As filed with the Securities and Exchange Commission on March 11, 1997
Registration No. 33-____________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form SB-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
K.L.S. ENVIRO RESOURCES, INC.
(Name of small business issuer in its charter)
Nevada 1090 75-2460365
(State or other juris- (Primary Standard Industrial (IRS Employer
diction of incorporation) Classification Code Number) identification
number)
3220 North Freeway, Suite 105
Ft. Worth, Texas 76111
(817) 624-4844
(Address and telephone number of principal
executive offices and principal place of business)
RAYMOND H. KURZON, PRESIDENT/CEO
K.L.S. ENVIRO RESOURCES, INC.
3220 North Freeway, Suite 105
Ft. Worth, Texas 76111
(817) 624-4844
(Name, address, and telephone number of agent for service)
Copies to:
JEFFREY M. JONES, ESQ.
DURHAM, EVANS, JONES & PINEGAR, P.C.
50 South Main Street, Suite 850
Salt Lake City, Utah 84144
Approximate date of proposed sale to the public: As soon as possible after
the Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(c) under the Securities Act of 1933, check the following
box and list the Securities Act registration statement number of the earlier
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Section 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act of 1933, please check the following box. [ ]
<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
Title of Each Class Dollar Proposed Maximum Proposed Amount of
of Securities Amount to be Offering Price Maximum Registration
to be Registered Registered per Share (1) Aggregate Fee
Offering Price
<S> <C> <C> <C> <C>
Common Stock $22,937,501.81 $4.3125 $22,937,501.81 $6,950.76
TOTAL $22,937,501.81 $4.3125 $22,937,501.81 $6,950.76
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933, based on average
bid and asked prices of the Company's Common Stock as reported by the OTC
Electronic Bulletin Board on March 4, 1997.
The Registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED MARCH 11, 1997
PROSPECTUS
K.L.S. ENVIRO RESOURCES, INC.
5,318,841 SHARES
Common Stock, Par Value $.0001
This Prospectus relates to the offer of 5,318,841 shares (the "Shares") of
issued and outstanding Common Stock, par value $.0001 (see "Description of
Securities"), of K.L.S. Enviro Resources, Inc., a Nevada corporation (the
"Company" or "KLS") on behalf of certain shareholders of the Company (see
"Selling Shareholders"). The Company will not receive any of the proceeds
from the sale of the Shares by the Selling Shareholders.
The Common Stock of the Company presently trades in the over-the-counter
("OTC") market and is quoted on the OTC Electronic Bulletin Board under the
symbol KLSE. On March 4, 1997, the last reported bid price of the Company's
Common Stock on the OTC Electronic Bulletin Board was $4.25 per share and the
last reported ask price was $4.375 per share. The Shares may be sold by the
Selling Shareholders from time to time on terms not yet determined. Sales,
which may or may not involve cash consideration or sales on the OTC market,
may be made directly to other purchasers or through one or more underwriters
or broker-dealers. See "Plan of Distribution."
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" FOR INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
_________________________________________________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Underwriting Discounts Proceeds to Proceeds to
Price to Public (1) and Commissions the Company (2) Selling Shareholders(3)
<S> <C> <C> <C> <C>
Per Share $ 4.3125 $ .__ $ 0.0 $ 4.3125
Total $22,937,501.81 $ .__ $ 0.0 $22,937,501.81
</TABLE>
(1) Based on the average bid and asked prices of the Company's Common Stock
on March 4, 1997 as required by SEC rules. The prices at which the Shares may
be sold will be dependent upon market prices and other factors on the date of
any such sale.
(2) The Company will receive no portion of the proceeds from the sale of
the Shares by the Selling Shareholders.
(3) The Selling Shareholders will be responsible for payment of any
commissions or discounts in connection with the sale of the Shares and such
amounts may vary. The Company is paying the cost of the preparation and
filing of the registration statement of which this Prospectus is a part. The
cost paid by the Company includes professional fees, filing fees, printing and
engraving expenses and other expenses. The total of such expenses associated
with the registration of the Shares is approximately $65,000.
The date of this Prospectus is March __, 1997.
<PAGE>
------------------------------------
AVAILABLE INFORMATION
The Company is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended, and in accordance therewith,
files reports, proxy statements and other information with the Securities and
Exchange Commission (Commission). Such reports, proxy statements and other
information, may be inspected and copied at the Public Reference Room of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
following regional offices of the Commission: Northeast Regional Office, 7
World Trade Center, Suite 1300, New York, New York, 10048, and the Midwest
Regional Office, 500 West Madison Street, Suite 1400, Chicago, Illinois
60611. Copies of such material can be obtained from the Public Reference
Section of the Commission at its Washington address at prescribed rates. The
Commission also maintains a website on the world wide web (internet) at
"http://www.sec.gov" where the public may access current and other reports
filed electronically with the Commission by the Company.
The Company furnishes annual reports to shareholders which contain
audited financial statements and such other periodic reports as the Company
may determine to be appropriate or as may be required by law.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the financial statements and notes thereto appearing elsewhere
in the Prospectus. Each prospective investor is encouraged to read this
Prospectus in its entirety and to carefully consider, among other things, the
information under the heading "RISK FACTORS." THE SECURITIES OFFERED HEREBY
INVOLVE A HIGH DEGREE OF RISK.
The Company
K.L.S. Enviro Resources, Inc. (sometimes referred to in this Prospectus
as KLS or the "Company") was incorporated under the laws of the State of
Nevada under the name K.L.S. Gold Mining Company on January 15, 1993. The
corporate name was changed to K.L.S. Enviro Resources, Inc. on September 10,
1993. As used in this Prospectus, the term the Company shall refer
collectively to KLS and its wholly-owned operating subsidiaries. Those
subsidiaries are identified as follows:
K.L.S. Co., Inc. (KLS Co.) is a Nevada corporation formed by KLS in
January 1993. KLS Co. engages in hydraulics servicing and manufacturing,
including the service and repair of hydraulic systems, the design and
manufacture of specialized drilling rigs for the mining industry and related
operations. Its principal offices are located in Missoula, Montana and its
primary business activities are also conducted in that state.
Dateline Drilling, Inc. (Dateline) is a Montana corporation formed in
1980. Dateline was acquired by KLS in January 1993. Since its formation,
Dateline has operated a production and exploration drilling business in the
precious metals mining industry. Its principal business offices are located
in Missoula, Montana. The business operations of Dateline are presently
conducted in North America and Mexico.
Dateline Internacional, S.A. de C.V. (DIMSA) is a Mexico corporation
formed in April 1993 which is engaged in precious metals mining production and
exploration drilling in Mexico.
The Company designs, builds and refurbishes or purchases drill rigs which
it uses under contracts with third party gold and/or other previous metals
exploration companies. The Company also designs, manufactures, sells,
services and repairs drill rigs and other hydraulic equipment used in logging,
mining and related industries. The Company is also a manufacturer's
representative for a line of diesel products and equipment. In addition, the
Company intends to engage in the future on a broader scale in the exploration
for and production, processing and sale of gold and other precious metals for
its own account and to develop its own properties.
The drilling operations of the Company include both production mining
drilling and exploration drilling as a contractor to the hard rock mining
industry. The Company specializes in exploration and production drilling,
using reverse circulation drilling. Its current business operations are located
in the United States and Mexico and are expanding to Africa. The Company's
drill rigs are track mounted, mobile, and compact. These features permit the
Company to use its rigs in relatively difficult and remote terrain, in many
cases without building new drill roads to access the areas. Management
believes that these attributes provide a competitive advantage, avoid certain
expenses for building roads, and also minimize adverse environmental impact in
those areas in which they are used.
The Company also owns certain inactive entities and has recently
discontinued some operations. See "Business" for a description of these
entities and the history of the Company's business development and
activities. The Company's principal offices are located at 3220 North
Freeway, Fort Worth, Texas 76111. Its telephone number is (817) 624-4844.
The Offering
Securities offered 5,318,841 Shares of Common Stock
Common Stock, par value $.0001
outstanding 16,923,497 shares
to be outstanding
after the offering 16,923,497 shares
Use of proceeds The Company will not receive any of
the proceeds from the sale of Shares
by the Selling Shareholders
Risk Factors
The securities offered hereby involve a high degree of risk. See "Risk
Factors."
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Consolidated Statement of Operations Data:
Fiscal Year Ended September 30 Three Months Ended December 31,
1995 1996 1995 1996
---------------------------------- -------------------------------
(Audited) (Audited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $ 3,019,597 $ 4,424,693 $ 780,368 $ 1,573,318
Net income (loss) from
operations ( 908,174) 117,158 ( 93,277) 129,933
Net income (loss)
(after tax) (1,185,850) ( 919,813) ( 68,978) 50,451
Primary earnings (loss)
per share ($ .13) $( .10) $( .01) $ .005
</TABLE>
<TABLE>
<CAPTION>
Consolidated Balance Sheet Data:
December 31, 1996 September 30, 1996
----------------- ------------------
(Unaudited) (Audited)
<S> <C> <C>
Total Assets $ 7,729,791 $ 4,528,677
Working capital (deficit) 1,818,016 ( 849,631)
Total Liabilities 3,052,148 2,974,951
Stockholders' Equity $ 4,677,643 $ 1,553,726
</TABLE>
RISK FACTORS
The Private Securities Litigation Reform Act of 1995 provides a "Safe
Harbor" for forward-looking statements. Certain information included in this
Prospectus contains statements that are forward-looking, such as statements
relating to plans for future production and development activities, as well as
other capital spending, financing sources and the effects of regulation. Such
forward-looking information involves important risks and uncertainties that
could significantly affect anticipated results in the future and, accordingly,
such results may differ from those expressed in any forward-looking statements
made herein. These risks and uncertainties include, but are not limited to,
those relating to the market price of metals, production rates, production
costs, the availability of financing, the ability to obtain and maintain
required permits, development and construction activities and dependence on
existing management. The Company cautions readers not to place undue reliance
on any such forward-looking statements and such statements speak only as of
the date made.
The securities being offered hereby are speculative, involve a high
degree of risk and should not be purchased by anyone who cannot afford the
loss of his, her or its entire investment. In addition to the other
information in this Prospectus, the following risk factors should be
considered carefully in evaluating an investment in the securities offered by
this Prospectus:
Recent Net Losses. The Company had significant net operating losses in
fiscal years 1994 and 1995. It also had operating losses in years prior to
fiscal 1994. As a result, the Company had an accumulated deficit of
approximately ($2,310,000) at September 30, 1994 and ($3,546,000) at September
30, 1995. Its accumulated deficit at September 30, 1996 was ($4,505,721).
Although the Company has experienced revenue growth and net operating income
in recent months, there can be no assurance that such growth will continue,
that net losses will not be incurred in future operating periods, or that the
Company will become profitable in the foreseeable future, if at all.
Need for Additional Funding. The Company has operated with negative cash
flow for several fiscal years and has substantial accumulated operating
deficits. In order to increase revenues, the Company requires additional fundin
g that will enable it to purchase additional equipment and to engage in
traditional exploration and extraction activities. The Company may seek such
funding through a public or future private offering of its stock. Shares
issued in such an offering would substantially dilute the shareholdings of
other shareholders, including purchasers of the Shares offered by this
Prospectus. There can be no assurance that the Company will be successful in
obtaining such financing or that it will be available to the Company on terms
and at rates that are favorable to the Company. Absent the Company's receipt
of such funding, however, the Company's ability to continue its operations
will be adversely affected.
Volatility of the Special Metals Market. The profitability of the
Company's operations can be significantly and adversely affected by changes in
the market price of gold and other precious metals. The market price of gold
has fluctuated widely and is affected by numerous factors beyond the Company's
control, including international economic trends, currency exchange
fluctuations, expectations for inflation, speculative activities, consumption
patterns (such as purchases of gold jewelry and the development of gold coin
programs and trends in manufacturing industries that use gold as a raw
material, such as the computer electronics and medical equipment markets),
purchases and sales of gold bullion, holdings by central banks and other large
gold bullion holders or dealers and global or regional political events,
particularly in major gold producing countries such as South Africa and some
of the countries that formerly comprised the Soviet Union. Gold market prices
are also affected by worldwide production levels which have increased in
recent years. The aggregate effect of these factors, all of which are beyond
the Company's control, is impossible for the Company to predict. In addition,
the market price of gold has, on occasion, been subject to rapid short-term
changes because of market speculation. If the price for precious metals such
as gold is below the Company's customers' cash production costs and remains
below such level for any sustained period, the Company's customers could
experience losses and could determine that it is not economically feasible to
continue to engage the Company for performance of its operations and services,
or to continue to develop some or all of their projects.
Continuation of Control. SMD L.L.C., ("SMD"), a significant shareholder
of the Company that is controlled and indirectly owned by certain officers and
directors of the Company, owns 2,581,500 shares (or approximately 15%) of the
issued and outstanding Common Stock of the Company. In addition, SMD has the
right to convert certain shares of Preferred Stock to 500,000 shares of Common
Stock and owns presently exercisable warrants to purchase an additional
6,600,000 shares of Common Stock. If the preferred shares were converted and
the warrants exercised at this time, SMD would own approximately 40% of the
total issued and outstanding shares of Common Stock of the Company. Officers
and directors of the Company presently own or have the right to acquire an
aggregate of 14,181,837 shares, or approximately 56% (assuming full exercise
of all options, warrants and conversion rights held by these individuals) of
the Company's issued and outstanding Common Stock. Three of the Company's
directors are also the managers and indirect owners of SMD and constitute
three of the four members of the Company's Executive Committee. The continued
ownership of a significant number of shares, the rights to purchase additional
shares of Common Stock and the board positions held by the SMD managers will
perpetuate and increase their ability to influence corporate policy and
management. Furthermore, the exercise of the warrants and other conversion
rights held by these officers and directors would likely be made at a time
when the Company could obtain equity financing at more favorable rates to the
Company and, regardless of when made, would likely have an immediate,
substantial dilutive effect on the persons holding stock in the Company,
including the purchasers of the Shares.
Potential Conflicts of Interest. Three of the nine members of the
Company's Board of Directors are also the indirect owners of and control a
significant shareholder of the Company, SMD, and a corporation providing
management and strategic planning services for the Company. [See, "Certain
Transactions."] In addition, these three persons and two other members of the
Board of Directors sit on the board of directors of another public company in
an unrelated industry and the acting chief financial officer of the Company is
the chief financial officer of such other company. Such associations and
relationships may give rise to conflicts of interest from time to time. If
any such conflict does arise, the policy of the Company, consistent with
Section 78.140 of the Nevada Revised Statutes, requires that the director who
has a conflict will disclose the same to a meeting of the directors of the
Company and will abstain from voting for or against approval of any matter in
which such director may have a conflict. Notwithstanding the adoption of the
Company's conflict of interest policy, there can be no assurance that all
potential conflicts of interest will be identified and appropriately resolved.
Exploration Activities. The Company presently plans to expand its
operations into more speculative and risky precious metal property acquisition
and exploration, in addition to its existing drilling services and equipment
maintenance and repair business. The Company presently plans to acquire
interests in existing gold and/or other precious metal properties with proven
reserves or which are in the final stages of proving such reserves. The
Company may acquire such interests on its own or with others as a joint
venture partner. Exploration for gold, silver and other precious metals is a
highly speculative business, with no assurance that meaningful volumes of ore
can be extracted, refined or sold at profitable rates, even where deposits or
reserves are proven in advance. In addition, the Company's present
management has limited experience in acquiring or operating previous metal
mining properties. The successful development and operation of any mineral
property may be affected by a number of factors beyond the control of
management. Substantial expenditures are required to establish ore reserves
through drilling, to develop metallurgical processes to extract metal from ore
and, in the case of new properties, to develop the mining and processing
facilities and infrastructure at any chosen site. Although substantial
benefits may be derived from the acquisition of an interest in a major
mineralized deposit, no assurance can be given that minerals can be produced
in sufficient quantities to justify commercial operations or that the funds
required for development can be obtained on a timely basis.
General Operations Risks. The Company has experienced and expects to
continue to experience significant fluctuations in its results of operations.
Factors that affect the Company's results of operations or that could cause
actual results to differ materially include, among others, the Company's
ability to successfully bid on new contracts, its ability to perform under
contracts on a timely basis, its access to suitable used or new equipment to
fulfill contract obligations, the ability to hire and retain skilled and
properly trained employees, industry conditions and world demand for precious
metals, as well as prices for such metals, the results of financing efforts
and financial market conditions and other factors mentioned above and the
additional factors discussed below.
Dependence on Precious Metals Mining Industry. The Company's operations
are largely dependent upon the levels of activity in precious metals
exploration and development drilling. Such activity levels are affected by
trends in the precious metals industry and precious metals prices.
Historically, prices for precious metals have been volatile and are subject to
wide fluctuations in response to changes in the supply of and demand for
precious metals, market uncertainty and a variety of political, economic and
other factors beyond the control of the Company. The Company cannot predict
future price movements with any certainty. Any prolonged reduction in
precious metals prices, however, will depress the level of exploration,
development and production activity and result in a corresponding decline in
the demand for the Company's services and, therefore, have a material adverse
effect on the Company's revenues and profitability.
Competition. The contract drilling industry is a highly competitive and
cyclical business characterized by high capital and maintenance costs.
Although conditions in recent years in the precious metals mining industry
have precipitated consolidation of drilling industry participants, the Company
believes the competition for drilling contracts will continue to be intense
for the foreseeable future because of contractors' ability to move rigs from
areas of low activity and day rates to areas of greater activity and
relatively higher rates. In addition, there are a number of inactive rigs
that are being reactivated and upgraded, and additional rigs that could be
reactivated and upgraded, and new rigs that could be constructed, to meet an
increase in demand for drilling rigs in any given market. Such movement,
reactivation, new construction or a decrease in drilling activity in any major
market could depress rates and could adversely affect utilization of the
Company's rigs even in an environment of stronger precious metals prices.
Many of the Company's principal competitors are substantially larger, have
substantially greater resources and have spent considerably larger sums of
capital than the Company for equipment, including drill rigs, development and
operations. These factors may enable those competitors to better withstand
industry downturns, compete on the basis of price, build new rigs or acquire
existing rigs that become available for purchase.
Risk of Upgrade and Refurbishment of Drill Rigs. In connection with its
plans to increase its fleet of drill rigs and the upgrade and refurbishment of
existing drill rigs and other rigs that the Company may acquire in the future,
the Company expects to make substantial completion, upgrade and refurbishment
capital expenditures. Such projects are subject to the risks of delay or cost
overruns inherent in any large reconstruction project, including shortages of
materials or skilled labor, unforeseen engineering problems, latent damage to
current equipment, work stoppages and unanticipated cost increases.
Significant cost overruns or delays would adversely affect the Company's
financial condition and results of operation.
Equipment Costs. To date the Company has been able to meet its
requirements for additional equipment by acquiring and refurbishing used
equipment. Such used equipment is generally acquired at prices that are
substantially less than the cost of new equipment. Generally, after
refurbishing the used equipment, the Company's total cost therefor is less
than the cost of new equipment. However, to meet its expansion needs and to
avoid delay if it is to take advantage of new contract opportunities, the
Company may be required to purchase new drill rigs rather than used or
refurbished drilling equipment. The cost of new equipment can be as much as
40% greater than a comparable refurbished rig, thereby increasing the
Company's investment cost in new operations and reducing the amount of capital
available for other expansion projects.
Dependence on Trained Personnel. The Company relies on the services of
trained technicians and skilled workers in many aspects of its operations. As
its operations expand, the Company will be required to seek, hire and retain
persons with the requisite expertise and experience to meet the Company's
needs. The cost of training and retaining such personnel may decrease
operating margins and affect profitability. There can be no assurance that
qualified personnel are readily available at costs that make it feasible for
the Company to retain them. In addition, the Company may experience delays in
its expansion efforts as new or current personnel are trained to perform at a
level needed by the Company.
Government Regulation and Environmental Matters. The Company's domestic
and foreign operations and mining operations in general are subject to
substantial government regulation including federal, provincial, state and/or
local laws concerning, but not limited to, such factors as safety, land use
and environmental protection. The Company also must comply with local, state,
provincial and/or federal requirements regarding exploration and drilling
operations, public safety, employee health and safety, air quality, water
pollution, noxious odor, noise and dust control, reclamation, solid waste,
hazardous waste and wildlife protection as well as laws protecting the rights
of other property owners and the public. Although the Company is aware of no
respect in which it is not in substantial compliance with such regulations,
laws and requirements, failure to comply could have a material adverse effect
on the Company including substantial penalties, fees and expenses and could
result in significant delays in the Company's operations or a potential
shutdown of some or all of its operations. The Company also must obtain and
comply with local, state, provincial and federal permits, including waste
discharge requirements, other environmental permits, use permits, plans of
operation and other authorizations. Obtaining these permits can be very
costly and takes significant amounts of time. Although the Company foresees
no material problems or delays, there can be no assurance that the Company can
obtain the necessary permits, commence new operations or continue existing
operations or that the Company can maintain economic production in compliance
with the necessary permits. Amendments to current laws and regulations
governing operations and activities of mining companies or more stringent
implementation of such laws are actively considered from time to time and
could have a material adverse impact on the Company. There can be no
assurance that future changes in existing law or new legislation will not
limit or adversely impact the Company's business operations.
