UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended May 31, 1999.
[ ] Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 (no fee required) for the transition
period from ______________ to _________________.
Commission file number: 0-17371
HYTK INDUSTRIES, INC.
(Name of Small Business Issuer in Its Charter)
Nevada 88-0182808
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
701 East Main, Benedict, Kansas 66714
(Address of Principal Executive Offices)(Zip Code)
316-698-2250
(Issuer's Telephone Number, Including Area Code)
Securities Registered Under Section 12(g) of the Exchange Act:
Title of Class: Common Stock, $0.001 Par Value
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B not contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
The issuer's revenues for the year ended May 31, 1999 were $1,540,954.
The aggregate market value of the voting stock held by non-affiliates computed
by reference to the last reported sale of the Company's Common Stock during the
month of July, 1999 at $5.50 per share was $12,760,000.
The number of shares outstanding of the issuer's common stock as of August 26,
1999 was 5,292,843.
Total of Sequentially Numbered Pages: 52
Exhibit Index on Page: 19
<PAGE>
TABLE OF CONTENTS
PART I
ITEM 1. DESCRIPTION OF BUSINESS...............................................3
ITEM 2. DESCRIPTION OF PROPERTY...............................................5
ITEM 3. LEGAL PROCEEDINGS.....................................................6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................6
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS...............................................................7
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...................................7
ITEM 7. FINANCIAL STATEMENTS.................................................11
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS........................12
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF
THE EXCHANGE ACT.....................................................12
ITEM 10. EXECUTIVE COMPENSATION...............................................13
ITEM 11. SECURITY OWNERSHIP OF BENEFICIAL OWNERS..............................14
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................16
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.....................................17
SIGNATURES...........................................................18
INDEX TO EXHIBITS....................................................18
<PAGE>
PART I
ITEM 1.DESCRIPTION OF BUSINESS
Business of Issuer
The fiscal year ended May 31, 1999, of HYTK Industries, Inc., a Nevada
corporation (the "Company"), was a period of significant change and transition.
On December 31, 1998, the Company, through its wholly owned subsidiary, HYTK
Holding Co., Inc., a Kansas corporation ("HYTK Holding"), effected a merger (the
"Merger") with Quest Resource Corporation, a Kansas corporation ("Quest").
Pursuant to the Merger, the Quest shareholders agreed to exchange 100% of its
issued and outstanding shares of common stock, or 3,421,077 shares, in exchange
for an equal quantity of shares of the Company's common stock, par value $0.001
("Common Stock"). Unless the context indicates otherwise, the term "Company"
shall hereinafter refer to HYTK Industries, Inc., a Nevada corporation, and its
predecessors and subsidiaries.
Quest is an independent energy company with an emphasis on the production,
transportation and development of natural gas in southeast Kansas. Quest's
management and key personnel have been involved in oil and gas production
activities in southeast Kansas for more than twenty years. Since its
incorporation on November 3, 1997 Quest has integrated the operations of two
sister companies, Quest Energy Service, Inc., a Kansas corporation ("QES"), and
Ponderosa Gas Pipeline Company, Inc., a Kansas corporation ("PGPC"). References
to Quest shall refer to and include its subsidiaries unless otherwise indicated.
Since the Merger on December 31, 1998, management has focused upon reducing debt
and upon continuing the consolidation of oil and gas properties and pipeline
assets into the Company through the Quest subsidiary, PGPC. These efforts have
resulted in an asset base with a net book value at May 31, 1999 of $4.3 million,
total debt of $1.6 million, and stockholder's equity of $2.7 million.
The Company incurred a slight loss but had positive cash flow from operations
for the fiscal year ended May 31, 1999. With most of the planned consolidation
of assets now accomplished, management intends to intensify it efforts to
develop the accumulated asset base as described in Items 2, and 6. The assets
are grouped into the two operating subsidiary companies, PGPC and QES, which are
more fully described below.
Ponderosa Gas Pipeline Company, Inc. (PGPC)
PGPC was incorporated in the State of Kansas in 1996 by Mr. Henry F. Mogg for
the purpose of consolidating the ownership of his various pipeline assets into
one entity. Mr. Mogg remained the sole stockholder of PGPC until 1998 when PGPC
was acquired by Quest. Mr. Douglas L. Lamb has been an officer in PGPC since
inception and was involved in the negotiation of all of the numerous asset
acquisitions made by PGPC.
PGPC's primary assets include 131 miles of gas gathering pipelines in several
counties of southeast Kansas and its oil and gas producing properties. The gas
pipeline network accesses about 500 square miles out of which only a few square
miles are being developed by competitors. Quest acquired PGPC from Mr. Henry
Mogg in exchange for 562,050 shares of Quest's common stock. PGPC has invested
approximately $600,000 for improvements to its pipeline facilities during the
past four years. The gas pipelines have realized increasing gas volumes and
revenues without the benefit of a company sponsored gas development program,
which Quest hopes to soon implement. Quest's pipelines are also used by third
parties and approximately 10% of Quest's revenues derive from other gas
providers who utilize PGPC's pipelines.
<PAGE>
These improvements have resulted in a regional gas gathering network which is
almost fully linked together for bi-directional flow that provides the exclusive
market for natural gas production in a multiple county region. The PGPC pipeline
network has multiple market outlets with above average prices that can
accommodate substantial additional gas volumes.
PGPC also owns numerous oil and gas properties in southeast Kansas. PGPC
currently has oil and gas leases on over 5,000 acres entitling it to the oil and
gas reserves therein. PGPC's primary focus is on the acquisition and development
of gas reserves in the region served by its gas gathering pipeline network which
management expects will significantly increase PGPC's leased acreage, gas
reserves and gas production in the future.
Quest Energy Service, Inc. (QES)
QES was incorporated in the State of Kansas in 1995 when it acquired all of the
trucks, equipment, and facilities necessary to operate and maintain PGPC's
pipelines and properties. Douglas Lamb has been in a CEO position conducting
oilfield and gas pipeline operations out of Benedict, Kansas, since 1980. His
brother, Dennis Lamb, is the QES field superintendent who has also been involved
in the business for over 20 years in field operations. They both grew up in the
oil industry as their father, Lawrence Lamb, first became an independent oil
producer in 1958. The QES oil and gas operations today involve multiple
activities which include: (i) the operation and maintenance of approximately 150
miles of gas gathering pipelines; (ii) the operation and servicing of over 100
oil and gas wells; (iii) the trucking and marketing of crude oil; (iv) new
pipeline construction and pipeline renovation; and, (v) the development of new
oil and gas wells. These activities are conducted in an eight county area of
southeast Kansas.
QES currently has thirteen employees, most of whom have been affiliated with the
oil and gas operations in Benedict, Kansas, for seven to twenty years. These
employees have been personally involved in the completion of most of the
producing wells and in the construction of the majority of the gas pipeline
network. Several of its employees are supervisors of field operations and
responsible for the daily operations involving the wells and pipelines. These
key field personnel have significant authority to conduct their daily operations
and very minimum supervision is required for these key employees.
QES provides all of the service activities required for the operation and
development of Quest's oil and gas properties and the gas pipelines. Its assets
include trucks, well service rigs, construction equipment and a shop with repair
and fabrication equipment. QES derives approximately 90% of its revenues from
servicing PGPC assets. Quest management believes that all fees QES earns from
PGPC are equitable for both entities and are directly competitive with other
such service providers.
Competition
The Company's oil and gas exploration activities are centered in a highly
competitive field. In seeking any other suitable oil and gas properties for
acquisition and related personnel and equipment, the Company may be competing
with a number of other companies, possibly including larger oil and gas
companies and other independent operators who may have greater financial
resources.
Environmental Regulation
The Company is subject to numerous state and federal environmental regulations.
Internal procedures and policies exist within the Company to ensure that its
operations are conducted in full and substantial regulatory compliance and the
Company believes it is currently operating within all such regulations. While
the Company intends to fully comply with such requirements, this compliance can
be very complex, and therefore no assurances can be given that such
environmental regulations will not detrimentally affect the Company in the
future.
<PAGE>
ITEM 2.DESCRIPTION OF PROPERTY
Ponderosa Gas Pipeline Company, Inc. (PGPC)
Pipelines . PGPC owns approximately 131 miles of gas gathering pipelines in the
counties of Wilson, Woodson, Greenwood, Neosho and Chautauqua counties in
southeast Kansas. This pipeline network provides a market outlet for natural gas
in a region of approximately 500 square miles in size. Included in this pipeline
network are ten gas compressors which are wholly owned by PGPC. The market
outlets available to this gas gathering pipeline network include connections to
both intrastate and interstate delivery pipelines.
On May 1, 1999, PGPC entered into an Asset Sale and Purchase Agreement
("Purchase Agreement") with Shotgun Ridge Gas System, L.C., a Kansas limited
liability company ("SRGS"), and 4/10 Energy Fund, Inc., a Kansas corporation
("4/10"), whereby PGPC purchased all real and personal property owned by SRGS,
including various pipelines and related oil and gas equipment in exchange for
160,000 shares of the Company's Common Stock. PGPC acquired the assets free of
any liens or ownership encumbrances which have been valued at $411,400, as more
fully discussed in the financial statements attached hereto. For more
information on this acquisition, see the Purchase Agreement attached hereto as
Exhibit 10(i)(a) and incorporated by reference.
Producing Wells and Acreage . The following table sets forth certain information
regarding PGPC's ownership of productive wells and acreage, as of May 31, 1999.
For purposes of this table, productive wells are producing wells and wells
capable of production.
No difference exists between gross and net as the Company owns 100% of all wells
and acres below referenced.
<PAGE>
PRODUCTIVE WELL AND ACREAGE SUMMARY
May 31, 1999
PRODUCTIVE WELLS LEASEHOLD ACREAGE
- ----------------------------- --------------------------------------------------
Proven Proven Unproven
Oil Natural Gas Total Developed Undeveloped Undeveloped Total Leased
- ------ ----------- ----- --------- ----------- ----------- ------------
45 8 53 660 680 3,988 5,328
Note: While the Company believes that the above wells and acreage will increase
in the future because the Company has just begun to focus on developing gas
production for its retained ownership, no such assurances can be given.
Production volumes, sales prices, and production costs. The following tables set
forth certain information regarding the oil and gas properties owned by PGPC in
fiscal year 1999.
Net Gas Production per Mcf
--------------------------
For Fiscal Year Ended
-----------------------
5/99 5/98 5/97
------ ------ ------
Net gas production (mcf) 73,528 67,270 70,384
Average wellhead gas price* $1.12 $1.26 $1.21
Average production cost $0.82 $0.65 $0.74
Net revenue $0.30 $0.61 $0.47
*This gas price is that realized by the PGPC working interest in the wells after
all royalties and gas gathering charges are deducted. .
Net Oil Production per Bbl
--------------------------
For Fiscal Year Ended
-----------------------
5/99 5/98 5/97
------ ------ ------
Net oil production (barrels) 18,159 18,948 17,226
Average wellhead oil price* $8.67 $11.72 $15.73
Average production cost $8.81 $10.30 $12.65
Net revenue $(.14) $ 1.42 $ 3.08
*This oil price is that realized by the PGPC working interest in the wells after
all royalties and transportation charges.
Delivery Commitments. While the Company does not have formal delivery
commitments, its gas is marketed exclusively by Bonanza Energy Corporation of
Kansas ("BECK"), which has long-term relationships with the end users of the
Company's gas. Therefore, while no such assurances can be given, the Company
does not anticipate a problem obtaining ongoing commitments for its gas.
Quest Energy Service, Inc. (QES)
The primary property categories within QES are: trucks, well service rigs and
construction equipment; and, a repair and fabrication shop which is located in
Benedict, Kansas. The QES employees represent its most valuable asset category.
