U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997
Commission file number: 0-10301
KIT KARSON CORPORATION
A WASHINGTON CORPORATION IRS No. 91-1067265
4201 East Interstate 20
Willow Park, Texas 76087
817-341-1477
Securities registered pursuant to Section 12 (b) of the Act:
None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, no par value
The registrant (1) has filed all reports required to be filed by Section
13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding
12 months, and (2) has been subject to such filing requirements for the
past 90 days. Yes [ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of June 5, 1998 was approximately $4,548,302 and consisted of
approximately 20,674,104 shares of no par value common stock.
On December 31, 1997 the Registrant had 49,959,356 shares of Common Stock
outstanding with no par value.
<PAGE>
Part I
Item 1. Description of Business.
(a) General Development of Business
Kit Karson Corporation (the Company) was incorporated under the laws of
Washington on March 1, 1979. The Company's office is located at 4201 I-20
East Service Road, Willow Park, Texas 76087.
During the period from March 1, 1979 to March 31, 1981, the Company
conducted no substantial business, received no material income and had no
material assets or liabilities. On March 31, 1981 a new management group
took control and moved the office from Spokane, Washington to
Wichita, Kansas. This new management group conducted the Company's
operations in two primary segments; oil and gas and real estate. The
Company's activities from March 31, 1981 through December 31, 1984 were
limited due to the availability of funds, however, the Company did enter
into a purchase agreement for an office building in Wichita, Kansas and
several oil and gas projects plus made a few stock acquisitions during
this period of time. Unfortunately, the investments did not sustain the
Company and the raising of additional working capital became more
difficult causing the Company to become inactive.
The Company has not been involved in any bankruptcy, receivership, or
similar proceeding and underwent no material reclassification, merger, or
consolidation during the dormant years from January 1, 1985 through
September 30, 1997. However, on October 8, 1997 an agreement was made to
revive the Company by issuing 14,150,000 shares of stock to Harold
(Hayseed) Stephens for certain oil and gas properties located in Parker
County, Texas. On December 22, 1997, Mr. Stephens became President of the
Company and the oil and gas interests were approved to be assigned to the
Company for 14,150,000 shares.
(b) Financial Information About Industry Segments
The Company's revenues for the past three years have been solely derived
from one gas well located in Beaver County, Oklahoma in which the Company
owns a 4.6125% working interest. The Company's interest in this well
generated $1,934 in 1997, $1,671 in 1996 and $1,413 in 1995. The Company
does not have any other oil and gas assets as of December 31, 1996. See
Items 6 and 7, "Management's Discussion and Analysis or Plan of
Operation" and "Financial Statements".
(c) Narrative Description of Business
The Company was seeking working capital during the years 1985 through 1987
to continue it operations; however, the collapse of the oil industry in
1986/87 caused funding to became even more difficult. The lack of working
capital led the Company to become dormant. During the years of being
dormant various opportunities were presented to the management to revive
the Company. Each opportunity was either not favorable to the Company or
was not able to close due to lack of financial commitment or strength by
the various interested parties.
Competition and Markets
The oil and gas industry is highly competitive in all of its phases, with
competition for favorable prospects being particularly intense. The
Company believes that price, geological and geophysical skill, and
familiarity with an area of operations are the primary competitive factors
in the acquisition of desirable leases and suitable prospects for oil and
gas drilling operations. The Company competes with independent operators
and occasionally major oil companies, a number of which have substantially
greater technical and financial resources than the Company.
States and countries and other jurisdictions in which the Company plans to
have operations regulate the exploration, development, production and
prices on the sale of oil and gas. The Federal Power Commission regulates
the sale of natural gas production sold in interstate commerce and the
U.S. Government regulates the price on oil. Markets for, and value of, oil
and gas discovered are dependent on such factors as regulation, including
well spacing and production allowable, import quotes, competitive fuels,
and proximity of pipelines and price-fixing by governments, all of which
are beyond the control of the Company.
On December 31, 1997, 40 degree oil (good gravity crude) was selling for
approximately $19.21 per barrel, compared to a December 31, 1996 figure of
$20.43 per barrel. Prices also vary according to gravity.
Foreign Taxes and United States Tax Credits
The Company's income is also subject to taxation under the United States
Internal Revenue Code of 1986, as amended (the "Code"). The Code
provides that a taxpayer may obtain a tax credit for certain taxes paid to
a foreign country or may take a deduction for such taxes. A tax credit is
generally more favorable than a deduction. The tax credit applicable to
particular foreign income generally arises when such income is included in
the Company's taxable income under the provisions of the Code. There are,
however, substantial restrictions and limitations on the amount of the tax
credit that can actually be claimed.
Other Regulations
Oil and gas operations are and will be subject to federal, state and local
laws and regulations and by political developments. The domestic
production and sale of oil and gas are subject to federal regulation by
the Department of Energy and the Federal Energy Regulation Commission.
Rates of production of oil and gas have for many years been subject to
federal and state conservation laws and regulations. In addition, oil and
gas operations are subject to extensive federal and state regulations
concerning exploration, development, production, transportation and
pricing, and to interruption or termination by governmental authorities.
In foreign countries, the Company may be subject to governmental
restrictions on production, pricing and export controls. Furthermore
regulations existing or imposed upon the Company at the time of its
acquisition of properties may change to an unpredictable extent. The
Company will have little or no control over the change of regulations or
imposition of new regulations and restrictions by foreign governments,
ex-appropriation or nationalization by foreign governments or the
imposition of additional foreign taxes and partial foreign ownership
requirements.
Personnel
The business of the Company has been carried on primarily by Arthur Sykes,
President, during the dormant years. The directors, Jereta Sykes and
Debra Vaughan, have devoted such time as has been necessary to carry on
the Company's business. The Company has no bonus, pension, or profit
sharing plans.
