586,000
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7,785,000 9,457,000
------------ ------------
Net loss from operations (2,242,000) (2,104,000)
Extraordinary loss -- (3,549,000)
------------
Net loss $ (2,242,000) $ (5,653,000)
Net loss before extraordinary loss per common share $ (0.07) $ (0.07)
============ ============
Net loss per common share $ (0.07) $ (0.19)
============ ============
Weighted average common shares outstanding 33,842,000 29,619,000
============ ============
See accompanying notes to unaudited interim period consolidated condensed
financial statements.
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QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three months ended September 30,
-----------------------------------
1999 1998
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Cash flows from operating activities:
Net loss $ (2,242,000) $ (5,653,000)
Depreciation, depletion and amortization 2,721,000 3,466,000
Unrealized gains in foreign currencies (45,000) (56,000)
Net change in operating assets and liabilities (5,174,000) (561,000)
------------- -------------
Net cash used in operating activities (4,740,000) (2,804,000)
------------- -------------
Cash flows used in investing activities
Additions to property and equipment (412,000) (3,131,000)
------------- -------------
Cash flows from financing activities:
Debt issuance and other deferred costs (638,000) (4,278,000)
Proceeds from long-term obligations -- 125,000,000
Payments on long-term obligations -- (142,385,000)
Payments on capital lease obligations -- (18,000)
Issuance of common stock -- 30,210,000
------------- -------------
Net cash provided from (used in) financing activities (638,000) 8,529,000
------------- -------------
Net increase (decrease) in cash (5,790,000) 2,594,000
Cash at beginning of period 9,367,000 1,029,000
------------- -------------
Cash at end of period $ 3,577,000 $ 3,623,000
============= =============
See accompanying notes to unaudited period consolidated condensed financial
statements.
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QUEEN SAND RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 1999
(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 three months ended
September 30, 1999 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 Annual Report filed on Form 10-K
for the fiscal year ended June 30, 1999, as amended.
Subsequent to March 31, 1999, the Company determined that the costs
associated with the termination of a LIBOR interest rate swap agreement
in the first quarter of fiscal year 1999 should have been expensed upon
termination. Consequently, the interim financial information for the
first quarter of 1999 has been restated from the information contained in
the Company's Form 10-Q for the quarter ended September 30, 1998, as
previously filed with the Securities and Exchange Commission, as if the
costs of the LIBOR interest rate swap termination were expensed during
the first quarter.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Account 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 three months ended September 30, 1999 and 1998, 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 at the beginning of the fiscal year
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 entered into a credit agreement with new
lenders which will allow the Company to borrow up to $25 million until
March 31, 2000 and, if there has not been an event of default during that
period, $30 million thereafter. The loan bears interest at prime plus 2%
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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 loan
matures on October 22, 2001. Pursuant to the 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. On October 28, 1999 the Company
borrowed $12.8 million under this credit facility, which was used as
follows: (i) $8.0 million to repay the principal amounts owed to the
former lenders; (ii) $0.3 million to pay accrued interest charges and
outstanding fees to the former lenders; (iii) $3.3 million to unwind the
ceiling component of a hedging contract with Bank of Montreal; and (iv)
$1.2 million to fund the costs of the transaction.
The Company's payment obligations under its 12.5% Senior Notes due 2008
are fully, unconditionally and jointly and severally guaranteed on a
senior subordinated basis by all of the domestic subsidiaries and future
Restricted Subsidiaries. Such guarantees are subordinated to the
guarantees of Senior Debt issued by the Guarantors (as defined in the
Indenture) under the Credit Agreement and to other guarantees of Senior
Debt issued in the future. All of the Company's current subsidiaries are
wholly owned. There are currently no contractual restrictions on
distributions from the Guarantors to the Company.
(3) Common Stock Issuance
During the three months ended September 30, 1999 the Company issued
266,720 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 410 shares of the Series `C'
preferred stock into 940,394 shares of the Company's common stock. A
further 79,959 shares of the Company's common stock was issued as a stock
dividend in conjunction with this conversion.
