UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended November 30, 1998
[ ] 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)
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 [XX] No [ ]
The number of shares outstanding of Registrant's common stock ($0.001 par
value) as of January 14, 1999, was 4,823,343.
Total of Sequentially Numbered Pages: 13
Exhibit Index on Page: 13
<PAGE>
TABLE OF CONTENTS
Item 1. Financial Statements........................................Page 3
Item 2. Management's Discussion And Analysis or Plan of Operations..Page 4
Merger with Quest Resource Corporation......................Page 4
Nature and Scope of Quest's Business: PGPC and QES..........Page 5
PGPC...................................................Page 5
QES....................................................Page 6
Change in Control of the Company............................Page 6
Post-Merger Expansion Plans.................................Page 8
Certain Factors That May Affect Future Results..............Page 8
General Risks of the Natural Gas Business..............Page 8
Substantial Capital Requirements.......................Page 8
Need for Additional Development........................Page 9
Replacement of Reserves................................Page 9
Uncertainty of Reserve Estimates.......................Page 9
Operating Hazards......................................Page 9
Product Liability.....................................Page 10
Competition...........................................Page 10
Dependence on Key Employees and Technical Personnel...Page 10
Governmental Regulations..............................Page 10
General Economic Risks/Potential Volatility
of Stock Price........................................Page 10
Future Acquisitions...................................Page 10
Item 5. Other Information..........................................Page 11
Change in Certifying Accountant............................Page 11
Item 6. Exhibits and Reports on Form 8-K...........................Page 11
SIGNATURES...........................................................Page 12
INDEX TO EXHIBITS....................................................Page 13
Page 2
<PAGE>
PART I
Item 1. Financial Statements
Unless otherwise indicated, the term "Company" refers to HYTK Industries,
Inc., and its current and former subsidiaries and predecessors. Unaudited
interim financial statements including a balance sheet for the Company as of
the fiscal quarter ended November 30, 1998 and statements of operations and
statements of cash flows for the interim period up to the date of such balance
sheet and the comparable period of the preceding fiscal year are attached
hereto as Pages F-1 through F-5 and are incorporated herein by this reference.
The Company is also attaching as pages F-6 through F-11 pro forma unaudited
financial statements for the period ended November 30, 1998, reflecting the
merger of its wholly owned subsidiary, HYTK Holding Co., Inc., and Quest
Resource Corporation effective on December 31, 1998. Finally, attached hereto
as pages F-12 through F-32 are audited financial statements for the operating
subsidiaries of Quest Resources Corporation, Quest Energy Service, Inc. and
Ponderosa Gas Pipeline Company, Inc., for the year ended May 31, 1998.
[ THIS SPACE WAS INTENTIONALLY LEFT BLANK ]
Page 3
<PAGE>
HYTK INDUSTRIES, INC.
Unaudited Balance Sheet
November 30, 1998
ASSETS
Current Assets ...................... $ --
Other Assets ........................ --
-----------
TOTAL ASSETS ........................ $ --
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and
accrued expenses ............... $ 15,013
-----------
Commitments and contingencies ....... --
Stockholders' Equity (Deficit)
Preferred stock, par value $.001,
50,000,000 shares authorized,
no shares issued and
outstanding .................... --
Common stock, par value $.001
950,000,000 shares authorized,
2,052,266 issued and outstanding 2,052
Additional paid-in-capital ..... 1,108,846
Retained earnings (deficit) .... (1,125,911)
-----------
Net Stockholders' equity (Deficit) (15,013)
-----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY ................ $ --
===========
See notes to unaudited financial statements.
F-1
<PAGE>
<TABLE>
HYTK INDUSTRIES, INC.
Unaudited Statements of Operations
For the Quarters and the Six Months Ended
November 30, 1998 and 1997
<CAPTION>
Quarter Ended Nine Months Ended
November 30, November 30,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues................. $ -- $ -- $ -- $ --
---------- ---------- ---------- ----------
General and
administrative expenses.. -- -- -- --
---------- ---------- ---------- ----------
-- -- -- --
---------- ---------- ---------- ----------
Non-Operating
Income (Expense)
Gain on sale of interest
in property............ -- -- -- --
Interest expense ...... -- -- -- 29
---------- ---------- ---------- ----------
Total non-operating
Income (Expenses)...... -- -- -- 29
Net Income (Loss) ....... $ -- $ -- $ -- $ (29)
========== ========== ========== ==========
Earnings (Loss) per share:
Net income/loss) ...... (0.00) (0.00) (0.00) (0.00)
========== ========== ========== ==========
Weighted-average shares
outstanding ............ 2,052,266 52,266 2,052,266 52,266
</TABLE>
See notes to unaudited financial statements.
F-2
<PAGE>
<TABLE>
HYTK INDUSTRIES, INC.
Unaudited Statements of Stockholders' Equity
November 30, 1998
<CAPTION>
Common Stock
---------------- Retained Stock-
Additional Earnings holders
Number Par Paid In (Deficit) Equity
of Shares Value Capital Accumulated (Deficit)
----------- ------ ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Balance,
May 31, 1997.... 52,266 $ 52 $ 1,108,846 $ (1,123,882) $ (14,984)
Issuance of
Stock........... 2,000,000 2,000 -- -- --
Net Income...... -- -- -- (2,029) (2,029)
----------- ------ ----------- ------------- -----------
Balance,
May 31, 1998.... 2,052,266 2,052 1,108,846 (1,125,911) (15,013)
Net Loss........ -- -- -- -- --
----------- ------ ----------- ------------- -----------
Balance,
November 30,
1998............ 2,052,266 $2,052 $ 1,108,846 $ (1,125,911) $ (15,013)
=========== ====== =========== ============= ===========
</TABLE>
See notes to unaudited financial statements.
F-3
<PAGE>
<TABLE>
HYTK INDUSTRIES, INC.
Unaudited Statements of Cash Flows
For the Six Months Ended November 30, 1998 and 1997
<CAPTION>
Six Months Ended
November 30, November 30
1998 1997
----------- -----------
<S> <C> <C>
Cash Flows From Operating Activities
Net income (Loss) ............. $ -- $ (29)
Noncash expenses included in
net income (Loss):
Services paid with common
stock ..................... -- --
Increase (Decrease)
in accounts payable
and accrued expenses ...... -- 29
------------ -----------
Net cash provided by (used for)
Operating Activities .............. -- --
------------ -----------
Cash Flows From Investing Activities
Net cash provided by (used for)
Investing Activities .............. -- --
------------ -----------
Cash Flows From Financing Activities
Repayment of note payable,
related party ..................... -- --
------------ -----------
Net cash provided by (used for)
Financing Activities .............. -- --
------------ -----------
Increase (decrease) in cash and
cash equivalents .................. -- --
Cash and cash equivalents,
beginning of year ................. -- --
------------ ------------
Cash and cash equivalents,
end of year ....................... $ -- $ --
============ ============
Supplemental Disclosures of Cash
Flow Information
Cash payments for Interest .... $ -- $ --
Cash payment for Income Taxes . $ -- $ --
</TABLE>
See notes to unaudited financial statements.
F-4
<PAGE>
HYTK INDUSTRIES, INC.
NOTES TO CONSOLIDATED UNAUDITED CONDENSED FINANCIAL STATEMENTS
FOR THE FISCAL QUARTER ENDED NOVEMBER 30, 1998
1. Basis of Presentation
The accompanying consolidated unaudited condensed financial statements
have been prepared by management in accordance with the instructions in Form
10-QSB and, therefore, do not include all information and footnotes required
by generally-accepted accounting principles and should, therefore, be read in
conjunction with the Company's Annual Report to Shareholders on Form 10-KSB
for the fiscal year ended May 31, 1998. These statements do include all normal
recurring adjustments which the Company believes necessary for a fair
presentation of the statements. The interim operations results are not
necessarily indicative of the results for the full year ended May 31, 1998.
4. Additional footnotes included by reference
Except as indicated in Notes 1 above, there have been no other material
changes in the information disclosed in the notes to the financial statements
included in the Company's Annual Report on Form 10-KSB for the year ended May
31, 1997. Therefore, those footnotes are included herein by reference.
F-5
<PAGE>
Pro Forma Financial Information (Unaudited)
The following pro forma summary financial information have been prepared
giving effect to the merger of HYTK Industries, Inc.("Company or HYTK") , HYTK
Holding Co. Inc. ("HYTK Holding"), and Quest Resource Corporation ("QRC") as
if the transaction had taken place at November 30, 1998 for the pro forma
condensed consolidated balance sheet, and November 30, 1998 for the pro forma
condensed income statement for the period from June 1, 1998 to November 30,
1998.