New directors and officers were appointed on December 22, 1997 when change
of control occurred. The new president is Harold (Hayseed) Stephens and
the Secretary/Treasurer is his wife, Mary Gene Stephens. The Company also
added two new directors, Ivan Webb and Richard Fessler. For more
information on the new officers and directors refer to Part III Item 9.
"Directors and Executive Officers, Promoters and Control Persons".
The day to day operations are under the direction of Mr. and Mrs.
Stephens. The Company has two full time and three part time employees.
Definitions
"Gravity" is a measure of the density of an oil. As defined in the
petroleum industry, a higher gravity corresponds to a lower density.
Gravity of crude oils range from about 12 degrees (heavy oil) to 60
degrees (distillate or gasoline-like oil). Lower gravity oils are
generally worth less, and they may require unconventional technology to
produce.
"Gross production" as used herein is defined as the total production of
oil, gas, or natural gas liquids from a property or group of properties
for any specified period of time.
"Initial Potential" (IP) is a test performed before any significant
production from a well is marketed. An oil well potential is an
indication of the maximum rate at which a well can produce. Usually, wells
produce at lower rates than their potentials. Reasons for lower rates can
involve natural decline, government regulations, difficulties with
operations or infrastructure, and reservoir management considerations.
The term "overriding royalty" (ORRI) as used herein is defined as an
interest carved out of the lessee's leasehold or working interest.
Overriding royalties are payments calculated as a percentage of either
gross production or gross revenue from a concession or lease, free and
clear of production and operations costs, except for production taxes and
marketing expenses.
The term "royalty" is generally defined as a share of the production
reserved by the grantor of an oil or gas lease or concession. Customarily,
the royalty interest is free of cost or expense incident to exploration,
development, or production, except for production taxes and marketing
expenses.
"Spudded in" means that drilling an oil or gas well has commenced.
The term "working interest" as used herein means all or a fractional
part of the ownership rights granted by a concession or lease. The working
interest, or a part thereof, pays all costs of operation and is entitled
to the gross production less royalties retained by the grantor or lessor
and less other royalties or non-operating interests created and assigned
from the working interest.
Abbreviations
BOPD - barrels of oil per day MCFG - thousand cubic feet gas
BOPM - barrels of oil per month MMCFG - million cubic feet gas
BCF - billion cubic feet WI - working interest
D&A - dry and abandoned
Item 2. Description of Property.
On December 31, 1996 the Company only had four assets. Three of these
assets were investments in stocks of which only one, Black Giant Oil
Company, is still in existence and is currently listed on the Electronic
Bulletin Board. The Company owned 87,400 shares of Black Giant Oil
Company and on December 22, 1997 (date of change of control) had a market
value of $2,622. The other two securities are considered to be worthless.
In addition to the marketable securities held by the Company, the Company
also owned a 4.6125% working interest in a gas well in Beaver County,
Oklahoma. This well, known as the Benjegerdes #1, is operated by Redstone
Oil & Gas Company of Dallas, Texas. Revenues from this working interest
for 1995 were $1,418 less operating expenses of $574 for a net income of
$844 before taxes. In 1996 the revenues were $1,696 with operating
expenses of $600, leaving a net income of $1,096 before taxes and in 1997
the revenues were $1,934 with operating expenses of $609, leaving a net
income of $1,325 before taxes.
Subsequent Events
Change of control of the Company from Art Sykes to Hayseed Stephens was on
December 22, 1997. At the time of change of control it was mutually
agreed between these two parties that Art Sykes would receive the above
mentioned assets as compensation for taking care of the Company during the
dormant years and that Hayseed Stephens would vend in an oil and gas asset
for 14,150,000 shares of stock. The following is a description of the oil
and gas asset (Greenwood Gas Field) located in Parker County, Texas.
The Company acquired a 25% working interest on December 22, 1997
(effective date of January 1, 1998) in the Greenwood Gas Field located in
Parker County, Texas. The Greenwood Gas Field is a developmental,
multipay, Strawn Sand Field, located about 35 miles due west of Fort
Worth. This 1100 acre field in the Fort Worth basin is in its early state
of development, although there has been prolific production on it, and
around it, since the 1960's. These particular leases were drilled
initially to find production in the conglomerates. This proved
unsuccessful, but a 2,800 foot Strawn Sand was discovered to be very
successful in two wells on Greenwood leases. One well produced 310,000
MCFG, while the other one produced 244,000 MCFG in six years and they were
both plugged while still producing, due to low gas prices in 1972.
The Greenwood Field was reactivated in 1984 to produce the left over gas
from the 2,800 foot sand while gas prices were high. Then it was
discovered that other shallower Strawn Sands also were very commercially
productive. These wells are drilled on 40 to 80 acre spacing and each
producing well in this field averages between 300,000 MCFG to 1BCF, only
drilling to a depth of 3,000 feet. The known productive zones are located
at 2,800 feet, 2,100 feet and 1,850 feet on the leases within the
Greenwood Gas Field. Other potentially productive zones are also known in
the area ranging from 500 feet to 1,600 feet.
There are currently 5 gas wells on the leases in which the Company owns a
25% working interest. Gas revenues from these wells for the Company's
working interest is expected to be $35,000 for 1998 and could exceed
$100,000 depending on the success of reworking certain wells and
attempting to complete other wells in an un-produced formation.
A reserve report and equipment evaluation was prepared on the Greenwood
leases in April, 1998. The reserve report reflects a fair value of $89,265
and the equipment is valued at $22,058 for the 25% working interest owned
by Kit Karson.
Gas Reserves
No estimates of reserves were filed by the Company with any agencies in
calendar year 1997.
The following table summarize certain information regarding the estimated
proved natural gas reserves and estimated future net revenues of the
Company and attributable to the Company's net revenue interests in the
Greenwood Gas Field located in Parker County, Texas. Such estimated
reserves are based upon an evaluation report prepared by Pearl Engineering
Consulting Service of Abilene, Texas, independent consulting engineering
firm.
