SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 0-21998
K.L.S. ENVIRO RESOURCES, INC.
----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Nevada 75-2460365
- -------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3220 North Freeway, Fort Worth, Texas 76111
- ----------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
(817) 624-4844
(Issuer's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
Applicable only to corporate issuers:
As of May 31, 1996, the Registrant had outstanding 9,348,275 shares of its
common stock, par value $.0001.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
K.L.S. ENVIRO RESOURCES, INC.
INDEX TO FINANCIAL INFORMATION
March 31, 1996
Page No.
--------
Consolidated Balance Sheets as of March 31, 1996 (unaudited) and
September 30, 1995 (audited) 3
Consolidated Statements of Operations (unaudited) for the Three
and Six Months Ended March 31, 1996 and 1995 4
Consolidated Statements of Cash Flows (unaudited) for the
Six Months Ended March 31, 1996 and 1995 5
Notes To Consolidated Financial Statements 6
Management's Discussion And Analysis Of Financial Condition
And Results Of Operations 8
<PAGE>
K.L.S. Enviro Resources, Inc. and Subsidiaries
Consolidated Balance Sheets
March 31, 1996 (unaudited) and September 30, 1995 (audited)
ASSETS
1996 1995
---- ----
Current assets:
Cash and cash equivalents $ 144,058 $ 174,479
Investment securities - 258,750
Accounts receivable:
Trade, net of allowance for 519,892 528,768
doubtful accounts of $128,402
in 1996 and 1995
Other 18,226 15,524
Inventory 400,622 708,872
Prepaid expenses 5,153 5,655
----------- -----------
Total current assets 1,087,951 1,692,048
Property, plant and equipment, net 1,570,247 1,665,128
----------- -----------
Other assets:
Other receivables 348,750 -
Intangible assets, net of accumulated
amortization 54,561 80,670
Deposits and other 20,216 22,101
Total other assets 423,527 102,771
Total assets $ 3,081,725 $ 3,459,947
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable:
Banks $ - $ 302,329
Shareholders 668,456 690,746
Current maturities of long-term debt 168,974 150,314
Accounts payable 364,888 674,301
Accrued expenses and other
current liabilities 359,715 297,682
Deferred revenue 40,188 29,616
----------- -----------
Total current liabilities 1,602,221 2,144,988
Long-term debt 359,658 455,644
----------- -----------
Total liabilities 1,961,879 2,600,632
----------- -----------
Shareholders' equity:
Cumulative convertible preferred stock,
Series A and B, $.0001 par value;
1,000,000 shares authorized; 167,500
issued and outstanding, respectively;
$5.00 stated value 17 17
Common stock, $.0001 par value;
50,000,000 shares authorized;
9,039,494 and 8,947,494 issued
and outstanding, respectively 904 894
Additional paid-in capital 4,426,914 4,417,724
Accumulated deficit (3,265,276) (3,545,782)
Unrealized gain on securities - 29,175
Foreign currency translation adjustments (4,213) (4,213)
---------- ----------
1,158,346 897,815
Treasury stock-shares held in treasury,
at cost (38,500 in 1996 and
1995, respectively) (38,500) (38,500)
---------- ----------
Total shareholders' equity 1,119,846 859,315
---------- ----------
Total liabilities and
shareholders' equity $ 3,081,725 $ 3,459,947
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements
3
<PAGE>
<TABLE>
<CAPTION>
K.L.S. Enviro Resources, Inc. and Subsidiaries
Consolidated Statements of Operations
for the Three Months ended March 31, 1996 and 1995
(Unaudited)
Three Months Ended Six Months Ended
3/31/96 3/31/95 3/31/96 3/31/95
------- ------- ------- -------
<S> <C> <C> <C> <C>
Drilling and repair service revenues $ 925,108 $ 542,819 $ 1,705,477 $ 1,280,633
Cost of drilling and repair service 577,124 284,565 1,005,427 589,131
----------- ---------- ------------ ------------
Gross profit 347,984 258,254 700,050 691,502
----------- ---------- ------------ ------------
Selling, general and administrative expenses:
Salaries, wages and related costs 135,539 83,105 251,726 204,906
Legal and professional fees 80,058 144,082 123,244 214,862