The merger has been accounted for as a "pooling". The carrying values of
assets and liabilities have been placed on the balance sheet at "historical"
costs, and adjusted for transactions that have occurred as a result of the
merger.
A Reorganization Agreement and Plan of Merger (the "Agreement") was closed on
December 31, 1998, between and among the Company, HYTK Holding, and QRC.
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. Pursuant to 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 common stock, par value $.001 ("Common Stock"). Upon
surrender of their stock certificates evidencing their ownership of QRC, the
shareholders of QRC will be issued a corresponding quantity of shares of the
Common Stock.
The pro forma financial information is not necessarily indicative of the
results of operations or the financial position which would have been attained
had the merger been consummated at either of the foregoing dates or which may
be attained in the future. The pro forma financial information should be read
in conjunction with the historical consolidated financial statements of HYTK
Industries, Inc., and the historical financial statements of Ponderosa Gas
Pipeline Co., Inc. and Quest Energy Service, Inc. Both being subsidiaries of
Quest Resource Corporation.
F-6
<PAGE>
<TABLE>
HYTK Industries Inc.
Proforma Condensed Consolidated Balance Sheet
(Unaudited)
As of November 30, 1998
<CAPTION>
Historical Financial
ASSETS Statements Pro Forma
- ------ ---------------------------- Pro Forma Financial
HYTK QRC Adjustments Statements
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Current Assets
- --------------
Cash $ 0 $ 35,180 $ 0 $ 35,180
Accounts Receivable 271,444 271,444
Notes Receivable 48,500 48,500
Inventory 23,140 23,140
------------ ------------ ------------ -------------
Total Current Assets $ 0 $ 378,264 $ 0 $ 378,264
Fixed Assets
- ------------
Equipment $ 0 $ 283,329 $ 0 $ 283,329
Pipeline Assets 2,418,274 2,418,274
Oil & Gas Well Equipment 380,836 380,836
Office Equipment 20,369 20,369
Buildings 40,159 40,159
Land 5,000 5,000
Gas Service Contract 25,000 25,000
Less: Allowance for Depreciation (1,469,458) (1,469,458)
------------ ------------ ------------ -------------
Total Fixed Assets $ 0 $ 1,703,509 $ 0 $ 1,703,509
Other Assets
- ------------
Contracts & Right of Way, net $ 0 $ 103,938 $ 0 $ 103,938
Oil & Gas Leasehold Interests, net 772,977 772,977
Organization Costs, net 1,242 1,242
Deferred Tax Credit 157,860 157,860
------------ ------------ ------------ -------------
$ 0 $ 1,036,017 $ 0 $ 1,036,017
Total Assets $ 0 $ 3,117,790 $ 0 $ 3,117,790
============ ============ ============ =============
</TABLE>
See notes to Proforma Condensed Financial Statements
F-7
<PAGE>
<TABLE>
HYTK Industries Inc.
Proforma Condensed Consolidated Balance Sheet
(Unaudited)
As of November 30, 1998
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------ Historical Financial
Statements Pro Forma
---------------------------- Pro Forma Financial
HYTK QRC Adjustments Statements
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Current Liabilities
- -------------------
Accounts Payable $ 15,013 $ 115,233 $ (15,013) A $ 115,233
Oil & Gas Payable 129,957 129,957
Accrued Interest 109,481 109,481
Notes Payable, Current Portion 258,701 258,701
Accrued Expenses 3,851 3,851
------------ ------------ ------------ -------------
Total Current Liabilities $ 15,013 $ 617,223 $ (15,013) $ 617,223
Non-Current Liabilities
- -----------------------
Notes Payable $ 0 $ 1,495,237 $ 0 $ 1,495,237
Less Portion Shown as Current (258,701) (258,701)
------------ ------------ ------------ -------------
$ 0 $ 1,236,536 $ 0 $ 1,236,536
Stockholders' Equity
- --------------------
Preferred stock, par value $.001,
50,000,000 shares authorized, no
shares issued $ 0 $ 0 $ 0 $ 0
Common Stock, (2,052,266 actual shares
and 4,823,343 pro forma shares) 2,052 0 2,771 A,B 4,823
Paid In Surplus 1,108,846 1,743,487 (482,227) A,B 2,370,106
Retained Earnings (1,125,911) (479,456) 494,469 (1,110,898)
------------ ------------ ------------ -------------
$ (15,013) $ 1,264,031 $ 15,013 $ 1,264,031
Total Liabilities and Stockholders' Equity $ 0 $ 3,117,790 $ 0 $ 3,117,790
============ ============ ============ =============
</TABLE>
See notes to Proforma Condensed Financial Statements
F-8
<PAGE>
<TABLE>
HYTK Industries Inc.
Proforma Consolidated Condensed Statement of Operations
(Unaudited)
For the Six Month Period Ended November 30, 1998
<CAPTION>
Historical Financial
Statements Pro Forma
---------------------------- Pro Forma Financial
HYTK QRC Adjustments Statements
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Revenue
- -------
Oil & Gas Well Servicing Revenue $ 0 $ 269,485 $ 0 $ 269,485
Pipeline Transportation Revenue 119,248 119,248
Pipeline Operating Revenue 188,063 188,063
Oil & Gas Production Revenue 70,639 70,639
Oil & Gas Marketing Revenue 30,910 30,910
Other Revenue 7,510 7,510
------------ ------------ ------------ -------------
Total Revenues $ 0 $ 685,855 $ 0 $ 685,855
Cost of Revenues
- ----------------
Purchases & Outside Services $ 0 $ 147,619 $ 0 $ 147,619
Lease Operating Expenses 53,850 53,850
Pipeline Operating Expenses 132,176 132,176
Wages 169,669 169,669
Payroll Taxes 14,099 14,099
Utilities-Leases 41,570 41,570
Tags, License, & Equipment Repairs 3,993 3,993
Fuel, Oil, Etc. 25,047 25,047
------------ ------------ ------------ -------------
Total Cost of Revenues $ 0 $ 588,023 $ 0 $ 588,023
------------ ------------ ------------ -------------
Gross Profit $ 0 $ 97,832 $ 0 $ 97,832
General and Administrative Expenses
- -----------------------------------
Interest $ 0 $ 76,477 $ 0 $ 76,477
Depreciation & Amortization 77,968 77,968
Insurance 42,016 42,016
Repairs 11,701 11,701
Legal & Professional 9,187 9,187
Depletion 7,468 7,468
Supplies 2,840 2,840
Telephone 9,446 9,446
Utilities 3,457 3,457
Other Expenses 12,955 12,955
------------ ------------ ------------ -------------
Total General and Administrative Expenses $ 0 $ 253,515 $ 0 $ 253,515
------------ ------------ ------------ -------------
Net Income (Loss) from Operations $ 0 $ (155,683) $ 0 $ (155,683)
</TABLE>
See notes to Proforma Condensed Financial Statements
F-9
<PAGE>
<TABLE>
HYTK Industries Inc.
Proforma Consolidated Condensed Statement of Operations
(Unaudited)
For the Six Month Period Ended November 30, 1998
<CAPTION>
Historical Financial
Statements Pro Forma
---------------------------- Pro Forma Financial
HYTK QRC Adjustments Statements
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Net Income (Loss) from Operations (con't) $ 0 $ (155,683) $ 0 $ (155,683)
Extraordinary Items:
- --------------------
Sale of Assets $ 0 $ 15,286 $ 0 $ 15,286
Interest Income 151 151
------------ ------------ ------------ -------------
Total Extraordinary Items $ 0 $ 15,437 $ 0 $ 15,437
------------ ------------ ------------ -------------
Net Income Before Provison for
Income Taxes $ 0 $ (140,246) $ 0 $ (140,246)
Provision for Income Taxes:
- ---------------------------
Current Tax Expense $ 0 $ 0 $ 0 $ 0
Deferred Tax Expense (35,934) (35,934)
------------ ------------ ------------ -------------
Provision for Income Taxes $ 0 ($35,934) $ 0 $ (35,934)
Net Income (Loss) $ 0 $ (104,312) $ 0 $ (104,312)
============ ============ ============ =============
Shares used to compute Net Income
per share 2,052,266 4,823,343
Net Income per share:
Primary $ 0 $ (0.0216)
Fully diluted $ 0 $ (0.0216)
</TABLE>
See notes to Proforma Condensed Financial Statements
F-10
<PAGE>
HYTK Industries, Inc.
Notes to Pro Forma Condensed Consolidated Financial Statements
(unaudited)
(A) According to the Agreement, Park Street Investments, Inc. ("Park Street")
agreed to assist the Company with its corporate maintenance, administration,
financial statement preparation, and securities filings. As consideration of
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. Park Street
received a cash fee of $100,000 in connection with the merger with QRC and
therefore agreed to cancel the 2,000,000 shares. Park Street has also agreed
to assume any liabilities that existed with the Company prior to the merger.
