<![CDATA[EXPLANATORY NOTE
This annual report on Form 10-KSB does not contain all of the
information required to be disclosed under the Securities Exchange Act of 1934,
as amended, and the rules and regulations promulgated thereunder. In particular,
this annual report does not contain the financial statements required by Item
310 of Regulation S-B, management's discussion and analysis required by Item 303
of Regulation S-B, disclosure controls and procedures required by Item 307 of
Regulation S-B, internal control over financial reporting required by Item 308
of Regulation S-B, and certifications required under Rule 13a-14 of the
Securities Exchange Act of 1934, as amended, and Section 1350 of the
Sarbanes-Oxley Act of 2002. The company intends to file an amendment to this
annual report on Form 10-KSB to provide the missing information once it becomes
available.
PART I
Quest Minerals & Mining Corp., including all its subsidiaries, are
collectively referred to herein as "Quest Minerals," "Quest," "the Company,"
"us," or "we."
Item 1. DESCRIPTION OF BUSINESS
General
Quest Minerals & Mining Corp. acquires and operates energy and mineral
related properties in the southeastern part of the United States. Quest focuses
its efforts on properties that produce quality compliance blend coal.
Quest is a holding company for Quest Minerals & Mining, Ltd., a Nevada
corporation, or Quest (Nevada), which in turn is a holding company for Quest
Energy, Ltd., a Kentucky corporation, or Quest Energy, and of Gwenco, Inc., a
Kentucky corporation, or Gwenco.
Gwenco leases over 700 acres of coal mines, with approximately
12,999,000 tons of coal in place in six seams. In 2004, Gwenco had reopened
Gwenco's two former drift mines at Pond Creek and Lower Cedar Grove, and had
begun production at the Pond Creek seam. This seam of high quality compliance
coal is located at Slater's Branch, South Williamson, Kentucky.
Fiscal 2007 and First Quarter 2008 Developments
Logan & Kanawha Purchase Order. In April 2008, our wholly owned
subsidiary, Gwenco, Inc., received a purchase order for up to $8 million of coal
through December 2008 from Logan & Kanawha Co., LLC, a West Virginia company
Rehabilitation and Reopening of Pond Creek Mine. In January 2007,
Gwenco received a permit from the Kentucky Department of Natural Resources to
conduct coal mining at its Pond Creed mine. In February 2007, Gwenco's
engineering firm, Alchemy Engineering of Prestonburg, Kentucky, completed one
and five year mine plan and maps required by the Kentucky Department of Mines
and Minerals in connection with the permit to conduct coal mining at Pond Creek.
Gwenco had retained General Mining, LLC of Wallins, Kentucky to rehabilitate the
Pond Creek mine in February 2007 and further retained General Mining to conduct
mining operations at Pond Creek in March 2007. The company completed its initial
rehabilitation of the Pond Creek mine, recommenced mining operations, and began
shipping commercial coal for sale in May 2007. The company completed all
rehabilitation the week of July 30, 2007. In January 2008, we retained White
Star Mining to conduct all mining operations at Pond Creek. White Star retained
all necessary permits to being mining operations in February 2008, and we expect
to resume mining operations in the second fiscal quarter of 2008.
March 2008 Financing. On March 11, 2008, we signed a 15% per annum
promissory note with a third party lender for $75,000 due on March 10, 2009. The
note is convertible at the option of the holder at a conversion price of 50% of
the average of the three lowest per share market values during the ten (10)
trading days immediately preceding a conversion date. The holder may not convert
any outstanding principal amount of this note or accrued and unpaid interest
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thereon to the extent such conversion would result in the holder beneficially
owning in excess of 4.999% of the then issued and outstanding common shares of
the Company.
Letter of Intent with McCoy Heirs. In January 2008, we entered into a
letter of intent on a joint venture with the McCoy Heirs, owners of coal
property in southern Kentucky. The project was intended to encompass 1,000,000
tons of recoverable coal reserves from the Elkhorn # 3 coal seam structured
through a lease agreement to mine property held by the McCoy Heirs. This letter
of intent has since been abandoned.
Gwenco, Inc. Chapter 11 Reorganization. On March 2, 2007, Quest's
wholly owned subsidiary, Gwenco, Inc., filed a voluntary petition for
reorganization under Chapter 11 of .the U.S. Bankruptcy Code with the United
States Bankruptcy Court for the Eastern District of Kentucky. Management felt
this was a necessary step to further the company's financial restructuring
initiative and to protect Gwenco's assets from claims, debts, judgments,
foreclosures, and forfeitures of those creditors and stakeholders with whom both
Quest and Gwenco were unable to negotiate restructured agreements. The company
is currently overseeing Gwenco's operations as a debtor in possession, subject
to court approval of matters outside the ordinary course of business. Gwenco is
currently seeking court approval for debtor in possession financing from holders
of Gwenco's existing debt obligations in order to fund operating expenses. The
company intends to continue its mining operations at Pond Creek mine at Slater's
Branch while this matter is completed. Under Chapter 11, claims against Gwenco
in existence prior to the filing of the petitions for reorganization relief
under the federal bankruptcy laws are stayed while Gwenco is in bankruptcy. On
August 3, 2007, the Bankruptcy Court approved Gwenco's request for
debtor-in-possession financing in an amount of up to $2,000,000. In February
2008, Gwenco submitted a preliminary plan of reorganization to the court for
approval.
Letter of Intent with Parsons Branch. On July 21, 2006, Quest signed a
non-binding letter of intent with Parsons Branch Development to acquire a permit
to mine the Elkhorn #2 seam on Parsons Branch located in Mud Creek, Kentucky.
Parsons Branch Development has approximately 450,000 tons of clean coal under
lease at this location. Upon completion of the transfer of the permit to Quest,
it will retain all revenues from coal sales after payment of a royalty to
Parsons Branch of $1.50 per clean ton mined and expenses of mine operations,
which are expected to be carried out by a contract miner. Management determined
not to pursue this transaction during fiscal 2007.
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Industry Overview
Coal is the second most widely used form of energy in the United
States, accounting for nearly one-fourth of the nation's total energy
consumption, according to the BP Statistical Review of World Energy ("BP"), June
2007. In 2006, coal was the fuel source of 50% of the electricity generated
nationwide, as reported by the Energy Information Administration ("EIA"), a
statistical agency of the United States Department of Energy.
The United States is the second largest coal producer in the world,
exceeded only by China. Other leading coal producers include India, Australia,
South Africa, Russia and Indonesia. The United States has the largest coal
reserves in the world, with proved reserves totaling 247 billion tons. Russia
ranks second in proved coal reserves with 157 billion tons, followed by China
with 115 billion tons, according to BP.
United States coal reserves are more plentiful than oil or natural gas
with 234 years of supply at current consumption rates. Proved United States
reserves of oil amount to 12 years of supply at current production rates and
proved United States reserves of natural gas amount to 11 years of supply at
current levels of consumption, as reported by the BP study.
United States coal production has more than doubled over the last 40
years. In 2006, total United States coal production, as estimated by the EIA,
was 1.2 billion tons.
Coal is used in the United States by utilities to generate electricity,
by steel companies to make steel products, and by a variety of industrial users
to produce heat and to power foundries, cement plants, paper mills, chemical
plants and other manufacturing and processing facilities. Significant quantities
of coal are also exported from both East and Gulf Coast terminals. The breakdown
of 2006 United States coal consumption, as estimated by the EIA, is as follows:
End Use % of Total
--------------------------------------------------------------------------------
Electrical Power 93%
Other Industrial 5%
Coke 2%
Residential and Commercial <1%
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Total 100%
Coal has long been favored as an electricity generating fuel because of
its basic economic advantage. The largest cost component in electricity
generation is fuel. This fuel cost is typically lower for coal than competing
fuels such as oil and natural gas on a Btu-comparable basis. Platts, which
provides global commodity news and information, estimated the average total
production costs of electricity, using coal and competing generation
alternatives in 2006 as follows:
Cost per million
Electricity Generation Source Kilowatt Hours
--------------------------------------------------------------------------------
Oil $ 14.69
Natural Gal $ 7.97
Coal $ 2.19
Nuclear $ 1.84
There are factors other than fuel cost that influence each utility's
choice of electricity generation mode, including facility construction cost,
access to fuel transportation infrastructure, environmental restrictions, and
other factors. The breakdown of United States electricity generation by fuel
source in 2006, as estimated by EIA, is as follows:
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% of Total
Electricity Generation Source Electricity Generation
--------------------------------------------------------------------------------
Coal 50%
Nuclear 20%
Natural Gas 19%
Hydroelectric 7%
Oil and other (solar, wind, etc.) 4%
------------
Total 100%
------------
Demand for electricity has historically been driven by United States
economic growth, but it can fluctuate from year to year depending on weather
patterns. In 2006, electricity consumption in the United States increased 0.2%,
but the average growth rate in the past decade was approximately 1.5% per year,
according to EIA estimates. Because coal-fired generation is used in most cases
to meet base load requirements, coal consumption has generally grown at the pace
of electricity demand growth.
According to the World Coal Institute ("WCI"), in 2006, the United
States ranked seventh among worldwide exporters of coal. Australia was the
largest exporter, with other major exporters including Indonesia, China, South
Africa, Russia, Columbia and Canada. According to EVA, United States exports
increased by 19% from 2006 to 2007. The usage breakdown for 2007 was that United
States exports of 59 million tons were 45% for electricity generation and 55%
for steel production. In 2007, the United States coal exports were shipped to
more than 30 countries. The largest purchaser of United States exported utility
coal in 2007 continued to be Canada, which took 14.6 million tons, or 55%, of
total utility coal exports. This was down 4% compared to the 15.2 million tons
exported to Canada in 2006. Overall steam coal exports increased 22% in 2007
compared to 2006. The largest purchasers of United States exported metallurgical
coal were Brazil, which imported approximately 6.5 million tons, or 20%, and
Canada, which imported 3.7 million tons, or 12%. In total, metallurgical coal
exports increased 16% in 2007 compared to 2006.
Depending on the relative strength of the United States dollar versus
currencies in other coal producing regions of the world, United States producers
may export more or less coal into foreign countries as they compete on price
with other foreign coal producing sources. Likewise, the domestic coal market
may be impacted due to the relative strength of the United States dollar to
other currencies, as foreign sources could be cost-advantaged based on a coal
producing region's relative currency position. During 2007, the United States
dollar weakened, making imported coal less competitive with United States
produced coal, and positively impacting the competitiveness of United States
exports in some overseas markets.
From 2003 to February 2008, the global marketplace for coal experienced
swings in the demand/supply balance. In periods of supply shortfall, as occurred
from 2003 to early 2006 and again in late 2007 through February 2008, the prices
for coal reached record highs in the United States. Increased worldwide demand
has been primarily driven by higher prices for oil and natural gas and economic
expansion, particularly in China, India, and elsewhere in Asia. At the same
time, infrastructure and regulatory limitations in China contributed to a
tightening of worldwide coal supply, affecting global prices of coal. The growth
in China and India caused an increase in worldwide demand for raw materials and
a disruption of expected coal exports from China to Japan, Korea, and other
countries.
