SEC Company Response from QUEST RESOURCE CORP (CIK 0000775351) — Aug 10, 2005
QUEST RESOURCE CORP (CIK 0000775351)
Date: Aug. 10, 2005 · CIK: 0000775351 · Accession: 0001014108-05-000218
AI Filing Summary & Sentiment
File numbers found in text: 000-17371
Referenced dates: July 27, 2005
Letter
August 9, 2005 Mr. Mark A Wojciechowski Staff Accountant United States Securities and Exchange Commission 450 Fifth Street, N.W. Division of Corporation Finance Washington, D.C. 20549-0405 (202) 772-9220 (Fax)
Re: Quest Resource Corporation Form 10-KSBT/A for the Transition Period from June 1, 2004 to December 31, 2004 Filed April 08, 2005 Response letter from SEC dated July 27, 2005 File No. 000-17371
Dear Mr. Wojciechowski:
In response to your letter dated July 27, 2005 of your review of Form 10-KSBT/A for the Transition Period from June 1, 2004 to December 31, 2004, please note the following reply. The paragraph numbers below correspond to those in your letter of July 27, 2005 (or the original June 22, 2005 comment where noted).
Form 10-KSBT/A for the Transition Period from June l, 2004 to December 31, 2004 -------------------------------------------------------------------------------
General -------
Commission Comment:
1. Please submit all draft disclosure revisions that you agreed to make in responding to comments in our June 22, 2005 letter. Please understand that it well be necessary to amend your filing to include these disclosures, as well as to indicate the timing of your evaluation of disclosure controls and procedures, and to include all of the comparable interim information required under Rule 13a-10 of Regulation 13A.
Registrant Response:
As requested, the proposed draft disclosure revisions to the Form 10-KSBT/A are provided below. We are providing these disclosures to the staff for their review prior to filing the From 10-KSBT/A in order to obtain the staff's confirmation that these disclosures are responsive to the staff's comments. Upon receipt of such confirmation, we will promptly file the amended filing.
<PAGE> Securities and Exchange Commission August 9, 2005 Page 2 of 16
Form 10-KSBT/A for the Transition Period from June l, 2004 to December 31, 2004 -------------------------------------------------------------------------------
Exploration and Production Activities, page 7 --------------------------------------------- Natural Gas and Oil Reserves, page 8 ------------------------------------
Commission Comment:
A. (Comment 1 in June 22, 2005 SEC letter) Your disclosure states that the table summarizing reserve estimates and analysis of net proved reserves is in accordance with SEC guidelines. However, the measures of Present Value of Future Net Cash Flow that you present do not agree with the corresponding amounts presented in Note 18 -- SFAS 69 Supplemental Disclosures (unaudited). For example, as of December 31, 2004, the present value disclosed in the table is $401,100,000 as compared to $295,603,000 in Note 18. Please expand your disclosure to discuss the reasons the amounts are different.
Registrant Response:
The following footnote "(a)" will be added to the table on page 8 of the Form 10-KST/A.
<TABLE> <CAPTION>
December 31, May 31, ----------------- ------------------------------------------------------------ 2004 2004 2003 2002 ----------------- ------------------ ------------------- ------------------- <S> <C> <C> <C> <C> Proved Developed Gas Reserves (mcf) 81,467,300 62,558,900 14,016,064 6,356,220 Proved Undeveloped Gas Reserves (mcf) 68,376,600 71,017,300 14,254,570 8,513,750 Total Proved Gas Reserves (mcf) 149,843,900 133,576,200 28,270,634 14,869,970 Proved Developed Oil Reserves (bbl) 47,834 57,105 43,083 45,944 Proved Undeveloped Oil Reserves (bbl) - - - 177,262 Total Proved Oil Reserves (bbl) 47,834 57,105 43,083 223,206 Future Net Cash Flow (after operating expenses) $611,106,300 $482,745,600 $95,572,500 $25,854,629 Present Value of Future Net Cash Flow (a) $401,100,700 $318,356,000 $69,954,990 $17,367,534
</TABLE>
(a) The standardized measure of discounted net cash flows at December 31, 2004 was $295.6 million.
Financial Statements --------------------
Commission Comment:
B. (Comment No. 3 in June 22, 2005 SEC letter). Please include financial statements for that portion of the preceding year that is comparable to your transition period to comply with Exchange Act Rule 13a-10(b), or explain to us why you believe this guidance does not apply to you.
