U.S. Securities And Exchange Commission
Washington, D.C. 20549
FORM 10-KSB
[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee Required] for the fiscal year ended September 30, 1996
[ ] Transition report under section 13 or 15(d)of the Securities Exchange Act
of 1934 [No Fee Required] for the transition period from __________________ to
___________________
Commission File Number 0-24152
K.L.S. ENVIRO RESOURCES. INC.
(Name of small business issuer in its charter)
Nevada 75-2460365
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
3220 North Freeway, Fort Worth, Texas 76111
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (817) 624-4844
Securities to be registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on
which registered
None None
Securities registered under Section 12(g) of the Exchange Act: None
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No __
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or an
amendment to this Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year were $4,424,693.
The aggregate market value of the voting stock held by non-affiliates computed
based on the average of the closing bid and asked prices of such stock as of
January 8, 1997 was approximately $50,061,612.
The number of shares outstanding of the issuer's common equity as of January
8, 1997 was 16,824,244 shares of common stock, par value $.0001.
Documents incorporated by reference. If the following documents are
incorporated by reference briefly describe them and identify the part of Form
10-KSB (e.g., Part I, Part II, etc.) into which the document is incorporated:
(1) any annual report to security holders; (2) any proxy or information
statement; and (3) any prospectus filed pursuant to Rule 424(b) or (c) of the
Securities Act of 1933 ("Securities Act"). The listed documents should be
clearly described for identification purposes (e.g., annual report to security
holders for the fiscal year ended December 24, 1990).
Transitional Small Business Disclosure Format
(check one): Yes ___; No X
<PAGE>
PART I
ITEM 1: DESCRIPTION OF BUSINESS
History And Overview
K.L.S. Enviro Resources, Inc. (sometimes referred to in this report as
"KLS") 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 report, the term the "Company" shall refer collectively to KLS and its
wholly-owned 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 conducted in
North America and Mexico.
In April 1993, KLS formed Dateline Internacional, S.A. de C.V. ("DIMSA"),
which is engaged in precious metals mining production and exploration drilling
in Mexico.
In addition to the wholly-owned operating subsidiaries described above,
KLS has an inactive subsidiary known as K.L.S. Environmental, Inc., a Nevada
corporation ("KLSEI"), formed in 1993 for the purpose of engaging in the
business of the remediation of contaminated soils which was subsequently
suspended by the Company. KLSEI does not conduct any business operations at
this time.
During the fiscal year ended September 30, 1996, KLS disposed of Kel-Lite
Industries, Inc., a Texas corporation ("Kel-Lite"), which was formed in 1994
to acquire the business of a defunct company and to manufacture flashlights.
KLS is no longer pursuing the flashlight business.
In September 1994, the Company formed K.L.S. International, Inc., a
Nevada corporation ("KLSII"), as a holding company for pursuing precious
metals exploration operations in Mexico. KLS also owns Beloro, S.A. de C.V.
("Beloro"), a Mexico corporation formed by KLS in 1994 to pursue gold
exploration and development in a joint venture with an unrelated entity. In
February 1996 Beloro withdrew from the joint venture. Although it plans to
expand its precious metals exploration business, KLS determined that it would
not be in the Company's best interests to pursue those activities through the
joint venture. In the future the Company will target medium size properties
that the Company believes may be too small for most major mining companies and
too large for most independent mining companies to cost-effectively exploit.
While the Company is actively pursuing several properties which may meet this
criteria, the Company owns no exploration properties or claims at this time.
The Company's principal offices are located at 3220 North Freeway, Fort
Worth, Texas 76111. Its telephone number is (817) 624-4844.
Description Of Business
The primary business of the Company is providing drilling services for
companies engaged in the exploration for, production and sale of gold and
other precious metals associated with gold, as well as the design,
manufacture, sale, service and repair of drilling rigs and hydraulic equipment
used in logging, mining and related industries. In addition, the Company
intends to engage in the future on a broader scale in the exploration for and
production, processing and sale of gold and other precious metals for its own
account and to develop its own properties.
Drilling Operations. The drilling operations of the Company include both
production mining drilling and exploration drilling as a drilling contractor
to the hard rock mining industry. The Company specializes in exploration and
production drilling, using reverse circulation drilling, performing work in
the United States and Mexico. The Company's drill rigs are track mounted,
mobile, and compact, and the Company believes that their usage does not result
in any significant adverse environmental impact. Because of their mobility,
track mounting, smaller size, and capability of drilling to 1,500 feet in most
environments, these rigs can be positioned and operated in relatively
difficult terrain without requiring the building of drill roads. Management
believes that these attributes provide competitive advantages in terms of
avoiding certain expenses for building roads and also minimizing adverse
environmental impact.
The Company submits written bids for drilling projects and negotiates
written contracts with the mining company prior to commencement of any
drilling project. During drilling operations, the driller, or supervisor, is
responsible for maintaining drill logs. Invoices for services rendered by the
Company are submitted to the mining company on a weekly basis. The
exploratory drilling business is very competitive and the Company attempts to
complete work on a project in the shortest time with the highest quality
results possible. The Company strongly emphasizes maintenance of its
equipment and retention of experienced drilling personnel.
In 1993, as governments in the United States and Canada raised taxes and
introduced tougher 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 receptive to mining activities.
Improved political stability in these markets also made expansion in that area
more attractive to North American mining companies. Changes in the laws
regarding foreign ownership in Mexico prompted an increase in the number of
foreign-owned mining concessions in that country. As a result, the Company
has become more active in the Mexican drilling market. In addition to
privatization of mineral lands and the low level of prior mineral extraction
activity which encouraged the expansion of foreign company interests, the
Mexican government has provided incentives to companies willing to operate in
Mexico. Among other things, for example, these concessions have in the past
enabled the Company to purchase support trucks at a substantially discounted
cost.
As of September 30, 1996, the Company had nine drill rigs in use. Six of
those drill rigs were operating in Mexico and three were operating in Alaska.
The Company is also presently awaiting delivery of two additional drill rigs
it has purchased and is in the process of constructing two additional new rigs
in the Missoula, Montana facility. It expects to have all four of these new
rigs available during fiscal 1997.
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 utilized 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. In February 1994, the
Company 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.
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:
Fiscal Year Ending Fiscal Year Ending
September 30, 1996 September 30, 1995
From Domestic Sources
Continuing Operations $1,742,318 $1,593,439
Discontinued Operations 374,233 899,253
From Foreign Sources
Continuing Operations 2,682,374 1,426,158
TOTALS $4,798,925 $3,918,850
========= =========
Marketing and Competition
Drilling Operations. The customers for the Company's drilling operations
include many precious metal mining companies in North, Central and South
America. In recent years, perhaps as many as 150 or more mining companies
have opened or greatly expanded mining operations in Mexico. Marketing of the
Company's drilling services is done through direct mail, mining convention
attendance and direct personal contacts. There are several large companies
with whom the Company competes for drilling contracts. The basis of
competition is usually price, service and timeliness. With respect to service
and speed, the Company believes it is able to compete effectively. The
Company believes that there is little effective competition in Mexico for the
reverse circulation drilling capability possessed by the Company and that
U.S.-based companies are the principal competitors to the Company for drilling
contracts in Mexico. Many of the Company's competitors possess greater
financial resources, larger work forces, and more highly developed marketing
programs than the Company. A number of smaller companies also compete with
the Company for this business.
