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 one share-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 will be approximately 6,483 shares at the $8.75 basis. This results as a liabilty of approximately $57,000 to the Company. The number of shareholders affectived by the reverse split 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 8 drilling partnerships and approximately 270 producing wells. At December 31, 1997 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 geologic 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 oil and gas leases for the purposes of either selling the leases subject to an overriding royalty or other retained interest, or entering into farmout, joint venture, or other arrangements, primarily with industry participants, for exploration of the leases.
The Company's activities during its fiscal year ended December 31, 1997, 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, 1997, unless otherwise indicated. The Company owns interests in wells located in Kansas, North Dakota, Colorado, Oklahoma and Texas: Gross Net
Total Developed leasehold acreage 56,871 acres 10,730 acres ============ ============
Total Oil Gas Gross productive wells 287.00 117.00 170.00 Net productive wells 83.90 17.60 66.30
1997 1996 1995 1994 Oil production (BBL) 41,798 40,114 39,339 47,519 Gas production (MCF) 1,179,299 1,078,857 955,435 869,555
Average Sales Price Oil (per BBL) $19.05 $19.52 $16.10 $14.92 Gas (per MCF) $ 2.69 $ 2.29 $ 1.58 $ 1.93
Average Production Cost per Equivalent unit of oil and gas $ 4.46 $ 4.28 $ 3.76 $ 4.16
The Company's reserves were calculated using two pricing scenarios, Schedule I uses the prices in effect at December 31, 1997, $16.48/BBL for oil and $2.45/MCF for gas.
Proved reserves OIL (BBLS) 465,222 GAS (MCF) 14,350,862
Estimated future net revenues from oil and gas reserves $19,999,000 Present value of estimated future net revenues $10,999,000
Wells drilled: Total Oil Gas Dry 1997 12 2 8 2 1996 9 3 4 2 1995 11 3 3 5 1994 18 1 14 3
Type of Wells Drilled: 1997 1996 1995 1994 Net productive development 1.91 1.71 2.42 4.41 Net dry development .23 1.63 1.54 .16
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 1997.
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 Price High Low First Quarter $ 7.25 $5.50 Second Quarter 11.13 6.63 Third Quarter 16.63 8.25 Fourth Quarter 16.50 8.50
First Quarter $7.88 $4.13 Second Quarter 5.50 4.25 Third Quarter 6.25 4.88 Fourth Quarter 6.25 5.00
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 February 17, 1998:
Number of Title of Class Record Holders
Common Stock, $.01 par value 1,872
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, 1997, the Company had current assets of $998,000 compared to current liabilities of approximately $895,000 resulting in positive working capital of $103,000. This represents a decrease of approximately $581,000 in the Company's working capital position at December 31,1996. The primary source of liquidity to the Company is oil and gas revenues.The principal reasons for the decrease in working capital were 1) one million dollars spent in the acquisition of an additional 25 to 75 percent of the Company's six drilling partnerships that are currently managed by Questa and 2) the expenditure of just over three quarters of a half million dollars in acquiring working interests and over-riding royalty interest in 30 producing properties.
Due to the increased ownership in the drilling partnerships the Company's reserves are increased by an additional 2,000,000 MCFs of gas and 48,000 BBLS of oil. These volumes are in addition to the reserves in the audited Notes to Financial Statements and the reserve totals on page 4.
The Company received $40,000 on a factoring company note that was written off in a previous period. In 1995 Questa decided to reserve $190,000 of a note from a local factoring company, the factoring company has continued to make payments on the principal outstanding amount. The Company has recorded this as an unusual item due to the reserve taken in 1995.
The Company has a line of credit and a term loan with a local bank. The aggregate borrowing of the loans are $3,100,000 ($2,100,000 term loan and $1,000,000 line of credit). Interest on the loans are New York prime. At December 31, 1997 the Company's balance on the term loan was $1,650,000 and zero has been borrowed on theline 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.
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 increasedby 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. And production tax expense increased due to the increase in product sales volume and prices. General and administrative expenses increased due toincreases 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.
Results of Operations 1996 Compared to 1995
Oil and gas sales for 1997 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 1997 increased by 21% over 1995 prices ($19.52 per barrel in 1997 compared to $16.10 per barrel in 1995). Questa's average gas price increased by 44% in 1997 ( $2.29 per MCF in 1997 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 1997. 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 1997 increased due to the increase in product prices and a steady increase in production while maintaining overhead costs.
Results of Operations 1995 Compared to 1994
Gross revenues in 1995 decreased by $267,000 compared to 1994 revenues. The decrease was the result of decreased oil and gas sales and the decrease in interest income. No interest was accrued on the factoring company note in 1995.