<PAGE> Securities and Exchange Commission August 9, 2005 Page 3 of 16
Registrant Response:
The following new footnote will be added to the financial statements in the Form 10-KSBT/A.
19. Comparison of Certain Financial Data Due To Change in Fiscal Year End
Seven months ended December 31, 2004 compared to the seven months ended December 31, 2003
The Company has changed its fiscal year-end from May 31 to December 31. As a result of this change, the Company has prepared financial statements for the seven-month transition period ended December 31, 2004. Accordingly, the following results of operations compares audited balances for the seven months ended December 31, 2004 to the unaudited balances for the seven months ended December 31, 2003.
Seven months ended December 31, ---------------- -- ----------------- 2004 2003 ---------------- ----------------- (unaudited) Oil and gas sales $ 24,201,000 $ 8,755,000 Gas pipeline revenue 1,918,000 1,289,000 Other revenue and expense 37,000 (1,356,000) ---------------- ----------------- Total revenues 26,156,000 8,688,000
Oil and gas production 5,389,000 2,267,000 Pipeline operating 3,653,000 1,140,000 General & administrative expense 2,681,000 831,000 Depreciation, depletion & amortization 7,671,000 2,235,000 Other costs of revenues -- (8,000) ---------------- ----------------- Total costs and expenses 19,394,000 6,465,000 ---------------- -----------------
Operating income 6,762,000 2,223,000
Change in derivative fair value (1,487,000) 3,312,000
Interest expense (10,147,000) (2,377,000) Interest income 9,000 -- ---------------- -----------------
Income (loss) before income taxes (4,863,000) 3,158,000 Income tax (expense) -- (1,263,000) ---------------- ----------------- Net income (loss) $ (4,863,000) $ 1,895,000 ================ =================
The following analysis of cash flows compares the audited seven months ended December 31, 2004 to the seven months ended December 31, 2003.
<PAGE> Securities and Exchange Commission August 9, 2005 Page 4 of 16
<TABLE> <CAPTION>
Seven months ended December 31, ----------------------------------- 2004 2003 ---------------- ----------------- (unaudited)
<S> <C> <C> Cash flows from operating activities: Net income (loss) $ (4,863,000) $ 1,895,000 Adjustments to reconcile net income (loss) to cash provided by operations: Depreciation & depletion 8,033,000 2,235,000 Accrued interest subordinated notes 4,866,000 210,000 Change in derivative fair value 1,487,000 (3,312,000) Cumulative effect of accounting change - 47,000 Deferred income taxes - 1,263,000 Accretion of line of credit - 1,204,000 Stock issued for services - 62,000 Stock issued for director fees 62,000 - Amortization of loan origination fees 530,000 172,000 Other 191,000 - Change in assets and liabilities: Accounts receivable 893,000 (2,397,000) Other receivables 85,000 - Other current assets 16,000 - Inventory 208,000 130,000 Accounts payable 13,628,000 1,201,000 Revenue payable 222,000 836,000 Accrued expenses 126,000 - ----------------- ------------------ Net cash provided by operating activities 25,484,000 3,546,000 Cash flows from investing activities: Acquisition of proved gas & oil properties-Devon - (111,220,000) Acquisition of gas gathering pipelines-Devon - (21,864,000) Equipment, development & leasehold costs (48,287,000) (6,425,000) Other assets (527,000) (188,000) ----------------- ------------------ Net cash used in investing activities (48,814,000) (139,697,000) Cash flows from investing activities: Long-term debt 136,118,000 89,450,000 Repayments of note borrowings (104,732,000) (19,500,000) Proceeds from subordinated debt - 51,000,000 Refinancing costs-UBS (4,942,000) - Accounts payable-Devon holdback - 12,417,000 Dividends paid (6,000) (5,000) Proceeds from the issuance of common stock 480,000 500,000 Change in other long-term liabilities (638,000) - ----------------- ------------------ Net cash provided by financing activities 26,280,000 133,862,000 ----------------- ----------------- Net increase in cash 2,950,000 (2,289,000) Cash, beginning of period 3,508,000 2,689,000 ----------------- ----------------- Cash, end of period $ 6,458,000 $ 400,000 ================= =================
</TABLE>
<PAGE> Securities and Exchange Commission August 9, 2005 Page 5 of 16
Principles of Consolidation and subsidiaries, page F-7 ------------------------------------------------------
Commission Comment:
C. (Comment No. 4 in June 22, 2005 SEC letter). Expand your disclosure to describe more thoroughly the accounting treatment that was applied to record the formation of Quest Cherokee LLC. Regarding the membership units of Quest Cherokee LLC, disclose your ownership interest as well as Archlight's ownership interest, and provide detail of the pertinent rights and privileges of both the Class A and Class B units.