PROVED GAS RESERVES
April 1, 1998
Gas
(Mcf)
Proved developed producing reserves 41,549
Proved developed non-producing reserves 86,406
Proved undeveloped reserves 141,076
-------
Total proved reserves 269,031
The reserve data herein represent only estimates that are based on
subjective determinations. Accordingly, the estimates are expected to
change as additional information becomes available. Further, estimates of
gas reserves, of necessity, are projections based on engineering and
economic data. There are uncertainties inherent in the interpretation of
such data, and there can be no assurance that the proved reserves set
forth herein will ultimately be produced.
Proved developed producing reserves are those expected to be recovered
from currently producing zones under continuation of present operating
methods. Proved developed non-producing reserves consist of (i) reserves
from wells which have been completed and tested but are not yet producing
due to lack or market or minor completion problems which are expected to
be corrected, and (ii) reserves currently behind the pipe in existing
wells and which are expected to be productive due to both the well log
characteristics and analogous production in the immediate vicinity of the
well. Proved undeveloped reserves are those reserves which may be expected
either from existing wells that will require major expenditure to develop
or from undrilled acreage adjacent to productive units which are
reasonably certain of production when drilled.
Item 3. Legal Proceedings.
As of June 5, 1998, there were no legal proceedings to which the Company
was a party, and no legal litigation is known to be pending.
Item 4. Submission of Matters to a Vote of Securities Holders.
No shareholder meetings were held in 1997, however subsequent to year end,
a meeting was held on March 6, 1998. The shareholders approved the
increase of the authorized shares from 50,000,000 to 100,000,000 and added
10,000,000 shares of preferred stock. The shareholders also elected new
directors for 1998 (Hayseed Stephens, Ivan Webb and Richard Fessler).
PART II
Item 5. Market for Common Equity and Related Stockholders Matters.
The Company;s Common Stock is traded on the over-the-counter market and is
quoted on the OTC Electronic Bulletin Board of the National Association of
Securities Dealers, Inc. under the symbol of KTKC. However, the stock did
not trade during 1997. On January 23, 1998 the Company began trading and
opened at 4 cents bid. On June 3, 1998 the stock price was 20 cent bid and
24 cent ask.
Approximate Number of Holders of Common Stock
The approximate number of security holders of record of Kit Karson
Corporation on June 3, 1998 was 896. Additional stockholders hold
stock in street name; the number of holders in street name is not
available to the Company.
Dividend Information
The Company has not declared or paid dividends in the past, and does
not anticipate doing so in the immediate future.
Item 6. Management's Discussion and Analysis or Plan of Operation.
Liquidity and Capital Resources
Prior to October, 1997 several attempts were made to keep the Company
active. These attempts included contacting several companies, none of
which materialized for various reasons.
On October 8, 1997, the management of the Company entered into an
agreement with Hayseed Stephens where he would take over operations in
conjunction with vending in certain oil and gas leases. Included in the
agreement, Mr. Stephens agreed to cause the accounting and filings to
become current with the Securities and Exchange Commission and other
regulatory authorities.
Change of control of the Company from Art Sykes to Hayseed Stephens was on
December 22, 1997. At the time of change of control it was approved by the
board of directors of Kit Karson and Mr. Stephens that Mr. Sykes would
receive the assets described in paragraphs 1 and 2 under Item 2
Description of Property, as compensation for taking care of the Company
during the dormant years and that Hayseed Stephens would vend in a
producing gas property in exchange for 14,150,000 shares of stock. Please
see Item 2. Properties "Subsequent Events" and "Gas Reserves" for a
description of this property (the Greenwood Gas Field).
The Company is currently in a il-liquid status as it has limited cash and
only one asset since it was revived on December 22, 1997 by an agreement
previously mentioned between the Company and Hayseed Stephens. The Company
and Ness Energy International Inc. (Ness) an entity also controlled by
Hayseed Stephens have entered into an acquisition agreement planned to
occur during the month of June 1998. This acquisition will include cash
of $400,000 to the Company, plus other assets of $314,000 - See Item 12
"Certain Relationships and Related Transactions" for more detail.
The new management has plans for additional financing of the Company's
operations through Private Placement of the Company's common stock,
Secondary Offering and the sale of working interests to fund drilling of
wells.
The principle asset on both December 31, 1995 and 1996 was cash being
$2,680 and $1,453 for these respective dates. The Company owned one
interest in a gas well in Beaver County, Oklahoma, which was acquired by
the Company without any cost in an agreement where after the investors
recaptured their investment, a 4.6125% working interest would become
effective. This interest was still in effect until it was assigned to Art
Sykes being a part of the closing for the change of control which occurred
on December 22, 1997.
Three of the Company's assets were investments in stocks of which only
one, Black Giant Oil Company, is still in existence and is currently
listed on the Electronic Bulletin Board. The Company owned 87,400 shares
of Black Giant Oil Company which on December 22, 1997 (date of change of
control) had a market value of $2,622. The other two securities are
considered to be worthless.
Results of Operations
The Company's 4.6125% working interest in the Benjegerdes #1 produced
revenues for 1995 of $1,418 less operating expenses of $574 for a net
income of $844 before taxes. In 1996 the revenues were $1,696 with
operating expenses of $600, leaving a net income of $1,096 before taxes.
No other income was reported during these three years. In 1997 the
revenues were $1,934 with operating expenses of $609, leaving a net income
of $1,325 before taxes.
The non-producing properties being acquired from Ness offer a large upside
potential for reserves and oil and gas revenues in the event the discovery
wells planned to be drilled are as successful as projected. No assurance
can be given that any of the wells to be drilled will be funded and if
funded will be completed as a successful producing well. A drilling
program is planned to drill a well on each of the three prospects prior to
the end of 1998. The Company plans to pay for 50% of the actual cost of
drilling and completing the wells and will farm out the remaining 50%. A
list of the non-producing properties are identified under Item 12.