(4) Hedging Activities
During the three months ended September 30, 1999 the Company paid
$358,000 in cash settlements on its crude oil hedges and $227,000 in cash
settlements on it natural gas hedges and amortized $27,000 of deferred
natural gas hedging costs. In conjunction with the execution of the new
credit agreement in October 1999 (see note 2), the Company unwound the
ceiling portion of one of its natural gas hedge contracts at a cost of
$3.3 million.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
All statements in this document concerning the Company other than purely
historical information (collectively "Forward-Looking Statements") reflect the
current expectation of management and are based on the Company's historical
operating trends, estimates of proved reserves and other information currently
available to management. These statements assume, among other things, (i) that
no significant changes will occur in the operating environment for the Company's
oil and gas properties, gas plants and gathering systems, and (ii) that there
will be no material acquisitions or divestitures. The Company cautions that the
Forward-Looking Statements are subject to all of the risks and uncertainties
incident to the acquisition, development and marketing of, and exploration for,
oil and gas reserves. These risks include, but are not limited to, commodity
price risk, environmental risk, drilling risk, reserve, operations, and
production risks, regulatory risks and counterparty risk. Many of these risks
are described in the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1999 filed with the Securities and Exchange Commission in October
1999, as amended. The Company may make material acquisitions or dispositions,
enter into new or terminate existing oil and gas sales or hedging contracts, or
enter into financing transactions. None of these can be predicted with any
certainty and, accordingly, are not taken into consideration in the
Forward-Looking Statements made herein. For all of the foregoing reasons, actual
results may vary materially from the Forward-Looking Statements and there is no
assurance that the assumptions used are necessarily the most likely.
SELECTED FINANCIAL DATA
The following tables set forth selected financial data for the Company,
presented as if our net profits interests had been accounted for as working
interests. The financial data were derived from the Consolidated Financial
Statements of the Company and should be read in conjunction with the
Consolidated Financial Statements and related Notes thereto included herein. The
results of operations for the three months ended September 30, 1999 will not
necessarily be indicative of the operating results for the full fiscal year
ending June 30, 2000.
Three Months Ended September 30,
1999 1998
----------- -----------
Oil and gas sales (1) $ 6,873,000 $ 9,104,000
Oil and gas production expenses (1) 1,536,000 2,956,000
General and administrative expenses 720,000 670,000
----------- -----------
EBITDA 4,617,000 5,478,000
Interest expense, excluding amortization
of deferred charges (2) 4,159,000 4,190,000
Depreciation, depletion and amortization (3) 2,721,000 3,466,000
Interest and other income (21,000 (74,000)
----------- -----------
Net loss from operations (2,242,000) (2,104,000)
----------- -----------
Extraordinary loss -- (3,549,000)
----------- -----------
Net loss $(2,242,000) $(5,653,000)
=========== ===========
(1) Oil and gas sales and production expenses related to net profits interests
have been presented as if such net profits interests had been accounted for
as working interests.
(2) Interest charges payable on outstanding debt obligations.
(3) Depreciation, depletion and amortization includes $478,000 and $510,000 of
amortized deferred charges related to debt obligations and $27,000 and
$33,000 of amortized deferred charges related to the Company's gas price
hedging program for the three months ended September 30, 1999 and 1998,
respectively.
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THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1999 1998
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PRODUCTION DATA:
Gas (MMcf) 2,669,000 3,308,000
Oil (MBbls) 60,000 153,000
MMcfe 3,027,000 4,227,000
AVERAGE SALES PRICE:
Gas ($/Mcf) $ 2.26 $ 2.17
Oil ($/Bbl) $ 13.93 $ 12.58
Mcfe ($/Mcfe) $ 2.27 $ 2.15
AVERAGE COST ($/MCFE) DATA:
Production and operating costs $ 0.42 $ 0.60
Production and severance taxes $ 0.09 $ 0.10
Depreciation, depletion and amortization of oil
and gas properties $ 0.74 $ 0.75
General and administrative expenses $ 0.24 $ 0.16
Interest and financing charges $ 1.37 $ 0.99
The following discussion of the results of operations and financial condition
should be read in conjunction with the Consolidated Condensed Financial
Statements and related Notes thereto included herein.
