<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15 (d) of
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1998
Commission File Number: 0-10301
KIT KARSON CORPORATION
A WASHINGTON CORPORATION IRS No. 91-1067265
4201 East I-20 Service Road
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
--- ---
State the aggregate market value of the voting stock held by non-affiliates of
the Registrant as of August 3, 1999.
Common Stock, no par value, 20,674,104 shares, $28,426,893 Market Value
On December 31, 1998 the Registrant had 49,959,356 shares of Common Stock
outstanding with no par value. On August 3, 1999 the total number of shares
outstanding were 53,894,801. The Registrant also has 10,000,000 shares of
Preferred Stock with a par value of $0.10 of which no shares have been issued.
<PAGE> 2
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.
The Company began trading during the month on January 23, 1998, after the
Company became current in its filings with the Securities and Exchange
Commission. On March 6, 1998, the Company held its annual meeting to ratify the
selection of auditors, elect new directors, increase the authorized shares from
50,000,000 to 200,000,000 shares plus add 10,000,000 Preferred Shares to the
capitalization of the Company.
Subsequent to the end of the year ended December 31, 1998, the Company changed
its name to Ness Energy International, Inc. The name change became effective
July 6, 1999.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company's revenues for 1998 were derived solely from the gas wells on the
Greenwood Gas Field in which the Company holds a 25% working interest. Gross
revenues from this interest for 1998 were $22,301. The Company's gross revenues
for the previous two years were 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 and $1,671 in 1996.
2
<PAGE> 3
The Company does not have any other oil and gas assets as of December 31, 1998.
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.
On December 22, 1997, the Company had a change in control. The change in control
caused the Company to be revived and allow the Company to become a viable
entity.
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, 1998, 40-degree oil (good gravity crude) was selling for
approximately $9.50 per barrel, compared to a December 31, 1997 figure of $19.21
per barrel. Prices also vary according to gravity. Natural gas prices for
December 31, 1997 were $1.70 per MCF and were $1.80 per MCF on December 31,
1998.
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.
3
<PAGE> 4
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
Since December 22, 1997, the President, Hayseed Stephens, has principally
conducted the business of the Company. Ivan Webb, Chief Financial Officer and
director, has 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. Subsequent to the end of the
fiscal year, Richard Fessler resigned as a director of the Company. Following
his resignation, Mr. David Boyce was appointed by the Board of Directors to fill
this vacancy until the next annual meeting. For more information on the new
officers and directors refer to Part III Item 9. "Directors and Executive
Officers, Promoters and Control Persons".
The daily operations are under the direction of Mr. and Mrs. Stephens. The
Company has one full time and one part time employee in addition to the
Stephens's. On April 15,1998 the Company entered into an agreement with Ness
Energy International, Inc. where Ness would provide Management, Secretarial,
Receptionist, Clerical and Bookkeeping for a turnkey flat rate monthly fee of
$2,750.00 beginning date of January 1, 1998. The contract term is for a two-year
period, which will end December 31, 1999.
DEFINITIONS
"Gravity" is a measure of the density of 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.
4
<PAGE> 5
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 owned a 4.6125% working interest in a gas well
in Beaver County, Oklahoma. Redstone Oil & Gas Company of Dallas, Texas operate
the well, Benjegerdes #1. 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.
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 asset
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
5
<PAGE> 6
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 sales from these wells for the Company's working interest
was $22,301 for 1998. Lease operating expenses, production taxes and compression
expenses totaled $10,460 leaving a profit from this lease of $11,841.
A reserve report and equipment evaluation was prepared on the Greenwood leases
in December 31, 1998. The reserve report reflects a fair market value of
$38,227, a present value of $70,556 and the equipment is valued at $22,058 for
the 25% working interest owned by the Company as of December 31, 1998.
GAS RESERVES
The following table summarizes 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
DECEMBER 31, 1998
Gas
(Mcf)
-------
Proved developed producing reserves 24,870
Proved developed non-producing reserves 85,964
Proved undeveloped reserves 141,266
Total proved reserves 252,100
6
<PAGE> 7
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 un-drilled acreage adjacent to productive
units, which are reasonably certain of production when, drilled.
ITEM 3. LEGAL PROCEEDINGS.
