Item 1 - Business
Questa Oil & Gas Co. (the "Company") was incorporated in Colorado on February 24, 1981 as Trinity Oil & Gas, Inc. The Company's name was changed to Questa Oil & Gas Co. on March 31, 1986. The Company is engaged in the oil and gas business in the continental United States. Its activities include the acquisition and exploration of oil and gas property interests and selling, developing, operating and otherwise dealing in oil and gas property interests of all types.
On March 31, 1986, the shareholders of the Company approved an agreement to acquire Questa Oil & Gas Co. ("Old Questa"). In connection with this acquisition, the shareholders of the Company approved a reverse split of the outstanding common stock on a 1-for-125 shares basis which reduced the number of shares outstanding at that time to 1,253,614 shares of common stock. The shareholders also approved the issuance of 11,500,000 shares of common stock in return for all of the issued and outstanding shares of Old Questa. On February 5, 1988, the shareholders of the Company approved a proposal to reverse split the outstanding shares of the Company's common stock such that each ten shares of the Company's issued and outstanding common stock automatically converted into one share of common stock.
On February 18, 1998 the Company had two special shareholders meetings. The first approved a 1-for-10 reverse split and the second meeting approved a 20-for-1 forward split of its common stock. The net of the splits doubled the number of common shares of stock outstanding in the Company. The Company will pay shareholders with factional shares, after the first reverse split, at a $8.75 per share basis. The total number of shares retired as factional shares were 6,620 shares at the $8.75 basis. This resulted in a liability to the Company of $57,925. The number of shareholders affected by the fractional share buy out is approximately 1,300 shareholders.
On June 22, 1990, the Company's common stock was listed on NASDAQ. The Company's common stock trades on The NASDAQ Small Cap Market under the symbol "QUES." The stock splits approved in February, 1998 kept the Company in compliance with NASDAQ's recently adopted listing requirements.
The Company's headquarters are located in Tulsa, Oklahoma. The office lease in Tulsa is for approximately 2,350 square feet, term of the lease is three years and expires December 31, 1999. Currently the Company's staff supervises, manages and monitors 5 drilling partnerships and approximately 300 producing wells. At December 31, 1998 the Company employed six persons on a full time basis.
The Company evaluates undeveloped oil and gas prospects and participates in drilling activities on those prospects which in the opinion of management are favorable for the production of oil or gas. Drilling activities are financed by entering into joint ventures or other arrangements under which the Company acquires oil and gas acreage, performs basic geological work on the prospect, and obtains the necessary equipment to complete a well if it is successful. There is no assurance that any such arrangements will result in the discovery of oil or gas or the generation of income to the Company. The Company also acquires interests in producing oil and gas leases for the purposes of reworking the wells to improve production and to further develop the area.
The Company's activities during its fiscal year ended December 31, 1998, are summarized in Item 2
Item 2 - Oil and Gas Properties
The following sets forth information with respect to the Company's oil and gas interests. This information is as of December 31, 1998, unless otherwise indicated. The Company owns interests in wells located in Kansas, North Dakota, Colorado, Oklahoma and Texas: Gross Net
Total Developed leasehold acreage 59,165 acres 12,103 acres
Total Oil Gas Gross productive wells 302.00 115.00 187.00 Net productive wells 102.00 17.90 84.00
1998 1997 1996 1995 Oil production (BBL) 43,304 41,798 40,114 39,339 Gas production (MCF) 1,267,488 1,179,299 1,078,857 955,435
Average Sales Price Oil (per BBL) $12.33 $19.05 $19.52 $16.10 Gas (per MCF) $ 2.02 $ 2.69 $ 2.29 $ 1.58
Average Production Cost per Equivalent unit of oil and gas $ 4.34 $ 4.46 $ 4.28 $ 3.76
The Company's reserves were calculated using tow pricing scenarios. Scenario I uses the price paid for production at December 31, 1997, $ 9.07/BBL for oil and $1.87/MCF for gas. Scenario II uses the average price for production sold for the twelve months in 1998, $12.33/BBL for oil and $2.02/MCF for gas. In the opinion of management, Scenario II uses a more realistic estimate of the Company's reserve volumes and values.
Scenario I Scenario II Proved reserves OIL (BBLS) 383,733 444,120 GAS (MCF) 15,089,373 15,442,796
Estimated future net revenues from oil and gas reserves $13,189,000 $15,672,000 Present value of estimated future net revenues $ 7,254,000 $ 8,547,000
Wells drilled: Total Oil Gas Dry 1998 18 2 10 6 1997 12 2 8 2 1996 9 3 4 2 1995 11 3 3 5
Type of Wells Drilled: 1998 1997 1996 1995 Net productive development 4.14 1.91 1.71 2.42 Net dry development 1.23 .23 1.63 1.54
Item 3
Item 3 - Legal Proceedings
The Company is not engaged in any legal proceedings and to the knowledge of management, no such legal proceedings are threatened.