THE THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1998
The following discussion and analysis reflects the operating results as if the
net profits interests were accounted for as working interests. We believe that
this presentation will provide you with a more meaningful understanding of the
underlying operating results and conditions for the period.
RESULTS OF OPERATIONS
REVENUES: Our total revenues declined by $2.2 million (24%) to $6.9 million for
the three months ended September 30, 1999, from $9.1 million during the
comparable period in 1998.
We produced 60,000 barrels of crude oil during the three months ended September
30, 1999, a decrease of 93,000 barrels (61%) from the 153,000 barrels produced
during the comparable period in 1998. This decrease was comprised of a decrease
of 34,000 barrels (37%) from the properties that we owned during both periods
and a decrease of 59,000 barrels from the properties sold at the end of June
1999. The decrease in production of crude oil from the properties owned during
the comparative quarters is a combination of the decision to reduce production
from certain high operating cost properties in light of the low oil prices being
paid during the first half of 1999 and the natural depletion of the crude oil
producing reservoirs. Those high operating cost properties where production was
reducedk are now back in production.
We produced 2,669,000 Mcf of natural gas during the three months ended September
30, 1999, a decrease of 639,000 Mcf (19%) from the 3,308,000 Mcf produced during
the comparable period in 1998. This decrease consists of a decrease of 337,000
Mcf from the properties that we owned during both periods and a decrease of
303,000 Mcf from the properties sold at the end of June 1999. The decrease in
production from the properties owned during the comparative quarters is
primarily the result of natural depletion of natural gas producing reservoirs.
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On a thousand cubic feet of gas equivalent ("Mcfe") basis, production for the
three months ended September 30, 1999 was 3,027,000 Mcfe, down 1,200,000 Mcfe
(28%) from the 4,227,000 Mcfe produced during the comparable period in 1998.
The decrease in revenues resulting from the decreased production has been
buffered by the recent increase in oil and natural gas prices. The average price
per barrel of crude oil we sold during the three months ended September 30, 1999
was $13.93, an increase of $1.35 per barrel (11%) from the $12.58 per barrel
during the three months ended September 30, 1998. The average price per Mcf of
natural gas we sold was $2.26 during the three months ended September 30, 1999,
an increase of $0.09 per Mcf (4%) from the $2.17 per Mcf during the comparable
period in 1998. Crude oil and natural gas prices have continued to increase
subsequent to September 30, 1999. On a Mcfe basis, the average price received by
us during the three months ended September 30, 1999 was $2.27, a $0.12 increase
(5%) from the $2.15 we received during the comparable period in 1998.
During the three months ended September 30, 1999 we paid $227,000 in cash
settlements and amortized $27,000 of deferred hedging costs, as a result of our
natural gas price hedging program. The net negative effect on the average
natural gas prices received by us during the period was $0.08 per Mcf. We paid
an additional $358,000 pursuant to our oil price hedging program. The net
negative effect on average oil prices received by us during the period was $6.00
per barrel. The last of our oil price hedging contracts expired on September 30,
1999. During the comparable period in 1998 we received $458,000 in cash
settlements and amortized $33,000 of deferred hedging costs, as a result of our
natural gas price hedging program. The net positive effect on the average
natural gas prices we received during the comparable period in 1998 was $0.13
per Mcf. We received $85,000 in cash settlements from our oil price hedging
program during the three months ended September 30, 1998. The impact of this
payment was to increase the average price received on our oil sales during the
comparable period in 1998 by $0.56 per barrel.
