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 August 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.)
P. O. Box 100 701 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 October 14, 1999, was 5,292,843.
Total of Sequentially Numbered Pages: 15
Exhibit Index on Page: 9
1
<PAGE>
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION.................................................3
Item 1. Financial Statements.........................................3
Consolidated Financial Statements..........................F-1
Item 2. Management's Discussion And Analysis.........................4
Business of Issuer...........................................4
Ponderosa Gas Pipeline Company...............................4
Quest Energy Service, Inc....................................5
Expansion Plans..............................................5
Results of Operations........................................6
Capital Resources and Liquidity..............................6
Year 2000 Concerns...........................................6
PART II - OTHER INFORMATION....................................................7
Item 2. Changes in Securities and Use of Proceeds....................7
Item 6. Exhibits and Reports on Form 8-K.............................7
SIGNATURES............................................................8
INDEX TO EXHIBITS.....................................................9
2
<PAGE>
PART I - FINANCIAL INFORMATION
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 August 31, 1999 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-6 and are incorporated herein by this reference. The Company was
essentially dormant of operational activity during the same quarter for the
preceding fiscal year so the comparable quarters do not have compatible
operations for comparison purposes.
The financial statements included herein have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with the generally
accepted accounting principles have been omitted. However, in the opinion of
management, all adjustments (which include only normal recurring accruals)
necessary to present fairly the financial position and results of operations for
the period presented have been made. The results for interim periods are not
necessarily indicative of trends or of results to be expected for the full year.
These financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's annual report on Form
10-KSB for the Fiscal Year Ended May 31, 1999.
3
<PAGE>
HYTK Industries Inc.
Consolidated Balance Sheet
August 31 May 31
1999 1999
----------- -----------
A S S E T S
Current Assets
Cash $ 28,134 $ 31,288
Accounts Receivable 381,660 294,301
Notes Receivable 62,860 68,119
Inventory 22,100 22,100
----------- -----------
Total Current Assets $ 494,754 $ 415,808
Fixed Assets
Equipment 532,528 538,662
Office Equipment 20,769 20,369
Buildings 40,159 40,159
Land 5,000 5,000
Less: Allowance for Depreciation (209,669) (197,073)
----------- -----------
388,787 407,117
Pipeline Assets, net 2,562,243 2,549,441
Oil & Gas Leasehold, net 577,010 575,401
Other Assets
Contracts & Right of Way, net 108,181 114,355
Organization Costs, net 119,329 119,475
Deferred Tax Credit 130,073 127,062
----------- -----------
357,583 360,892
----------- -----------
Total Assets $ 4,380,377 $ 4,308,659
=========== ===========
F-1
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<TABLE>
<CAPTION>
HYTK Industries Inc.
Consolidated Balance Sheet
August 31 May 31
1999 1999
----------- -----------
L I A B I L I T I E S A N D S T O C K H O L D E R S' E Q U I T Y
Current Liabilities
<S> <C> <C>
Accounts Payable $ 33,490 $ 81,699
Oil & Gas Payable 160,448 118,765
Accrued Interest 81,294 67,496
Notes Payable, Current Portion 349,294 360,097
Accrued Expenses 2,962 3,217
----------- -----------
Total Current Liabilities 627,488 631,274
Non-Current Liabilities
Note Payable 1,328,574 1,346,810
Less Portion Shown as Current (349,294) (360,097)
----------- -----------
979,280 986,713
----------- -----------
Total Liabilities 1,606,768 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 5,293 5,138
Value; Issued and Outstanding shares were 5,292,843 on
8/31/99 and 5,137,843 shares on 5/31/99
Paid In Surplus 3,189,628 3,089,783
Retained Earnings (421,312) (404,249)
----------- -----------
2,773,609 2,690,272
----------- -----------
Total Liabilities and Stockholders' Equity $ 4,380,377 $ 4,308,659
=========== ===========
F-2
</TABLE>
<PAGE>
HYTK Industries Inc.