As of August 3, 1999, there were no lawsuits against the company. However, the
Company settled two lawsuits filed against the Company during the last quarter
of 1998 subsequent to year end through the issuance of stock to settle these two
lawsuits (See Note 7 to the Financial Statements). A request has been made by
one of the parties to remove the restrictive legend on the shares, which has
been denied by the Company. An arbitration hearing is set for August 27, 1999 to
resolve this matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
A meeting was held on March 6, 1998. The shareholders approved the increase of
the authorized shares from 50,000,000 to 200,000,000 and added 10,000,000 shares
of preferred stock. The shareholders also elected new directors for 1998
(Hayseed Stephens, Ivan Webb and Richard Fessler). The next annual meeting of
the shareholders is planned for the fall of 1999.
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 until July 6, 1999. The symbol
changed to NESS on July 6, 1999, pursuant to changing the name of the
Corporation to Ness Energy International, Inc.
The stock did not trade during 1997. On January 23, 1998, the Company began
trading after being revived and opened at 4 cents bid. These bid quotations
reflect inter-dealer bid prices and not ask prices, without mark-down or
commissions, and may not necessarily represent actual transactions.
7
<PAGE> 8
<TABLE>
<CAPTION>
Period Low Bid High Bid
-------------- ------- --------
<S> <C> <C>
First Quarter $0.04 $0.63
Second Quarter $0.17 $0.68
Third Quarter $0.25 $0.52
Fourth Quarter $0.20 $0.36
</TABLE>
On August 3, 1999, the stock price was $1.37 bid and $1.45 ask.
APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK
The approximate number of security holders of record of Kit Karson
Corporation on August 3, 1999 was 1,125. 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 were ever completed
due to either financing problems or lack of working capital to make the merger
successful.
On October 8, 1997, the management of the Company of that time entered into an
agreement with Hayseed Stephens where he would take over operations in
conjunction with vending 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 gas asset for 14,150,000 shares of stock.
Please see Item 2. Properties and "Gas Reserves" for a description of the gas
asset (Greenwood Gas Field) located in Parker County, Texas.
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 oil and gas 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 that occurred on December 22, 1997.
8
<PAGE> 9
RESULTS OF OPERATIONS
The Company's 4.6125% working interest in 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 Company's natural gas revenues for 1998 were $22,301 compared to $1,934 for
1997. The operating expenses, production taxes and compression expenses totaled
$10,460 leaving a profit from this lease of $11,841 for 1998 and net revenues of
$1,119 for 1997 from the well owned in 1997.
The expenses during the year ended December 31, 1998 were nominal except for the
litigation settlement which is a non cash outlay expense as the Company issued
2,701,500 shares which had a value of $1,392,900 at the time of settlement with
each case.
As previously discussed in this section the Company was revived in December 1997
and during the first year of operations by new management expenses were paid by
Ness Energy International, Inc. as the Company had very limited working capital.
Ness paid the general and administrative expenses of $110,053 shown for 1998.
Net loss reported for 1997 and 1998 was $1,549 and 1,496,720 respectively. The
1997 loss was insignificant on a per share basis and was 3 cents per share for
1998.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133). This statement standardized the accounting
for derivative instruments, including certain derivative instruments embedded in
other contracts, requiring that an entity recognize those items as assets or
liabilities in the statement of financial position and measure them at fair
value. The statement generally provides for matching the timing of gain or loss
recognition on the hedging instrument with the recognition of (a) the changes in
fair value of the hedged assets or liabilities that are attributable to the
hedged risk, or (b) the earnings effect of the hedged transaction. The statement
is effective for all fiscal quarters of all fiscal years beginning after June
15, 1999, with earlier application encouraged, and shall be applied
retroactively to financial statements of prior periods. Adoption of SFAS 133 is
expected to have no effect on the Company's financial statements.
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 works "anticipates," "believes," "expects."
9
<PAGE> 10
"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 COMPLIANCE
The year 2000 poses certain issues for business and consumer computing,
particularly the functionality of software for two-digit storage of dates and
special meanings for certain dates such as 9/9/99. The year 2000 is also a leap
year, which may lead to incorrect calculations, functions or system failure. The
widespread use of computer programs that rely on these two-digit date programs
to perform computations and decision-making functions may cause information
technology systems to malfunction in and around the year 2000. Such malfunctions
may lead to significant business delays in the U.S. and internationally. The
problem exists for many kinds of software, including software for mainframes,
PCs and embedded systems. Many normal business activities will potentially be
impacted because computers control information necessary to monitor and control
various operations.
The Company has studied and tested its technologies systems impacted by the Year
2000 transition. The Company believes that its systems are Year 2000 compliant.