Five administrative personnel work out of the office facility on the east edge
of Benedict, Kansas at 701 East Main Street. The office facility is leased from
Crown Properties, LC for $500 per month. Crown Properties, LC is owned by Marsha
Lamb who is also an officer of QES and PGPC. Field operations include five
"pumpers" or employees whose primary duties are to operate the wells and the
pipelines. QES employs additional personnel who are responsible for: well
servicing, pipeline maintenance, the development of new wells and associated
infrastructure, and new pipeline construction.
ITEM 3.LEGAL PROCEEDINGS
Management is not aware of any pending or threatened legal proceedings involving
the Company or any of its subsidiaries.
ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE>
PART II
ITEM 5.MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
No shares of Common Stock are subject to outstanding options or warrants to
purchase, and no other securities convertible into Common Stock are currently
issued or outstanding. All outstanding shares of Common Stock are fully paid and
nonassessable. The Company's Common Stock was approved for trading on the OTC
Bulletin Board on June 8, 1999, under the symbol "QRCP." The table set forth
below lists the range of high and low bids of the Company's Common Stock for
each month subsequent to the time trading actually commenced on July 9, 1999
through August 26, 1999. The prices in the table reflect inter-dealer prices,
without retail markup, markdown or commission and may not represent actual
transactions.
Month High Price Low Price
------------------------------- ----------------------------- ------------
July 1999 $4.50 $5.50
------------------------------- ----------------------------- ------------
August 1999 $10.00 $9.00
------------------------------- ----------------------------- ------------
Record Holders
There are 950,000,000 shares of Common Stock authorized for issuance and
50,000,000 shares of Preferred Stock authorized for issuance. As of August 26,
1999, there were 5,292,843 shares of Common Stock issued and outstanding, held
by approximately 2,065 record holders. No shares of Preferred Stock have been
issued and none are outstanding.
Dividends
The Company has not declared any cash dividends on its Common Stock for the last
three years and does not anticipate paying any dividends on its Common Stock in
the foreseeable future. The payment of dividends on the Common Stock is within
the discretion of the board of directors and will depend on the Company's
earnings, capital requirements, financial condition and other relevant factors.
ITEM 6.MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE HEREIN. EXCEPT FOR
HISTORICAL INFORMATION CONTAINED HEREIN, CERTAIN STATEMENTS HEREIN ARE
FORWARD-LOOKING STATEMENTS THAT ARE MADE PURSUANT TO THE SAFE HARBOR PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
FORWARD-LOOKING STATEMENTS INVOLVE ESTIMATED FUTURE NET REVENUES FROM OIL AND
NATURAL GAS RESERVES AND THE PRESENT VALUE THEREOF, PLANNED CAPITAL
EXPENDITURES, INCREASES IN OIL AND GAS PRODUCTION AND DEVELOPMENT, AND THE
COMPANY'S FINANCIAL POSITION, BUSINESS STRATEGY AND OTHER PLANS AND OBJECTIVES
FOR FUTURE OPERATIONS. ALTHOUGH THE COMPANY BELIEVES THAT THESE EXPECTATIONS ARE
REASONABLE, THERE CAN BE NO ASSURANCE THAT THE ACTUAL RESULTS OR DEVELOPMENTS
ANTICIPATED BY THE COMPANY WILL BE REALIZED OR, EVEN IF SUBSTANTIALLY REALIZED,
THAT THEY WILL HAVE THE EXPECTED EFFECTS ON ITS BUSINESS OR OPERATIONS.
<PAGE>
The PGPC pipelines are currently producing positive cash flow from operations
with gas volumes that approximate only 50% of pipeline capacity. PGPC intends to
develop new gas reserves in the area of its pipelines which would increase the
pipelines' usage. Since a portion of pipeline operating costs are fixed, the
Company expects additional gas volumes to create new revenues without
proportionate increases in expenses, which should thus increase net operating
profit margins.
For all gas wells connected to the PGPC pipeline network, PGPC receives a
transportation charge for the gathering of the gas produced therefrom. If such
gas is produced from wells developed by outside parties, Quest still benefits
from the pipeline transportation revenue. When Quest is the owner of a producing
gas well, it receives both the wellhead gas sales as the well owner plus the
pipeline transportation charges. Therefore, Quest enjoys a distinct competitive
advantage for natural gas operations on properties in the PGPC pipeline region.
QES personnel have been involved in the southeast Kansas oil and gas industry
for over 20 years and have accomplished the completion of numerous gas wells
during the past several years with a success rate of over 90%. Most of these new
wells were completed for other parties before the consolidation of assets into
Quest and were converted from abandoned oil wells. These converted gas wells are
still producing an average of about 1,200 mcf of gas per month. A 1,200
mcf/month gas well conversion typically costs between $15,000-$25,000 and
produces net gas sales and pipeline revenue after expenses of approximately
$1,700 per month, or $20,400 per year.
Quest has selected approximately twenty existing well bores on properties within
its pipeline region for conversion into gas wells. Numerous additional well
bores exist in the PGPC pipeline region for study as to applicability for gas
well conversion.
Furthermore, management has concluded from its geological study of the pipeline
region that the drilling of many new gas wells is warranted, in addition to the
conversion of existing well bores. Therefore, it is management's belief that
significant additional cash flow and gas reserves can be realized from the
development of numerous identified gas development opportunities in the PGPC
pipeline region.
The last gas well conversion performed by QES was the Clinesmith #5-4 well,
located in Wilson County, Kansas. This abandoned oil well owned by Quest was
successfully converted by QES personnel into a productive gas well. The well is
located on a Quest owned pipeline which thus also benefits from the increased
production created by this new well. The conversion cost of the Clinesmith #5-4
well was $16,726 and it is producing about $3,500 per month in gross revenue to
Quest, resulting in a very favorable return on capital. Quest has identified
numerous additional conversion candidate well bores and new well locations to
drill that have proven gas reserves which Quest expects to begin developing in
1999 in the region served by the Quest pipeline network. The Clinesmith 5-4 well
is quite exceptional and is expected to be considerably above the average
results anticipated from other well conversions which management has projected
at an average of 40 mcf per day. However, this well is an indication of the
upside potential that can be derived from the better wells in the PGPC pipeline
area.
<PAGE>
Development Plans
Only a fraction of the proven and probable yet undeveloped gas reserves have
been developed in the region served by Quest's pipeline network. Quest intends
to maximize its involvement in the development of these gas reserves as an owner
of the producing wells instead of its previous limited role of contract
developer and pipeline gatherer. None of PGPC's existing pipelines are utilizing
the available taps into the interstate pipeline network because PGPC has only
focused on delivering gas to local markets, which still have ample demand for
additional gas. Therefore, Quest feels confident that dramatically increased gas
reserves can be promptly sold either in local markets or through the interstate
pipeline network.
Quest has identified numerous gas development opportunities in its pipeline
operating region that it believes are low risk which could add significant cash
flow and gas reserves to Quest. The most significant growth opportunity
immediately available to Quest is in the 500 square mile region that is served
by Quest's gas gathering pipeline network. Quest intends to address these gas
development opportunities by launching a serious effort to: (1) develop the
existing gas reserves already owned by the conversion of abandoned oil wells and
the drilling of new gas wells, as appropriate; (2) acquire additional
prospective acreage with a preference towards properties near the existing
company-owned pipelines; (3) develop new reserves via workover of existing wells
or by drilling new wells; and (4) expand the pipeline network to support the
development of new gas reserves. If Quest can accomplish these efforts, which
cannot be assured, it believes it can achieve a significant increase in revenue.
The new unified ownership that has resulted from the recent mergers, coupled
with funding that is being pursued by the Company in a private placement
offering of preferred stock, will allow Quest to begin its planned development
of the area gas reserves. This development is expected to create substantial new
revenue from the ownership of additional gas wells and from the more profitable
utilization of the pipelines.
The private placement offering of preferred stock by the Company is an attempt
to obtain at least two million dollars to be used for development purposes and
to reduce debt. As of August 26, 1999, no preferred stock has been sold. No
assurances can be given that the Company will be even partially successful in
its financing attempts.
The significance of this growth opportunity that is available to Quest is that
of its simplicity and its availability. Quest has the opportunity to
substantially improve its profitability by simply increasing its development of
gas reserves that are readily available in the area of its gas gathering
pipeline network. This development will be conducted by QES personnel, who have
gained much expertise over many years in doing this same work for outside
entities. In the event the Company is successful in obtaining its desired
financing, which cannot be assured, the QES team will immediately begin an
aggressive campaign of low-risk gas development of both the conversion of
existing oil wells and the drilling of new gas wells into known gas reserves,
all in its existing operating area.
Need for the Replacement of Reserves
The proved reserves of the Company will generally decline as they are produced,
except to the extent that the Company conducts revitalization activities, or
acquires properties containing proved reserves, or both. To increase reserves
and production, the Company intends to continue its development drilling and
recompletion programs, to identify and produce previously overlooked or bypassed
zones in shut-in wells, and to acquire additional properties or undertake other
replacement activities. The Company's current strategy is to increase its
reserve base, production and cash flow through the development of its existing
gas fields and through the selective acquisition of other promising properties
where the Company can utilize its existing technology and infrastructure. The
Company can give no assurance that its planned revitalization, development and
acquisition activities will result in significant additional reserves or that
the Company will have success in discovering and producing reserves at
economical exploration and development costs. Furthermore, while the Company's
revenues may increase if prevailing oil and gas prices increase significantly,
the Company's exploration costs for additional reserves may also increase.
<PAGE>
One final consideration concerning replacement of reserves is that drilling new
wells and converting existing wells for gas production is a speculative activity
and the possibility always exists that newly drilled or converted gas wells will
be non-productive or fail to produce enough revenue to be commercially
worthwhile.
Results of Operations
While the Company itself had no revenue from operations during the fiscal years
ended May 31, 1999 and 1998, the subsidiaries acquired on December 30, 1998 did
generate revenue from operations in such periods. In anticipation of the merger
of QES and PGPC into Quest, and the subsequent merger of Quest into the Company,
audited financial statements were prepared for QES and PGPC as of their fiscal
year ended May 31, 1998. As the Company, Quest, QES and PGPC share a fiscal year
end of May 31, and as QES and PGPC comprised the sole operating activities for
the Company during its fiscal year 1999, the combined audited financial
statements of QES and PGPC for the fiscal year ended May 31, 1998, are used as
the source of comparison data for the Company's audited consolidated financial
statements for the fiscal year ended May 31, 1999. The following information
incorporates the operations of Quest and its two subsidiaries with the Company
and should be read in conjunction with the actual financial statements and
accompanying notes found herein.
Revenue from operations for the year ended May 31, 1999 of $1,540,954 increased
13% when compared to revenue of $1,363,769 for the fiscal year ended May 31,
1998. The increase is attributable to a 137% increase in oil and gas sales
revenue which resulted from PGPC's completion of an additional gas well and the
acquisition of additional gas and oil properties. The total revenue increase is
also attributable to a 31% increase in pipeline operations revenue that resulted
from increased pipeline operating revenue to QES. The costs and expenses for the
fiscal year ended May 31, 1999 totaled $1,629,628 which is a 4% increase when
compared to the total costs and expenses incurred for the fiscal year ended May
31, 1998. The largest single increase in costs occurred in the oil and gas lease
operating costs due to the increased number of wells acquired in fiscal year
1999. The net loss before income taxes for fiscal year 1999 was reduced to
($34,241), an 80% reduction from the loss in fiscal year 1998 of ($168,081).