Metallurgical grade coal is distinguished by special quality
characteristics that include high carbon content, volatile matter, low expansion
pressure, low sulfur content, and various other chemical attributes. High vol
met coal is also high in heat content (as measured in Btus), and therefore is
desirable to utilities as fuel for electricity generation. Consequently, high
vol met coal producers have the ongoing opportunity to select the market that
provides maximum revenue and profitability. The premium price offered by steel
makers for the metallurgical quality attributes is typically higher than the
price offered by utility coal buyers that value only the heat content. The
primary concentration of United States metallurgical coal reserves is located in
the Central Appalachian region. EVA estimates that the Central Appalachian
region supplied 89% of domestic metallurgical coal and 73% of United States
exported metallurgical coal during 2006.
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For utility coal buyers, the primary goal is to maximize heat content,
with other specifications like ash content, sulfur content, and size varying
considerably among different customers. Low sulfur coals, such as those produced
in the western United States and in Central Appalachia, generally demand a
higher price due to restrictions on sulfur emissions imposed by the Clean Air
Act of 1963 ("Clean Air Act") and the volatility in SO2 allowance prices that
occurred in recent years when the demand for all specifications of coal
increased. SO2 allowances permit utilities to emit a higher level of SO2 than
otherwise required under the Clean Air Act regulations. The demand and premium
price for low sulfur coal is expected to diminish as more utilities install
scrubbers at their coal-fired plants. Coal shipped for North American
consumption is typically sold at the mine loading facility with transportation
costs being borne by the purchaser. Offshore export shipments are normally sold
at the ship-loading terminal, with the purchaser paying the ocean freight.
According to the National Mining Association ("NMA"), approximately two-thirds
of United States coal production in recent years was shipped via railroads.
Final delivery to consumers often involves more than one transportation mode. A
significant portion of United States production is delivered to customers via
barges on the inland waterway system and ships loaded at Great Lakes ports.
Market Opportunity
In the past, coal price declines lead to widespread mine shutdowns.
Beginning in the fourth quarter of 2003, coal prices began a steady increase.
Traditionally, coal price increases have been caused by harsh North American
weather or labor stoppages. Current upward pricing trends have no specific
driver outside of general price increases in all energy sources, which appear to
be driven by geo-political concerns and the current non-renewable
characteristics of fossil fuels. Equivalent current natural gas prices imply
that coal should currently be trading at U.S. $175 per ton. Nymex July 2004 coal
deliveries were trading just above $80 per ton as of the beginning of March
2004. As coal prices strengthen, Quest believes that it could become highly
lucrative to re-open the best of these recently closed mines.
Gwenco Mines
Gwenco holds approximately 30 coal leases, covering an estimated 700
acres, with a projected 12,999,000 tons of coal in place in six seams with
possible additional reserves on adjacent leases. From 1997 to 2001, Gwenco
operated two deep mines in the Lower Cedar Grove and Pond Creek seams -- until a
downturn in coal prices made continued operations unfeasible, and the mines were
shut down. As discussed above, Gwenco has recently re-opened the Pond Creek mine
is starting to mine the Pond Creek seam.
The primary reserves are in the Pond Creek, Lower Cedar Grove, and
Taylor seams. Both the Pond Creek and Lowers Cedars Grove seams are permitted
and bonded and have been mined to a limited extent. The coal in the Pond Creek
seam is low-sulfur, compliance coal, running at an average of 12,000 to 12,500
BTUs when mined clean. The coal in the Lower Cedar Grove seam has a shale
parting and must be washed to be commercial. When cleaned it is a high BTU coal
with certain metallurgical coal qualities.
Mining Techniques
There are several basis techniques for mining drift or adit mines.
Quest has used, and intends to use, a continuous miner on the Pond Creek seam at
its Gwenco facility. Quest has used, and intends to use, a Joy 14-10AA
continuous miner at the Gwenco mines. In this technique, the miner has a cutting
head that tears the coal from it natural deposit and transfers the coal to a
gather head and then to shuttle cars that can carry from 3 to 10 tons depending
on the size. This method can create higher volume mining than the conventional
method, but may mine the coal with a higher content of ash.
Expansion Strategy
Quest seeks to acquire new mines and contracting to produce and market
additional coal in its geographic focus area. Quest intends to acquire and
operate high quality coal properties with established field personnel, primarily
in the eastern Kentucky coalfields, with additional properties in southwestern
West Virginia and western Virginia. This region has an excellent infrastructure
of workers, truckers, rail sidings on the CSX and N&W rail lines and low cost
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access to the Big Sandy barge docks near Ashland, KY, for effective coal
distribution. Quest intends to use its local knowledge to pursue high returns on
investment from re-opening profitable properties in this region. It intends to
grow by additional accretive acquisitions, contract mining, and internal
development of owned properties.
Quest is also seeking to diversify its operations into other sectors of
the energy industry, including the oil and gas sector. Quest's coal miners
collectively have over 50 years of mining experience. Quest may also engage key
industry experts to assist in the analysis and funding of these properties.
Quest management believes that a successful diversification into the oil and gas
field would provide Quest with an opportunity to improve its results of
operations while hedging on coal production and prices.
Customers
Quest currently has one customer, which has delivered a purchase order
purchase order for up to $8 million of coal through December 2008. To the extent
that Quest produces coal in excess of this order, it intends to sell its
remaining coal to other purchasers or on the spot market to coal brokers. Quest
may seek to enter into long-term contracts (exceeding one year in duration) with
customers if economic circumstances indicate that such arrangements would
maximize profitability. These arrangements would allow customers to secure a
supply for their future needs and provide Quest with greater predictability of
sales volume and sales prices.
Competition
The coal industry in the United States is highly competitive. Quest
competes with many large producers and other small coal producers. Quest also
competes with other producers primarily on the basis of price, coal quality,
transportation cost and reliability of supply. Continued demand for coal is also
dependent on factors outside of Quest's control, including demand for
electricity, environmental and governmental regulations, weather, technological
developments, and the availability and cost of alternative fuel sources.
The price at which Quest's production can be sold is dependent upon a
variety of factors, many of which are beyond Quest's control. Quest sells coal
on the spot-market and seeks to sell coal under long-term contracts. Generally,
the relative competitiveness of coal vis-a-vis other fuels or other coals is
evaluated on a delivered cost per heating value unit basis. In addition to
competition from other fuels, coal quality, the marginal cost of producing coal
in various regions of the country and transportation costs are major
determinants of the price for which Quest's production can be sold. Factors that
directly influence production cost include geological characteristics (including
seam thickness), overburden ratios, depth of underground reserves,
transportation costs and labor availability and cost. Underground mining has
higher labor (including reserves for future costs associated with labor benefits
and health care) and capital (including modern mining equipment and construction
of extensive ventilation systems) costs than those of surface mining. In recent
years, increased development of large surface mining operations, particularly in
the western United States, and more efficient mining equipment and techniques,
have contributed to excess coal production capacity in the United States.
Competition resulting from excess capacity has encouraged producers to reduce
prices and to pass productivity gains through to customers. Demand for Quest's
low sulfur coal and the prices that Quest will be able to obtain for it will
also be affected by the price and availability of high sulfur coal, which can be
marketed in tandem with emissions allowances.
Transportation costs are another fundamental factor affecting coal
industry competition. Coordination of the many eastern loadouts, the large
number of small shipments, terrain and labor issues all combine to make
shipments originating in the eastern United States inherently more expensive on
a per-mile basis than shipments originating in the western United States.
Historically, coal transportation rates from the western coal producing areas
into Central Appalachian markets limited the use of western coal in those
markets. More recently, however, lower rail rates from the western coal
producing areas to markets served by eastern producers have created major
competitive challenges for eastern producers. Barge transportation is the lowest
cost method of transporting coal long distances in the eastern United States,
and the large numbers of eastern producers with river access keep coal prices
competitive. Quest believes that many utilities with plants located on the Ohio
River system are well positioned for deregulation as competition for river
shipments should remain high for Central Appalachian coal. Quest also believes
that with close proximity to competitively-priced Central Appalachian coal,
utilities with plants located on the Ohio River system will become price setters
in a deregulated environment.
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Although undergoing significant consolidation, the coal industry in the
United States remains highly fragmented. It is possible that Quest's costs will
not permit it to compete effectively with other producers seeking to provide
coal to a customer; however, it is Quest's goal to maintain low production
costs, offer a variety of products and have develop access to multiple
transportation systems that will enable it to compete effectively with other
producers.
Environmental, Safety and Health Laws and Regulations
The coal mining industry is subject to regulation by federal, state and
local authorities on matters such as the discharge of materials into the
environment, employee health and safety, permitting and other licensing
requirements, reclamation and restoration of mining properties after mining is
completed, management of materials generated by mining operations, surface
subsidence from underground mining, water pollution, water appropriation and
legislatively mandated benefits for current and retired coal miners, air quality
standards, protection of wetlands, endangered plant and wildlife protection,
limitations on land use, and storage of petroleum products and substances that
are regarded as hazardous under applicable laws. The possibility exists that new
legislation or regulations may be adopted that could have a significant impact
on our mining operations or on our customers' ability to use coal.
Numerous governmental permits and approvals are required for mining
operations. Regulations provide that a mining permit or modification can be
delayed, refused, or revoked if an officer, director, or a stockholder with a
10% or greater interest in the entity is affiliated with or is in a position to
control another entity that has outstanding permit violations. Thus, past or
ongoing violations of federal and state mining laws by individuals or companies
no longer affiliated with us could provide a basis to revoke existing permits
and to deny the issuance of addition permits. We are required to prepare and
present to federal, state, or local authorities data and/or analysis pertaining
to the effect or impact that any proposed exploration for or production of coal
may have upon the environment, public and employee health and safety. All
requirements imposed by such authorities may be costly and time-consuming and
may delay commencement or continuation of exploration or production operations.
Accordingly, the permits we need for our mining and gas operations may not be
issued, or, if issued, may not be issued in a timely fashion. Permits we need
may involve requirements that may be changed or interpreted in a manner that
restricts our ability to conduct our mining operations or to do so profitably.
Future legislation and administrative regulations may increasingly emphasize the
protection of the environment, health and safety and, as a consequence, our
activities may be more closely regulated. Such legislation and regulations, as
well as future interpretations of existing laws, may require substantial
increases in equipment and operating costs, delays, interruptions or a
termination of operations, the extent of which cannot be predicted.
While it is not possible to quantify the expenditures we incur to
maintain compliance with all applicable federal and state laws, those costs have
been and are expected to continue to be significant. We post surety performance
bonds or letters of credit pursuant to federal and state mining laws and
regulations for the estimated costs of reclamation and mine closing, often
including the cost of treating mine water discharge when necessary. Compliance
with these laws has substantially increased the cost of coal mining for all
domestic coal producers. We endeavor to conduct our mining operations in
compliance with all applicable federal, state, and local laws and regulations.
However, even with our substantial efforts to comply with extensive and
comprehensive regulatory requirements, violations during mining operations could
occur from time to time.
Mine Safety and Health
Stringent health and safety standards have been in effect since
Congress enacted the Federal Coal Mine Health and Safety Act of 1969. The
Federal Coal Mine Safety and Health Act of 1977 significantly expanded the
enforcement of safety and health standards and imposed safety and health
standards on all aspects of mining operations. A further expansion occurred in
June 2006 with the enactment of the Mine Improvement and New Emergency Response
Act of 2006 ("MINER Act").