(B) Following the share exchange, the Company issued 1,200,000 shares of its
Common Stock to various employees, consultants, and advisors of the Company
and QRC for operational and administrative services rendered. An adjustment
has been made to record the par value of $.001 in the financial statements for
these shares and other stock exchanged as a result of the Agreement. The
primary recipients of such shares are:
Kenneth O'Neil 200,000 shares
Ken W. Kurtz 447,734 shares
Henry F. Mogg M&M Trust 400,000 shares
F-11
<PAGE>
CLYDE BAILEY P.C.
- ------------------------------------------------------------------------------
Certified Public Accountant
10935 Wurzbach #203
San Antonio, Texas 78230
(210) 699-1287(ofc.)
(800) 364-7347 - (210) 691-2911 (fax)
Member:
American Institute of CPA's
Texas Society of CPA's
Board of Directors
Quest Energy Service Inc.
Report of Independent Public Accountant
-----------------------------------------
I have audited the accompanying balance sheet of Quest Energy Service Inc.
(Company) as of May 31, 1998 and 1997 and the related statement of income and
expenses, statement of changes in stockholders' equity, and the statement of
cash flows for the periods ended May 31, 1998, 1997, and 1996. These financial
statements are the responsibility of the Company's management. My
responsibility is to express an opinion on these statements based on my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I 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. I believe that my audit provides a reasonable basis for my
opinion.
In my opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of the periods
ended, and the results of its operations for the years then ended in
conformity with generally accepted accounting principles.
Clyde Bailey
Certified Public Accountant
San Antonio, Texas
July 30, 1998
F-12
<PAGE>
<TABLE>
Quest Energy Services Inc.
Balance Sheets
As of May 31, 1998 and 1997
ASSETS
-------------
<CAPTION>
1998 1997
<S> <C> <C>
Current Assets
- --------------
Cash $ 6,522 $ 4,908
Accounts Receivable 270,045 257,414
Notes Receivable 26,500 6,500
Inventory 23,140 21,600
------------- -------------
Total Current Assets $ 326,207 $ 290,422
Fixed Assets
- ------------
Equipment $ 278,346 $ 250,892
Office Equipment 20,369 17,175
Buildings 36,000 36,000
Land 5,000 5,000
Gas Service Contract 25,000 25,000
Less: Allowance for Depreciation (129,823) (78,205)
------------- -------------
$ 234,892 $ 255,862
Other Assets
- ------------
Contracts & Right of Way, net $ 107,025 $ 113,199
Deferred Tax Credit 40,301 34,415
------------- -------------
$ 147,326 $ 147,614
Total Assets $ 708,425 $ 693,898
============= =============
</TABLE>
F-13
<PAGE>
<TABLE>
Quest Energy Services Inc.
Balance Sheets
As of May 31, 1998 and 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
----------------------------------------
<CAPTION>
1998 1997
<S> <C> <C>
Current Liabilities
- -------------------
Accounts Payable $ 132,345 $ 139,675
Oil & Gas Payable 120,186 145,726
Accrued Interest 69,776 42,730
Notes Payable, Current Portion 129,875 85,122
Accrued Expenses 2,235 4,039
------------- -------------
Total Current Liabilities $ 454,417 $ 417,292
Non-Current Liabilities
- -----------------------
Note Payable $ 493,240 $ 437,732
Less Portion Shown as Current (129,875) (85,122)
------------- -------------
$ 363,365 $ 352,610
Stockholders' Equity
Common Stock, 100,000 Shares Authorized
$1 par value, 18,800 shares outstanding $ 0 $ 0
Paid In Surplus 18,800 18,800
Retained Earnings (128,157) (94,804)
------------- -------------
$ (109,357) $ (76,004)
Total Liabilities and Stockholders' Equity $ 708,425 $ 693,898
============= =============
</TABLE>
F-14
<PAGE>
<TABLE>
Quest Energy Services, Inc.
Statements on Income and Expenses
For the Fiscal Years Ended May 31, 1998, 1997, and 1996
<CAPTION>
From Inception
May 31, 1998 May 31, 1997 May 31, 1996
------------- ------------- -------------
<S> <C> <C> <C>
Revenue
- -------
Oil Operations $ 330,545 $ 450,564 $ 394,472
Gas Operations 245,807 293,117 116,975
Pipeline Operations 300,705 302,720 66,382
Pipeline Development 24,387 110,792 26,485
Oil & Gas Marketing 81,032 56,777 40,238
Other Revenue 17,944 30,139 19,309
------------- ------------- -------------
Total Revenues $ 1,000,420 $ 1,244,109 $ 663,861
Cost of Revenues
- ----------------
Purchases & Outside Services $ 242,972 $ 366,087 $ 281,131
Wages 333,767 404,847 199,227
Payroll Taxes 28,505 27,552 12,235
Utilities-Leases 94,507 102,371 65,467
Tags, License, & Equipment Repairs 13,230 20,287 18,113
Fuel, Oil, Etc 53,333 61,106 78,258
------------- ------------- -------------
Total Cost of Revenues $ 766,314 $ 982,250 $ 654,431
Gross Profit $ 234,106 $ 261,859 $ 9,430
General and Administrative Expenses
- -----------------------------------
Interest $ 48,154 $ 25,120 $ 24,390
Depreciation & Amortization 57,793 53,402 35,094
Insurance 66,321 66,691 31,502
Repairs 58,073 64,557 25,672
Supplies 34,824 5,216 6,656
Telephone 17,236 14,638 10,899
Utilities 6,910 6,928 1,818
Other Expenses 24,654 22,676 5,912
------------- ------------- -------------
Total General and Administrative Expenses $ 313,965 $ 259,228 $ 141,943
Net Income (Loss) from Operations $ (79,859) $ 2,631 $ (132,513)
Extraordinary Items:
- --------------------
Sale of Assets $ 40,079 0 0
Interest Income 541 572 91
------------- ------------- -------------
Total Extraordinary Items $ 40,620 $ 572 $ 91
Net Income Before Provison for Income Taxes $ (39,239) $ 3,203 $ (132,422)
Provision for Income Taxes:
- ---------------------------
Current Tax Expense $ 0 $ 480 $ 0
Deferred Tax Expense (5,886) 0 (34,895)
------------- ------------- -------------
Provision for Income Taxes $ (5,886) $ 480 $ (34,895)
Net Income (Loss) $ (33,353) $ 2,723 $ (97,527)
============= ============= =============
</TABLE>
F-15
<PAGE>
<TABLE>
Quest Energy Services, Inc.
Statement of Cashflows
For the Fiscal Years Ended May 31, 1998, 1997, and 1996
<CAPTION>
From Inception
May 31, 1998 May 31, 1997 May 31, 1996
------------- ------------- -------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income $ (33,353) $ 2,723 $ 97,527
Adjustments to Reconcile Excess Contributions
to cash provided from operations:
Depreciation $ 51,618 $ 47,227 $ 30,978
Amortization 6,175 6,175 4,116
Accounts Receivable (12,631) (1,294) (257,721)
Inventory (1,540) (1,600) (20,000)
Accounts Payable (7,330) (10,995) 150,670
Oil & Gas Payable (25,540) (1,779) 147,503
Notes Receivable (20,000) (6,500) 0
Deferred Tax Credit (5,886) 480 (34,895)
Accrued Interest Payable 27,354 25,610 16,941
Accrued Expenses (2,112) 4,623 1,017
------------- ------------- -------------
Total Adjustments $ 10,108 $ 61,947 $ 38,609
Net Cash used in Operating Activities $ (23,245) $ 64,670 $ (58,918)
Cash flows from Investing Activities:
Fixed Assets $ (30,648) $ (30,218) $ (427,159)
------------- ------------- -------------
Net Cash used in Investing Activities $ (30,648) $ (30,218) $ (427,159)
Cash flows from Financing Activities
Net Long-Term Borrowing $ 55,506 $ (35,466) $ 473,200
Common Stock 0 0 0
Paid-In-Capital 0 0 18,800
------------- ------------- -------------
Net Cash used in Financing Activities $ 55,506 $ (35,466) $ 473,200
Net Increase (Decrease) in Cash $ 1,613 $ (1,014) $ (12,877)
Cash Balance, Begin of Period $ 4,909 $ 5,923 $ 0
Cash Balance, End of Period $ 6,522 $ 4,909 $ 5,923
============= ============= =============
</TABLE>
F-16
<PAGE>
<TABLE>
Quest Energy Services Inc.