Included in the ($34,241) net loss figure for fiscal year 1999 is $199,281 of
non cash deductions including bad debt write offs and depreciation and
amortization expenses. This decreased loss, in management's opinion, reflects
positive results from the consolidation of producing oil and gas properties into
the Company and continued progress in the Company's effort to increase the
profitability of the gas pipeline network.
Capital Resources And Liquidity
During the fiscal year ended May 31, 1999 a total of $1,631,967 was invested in
fixed assets, long term notes payable decreased by $239,108, net cash from
operating activities was $12,867, and the ending cash balance was $31,288.
During the fiscal year ended May 31, 1998 a total of $195,039 was invested in
fixed assets, long term borrowing increased by $173,367, net cash from operating
activities was $23,323, and the ending cash balance was $6,560. The increased
investment in fixed assets was a result of the various oil and gas property and
pipeline acquisitions that were made after May 31, 1998, while the decrease in
notes payable reflect debt reduction for stock transactions. The increased cash
balance is primarily due to an increase in paid in capital that occurred in
conjunction with the merger activity during fiscal year 1999.
Operating cash flows for the Company are closely aligned with revenues and costs
of Quest's oil and gas operations. Quest's cash flow remains at near breakeven
status and there are currently no significant cash reserves available. The most
significant cash obligations in Quest operations are payroll, operating costs
for the wells and pipelines, and debt service. The Quest cash flow can be
improved significantly with more profitable utilization of its pipelines and
with additional gas wells under its ownership.
<PAGE>
The Company had a deficit in working capital of ($215,466) on May 31, 1999 which
is primarily comprised of accrued interest and the current portion of notes
payable. This is an improvement from the working capital deficit of ($295,102)
on May 31, 1998. Until the anticipated development of area gas reserves is
commenced, the Company is expected to continue operating at near break even cash
flow levels. Such was the case during the fiscal year ended May 31, 1999 in
which the cash balance began with $6,560 and ended with $31,288. No assurance
can be given that the Company will be successful in obtaining the additional
funding required for the development of gas reserves in the Quest pipeline area.
Certain Capital Transactions
During the first six months of fiscal year 1999 and before the Merger, Quest
issued 320,500 shares of its Common Stock in exchange for services provided by
employees and consultants; 2,000,577 shares were exchanged for assets; and
150,000 shares of Common Stock were issued for interest and loan guarantees.
Effective May 1, 1999, the Company eliminated $210,710 of debt plus accrued
interest since March 1, 1997 in exchange for 112,000 restricted shares of common
stock issued to Bonanza Oil & Gas Corporation, a Kansas corporation wholly owned
by Douglas L. Lamb, the Company's president and one of its directors, and Marsha
K. Lamb, Douglas L. Lamb's wife.
Year 2000 Issues
The Company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The "Year 2000" problem
is concerned with whether computer systems will properly recognize date
sensitive information when the year changes to 2000. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail. The Year 2000 problem is pervasive and complex as virtually
every company's computer operation may be affected in some way.
The Company believes that the Year 2000 problem will not pose material
operational problems for the Company's existing computer hardware and software.
To the Company's knowledge, after investigation, no "imbedded technology" (such
as microchips in an electronic control system) of the Company's equipment poses
a material Year 2000 problem.
It is possible, however, that Year 2000 problems incurred by the clients of the
Company could have a negative impact on future operations and financial
performance of the Company, although the Company has not specifically identified
any such problems among its clients or suppliers. Furthermore, the Year 2000
problem may impact other entities with which the Company transacts business and
the Company cannot predict the effect of the Year 2000 problem on such entities
or the resulting effect on the Company. The Company does not plan to have a
contingency plan to operate in the event that any non-compliant client or
supplier systems that materially impact the Company are not remedied by January
1, 2000. As a result, if preventative and/or corrective actions by the Company
or those entities with which the Company does business are not made in a timely
manner, the Year 2000 issue could have a material adverse effect on the
Company's business, financial condition and results of operations.
Because the Company believes that it has no material internal Year 2000
problems, the Company has not expended and does not expect to expend a
significant amount of funds to address Year 2000 issues. It is Company policy to
continue to review its suppliers' Year 2000 compliance and require assurance of
Year 2000 compliance from new suppliers; however, such monitoring does not
involve a significant cost to the Company.
<PAGE>
ITEM 7.FINANCIAL STATEMENTS
Please see the accompanying financial statements attached as pages F-1 through
F-20.
<PAGE>
CLYDE BAILEY P.C.
- --------------------------------------------------------------------------------
Certified Public Accountants
10935 Wurzbach #203
San Antonio, Texas 78230
(210) 699-1287(ofc.)
(888) 699-1287 (210) 691-2911 (fax)
Member:
American Institute of CPA's
Texas Society of CPA's
Report of Independent Certified Public Accountant
To the Board of Directors and Shareholders
HYTK Industries Inc.
Benedict Kansas
We have audited the accompanying consolidated balance sheet of HYTK Industries
Inc. and subsidiaries (Company) as of May 31, 1999 and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for
the year ended May 31, 1999. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on the
financial statements based on our audit. The financial statements of the
Company, as of May 31, 1998, were audited by other auditors whose report dated
September 10, 1998 expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company and
subsidiaries as of May 31, 1999, and the consolidated results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
Clyde Bailey
Certified Public Accountant
July 23, 1999
<PAGE>
HYTK Industries, Inc.
Audited Financial Statements
May 31, 1999
Clyde Bailey, P.C.
Certified Public Accountant
10935 Wurzbach #203
San Antonio, Texas 78230
F-2
<PAGE>
<TABLE>
<CAPTION>
HYTK Industries Inc.
Consolidated Balance Sheet
As of May 31, 1999
A S S E T S
<S> <C> <C>
Current Assets
Cash $ 31,288
Accounts Receivable 294,301
Notes Receivable 68,119
Inventory 22,100
Total Current Assets $ 415,808
Fixed Assets
Equipment $ 538,662
Office Equipment 20,369
Buildings 40,159
Land 5,000
Less: Allowance for Depreciation (197,073)
$ 407,117
Pipeline Assets, net $ 2,549,441
Oil & Gas Leasehold, net $ 575,401
Other Assets
Contracts & Right of Way, net $ 114,355
Organization Costs, net 119,475
Deferred Tax Credit 127,062
$ 360,892
-----------
Total Assets $ 4,308,659
===========
See accompanying summary of accounting policies and notes to financial statements
F-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HYTK Industries Inc.
Consolidated Balance Sheet
As of May 31, 1999
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities
Accounts Payable $ 81,699
Oil & Gas Payable 118,765
Accrued Interest 67,496
Notes Payable, Current Portion 360,097
Accrued Expenses 3,217
-----------
Total Current Liabilities $ 631,274
Non-Current Liabilities
Note Payable $ 1,346,810
Less Portion Shown as Current (360,097)
-----------
$ 986,713
-----------
Total Liabilities 1,617,987
Commitments and contingencies $ --
Stockholders' Equity
Preferred stock, 50,000,000 Shares Authorized $ --
$.001 par value, no shares outstanding
Common Stock, 950,000,000 Shares Authorized
$.001 par value, 5,137,843 shares outstanding 5,133
Paid In Surplus 3,089,788
Retained Earnings (404,249)
------------
$ 2,690,672
-----------
Total Liabilities and Stockholders' Equity $ 4,308,659
===========
See accompanying summary of accounting policies and notes to financial statements
F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HYTK Industries Inc.
Consolidated Statement of Operations
For the Fiscal Years Ended May 31, 1999 and 1998
For the Years Ended May 31
------------------------------------------------
1999 1998
---------- -----------
<S> <C> <C>
Revenue
Gas Pipeline Transmission Fees $ 274,586 $ 286,286
Oil & Gas Production Revenue 164,968 69,552
Oil & Gas Operations 533,280 576,352
Pipeline Operations 396,002 300,705
Pipeline Development 55,456 24,387
Oil & Gas Marketing 59,848 81,032
Other Revenue 56,814 25,455
---------- -----------
Total Revenues $1,540,954 $ 1,363,769
Cost of Revenues
Purchases & Outside Services $ 250,859 $ 242,972
Lease Operating Costs 200,171 70,183
Pipeline Operating Costs 234,156 208,990
Wages 337,199 333,767
Payroll Taxes 27,763 28,505
Utilities-Leases 79,243 94,507
Tags, License, & Equipment Repairs 17,159 13,230
Fuel, Oil, Etc 36,266 53,333
---------- -----------
Total Cost of Revenues $1,182,816 $ 1,045,487
Gross Profit $ 358,138 $ 318,282
See accompanying summary of accounting policies and notes to financial statements
F-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HYTK Industries Inc.
Consolidated Statement of Operations (con't)
For the Years Ended May 31
-----------------------------------------------
General and Administrative Expenses 1999 1998
---------- -----------
<S> <C> <C>
Interest $ 64,229 $ 130,582
Bad Debts 30,424 --
Depreciation & Amortization 168,857 173,541
Insurance 73,774 66,321
Repairs 27,313 58,073
Supplies 7,335 34,824
Telephone 20,352 17,236
Utilities 4,763 6,910
Other Expenses 49,765 39,496
---------- -----------
Total General and Administrative Expenses 446,812 526,983
Income (loss) from continuing operations before
other income and expenses and income taxes (88,674) (208,701)
Other Income
Sale of Assets 54,019 40,079
Interest Income 414 541
---------- -----------
Total Other Income 54,433 40,620
Net (Loss) Provison for Income Taxes (34,241) (168,081)
Income Tax Benefit 5,136 37,252
---------- -----------
Provision for Income Taxes: 5,136 37,252
Net (Loss) $ (29,105) $ (130,829)
========== ===========
Net Loss per share ($0.006) ($0.270)
Weighted Average Number of
Shares Outstanding 4,849,135 $ 4,823,343
See accompanying summary of accounting policies and notes to financial statements
F-7
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HYTK Industries Inc.
Consolidated Statement of Cashflows
For the Years Ended May 31
-----------------------------------------------
1999 1998
---------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Loss $ (29,105) $ (130,829)
Adjustments to Reconcile Excess Contributions to cash
provided from operations:
Depreciation & Depletion 146,036 144,592
Amortization 9,270 6,771
Depletion 13,550 22,178
Accounts Receivable 7,429 (18,730)
Inventory (1,040) (1,540)
Accounts Payable (110,719) 3,161
Oil & Gas Payable (1,421) (25,540)
Notes Receivable 60,994 (20,000)
Deferred Tax Credit 5,136 (37,252)
Accrued Interest Payable (88,245) 76,744
Accrued Expenses 982 3,768
----------- -----------
Total Adjustments 41,972 154,152
Net Cash used in Operating Activities 12,867 23,323
Cash flows from Investing Activities:
Fixed Assets (1,631,967) (195,039)
----------- -----------
Net Cash used in Investing Activities (1,631,967) (195,039)
Cash flows from Financing Activities
Net Long-Term Borrowing (239,108) 173,367
Paid-In-Capital 1,882,936 --
---------- -----------
Net Cash used in Financing Activities 1,643,828 173,367
Net Increase (Decrease) in Cash 24,728 1,651
Cash Balance, Begin of Period 6,560 4,909
Cash Balance, End of Period $ 31,288 $ 6,560
========== ===========
See accompanying summary of accounting policies and notes to financial statements
F-8
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HYTK Industries Inc.