The MINER Act and related Mine Safety and Health Administration
("MSHA") regulatory action require, among other things, improved emergency
response capability, increased availability of emergency breathable air,
enhanced communication and tracking systems, more available mine rescue teams,
increased mine seal strength and monitoring of sealed areas in underground
mines, as well as larger penalties by MSHA for noncompliance by mine operators.
Coal producing states, including West Virginia and Kentucky, passed similar
legislation. The bituminous coal mining industry was actively engaged throughout
2007 in activities to achieve compliance with these new requirements. These
compliance efforts will continue into 2008.
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On February 8, 2008, MSHA published a final rule that revises existing
standards for mine rescue teams for underground coal mines. This final rule
implements Section 4 of the MINER Act to improve overall mine rescue capability,
mine emergency response time, and mine rescue team effectiveness. It also calls
for increased quantity and quality of mine rescue team training. Additional
substantive legislation is also possible in 2008 with the passage by the United
States House of Representatives in January 2008 of the Supplementary Mine
Improvement and New Emergency Response Act, ("S-MINER Act"). The House
legislation augments portions of the MINER Act and proposes changes to retreat
mining practices, study of substance abuse issues, and the use of coal dust
monitors to reduce miner respirable dust exposure.
Kentucky, the state in which we currently operate, has state programs
for mine safety and health regulation and enforcement. Collectively, federal and
state safety and health regulation in the coal mining industry is perhaps the
most comprehensive and pervasive system for protection of employee health and
safety affecting any segment of industry in the United States. While regulation
has a significant effect on our operating costs, our United States competitors
are subject to the same degree of regulation.
Our goal is sustainable excellence in our safety and health
performance. We are committed to doing our best, and then learning to do even
better. We recognize each employee's and consultant's contributions to our
collective safety and health efforts and reward outstanding performance. We
measure our success in this area primarily through the use of occupational
injury and illness frequency rates. We believe that a superior safety and health
regime is inherently tied to achieving productivity and financial goals, with
overarching benefits for our shareholders, the community, and the environment.
Black Lung. Under federal black lung benefits legislation, each coal
mine operator is required to make payments of black lung benefits or
contributions to: (i) current and former coal miners totally disabled from black
lung disease; and (ii) certain survivors of a miner who dies from black lung
disease. The Black Lung Disability Trust Fund, to which we must make certain tax
payments based on tonnage sold, provides for the payment of medical expenses to
claimants whose last mine employment was before January 1, 1970 and to claimants
employed after such date, where no responsible coal mine operator has been
identified for claims or where the responsible coal mine operator has defaulted
on the payment of such benefits. In addition to federal acts, we are also liable
under various state statutes for black lung claims. Federal benefits are offset
by any state benefits paid.
Environmental Laws
Surface Mining Control and Reclamation Act. The Surface Mining Control
and Reclamation Act, ("SMCRA"), which is administered by the Office of Surface
Mining Reclamation and Enforcement ("OSM"), establishes mining, environmental
protection and reclamation standards for all aspects of surface mining as well
as many aspects of deep mining. The SMCRA and similar state statutes require,
among other things, the restoration of mined property in accordance with
specified standards and an approved reclamation plan. In addition, the Abandoned
Mine Land Fund, which is part of the SMCRA, imposes a fee on all current mining
operations, the proceeds of which are used to restore mines closed before 1977.
The maximum tax is $0.315 per ton on surface-mined coal and $0.135 per ton on
deep-mined coal. A mine operator must submit a bond or otherwise secure the
performance of its reclamation obligations. Mine operators must receive permits
and permit renewals for surface mining operations from the OSM or, where state
regulatory agencies have adopted federally approved state programs under the
act, the appropriate state regulatory authority. We accrue for reclamation and
mine-closing liabilities in accordance with Statement of Financial Accounting
Standard ("SFAS") No. 143, "Accounting for Asset Retirement Obligations" ("SFAS
143").
Clean Water Act. Section 301 of the Clean Water Act prohibits the
discharge of a pollutant from a point source into navigable waters of the United
States except in accordance with a permit issued under either Section 402 or
Section 404 of the Clean Water Act. Navigable waters are broadly defined to
include streams, even those that are not navigable in fact, and may include
wetlands. All mining operations in Appalachia generate excess material, which
must be placed in fills in adjacent valleys and hollows. Likewise, coal refuse
disposal areas and coal processing slurry impoundments are located in valleys
and hollows. Almost all of these areas contain intermittent or perennial
streams, which are considered navigable waters under the Clean Water Act. An
operator must secure a Clean Water Act permit before filling such streams. For
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approximately the past twenty-five years, operators have secured Section 404
fill permits that authorize the filling of navigable waters with material from
various forms of coal mining. Operators have also obtained permits under Section
404 for the construction of slurry impoundments although the use of these
impoundments, including discharges from them, requires permits under Section
402. Section 402 discharge permits are generally not suitable for authorizing
the construction of fills in navigable waters.
Clean Air Act. Coal contains impurities, including sulfur, mercury,
chlorine, nitrogen oxide, and other elements or compounds, many of which are
released into the air when coal is burned. The Clean Air Act and corresponding
state laws extensively regulate emissions into the air of particulate matter and
other substances, including sulfur dioxide, nitrogen oxide and mercury. Although
these regulations apply directly to impose certain requirements for the
permitting and operation of our mining facilities, by far their greatest impact
on us and the coal industry generally is the effect of emission limitations on
utilities and other customers. Owners of coal-fired power plants and industrial
boilers have been required to expend considerable resources in an effort to
comply with these air pollution standards. The United States Environmental
Protection Agency ("EPA") has imposed or attempted to impose tighter emission
restrictions in a number of areas, some of which are currently subject to
litigation. The general effect of such tighter restrictions could be to reduce
demand for coal. This in turn may result in decreased production and a
corresponding decrease in revenue and profits.
National Ambient Air Quality Standards. In 1997, EPA adopted a new
National Ambient Air Quality Standard ("NAAQS") for very fine particulate matter
and a more stringent NAAQS for ozone. Ozone is produced by a combination of two
precursor pollutants: volatile organic compounds and nitrogen oxide, a
by-product of coal combustion. States were required to submit to EPA revisions
to their State Implementation Plans ("SIPs") that demonstrate the manner in
which the states will attain the fine particulate NAAQS by December 18, 2007.
The ozone NAAQS has been the subject of litigation and, during the course of
this litigation, EPA has proposed revisions to the ozone NAAQS that are more
stringent than the standards being litigated. EPA intends to begin the
promulgation process for the new, more stringent ozone NAAQS in the spring of
2008. Revised SIPs could require electric power generators to further reduce
nitrogen oxide and sulfur dioxide emissions. In addition to the SIP process, the
Clean Air Act permits states to assert claims against sources in other "upwind"
states alleging that emission sources including coal fired power plants in the
upwind states are preventing the "downwind" states from attaining a NAAQS. All
these actions could result in additional controls being required on coal fired
power plants and we are unable to predict the effect on coal production.
Acid Rain Control Provisions. The acid rain control provisions
promulgated as part of the Clean Air Act Amendments of 1990 in Title IV of the
Clean Air Act ("Acid Rain program") required reductions of sulfur dioxide
emissions from power plants. The Acid Rain program is now a mature program and
we believe that any market impacts of the required controls have likely been
factored into the price of coal in the national coal market.
Regional Haze Program. EPA promulgated a regional haze program designed
to protect and to improve visibility at and around so-called Class I Areas,
which are generally National Parks, National Wilderness Areas, and International
Parks. This program may restrict the construction of new coal-fired power plants
whose operation may impair visibility at and around the Class I Areas. Moreover,
the program requires certain existing coal-fired power plants to install
additional control measures designed to limit haze-causing emissions, such as
sulfur dioxide, nitrogen oxide and particulate matter. States were required to
submit Regional Haze SIPs to EPA by December 17, 2007. Many states did not meet
the December 17, 2007, deadline, and we are unable to predict the impact on the
coal market of the failure to submit Regional Haze SIPs by the deadline.
New Source Review Program. Under the Clean Air Act, new and modified
sources of air pollution must meet certain new source standards ("New Source
Review Program"). In the late 1990s, the EPA filed lawsuits against many
coal-fired plants in the eastern United States alleging that the owners
performed non-routine maintenance, causing increased emissions that should have
triggered the application of these new source standards. Some of these lawsuits
have been settled, with the owners agreeing to install additional pollution
control devices in their coal-fired plants. The remaining litigation and the
uncertainty around the New Source Review Program rules could adversely impact
utilities' demand for coal in general or coal with certain specifications,
including the coal produced by us.
Multi-Pollutant Strategies. In March 2005, EPA issued two closely
related rules designed to significantly reduce levels of sulfur dioxide,
nitrogen oxide and mercury: the Clean Air Interstate Rule and the Clean Air
Mercury Rule. The Clean Air Interstate Rule sets a cap-and-trade program in 28
10
states and the District of Columbia to establish emissions limits for sulfur
dioxide and nitrogen oxide, by allowing utilities to buy and sell credits to
assist in achieving compliance with the NAAQS for 8-hour ozone and fine
particulates. The Clean Air Mercury Rule as promulgated will cut mercury
emissions nearly 70% by 2018 through a cap-and-trade program. Both rules were
challenged in numerous lawsuits. Portions of each of these rules are still in
litigation, and on February 8, 2008, the United States Court of Appeals for the
District of Columbia Circuit vacated the entire mercury rule and remanded it to
EPA for reconsideration. Immediately following the decision, EPA announced that
it has not decided how to respond. Regardless of the outcome of litigation on
either rule, a form of each of the rules will likely be promulgated and
ultimately directly affect coal producers, suppliers, and utilities in the
eastern and western regions of the United States, by requiring revisions to the
SIPs in many eastern states. Any such controls may have an impact on the demand
for our coal and possibly give the users of western sub-bituminous coal a
significant competitive advantage over eastern bituminous coal users.
Comprehensive Environmental Response, Compensation and Liability Act.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), and similar state laws affect coal mining operations by, among other
things, imposing cleanup requirements for threatened or actual releases of
hazardous substances that may endanger public health or welfare or the
environment. Under CERCLA and similar state laws, joint and several liability
may be imposed on waste generators, site owners, and lessees and others
regardless of fault or the legality of the original disposal activity. Although
the EPA excludes most wastes generated by coal mining and processing operations
from the hazardous waste laws, such wastes can, in certain circumstances,
constitute hazardous substances for the purposes of CERCLA. In addition, the
disposal, release, or spilling of some products used by coal companies in
operations, such as chemicals, could implicate the liability provisions of the
statute. Under the EPA's Toxic Release Inventory process, companies are required
annually to report the use, manufacture, or processing of listed toxic materials
that exceed defined thresholds, including chemicals used in equipment
maintenance, reclamation, water treatment, and ash received for mine placement
from power generation customers. Our current and former coal mining operations
may incur expenditures associated with the investigation and remediation of
facilities and environmental conditions under CERCLA.