Statement of Stockholders Equity
For the Fiscal Years Ended May 31, 1998, 1997, and 1996
<CAPTION>
Without Paid-In Retained
Shares Par Value Capital Earnings Total
--------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance October 1, 1995 0 0 0 0
Stock Issuance 18,800 $ 0 18,800 $ 18,800
Net Income (97,527) (97,527)
--------- --------- ---------- ----------- -----------
Balance May 31, 1996 18,800 0 18,800 (97,527) (78,727)
Net Income 0 0 2,723 2,723
--------- --------- ---------- ----------- -----------
Balance May 31, 1997 18,800 0 18,800 (94,804) (76,004)
Net Income 0 0 (33,353) (33,353)
--------- --------- ---------- ----------- -----------
Balance May 31, 1998 18,800 $ 0 18,800 $ (128,157) $ (109,357)
========= ========= ========== =========== ===========
</TABLE>
F-17
<PAGE>
Quest Energy Service Inc.
Notes to Financial Statements
Note 1 - Summary of Significant Accounting Policies
- ---------------------------------------------------
Organization
- -------------
Quest Energy Service Inc. ("the Company") was formed to service and develop
oil & gas wells, and to transport and market oil, gas, and other minerals. The
State of Kansas charted the company as a corporation on January 9, 1995. The
Company was inactive until October 1, 1995 when operations began. On May 31,
1998 and 1997 the company had a total of 100,000 authorized shares with 18,800
shares outstanding.
Method of Accounting
- ---------------------
These financial statements are shown based on the accrual method of
accounting. Revenue will be recognized when earned, and expenses will be
record when incurred.
Property and equipment are stated at cost less accumulated depreciation and
amortization, which is computed by using the straight-line method over
estimated useful lives. Trucks and equipment are depreciated over 7 years.
Contracts and right-of-way is being amortized over a twenty-year period.
Federal Income Tax
- -------------------
The Company has filed a 1996 and 1997 Federal Income Tax return as a C
Corporation with a year-end date of September 30. For tax purposes the method
of accounting is cash accounting. The Company shows a net loss of $37,544 for
the fiscal year ended September 30, 1995 and a net loss of $50,998 for the
fiscal year ended September 30, 1997. These losses will be carried over to
future years to offset future income from operations. Deferred tax liability,
deferred tax credits, and deferred tax expense is being shown because of
different accounting methods and depreciation methods for tax purposes. The
method used for book is accrual accounting while the tax method uses the cash
method of accounting.
Cash Equivalent
- ----------------
Cash and cash equivalents consist of cash on hand and demand deposits held by
financial institutions. Also, stock issued for value to acquire assets will be
treated as cash equivalents.
F-18
<PAGE>
Quest Energy Service Inc.
Notes to Financial Statements
Note 1 - Summary of Significant Accounting Policies (con't)
- -----------------------------------------------------------
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.
Note 2 - Common Stock
- ----------------------
On June 9, 1995, a trust by the name of Helen Marilyn Lamb Revocable Trust was
issued 18,800 shares of stock for cash. This is the total outstanding stock on
the Company for the period shown on the balance sheet.
Note 3 - Notes Payable
- -----------------------
There are several notes payable that the Company is indebted. Some are related
parties being officers or directors or entities that are owned by the
principles of the Company. On these notes, an interest rate of 8% has been
accrued. Details of the other notes are as follows:
1) Bank of Commerce - Chanute KS - Various notes on inventory and
equipment. The original amount of the notes was $79,592 and the balance
of the notes was $ 62,262 and $ 67,510 on May 31, 1998 and 1997,
respectively. The payments originally were $5,712 per month, but the
bank restructured the notes call for a total monthly payments of $ 4,063
and carry an interest rate of 12%.
2) Henry F Mogg - Henry F. Mogg is the primary shareholder of a related
corporation (Ponderosa Gas Pipeline Co. Inc. has loaned the Company
funds for working capital and equipment. The balance of the notes is
$100,000 for the period presented. No payments have been made on this
note, but accrued interest has been recorded at the rate of 8%. The
balance of the notes is shown in the schedule contained below.
3) Argus Management - A loan was secured in June 1997 to assist in covering
working capital. The loan is to be a short-term loan and is expected to
be repaid with funds from a public offering. Interest at the rate of 8%
has been accrued.
F-19
<PAGE>
Quest Energy Service Inc.
Notes to Financial Statements
Note 3 - Notes Payable (con't)
- ------------------------------
<TABLE>
Schedule of Notes Payable
- -------------------------
<CAPTION>
Balance Accrued Balance Accrued
May 31, 1998 Interest May 31, 1997 Interest
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Bank of Commerce $ 62,263 0 $ 67,510 0
BEC of Kansas 112,786 9,023 76,536 6,123
Doug Lamb-Credit Card 22,134 1,771 33,434 2,675
Caterpillar Leasing 15,813 0 8,320 0
First Bank 6,748 0 10,160 0
John Jones 39,898 3,192 39,898 3,192
Marilyn Lamb 2,725 218 2,725 218
Marsha Lamb 10,760 861 9,129 730
Metro Systems 5,600 0 9,560 0
Microlife 0 0 5,150 0
Intrust Bank 5,076 0 7,144 0
Henry F Mogg 100,000 8,000 100,000 8,000
Argus Management 50,000 333 0 0
Poston Trust 3,200 0 3,200 256
Toyota Finance 5,490 0 9,766 0
Xerox 1,297 0 0 0
Volkman Trust 36,250 2,900 42,000 3,360
J C Swanson 10,000 800 10,000 800
S Langhofer 3,200 256 3,200 256
------------ ------------ ------------ ------------
Total Notes Payable $ 493,240 $ 27,354 $ 437,732 $ 25,610
Less Current Portion 129,875 85,122
------------ ------------ ------------ ------------
Total Long-Term Debt $ 363,365 $ 27,354 $ 352,610 $ 25,610
============ ============ ============ ============
</TABLE>
The total of interest paid during the following fiscal periods are as follows:
May 31, 1996 $ 6,718
May 31, 1997 $ 10,106
May 31, 1998 $ 20,800
F-20
<PAGE>
Quest Energy Service Inc.
Notes to Financial Statements
Note 4 - Capitalization of Company
- -----------------------------------
On June 9, 1995, the Company held a meeting of the Board of Directors in which
a resolution was agreed upon and passed to acquire all of the assets of
Bonanza Energy Corporation (owned by Doug & Marsha Lamb) for a purchase price
of $20,000 plus assume certain outstanding liabilities of $529,006 at the time
of the agreement.
Note 5 - Related Parties
- -------------------------
The Organization has significant related party transactions and/or
relationships with the following individuals and entities:
1) Doug Lamb - Director and President - Note Payable in the amount of
$22,134 before accrued interest. Mr. Lamb is also involved either as an
officer, director, shareholder, or partner in other related entities.
2) Ponderosa Pipeline Co., Inc. - Related corporation that owns various gas
pipelines and oil & gas wells. The Company performs service work on
Ponderosa's gas pipeline and oil & gas properties.
3) Henry F. Mogg - Note Payable in the amount if $100,000 before accrued
interest. Henry F. Mogg is the sole shareholder of Ponderosa Pipeline
Co. Inc. in which the Company performs service work on their gas
pipelines.
4) BEC of Kansas - Owned by Doug and Marsha Lamb. Note Payable in the
amount of $112,786 and $76, 536 for the period ended May 31, 1998 and
1997, respectively.
Note 6 - Sale of Assets
- ------------------------
The Company sold a parcel of real estate on November 1997, which it had
acquired in September 1997 for a net profit of $40, 079.
Note 7 - Subsequent Events
- ---------------------------
The Company plans to merge into a "holding company" by the name of Quest
Resource Corp. as a stock exchange. Quest Resource Corp. subsequently plans to
perform a "reverse" merger with a public shell in October or November of 1998.
There were no other material subsequent events that have occurred since the
balance sheet date that warrants disclosure in these financial statements.
F-21
<PAGE>
CLYDE BAILEY P.C.
- ------------------------------------------------------------------------------
Certified Public Accountant
10935 Wurzbach #203
San Antonio, Texas 78230
(210) 699-1287(ofc.)
(800) 364-7347 - (210) 691-2911 (fax)
Member:
American Institute of CPA's
Texas Society of CPA's
Board of Directors
Ponderosa Gas Pipeline Co. Inc.
Report of Independent Public Accountant
-----------------------------------------
I have audited the accompanying balance sheet of Ponderosa Gas Pipeline Co.
Inc. (Company) as of May 31, 1998 and 1997 and the related statement of income
and expenses, statement of changes in stockholders' equity, and the statement
of cash flows for the periods ended May 31, 1998, 1997, and 1996 then ended.