The decrease in the gas sales price ( 1995 average price of $ 1.58 verses 1994 average price of $ 1.93) was the major factor in the decrease in 1995 revenues. Administrative charges and interest income were down. "Other" revenues were up due to the acquisition of additional interest in the Company's partnership programs.
Production expenses for 1995 decreased by $159,000 from the prior year due to lower production taxes on the lower prices and a general decrease in the cost of operations of wells due to better management of costs. Dry hole and exploration costs in 1995 increased by $270,000 from 1994 due to the write off of several wells deemed uneconomical and the drilling of five dry holes.
General and administrative expenses remained stable and interest expense increased slightly due to higher interest rates in 1995.
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. No annual meeting was held during 1995 and the same directors remained in office for another year. Year elected as Officer and/or Name Age Position Director
Warren L. Meeks 71 President,Director 1986 Alan W. Meeks 44 Vice President,Director 1986 Lowell C. Sund 77 Secretary,Director 1986 Bruce L. Sturdevant 75 Director 1986 Donald A. Towner 44 Controller/Treasurer 1989
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 been President and a 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 Controller/Treasurer for 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.
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 1997 104,820 20,000 4,709 N/A N/A N/A 12,496 President 1996 99,240 -0- 1,781 N/A N/A N/A 11,800 Director 1995 94,740 5,000 2,681 N/A N/A N/A 11,489
Alan Meeks 1997 100,200 20,000 2,335 N/A N/A N/A 11,981 Vice-President 1996 94,800 -0- 1,279 N/A N/A N/A 11,306 Director 1995 90,300 5,000 2,999 N/A N/A N/A 10,973
[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, 1997, Warren Meeks owned 295,407 shares of Company's common stock, which has a value of approximately $2,806,000 (closing price of $9.50). As of December 31, 1997, Alan Meeks owned 234,625 shares of Company's common stock, which has a value of approximately $2,229,000 (closing price of $9.50). [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 ($9,289-1995, $9,400-1996, $10,096-1997) and directors fees ($2,200-1995,$2,400-1996, $2,400-1997).In the case of Alan Meeks, the amount represents Company contributions to a 401(k) pension plan ($8,773-1995,$8,906-1996,$9,581-1997) and directors fees ($2,200-1995,$2,400-1996,$2,400-1997).
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, 1995,1996 and 1997, 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 1995,1996 and 1997.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, 1997, 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, 1997, the Company did not have a compensation committee. During the year ending December 31, 1997, the following officers participated in deliberations of the Company's Board of Directors concerning executive compensation:
Warren L. Meeks President Alan W. Meeks Vice President Lowell L. Sund Secretary Bruce Sturdevant Director
During the year ended December 31, 1997, no director of the Company was also an executive officer of another entity, which had an executive officer of the Company serving as a director of such entity or as a member of the compensation committee of such entity.
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 $0.01 par value common stock, its only class of outstanding equity securities as of February 17, 1998. 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 295,407 30.5% 8629 So. Darlington Tulsa, OK 74137 (1)
Alan W. Meeks 234,625 24.3% 11020 S. Richmond Tulsa, OK 74137 (2)
Lowell C. Sund 18,000 1.9% 3087 Owens Court Lakewood, CO 80215
Bruce L. Sturdevant 10,200 1.0% 505 Wrangler Road Castle Rock, CO 80104
Donald A. Towner 2,875 0.3% 1517 E. 34th Street Tulsa, OK 74105 All Officers and Directors as a group 561,107 58.0%
(1)Includes 136,250 shares owned of record by Faith J. Meeks, the wife of Warren L. Meeks, and 13,057 shares owned by American Petro Management, Inc. for which Warren L. Meeks is deemed to be the beneficial owner. (2) Includes 10,625 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, 1995
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, President and Chief Executive Officer
By /s/ Donald A. Towner Donald A. Towner Principal Financial Officer and Chief Accounting Officer
Dated: March 30,1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on March 30, 1998:
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
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, 1997 and 1996
Statement of Operations - For the Years Ended December 31, 1997,1996 and 1995
Statement of Changes in Stockholders' Equity - For the Years Ended December 31, 1997,1996 and 1995
Statement of Cash Flows - For the Years Ended December 31, 1997,1996 and 1995
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, 1997,1996 and 1995
Schedule VI - Accumulated Depreciation, Depletion and Amortization of Property and Equipment for the Years Ended December 31, 1997,1996 and 19954
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, 1997 and 1996 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, 1997. These financial statements are the responsibility of Questa Oil & Gas Co.and 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, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles.