Operations - Permitting; Compliance. Quest has obtained all the permits
required for its current operations under the SMCRA, the Clean Water Act, the
Clean Air Act, and corresponding state laws. Quest intends to be in compliance
in all material respects with such permits and intends to routinely correct in a
timely fashion violations of which it receives notice in the normal course of
operations. The expiration dates of the permits are largely immaterial as the
law provides for a right of successive renewal. The cost of obtaining surface
mining, clean water, and air permits can vary widely depending on the scientific
and technical demonstrations that must be made to obtain the permits. However,
the cost of obtaining a permit is rarely more than $500,000 and of obtaining a
renewal is rarely more than $5,000. It is impossible to predict the full impact
of future judicial, legislative, or regulatory developments on Quest's
operations because the standards to be met, as well as the technology and length
of time available to meet those standards, continue to develop and change.
The imposition of more stringent requirements under environmental laws
or regulations, new developments or changes regarding site cleanup costs or the
allocation of such costs among potentially responsible parties, or a
determination that Quest is potentially responsible for the release of hazardous
substances at sites other than those currently identified, could result in
additional expenditures or the provision of additional accruals in expectation
of such expenditures.
Coal Reserves
Quest estimates that, as of December 31, 2007, it has total recoverable
reserves of approximately twelve million tons consisting of both proven and
probable reserves. "Reserves" are defined by Securities and Exchange Commission
Industry Guide 7 as that part of a mineral deposit, which could be economically
and legally extracted or produced at the time of the reserve determination.
"Recoverable" reserves mean coal that is economically recoverable using existing
equipment and methods under federal and state laws currently in effect.
Approximately three million tons of Quest's reserves are classified as proven
reserves. "Proven (Measured) Reserves" are defined by Securities and Exchange
Commission Industry Guide 7 as reserves for which (a) quantity is computed from
dimensions revealed in outcrops, trenches, workings or drill holes; grade and/or
quality are computed from the results of detailed sampling and (b) the sites for
inspection, sampling and measurement are spaced so closely and the geologic
character is so well defined that size, shape, depth and mineral content of
reserves are well-established. None of Quest's reserves are classified as
11
probable reserves. "Probable reserves" are defined by Securities and Exchange
Commission Industry Guide 7 as reserves for which quantity and grade and/or
quality are computed from information similar to that used for proven (measured)
reserves, but the sites for inspection, sampling, and measurement are farther
apart or are otherwise less adequately spaced. The degree of assurance, although
lower than that for proven (measured) reserves, is high enough to assume
continuity between points of observation.
Information about Quest's reserves consists of estimates based on
engineering, economic, and geological data assembled and analyzed by its
contracted engineers, geologists, and finance associates. Reserve estimates are
updated as deemed necessary by management using geologic data taken from drill
holes, adjacent mine workings, outcrop prospect openings and other sources. Coal
tonnages are categorized according to coal quality, seam thickness, mineability,
and location relative to existing mines and infrastructure. In accordance with
applicable industry standards, proven reserves are those for which reliable data
points are spaced no more than 2,700 feet apart. Probable reserves are those for
which reliable data points are spaced 2,700 feet to 7,900 feet apart. Further
scrutiny is applied using geological criteria and other factors related to
profitable extraction of the coal. These criteria include seam height, roof and
floor conditions, yield and marketability.
As with most coal-producing companies in Central Appalachia, all of
Quest's coal reserves are controlled pursuant to leases from third party
landowners. These leases convey mining rights to the coal producer in exchange
for a per ton or percentage of gross sales price royalty payment to the lessor.
The royalties for coal reserves from Quest's producing properties was
approximately $55,000 for the year ended December 31, 2007 and $55,000 for the
year ended December 31, 2006.
Employees
Quest currently employs one person, our President, Eugene Chiaramonte,
Jr. All other personnel who provide services for Quest, whether in
administration or in mining operations, either work on an independent contractor
basis or work for White Star Mining under a contract mining arrangement. None of
Quest's employees are represented by a labor union, and Quest has not entered
into a collective bargaining agreement with any union. Quest has not experienced
any work stoppages and believes that it has good relations with its employees.
12
Item 1A. RISK FACTORS AND CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING
INFORMATION
An investment in Quest common stock involves a high degree of risk. You
should carefully consider the following risk factors and the other information
in this report before investing in Quest common stock. Quest's business and
results of operations could be seriously harmed by any of the following risks.
The trading price of Quest's common stock could decline due to any of these
risks, and you may lose part or all of your investment.
Our wholly owned subsidiary, Gwenco, Inc., has filed for bankruptcy
protection. On March 2, 2007, our wholly owned subsidiary, Gwenco, Inc., filed a
voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy
Code with the United States Bankruptcy Court for the Eastern District of
Kentucky. We are currently overseeing Gwenco's operations as a debtor in
possession, subject to court approval of matters outside the ordinary course of
business. We are currently seeking court approval for debtor in possession
financing from holders of Gwenco's existing debt obligations in order to fund
operating expenses. We intend to continue our mining operations at Pond Creek
Mine at Slater's Branch while this matter is completed. Under Chapter 11, claims
against us in existence prior to the filing of the petitions for reorganization
relief under the federal bankruptcy laws are stayed while we are in bankruptcy.
On August 3, 2007, the Bankruptcy Court approved Gwenco's request for
debtor-in-possession financing in an amount of up to $2,000,000. In February
2008, Gwenco submitted a preliminary plan of reorganization to the court for
approval. If we are unable to procure sufficient debtor in possession financing
and/or if we are unable to negotiate an acceptable plan of reorganization with
Gwenco's creditors, we may be forced to file for protection under Chapter 7 of
the U.S Bankruptcy Code and liquidate all or Gwenco's assets, in which case,
Quest would cease to have an operating business.
We have only recently recommenced mining operations, and it is possible
that we may need to stop mining again if we have insufficient working capital.
Due to lack of working capital, Quest was forced to cease mining operations at
the Pond Creek mine at Slater's Branch, Kentucky in June 2005. In January 2007,
Gwenco received a permit from the Kentucky Department of Natural Resources to
conduct coal mining at its Pond Creed mine. In February 2007, Gwenco's
engineering firm, Alchemy Engineering of Prestonburg, Kentucky, completed a one
and five year mine plan and maps required by the Kentucky Department of Mines
and Minerals in connection with the permit to conduct coal mining at Pond Creek.
Gwenco had retained General Mining, LLC of Wallins, Kentucky to rehabilitate the
Pond Creek mine in February 2007 and further retained General Mining to conduct
mining operations at Pond Creek in March 2007. The company completed its initial
rehabilitation of the Pond Creek mine, recommenced mining operations, and began
shipping commercial coal for sale in May 2007. In January 2008, Quest retained
White Star Mining to conduct all mining operations at Pond Creek. White Star
retained all necessary permits to being mining operations in February 2008, and
Quest expects to resume mining operations in the second fiscal quarter of 2008.
However, it is possible that Quest may not be able to maintain sufficient
working capital to continue mining operations and that we may need to cease
operations again in the future.
Pending and threatened litigation could result in Quest losing its
primary operating assets. Currently, Quest is a party to various pending
lawsuits and judgments, including judgments in favor of Interstellar Holdings
and Duke Energy Merchants. The judgment creditors have sought to foreclose on
our assets, including our leasehold interests in the mines. These foreclosure
actions were stayed by the bankruptcy proceedings. While one judgment creditor
has agreed to forbear on further collections, enforcement, and foreclosure with
respect to this indebtedness, such investor may withdraw such forbearance if we
do not comply with our covenants with the creditor. It is possible that, in
connection with a foreclosure action, the leasehold interests or other assets of
Quest could be sold to one or more of the judgment or other creditors or to a
third party. In the event that the leasehold interests or the other assets are
put up for sale, Quest intends to bid on them, but it is possible that it may
not be able to purchase the leasehold interests or the other assets, either
because it does not have the assets with which to make a competitive bid or
because it is simply outbid by one of its creditors or a third party. In the
event that either the bank or a third party purchases the leasehold interests or
the other assets, Quest would no longer have any operating business.
13
We have issued a substantial number of securities convertible into
shares of our common stock which will result in substantial dilution to the
ownership interests of our existing stockholders. As of December 31, 2007,
approximately 577,354,189 shares of our common stock were required for issuance
upon exercise or conversion of the following securities: (i) 297,437,731 shares
representing shares of common stock issuable upon conversion in full of our
outstanding convertible promissory notes (without regard to any limitations on
conversion); (ii) 279,916,458 shares of common stock issuable upon conversion of
our Series A Preferred. The exercise or conversion of these securities will
result in a significant increase in the number of outstanding shares and
substantially dilute the ownership interests of our existing shareholders.
In addition, any decrease in our stock price will result in additional shares
of common stock required for issuance upon exercise or conversion of the
securities set forth above.
The issuance of shares upon conversion of our convertible securities
may cause immediate and substantial dilution to our existing stockholders. The
issuance of shares upon conversion of our outstanding convertible notes or
Series A Preferred Stock may result in substantial dilution to the interests of
other stockholders since the selling stockholders may ultimately convert and
sell the full amount issuable on conversion. Although the selling stockholders
may not convert their convertible notes if such conversion would cause them to
own more than 4.99% of our outstanding common stock, this restriction does not
prevent the selling stockholders from converting some of their holdings and then
converting the rest of their holdings. In this way, the selling stockholders
could sell more than this limit while never holding more than this limit. There
only upper limit on the number of shares that may be issued is the number of
shares of common stock authorized for issuance under our articles of
incorporation. The issuance of shares upon conversion of the convertible notes
will have the effect of further diluting the proportionate equity interest and
voting power of holders of our common stock.
Quest's former President and Chief Executive Officer has been convicted
by a federal jury, which may negatively effect the public's perception of Quest
and its operations. In May, 2006, a federal grand jury indicted Mr. Runyon, Ms.
Holbrook, James Daniel Stollings, and Quest's former President and Chief
Executive Officer, William R. Wheeler on charges of bank fraud. Mr. Wheeler
resigned as an officer or director of Quest on May 31, 2006. In connection with
the indictments, Mr. Runyon and Ms. Holbrook each pled guilty. In December 2006,
a federal jury convicted Mr. Stollings and Mr. Wheeler of bank fraud. Mr.
Wheeler has appealed the conviction. Quest denies any wrongdoing in connection
with these matters. Although Quest does not believe that this conviction will
affect the business plans of Quest, it is possible that Mr. Wheeler, Quest, or
one or more of Quest's subsidiaries may be the subject of civil or
administrative actions based on the allegations set forth in the indictment. As
a result, Quest may incur civil or administrative liability based on these
allegations. Further, it is possible that the public perception of Quest may be
negatively affected by these allegations, which in turn may cause a drop in the
market price of Quest's common stock.
Quest will need to continue to finance its operations through
additional bank borrowings or other capital financings, and if it is unable to
obtain additional capital, it may not be able to continue as a going concern.
Quest had a working capital deficit as of December 31, 2007 of approximately
$7,000,000. As of the date of this annual report, Quest does not believe that it
will be able to fund its operations, working capital requirements, and debt
service requirements over the fiscal year 2008 through cash flows generated from
operations. Quest will need to continue to finance its operations through
additional borrowings or other capital financings. Quest's collateral may not be
sufficient to borrow additional amounts at such time. Quest may also seek equity
financing in the form of a private placement or a public offering. Such
additional financing may not be available to Quest, when and if needed, on
acceptable terms or at all. If Quest is unable to obtain additional financing in
sufficient amounts or on acceptable terms, its operating results and prospects
could be further adversely affected.