However, variability of hardware and software combinations may lead to
unforeseen problems. The Company does not believe that any problems that arise
with internal systems will be material or will require more than minimal costs
to overcome.
The Company's vendors are various and diverse and the bulk of the items
purchased by the Company are widely available. There are no problems which are
expected to arise due to vendors' failure to be Year 2000 compliant because
auxiliary channels should be available to the Company to acquire its supplies,
parts and other needs from other vendors should any particular vendor have a
problem due to noncompliance.
Due to the nature of the Company's business and its information and accounting
systems, costs to bring its systems into compliance have been immaterial.
ITEM 7. FINANCIAL STATEMENTS.
The following financial statement information for Kit Karson Corporation begins
following the signature page of this form. The index to the following financial
statements is on page F-1.
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
Supplemental Data
10
<PAGE> 11
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Robert Early & Company, P.C. audited the following years of the Company 1995,
1996 and 1997 and Weaver and Tidwell, L.L.P. audited the year ended December
31, 1998.
There are no disagreements between the Company and its auditor, Robert Early &
Company P.C. of Abilene, Texas, and there are no disagreements between the
Company and its current auditor Weaver and Tidwell, L.L.P. of Fort Worth
regarding accounting and/or financial disclosure.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
--------- --- ------------
<S> <C> <C>
Harold "Hayseed" Stephens(1) 60 President, CEO & Director
Mary Gene Stephens(1) 58 Secretary & Treasurer
Ivan Webb 48 CFO & Director
David Boyce 42 Director
</TABLE>
(1)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.
11
<PAGE> 12
DAVID BOYCE, Director, graduated from Texas Tech University in 1979 with a BBA
degree. In 1994, Mr. Boyce founded his own company, Boyce Producing Corp. which
is involved in drilling, production and exploration in mid-continent USA. He has
knowledge and experience in drilling and completing oil and gas wells. Prior to
1994, Mr. Boyce was president of OKT Petroleum Company, Inc. which he also
founded. Currently, Mr. Boyce is president of a Full Gospel Businessmen's
Fellowship (Greater Oklahoma City Chapter). He has also served as president for
four years Christian Oilman's Association of Oklahoma City.
ITEM 10. EXECUTIVE COMPENSATION.
No compensation was paid during the year ended December 31, 1996. No
compensation was 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 annual compensation to be paid to the officers of
Kit Karson Corporation in 1998 subject to funding and/or the availability of
funds.
<TABLE>
<CAPTION>
Name and Principal Position Salary
-----------------------------------------------------------------------
<S> <C>
Hayseed Stephens, President & CEO $60,000
Mary Gene Stephens, Secretary/Treasurer $18,000
Ivan Webb, Chief Financial Officer $15,800
</TABLE>
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.
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 August 3, 1998:
<TABLE>
<CAPTION>
Name and Address Number of Percent
Title of Class of Beneficial Owner Shares Owned of Class
- -------------- ----------------------------- -------------- --------
<S> <C> <C> <C>
Common Stock Hayseed Stephens Oil, Inc.(1) 14,150,000 26.3%
No Par Value 365 Cook Road
Willow Park, Texas 76087
Common Stock Hayseed Stephens(1) 13,435,375(2) 24.9%
No Par Value 365 Cook Road
Willow Park, Texas 76087
</TABLE>
12
<PAGE> 13
(1)Hayseed Stephens and his wife are the owners of Hayseed Stephens Oil, Inc.
(2)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 August 3, 1999 information concerning the
beneficial ownership of common stock by all directors and all directors and
officers of the Company as a group based on 53,894,801 shares outstanding.
<TABLE>
<CAPTION>
Name and Address Number of Percent
Title of Class of Beneficial Owner Shares Owned of Class
- -------------- ----------------------------- -------------- --------
<S> <C> <C> <C>
Common Stock Hayseed Stephens Oil, Inc.(1) 27,585,375(2) 51.2%
No Par Value 365 Cook Road
Willow Park, Texas 76087
Common Stock Hayseed Stephens(1) -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 David Boyce -0- -0-
No Par Value P.O. Box 1860
Edmond, Ok 73083
All directors and officers as a group (4 persons) 27,585,375 51.2%
</TABLE>
(1)Harold "Hayseed" Stephens and Mary Gene Stephens are husband and wife. There
are no other family relationships between the directors and officers.
(2)This amount includes the stock owned by Hayseed Stephens Oil Inc. (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 for further information on this property.