Competition. The Company operates in an industry that is characterized by
intense competition for resources, equipment and personnel. Some of the
Company's principal competitors are substantially larger, have substantially
greater resources and have spent considerably larger sums of capital than the
Company for equipment, including drill rigs, development and operations.
Risks Associated with Mining Operations, Insurance Coverage and Uninsured
Losses. The Company's activities are subject to all the risks and hazards
commonly associated with mining operations, including, but not limited to,
unusual or unforeseen geological formations, flooding, cave-ins, environmental
concerns, personal injury, changes in technology or mining techniques, and
delays or periodic interruptions in operations due to inclement weather. The
Company has insurance covering personal injury, worker's compensation and
damage to property and equipment, although in view of recent trends in damage
awards in personal injury lawsuits, such insurance may be insufficient to
satisfy large losses or judgments against the Company. Furthermore, certain
types of insurance coverage (generally against losses caused by natural
disasters and acts of God) are either unattainable or prohibitively
expensive. Substantial damage awards against the Company or substantial
damages not covered by insurance will affect the Company's ability to continue
as a going concern.
Foreign Operations Risks Generally. The Company has recently expanded
much of its operations to meet increased demand for its services both inside
and outside the United States. The Company intends to expand operations into
other parts of the world, including Africa. There are numerous risks
associated with conducting business in foreign countries. The distance from
corporate headquarters and the often remote locations of drilling and mining
sites in these foreign countries exacerbates the difficulties discussed
above. In addition, problems associated with possible political risks,
instability of local governments, safety of personnel and equipment, the lack
of spare parts or adequate service assistance, the need for skilled labor and
supervision, lack of infrastructure and accessability to sources of power and
other supplies necessary for operations, tariff restrictions, currency control
regulations, competing or conflicting manufacturing and production standards,
governmental approval, licensing and permit requirements and procedures, high
inflation and currency fluctuations which may erode profitability levels, and
the difficulty of obtaining and enforcing judgments in foreign courts and
under foreign legal systems that differ substantially from the U.S., all add
to the risk of foreign operations.
Foreign Currency. The Company's operations in Mexico and its
anticipated operations in other countries render the Company subject to
foreign currency fluctuations which may materially affect financial position
and results. The Company does not presently engage in any currency hedging to
offset any risk of currency fluctuations.
Potential Depressive Effect of Sales of Shares by Present Stockholders. A
substantial number of shares of the Company's Common Stock currently issued
and outstanding are "restricted securities" as that term is defined by Rule
144 under the Securities Act of 1933, as amended. The Company believes that a
significant portion of such restricted securities presently are or in the
immediate future will be available for resale under Rule 144. Sales of
substantial amounts of Common Stock pursuant to Rule 144 or otherwise into the
public market could adversely affect the market price for the Company's
securities.
No Dividends. The Company has never declared or paid any cash dividends
on its shares and does not anticipate paying cash dividends in the foreseeable
future.
Risk of Dilution by Future Issuance of Shares. The Company may use its
securities, including shares of its Common Stock or its Preferred Stock, to
finance acquisitions or to obtain additional capital for continued
operations. In addition, the Company has granted warrants and options to
acquire a significant number of shares of Common Stock of the Company at
prices which are currently substantially less than the prices quoted for the
Company's securities in the OTC market. See "Certain Transactions." The
existence of these rights and the issuance by the Company of its equity
securities, including Common Stock or securities convertible into Common
Stock, in any such transaction will result in immediate and possibly
substantial dilution to the existing stockholders of the Company.
Effect of Certain Anti-Takeover Provisions. Nevada's "Combination with
Interested Stockholders' Statute" and its "Control Share Acquisition Statute"
may have the effect in the future of delaying or making it more difficult to
effect a change in control of the Company. See "Description of Securities,"
below. These statutory anti-takeover measures may have certain negative
consequences, including an effect on the ability of the stockholders of the
Company or other individuals to (i) change the composition of the incumbent
Board of Directors of the Company; (ii) benefit from certain transactions
which are opposed by the incumbent Board of Directors; and (iii) make a tender
offer or attempt to gain control of the Company, even if such attempt were
beneficial to the Company and its shareholders. Since such measures may also
discourage the accumulations of large blocks of the Company's Common Stock by
purchasers whose objective is to seek control of the Company or have such
Common Stock repurchased by the Company or other persons at a premium, these
measures could also depress the market price of the Company's Common Stock.
Accordingly, shareholders of the Company may be deprived of certain
opportunities to realize the "control premium" associated with takeover
attempts.
USE OF PROCEEDS
The Shares are being offered for sale or will be sold by the Selling
Shareholders. The Company will not receive any portion of the proceeds from
the sale of Shares by the Selling Shareholders.
DETERMINATION OF OFFERING PRICE
The Shares may be sold by the Selling Shareholders from time to time at
prices and on terms not yet determined. Sales, which may or may not involve
cash consideration or sales on the OTC market, may be made directly to other
purchasers or through one or more underwriters or broker-dealers at prices
quoted on the OTC Electronic Bulletin Board at the time of sale or on other term
s as agreed with such underwriters or broker-dealers as the case may be. [See
"Plan of Distribution."]
DILUTION
There is no dilution to existing shareholders generally which will result
from the sale of the Shares by the Selling Shareholders.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Trading in the Common Stock of the Company commenced over the counter in
January 1994. Trading of the Common Stock of the Company is quoted on the OTC
Electronic Bulletin Board under the symbol "KLSE." The range of high and low
bid quotations for each quarterly period since the Company's Common Stock
began trading in January 1994, as reported by the OTC Electronic Bulletin
Board, is as follows:
<TABLE>
<CAPTION>
FISCAL QUARTER ENDED HIGH LOW
- -------------------- ------- -------
<S> <C> <C>
March 31, 1994 $1.88 $1.13
June 30 1.88 1.13
September 30 1.75 1.13
December 30, 1994 2.50 2.25
March 31, 1995 1.31 1.31
June 30 0.62 0.50
September 30 0.38 0.37
December 29, 1995 0.28 0.25
March 29, 1996 0.33 0.30
June 28 0.55 0.50
September 30 1.13 1.00
December 31, 1996 $3.00 $0.87
</TABLE>
On March 4, 1997, the last reported bid and ask prices for the Common
Stock were respectively $4.25 and $4.375 per share.
The above quotations reflect inter-dealer prices, without retail mark-up,
retail mark-down or commission, and may not represent actual transactions.
Holders. The approximate number of record holders of the Company's
Common Stock as of February 19, 1997 was 1,219.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1996 (audited) and December 31, 1996 (unaudited):
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1996
------------------ ------------------
(Audited) (Unaudited)
<S> <C> <C>
Long-term debt (less current portion),
including obligations
under capital leases,
less current portion $ 270,995 $ 258,308
Redeemable Common Stock 0 0
Stockholders' equity:
Cumulative convertible preferred
stock, par value $.0001 per share;
1,000,000 shares authorized, 100,000
shares outstanding, $5.00 stated value 10 10
Common Stock, par value
$.0001 per Share; 50,000,000
shares authorized, 10,931,497 and
15,761,497 outstanding, respectively 1,093 1,576
Additional paid-in capital 6,101,057 9,181,539
Retained earnings (deficit) (4,505,721) (4,462,769)
Cumulative translation adjustment (4,213) (4,213)
Treasury stock (38,500) (38,500)
Stockholders' equity 1,553,726 4,677,643
Total capitalization $ 1,824,721 $ 4,935,951
========== ==========
</TABLE>
See the Financial Statements included in this Prospectus and the notes
thereto. The above table does not include shares reserved for issuance upon
the exercise of options under stock plans of the Company or under certain
warrants held by an affiliate of the Company. [See Description of Securities,
Executive Compensation, and Plan of Distribution.]
DIVIDEND POLICY
The Company has never declared or paid any dividends on its Common Stock
and does not anticipate the declaration or payment of cash dividends in the
foreseeable future. The Company intends to retain future earnings, if any, to
finance the development and expansion of its business. Future dividend policy
will be subject to the discretion of the Board of Directors and will be
contingent upon, among other things, future earnings, the Company's financial
condition, capital requirements, general business conditions, level of
indebtedness, and contractual restrictions with respect to the payment of
dividends and other relevant factors.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
The following discussion and analysis should be read in conjunction with
the Company's consolidated financial statements and the notes thereto
contained elsewhere in this Prospectus.
Results of Operations
Three Months Ended December 31, 1996 Compared With Three Months Ended December
31, 1995 (Unaudited)
The Company's net income for the three months ended December 31, 1996 was
approximately $50,500 as compared to a loss of approximately $69,000 for the
three months ended December 31, 1995. The profit is attributable to increased
revenues over the comparable period of the prior year, and a reduction in the
direct costs of drilling and repair services as a percentage of revenue.
Selling, general and administrative expenses have decreased over the same
comparable period of the prior year as a percentage of revenues.
Total revenues from continuing operations for the three months ended
December 31, 1996 were $1,573,318, an increase of $792,950 or approximately
102 percent, over the three months ended December 31, 1995. The increase in
revenues is primarily due to an increase in drilling services of $321,045 in
the U.S. and $437,458 in Mexico. The Company increased its drilling fleet
from five rigs to nine and added a machine shop division to its hydraulic
repair and fabrication operations during fiscal 1996. This contributed to the
increased revenues during the first quarter of fiscal 1997, and the Company
anticipates increased drilling and repair service revenues for the remainder
of fiscal 1997. Four additional rigs are expected to be added in the second
quarter of fiscal 1997.
Total operating expenses from continuing operations increased by
approximately $570,000, or approximately 65 percent, to $1,443,385 for the
three months ended December 31, 1996, as compared to the three months ended
December 31, 1995. Revenues increased approximately 102 percent over the
comparable period. Direct costs of drilling and repair services were
$727,126, an increase of $298,823 over the comparable period of the prior
year. Selling, general and administrative expenses were $716,259, an increase
of $270,917 over the comparable period of the prior year. These expenses
decreased approximately 20 percent, when compared as a percentage of revenue
over the comparable period of fiscal 1996.
Mineral exploration expenditures are expensed as incurred. Expenditures
incurred on properties identified as having development potential are deferred
on a project basis until the viability of the project is determined. If a
project is abandoned, the accumulated costs are charged to operations in the
year in which the determination is made. Costs associated with economically
viable projects are capitalized and amortized over the estimated useful life.
There are no costs capitalized as of December 31, 1996 and 1995. Exploration
expenses were $40,740 and $30,906 for the three month periods ending December
31, 1996 and 1995, respectively.
Other net expenses increased $103,780 for the three months ended December
31, 1996 over the comparable period of the prior year. Of this amount,
interest expense increased by $42,023 and gains from the sale of marketable
securities decreased $51,515.
Fiscal Year Ended September 30, 1996 Compared With Fiscal Year Ended September
30, 1995 (Unaudited)
The Company had a net loss for the fiscal year ended September 30, 1996
of approximately $920,000 compared to a net loss of approximately $1,186,000
for the fiscal year ended September 30, 1995. Total sales and revenues from
continuing operations for the fiscal years ended September 30, 1996 and
September 30, 1995 were approximately $4,424,693 and $3,019,597, respectively,
an increase of $1,405,095 or approximately 47 percent. The increased revenues
were attributable to increased drilling service revenues in both Mexico and
the United States. The Company increased its available drill rig fleet from
five to nine rigs in fiscal 1996, and added a machine shop division to its
hydraulic repair and fabrication operations. The Company anticipates
increased revenues in fiscal 1997 from existing facilities as well as from
planned additions to the drill rig fleet.
Cost of sales for fiscal years ended September 30, 1996 and September 30,
1995 were $2,447,843 and $1,836,671, respectively. This represents a 6
percent increase in the profit margin. Selling, general and administrative
expenses for fiscal 1996 and fiscal 1995 were $1,859,692 and $2,091,100,
respectively, a decrease of 27 percent expressed as a ratio to sales and
revenues. The decreases in expenses as a percentage of sales and revenues
were attributable to a decrease in exploration costs and the Company's efforts
at overall cost containment. The Company has renewed its mining property
exploration efforts in fiscal 1997 and expects costs to increase for this
program.
The Company's net income or (loss) from continuing operations for fiscal
years ended September 30, 1996 and September 30, 1995 was $117,158 income and
($908,174) loss, respectively. The increase of $1,025,329 in income was
attributable to an increase in gross profit, decreases in legal and
professional fees and exploration costs, but was partially offset by increases
in salaries, wages and related costs, and depreciation expense.
Discount on Debt. The Company entered into a financing arrangement on
September 30, 1996 with a related party. [See "Certain Transactions,"
below.] This transaction included the issuance of Common Stock purchase
warrants, the effect of which was an increase in stockholders' equity of
$1,024,322 and an offsetting finance charge on the income statement in the
same amount. This resulted in a net loss as indicated above.
Interest expense for the fiscal years ended September 30, 1996 and
September 30, 1995 was $311,303 and $144,835, respectively. The increase was
due to additions to debt financing. Interest and other income for the fiscal
years 1996 and 1995 were $187,077 and $21,220, respectively. The increase was
primarily due to the forgiveness of interest by the Bell Estate totaling
$172,823 [see "Certain Transactions," below]. Gain on sale of marketable
securities for the fiscal years ended September 30, 1996 and 1995 was $99,289
and $209,943, respectively. The balance of the Company's holdings of
marketable securities was sold in fiscal 1996 to provide additional working
capital. The Company will not have these securities as a source of capital in
future years. Loss from discontinued operations for the fiscal years ended
September 30, 1996 and September 30, 1995 was $3,326 and $363,462,
respectively. The subsidiary responsible for this loss was sold in fiscal
1996 and there will be no future revenues or expenses incurred by the Company
from that transaction.
The Company plans to expand its drill rig fleet during fiscal 1997 and is
working to improve the efficiency of its other operations. The Company
believes these efforts will improve operating results for fiscal 1997, however
there is no assurance that this will occur.
Fiscal Year Ended September 30, 1995 Compared With Fiscal Year Ended September
30, 1994
The Company's net loss for the fiscal year ended September 30, 1995 was
approximately $1,186,000 as compared to approximately $1,811,000 for the
fiscal year ended September 30, 1994. The difference was attributable to an
increase in revenues and a decrease in expenses as a percentage of revenues.
Total sales and revenues from continuing operations for fiscal 1995 were
$3,019,597, an increase of $851,146, or 39 percent, over fiscal 1994. The
increased revenues were attributable to increases in revenues from both the
Company's drilling services and repair services segments.
Total costs and expenses from continuing operations decreased in fiscal
1995 approximately 1.7 percent to $3,932,743 when compared to fiscal 1994.
These decreased costs and expenses were attributable to decreases in legal and
other professional fees, rents, travel expenses, and consulting fees, which
were offset to an extent by increases in fuel, supply, and exploration costs
as a result of increased drilling and exploration activities.
The Company's loss from continuing operations decreased from $1,834,275
in fiscal 1994 to $913,146 in fiscal 1995 as a result of the items described
above. The decreased loss from operations for fiscal 1995 as compared to 1994
was offset by a $670,039 decrease in gain on sale of marketable securities.
The lower amount of gain on sale of marketable securities resulted from
smaller amounts of marketable securities being sold in fiscal 1995. At
September 30, 1995, the total value of the Company's marketable securities was
$258,750.
Liquidity and Capital Resources
September 30, 1996 (Unaudited)
As of September 30, 1996, the Company's current assets were $1,854,325
and its current liabilities were $2,703,956, resulting in an excess of
liabilities of $849,631. At September 30, 1995, the current liabilities
exceeded current assets by $452,940. The increase is due primarily to
additions to short-term debt from a related party. From September 30, 1995 to
September 30, 1996, cash and cash equivalents increased $126,288 to $300,767.
Net trade accounts receivable increased $521,603 to $1,050,371. These
increases are attributable to a 47 percent increase in revenues for the same
period. Inventory decreased $224,934 to $483,938, primarily due to the sale
of a manufacturing subsidiary. Accounts payable decreased during the period
by $261,814 to $412,487 and accrued expenses decreased $109,154 to $188,628,
due primarily to the sale of a subsidiary and to the availability of capital
provided by debt financing.
During the fiscal year ended September 30, 1996, total assets increased
$1,068,730 to $4,528,677. This included net additions to property, plant and
equipment of $939,382, due primarily to the purchase of additional drill
rigs. During fiscal 1996, total liabilities increased $374,319 to
$2,974,951. This included a reduction in long-term debt of $184,649 to
$270,995.
Stockholders' equity increased $694,411 during the fiscal year ended
September 30, 1996 to $1,553,726. To provide capital, stock and stock
purchase warrants were sold in private placements and issued in exchange for
fees, services and debts of the Company. These issuances resulted in an
increase of $1,683,525. This capital increase was partially offset by the
Company's net loss for the period of ($919,813).
The Company realized positive earnings from its operating activities in
the last half of fiscal 1996. However, the Company will continue to need
infusions of equity or debt as it expands its drill rig fleet, increases its
sales activities in the machine shop, hydraulic repair and fabrication
segments, and pursues mining property exploration and acquisitions.
During fiscal 1996, the Company incurred short-term debt with Common
Stock conversion rights from an unrelated entity. The first loan of $710,000
was obtained in May 1996. Subsequent notes were executed and funds borrowed
from the same entity in June ($450,000), July 10 ($150,000) and July 16, 1996
($590,000). These notes were partially refinanced on September 30, 1996 with
the execution of a short-term note in the amount of $1,673,730 from a related
party, coupled with the issuance to the related party lender of Common Stock
purchase warrants. Subsequent to the fiscal year end on September 30, 1996,
the Company borrowed an additional $300,000 from the same related party on a
short-term basis. Of this aggregate $2,200,000 of short-term debt, $1,842,400
was repaid by January 2, 1997 from the proceeds of an offering selling
approximately 4,000,000 shares of Common Stock. [See "Certain Transactions"
and "Recent Sales of Unregistered Securities," below.]
December 31, 1996 (Unaudited)
At December 31, 1996, the Company's current assets exceeded its current
liabilities by $1,818,016 as compared with current liabilities exceeding
current assets by $849,631 at September 30, 1996. The current ratio of assets
to liabilities was 1.65 at December 31, 1996 as compared with .69 at September
30, 1996. Current assets increased by $2,757,531 to $4,611,856 from September
30, 1996 to December 31, 1996. Current liabilities increased by $89,884
during the same period. The significant increase in working capital over this
period is primarily attributable to the sale of Common Stock in December
1996.
Total assets were $7,729,791 at December 31, 1996 as compared to
$4,528,677 at September 30, 1996. The increase of $3,201,114 is due to the
sale of stock described above and additions to fixed assets of $446,253,
primarily additions to the drill rig fleet and supporting equipment.
For the three-month period ended December 31, 1996, the Company continued
to have positive cash flow from operations. The Company anticipates
continual increases in revenues and cash flow from operations as it expands
its drill rig fleet for the balance of fiscal 1997. Four additional rigs with
support equipment are being acquired by purchase and in-house construction and
are expected to be available for operation by March 31, 1997. This will
increase the Company's fleet of drill rigs to thirteen. As the Company
continues to expand, it endeavors to maintain its positive cash flow from
operations, although there can be no assurance of this. The Company is also
increasing its efforts to acquire mining properties, and it will continue to
need additional sources of funds in order to pursue gold exploration and
development and expand its drilling and repair services.
Forward-looking Statements
The forward-looking statements contained in this Management's Discussion
and Analysis of Operation section and in the section labeled "Business,"
elsewhere in this Prospectus, involve a number of risks and uncertainties.
Some of the factors that could cause actual results to differ materially are
set forth above under the caption "Risk Factors." In addition, the risk
factors discussed below may also affect actual operating results in the
future.
The Company has experienced and expects to continue to experience
significant fluctuations in its results of operations. Factors that affect
the Company's results of operations include its ability to successfully bid on
new contracts, its ability to perform contracts on a timely basis, its access
to suitable used or new equipment to fulfill contract obligations, the ability
to hire and retain skilled and properly trained employees, industry conditions
and world demand for precious metals, as well as prices for such metals. In
addition, the exploration and production of gold is a highly speculative and
competitive business into which the Company expects to expand. As a result of
the foregoing and other factors, there can be no assurance that the Company
will not experience material fluctuations in future operating results on a
quarterly or annual basis which would materially and adversely affect the
Company's business, financial condition and results of operation.
The Company has recently expanded much of its operations to meet
increased demand for its services both inside and outside the United States.