Quest has substantial indebtedness outstanding, and its operations are
significantly leveraged. In order to finance its operations, Quest has incurred
substantial indebtedness. Quest is not in compliance with its debt covenants
under its loan agreements, and it has defaulted on substantially all of its loan
obligations, which has resulted in lawsuits, judgments, and foreclosure
proceedings against Quest and its assets. Quest has no cash flows from
operations, and without additional financing or cash flows from operations, it
cannot service its debt obligations. Quest's subsidiary, Gwenco, Inc., has
already filed for protection under Chapter 11 of the U.S. Bankruptcy Code. Quest
is currently negotiating with its creditors to reorganize and restructure its
debt obligations, both within the Chapter 11 reorganization at the Gwenco level
and outside the Chapter reorganization at other corporate levels, but if it is
unable to do so, there is a significant chance that Quest or its other
subsidiaries may be forced to seek protection under the U.S. Bankruptcy code, or
that its creditors could foreclose on its remaining assets, in which case it
would cease to continue as a going concern.
14
Quest may be unable to continue as a going concern, in which case its
securities will have little or no value. Quest's independent auditor has noted
in its report concerning Quest's financial statements as of December 31, 2007
that it has incurred recurring losses from operations and has a working capital
deficiency, which raises substantial doubt about its ability to continue as a
going concern. As shown in the consolidated financial statements included in
this report, Quest has incurred recurring losses from operations in 2007 and
2006, and has an accumulated deficit and a working capital deficit as of
December 31, 2007. These conditions raise substantial doubt as to Quest's
ability to continue as a going concern. It is possible that Quest will not
achieve operating profits in the future.
The level of Quest's indebtedness could adversely affect its ability to
grow and compete and prevent it from fulfilling its obligations under its
contracts and agreements. Quest has significant debt, lease, and royalty
obligations. Its ability to satisfy debt service, lease, and royalty obligations
and to effect any refinancing of its indebtedness will depend upon future
operating performance, which will be affected by prevailing economic conditions
in the markets that it serves as well as financial, business and other factors,
many of which are beyond its control. Quest may be unable to generate sufficient
cash flow from operations and future borrowings, or other financings may be
unavailable in an amount sufficient to enable it to fund its debt service,
lease, and royalty payment obligations or its other liquidity needs.
Quest's relative amount of debt could have material consequences to its
business, including, but not limited to, the following: (i) making it more
difficult to satisfy debt covenants and debt service, lease payment, and other
obligations; (ii) increasing its vulnerability to general adverse economic and
industry conditions; (iii) limiting its ability to obtain additional financing
to fund future acquisitions, working capital, capital expenditures, or other
general corporate requirements; (iv) reducing the availability of cash flows
from operations to fund acquisitions, working capital, capital expenditures, or
other general corporate purposes; (v) limiting its flexibility in planning for,
or reacting to, changes in its business and the industry in which it competes;
or (vi) placing it at a competitive disadvantage when compared to competitors
with less relative amounts of debt.
If transportation for Quest's coal becomes unavailable or uneconomic
for its customers, Quest's ability to sell coal could suffer. Transportation
costs represent a significant portion of the total cost of coal and, as a
result, the cost of transportation is a critical factor in a customer's
purchasing decision. Increases in transportation costs could make coal a less
competitive source of energy or could make some of Quest's operations less
competitive than other sources of coal. Coal producers depend upon rail, barge,
trucking, overland conveyor, and other systems to deliver coal to markets. While
U.S. coal customers typically arrange and pay for transportation of coal from
the mine to the point of use, disruption of these transportation services
because of weather-related problems, strikes, lock-outs or other events could
temporarily impair Quest's ability to supply coal to its customers and thus
could adversely affect Quest's results of operations. For example, the high
volume of coal shipped from one region of mines could create temporary
congestion on the rail systems servicing that region.
Risks inherent to mining could increase the cost of operating Quest's
business. Quest's mining operations are subject to conditions beyond its control
that can delay coal deliveries or increase the cost of mining at particular
mines for varying lengths of time. These conditions include weather and natural
disasters, unexpected maintenance problems, key equipment failures, variations
in coal seam thickness, variations in the amount of rock and soil overlying the
coal deposit, variations in rock, and other natural materials and variations in
geologic conditions. In addition, the United States and over 160 other nations
are signatories to the 1992 Framework Convention on Climate Change, which is
intended to limit emissions of greenhouse gases, such as carbon dioxide. In
December 1997, in Kyoto, Japan, the signatories to the convention established a
binding set of emission targets for developed nations. Although the specific
emission targets vary from country to country, the United States would be
required to reduce emissions to 93% of 1990 levels over a five-year budget
period from 2008 through 2012. Although the United States has not ratified the
emission targets and no comprehensive regulations focusing on U.S. greenhouse
gas emissions are in place, these restrictions, whether through ratification of
the emission targets or other efforts to stabilize or reduce greenhouse gas
emissions, could adversely impact the price of and demand for coal. According to
the Energy Information Administration's Emissions of Greenhouse Gases in the
United States 2002, coal accounts for 30% of greenhouse gas emissions in the
United States, and efforts to control greenhouse gas emissions could result in
reduced use of coal if electricity generators switch to sources of fuel with
lower carbon dioxide emissions. Further developments in connection with
regulations or other limits on carbon dioxide emissions could have a material
adverse effect on Quest's financial condition or results of operations.
15
Quest's future success depends upon its ability to continue acquiring
and developing coal reserves that are economically recoverable. Quest's
recoverable reserves decline as it produces coal. Quest has not yet applied for
the permits required or developed the mines necessary to use all of its
reserves. Furthermore, Quest may not be able to mine all of its reserves as
profitably as it does at its current operations. Quest's future success depends
upon its conducting successful exploration and development activities or
acquiring properties containing economically recoverable reserves. Quest's
planned mine development projects and acquisition activities may not result in
significant additional reserves, and it may not have continuing success
developing additional mines. Most of Quest's mining operations are conducted on
properties owned or leased by Quest. Because title to most of its leased
properties and mineral rights are not thoroughly verified until a permit to mine
the property is obtained, Quest's right to mine some of its reserves may be
materially adversely affected if defects in title or boundaries exist. In
addition, in order to develop its reserves, Quest must receive various
governmental permits. Quest cannot predict whether it will continue to receive
the permits necessary for it to operate profitably in the future. Quest may not
be able to negotiate new leases from the government or from private parties or
obtain mining contracts for properties containing additional reserves or
maintain its leasehold interest in properties on which mining operations are not
commenced during the term of the lease. From time to time, Quest has experienced
litigation with lessors of our coal properties and with royalty holders.
If the coal industry experiences overcapacity in the future, our
profitability could be impaired. During the mid-1970s and early 1980s, a growing
coal market and increased demand for coal attracted new investors to the coal
industry, spurred the development of new mines, and resulted in added production
capacity throughout the industry, all of which led to increased competition and
lower coal prices. Similarly, an increase in future coal prices could encourage
the development of expanded capacity by new or existing coal producers. Any
overcapacity could reduce coal prices in the future.
Quest's ability to operate effectively could be impaired if it loses
key personnel. Quest manages its business with a number of key personnel, the
loss of a number of whom could have a material adverse effect on Quest. In
addition, as its business develops and expands, Quest believes that its future
success will depend greatly on its continued ability to attract and retain
highly skilled and qualified personnel. It is possible that key personnel will
not continue to be employed by Quest and that we will be not able to attract and
retain qualified personnel in the future. Quest does not have "key person" life
insurance to cover its executive officers. Failure to retain or attract key
personnel could have a material adverse effect on Quest.
Coal markets are highly competitive and affected by factors beyond
Quest's control. Quest competes with coal producers in various regions of the
U.S. for domestic sales and with both domestic and overseas producers for sales
to international markets. Continued domestic demand for Quest's coal and the
prices that it will be able to obtain primarily will depend upon coal
consumption patterns of the domestic electric utility industry and the domestic
steel industry. Consumption by the domestic utility industry is affected by the
demand for electricity, environmental and other governmental regulations,
technological developments and the price of competing coal and alternative fuel
supplies including nuclear, natural gas, oil and renewable energy sources,
including hydroelectric power. Consumption by the domestic steel industry is
primarily affected by the demand for U.S. steel. Quest's sales of metallurgical
coal are dependent on the continued financial viability of domestic steel
companies and their ability to compete with steel producers abroad. The cost of
ocean transportation and the valuation of the U.S. dollar in relation to foreign
currencies significantly impact the relative attractiveness of Quest's coal as
it competes on price with other foreign coal producing sources.
Coal prices are affected by a number of factors and may vary
dramatically by region. The two principal components of the price of coal are
the price of coal at the mine, which is influenced by mine operating costs and
coal quality, and the cost of transporting coal from the mine to the point of
use. The cost of mining the coal is influenced by geologic characteristics such
as seam thickness, overburden ratios and depth of underground reserves.
Underground mining is generally more expensive than surface mining as a result
of high capital costs, including costs for modern mining equipment and
construction of extensive ventilation systems and higher labor costs due to
lower productivity. Quest currently engages in three principal coal mining
techniques: underground room and pillar mining, underground longwall mining and
highwall mining. Because underground longwall mining, surface mining, and
highwall mining are high-productivity, low-cost mining methods, Quest seeks to
increase production from its use of these methods to the extent permissible and
cost effective.
16
Quest depends on continued demand from its customers. Reduced demand
from Quest's largest customers could have an adverse impact on its ability to
achieve its projected revenue. When Quest's contracts with its current customers
reach expiration, it is possible that that the customers will not extend or
enter into new long-term contracts or, in the absence of long-term contracts,
that they will not continue to purchase the same amount of coal as they have in
the past or on terms, including pricing terms, as favorable as under existing
agreements.
Quest faces numerous uncertainties in estimating its economically
recoverable coal reserves, and inaccuracies in its estimates could result in
lower than expected revenues, higher than expected costs and decreased
profitability. There are numerous uncertainties inherent in estimating
quantities and values of economically recoverable coal reserves, including many
factors beyond Quest's control. As a result, estimates of economically
recoverable coal reserves are by their nature uncertain. Information about
Quest's reserves consists of estimates based on engineering, economic, and
geological data assembled and analyzed by Quest's staff. Some of the factors and
assumptions that impact economically recoverable reserve estimates include the
following:
o geological conditions;
o historical production from the area compared with production from other
producing areas;
o the assumed effects on regulations and taxes by governmental agencies;
o assumptions governing future prices; and
o future operating costs.
Each of these factors may in fact vary considerably from the
assumptions used in estimating reserves. For these reasons, estimates of the
economically recoverable quantities of coal attributable to a particular group
of properties may vary substantially. As a result, Quest's estimates may not
accurately reflect its actual reserves. Actual production, revenues, and
expenditures with respect to its reserves will likely vary from estimates, and
these variances may be material.