Rents 12,643 30,406 35,143 49,338
Repairs and maintenance 5,736 15,713 17,341 62,849
Taxes, licenses and permits 12,809 1,740 26,017 7,038
Advertising 1,808 2,158 6,191 10,061
Travel and lodging 45,786 36,127 61,740 67,902
Consulting 11,000 42,391 25,500 97,688
Exploration costs (46,354) 109,273 (15,448) 264,563
Other operating expenses 67,424 106,556 139,653 166,044
Depreciation and amortization 70,839 75,679 139,543 151,402
---------- --------- ------------ ------------
Total selling, general and
administrative expenses 397,288 647,230 810,650 1,296,653
---------- --------- ------------ ------------
Loss from operations (49,304) (388,976) (110,600) (605,151)
Other income (expenses):
Interest expense (32,360) (24,842) (68,290) (49,749)
Interest and other income 1,877 11,790 5,312 21,326
Gain on sale of marketable securities 47,771 89,982 99,286 162,931
Gain on sale of assets 21,366 - 21,366 -
Gain from foreign currency translation 13,970 20,435 13,133 19,611
---------- ---------- ---------- ----------
Income (loss) before income taxes 3,320 (291,611) (39,793) (451,032)
Income taxes - - - -
---------- ---------- ---------- ----------
Income (loss) from continuing operations 3,320 (291,611) (39,793) (451,032)
Discontinued operations:
Loss from discontinued operations (8,646) (68,139) (34,511) (231,187)
Gain on sale of subsidiary 379,935 - 379,935 -
---------- ---------- ---------- ----------
Net income (loss) $ 374,609 $ (359,750) $ 305,631 $ (682,219)
========== =========== ========== ===========
Income (loss) per weighted-average common shares outstanding:
Loss from continuing operations $ - $ (.03) $ (.004) $ (.05)
from
continuing
operations
Income (loss) from discontinued operations $ .04 $ (.01) $ .04 $ (.03)
Weighted-average number of shares outstanding 9,039,494 8,747,974 8,993,243 8,745,916
The accompanying notes are an integral part of these consolidated financial statements
4
</TABLE>
<PAGE>
K.L.S. Enviro Resources, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
for the Three Months ended March 31, 1996 and 1995
(Unaudited)
1996 1995
---- ----
Cash flows from operating activities:
Net income (loss) $ 305,631 $ (682,219)
Adjustments to reconcile net
income (loss) to cash used
in operating activities:
Common stock for services 9,200 17,456
Depreciation and amortization 139,543 167,387
Gain on sale of marketable securities (99,286) (162,931)
Gain on disposal of equipment (21,366) -
Gain on sale of subsidiary (379,935) -
Translation gain 805 -
Changes in:
Accounts and other receivables (42,493) 59,572
Inventory 12,740 (120,134)
Income tax receivable - 56,862
Prepaid expenses (2,414) (4,475)
Other assets (2,447) 53,043
Accounts payable (125,076) 316,204
Accrued expenses 48,622 (9,034)
Deferred revenue 10,572 19,197
---------- ----------
Net cash used in
operating activities (145,904) (289,072)
---------- ----------
Cash flows from investing activities:
Proceeds from sales of marketable
securities 328,861 476,491
Proceeds from sale of subsidiary,
net of selling costs 184,042 -
Proceeds from sale of equipment 14,750 -
Purchases of equipment (146,682) (126,626)
---------- ----------
Net cash provided by
investing activities 380,971 349,865
---------- ----------
Cash flows from financing activities:
Net change in bank notes (196,505) (105,848)
Proceeds from long-term debt - 15,664
Principal payments on long-term debt (66,685) (55,352)
Net payments to shareholders (2,290) (39,000)
Dividends paid - (6,749)
Cash received from stock subscriptions - 150,324
---------- ----------
Net cash used in financing
activities (265,480) (40,961)
Effect of exchange rate changes on cash (8) (100,910)
---------- ----------
Decrease in cash (30,421) (81,078)
Cash at beginning of period 174,479 177,103
Cash at end of period $ 144,058 $ 96,025
The accompanying notes are an integral part of these
consolidated financial statements
5
<PAGE>
K.L.S. Enviro Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. General
The accompanying unaudited consolidated financial statements of K.L.S.