There are numerous risks associated with conducting business in foreign
countries. The distance from corporate headquarters and the often remote
locations of drilling and mining sites in these foreign countries exacerbates
the difficulties discussed above. In addition, problems associated with
possible political risks, instability of local governments, safety of
personnel and equipment, the lack of spare parts or adequate service
assistance, the need for skilled labor and supervision, all add to the risk of
foreign operations. [See, "Risk Factors."]
BUSINESS
The primary business of the Company is providing drilling services for
companies engaged in the exploration for, production and sale of gold and
other precious metals associated with gold, as well as the design,
manufacture, sale, service and repair of drilling rigs and hydraulic equipment
used in logging, mining and related industries. In addition, the Company
intends to engage in the future on a broader scale in the exploration for and
production, processing and sale of gold and other precious metals for its own
account and to develop its own properties.
Drilling Operations
The drilling operations of the Company include both production mining
drilling and exploration drilling as a drilling contractor to the precious
metals mining industry. The Company specializes in exploration and production
drilling, using reverse circulation drilling, performing work in the United
States and Mexico. The Company also designs, manufactures, sells, services
and repairs drill rigs and other hydraulic equipment used in the logging,
mining and related industries. It is anticipated that it may also soon
commence operations in Africa. The Company's drill rigs are track mounted,
mobile, and compact, and the Company believes that their usage does not result
in significant adverse environmental impact. Because of their mobility, track
mounting, small size, and capability of drilling to 1,500 feet in most
environments, these rigs can be positioned and operated in relatively
difficult terrain without requiring the building of drill roads. Management
believes that these attributes provide competitive advantages in terms of
avoiding certain expenses for building roads and also minimizing adverse
environmental impact.
The Company submits written bids for drilling projects and negotiates
written contracts with the mining company prior to commencement of any
drilling project. During drilling operations, the driller, or supervisor, is
responsible for maintaining drill logs. Invoices for services rendered by the
Company are submitted for payment to the mining company on a weekly basis.
Given the intensely competitive market for its contract drilling services, the
Company emphasizes timely completion of its projects, meticulous maintenance
of its equipment and retention of experienced employees.
In 1993, as governments in the United States and Canada raised taxes and
introduced more stringent mining regulations, many mining companies sought
opportunities to shift their mining efforts to South and Central America and
Mexico, where the regulatory regimes are more conducive to mining activities.
Improved political stability in these regions also made expansion there more
attractive to North American mining companies. Changes in the laws regarding
foreign ownership in Mexico prompted an increase in the number of
foreign-owned mining concessions in that country. Privatization of mineral
lands subject to previously low levels of prior mineral extraction activity
and the Mexican government's provision of incentives to companies willing to
operate in Mexico have further encouraged the expansion of foreign company
interests. Increased activities in Mexico by the Company's clients has
resulted in a greater percentage of the Company's services being provided
there.
The Company presently has nine drill rigs in use. Six of those drill
rigs are operating in Mexico and three are operating in Alaska. The Company
also is presently awaiting delivery of two additional drill rigs it has
purchased and is in the process of constructing two additional new rigs at the
Missoula, Montana facility. It expects to have all four of these new rigs
operational during fiscal 1997, although there can be no assurance that such
equipment will be available in that time frame.
Specialty Design and Manufacture, Hydraulic Repair Services
KLS Co. designs and manufactures drilling rigs for use by the Company and
for sale or lease to others in the industry. In addition, KLS Co. offers
replacement parts and repair services for an array of hydraulic equipment used
in logging, mining and construction. The Company is the exclusive authorized
dealer and repair center for Denison Hydraulics of Cleveland, Ohio, for the
state of Montana. KLS Co. also offers specialty manufacturing services,
including pump installation and modification, with an emphasis on hydraulic
systems. To date, KLS Co. has performed specialty manufacturing services
primarily for Dateline.
Precious Metals Exploration
The Company is not presently engaged in any exploration or production on
its own properties or with respect to its own extraction rights. In February
1994, the Company, through Beloro, entered into a joint venture (the "La
Cienega Agreement") with Pacific Rainier De Mexico, S.A. de C.V.
("Pacific"), a subsidiary of Nevada Star Resources Corp., to pursue the
development of property located at La Cienega, Sonora, Mexico, and a potential
placer gold deposit on the Rio Yaqui, approximately 80 miles east of
Hermosillo, Mexico. The Company formed Beloro to own its interests in the
joint venture. As of January 1996, Beloro had contributed cash, property and
services valued at approximately $475,000 to this project. Pacific's initial
contribution was its title to mining claims covering the mineral rights in the
land. The Company terminated its rights and obligations under the La Cienega
Agreement in February 1996, largely because performance did not meet
expectations and because the feasibility studies for future undertakings by
the joint venture indicated that continued participation was not in the best
interests of the Company.
The Company intends to expand its operations in the exploration and
production drilling field by entering into joint ventures or similar
arrangements with the owners of properties containing mineable ore reserves
consisting of both proven and probable ore reserves. As used in this
Prospectus, the term "mineable ore reserves" includes both proven and probable
reserves. The term reserves means that part of a mineral deposit which can be
reasonably assumed to be economically extracted or produced at the time of the
reserve's determination. The term economically, as used in the definition of
reserves, implies that profitable extraction or production under defined
investment assumptions has been established or analytically demonstrated. The
assumptions made must be reasonable, including assumptions concerning the
prices and costs that will prevail during the life of the project.
The term proven reserves means reserves for which (a) quantity is
computed from dimensions revealed in outcrops, trenches, workings and drill
holes; grade and/or quality are computed from the results of detailed
sampling; and (b) the sites for inspection, sampling and measurement are
spaced so closely and the geologic character is so well defined that size,
shape, depth and mineral content of reserves are well established.
The term probable reserves means reserves for which quantity and grade
and/or quality are computed from information similar to that used for
reserves, but the sites for inspection, sampling and measurement are farther
apart or are otherwise less adequately spaced. The degree of assurance,
although lower than that for proven reserves, is high enough to assume
continuity between points of observation. Despite the best efforts of the
owners of these properties or the Company to estimate or measure reserves, no
assurance can be given in any case that the indicated amount of gold or other
minerals may be economically recovered. Reserve estimates may from time to
time require revisions based on actual production experience. The ore grade
actually recovered by the Company may differ from the estimated grade of the
reserves. Reserve estimates generally are revised annually based on the
previous year's operating history. Many factors relating to each mine, such
as the design of the mine plan, unexpected operating and processing problems,
increases in the stripping ratio in open pit mines, unforeseen geotechnical
conditions which may result in increased ground support or dilution in
underground operations, and the complexity of the metallurgy of an ore body,
may adversely affect cash costs. Moreover, fluctuations in the market price of
gold or other minerals, as well as increased production costs or reduced
recovery rates, may render reserves containing relatively lower grades of
mineralization uneconomical to recover and may ultimately result in a
restatement of reserves.
Domestic/Foreign Revenues
During the fiscal years ended September 30, 1996 and 1995, the Company
had business operations in the United States and Mexico. The Company expects
to increase its foreign activity in the future. The following table sets
forth the revenues from all domestic and foreign sources of the Company for
those years:
<TABLE>
<CAPTION>
Fiscal Year Ending Fiscal Year Ending
September 30, 1996 September 30, 1995
------------------ ------------------
<S> <C> <C>
From Domestic Sources
Continuing Operations $1,742,318 $1,593,439
Discontinued Operations 374,233 899,253
From Foreign Sources
Continuing Operations 2,682,375 1,426,158
TOTALS $4,798,926 $3,918,850
========== ==========
</TABLE>
Discontinued Operations
KLS has an inactive subsidiary, known as K.L.S. Environmental, Inc., a
Nevada corporation ("KLSEI"), that was formed in 1993 for the purpose of
engaging in the business of remediating contaminated soils. The Company
subsequently suspended that business. KLSEI does not conduct any business
operations at this time.
During the fiscal year ended September 30, 1996, KLS sold Kel-Lite
Industries, Inc., a Texas corporation ("Kel-Lite"), which was formed in 1994
to acquire the business of a defunct company and to manufacture flashlights.
KLS is no longer pursuing the flashlight business.
In September 1994, the Company formed K.L.S. International, Inc., a
Nevada corporation, as a holding company for pursuing precious metals
exploration operations in Mexico. KLSII has no operations presently. KLS
also owns Beloro, S.A. de C.V. ("Beloro"), a Mexico corporation formed by KLS
in 1994 to pursue gold exploration and development in a joint venture with an
unrelated entity. In February 1996 Beloro withdrew from the joint venture.
Although it plans to expand its precious metals exploration business, KLS
determined that it would not be in the Company's best interests to pursue
those activities through the joint venture. In the future the Company will
target medium size properties that the Company believes may be too small for
most major mining companies and too large for most independent mining
companies to cost-effectively exploit. While the Company is actively pursuing
several properties which may meet this criteria, the Company owns no
exploration properties or claims at this time.
Competition
Drilling Operations. The customers for the Company's drilling operations
include many precious metal mining companies in North, Central and South
America. The Company also expects to expand its services to Africa. In
recent years, approximately 150 mining companies have opened or greatly
expanded mining operations in Mexico. Marketing of the Company's drilling
services is done through direct mail, mining convention attendance and direct
personal contacts. There are several large companies with whom the Company
competes for drilling contracts. The basis of competition is usually price,
service and timeliness. With respect to service and speed, the Company
believes it is able to compete effectively. The Company believes that there
is little effective competition in Mexico for the reverse circulation drilling
capability possessed by the Company and that U.S.-based companies are the
principal competitors to the Company for drilling contracts in Mexico. Many
of the Company's competitors possess greater financial resources, larger work
forces, and more highly developed marketing programs than the Company. A
number of smaller companies also compete with the Company for this business.
Much of the drilling work performed by the Company is in remote,
mountainous areas. With its track mounted, compact, and highly mobile
drilling equipment, the Company believes that it can perform drilling work in
these remote areas more easily and efficiently than other companies that do
not have such equipment. Some of the Company's drill rigs are specially
designed to minimize both adverse impact on the environment and the need for
construction or improvement of roads to access mining sites. The Company
believes that its rigs can be used in soft-soil conditions with less damage to
the environment than equipment used by its competitors. The Company believes
these capabilities give the Company a competitive advantage, although no
assurance can be given that the Company will be able to continue to exploit
this perceived advantage in a profitable manner.
Acquisition of Precious Metals Properties or Interests. The Company
competes with substantially larger companies as well as experienced smaller
companies for the acquisition of properties or interests in properties with
precious metals reserves. Those competitors that are significantly larger
than the Company have far greater financial, management and exploration
resources than the Company to search for, acquire and develop these
properties. However, the Company currently is focusing its efforts on medium
size properties in which it believes it may have a competitive advantage
because properties of this size generally are too small for most major mining
companies and too large for most independent mining companies to develop
effectively.
Specialty Manufacturing and Hydraulic Services. The primary markets for
the Company's specialty manufacturing and hydraulic repair services consist of
logging, mining, and construction companies in the Missoula, Montana area.
These services are marketed through direct contact, attendance at mining
conventions, and direct mail. There are several companies with whom the
Company competes for specialty manufacturing and hydraulic repair services,
and many of those companies have significantly greater financial resources
than the Company.
Equipment
Drilling Equipment. The Company owns nine functional drill rigs, eight
of which were either designed and manufactured by Dateline or were
substantially redesigned and remanufactured by the Company. The drill rigs
are highly mobile and compact and are able to access remote areas with
relatively low environmental impact. The Company employs the reverse
circulation method of drilling in its drilling operations. This method of
drilling entails directing the drilling medium (air or mud) through the
annulus (the space between the drill pipe and the drill pipe cover) outside
the drill pipe, causing the cuttings to come to the surface through the center
of the drill pipe. In conventional drilling, the air or mud is forced down
the interior of the drill pipe and the cuttings come to the surface through
the annulus. The cuttings derived from the reverse circulation method are
cleaner, less damaged and easier to analyze and/or assay. Additionally, to
the extent the Company's drilling methods are used in lieu of core drilling,
the Company believes that its drilling offers a significantly less costly
service. The Company believes that the combination of greater mobility,
compactness and comparatively low environmental impact is a competitive
advantage, despite the fact that the rigs are not able to drill to the depth
of larger drills.
In addition to its drill rigs, the Company owns drill pipe, tools and
replacement parts used in reverse circulation drilling operations.
Other Equipment. The Company owns office equipment and machines,
including a computer system, telephone and facsimile equipment, furniture and
supplies sufficient for its operations. It also owns equipment needed in its
manufacture and repair operations, including metal lathes, drill presses,
welding equipment, hoists, and other equipment. The Company maintains
approximately 35 vehicles, primarily trucks, which are used in its drilling
and other operations.
Marketing
During fiscal 1996, the Company provided its drilling services for
approximately 36 different entities on 40 sites. Principal customers of the
Company include Phelps Dodge Corp., FMC Gold Company, Placer Dome USA, Inc.
and USMX. The customers of the Company are primarily gold and precious metal
producers and the services of the Company are provided under contract.
Contracts for drilling services are obtained through responding to invitations
for bids, attendance at trade shows, personal contacts and direct mail
contacts.
The Company is the exclusive service representative and dealer of the
Denison Hydraulics Company of Cleveland, Ohio for the state of Montana. Under
its arrangement with Denison Hydraulics, the Company services Denison
Hydraulics products used primarily by logging interests in the state of
Montana. Other repair, design and manufacturing projects are obtained through
participation in and attendance at trade shows, direct mail and personal
contact.
Reliance On Major Customers
During the fiscal years ended September 30, 1995 and 1996, no customer of
the Company accounted for more than 10 percent of the Company's revenues from
continuing operations. For the fiscal year ended September 30, 1995, there
was one customer of the Company's now discontinued flashlight business that
was responsible for more than 10 percent of the Company's revenues from that
now-discontinued operation of the Company.
Properties
Drill Rig Manufacturing and Maintenance Facilities. The Company owns an
industrial tract of land constituting approximately 3.11 acres, located at
3560 North Grant Creek Road, Missoula, Montana. The Company's KLS Co. and
Dateline operations are generally conducted from that property. Located on
the property in Missoula are: (i) a single-story building of frame
construction containing approximately 3,600 square feet of office space, (ii)
a single-story cold-storage facility containing approximately 5,000 square
feet, which subsequently was converted to an inventory and environmental
equipment storage facility, (iii) a steel building containing approximately
5,000 square feet, which houses the manufacturing and repair activities, and
(iv) a 7,500 square foot building which is used by KLS Co. in its specialty
manufacturing and hydraulic systems repair activities.
Corporate Office. The Company's headquarters are located at 3220 North
Freeway, Fort Worth, Texas 76111 and consist of approximately 2,000 square
feet of rented office space. The Company leases this property on a
month-to-month basis for $1,110 per month from a partnership that is 50
percent owned by Merlyn Dahlin, the former Chief Financial Officer, Treasurer
and director of the Company. The Company believes that the rent agreement
respecting its headquarters is as favorable as an arms-length-transaction.
The Company will probably vacate these facilities within the next twelve
months.
The Company believes the other facilities and properties described above
to be sufficient for its immediate needs and for the next twelve months. In
addition to these properties, the Company from time to time may acquire
interests in mining properties.
Employees
As of March 5, 1997 the Company employed approximately 56 full-time
employees and no part-time employees. In addition, the Company employed two
outside consultants. From time to time the Company employs additional outside
consultants as needed. The Company believes that it will be able to attract
qualified personnel to fill any job openings. None of the Company's employees
is a member of a union, and neither the Company nor any subsidiary has
experienced a work stoppage. The Company also pays for certain strategic
planning, investment planning and management services under a contract with a
related party. [See, "Certain Relationships."]
In December 1996, the Company entered into a management contract with
Studdert Companies Corp. ("SCC"), a Utah corporation owned and controlled by
Stephen M. Studdert, Thomas A. Murdock and Roger D. Dudley. Under the
management agreement, SCC will receive a monthly management fee of $50,000
payable in stock of the Company or in cash and will provide investment
banking, investor relations, financial management and strategic planning
services for the Company for a term of five years. If the fee is paid in
shares of stock of the Company, the number of shares issuable would be
determined with reference to the average trading price of the Company's Common
Stock during the month for which the services were provided in consideration
for such fee. The agreement also provides for reimbursement of expenses
incurred by SCC since June 1996 in connection with services rendered to the
Company and for similar treatment of expenses incurred during the term of the
agreement.
Legal Proceedings
As of March 5, 1997 the Company was involved in the following legal
proceedings:
PanAmerican Mineral Services, Inc. v. KLS Enviro Resources, Inc.,
Dateline Drilling, Inc., and Dateline Internacional S.A. De C.V. (the "Texas
Litigation"). This action is filed in the District Court of Dallas County,
Texas. The Texas Litigation is related to litigation (the "Wyoming
Litigation) and an arbitration proceeding between one or more of the
defendants and the plaintiff in the state of Wyoming. In 1991, before KLS
acquired any interest in Dateline, Dateline allegedly entered into a contract
with PanAmerican Mineral Services, Inc. ("PanAmerican"). PanAmerican was to
perform certain services and render certain consultation with reference to
business to be conducted by Dateline in Mexico. PanAmerican was to bill for
services performed by Dateline and then remit to Dateline. After the
acquisition of Dateline by KLS, it was discovered that PanAmerican had not
performed as required under the contract and was holding funds due Dateline.
Pursuant to an arbitration agreement between Dateline and PanAmerican,
Dateline began an arbitration proceeding in the state of Wyoming. PanAmerican
has filed documents in the arbitration proceeding indicating that it intends
to assert a counterclaim against Dateline, DIMSA and KLS. PanAmerican
contends that it performed all of its obligations under the contract with
Dateline and alleges that Dateline and the Company are in violation of their
contractual obligations. PanAmerican seeks to recover damages in an
unspecified amount. The Wyoming Litigation was dismissed for lack of
jurisdiction over KLS and DIMSA. That decision was reversed on appeal by the
Wyoming Supreme Court. Motions to Dismiss as to Dateline and DIMSA have been
filed in the Texas Litigation. No decision has been made by the Texas court
on these motions. However, Dateline and DIMSA have determined to withdraw
the Motions to Dismiss and proceed to prepare for trial of PanAmerican's
claims. KLS, Dateline and/or DIMSA anticipate that one or more of them will
file a counterclaim against PanAmerican in the Texas Litigation. The officers
of the Company vigorously dispute that there is any merit to any claim by
PanAmerican. KLS, as well as Dateline and DIMSA, are vigorously defending
themselves in the Texas Litigation.
MANAGEMENT
Directors and Executive Officers
The following table sets forth the executive officers and directors of
the Company, a key executive officer of a significant subsidiary, and a
significant employee of the Company:
<TABLE>
<CAPTION>
Name Age Position
- ------------------------ ----- ---------------------
<S> <C> <C>
Stephen M. Studdert 49 Director,
Chairman
Raymond H. Kurzon 48 President and Director
Charles E. Nuanez 39 Vice President and Director
Wyman Au 57 Director
Philip B. Smith 61 Director
Thomas A. Murdock 52 Director
Roger D. Dudley 44 Director, Acting Chief Financial Officer
Joseph Verner Reed 60 Director
Rick D. Nydegger 48 Director
Adam Taylor 58 Chief Metallurgist
</TABLE>
Stephen M. Studdert was appointed a director and elected by the Board of
Directors as its chairman in December 1996. Mr. Studdert also is the chairman
of the Board of Directors and chief executive officer of fonix Corporation
("fonix"),a publicly-held research and development company engaged in the
development of speech recognition technology. Mr. Studdert is also chairman
and CEO of SCC, and a manager and member of SMD, L.L.C. ("SMD"), a Utah
limited liability company that has previously made loans to the Company and is
a substantial shareholder of the Company. SCC has contracted with the Company
to provide certain management and consulting services to the Company. [See
"Certain Transactions."] Mr. Studdert was a White House advisor to U.S.
Presidents Bush, Reagan and Ford and he served as a member of the President's
Export Council and the Foreign Trade Practices Subcommittee. He is a director
and former chairman of the Federal Home Loan Bank of Seattle and from October
1993 until March 10, 1995, Mr. Studdert also served briefly as a director of
Seiler Pollution Control Systems, Inc., a company having a class of securities
registered under the Securities Exchange Act of 1934.
Raymond H. Kurzon has been President and a director of the Company since
its formation in 1993. From May 1990 to March 1992, he was a partner/manager
in Golden Corral Corp., a joint venture operating a restaurant in McKinney,
Texas. From May 1991 until July 1992, Mr. Kurzon was assistant to the
president of Gateway Mining Company, a Nevada corporation. Mr. Kurzon left
Gateway to work on the formation of the Company.
Charles E. Nuanez has been Vice President and a director of the Company
since January 1993. From 1980 through June 1990, Mr. Nuanez was employed by
Pacific Silver Corp. and Silver King Mines Inc. as mine superintendent and
mine manager at different locations. From June 1990 to September 1991, Mr.