PRODUCTION EXPENSES: Our lease operating expenses fell to $1.3 million for the
three months ended September 30, 1999, a decrease of $1.2 million (50%) from the
$2.5 million incurred during the comparable period in 1998. This decrease
resulted from the decreased production of crude oil and natural gas and the sale
of higher operating cost properties at the end of June 1999. Lease operating
expenses were $0.42 per Mcfe during the three months ended September 30, 1999, a
decrease of $0.18 (30%) from the $0.60 per Mcfe incurred during the comparable
period in 1998. This improvement is a result of improved efficiencies at an
operating level and the June 1999 sale of properties that had higher average
operating costs per Mcfe than the remaining properties.
SEVERANCE AND PRODUCTION TAXES: Severance and production taxes were $258,000
($0.09 per Mcfe) during the three months ended September 30, 1999, as compared
to $411,000 ($0.10 per Mcfe) during the comparable period in 1998. The decrease
of $153,000 (37%) is primarily a result of the 28% decrease in Mcfe production
for the three month period ended September 30, 1999, as compared to the same
period for 1998. as the decrease in the average rate per Mcfe is a result of the
June 1999 sale of properties, as our remaining properties are generally in areas
that have lower production and severance tax assessments, as a result of certain
tax abatements.
DEPLETION, DEPRECIATION AND AMORTIZATION EXPENSE: Depletion and oil field
equipment related depreciation costs were $2.2 million ($0.74 per Mcfe) during
the three months ended September 30, 1999, a decrease of $934,000 (30%) from the
$3.2 million ($0.75 per Mcfe) charged to income during the comparable period in
1998. The decrease in the provision is a result of the 28% decrease in
production for the three month period ended September 30, 1999, as compared to
the same period for 1998.
GENERAL AND ADMINISTRATIVE EXPENSES: The increase of $50,000 in general and
administrative costs is a result of the increased management support
requirements of the Company as it continues to evaluate the opportunity to
acquire new properties, redevelop existing properties and raise the funds
necessary to accomplish these activities. Since inception the Company has been
growth oriented and has directed its efforts at acquiring and developing oil and
natural gas producing properties. This activity requires additional personnel
and outside consultants thereby increasing general and administrative expenses.
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INTEREST EXPENSE: Interest charges on outstanding debt obligations during the
three months ended September 30, 1999 decreased by $31,000 (1%) from the $4.2
million for the three months ended September 30, 1998. This decrease is a
combination of a reduction in the average interest bearing debt carried during
the comparable periods offset by the higher marginal cost of funds borrowed
during the quarter ended September 30, 1999.
NET LOSS: The Company has incurred losses since its inception, including $2.2
million ($0.07 per common share) for the three months ended September 30, 1999
compared to $2.1 million ($0.07 per common share) before an extraordinary loss
of $3.5 million for the three months ended September 30, 1998. We believe, but
cannot assure, that as a result of entering into a new credit agreement during
October 1999, that we now have the liquidity needed to develop and exploit our
existing oil and natural gas reserves and that the success of this program, in
conjunction with the return of normal commodity prices, will generate sufficient
revenues to cover our production costs and operating expenses. Our revenues,
profitability and future rate of growth are substantially dependent on
prevailing prices for oil and natural gas and the volumes of oil and natural gas
that we produce (see "Changes in Prices and Hedging Activities"). In addition,
our proved reserves will decline as oil and natural gas are produced unless we
are successful in acquiring additional properties containing proved reserves or
we conduct successful exploration and development 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 and development and exploitation
programs, and to fund 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. There can be no assurance that cash from operations will be
sufficient in the future to cover all such purposes.
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
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 such sources will be available to us to meet our
budgeted capital spending. Furthermore, our ability to borrow other than under
the Amended and Restated Credit Agreement dated as of October 22, 1999 with
Ableco Finance LLP (`Ableco') and Foothill Capital Corporation (`Foothill') (the
`Credit Agreement') is subject to restrictions imposed by that 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.