/s/ Magree Rausch & Shelton
March 17, 1998
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 hole 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 undeveloped 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). Cost are not capitalized in an amount which exceed estimated future undiscounted net revenues of the Company's proved reserves. Questa is managing general partner of a total of eight 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 and Change in Accounting Policy - 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 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 30,1998, bears interest at prime (8.5 percent at December 31, 1997), and is secured by certain of the Company's oil and gas interest. At December 31, 1997 the Company has not borrowed on the line-of-credit.
3. LONG-TERM DEBT:
Long-term debt consists of the following: 1997 1996 Note payable to a local bank bearing interest at 6.39% per annum payable in 60 monthly installments of $394 including interest,secured by automotive equipment. $ 0 $ 10,202
Note payable to a local bank interest at prime (8.5 percent at December 31,1997),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. $ 1,650,000 $ 1,950,000
Note payable to a finance company bearing interest at 3.5% per annum payable in monthly installments of $217 secured by automotive equipment. $ 0 $ 15,183
Note payable to a local bank bearing interest at 7.57% per annum payable in 60 monthly installments of $304 including interest,secured by automotive equipment. $ 14,522 $ 0
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. $ 23,945 $ 0
$ 1,688,467 $ 1,975,385 Less current maturities 308,504 320,018 ------------ ------------- $ 1,379,963 $ 1,655,367 ============ =============
QUESTA OIL AND GAS CO.
NOTES TO FINANCIAL STATEMENTS
3. LONG-TERM DEBT: (continued)
The annual principal repayment requirements are as follows:
1998 $308,504 1999 307,979 2000 308,612 2001 759,296 2002 4,076
4. STOCKHOLDER'S 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 in 1988) when and if net production from certain Trinity properties reaches a specific level. This level was not reached as of December 31, 1997.
During 1991, the Company issued certain stock warrants entitling holders of these warrants to purchase up to 83,000 shares of Questa common stock at an exercise price of $3.00 per share. During 1995 all of these warrants were exercised and the Company received $249,000 and issued 83,000 new shares of stock.
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. Common stock equivalents for primary earnings per share include shares issuable upon the exercise of the company's outstanding stock warrants.
For fully diluted net earnings per share the weighted average number of shares includes common stocks and common stock equivalents which include shares issuable upon the exercise of the Company's outstanding stock warrants assuming they were exercised at the beginning of the year.
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 1997, 1996 and 1995.
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, 1997, 1996,and 1995 were $45,100, $40,300 and $36,000 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:
1997 1996 1995 Deferred tax assets $ 50,000 $ 404,600 $ 150,000 Valuation allowance 0 0 0
Net deferred tax asset 50,000 404,600 150,000
Deferred tax liability 1,065,000 954,600 490,000
Net deferred tax liability $1,015,000 $ 550,000 $ 340,000
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:
1997 1996 1995 Federal Current $ 95,000 $ 45,000 $ 0 Deferred (benefit) 465,000 210,000 (81,151) $ 560,000 $ 255,000 $ (81,151)
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:
1997 1996 1995
Statutory rate applied to earnings before income taxes $ 582,000 $ 366,000 $ 7,500
Increase (decrease) in income taxes resulting from: Note receivable write-off 14,000 0 (64,600) Deduction of intangible drilling costs (177,000) (100,000) 0 Use of tight sands tax credit (20,000) (11,000) 0 Other 161,000 0 (24,051)
Income tax expense (benefit) $ 560,000 $ 255,000 $ (81,151) ========== ========== ==========
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 1997 1996 1995
A 15% 17% 18% B 12% 10% 10% C 36% 37% 27%
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:
1998 $ 26,390 1999 27,050
Rent expense for the years ended December 31, 1997, 1996, 1995, was $25,483, $15,228, and $23,889, 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 1997 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 due in December 1997. This loan continues to be unsecured.
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, 1997. The balance is reported as follows:
1997 1996
Notes receivable $ 150,000 $ 290,000 Less reserve 150,000 190,000 $ 0 $ 100,000
Short term $ 0 $ 100,000 Long term $ 0 $ 0
The recording of the reserve for this note and partial subsequent collection has been recorded as an unusual item in 1995 and 1997 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 1995,the Company recognized income of $62,589 relating to a gas contract settlement received in a prior year. The Company's ownership of this portion of the settlement was uncertain until 1995. Upon advice from legal counsel the Company moved the amount from liabilities to income. During 1997, the Company recognized an additional $15,596 relating to this settlement.
14. RELATED PARTY TRANSACTIONS:
During 1995 Questa purchased 4,600 shares of its own stock from the Vice President, Director of the Company. The purchase price was $20,700.
During 1997 Questa purchased certain oil and gas properties from the Vice President, Director of the Company. The purchase price was $10,000.