13
<PAGE> 14
On April 15, 1998, the Company entered into four agreements with Ness Energy
International, Inc. where Ness would provide certain services on a turnkey flat
rate basis. The following is a list of these services and the amount of monthly
consideration for said services:
Management including office staff $2,750
Office Rent 350
Telephone equipment and Long Distance 150
Copier 100
Each 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: August 3, 1999
<PAGE> 15
KIT KARSON CORPORATION
AUDITED FINANCIAL INFORMATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditor's Report - Weaver and Tidwell, L.L.P. F-2
Independent Auditor's Report - Robert Early & Company P.C. F-3
Balance Sheets for the years ended
December 31, 1997 & 1998 F-4
Statements of Operations for the years ended
December 31, 1997 & 1998 F-6
Statements of Changes in Stockholders' Equity
for the years ended December 31, 1997 & 1998 F-7
Statements of Cash Flow for the years ended
December 31, 1997 & 1998 F-8
Notes to Financial Statements F-9
Supplemental Financial Information on Oil and Gas
Exploration, Development and Production Activities F-16
</TABLE>
F-1
<PAGE> 16
INDEPENDENT AUDITOR'S REPORT
To the Shareholders
Kit Karson Corporation
Willow Park, Texas
We have audited the accompanying balance sheet of Kit Karson Corporation (a
development stage company) (the Company) as of December 31, 1998, and the
related statements of operations, changes in stockholders' equity and cash
flows for the year 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Kit Karson Corporation
(a development stage company) at December 31, 1998, and the results of its
operations and its cash flows for the year 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 1 to the
financial statements, the Company is in its development stage and has
insignificant operating revenue. In addition, the Company has limited
capital resources and has initiated a new phase of activity, all of which
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also discussed in Note 1.
The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
/s/ WEAVER AND TIDWELL, L.L.P.
WEAVER AND TIDWELL, L.L.P.
Fort Worth, Texas
July 29, 1999
3276
F-2
<PAGE> 17
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
KIT KARSON CORPORATION
Willow Park, Texas
We have audited the accompanying balance sheet of Kit Karson Corporation (a
development stage Company) (the "Company") as of December 31, 1997 and the
related statement of operations, changes in shareholders' equity, and cash flows
for the year 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 the results of its
operations and its cash flows for the year 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 1 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 December 31, 1997, the Company had no assets or liabilities, was reliant
on the completion of an agreement for the infusion of capital, and had 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 1. 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
F-3
<PAGE> 18
KIT KARSON CORPORATION
(a development stage company)
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 4,352 $ --
---------- ----------
Total current assets 4,352 --
PROPERTY AND EQUIPMENT
Oil and gas properties, proved 28,300 --
Less accumulated depreciation and depletion 5,608 --
---------- ----------
22,692 --
---------- ----------
TOTAL ASSETS $ 27,044 $ --
========== ==========
</TABLE>
The Notes to Financial Statements are
an integral part of these statements.
F-4
<PAGE> 19
KIT KARSON CORPORATION
(a development stage company)
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
LIABILITIES
Accrued expenses $ 1,392,900 $ --
Accounts payable - related party 102,564 --
----------- -----------
Total current liabilities 1,495,464 --
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $0.10 par value
10,000,000 shares authorized, none issued -- --
Common stock, no par value,
200,000,000 shares authorized,
49,959,356 shares issued and outstanding 1998;
35,809,356 shares issued and outstanding 1997 2,658,533 2,630,233
Retained deficit prior to reentering
development stage January 1, 1998 (2,630,233) (2,630,233)
Deficit accumulated since reentering
development stage January 1, 1998 (1,496,720) --
----------- -----------
Total stockholders' equity (deficit) (1,468,420) --
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 27,044 $ --
=========== ===========
</TABLE>
The Notes to Financial Statements are
an integral part of these statements.
F-5
<PAGE> 20
KIT KARSON CORPORATION
(a development stage company)
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Year Ended
December 31,
1998 and
Cumulative
Amounts
Since
Reentering
Development
Stage 1997
------------ ------------
<S> <C> <C>
REVENUES
Oil and gas revenues $ 22,301 $ 1,934
EXPENSES
Lease operating expenses 5,585 609
Production taxes 1,594 147
Taxes -- 59
Compression expenses 3,281 --
Depreciation, depletion and amortization 5,608 --
Litigation settlement 1,392,900
General and administrative expenses 110,053 4,084
------------ ------------
Total operating expenses 1,519,021 4,899
------------ ------------
Operating loss (1,496,720) (2,965)
OTHER INCOME
Interest income -- 60
Miscellaneous income -- 1,356
------------ ------------
Loss before income taxes (1,496,720) (1,549)
INCOME TAXES -- --
------------ ------------
NET LOSS $ (1,496,720) $ (1,549)
============ ============
Net loss per weighted average share $ (0.03) $ (0.00)
============ ============
Weighted average shares outstanding 49,959,356 35,809,356
============ ============
</TABLE>
The Notes to Financial Statements are
an integral part of these statements.