Nuanez was employed by Alta Gold Co. as General Manager of certain mining
prospects and, from October 1991 to March 1993, as manager of Alta's Nevada
operations. Since October 1991, Mr. Nuanez has been employed by Dateline in
various capacities. He currently serves as its President.
Wyman Au has been a director of the Company since November 1993. For
more than 30 years, Mr. Au has been employed as a meteorologist by the
National Weather Service in Honolulu, Hawaii. Mr. Au currently is a director
(Vice Chairman) of the Honolulu Federal Employees Credit Union, a director and
secretary of the Hawaii Credit Union League, and a national director of the
Credit Union National Association.
Philip B. Smith has been a director of the Company since February 1995.
Mr. Smith served as the managing director of Prudential Securities in its
merchant bank from 1986 until 1988. Mr. Smith is a founding general partner
of Lawrence Venture Associates, a venture capital limited partnership based in
New York, New York, where Mr. Smith has served as general partner from 1984 to
the present time. Mr. Smith is presently managing general partner of The
Private Equity Partnership based in New York, New York, which was formed in
1988. He is also vice chairman of Spencer Trask, Inc. in New York, New York,
and is a special limited partner and founder of Utech Venture Capital Fund
located in Washington, D.C. Mr. Smith also serves on the Board of Directors
of Movie Gallery Inc., American Family Restaurants, StarPress Inc., Digital
Video Inc., AstroSciences, Inc., and several private companies. In addition,
Mr. Smith previously has worked with Citibank where he founded Citicorp
Venture Capital for which he served as president and chief executive officer,
and he served as executive vice president and group executive of the Worldwide
Corporate Group at Irving Trust Company. Mr. Smith received a BSE in Chemical
Engineering from Princeton University and a Masters of Business Administration
from the Harvard Business School and is an adjunct professor at Columbia
Business School.
Thomas A. Murdock has been a director of the Company since July 1996.
Since June 1994, Mr. Murdock has been an officer and director of fonix and
currently is the president and chief operating officer of that company. Mr.
Murdock is President of SCC and Assistant to the Chairman and director of
Synergetics, Inc., a private research and development company. For much of
his career, Mr. Murdock has been a commercial banker and a senior corporate
executive with significant international emphasis and experience. Mr. Murdock
is a manager and indirect owner of SMD.
Roger D. Dudley was appointed acting chief financial officer and a
director of the Company on December 31, 1996. He has been a director and
officer of fonix since June 1994, presently in the capacity of executive vice
president and chief financial officer of that company. Mr. Dudley is also
executive vice president of SCC and a manager of SMD. After several years at
IBM in marketing and sales, Mr. Dudley began his career in the investment
banking and asset management industry. He has extensive experience in real
estate asset management and in project development. He also serves as
executive vice president of an international investment fund, and has managed
assets in excess of $200 million. From February 1995 to November 1995, Mr.
Dudley served as a director for Pacific Aerospace & Electronics, Inc., a
Nevada corporation, which has a class of securities registered under the
Securities Exchange Act of 1934.
Joseph Verner Reed was Under Secretary General of the United Nations in
New York for more than ten years until his retirement from that post effective
January 31, 1997. Following a career as a senior advisor to the chairman of
the Chase Manhattan Bank, Ambassador Reed became the United States Ambassador
to Morocco. He subsequently served as United States Ambassador to the United
Nations and Chief of Protocol of the United States. He holds honorary degrees
from several universities. Since June 1994, Ambassador Reed has also served
as a director of fonix. Ambassador Reed became a director of the Company on
December 31, 1996.
Rick D. Nydegger is a patent and trademark attorney. Mr. Nydegger is a
founding shareholder and director of the law firm Workman, Nydegger & Seeley
in Salt Lake City, Utah, a firm specializing in patent, trademark, copyright,
trade secret, unfair competition, licensing and intellectual property
matters. Mr. Nydegger received his law degree from the J. Reuben Clark Law
School (cum laude, 1974)in Provo, Utah. He has published numerous articles in
trade journals and law reviews on the subject of computer law and intellectual
property. Mr. Nydegger is registered to practice before the U.S. Patent and
Trademark Office, and has been admitted to practice before the U.S. Court of
Appeals in the Federal Circuit and the Fifth and Tenth Circuits, as well as
the U.S. Supreme Court. Mr. Nydegger also joined the Board of Directors of
fonix in December 1996. He also became a director of the Company on December
31, 1996.
The Board of Directors has an Executive Committee comprised of Messrs.
Kurzon, Studdert, Murdock and Dudley. Mr. Kurzon, president and CEO of the
Company, is also the chairman of the Executive Committee. Under the bylaws of
the Company (Article V, Section 5.1), the Executive Committee has the
authority to exercise all powers of the Board of Directors of the Company
except the power to declare dividends, issue stock, recommend to shareholders
any matter requiring shareholder approval, change the membership of the
Executive Committee, fill vacancies on the committee or discharge any
committee member. The Executive Committee is appointed by the Board of
Directors to facilitate company management between regularly scheduled and
special meetings of the full Board.
During fiscal 1996, the Company had no other committees of the Board of
Directors. On December 31, 1996, the board appointed an Audit Committee and a
Compensation Committee. The Audit Committee is chaired by Mr. Dudley, who is
also the acting CFO of the Company. Also serving on this board committee are
Mr. Smith and Mr. Au. The Compensation Committee is chaired by Ambassador
Reed and is also comprised of Mr. Nuanez and Mr. Murdock.
No family relationships exist between or among any of the Company's
officers and directors.
In addition to the previously named directors and executive officers, the
Company expects the following individual to make significant contributions to
the Company's business:
Adam Taylor has been Chief Metallurgist of the Company since January
1993. For more than the past 30 years and since he joined the Company, Mr.
Taylor has worked in metallurgy, principally in the processing of base and
precious metals, environmentally sound mining practices, and the design of
equipment and systems for the remediation of contaminated soil and water.
From 1990 to 1993, Mr. Taylor served as project manager of La Teko Resources,
Inc., where he directed the planning, control and remediation of hazardous
waste at a mining property in Fairbanks, Alaska, work for which he received a
commendation from the Alaska Department of Environmental Conservation. From
1987 to 1990, Mr. Taylor served as Chief Metallurgist of Coral Gold Resources
Corporation where he directed mining projects and developed systems to
optimize metals recovery and minimize environmental impact. Before 1987, Mr.
Taylor held positions with various mining companies, one of which included the
management of the processing department of a 3.5 million-ton-per-year
silver/gold mine.
Directors of the Company hold office until the next annual meeting of the
Company's shareholders and until their successors have been elected and duly
qualified. Notwithstanding that certain of the board members are also
directors of fonix, there is no present relationship, contractual or otherwise
between the Company and fonix and no relationship is intended or expected to
develop in the future. During the Company's fiscal year ended September 30,
1996, fonix made a series of short-term loans to the Company totaling
approximately $1,900,000 dollars. All but $270,000 in principal was repaid by
the Company by September 30, 1996, with the balance being converted by an
assignee of fonix to shares of Common Stock of the Company on December 31,
1996. The Company is not indebted to fonix at this time and it is not
anticipated that there will be any further transactions between the two
corporations in the future. The Company owes SMD a total of approximately
$185,191 for sums previously loaned by SMD to the Company. [See "Certain
Transactions" for a discussion of these related transactions and for
disclosure of potential conflicts of interest created by these relationships.]
Board of Director Compensation
On December 31, 1996, the Board of Directors approved the material terms
of a Director's and Employee's Stock Option Plan (the "1997 Plan"). Under the
terms of the 1997 Plan, the Company will grant options to purchase up to an
aggregate of 2,230,000 shares of the Company's Common Stock as either
incentive options or non-qualified stock options. All incentive stock options
are structured to qualify for favorable tax treatment provided for incentive
stock options by Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code"). The Plan shall be administered by an Option Committee comprised
of Mr. Reed, as Chairman and Messrs. Murdock and Nuanez. The Option Committee
has discretion to select persons to whom options are granted, the number of
shares to be granted, the term of each option, and the exercise price of each
option; provided, however, that no option may be exercisable more than 10
years after the date the option is granted and no option may be granted after
December 31, 2006. For fiscal 1997, each director shall receive 50,000
options to purchase Common Stock at an exercise price of $3.00 per share,
except for the members of the Executive Committee of the Board of Directors,
which consists of Messrs. Studdert, Kurzon, Murdock and Dudley, which members
shall receive options to purchase 150,000 shares of Common Stock at an
exercise price of $3.00 per share.
During fiscal year 1996, the Company had no standard arrangement pursuant
to which directors of the Company were compensated for any services as a
director or for committee participation or special assignments performed in
the capacity of director of the Company. During fiscal 1996, options to
acquire shares of the Company's Common Stock were granted to certain members
of the Board of Directors as described below.
On February 24, 1995, the Board of Directors approved the issuance to
Philip B. Smith of options to purchase 200,000 shares of the restricted Common
Stock of the Company at a purchase price of $1 per share. These options were
subsequently canceled and replaced by options granted April 18, 1996, which
are exercisable until April 18, 1998 at a price of $.40 per share. Also on
April 18, 1996, the Board approved a grant of options to acquire 25,000 shares
of stock to Wyman Au, a member of the Board. These options were issued in
place of other options granted in February 1995 at a higher exercise price.
Like those granted to Mr. Smith, the options granted to Mr. Au will expire at
April 18, 1998 and are exercisable at a price of $.40 per share.
On July 11, 1996, the Board granted options to Mr. Au to purchase an
additional 75,000 shares of the Company's Common Stock at a price of $.50 per
share. At the same time, the Board also approved the grant of options to
Merlyn Dahlin, then a director and CFO of the Company, to purchase 100,000
shares of stock at $.50 per share and to Mr. Nuanez to purchase 50,000 shares
of the Company's Common Stock at a price of $.50 per share. All of these
options were granted subject to subsequent approval of the shareholders to be
obtained within one year of the date of grant. [See "Option/SAR Grants in Last
Fiscal Year" below for information regarding additional options granted to
officers of the Company during fiscal 1996.]
In December 1996, options were granted to all directors of the Company.
[See "Security Ownership of Certain Beneficial Owners and Management" for a
description of these grants.]
During fiscal year 1996, the Board of Directors held three regular
meetings and took action three times by unanimous consent resolution. No
director attended fewer than 75% of these meetings.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who beneficially own more than
ten percent of a registered class of the Company's equity securities, to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission. Officers, directors and greater than ten-percent shareholders are
required by regulation of the Securities and Exchange Commission to furnish
the Company with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms furnished to the
Company during the fiscal year ended September 30, 1996 and representations
made by certain persons subject to this obligation that such filings were not
required to be made, the Company believes that all of the reports required to
be filed by these individuals and persons under Section 16(a) were filed in a
timely manner except as follows: (1) fonix was deemed to be the beneficial
owner of more than 10% of the Company's Common Stock by virtue of certain
conversion rights attached to demand notes given by the Company to secure
short-term financing from fonix. fonix was late in filing a Form 5 reporting
a change in its beneficial ownership of these derivative securities which
resulted from the repayment of a substantial portion of the amounts owed by
the Company and in a corresponding termination of a portion of the
aforementioned conversion rights which resulted in reducing fonix's beneficial
ownership of the Company's securities below 10%; (2) Thomas A. Murdock, a
director of the Company and the controlling shareholder of fonix is deemed to
beneficially own securities held by fonix and therefore had an obligation to
file a Form 4 reporting the change in the conversion rights held by fonix,
which change was reported by Mr. Murdock on an untimely filed Form 5; (3) SMD,
which acquired warrants to purchase approximately 6,600,000 shares of the
Company's Common Stock on September 30, 1996, was delinquent in filing a Form
4 to report the change in its beneficial ownership as a result of such
transaction; and (4) similarly, Messrs. Studdert, Murdock and Dudley, who are
the ultimate beneficial owners of SMD, were delinquent in their filing of an
annual report of change in beneficial ownership on Form 5 to report their
proportionate beneficial ownership of the warrants acquired by SMD on
September 30, 1996. All filings referenced above were made and the Company is
not aware of any filings required to be made under Section 16(a) by reporting
persons of the Company which were not made for fiscal year 1996.
EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to the
compensation of the Chief Executive Officer and all executive officers of the
Company and its subsidiaries who earned $100,000 or more during the three most
recent fiscal years of the Company, ending September 30, 1996, 1995 and 1994
and the amounts earned:
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
Other Long-term
Name Annual Compensation All other
and Compensa- Awards of Compensa-
Principal Salary Bonus tion Stock Options tion
Position Year ($) ($) ($) (#) ($)
- ----------------- ---- --------- --------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Raymond H. Kurzon
CEO/President 1996 $ 90,000 $ 0 $83,375(1) 0 $1,000 (2)
1995 60,000 0 0 0 0
1994 60,000 0 0 0 0
Charles E. Nuanez
Vice President 1996 100,075 1,500 1,875(3) 50,000 (4) 0
1995 96,402 0 0 0 0
1994 $ 99,999 $ 0 $ 0 0 $ 0
</TABLE>
(1) Represents a bonus paid as 225,000 restricted shares of Common Stock
of the Company valued at $.375 per share, granted April 18, 1996.
(2) Represents fair market value of employee's personal use of
Company-owned vehicle.
(3) Represents a bonus paid as 5,000 restricted shares of Common Stock
of the Company valued at $.375 per share granted April 18, 1996.
(4) Represents options to acquire 50,000 shares of Common Stock of the
Company at a price of $.50 per share. On the date of grant (July 11, 1996),
the bid price of the Company's Common Stock was $.375 per share.
Employment Contracts and Termination of Employment and Change-In-Control
Arrangements.
The Company does not have any written employment contracts with any of
its executive officers. The Company has no compensatory plan or arrangement
that results or will result from the resignation, retirement, or any other
termination of an executive officer's employment with the Company and its
subsidiaries or from a change in control of the Company or a change in an
executive officer's responsibilities following a change-in-control. The
Company has entered into a management agreement with SCC pursuant to which SCC
has agreed to provide administrative, strategic planning, management
consulting, investor relations, investment banking and other services. Under
the agreement, which has a five-year term, SCC receives a management fee of
$50,000 per month, payable in Common Stock of the Company or in cash. The
Company also reimburses or otherwise pays all SCC expenses incurred in
connection with the services provided on behalf of the Company by SCC. SCC
provides similar services for other corporations and entities and its
agreement with the Company requires only that SCC devote such time as it
reasonably deems necessary to provide the services required to be provided to
the Company under the agreement. [See "Certain Transactions" for additional
information concerning this agreement and the other relationships involving
SCC, SMD and its principals.]
Option/SAR Grants In Last Fiscal Year
The following table sets forth certain information with respect to
options granted to the named executive officers of the Company during the
fiscal year ended September 30, 1996. The Company has never granted any stock
appreciation rights ("SARs"). No options were exercised during fiscal year
1996.
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of % of Total
Securities Options/SARs
Underlying Granted to
Options/SAR's Employees Exercise or Base
Name Granted (#) in Fiscal Year Price ($/Sh) Expiration Date
- --------------------- ------------- -------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Raymond H. Kurzon 0 0 n/a n/a
Charles E. Nuanez 50,000 100% $.50 July 11, 1998
</TABLE>
1997 Stock Option and Incentive Plan
On December 31, 1996, the Board of Directors approved the material terms
of a Director's and Employee's Stock Option Plan (the "1997 Plan"). Under the
terms of the 1997 Plan, the Company may grant options to purchase up to an
aggregate of 2,230,000 shares of the Company's Common Stock as either
incentive options or non-qualified stock options. All incentive stock options
are structured to qualify for favorable tax treatment provided for incentive
stock options by Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code"). The Plan will be administered by an Option Committee comprised
of Mr. Reed, as Chairman and Messrs. Murdock and Nuanez. The Option Committee
has discretion to select persons to whom options are granted, the number of
shares to be granted, the term of each option, and the exercise price of each
option; provided, however, that no option may be exercisable more than 10
years after the date the option is granted and no option may be granted after
December 31, 2006. For fiscal 1997, each director will receive 50,000 options
to purchase Common Stock at an exercise price of $3.00 per share, except for
the members of the Executive Committee of the Board of Directors, which
consists of Messrs. Studdert, Kurzon, Murdock and Dudley, who will receive
options to purchase 150,000 shares of Common Stock at an exercise price of
$3.00 per share.
Options under the 1997 Plan may be granted to employees of the Company,
including officers. Directors may participate in the Plan. The Committee
has the discretion to select individuals from among those eligible for
participation in the 1997 Plan to receive options, determine the terms of the
options granted (which need not be identical), determine when options shall be
granted, and determine the number of shares subject to each option. Despite
the Committee's flexibility in setting the terms of each option, the price at
which the option is exercisable may not be lower than the market price of the
Common Stock of the Company on the day the option is granted. If not
terminated earlier by the Board, the Plan will terminate on December 31,
2006. The exercise of any option at a price below the per share net tangible
book value of the Company's Common Stock on the date of exercise will dilute
the net tangible book value of all common shares outstanding on the exercise
date.
There presently are no unexercised options outstanding under the Plan.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table summarizes certain information as of February 19,
1997 with respect to the beneficial ownership of the Company's Common Stock
(i) by the Company's officers and directors, (ii) by stockholders known by the
Company to own five percent or more of the Company's Common Stock and (iii) by
all officers and directors as a group. At February 19, 1997, there were
approximately 16,923,497 shares of Common Stock issued and outstanding.
<TABLE>
<CAPTION>
Number of Shares
of Common Stock
Name and Address of 5% Beneficial Owners, Beneficially Owned
Executive Officers and Directors at December 31, 1996(1) Percent of Class(2)
- ----------------------------------------- ----------------------- -------------------
<S> <C> <C>
Stephen M. Studdert , Director 3,377,167(3) 17.5%
60 East South Temple Street, Suite 1225
Salt Lake City, UT 84111
Raymond H. Kurzon 2,321,784(4) 13.6
President, CEO and Director
3220 North Freeway
Ft. Worth, TX 76111
Charles E. Nuanez, Director 505,000 3.0
3650 N. Grant Creek
Missoula, MT 59802
Wyman Au , Director 786,265(5) 4.6
3419 Ala Ilima St.
Honolulu, HI 96818
Philip B. Smith , Director 250,000 1.5
535 Madison Avenue
New York, NY 10022
Roger D. Dudley, Director and CFO 3,377,167(3) 17.5
60 East South Temple Street, Suite 1225
Salt Lake City, UT 84111
Thomas A. Murdock, Director 3,382,515(6) 17.5
60 East South Temple Street, Suite 1225
Salt Lake City, UT 84111
Joseph Verner Reed, Director 50,000 *
73 Sterling Road
Greenwich, CT 06831
Rick D. Nydegger, Director 50,000 *
10217 North Oak Creek Lane
Highland, Utah 84003
SMD LLC 9,681,500(7) 41.1
60 East South Temple Street, Suite 1225
Salt Lake City, UT 84111
Ballard Investment Company 1,567,381(8) 9.3
145 South Fairway Drive
North Salt Lake, Utah 84054
Thurgauer Kantonalbank 1,250,000(9) 7.4
Weinfelden, Switzerland
Tuscan Finance & Trade 1,062,500(9) 6.3
Austrasse 15
Vaduz, Liechtenstein FL-9490
Officers and Directors as a Group 14,099,900(10) 56.0%(11)
(9 Persons)
- ---------------------------------
</TABLE>
(*) Less than 1 percent.
(1) The number of shares indicated includes the following number of
shares underlying options that currently are exercisable or that become
exercisable at various strike prices within the next sixty (60) days held by
each of the following persons:
Raymond Kurzon 150,000 shares
Charles E. Nuanez 100,000 shares
Philip B. Smith 250,000 shares
Wyman Au 125,000 shares
Stephen M. Studdert 150,000 shares
Thomas A. Murdock 150,000 shares
Roger D. Dudley 150,000 shares
Joseph Verner Reed 50,000 shares
Rick D. Nydegger 50,000 shares
(2) Percentages rounded to nearest 1/10th of one percent. Except as
indicated in the footnotes below, each of the persons listed exercises sole
voting and investment power over the shares of the Company's Common Stock
listed for each such person in the table. The percentage of any person's
ownership of issued and outstanding shares is calculated by assuming the
exercise in full of all options, warrants and conversion rights held by such
person without regard to such rights held by others.
(3) Messrs. Studdert, Murdock and Dudley each owns or controls
one-third of the ownership interest of SMD and each is a manager and control
person of SMD. Consequently, their respective individual totals in the table
include a proportionate share of the shares beneficially owned by SMD as well
as any shares or rights to acquire shares beneficially owned by them
individually. [See "Certain Transactions."]
(4) The amount shown includes 2,171,784 shares owned of record by Mr.