Registrant Response:
Footnote 1. "Basis of Presentation and Summary of Significant Accounting Policies--Principles of Consolidation" will be replaced with the following:
Principles of Consolidation and Subsidiaries
Ownership of Subsidiaries; Formation of Quest Cherokee. -------------------------------------------------------
Company's subsidiaries consist of:
o Quest Cherokee, LLC, a Delaware limited liability company ("Quest Cherokee"), o Bluestem Pipeline, LLC, a Delaware limited liability company ("Bluestem"), o Quest Cherokee Oilfield Service, LLC, a Delaware limited liability company ("QCOS"), o Quest Energy Service, Inc., a Kansas corporation ("QES"), o Quest Oil & Gas Corporation, a Kansas corporation ("QOG"), o Ponderosa Gas Pipeline Company, a Kansas corporation ("PGPC"), o Producers Service, Incorporated, a Kansas corporation ("PSI"), o J-W Gas Gathering, L.L.C., a Kansas limited liability ("J-W Gas"), and o STP Cherokee, Inc., an Oklahoma corporation ("STP").
QES, QOG, PGPC and STP are wholly-owned by the Company. PGPC owns all of the outstanding capital stock of PSI and PSI is the sole member of J-W Gas.
Quest Cherokee was formed on December 22, 2003 to own and operate the Company's oil and gas properties in the Cherokee Basin of southeastern Kansas and northeastern Oklahoma. Upon its formation, QES, QOG, PGPC, STP, PSI and J-W Gas contributed all of their natural gas and oil properties in the Cherokee Basin with an agreed upon value of $5
Show Raw Text
<DOCUMENT>
<TYPE>CORRESP
<SEQUENCE>1
<FILENAME>filename1.txt
<TEXT>
August 9, 2005
Mr. Mark A Wojciechowski
Staff Accountant
United States Securities and Exchange Commission
450 Fifth Street, N.W.
Division of Corporation Finance
Washington, D.C. 20549-0405
(202) 772-9220 (Fax)
Re: Quest Resource Corporation
Form 10-KSBT/A for the Transition Period from June 1, 2004 to
December 31, 2004
Filed April 08, 2005
Response letter from SEC dated July 27, 2005 File No. 000-17371
Dear Mr. Wojciechowski:
In response to your letter dated July 27, 2005 of your review of Form
10-KSBT/A for the Transition Period from June 1, 2004 to December 31, 2004,
please note the following reply. The paragraph numbers below correspond to those
in your letter of July 27, 2005 (or the original June 22, 2005 comment where
noted).
Form 10-KSBT/A for the Transition Period from June l, 2004 to December 31, 2004
-------------------------------------------------------------------------------
General
-------
Commission Comment:
1. Please submit all draft disclosure revisions that you agreed to make in
responding to comments in our June 22, 2005 letter. Please understand that it
well be necessary to amend your filing to include these disclosures, as well as
to indicate the timing of your evaluation of disclosure controls and procedures,
and to include all of the comparable interim information required under Rule
13a-10 of Regulation 13A.
Registrant Response:
As requested, the proposed draft disclosure revisions to the Form
10-KSBT/A are provided below. We are providing these disclosures to the staff
for their review prior to filing the From 10-KSBT/A in order to obtain the
staff's confirmation that these disclosures are responsive to the staff's
comments. Upon receipt of such confirmation, we will promptly file the amended
filing.