Item 4
Item 4 - Submission of Matters to a Vote of Security Holders
There were no resolutions submitted to the Company's shareholders for a vote during the last quarter of 1998. There were two meetings of the shareholders held February 18, 1998, to vote upon the two separate stock splits. In both meetings the splits were approved.The Company is planning a shareholders meeting for the first of June, 1999, to be held at the Company's offices in Tulsa, Oklahoma. PART II
Item 5
Item 5 -Market for Registrant's Common Stock and Related Security Holder Matters
The Company's common stock is listed on the NASDAQ system. The Company's trading symbol is QUES. The following table sets forth the high and low bid prices for the Company's common stock for each quarter for the past two fiscal years. The bid prices represent prices between dealers, do not include retail markups, markdowns, or commissions, and may not represent actual transactions. Bid Prices Adjusted to Reflect Stock splits on 2/18/98 High Low High Low 1998 1997 First Quarter $ 6.37 $ 3.88 $ 3.63 $ 2.75 Second Quarter 7.00 4.50 5.56 3.32 Third Quarter 5.75 3.50 8.32 4.13 Fourth Quarter 4.25 3.38 8.25 4.25
Holders of common stock are entitled to receive such dividends as may be declared legally by the Board of Directors. The Company has not paid any dividends on its common stock. The following sets forth the approximate number of record holders of the Company's equity securities as of March 23, 1999:
Number of Title of Class Record Holders
Common Stock, $.005 par value 560
Item 6
Item 6 - Selected Financial Data
Item 7
Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources
At December 31, 1998, the Company had current assets of $978,000 compared to current liabilities of $880,000 resulting in positive working capital of $98,000. As of December 31, 1998 the total outstanding bank loan balance was $2,425,000 compared to $1,650,000 as of December 31, 1997. In December, 1998 the Company increased its term loan with the bank, increasing the balance by $1,075,000. With the current line of credit of $1,000,000 and cash flows from operations the Company is in a very positive position for future drilling and acquisitions. Working capital will continue to fluctuate during the year as the Company wells are drilled, completed and connected to a sales outlet.
Average oil and natural gas prices received during 1998 were considerably lower than 1997. The average oil price received by the Company during 1998 was $12.33 per barrel which was a $6.72 per barrel decrease when compared to 1997 ($19.05/BBL). Average natural gas prices decreased to $2.02 per MCF, a $.67 per MCF decrease when compared to 1997 ($2.69/MCF). Oil prices within the industry remain largely dependent upon world markets for crude oil. Prices for natural gas are influenced by weather conditions and supply imbalances. Natural gas comprises approximately 83.5 percent of the Company's revenues. A large drop in the natural gas prices will have a significant affect on the earning potential of the Company. Such decreases, if sustained, will adversely effect the Company's cash flow in future quarters.
The Company has a line of credit and a term loan with a local bank. The aggregate borrowing of the loans are $3,500,000 ($2,500,000 term loan and $1,000,000 line of credit). Interest on the loans are at New York banks prime rate. At December 31, 1998 the Company's balance on the term loan was $2,425,000 and zero had been borrowed on the line of credit. The loan is secured by certain of the Company's interest in oil and gas properties. The Company also has two automobile loans with the bank. The loans are for 60 months at an interest rate of 7.5% and 7.75%, with final payment due September, 2002.
During the year 1998 the Company participated in the drilling of eighteen wells; six dry holes, two oil wells and ten gas wells. The Company's working interest in the eighteen wells range from 6% to 97% with the Company acting as operator on seven of the wells and an outside joint owner in the other eleven wells. The new wells drilled and on line in 1998 are providing the Company an additional net cash flow of $30,000 monthly.
Expenditures for drilling during the year 1998 was $770,000, acquisition of producing properties was $260,000 and acreage acquisition costs of $600,000. The Company purchased additional units in four of the drilling partnerships managed by the Company. The Company spent $181,500 in acquiring the final 15% to 27% in three of the partnerships, and these partnerships were closed out in 1998. Questa will continue to manage, as General Partner, five limited partnerships.
In the fourth quarter of 1998 the Company acquired approximately 3,650 acres in Kiowa and Caddo Counties, Oklahoma to resell and/or develop. This acreage offsets several Springer Sand gas wells, 12,000 feet deep, and the wells are of the 5-15 BCF (billion cubic feet) type gas wells. In 1999 the Company anticipates selling a portion of the acreage and provide additional funds for future development and acquisitions.
The Company currently anticipates that its information system and equipment will be Year 2000 compliant by the end of the second quarter of 1999 and that the associated costs will not have a material adverse effect on the Company's financial condition. The Company cannot currently determine the impact third parties will have on the Company's Year 2000 exposure, but intends to continue to evaluate its Year 2000 compliance.
In the fourth quarter of 1998, the Company's Board of Directors authorized the Company to purchase up to 30,000 shares of its outstanding common stock on the open market. The Company will periodically make these purchases, based upon terms determined by management. If the maximum number of shares are purchased, it will represent four (4) percent of the public float of Questa's common stock.
Results of Operations 1998 Compared to 1997
Oil and gas sales during the year 1998 decreased from $3,920,000 to $3,192,000 as the result of lower oil and gas prices (oil prices have dropped 35% and gas prices dropped 21%).
Lease operating expenses for the year decreased from $1,160,000 to $1,112,000. This decrease is the result of lower severance taxes due to lower sale prices. Dry hole expense increased $197,000 in 1998, from $65,000 to $262,000. Increases in depletion, depreciation, and amortization from $821,000 to $1,189,000 are due to reductions in the Company's reserves, as a direct result of lower oil and gas prices. Changes in the Company's general and administrative expenses was due to salary increases, expenses associated with two shareholder meetings, and the hiring of a contract exploration analyst.
Interest income decreased due to smaller cash balances in the bank accounts. Interest expenses decreased due to the lower principal balance on the term loan, prior to the new negotiated term loan dated December 15, 1998. Miscellaneous income came from the settlement of outstanding payables and other non oil and gas related items. The Company's $40,000 unusual item in 1997 was a payment from a factoring company note that was written off in a previous period.
Questa had a fourth quarter net loss of $23,000. Fourth quarter revenues were $893,000, operating expenses were $986,000 and income tax provision was adjusted to ($70,000). Oil and gas prices in the fourth quarter were down ten percent (10%) from the first three quarters of 1998.