Kurzon, in addition to the options discussed above.
(5) Of the total shown in the table, 633,921 shares are held jointly
and Mr. Au shares voting and dispositive power over the shares with his wife,
Elizabeth Au. The amount also includes 27,344 shares held of record in Mr.
Au's name.
(6) In addition to currently exercisable options held by Mr. Murdock
and his proportionate interest in the shares and warrants held by SMD (see
note (3), above), the amount indicated includes 5,350 shares owned by Mr.
Murdock's wife which were acquired in open market purchases.
(7) 2,561,000 shares of record are held by SMD. The amount shown also
includes (a) 20,500 shares of stock owned by a trust controlled by or under
common control with SMD, (b) 500,000 shares issuable upon conversion of
Preferred Stock owned by SMD, and (c) 6,600,000 shares of Common Stock
issuable to SMD under a presently exercisable warrant.
(8) Includes 900,000 shares issued upon conversion of a promissory
note made by the Company and purchased by Ballard Investment Company ("BIC").
BIC exercised the conversion right on December 31, 1996.
(9) In November and December 1996, the Company undertook a private
placement of 4,990,500 shares of Common Stock to 19 accredited investors at a
price of $.80 per share. Thurgauer Kantonalbank and Tuscan Finance & Trade
were the only such investors purchasing shares in excess of 5% of the issued
and outstanding Common Stock of the Company.
(10) Eliminates duplicate entries and assumes exercise of all
conversion rights, options, warrants and similar rights held by the officers
and directors.
(11) Fully diluted, based on total issued and outstanding shares of
25,198,967.
SELLING SHAREHOLDERS
The Shares which are being or which may be offered pursuant to this
Prospectus are held by the Selling Shareholders identified below and will be
held for resale by the Selling Shareholders. A total of 5,318,841 Shares have
been registered and may be offered by the Selling Shareholders on a delayed or
continuous basis. 328,341 of such Shares were issued in private transactions
by the Company during 1994, 1995 and 1996. A total of 4,990,500 shares were
issued in a private placement conducted by the Company in November 1996
through January 1997. Pursuant to the terms of the stock purchase agreements
entered into with the purchasers in the latter offering, the Company agreed to
file the registration statement of which this Prospectus forms a part.
The following table sets forth the number of Shares held for resale
hereunder by the Selling Shareholders, the address of each Selling
Shareholder, and the percentage of the total issued and outstanding Common
Stock held by each Selling Shareholder (prior to any sale of the Shares by
such person). Sales of Shares by the Selling Shareholders will result in a
corresponding decrease in their respective percentage ownership of the
Company's securities. Except for this transaction, none of the Selling
Shareholders has any material relationship with the Company within the past
three years and no officer, director or shareholder of any Selling Shareholder
is an officer, director or affiliate of the Company.
<TABLE>
<CAPTION>
Name and Address of Selling Shareholder Shares Held for Resale Percentage of Class(1)
<S> <C> <C>
Carsten-Dirk Schulte 250,000 1.5%
Elbchaussee 245
D-22605 Hamburg, Germany
Stefan Giacomuzzi 30,000 *
Waldeggweg 3
CH-8302 Kloten, Switzerland
Guy Klement 20,000 *
Dorfwiesenstr. 8
CH-6165 Schofflisdorf, Switzerland
Claudio Blank 20,000 *
Buchzelgweg 2
CH-8053 Zurich, Switzerland
Beat Jakob 30,000 *
Metzgerweg 2
CH-8906 Bonstetten, Switzerland
Rene Bleisch 50,000 *
Witikonerstr. 507
CH-8053 Zurich, Switzerland
Markus Wassmer 50,000 *
Reitwiesenstr. 22
CH-8304 Wallisellen, Switzerland
Bruno D. Tambini 250,000 1.5
Bank Sal. Oppenheim, jr. & Cie.
Schweiz AG
Zurich, Switzerland
Roger Fischer 687,500 4.1
Bank Leu Zurich
Banhofstr. 32
P.O. Box 8022
Zurich, Switzerland
Kai Wunsche 500,000 3.0
Palmaille 75
D-22767 Hamburg, Germany
Thomas Bierwagen 10,000 *
Westerjork 67B
D-21635 Jork, Germany
Hartwig Drager 52,500 *
Magdalenen Str. 14
D-20148 Hamburg, Germany
Jorg Holz 25,000 *
76, rue Stalingrad
F-78500 Satrouville, France
Trappli Stiftung 50,000 *
P.O. Box 638, Pflugstr. 12
FL-9490 Vaduz, Liechtenstein
Thurgauer Kantonalbank 1,250,000 7.4
Bankplatz 1
CH-8570 Weinfelden
Switzerland
Stefan Mattich 15,000 *
Schorenstr. 9
CH-8603 Schwerzenbach,
Switzerland
Bank Leumi Le-Israel 625,000 3.7
(Schweiz)
Claridenstrasse 3,4
CH-8022 Zurich, Switzerland
Erich Gujer 13,000 *
Sennhauserweg 11
CH-8032 Zurich, Switzerland
Enhanced Invest Foundation 100,000 *
Neumuhle Strasse 23B
CH-8580 Amriswil, Switzerland
Tuscan Finance & Trade 1,062,000 6.3
Austrasse 15
Vaduz, Liechtenstein FL9490
Carpenter Properties, Ltd. 62,500 *
618 Enchanted Isles
Payne Springs, TX 75147
Principal Financial Securities, Inc. 62,500 *
Custodian FBO Tom Carpenter
IRA #080-13773-1-8
P.O. Box 215132
Dallas, TX 75221
Michael Ames 50,000 *
1108 Crowley
Arlington, TX 76012
John L. Anderson 30,000 *
7513 Susan Court
Ft. Worth, TX 76180
Friedland Associates, Ltd. 23,841 *
3801 East Florida Ave.
Empire Park, Suite 400
Denver, CO 80210
TOTALS 5,318,841 31.4%
</TABLE>
_______________________
(*) Less than 1 percent.
PLAN OF DISTRIBUTION
The Shares may be sold by and for the account of the Selling Shareholders
as discussed below. The Shares were originally issued in connection with
private transactions pursuant to exemptions from the registration provisions
of the securities laws of the United States. At such time as the registration
statement of which this Prospectus forms a part has been declared effective by
the Securities and Exchange Commission and thereafter so long as the
registration statement shall continue effective, the Selling Shareholders may
offer and sell the Shares at such times and in such amounts as they may
respectively determine in their sole discretion. The Company has been advised
by the Selling Shareholders that the Shares may be sold by or on their behalf
through one or more broker-dealers or underwriters or directly to investors
pursuant to this Prospectus or in transactions that are exempt from the
requirements of registration under the Securities Act. As of the date hereof,
none of the Selling Shareholders has advised the Company that it has entered
into any agreement or understanding with any broker-dealer for the offer or
sale of the Shares. The Selling Shareholders may enter into such agreements
or understandings in the future. Such brokers may act as dealers by
purchasing any or all of the Shares covered by the Prospectus.
Under the Exchange Act and the regulations thereunder, persons engaged in
a distribution of the Shares offered hereby may not simultaneously engage in
market making activities with respect to the Common Stock of the Company
during the applicable "cooling off" periods prior to the commencement of such
distribution. In addition, and without limiting the foregoing, the Selling
Shareholders will be subject to applicable provisions of the Exchange Act and
the rules and regulations thereunder, including, without limitation, Rules
10b-6 and 10b-7, which provisions may limit the timing of purchases and sales
of Common Stock of the Company by the Selling Shareholders. The Selling
Shareholders and any broker-dealer who may act in connection with the sale of
the Shares hereunder may be deemed to be "underwriters" as that term is
defined in Section 2(11) of the Securities Act, as amended. Offers and sales
may also be made into markets outside the United States.
The Selling Shareholders may offer the Shares through market transactions
at prices prevailing in the OTC market or at negotiated prices, which may be
fixed or variable and which may differ substantially from OTC prices.
Moreover, the Selling Shareholders may receive cash or other forms of
consideration in exchange for the Shares. The Selling Shareholders have not
advised the Company that they anticipate paying any consideration, other than
usual and customary broker's commissions, in connection with sales of the
Shares. The Selling Shareholders are acting independently of the Company in
making such decisions with respect to the timing, manner and size of each
sale.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 78.751 of Chapter 78 of the Nevada Revised Statutes and Article
VIII of the Company's Bylaws contain provisions for indemnification of the
officers, directors, employees and agents of the Company. The Bylaws require
the Company to indemnify such persons to the full extent permitted by Nevada
law. The bylaws, as amended, with certain exceptions, eliminate any personal
liability of a director to the Company or its shareholders for monetary
damages to the Company or its shareholders for gross negligence or lack of due
care in carrying out the director's fiduciary duties as such. The Company's
articles of incorporation also provide for indemnification to the full extent
permitted by Nevada law, which includes all liability, damages and costs or
expenses arising from or in connection with service for, employment by, or
other affiliation with the Company. Nevada law permits such indemnification
if a director or officer acts in good faith in a manner reasonably believed to
be in, or not opposed to, the best interests of the corporation. A director
or officer must be indemnified as to any matter in which he successfully
defends himself. The Company may also purchase and maintain insurance on
behalf of present and past directors or officers insuring against any
liability asserted against such person incurred in the capacity of director or
officer or arising out of such status, whether or not the Company would have
the power to indemnify such person.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, or persons controlling the
Company pursuant to the foregoing provisions, or otherwise, the Company has
been informed that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
DESCRIPTION OF SECURITIES
The following descriptions are qualified in their entirety by reference
to the detailed provisions of the Company's articles of incorporation and
bylaws, copies of which will be furnished to any prospective investor upon
written request. [See "Additional Information."]
Common Stock
The Company's authorized capital stock consists of 50,000,000 shares of
Common Stock, par value $.0001. As of the date of this Prospectus, there are
16,923,497 shares issued and outstanding. Holders of the Common Stock are
entitled to one vote for each share held of record on matters submitted to a
vote of stockholders. Each share is entitled to share pro rata in dividends
and distributions with respect to the shares when, as and if declared by the
Board of Directors from funds legally available therefor.
The articles of incorporation of the Company do not grant any shareholder
of the Company preemptive rights to subscribe for any of the Company's
securities. Upon dissolution, liquidation or winding up of the Company, the
assets will be divided pro rata on a share-for-share basis among the holders
of the Common Stock, subject to the rights of creditors. The outstanding
shares of the Company's Common Stock are fully paid and non-assessable.
The Shareholders of the Company are not entitled to cumulative voting in
the election of directors. Accordingly, the holders of more than 50% of the
shares voting for the election of directors can elect all of the directors if
they choose to do so; in such event, the holders of the remaining shares
voting for the election of the directors will be unable to elect any person or
persons to the Board of Directors.
The Board of Directors has authority to issue the authorized but unissued
shares of Common Stock without action by the Shareholders. Future issuance of
shares, whether by exercise of outstanding options, warrants or conversion
rights or otherwise, would reduce the percentage ownership held by existing
Shareholders, including persons purchasing the Shares.
Preferred Stock
The Company is authorized to issue up to 1,000,000 shares of Preferred
Stock, par value $.0001. There are presently 100,000 shares of Series A
Preferred Stock issued and outstanding. From time to time the Board of
Directors may designate the rights, privileges and classifications of
additional series of Preferred Stock and could issue additional series of
Preferred Stock with such voting and conversion rights and privileges as it
may determine, without further action by the holders of the Common Stock.
Presently there are no plans to issue any additional shares of Preferred
Stock. Any future issuance of Preferred Stock could occur in such a manner as
to impede a change in control of the Company and could adversely affect the
voting power and rights of the holders of Common Stock.
The Company has 100,000 issued and outstanding shares of Series A
Preferred Stock. If all of the outstanding shares of Series A Preferred Stock
were converted into Common Stock of the Company pursuant to their terms, a
total of 500,000 shares of Common Stock would be issued to the holder(s)
thereof. Any or all of the shares of Series A Preferred Stock may be
converted into Common Stock at any time. The holders of the Series A
Preferred Stock are entitled to receive a cash dividend at the rate of six
percent per annum, payable quarterly, with cumulative rights. Holders of the
Series A Preferred Stock are not entitled to vote on matters upon which
holders of Common Stock have the right to vote; provided, however, that, upon
default in payment of any dividend payment, which default shall continue for a
period of sixty (60) days, the Series A Preferred Stock will be entitled to
vote, pari passu, with the Company's Common Stock until such default is
cured. Upon dissolution of the Company, holders of the Series A Preferred
Stock are entitled, before any payment shall be made to the holders of the
Common Stock, to be paid an amount equal to $5.00 per share, on 30 days
notice.
The foregoing statements are summaries of the rights and privileges of
the holders of the Company's securities. They do not purport to be complete
and are subject to the terms of the Nevada General Corporation Law and the
Company's Articles of Incorporation, as amended.
Nevada Laws
The Nevada Business Corporation Law (Nevada Revised Statutes, Sections
78.378 to 78.3793, inclusive) contains a provision governing "Acquisition of
Controlling Interest" (the "Control Share Acquisition Act"). This law
provides generally that any person or entity that acquires 20% or more of the
outstanding voting shares of a publicly-held Nevada corporation in the
secondary public or private market may be denied voting rights with respect to
the acquired shares, unless a majority of the disinterested shareholders of
the corporation elects to restore such voting rights in whole or in part. The
Control Share Acquisition Act provides that a person or entity acquires
"control shares" whenever it acquires shares that, but for the operation of
the Control Share Acquisition Act, would bring its voting power within any of
the following three ranges: (i) 20 to 331/3%, (ii) 331/3 to 50%, or (iii) more
than 50%. A "control share acquisition" is generally defined as the direct or
indirect acquisition of either ownership or voting power associated with
issued and outstanding control shares. The shareholders or board of directors
of a corporation may elect to exempt the stock of the corporation from the
provisions of the Control Share Acquisition Act through adoption of a
provision to that effect in the articles of incorporation or bylaws of the
corporation. The Company's articles of incorporation and bylaws do not exempt
the Company's Common Stock from the Control Share Acquisition Act.
The Control Share Acquisition Act is applicable only to shares of
"Issuing Corporations" as defined by the Act. An Issuing Corporation is a
Nevada corporation which (1) has 200 or more stockholders, with at least 100
of such stockholders being both stockholders of record and residents of
Nevada; and (2) does business in Nevada directly or through an affiliated
corporation. At this time, the Company does not have 100 stockholders of
record resident of Nevada, nor does the Company do any business in the state
of Nevada. Therefore, the provisions of the Control Share Acquisition Act do
not apply to acquisitions of the Company's shares and will not until such time
as these requirements have been met.
At such time as they may apply to the Company, the provisions of the
Control Share Acquisition Act may discourage companies or persons interested
in acquiring a significant interest in or control of the Company, regardless
of whether such acquisition may be in the interest of the Company's
shareholders.
The Nevada "Combination with Interested Stockholders Statute" (Sections
78.411 to 78.444, inclusive, Nevada Revised Statutes) may also have an effect
of delaying or making it more difficult to effect a change in control of the
Company. This Statute prevents an "interested stockholder" and a resident
domestic Nevada corporation from entering into a "combination," unless certain
conditions are met. The Statute defines "combination" to include any merger
or consolidation with an "interested stockholder," or any sale, lease,
exchange, mortgage, pledge, transfer or other disposition, in one transaction
or a series of transactions with an "interested stockholder" having (i) an
aggregate market value equal to 5 percent or more of the aggregate market
value of the assets of the corporation; (ii) an aggregate market value equal
to 5 percent or more of the aggregate market value of all outstanding shares
of the corporation; or (iii) representing 10 percent or more of the earning
power or net income of the corporation. An "interested stockholder" means the
beneficial owner of 10 percent or more of the voting shares of a resident
domestic corporation, or an affiliate or associate thereof. A corporation
affected by the Statute may not engage in a "combination" within three years
after the interested stockholder acquires its shares unless the combination or
purchase is approved by the board of directors before the interested
stockholder acquired such shares. If approval is not obtained, then after the
expiration of the three-year period, the business combination may be
consummated with the approval of the board of directors or a majority of the
voting power held by disinterested stockholders, or if the consideration to be
paid by the interested stockholder is at least equal to the highest of (i) the
highest price per share paid by the interested stockholder within the three
years immediately preceding the date of the announcement of the combination or
in the transaction in which he became an interested stockholder, whichever is
higher; (ii) the market value per common share on the date of announcement of
the combination or the date the interested stockholder acquired the shares,
whichever is higher; or (iii) if higher for the holders of Preferred Stock,
the highest liquidation value of the Preferred Stock.
The Company presently is not resident in Nevada and conducts no
operations there. Should this Statute affect the Company in the future
because of a change in its status or operations, it may have the effects
described above on the ability of the Company to enter into certain
transactions with related parties, even if the terms of such transactions may
be more favorable to the Company than those it could obtain from unrelated
parties at that time.
Registration Rights
The Selling Shareholders' Shares have been registered for offer and sale
pursuant to this Prospectus under the terms of certain registration rights
granted to the Selling Shareholders. Such rights are contained in agreements
entered into by the Company and the Selling Shareholders. In addition to the
registration rights of the Selling Shareholders which are fulfilled with the
filing of the registration statement, of which this Prospectus forms a part,
the Company has granted limited registration rights to SCC, an affiliate of
the Company which is controlled by three members of the Company's Board of
Directors. See "Certain Transactions." Pursuant to the terms of a Management
Services Contract entered into with SCC, the SCC may accept payment of its
management fees and expenses in the form of Common Stock instead of cash. If
the management fee is paid in shares of Common Stock, the Company has agreed
it will register such stock by filing with the Securities and Exchange
Commission a registration statement at its own expense. Furthermore, the
Company has agreed to register the stock underlying certain warrants held by
SMD, an affiliate of the Company that is controlled by three members of the
Company's Board of Directors. See "Certain Transactions." The existence
and/or the exercise of these rights could adversely affect the market price of
the Company's Common Stock and could impair the Company's future ability to
raise capital through an offering of its equity securities. .
Transfer Agent
The transfer agent and registrar for the Company is Securities Transfer
Corporation, 16910 Dallas Parkway, Suite 100, Dallas, Texas 75248.
CERTAIN TRANSACTIONS
Over the course of fiscal years 1994, 1995 and 1996, the Company borrowed
funds from J. R. Bell ("Bell"), a former officer and director of the Company.
Bell died in February 1996 and all obligations of the Company to Bell were
thereafter owed to his estate (the "Bell Estate"). As of August 16, 1996, the
principal amount owing to the Bell Estate was $623,000, together with interest
on the outstanding balance at the rate of the bank prime rate plus one
percent. The loans from the Bell Estate were secured by second liens on real
and personal property of the Company. All obligations of the Company to the
Bell Estate were retired in August 1996 as a result of certain transactions
described below.
Merlyn W. Dahlin, formerly an officer and director of the Company, loaned
the Company money in a series of transactions during fiscal years 1994 and
1995 and in previous years. Mr. Dahlin resigned as an officer and director of
the Company in November 1996. As of September 30, 1995, all sums previously
loaned by Mr. Dahlin to the Company had been repaid. Total payments to Mr.
Dahlin during fiscal 1995 were approximately $167,000. During fiscal year
1996 Mr. Dahlin loaned the Company $20,000, which was repaid. The Company has
no presently outstanding obligation to Mr. Dahlin.
In several loan transactions during fiscal years 1994 and 1995, the
Company borrowed money from Wyman Au, one of its directors. As of September
30, 1995, the Company owed Mr. Au $47,746, with interest at the prime rate
plus one percent. As of September 30, 1996, the Company owed Mr. Au $42,948.
Pursuant to its understanding with Mr. Au, the Company is making regular
monthly payments to Mr. Au to retire this obligation.
The Company leases approximately 2,000 square feet of office space in Ft.
Worth, Texas, from a partnership that is owned 50 percent by Merlyn W. Dahlin,
formerly an officer and director of the Company. The lease term is
month-to-month and the rate is $1,110 per month. The Company believes this
rate and these terms to be commercially reasonable and at least as favorable
to the Company as it could obtain from an unaffiliated third party.
On August 16, 1996, SMD acquired 2,561,000 shares of the Company's Common
Stock and 100,000 shares of Preferred Stock from the Bell Estate at a price of
$.48 per share (including the 500,000 shares of Common Stock into which the
Preferred Stock may be converted). The purchase price is payable by SMD in
four installments on February 12, 1997, August 12, 1997, February 12, 1998 and
August 12, 1998. Messrs. Studdert, Murdock and Dudley, directors of the
Company, are the managers and beneficial owners of SMD. Mr. Dudley is also
the acting Chief Financial Officer of the Company. The first installment was
paid on February 10, 1997.