Consolidated Statement of Stockholders Equity
For the Fiscal Years Ended May 31, 1999 and 1998
Common Par Paid-In Retained
Shares Value Capital Earnings Total
----------- ----------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C>
Balance June 1, 1997 52,266 $ 52 1,108,846 (1,123,882) $ (14,984)
Stock Issuance 2,000,000 $ 2,000 -- $ 2,000
Net Income (130,829) $(130,829)
----------- ----------- ------------ ------------ ---------
Balance May 31, 1998 2,052,266 2,052 1,108,846 (1,254,711) $(143,813)
Stock Merger 4,771,077 4,771 2,432,817 (246,315) 2,191,273
Stock Cancellation (2,000,000) (2,000) 2,000 --
Close Retained Earnings (1,123,882) 1,123,882 --
Stock Issued 309,500 310 672,007 -- 672,317
Net Income -- -- (29,105) $ (29,105)
----------- ----------- ------------ ------------ ---------
Balance May 31, 1999 5,132,843 5,133 3,089,788 (404,249) 2,690,672
=========== =========== ============ ============ =========
See accompanying summary of accounting policies and notes to financial statements
F-9
</TABLE>
<PAGE>
HYTK INDUSTRIES INC.
AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
NATURE OF BUSINESS
On December 31, 1998, a Reorganization Agreement and Plan of Merger (the
"Agreement") was completed between the Company, HYTK Holding Co. Inc. (HYTK
Holding), and Quest Resource Corporation (QRC). The Company had been inactive
prior to this transaction. The nature of the business after the merger will be
to service and develop oil and gas wells, and to conduct or promote gas
gathering and transmission of natural gas.
PRINCIPLES OF CONSOLIDATION AND SUBSIDIARIES
Pursuant to the Agreement, HYTK Holding merged with and into
QRC, which survived and became a wholly owned subsidiary of the Company. HYTK
Holding was incorporated for the purpose of facilitating the Merger. QRC agreed
to exchange 100% of its issued and outstanding shares of common stock, or
3,421,077 shares, in exchange for an equal quantity of shares of the Company's
shares, par value $.001 ("Common Stock"). Upon surrender of their stock
certificates evidencing their ownership of QRC, the shareholders were issued a
corresponding quantity of shares in the Company.
The acquisition was accounted for as a re-capitalization of QRC because the
shareholders of QRC controlled the Company after acquisition. Therefore QRC is
treated as the acquiring entity. There were no adjustments to the carrying value
of the assets or liabilities of QRC or the Company in the exchange. The Company
is the acquiring entity for legal purposes and QRC is the surviving entity for
accounting purposes. Although the effective date of the Merger is December 31,
1998, the results of operations and statement of cash flows contains financial
information of May 31, 1998 in accordance with the accounting rules of "pooling
of interests" accounting rules.
Quest Resource Corporation (QRC) was incorporated in Kansas on November 3, 1997
to facilitate the consolidation of a number of related companies. Since its
incorporation, QRC has integrated the operations of two sister companies, Quest
Energy Service, Inc. ("Quest"), a Kansas corporation, and Ponderosa Gas Pipeline
Company, Inc., ("PGPC"). QRC is the holder of 100% of the outstanding stock of
Quest and PGPC.
Quest provides all of the service activities required for the operation and
development of the Company's oil and gas properties and the gas pipelines. Quest
derives approximately 90% of its revenue from servicing PGPC assets.
PGPC primary assets are one hundred and forty miles of gas gathering pipelines
throughout southeast Kansas, oil and gas producing properties and undeveloped
oil and gas reserves.
F-10
<PAGE>
Investments in which the Company does not have a majority voting or financial
controlling interest are accounted for under the equity method of accounting
unless its ownership constitutes less than a 20% interest in such entity for
which such investment would then be included in the consolidated financial
statements on the cost method. All significant inter-company transactions and
balances have been eliminated in consolidation.
MARKETABLE SECURITIES
In accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," (SFAS 115),
the Company classifies its investment portfolio according to the provisions of
SFAS 115 as either held to maturity, trading, or available for sale. At May 31,
1999 and 1998, the Company did not have any investments in its investment
portfolio classified as available for sale and held to maturity.
INCOME TAXES
The Company accounts for income taxes pursuant to the provisions of the
Financial Accounting Standards Board Statement No. 109, "Accounting for Income
Taxes", which requires an asset and liability approach to calculating deferred
income taxes. The asset and liability approach requires the recognition of
deferred tax liabilities and assets for the expected future tax consequences of
temporary differences between the carrying amounts and the tax basis of assets
and liabilities.
ACCOUNTING METHOD
The Company's financial statements are prepared using the
accrual method of accounting. The successful efforts method of accounting is
used for oil & gas property acquisitions, exploration and production activities
as defined by the Securities and Exchange Commission, whereby all costs incurred
in connection with the properties, productive or nonproductive, are capitalized.
Capitalized costs related to proved properties and estimated future costs to be
incurred in the development of proved reserves are amortized using the
unit-of-production method. Capitalized costs are annually subjected to a test of
recoverability by comparison to the present value of future net revenues from
proved reserves, adjusted for the cost of certain unproved properties, are
expensed in the year in which such an excess occurs. Revenues are recognized
when earned and expenses when incurred. Fixed assets are stated at cost.
Depreciation and amortization using the straight-line method for financial
reporting purposes and accelerated methods for income tax purposes.
The estimated useful lives are as follows:
Buildings 25 years
Equipment 10 years
Vehicles 7 years
Pipelines 20 years
F-11
<PAGE>
Depreciation expense for the years ended May 31, 1999 and 1998 was $146,036 and
$144,592, respectively.
EARNINGS PER COMMON SHARE
The Company adopted Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share," which simplifies the computation of earnings per share requiring the
restatement of all prior periods.
Basic earnings per share are computed on the basis of the weighted average
number of common shares outstanding during each year.
Diluted earnings per share are computed on the basis of the weighted average
number of common shares and dilutive securities outstanding. Dilutive securities
having an anti-dilutive effect on diluted earnings per share are excluded from
the calculation.
UNINSURED CASH BALANCES
The Company maintains its cash balances at several financial institutions.
Accounts at the institutions are secured by the Federal Deposit Insurance
Corporation up to $100,000. Periodically, balances may exceed this amount. At
May 31, 1999, there were no uninsured cash balances.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure on
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
YEAR 2000 CONCERNS
The Company has addressed the concerns of potential year 2000 computing
problems, both internally and with external parties and believes that
significant additional costs will not be incurred because of this circumstance.
The Company has performed an evaluation of its computer hardware and software
and has determined that recent enhancements and upgrades have brought it's
systems significantly into compliance with the year 2000 phenomenon and that
existing support agreements are adequate to cope with any remaining issues.
Based upon equipment evaluations and analysis by consulting parties, management
does not believe that significant operational equipment modifications are
necessary.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of financial instruments including marketable securities,
notes and loans receivables, accounts payable and notes payable approximate
their fair values at May 31, 1999.
F-12
<PAGE>
LONG-LIVED ASSETS
Statement of Financial Accounting Standards No. 121 "Accounting for
Impairment of Long-Lived Assets to be Disposed of " requires, among other
things, impairment loss of assets to be held and gains or losses from assets
that are expected to be disposed of be included as a component of income from
continuing operations before taxes on income.
STOCK BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" SFAS No. 123 established a fair value method for accounting for
stock-based compensation plans either through recognition or disclosure. The
Company did not adopt the fair value based method but instead discloses the
effects of the calculation required by the statement.
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, SFAS
No.130 requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. The Company does not have any assets requiring disclosure
of comprehensive income.
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures
about Segments of an Enterprise and Related Information, supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise." SFAS 131
establishes standards for the way that public companies report information about
operating segments in annual financial statements and requires reporting of
selected information about operating segments in interim financial statements
issued to the public. It also establishes standards for disclosures regarding
products and services, geographic areas and major customers. SFAS 131 defines
operating segments as components of a company about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year's financial
statements in order to conform to the current presentation.
F-13
<PAGE>
HYTK INDUSTRIES INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. NOTES RECEIVABLE
Notes and loans receivable at May 31, 1999 comprise the following:
On May 25, 1999, the Company executed a note receivable with Aspen
Ridge Corporation in the amount of $70,000. The note bears an interest rate of
8% per annum, payable monthly in the form of 100% of the net cash revenue after
applicable operating expenses and taxes from the interests in gas wells assigned
to Aspen effective March 1, 1999. This transaction is further explained in Note
10 - Other Income and Expenses. The balance of the note receivable as of May 31,
1999 is $68,119.
<TABLE>
<CAPTION>
2. LONG TERM DEBT
The Company had the following debt obligations at May 31, 1999:
<S> <C>
Note Payable to an individual for gas pipelines improvements. The note was $ 420,226
renewed on October 1, 1998 and calls for an interest rate of 9% to be paid or
accrued. The accrued interest up to January 1, 1999 was paid with the issuance
of 100,000 shares of common stock. The note matures December 31, 2000.
Bank of Commerce - Chanute KS - Various notes secured by equipment, gas 407,295
pipelines, and other assets provided for working capital and asset purchases.
The notes calls for a variable interest rate of an average of 9 % with monthly
payments of $17,750 (principal and interest). The notes have various maturity
dates.
Argus Management - Note dated July 9, 1998 to assist in covering working 100,000
capital. The loan matured July 9, 1999 and carries an interest rate of 15%. The
note has been extended to October 9, 1999.
Waddell Family Trust - Note dated August 15, 1998 to assist in working capital. 43,000
The loan matured June 30, 1999, but was extended to September 30, 1999. The
promissory loan carries an interest rate of 18%.
Bonanza Oil Company - Various notes and advances to assist in working capital 88,416
requirements. Stock was issued for some of this note. Monthly payments in the
amount of $ 2,145 are being paid. Entity is owned by a related party. Interest
has been accrued at the rate of 9%.
BEC of Kansas - Various notes and advances to assist in working capital 41,564
requirements. entity is owned by a related party. Interest has been accrued at
the rate of 9%.
Harold W Volkman Living Trust - Note dated July 1, 1997 for working capital and 34,500
service equipment. The note calls for monthly payments of $500 for six months
beginning July 31, 1997, six monthly payments of $750 beginning January 31,
1998, and twenty-four payments of $1,000 beginning July 31, 1998, and a balloon
payment of $10,500 following these thirty-six payments. There is no provision
for interest in the note.
</TABLE>
F-14
<PAGE>
<TABLE>
<CAPTION>
2. LONG TERM DEBT (con't)
<S> <C>
Note payable to an individual secured in May of 1999 for working capital. Note 50,000
is to mature in May 2000 and carries an interest rate of 9%.
Note payable to Doug & Marsha Lamb for loans for working capital requirements. 78,069
Interest is being accrued at the rate of 9%.
Various other notes from individuals for equipment and vehicles that contains 83,740
various monthly payments and interest rates. -----------
Total Long-Term Debt 1,346,810
Less current maturities (360,097)
Notes Payable - Long-Term $ 986,713
===========
</TABLE>
The following is a summary of annual principal payments due under these notes:
Year Ended May 31, Amount
- ------------------ ------------
2000 $ 360,097
2001 587,323
2002 165,597
2003 and Future Years 233,793
$1,346,810
The balance of the accrued interest is $ 67,496 as of May 31, 1999.
3. STOCKHOLDERS' EQUITY
The company has authorized 950,000,000 shares of common stock, and
50,000,000 preferred shares of stock. As of May 31, 1999, there were 5,137,843
shares of common stock outstanding and no outstanding preferred stock
outstanding.
Pursuant to the merger agreement the retained earning balance of HTYK
was closed to Paid in Surplus as part of consolidation of QRC and HYTK. Also,
2,000,000 shares issued to a consultant was cancelled as part of the agreement.