Results of Operations 1997 Compared to 1996
Oil and gas sales for 1997 increased from $3,276,000 in 1996 to $4,004,000, this increase was due to steady gas prices and increases in production volumes. The Company's average gas price increased by 17% in 1997 and gas volumes increased by 10%. Questa' income from drilling partnerships increased in 1997 by 228%(from $49,000 in 1996 to $163,000 in 1997).
Production costs increased from $1,003,000 to $1,161,000, this increase was the result of acquisitions made in late 1996 and 1997. Production tax expense increased due to the increase in product sales volume and prices. General and administrative expenses increased due to increases in bonuses, salaries, office rent, and related employee expenses. Interest expense increased slightly due to higher borrowing base.
Net income for 1997 increased due to the increases in sales volumes and gas prices, increase in drilling partnership income, and a decrease in dry hole expenses. Questa also had a positive unusual item in 1997 of $40,000.
Results of Operations 1996 Compared to 1995
Oil and gas sales for 1996 increased from $2,130,000 in 1995 to $3,229,000, this increase was due to price increases and steady production volumes. The Company's average oil price in 1996 increased by 21% over 1995 prices ($19.52 per barrel in 1996 compared to $16.10 per barrel in 1995). Questa's average gas price increased by 44% in 1996 ( $2.29 per MCF in 1996 compared to $1.58 per MCF in 1995).
The lease operating expenses increased from $627,000 to $843,000, this increase was the result of several workovers and recompletions in 1996. Production tax expense increased due to the increase in product prices. General and administrative expenses remained stable and interest expense increased slightly higher due to new borrowing base.
Net income for 1996 increased due to the increase in product prices and a steady increase in production while maintaining overhead costs.
Item 8
Item 8 - Financial Statements and Supplementary Data
See the financial statements appended to this report.
Item 9
Item 9 - Change in and Disagreements With Accountants
No changes or disagreements.
PART III
Item 10
Item 10 - Directors and Executive Officers of the Company
The following sets forth certain information concerning the officers and directors of the Company. Each director was elected for a one-year term which expires at the next annual meeting of the Company's shareholders. All officers serve at the pleasure of the Company's Board of Directors.
Year first elected as Officer and/or Name Age Position Director
Warren L. Meeks 72 Chief Executive Officer,Director 1986 Alan W. Meeks 45 President,Director 1986 Lowell C. Sund 78 Secretary,Director 1986 Bruce L. Sturdevant 76 Director 1986 Donald A. Towner 45 Controller/Treasurer 1989 S. Alex Sund 29 Director 1998
Warren Meeks, Alan Meeks and Donald Towner devote their full time to the affairs of the Company. Mr. Sund devotes such time as is necessary to the affairs of the Company.
The following sets forth certain background information concerning the Company's officers and directors:
Warren L. Meeks has served as an officer and director of Questa Oil & Gas Co. since 1981. Mr. Meeks was Treasurer of Brent Exploration, Inc. in Denver, Colorado from 1978 to 1981. From 1975 to 1978, he was Treasurer of Anderson Petroleum, Inc. and Anderson Resources, Inc. Prior to his association with Anderson Petroleum and Anderson Resources, Mr. Meeks served for 18 years in various capacities with Apache Corporation. Mr. Meeks received his Bachelor of Science degree in business administration from the University of Tulsa.
Alan W. Meeks has served as an officer and director of Questa Oil & Gas Co. since 1981. He was employed as an exploration and development geologist for Indian Wells Oil Company in Tulsa, Oklahoma from 1979 to 1981. From 1977 to 1979, he was an exploration and development geologist for Apache Corporation. Mr. Meeks received his Bachelor of Science degree in geology from the University of Tulsa. Alan W. Meeks is the son of Warren L. Meeks.
Lowell C. Sund has served as an officer and director of Questa Oil & Gas Co. since 1981. In 1982, Mr. Sund retired as Director, Executive Vice-President and Secretary of Adolph Coors Company where he had been employed since 1947.
Bruce L. Sturdevant has been a director of Questa Oil & Gas Co. since 1984. Mr. Sturdevant is a Partner Emeritus of the consulting engineering firm of R.W. Beck & Associates, Denver, Colorado since 1969. From 1948 to 1969, he was employed by Stanley Consultants, Inc., rising to the position of Vice- President and Director. Mr. Sturdevant received his Bachelor of Science degree in mechanical engineering from the University of Iowa.
Donald A. Towner has been with Questa Oil & Gas Co. since September, 1989. Mr. Towner was the Accounting Manager for Utica National Bank and Trust Co. in Tulsa, Oklahoma from 1987 to 1989. Prior to that he was Revenue Accounting Manager for Cotton Petroleum Corporation in Tulsa, Oklahoma. Mr. Towner received his Bachelor of Science degree in Accounting from California State University, Fresno.
S.Alex Sund was appointed as Director of Questa Oil & Gas Co. on March 11,1998. Mr.Sund graduated from the University of Denver, 1992 with a B.A. in Communication and 1993 with a M.B.A. in Marketing. Currently he serves as Vice President and General Manager of Colorado Health, Inc. Colorado Health operates General Nutrition Center franchise stores in Boulder, Colorado and Scottsdale, Arizona. S. Alex Sund is the grandson of Lowell C. Sund.
Item 11
Item 11 - Executive Compensation
The following table sets forth information relating to cash compensation paid by the Company to the Chief Executive Officer and any Highly Compensated Executive Officers.