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
included funds available under the Credit Agreement, DM denominated bonds issued
to European investors, the 12.5% Senior Notes and a capital lease.
On October 22, 1999 Ableco and Foothill acquired our outstanding note from Bank
of Montreal, as agent for the lenders party to the Amended and Restated Credit
Agreement. We then entered into an Amended and Restated Credit Agreement dated
October 22, 1999 with Ableco and Foothill. The 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) from such lenders to
fund, among other things, development and
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exploitation expenditures, acquisitions and general working capital. Our
borrowing base is currently $25 million, of which $12.8 million is outstanding
as of November 10, 1999. The funds were used as follows:
o $8.0 million to repay the principal outstanding to Bank of Montreal, as
agent for the lenders;
o $0.3 million to pay accrued interest charges and outstanding restructuring
fees to the former lenders;
o $3.3 million to unwind the ceiling component of a natural gas hedging
contract with Bank of Montreal;
o $1.2 million to fund the costs (principally fees paid to the lenders and
their counsel) of the transaction
In addition, we issued a letter of credit in the amount of $2.6. million to an
affiliate of Enron to secure a swap exposure.
Pursuant to the credit agreement, we are subject to certain affirmative and
negative financial and operating covenants that are usual and customary for
transactions of this nature. The affirmative covenants include, but are not
limited to, covenants to:
o provide financial information;
o provide notices of the occurrence of certain material events affecting us;
o promptly provide notice of all legal or arbital proceedings affecting us or
our subsidiaries which could reasonably be expected to have a material
adverse effect;
o maintain and preserve our existence, oil and gas properties and other
material properties;
o implement and comply with certain environmental procedures;
o perform our obligations under the credit agreement;
o provide reserve reports;
o deliver certain title information;
o grant a security interest in oil and gas properties that we acquire in the
future; and
o deliver certain information relating to compliance with ERISA laws and
regulations.
The negative covenants include, but are not limited to, covenants to:
o not to incur any indebtedness except as expressly permitted under the
credit agreement;
o not to incur any lien on any of its properties except as expressly
permitted under the credit agreement;
o not to make any loans or advances to or investments in any person except as
expressly permitted under the credit agreement;
o with respect to the parent company, not to declare or pay any dividends or
redeem or otherwise acquire for value any capital stock of the parent
company except for stock dividends;
o not to enter into sale and leaseback transactions;
o not to materially change the character of our business as an independent
oil and natural gas exploration and production company;
o not to enter into lease agreements except as expressly permitted under the
credit agreement;
o not to merge with or sell all or substantially all of our property or
assets to any other person;
o not to permit the borrowed proceeds under the credit agreement to be used
for any purpose except as expressly permitted under the credit agreement;
o not to violate ERISA laws and regulations;
o not to discount or sell any notes or accounts receivable;
o not to maintain a working capital ratio of less than 1.5 to 1.0;
o to pay our trade accounts payable when due;
o not maintain a fixed charge coverage ratio of less than 1.0 to 1.0;
o not to sell, assign or otherwise transfer any interest in any oil or
natural gas properties except as expressly permitted under the credit
agreement;
o not to violate environmental laws and regulations;
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o not to enter into transactions with affiliates other than those entered
into in the ordinary course of business on fair and reasonable terms;
o not to create any additional subsidiaries unless such subsidiaries
guarantee the obligations under the credit agreement or issue stock of any
subsidiaries to third parties;
o not to enter into negative pledge agreements;
o not to enter into any contracts which warrant production of oil and natural
gas and not allow gas imbalances, take-or-pay or other prepayments which
would require the delivery of oil or natural gas at some future time
without receiving full payment therefor to exceed 5% of the current
aggregate monthly gas production from the mortgaged oil and natural gas
properties;
o not to amend or modify any material agreements;
o not to repay other indebtedness except as expressly permitted under the
credit agreement; and
o not make or pay capital expenditures more than specified amounts.
