As filed with the Securities and Exchange Commission on May 30, 1997
Registration No. 333-23117
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form SB-2/A
Amendment No. 2
To
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 (Primary Standard Industrial (IRS Employer
jurisdiction of Classification Code Number) identification
incorporation) 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. [ ]
[Calculation of registration fee on following page.]
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
========================================================================================================
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 $22,052,277.81 $4.0625 $22,052,277.81 $6,682.51
TOTAL $22,052,277.81 $4.0625 $22,052,277.81 $6,682.51
- --------------------------------------------------------------------------------------------------------
</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 April
21, 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 MAY 30, 1997
PROSPECTUS
K.L.S. ENVIRO RESOURCES, INC.
5,428,253 SHARES
Common Stock, Par Value $.0001
_________________________________________
This Prospectus relates to the offer of 5,428,253 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 May 14, 1997, the reported bid price of the Company's Common
Stock on the OTC Electronic Bulletin Board was $3.25 per share and the
reported ask price was $3.375 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 $ 3.3125 $ .__ $ 0.0 $ 3.3125
Total $17,981,107.94 $ .__ $ 0.0 $17,981,107.94
================================================================================================================
</TABLE>
(1) Based on the average bid and asked prices of the Company's Common Stock
on May 15, 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 $87,500.
The date of this Prospectus is June __, 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 (the "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 web site on the world wide web (the "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.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.]
<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" refers 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 precious 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 expected to expand into 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 remote drilling areas. These
attributes provide certain competitive advantages, avoid or reduce certain
expenses associated with 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.
<PAGE> The Offering
Securities offered . . . . . . . .. . . 5,428,253 Shares of Common Stock
Common Stock, par value $.0001
outstanding . . . . . . . . . . . . . . . . . . . 16,935,947 shares
to be outstanding after the offering. . . . . . . 16,935,947 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, Six Months Ended March 31,
1995 1996 1996 1997
-------------------------------- --------------------------------
(Audited) (Audited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $ 3,019,597 $ 4,424,693 $ 1,705,744 $ 2,748,811
Net income (loss) from operations ( 908,174) 117,158 ( 39,793) ( 274,973)
Net income (loss) (after tax) (1,185,850) ( 919,813) 305,631 ( 274,973)
Primary earnings (loss) per share $ ( .13) $ (.10) $ .03 $ (.02)
</TABLE>
<TABLE>
<CAPTION>
Consolidated Balance Sheet Data:
March 31, 1997 September 30, 1996
-------------- ------------------
(Unaudited) (Audited)
<S> <C> <C>
Total Assets $ 7,784,637 $ 4,528,677
Working capital (deficit ( 275,615) ( 849,631)
Total Liabilities 2,759,918 2,974,951
Stockholders' Equity $ 5,024,719 $ 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, 1995 and 1996. 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 funding 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 future public or 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, 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, 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 and the success or
failure of other businesses in the precious metals industry. 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.
Similarly, if and when the Company acquires its own exploration properties, the
same factors may cause the Company to experience losses and/or to cease
exploration, development or production activities on its exploration
properties.
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,
exploration and extraction, 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 precious 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 any 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 strong 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 or more efficient 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. Specifically, the Company 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 take 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.
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, workers' 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 in the United
States and abroad. 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 its financial condition and results.
The Company does not presently engage in any currency hedging or other
transactions to offset any risk of fluctuations in foreign currency exchange
rates, inflation or interest rates. Contracts for drilling services are
generally denominated in and provide for payment with U.S. dollars. Accounting
records of the Company's Mexican subsidiaries, however, are maintained in
Mexican pesos. The financial statements of the Company which include those of
its Mexican subsidiaries have been prepared in accordance with GAAP and are
stated in U.S. dollars. At all times the functional currency of the Company
is the U.S. dollar because the majority of its revenues, costs, property and
equipment purchased and debt and trade liabilities are measured in U.S.
dollars. To minimize the risk of currency fluctuations and consequent
devaluation, the Company lists its fees for services in U.S. dollars,
calculates its customers' billing statements and invoices in U.S. dollars, and
requests payment in U.S. dollars (to the extent permitted by local law) or in
local currency based on the free market exchange rate on the date of payment.
The Company also maintains both dollar and peso bank accounts for receiving
deposits and making disbursements locally. See "Risks Related to Mexico,"
below.
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 antitakeover 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.
Risks Related to Mexico - Economic, Political and Social Conditions. The
Company has several subsidiaries incorporated in Mexico and a significant
amount of its drilling operations are located in Mexico, although many of the
Company's customers in Mexico are headquartered outside Mexico, mostly in the
United States and Canada. Because of the location of its drilling operations,
the Company may be affected by economic, political and social conditions in
Mexico. For example, the Company's financial condition and results of
operations or the market price of its Common Stock could be adversely affected
if the current policies of the Mexican government encouraging foreign
investment and foreign trade are reversed. Changes in policies by the U.S.,
Mexican or other governments resulting in, among other things, increased
duties, higher taxation, currency conversion limitations, limitations on
imports or exports or the expropriation of private enterprises could have a
material adverse effect on the Company's results of operations. Furthermore,
Mexico has experienced political, economic and social uncertainty resulting
from the assassination of political leaders, government scandals, and peasant
uprisings in certain states. Since December 1994, Mexico has experienced an
economic crisis characterized by exchange rate instability and devaluation,
increased inflation, high domestic interest rates, negative economic growth,
reduced consumer purchasing power and high unemployment. Under its current
leadership, the Mexican government has been pursuing economic reform policies,
including the encouragement of foreign trade and investment and an exchange
rate policy of free market flotation. No assurance can be given however that
the Mexican government will continue to pursue such policies, that such
policies will be successful if pursued or that such policies will not be
significantly altered from time to time.
Exchange Rates; Inflation - While the Company transacts business generally in
U.S. dollars and its revenues are collected to the extent possible in U.S.
dollars, a portion of the Company's costs and expenses are not denominated in
U.S. dollars; substantially all of such non-U.S. dollar costs and expenses to
date are denominated in New Pesos. As a result, changes in the relationship
of the U.S. dollar to the New Peso could affect the Company's cost of goods
sold, operating expenses and operating margins. The devaluation of the New
Peso during late 1994 and early 1995 reduced the U.S. dollar cost of the
Company's New Peso expenses, but also had a negative impact on its New Peso
revenues. From December 18, 1994 through October 1, 1995, the U.S. dollar
appreciated approximately 84% in value against the New Peso. In addition,
inflation in the New Peso could affect the Company's cost of goods sold and
operating margins. Mexican inflation, as measured by the NCPI, the Mexican
government's consumer price index, was 51.9% for calendar 1995 and 27.7% in
1996. Inflation in Mexico may ultimately increase the cost of goods and
services purchased in Mexico with New Pesos and lead to higher wages and
salaries for the Company's employees in that country. Such increases may
adversely affect the Company's operating margins in the future. The impact of
future exchange rate fluctuations and inflation on the Company's results of
operations cannot be accurately predicted. The Mexican government is also
attempting to boost the economy by providing tax incentives for new business
investments, and utilizing wage and price controls to contain inflation. As
part of these policies, the Mexican government has committed to retaining a
free flotation system for the New Peso in international currency markets.
However, the impact of these policies on the Company or the Mexican economy
cannot be accurately predicted. See "Management's Discussion and Analysis of
Results of Operations and Financial Condition" and "Exchange Rates."
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
terms 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
March 31, 1997 4.13 3.88
</TABLE>
On May 14, 1997, the last reported bid and ask prices for the Common Stock were
respectively $3.25 and $3.375 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 April 30, 1997 was 1,215.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1996 (audited) and March 31, 1997 (unaudited):
<TABLE>
<CAPTION>
September 30, 1996 March 31, 1997
------------------ --------------
(Audited) (Unaudited)
<S> <C> <C>
Long-term debt (less current portion),
including obligations under capital leases,
less current portion $ 270,995 $ 242,671
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 1,692
Additional paid-in capital 6,101,057 9,861,423
Retained earnings (deficit) (4,505,721) (4,795,693)
Cumulative translation adjustment (4,213) (4,213)
Treasury stock (38,500) (38,500)
Stockholders' equity 1,553,726 5,024,719
Total capitalization $ 1,824,721 $ 5,267,390
================== ==============
</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, levels 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
Six Months Ended March 31, 1997 Compared With Six Months Ended March 31, 1996
(Unaudited)
The Company had a net loss for the six months ended March 31, 1997 of $274,973
compared to net income of $305,631 for the six months ended March 31, 1996.
The difference is attributable to a $379,935 gain on the sale of a subsidiary
during the six months ended March 31, 1996 and to increased exploration costs,
legal fees, management fees and other operating expenses for the six months
ended March 31, 1997. The Company had a loss from continuing operations of
$274,973 for the six months ended March 31, 1997 compared to a loss of $39,793
for the comparable period in 1996. This increased loss from continuing
operations is due to increased exploration costs, legal fees, management fees
and other operating expenses.