[A]Name and Principal Position,[B]Fiscal Year,[C]Salary, [D]Bonus,[E]Other Annual Compensation,[F]Restricted Stock Awards, [G]Options Granted,[H]LTIP Payout,[I]All Other Compensation
[A] [B] [C] [D] [E] [F] [G] [H] [I]
[1] [2] [3] [4] [5] [6] [7] Warren Meeks 1998 110,400 22,000 2,390 N/A N/A N/A 11,921 CFO 1997 104,820 20,000 4,709 N/A N/A N/A 12,496 Director 1996 99,240 -0- 1,781 N/A N/A N/A 11,800
Alan Meeks 1998 105,600 22,000 1,269 N/A N/A N/A 11,843 President 1997 100,200 20,000 2,335 N/A N/A N/A 11,981 Director 1996 94,800 -0- 1,279 N/A N/A N/A 11,306
[1] The dollar value of base salary (cash and non-cash) received. [2] The dollar value of bonus (cash and non-cash) received. [3] Any other annual compensation not property categorized as salary or bonus: auto usage and auto allowance [4] During the period covered by the Table, the shares of stock issued as compensation for services. As of December 31, 1998,(adjusted for stock splits) Warren Meeks owned 590,814 shares of Company's common stock, which has a value of approximately $2,216,000(closing price of $3.75). As of December 31, 1998, (adjusted for stock splits) Alan Meeks owned 468,450 shares of Company's common stock, which has a value of approximately $1,757,000(closing price of $3.75). [5] The shares of Common Stock to be received upon the exercise of all stock options granted during the period covered by the Table.[6] "LTIP" is an abbreviation for "Long-Term Incentive Plan." An LTIP is any plan that is intended to serve as an incentive for performance to occur over a period longer then one fiscal year.[7] All other compensation received that the Company could not properly report in any other column of the Table including annual Company contributions or other allocations to vested defined contribution plans, and the dollar value of any insurance premiums paid by, or on behalf of, the Company with respect to term life insurance for the benefit of the named executive officer, and the full dollar value of the remainder of the premiums paid by, or on behalf of, the Company. In the case of Warren Meeks, the amount represents Company contributions to a 401(k) pension plan ($9,400-1996,$10,096-1997,$9,521 - -1998)and directors fees ($2,400-1996,$2,400-1997,$2,400-1998).In the case of Alan Meeks, the amount represents Company contributions to a 401(k) pension plan ($8,906-1996,$9,581-1997,$9,443-1998)and directors fees ($2,400-1996,$2,400-1997 $2,400-1998).
Stock Options
The Company does not have any stock option or stock bonus plans. The Company has not granted any stock options, stock appreciation rights or any similar security to any current officer of the Company. During the years ended December 31, 1996,1997 and 1998, no current or former officer or director has exercised any stock options.
Long Term Incentive Plans - Awards in Last Fiscal Year
None.
Employee Pension, Profit Sharing or Other Retirement Plans
Effective August 1, 1992, by action of the Board of Directors, the Company adopted a defined contribution profit sharing plan with a 401(k) provision. The plan calls for discretionary contribution to be made by the employer. The plan also allows elective deferrals by plan participants of up to 10 percent of their annual salary. Elective deferrals are being matched with Company contributions of up to 6 percent of each participant's compensation. Contributions to this plan and plan expenses totaled approximately $31,000 for 1996,1997 and 1998.Other than the 401(k) Plan described above, the Company does not have a defined benefit, pension plan, profit sharing or retirement plan.
Compensation of Directors
Standard Arrangements. The Company pays each director $300 for each meeting of the Board of Directors which the director personally attends and a quarterly retainer fee of $300. The Company has no standard agreement pursuant to which directors of the Company are otherwise compensated for any service provided as a director or for committee participation or special assignment. Other Arrangements. During the year ended December 31, 1998, and except as disclosed above, no director of the Company received any form of compensation from the Company.
Compensation Committee Interlocks and Insider Participation
During the year ending December 31, 1998, the following officers participated in deliberations of the Company's Board of Directors concerning executive compensation:
Warren L. Meeks Chief Executive Officer/Chairman of the Board Alan W. Meeks President/Director Lowell L. Sund Secretary/Director Bruce Sturdevant Director
During the year ended December 31, 1997, no director of the Company was also an executive officer of another entity.
Audit Committee
During the year ending December 31, 1998, the following directors participated on the Audit Committee:
Warren L. Meeks Chief Executive Officer/Chairman of the Board S. Alex Sund Director Bruce Sturdevant Director
The purpose of the Audit Committee is to review and approve the selection of the Company's auditors, review the Company's Financial statements with the Company's independent auditors, and review and discuss the independent auditor's management letter relating to the Company's internal Controls.
Employment Agreements
The Company does not have an employment agreement with any of its executive officers.
Item 12
Item 12 - Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the shareholdings of the Company's officers and directors of the Company's $0.005 par value common stock, its only class of outstanding equity securities as of March 23, 1999. Unless otherwise specified, the shares owned reflect both record and beneficial ownership.
Name and Address of Beneficial Number of Percent of Owner Shares Class
Warren L. Meeks 590,814 30.9% 8629 So. Darlington Tulsa, OK 74137 (1)
Alan W. Meeks 468,450 24.5% 11020 S. Richmond Tulsa, OK 74137 (2)
Lowell C. Sund 37,000 1.9% 3087 Owens Court Lakewood, CO 80215
Bruce L. Sturdevant 20,400 1.0% 505 Wrangler Road Castle Rock, CO 80104
Donald A. Towner 5,866 0.3% 1517 E. 34th Street Tulsa, OK 74105
S. Alex Sund 386 Boyd Street Golden, CO 80403 600 0.03%
All Officers and Directors as a group 1,123,130 58.63%
(1)Includes 272,500 shares owned of record by Faith J. Meeks, the wife of Warren L. Meeks, and 26,114 shares owned by American Petro Management, Inc. for which Warren L. Meeks is deemed to be the beneficial owner. (2) Includes 20,450 shares owned by minor children of Alan W. Meeks.