These financial statements are the responsibility of the Company's management.
My responsibility is to express an opinion on these statements based on my
audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I 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. I believe that my audit provides a reasonable basis for my
opinion.
In my opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as the periods
presented, and the results of its operations for the periods then ended in
conformity with generally accepted accounting principles.
Clyde Bailey
Certified Public Accountant
San Antonio, Texas
July 30, 1998
F-22
<PAGE>
<TABLE>
Ponderosa Gas Pipeline Co. Inc.
Balance Sheets
As of May 31, 1998 and 1997
ASSETS
-------------
<CAPTION>
1998 1997
<S> <C> <C>
Current Assets
- --------------
Cash $ 39 $ 3,852
Accounts Receivable 17,453 11,354
------------- -------------
Total Current Assets $ 17,492 $ 15,206
Fixed Assets
- ------------
Equipment $ 4,983 $ 2,500
Storage Building 4,159 4,159
Gas Pipelines 1,782,947 1,621,039
Equipment on Oil & Gas Producing Wells 14,875 14,875
Less: Allowance for Depreciation (534,201) (441,227)
------------- -------------
$ 1,272,763 $ 1,201,346
Other Assets
- ------------
Oil & Gas Leasehold, net $ 556,509 $ 578,687
Deferred Tax Credit 81,625 50,259
Organization Costs, net 1,540 2,136
------------- -------------
$ 639,674 $ 631,082
------------- -------------
Total Assets $ 1,929,929 $ 1,847,634
============= =============
</TABLE>
F-23
<PAGE>
<TABLE>
Ponderosa Gas Pipeline Co. Inc.
Balance Sheets
As of May 31, 1998 and 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
--------------------------------------
<CAPTION>
1998 1997
<S> <C> <C>
Current Liabilities
- -------------------
Accounts Payable $ 45,060 $ 34,566
Current Portion of Long-Term Debt 53,359 57,835
Accrued Expenses 85,965 36,575
------------- -------------
Total Current Liabilities $ 184,384 $ 128,976
Non-Current Liabilities
- -----------------------
Note Payable $ 1,112,678 $ 994,820
Less Portion Shown as Current (53,359) (57,835)
------------- -------------
$ 1,059,319 $ 936,985
Stockholders' Equity
- --------------------
Common Stock, 1,000,000 Shares
Authorized, No Par Value, 100
Shares Issued and Outstanding $ 0 $ 0
Paid In Surplus 933,213 933,213
Retained Earnings (246,987) (151,540)
------------- -------------
$ 686,226 $ 781,673
Total Liabilities and Stockholders' Equity $ 1,929,929 $ 1,847,634
</TABLE>
F-24
<PAGE>
<TABLE>
Ponderosa Gas Pipeline Co. Inc.
Statements on Income and Expenses
<CAPTION>
For the Fiscal Years Ended May 31,
----------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Revenue
- -------
Gas Pipeline Transportation Fees $ 286,286 $ 133,232 $ 39,408
Gas Production Revenue 6,951 815 5,656
Oil Production Revenue 62,601 11,108 2,599
Other Revenue 7,511 0 0
------------- ------------- -------------
Total Revenues $ 363,349 $ 145,155 $ 47,663
Cost of Revenues
- ----------------
Lease Operating Costs 70,183 11,434 7,913
Pipeline Operating Costs 208,990 158,657 35,955
------------- ------------- -------------
Total Cost of Revenues $ 279,173 $ 170,091 $ 43,868
Gross Profit $ 84,176 $ (24,936) $ 3,795
General and Administrative Expenses
- -----------------------------------
Interest $ 82,399 $ 40,847 $ 4,752
Depreciation 92,974 82,758 30,281
Consulting 1,973 0 0
Amortization 596 596 248
Depletion Expense 22,178 6,438 0
Other Expenses 10,869 11,475 3,263
------------- ------------- -------------
Total General and Administrative Expenses $ 210,989 $ 142,114 $ 38,544
Net Income before Provision for Tax $ (126,813) $ (167,050) $ (34,749)
Provision of Income Tax:
- ------------------------
Current Income Tax Expense $ 0 $ 0 $ 0
Deferred Income Tax Credit (31,366) (45,047) (5,212)
------------- ------------- -------------
Total Provision for Income Tax $ (31,366) $ (45,047) $ (5,212)
Net Income (Loss) $ (95,447) $ (122,003) $ (29,537)
============= ============= =============
</TABLE>
F-25
<PAGE>
<TABLE>
Ponderosa Gas Pipeline Co. Inc.
Statements of Cashflows
<CAPTION>
For the Fiscal Years Ended May 31,
----------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income $ (95,447) $ (122,003) $ (29,537)
Adjustments to Reconcile Excess Contributions
to cash provided from operations:
Depreciation $ 92,974 $ 82,758 $ 30,281
Amortization 596 596 248
Accounts Receivable (6,099) (3,912) (7,442)
Organizational Costs 0 0 (2,980)
Deferred Tax Credit (31,366) (45,047) (5,212)
Accrued Interest Receivable 49,390 31,824 4,751
Accounts Payable 10,491 9,125 25,444
Depletion Expense 22,178 6,438 0
------------- ------------- -------------
Total Adjustments $ 138,164 $ 81,782 $ 45,090
Net Cash used in Operating Activities 42,717 (40,221) 15,553
Cash flows from Investing Activities:
Oil and Gas Properties $ (164,391) $ (781,089) $ (105,575)
------------- ------------- -------------
Net Cash used in Investing Activities $ (164,391) $ (781,089) $ (105,575)
Cash flows from Financing Activities
Notes Payable $ 117,861 $ 822,364 $ 92,820
------------- ------------- -------------
Net Cash used in Financing Activities $ 117,861 $ 822,364 $ 92,820
Net Increase (Decrease) in Cash $ (3,813) $ 1,054 $ 2,798
Cash Balance, Begin of Period $ 3,852 $ 2,798 $ 0
Cash Balance, End of Period $ 39 $ 3,852 $ 2,798
============= ============= =============
</TABLE>
F-26
<PAGE>
<TABLE>
Ponderosa Gas Pipeline Co. Inc.
Statement of Stockholders Equity
For the Fiscal Years Ended May 31, 1998, 1997, and 1996
<CAPTION>
No Par Paid-In Retained
Shares Value Capital Earnings Total
--------- --------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance January 16, 1996 0 0 0 0 0
Stock Issued for Assets 100 0 $ 933,213 $ 933,213
Net Loss, May 31, 1996 (29,537) (29,537)
--------- --------- ---------- ----------- ----------
Balance May 31, 1996 100 0 933,213 (29,537) 903,676
Net Loss, May 31, 1997 (122,003) (122,003)
--------- --------- ---------- ----------- ----------
Balance May 31, 1997 100 0 933,213 (151,540) 781,673
Net Loss May 31, 1998 (95,447) (95,447)
--------- --------- ---------- ----------- ----------
Balance May 31, 1998 100 0 933,213 (246,987) $ 686,226
========= ========= ========== =========== ==========
</TABLE>
F-27
<PAGE>
Ponderosa Gas Pipeline Co. Inc.
Notes to Financial Statements
Note 1 - Summary of Significant Accounting Policies
- ----------------------------------------------------
Organization
- -------------
Ponderosa Gas Pipeline Co. Inc. ("the Company") was formed to conduct or
promote gas gathering and transmission of natural gas in the State of Kansas.
The State of Kansas charted the company as a corporation on February 12, 1996
and on May 31, 1998 the company had a total of 1,000,000 authorized shares
with 100 shares outstanding.
Method of Accounting
- ---------------------
These financial statements are shown based on the accrual method of
accounting. Revenue will be recognized when earned, and expenses will be
record when incurred.
Property and equipment are stated at cost less accumulated depreciation and
amortization, which is computed by using the straight-line method over
estimated useful lives. Pipelines are depreciated over 20 years, compressors
over 10 years, and trucks and equipment over 5 years. Organizational costs are
amortized over a five-year period.
Federal Income Tax
- -------------------
The Company has filed a 1996 and 1997 Federal Income Tax return as a C
Corporation. For tax purposes the method of accounting will be cash
accounting. The Company shows a net loss of $47,961 for 1996 and a net loss of
$25,724 for 1997. These losses will be carried over to future years to offset
future income from operations. For tax purposes the Company uses a calendar
year for reporting its income and expenses on their tax return. Deferred tax
liability, deferred tax credits, and deferred tax expense is being shown
because of different accounting methods and depreciation methods for tax
purposes. The method used for book is accrual accounting while the tax method
uses the cash method of accounting.