Total revenues from continuing operations for the six months ended March 31,
1997 were $2,748,811, an increase of $1,043,334 or approximately 61 percent,
over the six months ended March 31, 1996. The increase in revenues is
primarily due to increases in drilling services revenues of $731,488 in Mexico
and $319,892 in the United States, and a decrease of $8,046 in hydraulic
services. The Company increased its drilling fleet from five rigs to nine
during fiscal 1996. This contributed to the increased revenues during the
second quarter of fiscal 1997, and the Company anticipates increased drilling
and repair service revenues for the remainder of fiscal 1997. Two additional
rigs were added in March 1997 and two more in April 1997. The Company
presently has a total of 13 drill rigs.
Total cost of drilling and repair services were $1,292,980 and $1,005,427 for
the six month periods ending March 31, 1997 and 1996, respectively. This
represents an increase of $287,553 or approximately 29 percent over the
comparable period of the prior year. When expressed as a percent of net sales
and revenues, these costs decreased from 59 to 47 percent. The primary reason
for this decrease was the improvement in the gross profit margin for drilling
services in Mexico. The Company has gradually phased out the use of North
American drillers on temporary travel assignments to Mexico in order to use
Spanish speaking resident drillers who would be more likely to work on a
permanent basis. This shift has reduced the cost of wages during the six-month
period ending March 31, 1997 as compared to the same period of the prior year.
With the maturity of Company operations in Mexico, contracts are for longer
durations than in the past. This trend has reduced the down-time between jobs
allowing for better utilization of labor, and lower mobilization costs for the
drill rigs. The cost of drilling parts and supplies has declined as it relates
to drilling revenues in the six months ended March 31, 1997 as compared to the
prior year. This decrease is attributable to improved efficiency with higher
volumes, and particularly to maintaining a spare parts inventory. The Company
has nearly tripled its inventory of spare parts held in Mexico at March 31,
1997 compared to the prior year, which avoids the higher costs of short-term
procurements and emergency buying. Another reason for the lower percent of
cost of drilling and repair services compared to net sales and revenues is the
improved gross profit margin in the hydraulic repair and manufacturing
operations. A machine shop division was added to the hydraulics company and
further expanded in August 1996. This improved the gross profit margin by
performing these services in-house rather than contracting with third parties
as had been done in the comparable period during the prior year.
Total cost and expenses for the six month period ending March 31, 1997 was
$1,659,951, an increase of $849,301 over the six-month period ending March 31,
1996. Of this amount, $332,682 is attributable to other operating expenses,
discussed below. The remaining increase of $516,639 is primarily due to
increases of $41,986 in salaries, wages and related costs, $151,168 in legal
and professional fees, $49,278 in consulting fees, $175,988 in exploration
costs, and $72,574 in depreciation and amortization expense. The increase in
legal fees was due to the active pursuit of litigation and arbitration with
PanAmerican Mineral Services, Inc. during the current six-month period. The
increase in exploration costs was due to the Company's resumption of efforts
to locate and evaluate suitable mining properties for acquisition, exploration
and development. The increase in depreciation and amortization expense was due
to the additional acquisition of equipment, primarily drill rigs and their
supporting vehicles and tooling.
Other operating expenses were $472,315 and $139,653 for the six months ended
March 31, 1997 and 1996, respectively. This increase is due to management
fees of $300,000 for the six month period ending March 31, 1997. In December
1996, the Company entered into a management services contract with SCC. Under
this agreement, effective October 31, 1996, SCC is to receive a monthly
management fee of $50,000 and will provide investment banking, investor
relations, financial management and strategic planning services for the Company
for a term of five years. See "Certain Transactions." Tradeshow expenses
increased $24,101 for the six-month period ending March 31, 1997 compared to
the same period of the prior year, which reflects the Company's increased
emphasis on marketing to increase revenues in drilling services as well as
hydraulic repairs and fabrication. Other categories of expenses included in
"other operating expenses" are general, administrative and selling expenses
that do not necessarily vary in proportion to sales and revenues. These
categories remained fairly constant for the six month periods ending March 31,
1997 and 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 project's estimated
useful life. There are no costs capitalized as of March 31, 1997 and 1996.
Exploration expenses increased $175,988 for the six months ending March 31,
1997 over the comparable period for the prior year reflecting the Company's
renewed commitment to pursue the acquisition and exploration of mining
properties.
Net income from other income and expenses decreased $141,660 for the six
months ended March 31, 1997 over the comparable period of the prior year. Of
this amount, interest expense increased by $28,928 and interest and other
income increased $33,592. Gains from the sale of investment securities
decreased $99,286 and gains from the sale of assets decreased by $21,366.
Also, the Company recorded a loss from foreign currency translation of $12,539
for the six months ended March 31, 1997, compared to a gain of $13,133 for the
six months ended March 31, 1996.
Fiscal Year Ended September 30, 1996 Compared With Fiscal Year Ended September
30, 1995
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 an increase in
the gross profit margin from 39 percent to 45 percent. The improved margin is
attributable to upgraded equipment which requires less repair and maintenance,
and to longer-term drilling contracts which reduce transportation costs by
reducing the number of times equipment must be moved between job sites.
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 decrease was primarily
attributable to a reduction in exploration costs from $324,931 in 1995 to
$4,203 in 1996. Legal and professional fees also decreased $97,959, while
salaries, wages and related costs increased $97,715 and taxes, licenses and
permits increased $23,879 as did depreciation and amortization, $67,346. The
Company has renewed its mining property exploration efforts in fiscal 1997 and
expects exploration costs to increase in future periods for this program.
The Company's net income or (loss) from continuing operations for the fiscal
years ended September 30, 1996 and September 30, 1995 was $117,158 and
($908,174), respectively. The increase of $1,025,332 in income was
attributable to an increase in sales and revenues, the improvement in gross
profit margin, the reduction in exploration costs and decreased legal and
professional fees, but was partially offset by increases in salaries, wages and
related costs, depreciation and amortization expense, and taxes, licenses and
permits.
Net loss for the fiscal years ended September 30, 1996 and September 30, 1995
was ($919,813) and ($1,185,850), respectively, a reduction in loss of $266,037.
Interest expense for the fiscal years ended September 30, 1996 and September
30, 1995 was $311,303 and $144,835, respectively, an increase due to the use
of debt financing to acquire additional equipment. The Company entered into a
financing arrangement on September 30, 1996 with a related party which resulted
in a charge to "other financing cost" of $1,024,322. [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. Gain on sale of investment 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. Therefore, there will be no future revenues
received or expenses incurred by the Company as a result of the operations of
that subsidiary. An extraordinary item of income was recorded in the fiscal
year ended September 30, 1996 in the amount of $172,823 as forgiveness of debt.
This was primarily the forgiveness of interest owed to the Bell Estate. [See
"Certain Transactions," below.]
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 fewer
sales of marketable securities 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
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 working capital for the Company, 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 to working capital 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 financing 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 $200,000 from the same unrelated party on
a short-term basis. Approximately $1,842,400 of this short-term debt was
repaid by January 2, 1997 from the proceeds of an offering selling
approximately 4,000,000 restricted shares of the Company's Common Stock. [See
"Certain Transactions" and "Recent Sales of Unregistered Securities," below.]
March 31, 1997 (unaudited)
At March 31, 1997, the Company's current liabilities exceeded its current
assets by $275,615 as compared with current liabilities exceeding current
assets by $849,631 at September 30, 1996. The current ratio of assets to
liabilities was .89 at March 31, 1997 as compared with .69 at September 30,
1996. Current assets increased by $387,307 to $2,241,632 from September 30,
1996 to March 31, 1997. Current liabilities decreased by $186,709 during the
same period. The significant increase in working capital over this period is
primarily attributable to the sale of restricted common stock in December 1996
and January 1997.
Total assets were $7,784,637 at March 31, 1997 as compared to $4,528,677 at
September 30, 1996. The increase of $3,255,960 is due to the sale of
restricted common stock described above and additions to fixed assets of
approximately $2,975,000, primarily additions to the drill rig fleet and
supporting equipment at a cost of approximately $2,650,000.
For the three-month period ended March 31, 1997, the Company operated on a
negative cash flow from operations. The negative cash flow was due to an
increase in exploration costs, management fees, legal fees and other operating
expenses. The Company anticipates substantial increases in revenues and cash
flow from operations as it expands its drill rig fleet for the balance of
fiscal 1997. Two drill rigs with support equipment were purchased in March
1997 and two additional rigs were constructed in-house and placed into service
in April 1997. This increases the Company's fleet of drill rigs to thirteen.