Item 13
Item 13 - Certain Relationships and Related Transactions
Certain directors and principal shareholders of the Company have purchased limited partnership interests in partnerships sponsored and managed by the Company. Also certain directors and principal shareholders of the Company have purchased working interests in prospects developed by the Company. In each case, the director or principal shareholder acquired the limited partnership interest, participated and paid, when due, all of their obligations to the partnership or to the Company. No officer or director paid more than $60,000 during the year ending December 31, 1997 for interests in limited partnerships sponsored by the Company or for working interests in wells in which the Company also had an interest. PART IV
Item 14
Item 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements Schedules (See attached Index to Financial Statements) (2) Exhibits: Number Description Page Number
(3) Articles of Incorporation(as amended) and Bylaws (1)(4)(5) (4) Instruments defining rights of Security Holders (1) (10) Material Contracts (1)(2)(3)
(1) Incorporated by reference to a Registration Statement filed on Form S-2 with the Securities and Exchange Commission, 1993 Act Registration Number 2-71990
(2)The Agreement relating to the acquisition of all the outstanding shares of Rival Resources, Inc. by the Registrant is incorporated by reference to Exhibit 2 to a Registration Statement filed on Form S-14 with the Securities andExchange Commission, 1933 Act Registration No. 33-1342.
(3) The Agreement relating to the acquisition of all the outstanding shares of Questa Oil & Gas Co. by the Registrant is incorporated by reference to Exhibit 2 to a Registration Statement filed on Form S-14 with the Securities and Exchange Commission, 1933 Act Registration No. 33-1342.
(4) Incorporated by reference from the same Exhibit filed with the Company's annual report on Form 10-K for the year ending December 31, 1986.
(5) Incorporated by reference from the same Exhibit filed with the Company's annual report on Form 10-K for the year ending December 31, 1987.
(b) Reports on Form 8-K - No Reports on Form 8-K have been filed by the Company for the last quarter of its fiscal year ending December 31, 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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:
QUESTA OIL AND GAS CO.
By /s/ Warren L. Meeks Warren L. Meeks Chief Executive Officer
By /s/ Donald A. Towner Donald A. Towner Chief Financial Officer
Dated: March 31,1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on March 31, 1999:
By /s/ Warren L. Meeks Warren L. Meeks, Director
By /s/ Lowell C. Sund Lowell C. Sund, Director
By /s/ Alan W. Meeks Alan W. Meeks, Director
By /s/ Bruce L. Sturdevant Bruce L. Sturdevant, Director
By /s/ S. Alex Sund S. Alex Sund, Director
QUESTA OIL AND GAS CO.
AND SCHEDULES
FINANCIAL STATEMENTS (SUBMITTED IN RESPONSE TO PART II, ITEM 8), AND SCHEDULES (SUBMITTED IN RESPONSE TO PART IV, ITEM 14):
Independent Auditors' Report
Balance Sheets - December 31, 1998 and 1997
Statement of Operations - For the Years Ended December 31, 1998,1997 and 1996
Statement of Changes in Stockholders' Equity - For the period from January 1, 1996 through December 31, 1998
Statement of Cash Flows - For the Years Ended December 31, 1998,1997 and 1996
Notes to Financial Statements
The Following Financial Statement Schedules are Filed with this Report:
Independent Auditors' Report on Financial Statement Schedules
Schedule V - Property and Equipment for the Years Ended December 31, 1998,1997 and 1996
Schedule VI - Accumulated Depreciation, Depletion and Amortization of Property and Equipment for the Years Ended December 31, 1998,1997 and 1996
All other schedules are omitted because the required information is not present in amounts sufficient to require submission of the schedule or because the information required is included in the Consolidated Financial Statements and Notes thereto.
Magee Rausch & Shelton, L.L.P. Certified Public Accountants 1856 East 15th Street Tulsa, OK 74159
To the Board of Directors and Stockholders Questa Oil & Gas Co. Tulsa, Oklahoma
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying balance sheets of Questa Oil & Gas Co. as of December 31, 1998 and 1997 and the related statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of Questa Oil & Gas Co.'s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards.Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the Financial statements referred to above present fairly, in all material respects, the financial position of Questa Oil & Gas Co. as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles.
/s/ Magee Rausch & Shelton LLP
March 22, 1999
QUESTA OIL AND GAS CO.
See accompanying notes to financial statements
QUESTA OIL AND GAS CO.
See accompanying notes to financial statements.
QUESTA OIL AND GAS CO.
See accompanying notes to financial statements.
QUESTA OIL AND GAS CO.
See accompanying notes to financial statements
QUESTA OIL AND GAS CO.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Operational Activities - The Company's primary business is acquiring, exploring and developing oil and gas properties. All properties owned by the Company are located in the United States.
Inventory - Inventory is comprised primarily of used oil and gas wellhead equipment and gas production units recorded at the lower of cost or market, using the specific identification method.
Oil and Gas Properties - The Company uses the successful efforts method of accounting for its oil and gas activities. Cost of drilling oil and gas properties are deferred until drilling and completion results are evaluated. At such time, cost of wells with economically recoverable oil and gas reserves and development dry holes are capitalized as developed oil and gas properties, and cost of unsuccessful or uneconomical wells (other than development dry holes) are expensed. Exploration costs, including geological and geophysical and cost of carrying and retaining unproved properties, are charged to operations as incurred.
Depreciation, depletion and amortization of the Company's capitalized costs of developed oil and gas properties are computed using the unit-of-production method based upon recoverable reserves as determined by Lee Keeling and Associates (independent petroleum engineers). Costs are not capitalized in an amount which exceeds estimated future undiscounted net revenues of the Company's proved reserves.