Prior to the merger QRC, Quest, and PGPC acquired by issuance of their
own common stock certain assets in anticipation of the merger with HYTK. Details
are as follows:
1) Acquired the Ponderosa Pipeline System for 622,027 shares of common
stock. A twenty- mile pipeline segment of the Ponderosa Pipeline System
was appraised by an independent appraiser and placed on the financial
statements with a value of $845,000. This acquisition included a
segment of pipeline known as the Wilwood Pipeline and placed on the
financial statements at a "net" book value of $142,046.
2) Acquired the balance of some oil and gas producing wells from
individuals known as Silver City Production for common stock. The total
shares issued were 167,500 shares and placed on the financial
statements at net book value.
3) Converted debt and accrued interest to equity by issuing common stock.
Issued 474,000 shares of stock for $325,745 of debt plus accrued
interest.
F-15
<PAGE>
Subsequent to the merger certain assets were acquired and debt retired
with the issuance of common stock. The following transactions were recorded in
the Company's financial statements.
1) Bonanza Oil & Gas Co. - Issued 112,000 share of common stock for the
"net" debt forgiveness of $220,710 plus accrued interest.
2) Individual - Issued 30,000 shares of common stock for debt forgiveness
of $39,897 plus accrued interest.
3) Individual - Issued 7,500 shares of common stock for debt forgiveness
of $10,000 plus accrued interest.
4) Individual - Issued 5,000 shares of common stock for incentive for
granting a working capital loan.
5) Shotgun Ridge L.C. - Issued 160,000 shares of common stock for a 10
mile natural gas pipeline system in Southern Kansas. The Company
received an appraisal on the pipeline and recorded the assets on the
financial statements for a value of $ 411,400
4. INCOME TAXES
The components of the provision for income taxes are as follows:
Year ended May 31, 1999 1998
- ------------------ --------------------- ------------------
Current:
Federal $ ( 5,136) $ (37,252)
State -0- -0-
--------------------- ------------------
$ ( 5,136) $ (37,252)
Such income taxes are included in the accompanying consolidated
financial statements as follows:
Income from operations
Extraordinary Items $ ( 5,136) $ (37,252)
-0- -0-
--------------------- ------------------
$ ( 5,136) $ (37,252)
The above provision has been calculated based on Federal and State
statutory rates.
No provision for taxes has been made, due to operating loss carryovers of
approximately $ 478,000 which expire by 2018. The potential tax benefits of the
loss carryforwards are offset by a valuation allowance of the same amount.
5. RELATED PARTY
TRANSACTIONS
At May 31, 1999, outstanding notes payable from the Company's major
stockholders and officers amounted to $97,781 plus accrued interest.
BEC of Kansas Inc. - owned by Doug and Marsha Lamb - Note payable in
the amount of $41,564 for working capital needs in current and prior years plus
BEC of Kansas Inc. ("BEC") holds the contract for natural gas sales and
production contracts. BEC subsequently contracts with PGPC for the transmission
of the natural gas.
Bonanza Oil Company - owned by Doug and Marsha Lamb - Note payable in
the amount of $ 88,416 for oil and gas properties acquired by PRGC in 1997. This
amount was reduced due to the issuance of common stock as part of the
re-capitalization of the Company.
F-16
<PAGE>
6. GOING CONCERN
The financial statements have been prepared on the basis of accounting
principles applicable to a going concern. Accordingly, they do not purport to
give effect to adjustments, if any, that may be necessary should the Company be
unable to continue as a going concern. Although there is not a "substantial"
doubt about the Company's ability to continue as a going concern, there is some
concern. The continuation of the Company's growth is dependent upon a successful
financing or raising of capital through the private placement program further
explained in Note 11, and its ability to establish itself as a profitable
business.
7. SUPPLEMENTAL
CASH FLOW INFORMATION
Year ended May 31, 1999 1998
Cash paid for interest $ 48,461 $ 53,838
Cash paid for income taxes -0- -0-
SUPPLEMENTARY INFORMATION:
During the year ended May 31, 1999, non-cash investing and financing
activities are as follows:
1) Acquired assets for common stock in the amount of $ 1,286,584.
2) Converted debt to equity in the amount of $ 596,352.
8. CONTINGENCIES
Like other oil and gas producers and marketers, the Company's operation
are subject to extensive and rapidly changing federal and state environmental
regulations governing air emissions, waste water discharges, and solid and
hazardous waste management activities. Therefore it is extremely difficult to
reasonably quantify future environmental related expenditures.
<TABLE>
<CAPTION>
9. EARNINGS PER SHARE
The following reconciles the components of the earnings per share (EPS) computation:
1999 1998
Earning per common Income Shares Per-Share Income Shares Per-Share
Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
- ----------------------------- ---------------- ------------------- -------------- ---------------- ------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net Income ($ 29,105) 4,849,135 ($.006) ($ 130,829) 4,826,343 ($ .027)
</TABLE>
The weighted number of shares outstanding is figured based on the number of
shares outstanding at the date of the merger (December 31, 1998) was outstanding
as of June 1, 1997. There are no options granted or outstanding at the present
time.
F-17
<PAGE>
10. OTHER INCOME AND EXPENSE ITEMS
In March of 1999 the Company sold some of its gas production interests
in "Coal Gas Wells" in Southern Kansas. The total sales price noted in the Bill
of Sale is $120,000 comprised of the following:
1) Cash down payment of $50,000.
2) Deferred payment of $70,000 to be paid from the net proceeds
from the sale of gas from the Coal Gas Wells.
3) Payment in an amount equal to 50% of the dollar amount of the
IRC Section 29 credits generated by the Coal Gas Wells during
the period March 1, 1999 through December 31, 2002.
The resulting transaction produced a gain on the sale of $ 54,019 recorded in
the year ended May 31, 1999.
In September of 1997 the Company sold a block of real estate that
generated a net gain of $40,079 that is recorded in the Statement of Operations
for the year ended May 31, 1998.
11. SUBSEQUENT EVENTS
The Company has introduced a Private Placement Memorandum program to
raise capital for working capital and additional oil and gas wells to increase
the production into existing gas pipelines. The Memorandum calls for a maximum
of 500,000 shares of preferred stock to be sold at an offering price of $10.00
per share. The Memorandum calls for a conversion feature of four shares of
common stock to each share of preferred stock at option of the shareholder.
Prior to conversion the preferred stock carries a 10% cash dividend.
No other material subsequent events have occurred that warrants
disclosure since the balance sheet date.
12. - SFAS 69 SUPPLEMENTAL DISCLOSURES (Un-audited)
(1)
Capitalized Costs Relating to
Oil & Gas Producing Activities
----------------------------------
Proved oil and gas properties and related lease equipment:
Developed $ 508,565
Non-developed 2,000
Accumulated depreciation and depletion (49,664)
----------
Net Capitalized Costs $ 458,901
==========
F-18
<PAGE>
(2)
Costs Incurred in Oil and Gas Property
Acquisition, Exploration, and Development Activities
-------------------------------------------------------
Acquisition of Properties Proved and Unproved $ 281,186
Exploration Costs -0-
Development Costs 44,272
----------
Total $ 325,459
=========
(3)
Results of Operations for
Producing Activities
May 31, 1999 May 31, 1998
------------ ------------
Production revenues $ 164,968 $ 69,552
Production Costs 120,839 50,947
Depreciation and depletion 18,569 14,303
--------- ---------
Results of operations for producing activities $ 25,560 $ 4,302
========= =========
(excluding corporate overhead and interest costs)
(4)
Reserve Quantity Information
The following schedule contains estimates of proved oil and natural gas
reserves attributable to the Company. Proved reserves are estimated quantities
of oil and natural gas which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions. Proved - developed reserves
are those which are expected to be recovered through existing wells with
existing equipment and operating methods. Reserves are stated in barrels of oil
(Bbls) and thousands of cubic feet of natural gas (Mcf). Geological and
engineering estimates of proved oil and natural gas reserves at one point in
time are highly interpretive, inherently imprecise and subject to ongoing
revisions that maybe substantial in amount. Although every reasonable effort is
made to ensure that the reserve estimates are accurate, but by their nature
generally less precise that other estimates presented in connection with
financial statement disclosures.
Oil
(Bbls)
Proved developed reserves:
Balance May 31, 1998 181,127
Acquisition of proved reserves 60,749
Revision of previous estimates -0-
Production ( 16,871)
---------
Balance May 31, 1999 225,005
========
F-19
<PAGE>
In addition, to the proved developed producing oil and gas reserves
reported in the geological and engineering reports, the Company holds ownership
interest in various proved - undeveloped properties. The reserve and engineering
reports performed for the Company by an independent engineering consulting firm
reflect additional proved reserves equal to approximately 218,000 BBLS of oil
for these undeveloped properties. The Company has a small amount of natural gas
production, but there has not been a reserve study performed. During the year
ended May 31, 1999 a total of 43,227 Mcf was produced.
The following schedule present the standardized measure of estimated
discounted future net cash flows from the Company's proved developed reserves
for the years ended May 31, 1999 and 1998. Estimated future cash flows were
based on an independent reserve data. Because the standardized measure of future
net cash flows was prepared using the prevailing economic conditions existing at
May 31, 1999 and 1998, it should be emphasized that such conditions continually
change. Accordingly, such information should not serve as a basis in making any
judgment on the potential value of the Company's recoverable reserves or in
estimating future results to operations.
<TABLE>
<CAPTION>
Standardized measures of discounted future net cash flows:
May 31, 1999 May 31, 1998
------------ ------------
<S> <C> <C>
Future production revenues $ 4,306,232 $ 4,471,200
Less: future production costs ( 3,154,315) ( 3,275,377)
------------ -----------
Future cash flows before income taxes 1,151,917 1,195,823
Future income tax (benefits) (345,575) (358,746)
------------ -----------
Future net cash flows 806,342 837,076
Effect of discounting future
Annual net cash flows at 10% ( 268,673) ( 279,416)
------------ ------------
Standardized measure of discounted $ 537,669 $ 557,660
========== ==========
Net cash flows
</TABLE>
F-20
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On January 14, 1999, the Company retained Quest's independent certified public
accountant, Clyde Bailey, P.C., to audit the Company's financial statements.
Seller's and Associates, the Company's previous accountant ("Seller's"), was
dismissed by the Company's board of directors on January 14, 1999, in connection
with the Merger of Quest. This dismissal was unrelated to Seller's competence,
practices and procedures. Seller's financial statement reports did not contain
any adverse opinion, disclaimer of opinion, or modified opinion.
Seller's has provided the SEC a letter, attached hereto as an exhibit and
incorporated by reference, stating that it does not disagree with any of the
foregoing statements regarding the Company's change in certifying accountant.
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
Directors and Executive Officers:
Douglas L. Lamb, age 48, Director and President since January 1998. Mr. Lamb has
been highly involved in gas gathering pipeline operations and construction in
the southeast Kansas region since 1984. He has fostered pipeline construction
and consolidation activities that have resulted in the 150 mile pipeline network
which is operated out of Benedict. He is also responsible for the operation of
about 100 oil and gas wells and has much experience in the drilling and
completion of oil and gas wells in southeast Kansas. Mr. Lamb earned his
Bachelor of Business Administration degree from Wichita State University in
1972.
John C. Garrison, age 47, Director and Treasurer since January 1998. Mr.
Garrison brings to the Quest team expertise in public company activities and
issues. His experience in public company matters has been gained in his service
as Secretary and as a Director for Infinity, Inc., a NASDAQ company (IFNY). Mr.
Garrison has been a Certified Public Accountant in public practice providing
financial management and accounting services to a variety of businesses for over
twenty years. Mr. Garrison holds a Bachelor degree in Accounting from Kansas
State University.
Richard M. Cornell, age 62, Director, Secretary and Vice-President since January
1998. Mr. Cornell has been involved in the oil and gas business in southeast
Kansas as an independent oil and gas producer and as a regional manager for an
international energy company. He is a full time employee of the company and is
responsible for oil & gas lease acquisitions and for regulatory compliance. Mr.