Much of the drilling work performed by the Company is in remote,
mountainous areas. With its track mounted, compact, and highly mobile
drilling equipment, the Company believes that it can perform drilling work in
these remote areas more easily and efficiently than other companies that do
not have such equipment. Some of the Company's drill rigs are specially
designed to minimize both adverse impact on the environment and the need for
construction or improvement of roads to access mining sites. The Company
believes that its rigs can be used in soft-soil conditions with less damage to
the environment than equipment used by its competitors. These capabilities
appear to give the Company a competitive advantage, although no assurance can
be given that the Company will be able to continue to exploit this perceived
advantage in a profitable manner.
Precious Metals Exploration. The Company competes with substantially
larger companies as well as experienced smaller companies for the acquisition
and exploration of 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 explore these properties. However, the Company currently is
focusing its efforts on medium size properties in which it believes it may
have a competitive advantage because properties of this size generally are too
small for most major mining companies and too large for most independent
mining companies to develop effectively.
Specialty Manufacturing and Hydraulic Services. The primary markets for
the Company's specialty manufacturing and hydraulic repair services consist of
logging, mining, and construction companies in the Missoula, Montana area.
These services are marketed through direct contact, attendance at mining
conventions, and direct mail. There are several companies with whom the
Company competes for specialty manufacturing and hydraulic repair services,
and many of those companies have significantly greater financial resources
than the Company.
Equipment
Drilling Equipment. The Company owns nine functional drill rigs, eight
of which were either designed and manufactured by Dateline or were
substantially redesigned and remanufactured by the Company.
The drill rigs are highly mobile and compact and are able to access
remote areas with relatively low environmental impact. The Company employs
the reverse circulation method of drilling in its drilling operations. This
method of drilling entails directing the drilling medium (air or mud) through
the annulus (the space between the drill pipe and the drill pipe cover)
outside the drill pipe, causing the cuttings to come to the surface through
the center of the drill pipe. In conventional drilling, the air or mud is
forced down the interior of the drill pipe and the cuttings come to the
surface through the annulus. The cuttings derived from the reverse
circulation method are cleaner, less damaged and easier to analyze and/or
assay. Additionally, to the extent the Company's drilling methods are
utilized in lieu of core drilling, the Company believes that its drilling
offers a significantly less costly service. The Company believes that the
combination of greater mobility, compactness and comparatively low
environmental impact is a competitive advantage, despite the fact that the
rigs are not able to drill to the depth of larger drills.
In addition to its drill rigs, the Company owns drill pipe, tools and
replacement parts utilized 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 35
vehicles, primarily trucks, which are used in its drilling and other
operations.
Marketing. During fiscal 1996, the Company provided its drilling
services for approximately 36 different entities on 40 sites. Principal
customers of the Company include Phelps Dodge Corp., FMC Gold Company, Placer
Dome USA, Inc. and USMX. The customers of the Company are primarily gold and
precious metal producers and the services of the Company are provided under
contract. Contracts for drilling services are obtained through responding to
invitations for bids, attendance at trade shows, personal contacts and direct
mail contacts.
The Company is the exclusive service representative and dealer of the
Denison Hydraulics Company of Cleveland, Ohio for the State of Montana. Under
its arrangement with Denison Hydraulics, the Company services Denison
Hydraulics products used primarily by logging interests in the State of
Montana. Other repair, design and manufacturing projects are obtained through
participation in and attendance at trade shows, direct mail and personal
contact.
Reliance On Major Customers
During the fiscal years ended September 30, 1995 and 1996, no customer of
the Company accounted for more than 10 percent of the Company's revenues from
continuing operations. For the fiscal year ended September 30, 1995, there
was one customer of the Company's now discontinued flashlight business that
was responsible for more than 10 percent of the Company's revenues from that
now-discontinued operation of the Company.
Employees
As of September 30, 1996 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.
Seasonality
Although historically the drilling business of the Company was subject
to seasonal trends, the Company has been successful in sharply reducing the
adverse effects of seasonal weather-related conditions that had previously
reduced its operating revenue in winter months. The Company has obtained new
agreements and placed new drill rigs in operation in Mexico, and has been
successful with its newest equipment to perform year-round drilling in
Alaska. These changes have diminished the historic seasonal trends.
Risk Factors
The business and operations of the Company are subject to various risks,
including, but not limited to, the following:
Recent Net Losses. The Company had significant net operating losses in
fiscal years 1994 and 1995. It also had operating losses in prior years. As
a result, the Company had an accumulated deficit of approximately ($2,300,000)
at September 30, 1994 and ($3,545,000) 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 or that net losses will not
be incurred in future operating periods.
Need for Additional Funding. The Company has operated in a negative cash
flow position for several 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. The Company may
seek such funding through a public or future private offering of its stock.
Shares issued in such an offering would substantially dilute the shareholdings
of other shareholders. 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.
Continuation of Control. SMD L.L.C., ("SMD"), a significant shareholder
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 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 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.
Dependency 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 until the expansion operations
begin operating at capacity. 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.
Equipment Costs. To date the Company has been able to meet its
requirements for additional equipment by acquiring used equipment which it has
thereafter refurbished. 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, 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.
Government Regulation and Environmental Matters. The Company's domestic
and foreign operations and mining operations in general are subject to
substantial government regulation including federal, provincial, state and/or
local laws concerning, but not limited to, such factors as safety, land use
and environmental protection. The Company must also 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 as well as laws protecting the rights of other
property owners and the public. Although the Company believes it is in
substantial compliance with such regulations, laws and requirements with
respect to its operations, 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 must also obtain and
comply with local, state, provincial and federal permits, including waste
discharge requirements, other environmental permits, use permits, plans of
operation and other authorizations. Obtaining these permits can be very
costly and takes significant amounts of time. Although the Company foresees
no material problems or delays, no assurances can be given that the Company
can obtain the necessary permits, commence new operations or continue existing
operations or that the Company can maintain economic production in compliance
with the necessary permits. Amendments to current laws and regulations
governing operations and activities of mining companies or more stringent
implementation of such laws are actively considered from time to time and
could have a material adverse impact on the Company. There can be no
assurance that future changes in existing law or new legislation will not
limit or adversely impact the Company's business operations.
Competition. The Company operates in an industry that is characterized by
intense competition for resources, equipment and personnel. Some of the
Company's principal competitors are substantially larger, have substantially
greater resources and have spent considerably larger sums of capital than the
Company for equipment, including drill rigs, development and operations.
Risks Associated with Mining Operations, Insurance Coverage and Uninsured
Losses. The Company's activities are subject to all the risks and hazards
commonly associated with mining operations, including, but not limited to,
unforeseen geological formations, environmental concerns and personal injury.
The Company has insurance covering personal injury, worker's compensation and
damage to property and equipment, although in view of recent trends in damage
awards in personal injury lawsuits, such insurance may be insufficient to
satisfy large losses or judgments against the Company. Furthermore, certain
types of insurance coverage (generally against losses caused by natural
disasters and acts of God) are either unattainable or prohibitively
expensive. Substantial damage awards against the Company or substantial
damages not covered by insurance will affect the Company's ability to continue
as a going concern.