Cash Equivalent
- ----------------
Cash and cash equivalents consist of cash on hand and demand deposits held by
financial institutions. Also, stock issued for value to acquire assets will be
treated as cash equivalents.
F-28
<PAGE>
Ponderosa Gas Pipeline Co. Inc.
Notes to Financial Statements
Note 1 - Summary of Significant Accounting Policies (con't)
- -----------------------------------------------------------
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.
Note 2 - Common Stock
- ----------------------
On January 16, 1996, Henry Mogg contributed certain pipeline assets valued at
$933,213 to the Company in exchange for 100 shares of stock. These assets were
placed on the balance sheet with the offset being additional paid-in-capital.
Note 3 - Notes Payable
- -----------------------
There are several notes payable that the Company is indebted. Some are related
parties being officers or directors or entities that are owned by the
principles of the Company. On these notes, an interest rate of 9% has been
accrued. Details of the other notes are as follows:
1) Bank of Commerce - Chanute KS - Original note dated March 20, 1990 that
was assumed by the Company in May 1997. The original amount of the note
was $333,060 and the balance of the notes was $ 149,044 and $ 168,228 on
May 31, 1998 and 1997, respectively. The payment was originally $5,712
per month, but the bank restructured the note to monthly payments of $
3,355. Final maturity date is September 25, 2002. Interest in adjusted
quarterly with the rate as of May 31, 1998 being 8.5%. Another note at
the Bank of Commerce was granted on February 6, 1998 in the amount of
$25,000. The maturity date on the note in November 6, 1998 and carries
an interest rate of 9%. The balance at May 31, 1998 is $22,435.
2) Richard Mogg - Relative of Hank Mogg (Sole Shareholder) has loaned the
Company advances to purchase and improve gas pipelines. The promissory
notes calls for advances up to $500,000 with payments on the note of
100% of the net profit from the operations of the gas pipelines. The
note was originally signed on January 2, 1996 and calls for an interest
rate of 9% to be paid or accrued. No payments have been made on this
note, but accrued interest has been recorded. The balance of the notes
is shown is the schedule contained below.
F-29
<PAGE>
Ponderosa Gas Pipeline Co. Inc.
Notes to Financial Statements
Note 3 - Notes Payable (con't)
- ------------------------------
<TABLE>
Schedule of Notes Payable
- --------------------------
<CAPTION>
Balance Accrued Balance Accrued
May 31, 1998 Interest May 31, 1997 Interest
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
4/10 Energy Fund $ 10,200 2,142 $ 10,200 $ 1,224
Hank Mogg 68,933 14,536 68,933 8,332
Richard Mogg 420,226 31,863 305,226 17,450
United Cities 6,116 - 6,116 -
Bonanza Oil & Gas CO 411,918 37,073 426,713 9,569
Bank of Commerce 149,045 - 168,229 -
H M Lamb 3,900 351 5,200 -
BEC of Kansas 22,340 - 4,203 -
Quest Energy Services Inc. 20,000 - - -
------------ ------------ ------------ ------------
Total Notes Payable 1,112,678 85,965 994,820 36,575
Less Current Portion (53,359) (57,835)
------------ ------------ ------------ ------------
Total Long-Term Debt $ 1,059,319 $ 85,965 $ 936,985 $ 36,575
============= ============ ============ ============
</TABLE>
Note 4 - Oil and Gas Producing Activities
- ------------------------------------------
The Company has an interest in two producing oil leases in the Buffalo Kansas
area. The properties are known as the Eby/Clinesmith leases and the Ecco
lease. The properties are recorded at actual cost paid for these properties
with an allocation of equipment and leasehold interests. The equipment is
being depreciated over a five-year period while the leasehold is amortized
using a percentage of depletion from actual production. There were $ 22,178
and $ 6,438 in depletion taken as depletion for the period ended May 31, 1998
and May 31, 1997.
F-30
<PAGE>
Ponderosa Gas Pipeline Co. Inc.
Notes to Financial Statements
Note 5 - Fixed Assets
- ----------------------
Fixed Assets consists primarily of gas transmission pipelines and compressors
to process the gas from producing gas wells connect to the various pipelines.
The assets are depreciated over a 20 year life for the pipeline and 10 year
life for the compressors and major equipment using the straight-line method of
depreciation.
<TABLE>
<CAPTION>
Balance Balance
May 31, 1998 May 31, 1997
-------------- --------------
<S> <C> <C>
Cedar Creek $ 762,072 $ 761,648
Chante Pipeline 118,845 117,695
Thayer Pipeline 366,396 358,489
Quogue Pipeline 113,745 113,711
Claiborne Pipeline 115,452 115,452
Kaltenback Pipeline 123,702 123,702
Latham Pipeline 18,320 18,320
E Buffalo Pipeline 11,998 11,998
Fredonia Pipeline 152,393 -
Equipment 4,983 2,500
Storage Building 4,183 4,183
Equipment on Oil & Gas Producing Wells 14,875 14,875
-------------- --------------
$ 1,806.964 $ 1,642,573
============== ==============
Note 6 - Related Parties
- -------------------------
The Organization has significant related party transactions and/or
relationships with the following individuals and entities:
1) Henry Mogg - Shareholder, Director, and President - Sole shareholder and
holder of Note Payable in the amount of $69,433 before accrued interest.
2) Doug Lamb - Director and Vice-President - Note Payable to 4/10Energy
Fund that is owned by Doug Lamb in the amount of $10,299 before accrued
interest. Mr. Lamb is also involved either as an officer, director,
shareholder, or partner in other related entities.
F-31
<PAGE>
Ponderosa Gas Pipeline Co. Inc.
Notes to Financial Statements
Note 6 - Related Parties (con't)
- --------------------------------
3) Quest Energy Service Inc. - Related corporation that performs service
work on the pipeline and oil and gas wells that the Company owns. The
Company owes Quest Energy Services Inc. (Quest) $79,102 and $34,569 for
the period ended May 31, 1998 and 1997, respectively. Quest owes the
Company $11,354 and $17,453 for primarily oil that has been produced
from the Company's interest in oil and gas wells for the same period.
4) Silver City Production Company - The Company owns a 48% limited
partnership interest and a 21.78% general partnership interest for a
total of 69.78% interest in the partnership. Silver City owns several
oil wells in the Kansas area.
5) Bonanza Oil & Gas Corp - Owned by Doug & Marsha Lamb - Contributed oil &
gas leases to the Company in exchange for a note payable and assumption
of a note at the Bank of Commerce.
Note 7 - Subsequent Events
- ---------------------------
The Company plans to merge into a "holding company" by the name of Quest
Resource Corp. as a stock exchange. Quest Resource Corp. subsequently plans to
perform a "reverse" merger with a public shell in October or November of 1998.
There were no other material subsequent events that have occurred since the
balance sheet date that warrants disclosure in these financial statements.
F-32
<PAGE>
Item 2. Management's Discussion And Analysis or Plan of Operations
This quarterly report contains forward-looking statements. For this purpose,
any statements contained herein that are not statements of historical fact may
be deemed to be forward-looking statements. Without limiting the foregoing,
the words "believes," "anticipates," "plans," "expects," "and similar
expressions are intended to identify forward-looking statements. There are a
number of important factors that could cause the Company's actual results to
differ materially from those indicated by such forward-looking statements.
These factors include, without limitation, those set forth below under the
caption "Certain Factors That May Affect Future Results."
Through the quarter ended November 30, 1998, the Company had not engaged in
active operations other than to seek a business combination with a viable
business entity since approximately 1992. On December 30, 1998, the Company,
through its wholly owned subsidiary, HYTK Holding Co., Inc., a Kansas
corporation ("HYTK Holding"), effected a merger with Quest Resource
Corporation, a Kansas corporation. Quest is an oil and gas company located in
southeast Kansas. The operations of the Company will hereafter be primarily
focused in the oil and gas industry.
Merger with Quest Resource Corporation
A Reorganization Agreement and Plan of Merger (the "Agreement") was closed on
December 31, 1998, between and among the Company, HYTK Holding and Quest
(collectively the "Parties"). Pursuant to Agreement, HYTK Holding merged with
and into Quest, which survived the merger and became a wholly owned subsidiary
of the Company ("Merger"). HYTK Holding was incorporated for the purpose of
facilitating the Merger.
The Company hopes the merger between HYTK Holding and Quest will result in a
viable avenue toward profitability. Quest sought the Merger for a number of
reasons, including: (i) Quest's consolidation of splintered ownership of
various asset and entities; (ii) the potential for greater equity liquidity;
(iii) the greater potential for future financing transactions; and (iv) stock
appreciation to its shareholders.