As the Company continues to expand, it endeavors to achieve a positive cash
flow from operations, although there can be no assurance that the Company will
achieve a positive cash flow from operations. The Company is also increasing
its efforts to acquire mining properties, and it will continue to require
additional sources of funds in order to pursue precious metals exploration and
development and expand its drilling and repair services. Such funding may come
from debt financing or the sale of the Company's equity securities, but there
is no assurance that the Company will obtain the funds needed to supplement the
shortfall in its cash flow as and when needed.
In January 1997, the Company granted options to acquire an aggregate of
1,000,000 shares of the Company's common stock to certain officers and
directors of the Company. These options are exercisable for a period of ten
years at prices ranging from $2.88 to $3.00 per share, which represented the
fair market value of the underlying common stock on the date of grant. None
of these options have been exercised and there were no other sales of
unregistered securities by the Company during the quarter. The grant of these
options was made without registration under the Securities Act of 1933, as
amended, in reliance upon exemptions under Section 4(2) and other provisions
of such Act, including rules and regulations promulgated thereunder relative
to sales of securities not involving a public offering.
Foreign Currency Risks and Inflation
The Company has operations in Mexico and anticipates commencing operations in
other countries. Such operations involve risks associated with foreign
currency fluctuations which may materially affect the Company's financial
condition and results. The Company does not presently engage in any currency
hedging or other transactions to offset any risk of fluctuations in foreign
currency exchange rates, inflation or interest rates. Contracts for drilling
services are generally denominated in and provide for payment with U.S.
dollars. Accounting records of the Company's Mexican subsidiaries, however,
are maintained in Mexican pesos. The financial statements of the Company which
include those of its Mexican subsidiaries have been prepared in accordance with
GAAP and are stated in U.S. dollars. At all times the functional currency of
the Company is the U.S. dollar because the majority of its revenues, costs,
property and equipment purchased and debt and trade liabilities are measured
in U.S. dollars. To minimize the risk of currency fluctuations and consequent
devaluation, the Company lists its fees for services in U.S. dollars,
calculates its customers' billing statements and invoices in U.S. dollars, and
requests payment in U.S. dollars (to the extent permitted by local law) or in
local currency based on the free market exchange rate on the date of payment.
The Company also maintains both dollar and peso bank accounts for receiving
deposits and making disbursements locally. Excess funds are maintained in the
dollar bank account for as long as possible. When needed for disbursing
locally, funds are transferred from the dollar to the peso bank account. This
practice minimizes the monetary assets held in functional currencies which
remain exposed to the risk of exchange rate fluctuations.
Since December 1994, Mexico has experienced an economic crisis characterized
by exchange rate instability and devaluation, increased inflation, high
domestic interest rates, negative economic growth, reduced consumer purchasing
power and high unemployment. Under its current leadership, the Mexican
government has been pursuing economic reform policies, including the
encouragement of foreign trade and investment and an exchange rate policy of
free market flotation. During the Company's first two fiscal years, the
Mexican economy was not considered "highly inflationary." Currency translation
adjustments were charged to and accumulated in the stockholders' equity section
of the balance sheet and transaction losses reduced earnings. After
devaluation occurred in 1994 and 1995, the Mexican economy was considered
highly inflationary and the Company included all currency gains and losses in
the earnings statement. As a result of these accounting policies, as of
September 30, 1994, the Company was required to record $4,213 in translation
loss in stockholders' equity, and currency transaction losses of $10,357
reduced earnings. From October 1, 1994 through March 31, 1997, currency losses
have reduced earnings by $4,892. These charges have been largely immaterial
because of the Company's practice of pricing its foreign drilling contracts in
U.S. dollars, invoicing and collecting (to the extent possible) each week or
as frequently as possible, to reduce the risks of currency fluctuation. On the
other hand, certain operating expenses in foreign countries (including wages,
fuel and supplies) are not adjusted upward immediately in response to
inflation, which may result in a savings to the Company.
Exchange Rates
From late 1982 until November 11, 1991, Mexico maintained a dual foreign
exchange rate system, consisting of a "controlled" exchange rate and a "free"
exchange rate. The controlled rate applied to specified transactions and the
free exchange rate applied to all other transactions. Mexico repealed its
exchange control rules effective November 11, 1991 and now has a free market
for foreign exchange.
Prior to December 21, 1994, Banco de Mexico sought to keep the New Peso-U.S.
dollar exchange rate within a range prescribed by the Mexican government
through intervention in the foreign exchange market. Under its policy
guidelines, Banco de Mexico generally intervened to reduce day-to-day
fluctuations in the exchange rate. From November 11, 1991 through October 20,
1992, the upper limit of the prescribed range, expressed in terms of New Pesos
("Nps") per U.S. dollar, rose by 0.0002 per day, equivalent to a maximum
devaluation of the New Peso with respect to the U.S. dollar of approximately
2.4 percent per year. From October 20, 1992 until December 19, 1994, the upper
limit of the central bank's accepted range increased by Nps 0.0004 per day,
equivalent to a maximum devaluation of the New Peso of approximately 4.6
percent per year. On December 20, 1994, the Mexican government increased the
ceiling by Nps 0.53 per day, equivalent to an effective devaluation of 15.3
percent.
On December 21, 1994, the Mexican government announced its decision to suspend
intervention by Banco de Mexico and to allow the New Peso to float freely
against the U.S. dollar. Factors contributing to the decision included the
growing size of Mexico's current account deficit, the declining level of Banco
de Mexico's foreign exchange reserves, rising interest rates for other
currencies, especially the U.S. dollar, and reduced confidence in the Mexican
economy on the part of international investors due to political uncertainty.
By December 31, 1994, the exchange rate was Nps 5.0 per U.S. dollar, compared
to Nps 3.5 per U.S. dollar on December 19, 1994. On May 31, 1995, as part of
Mexico's National Plan for Development 1995-2000, the Mexican government
announced its intention to maintain a free-floating exchange rate regime. The
New Peso was highly volatile throughout 1995, and fluctuated between Nps 5.27
and Nps 8.14 per U.S. dollar. During 1996, however, the exchange of the Nps
against the U.S. dollar performed in a more stable manner, depreciating
approximately 1.7 percent. As of March 15, 1997, the rate of exchange was
approximately Nps 8.00 to the dollar. There can be no assurance that the
Mexican government will maintain its current policies with regard to the New
Peso or that the New Peso will not further depreciate significantly in the
future.
In recent months the Company has been investigating possible drilling services
and exploration opportunities in The Ivory Coast and Tanzania. The economics
of these and other African countries have been depressed for many years and
these two countries are among the poorest in the world, notwithstanding that
they may have abundant natural resources. Both Tanzania and The Ivory Coast
have experienced high inflation and fluctuations in currency valuation.
The currency exchange rates for the past several years for the Tanzanian
shilling ("TZS") to the U.S. dollar are as follows:
Year TZS per $1.00
---- -------------
1991 219.16
1992 297.71
1993 405.27
1994 509.63
1995 574.76
1996 595.00
As of April 21, 1997, the rate was U.S. $1.00 = 599 TZS.
The Ivory Coast franc ("Communaute Financiere Africaine franc" or "CFA") was
devalued 50% against the French franc in 1994, after being fixed at 50 CFA per
French franc since 1948. The exchange rates for the CFA to the U.S. dollar for
the past several years were as follows:
Year CFA per $1.00
---- -------------
1991 282.11
1992 264.69
1993 283.16
1994 555.20
1995 499.15
1996 524.40
As of April 21, 1997, the rate of exchange of CFA per U.S. $1.00 was 570 CFA.
Forward-looking Statements
The forward-looking statements contained in this Management's Discussion and
Analysis of Financial Condition and Results of Operations 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 in the United States and abroad. 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 and the 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. Its present operations are based in Mexico
and the United States. The Company also designs, manufactures, sells, services
and repairs drill rigs and other hydraulic equipment used in the logging,
mining and related industries. The Company anticipates 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. Based on its experience
in the industry, 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 its mining company customers 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 customer 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 Mexican laws
regarding foreign ownership 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 thirteen drill rigs in use. Six of those drill rigs
are operating in Mexico, six are operating in Alaska and one is in use in
Nevada.
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 proven 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, and the Company does not anticipate reactivating KLSEI's operations
in the foreseeable future.
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 manufacturing business.
In September 1994, the Company formed K.L.S. International, Inc., a Nevada
corporation ("KLSII"), 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,
particularly outside of the United States, 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 may
be too small for most major mining companies and too large for most independent
mining companies to cost-effectively develop. While the Company is actively
pursuing several properties which may meet these 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. The
Company is presently pursuing mining and drilling concessions and opportunities
in the United Republic of Tanzania ("Tanzania") and Cote d'Ivoire ("The Ivory
Coast"). However, as of the date of this Prospectus it has no agreements for
any business in these countries and there can be no assurance that it will be
able to enter into such agreements in the future.
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, based on its understanding of the
industry, and its competition's business practices, as well as the limitations
of its competition's equipment. The Company has observed 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 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's rigs can be used in soft-soil conditions
with less damage to the environment than equipment used by its competitors.