Consolidated Statement of Operations
For the Three Months Ended August 31
------------------------------------
1999
Revenue -------- --------
Gas Pipeline Transmission Fees $127,998 $ --
Oil & Gas Production Revenue 46,348 --
Oil & Gas Operations 81,059 --
Pipeline Operations 49,086 --
Pipeline Development 32,371 --
Oil & Gas Marketing 13,540 --
Other Revenue 5,778 --
-------- --------
Total Revenues 356,180 --
Cost of Revenues
Purchases & Outside Services 47,678 --
Lease Operating Costs 33,462 --
Pipeline Operating Costs 43,700 --
Wages 80,126 --
Payroll Taxes 6,129 --
Utilities-Leases 14,853 --
Tags, License, & Equipment Repairs 1,024 --
Fuel, Oil, Etc 10,325 --
-------- --------
Total Cost of Revenues 237,297 --
Gross Profit $118,883 $ --
F-3
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<TABLE>
<CAPTION>
HYTK Industries Inc.
Consolidated Statement of Operations (con't)
For the Three Months Ended August 31
------------------------------------
General and Administrative Expenses 1999 1998
-------- --------
<S> <C> <C>
Interest $ 26,781 29
Bad Debts 0 --
Depreciation & Amortization 58,626 --
Insurance 13,130 --
Repairs 12,568 --
Supplies 3,251 --
Telephone 4,106 --
Utilities 1,662 --
Other Expenses 20,216 --
-------- --------
Total General and Administrative Expenses 140,340 29
Income (Loss) from continuing operations before (21,457) (29)
other income and expenses and income taxes
Other Income
Sale of Assets -- --
Interest Income 1,383 --
-------- --------
Total Other Income 1,383 --
Net (Loss) Before Income Taxes (20,074) (29)
Income Tax Benefit 3,011 --
-------- --------
Provision for Income Taxes 3,011 --
Net (Loss) (17,063) (29)
======== ========
Net Loss per share $ (0.003) $ (0.000)
Weighted Average Number of
Shares Outstanding 5,257,565 2,052,266
F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HYTK Industries Inc.
Consolidated Statement of Cashflows
For the Three Months Ended August 31
--------------------------
1999 1998
Cash Flows from Operating Activities: --------- ---------
<S> <C> <C>
Net Loss $ (17,063) $ (29)
Adjustments to Reconcile Excess Contributions to cash
provided from operations:
Depreciation 41,985 --
Amortization 10,320 --
Depletion 6,321 --
Accounts Receivable (87,359) --
Organization Costs (4,000) --
Accounts Payable (48,209) --
Oil & Gas Payable 44,711 --
Notes Receivable 5,259 --
Deferred Tax Credit (3,011) --
Accrued Interest Payable 13,798 29
Accrued Expenses 255 --
--------- ---------
Total Adjustments (19,930) 29
Net Cash used in Operating Activities (36,993) --
Cash flows from Investing Activities:
Fixed Assets (47,925) --
--------- ---------
Net Cash used in Investing Activities (47,925) --
Cash flows from Financing Activities
Increase in Long-Term Debt 0 --
Extinguishment of Long-Term Debt (18,236) --
Paid-In-Capital 100,000 --
--------- ---------
Net Cash used in Financing Activities 81,764 --
Net Increase (Decrease) in Cash (3,154) --
Cash Balance, Begin of Period 31,288 --
Cash Balance, End of Period $ 28,134 $ --
========= =========
F-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HYTK Industries Inc.
Consolidated Statement of Stockholders Equity
Common Par Paid-In Retained
Shares Value Capital Earnings Total
--------- ---------- --------- -------- ----------
<S> <C> <C> <C> <C> <C>
Balance June 1, 1999 5,137,843 $ 5,138 3,089,783 (404,249) $2,690,672
Stock Issuance 155,000 155 99,845 100,000
Net Income (Loss) (17,063) (17,063)
--------- ---------- --------- -------- ----------
Balance August 31, 1999 5,292,843 5,293 3,189,628 (421,312) 2,773,609
========= ========== ========= ======== ==========
F-6
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</TABLE>
<PAGE>
Item 2. Management's Discussion And Analysis
Business of Issuer
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
factors that could cause the Company's actual results to differ materially from
those indicated by such forward-looking statements.
On December 31, 1998, HYTK Industries, Inc., a Nevada corporation (the
"Company"), 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 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, the Company has focused upon reducing
debt and 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 August 31, 1999 of $4.38
million, total debt of $1.61 million, and stockholder's equity of $2.77 million.
Ponderosa Gas Pipeline Company, Inc. (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 approximately 500 square miles out of which only a few
square miles are being developed by competitors. 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 an internally funded 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.
The pipeline improvements have resulted in a regional gas gathering network
which has bi-directional flow capability that provides access to outlet
connections for multiple markets. The PGPC pipeline network currently provides
the exclusive market outlet for natural gas production in a region which extends
into several counties in southeast Kansas.