Exploration Activities. The Company presently plans to expand its
operations in more speculative and risky precious metal exploration, in
addition to its existing drilling services and equipment maintenance and
repair business. Exploration for gold, silver and other precious metals is a
highly speculative business, with no assurance that adequate deposits or
reserves can be located or that if located, meaningful volumes of ore can be
extracted, refined or sold at profitable rates. In addition, the Company's
present management has limited experience in acquiring or operating previous
metal mining properties.
Volatility of the Special Metals Market. The profitability of the
Company's operations can be significantly affected by changes in the market
price of gold and other precious metals. The market price of gold has
fluctuated widely and is affected by numerous factors beyond the Company's
control, including international economic trends, currency exchange
fluctuations, expectations for inflation, speculative activities, consumption
patterns (such as purchases of gold jewelry and the development of gold coin
programs), purchases and sales of gold bullion, holdings by central banks and
other large gold bullion holders or dealers and global or regional political
events, particularly in major gold producing countries such as South Africa
and some of the countries that formerly comprised the Soviet Union. Gold
market prices are also affected by worldwide production levels which have
increased in recent years. The aggregate effect of these factors, all of
which are beyond the Company's control, is impossible for the Company to
predict. In addition, the market price of gold has, on occasion, been subject
to rapid short-term changes because of market speculation. If the price for
precious metals such as gold is below the Company's customers' cash production
costs and remains below such level for any sustained period, the Company's
customers could experience losses and could determine that it is not
economically feasible to continue to engage the Company for performance of its
operations and services, or to continue to develop some or all of their
projects.
Foreign Operations. The Company's operations presently include contract
drilling in the country of Mexico where the Company is required to comply with
various environmental and other laws, rules and regulations. The Company's
business is or may become subject to many other risks of international
operations, including potential tariff restrictions, currency fluctuations,
currency control regulations, competing or conflicting manufacturing
standards, government regulation and approval policies and licensing and
permit requirements. In recent years the economic situation in Mexico has
been subject to volatile change. In addition, political and economic changes
in the future could adversely affect the Company's investment and operations
in Mexico and elsewhere.
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. 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. 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.
ITEM 2: DESCRIPTION OF PROPERTY
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 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
feet 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 the above facilities and properties to be sufficient
for its immediate needs and for the next twelve months. In addition to these
properties, the Company from time to time may acquire interests in mining
properties, although at present, with the disposal of its interest in the La
Cienega joint venture, the Company does not own any interests in exploration
properties.
ITEM 3: LEGAL PROCEEDINGS
As of September 30, 1996 the Company was involved in the following legal
proceedings:
PanAmerican Mineral Services, Inc. v. KLS Enviro Resources, Inc., Datelin
Drilling, Inc., and Dateline Internacional S.A. De C.V. (the "Texas
Litigation"). This action is filed in the District Court of Dallas County,
Texas. The Texas Litigation is related to litigation 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
entered into an apparent 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. An arbitration agreement existed between Dateline and
PanAmerican. Dateline began an arbitration proceeding under that contract in
the state of Wyoming. PanAmerican has filed documents in the arbitration
proceeding indicating that it intends to assert a counterclaim against Dateline,
DIMSA and KLS. PanAmerican contends that it performed all of its obligations
under the contract with Dateline and alleges that Dateline and the Company are
in violation of their contractual obligations. PanAmerican seeks to recover
damages in an unspecified amount. The Wyoming litigation was dismissed for lack
of jurisdiction over KLS and DIMSA. That decision was reversed on appeal by
the Wyoming Supreme Court. Motions to Dismiss as to Dateline and DIMSA have
been filed in the Texas Litigation. No decision has been made by the Texas
court on these motions. 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.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year ended September 30, 1996.
PART II
ITEM 5: MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information. Trading in the common stock of the Company commenced
over the counter in January 1994. To date, the trading volume has been low.
The common stock of the Company is traded 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, 1994 1.75 1.13
December 30, 1994 2.50 2.25
March 31, 1995 1.31 1.31
June 30, 1995 0.62 0.50
September 30, 1995 0.38 0.37
December 29, 1995 0.28 0.25
March 29, 1996 0.33 0.30
June 28, 1996 0.55 0.50
September 30, 1996 $1.13 $1.00
</TABLE>
On January 8, 1997, the last reported bid and ask prices for the common
stock were respectively $4.36 and $4.60 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 January 8, 1997 was 1,240.
Dividends. The Company has not paid any cash dividends on its common
stock since its inception in January 1993. The Company anticipates that any
earnings, of which there is no assurance, will be retained for development of
the Company's businesses and therefore no dividends on the Company's common
stock may be declared in the foreseeable future.
ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
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 a 6
percent increase in the profit margin. Selling, general and administrative
expenses for fiscal 1996 and fiscal 1995 were $1,859,692 and $2,091,100,
respectively, a decrease of 27 percent expressed as a ratio to sales and
revenues. The decreases in expenses as a percentage of sales and revenues
were attributable to a decrease in exploration costs and the Company's efforts
at overall cost containment. The Company has renewed its mining property
exploration efforts in fiscal 1997 and expects costs to increase for this
program.
The Company's net income or (loss) from continuing operations for fiscal
years ended September 30, 1996 and September 30, 1995 was $117,158 income and
($908,174) loss, respectively. The increase of $1,025,329 in income was
attributable to an increase in gross profit, decreases in legal and
professional fees and exploration costs, but partially offset by increases in
salaries, wages and related costs, and depreciation expense.
Discount on Debt. The Company entered into a financing arrangement on
September 30, 1996 with a related party. See "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS," below. This transaction included the issuance of
common stock purchase warrants, the effect of which was an increase in
stockholders' equity of $1,024,322 and an offsetting finance charge on the
income statement in the same amount. This resulted in a net loss as indicated
above.
Interest expense for the fiscal years ended September 30, 1996 and
September 30, 1995 was $311,303 and $144,835, respectively. The increase was
due to additions to debt financing. Interest and other income for the fiscal
years 1996 and 1995 were $187,078 and $21,220, respectively. The increase was
primarily due to the forgiveness of interest by the Bell Estate totaling
$172,823 (see "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS," below). Gain
on sale of marketable securities for the fiscal years ended September 30, 1996
and 1995 was $99,289 and $209,943, respectively. The balance of the Company's
holdings of marketable securities was sold in fiscal 1996 to provide
additional working capital. The Company will not have these securities as a
source of capital in future years. Loss from discontinued operations for the
fiscal years ended September 30, 1996 and September 30, 1995 was $3,326 and
$363,462, respectively. The subsidiary responsible for this loss was sold in
fiscal 1996 and there will be no future revenues or expenses incurred by the
Company from that transaction.
The Company is expanding 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 is attributable to an
increase in revenues and a decrease in expenses as a percentage of revenues.
Total sales and revenues from continuing operations for fiscal 1995 were
$3,019,597, an increase of $851,146, or 39 percent, over fiscal 1994. The
increased revenues were attributable to increases in revenues from both the
Company's drilling services and repair services segments.