Cornell also participates in the analysis and qualification of development
projects.
All of the Company's directors serve one year terms and are reappointed
annually. The directors of the Company receive no compensation for serving as
such or for attending meetings.
Compliance with Section 16(a) of the Exchange Act
The Company is not aware of any person who was a director, officer, or
beneficial owner of more than ten percent of the Company's Common Stock and who
failed to file reports required by Section 16(a) of the Securities Exchange Act
of 1934 in a timely manner except those listed in this subsection.
ITEM 10. EXECUTIVE COMPENSATION
No compensation in excess of $100,000 was awarded to, earned by, or paid to any
executive officer of the Company during the fiscal years 1999, 1998 and 1997.
The following table provides summary information for the years 1999, 1998 and
1997 concerning cash and noncash compensation paid or accrued by the Company to
or on behalf of its then chief executive officer, Ken W. Kurtz, and to the
Company's current president, Douglas L. Lamb. Mr. Lamb's compensation has been
paid by QES as more fully described in Note (1) below. Mr. Lamb is the president
and a director of the Company, Quest, PGPC, and QES.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLES
------------------------------------------------
Annual Compensation
------------------------------------------------
- --------------------------------------------------------------------------------------
Name and Other Annual
Principal Position Year Salary ($) Bonus ($) Compensation ($)
- ------------------ ----- ---------- --------- ----------------
<S> <C> <C> <C> <C>
Douglas L. Lamb, President 1999 -0-(1) -0-(1) -0-
Ken W. Kurtz,
President 1998 -0- -0-(2) -0-
Ken W. Kurtz,
President 1997 -0- -0- -0-
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------
Long Term Compensation
----------------------------------------------------------------------
Awards Payouts
---------------------------------------- ---------------------------
Restricted Securities Underlying LTIP All Other
Name and Principal Award(s) Options/ Payouts Compensation
Position Year ($) SARs(#) ($) ($)
- ------------------ ------ ---------------- --------------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Douglas L. Lamb,
President 1999 -0- -0- -0- -0-
Ken W. Kurtz,
President 1998 -0- -0- -0- -0-
Ken W. Kurtz,
President 1997 -0- -0- -0- -0-
</TABLE>
(1) Douglas L. Lamb has received a salary while serving as the president of QES.
As of May 31, 1999, his annual salary was $36,000, while his annual compensation
in 1998 was $36,000 and in the years 1997 and 1996 was $33,000. Mr. Lamb also
received 80,766 shares of Common Stock on January 7, 1999 for services he has
rendered to the Company.
(2) Mr. Kurtz received 447,734 shares of Common Stock on January 7, 1999 for
services he rendered to the Company since he was appointed as its sole officer
and director on March 5, 1998. Mr. Kurtz also received $100,000 in the form of a
finder's fee for his role in introducing the Company to Quest. This payment was
made by Quest and was pursuant to a March 5, 1998 Agreement between Park Street
Investments, Inc., a Utah corporation wholly owned by Mr. Kurtz, and the
Company. For more information about this agreement, see "Certain Relationships
and Related Transactions".
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock of the Company as of August 26, 1999, by each
shareholder who is known by the Company to beneficially own more than 5% of the
outstanding Common Stock, by each director and by all executive officers and
directors as a group. The table also sets forth the number and percentage of the
outstanding shares to be owned by each such person or group. The percentages of
ownership and the number of shares beneficially owned are disproportionate due
to joint beneficial ownership making the notes following the table essential for
a complete understanding of the Company's ownership structure.
<PAGE>
<TABLE>
<CAPTION>
The table below only contains information relating to the Company's Common
Stock, as no shares of Preferred Stock have been issued or are outstanding.
Name and Address of Number of Shares Beneficially
Beneficial Owner Owned (1) Percent of Class
- --------------------------------------------------------- --------------------------------- ------------------------
<S> <C> <C>
Marsha K. Lamb (2)
701 East Main Street
Benedict, KS 66714 1,691,793 32.0%
- --------------------------------------------------------- --------------------------------- ------------------------
The Henry F. Mogg M&M Trust (3)
1999 London Town Lane
Titusville, FL 23796 862,050 16.3%
- --------------------------------------------------------- --------------------------------- ------------------------
Crown Properties, LC (4)
701 East Main Street
Benedict, KS 66714 975,000 18.4%
- --------------------------------------------------------- --------------------------------- ------------------------
Bonanza Energy Corporation of Kansas (5)
701 East Main Street
Benedict, KS 66714 508,527 9.6%
- --------------------------------------------------------- --------------------------------- ------------------------
Executive Officers and Directors
- --------------------------------------------------------- --------------------------------- ------------------------
Douglas L. Lamb (7)
701 East Main Street
Benedict, KS 66714 1,691,793 32.0%
- --------------------------------------------------------- --------------------------------- ------------------------
John C. Garrison
701 East Main Street
Benedict, KS 66714 50,000 (8)
- --------------------------------------------------------- --------------------------------- ------------------------
Richard M. Cornell
701 East Main Street
Benedict, KS 66714 17,500 (8)
- --------------------------------------------------------- --------------------------------- ------------------------
All Executive Officers & Directors
as a Group (Three persons) 1,759,293 33.2%
- --------------------------------------------------------- --------------------------------- ------------------------
</TABLE>
(1) The number of shares beneficially owned by the entities above is determined
under rules promulgated by the SEC and the information is not necessarily
indicative of beneficial ownership for any other purpose. Under such rules,
beneficial ownership includes any shares as to which the individual has sole or
shared voting power or investment power and also any shares which the individual
has the right to acquire within 60 days through the exercise of any stock option
or other right. The inclusion herein of such shares, however, does not
constitute an admission that the named stockholder is a direct or indirect
beneficial owner of such shares. Unless otherwise indicated, each person or
entity named in the table has sole voting power and investment power (or shares
such power with his or her spouse) with respect to all shares of capital stock
listed as owned by such person or entity.
<PAGE>
(2) Includes (i) 15,500 shares held by Marsha K. Lamb; (ii) 975,000 shares held
by Crown Properties LC, which is 100% owned by Marsha K. Lamb; (iii) 508,527
shares held by Bonanza Energy Corporation of Kansas, which is jointly owned by
Douglas L. Lamb and Marsha K. Lamb; (iv) 112,000 shares held by Bonanza Oil &
Gas Corporation, which is jointly owned by Douglas L. Lamb and Marsha K. Lamb;
and (v) 80,766 shares held by Douglas L. Lamb. Marsha K. Lamb disclaims
beneficial ownership of the shares specified in clause (v) above.
(3) The Henry F. Mogg M&M Trust is controlled by Henry F. Mogg as its settlor
and trustee with full and exclusive personal power of revocation and amendment
over the Trust as long as he is alive.
(4) Crown Properties, LC is wholly owned by Marsha K. Lamb.
(5) Bonanza Energy Corporation of Kansas is jointly owned by Douglas L. Lamb and
Marsha K. Lamb.
(6) Park Street Investments, Inc. is wholly owned by Ken W. Kurtz, the Company's
former president. For more information on these shares and Park Street's
relationship with the Company, see "Executive Compensation" and "Certain
Relationships and Related Transactions."
(7) Includes (i) 80,766 shares held by Douglas L. Lamb; (ii) 975,000 shares held
by Crown Properties LC, which is 100% owned by Marsha K. Lamb; (iii) 15,500
shares held by Marsha K. Lamb;(iv) 508,527 shares held by Bonanza Energy
Corporation of Kansas, which is jointly owned by Douglas L. Lamb and Marsha K.
Lamb; and (v) 112,000 shares held by Bonanza Oil & Gas Corporation, which is
jointly owned by Douglas L. Lamb and Marsha K. Lamb. Douglas L. Lamb disclaims
beneficial ownership of the shares specified in clauses (ii) and (iii) above.
(8) Does not exceed 1% of the referenced class of securities.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company entered into a Financial Consulting Agreement ("Agreement") with
Park Street Investments, Inc. ("Park Street") on March 5, 1998. Park Street is a
Utah Corporation wholly owned by Ken Kurtz, the Company's former president,
majority shareholder and director. According to the Agreement, Park Street
agreed to assist the Company with its corporate maintenance, administration,
financial statement preparation and securities filings. In addition, Park Street
agreed to actively pursue, negotiate and structure a merger or business
combination with a third party on behalf of the Company. Park Street was
responsible for all such costs until the Company effected a business combination
with another entity. As consideration for its services and payment of the
Company's costs, the Company's board issued 2,000,000 restricted shares of
Common Stock to Park Street at par value of $.001, or $2,000. Park Street
received a cash fee of $100,000 in connection with the merger with Quest and
therefore agreed to cancel the 2,000,000 shares. Park Street has also assumed
any liability of the Company which existed prior to the merger.
Bonanza Energy Corporation of Kansas, a Kansas corporation ("BECK") has been the
sole marketer of gas transported by the gas gathering pipelines involved in
these acquisitions. BECK is owned by Douglas and Marsha Lamb and BECK earns a
fee for the gas marketing services that it provides. BECK has never failed to
sell all of the gas that is available each month and at sales prices that are
competitive. Bonanza Energy Corporation of Kansas is owned by Douglas and Marsha
Lamb.
<PAGE>
On September 8, 1998, one of Quest's subsidiaries, PGPC, issued 443,277 shares
of its common stock to BECK in consideration for the purchase of the majority of
BECK's pipeline assets. BECK is owned by Douglas and Marsha Lamb. Douglas Lamb
is Quest's president and a director for the Company, Quest, PGPC and QES.
On September 11, 1998, one of Quest's subsidiaries, PGPC, issued 66,250 shares
of its common stock to Bonanza Oil & Gas Corporation, a Kansas corporation
("Bonanza"), and assumed $21,375.27 of Bonanza's bank debt in consideration for
a majority of Bonanza's oil and gas properties. Bonanza is owned by Douglas and
Marsha Lamb. Douglas Lamb is president and a director of the Company, Quest,
PGPC and QES.
On October 1, 1998, Quest issued 180,000 shares of its common stock to Dennis
Lamb in recognition of more than 20 years of service in developing the existing
asset base that is now consolidated into Quest. Dennis Lamb is the brother of
Douglas Lamb, the president and a director of the Company, Quest, PGPC and QES.
Argus Management, Inc. has been consulting with Quest since 1995. Argus has
rendered a variety of services to Quest, including loaning money and services in
connection with the Merger transaction described herein. Argus is the obligee of
a Quest July 9, 1998 $100,000 Promissory Note bearing 15% interest with an
October 9, 1999 maturity date.
Effective May 1, 1999 the Company eliminated $210,710 of debt plus accrued
interest since March 1, 1997 in exchange for 112,000 shares of restricted common
stock that was issued to Bonanza Oil & Gas Corporation which is an entity owned
by Douglas L. Lamb and Marsha K. Lamb.
On May 1, 1999, PGPC entered into an Asset Sale and Purchase Agreement
("Purchase Agreement") with Shotgun Ridge Gas System, L.C., a Kansas limited
liability company ("SRGS"), and 4/10 Energy Fund, Inc., a Kansas corporation
("4/10"), whereby PGPC purchased all real and personal property owned by SRGS,
including various pipelines and related oil and gas equipment in exchange for
160,000 shares of the Company's Common Stock. PGPC acquired the assets free of
any liens or ownership encumbrances. For more information on this acquisition,
see Item 2, Description of Property herein. Douglas L. Lamb is president of one
of the members of SRGS and is also president and sole owner of 4/10.
The QES office facility is leased from Crown Properties, LC for $500 per month.