Enviro Resources, Inc. and Subsidiaries (the "Company") have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Article
10 of Regulation S-X. Accordingly, such unaudited financial statements do
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments, consisting only of normal
recurring adjustments and eliminations of material intercompany sales and
purchases necessary to present fairly the financial condition, results of
operations and cash flows for the Company for the respective interim periods
presented, have been included. Operating results for the three and six-month
periods ended March 31,1996, are not necessarily indicative of the results
that may be expected for the year ending September 30, 1996.
Certain amounts have been reclassified from previously presented
consolidated financial statements to conform with the March 31, 1996
presentation.
2. Principles of Consolidation
The accompanying unaudited consolidated financial statements contain the
accounts of K.L.S. Enviro Resources, Inc., Dateline Drilling, Inc., K.L.S.
Co., Inc., K.L.S. Environmental, Inc., Dateline Internacional, S.A. de C.V.,
Kel-Lite Industries, Inc., K.L.S. International, Inc. and Beloro, S.A. de
C.V. The operations of K.L.S. Environmental, Inc. were discontinued during
1995 and Kel-Lite Industries, Inc. was sold during the second quarter of
1996, see Note 3. All significant intercompany transactions and balances
have been eliminated in consolidation.
3. Discontinued Operations
Effective February 1, 1996, the Company sold all of the issued and
outstanding stock of Kel-Lite. As a result of the sale, activities of
Kel-Lite have been accounted for as discontinued operations. A gain on this
sale which includes cash received of $250,000 and the present value of
future minimum royalty payments, less current expenses of the sales
transaction, is approximately $380,000 and has been recorded in the
accompanying consolidated financial statements. The buyer is contractually
liable for aggregate minimum royalty payments of $600,000 over a ten year
period, among other considerations. The present value of the future minimum
royalty payments, discounted at 9.5%, is calculated at approximately
$348,800 and is recorded in the accompanying financial statements as an
other receivable. The receivable from the future minimum royalty payments,
present valued, is due in periods beginning fifteen months from the date of
the sale of the subsidiary and therefore, has been classified as a
noncurrent asset.
Additionally, operations of K.L.S. Environmental, Inc. were discontinued in
1995; accordingly, their results are accounted for as discontinued
operations and presented as net amounts and combined with Kel-Lite in the
consolidated statements of operations. For more detail regarding the sale
documents refer to fiscal 1995, Form 10-KSB, Note 15 to the consolidated
financial statements included in such report and the accompanying exhibits
to the 1995 Form 10-KSB.
4. Income (Loss) Per Common Share
Income (loss) per share of common stock is based on the weighted average
number of shares outstanding during the periods ended March 31, 1996 and
1995.
6
<PAGE>
5. Subsequent Events
On May 16, 1996, the Company borrowed $710,000 from an unrelated party. Of
these funds, $425,000 is to purchase a used drilling rig, $185,000 is to
refurbish an existing drilling rig, $21,300 is for prepayment of interest,
and the remainder is for other fees and expenses related to the transaction.
The loan will be evidenced by a promissory note, face amount $710,000, with
the entire $710,000 principal amount payable on demand together with accrued
interest at the rate of 12 percent per annum. At the option of the note
holder, the $710,000 note will be convertible into 2,366,666 shares of the
Company's common stock at the rate of $.30 per share.
On May 20, 1996, the Company executed a Contract to Purchase a used deep
hole drill rig system for $425,000, with the funds for the purchase being
provided from the May 16, 1996 advance of funds. Finalization of the
Contract to Purchase the deep hole drill rig system is contingent upon a
successful test drilling project.
7
<PAGE>
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations.