Questa is currently the managing general partner of a total of five oil and gas limited partnerships. These partnership interests, which represent interests in producing properties, have been included in developed oil and gas properties. The Company's share of partnership revenue and expenses is in the statement of operations. As general partner, Questa makes and receives advances to the partnerships, which are recorded as receivables from affiliates and advances from affiliates in the accompanying balance sheets.
Furniture and Fixtures - Furniture and fixtures are depreciated using accelerated methods over their useful lives of five years. Maintenance and repair costs are expensed when incurred, while major improvements are capitalized. Gains or losses on retirement or replacement of furniture and fixtures are included in operations.
Income Taxes - The Company computes income tax expenses using Statement of Financial Accounting Standards (SFAS) No. 109,"Accounting for Income Taxes". SFAS No.109, requires the measurement of deferred tax assets for deductible temporary differences and operating loss carry forwards and of deferred tax liabilities for taxable temporary differences. Measurement of current and deferred tax liabilities and assets is based on provisions of enacted law; the effects of future changes in tax laws or rates are not anticipated. Deferred tax assets primarily result from net operating loss carryforwards and unused minimum tax and tight sand gas credits and deferred tax liabilities from the recognition of depreciation, depletion and amortization in different periods for financial reporting and tax purposes.
QUESTA OIL AND GAS CO.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:(Continued)
Concentrations of Credit Risk - The Company's primary business is exploration and development of oil and gas properties primarily in Texas and Oklahoma. The Company grants credit to outside Joint interest owners who are located throughout the United States.
Cash and Cash Equivalents - The Company defines cash and cash equivalents to be cash on hand, cash in checking accounts, certificates of deposit, cash in money market accounts and certain investments with short-term maturities.
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 amount of assets and liabilities and disclosure of contingent asset and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
2. NOTE PAYABLE:
The Company has a line of credit with a local bank. This line of credit allows maximum borrowing of $1,000,000, with a maturity date of June 30, 1999, bears interest at prime (7.75 percent at December 31, 1998), and is secured by certain of the Company's oil and gas interest. At December 31, 1998 the Company has not borrowed on the line of credit.
3. LONG-TERM DEBT:
Long-term debt consists of the following: 1998 1997 Note payable to a local bank bearing interest at prime (7.75 percent at December 31, 1998),payable in quarterly installments of $75,000, with all remaining principal and accrued interest due at maturity on June 30, 2001, secured by certain of the Company's oil and gas interests. $ 2,425,000 $ 1,650,000
Note payable to a local bank bearing interest at 7.5% per annum payable in 60 monthly installments of $304 including interest, secured by automotive equipment. $ 11,868 $ 14,522
Note payable to a local bank bearing interest at 7.75% per annum payable in 60 monthly installments of $539 including interest, secured by automotive equipment. $ 18,696 $ 23,945
$ 2,455,564 $ 1,688,467 Less current maturities 307,979 308,504 ------------ ------------- $ 2,147,585 $ 1,379,963 ============ =============
QUESTA OIL AND GAS CO.
NOTES TO FINANCIAL STATEMENTS
3. LONG-TERM DEBT: (continued)
The annual principal repayment requirements are as follows:
1999 307,979 2000 308,612 2001 1,838,973 2002 0 2003 0
4. STOCKHOLDERS' EQUITY:
On March 31, 1986, the stockholders of Questa and the stockholders of Trinity Oil and Gas, Inc.(Trinity) approved an agreement whereby Questa acquired all of the outstanding common stock of Trinity in exchange for 125,361 shares of Questa's common stock (as adjusted for the stock split in 1988).The transaction was accounted for as a purchase of Trinity by Questa. The fair value of the net assets of Trinity on the purchase date was determined to be $222,532 by Questa's Board of Directors. The common stock of Questa issued to Trinity stockholders was valued at this amount. The agreement also provided that former stockholders of Trinity would receive an additional 12,000 shares of Questa's common stock (as adjusted for the stock split in 1988) when and if net production from certain Trinity properties reaches a specific level. This level was not reached as of December 31, 1998.
During 1998, the Company consummated a one for ten reverse stock split and a twenty for one stock split. All shares and per share information has been restated to retroactively show the effect of this stock split. Weighted average shares outstanding used in the calculation of earnings per share were 1,921,717, 1,955,480 and 1,977,118 for the periods December 31, 1998, 1997 and 1996, respectively.
5. NET EARNINGS PER SHARE:
Primary net earnings per share are computed by dividing net income by the weighted average number of shares of common stock and common stock equivalents during the period.
For fully diluted net earnings per share the weighted average number of shares includes common stocks and common stock equivalents .
QUESTA OIL AND GAS CO.
NOTES TO FINANCIAL STATEMENTS
6. EMPLOYEE RETIREMENT PLAN:
During 1992, by action of the Board of Directors, the Company adopted a defined contribution profit sharing plan with a 401(K) provision effective August 1, 1992. The plan calls for discretionary contribution to be made by the employer. The plan also allows elective deferrals by plan participants of up to 10 percent of their annual salary. These elective deferrals are being matched with company contributions of up to six percent of each participant's compensation. Contributions to this plan and plan expenses totaled approximately $30,000, $31,000 and $31,000 for 1998, 1997 and 1996.
7. ADMINISTRATIVE CHARGES AND MANAGEMENT FEES:
Administrative charges represent amounts charged to joint interest owners for services performed in administering joint operations. Amounts charged to related partnerships for the years ended December 31, 1998, 1997,and 1996 were $43,200, $45,100 and $40,300 respectively. Management fees are amounts charged to limited partnerships for services performed by the Company as managing general partner.