Crown Properties, LC is owned by Marsha Lamb who is also an officer of QES and
PGPC, and is the wife of Douglas L. Lamb.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Index to Exhibits. Exhibits required to be attached by Item 601 of
Regulation S-B are listed in the Index to Exhibits beginning on page 18 of this
Form 10-KSB, which is incorporated herein by reference.
(b) Reports on Form 8-K. The Company did not make any filings on Form 8-K during
the fourth quarter of the fiscal year ended May 31, 1999.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized this September 7TH day of August 1999.
HYTK Industries, Inc.
/s/ Douglas L. Lamb
Douglas L. Lamb, President
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Signature Title Date
/s/ Douglas L. Lamb President/Director September 7, 1999
- ----------------------------
Douglas L. Lamb
/s/ John C. Garrison Director/Treasurer September 7, 1999
- ----------------------------
John C. Garrison
/s/ Richard M. Cornell Director/Secretary/ September 7, 1999
- -------------------------- Vice President
Richard M. Cornell
<PAGE>
INDEX TO EXHIBITS
Exhibit Page
No. No. Description
2 * Reorganization Agreement and Plan of Merger dated
December 31, 1998, between and among HYTK Holding
Co., Inc., Quest Resource Corporation and HYTK
Industries, Inc. (Incorporated herein by reference
to the Company's Form 10-QSB dated August 31, 1998).
3(i) * The Company's Articles of Incorporation
(incorporated herein by reference to the Exhibits to
the Company's Registration Statement on Form S-18,
Registration No. 2-99737-LA ).
3(ii) * The Company's Bylaws, as amended (incorporated
herein by reference to the Exhibits to the Company's
Registration Statement on Form S-18, Registration
No. 2-99737-LA).
10(i)(a) 20 Asset Sale and Purchase Agreement dated May 1, 1999,
by and among Ponderosa Gas Pipeline Company, Inc.,
Shotgun Ridge Gas Systems, L.C., and 4/10 Energy
Fund, Inc.
16 * January 14, 1999 Letter of Seller's and Associates
regarding the change of certifying accountant of
HYTK Industries, Inc. (Incorporated herein by
reference from the Company's Form 8-K filed on
February 24, 1999).
27(i) 34 Financial Data Schedule
ASSET SALE AND PURCHASE AGREEMENT
THIS ASSET SALE AND PURCHASE AGREEMENT is entered into as of the 1st
day of May 1999, by and among the following: Shotgun Ridge Gas System,
L.C., a Kansas limited liability company (hereinafter referred to as
"SRGS");
Ponderosa Gas Pipeline Company, Inc., a Kansas corporation ("PGPC");
and
4\10 Energy Fund, Inc., a Kansas corporation ("4\10").
WHEREAS, SRGS is in the business of transporting and marketing natural
gas (the "Business"); and
WHEREAS, PGPC desires to purchase the Assets (as hereinafter defined)
from SRGS in accordance with and subject to the terms and conditions
hereinafter set forth; and
WHEREAS, 4\10 has a perfected security interest in the Assets and
agrees to release all of its Encumbrances on the Assets in exchange for
substitution of collateral by SRGS;
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements hereinafter set forth, the parties hereto hereby
agree as follows:
1. Definitions and References. As used herein, the following terms
shall have the meanings set forth below, unless the context otherwise
requires:
"Assets" mean the Business and all real and personal property, both
tangible and intangible, wherever located, that is owned or held by the
SRGS and used or useful in connection with the Business as follows:
(a) all fixtures, easements and rights of way, as
more fully described in Exhibit "A";
(b) all meters, pipeline, gauges, valves,
compressors, regulators, fittings, connections,
machinery, equipment, inventory, supplies, and other
property owned or held by SRGS and used or useful in
connection with the Business, as more fully described
in Exhibit "B";
(c) all permits, licenses, gas purchase and sale
contracts, the name "Shotgun Ridge Gas System", and
other intangible assets owned or held by SRGS and
used in connection with the Business, including,
without limitation, the contracts described in
Exhibit "B"; and
(d) all telephone numbers, books, papers, files
and records pertaining to the Business, but not the
articles of organization, operating agreement,
membership interest transfer records, minutes of
meetings or other organizational records of SRGS.
"Closing" means the closing of the purchase, assignment and sale of the
Assets contemplated hereunder.
"Closing Date" means the time and date on which the Closing takes
place, as established by Section 6.01.
"Encumbrances" means perfected security interest held by 4\10 and any
other mortgage, pledge, lien, claim, security interest, agreement, restriction,
defect in title, easement, encumbrance or charge held by 4\10.
"Consideration" shall have the meaning specified in Section 2.02.
2. Sale and Purchase of Assets; Consideration; Release of Encumbrance.
2.01 Asset Sale. On the basis of the representations, warranties
and agreements contained herein, and subject to the terms and
conditions hereof, SRGS agrees to sell, assign, transfer, convey and
deliver to PGPC, and PGPC agrees to purchase from SRGS, the Assets at
the Closing.
Prior to the Closing Date, SRGS agrees to obtain title to an account receivable
owed by PGPC to 4\10 in the amount of $10,200. SRGS agrees to cancel such
obligation on the Closing Date. The cancellation of the obligation shall be
evidenced by the execution of the instrument attached as Exhibit "F" to this
agreement.
2.02 Consideration. For and in consideration of the conveyances and
assignments described herein, PGPC agrees to pay to SRGS, and SRGS
agrees to accept from PGPC, the following consideration (the
"Consideration"): delivery of 160,000 shares of restricted common stock
of HYTK Industries, Inc., a Nevada corporation. Such shares shall be
issued in blank and with an assignment separate from certificate
executed by PGPC to SRGS.
2.03 Release of Encumbrances. At the Closing, SRGS agrees to
immediately convey 150,000 shares of restricted common stock of HYTK
Industries, Inc. to 4\10. Such conveyance shall be evidenced by an
assignment separate from certificate executed by SRGS to 4\10. At the
Closing, 4\10 agrees to release the Encumbrances by executing the lien
release and satisfaction of loan that is attached as Exhibit "D" to
this agreement and by executing two Forms UCC-2, release of security
interest, that are attached as Exhibit "E". As additional consideration
for the conveyance of the HYTK common stock, 4\10 agrees to assign to
SRGS all of 4\10's right, title and interest in an account receivable
from PGPC to 4\10 in the amount of $10,200.
2.05 Assumption of Liabilities. PGPC shall not assume any
liabilities or obligations of SRGS, except for the following
obligation:
Promissory note: dated June 5, 1995 in the principal amount of
$45,098.53
Obligee: Bonanza Energy Corporation
Assignee: Quest Energy Service
Security Agreement: dated June 5, 1995 and grants security
interest in pipeline
Financing Statement: No. 2145804 filed June 8, 1995
The Closing shall be contingent upon Quest Energy Service consenting to the
assignment of the obligation by executing the consent attached as Exhibit "C".
2.06 Sale of Gas in Pipeline. The assignment of inventory shall
include all gas in the pipeline on the Closing
Date.
3. Representations and Warranties by SRGS. SRGS represents and
warrants to PGPC as follows:
3.01 Organization and Standing. SRGS is a limited liability company
that is duly organized under the laws of the State of Kansas. SRGS has
failed to timely file annual reports with the Kansas Secretary of
State. However, SRGS has not been liquidated or dissolved. Except for
such failure and except for the terms of the security agreement with
Bonanza Energy Corporation, the limited liability company has the full
and unrestricted power and authority to enter into and perform the
terms of this agreement and the transactions contemplated hereby.
3.02 Authorization. The execution, delivery and performance of this
agreement and of the agreements and instruments called for hereunder,
and the consummation of the transactions contemplated hereby and
thereby, have been duly and validly authorized by all necessary actions
of SRGS (none of which actions have been modified or rescinded and all
of which actions are in full force and effect). This agreement
constitutes a valid and binding agreement and obligation of SRGS,
enforceable in accordance with its terms.
3.03 Litigation: Compliance with Law. Except for the forfeiture of
the filing with the Kansas Secretary of State, there is no action,
suit, investigation, claim, arbitration or litigation pending or, so
far as SRGS knows, threatened against or involving SRGS, the Assets,
the Business and its operations. The Business is not being operated
under or subject to any order, judgment, decree or injunction of any
court, arbitrator or governmental authority. Except for the forfeiture
of the filing with the Kansas Secretary of State, SRGS has complied and
is in compliance in all material respects with all laws, ordinances,
regulations, awards, orders, judgments, decrees and injunctions
applicable to SRGS, to the Assets, to the Business and operations.
3.04 Assets; Consents. The Assets constitute all of the real and
personal property, both tangible and intangible, that are used, held
for use, or necessary for the Business and operations of the Business
as presently conducted. SRGS is the sole owner of and has good and
marketable title to all Assets free and clear of any liens or
encumbrances, except for the Encumbrances and except for the security
interest granted to Bonanza Energy Corporation. The obligation to
Bonanza Energy Corporation has been assigned to Quest Energy Service.
Subject to the terms of the Encumbrances and the security interest
granted to Bonanza Energy Corporation, the Assets are transferable by
SRGS's sole act and deed, and no consent on the part of any other
person is necessary to validate the transfer to PGPC.
3.05 Condition of Tangible Assets. All tangible Assets are in good
operating condition and repair, free of defects, and are suitable,
adequate and fit for the uses for which thy are intended or are being
used.
3.06 Disclosure. All facts of material importance to the Assets and
to the Business have been fully and truthfully disclosed to PGPC. No
representation or warranty by SRGS and no document or exhibit to be
furnished or delivered to PGPC pursuant to this agreement, contains or
will contain any material untrue or misleading statement of fact or
omits or will omit any fact necessary to make the statements contained
therein not materially misleading.
4. Representations and Warranties by PGPC. PGPC represents, warrants
and covenants to SRGS as follows:
4.01 Organization and Standing. PGPC is a corporation duly
organized, validly existing, and in good standing under the laws of the
State of Kansas. PGPC has the requisite corporate power and corporate
authority to enter into and perform the terms of this agreement and to
carry out the transactions contemplated hereby.
4.02 Authorization. The execution, delivery and performance of this
agreement and of the agreements and instruments called for hereunder,
and the consummation of the transactions contemplated hereby and by
such agreements and instruments, have been duly and validly authorized
by all necessary actions of PGPC (none of which actions have been
modified or rescinded and all of which actions are in full force and
effect). This agreement constitutes, and upon execution and delivery
each such agreement and instrument will constitute, a valid and binding
agreement and obligation of PGPC, enforceable in accordance with its
respective terms.
5. Representations and Warranties by 4\10. 4\10 represents, warrants
and covenants to PGPC as follows:
5.01 Organization and Standing. 4\10 is a Kansas corporation that
has the requisite corporate power and corporate authority to enter into
and perform the terms of this agreement and to carry out the
transactions contemplated hereby.
5.02 Authorization. The execution, delivery and performance of this
agreement and of the agreements and instruments called for hereunder,
and the consummation of the transactions contemplated hereby and by
such agreements and instruments, have been duly and validly authorized
by all necessary actions of 4\10 (none of which actions have been
modified or rescinded and all of which actions are in full force and
effect). This agreement constitutes, and upon execution and delivery
each such agreement and instrument will constitute, a valid and binding
agreement and obligation of PGPC, enforceable in accordance with its
respective terms. 5.03 Release of Encumbrance. If, at any time after
the Closing, PGPC requests any additional evidence of the release of
the Encumbrances, 4\10 shall promptly provide such evidence to PGPC.
6. The Closing.
6.01 Closing. Unless otherwise agreed by the parties hereto, the
Closing hereunder shall be held on May 1, 1999. The assignment and
delivery of assets shall be effective at 12:01 a.m. on May 1, 1999.