"Certain Relationships and Related Transactions". Both the retiring
management and the new management are excited about these prospects to
rebuild the asset and revenue base of the Company during 1998.
Disclosure Regarding Forward-Looking Statements
This document includes "forward-looking" statements within the meaning
of Section 27A of the Securities Act and the Company desires to take
advantage of the "safe harbor" provisions thereof. Therefore, the
Company is including this statement for the express purpose of availing
itself of the protections of such safe harbor provisions with respect to
all of such forward-looking statements. The forward-looking statements in
this document reflect the Company's current views with respect to future
events and financial performance. These forward-looking statements are
subject to certain risks and uncertainties that could cause actual results
to differ from those anticipated. In this document, the words
"anticipates", "believes", "expects", "intends", "future", and
similar expressions identify forward-looking statements. The Company
undertakes no obligation to publicly revise these forward-looking
statements to reflect events or circumstances that may arise after the
date hereof. All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by this section.
Year 2000
The Company has conducted a comprehensive review of its computer systems
to identify the systems that could be affected by the "Year 2000" issue.
The "Year 2000" problem is the result of computer programs being written
using two digits rather than four to define the applicable year. Any
programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a
major system failure or miscalculations. The Company believes that all of
its software and equipment are "Year 2000" compliant and that this
problem will have no affect on the Company's internal operations.
Subsequent Events
During the first quarter of 1998 the Company entered into an acquisition
agreement with Ness Energy International Inc., a company which Hayseed
Stephens is also president and major shareholder. For further description
of the planned acquisition with Ness Energy International Inc., See: Item
12 "Certain Relationships and Related Transactions".
Item 7. Financial Statements.
The following financial statement information for Kit Karson Corporation
is set forth below:
Report of Independent Certified Public Accountant
Balance Sheets
Statement of Operations
Statement of Changes in Stockholders' Equity
Statement of Cash Flows
Notes to Financial Statements
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
KIT KARSON CORPORATION
Willow Park, Texas
We have audited the accompanying balance sheets of Kit Karson Corporation
(a development stage Company) (the "Company") as of December 31, 1997
and 1996 and the related statements of operations, changes in
shareholders' equity, and cash flows for each of the two years then ended.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Kit Karson Corporation
(a development stage Company) as of December 31, 1997 and 1996, and the
results of its operations and its cash flows for each of the two years
then ended, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 7 to the
financial statements, the Company has discontinued previous operations at
December 31, 1997 and is in the process of initiating a new phase of
activity. At the date of these financial statements, the Company had no
assets or liabilities, is reliant on the completion of an agreement for
the infusion of capital, and has entered into an agreement effecting a
change in management control. These facts raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also discussed in Note 7. The financial
statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ ROBERT EARLY & COMPANY
Robert Early & Company, P.C.
Abilene, Texas
May 26, 1998
<PAGE>
KIT KARSON CORPORATION
(A Development Stage Company)
Balance Sheets
December 31, 1997 and 1996
1997 1996
--------- ---------
Assets
Cash $ - $ 1,453
Accounts receivable - 151
--------- ---------
Total current assets - 1,604
--------- ---------
TOTAL ASSETS $ - $ 1,604
========= =========
Liabilities & Stockholders' Equity
Liabilities
Accrued expenses $ - $ 55
Income taxes payable - -
--------- ---------
Total current liabilities - 55
Stockholders' Equity
Common stock, no par (50,000,000 shares
authorized, 35,809,356 outstanding) 2,630,233 2,630,233
Retained (deficit) (2,630,233) (2,628,684)
--------- ---------
Total Stockholders' Equity/(Deficiency) - 1,549
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ - $ 1,604
========= =========
The accompanying notes are an integral part of these financial statements.
<PAGE>
KIT KARSON CORPORATION
(A Development Stage Company)
Statement of Operations
For the years ended December 31, 1997 and 1996
1997 1996
---------- ----------
Oil & gas revenues $ 1,934 $ 1,698
Production taxes 147 121
Lease operating expenses 609 600
Taxes 59 110
General and administrative expenses 4,084 2,148
---------- ----------
Total operating expenses 4,899 2,979
Operating Income (2,965) (1,281)
Interest income 60 66
Miscellaneous income 1,356 -
---------- ----------
Net (loss) before income taxes (1,549) (1,215)
Income tax benefit - 36
---------- ----------
NET (LOSS) $ (1,549) $ (1,179)
========== ==========
Net loss per weighted average share $ (0.00) $ (0.00)
========== ==========
Weighted average shares outstanding 35,809,356 35,809,356
========== ==========
The accompanying notes are an integral part of these financial statements.
<PAGE>
KIT KARSON CORPORATION
(A Development Stage Company)
Statement of Changes in Stockholders' Equity
For the years ended December 31, 1997 and 1996
Common Stock Accumulated
Shares Amount (Deficit)
------------------------- ------------
BALANCES, January 1, 1996 35,809,356 $ 2,630,233 $ (2,627,505)
Net (loss) - - (1,179)
---------- ------------ ------------
BALANCES, December 31, 1996 35,809,356 2,630,233 (2,628,684)
Net (loss) - - (1,549)
---------- ------------ ------------
BALANCES, December 31, 1997 35,809,356 $ 2,630,233 $ (2,630,233)
========== ============ ============
The accompanying notes are an integral part of these financial statements.
<PAGE>
KIT KARSON CORPORATION
(A Development Stage Company)
Statements of Cash Flows
For the years ended December 31, 1997 and 1996
1997 1996
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $ (1,549) $ (1,179)
Adjustments to reconcile net income/(loss) to
net cash provided by operations:
(Increase)/decrease in accounts receivable 151 (25)
Increase/(decrease) in accrued expenses (55) 13
Increase/(decrease) in income taxes payable - (36)
--------- ---------
NET CASH (USED) BY OPERATING ACTIVITIES (1,453) (1,227)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
None
CASH FLOWS FROM FINANCING ACTIVITIES:
None
Increase/(decrease) in cash for period (1,453) (1,227)
Cash, Beginning of period 1,453 2,680
--------- ---------
Cash, End of period $ - $ 1,453
========= =========
Supplemental Disclosures:
Cash payments for:
Interest $ - $ -
Income taxes - -
The accompanying notes are an integral part of these financial statements.