Based upon drilling contracts previously awarded to the Company, and the
circumstances under which they were awarded, the Company believes these
capabilities give the Company a competitive advantage when bidding for
contracts which require drilling in remote, mountainous or unstable geographic
regions, 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 thirteen functional drill rigs, ten 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, they offer a significantly
less costly service alternative to the customer. 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 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, however, the
Company will shortly vacate these facilities and move to a smaller facility in
the Dallas, Texas, area which is more centrally located, modern and efficient.
The Company believes that the other facilities and properties described above
are 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 May 15, 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.
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 each of whom are directors,
executive officers and substantial shareholders of the Company. 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. [See,
"Certain Relationships."]
Legal Proceedings
As of March 31, 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 was 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, Dateline Internacional S.A. De C.V.
("DIMSA")and KLS. PanAmerican contends that it performed all of its
obligations under the contract with Dateline and alleges that Dateline and KLS
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. 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:
Name Age Position
------------------- --- ----------------
Stephen M. Studdert 48 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
Stephen M. Studdert was appointed a director and elected by the Board of
Directors as its chairman in December 1996. Mr. Studdert 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 automatic 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 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 and indirect owner 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 comprising 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
$1,386,343 for sums previously lent 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"). Directors of
the Company participate in the 1997 Plan as discussed below under "Executive
Compensation -- 1997 Stock Option and Incentive Plan."
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 restricted shares of the 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 restricted
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. The repricing
of the option exercise price of the options held by Mr. Au and Mr. Smith was
done to bring the exercise price closer to the market price of the Company's
Common Stock as of the date of the repricing, to encourage the exercise of the
options and ownership of the underlying shares of stock. (See, also, "Certain
Transactions.")
On July 11, 1996, the Board granted options to Mr. Au to purchase an additional
75,000 restricted 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
restricted shares of stock at $.50 per share and to Mr. Nuanez to purchase
50,000 restricted 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 10 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 the only executive officer of
the Company and its subsidiaries who earned $100,000 or more during the three
most recent fiscal years of the Company (the "Named Officers"), ending
September 30, 1996, 1995 and 1994 and the amounts earned:
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
---------------------------------------
Long-term
Name and Other Annual Compensation Awards All other
Principal Salary Bonus Compensation Of Stock Options Compensation
Position Year ($) ($) ($) (#) ($)
- - -------------------- ---- --------- --------- ------------ ------------------- ------------
<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
$50,000 per month, payable in Common Stock of the Company or in cash. The
Company also reimburses or otherwise pays all SCC expenses incurred in
connection with the services provided on behalf of the Company by SCC. SCC
provides similar services for other corporations and entities and its agreement
with the Company requires only that SCC devote such time as it reasonably deems
necessary to provide the services required to be provided to the Company under
the agreement. [See "Certain Transactions" for additional information
concerning this agreement and the other relationships involving SCC, SMD and
its principals.]
Option/SAR Grants in Last Fiscal Year
The following table sets forth certain information with respect to options
granted to the Named Officers during the fiscal year ended September 30, 1996.
The Company has never granted any stock appreciation rights ("SARs"). No
options were exercised during fiscal year 1996.
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of % of Total
Securities Options/SARs
Underlying Granted to
Options/SAR's Employees Exercise or Base
Name Granted (#) in Fiscal Year Price ($/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 is 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 will 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.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table summarizes certain information as of April 30, 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 5 percent or more of the Company's Common Stock and (iii) by all officers
and directors as a group. At April 30, 1997, there were approximately
16,935,947 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 April 30, 1997(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
Officers and Directors as a Group 14,099,900(9) 56.0%(10)
(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 237,500 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 1 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, (directly
or indirectly) 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) Includes options to acquire 237,500 shares, as indicated in (1),
above, and 5,000 shares owned of record.
(7) 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.
(8) 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.
(9) 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.
(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 5,428,253 Shares have been
registered and may be offered by the Selling Shareholders on a delayed or
continuous basis. A total of 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 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
- - --------------------------------------- ---------------------- -------------------
<S> <C> <C>
Carsten-Dirk Schulte 250,000 1.5%
Stefan Giacomuzzi 30,000 *
Guy Klement 20,000 *
Claudio Blank 20,000 *
Beat Jakob 30,000 *
Rene Bleisch 50,000 *
Markus Wassmer 50,000 *
Bruno D. Tambini 250,000 1.5
Roger Fischer 687,500 4.1
Kai Wunsche 500,000 3.0
Thomas Bierwagen 10,000 *
Hartwig Drager 52,500 *
Jorg Holz 25,000 *
Trappli Stiftung 50,000 *
Thurgauer Kantonalbank 1,250,000 7.4
Stefan Mattich 15,000 *
Bank Leumi Le-Israel 625,000 3.7
Erich Gujer 13,000 *
Enhanced Invest Foundation 100,000 *
Tuscan Finance & Trade 189,412 *
Capital International Fund 160,000 *
Optimum Fund 250,000 1.5
Kalera Foundation 50,000 *
Basler Kantonalbank 150,000 *
Wimer AG 50,000 *
Peter Maron 80,000 *
Larrabee Foundation 72,000 *
Polsa Management Ltd. 125,000 *
Carpenter Properties, Ltd. 62,500 *
Principal Financial Securities, Inc. 62,500 *
Michael Ames 50,000 *
John L. Anderson 30,000 *
Friedland Associates, Ltd. 23,841 *
Ballard Investment Co. 80,000 9.3**
--------- -----
TOTALS 5,428,253 32.1%
</TABLE>
(*) Less than 1 percent.
(**) Ballard Investment Co. ("BIC") owns 1,567,381 shares of Common Stock
prior to this offering. If all of the shares offered by BIC hereunder
are sold, BIC will continue to own 1,487,381 shares or approximately 8.8
percent of the issued and outstanding shares of the Company.
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 for so long as the
registration statement will continue effective, the Selling Shareholders may
offer and sell the Shares to the public or otherwise 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, Regulation
M, which provisions may limit the timing of purchases and sales of Common Stock
of the Company by the Selling Shareholders. Regulation M contains certain
limitations and prohibitions intended to prevent issuers and selling security
holders and other participants in a distribution of securities from
conditioning the market through manipulative or deceptive devices to facilitate
the distribution. 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
brokers' 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 acted 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
16,935,947 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, which are convertible into shares of the
Company's Common Stock. 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 which are convertible into shares of Common 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 6 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 continues
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 will 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 1 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, lent 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 lent 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 1
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.
In a series of transactions between May and August 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. Each of the loans was due on demand, bore interest at the rate of 12
percent per annum, required the payment of certain loan origination fees to
fonix and was secured by substantially all of the assets of the Company, except
its real property. 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. 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 ("Note 1"). 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 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 under Note 1, it could have acquired up to 2,366,667 shares
of the Company's Common Stock. Similarly, the remaining $1,190,000 owed to
fonix, represented by four separate promissory notes, was convertible into a
total of 2,975,000 shares of the Company's restricted Common Stock at the rate
of $.40 per share.) 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 advanced debt financing to the Company (the "SMD
Loan") in the amount of $1,673,730. The SMD Loan was due on demand, bore
interest at the rate of 12 percent per annum and was secured by substantially
all of the assets of the Company, except its real property. 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 SMD Loan were used to repay fonix as indicated above.
Without these additional funds, the Company would have been unable to pay all
or a significant part of the loans owed fonix as requested. The warrants held
by SMD have not been exercised. 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. On
March 25, 1997, SMD loaned an additional $936,896 to the Company under similar
terms pursuant to a Loan Modification Agreement. At March 31, 1997, this note
payable had a balance of $1,123,239. Subsequent to March 31, 1997, SMD loaned
an additional $263,104 to the Company under the SMD Loan, as modified.
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 will 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. Subsequent to
the end of the fiscal year ended September 30, 1996, the Company paid SCC a fee
of $250,000 for its services in structuring a private placement of the
Company's securities in November and December 1996 and for arranging for the
services of the Company's primary placement agent in that offering.
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, as amended ("Rule 144"). In general, Rule
144 allows a person holding restricted securities for a period of at least one
year 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 two 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. 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 "web site" 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 . . . . . . . . . . . . . . . . . . . . . F-2
FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 1996 and 1995 . . . . .F-3
Consolidated Statements of Operations
for the Years Ended September 30, 1996 and 1995. . . . . . . . . . . . F-4
Consolidated Statements of Shareholders' Equity
for the Years Ended September 30, 1996 and 1995. . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows
for the Years Ended September 30, 1996 and 1995. . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . F-8
INTERIM FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 1997 (unaudited)
and September 30, 1996 (audited) . . . . . . . . . . . . . . . . . . .F-21
Consolidated Statements of Operations for the
Six Months ended March 31, 1997 and 1996 (unaudited) . . . . . . . . .F-22
Consolidated Statements of Cash Flows for the
Six Months ended March 31, 1997 and 1996 (unaudited) . . . . . . . . .F-23
Notes to Consolidated Financial Statements . . . . . . . . . . . . . .F-24
<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 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 consolidated 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 consolidated financial position of K.L.S.