Union represented labor creates an increased risk of work stoppages and
higher labor costs. As of December 31, 2007, none of Quest's workforce was
represented by a union. However, in the event that Quest is required to hire
union labor, there may be an increased risk of strikes and other related work
actions, in addition to higher labor costs associated with union labor. Quest
has experienced some union organizing campaigns at some of its open shop
facilities within the past five years. If some or all of Quest's current open
shop operations were to become union represented, Quest could be subject to
additional risk of work stoppages and higher labor costs. Increased labor costs
or work stoppages could adversely affect the stability of production and reduce
its net income.
Severe weather may affect Quest's ability to mine and deliver coal.
Severe weather, including flooding and excessive ice or snowfall, when it
occurs, can adversely affect Quest's ability to produce, load, and transport
coal.
Shortages of skilled labor in the Central Appalachian coal industry may
pose a risk to achieving high labor productivity and competitive costs. Coal
mining continues to be a labor intensive industry. In 2001, the coal industry
experienced a shortage of trained coal miners in the Central Appalachian region
causing many companies to hire mine workers with less experience. While Quest
did not experience a comparable labor shortage in 2003, if another such shortage
of skilled labor were to arise, Quest's productivity could decrease and our
costs could increase. Such a lack of skilled miners could have an adverse impact
on Quest's labor productivity and costs and its ability to expand production in
the event there is an increase in the demand for coal.
If the coal industry experiences overcapacity in the future, Quest's
profitability could be impaired. Historically, a growing coal market and
increased demand for coal attract new investors to the coal industry, spur the
development of new mines and result in added production capacity throughout the
industry, all of which can lead to increased competition and lower coal prices.
Similarly, an increase in future coal prices could encourage the development of
expanded capacity by new or existing coal producers. Any overcapacity could
reduce coal prices and therefore reduce Quest's revenues.
17
Terrorist attacks and threats, escalation of military activity in
response to such attacks, or acts of war may negatively affect Quest's cash
flows, results of operations, or financial condition. Terrorist attacks and
threats, escalation of military activity in response to such attacks or acts of
war may negatively affect Quest's cash flows, results of operations, or
financial condition. Quest's business is affected by general economic
conditions, fluctuations in consumer confidence and spending, and market
liquidity, which can decline as a result of numerous factors outside of its
control, such as terrorist attacks and acts of war. Future terrorist attacks
against U.S. targets, rumors or threats of war, actual conflicts involving the
U.S. or its allies, or military or trade disruptions affecting Quest's customers
may materially adversely affect its operations. As a result, there could be
delays or losses in transportation and deliveries of coal to Quest's customers,
decreased sales of its coal, and extension of time for payment of accounts
receivable from its customers. Strategic targets such as energy-related assets
may be at greater risk of future terrorist attacks than other targets in the
U.S. In addition, disruption or significant increases in energy prices could
result in government-imposed price controls. It is possible that any, or a
combination, of these occurrences could have a material impact on Quest's cash
flows, results of operations, or financial condition.
Quest may not be able to identify quality strategic acquisition
candidates, and if it does make strategic acquisitions, it may not be able to
successfully integrate their operations. Quest intends to acquire companies in
the coal mining industry that offer complementary products and services to its
current business operations. For each acquisition, Quest will be required to
assimilate the operations, products, and personnel of the acquired business and
train, retain, and motivate its key personnel. Quest may be unable to maintain
uniform standards, controls, procedures, and policies if it fails in these
efforts. Similarly, acquisitions may subject Quest to liabilities and risks that
are not known or identifiable at the time of the acquisition or may cause
disruptions in its operations and divert management's attention from day-to-day
operations, which could impair Quest's relationships with its current employees,
customers, and strategic partners. Quest may have to incur debt or issue equity
securities to pay for any future acquisitions. The issuance of equity securities
could be substantially dilutive to Quest's stockholders. In addition, Quest's
profitability may suffer because of acquisition related costs. Quest currently
has no agreements or commitments concerning any such additional acquisitions,
and it may not be able to identify any companies that satisfy its acquisition
criteria.
The government extensively regulates Quest's mining operations, which
imposes significant costs on Quest, and future regulations could increase those
costs or limit Quest's ability to produce coal. Federal, state, and local
authorities regulate the coal mining industry with respect to matters such as
employee health and safety, permitting and licensing requirements, air quality
standards, water pollution, plant and wildlife protection, reclamation and
restoration of mining properties after mining is completed, the discharge of
materials into the environment, surface subsidence from underground mining, and
the effects that mining has on groundwater quality and availability. In
addition, significant legislation mandating specified benefits for retired coal
miners affects Quest's industry. Numerous governmental permits and approvals are
required for mining operations. Quest is required to prepare and present to
federal, state, or local authorities data pertaining to the effect or impact
that any proposed exploration for or production of coal may have upon the
environment. The costs, liabilities, and requirements associated with these
regulations may be costly and time-consuming and may delay commencement or
continuation of exploration or production. The possibility exists that new
legislation and/or regulations and orders may be adopted that may materially
adversely affect Quest's mining operations, its cost structure, and/or its
customers' ability to use coal. New legislation or administrative regulations
(or judicial interpretations of existing laws and regulations), including
proposals related to the protection of the environment that would further
regulate and tax the coal industry, may also require Quest or its customers to
change operations significantly or incur increased costs. The majority of
Quest's coal supply agreements contain provisions that allow a purchaser to
terminate its contract if legislation is passed that either restricts the use or
type of coal permissible at the purchaser's plant or results in specified
increases in the cost of coal or its use. These factors and legislation, if
enacted, could have a material adverse effect on Quest's financial condition and
results of operations.
There is a limited active trading market for Quest shares. Quest common
stock is traded on the OTC Bulletin Board under the symbol "QMNM.OB." Trading
activity in Quest common stock has fluctuated widely and at times has been
limited. Quest considers its common stock to be "thinly traded" and any last
reported sale prices may not be a true market-based valuation of the common
stock. A consistently active trading market for Quest's stock may not develop at
any time in the future. Stockholders may experience difficulty selling their
shares if they choose to do so because of the illiquid market and limited public
float for Quest stock.
18
Quest's common stock is considered to be a "penny stock" and, as such,
the market for Quest common stock may be further limited by certain SEC rules
applicable to penny stocks. As long as the price of Quest's common stock remains
below $5.00 per share or Quest has net tangible assets of $2,000,000 or less,
Quest's common shares are likely to be subject to certain "penny stock" rules
promulgated by the SEC. Those rules impose certain sales practice requirements
on brokers who sell penny stock to persons other than established customers and
accredited investors (generally institutions with assets in excess of $5,000,000
or individuals with net worth in excess of $1,000,000). For transactions covered
by the penny stock rules, the broker must make a special suitability
determination for the purchaser and receive the purchaser's written consent to
the transaction prior to the sale. Furthermore, the penny stock rules generally
require, among other things, that brokers engaged in secondary trading of penny
stocks provide customers with written disclosure documents, monthly statements
of the market value of penny stocks, disclosure of the bid and asked prices and
disclosure of the compensation to the brokerage firm and disclosure of the sales
person working for the brokerage firm. These rules and regulations make it more
difficult for brokers to sell Quest common shares and limit the liquidity of
Quest's securities.
Quest has no immediate plans to pay dividends. Quest has not paid any
cash dividends to date and does not expect to pay dividends for the foreseeable
future.
Our sole officer and director controls our voting rights, and as long
as he does, he will be able to control the outcome of stockholder voting.
Quest's sole officer and director is the owner of all of the outstanding shares
of Quest's Series C Preferred Stock, pursuant to which he holds approximately
67% of the outstanding voting rights for Quest's capital stock. As long as he
controls our voting rights, our other stockholders will generally be unable to
affect or change the management or the direction of our company without the
support of our officers and directors. As a result, some investors may be
unwilling to purchase our common stock. If the demand for our common stock is
reduced because our officers and directors have significant influence over our
company, the price of our common stock could be materially depressed. Our sole
officer and director will be able to exert significant influence over the
outcome of all corporate actions requiring stockholder approval, including the
election of directors, amendments to our certificate of incorporation and
approval of significant corporate transactions.
Quest's articles of incorporation authorizes Quest's board of directors
to designate and issue preferred stock with rights, preferences and privileges
that may be adverse to the rights of the holders of Quest's common stock.
Quest's board of directors has the authority to issue up to an additional
21,140,000 shares of preferred stock and to determine the price, rights,
preferences, and privileges of those shares without any further vote or action
by Quest's stockholders. To date, Quest has issued 2,000,000 shares of Series A
preferred stock, 1,600,000 shares of Series B preferred stock and 260,000 shares
of Series C preferred stock. Any preferred stock issued by Quest's board of
directors may, and in certain cases, do contain rights and preferences adverse
to the voting power and other rights of the holders of common stock.
Cautionary Statement Concerning
Forward-Looking Information
This annual report and the documents to which Quest refers you and
incorporate into this annual report by reference contain forward-looking
statements. In addition, from time to time, Quest, or its representatives, may
make forward-looking statements orally or in writing. These are statements that
relate to future periods and include statements regarding Quest's future
strategic, operational and financial plans, potential acquisitions, anticipated
or projected revenues, expenses and operational growth, markets and potential
customers for Quest's products and services, plans related to sales strategies
and efforts, the anticipated benefits of Quest's relationships with strategic
partners, growth of its competition, its ability to compete, the adequacy of its
current facilities and its ability to obtain additional space, use of future
earnings, and the feature, benefits and performance of its current and future
products and services.
You can identify forward-looking statements by those that are not
historical in nature, particularly those that use terminology such as "may,"
"will," "should," "expects," "anticipates," "contemplates," "estimates,"
"believes," "plans," "projected," "predicts," "potential," "seek" or "continue"
or the negative of these or similar terms. In evaluating these forward-looking
statements, you should consider various factors. These factors may cause Quest's
actual results to differ materially from any forward-looking statement. Quest
cautions you not to place undue reliance on these forward-looking statements.
19
Quest bases these forward-looking statements on its expectations and
projections about future events, which it derives from the information currently
available to it. Such forward-looking statements relate to future events or
future performance. Forward-looking statements are only predictions. The
forward-looking events discussed in this annual report, the documents to which
Quest refers you and other statements made from time to time by Quest or its
representatives, may not occur, and actual events and results may differ
materially and are subject to risks, uncertainties and assumptions about Quest.
For these statements, Quest claims the protection of the "bespeaks caution"
doctrine. The forward-looking statements speak only as of the date hereof, and
Quest expressly disclaims any obligation to publicly release the results of any
revisions to these forward-looking statements to reflect events or circumstances
after the date of this filing.
20
Item 2. PROPERTIES
PROPERTIES
Quest's executive offices are located in Paterson, New Jersey and
consist of approximately 1,000 square feet of leased space. Quest leases this
space at the rate of $500 per month from a related party corporation.
Gwenco leases over 700 acres of coal mines in Pike County, Kentucky,
with approximately 12,999,000 tons of coal in place in six seams. Gwenco is
required to make annual minimum lease payments of approximately $55,000 per
year.
All of Quest's current facilities are adequate for its current
operations. Quest anticipates that additional facilities will be leased or
purchased as needed and that sufficient facilities for its needs are readily
available.