8. INCOME TAXES:
The net deferred tax liability in the accompanying balance sheet includes the following amounts of deferred tax assets and liabilities:
1998 1997 1996 Deferred tax assets $ 50,000 $ 50,000 $ 404,600 Valuation allowance 0 0 0
Net deferred tax asset 50,000 50,000 404,600
Deferred tax liability 1,065,000 1,065,000 954,600
Net deferred tax liability $1,015,000 $1,015,000 $ 550,000
The deferred tax liability results primarily from deducting intangible drilling costs for tax purposes. The deferred tax asset results from net operating loss carry forwards and alterative minimum tax credit carry forwards. The components of income tax expense (benefit) related to continuing operations are as follows:
1998 1997 1996 Federal Current $ 75,000 $ 95,000 $ 45,000 Deferred (benefit) 0 465,000 210,000
$ 75,000 $ 560,000 $ 255,000 ========== ========== ==========
QUESTA OIL AND GAS CO.
NOTES TO FINANCIAL STATEMENTS
8. INCOME TAXES: (Continued)
Questa's income tax expense differed from the statutory federal rate of 34% as follows:
1998 1997 1996
Statutory rate applied to earnings before income taxes $ 161,000 $ 582,000 $ 366,000
Increase (decrease) in income taxes resulting from: Note receivable write-off 0 14,000 0 Deduction of intangible drilling costs 0 (177,000) (100,000) Use of tight sands tax credit (40,000) (20,000) (11,000) Other (46,000) 161,000 0
Income tax expense (benefit) $ 75,000 $ 560,000 $ 255,000 ========== ========== ==========
9. MAJOR CUSTOMERS:
Oil and gas purchasers, individually, accounted for more than 10% of the total revenues in each of the three years as follows:
Purchaser 1998 1997 1996
A * 15% 17% B * 12% 10% C 34% 36% 37% D 11% * *
* Denotes revenues from purchaser less than 10%
QUESTA OIL AND GAS CO.
NOTES TO FINANCIAL STATEMENTS
10. COMMITMENTS AND CONTINGENCY:
The Company is obligated under operating leases for rental of its office facilities during future years ending December 31 as follows:
1999 27,048
Rent expense for the years ended December 31, 1998, 1997, 1996, was $26,975, $25,483 and $15,228 respectively.
11. FINANCIAL INSTRUMENTS:
The Company's financial instruments subject to credit risk include accounts receivable and cash on deposit at various banks.
12. NOTES RECEIVABLE:
In January of 1994, Questa made loans totaling $450,000 to an accounts receivable factoring company. The accounts receivable factoring company is not a related party. The loans are generally unsecured.
In July of 1996 the Company restructured these loans. The note bears interest at 9% per annum, called for principal payments of $130,000 in 1996 and monthly payments in 1997 of $20,000 per month with a balloon payment of $30,000 due in December, 1997. This loan continues to be unsecured. The Company collected $40,000 relating to this note in 1997.
Based on the financial status of the factoring company and other factors, Questa has decided not to record accrued interest on the note and to reserve the $150,000 outstanding balance as of December 31, 1998. The balance is reported as follows:
1998 1997 1996
Notes receivable $ 150,000 $ 150,000 $ 290,000 Less reserve 150,000 150,000 190,000 $ 0 $ 0 $ 100,000
Short term $ 0 $ 0 $ 100,000 Long term $ 0 $ 0 $ 0
The recording of the reserve for this note and partial subsequent collection has been recorded as an unusual item due to the receivable not occurring from Questa's normal course of business.
QUESTA OIL AND GAS CO.
NOTES TO FINANCIAL STATEMENTS
13. GAS CONTRACT SETTLEMENT:
During 1997, the Company recognized income of $15,596 relating to a gas contract settlement received in a prior year.
14. RELATED PARTY TRANSACTIONS:
During 1997 Questa purchased certain oil and gas properties from the President/ Director of the Company. The purchase price was $10,000.
15. SUPPLEMENTARY OIL AND GAS INFORMATION (Unaudited):
Capitalized Costs - Capitalized costs relating to the Company's oil and gas producing activities as of December 31, 1998, 1997 and 1996 are as follows:
1998 1997 1996
Oil and gas properties $ 12,498,298 $ 10,510,388 $ 8,149,586 Well and related equipment 3,012,526 2,725,255 2,500,487
$ 15,510,824 $ 13,235,643 $ 10,650,073 Accumulated depreciation, depletion and amortization (6,063,133) (4,877,483) (4,059,019)
$ 9,447,691 $ 8,358,160 $ 6,591,054 ============= ============= =============
Cost incurred in Oil and Gas Property Acquisition, Exploration and Development Activities - Costs incurred in oil and gas property acquisition, exploration and development activities, including capital expenditures, are summarized as follows for the years ended December 31, 1998, 1997 and 1996:
1998 1997 1996 Property acquisition cost: Proved $ 197,000 $ 2,063,266 $ 768,785 Unproved 558,478 71,993 108,816 Exploration and development costs 1,558,127 578,279 1,054,077
$ 2,313,605 $ 2,713,538 $ 1,931,678 ============= ============= =============
QUESTA OIL AND GAS CO.
NOTES TO FINANCIAL STATEMENTS
15. SUPPLEMENTARY OIL AND GAS INFORMATION (Unaudited):(Continued)
Oil and Gas Reserve Quantities - The estimates of proved reserves and related valuations were determined by Lee Keeling and Associates (independent petroleum engineers) in accordance with the rules of the Securities and Exchange Commission. Estimates of proved reserves are inherently imprecise and are continually subject to revision based on production history, results of additional exploration and development and other factors.