As a party to the same transaction by which SMD acquired its interest in
the Company from the Bell Estate, Raymond H. Kurzon, the President and a
director of the Company, acquired 1,000,000 shares of Common Stock of the
Company from the Bell Estate at a price and upon terms identical to SMD. In
connection with the transaction among the Bell Estate, SMD and Mr. Kurzon, the
Company and Mr. Kurzon agreed to convert $180,000 of the Company's debt owed
to Mr. Kurzon into 450,000 shares of restricted Common Stock of the Company.
During fiscal 1996, the Company borrowed an aggregate of $1,900,000 from
fonix, a Delaware corporation of which Messrs. Studdert, Murdock and Dudley
are directors, executive officers and significant shareholders, and of which
Mr. Reed and Mr. Nydegger are directors. Prior to the time of the first loan
made by fonix in May 1996, there was no existing relationship between the
Company and fonix. Mr. Murdock, an officer, director and the controlling
shareholder of fonix became a director of the Company in July 1996 in
connection with the provision to the Company of debt financing by fonix. The
proceeds of these loans were used by the Company to retire the balance of the
amount owing under the $623,000 note to the Bell Estate as described above, to
acquire and refurbish drill rigs, acquire inventory and parts necessary to
operate new and existing drill rigs and as operating capital. Each of the
fonix loans was due upon demand, bore interest at the rate of 12% per annum
and was secured by substantially all of the assets of the Company, except its
real property. On September 30, 1996, the Company paid fonix $1,673,700 in
satisfaction of substantially all loans from fonix except for a balance of
$272,156 due and owing under the first promissory note from the Company to
fonix. The funds used to make this partial repayment came from the proceeds
of a loan to the Company from SMD, described below.
Pursuant to the terms of the first fonix promissory note in the amount of
$710,000 ("Note 1"), all or part of the indebtedness owed to fonix was
convertible at the option of the holder to shares of the Company's Common
Stock at the rate of $.30 per share. (If fonix had elected to exercise this
conversion right, it could have acquired up to 2,366,667 shares of the
Company's Common Stock.) On December 31, 1996 fonix sold and assigned
$270,000 of the balance due under Note 1 to Ballard Investment Company
("BIC"), a shareholder of the Company that is not affiliated with either SMD,
SCC or fonix. On the same day, BIC gave notice to the Company that it had
elected to convert its interest in Note 1 into 900,000 shares of restricted
Common Stock of the Company. Also, on December 31, 1996, the Company paid
fonix the final balance of approximately $10,500 due and owing fonix. Thus, as
of December 31, 1996, the Company was not indebted to fonix in any amount nor
did fonix have any interest in the Company. On December 31, 1996, Messrs.
Studdert, Dudley, Reed and Nydegger joined the Board of Directors of the
Company. All four of these gentlemen, as well as Mr. Murdock, are also
members of the fonix Board of Directors. No future transactions are
contemplated between fonix and the Company.
On September 30, 1996, SMD loaned the Company $1,673,730, which loan is
due on demand, accrues interest at the rate of 12%, and is secured by all of
the assets of the Company and all of the assets of the subsidiaries of the
Company, except certain real property owned by the Company. Also on September
30, 1996, the Company issued to SMD warrants to purchase up to 6,600,000
shares of restricted Common Stock at an exercise price of $.40 per share. The
proceeds from the loan for $1,673,730 were used to repay fonix following a
demand for payment of all or a substantial part of its loans to the Company
totaling $1,900,000. Without these additional funds, the Company would have
been unable to pay all or a significant part of the loans owed fonix as
requested. As a result of the Company's inability to pay the loans or a
substantial part of them, Mr. Studdert, Mr. Murdock and Mr. Dudley agreed to
cause SMD, a private management and investment entity controlled by them, to
loan $1,673,730 to the Company, the proceeds of which would be used by the
Company to pay down a substantial portion of the loans to the Company from
fonix. On October 16, 1996, SMD advanced the Company an additional $100,000
on the same terms. On December 31, 1996, the Company paid SMD $100,000 and on
January 2, 1997, the Company paid SMD $1,542,400. As a result of these
payments, on January 2, 1997, the balance due and owing SMD from the Company
under the loan described above was approximately $185,191. The funds to make
these repayments to SMD were provided by the proceeds from the private
placement of Common Stock to accredited investors conducted by the Company
during November and December 1996 and concluded in January 1997.
In December 1996, the Company entered into a management contract with
SCC, a Utah corporation owned and controlled by Messrs. Studdert, Murdock and
Dudley. Under the management agreement, SCC will receive a monthly management
fee of $50,000 payable in stock of the Company or in cash and will provide
investment banking, investor relations, financial management and strategic
planning services for the Company for a term of five years. If the fee is
paid in shares of stock of the Company, the number of shares issuable would be
determined with reference to the average trading price of the Company's Common
Stock during the month for which the services were provided in consideration
for such fee. The agreement also provides for reimbursement of expenses
incurred by SCC since June 1996 in connection with services rendered to the
Company and for similar treatment of expenses incurred during the term of the
agreement. Also in December 1996, Messrs. Studdert and Dudley joined Mr.
Murdock as members of the Board of Directors of the Company and Mr. Dudley
became the acting CFO of the Company. The management agreement was approved
by vote of the disinterested members of the Board of Directors.
The Company believes that the terms of the above transactions with fonix,
SMD and SCC were at least as favorable as could have been obtained from
unaffiliated third parties.
SHARES ELIGIBLE FOR FUTURE SALE
As of the date hereof, 5,824,900 shares of Common Stock of the Company
(approximately 34.4%) are owned by officers, directors and certain
stockholders of the Company or are otherwise "restricted securities" as that
term is defined in the Securities Act and rules and regulations under such
act. As of the date of this offering, a significant number of shares
(including those owned by the officers and directors described above) are
eligible for sale in the public market pursuant to Rule 144. In general, Rule
144 allows a person holding restricted securities for a period of at least two
years to sell within any three-month period, that number of shares which does
not exceed the greater of 1% of the Company's then outstanding shares, or the
average weekly trading volume of the shares during the four calendar weeks
preceding such sale. Rule 144 also permits, under certain circumstances, the
sale of shares by a person who is not an affiliate of the Company and who has
satisfied a three-year holding period without any volume limitations, manner
of sale provisions or current information requirements. As defined by Rule
144, an affiliate of an issuer is a person who directly or indirectly, through
one or more intermediaries, controls, or is controlled by, or is under common
control with, such issuer, and generally includes members of the Board of
Directors and senior management. After April 29, 1997, the holding periods
described above will be reduced to one and two years, respectively, pursuant
to changes to Rule 144 adopted by the Securities and Exchange Commission on
February 20, 1997. Sales, pursuant to Rule 144, or otherwise, if in
sufficient volume, could have a depressive effect on the market price of the
Company's securities. Moreover, the possibility of such sales may have a
depressive effect on market prices. [See "Risk Factors."]
LEGAL MATTERS
The validity of the issuance of the Shares offered hereby will be passed
upon for the Company by Durham, Evans, Jones & Pinegar, P.C., Salt Lake City,
Utah.
EXPERTS
The consolidated financial statements of the Company included in this
Prospectus and registration statement have been audited by Weaver & Tidwell,
independent auditors, to the extent and for the periods indicated in their
reports thereon also appearing elsewhere herein and in the registration
statement. Such consolidated financial statements have been included herein
in reliance upon such reports given upon the authority of said firm as experts
in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed a registration statement on Form SB-2 (the
"Registration Statement") with respect to the Shares offered hereby by the
Selling Shareholders with the Securities and Exchange Commission (the
"Commission"), under the Securities Act of 1933, as amended. This Prospectus,
which constitutes a part of the Registration Statement, does not contain all
of the information set forth in the Registration Statement, certain items of
which are contained in exhibits to the Registration Statement as permitted by
the rules and regulations of the Commission. Statements contained in this
Prospectus as to the contents of any contract, agreement or other document
referred to are not necessarily complete; however, the Company believes that
the descriptions set forth in this Prospectus are accurate summaries of the
material terms of such documents. With respect to each such contract,
agreement or other document filed as an exhibit to the Registration Statement,
reference is made to the exhibit for a more complete description of the matter
involved.
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended, and, in accordance therewith, files reports,
proxy statements and other information with the Commission. The Registration
Statement and the exhibits forming a part thereof, as well as such reports,
proxy statements and other information, may be inspected and copied at the
Public Reference Room of the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the following regional offices of the Commission:
Northeast Regional Office, 7 World Trade Center, Suite 1300, New York, New
York, 10048, and the Midwest Regional Office, 500 West Madison Street, Suite
1400, Chicago, Illinois 60611. Copies of such material can be obtained from
the Public Reference Section of the Commission at its Washington address at
prescribed rates. In addition, the Commission maintains a "website" on the
internet at "http://www.sec.gov" where electronically filed documents such as
the quarterly and annual reports of the Company and the Registration Statement
may be viewed and retrieved.
<PAGE>
K. L. S. ENVIRO RESOURCES, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL REPORT
SEPTEMBER 30, 1996
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditor's Report . . . . . . . . . . . . . . . . . . . . . .
FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 1996 and 1995. . . . . .
Consolidated Statements of Operations
for the Years Ended September 30, 1996 and 1995. . . . . . . . . . . . .
Consolidated Statements of Shareholders' Equity
for the Years Ended September 30, 1996 and 1995. . . . . . . . . . . . .
Consolidated Statements of Cash Flows
for the Years Ended September 30, 1996 and 1995. . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . .
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
K. L. S. Enviro Resources, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of K. L. S. Enviro
Resources, Inc. and Subsidiaries (the Company) as of September 30, 1996 and
1995, and the related consolidated statements of operations, shareholders'
equity, and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
September 30, 1996 and 1995, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
/s/ Weaver and Tidwell, L.L.P.
WEAVER AND TIDWELL, L.L.P.
Fort Worth, Texas
December 31, 1996
<PAGE>
K. L. S. ENVIRO RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS
1996 1995
------------ -------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 300,767 $ 174,479
Investment securities - 258,750
Accounts receivable - trade, net of allowance for
doubtful accounts $123,402 and $128,402, respectively 1,050,371 528,768
Other receivables 13,274 15,524
Inventory 483,938 708,872
Prepaid expense 5,975 5,655
------------ ------------
Total current assets 1,854,325 1,692,048
Property, Plant and Equipment, net 2,604,510 1,665,128
Other Assets
Intangible assets, net of accumulated amortization
$ 70,014 and $65,103, respectively 49,065 80,670
Deposits and other 20,777 22,101
------------ ------------
69,842 102,771
------------ ------------
Total Assets $ 4,528,677 $ 3,459,947
============ ============
</TABLE>
<PAGE>
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1995-Continued
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
1996 1995
------------ -------------
<S> <C> <C>
Current Liabilities
Notes payable - banks $ - $ 302,329
Notes payable - related parties 1,988,622 690,746
Current maturities of long-term debt 114,219 150,314
Accounts payable 412,487 674,301
Accrued expenses and other current liabilities 181,128 231,067
Deferred revenue - 29,616
Accrued dividends payable 7,500 66,615
------------ ------------
2,703,956 2,144,988
Long-term Debt 270,995 455,644
------------ ------------
2,974,951 2,600,632
------------ ------------
Commitments and Contingencies (Notes 10 and 12) -
Shareholders' Equity
Cumulative convertible preferred stock,
Series A and B, $.0001 par value; 1,000,000
shares authorized; 100,000 and 167,500 shares
issued and outstanding respectively; $5.00 stated value 10 17
Common stock, $.0001 par value; 50,000,000 shares
authorized; 10,931,497 and 8,947,494 shares issued,
respectively 1,093 894
Additional paid-in capital 6,101,057 4,417,724
Accumulated deficit ( 4,505,721) ( 3,545,782)
Foreign currency translation adjustments ( 4,213) ( 4,213)
Unrealized gain on securities available-for-sale - 29,175
------------ ------------
1,592,226 897,815
Treasury stock - common shares held in the treasury,
at cost (38,500 shares in 1996 and 1995) ( 38,500) ( 38,500)
------------ ------------
1,553,726 859,315
------------ ------------
Total Liabilities and Shareholders' Equity $ 4,528,677 $ 3,459,947
============ ============
</TABLE>
The Notes to Consolidated Financial Statement are
an integral part of these statements.
<PAGE>
K. L. S. ENVIRO RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended September 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Net Sales and Revenues
Drilling and repair service revenues 4,424,693 3,019,597
Cost of drilling and repair services 2,447,843 1,836,671
------------ -----------
Gross Profit 1,976,850 1,182,926
----------- -----------
Cost and Expenses
Salaries, wages and related costs 604,351 506,636
Legal and professional fees 265,232 363,191
Rents 65,361 72,564
Repairs and maintenance 27,048 8,974
Taxes, licenses and permits 54,608 30,729
Advertising 9,842 16,928
Travel and lodging 98,961 88,402
Consulting 106,701 124,837
Exploration costs 4,203 324,931
Other operating expenses 284,299 282,168
Depreciation and amortization 339,086 271,740
----------- -----------
Total cost and expenses 1,859,692 2,091,100
----------- -----------
Income (loss) from operations 117,158 ( 908,174)
Other Income (Expenses)
Interest expense ( 311,303) ( 144,835)
Other financing cost ( 1,024,322) -
Interest and other income, net 14,254 21,214
Gain on sale of investment securities 99,289 209,943
Gain (loss) on disposal of assets 25,158 ( 17,733)
Gain (loss) from foreign currency translation ( 9,544) 17,191
----------- -----------
Loss before income taxes ( 1,089,310) ( 822,388)
Income tax benefit - -
----------- -----------
Loss from continuing operations ( 1,089,310) ( 822,388)
Discontinued operations:
Loss from operations of discontinued segment ( 34,511) ( 363,462)
Gain on sale of discontinued segment 31,185 -
----------- -----------
( 3,326) ( 363,462)
----------- -----------
Loss before extraordinary item ( 1,092,636) ( 1,185,850)
Extraordinary Item, gain on forgiveness of debt 172,823 -
----------- -----------
Net Loss ($ 919,813) ($1,185,850)
=========== ===========
</TABLE>
<PAGE>
K. L. S. ENVIRO RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended September 30, 1996 and 1995-Continued
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Loss per weighted-average common share outstanding
Loss from continuing operations ($ .12) ($ .09)
Loss from operations of discontinued segment ( .00) ( .04)
Gain on sale of discontinued segment ( .00) -
----------- -----------
Loss before extraordinary item ($ .12) ($ .13)
Extraordinary item ( .02) -
----------- -----------
Net loss ($ .10) ($ .13)
=========== ===========
Weighted-average number of common shares outstanding 9,345,628 8,821,260
=========== ===========
</TABLE>
The Notes to Consolidated Financial Statements are
an integral part of these statements.
<PAGE>
K. L. S. ENVIRO RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended September 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
-------------- -------------
<S> <C> <C>
Cash Flows from Operating Activities
Net loss ( $ 919,813) ($ 1,185,850)
Adjustments to reconcile net loss to
net cash used in operating activities:
Discontinued operations 34,511 343,915
Common stock for services 163,665 33,768
Depreciation and amortization 339,086 271,741
Other financing cost 1,024,322
Gain on sale of investment securities ( 99,289) ( 209,943)
Gain on sale of discontinued segment ( 31,185) -
Loss on disposal of property, plant
and equipment ( 25,158) 17,733
Translation gain on foreign currency ( 9,544) ( 17,191)
Debt issued in litigation settlement - 30,000
Changes in:
Accounts and notes receivable ( 619,418) ( 90,154)
Inventory ( 112,502) ( 38,787)
Income tax receivable - 81,649
Prepaid expenses ( 4,516) ( 303)
Other assets 19,972 50,168
Accounts payable ( 47,810) 228,355
Accrued expenses ( 15,815) 82,972
Deferred revenue ( 40,742) 24,576
------------- ------------
Net cash used in operating activities ( 344,466) ( 377,351)
------------- ------------
Cash Flows from Investing Activities
Proceeds from sale of investment securities 328,864 659,905
Purchase of property, plant and equipment ( 1,314,204) ( 95,995)
Proceeds from sale of equipment 20,250 2,404
Proceeds from sale of discontinued segment 184,042 -
Advances to discontinued operations - ( 142,120)
------------- -----------
Net cash (used) provided by
investing activities ( 781,048) 424,194
------------- -----------
Cash Flows from Financing Activities
Net change in bank notes ( 196,505) ( 7,655)
Principal payments on long-term debt ( 249,588) ( 113,797)
Net (payments) advances (to) from shareholders 1,497,876 ( 71,254)
Sale of common stock, net of offering cost 200,000 150,000
Dividends paid - ( 6,750)
------------- -----------
Net cash provided (used) in
financing activities 1,251,783 ( 49,456)
Effect of exchange rate changes on cash 19 ( 11)
------------- -----------
Increase (decrease) in cash 126,288 ( 2,624)
Cash at beginning of period 174,479 177,103
------------- -----------
Cash at end of period $ 300,767 $ 174,479
============= ===========
</TABLE>
<PAGE>
K. L. S. ENVIRO RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
for the years ended September 30, 1996 and 1995
<TABLE>
<CAPTION>
Preferred Stock Common Stock
----------------------- ------------------------- Paid-in
Shares Amount Shares Amount Capital
--------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Balances at September 30, 1994 167,500 $ 17 8,743,486 $ 874 $ 4,233,976
Cumulative effect of change
in accounting principles
as of 10/1/94 - - - - -
Sale of common stock
to private placement - - 150,000 15 149,985
Exchange of stock for
services performed - - 54,008 5 33,763
Dividends on
preferred stock - - - - -
Net loss for the year - - - - -
Changes in unrealized gain on
securities available-for-sale - - - - -
--------- ----------- ------------ ----------- -------------
Balances at September 30, 1995 167,500 17 8,947,494 894 4,417,724
Sale of common stock
to private placements - - 500,000 50 199,950
Conversion of preferred
stock to common stock ( 67,500) ( 7) 337,500 34 ( 27)
Exchange of common stock
for services performed - - 585,781 59 1,187,929
Exchange of common
stock for debt - - 560,722 56 226,617
Dividends on
preferred stock - - - - -
Forgiveness of dividends - - - - 68,864
Net loss for the year - - - - -
Changes in unrealized gain on
securities available-for-sale - - - - -
--------- ----------- ------------ ----------- -------------
Balances at September 30, 1996 100,000 $ 10 10,931,497 $ 1,093 $ 6,101,057
========= =========== ============ =========== =============
</TABLE>
<PAGE>
The Notes to Consolidated Financial Statements are
an integral part of these statements.
K. L. S. ENVIRO RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
for the years ended September 30, 1996 and 1995--Continued
<TABLE>
<CAPTION>
Unrealized
Gains on
Foreign Securities
Accumulated Currency Available Treasury
Deficit Translation for-Sale Stock Total
-------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balances at September 30, 1994 ($ 2,309,682) ($ 4,213) $ - ($ 38,500) $ 1,882,472
Cumulative effect of change
in accounting principles
as of 10/1/94 - - 446,517 - 446,517
Sale of common stock
to private placement - - - - 150,000
Exchange of stock for
services performed - - - - 33,768
Dividends on
preferred stock ( 50,250) - - - ( 50,250)
Net loss for the year ( 1,185,850) - - - ( 1,185,850)
Changes in unrealized gain on
securities available-for-sale - - ( 417,342) - ( 417,342)
-------------- ------------- ------------- ------------- -------------
Balances at September 30, 1995 ( 3,545,782) ( 4,213) 29,175 ( 38,500) 859,315
Sale of common stock
to private placements - - - - 200,000
Conversion of preferred
stock to common stock - - - - -
Exchange of common stock
for services performed - - - - 1,187,988
Exchange of common
stock for debt - - - - 226,673
Dividends on
preferred stock ( 40,126) - - - ( 40,126)
Forgiveness of dividends - - - - 68,864
Net loss for the year ( 919,813) - - - ( 919,813)
Changes in unrealized gain on
securities available-for-sale - - ( 29,175) - ( 29,175)
-------------- ------------- ------------- ------------- -------------
Balances at September 30, 1996 ($ 4,505,721) ($ 4,213) - ($ 38,500) $ 1,553,726
============== ============= ============= ============= =============
</TABLE>
The Notes to Consolidated Financial Statements are
an integral part of these statements.
<PAGE>
K. L. S. ENVIRO RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended September 30, 1996 and 1995 - continued
<TABLE>
<CAPTION>
1996 1995
-------------- -------------
<S> <C> <C>
Supplemental disclosures of interest paid:
Continuing operations:
Interest paid 64,522 $ 65,247
Discontinued operations:
Interest paid - 11,228
Supplemental schedule of noncash
investing and financing activities:
Continuing operations:
Cumulative dividends not paid 40,126 $ 50,250
Acquisition of equipment for debt ( 56,667) ( 12,731)
Unrealized gain on investment securities - 29,175
Issuance of stock for debt 226,673 -
Forgiveness of dividends 68,864 -
Use of inventory for fixed assets 21,050 -
Discontinued operations:
Disposal of equipment on
settlement of accounts payable - ( 12,731)
Acquisition of equipment for debt - 36,901
</TABLE>
The Notes to Consolidated Financial Statements are
an integral part of these statements.