Item 3. LEGAL PROCEEDINGS
Litigation
Gwenco, Inc. Chapter 11 Reorganization. On March 2, 2007, our wholly
owned subsidiary, Gwenco, Inc., filed a voluntary petition for reorganization
under Chapter 11 of the U.S. Bankruptcy Code with the United States Bankruptcy
Court for the Eastern District of Kentucky. Management felt this was a necessary
step to further our financial restructuring initiative and to protect Gwenco's
assets from claims, debts, judgments, foreclosures, and forfeitures of those
creditors and stakeholders with whom both Quest and Gwenco were unable to
negotiate restructured agreements. We are currently overseeing Gwenco's
operations as a debtor in possession, subject to court approval of matters
outside the ordinary course of business. We are currently seeking court approval
for debtor in possession financing from holders of Gwenco's existing debt
obligations in order to fund operating expenses. We intend to continue our
mining operations at Pond Creek Mine at Slater's Branch while this matter is
completed. Under Chapter 11, claims against Gwenco in existence prior to the
filing of the petitions for reorganization relief under the federal bankruptcy
laws are stayed while Gwenco is in bankruptcy. On August 3, 2007, the Bankruptcy
Court approved Gwenco's request for debtor-in-possession financing in an amount
of up to $2,000,000. In February 2008, Gwenco submitted a preliminary plan of
reorganization to the court for approval.
In or about May, 2004, National City Bank of Kentucky commenced an
action in Boyd County Court, Kentucky against Quest's indirect wholly-owned
subsidiary, Gwenco, Inc., and Albert Anderson for breach of various promissory
notes issued by Gwenco. Duke Energy Merchants and First Sentry Bank were joined
in the action. National City Bank and Duke Energy are collectively seeking
approximately $1,100,000 in principal as well as interests, fees, and costs.
National City Bank and Duke Energy have been granted summary judgment in this
action and both obtained judgment.
In March, 2006, National City Bank commenced an action commenced an
action in Pike County Court, Kentucky against Quest, Gwenco, and Quest Energy,
seeking to be adjudged a lien on certain real and personal property of Gwenco
pursuant to the aforementioned judgment and that said real and personal property
be sold to satisfy the aforesaid lien, and that the liens of National City Bank
attach to the proceeds of the sale. In July, 2006, National City Bank of
Kentucky sold its right, title, and interest in and to the various judgments,
judgment liens, security interests, and lines of credit to a third party
investor. The third party investor has agreed to forbear on further collection,
enforcement, and foreclosure with respect to this indebtedness, in exchange for
which Gwenco agreed to grant the investor a royalty on gross profits of Gwenco.
This foreclosure action was stayed against Gwenco as a result of Gwenco's
Chapter 11 filing.
On or about August 25, 2004, Valley Personnel Services, Inc. commenced
an action in the Circuit Court of Mingo County, West Virginia against Quest's
indirect wholly-owned subsidiaries, D&D Contracting, Inc. and Quest Energy, Ltd.
for damages in the amount of approximately $150,000, plus pre and post judgment
interest as provided by law, costs, and fees. This action was stayed against
Gwenco as a result of Gwenco's Chapter 11 filing.
The Federal Insurance Company, the insurer for Community Trust Bank,
commenced an action in Pike County Court, Kentucky against Quest Energy for
subrogation of monies it has paid to the bank and repayment of deductibles by
Community Trust as a part of an alleged criminal scheme and conspiracy by Mr.
Runyon, Ms. Holbrook, Mr. Stollings, and Mr. Wheeler. The insurer alleged that
21
former employees or associates of Quest Energy, including Mr. Runyon and Mr.
Wheeler, were primarily involved in the alleged scheme, that Quest Energy is
accordingly responsible for the actions of these former employees and
associates, and that Quest Energy obtained a substantial material benefit as a
result of this alleged scheme. Quest Energy has denied these allegations, that
it had any involvement with or responsibility for any of the actions alleged by
the insurer, and it further denies that it has benefited from any such alleged
scheme. Further, Quest Energy filed a counterclaim against the Federal Insurance
Company and Community Trust contending that the negligent actions and inactions
by Community Trust caused severe damage and loss to Quest Energy and Quest. The
court granted Community Trust's motion to dismiss the counterclaim.
Mountain Edge Personnel has commenced an action in the Circuit Court of
Mingo County, West Virginia against Quest's now-dissolved indirect wholly-owned
subsidiary, J. Taylor Mining, for damages in the amount of approximately
$115,000, plus pre and post judgment interest as provided by law, costs, and
fees.
An action has been commenced in the Circuit Court of Pike County,
Kentucky against Quest and its indirect, wholly-owned subsidiaries, Gwenco,
Inc., Quest Energy, Ltd., and J. Taylor Mining, for unspecified damages
resulting from personal injuries suffered while working for Mountain Edge
Personnel, an employee leasing agency who leased employees to Quest's
subsidiaries. Quest Energy is actively defending the action. This action was
originally stayed against Gwenco as a result of Gwenco's Chapter 11 filing.
However, in March, 2008, the plaintiff obtained relief from stay and as a result
the lawsuit has reopened against Gwenco.
BHP, Inc. commenced an action in the Circuit Court of Pike County,
Kentucky against Quest's indirect, wholly-owned subsidiary, Quest Energy, Ltd.,
for damages resulting an alleged failure to pay for certain equipment leases in
the amount of approximately $225,000, plus pre and post judgment interest as
provided by law, costs, and fees. July 10, 2006, Quest Energy entered into a
settlement arrangement with BHP for the bill of sale on two pieces of equipment,
of which Quest Energy had retained possession while in default of prior lease
payments. On October 10, 2006, the Pike County Circuit Court entered an order
enforcing this settlement agreement, and on December 19, 2006, BHP was awarded
summary judgment in the amount of $35,000 plus 8% accrued interest from August
9, 2006. BHP, Inc. has since repossessed the equipment.
Christopher Younger and Sharon Preece commenced an action in the
Circuit Court of Pike County against Quest's indirect, wholly-owned subsidiary,
Gwenco, Inc., for damages resulting from an alleged failure to pay past
royalties and other amounts allegedly due. The plaintiffs have obtained a
default judgment in this action in the amount of approximately $600,000, from
which Gwenco has taken appeal. The plaintiffs then amended their complaint,
seeking to be adjudged a lien on certain real and personal property of Gwenco
pursuant to the aforementioned judgment and that said real and personal property
be sold to satisfy the aforesaid lien, and that the liens of the plaintiffs
attach to the proceeds of the sale. This foreclosure action was stayed against
Gwenco as a result of Gwenco's Chapter 11 filing. In 2007, Gwenco settled the
claim Sharon Preece for $150,000. The settlement was approved by the bankruptcy
court.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
22
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Quest's common stock is traded on the OTC Bulletin Board under the
symbol "QMNM." The following table shows the high and low bid prices for Quest's
common stock for each quarter since January 1, 2006 as reported by the OTC
Bulletin Board. All share prices have been adjusted to provide for the 1-4
reverse split effected in August 2007 and the 1-10 reverse split effected in
December 2007. Quest considers its stock to be "thinly traded" and any reported
sale prices may not be a true market-based valuation of its stock. Some of the
bid quotations from the OTC Bulletin Board set forth below may reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions.
2006 (OTC Bulletin Board) High Bid Low Bid
------------------------------------------------------------------------
First quarter 7.24 3.16
Second quarter 6.08 0.12
Third quarter 1.60 0.64
Fourth quarter 0.76 0.16
2007 (OTC Bulletin Board) High Bid Low Bid
------------------------------------------------------------------------
First quarter 9.60 1.12
Second quarter 2.96 1.88
Third quarter 2.08 0.51
Fourth quarter 4.50 0.01
As of April 15, 2008, there were approximately 522 record holders of
Quest's common stock.
Quest has not paid any cash dividends since its inception and does not
contemplate paying dividends in the foreseeable future. It is anticipated that
earnings, if any, will be retained for the operation of its business.
Shares eligible for future sale could depress the price of Quest's
common stock, thus lowering the value of your investment. Sales of substantial
amounts of Quest's common stock, or the perception that such sales could occur,
could adversely affect prevailing market prices for shares of Quest's common
stock.
Quest's revenues and operating results may fluctuate significantly from
quarter to quarter, which can lead to significant volatility in the price and
volume of its stock. In addition, stock markets have experienced extreme price
and volume volatility in recent years. This volatility has had a substantial
effect on the market prices of securities of many smaller public companies for
reasons unrelated or disproportionate to the operating performance of the
specific companies. These broad market fluctuations may adversely affect the
market price of Quest's common stock.
Recent Sales of Unregistered Securities
1. On March 10, 2008, we entered into a Convertible Note Purchase
Agreement with a single accredited investor pursuant to which we agreed to issue
a $75,000 convertible promissory note. The convertible note has a 1 year term
and bear interest at fifteen percent (15%) payable at the maturity date of the
note. The note is convertible into our common stock pursuant to a "variable
conversion price" equal to 50% of the average of the 3 lowest closing bid prices
for our common stock during the 10 trading day period prior to conversion. The
note contains monetary penalties for late delivery of shares and certain other
items as more specifically defined therein. In addition, the purchase agreement
provides liquidated damages (2-3% per month based on the principal outstanding)
to the extent we are not current in our public filings.
Under the terms of note, the note is convertible by holder only to the
extent that the number of shares of common stock issuable pursuant to such
securities, together with the number of shares of common stock owned by such
holder and its affiliates (but not including shares of common stock underlying
unconverted shares of the note) would not exceed 4.99% of our then outstanding
common stock as determined in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended.
23
We intend to use the proceeds from sale of the convertible promissory
note for purchase of equipment for mine operations, supplies and payroll for
mine operations, professional fees, and working capital.
We relied on the exemption from registration provided by Section 4(2)
of the Securities Act of 1933, as amended, for the offer and sale of the notes
and the warrants.
2. During the quarter ended December 31, 2007, Quest issued an aggregate
of 3,910,148 shares of common stock upon conversions of amended and restated 7%
convertible notes. The aggregate principal and interest amount of these notes
that were converted was $72,026. The issuances were exempt pursuant to Section
3(a)(9) of the Securities Act as well as Section 4(2) of the Securities Act.
3. During the quarter ended December 31, 2007, Quest issued an aggregate
of 3,400,000 shares of common stock upon conversion of 5,467 shares of its
series A preferred stock. The issuances were exempt pursuant to Section 3(a)(9)
of the Securities Act as well as Section 4(2) of the Securities Act.
4. During the quarter ended December 31, 2007, Quest issued an aggregate
of 5,900,000 shares of common stock upon partial conversion of a secured note
and judgment thereon. The aggregate principal and interest amount of this
judgment that was converted was $64,009. The issuances were exempt pursuant to
Section 3(a)(9) of the Securities Act as well as Section 4(2) of the Securities
Act.
24
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
We will file an amendment to this annual report to provide management's
discussion and analysis or plan of operation as required by Item 303 of
Regulation S-B.
25
Item 7. FINANCIAL STATEMENTS
We will file an amendment to this annual report to provide the
financial statements as required by Item 310 of Regulation S-B.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
Item 8A. CONTROLS AND PROCEDURES.
We will file an amendment to this annual report to provide the
disclosures relating to controls and procedures as required by Items 307 and 308
of Regulation S-B.
Item 8B. OTHER INFORMATION.
None.