Enviro Resources, Inc. and Subsidiaries as of September 30, 1996 and 1995, and
the results of their operations and their 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>
<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.
F-3
<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 $3,019,597
Cost of drilling and repair services
(exclusive of items shown separately below) 2,447,843 1,836,671
------------ -----------
Gross Profit 1,976,850 1,182,926
----------- -----------
Cost and Expenses
Salaries, wages and related costs 604,351 506,636
Legal and professional fees 265,232 363,191
Rents 65,361 72,564
Repairs and maintenance 27,048 8,974
Taxes, licenses and permits 54,608 30,729
Advertising 9,842 16,928
Travel and lodging 98,961 88,402
Consulting 106,701 124,837
Exploration costs 4,203 324,931
Other operating expenses 284,299 282,168
Depreciation and amortization 339,086 271,740
----------- -----------
Total cost and expenses 1,859,692 2,091,100
----------- -----------
Income (loss) from operations 117,158 ( 908,174)
Other Income (Expenses)
Loss on contract settlement ( 348,750) -
Interest expense ( 311,303) ( 144,835)
Other financing cost ( 1,024,322) -
Interest and other income, net 14,254 21,220
Gain on sale of investment securities 99,289 209,943
Gain (loss) on disposal of assets 25,158 ( 17,733)
Gain (loss) from foreign currency transactions ( 9,544) 17,191
----------- -----------
Loss before income taxes ( 1,438,060) ( 822,388)
Income tax benefit - -
----------- -----------
Loss from continuing operations ( 1,438,060) ( 822,388)
Discontinued operations:
Loss from operations of discontinued segment ( 34,511) ( 363,462)
Gain on sale of discontinued segment 379,935 -
----------- -----------
345,424 ( 363,462)
----------- -----------
Loss before extraordinary item ( 1,092,636) ( 1,185,850)
Extraordinary Item, gain on forgiveness of debt 172,823 -
----------- -----------
Net Loss ($ 919,813) ($1,185,850)
=========== ===========
Loss per weighted-average common share outstanding
Loss from continuing operations ($ .15) ($ .09)
Loss from operations of discontinued segment ( .00) ( .04)
Gain on sale of discontinued segment .03 -
----------- -----------
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.
F-4
<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 - - 150,000 15 149,985
Exchange of stock for services - - 54,008 5 33,763
Dividends on
preferred stock - - - - -
Net loss - - - - -
Changes in unrealized gain - - - - -
--------- ----------- ------------ ----------- -------------
Balances at September 30, 1995 167,500 17 8,947,494 894 4,417,724
Sale of common stock - - 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 - - 585,781 59 163,607
Issuance of warrants for debt
renewal - - - - 1,024,322
Exchange of common
stock for debt - - 560,722 56 226,617
Dividends on
preferred stock - - - - 68,864
Forgiveness of dividends - - - - -
Net loss - - - - -
Changes in unrealized gain - - - - -
--------- ----------- ------------ ----------- -------------
Balances at September 30, 1996 100,000 $ 10 10,931,497 $ 1,093 $ 6,101,057
========= =========== ============ =========== =============
</TABLE>
<TABLE>
<CAPTION>
Foreign Unrealized
Accumulated Currency Gains on Treasury
Deficit Translation Securities 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 - - - - 150,000
Exchange of stock for
services - - - - 33,768
Dividends on
preferred stock ( 50,250) - - - ( 50,250)
Net loss ( 1,185,850) - - - ( 1,185,850)
Changes in unrealized gain - - ( 417,342) - ( 417,342)
-------------- ------------- ------------- ------------- -------------
Balances at September 30, 1995 ($ 3,545,782) ($ 4,213) $ 29,175 ($ 38,500) $ 859,315
Sale of common stock - - - - 200,000
Conversion of preferred
stock to common stock - - - - -
Exchange of common stock
for services - - - - 163,666
Issuance of warrants for
debt renewal - - - - 1,024,322
Exchange of common
stock for debt - - - - 226,673
Dividends on
preferred stock ( 40,126) - - - ( 40,126)
Forgiveness of dividends - - - - 68,864
Net loss ( 919,813) - - - ( 919,813)
Changes in unrealized gain - - ( 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.
F-5
<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 34,511 211,250
Common stock for services 163,666 33,768
Depreciation and amortization 339,086 271,741
Loss on contract settlement 348,750 -
Other financing cost 1,024,322 -
Gain on sale of investment securities ( 99,289) ( 209,943)
Gain on sale of discontinued segment ( 379,935) -
Gain (Loss) on disposal of property, plant
and equipment ( 25,158) 17,733
Translation (gain) loss on foreign currency 9,544 ( 17,191)
Debt issued in litigation settlement - 30,000
Changes in:
Accounts and notes receivable ( 614,521) ( 94,154)
Inventory ( 112,502) ( 38,787)
Income tax receivable - 81,649
Prepaid expenses ( 4,516) ( 303)
Other assets 19,972 50,168
Accounts payable ( 54,825) 222,900
Accrued expenses ( 55,310) 82,972
Deferred revenue ( 18,448) 24,576
------------- ------------
Net cash used in operating activities ( 344,466) ( 519,471)
------------- ------------
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 -
------------- -----------
Net cash (used) provided by
investing activities ( 781,048) 566,314
------------- -----------
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>
The Notes to Consolidated Financial Statements are
an integral part of these statements.
F-6
<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 REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.]
The Notes to Consolidated Financial Statements are
an integral part of these statements.
F-7
<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") 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.
Investment Securities
The Company held investment securities during the fiscal years ended September
30, 1995 and 1996. During both fiscal 1995 and 1996 the Company sold much
investment securities to obtain operating capital. At September 30, 1996 the
Company had no investment securities. The Company's investment securities were
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.
<PAGE>
K.L.S. ENVIRO RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued:
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. Estimated useful lives are as follows:
Years
------
Machinery and equipment 5-10
Transportation equipment 3-7
Buildings and improvements 10-32
Furniture and fixtures 5-7
Significant additions from periodic renovations of drilling rigs are
capitalized and amortized over the remaining useful life of the rig. 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.
Intangible Assets
Intangible assets consist of organizational costs, patents, and a covenant not
to compete.
<PAGE> K.L.S. ENVIRO RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued:
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 earned. 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 until a
property is identified as having development potential. Development costs are
deferred and amortized to expense on a units of production method based on
proven and probable reserves. 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. There are no development costs deferred as of September
30, 1996 and 1995.
Foreign Currency Translation
For non-U.S. subsidiaries which operate in a local currency environment, assets
and liabilities are translated to U.S. dollars at year-end exchange rates and
income and expense items are translated at average rates of exchange prevailing
during the year. Translation adjustments are accumulated in a separate
component of stockholders' equity. When the economic environment of a non-U.S.
subsidiary is considered highly inflationary, transactions are remeasured as
if the U.S. dollar were the reporting currency and gains and losses which
result from remeasurement are included in earnings. The Company has considered
the economy of Mexico to be highly inflationary since December 1994.
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
<PAGE> K.L.S. ENVIRO RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued:
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. Common stock
equivalents have not been included since the effect of inclusion would be
antidilutive.
Reclassifications
Certain amounts have been reclassified from previously presented financial
statements to conform with the September 30, 1996 presentation.
Recently Issued Accounting Pronouncements
The Financial Accounting Standards Board (FASB) has recently issued Statement
of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
SFAS 121 requires that long-lived assets and certain intangibles be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable and that long-lived assets and certain
intangibles to be disposed of be reported at the lower of carrying amount or
fair value less costs to sell. The Company is required to adopt SFAS 121 for
its fiscal year beginning October 1, 1996. The initial adoption is not
expected to have a material impact on the Company's financial position or
results of operation.
The FASB has also issued SFAS 123, "Accounting for Stock Based Compensation"
which establishes a fair value based method of accounting for stock based
compensation plans. As permitted under SFAS 123, the Company does not intend
to adopt the recognition or accounting requirements of this statement for
transactions with employees and will continue to recognize stock based
compensation using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. The
Company will be required to adopt the disclosure requirements of SFAS 123 for
its fiscal year beginning October 1, 1996. The disclosures will include the
difference between the compensation amounts recorded using the intrinsic value
method and the pro forma amounts calculated as if the measurement requirements
of SFAS 123 had been adopted. Since the measurement principles of SFAS 123
will not be adopted for transactions with employees, adoption of the disclosure
requirements will not have a material impact on the Company's financial
position or results of operations. The compensation amount for equity
investments issued to nonemployees, including nonemployee directors under the
Company's 1997 Plan, is based on the fair value of the goods or services
received or the fair value of the equity instrument issued, whichever is more
reliably measurable as required by SFAS 123 for transactions entered into after
December 15, 1995. Transactions with nonemployees are disclosed in Note 13 to
the Financial Statements.