Total costs and expenses from continuing operations decreased in fiscal
1995 approximately 1.7 percent to $3,932,743 when compared to fiscal 1994.
These decreased costs and expenses were attributable to decreases in legal and
other professional fees, rents, travel expenses, and consulting fees, which
were offset to an extent by increases in fuel, supply, and exploration costs
as a result of increased drilling and exploration activities.
The Company's loss from continuing operations decreased from $1,834,275
in fiscal 1994 to $913,146 in fiscal 1995 as a result of the items described
above. The decreased loss from operations for fiscal 1995 as compared to 1994
was offset by a $670,039 decrease in gain on sale of marketable securities.
The lower amount of gain on sale of marketable securities resulted from
smaller amounts of marketable securities being sold in fiscal 1995. At
September 30, 1995, the total value of the Company's marketable securities was
$258,750.
Financial Condition
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 $261,812 to $412,487 and accrued expenses decreased $42,440 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
$1,068,734 to $4,528,677. This included net additions to property, plant and
equipment of $939,383, due primarily to the purchase of additional drill
rigs. During fiscal 1996, total liabilities increased $374,320 to
$2,974,951. This included a reduction in long-term debt of $184,649 to
$270,995.
Stockholders' equity increased $694,411 during the fiscal year ended
September 30, 1996 to $1,553,726. To provide capital, stock and stock
purchase warrants were sold in private placements and issued in exchange for
fees, services and debts of the Company. These issuances resulted in an
increase of $1,683,525. This capital increase was partially offset by the
Company's net loss for the period of $919,813.
The Company realized positive earnings from its operating activities in
the last half of fiscal 1996. However, the Company will continue to need
infusions of equity or debt as it expands its drill rig fleet, increases its
sales activities in the machine shop, hydraulic repair and fabrication
segments, and pursues mining property exploration and acquisitions.
During fiscal 1996, the Company incurred short-term debt with common
stock conversion rights from an unrelated entity. The first loan of $710,000
was obtained in May 1996. Subsequent notes were executed and funds borrowed
from the same entity in June ($450,000), July 10 ($150,000) and July 16, 1996
($590,000). These notes were partially refinanced on September 30, 1996 with
the execution of a short-term note in the amount of $1,673,730 from a related
party, coupled with the issuance to the lender of common stock purchase
warrants. Subsequent to the fiscal year end on September 30, 1996, the
Company borrowed an additional $300,000 from the same related party on a
short-term basis. Of this aggregate $2,200,000 of short-term debt, $1,842,400
was repaid by January 2, 1997 from the proceeds of an offering selling
approximately 4,000,000 shares of common stock. See "CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS" and "Recent Sales of Unregistered Securities,"
below.
Forward-looking Statements
The forward-looking statements contained in this Management's Discussion
and Analysis of Operation and in Part I, Item I "Business," above, involve a
number of risks and uncertainties. Some of the factors that could cause
actual results to differ materially are set forth below. In addition, the
risk factors discussed in Part I, Item 1 ("Business") may also affect actual
operating results.
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 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. As a result of the foregoing and other factors, there can be no
assurance that the Company will not experience material fluctuations in future
operating results on a quarterly or annual basis which would materially and
adversely affect the Company's business, financial condition and results of
operation.
The Company has recently expanded much of its operations to meet
increased demand for its services both inside and outside the United States.
There are numerous risks associated with conducting business in foreign
countries. The distance from corporate headquarters and the often remote
locations of drilling and mining sites in these foreign countries exacerbates
the difficulties discussed above. In addition, problems associated with
possible political risks, instability of local governments, safety of
personnel and equipment, the lack of spare parts or adequate service
assistance, the need for skilled labor and supervision, all add to the risk of
foreign operations.
ITEM 7: FINANCIAL STATEMENTS
The Consolidated Financial Statements that constitute Item 7 are attached
at the end of this Annual Report on Form 10-KSB. An index to those
Consolidated Financial Statements also is included in Item 13(a) of this
Annual Report on Form 10-KSB.
ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On October 17, 1995, the Board of Directors approved the appointment of
and the Company engaged Weaver and Tidwell, LLP, Certified Public Accountants,
as the Company's independent accountant to replace Coopers & Lybrand LLP,
which was dismissed by the Company on that date. Coopers & Lybrand's reports
on the financial statements of the Company for fiscal years 1993 and 1994 did
not contain an adverse opinion or disclaimer of opinion, and were not
qualified as to uncertainty, audit scope, or accounting principles. There
have been no disagreements with Coopers & Lybrand on any matter of accounting
principles or practice, financial statement disclosure or auditing scope or
procedure. Prior to its appointment by the Company, Weaver and Tidwell, LLP
had not been consulted by the Company regarding any matter.
PART III
ITEM 9: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following table sets forth the executive officers and directors of
the Company during fiscal 1996, a key executive officer of a significant
subsidiary, and a significant employee of the Company:
<TABLE>
<CAPTION>
Name Age Position
- ------------------------- ----- ------------------------
<S> <C> <C>
Raymond H. Kurzon 48 President and Director
Merlyn W. Dahlin 69 Chief Financial Officer and
Director
Charles E. Nuanez 39 Vice President and Director
Wyman Au 57 Director
Philip B. Smith 61 Director
Thomas A. Murdock 52 Director
Adam Taylor 58 Chief Metallurgist
</TABLE>
Subsequent to the end of fiscal year 1996 on September 30, 1996, in
November 1996, Merlyn W. Dahlin resigned from the Board of Directors and as
Chief Financial Officer and Treasurer of the Company to pursue other
interests. Mr. Dahlin had been an officer and Director of the Company since
its formation. For more than five years, Mr. Dahlin has been the President of
Dahlin, Fitch, Alexander & Siegmund, P.C., Certified Public Accountants, and
its predecessor firms. Mr. Dahlin has been licensed as a Certified Public
Accountant in Texas since 1955. At a special meeting of the Board of
Directors held December 31, 1996, the board accepted the resignation of Mr.
Dahlin, increased the number of directors from six to nine, and appointed the
following four new directors and officers:
<TABLE>
<CAPTION>
Name Age Position
- ---------------------- ----- ---------------------
<S> <C> <C>
Stephen M. Studdert 49 Director, Chairman
Roger D. Dudley 44 Director, Chief Financial
Officer
Joseph Verner Reed 60 Director
Rick D. Nydegger 48 Director
</TABLE>
Information concerning the officers and directors of the Company as of January
1, 1997 follows:
Raymond H. Kurzon has been President and a Director of the Company since
its formation in 1993. Prior to joining the Company in a full-time capacity,
Mr. Kurzon was employed in various executive and management positions. 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 Nevada
Operations. Since October 1991, Mr. Nuanez has been employed by Dateline
Drilling, Inc. in various capacities. He currently serves as its President.
Wyman Au has been a Director of the Company since November 1993. For
more than the past 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 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.
Stephen M. Studdert was appointed a Director and elected by the Board of
Directors as its Chairman in December 1996. Mr. Studdert is also the Chairman
of the Board of Directors and Chief Executive Officer of fonix Corporation
("fonix"), a publicly-held research and development company engaged in the
development of speech recognition technology. Mr. Studdert is also Chairman
and CEO of Studdert Companies Corp. and a manager and member of SMD. 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 as a Director of Seiler Pollution Control Systems,
Inc., a company having a class of securities registered under the Securities
Exchange Act of 1934.