<PAGE>
KIT KARSON CORPORATION
(A Development Stage Company)
Notes to Financial Statements
December 31, 1997 and 1996
GENERAL:
Kit Karson Corporation (the Company) has been involved in the exploration
and development of oil and gas reserves. Although incorporated in
Washington in 1979, the Company's offices and primary businesses have been
in Kansas. The Company's main businesses of energy and real estate were
essentially abandoned by late 1985 due to insufficient operations and
capital to support ongoing cash requirements. There were two attempts
during 1986 to exploit the fact that the Company was publicly traded in
startup ventures which did not result insignificant activity or value to
the Company. Since 1986, the Company has either converted its existing
assets to cash or seen their value evaporate with time. The Company's
sole source of revenue since 1991 has been a single small working interest
in one lease which has provided approximately $1,500 per year in revenue.
This revenue has been used to pay the minimal operating costs and taxes
associated with retaining a valid corporate charter. Any remaining funds
were paid to the Company's president as compensation for seeing to the
corporate business. There have been no filings with the SEC between 1985
and 1996. An agreement was reached in late 1997 for a change in
management control of the Company (discussed further in Note 5). In the
January 1998, the Company filed the required reports on Forms 10-KSB and
10-QSB to allow its stock to resume trading.
Due to the transition between previous operations and new operations, the
Company has effectively discontinued its ongoing operations and has
initiated a new phase. As a result, the Company is deemed to have
re-entered a development stage. Effective in December 1997, the Company
disposed of its principal revenue source and began awaiting the transfer
of a new oil and gas property as discussed in Note 6. The Company will
continue to be deemed to be in a development stage until it has begun to
generate significant revenues.
Generally accepted accounting principles require financial statements to
include separate columns presenting cumulative financial statement
information. These columns have been omitted in these financial statements
because they would contain no data.
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of the Company conform with
generally accepted accounting principles.
Earnings per share -- Earnings per share are computed based on the weighted
average number of shares actually outstanding.
Cash Flows -- The Company considers cash to be its only cash equivalent
for purposes of presenting its Statement of Cash Flows.
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, the disclosure of 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.
Recent Accounting Pronouncements. In June 1997, the Financial Accounting
Standards Board (FASB) issued SFAS No. 130, ""Reporting Comprehensive
Income" which establishes standards for reporting and display of
comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except
those resulting from investments by owners and distributions to owners.
Among other disclosures, SFAS 130 requires that all items that are
required to be recognized under current accounting standards as components
of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements.
Also, in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" which supersedes SFAS
No. 14, "Financial Reporting for Segments of a Business Enterprise."
SFAS 131 establishes standards for the way that public companies report
information about operating segments in annual financial statements and
requires reporting of selected information about operating segments in
interim financial statements issued to the public. It also establishes
standards for disclosure regarding products and services, geographic areas
and major customers. SFAS 131 defines operating segments as components of
a Company about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how
to allocate resources and in assessing performance.
Both SFAS 130 and 131 are effective for financial statements for periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated. Management has determined that the impact
that these standards may have on future financial statement disclosures
will be minimal. Results of operations and financial position will be
unaffected by implementation of these standards.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Post Retirement Benefits" which standardizes the
disclosure requirements for pensions and other post retirement benefits
and requires additional information on changes in the benefit obligations
and fair values of plan assets that will facilitate financial analysis.
SFAS 132 is effective for years beginning after December 15, 1997, and
requires comparative information for earlier years to be restated, unless
such information is not readily available. The Company has no pensions or
post retirement benefit plans in place at this time. There is no impact
on the Company's financial statements related to the issuance of this
statement.
NOTE 2: INVESTMENTS IN MARKETABLE SECURITIES
The Company owned interests in three entities which were publicly traded
at the time of acquisition. These entities, like the Company itself, had
suffered significant setbacks in their operating activities. It is
believed that two of these entities have not retained their state charters
as active entities. The third, Black Giant Oil Corporation, is still in
existence and listed as tradable on the Electronic Bulletin Board.
However, there has been no trading activity in Black Giant's stock during
the 1994-1997 period.
As part of the agreement regarding the change in control of the Company,
these interests were transferred to the Company's former president. (See
the Note 5 regarding a change in control of the Company.)
NOTE 3: OIL AND GAS PRODUCING ACTIVITIES
Although the Company was in the oil and gas business with significant oil
and gas interests during its primary period of activity, the remaining
single interest is not significant enough to require the disclosures of
oil and gas activities required by Statement of Financial Accounting
Standards No. 69, "Disclosures about Oil and Gas Producing Activities".
There is no capitalized cost associated with this asset because it was
received under an agreement which gave the Company an interest in the
lease after investors had fully received their investment back from
production revenues. At the time the lease had reached "payout", the
Company had either sold, abandoned, or written off its entire oil and gas
assets leaving no basis on the books for this interest.
As part of the agreement regarding the change in control of the Company,
this interest was transferred to the Company's former president. (See the
Note 5 regarding a change in control of the Company.)
NOTE 4: INCOME TAXES
The Company's last income tax return was filed for 1984 and it showed
total operating loss carry-forwards at that time of $645,484. It is
believed that the Company generated additional operating loss
carry-forwards as the Company's business wound down in 1985 and 1986.