F-6
<PAGE> 21
KIT KARSON CORPORATION
(a development stage company)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Accumulated Accumulated
Deficit Deficit
Prior to Since
Reentering Reentering
Development Development
Common Stock Stage Stage
--------------------------- January 1, January 1,
Shares Amount 1998 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE,
January 1, 1997 35,809,356 $ 2,630,233 ($2,628,684) $ --
Net loss -- -- (1,549) --
----------- ----------- ----------- -----------
BALANCE,
December 31, 1997 35,809,356 2,630,233 (2,630,233) --
Shares issued for
oil and gas
property 14,150,000 28,300 -- --
Net loss -- -- -- (1,496,720)
----------- ----------- ----------- -----------
BALANCE,
December 31, 1998 49,959,356 $ 2,658,533 ($2,630,233) ($1,496,720)
=========== =========== =========== ===========
</TABLE>
The Notes to Financial Statements are
an integral part of these statements.
F-7
<PAGE> 22
KIT KARSON CORPORATION
(a development stage company)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Year Ended
December 31,
1998 and
Cumulative
Amounts
Since
Reentering
Development
Stage 1997
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,496,720) $ (1,549)
Adjustments to reconcile net loss
to net cash used in operating activities
Depreciation, depletion, and amortization 5,608 --
Change in operating assets and liabilities:
Accrued expenses 1,392,900 (55)
Accounts payable - related party 102,564 --
Accounts receivable -- 151
----------- -----------
Net cash provided by operating activities 4,352 (1,453)
CASH FLOWS FROM INVESTING ACTIVITIES -- --
CASH FLOWS FROM FINANCING ACTIVITIES -- --
----------- -----------
Net increase in cash 4,352 (1,453)
CASH, beginning of period -- 1,453
----------- -----------
CASH, end of period $ 4,352 $ --
=========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Acquisition of oil and gas property
for 14,150,000 shares of common stock $ 28,300 $ --
=========== ===========
</TABLE>
The Notes to Financial Statements are
an integral part of these statements.
F-8
<PAGE> 23
KIT KARSON CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS, ORGANIZATION
AND BASIS OF PRESENTATION
Kit Karson Corporation (the Company), a Washington corporation, has been
involved in the exploration and development of oil and gas reserves. 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. Between 1985 and 1996 there were no
filings with the SEC. An agreement was reached in late 1997 for a change in
management control of the Company (Note 9) and the required filings were
filed to allow the stock to resume trading.
The Company is reentering the exploration and development of oil and gas
reserves under the new management. However, due to the exhaustion of all
assets prior to the change in management, the Company is deemed to have
reentered the development stage as of January 1, 1998, and the operations
and cash flows of the Company since reentering the development stage are
effectively the same as the year ended December 31, 1998.
The financial statements have been prepared on a going concern basis, which
contemplates realization of assets and liquidation of liabilities in the
ordinary course of business. Since the Company is in the development stage,
it has limited capital resources, insignificant revenue and a loss from
operations. The appropriateness of using the going concern basis is
dependent upon the Company's ability to obtain additional financing or
equity capital and, ultimately, to achieve profitable operations. The
uncertainty of these conditions raises substantial doubt about its ability
to continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Management plans to raise capital through the private placement of company
stock and, eventually, through public offerings. Management intends to use
the proceeds from any equity sales to further develop oil and gas reserves
in the United States and in selected foreign countries. The Company
believes that these actions will enable the Company to carry out its
business plan and ultimately to achieve profitable operations.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OIL AND GAS PROPERTY AND EQUIPMENT
The Company uses the full cost method of accounting for its' oil and gas
producing activities, which are located in North Central Texas.
Accordingly, all costs associated with acquisition, exploration and
development of oil and gas reserves, including directly related overhead
costs, are capitalized.