The credit agreement also contains usual and customary events of default and
provides remedies to the lenders in the event of default. The events of default
include:
o default in payment when due of any principal of or interest on indebtedness
under the credit agreement;
o default in payment when due of any principal of or interest on any other
indebtedness aggregating $500,000 or more or an event shall occur which
requires us to mandatorily redeem any of our existing preferred stock;
o breach of a representation and warranty under the credit agreement;
o default in performance of obligations under the credit agreement;
o our admitting in writing our inability to pay debts as they become due;
o voluntary or involuntary bankruptcy;
o a judgment in excess of $100,000 shall be entered and not vacated within 30
days;
o the security agreements under the credit agreement shall cease to be in
full force and effect; and
o we discontinue our usual business or any person or group of persons (other
than JEDI, Enron or its affiliates) shall have acquired beneficial
ownership of 30% or more of the outstanding shares of voting stock the
parent company or individuals who constitute the Board of Directors of the
parent company cease to constitute a majority of the then-current Board of
Directors of the parent company.
In conjunction with the closing of the Ableco and Foothill credit facility our
existing ECT Subordinated Revolving Credit Agreement was terminated.
Although we believe that our cash flows and available sources of financing will
be sufficient to satisfy the interest payments on our debt at currently
prevailing interest rates and oil and natural gas prices, our level of debt may
adversely affect our ability:
o to obtain additional financing for working capital, capital expenditures or
other purposes, should we need to so do; or
o to acquire additional oil and natural gas properties or to make
acquisitions utilizing new borrowings.
We are currently exploring the opportunity to raise additional equity. However,
there can be no assurances that we will be able to obtain additional financing,
if required, or that such financing, if obtained, will be on terms favorable to
us.
USES OF CAPITAL
Since commencing our oil and natural gas operations in August 1994 we have
completed 19 acquisitions of oil and natural gas producing properties. Through
September 30, 1999 we have expended a total of $179 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 quarter ended September 30,
1999 we currently generate a positive cash flow from operations. During the
quarter ended September 30, 1999 we spent $412,000 on developing and exploiting
Pg. 12
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our oil and natural gas producing properties. We expect to spend a further $5.1
million on discretionary capital expenditures through June 2000 for exploitation
and development projects. We are not contractually obligated to fund any capital
expenditures through June 2000. During the quarter ended September 30, 1999 we
incurred debt issuance and other deferred costs of $638,000.
We continue to evaluate acquisition opportunities, however there are no existing
agreements regarding any acquisitions. An acquisition would 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 such 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 gas prices have increased during the three
months ended September 30, 1999. Our results of operations and cash flow have
been, and will continue to be, affected to a certain extent by the volatility in
oil and natural gas prices. Should we experience a significant increase in oil
and natural gas prices that is sustained over a prolonged period, we could
expect that there would be also be a corresponding increase in oil and natural
as finding and development costs, lease acquisition costs and operating
expenses.
CHANGES IN PRICES AND HEDGING ACTIVITIES
Annual average oil and natural gas prices have fluctuated significantly over the
last two years. The table below sets out our weighted average price per barrel
of oil and the weighted average price per Mcf of natural gas, the impact of our
hedging programs and the related NYMEX indices.
THREE MONTHS ENDED
SEPTEMBER 30
1999 1998
------ ------
Gas (per Mcf)
Price received at wellhead $ 2.34 $ 2.11
Effect of hedge contracts $(0.08) $ 0.06
Effective price received, including hedge contracts $ 2.26 $ 2.17
Average NYMEX Henry Hub $ 2.60 $ 2.02
Average basis differential including hedge contracts $(0.34) $ 0.15
Average basis differential excluding hedge contracts $(0.26) $ 0.09
Oil (per barrel)
Price received at wellhead $19.93 $11.62
Effect of hedge contracts $(6.00) $ 0.96
Effective price received, including hedge contracts $13.93 $12.58
Average NYMEX Sweet Light Oil $21.72 $14.15
Average basis differential including hedge contracts $(7.79) $(1.57)
Average basis differential excluding hedge contracts $(1.79) $(2.53)
The operator of a significant natural gas producing property in which we hold a
net profits interest had placed a fixed price contract for the period January 1
through September 30, 1999. The prices for this contract, from a retrospective
perspective when compared to Henry Hub prices, were favorable during the three
months ended March 31, 1999 but became, in the fullness of time, unfavorable for
the following six months. Largely as a result of this fixed price contract, the
average basis differential excluding hedge contracts was reduced by $0.35 during
the three months ended September 30, 1999 compared to the three months ended
September 30, 1998. This fixed price contract expired during October 1999.