However, no income tax returns have been filed during the period from 1985
through 1993. Due to planned changes in control discussed in Note 5, it
is believed that the benefits from utilization of any of these
carry-forwards would be extremely limited. Management has decided that
the cost of researching the timing of transaction and preparing income tax
returns to document the loss carry-forwards for the unfiled years would
not be a cost effective use of resources available to the Company. In
view of this decision, these potential loss carry-forwards have been
discounted and are considered to be of no value. The disclosures
presented below include the activities of the Company since 1994.
A reconciliation of income tax expense at statutory tax rates to the
Company's effective tax rates follows:
1997 1996
--------- ---------
Current income tax expense $ - $ -
Benefit from loss carry-forward - -
Benefit from loss carry-back - (36)
--------- ---------
Net income tax expense $ - $ (36)
========= =========
The deferred tax asset is comprised of the following at December 31, 1997
and 1996. The valuation allowance has been established because the
Company's activities did not indicate a "more likely than not"
probability of future utilization at December 31, 1997 or 1996.
1997 1996
--------- ---------
Net operating loss carry-forward $ 379 $ 147
Less valuation allowance (379) (147)
--------- ---------
Net deferred tax asset $ - $ -
========= =========
The Company has an unused net operating loss carry-forward of $2,526 and
$977 at December 31, 1997 and 1996 that may be applied against future
taxable income. Carry-forward of $977 expires in 2011 and $1549 expires in
2012.
NOTE 5: CHANGE IN CONTROL
During the last quarter of 1997, an agreement was reached between the
Company and Hayseed Stephens which effectively transferred operating
control of the Company to him. This agreement was consummated in December
1997. Under this agreement, Stephens caused a corporation which he owned
to transfer its interest in an oil and gas lease to the Company in
exchange for 14,150,000 shares of the Company's unissued common stock.
This transaction was made effective January 1, 1998. The Company's
president agreed to provide assistance to Stephens in contacting current
stockholders in an effort for Stephens to acquire as many as 15,000,000
previously outstanding shares. Additionally, the Company's president
resigned his position as president and as a director. The board of
directors elected Stephens as the Company's new president and appointed
him as a director to fill the place of the resigning president. The board
also appointed individuals selected by Stephens to the board and previous
board members resigned.
A portion of the agreement between Stephens, the Company, and the
Company's president called for the Company to transfer the single oil and
gas lease and the investments deemed to be worthless (including Black
Giant)to the outgoing president in recognition of his efforts in keeping
the Company in existence over the years.
Stephens agreed to cause the Company to regain full reporting status with
the Securities and Exchange Commission through current filings and to seek
market makers and trading on the Electronic Bulletin Board. This resulted
in the filing of a Form 10-KSB for the year ended December 31, 1996 and a
Form 10-QSB for the nine months ended September 30, 1997. The filing of
these forms along with some additional information allowed the Company's
stock become tradable as a NASD Bulletin Board stock in February 1998.
NOTE 6: SUBSEQUENT EVENTS
Effective January 1, 1998, Hayseed Stephens Oil Company, Inc. transferred
a 25% working interests (an 18.75% net revenue interest) in a producing
oil and gas property designated the ""Greenwood" property to the Company
in accordance with an agreement dated December 22, 1997 as discussed at
Note 5. This property contains three producing gas wells and has spacing
available to drill new wells. Historical production for this interest for
1997 and 1996 consisted of 23,080 and 25,849 mcf of gas valued at $45,004
and $50,406, respectively. Production costs and taxes totaled $11,961 and
$12,548 for 1997 and 1996. Management hired a petroleum engineer to
review an report on this property. Results of this study estimated this
interest's share of producible reserves at 269,031 MCF with an estimated
fair value of $89,265. Management has inventoried the equipment and
production facilities on these properties and estimated this interest's
portion of the fair value to be $22,058. Management's plan for this
property calls for the drilling of two wells, re-working the three
existing wells, and re-entering an abandoned well.
During March 1998 at the annual stockholders' meeting, the stockholders
approved amendments to the Company's articles of incorporation to increase
the authorized common shares of the Company to 200,000,000 and to
authorize 10,000,000 shares of preferred stock.
Ness Energy International, Inc., an entity controlled by Stephens, has
agreed to transfer cash, an office building, and oil and gas interests in
three undeveloped prospects to the Company in exchange for 18,500,000
newly issued shares of common stock. In addition, during the first
quarter of 1998, Ness has paid approximately $74,000 for costs incurred by
the Company. This liability to Ness will be cleared as part of the
exchange transaction. The exchange transaction is delayed pending a
special stockholder meeting at which the stockholders will be asked to
approve a reverse split of the Company's outstanding shares 1 for 10 and
to ratify the transaction with Ness.
Once these properties have been transferred to the Company and funding is
in place, the Company expects to drill three wells on these properties
during 1998.
NOTE 7: GOING CONCERN
These financial statements have been prepared on the assumption that the
Company will continue as a going concern. The Company has been relatively
inactive during the past ten years due to a shortage of operating assets
and working capital. These factors raise questions about the Company's
ability to continue as a going concern. However, until the transfer of the
Company's single property there was no indication the Company could not
continue to operate at historical minimal level. The agreement with
Hayseed Stephens altered the status quo which the Company has experienced
over the last several years because of the transfer of the single existing
revenue source to the previous president. Stephens' transfer to the
Company of another producing property would imply that a minimal
operating level can be maintained. However, the Company's plans and
efforts have a high cost. The Company's ability to continue is contingent
on its ability to raise new capital, to exploit the oil and gas properties
which are to be transferred to the Company, and to develop sufficient
revenues to cover costs.
Management believes that it can adequately raise the necessary capital to
restart the Company and develop revenue generating assets such that the
Company will become profitable. Plans include a stock offering during
1998, funding oil and gas development through joint ventures, and interim
assistance from entities controlled by Stephens. The consummation of
Stephens' transfer of the one producing property and plans to transfer
non-producing properties to the Company do not appear to provide adequate
revenues to support the planned activities. Therefore, the planned
activities are dependent on the Company's ability to fund its working
capital and development requirements through private placements or public
offerings of equity securities and/or debt. There is no assurance that the
Company will obtain sufficient funding for it's plans. Should the Company
not obtain the necessary funding, its plans would have to be significantly
reduced.