F-9
<PAGE> 24
KIT KARSON CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
OIL AND GAS PROPERTY AND EQUIPMENT - CONTINUED
All capitalized costs of oil and gas properties, including the estimated
future costs to develop proved reserves, are amortized on the
unit-of-production method using estimates of proved reserves. Investments
in unproved properties and major development projects are not amortized
until proved reserves associated with the projects can be determined or
until impairment occurs. If the results of an assessment indicate that the
properties are impaired, the amount of the impairment is added to the
capitalized costs to be amortized.
In addition, the capitalized costs are subject to a "ceiling test," which
basically limits such costs to the aggregate of the "estimated present
value," discounted at a 10 percent interest rate of future net revenues
from proved reserves, based on current economic and operating conditions,
plus the lower of cost or fair market value of unproved properties.
Sales of proved and unproved properties are accounted for as adjustments of
capitalized costs with no gain or loss recognized, unless such adjustments
would significantly alter the relationship between capitalized costs and
proved reserves of oil and gas, in which case the gain or loss is
recognized in income.
Abandonments of properties are accounted for as adjustments of capitalized
costs with no loss recognized.
Prior to 1998, it was determined that the remaining single oil and gas
interest was not significant enough to require the disclosures of oil and
gas activities required by SFAS No. 69, "Disclosures about Oil and Gas
Producing Activities". This lease was transferred to the Company's former
president as part of the agreement regarding change in control of the
Company.
ACCOUNTS RECEIVABLE
The Company has not provided an allowance for doubtful accounts. The
Company's receivables are from a related party and have been netted against
the accounts payable - related party (see Note 4). All receivables
considered doubtful have been charged to current operations and it is
management's opinion that no additional material amounts are doubtful of
collection.
INCOME TAXES
Deferred taxes are recognized for differences between the financial
statement and tax bases of assets and liabilities that will result in
taxable or deductible amounts in the future based on enacted tax laws and
rates applicable to the periods in which the differences are expected to
affect taxable income.
F-10
<PAGE> 25
KIT KARSON CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
STATEMENT OF CASH FLOWS
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents.
LOSS PER COMMON SHARE
The loss per common share has been computed by dividing the net loss by the
weighted average number of shares of common stock outstanding throughout
the year. The Company has no potential common stock.
NEW ACCOUNTING STANDARD
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. The Company
intends to adopt the new standard when required in 2000. The Company does
not expect that SFAS No. 133 will have a material effect on its financial
statements; however, its effect, if any, will depend on the Company's
exposure to derivative instruments at the time of adoption and thereafter.
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 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.
Depletion was calculated based on engineers estimates of reserves and it is
reasonably possible that those estimates may change materially in the near
term.
FINANCIAL INSTRUMENTS
Financial instruments consist principally of cash and accounts payable -
related party. Recorded values approximate fair values due to the short
maturities of these instruments.
NOTE 3. INVESTMENTS IN MARKETABLE SECURITIES
The Company owned interests in three entities, which were publicly traded at
the time of acquisition. As part of the agreement regarding the change in
control of the Company, these interests were transferred to the Company's
former president (Note 9).
F-11
<PAGE> 26
KIT KARSON CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 4. RELATED PARTY TRANSACTIONS
In June 1998, the Company entered into a series of agreements with a company
related through common ownership whereby the related party will provide the
majority of the Company's management, general and administrative and
facilities. The agreements were effective January 1, 1998 and provide for
monthly payments of $3,350. As of December 31, 1998, the Company owed $109,911
under these agreements and for other costs incurred by the related party on
behalf of the Company.
The related party also collects the net oil and gas revenues from the
Company's properties and remits the funds to the Company. At December 31,
1998, the Company was owed $7,347, which has been offset against the accounts
payable.