15. SUBSEQUENT EVENT:
On February 18, 1998, the Stockholders authorized a 10-for-1 reverse stock split and a 20-to-1 forward stock split. As a result of the reverse stock split, the Company has decided to pay cash for factional shares. This resulted in a liability of approximately $57,000.
16. SUPPLEMENTARY OIL AND GAS INFORMATION (Unaudited):
Capitalized Costs - Capitalized costs relating to the Company's oil and gas producing activities as of December 31, 1997, 1996 and 1995 are as follows:
1997 1996 1995
Oil and gas properties $ 10,510,388 $ 8,149,586 $ 7,035,189 Well and related equipment 2,725,255 2,500,487 2,197,667
$ 13,235,643 $ 10,650,073 $ 9,232,856 Accumulated depreciation, depletion and amortization (4,877,483) (4,059,019) (3,590,413)
$ 8,358,160 $ 6,591,054 $ 5,642,443 ============= ============= =============
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, 1997, 1996 and 1995:
1997 1996 1995 Property acquisition cost: Proved $ 2,063,266 $ 768,785 $ 475,128 Unproved 71,993 108,816 41,110 Exploration and development costs 578,279 1,054,077 598,611
$ 2,713,538 $ 1,931,678 $ 1,114,849 ============= ============= =============
QUESTA OIL AND GAS CO.
NOTES TO FINANCIAL STATEMENTS
16. 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, 1997, 1996 and 1995. For these years,the Company's proved undeveloped reserves were immaterial in relation to total reserves and are not presented below.
OIL (BBLS) 1997 1996 1995 Proved developed reserves: Beginning year 460,451 464,017 328,911 Revisions of previous estimates (5,803) 14,584 102,999 Purchases of minerals in place 24,956 23,227 68,109 Extension and discoveries 27,416 2,034 3,337 Sales of mineral in place 0 (3,297) 0 Production (41,798) (40,114) (39,339)
End of year 465,222 460,451 464,017 ========= ========= =========
GAS (MCF) 1997 1996 1995 Proved developed reserves: Beginning year 15,910,802 13,481,897 8,762,173 Revisions of previous estimates (1,881,311) 1,101,029 2,791,556 Purchases of minerals in place 1,102,672 2,148,249 2,155,140 Extension and discoveries 397,998 406,799 728,463 Sales of mineral in place 0 (148,314) 0 Production (1,179,299) (1,078,858) (955,435)
End of year 14,350,862 15,910,802 13,481,897 ============ ============ ============
QUESTA OIL AND GAS CO.
NOTES TO FINANCIAL STATEMENTS
16. SUPPLEMENTARY OIL AND GAS INFORMATION (Unaudited):(Continued)
Standardized Measure of Discounted Future Net Cash Flows and Changes 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 estimate 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, 1997 1996 1995
Future cash inflows $ 40,426,000 $ 70,821,000 $ 31,562,000 Future production and development costs (13,761,000) (17,970,000) (11,432,000)
Future income tax expense (6,666,000) (13,213,000) (5,033,000)
Future net cash flows 19,999,000 39,638,000 15,097,000
10% annual discount for estimated timing of cash flows (9,000,000) (18,888,000) (6,977,000)
Standardized measure of discounted future net cash flows $ 10,999,000 $ 20,750,000 $ 8,120,000 ============== ============== ==============
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, 1997, 1996 and 1995:
1997 1996 1995
Standardized measure - beginning of year $ 20,750,000 $ 8,120,000 $ 5,465,000
Sale and transfers of oil and gas produced, net of production costs (2,844,000) (2,275,000) (1,435,000)
Extensions, discoveries and improved recovery,less related costs 1,426,000 1,676,000 1,437,000
Net change due to quantity revisions (4,705,000) 4,755,000 6,220,000
Net change in prices and production costs (23,875,000) 26,794,000 (2,750,000)
Purchases of minerals in place 3,173,000 9,152,000 4,965,000
Net change in income taxes 6,547,000 (8,180,000) (2,157,000)
Net change in future development costs (65,000) 82,000 191,000
Accretion of discount 10,592,000 (19,375,000) (3,816,000)
Net increase ( decrease) (9,751,000) 12,630,000 2,655,000
Standardized measure - end of year $ 10,999,000 $ 20,750,000 $ 8,120,000 ============= ============= ==============
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 basis 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, 1997, 1996 and 1995 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, 1997, 1995 and 1994 are fairly stated in all material respects in relation to the basic financial statements taken as a whole.
/s/ Magree Rausch & Shelton
March 17, 1998
QUESTA OIL AND GAS CO.
* Reclassification from unproved to producing properties.
QUESTA OIL AND GAS CO.