<PAGE>
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.
The new 1997 management engaged Robert Early & Company, P.C. to audit
1995, 1996 and 1997.
There are no disagreements between the Company and its auditor, Robert
Early & Company, P.C. of Abilene, Texas, regarding accounting and/or
financial disclosure.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons.
Before Change of Control
The following is a list of the directors and executive officers of the
Company as of December 31, 1996 and until the change of control on
December 22, 1997:
Name Age Position
---- --- --------
Arthur Sykes, Jr. 70 President, Chief Executive
Officer and Director
Jereta R. Sykes 72 Secretary/Treasurer and
Director
Debra Vaughan 46 Director
Arthur Sykes, Jr. and Jereta Sykes are husband and wife and Debra Vaughan
is their daughter.
After Change of Control
The directors and executive officers of the Company on December 22, 1997
are as follows:
Name Age Position
---- --- --------
Harold (Hayseed) Stephens* 60 President, Chief Executive
Officer and Director
Mary Gene Stephens* 58 Secretary & Treasurer
Ivan Webb 47 Director
Richard H. Fessler 52 Director
*Harold (Hayseed) Stephens and Mary Gene Stephens are husband and wife.
There are no other family relationships between the directors and
officers.
Harold (Hayseed) Stephens, President & Director, graduated from Hardin
Simmons University in 1961 with a BS degree. Mr. Stephens founded Hayseed
Stephens Oil & Gas Inc. in 1983 for domestic oil and gas operations
primarily in Texas and Oklahoma. He also founded Ness Energy International
for international operations focusing on Israel for oil and gas
concessions. In 1984 - 1985 Stephens partnered with three Israeli
companies in a 50 million dollar drilling consortium that leased 400,000
acres.
Mary Gene Stephens, Secretary & Treasurer, has been involved in office
administration and day to day bookkeeping and correspondence for Hayseed
Stephens Oil & Gas Inc. and Ness International Energy Inc. for the past 15
years. Mrs. Stephens has also been involved in preparing drilling
proposals and joint interest billing and income distribution.
Ivan W. Webb, Chief Financial Officer and Director, received his Bachelor
of Business Degree in Business Administration from Tarleton State
University (Texas A&M Branch) in 1978. He was instrumental in the
preparation of four domestic oil and gas public stock offerings. Mr. Webb
has been involved in the negotiations for the acquisition of more than 200
producing oil and gas properties within the United States during his
career. He has international experience through negotiating with
governments for oil and gas concessions in Australia and gold and diamond
leases in Guyana, South America. He is currently President of Black Giant
Oil Company, a public company also listed on the Electronic Bulletin
Board.
Richard H. Fessler, Director, graduated from Northrop University in 1966
and is President, owner and co-founder (1969) of Hallmark Aero-Tech,
Hallmark Institutes and Hallmark Jet Center. He served as Commissioner for
six years for Accrediting Commission of Career Colleges and Technical
Schools of Washington, D.C., and was founding chairman of the Texas
Association of Private Schools (TAPS) Scholarship program which has raised
over $8,000,000 in scholarships for Texas students.
Item 10. Executive Compensation.
No compensation was paid during the years ended December 31, 1995 and
1996. No compensation is to be paid in 1997 other than the assignment of
the working interest in the gas well in Beaver County, Oklahoma and 87,400
shares of Black Giant Oil Company to Arthur Sykes, Jr. for maintaining the
Company during the dormant years. The amount of this compensation is
calculated to be $4,622.
The following table shows the proposed annual compensation to be paid to
the officers of Kit Karson Corporation in 1998 subject to funding and/or
the availability of funds.
Name and Principal Position Salary
--------------------------- -------
Hayseed Stephens, President
and Chief Executive Officer $60,000
Mary Gene Stephens, Secretary/Treasurer $18,000
All compensation and other arrangements between the Company and its
officers and directors are to be approved by a Compensation Committee of
the Board of Directors, a majority of whom are to have no affiliation or
relationship with the Company other than as directors.
Compensation of Directors: Directors are not compensated for attendance
at meetings of the Board, although certain travel expenses relating to
attending meetings are reimbursed.
No employment contracts are currently outstanding as of this date,
however, it is anticipated that some may be entered into prior to December
31, 1998.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
Security Ownership of Certain Beneficial Owners
Set forth below is certain information concerning persons or firms who are
known by the Company to own beneficially more than 5% of the Company's
common stock and voting shares on June 3, 1998:
Name and Address Number of Percent
Title of Class of Beneficial Owner Shares Owned of Class
- ------------ --------------------------- ------------ --------
Common Stock Hayseed Stephens Oil, Inc.* 14,150,000 28.3%
No Par Value 365 Cook Road
Willow Park, Texas 76087
Common Stock Hayseed Stephens* 14,079,752** 28.2%
No Par Value 365 Cook Road
Willow Park, Texas 76087
*Hayseed Stephens and his wife are the owners of Hayseed Stephens Oil,
Inc.
**Hayseed Stephens acquired these shares from a group of large
shareholders at the same time change of control became effective.
Security Ownership of Management
The following table sets forth as of June 3, 1998 information concerning
the beneficial ownership of common stock by all directors and all
directors and officers of the Company as a group based on 49,959,356
shares outstanding.
Name and Address Number of Percent
Title of Class of Beneficial Owner Shares Owned of Class
- ------------ ------------------- ------------ --------
Common Stock Hayseed Stephens* 28,229,752** 56.5%
No Par Value 365 Cook Road
Willow Park, Texas 76087
Common Stock Mary Gene Stephens* -0- -0-
No Par Value 365 Cook Road
Willow Park, Texas 76087
Common Stock Ivan Webb -0- -0-
No Par Value 901 West 6th Street
Cisco, Texas 76437
Common Stock Richard Fessler -0- -0-
No Par Value One Priors Way
San Antonio, Texas 78257
All directors and officers as a
group (4 persons) 28,229,752 56.5%
*Harold (Hayseed) Stephens and Mary Gene Stephens are husband and wife.