<PAGE> K.L.S. ENVIRO RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued:
The FASB has also issued SFAS 128, "Earnings Per Share" which establishes a new
standard for computing and presenting earnings per share (EPS). Under SFAS
128, basic EPS excludes dilution and is computed by dividing income available
to common shareholders by the weighted-average number of common shares
outstanding for the period. It also requires dual presentation of basic and
diluted EPS for all entities with complex capital structures. Diluted EPS
reflects the potential dilution that could occur if all dilutive potential
common shares had been issued. The Company is required to adopt SFAS 128 for
periods ending after December 15, 1997. Earlier adoption is not permitted.
When adopted, this statement requires restatement of all prior period EPS data
presented. The Company anticipates that in periods of positive income
available to common shareholders, basic EPS as computed under SFAS 128 will be
greater than primary EPS as computed under the existing standard and that in
periods of losses, basic EPS and primary EPS would be approximately the same
due to the antidilutive provisions of both standards.
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
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
<PAGE> K.L.S. ENVIRO RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. PROPERTY, PLANT AND EQUIPMENT - continued:
$150,000 and $ 223,843, respectively, of net assets held for sale. Assets held
for sale are carried at estimated net realizable value.
Total depreciation expense for the years ended September 30, 1996 and 1995 was
$328,310 and $290,763, respectively.
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
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
============== =============
<PAGE> K.L.S. ENVIRO RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. NOTES PAYABLE TO RELATED PARTIES - continued
During fiscal 1996, the Company borrowed an aggregate of $1,900,000 from fonix,
a corporation related through common directors, officers and significant
shareholders. The proceeds of these loans were used to retire the $623,000
note payable to a former shareholder's estate, to refurbish drilling rigs and
as operating capital. Each of the loans were due on demand with interest at
12 percent and collateralized by substantially all assets except real property.
On September 30, 1996, SMD, L.L.C. (SMD), a significant shareholder of the
Company, loaned the Company $1,673,730 the proceeds of which were used to repay
fonix all except approximately $272,000 following a demand for payment by
fonix. SMD is owned by certain directors and officers of the Company. In
connection with the loan from SMD, the Company issued to SMD warrants to
purchase 6,600,000 shares of restricted common stock at an exercise price of
$.40 per share. (See Note 13).
The notes payable to 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
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 -
<PAGE> K.L.S. ENVIRO RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. LONG-TERM DEBT - continued
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:
<PAGE> K.L.S. ENVIRO RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. INCOME TAXES - continued:
<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
------------- -------------
Deferred tax liabilities
Inventory ($ 54,474) $
Depreciation ( 8,143) ( 17,110)
-------------- -------------
Gross deferred tax liabilities ( 62,617) ( 17,110)
Deferred tax assets:
Net operating losses 1,401,595 1,073,506
Other 110,087 114,990
-------------- -------------
Gross deferred tax assets 1,511,682 1,188,496
Less valuation allowance ( 1,449,065) 1,171,386
-------------- -------------
Net deferred tax assets 62,617 17,110
-------------- -------------
Net 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.
<PAGE> K.L.S. ENVIRO RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
During the year ended September 30, 1996, the Company converted 67,500 of its
convertible preferred stock to 337,500 shares of its unregistered common stock.
The Company also issued 560,722 shares of its unregistered common stock for the
extinguishment of debt of $226,673. The number of shares issued was determined
by the most recent cash sale of unregistered common stock of approximately $.40
per share.
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 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 alleged 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 or results of operation.
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 specialty 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.
<PAGE> K.L.S. ENVIRO RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. SEGMENT INFORMATION, FOREIGN OPERATIONS AND MAJOR CUSTOMERS -
continued:
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.
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
All stock options were issued with exercise prices equal to or exceeding the
fair market value of the common stock at the date of issuance.
<PAGE> K.L.S. ENVIRO RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. STOCK OPTIONS AND WARRANTS - continued:
Stock options for 200,000 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
The warrants to purchase 125,000 shares of the Company's common stock issued
to the purchaser of Kel-Lite (see Note 14) were issued with an exercise price
equal to or exceeding the fair value of the common stock at the date of
issuance. Therefore, no value was assigned to these warrants. The warrants to
purchase 6,600,000 shares of common stock were issued with an exercise price
below the fair market value of the common stock at the date of issuance and
$1,024,322 has been charged to operations as an "Other financing cost."
The warrants to purchase 6,600,000 shares were issued to a company related
through common shareholders. No warrants were exercised during the year 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 a settlement agreement
with the purchaser of Kel-Lite whereby all royalty payment obligations by the
purchaser were canceled and warrants issued to the purchaser were reduced to
125,000 shares. Accordingly, the Company has recognized a loss on the contract
settlement of $ 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.
<PAGE> K.L.S. ENVIRO RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. DISCONTINUED OPERATIONS - continued:
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 receivable and accounts payable approximates fair value because
of the short maturities of those instruments. The fair value of 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.
<PAGE> K.L.S. ENVIRO RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17. SUBSEQUENT EVENTS
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 $0.0001 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 Subsidiaries
Condensed Consolidated Balance Sheets
March 31, 1997 (unaudited) and September 30, 1996 (audited)
<TABLE>
<CAPTION>
March 31, September 30,
1997 1996
-------------- --------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 562,774 $ 300,767
Accounts receivable-trade, net of allowance for
doubtful accounts of $123,402 981,866 1,050,371
Other receivables - 13,274
Inventory 665,839 483,938
Prepaid expenses 31,153 5,975
-------------- --------------
Total current assets 2,241,632 1,854,325
Property, plant and equipment, net 5,371,902 2,604,510
Other assets
Intangible assets, net of accumulated
amortization $75,401 and $70,014, respectively 43,677 49,065
Deposits and other 127,426 20,777
-------------- --------------
Total other assets 171,103 69,842
-------------- --------------
Total assets $ 7,784,637 $ 4,528,677
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Notes payable-related parties $ 1,163,544 $ 1,988,622
Current maturities of long-term debt 47,204 114,219
Accounts payable 1,065,744 412,487
Accrued expenses and other current liabilities 220,920 188,628
Deferred revenues 19,835 -
-------------- --------------
Total current liabilities 2,517,247 2,703,956
Long-term Debt 242,671 270,995
-------------- --------------
Total liabilities 2,759,918 2,974,951
-------------- --------------
Shareholders' equity
Preferred stock 10 10
Common stock 1,692 1,093
Additional paid-in capital 9,861,423 6,101,057
Accumulated deficit (4,795,693) (4,505,721)
Foreign currency translation adjustments (4,213) (4,213)
-------------- --------------
5,063,219 1,592,226
Treasury stock-common shares held in the
treasury, at cost (38,500) (38,500)
-------------- --------------
Total shareholders' equity 5,024,719 1,553,726
-------------- --------------
Total liabilities and shareholders' equity $ 7,784,637 $ 4,528,677
============== ==============
</TABLE>
The notes to Consolidated Financial Statements are an integral part of these
statements
<PAGE>
K.L.S. Enviro Resources, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
For the Six Months ended March 31, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
March 31,
--------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Net sales and revenues
Drilling and repair services revenues $ 2,748,811 $ 1,705,477
Cost of drilling and repair services 1,292,980 1,005,427
-------------- --------------
Gross profit 1,455,831 700,050
-------------- --------------
Cost and expenses
Salaries, wages and related costs 293,712 251,726
Legal and professional fees 274,412 123,244
Rents 33,852 35,143
Repairs and maintenance 25,727 17,341
Taxes, licenses and permits 23,620 26,017
Advertising 4,250 6,191
Travel and lodging 84,628 61,740
Consulting 74,778 25,500
Exploration costs 160,540 (15,448)
Other operating expenses 472,315 139,653
Depreciation and amortization 212,117 139,543
-------------- --------------
Total cost and expenses 1,659,951 810,650
-------------- --------------
Loss from operations (204,120) (110,600)
Other income (expenses)
Interest expense (97,218) (68,290)
Interest and other income, net 38,904 5,312
Gain on sale of investment securities - 99,286
Gain on sale of assets - 21,366
Gain (loss) from foreign currency translation (12,539) 13,133
-------------- --------------
Income (loss) before income taxes (274,973) (39,793)
Income taxes - -
-------------- --------------
Income (loss) from continuing operations (274,973) (39,793)
Discontinued operations:
Loss from discontinued operations - (34,511)
Gain on sale of subsidiary - 379,935
-------------- --------------
Net income (loss) $ (274,973) $ 305,631
============== ==============
Income (loss) per weighted-average common share outstanding:
Income (loss) from continuing operations $ (0.02) $ (0.00)
Income from discontinued operations $ - $ 0.04
-------------- --------------
Net income (loss) $ (0.02) $ 0.03
============== ==============
Weighted-average number of common shares outstanding 13,710,959 8,993,243
============== ==============
</TABLE>
The Notes to Consolidated Financial Statements are an integral
part of these statements.