Pg. 13
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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.
Volume Floor Ceiling
Period Beginning Period Ending (MMBtu) Price Price
---------------- ------------- ------- ----- -----
September 1, 1997 August 31, 1998 600,000 $1.90 $2.66
We had a contract with an affiliate of Enron involving the hedging of a portion
of our future crude 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.
Volume Floor Ceiling
Period Beginning Period Ending (Barrels) Price Price
---------------- ------------- --------- ----- -----
September 1, 1997 August 31, 1998 120,000 $18.00 $20.40
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.
Volume Floor Ceiling
Period Beginning Period Ending (MMBtu) Price Price
---------------- ------------- ------- ----- -----
January 1, 1999 October 31, 1999 3,608,333 $2.00 $2.70
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:
Volume
Period Beginning Period Ending (MMBtu)
- ---------------- ------------- -------
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
The table below sets out 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:
Volume
Period Beginning Period Ending (MMBtu)
- ---------------- ------------- -------
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
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:
Volume
Period Beginning Period Ending (MMBtu)
- ---------------- ------------- -------
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
Pg. 14
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The table below sets out volume of crude 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:
Volume
Period Beginning Period Ending (Barrels) Price per barrel
---------------- ------------- -------- ----------------
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
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 hedge on our indebtedness under the
credit agreement and certain short term loans used to finance the April 1998
acquisition of our net profit and royalty interests in the event that 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 portion of the proceeds from the Notes proceeds. This cost was expensed
as an extraordinary loss during the year ended June 30, 1999.
YEAR 2000 COMPUTER ISSUE
GENERAL. We are addressing the potential impact of the Year 2000 ("Y2K") issue
on our operations. A review of internal systems and a review of the state of
readiness of significant suppliers and customers is substantially complete. We
have determined that, subject to the validity of the responses we have received
from external suppliers of services and the purchasers of our products, the
impact of Y2K will not have a material affect on our financial condition or
results of operations.
STATE OF READINESS. We currently use commercially available software for our
management information ('IT') systems including accounting, engineering
evaluation, acquisition analysis and word processing. This software is warranted
by the suppliers/manufacturers to be Y2K compliant. We have not taken any steps
to independently verify the truth of such warranties but we have no reason to
believe that the software is not as warranted.
COSTS OF COMPLIANCE. Our IT systems were warranted to be Y2K compliant when
purchased, as such we have not incurred any significant incremental costs to
modify or replace such systems to make them compliant. Our products do not
contain any microprocessors.
We have been in communication with our major operators, suppliers and customers
to determine whether they will be Y2K compliant. We have determined that,
subject to the validity of the responses we have received, our major suppliers
and customers are or will be materially unaffected by the Y2K issue. The cost of
seeking verification was minimal. We believe that it was not practical to
independently verify the responses because we do not believe that we would be
given access to carry out such verification or that the costs of doing so would
be affordable.
RISK. Any Y2K problems that do occur will likely manifest themselves in reduced
production through equipment shut down or impaired liquidity through inability
of customers to take delivery or process payment.
CONTINGENCY. We have established contingency plans regarding the replacement of
our major suppliers and customers in the event that any of them are affected
materially by the Y2K issue.
Pg. 15
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 3. "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Changes in Prices and Hedging Activities".