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 Studdert Companies Corp. 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 of SMD.
Roger D. Dudley was appointed 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, Chief
Financial Officer and Secretary of that company. Mr. Dudley is also Executive
Vice President of Studdert Companies Corp. and a manager of SMD. After
several years at IBM in marketing and sales, Mr. Dudley began his career in
the investment banking and asset management industry. He has extensive
experience in real estate asset management and in project development. He
also serves as Executive Vice President of an international investment fund,
and has managed assets in excess of $200 million. From February 1995 to
November 1995, Mr. Dudley served as a Director for PCT Holdings, Inc., a
Nevada corporation, which has a class of securities registered under the
Securities Exchange Act of 1934.
Joseph Verner Reed is Under Secretary General of the United Nations in
New York. 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.
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.
During fiscal year 1996, the Executive Committee of the Board of
Directors was comprised of Messrs. Kurzon, Dahlin and Nuanez. Messrs.
Kurzon, Studdert, Murdock and Dudley are the current members of the Executive
Committee of the Board of Directors. Mr. Kurzon, President of the Company, is
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 new CFO of the Company. Also serving on this board committee are Mr.
Smith and Mr. Au. The Compensation Committee will be chaired by Mr. Reed and
is comprised of Mr. Reed, 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 individuals 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 has 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, including those appointed on December 31, 1996,
hold office until the next annual meeting of the Company's shareholders and
until their successors have been elected and duly qualified. Notwithstanding
that the newly appointed 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.
Short-term loans made by fonix to the Company totaling approximately
$1,900,000 dollars have been repaid or converted (by an assignee of fonix) to
shares of common stock of the Company and there are no outstanding amounts
owed by the Company to fonix at this time. The Company owes SMD a total of
approximately $185,191 for sums previously loaned by SMD to the Company.
Compensation Of Directors
During fiscal year 1996, the Company had no standard or other arrangement
pursuant to which directors of the Company were compensated for any services
as a director or for committee participation or special assignments. During
fiscal 1996, options to acquire shares of the Company's common stock were
granted to certain members of the Board of Directors as follows:
On February 24, 1995, the Board Of Directors approved the issuance to
Philip B. Smith of options to purchase 200,000 shares of the restricted common
stock of the Company at a purchase price of $1 per share. These options were
subsequently canceled and replaced by options granted April 18, 1996, which
are exercisable until April 18, 1998 at a price of $.40 per share. Also on
April 18, 1996, the Board approved a grant of options to acquire 25,000 shares
of stock to Wyman Au, a member of the Board. These options were issued in
place of other options granted in February 1995 at a higher exercise price.
Like those granted to Mr. Smith, the options granted to Mr. Au will expire at
April 18, 1996 and are exercisable at a price of $.40 per share.
On July 11, 1996, the Board granted options to Mr. Au to purchase an
additional 75,000 shares of the Company's common stock at a price of $.50 per
share. At the same time, the Board also approved the grant of options to Mr.
Dahlin, then a Director of the Company, to purchase 100,000 shares of stock at
$.50 per share and to Mr. Nuanez to purchase 50,000 shares of the Company's
common stock at a price of $.50 per share. All of these options were granted
subject to subsequent approval of the shareholders to be obtained within one
year of the date of grant. See "Option/SAR Grants in Last Fiscal Year" below
for information regarding additional options granted to officers of the
Company during fiscal 1996.
Subsequent to the fiscal year end, options were granted to all directors
of the Company. See "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT" for a description of the grants made following the end of the
period that is the subject of this Report.
During fiscal year 1996, the Board of Directors held three regular
meetings and took action three times by unanimous consent resolution. No
director attended fewer than 75% of these meetings.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who beneficially own more than
ten percent of a registered class of the Company's equity securities, to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission. Officers, directors and greater than ten-percent shareholders are
required by regulation of the Securities and Exchange Commission to furnish
the Company with copies of all Section 16(a) forms which 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 4 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.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth in summary form the compensation received
during each of the Company's last three completed fiscal years by the
President of the Company and each executive officer of the Company who
received total salary and bonus exceeding $100,000 during any of the last
three fiscal years.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
Other Long-term
Name Annual Compensation All other
and Compensa- Awards of Compensa-
Principal Salary Bonus tion Stock Options tion
Position Year ($) ($) ($) (#) ($)
- ------------------ ----- -------- -------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Raymond H. Kurzon
CEO/President 1996 $ 90,000 $83,375(1) $0 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 July 11, 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 July 11, 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 $.375 per share.
Employment Contracts and Termination of Employment and Change-In-Control
Arrangements.
The Company does not have any written employment contracts with respect
to any of its executive officers. The Company has no compensatory plan or
arrangement that results or will result from the resignation, retirement, or
any other termination of an executive officer's employment with the Company
and its subsidiaries or from a change in control of the Company or a change in
an executive officer's responsibilities following a change-in-control.
Option/SAR Grants In Last Fiscal Year
The following table sets forth certain information with respect to
options granted to the named executive officers of the Company during the
fiscal year ended September 30, 1996. The Company has never granted any stock
appreciation rights ("SARs"). No options were exercised during fiscal year
1996.
<TABLE>
<CAPTION>
Option/SAR Grants in Last Fiscal Year
Individual Grants
(a) (b) (c) (d) (e)
Number of % of Total
Securities Options/SARs
Underlying Granted to
Options/SAR's Employees Exercise or Base
Name Granted (#) in Fiscal Year Price ($/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>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table summarizes certain information as of January 8, 1997
with respect to the beneficial ownership of the Company's common stock (i) by
the Company's officers and directors, (ii) by stockholders known by the
Company to own five percent or more of the Company's common stock and (iii) by
all officers and directors as a group. At January 8, 1997, there were
approximately 16,824,244 shares of common stock issued and outstanding.
<TABLE>
<CAPTION>
Number of Shares
of Common Stock
Name and Address of 5% Beneficial Owners, Beneficially Owned
Executive Officers and Directors at December 31, 1996 (1) Percent of Class(2)
- ----------------------------------------- ------------------------ -------------------