4
<PAGE>
The PGPC pipelines are currently operating at about 50% capacity and near
breakeven cash flows at such levels. The pipelines serve areas where additional
gas volumes are available from proven and probable yet undeveloped gas reserves.
Quest's intended development of these gas reserves is expected to increase the
pipelines' usage and profitability. 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 cause attractive increases in net
operating profit.
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
the Company expects will significantly increase PGPC's leased acreage, gas
reserves and gas production.
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. 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 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.
Expansion Plans
The Company's primary goal is to increase its profitability significantly beyond
the existing status which is at a level that is approximately breakeven. The key
factor required for achieving such profitability is the expansion of the
Company's gas production. For this to occur, the Company must secure additional
funding. The structure of a private placement offering of the Company's
preferred stock has just been finalized. The Company intends to attempt to raise
up to $5,000,000 to finance gas development and reduce debt. No assurances can
be given that the Company will be successful in obtaining additional financing,
or, if it does, that the Company will be able to increase its profitability as a
result.
Quest's well completion success rate has been about 90% during the past four
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 500 square mile
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. However, much of
this splintered ownership has since been consolidated into PGPC through various
asset exchanges for Company stock.
5
<PAGE>
Results of Operations
The Company was essentially dormant of operational activity until the Merger
with Quest in December, 1998 so there is no previous period with comparable
operations for the quarter ended on August 31st. 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 quarter ended August 31, 1999 was $356,180 which
resulted in a net loss after provision for income taxes of $(20,074). Included
in this net loss were non-cash deductions including depreciation, amortization
and depletion expenses which totaled $58,626.
Capital Resources and Liquidity
During the fiscal quarter ended August 31, 1999 a total of $47,925 was invested
in fixed assets; long term notes payable decreased by $18,236, net cash from
operating activities was $(36,993), and the ending cash balance was $28,134. The
increased investment in fixed assets was a result of ongoing improvements to the
gas pipeline assets, while the decrease in notes payable reflects debt reduction
from routine monthly debt service payments.
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, which it is seeking to address
through its expansion plans as discussed above.
The Company had a deficit in working capital of $(132,734) on August 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
($215,466) on May 31, 1999 which was caused primarily by the reduction in
accounts payable and notes payable. 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 quarter ended
August 31, 1999 in which the cash balance began with $31,288 and ended with
$28,134. 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.
Year 2000 Concerns
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.
6
<PAGE>
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.
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On June 24, 1999 the Company entered into a stock purchase agreement whereby it
issued 75,000 shares to Wasatch Capital Corporation in exchange for the amount
of $100,000 which the Company received in four equal cash payments during the
four month period ending in September, 1999. Such issuance was made pursuant to
an exemption from registration contained in Section 4(2) of the Securities Act
of 1933, as amended.
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 8 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 August 31, 1999.
7
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<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 14th day of October, 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 October 14, 1999
- ----------------------------
Douglas L. Lamb
/s/ Richard M. Cornell Secretary and Director October 14, 1999
- ----------------------------
Richard M. Cornell
/s/ John C. Garrison Treasurer and Director October 14, 1999
- ----------------------------
John C. Garrison
8
<PAGE>
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).
9
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000775351
<NAME> HYTK Industries, Inc.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1999
<PERIOD-END> AUG-31-1999
<EXCHANGE-RATE> 1.000
<CASH> 28,134
<SECURITIES> 0
<RECEIVABLES> 444,520
<ALLOWANCES> 0
<INVENTORY> 22,100
<CURRENT-ASSETS> 494,754
<PP&E> 3,160,699
<DEPRECIATION> (209,669)
<TOTAL-ASSETS> 4,380,377
<CURRENT-LIABILITIES> 627,488
<BONDS> 979,280
0
0
<COMMON> 5,293
<OTHER-SE> 2,768,316
<TOTAL-LIABILITY-AND-EQUITY> 4,380,377
<SALES> 356,180
<TOTAL-REVENUES> 357,563
<CGS> 237,297
<TOTAL-COSTS> 377,637
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,781
<INCOME-PRETAX> (20,074)
<INCOME-TAX> (3,011)
<INCOME-CONTINUING> (17,063)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,063)
<EPS-BASIC> (0.003)
<EPS-DILUTED> (0.003)
</TABLE>