6.02 Deliveries by SRGS. At or before the Closing, SRGS shall
deliver to PGPC:
6.02(a) Transfer Documents. Bills of sale and assignments, dated as of
the Closing Date, in form sufficient to transfer and convey title to
the Assets to PGPC.
6.02(b) Release of Encumbrance. A duly executed release and
satisfaction of the Encumbrances by 4/10, a duly executed Form UCC-2
evidencing release of the 4/10 security interest, and a duly executed
consent by Quest Energy Service. 6.02(c) Corporate Resolutions. Copies
of the resolutions of members of SRGS, certified as of the Closing Date
as being correct and complete and then in full force and effect,
authorizing the execution, delivery and performance of this agreement.
6.03 Deliveries by PGPC. At or before the Closing, PGPC shall
deliver to SRGS:
6.03(a) Consideration. PGPC shall deliver, in consideration of SRGS
entering this transaction, a certificate issued in blank for 160,000
shares of restricted common stock of HYTK Industries, Inc. Such
conveyance shall be evidenced by an assignment separate from
certificate executed by PGPC to SRGS.
6.03(b) Resolutions. Copies of the resolutions of the directors of
PGPC, certified as being correct and complete and then in full force
and effect, authorizing the execution, delivery and performance of this
agreement.
6.04 Deliveries by 4\10. At or before the Closing, 4\10 shall
deliver to PGPC:
6.04(a) Release of Encumbrance. A duly executed release and
satisfaction of the Encumbrances and a duly executed Form UCC-2
releasing the security interest.
6.04(b) Corporate Resolutions. Copies of the resolutions of the
directors of 4\10, certified as being correct and complete and then in
full force and effect, authorizing the execution, delivery and
performance of this agreement
7. Risk of Loss. The risk of loss or damage by fire or other casualty
or cause to the Assets until the Closing Date shall be upon SRGS.
8. Survival; Indemnification.
8.01 Survival of Representations. Except as otherwise specified,
the representations, warranties, covenants and agreements made by SRGS,
PGPC, and 4\10 in this agreement or pursuant hereto shall survive the
Closing Date for a period of one year.
8.02 Indemnification. Each party agrees to indemnify, defend and
hold harmless the other parties from and against any and all demands,
claims, complaints, actions or causes of action, suits, proceedings,
investigations, arbitrations, assessments, losses, damages,
liabilities, costs and expenses, including, but not limited to,
interest, penalties and attorneys' fees and disbursements asserted
against, imposed upon or incurred by such other parties, directly or
indirectly, by reason of or resulting from (a) any liability or
obligation of or claim against the indemnifying party (whether
absolute, accrued, contingent or otherwise and whether a contractual,
tax or any other type of liability or obligation or claim) not
expressly assumed, arising out of, relating to, or resulting from the
Assets or the Encumbrance during the period prior to the Closing Date;
(b) any misrepresentations and warranties of contained in or made
pursuant to this agreement; or (c) any noncompliance with any
covenants, agreements or undertakings contained in or made pursuant to
this agreement.
8.03 Conditions of Indemnification. The obligations and liabilities
of the parties with respect to their respective indemnities pursuant to
this Section 8, resulting from any claim or other assertion of
liability by third parties (hereinafter called collectively, "Claims"),
shall be subject to the following terms and conditions:
8.03(a) The party seeking indemnification (the "Indemnified Party")
must give the other party or parties, as the case may be (the
"Indemnifying Party"), notice of any such Claim promptly after the
Indemnified Party receives notice thereof.
8.03(b) The Indemnifying Party shall have the right to undertake, by
counsel or other representatives of its own choosing, the defense of
such claim.
8.03(c) In the event that the Indemnifying Party shall elect not to
undertake such defense or, within a reasonable time after notice of any
such Claim from the Indemnified Party, shall fail to defend, the
Indemnified Party (upon further written notice to the Indemnified
Party) shall have the right to undertake the defense, compromise or
settlement of such Claim, by counsel or other representatives of its
own choosing, on behalf of and for the account and risk of the
Indemnifying Party (subject to the right of the Indemnifying Party to
assume defense of such Claim at any time prior to settlement,
compromise or final determination thereof).
8.03(d) Anything in this Section 8 to the contrary notwithstanding,
(i) if there is reasonable probability that a Claim may materially and
adversely affect the Indemnified Party other than as a result of money
damages or other money payments, the Indemnified Party shall have the
right, at its own cost and expense, to participate in the defense,
compromise or settlement of the Claim; (ii) the Indemnifying Party
shall not, without the Indemnified Party's written consent, settle or
compromise any Claim or consent to entry of any judgment that does not
include as an unconditional term thereof the giving by the claimant or
the plaintiff to the Indemnified Party of a release from all liability
in respect of such Claim; and (iii) in the event that the Indemnifying
Party undertakes defense of any Claim, the Indemnified Party, by
counsel or other representative of its own choosing and at its sole
cost and expense, shall have the right to consult with the Indemnifying
Party and its counsel or other representatives concerning such Claim,
and the Indemnifying Party and the Indemnified Party and their
representative counsel or other representatives shall cooperate with
respect to such Claim.
9. Specific Performance. SRGS and 4\10 acknowledges that the Assets to
be sold and delivered to PGPC pursuant to this agreement are unique and that
PGPC has no adequate remedy at law if SRGS and 4\10 shall fail to perform any of
their obligations hereunder. SRGS and 4\10 therefore confirm and agree that
PGPC's right to specific performance is essential to protect the rights and
interests of PGPC. Accordingly, in addition to any other remedies that PGPC may
have hereunder or at law or in equity or otherwise, SRGS and 4\10 hereby agree
that PGPC shall have the right to have all obligations, undertakings, agreements
and other provisions of this agreement specifically performed by SRGS and 4\10.
In addition, PGPC shall have the right to obtain an order or decree of such
specific performance in any of the courts of the United States or of any state
or other political subdivision thereof.
10. Additional Actions and Documents. Each of the parties hereto agrees
that it will, at any time prior to, at, or after the Closing Date, take or cause
to be taken such further actions, and execute, deliver and file, or cause to be
executed, delivered and filed, such further documents and instruments as may be
necessary or reasonably requested in connection with the consummation of the
transactions contemplated hereby in order to fully effectuate the purposes,
terms and conditions of this agreement.
11. Expenses. Each party hereto shall pay its own expenses incurred in
connection with this agreement and in the preparation for and consummation of
the transactions provided for herein.
12. Notices. All notices, demands, requests or other complications that
may be or are required to be given or made by a party to any other party
pursuant to this agreement shall be in writing and shall be mailed by
first-class mail (registered or certified, return receipt requested, postage
prepaid), transmitted by telegram or telex, express delivery service,
hand-delivered, addressed as follows:
(i) If to PGPC: Ponderosa Gas Pipeline Company, Inc.
P. O. Box 100
Benedict, Kansas 66714
(ii) If to SRGS: Churchill Energy Corporation
P. O. Box 100
Benedict, Kansas 66714
(iii) If to 4\10: 4\10 Energy Fund, Inc.
P. O. Box 100
Benedict, Kansas 66714
13. Waiver. No delay or failure on the part of any party hereto in
exercising any right, power or privilege under this agreement, or under any
other instrument or document given in connection with or pursuant to this
agreement, shall impair any such right, power or privilege or be construed as a
waiver of any default or any acquiescence therein. No single or partial exercise
of any such right, power or privilege shall preclude the further exercise of
such right, power or privilege, or the exercise of any other right, power or
privilege. No other actions taken or failed to be taken by any party, including,
without limitation, any investigation or inspection by or on behalf of such
party, shall be deemed to constitute a waiver, extension or acknowledgment by
such party of compliance with any representation, warranty, condition, agreement
or indemnification set forth in this agreement. No waiver shall be valid against
any party hereto unless made in writing and signed by the party against whom
enforcement of such waiver is sought, and then only to the extent expressly
specified therein.
14. Benefit and Assignment. Except as hereinafter specifically provided
in this Section 14, no party hereto shall assign this agreement, in whole or in
part, whether by operation of law or otherwise, without the prior written
consent of SRGS (if the assignor is PGPC) or PGPC (if the assignor is SRGS), and
any purported assignment contrary to the terms hereof shall be null, void and of
no force and effect.
This agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors and assigns as permitted
hereunder. No person or entity other than the parties hereto is or shall be
entitled to bring any action to enforce any provision of this agreement against
any of the parties hereto, and the covenants and agreements set forth in this
agreement shall be solely for the benefit of, and shall be enforceable only by,
the parties hereto or their respective successors and assigns as permitted
hereunder.
15. Entire agreement; Amendment. This agreement, including the
Schedules and Exhibits hereto and other instruments and documents referred to
herein or delivered pursuant hereto, contains the entire agreement among the
parties with respect to the subject matter hereof and supersedes all prior oral
or written agreements, commitments or understandings with respect to such
matters. No amendment, modification or discharge of this agreement shall be
valid or binding unless set forth in writing and duly executed by the party
against whom enforcement of the amendment, modification or discharge is sought.
16. Severability. If any part of any provision of this agreement or any
other agreement, document or writing given pursuant to or in connection with
this agreement shall be invalid or unenforceable under applicable law, such part
shall be effective to the extent of such invalidity or unenforceability only,
without in any way affecting the remaining parts of such provisions or the
remaining provisions of said agreement.
17. Headings. The headings of the sections and subsections contained in
this agreement are inserted for convenience only and do not form a part or
affect the meaning, construction or scope thereof.
18. Governing Law. This agreement, the rights and obligations of the
parties hereto, and any claims or disputes relating thereto, shall be governed
by and construed under and in accordance with the laws of the State of Kansas,
excluding the choice of law rules thereof.
19. Signature in Counterparts. This agreement may be executed in
separate counterparts, none of which need contain the signatures of all parties,
each of which shall be deemed to be an original, and all of which together
constitute one and the same instrument. It shall not be necessary in making
proof of this agreement to produce or account for more than the number of
counterparts containing the respective signatures of, or on behalf of, all the
parties hereto.
IN WITNESS WHEREOF, each of the parties hereto has executed this
agreement, or has caused this agreement to be duly executed and delivered in its
name on its behalf, all as of the day and year first above written.
"SRGS"
SHOTGUN RIDGE GAS SYSTEM, L.C.
By: Churchill Energy Corporation, Member
By: /s/ Douglas L. Lamb
-------------------------------------
Douglas L. Lamb, President
By: Ponderosa Gas Pipeline Company, Inc., Member
By: /s/ Douglas L. Lamb
-------------------------------------
Douglas L. Lamb, President
"PGPC"
PONDEROSA GAS PIPELINE COMPANY, INC.
By: /s/ Douglas L. Lamb
-------------------------------------
Douglas L. Lamb, President
"4\10"
4\10 ENERGY FUND, INC.
By: /s/ Douglas L. Lamb
-------------------------------------
Douglas L. Lamb, President
Consent to Sale and to Assignment of Note and Security Interest
BONANZA ENERGY CORPORATION
By: /s/ Douglas L. Lamb
----------------------------------
Douglas L. Lamb, President
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000775351
<NAME> HYTK Industries, Inc.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> MAY-31-1999
<EXCHANGE-RATE> 1.000
<CASH> 31,288
<SECURITIES> 0
<RECEIVABLES> 362,420
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<DEPRECIATION> (197,073)
<TOTAL-ASSETS> 4,308,659
<CURRENT-LIABILITIES> 631,275
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0
0
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<INCOME-PRETAX> (34,241)
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<INCOME-CONTINUING> (29,405)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (29,105)
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