<S> <C> <C>
Raymond H. Kurzon 2,328,539 13.7%
President, CEO and Director
3220 North Freeway
Ft. Worth, TX 76111
Charles E. Nuanez 505,000 3.0
3650 N. Grant Creek
Missoula, MT 59802
Wyman Au 866,797 5.1
Director
3419 Ala Ilima St.
Honolulu, HI 96818
Philip B. Smith 250,000 1.5
535 Madison Avenue
New York, NY 10022
Stephen M. Studdert 3,377,167 (3) 17.6
Director
60 East South Temple Street, Suite 1225
Salt Lake City, UT 84111
Roger D. Dudley 3,377,167 (3) 17.6
Director
60 East South Temple Street, Suite 1225
Salt Lake City, UT 84111
Thomas A. Murdock 3,382,517 (4) 17.6
Director
60 East South Temple Street, Suite 1225
Salt Lake City, UT 84111
Joseph Verner Reed 50,000 *
Director
Under Secretary General
United Nations, Room S3045A
New York, N.Y. 10017
Rick D. Nydegger 50,000 *
Director
10217 North Oak Creek Lane
Highland, Utah 84003
SMD LLC 9,681,500 (5) 40.1
60 East South Temple Street, Suite 1225
Salt Lake City, UT 84111
Ballard Investment Company 1,567,381 (6) 9.3
145 South Fairway Drive
North Salt Lake, Utah 84054
Thurgauer Kantonalbank 1,250,000 (7) 7.4
Weinfelden, Switzerland
Tuscan Finance & Trade 1,062,500 (7) 6.3
Austrasse 15
Vaduz, Liechtenstein FL-9490
Officers and Directors as a Group 14,181,837 (8) 56.3% (8)
(9 Persons)
</TABLE>
- ---------------------------------
(1) The number of shares indicated includes the following number of shares
underlying options that currently are exercisable or that become exercisable
at various strike prices within the next sixty (60) days held by each of the
following persons: Raymond Kurzon (150,000 shares), Charles E. Nuanez (100,000
shares), Philip B. Smith (250,000 shares), Wyman Au (125,000 shares), Stephen
M. Studdert (150,000 shares), Thomas A. Murdock (150,000 shares), Roger D.
Dudley (150,000 shares), Joseph Verner Reed (50,000 shares) and Rick D.
Nydegger (50,000 shares).
(2) Percentages rounded to nearest 1/10th of one percent. Except as
indicated in the footnotes below, each of the persons listed exercises sole
voting and investment power over the shares of the Company's common stock
listed for each such person in the table. The percentage of any person's
ownership of issued and outstanding shares is calculated by assuming the
exercise in full of all options, warrants and conversion rights held by such
person without regard to such rights held by others.
(3) Messrs. Dudley, Studdert and Murdock each owns or controls one-third
of the ownership interest of SMD and each is a manager and control person of
SMD. Consequently, their totals 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 WITH
MANAGEMENT AND PRINCIPAL STOCKHOLDERS."
(4) 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), amount indicated includes 5,350 shares owned by Mr. Murdock's
wife which were acquired in open market purchases.
(5) 2,561,000 shares of record are held by SMD. 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.
(6) Includes 900,000 shares issuable upon conversion of a promissory note
purchased by Ballard Investment Company ("BIC") from fonix. BIC exercised the
conversion right on December 31, 1996.
(7) In November and December 1996, the Company undertook a private
placement of up to 5,000,000 shares of common stock. A total of 4,990,500
shares have been purchased by 19 accredited investors at a price of $.80 per
share. Thurgauer Kantonalbank and Tuscan Finance & Trade were the only such
investors purchasing shares in excess of 5% of the issued and outstanding
common stock of the Company.
(8) Eliminates duplicate entries and assumes exercise of all conversion
rights, options, warrants and similar rights held by the officers and
directors.
(9) Fully diluted, based on total issued and outstanding shares of
25,099,244.
ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain Transactions
At August 16, 1996, the Company was indebted to J.R. Bell, a former
officer and Director of the Company, in the amount of $623,000 together with
interest on the outstanding balance at the rate of the bank prime rate plus
one percent. The loans were secured by second liens on real and personal
property of the Company. Mr. Bell died in February 1996 and all obligations
of the Company to Mr. Bell were thereafter owed to Mr. Bell's estate. All
obligations of the Company to the Bell Estate were retired in August 1996 as
described below.
Merlyn W. Dahlin, then an officer and Director of the Company, loaned the
Company money in a series of transactions during fiscal years 1994 and 1995
and previous years. As of September 30, 1995 all sums previously loaned to
the Company had been repaid. Total payments to Mr. Dahlin during fiscal 1995
were approximately $167,000. During 1996 Mr. Dahlin loaned the Company
$20,000, which has been repaid. As of September 30, 1996, the Company was not
indebted to Mr. Dahlin. This sum is being retired by regular monthly payments
to Mr. Dahlin of principal and interest.
In several loan transactions during fiscal years 1994 and 1995, the
Company borrowed money from Wyman Au, a Director of the Company. As of
September 30, 1995, the Company owed Mr. Au $47,746, with interest at the
prime rate plus one percent. As of September 30, 1996, the Company owed Mr.
Au $42,948. The Company is making regular monthly payments to Mr. Au to retire
this obligation.
Terence J. Williams, a former officer, Director, and principal
stockholder of the Company and former President of Dateline, personally
guaranteed an equipment loan from CIT Group. Such loan bears interest at 9.25
percent per annum and is due in January 1997. The Company has agreed to
indemnify Mr. Williams for any liability he incurs as a result of this
guarantee.
The Company leases approximately 2,000 square feet of office space in Fort
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 500,000 shares of preferred stock from the Bell Estate at a price of
$.48 per share (including the 100,000 shares of common stock into which the
preferred stock may be converted). The purchase price is payable in four
installments on February 16, 1997, August 16, 1997, February 16, 1998 and
August 16, 1998. Messrs. Studdert, Murdock and Dudley are also Directors of
the Company and Mr. Dudley is the Chief Financial Officer of the Company.
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.
As of September 30, 1996, the Company was indebted to fonix, a Delaware
corporation of which Messrs. Studdert, Murdock and Dudley are Directors and
executive officers and of which Mr. Reed and Mr. Nydegger are Directors, in
the sum of $272,156 as a result of a series of loan transactions. The first
loan from fonix in the amount of $710,000 was made on May 16, 1996 and the
last loan prior to September 30, 1996, in the amount of $590,000, was made on
July 16, 1996. At July 16, 1996, fonix had loaned the Company a total of
$1,900,000. 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, to
acquire and refurbish drill rigs, acquire inventory and parts necessary to
operate new and existing drill rigs and as operating capital. See "Security
Ownership of Certain Beneficial Owners and Management." Each of these loans
was due upon demand, bore interest at the rate of 12% per annum and was
secured by substantially all of the assets of the Company, except its real
property. On September 30, 1996, the Company paid fonix $1,673,700 in
satisfaction of all loans from fonix except for a balance of $272,156 due and
owing under the first promissory note from the Company to fonix in the amount
of $710,000. Pursuant to the terms of the $710,000 promissory note, all or
part of the indebtedness owed to fonix was convertible at the option of the
holder to 2,366,667 shares of the Company's common stock at the rate of $.30
per share. On December 31, 1996 fonix sold and assigned $270,000 of the
balance due under the $710,000 promissory note to Ballard Investment Company
("BIC"). On December 31, 1996, BIC gave notice to the Company that it had
elected to convert its interest in the $710,000 note into 900,000 shares of
restricted common stock of the Company. Also, on December 31, 1996, the
Company paid fonix the balance of approximately $10,500 due and owing under
the $710,000 promissory note.