<PAGE>
Securities and Exchange Commission
August 9, 2005
Page 2 of 16
Form 10-KSBT/A for the Transition Period from June l, 2004 to December 31, 2004
-------------------------------------------------------------------------------
Exploration and Production Activities, page 7
---------------------------------------------
Natural Gas and Oil Reserves, page 8
------------------------------------
Commission Comment:
A. (Comment 1 in June 22, 2005 SEC letter) Your disclosure states that the
table summarizing reserve estimates and analysis of net proved reserves is in
accordance with SEC guidelines. However, the measures of Present Value of Future
Net Cash Flow that you present do not agree with the corresponding amounts
presented in Note 18 -- SFAS 69 Supplemental Disclosures (unaudited). For
example, as of December 31, 2004, the present value disclosed in the table is
$401,100,000 as compared to $295,603,000 in Note 18. Please expand your
disclosure to discuss the reasons the amounts are different.
Registrant Response:
The following footnote "(a)" will be added to the table on page 8 of the
Form 10-KST/A.
<TABLE>
<CAPTION>
December 31, May 31,
----------------- ------------------------------------------------------------
2004 2004 2003 2002
----------------- ------------------ ------------------- -------------------
<S> <C> <C> <C> <C>
Proved Developed Gas Reserves (mcf) 81,467,300 62,558,900 14,016,064 6,356,220
Proved Undeveloped Gas Reserves (mcf) 68,376,600 71,017,300 14,254,570 8,513,750
Total Proved Gas Reserves (mcf) 149,843,900 133,576,200 28,270,634 14,869,970
Proved Developed Oil Reserves (bbl) 47,834 57,105 43,083 45,944
Proved Undeveloped Oil Reserves (bbl) - - - 177,262
Total Proved Oil Reserves (bbl) 47,834 57,105 43,083 223,206
Future Net Cash Flow (after operating expenses) $611,106,300 $482,745,600 $95,572,500 $25,854,629
Present Value of Future Net Cash Flow (a) $401,100,700 $318,356,000 $69,954,990 $17,367,534
</TABLE>
(a) The standardized measure of discounted net cash flows at December 31,
2004 was $295.6 million.
Financial Statements
--------------------
Commission Comment:
B. (Comment No. 3 in June 22, 2005 SEC letter). Please include financial
statements for that portion of the preceding year that is comparable to your
transition period to comply with Exchange Act Rule 13a-10(b), or explain to us
why you believe this guidance does not apply to you.
<PAGE>
Securities and Exchange Commission
August 9, 2005
Page 3 of 16
Registrant Response:
The following new footnote will be added to the financial statements in
the Form 10-KSBT/A.
19. Comparison of Certain Financial Data Due To Change in Fiscal Year End
Seven months ended December 31, 2004 compared to the seven months ended December
31, 2003
The Company has changed its fiscal year-end from May 31 to December 31. As
a result of this change, the Company has prepared financial statements for the
seven-month transition period ended December 31, 2004. Accordingly, the
following results of operations compares audited balances for the seven months
ended December 31, 2004 to the unaudited balances for the seven months ended
December 31, 2003.
Seven months ended December 31,
---------------- -- -----------------
2004 2003
---------------- -----------------
(unaudited)
Oil and gas sales $ 24,201,000 $ 8,755,000
Gas pipeline revenue 1,918,000 1,289,000
Other revenue and expense 37,000 (1,356,000)
---------------- -----------------
Total revenues 26,156,000 8,688,000
Oil and gas production 5,389,000 2,267,000
Pipeline operating 3,653,000 1,140,000
General & administrative expense 2,681,000 831,000
Depreciation, depletion & amortization 7,671,000 2,235,000
Other costs of revenues -- (8,000)
---------------- -----------------
Total costs and expenses 19,394,000 6,465,000
---------------- -----------------
Operating income 6,762,000 2,223,000
Change in derivative fair value (1,487,000) 3,312,000
Interest expense (10,147,000) (2,377,000)
Interest income 9,000 --
---------------- -----------------
Income (loss) before income taxes (4,863,000) 3,158,000
Income tax (expense) -- (1,263,000)
---------------- -----------------
Net income (loss) $ (4,863,000) $ 1,895,000
================ =================
The following analysis of cash flows compares the audited seven months
ended December 31, 2004 to the seven months ended December 31, 2003.