Results Of Operations
Three Months Ended March 31, 1996 Compared With Three Months
Ended March 31, 1995
The Company's net income for the three months ended March 31, 1996 was
approximately $375,000 as compared to a net loss of approximately $360,000 for
the three months ended March 31, 1995. The difference is attributable to an
increase in revenue, a decrease in expenses as a percentage of revenues, and the
effects of discontinued operations, which includes a $380,000 gain on the sale
of the Company's flashlight subsidiary, Kel-Lite Industries, Inc. The Company's
income from continuing operations, including $47,771 gain from the sale of
marketable securities, for the three months ended March 31, 1996 was
approximately $3,300 as compared to a loss from continuing operations of
approximately $292,000 for the comparable quarter in the prior year. This
reduction in operating losses from continuing operations is reflective of
increased revenue and decreased selling, general and administrative expenses as
a percentage of revenue.
Total revenues from continuing operations for the three months ended March
31, 1996 were $925,108, an increase of $382,289 or 70.4 percent, over the three
months ended March 31, 1995. The increased revenues were attributable to an
increase in revenues from the Company's drilling services. The Company's Mexican
operations accounted for $249,339 or 65.2 percent of the increase. The remainder
of the increase in revenue came from Dateline Drilling, Inc. The Company's
repair operations remained at the same revenue level as in the quarter ended
1995. The Company anticipates increased drilling service revenues for the
remainder of fiscal 1996, resulting primarily from its Mexican operations.
Increase in drilling service revenues is contingent upon an increase in the
utilization of existing drilling rigs or the purchase of additional drilling
rigs.
Total costs and expenses from continuing operations increased by
approximately $43,000 or 4.6 percent, to $974,412 for the three months ended
March 31, 1996, as compared to the three months ended March 31, 1995. Of the
$43,000 increase in costs, costs of drilling and repair services amounted to
$577,124 or an increase of $292,559 over the corresponding period in the prior
year. Selling, general and administrative expenses decreased by $249,942 from
the three months ended March 31, 1995. The increase in costs of drilling are
primarily the result of a 70.4 percent increase in drilling revenue when the
second quarter of 1996 is compared to the second quarter of 1995. The decrease
in selling, general and administrative expenses is attributable primarily to
decreases in the following expenses: legal and professional, repairs and
maintenance, consulting, exploration costs, and other operating expenses of
which these identified expense categories amounted to decreases in expenses of
$300,151. These decreased expenses were partially offset by an increase in wages
and related costs by $52,434, thus accounting for $247,717 of the decrease in
selling, general and administrative expenses of $249,942. Selling, general and
administrative expense reductions are partially the result of the Company's
ongoing efforts to control and reduce costs.
Other income and expenses decreased by $44,741, primarily as the result of
fewer sales of marketable securities with such sales producing gains of $89,982
in the 1995 quarter and gains of $47,771 during the 1996 quarter. Investment
securities available for the generation of cash and as a source of revenue
amounted to $137,941 as of December 31, 1995 and as of March 31,1996 all
investment securities have been sold to assist in meeting various obligations of
the Company.
8
<PAGE>
Financial Condition
As of March 31, 1996, the Company's current liabilities exceeded its
current assets by $514,270 as compared with current liabilities exceeding
current assets by $452,940 as of September 30, 1995. The current ratio of assets
to liabilities was .68 at March 31, 1996 as compared with .79 at September 30,
1995. Current assets decreased by $604,097 to $1,087,951 from September 30, 1995
to March 31, 1996, and current liabilities decreased by $542,767 to $1,602,221
during that same period. A major portion of the change in current assets and
current liabilities is attributable to the sale of Kel-Lite Industries, Inc. As
of the sale date, which was effective on February 1, 1996, $345,653 of current
assets and $319,594 of current liabilities, formally owned by the Company and
included in its consolidated financial condition, were removed from the
Company's consolidated financial statements due to the sale. After considering
the effect of the aforementioned subsidiary sale and other normal increases in
current liabilities and decreases in current assets, which are the result of
negative cash flows from operations, investment securities were entirely sold
since September 30, 1995 and amounted to a decrease in current assets of
$258,750. The investment securities have been liquidated to obtain cash for
operations and other outstanding obligations.
Total assets decreased in fiscal 1996 by $378,222 to $3,081,725, primarily
with respect to the effects of recording the Kel-Lite sale and the decrease in
investment securities as previously indicated. Also the Company decreased its
long-term debt from $455,644 as at September 30, 1995 to $359,658 at March 31,
1996.