Pursuant to the Merger, Quest 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"). Upon surrender of their stock certificates evidencing their
ownership of Quest, the shareholders of Quest will be issued a corresponding
quantity of shares of the Common Stock.
Following the share exchange, the Company issued 1,200,000 shares of its
Common Stock to various employees, consultants and advisors of the Company and
Quest for operational and administrative services rendered. The primary
recipients of such shares are: Kenneth O'Neal - 200,000 shares; Ken W. Kurtz -
447,734 shares; and The Henry F. Mogg M&M Trust - 400,000 shares.
Ken W. Kurtz is also the president and sole shareholder of Park Street
Investments, Inc. ("Park Street") and was the Company's president until the
Merger. Park Street and the Company entered into a Financial Consulting
Agreement ("Agreement") on March 5, 1998, in an effort to facilitate the
revival of the Company and a business combination between the Company and a
viable operating business entity.
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,
Page 4
<PAGE>
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 2,00,000 shares. Park Street has also agreed to assume any
liabilities that existed with the Company prior to the merger.
Nature and Scope of Quest's Business: PGPC and QES
Quest Resource Corporation ("Quest") was incorporated in Kansas on November 3,
1997 to facilitate the consolidation of a number of related companies. Since
its incorporation, 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.
QES has conducted numerous oil and gas related activities in southeast Kansas
from its headquarters in the Wilson County town of Benedict during the past
twenty years. These oil and gas activities 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) pipeline construction; and, (v) the development
of new oil and gas wells. These activities are conducted in an eight county
area of southeast Kansas.
PGPC
Quest acquired PGPC from Mr. Henry Mogg in exchange for 562,050 restricted
shares of Quest's common stock. PGPC's primary assets are one-hundred forty
miles of gas gathering pipelines throughout southeast Kansas, oil and gas
producing properties and undeveloped oil and gas reserves. The gas pipeline
network accesses about 500 square miles out of which only a few square miles
are being developed by competitors. PGPC has invested approximately $500,000
in pipeline infrastructure during the past three 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 receives approximately 10% of its revenues from other gas
providers who utilize PGPC's pipelines.
The PGPC pipelines are currently operating at about 50% capacity and near
breakeven cash flows at such levels. Quest believes these pipelines therefore
possess tremendous potential and Quest intends to attempt to develop new gas
reserves in the area of the PGPC pipelines which will increase the pipelines'
usage. Since a portion of pipeline operating costs are of a fixed nature,
additional gas volumes should create new revenues without proportionate
increases in expense and thereby increase net operating profit significantly.
The pipelines serve areas where additional gas volumes are available from
proven and probable yet undeveloped gas reserves. Quest therefore has a
strong expectation of increased gas volumes in PGPC's pipelines which should
result in increased profitability. In the event Quest is capable of
conducting future gas development efforts, it anticipates such efforts will
provide significant additional sales revenue.
Although Quest owns several oil properties with substantial oil reserves and
some gas producing properties, some of the oil properties have had negative
cash flow with the recently depressed oil prices. Quest intends to utilize
its oil reserves if and when oil prices increase, which may never happen.
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Approximately 20% of Quest's revenues are generated from its oil operations.
Quest has oil and gas leases on approximately 2500 acres entitling it to the
oil and gas reserves. Quest has approximately 10 million barrels in place in
this field with approximately 15% being, in Quest's opinion, recoverable by
today's technology.
QES
QES provides all of the service activities required for the operation and
development of Quest's oil and gas properties and the gas pipelines. This is
a vital role because the operation of the producing assets is a key element
behind the profitability of the asset base. 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 believes that all fees QES earns from PGPC are equitable for
both entities and are directly competitive with other such service providers.
The profitability of QES depends primarily on the profitability of the assets
(oil and gas wells and pipelines) that it operates. QES has not enjoyed the
benefit of an aggressive program to develop the area gas reserves and to
utilize the pipelines most effectively. Quest believes that QES's revenues
will grow if more profitable gas wells can be added to QES operations. Quest
also believes that any such addition of wells will increase pipeline
profitability.
QES is a successor business to the oilfield service company which was started
in 1958 by Douglas Lamb's father, Lawrence Lamb. Douglas Lamb became the
president of the successor company of Lawrence Lamb's operation in 1983, the
operations of which continue today in the form of QES. QES currently has
eleven employees, most of whom have been affiliated with Quest's predecessor
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 highly trusted and, in Quest's opinion,
highly experienced field personnel. They are 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.
Change in Control of the Company
Pursuant to the Merger, the Company experienced a change in control. Prior to
the Merger and after giving effect to the cancellation of 2,000,000 shares
held by Park Street Investments, Inc., the Company had 52,266 shares of Common
Stock issued and outstanding, The Company issued 3,421,077 shares of Common
Stock to the holders of Quest's common stock and one million two hundred
thousand (1,200,000) shares of the Common Stock is being issued to consultants
and employees of the Company or Quest as discussed above.
The current officers and directors of Quest shall remain the officers and
directors of Quest after the Merger. The officers and directors of the
Company and HYTK Holding resigned their positions and appointed the officers
and directors of Quest as their respective replacement officers and directors.
The persons who acquired control of the Company are set forth in the following
table which lists each shareholder who after the Merger beneficially owns more
than 5% of the Company's issued and outstanding Common Stock. The table also
sets forth the number and percentage of the outstanding shares to be owned by
each such shareholder. The notes following the table are essential for a
complete understanding of the Company's ownership structure due to overlapping
of beneficial ownership of certain shares.
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Number of Shares
Beneficial Owner Beneficially Owned(1) Percent of Class
------------------ ----------------------- ------------------
Douglas L. Lamb (2) 1,579,293 32.7%
Marsha K. Lamb (3) 1,579,293 32.7%
The Henry F. Mogg M&M Trust 1,212,050 25.1%
Crown Properties, LC (4) 975,000 20.2%
Bonanza Energy Corporation
of Kansas (5) 508,527 10.5%
Park Street Investments,
Inc. (6) 450,299 9.3%
(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.
(2) Includes: (i) 975,000 shares held by Crown Properties LC, which is 100%
owned by Marsha Lamb, Mr. Lamb's wife; (ii) 15,500 shares held by Marsha K.
Lamb, Douglas L. Lamb's wife; (iii) 508,527 shares held by Bonanza Energy
Corporation of Kansas, which is owned by Douglas L. Lamb and his wife, Marsha
K. Lamb; (iv) 80,766 shares held by Douglas L. Lamb. Douglas L. Lamb
disclaims beneficial ownership of the shares specified in clauses (i), (ii)
and (iii) above.
(3) Includes: (i) 15,500 shares held by Marsha K. Lamb; (ii) 975,000 shares
held by Crown Properties, LC, which is wholly owned by Marsha K. Lamb; (iii)
508,527 shares held by Bonanza Energy Corporation of Kansas, which is jointly
owned by Marsha K. Lamb and her husband, Douglas L. Lamb; and (iv) 80,766
shares held by Douglas L. Lamb, Marsha K. Lamb's husband. Marsha K. Lamb
disclaims beneficial ownership of the shares specified in clauses (iii) and
(iv) above.
(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 the discussion above under "Merger
with Quest Resource Corporation."
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Post-Merger Expansion Plans
Quest's well completion success rate is over 90% during the past three years.
These wells have provided positive returns on their respective investments in
addition to increasing the pipeline profitability. Quest has identified
numerous gas development opportunities in its pipeline operating region which
it believes can potentially add positive cash flow and gas reserves. Such
opportunities have not been properly developed due to a lack of capital and
lack of unity among splintered ownership with numerous entities unable or
unwilling to finance additional projects. During 1998 much of this splintered
ownership was consolidated in PGPC through an exchange of assets for Quest
stock.
Quest intends to address the gas development opportunities by launching a
serious effort to: (1) exploit the existing oil and gas reserves already
owned; (2) acquire additional prospective acreage; (3) develop new reserves
via workover of existing wells or by drilling new wells; and (4) expand the
pipeline network to new gas production. If Quest can accomplish these
efforts, which cannot be assured, it believes it can increase its
profitability.
An important post merger activity of Quest will be an attempt to obtain
approximately $2 million through a securities offering in order to foster the
development of the existing gas reserves that are available to Quest in the
vicinity of the existing pipeline network and to reduce debt. No assurances
can be given that Quest will be even partially successful in its financing
attempts at any time in the future or that Quest will ever be capable of
increasing the gas usage of its pipelines.
There are several other gas gathering pipeline systems in Quest's region which
are potential acquisition candidates. Each acquisition candidate will be
thoroughly investigated and will only be seriously considered if there is
significant upside potential which can justify the dilution of both Quest
stock and management resources.