NOTE 5. INCOME TAXES
The Company's last income tax return was filed for 1984 and it showed total
operating loss carryforwards at that time of $645,484. It is believed that the
Company generated additional operating loss carryforwards 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 the changes in control
discussed in Note 9, it is believed that the benefits from utilization of any
of these carryforwards 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 carryforwards 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 carryforwards 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:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Current income tax expense $ -- $ --
Benefit from loss carryforward -- --
Benefit from loss carryback -- --
--------- --------
$ -- $ --
========= ========
</TABLE>
F-12
<PAGE> 27
KIT KARSON CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 5. INCOME TAXES - CONTINUED
The deferred tax assets at December 31, 1998 and 1997, respectively, are
comprised of the Company's net operating loss carryforwards:
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Litigation settlement $ 473,586 $ --
Net operating loss carryforward 15,952 379
Less valuation allowance (489,538) (379)
-------------- --------------
Net deferred tax asset $ -- $ --
============== ==============
</TABLE>
The Company's net operating loss carryforwards may be applied against future
taxable income. The net operating loss carryforwards expire as follows:
Year Expiring
2011 $ 977
2012 1,549
2013 103,820
-----------
$ 106,346
===========
The net changes in the valuation allowance during 1998 and 1997 are as
follows:
1998 1997
--------- ---------
Balance at beginning of year $ (379) $ (147)
Balance at end of year (489,538) (379)
--------- ---------
Net change $(489,159) $ (232)
========= =========
NOTE 6. STOCKHOLDERS' EQUITY
On March 6, 1998, the Company's Certificate of Incorporation was amended to
authorize the issuance of 10,000,000 shares of preferred stock and to increase
the number of shares of the Company's Common Stock authorized for issuance by
150,000,000 shares to a total of 200,000,000.
NOTE 7. COMMITMENTS AND CONTINGENCIES
At December 31, 1998, the Company was party to two lawsuits filed by
shareholders who claimed that they were due shares from transactions that they
had conducted with the Company in the past.
F-13
<PAGE> 28
KIT KARSON CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 7. COMMITMENTS AND CONTINGENCIES - CONTINUED
The lawsuits were subsequently settled through the issuance of 2,701,500
shares of the Company's common stock. The value of these shares are recorded
as accrued liabilities and litigation settlement in the accompanying financial
statements.
NOTE 8. MAJOR CUSTOMERS
The Company sells gas and natural gas liquids to one purchaser. However,
management believes the competitive nature of the field and available
marketing alternatives do not make the Company dependent on any single
purchaser.
NOTE 9. CHANGE IN CONTROL
During the last quarter of 1997, an agreement was reached and consummated
between the Company and Hayseed Stephens, which effectively transferred
operating control of the Company to him. All remaining assets of the Company
were transferred to its former president.
The Company filed the require documents with the Securities and Exchange
Commission to allow its stock to resume trading on the NASD Bulletin Board in
February 1998.
NOTE 10. SUBSEQUENT EVENTS
Effective July 6, 1999, the Company changed its name to Ness Energy
International, Inc.
On June 7, 1999, the Company successfully completed a private placement of
625,001 shares of stock and received proceeds of $281,250.
The Company has entered into discussions aimed at acquiring a 25% interest in
an oil lease in Israel from a company related by common ownership.
NOTE 11. YEAR 2000 ISSUES
The Company is working to resolve the potential impact of the Year 2000 on the
ability of the Company's computerized information systems to accurately
process information that may be date sensitive. Any of the Company's programs
that recognize a date using "00" as the year 1900 rather than the year 2000
could result in errors or system failures. The Company has completed its
assessment and believes that any additional costs of addressing this issue
will not have a material adverse impact on the Company's financial position.
However, if
F-14
<PAGE> 29
KIT KARSON CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 11. YEAR 2000 ISSUES - CONTINUED
the Company and third parties upon which it relies are unable to address
this issue in a timely manner, it could result in a material financial
statement risk to the Company. In order to assure that this does not occur,
the Company plans to devote the necessary time and resources to resolve any
significant Year 2000 issues that may arise in a timely manner.
Because of the unprecedented nature of the Year 2000 issue, its effects and
the success of related remediation efforts will not be fully determinable
until the year 2000 and thereafter. Management cannot assure that the
Company's remediation efforts will be successful in whole or in part, or
that parties with whom the Company does business will be Year 2000
ready.
F-15
<PAGE> 30
KIT CARSON CORPORATION
(A DEVELOPMENT STAGE COMPANY)
SUPPLEMENTARY FINANCIAL INFORMATION ON OIL AND GAS
EXPLORATION, DEVELOPMENT AND PRODUCTION ACTIVITIES
(UNAUDITED)
This section provides information required by Statement of Financial Accounting
Standards No. 69, Disclosures About Oil and Gas Producing Activities.
The SEC defines proved oil and gas reserves as those estimated quantities of
crude oil, natural gas, and natural gas liquids which geological and engineering
data demonstrate with reasonable certainty to be recoverable in future years
from known reservoirs under existing economic and operating conditions. Proved
oil and gas reserves are reserves that can be expected to be recovered through
existing wells with existing equipment and operating methods.
Estimates of petroleum reserves have been made by independent engineers. The
valuation of proved reserves may be revised in the future on the basis of new
information as it becomes available. Estimates of proved reserves are inherently
imprecise.