<PAGE>
K.L.S. Enviro Resources, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
for the Six Months ended March 31, 1997 and 1996 (Unaudited)
<TABLE>
<CAPTION>
Six months ended
March 31,
--------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ (274,973) $ 305,631
Adjustments to reconcile net income (loss)
to cash used in operating activities:
Common stock for services 80,487 9,200
Depreciation and amortization 212,117 139,543
Gain on sale of investment securities - (99,286)
Gain on disposal of equipment - (21,366)
Gain on sale of subsidiary - (379,935)
Translation loss 9,555 805
Changes in
Accounts and other receivables 77,119 (42,493)
Inventory (183,223) 12,740
Prepaid expenses (25,178) (2,414)
Other assets (106,680) (2,447)
Accounts payable 650,199 (125,076)
Accrued expenses 24,244 48,622
Deferred revenue 13,444 10,572
-------------- --------------
Net cash provided by (used in) operating activities 477,111 (145,904)
-------------- --------------
Cash flows from investing activities:
Proceeds from sales of investment securities - 328,861
Proceeds from sale of subsidiary, net of selling costs - 184,042
Proceeds from sale of equipment - 14,750
Purchases of equipment (2,974,122) (146,682)
-------------- --------------
Net cash (used in) provided by investing activities (2,974,122) 380,971
-------------- --------------
Cash flows from financing activities:
Net change in bank notes - (196,505)
Principal payments on long-term debt (95,340) (66,685)
Net change in loans from related parties (555,078) (2,290)
Cash received from stock subscriptions and sales of common stock 3,410,478 -
-------------- --------------
Net cash provided by (used in) financing activities 2,760,060 (265,480)
-------------- --------------
Effect of exchange rate changes on cash (1,042) (8)
-------------- --------------
Increase (decrease) in cash 262,007 (30,421)
Cash at beginning of period 300,767 174,479
-------------- --------------
Cash at end of period $ 562,774 $ 144,058
============== ==============
</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
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 item 310(b) of Regulation S-B. 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 six months ended March 31, 1997,
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 of 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.
Income (Loss) Per Common Share - Income (loss) per share of common stock is
based on the weighted average number of shares outstanding during the three and
six months ended March 31, 1997 and 1996. Common Stock Equivalents have not
been included since their inclusion would be anti-dilutive.
NOTE 2. INVENTORY
<TABLE>
<CAPTION>
March 31, September 30,
1997 1996
-------------- --------------
<S> <C> <C>
Major classes of inventories are as follows:
Consumable supplies $ 665,839 $ 483,938
Raw materials - -
Finished goods - -
-------------- --------------
$ 665,839 $ 483,938
============== ==============
</TABLE>
NOTE 3. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
March 31, September 30,
1997 1996
-------------- --------------
<S> <C> <C>
Property, plant and equipment are as follows:
Machinery and equipment $ 5,512,131 $ 2,763,188
Transportation equipment 531,305 433,514
Building and improvements 493,066 493,066
Furniture and fixtures 267,809 140,422
-------------- --------------
Accumulated depreciation ( 1,582,409) ( 1,375,680)
-------------- --------------
5,221,902 2,454,510
Land 150,000 150,000
-------------- --------------
Property, plant and equipment, net $ 5,371,902 $ 2,604,510
============== ==============
</TABLE>
NOTE 4. NOTES PAYABLE
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. The balance of the note to fonix
was paid December 31, 1996 from the proceeds of the sale of stock (see
Stockholders' Equity, 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. On October 16, 1996, the shareholder loaned an
additional $100,000 to the Company under similar terms. Payments were made by
the Company to the shareholder from the proceeds of the sale of stock (see
Stockholders' Equity below) on December 31, 1996, reducing the balance to
$1,727,591 and on January 2, 1997, reducing the balance to $186,343. On March
25, 1997, the shareholder loaned an additional $936,896 to the Company under
similar terms. At March 31, 1997, this note payable had a balance of
$1,123,239. Subsequent to March 31, 1997, the shareholder loaned an additional
$263,104 to the Company. (See Subsequent Events below).
As of March 31, 1997, the Company had a note payable to a shareholder in the
amount of $15,000, bearing interest at prime plus 1%, due on demand,
collateralized by Dateline's accounts receivable.
As of March 31, 1997, the Company had a note payable to a shareholder in the
amount of $25,305, bearing interest at prime plus 1%, due on demand,
collateralized by KLS Co.'s accounts receivable.
NOTE 5. STOCKHOLDERS' EQUITY
Issuance of Stock - In December 1996, the Company sold 4,990,500 shares of
restricted common stock for consideration of $0.80 per share pursuant to
Regulation D of the Securities Act of 1933, as amended. As part of this
offering, in January 1997, the Company issued 100,000 shares of common stock
for finder's fees.
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 restricted common stock.
Stock Options and Warrants - On December 31, 1996, the directors approved a
stock option plan for directors, employees and other persons acting on behalf
of the Company, under which the aggregate number of shares available for
issuance is 2,230,000. The exercise price of such options is the closing
market price of the stock on the date the options are granted. The term of
each option is ten years from the date of grant. In January 1997, options to
purchase a total of 1,000,000 shares were granted to certain directors and
officers of the Company with exercise prices ranging from $2.88 to $3.00. None
of these options have been exercised.
NOTE 6. INCOME TAXES
At March 31, 1997, deferred tax assets were approximately $1,600,000 and
deferred tax liabilities were approximately $60,000. The amount of and
ultimate realization of the benefits from the deferred tax assets for income
tax purposes is dependent, in part, upon the tax laws in effect, the Company's
future earnings, and other future events, the effects of which cannot be
determined. Because of the uncertainty surrounding the realization of the loss
carryforwards the Company has established a valuation allowance for all net
deferred tax assets of approximately $1,540,000. The net change in the
valuation allowance was approximately $91,000 for the six months ended March
31, 1997.
The Company has available at March 31, 1997, net operating tax loss
carryforwards of approximately $4,300,000, 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 7. RELATED PARTY
Fees totaling $24,660 for the six months ended March 31, 1997 were paid to a
shareholder for advisory and accounting services performed and the lease of
office space.
The Company has a consulting agreement with a shareholder of the Company to
provide management advice. The agreement has a three year term and requires
monthly payments of approximately $2,000. Total payments for the six months
ended March 31, 1997 approximated $12,000.
The Company has a $50,000 per month consulting agreement with an affiliated
company to provide the Company with management services over a 5 year period
beginning October 1, 1996 payable in cash or stock. No cash payments have been
made during the six months ended March 31, 1997.
NOTE 8. COMMITMENTS AND 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 lawsuit against Dateline
and KLS alleging a violation of their contractual obligations. This lawsuit
is being vigorously contested by the Company.
The ultimate outcome of this lawsuit cannot be predicted and no provision for
liability has been made in the accompanying consolidated financial statements.
It is management's belief that the outcome is not likely to have a material
adverse effect on the Company's financial position.
NOTE 9. SUBSEQUENT EVENTS
As of March 31, 1997, the Company was obligated to a shareholder in the amount
of $1,123,239 under the terms of a demand note, interest at 12 percent,
collateralized by all assets, except real estate. Subsequent to March 31,
1997, the shareholder loaned to the Company an additional $263,104 making a
balance of $1,386,343.
<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
DIVIDEND POLICY
CAPITALIZATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
BUSINESS
EXCHANGE RATES
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
FINANCIAL STATEMENTS
<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(*) 45,000
Blue sky fees and expense(*) 20,000
Miscellaneous expenses(*) 1,000
----------
Total(*) $ 87,500
==========
________________
(*) 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(2) 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
<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).**
3.7 First Amendment to Bylaws of the Registrant, dated March 10, 1997.**
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).**
10.3 Loan Modification Agreement between Registrant and SMD LLC, April 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>
________________________
(**) Previously filed.
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 has duly caused this amendment to its registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the Fort
Worth, State of Texas, on May 30, 1997.
K.L.S. ENVIRO RESOURCES, INC.
(Registrant)
By: /s/ Raymond H. Kurzon
---------------------------------
Raymond H. Kurzon, President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement amendment has been signed by the following persons
in the capacities and on the dates indicated.
Signature Capacity Date
/s/ Stephen M. Studdert* Director, Chairman May 30, 1997
- ---------------------------
Stephen M. Studdert
/s/ Raymond H. Kurzon President, CEO May 30, 1997
- --------------------------- and Director
Raymond H. Kurzon
/s/ Roger D. Dudley * Acting Chief Financial May 30, 1997
- --------------------------- Officer and Director
Roger D. Dudley
/s/ Charles E. Nuanez* Director May 30, 1997
- ---------------------------
Charles E. Nuanez
/s/ Thomas A. Murdock* Director May 30, 1997
- ---------------------------
Thomas A. Murdock
/s/ Wyman Au* Director May 30, 1997
- ----------------------------
Wyman Au
* By: /s/ Raymond H. Kurzon
-----------------------------
Attorney in fact
Exhibit 5.1
Durham, Evans, Jones & Pinegar, P.C.