On October 29, 1996, fonix made an additional loan of $200,000 to the
Company on the same terms as the loans described above. That loan was paid in
full by the Company on December 24, 1996. 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 or about September 30, 1996, SMD, loaned the Company $1,673,730, which
loan is due on demand, accrues interest at the rate of 12%, and is secured by
all of the assets of the Company and all of the assets of the subsidiaries of
the Company. 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 loan for $1,673,730 arose after fonix requested
payment of all or a substantial part of its loans to the Company, the
principal amount of which loans totaled $1,900,000 at July 16, 1996. The
Company was unable to pay all or a significant part of those loans at the
request of fonix. As a result of the Company's inability to pay the loans or
a substantial part of them, Mr. Studdert, Mr. Murdock and Mr. Dudley agreed to
cause SMD to loan $1,673,730 to the Company, the proceeds of which would be
used by the Company to pay down a substantial portion of the loans to the
Company from fonix. When the loan from SMD to the Company closed, the Company
paid fonix $1,673,730 in satisfaction of a portion of the fonix loans
described above. 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.
In December 1996, after the end of the fiscal year that is the subject of
this report, the Company entered into a management contract with Studdert
Companies Corp. ("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 and will provide investment
banking, investor relations, financial management and strategic planning
services for the Company for a term of five years. 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.
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.
Recent Sales of Unregistered Securities. In November and December 1996,
the Company undertook a private placement of up to 5,000,000 shares of common
stock to accredited investors as that term is defined in Item 501 of
Regulation D under the Securities Act of 1933, as amended (the "Securities
Act"). The shares were to be sold pursuant to exemptions from the
registration requirements of the Securities Act afforded to such offers and
sales under Section 4(b) and Regulation D, promulgated under the Securities
Act. A total of 4,990,500 shares were sold to approximately 19 accredited
investors at $.80 per share. Gross proceeds of the offering as of such date
were $3,992,400. The Company paid a commission fee in stock and cash totaling
10% of $3,142,000 of the proceeds to Enhanced Invest Foundation ("EIF"), a
Liechtenstein foundation, in connection with its efforts in assisting the
Company in placing some of the securities in the private offering. The
Company also paid SCC a fee of $250,000 for its services in structuring the
offering and for arranging for the services of EIF. The shares sold in the
offering are "restricted" shares as defined by 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. 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.
ITEM 13: EXHIBITS AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
Index To Financial Statements F-1
Independent Auditors Report F-2
Report Of Independent Accountants F-3
Balance Sheets At September 30, 1996 and 1995 F-4
Statements Of Operations For The Fiscal Years Ended
September 30, 1996 and 1995 F-5
Statements Of Changes In Shareholders' Equity For
The Fiscal Years Ended September 30, 1996 and 1995 F-6
Statements Of Cash Flows For The Fiscal Years Ended
September 30, 1996 and 1995 F-7, F-8
Notes To Financial Statements F-9, F-22
(a)(2) Exhibits.
Exhibit Index
Exhibit No. Description
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, Sled April 8, 1994 (incorporated by
reference from Exhibit 3.2 of Registrant's Quarterly Report on Form IO-QSB for
the Quarterly Period Ended March 31, 1994).
4.1 Specimen Common Stock Certificate (incorporated by reference to Exhibit
4.1 of Registrant's Registration Statement on Form S-1 filed May 5, 1993).
4.2 Specimen of stock purchase warrant issued to SMD September 30, 1996.
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 Pledge Agreement between Registrant and J.R. Bell, dated March 9, 1993
(incorporated by reference from Exhibit 10.2 of Registrant's Registration
Statement on Form S-1 filed May 5, 1993).
10.3 Pledge Agreement between Registrant and J.R. Bell, dated March 9, 1993
(incorporated by reference from Exhibit 10.3 of Registrant's Registration
Statement on Form S-1 filed May 5, 1993).
10.4 Pledge Agreement-between Registrant and Merlyn W. Dahlin, dated March 9,
1993 (incorporated by reference from Exhibit 10.4 of Registrant's Registration
Statement on Form S-1 filed May 5, 1993).
10.5 Pledge Agreement between Registrant and Merlyn W. Dahlin, dated April
14, 1993 (incorporated by reference from Exhibit 10.5 of Registrant's
Registration Statement on Form S-1 filed May 5, 1993).
10.6 Promissory Note, face amount $200,000, dated March 9, 1993 (incorporated
by reference from Exhibit 10.6 of Registrant's Registration Statement on Form
S-1 filed May 5, 1993).
10.7 Promissory Note, face amount of $320,000 dated March 14, 1993
(incorporated by reference from Exhibit 10.7 of Registrant's Registration
Statement on Form S-1 filed May 5, 1993).
l0.8 Amendment No. 1 to Pledge Agreement dated March 9, 1993, executed
November 18, 1993 (incorporated by reference from Exhibit 10.1 of Registrant's
Annual Report on Form 10-KSB for the Fiscal Year Ended September 30, 1993).
10.9 Amendment No. 1 to Pledge Agreement dated March 9, 1993, executed
November 18, 1993 (incorporated by reference from Exhibit 10.2 of Registrant's
Annual Report on Form 10-KSB for the Fiscal Year Ended September 30, 1993).
10.10 Amendment No. 1 to Pledge Agreement dated March 9, 1993, executed
November 18, 1993 (incorporated by reference from Exhibit 10.3 of Registrant's
Annual Report on Form 10-KSB for the Fiscal Year Ended September 30, 1993).
10.11 Amendment No. 1 to Pledge Agreement dated April 14, 1993, executed
November 18, 1993 (incorporated by reference from Exhibit 10.4 of Registrant's
Annual Report on Form 10-KSB for the Fiscal Year Ended September 30, 1993).
10.12 Pledge Agreement dated August 13, 1993, as amended November 18, 1993,
and Promissory Note (incorporated by reference from Exhibit 10.5 of Registrant's
Annual Report on Form 10-KSB for the Fiscal Year Ended September 30, 1993).
10.13 Pledge Agreement dated September 14, 1993, as amended November 18, 1993,
and Promissory Note (incorporated by reference from Exhibit 10.6 of
Registrant's Annual Report on Form 10-KSB for the Fiscal Year Ended September
30, 1993).
10.14 Pledge Agreement dated September 27, 1993, as amended November 18, 1993,
and Promissory Note (incorporated by reference from Exhibit 10.7 of
Registrant's Annual Report on Form 10-KSB for the Fiscal Year Ended September
30, 1993).
10.15 Pledge Agreement dated October 11, 1993, as amended November 18, 1993,
and Promissory Note (incorporated by reference from Exhibit 10.8 of
Registrant's Annual Report on Form 10-KSB for the Fiscal Year Ended September
30, 1993).
10.16 Pledge Agreement dated October 28, 1993, between Registrant and J.R.
Bell and Promissory Note (incorporated by reference from Exhibit 10.9 of
Registrant's Annual Report on Form 10-KSB for the Fiscal Year Ended September
30, 1993).
10.17 Pledge Agreement dated November 18, 1993, between Registrant and J.R.
Bell (incorporated by reference from Exhibit 10.10 of Registrant's Annual
Report on Form 10-KSB for the Fiscal Year Ended September 30, 1993).
10.18 Pledge Agreement dated November 18, 1993, between Registrant and J.R.
Bell (incorporated by reference from Exhibit 10.11 of Registrant's Annual
Report on Form 10-KSB for the Fiscal Year Ended September 30, 1993).