As of March 31, 1996, the Company continued to be operating on a negative
cash flow basis. Investment securities no longer serve as a source of cash to
absorb operating cash losses; therefore, the Company continues its program to
improve operating results for fiscal 1996 through increased drilling and repair
service activities. Additionally, the Company continues to monitor its costs
with efforts to reduce costs that are not directly related to the production of
increased revenues from segments with the highest profit potential. In February
1996, the Company received $250,000 in cash from the sale of its Kel-Lite
subsidiary, but will still require additional capital to expand its drilling and
repair operations. The Company is endeavoring to reach a break-even level for
its operating activities during fiscal 1996, but there is no assurance that this
will occur. Even if the Company is able to reach a break-even, or positive cash
flow level of operations, of which there is no assurance, the Company will
continue to need additional sources of funds in order to pursue the capital
funding that it desires for its gold exploration and development and drilling
operations.
On May 16, 1996, the Company borrowed $710,000 from an unrelated party. Of
these funds, $425,000 is to purchase a used drilling rig, $185,000 is to
refurbish an existing drilling rig, $21,300 is for prepayment of interest, and
the remainder is for other fees and expenses related to the transaction. The
loan will be evidenced by a promissory note, face amount $710,000, with the
entire $710,000 principal amount payable on demand together with accrued
interest at the rate of 12 percent per annum. At the option of the note holder,
the $710,000 note will be convertible into 2,366,666 shares of the Company's
common stock at the rate of $.30 per share.
On May 20, 1996, the Company executed a Contract to Purchase a used deep
hole drill rig system for $425,000, with the funds for the purchase being
provided from the May 16, 1996 advance of funds. Finalization of the Contract to
Purchase the deep hole drill rig system is contingent upon a successful test
drilling project.
9
<PAGE>
PART II - OTHER INFORMATION
Item 5. Other Information.
On May 16, 1996, the Company borrowed $710,000 from an unrelated party. Of
these funds, $425,000 is to purchase a used drilling rig, $185,000 is to
refurbish an existing drilling rig, $21,300 is for prepayment of interest, and
the remainder is for other fees and expenses related to the transaction. The
loan will be evidenced by a promissory note, face amount $710,000, with the
entire $710,000 principal amount payable on demand together with accrued
interest at the rate of 12 percent per annum. At the option of the note holder,
the $710,000 note will be convertible into 2,366,666 shares of the Company's
common stock at the rate of $.30 per share.
On May 20, 1996, the Company executed a Contract to Purchase a used deep
hole drill rig system for $425,000, with the funds for the purchase being
provided from the May 16, 1996 advance of funds. Finalization of the Contract to
Purchase the deep hole drill rig system is contingent upon a successful test
drilling project.
Item 6. Exhibits And Reports On Form 8-K.
(a) Exhibits. There are no exhibits filed as part of this report.
(b) Reports on Form 8-K. There were no reports on Form 8-K filed
during the three months ended March 31, 1996.
10
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act Of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
K.L.S. ENVIRO RESOURCES, INC.
Date: June 11, 1996 By: /s/ Merlyn W. Dahlin
--------------------
Merlyn W. Dahlin, Vice President and
Principal Financial Officer
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> MAR-31-1996
<CASH> 144,058
<SECURITIES> 0
<RECEIVABLES> 519,892
<ALLOWANCES> 128,402
<INVENTORY> 400,622
<CURRENT-ASSETS> 1,087,951
<PP&E> 1,570,247
<DEPRECIATION> (1,200,423)
<TOTAL-ASSETS> 3,081,725
<CURRENT-LIABILITIES> 1,602,221
<BONDS> 0
0
17
<COMMON> 904
<OTHER-SE> 1,118,925
<TOTAL-LIABILITY-AND-EQUITY> 3,081,725
<SALES> 1,705,477
<TOTAL-REVENUES> 1,705,477
<CGS> 1,005,427
<TOTAL-COSTS> 1,005,427
<OTHER-EXPENSES> 810,650
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 68,290
<INCOME-PRETAX> (39,793)
<INCOME-TAX> 0
<INCOME-CONTINUING> (39,793)
<DISCONTINUED> 345,424
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 305,631
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