Proved reserves are reserves judged to be economically producible in future years from known reservoirs under existing economic and operating conditions, i.e., prices and costs as of the date the estimate is made and assuming continuation of current regulatory practices using conventional production methods and equipment. Proved developed reserves are expected to be recovered through existing wells, equipment and operating methods.
Following is a summary of the changes in estimated proved developed reserves of the Company, all of which are located in the continental United States, for the years ended December 31, 1998, 1997 and 1996.For these years, the Company's proved undeveloped reserves were immaterial in relation to total reserves and are not presented below.
OIL (BBLS) 1998 1997 1996 Proved developed reserves: Beginning year 465,222 460,451 464,017 Revisions of previous estimates (62,493) (5,803) 14,584 Purchases of minerals in place 3,663 24,956 23,227 Extension and discoveries 20,645 27,416 2,034 Sales of mineral in place 0 0 (3,297) Production (43,304) (41,798) (40,114)
End of year 383,733 465,222 460,451 ========= ========= =========
GAS (MCF) 1998 1997 1996 Proved developed reserves: Beginning year 14,350,862 15,910,802 13,481,897 Revisions of previous estimates (276,818) (1,881,311) 1,101,029 Purchases of minerals in place 329,160 1,102,672 2,148,249 Extension and discoveries 1,953,657 397,998 406,799 Sales of mineral in place 0 0 (148,314) Production (1,267,488) (1,179,299) (1,078,858)
End of year 15,089,373 14,350,862 15,910,802 ============ ============ ============
QUESTA OIL AND GAS CO.
NOTES TO FINANCIAL STATEMENTS
15. SUPPLEMENTARY OIL AND GAS INFORMATION (Unaudited):(Continued)
Standardized Measure of Discounted Future Net Cash Flows and Changes Therein Relating to Proved Developed Oil and Gas Reserves - Statement of Financial Accounting Standards No.69 prescribes guidelines for computing a standardized measure of future net cash flows and changes therein relating to estimated proved reserves. The Company has followed these guidelines which are briefly discussed in the following paragraphs.
Future cash inflows and future production and development costs are determined by applying year-end prices and costs to the estimated quantities of oil and gas to be produced. Estimated future income taxes are computed by using year-end statuary income tax rates including consideration for previously legislated future statuary depletion rates. The resulting future net cash flows are reduced to present value amount by applying a 10% annual discount factor.
The assumptions used to compute the standardized measure are those prescribed by the Financial Accounting Standard Board and, as such, do not necessarily reflect the Company's expectations of actual revenues to be derived from those reserves or their present worth. The limitations inherent in the reserve quantity estimation process, as discussed previously, are equally applicable to the standardized measure computations since these estimates are the basis for the valuation process.
Presented below is the standardized measure of discounted future net cash flows relating to proved developed reserves as of:
DECEMBER 31, 1998 1997 1996
Future cash inflows $ 29,857,000 $ 40,426,000 $ 70,821,000 Future production and development costs (12,271,000) (13,761,000) (17,970,000)
Future income tax expense (4,397,000) (6,666,000) (13,213,000)
Future net cash flows 13,189,000 19,999,000 39,638,000
10% annual discount for estimated timing of cash flows (5,935,000) (9,000,000) (18,888,000)
Standardized measure of discounted future net cash flows $ 7,254,000 $ 10,999,000 $ 20,750,000 ============== ============== ==============
QUESTA OIL AND GAS CO.
NOTES TO FINANCIAL STATEMENTS
15. SUPPLEMENTARY OIL AND GAS INFORMATION (Unaudited):(Continued)
The following are the principal sources of changes in the standardized measure of discounted future net cash flows for the years ended December 31, 1998, 1997 and 1996:
1998 1997 1996
Standardized measure - beginning of year $ 10,999,000 $ 20,750,000 $ 8,120,000
Sale and transfers of oil and gas produced, net of production costs (2,160,000) (2,844,000) (2,275,000)
Extensions, discoveries and improved recovery,less related costs 3,840,000 1,426,000 1,676,000
Net change due to quantity revisions (1,085,000) (4,705,000) 4,755,000
Net change in prices and production costs (10,388,000) (23,875,000) 26,794,000
Purchases of minerals in place 649,000 3,173,000 9,152,000
Net change in income taxes 2,269,000 6,547,000 (8,180,000)
Net change in future development costs 108,000 (65,000) 82,000
Accretion of discount 3,022,000 10,592,000 (19,374,000)
Net increase ( decrease) (3,745,000) (9,751,000) 12,630,000
Standardized measure - end of year $ 7,254,000 $ 10,999,000 $ 20,750,000 ============= ============= =============
SUPPLEMENTARY INFORMATION
Magee Rausch & Shelton, L.L.P. Certified Public Accountants 1856 East 15th Street Tulsa, OK 74159
To the Board of Directors and Stockholders Questa Oil & Gas Co. Tulsa, Oklahoma
INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTARY INFORMATION
Our audit was made for the purpose of forming an opinion on the basic financial statements take as a whole. The schedules to the financial statements referred to in the accompanying index are presented for the purposes of additional analysis and are not a required part of the basic financial statements. Such information for the years ended December 31, 1998, 1997 and 1996 has been subjected to the auditing procedures applied in the audits of the basic financial statements. In our opinion, such information for the years ended December 31, 1998, 1997 and 1996 are fairly stated in all material respects in relation to the basic financial statements taken as a whole.
/s/ Magee Rausch & Shelton LLP
March 22, 1999
QUESTA OIL AND GAS CO.
* Reclassification from unproved to producing properties.
QUESTA OIL AND GAS CO.