<PAGE>
K.L.S. ENVIRO RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Business and Organization
K. L. S. Enviro Resources, Inc. (KLS) and Subsidiaries, was
incorporated in the State of Nevada on January 15, 1993 for the
purpose of engaging in the exploration, production and sale of gold
and for the acquisition of businesses active in the general industry
of minerals mining and processing.
As of September 30, 1996, KLS had six wholly owned subsidiaries:
Dateline Drilling, Inc. (a Montana corporation) (Dateline) is in the
business of providing exploration reverse circulation drilling
services to other companies involved in mineral exploration and
development; K.L.S. Environmental, Inc. (a Nevada corporation)
(KLSEI), formed for the purpose of engaging in environmental
remediation; K.L.S. Co., Inc. (a Nevada corporation) (KLS Co), formed
for the purpose of hydraulic systems repair; Dateline International,
S.A. de C.V. (a Coahuila, Mexico corporation) (DIMSA), engaged in
exploration drilling in Mexico; KLS International, Inc. (a Nevada
corporation), (KLSI), formed as a holding company for operations in
Mexico; and Beloro, S.A. de C.V. (Beloro), (a Mexico City, Mexico
corporation), formed to carry out activities related to mining and
drilling projects in Mexico. The operations of KLSEI were abandoned
during 1995. In addition, Kel-Lite, a former subsidiary was sold
February 1, 1996, See note 14 for discussion of the discontinued
operations.
Principles of Consolidation
The accompanying consolidated financial statements include all the
accounts of KLS, and its wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in
consolidation. The consolidated group is referred to as the
"Company".
Cash and Temporary Investments
The Company considers short-term investments with maturities of three
months or less when purchased to be cash equivalents. Cash
equivalents are stated at cost, which approximates market value.
The Company maintains its cash in bank deposit accounts which, at
times, may exceed federally insured limits. The Company has not
experienced any losses in such accounts. The Company believes it is
not exposed to any significant credit risk on cash.
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued:
Investment Securities
The Company's investment securities are classified as available for
sale. Accordingly, unrealized gains and losses and the related
deferred income tax effects are excluded from earnings and reported
in a separate component of shareholders' equity. Realized gains or
losses are computed based on the average cost method of the
securities sold.
Accounts and Notes Receivable
The Company performs ongoing credit evaluations of its customers'
financial condition and extends credit to virtually all of its
customers on an uncollateralized basis. Customers are headquartered
throughout the United States, Mexico and Canada. Because of the
credit risk involved, management has provided an allowance for
doubtful accounts which reflects its opinion of amounts which will
eventually become uncollectible.
Inventory
Inventory consists of two components: (1) raw materials, work in
process and finished goods related to the Company's manufacturing
subsidiary and (2) consumable supplies and repair parts for mobile
exploration reverse circulation sample drilling rigs, hydraulic
components, and other related support equipment and vehicles.
Inventory is valued at the lower of cost, using the first-in, first-
out method, or market. Cost includes material, labor and
manufacturing overhead cost.
Property, Plant and Equipment
Property, plant and equipment are recorded at historical cost. These
costs are depreciated over the estimated useful lives of the
individual assets using the straight-line method.
Significant additions from periodic renovations of drilling rigs are
capitalized and the related unamortized basis at such time is charged
to repairs and maintenance expense. Normal repairs and maintenance
items are charged to expense as incurred. Gains and losses from
disposition of property and equipment are recognized as incurred and
are included in operations.
The Company, as lessee, entered into a capital lease during 1995 and
such lease is considered to be an installment purchase for accounting
presentation, and is included in property, plant and equipment. The
related lease obligation, less current installments, is included in
long-term debt in the accompanying balance sheets.
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued:
Intangible Assets
Intangible assets consist of organizational costs, patents, and a
covenant not to compete.
Organization costs are amortized over five to twenty year periods on
a straight-line basis. The amount of these costs capitalized as of
September 30, 1996 and 1995 was $81,517, before related accumulated
amortization of $ 52,513 and $30,924, respectively.
Patents obtained for the design and manufacture of flashlights
totaled $8,492 for the year ended September 30, 1995, before
accumulated amortization of $708. Amortization is over the 17 year
life of the patents.
The covenant not to compete given by a former owner of Dateline is
valued at $55,764, before accumulated amortization of $35,702 and
$33,471 at September 30, 1996 and 1995, respectively, and is being
amortized over the 25 year life of the covenant on a straight-line
basis.
Revenue Recognition
The Company recognizes revenues related to drilling and other related
services under the respective terms of each drilling contract,
generally on a "per foot drilled" basis as periodically billed to the
customer. As of September 30, 1996 and 1995, no significant revenues
were attributable to either KLS, KLSEI or KLSI. Revenues
attributable to KLS Co are recognized at the point of sale.
Mineral Exploration
Mineral exploration expenditures are charged to income as incurred.
Expenditures incurred on properties identified as having development
potential are deferred on a project basis until the viability of the
project is determined. If a project is abandoned, the accumulated
project costs are charged to operations in the year in which the
determination is made. Costs associated with economically viable
projects are depreciated and amortized in accordance with the
policies described above. There are no costs capitalized as of
September 30, 1996 and 1995.
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued:
Income Taxes
The Company has adopted the liability method of accounting for income
taxes in accordance with Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" (SFAS No. 109). Deferred
income taxes are recognized for temporary differences between
financial statement and income tax bases of assets and liabilities
and net operating loss carryforwards for which income tax benefits
will be realized in future years.
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.
Loss Per Common Share
Loss per share has been computed by dividing net loss by the weighted
average number of shares of common stock outstanding during the year.
Reclassifications
Certain amounts have been reclassified from previously presented
financial statements to conform with the September 30, 1996
presentation.
NOTE 2. INVESTMENT SECURITIES
Equity securities at September 30 are as follows:
1996 1995
------------- -----------
Cost $ - $ 229,575
Market value at balance sheet date - 258,750
Unrealized gains - 29,175
<PAGE>
NOTE 3. INVENTORY
Major classes of inventories are as follows:
1996 1995
-------------- ------------
Consumable supplies $ 483,938 $ 384,568
Raw materials - 314,842
Finished goods - 9,462
-------------- ------------
$ 483,938 $708,872
============== ============
NOTE 4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at September 30:
1996 1995
--------------- ---------------
Machinery and equipment $ 2,763,188 $ 1,727,526
Transportation equipment 433,514 215,962
Buildings and improvements 493,066 518,977
Furniture and fixtures 140,422 154,178
--------------- ---------------
3,830,190 2,616,643
Accumulated depreciation ( 1,375,680) ( 1,101,515)
--------------- ---------------
2,454,510 1,515,128
Land 150,000 150,000
--------------- ---------------
Property, plant and equipment, net $ 2,604,510 $1,665,128
=============== ===============
At September 30, 1995, property, plant and equipment includes property
with a cost of $36,901 and accumulated depreciation of $5,989 obtained
under a capital lease. Additionally, at September 30, 1996 and 1995,
property includes $150,000 and $ 223,843, respectively, of net assets held
for sale.
Total depreciation expense for the years ended September 30, 1996 and 1995
was $328,310 and $290,763, respectively.
<PAGE>
NOTE 5. NOTES PAYABLE - BANKS
Notes payable to banks consist of the following at September 30:
1996 1995
-------------- ------------
Note payable to bank,
retired February 1996. $ - $ 100,000
$250,000 revolving line of credit,
retired February 1996. - 180,000
Note payable to vendor, assumed by
purchaser of Kel-Lite, retired
February 1996. - 22,329
--------------- ------------
$ - $ 302,329
=============== ============
NOTE 6. NOTES PAYABLE TO RELATED PARTIES
Listed below are related party notes payable at September 30:
1996 1995
-------------- -------------
Notes payable to shareholder,
retired August 1996. $ - $ 623,000
Notes payable to shareholder,
interest at prime plus 1%, due
on demand, collateralized by
Dateline's accounts receivable. 15,000 15,000
Notes payable to shareholder,
interest at prime plus 1%, due
on demand, collateralized by
KLS Co.'s accounts receivable. 27,948 32,746
Notes payable to shareholder,
retired February 1996. - 20,000
<PAGE>
NOTE 6. NOTES PAYABLE TO RELATED PARTIES - continued
1996 1995
-------------- -------------
Notes payable to related company,
interest at 12% due on demand,
collateralized by all assets
except real estate 271,944 -
Notes payable to related company,
interest at 12% due on demand,
collateralized by all assets,
except real estate (See Note 17) 1,673,730 -
-------------- -------------
$ 1,988,622 $ 690,746
============== =============
The notes payable to a related companies are related through common
stockholders and officers. The debt with a September 30, 1996 balance of
$271,944 is convertible to common stock at $.30 per share.
Related party interest expense for the years ended September 30, 1996 and
1995 was $109,922 and $ 68,332, respectively. Unpaid interest to related
parties of $3,167 and $111,432 is included in accrued expenses at
September 30, 1996 and 1995, respectively.
NOTE 7. LONG-TERM DEBT
Long-term debt consists of the following at September 30:
1996 1995
-------------- --------------
Installment loan payable to finance
company; interest at 8.15%; payable
in aggregate monthly installments of
$15,043, including interest; due
February 1997; collateralized by
drilling equipment and office
furniture and equipment. $ 72,991 $ 197,858
Installment loan payable to a
shareholder, interest at 9.25%;
payable in monthly installments of
approximately $3,297, including
interest; due February 2003;
collateralized by property. 234,225 341,499
Note payable to an individual;
interest at 10%; payable in monthly
installments of $968, including
interest; due April 1998;
guaranteed by KLS. 16,952 26,349
<PAGE>
NOTE 7. LONG-TERM DEBT - continued
1996 1995
-------------- --------------
Installment loan payable to finance
company; interest at 9.75%; payable
in monthly installments of $265,
including interest; due October
1999; collateralized by vehicle. 8,447 10,310
Installment loan payable to credit
institution, interest at 9.75%,
payable in monthly installments of
$434, including interest, due
January 2000, collateralized by
vehicle 14,371 -
Installment loan payable to bank,
interest at 9.50%, payable in
monthly installments of $379,
including interest, due July 2001,
collateralized by vehicle 17,437 -
Installment loan payable to credit
institution, interest at 9.75%,
payable in monthly installments of
$543, including interest, due July
2000, collateralized by vehicle 20,791 -
Capital lease obligation - 29,942
------------- ------------
Total long-term debt 385,214 605,958
Current maturities ( 114,219) ( 150,314)
------------- ------------
Long-term portion $ 270,995 $ 455,644
============= ============
Future maturities of long-term debt for years ended September 30 are as
follows:
Year ending
1997 $ 114,219
1998 44,643
1999 39,643
2000 35,285
2001 30,427
Thereafter 120,997
-------------
$ 385,214
=============
NOTE 8. INCOME TAXES
Due to the provisions of SFAS No. 109, the Company is not eligible to
recognize any income tax benefits. Accordingly, no current or deferred
income tax benefits have been recorded for the years ended September 30,
1996 and 1995.
The Company's income tax benefit for the years ended September 30 differed
from the statutory federal rate of 34% as follows:
<TABLE>
<CAPTION>
1996 1995
---------------------- ------------------------
Amount Percent Amount Percent
----------- --------- -------------- ---------
<S> <C> <C> <C> <C>
Statutory rate applied to
loss from continuing
operations before income
taxes ($370,365) (34.00%) ($ 279,612) (34.00%)
Increase (decrease) in in-
come taxes resulting from:
State income taxes, net
of federal tax benefit - - - -
Other ( 19,625) ( 1.80 ) ( 9,472) ( .80 )
Net operating loss not
utilized 389,990 35.80 289,084 34.80
----------- --------- -------------- --------
Total income tax
expense (benefit) $ - - % $ - - %
=========== ========= =============== ========
</TABLE>
The tax effects of significant items comprising of the Company's
continuing operations net deferred tax liability as of September 30 under
SFAS No. 109, are as follows:
1996 1995
------------- --------------
Taxable differences:
Depreciation $ 17,110
--------------
Deductible differences:
Net operating losses ( 1,073,506)
Other ( 114,990)
--------------
Total deductible differences ( 1,188,496)
Less valuation allowance 1,171,386
--------------
Net deductible differences ( 17,110)
--------------
Total deferred income taxes $ -
==============
The Company has available as of September 30, 1996, net operating tax loss
carryforwards of approximately $4,100,000, some of which has been used to
reduce the Company's deferred income taxes payable. These carryforwards
expire beginning in 2008 except for $427,209 of the loss which expires
beginning in 2004.
NOTE 9. CAPITAL STOCK TRANSACTIONS
During the years ended September 30, 1996 and 1995, the Company sold
500,000 and 150,000 shares, respectively, of unregistered common stock at
$.40 and $1.00 per share, respectively.
During the years ended September 30, 1996 and 1995, the Company issued
325,000 and 525 shares, respectively, of its unregistered common stock for
services rendered by a shareholder. The Company also issued 260,781 and
53,483 shares, respectively, of unregistered common stock to employees,
for bonuses and other services.
The Company is to issue dividends on Series A and Series B preferred stock
on a quarterly basis at a rate of 6% per annum. Dividends on preferred
stock for the year ended September 30, 1996 and 1995 totaled $40,126 and
$50,250, respectively. Accrued dividends payable at September 30, 1996
and 1995 are $7,500 and $66,615, respectively.
NOTE 10. RELATED PARTY TRANSACTIONS
Fees totaling $49,320 for the years ended September 30, 1996 and 1995,
respectively, were paid to a shareholder and director for advisory and
accounting services performed and lease of office space.
In 1996, the Company has entered into a consulting agreement with a
officer and director of the Company to provide management advice. The
agreement has a three year term and requires monthly payments of $2,000.
Total payments in 1996 approximated $9,700.
See other footnotes to the consolidated financial statements for additional
related party transactions.
NOTE 11. CONTINGENCIES
Dateline has instituted arbitration proceedings against a former customer
seeking the recovery of approximately $123,000 wrongfully withheld. An
allowance for $123,000 offsetting the customer receivable is recorded on
the financial statements. The former customer has filed a counterclaim
against Dateline and KLS for violation of their contractual obligations.
This counterclaim is being vigorously contested by the Company.
The ultimate outcome of these lawsuits cannot be predicted and no
provision for liability has been made in the accompanying consolidated
financial statements. It is management's belief that the outcomes are not
likely to have a material adverse effect on the Company's financial
position.
NOTE 12. SEGMENT INFORMATION,
FOREIGN OPERATIONS AND MAJOR CUSTOMERS
The Company's continuing operations are classified into two business
segments as follows:
Production and exploration Included are all drilling operations in
drilling the United States and Mexico
Hydraulic repairs and Includes replacement parts and repair
specialty services for an array of hydraulic
equipment utilized in logging, mining,
and construction. Additionally, pump
installation and modification related to
hydraulic systems.
For the year ended September 30, 1996:
<TABLE>
<CAPTION>
Production and Exploration
Drilling Hydraulic
--------------------------- Repairs & Corporate Consolidated
Domestic Foreign Spec. Mfg. & Other Total
----------- ------------ ---------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Revenues/sales $ 969,937 $ 2,682,375 $ 772,381 $ - $ 4,424,693
Income (loss) from
operations (249,153) 958,352 3,671 (595,712) 117,158
Identifiable assets 1,780,639 1,378,953 1,151,249 217,836 4,528,677
Depreciation and
amortization expense 235,502 47,382 46,561 9,641 339,086
Capital expenditures 1,021,177 319,998 64,836 - 1,406,011
</TABLE>
For the year ended September 30, 1995:
<TABLE>
<CAPTION>
Production and Exploration
Drilling Hydraulic
--------------------------- Repairs & Corporate Consolidated
Domestic Foreign Spec. Mfg. & Other Total
----------- ------------ ---------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Revenues/sales 9,744 $ 1,426,158 $ 893,695 $ - $ 3,019,597
Income (loss) from
operations ( 376,799) 47,671 71,998 ( 656,016) ( 913,146)
Identifiable assets 870,946 509,875 1,156,974 296,201 2,833,996
Depreciation and
amortization expense 229,485 11,234 21,097 9,925 271,741
Capital expenditures 56,304 35,650 20,502 366 112,822
</TABLE>
For the years ended September 30, 1996 and 1995, there were no customers
in continuing operations responsible for more than 10% of sales and
revenues.
At September 30, 1996, the foreign currency exchange rate with Mexico was
7.534 pesos for one dollar.
NOTE 13. STOCK OPTIONS AND WARRANTS
The Company has issued exercisable stock options for the following numbers
of shares and exercise prices at September 30, 1996:
Number Exercise
of Shares Price
------------ ------------
325,000 $ 0.40
225,000 0.50
10,000 0.75
Stock options for 225,000 shares at $ 0.40 and 225,000 shares at $ 0.50
were issued to directors and shareholders of the company. Additionally
stock options for 100,000 shares at $0.40 were issued to a shareholder of
the company. No options were exercised during the years ended September
30, 1996 and 1995.
The Company has issued stock purchase warrants for the following numbers
of shares and exercise prices at September 30, 1996:
Number Exercise
of Shares Price
------------ ------------
6,600,000 $ 0.40
125,000 0.40
All stock purchase warrants were issued to companies related through
common shareholders. No warrants were exercised during the years ended
September 30, 1996.
NOTE 14. DISCONTINUED OPERATIONS
Effective February 1, 1996, the Company sold all of the issued and
outstanding capital stock of Kel-Lite. As consideration for the stock
purchase, the buyer agreed to pay a cash purchase price of $250,000 and a
deferred purchase price representing royalty payments as further described
in a royalty agreement. The royalty agreement originally provided for
such payments to begin one year from closing (February 6, 1996) and ending
ten years thereafter. Minimum royalty payments due under the royalty
agreement were $600,000. Additionally, the buyer has agreed to an early
termination payment if Kel-Lite should be sold or substantially disposes
of all its assets prior to January 31, 2007. Notwithstanding any early
termination payment, the buyer remained liable for the minimum royalty
payments of $600,000. In connection with the sale of Kel-Lite, the
Company agreed to issue to the buyer warrants to purchase up to 250,000
shares of the Company's restricted common stock at an exercise price of
$.40 per share, exercisable until February 1997, and to grant to the buyer
registration rights to register the transfer of the common stock issued
upon the exercise of those warrants. Subsequent to the date of sale, the
purchaser expressed dissatisfaction with the original agreement and voiced
certain claims against the Company.
Subsequent to September 30, 1996, the company reached an agreement with
the purchaser of Kel-Lite whereby all royalty payment obligations by the
purchaser were cancelled and warrants issued to the purchaser were reduced
to 125,000 shares. Accordingly, the gain on sale of Kel-Lite has been
decreased by $ 348,750 in the accompanying financial statements as a
result of the subsequent agreement with the purchaser.
As a result of the sale, activities of Kel-Lite have been accounted for as
discounted operations in the accompanying financial statements. The
results are presented as net amounts in the Consolidated Statements of
Operations, with prior periods restated to conform to the current
presentation.
Additionally, operations of KLSEI were abandoned 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. Selected operating results for Kel-Lite and KLSEI are
presented in the following tables:
<TABLE>
<CAPTION>
Kel-Lite KLSEI
------------------------- -----------------------
1996 1995 1996 1995
------------ ------------ ---------- -----------
<S> <C> <C> <C> <C>
Revenues $ 374,233 $ 899,253 $ - $ -
Income tax benefit (provision) - - - -
Net losses ( 34,511) ( 337,351) - ( 26,111)
</TABLE>
Net assets of discontinued operations, which are included in the various
asset and liability amounts in the Consolidated Balance Sheets at
September 30, are as follows:
<TABLE>
<CAPTION>
Kel-Lite KLSEI
------------------------- -----------------------
1996 1995 1996 1995
------------ ------------ ---------- -----------
<S> <C> <C> <C> <C>
Current assets $ - $ 471,912 $ - $ -
Property, plant and equipment, net - 129,137 - -
Other assets - 24,904 - -
Current liabilities - ( 422,701) - ( 7,747)
Long-term debt - ( 23,347) - -
------------ ------------ ---------- -----------
Net liabilities $ - $ 179,905 $ - ($ 7,747)
============ =========== ========= ==========
</TABLE>
NOTE 15. FINANCIAL INSTRUMENTS
Financial instruments of the Company include cash, accounts receivable,
accounts payable, notes payable and long-term debt. The carrying value of
cash, accounts receivables and accounts payable approximates fair value
because of the short maturities of those instruments. The fair value of
notes receivable, notes payable and long-term debt, calculated using
current interest rates for instruments with similar maturities,
approximates their carrying values.