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
OTHER ISSUANCES OF COMMON STOCK. During the quarter ended September 30, 1999,
pursuant to Section 3(a)(9) of the Securities Act, the Company issued an
aggregate of 266,720 shares of Common Stock to stockholders who exercised 23,000
repricing rights under the Amended and Restated Securities Purchase Agreement
dated as of July 8, 1998 among the Company and the buyers signatory thereto. The
repricing rights were issued in connection with a July 1998 private placement
and permit the holders to acquire shares of Common Stock without the payment of
additional consideration if the Company's Common Stock does not achieve certain
price thresholds in excess of the original issuance of the shares purchased by
the holders in the July 1998 private placement. The resale of these shares of
Common Stock is registered pursuant to a Registration Statement on Form S-3
filed by the Company and declared effective by the Securities and Exchange
Commission.
During the quarter ended September 30, 1999, pursuant to Section 3(a)(9) of the
Securities Act, the Company issued an aggregate of 1,020,353 shares upon
conversion of 410 shares of the Company's Series C Convertible Preferred Stock
by the holders thereof. The resale of these shares of Common Stock is registered
pursuant to a Registration Statement on Form S-3 filed by the Company and
declared effective by the Securities and Exchange Commission.
Due to the current market price of the Company's Common Stock, it is likely that
additional shares of Common Stock will be issued upon exercise of Repricing
Rights and upon conversion of the Series C Convertible Preferred Stock.
ITEM 5. OTHER INFORMATION
AMENDED CREDIT FACILITY Please see Part I - Item 2 "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" for a discussion of the amended Credit Facility and the
termination of the ECT Revolving Credit Facility.
NASDAQ SMALLCAP MARKET LISTING At the close of business November 10, 1999 our
common stock was delisted from the Nasdaq SmallCap Market. This action was
solely attributable to our inability to satisfy the Nasdaq SmallCap Market
maintenance standards for the continued listing of common stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
10.1 Fifth Amendment to Amended and Restated Credit Agreement among
the Company, Queen Sand Resources, Inc., A Nevada corporation,
Bank of Montreal, as Agent and the lenders signatory thereto,
effective as of October 13, 1999.
10.2 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.
10.3 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.
Pg. 16
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================================================================================
10.4 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.
10.5 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.
10.6 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.
10.7 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.
10.8 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.
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K.
NONE
Pg. 17
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
QUEEN SAND RESOURCES, INC. (DELAWARE)
By: /s/ Edward J. Munden
-------------------------------
Edward. J. Munden
President and Chief Executive
Officer
By: /s/ Ronald Benn
-------------------------------
Ronald Benn
Chief Financial Officer
QUEEN SAND RESOURCES, INC. (NEVADA)
By: /s/ Edward J. Munden
-------------------------------
Edward. J. Munden
President and Chief Executive
Officer
By: /s/ Ronald Benn
-------------------------------
Ronald Benn
Vice President (Principal
Financial Officer)
QUEEN SAND OPERATING COMPANY
By: /s/ Edward J. Munden
-------------------------------
Edward. J. Munden
President and Chief Executive
Officer
By: /s/ Ronald Benn
-------------------------------
Ronald Benn
Vice President (Principal
Financial Officer)
CORRIDA RESOURCES, INC.
By: /s/ Edward J. Munden
-------------------------------
Edward. J. Munden
President and Chief Executive
Officer
By: /s/ Ronald Benn
-------------------------------
Ronald Benn
Treasurer (Principal Financial
Officer)
Pg. 18
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EXHIBIT INDEX
Exhibit
No Description
------- -----------
10.1 Fifth Amendment to Amended and Restated Credit Agreement among
the Company, Queen Sand Resources, Inc., A Nevada corporation,
Bank of Montreal, as Agent and the lenders signatory thereto,
effective as of October 11, 1999.
10.2 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.
10.3 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.
10.4 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.
10.5 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.
10.6 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.
10.7 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.
10.8 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.
27 Financial Data Schedule
Pg. 16