There are no other family relationships between the directors and
officers.
**This amount includes the stock owned by Hayseed Stephens Oil Inc. which
is 14,150,000 shares.
Item 12. Certain Relationships and Related Transactions.
The change of control between Arthur Sykes, Jr. and Hayseed Stephens
provided for Arthur Sykes, Jr. to receive the assets of the Company as
compensation for his efforts in keeping the Company in existence during
the dormant years. Total value of these assets is estimated to be $4,622
for the oil and gas interest in the gas well in Beaver County, Oklahoma
and the various stocks. See Item 2 Description of Property.
Hayseed Stephens through his company, Hayseed Stephens Oil Inc. acquired
14,150,000 shares of the Company's common stock for a 25% working interest
in the Greenwood Gas Field located in Parker County, Texas. See Item 2
Description of Property under the heading Subsequent Events for further
information on this property.
On April 3, 1998 Kit Karson and Ness entered into an agreement for a
total benefit of $788,153 in assets ($400,000 of which is cash) and paid
expenses from Ness for stock in Kit Karson. The Board of Directors
approved the agreement subject to shareholder approval. This transaction
involves the acquisition by Kit Karson of $714,168 in net assets and
$73,985 in expenses incurred by Ness for a total of $788,153 for
18,500,000 (adjusted to reflect a proposed 1 for 10 reverse split) shares
of the Company's common stock. Of the $714,168 net assets being acquired
from Ness, $400,000 is cash. This cash position is very important to Kit
Karson, as this will be the first time that the Company has had any
material cash on hand since the early 1980's.
The following is an allocation of the assets being acquired from Ness:
Category Amount
---------------------------------------------------------------
Cash* $ 400,000
Non Producing Leases** 140,784
1996 Ford Truck 21,884
Israel Deposit*** 50,000
Account Receivable**** 35,000
Office Building***** 106,000
---------
Total Assets $ 753,668
Office Building Debt (39,500)
---------
NET ASSETS FROM NESS $ 714,168
=========
Notes: *An important part of the assets being acquired from Ness is
$400,000 in cash which will be placed in interest bearing accounts pending
investment and/or use for operating expenses.
**The non-producing properties consist of three leases identified below:
Appraised
Lease Name Actual Cost Value
-------------------------------------------------------------
Theis $ 44,733 $ 75,733
Susan Peak North 74,766 105,733
Hazelwood 21,285 60,785
---------- ----------
Totals $ 140,784 $ 242,284
========== ==========
***On May 10, 1998 Ness placed a $50,000 deposit in Israel pending the
signing of a lease agreement. Ness has also incurred $18,500.43 in travel
expense during the first three months of 1998 on trips to Israel and here
in the United States seeking to acquire the lease and/or obtain a farm-out
arrangement on the area of interest. Also incurred were legal fees in
preparation of certain legal documents on the Israel project which amount
to $4,063 during the first quarter by Ness. There is no assurance that the
Company can obtain a lease or if a lease is obtained that financing can be
arranged to meet the financial requirements. At the time the lease
agreement is effective an additional $50,000 will be paid. Ness will
receive all geological and geophysical data for the two payments totaling
$100,000. Ness will transfer the rights to this deposit, data and lease to
Kit Karson.
****Ness loaned $35,000 to Trinity Financial Services, L.C. to assist them
in obtaining funding of which a part is directed toward Ness' Israel
Project. Ness will transfer this receivable to Kit Karson.
*****The building cost $66,000 and $40,000 in improvements have been made
for a total cost of $106,000. Currently, Ness owes approximately $39,500
on the building, this debt will also convey to Kit Karson. During the
first quarter Ness made expenditures of $8,313 on the building, primarily
related to the repairs to the roof.
In addition to the $714,168 in net assets, Ness Energy has paid expenses
on behalf of Kit Karson of $73,985 from January 1, 1998 through March 31,
1998. The categories of these expenses are; Advertising $11,327,
Professional Fees $16,657, Salaries $19,346, Contract Labor $1,107,
Offices Expenses $11,156, Utilities $1,121, Postage & Freight $6,362 and
Telephone $6,909.
Several of the officers and directors of the Company have invested in the
oil and gas business, either directly or through entities in which they
have an interest. Certain of these interests could directly compete with
the interests of the Company. Although the Company is not aware of any
present conflicts of interest, such present or future activities on the
part of the officers and directors could directly compete with the
interests of the Company. If the Company should enter into future
transactions with its officers, directors or other related parties, the
terms of any such transactions will be as favorable to the Company, as
those which could be obtained from an unrelated party in an arm's length
transaction.
Item 13. Exhibits and Reports on Form 8-K.
On January 12, 1998 a Form 8-K was filed reporting the change of control
of ownership of the Company, change of directors and officers and change
of the Company's auditor.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, Kit Karson Corporation has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
KIT KARSON CORPORATION
/s/ Hayseed Stephens
By: Hayseed Stephens
President & Chief Executive Officer
/s/ Ivan Webb
Ivan Webb
Principal Accounting Officer &
Principal Financial Officer
Date: June 11, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The following schedule contains summary financial information which has been
extracted from the consolidated financial statements of Kit Karson Corporation
for the annual financial statements filed on Form 10-KSB for the periods
indicated. These summary schedules are qualified in their entirety by
reference to such financial statements and the notes thereto.
</LEGEND>
<CIK> 0000353634
<NAME> Kit Karson Corporation
<S> <C> <C>
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<PERIOD-END> DEC-31-1997 DEC-31-1996
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<SECURITIES> 0 0
<RECEIVABLES> 0 151
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 1604
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0 00
0 0
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