A Professional Corporation
50 South Main Street, Suite 50
Salt Lake City, Utah 84144
Tel: (801) 538-2424
Fax: (801) 538-2425
May 30, 1997
K.L.S. Enviro Resources, Inc.
3220 North Freeway, Suite 105
Ft. Worth, Texas 76111
Ladies and Gentlemen:
We have acted as counsel to K.L.S. Enviro Resources, Inc., a Nevada
corporation (the "Company"), in connection with the preparation and filing
of the Registration Statement (File No. 333-23117) of the Company on Form
SB-2 (as amended, the "Registration Statement") under the Securities Act of
1933, as amended (the "Securities Act"), relating to the public offering
(the
"Offering") by the Selling Stockholders identified as such in the
Registration Statement of an aggregate of 5,428,253 shares of Common Stock,
par value $.0001 per share (the "Common Stock"), of the Company (the
"Shares").
In so acting, we have reviewed the Registration Statement, including
the Prospectus contained therein (the "Prospectus"), the Articles of
Incorporation of the Company and the Bylaws of the Company, including, in
each case, all amendments to such documents. In addition, we have examined
originals or copies, certified or otherwise identified to our satisfaction,
of such corporate records, agreements, documents and other instruments, and
such certificates or comparable documents of public officials and of
officers and representatives of the Company, and have made such inquiries of
such officers and representatives, as we have deemed relevant and necessary
as a basis for the opinions hereinafter set forth.
<PAGE>
K.L.S. Enviro Resources, Inc.
May 30, 1997
Page 2
________________________
In such examination, we have assumed the genuineness of all
signatures, the legal capacity of natural persons, the authenticity of all
documents submitted to us as originals, the conformity to original documents
of all documents submitted to us as certified, conformed or photostatic
copies and the authenticity of the originals of such latter documents. As to
all questions of fact material to this opinion that have not been
independently established, we have relied upon certificates or comparable
documents of officers and representatives of the Company.
Based on the foregoing, and subject to the qualifications stated
herein, we are of the opinion that the Shares registered for sale by the
Selling Stockholders under the Registration Statement have been duly
authorized, and the Shares being sold by the Selling Stockholders, are
validly issued, fully paid and nonassessable.
The opinions expressed herein are limited to the corporate laws of the
State of Utah, and we express no opinion as to the effect on the matters
covered by this letter of the laws of any other jurisdiction.
The opinions expressed herein are rendered solely for your benefit in
connection with the transactions described herein. These opinions may not be
used or relied upon by any other person, nor may this letter or any copies
thereof be furnished to a third party, filed with a governmental agency,
quoted, cited or otherwise referred to without our prior written consent.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the references to this firm under the heading
"Legal Matters" in the Prospectus, without admitting that we are "experts"
under the Securities Act or the rules and regulations promulgated thereunder
with respect to any part of the Registration Statement.
Very truly yours,
/s/ Durham, Evans, Jones & Pinegar, P.C.
Exhibit 10.3
LOAN MODIFICATION AGREEMENT
This Loan Modification Agreement (the "Agreement") is made and entered
into this 16th day of April, 1997, by and between K.L.S. Enviro Resources, Inc.,
a Nevada corporation ("KLS"), and its wholly-owned subsidiaries, Dateline
Drilling, Inc., a Montana corporation, K.L.S. Co., Inc., a Nevada corporation,
K.L.S. International, Inc., a Nevada corporation, Dateline Internacional, S.A.
de C.V., an entity incorporated under the laws of Mexico, Beloro, S.A. de C.V.,
an entity incorporated under the laws of Mexico, and K.L.S. Environmental,
Inc., a Nevada corporation (KLS and each of its subsidiaries listed above are
sometimes collectively referred to as "Borrower") and SMD, L.L.C., a Utah
limited liability company (hereinafter "Lender").
RECITALS:
A.On September 30, 1996 Borrower executed and delivered to Lender
that certain Promissory Note (the "Note") in the principal amount of One
Million Six Hundred Seventy-Three Thousand Seven Hundred Thirty Dollars
($1,673,730.00). The obligations of the Borrower reflected by the Note are
hereinafter sometimes referred to as the "Loan".
B.Thereafter, Borrower paid down the principal balance of the Loan
to approximately $185,000. In March 1997, Borrower requested that Lender
advance an additional $1,200,000 to it pursuant to the terms of the Loan.
C.Lender advanced sums totaling $1,200,000 to Borrower in three (3)
separate tranches on March 25, 1997, April 4, 1997 and April 18, 1997
(collectively, the "Advance") as follows:
Date Amount of Advance
----- -------------------
March 25, 1997 $ 936,896.00
April 1, 1997 63,104.00
April 18, 1997 200,000.00
-------------------
TOTAL $ 1,200,000.00
NOW, THEREFORE, in consideration of the mutual covenants contained herein
and for other good and valuable consideration, the adequacy and receipt of
which are hereby acknowledged, the parties hereto agree as follows:
1. Incorporation of Recitals. All of the terms and representations
set forth in the above Recitals are incorporated herein by this reference.
2. Advance Governed by the Note. Borrower and Lender acknowledge and
agree that the Advance was made pursuant to the terms of the Note, and that the
repayment of the Advance shall be governed by the terms and conditions of the
Note.
3. Representations and Warranties. Borrower hereby represents and
warrants to Lender that, upon execution of this Agreement, Borrower shall not
be in default in any term, condition, or covenant contained in the Note, this
Agreement, or any other agreement made or given in connection therewith or the
Loan, and is not aware of the occurrence of any event or the existence of any
condition which, with the giving of notice or passage of time or both, would
constitute a default thereunder.
4. Remaining Terms Unchanged. Except as specifically modified by this
Agreement, all of the remaining terms and conditions set forth in the Note and
any other agreement or any other document made and given in connection
therewith, shall remain unchanged and in full force and effect. Borrower
specifically acknowledges and agrees that any security interest previously
conveyed to Lender shall continue to secure Borrower's obligations as modified
by this Agreement. This Agreement shall be secured by that Security Agreement
dated as of September 30, 1996 from Borrower to Lender, Stock Pledge Agreement
dated as of September 30, 1996 between KLS and Lender, UCC-1 Financing
Statements filed with the Montana Secretary of State at File Nos. 498721,
498722, 498723, 498724, and 498725 and filed with the Texas Secretary of State
at File Nos. 254253, 254254, and 254255.
5. Entire Agreement. This Agreement represents the entire
understanding and Agreement of Borrower and Lender with respect to the Loan
modification discussed herein, and supersedes any previous discussions,
negotiations or agreements with respect thereto. Except as specifically set
forth herein, the Loan and documents executed in connection therewith are
unmodified and remain in full force and effect.
6. Governing Law. This Agreement shall be governed by and interpreted
in accordance with the laws of the State of Utah, without giving effect to its
conflicts of laws principles.
EXECUTED on the day and year first above written.
BORROWER: K.L.S. ENVIRO RESOURCES, INC., a Nevada
corporation
By: /s/ Raymond H. Kurzon
------------------------------
Raymond H. Kurzon, President
DATELINE DRILLING, INC., a Montana corporation
By: /s/ Raymond H. Kurzon
-------------------------------
Raymond H. Kurzon, Vice President
K.L.S. CO., INC., a Nevada corporation
By: /s/ Raymond H. Kurzon
--------------------------------
Raymond H. Kurzon, President
K.L.S. INTERNATIONAL, INC., a Nevada corporation
By: /s/ Raymond H. Kurzon
--------------------------------
Raymond H. Kurzon, President
DATELINE INTERNACIONAL, S.A. de C.V., a Mexican
corporation
By: /s/ Raymond H. Kurzon
----------------------------------
Raymond H. Kurzon, President
BELORO, S.A. de C.V., a Mexican corporation,
By: /s/ Raymond H. Kurzon
----------------------------------
Raymond H. Kurzon, President
K.L.S. ENVIRONMENTAL, INC., a Nevada corporation
By: /s/ Raymond H. Kurzon
----------------------------------
Raymond H. Kurzon, President
LENDER: SMD, L.L.C., a Utah limited liability company
By:/s/ Thomas A. Murdock
-----------------------------
Its: Manager
-----------------------------
INDEPENDENT AUDITOR'S CONSENT
We consent to the use in the Registration Statement of KLS Enviro Resources,
Inc. on Form SB-2/A, Amendment No. 2, of our report dated December 31, 1996
appearing in the Prospectus which is 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.
Fort Worth, Texas
May 22, 1997