Bonanza Energy Corporation of Kansas ("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 is therefore a related entity of
Quest. 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 higher than other available sales alternatives.
Certain Factors That May Affect Future Results
General Risks of the Natural Gas Business. The price of natural gas is
volatile and subject to wide variation. The longevity of gas wells are
affected by numerous risk factors including: gas prices; mechanical factors of
the well production equipment and of pipeline equipment; unpredictable
geological factors affecting gas reserve life and gas flow rates; and,
unpredictable operating costs which eventually exceed well revenues from
declining gas production. The development of additional gas production is
affected by numerous risk factors including: the availability of risk capital
for gas exploration; the subjective interpretation of geological data; the
availability of leases on prospective acreage for gas exploration; and, the
lack of totally certain results from well completion activities.
Substantial Capital Requirements. The Company intends to make substantial
capital expenditures for the acquisition, exploration development and
production of its oil and gas reserves. If revenues were to decrease as a
result of lower oil and gas prices, decreased production or otherwise, the
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Company may have limited ability to proceed with these plans, resulting in a
further decrease in production and revenues. If the Company's cash flow from
operations is not sufficient to satisfy its capital expenditure requirements,
there can be no assurance that additional debt or equity financing will be
available to meet these requirements.
Need for Additional Development. Additional development of the gas reserves
in the vicinity of the PGPC pipelines is required to increase the
profitability of the pipelines to a level sufficient to sustain company
operations without dependence upon outside capital infusions.
Replacement of Reserves. The Company's future success will depend upon
Quest's ability to find, acquire and develop additional oil and gas reserves
that are economically recoverable. 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 must
continue its development drilling and recompletion programs, identify and
produce previously overlooked or bypassed zones in shut-in wells, 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 oil and gas fields and
selective acquisitions of other promising properties where the Company can
utilize its existing technology. 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.
Uncertainty of Reserve Estimates. Oil and gas reserve estimates and the
present value estimates associated therewith are based on numerous
engineering, geological and operational assumptions that generally are derived
from limited data. Common assumptions include such matters as the extent and
average thickness of a particular reservoir, the average porosity and
permeability of the reservoir, the anticipated future production from
existing and future wells, future development and production costs and the
ultimate hydrocarbon recovery percentage. As a result, oil and gas reserve
estimates and present value estimates are frequently revised in subsequent
periods to reflect production data obtained after the date of the original
estimate. If reserve estimates are inaccurate, production rates may decline
more rapidly than anticipated, and future production revenues may be less than
estimated. Moreover, significant downward revisions of reserve estimates may
adversely affect the Company's ability to borrow funds in the future or have
an adverse impact on other financing arrangements.
In addition, any estimates of future net revenues and the present value hereof
are based on period ending prices and on cost assumptions made by the Company
which only represent its best estimate. If these estimates of quantities,
prices and costs prove inaccurate and the Company is unsuccessful in expanding
its oil and gas reserves base, and/or declines in and instability of oil and
gas prices occur, writedowns in the capitalized costs associated with the
Company's oil and gas assets may be required. The Company will also rely to a
substantial degree on reserve estimates in connection with the acquisition of
producing properties. If the Company overestimates the potential oil and gas
reserves of a property to be acquired, or if its subsequent operations on the
property are not successful, the acquisition of the property could result in
substantial losses to the Company.
Operating Hazards. Oil and gas operations involve a high degree of risk.
Natural hazards, such as excessive underground pressures, may cause costly and
dangerous blowouts or make further operations on a well financially or
physically impractical. Similarly, the testing and recompletion of oil and
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gas wells involves a high degree of risk arising from operational failures,
such as blowouts, fires, pollution, collapsed casing, loss of equipment and
numerous other mechanical and technical problems. Any of the foregoing
hazards may result in substantial losses or liabilities to third parties,
including claims for bodily injuries, reservoir damage, loss of reserves,
environmental damage and other damages to persons or property.
Product Liability. The Company currently does not carry product liability
insurance covering its products. The Company does intend to pursue such
insurance but cannot predict whether the Company will be able to obtain such
insurance in amounts and coverages adequate to cover the risks inherent in the
oil and gas industry or that such insurance will be available at premiums
which can be economically justified. Lack of this insurance could expose the
Company to claims for substantial damages.
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, including large oil and gas
companies and other independent operators who may have greater financial
resources.
Dependence on Key Employees and Technical Personnel. The Company is
substantially dependent upon the continued services of Douglas Lamb, its
president and a director. This individual is in good health; however, his
disability or death would have a significant adverse impact on the Company's
business operations. To the extent that his services become unavailable, the
Company will be required to retain other qualified personnel; there can be no
assurance that it will be able to recruit and hire qualified persons upon
acceptable terms.
Similarly, the oil and gas exploration industry requires the use of personnel
with substantial technical expertise. In the event that the services of its
current technical personnel become unavailable, the Company will need to hire
qualified personnel to take their place; no assurance can be given that it
will be able to recruit and hire such persons on mutually acceptable terms.
Governmental Regulations. The Company is subject to numerous state and
federal regulations, environmental and otherwise, that may have a substantial
negative effect on its ability to operate at a profit.
General Economic Risks/Potential Volatility of Stock Price. The Company's
current and future business plans are dependent, in large part, on the state
of the general economy. Adverse changes in general and local economic
conditions may cause high volatility in the market price of the Company's
securities and may adversely affect an investment in these securities. Oil and
gas prices are extremely volatile and are subject to substantial seasonal,
political and other fluctuations, all of which are beyond the Company's
control.
Future Acquisitions. The Company intends to develop and expand its business,
principally by developing its existing oil and gas leases and acquiring
additional oil and gas producing properties and/or leases thereon. See the
caption "Management's Discussion and Analysis and Plan of Operation," herein.
Although Quest has selected several properties in connection with its
expansion plans, no assurances can be given that such properties will undergo
attempted commercial development, or if they are developed, that any will be
successful or have any material positive effect on Quest or the Company.
Page 10
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PART II
Item 5. Other Information
As stated in Item 2 above, the Company's wholly owned subsidiary, HYTK Holding
Co., Inc., a Kansas corporation ("HYTK Holding"), merged (the "Merger") with
Quest Resource Corporation, a Kansas corporation ("Quest"). The amount of
assets the Company acquired from Quest pursuant to the Merger is extremely
significant when compared to the Company's pre-Merger assets. For all other
information required by Form 8-K concerning the acquisition of these assets,
see "Item 2 - Management's Discussion and Analysis or Plan of Operations,
Merger with Quest Resource Corporation."
Change in Certifying Accountant
As the Company will hereafter be focused on the operations of Quest, it has
retained the services of Quest's independent certified public accountant,
Clyde Bailey, P.C., as of January 14, 1999, for all of the Company's needs.
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 and Associates have 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.
Item 6. 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 12 of
this Form 10-QSB. The Index to Exhibits is incorporated herein by this
reference.
(b) Reports on Form 8-K. The Company did not file any reports on Form 8-K
during the quarter ended November 30, 1998.
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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 14th day of January 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 and Director January 14, 1999
- ----------------------------
Douglas L. Lamb
/s/ Richard M. Cornell Secretary and Director January 14, 1999
- ----------------------------
Richard M. Cornell
/s/ John C. Garrison Treasurer and Director January 14, 1999
- ----------------------------
John C. Garrison
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INDEX TO EXHIBITS
Exhibit Description
Page No. No. Description
- -------- ----------- -----------
* 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).
* 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).
* 10 Financial Consulting Agreement dated March 5,
1998, by and between Park Street Investments,
Inc. and HYTK Industries, Inc. (Incorporated
herein by reference to the Company's Form 10-QSB
dated November 30, 1997).
14 16 January 14, 1999 Letter Seller's and Associates
regarding the change of certifying accountant of
HYTK Industries, Inc.
Page 13
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Sellers & Associates
Certified Public Accountant
3785 Harrison Blvd. Suite 101
Ogden, Utah 84403
(801) 621-8128
Fax: (801) 627-1639
January 15, 1998
Securities and Exchange Commission
Washington, DC 20549
Gentlemen:
We were previously principal accountants for HYTK Industries, Inc. ("HYTK")
and have reported on the financial statements of HYTK as of and for the two
years ended May 31,1998 and 1997. On January 14, 1998, we were dismissed as
principal accountants of HYTK.
During the two most recent fiscal years and interim period subsequent to May
31, 1998, there have been no disagreements between HYTK and Seller's and
Associates on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure or any reportable events.
Sellers & Associates' report on the financial statements for the past two
years contained no adverse opinion or disclaimer of opinion and was not
qualified or modified as to uncertainty, audit scope or accounting principles.
Sincerely,
/s/ Sellers & Associates