<PAGE>
Securities and Exchange Commission
August 9, 2005
Page 4 of 16
<TABLE>
<CAPTION>
Seven months ended December 31,
-----------------------------------
2004 2003
---------------- -----------------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (4,863,000) $ 1,895,000
Adjustments to reconcile net income (loss) to cash provided
by operations:
Depreciation & depletion 8,033,000 2,235,000
Accrued interest subordinated notes 4,866,000 210,000
Change in derivative fair value 1,487,000 (3,312,000)
Cumulative effect of accounting change - 47,000
Deferred income taxes - 1,263,000
Accretion of line of credit - 1,204,000
Stock issued for services - 62,000
Stock issued for director fees 62,000 -
Amortization of loan origination fees 530,000 172,000
Other 191,000 -
Change in assets and liabilities:
Accounts receivable 893,000 (2,397,000)
Other receivables 85,000 -
Other current assets 16,000 -
Inventory 208,000 130,000
Accounts payable 13,628,000 1,201,000
Revenue payable 222,000 836,000
Accrued expenses 126,000 -
----------------- ------------------
Net cash provided by operating activities 25,484,000 3,546,000
Cash flows from investing activities:
Acquisition of proved gas & oil properties-Devon - (111,220,000)
Acquisition of gas gathering pipelines-Devon - (21,864,000)
Equipment, development & leasehold costs (48,287,000) (6,425,000)
Other assets (527,000) (188,000)
----------------- ------------------
Net cash used in investing activities (48,814,000) (139,697,000)
Cash flows from investing activities:
Long-term debt 136,118,000 89,450,000
Repayments of note borrowings (104,732,000) (19,500,000)
Proceeds from subordinated debt - 51,000,000
Refinancing costs-UBS (4,942,000) -
Accounts payable-Devon holdback - 12,417,000
Dividends paid (6,000) (5,000)
Proceeds from the issuance of common stock 480,000 500,000
Change in other long-term liabilities (638,000) -
----------------- ------------------
Net cash provided by financing activities 26,280,000 133,862,000
----------------- -----------------
Net increase in cash 2,950,000 (2,289,000)
Cash, beginning of period 3,508,000 2,689,000
----------------- -----------------
Cash, end of period $ 6,458,000 $ 400,000
================= =================
</TABLE>
<PAGE>
Securities and Exchange Commission
August 9, 2005
Page 5 of 16
Principles of Consolidation and subsidiaries, page F-7
------------------------------------------------------
Commission Comment:
C. (Comment No. 4 in June 22, 2005 SEC letter). Expand your disclosure to
describe more thoroughly the accounting treatment that was applied to record the
formation of Quest Cherokee LLC. Regarding the membership units of Quest
Cherokee LLC, disclose your ownership interest as well as Archlight's ownership
interest, and provide detail of the pertinent rights and privileges of both the
Class A and Class B units.
Registrant Response:
Footnote 1. "Basis of Presentation and Summary of Significant Accounting
Policies--Principles of Consolidation" will be replaced with the following:
Principles of Consolidation and Subsidiaries
Ownership of Subsidiaries; Formation of Quest Cherokee.
-------------------------------------------------------
Company's subsidiaries consist of:
o Quest Cherokee, LLC, a Delaware limited liability company ("Quest
Cherokee"),
o Bluestem Pipeline, LLC, a Delaware limited liability company
("Bluestem"),
o Quest Cherokee Oilfield Service, LLC, a Delaware limited liability
company ("QCOS"),
o Quest Energy Service, Inc., a Kansas corporation ("QES"),
o Quest Oil & Gas Corporation, a Kansas corporation ("QOG"),
o Ponderosa Gas Pipeline Company, a Kansas corporation ("PGPC"),
o Producers Service, Incorporated, a Kansas corporation ("PSI"),
o J-W Gas Gathering, L.L.C., a Kansas limited liability ("J-W Gas"), and
o STP Cherokee, Inc., an Oklahoma corporation ("STP").
QES, QOG, PGPC and STP are wholly-owned by the Company. PGPC owns all
of the outstanding capital stock of PSI and PSI is the sole member of J-W
Gas.
Quest Cherokee was formed on December 22, 2003 to own and operate the
Company's oil and gas properties in the Cherokee Basin of southeastern
Kansas and northeastern Oklahoma. Upon its formation, QES, QOG, PGPC, STP,
PSI and J-W Gas contributed all of their natural gas and oil properties in
the Cherokee Basin with an agreed upon value of $5