26
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; CORPORATE
GOVERNANCE AND COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information under the captions "Election of Directors" and
"Management--Executive Officers and Directors" in the proxy statement for our
2008 annual meeting is incorporated herein by reference.
The information under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" in the proxy statement for our 2008 annual meeting is
incorporated herein by reference.
Item 10. EXECUTIVE COMPENSATION
The information under the caption "Executive Compensation" in the proxy
statement for our 2008 annual meeting is incorporated herein by reference.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the proxy statement for our 2008 annual
meeting is incorporated herein by reference.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "Certain Relationships and Related
Transactions" in the proxy statement for our 2008 annual meeting is incorporated
herein by reference.
Item 13. EXHIBITS
Exhibit No. Description
----------- -----------
3.1 Restated Articles of Incorporation of Sabre, Inc. (now known as
Quest Minerals & Mining Corp.), incorporated by reference to
Quest's Registration Statement on Form 10-SB filed on December 18,
2000.
3.2 Articles of Amendment to Articles of Incorporation of Tillman
International, Inc. (now known as Quest Minerals & Mining Corp.),
incorporated by reference to Quest's Definitive Information
Statement on Schedule 14C filed on March 16, 2004.
3.3 Articles of Amendment to Articles of Incorporation of Quest
Minerals & Mining Corp., incorporated by reference to our Annual
Report on Form 10 KSB/A for the year ended December 31, 2006,
filed on July 19, 2007.
3.4 Articles of Amendment to Articles of Incorporation of Quest
Minerals & Mining Corp., incorporated by reference to our Annual
Report on Form 10 KSB/A for the year ended December 31, 2006,
filed on July 19, 2007.
3.5 Articles of Amendment to Articles of Incorporation of Quest
Minerals & Mining Corp., incorporated by reference to Quest's
Current Report on Form 8-K filed on January 30, 2007.
27
3.6 Articles of Amendment to Articles of Incorporation of Quest
Minerals & Mining Corp., incorporated by reference to Quest's
Definitive Information Statement on Schedule 14C filed on January
29, 2007.
3.7 Bylaws of Tillman International, Inc. (now known as Quest Minerals
& Mining Corp.), incorporated by reference to Quest's Registration
Statement on Form 10-SB filed on December 18, 2000.
4.1 Specimen Certificate of Quest Mineral & Mining Corp.'s common
stock, incorporated by reference to our Annual Report on Form 10
KSB/A for the year ended December 31, 2006, filed on July 19,
2007.
4.2 Amended and restated convertible promissory note, filed herewith.
4.3 Form of amended and restated convertible promissory note,
incorporated by reference to Quest's Current Report on Form 8-K
filed on June 17, 2006.
4.4 Convertible promissory note, incorporated by reference to our
Annual Report on Form 10 KSB/A for the year ended December 31,
2006, filed on July 19, 2007.
4.5 Secured promissory note, incorporated by reference to our Annual
Report on Form 10 KSB/A for the year ended December 31, 2006,
filed on July 19, 2007.
4.6 Form of convertible promissory note, incorporated by reference to
our Annual Report on Form 10 KSB/A for the year ended December 31,
2006, filed on July 19, 2007.
4.7 Convertible promissory note, incorporated by reference to our
Annual Report on Form 10 KSB/A for the year ended December 31,
2006, filed on July 19, 2007.
4.8 Promissory Note dated February 21, 2000, as amended, incorporated
by reference to our Annual Report on Form 10 KSB/A for the year
ended December 31, 2006, filed on July 19, 2007.
4.9 Commercial Installment Note dated January 20, 1997, incorporated
by reference to our Annual Report on Form 10 KSB/A for the year
ended December 31, 2006, filed on July 19, 2007
4.10 Commercial Time Note dated February 21, 2000, incorporated by
reference to our Annual Report on Form 10 KSB/A for the year ended
December 31, 2006, filed on July 19, 2007
4.11 Amended Promissory Note dated August 24, 2006, incorporated by
reference to our Annual Report on Form 10 KSB/A for the year ended
December 31, 2006, filed on July 19, 2007.
4.12 Amended Promissory Note dated August 24, 2006, incorporated by
reference to our Annual Report on Form 10 KSB/A for the year ended
December 31, 2006, filed on July 19, 2007.
4.13 Warrant, incorporated by reference to Quest's Current Report on
Form 8-K filed on October 25, 2005.
4.14 Form of Warrant, incorporated by reference to our Annual Report on
Form 10 KSB/A for the year ended December 31, 2006, filed on July
19, 2007.
4.15 Form of Series A Warrant, incorporated by reference to our Annual
Report on Form 10 KSB/A for the year ended December 31, 2006,
filed on July 19, 2007.
4.16 Form of Series B Warrant, incorporated by reference to our Annual
Report on Form 10 KSB/A for the year ended December 31, 2006,
filed on July 19, 2007
28
4.17 Warrant, incorporated by reference to Quest's Current Report on
Form 8-K filed on February 21, 2006.
4.18 Amended and Restated Warrant, incorporated by reference to Quest's
Current Report on Form 8-K filed on February 21, 2006.
4.19 Form of Warrant, incorporated by reference to our Annual Report on
Form 10 KSB/A for the year ended December 31, 2006, filed on July
19, 2007.
10.1 Securities Purchase Agreement and Plan of Reorganization dated
February 9, 2004, incorporated by reference to Quest's Current
Report on Form 8-K filed on February 24, 2004.
10.2 Securities Purchase Agreement and Plan of Reorganization by and
among Tillman International, Inc., Quest Minerals & Mining, Ltd.,
Gwenco, Inc., and the stockholders of Gwenco, Inc., dated as of
April 28, 2004, incorporated by reference to Quest's Current
Report on Form 8-K filed on May 6, 2004.
10.3 William R. Wheeler Employment Agreement, incorporated by reference
to Quest's Quarterly Report on Form 10-QSB for the quarter ending
September 30, 2005.
10.4 Eugene Chiaramonte, Jr. Employment Agreement, incorporated by
reference to Quest's Quarterly Report on Form 10-QSB for the
quarter ending September 30, 2005.
10.5 William R. Wheeler Consulting Agreement, filed herewith.
10.6 Eugene Chiaramonte, Jr. Indemnification Agreement, incorporated by
reference to Quest's Current Report on Form 8-K filed on January
30, 2007.
10.7 2006 Stock Incentive Plan, incorporated by reference to Quest's
Registration Statement on Form S-8, filed on May 9, 2006 (File No.
333-133939).
10.8 2006 Stock Incentive Plan No. 2, incorporated by reference to
Quest's Registration Statement on Form S-8, filed on September 28,
2006 (File No. 333-137645).
10.9 Coal Mining Agreement dated February 23, 2007, incorporated by
reference to our Annual Report on Form 10 KSB/A for the year ended
December 31, 2006, filed on July 19, 2007.
10.10 Stock Purchase Agreement, incorporated by reference to our Annual
Report on Form 10 KSB/A for the year ended December 31, 2006,
filed on July 19, 2007.
10.11 Lease Agreement, incorporated by reference to our Annual Report on
Form 10 KSB/A for the year ended December 31, 2006, filed on July
19, 2007.
10.12 Lease Agreement, incorporated by reference to our Annual Report on
Form 10 KSB/A for the year ended December 31, 2006, filed on July
19, 2007.
10.13 Lease Agreement, incorporated by reference to our Annual Report on
Form 10 KSB/A for the year ended December 31, 2006, filed on July
19, 2007.
10.14 Lease Agreement, incorporated by reference to our Annual Report on
Form 10 KSB/A for the year ended December 31, 2006, filed on July
19, 2007.
10.15 Lease Agreement, incorporated by reference to our Annual Report on
Form 10 KSB/A for the year ended December 31, 2006, filed on July
19, 2007.
29
10.16 Lease Agreement, incorporated by reference to our Annual Report on
Form 10 KSB/A for the year ended December 31, 2006, filed on July
19, 2007.
10.17 Lease Agreement, incorporated by reference to our Annual Report on
Form 10 KSB/A for the year ended December 31, 2006, filed on July
19, 2007.
10.18 Lease Agreement, incorporated by reference to our Annual Report on
Form 10 KSB/A for the year ended December 31, 2006, filed on July
19, 2007.
10.19 Lease Agreement, incorporated by reference to our Annual Report on
Form 10 KSB/A for the year ended December 31, 2006, filed on July
19, 2007.
10.20 Lease Agreement, incorporated by reference to our Annual Report on
Form 10 KSB/A for the year ended December 31, 2006, filed on July
19, 2007.
10.21 Lease Agreement, incorporated by reference to our Annual Report on
Form 10 KSB/A for the year ended December 31, 2006, filed on July
19, 2007.
10.22 Lease Agreement, incorporated by reference to our Annual Report on
Form 10 KSB/A for the year ended December 31, 2006, filed on July
19, 2007.
10.23 Lease Agreement, incorporated by reference to our Annual Report on
Form 10 KSB/A for the year ended December 31, 2006, filed on July
19, 2007.
10.24 Lease Agreement, incorporated by reference to our Annual Report on
Form 10 KSB/A for the year ended December 31, 2006, filed on July
19, 2007.
10.25 Lease Agreement, incorporated by reference to our Annual Report on
Form 10 KSB/A for the year ended December 31, 2006, filed on July
19, 2007.
10.26 Lease Agreement, incorporated by reference to our Annual Report on
Form 10 KSB/A for the year ended December 31, 2006, filed on July
19, 2007.
10.27 Lease Agreement, incorporated by reference to our Annual Report on
Form 10 KSB/A for the year ended December 31, 2006, filed on July
19, 2007.
10.28 Forbearance Agreement, incorporated by reference to our Annual
Report on Form 10 KSB/A for the year ended December 31, 2006,
filed on July 19, 2007.
10.29 Conversion Agreement, incorporated by reference to our Annual
Report on Form 10 KSB/A for the year ended December 31, 2006,
filed on July 19, 2007.
10.30 Royalty Agreement, incorporated by reference to our Annual Report
on Form 10 KSB/A for the year ended December 31, 2006, filed on
July 19, 2007.
10.31 Amendment to Administrative Services Agreement dated January 6,
2008, to be filed by amendment.
21.1 Subsidiaries of Quest Minerals and Mining Corp., incorporated by
reference to our Annual Report on Form 10 KSB/A for the year ended
December 31, 2006, filed on July 19, 2007
23.1 Consent of Independent Public Accountants, Kempisty & Company, to
be filed by amendment.
31.1 Certification of Eugene Chiaramonte, Jr. pursuant to Rule
13a-14(a), to be filed by amendment.
32.1 Certification of Eugene Chiaramonte, Jr. pursuant to 18 U.S.C
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, to be filed by amendment.
__________________
30
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information under the caption "Accountants Fees and Services" in
the proxy statement for our 2008 annual meeting is incorporated herein by
reference.
31
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
QUEST MINERAL AND MINING CORP.
By: /s/ Eugene Chiaramonte, Jr.
-------------------------------------
Eugene Chiaramonte, Jr.
President
(Principal Executive Officer and
Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated.
Signatures Title Date
--------------------------------------------------------------------------------
/s/ Eugene Chiaramonte, Jr. President and sole Director April 15, 2008
----------------------------
Eugene Chiaramonte, Jr.
32
</TEXT>
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