NOTE 16. EXTRAORDINARY ITEM
In August 1996, the company entered into an agreement with the estate of a
former shareholder. The provisions of the agreement allowed the company
to receive forgiveness on $ 172,823 of accrued interest expense by
retiring the related party notes payable. The $172,823 of accrued
interest forgiveness has been recorded as an extraordinary item in the
financial statements.
NOTE 17. SUBSEQUENT EVENT
On November 20, 1996, the company entered into an agreement to purchase
drilling equipment from a supplier for approximately $ 1,300,000.
In December, 1996, the Company instituted a stock option and incentive
plan authorizing the issuance of stock options to purchase a maximum of
2,230,000 shares of the Company's $0.001 par value common stock to
employees and directors. The exercise price of options granted pursuant
to the plan are determined by an option committee designated by the board
of directors.
In December, 1996, the Company sold 4,990,500 shares of common stock for
consideration of $0.80 per share. All shares issued were pursuant to
Regulation D of the Securities Act of 1933. A portion of the proceeds was
used to pay $1,542,400 of the debt to a related company. (See Note 6.)
In December, 1996, the Company entered into a five-year management
agreement with a company related through common directors. The agreement
provides for a monthly fee of $50,000 payable by the Company for
investment banking, investor relations, and financial management services.
<PAGE>
K.L.S. Enviro Resources, Inc. and Subsidiarie
Consolidated Balance Sheets
December 31, 1996 (unaudited) and September 30, 1996 (audited)
<TABLE>
<CAPTION>
December 31, September 30,
1996 1996
-------------- --------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 2,800,590 $ 300,767
Accounts receivable-trade, net of allowance for
doubtful accounts of $123,402 831,203 1,050,371
Other receivables 13,908 13,274
Inventory 678,011 483,938
Prepaid expenses 288,144 5,975
-------------- --------------
Total current assets 4,611,856 1,854,325
Property, plant and equipment, net 3,050,763 2,604,510
Other assets
Intangible assets, net of accumulated amortization
$72,601 and $70,014, respectively 46,478 49,065
Deposits and other 20,694 20,777
-------------- --------------
Total other assets 67,172 69,842
Total assets $ 7,729,791 $ 4,528,677
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Notes payable-related parties $ 1,769,241 $ 1,988,622
Current maturities of long-term debt 71,777 114,219
Accounts payable 775,374 412,487
Accrued expenses and other current liabilities 148,412 188,628
Deferred revenues 29,036 -
-------------- --------------
Total current liabilities 2,793,840 2,703,956
Long-term Debt 258,308 270,995
-------------- --------------
Total liabilities 3,052,148 2,974,951
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 10 10
Common stock, $.0001 par value; 50,000,000 shares authorized;
15,761,497 and 10,931,497 issued and outstanding, respectively 1,576 1,093
Additional paid-in capital 9,181,539 6,101,057
Accumulated deficit (4,462,769) (4,505,721)
Foreign currency translation adjustments (4,213) (4,213)
-------------- --------------
4,716,143 1,592,226
Treasury stock-common shares held in the treasury, at cost (38,500) (38,500)
-------------- --------------
Total shareholders' equity 4,677,643 1,553,726
-------------- --------------
Total liabilities and shareholders' equity $ 7,729,791 $ 4,528,677
============== ==============
The notes to Consolidated Financial Statements are an integral part of these statements
</TABLE>
<PAGE>
K.L.S. Enviro Resources, Inc. and Subsidiaries
Consolidated Statements of Operations
for the Three Months ended December 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Net sales and revenues
Drilling and repair services revenues $ 1,573,318 $ 780,368
Cost of drilling and repair services 727,126 428,303
-------------- --------------
Gross profit 846,192 352,065
Cost and expenses
Salaries, wages and related costs 135,874 116,188
Legal and professional fees 97,132 54,166
Rents 12,737 22,500
Repairs and maintenance 15,001 11,605
Taxes, licenses and permits 7,612 13,208
Advertising 1,816 4,384
Travel and lodging 46,630 15,953
Consulting 33,889 35,500
Exploration costs 40,740 30,906
Other operating expenses 229,279 72,227
Depreciation and amortization 95,549 68,705
-------------- --------------
Total cost and expenses 716,259 445,342
Income (loss) from operations 129,933 (93,277)
Other income (expenses)
Interest expense (77,953) (35,930)
Interest and other income, net 2,534 3,436
Gain on sale of investment securities - 51,515
Loss from foreign currency translation (4,063) (837)
-------------- --------------
Income (Loss) before income taxes 50,451 (75,093)
Income taxes - -
-------------- --------------
Income (Loss) from continuing operations 50,451 (75,093)
Discontinued operations - 6,115
-------------- --------------
Net income (loss) $ 50,451 $ (68,978)
============== ==============
Loss per weighted-average common share outstanding
Income (loss) from continuing operations $ 0.005 $ (0.008)
Loss from operations of discontinued segment - -
-------------- --------------
Net income (loss) $ 0.005 $ (0.008)
============== ==============
Weighted-average number of common shares outstanding 10,933,040 8,958,494
============== ==============
The Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
<PAGE>
K.L.S. Enviro Resources, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
for the Three Months ended December 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 50,453 $ (68,978)
Adjustments to reconcile net income (loss) to cash
used in operating activities:
Common stock for services 487 9,200
Depreciation and amortization 95,548 75,253
Gain on sale of marketable securities - (51,515)
Translation loss 4,213 837
Changes in:
Accounts and other receivables 215,819 (18,306)
Inventory (194,073) 49,486
Prepaid expenses (282,169) (6,635)
Others assets 65 (1,728)
Accounts payable 363,927 11,733
Accrued expenses (43,864) 2,475
Deferred revenue 22,623 22,163
-------------- --------------
Net cash provided by operating activities 233,029 23,985
Cash flows from investing activities:
Proceeds from sales of marketable securities - 197,911
Purchases of equipment (539,214) (85,416)
-------------- --------------
Net cash (used in) provided by investing activities (539,214) 112,495
-------------- --------------
Cash flows from financing activities:
Net change in bank notes - (97,085)
Principal payments on long-term debt (55,129) (30,280)
Net change in loans from related parties 50,619 (1,144)
Cash received from stock subscriptions and sales of common stock 2,810,478 -
-------------- --------------
Net cash provided by (used in) financing activities 2,805,968 (128,509)
-------------- --------------
Effect of exchange rate changes on cash 40 3
-------------- --------------
Increase in cash 2,499,823 7,974
Cash at beginning of period 300,767 174,479
-------------- --------------
Cash at end of period $ 2,800,590 $ 182,453
============== ==============
The Notes to Consolidated Financial Statements are an integral part of these Statements
</TABLE>
<PAGE>
K.L.S. ENVIRO RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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. It is suggested that
these financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's September 30, 1996
audited financial statements.
In the opinion of management, all adjustments, consisting only of normal
recurring adjustments and elimination of material intercompany sales and
purchases necessary to present fairly the financial condition, results of
operations and cash flows for the Company for the interim periods presented,
have been included. Operating results for the three months ended December 31,
1996, are not necessarily indicative of the results that may be expected for
the year ending September 30, 1997.
Principles of Consolidation
The accompanying unaudited consolidated financial statements include all the
accounts K.L.S. Enviro Resources, Inc. and its six wholly-owned subsidiaries,
Dateline Drilling, Inc., K.L.S. Co., Inc., Kel-Lite Industries, Inc., Dateline
Internacional, S.A. de C. V., K.L.S. International, Inc., and Beloro, S.A. de
C.V. The operations of Kel-Lite Industries, Inc. were discontinued during
1996.
Note Payable
As of the fiscal year ended September 30, 1996 the Company had a note payable
to fonix Corporation ("fonix"), bearing interest at 12 percent, due on demand,
collateralized by all assets, except real estate, in the amount of $271,944.
On October 21, 1996 fonix loaned an additional $200,000 to the Company under
similar terms. On December 31, 1996 a shareholder of the Company purchased
$270,000 of the note and converted it to 900,000 shares of common stock at a
conversion rate of $.30 per share (see Capital Stock below). The balance of
the note to fonix was paid December 31, 1996 from the proceeds of the sale of
stock (see Capital Stock below).
Note Payable - Related Party
As of the fiscal year ended September 30, 1996 the Company had a note payable
to a shareholder, bearing interest at 12 percent, due on demand,
collateralized by all assets, except real estate, in the amount of $1,673,730.
<PAGE>
On October 16, 1996 the shareholder loaned an additional $100,000 to the
Company under similar terms. A payment was made by the Company to the
shareholder from the proceeds of the sale of stock (see Capital Stock below)
on December 31, 1996 reducing the balance to $1,727,591. This note was
substantially reduced by a payment on January 2, 1997 (see Subsequent Events
below).
Capital Stock
In December 1996, the Company sold 4,990,500 shares of common stock for
consideration of $0.80 per share pursuant to Regulation D of the Securities
Act of 1993.
On December 31, 1996 a shareholder purchased $270,000 of a demand note of the
Company from fonix. Also on December 31, 1996, the shareholder exercised the
conversion rights associated with such note, at an exchange rate of $0.30 per
share, to acquire 900,000 shares of common stock.
Subsequent Events
As of December 31, 1996, the Company was obligated to a shareholder in the
amount of $1,727,591 under the terms of a demand note, interest at 12 percent,
collateralized by all assets, except real estate. A payment was made on
January 2, 1997, reducing principal by $1,541,248 and paying then-accrued
interest of $1,152. The balance due the shareholder following this payment of
principal and interest was $185,191. The funds for such payment were obtained
from the sale of common stock (see Capital Stock above).
Income Per Common Share
Income per share of common stock is based on the weighted average number of
shares outstanding during the periods ended December 31, 1996 and 1995.
<PAGE>
No dealer, salesperson or other person has been authorized to give any
information or make any representation not contained in this Prospectus. If
given or made, such information or representation must not be relied upon as
having been authorized by the Company or any Underwriter. This Prospectus
does not constitute an offer to sell or a solicitation of an offer to buy
shares of common stock or other securities to any person in any jurisdiction
or in any circumstance in which such offer would be unlawful. Neither
delivery of this Prospectus nor any sale made hereunder shall under any
circumstances create an implication that there has been no change in the
affairs of the Company since the date of this Prospectus or that the
information contained herein is correct as of any time subsequent to its date.
________________________________________________
TABLE OF CONTENTS
PROSPECTUS SUMMARY
SUMMARY CONSOLIDATED FINANCIAL DATA
RISK FACTORS
USE OF PROCEEDS
DETERMINATION OF OFFERING PRICE
DILUTION
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
CAPITALIZATION
DIVIDEND POLICY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
BUSINESS
MANAGEMENT
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
EXECUTIVE COMPENSATION
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
SELLING SHAREHOLDERS
PLAN OF DISTRIBUTION
INDEMNIFICATION OF DIRECTORS AND OFFICERS
DESCRIPTION OF SECURITIES
CERTAIN TRANSACTIONS
SHARES ELIGIBLE FOR FUTURE SALE
LEGAL MATTERS
EXPERTS
ADDITIONAL INFORMATION
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
The Nevada Business Corporation Act and the Registrant's Articles of
Incorporation and Bylaws under certain circumstances provide for the
limitation of liability and indemnification of the Registrant's directors
against liabilities which they may incur in the course of acting in such
capacity. A summary of the circumstances in which such indemnification is
provided for is contained in this Item, but that description is qualified in
its entirety by reference to the Registrant's Articles of Incorporation. The
Bylaws of the Registrant extend the same limitation of liability and
indemnification to the executive officers of the Registrant.
In general, under these provisions, any officer, director, employee or
agent may be indemnified against expenses, fines, settlements or judgments
arising in connection with a legal proceeding to which such person is a party,
as a result of such relationship, except in relation to matters in which such
person is adjudged to be liable for his own negligence or intentional
misconduct in the performance of his duty.
Indemnification may also be granted pursuant to the terms of agreements
which may be entered into in the future of pursuant to a vote of stockholders
or directors. This indemnification is in addition to any other right of the
indemnified person under any such contract or any law, bylaw, agreement, vote
of stockholders or otherwise.
Item 25. Other Expenses of Issuance and Distribution.
The following is an itemization of all expenses (subject to future
contingencies) incurred or to be incurred by the Registrant in connection with
the issuance and distribution of the securities of the Registrant being
offered hereby. Some of the expenses included below may be prepaid by the
Registrant prior to the effective date of the Registration Statement. All
expenses are estimated:
Registration and filing fee(*) $ 7,000
Transfer agent's fee(*) 1,500
Printing and engraving(*) 3,000
Accounting fees and expenses(*) 10,000
Legal fees and expenses(*) 35,000
Blue sky fees and expense(*) 10,000
Miscellaneous expenses(*) 1,000
Total(*) $ 67,500
======
__________________
(*) Estimated.
Item 26. Recent Sales of Unregistered Securities.
Within the past three calendar years, the Registrant has issued
securities in transactions summarized below:
1994
The Company issued a total of 149,750 shares of Common Stock in
connection with a private placement during the months of January through May
of 1994. The gross proceeds from the sale of such shares was $299,500 ($2.00
per share). In May 1994, the Company sold 100,000 shares of convertible
Preferred Stock to a shareholder and director for $500,000 cash. In June
1994, the Company issued 225,000 shares of Common Stock to a shareholder upon
conversion of preferred shares. From time to time during calendar 1994, the
Company paid certain expenses, including fees for services, in stock in order
to preserve its cash for operations. A total of 31,588 shares of Common Stock
were issued in such transactions. The Company also exchanged a total of
283,105 shares of Common Stock for certain shares of common stock in unrelated
corporations.
1995
During calendar 1995, the Company sold 150,000 shares of Common Stock for
$1 per share in a private offering. In addition, the Company issued a total
of 54,003 shares in exchange for services.
1996
In August 1996, the Company sold 500,000 shares for a total of $200,000
cash to two accredited investors. In connection with that offering, the
Company granted these two investors certain registration rights. These
investors are also Selling Shareholders as identified in the Prospectus
forming a part of this Registration Statement. During calendar 1996, the
Company issued a total of 585,781 shares of Common Stock in exchange for
services. The Company also issued a total of 337,500 shares of Common Stock
upon conversion of Preferred Stock. In addition, the Company issued 1,460,722
shares of Common Stock in conversion of debt.
In November and December 1996, the Company undertook a private placement
of up to 5,000,000 shares of Common Stock to accredited investors as that term
is defined in Item 501 of Regulation D under the Securities Act of 1933, as
amended (the "Securities Act"). The shares were to be sold pursuant to
exemptions from the registration requirements of the Securities Act afforded
to such offers and sales under Section 4(b) and Regulation D, promulgated
under the Securities Act. A total of 4,990,500 shares were sold to
approximately 19 accredited investors at $.80 per share. Gross proceeds of
the offering as of such date were $3,992,400. The Company paid a commission
fee in stock and cash totaling 10% of $3,142,000 of the proceeds to Enhanced
Invest Foundation ("EIF"), a Liechtenstein foundation, in connection with its
efforts in assisting the Company in placing some of the securities in the
private offering. The Company also paid SCC a fee of $250,000 for its
services in structuring the offering and for arranging for the services of
EIF. The Company has agreed to register the shares issued in the private
placement under certain circumstances at its own expense. At the time of the
offering, the average bid price for the Company's Common Stock in the public
market was $1.00 per share. The proceeds of this offering were used to pay a
portion of the loan balance due SMD, to acquire additional drill rigs and
parts and inventory relating to new and existing drill rigs and for operating
capital.
Each of the transactions described above was entered into and concluded
by the Company pursuant to exemptions from the registration requirements of
the Securities Act and similar exemptions available under state securities
laws, afforded to offers and sales of securities not involving a public
offering. The shares issued in such transactions are "restricted securities"
as defined by rules promulgated under the Securities Act, meaning that they
cannot be resold by the original purchaser unless they are first the subject
of a registration statement filed by the Company or an exemption from
registration is available for the transaction in which they are sold.
Item 27. Exhibits
Exhibits not filed herewith will be filed by future amendment.
Index to Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description
- ----------- -----------------------------------------------------------
<S> <C>
3.1 Articles of Incorporation of Company (incorporated by reference from
Exhibit 3.1 of Registrant's Registration Statement on Form S-1 filed May 5,
1993).
3.2 Amendment to Articles of Incorporation (incorporated by reference from
Exhibit 3.1 of Registrant's Current Report on Form 8-K reporting an event
occurring on September 29, 1993).
3.3 Certificate of Resolution to Change the Resident Agent and Change of
Location of Principal Office of Registrant (incorporated by reference from
Exhibit 3.2 of Registrant's Registration Statement on Form S-1 filed May 5,
1993).
3.4 Bylaws of Registrant (incorporated by reference from Exhibit 3.3 of
Registrant's Registration Statement on Form S-1 filed May 5, 1993).
3.5 Certificate of Designation, Voting Powers, Preferences and Rights of the
Series of the Preferred Stock of K.L.S. Enviro Resources, Inc. to be
Designated Series "A" Preferred Stock filed March 30, 1994 (incorporated by
reference from Exhibit 3.1 of Registrant's Quarterly Report on Form 10-QSB for
the Quarterly Period Ended March 31, 1994).
3.6 Certificate of Designation, Voting Powers, Preferences and Rights of the
Series of the Preferred Stock of K.L.S. Enviro Resources, Inc. to be
Designated Series "B" Preferred Stock, filed April 8, 1994 (incorporated by
reference from Exhibit 3.2 of Registrant's Quarterly Report on Form 1O-QSB for
the Quarterly Period Ended March 31, 1994).
4.1 Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1
of Registrant's Registration Statement on Form S-1 filed May 5, 1993).
4.2 Specimen of stock purchase warrant issued to SMD September 30, 1996,
incorporated by reference to Exhibit 4-2 to Registrant's Annual Report on Form
10-KSB for the fiscal year ended September 30, 1996, filed January 13, 1997.
5.1 Opinion of Counsel(*)
10.1 Pre-incorporation Agreement and Subscription (incorporated by reference
from Exhibit 10.1 of Registrant's Registration Statement on Form S-1 filed May
5, 1993).
10.2 Contract with Studdert Companies Corp. For Management Services
(incorporated by reference from Exhibit 10.1 to Registrant's Annual Report on
Form 10-KSB for the fiscal year ended September 30, 1996, filed January 13,
1997).
22.1 Subsidiaries of Registrant (incorporated by reference from Exhibit 22.1
of Registrant's Annual Report on Form 10-KSB for the year ended September 30,
1994).
24.1 Consent of Weaver & Tidwell
24.2 Consent of Durham, Evans, Jones & Pinegar, P.C. (included in 5.1,
above)(*)
25.1 Powers of Attorney (included at signature page)
</TABLE>
________________________
(*) To be filed by amendment.
Item 28. Undertakings.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(a) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(b) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement;
(c) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination
of the offering.
The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements
certificates in such denominations and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. If a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and authorized this
registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Salt Lake City, State of Utah, on
March 5, 1997.
K.L.S. ENVIRO RESOURCES, INC.
(Registrant)
By: /s/ Raymond H. Kurzon
Raymond H. Kurzon,
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Raymond H. Kurzon and Stephen M. Studdert and
each of them his true and lawful attorney-in-fact and agent, with full power
of substitution and re-substitution for him and in his name, place and stead
in any and all capacities to sign any and all amendments (including
post-effective amendments) to this registration statement and to file the same
with all exhibits thereto and other documents in connection therewith with the
Securities and Exchange Commission granting unto said attorneys-in-fact and
agents and each of them full power and authority to do and perform each and
every act and thing requisite or necessary to be done in and about the
premises as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them or their or his substitute or substitutes may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Capacity Date
- ----------------------- ------------------ -------------
/s/ Stephen M. Studdert Director, Chairman March 5, 1997
- -----------------------
Stephen M. Studdert
/s/ Raymond H. Kurzon President, CEO March 5, 1997
- ----------------------- and Director
Raymond H. Kurzon
/s/ Roger D. Dudley Acting Chief Financial March 5, 1997
- ----------------------- Officer and Director
Roger D. Dudley
/s/ Charles E. Nuanez Director March 6, 1997
- -----------------------
Charles E. Nuanez
/s/ Thomas A. Murdock Director March 6, 1997
- -----------------------
Thomas A. Murdock
/s/ Wyman Au Director March 7, 1997
- -----------------------
Wyman Au
<PAGE>
Exhibit 24.1 - Consent of Independent Auditor
INDEPENDENT AUDITOR'S CONSENT
We consent to the use in this Registration Statement of K.L.S. Enviro
Resources, Inc. on Form SB-2 of our report dated December 31, 1996 appearing
in the Prospectus which is a part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ Weaver and Tidwell, L.L.P.
- ------------------------------
Weaver and Tidwell, L.L.P.
Ft. Worth, Texas
March 4, 1997
Fort Worth Office
307 West Seventh Street
Suite 1500
Fort Worth, Texas 76102