Estimated quantities of proved oil and gas reserves of the Company (all of which
are located in the United States) are as follows:
<TABLE>
<CAPTION>
Petroleum Natural
Liquids Gas
(Bbls) (Mcf)
--------- -------
<S> <C> <C>
December 31, 1998 - proved developed reserves - 110,834
December 31, 1998 - proved reserves - 252,100
</TABLE>
The Company did not have any proved reserves prior to 1998.
<TABLE>
<CAPTION>
Petroleum Natural
Liquids Gas
(Bbls) (Mcf)
--------- -------
<S> <C> <C>
Reserves at December 31, 1997 -- --
Purchases of Reserves-in-Place -- 264,481
Production -- (12,381)
--------- -------
Reserves at December 31, 1998 -- 252,100
========= ========
</TABLE>
F-16
<PAGE> 31
KIT CARSON CORPORATION
(A DEVELOPMENT STAGE COMPANY)
SUPPLEMENTARY FINANCIAL INFORMATION ON OIL AND GAS
EXPLORATION, DEVELOPMENT AND PRODUCTION ACTIVITIES
(UNAUDITED)
The standardized measure of discounted estimated future net cash flows, and
changes therein, related to proved oil and gas reserves for the year ended
December 31, 1998 is as follows:
<TABLE>
<S> <C>
Future cash inflows $ 403,363
Future development and production costs (283,549)
Future income tax expense --
-----------
Future net cash flows 119,814
10% annual discount 49,258
-----------
Standardized measure of
discounted future cash flows $ 70,556
===========
</TABLE>
Primary changes in standardized measure of discounted future net cash flow for
the year ended December 31, 1998 is as follows:
<TABLE>
<S> <C>
Purchases of reserves in place $ 82,397
Sales of oil and gas, net of production costs (11,841)
----------
$ 70,556
==========
</TABLE>
Estimated future cash inflows are computed by applying year end prices of oil
and gas to year end quantities of proved developed reserves. Estimated future
development and production costs are determined by estimating the expenditures
to be incurred in developing and producing the proved oil and gas reserves in
future years, based on year end costs and assuming continuation of existing
economic conditions.
These estimates are furnished and calculated in accordance with requirements of
the Financial Accounting Standards Board and the SEC. Because of unpredictable
variances in expenses and capital forecasts, crude oil and natural gas price
changes, and the fact that the bases for such estimates vary significantly,
management believes the usefulness of these projections is limited. Estimates of
future net cash flows do not necessarily represent management's assessment of
future profitability or future cash flow to the Company.
F-17
<PAGE> 32
KIT CARSON CORPORATION
(A DEVELOPMENT STAGE COMPANY)
SUPPLEMENTARY FINANCIAL INFORMATION ON OIL AND GAS
EXPLORATION, DEVELOPMENT AND PRODUCTION ACTIVITIES
(UNAUDITED)
The aggregate amounts of capitalized costs relating to oil and gas producing
activities and the related accumulated depletion and depreciation as of December
31, 1998 is as follows:
Proved properties $ 28,300
Accumulated depletion and depreciation (5,608)
---------
Net capitalized costs $ 22,692
=========
The costs, both capitalized and expensed, incurred in oil and gas producing
activities during the year ended December 31, 1998 is as follows:
Property acquisition costs $ 28,300
Exploration and depletion costs --
---------
Total $ 28,300
=========
Results of oil and gas operations in the aggregate for the year ended December
31, 1998 is as follows:
<TABLE>
<S> <C>
Revenues $ 22,301
Compression expense (3,281)
Production costs (7,179)
Exploration expense --
Depreciation and depletion (5,608)
Income taxes --
---------
Net oil and gas income $ 6,233
=========
</TABLE>
F-18
<PAGE> 33
Index to Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 4,352
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,352
<PP&E> 28,300
<DEPRECIATION> 5,608
<TOTAL-ASSETS> 27,044
<CURRENT-LIABILITIES> 1,495,464
<BONDS> 0
0
0
<COMMON> 2,658,533
<OTHER-SE> (4,126,953)
<TOTAL-LIABILITY-AND-EQUITY> 27,044
<SALES> 22,301
<TOTAL-REVENUES> 22,301
<CGS> 0
<TOTAL-COSTS> 16,068
<OTHER-EXPENSES> 1,502,953
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,496,720)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,496,720)
<EPS-BASIC> (.03)
<EPS-DILUTED> (.03)
</TABLE>