10.19 Pledge Agreement dated November 18, 1993, between Registrant and Merlyn
W. Dahlin (incorporated by reference from Exhibit 10.12 of Registrant's Annual
Report on Form 10-KSB for the Fiscal Year Ended September 30, 1993).
10.20 Promissory Note, with the Company as Maker, dated April 25, 1994
(incorporated by reference from Exhibit 10.1 of Registrant's Quarterly Report
on Form 10-QSB for the Quarterly Period Ended March 31, 1994).
10.21 Commercial Pledge Agreement between the Company and First Interstate
Bank of Texas N.A., dated April IS, 1994 (incorporated by reference from Exhibit
10.2 of Registrant's Quarterly Report on Form 10-QSB for the Quarterly Period
Ended March 31, 1994).
10.22 Note Purchase Agreement between J.R. Bell and First Interstate Bank of
Texas N.A. (incorporated by reference from Exhibit 10.3 of Registrant's
Quarterly Report on Form 10-QSB for the Quarterly Period Ended March 31,
1994).
10.23 Asset Purchase Agreement among SAMOHT, Inc., Kel-Lite Industries, Inc.,
Cecil R. Spillers and John R. Thomas, dated April 8, 1994 (incorporated by
reference from Exhibit 10.4 of Registrant's Quarterly Report on Form 10-QSB
for the Quarterly Period Ended March 31, 1994).
10.24 Commercial Lease between Kel-Lite Industries, Inc. and (J.B. Land Co.,
dated April 14, 1994 (incorporated by reference from Exhibit 10.5 of
Registrant's Quarterly Report on Form 10-QSB for the Quarterly Period Ended
March 31, 1994).
10.25 Promissory Note, dated July 11, 1994, $500,000 face amount, with the
Company as Maker (incorporated by reference from Exhibit 10.2 of Registrant's
Quarterly Report on Form 10-QSB for the Quarterly Period Ended June 30, 1994).
10.26 Pledge Agreement, dated July 11, 1994, between the Company and J.R Bell
(incorporated by reference from Exhibit 10.3 of Registrant's Quarterly Report
on Form 10-QSB for the Quarterly Period Ended June 30, 1994).
10.27 Settlement Indemnification and Confidentiality Agreement dated August
24, 1994 among the Company, Dateline Drilling, Inc., Terence J. Williams and
Linda Williams (incorporated by reference from Exhibit 10.1 of Registrant's
Current Report on Form 8-K reporting an event occurring on August 26, 1994).
10.28 Promissory Note dated August 22, 1994, $625,000 face amount, with the
Company as maker (incorporated by reference from Exhibit 10.3 of Registrant's
Current Report on Form 8-K reporting an event occurring on August 26, 1994).
10.29 Promissory Note dated August 22, 1994, $625,000 face amount, with the
Company as maker (incorporated by reference from Exhibit 10.4 of Registrant's
Current Report on Form 8-K reporting an event occurring on August 26, 1994).
10.30 Pledge Agreement dated August 22, 1994 between the Company and J.
Robert Bell (incorporated by reference from Exhibit 10.5 of Registrant's Current
Report on Form 8-K reporting an event occurring on August 26, 1994).
10.31 Pledge Agreement dated August 22, 1994 between the Company and JoAnn
Bell (incorporated by reference from Exhibit 10.6 of Registrant's Current Report
on Form 8-K reporting an event occurring on August 26, 1994).
10.32 Option Contract dated August 22, 1994 between the Company and J.
Robert Bell (incorporated by reference from Exhibit 10.7 of Registrant's Current
Report on Form 8-K reporting an event occurring on August 26, 1994).
10.33 Option Contract dated August 22, 1994 between the Company and JoAnn
Bell (incorporated by reference from Exhibit 10.8 of Registrant's Current Report
on Form 8-K reporting an event occurring on August 26, 1994).
10.34 Notice of Exercise of Option by J. Robert Bell and JoAnn Bell dated
September 23, 1994 (incorporated by reference from Exhibit 10.34 of
Registrant's Annual Report on Form 10-KSB for the year ended September 30,
1994).
10.35 Amendment To Notice of Exercise of Option by J. Robert Bell and JoAnn
Bell dated November 15, 1994 (incorporated by reference from Exhibit 10.35 of
Registrant's Annual Report on Form 10-KSB for the year ended September 30,
1994).
10.36 Consulting Agreement dated August 15, 1994 between the Company and Sage
Capital Management, Inc. ("Sage") (incorporated by reference from Exhibit
10.36 of Registrant's Annual Report on Form 10-KSB for the year ended
September 30, 1994).
10.37 Exclusive Agency Agreement dated August 15, 1994 between the Company
and Sage (incorporated by reference from Exhibit 10.37 of Registrant's Annual
Report on Form 10-KSB for the year ended September 30, 1994).
10.38 Non-binding Letter of Intent dated December 27, 1994 between the Company
and Southwest Soil Remediation, Ltd. (incorporated by reference from Exhibit
10.38 of Registrant's Annual Report on Form 10-KSB for the year ended
September 30, 1994).
10.39 Interim Agreement dated February 16, 1994 between Pacific Rainier De
Mexico, S.A. de C.V. ('Pacific") and Beloro, S.A. de C.V. ("Beloro"), and
Letter Agreement dated November 23, 1994 between Pacific and Beloro
(incorporated by reference from Exhibit 10.39 of Registrant's Annual Report on
Form 10-KSB for the year ended September 30, 1994).
10.40 Form of Subscription Agreement for Private Placement in November and
December 1996.
10.41 Form of Registration Rights Agreement between the Company and SMD
L.L.C. dated September 30, 1996.
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).
(b) Reports On Form 8-K.
During the fourth quarter of the fiscal year ended September 30, 1996, on
or about September 9, 1996, the Company filed a Current Report on Form 8-K to
report a change in control resulting from the purchase of shares by SMD and
the other transactions described in this Report.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
K.L.S. ENVIRO RESOURCES, INC.
/s/ Raymond H. Kurzon
-----------------------------
Raymond H. Kurzon, President
Date: January 13, 1997
/s/ Roger D. Dudley
-----------------------------
Principal Financial Officer
Date:January 13, 1997
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
/s/ Raymond H. Kurzon
- --------------------------------
Raymond H. Kurzon, Director and President
Date: January 13, 1997
/s/ Wyman Au
- --------------------------------
Wyman Au, Director
Date: January 13, 1997
- --------------------------------
Charles E. Nuanez, Director
Date:
- --------------------------------
Philip B. Smith, Director
Date:
/s/ Thomas A. Murdock
- --------------------------------
Thomas A. Murdock, Director
Date: January 13, 1997
/s/ Stephen M. Studdert
- --------------------------------
Stephen M. Studdert, Director
Date: January 13, 1997
/s/ Roger D. Dudley
- ------------------------------
Roger D. Dudley, Director
Date: January 13, 1997
/s/ Rick D. Nydegger
- --------------------------------
Rick D. Nydegger, Director
Date: January 13, 1997
- --------------------------------
Joseph Verner Reed, Director
Date:
<PAGE>
K. L. S. ENVIRO RESOURCES, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL REPORT
SEPTEMBER 30, 1996
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditor's Report . . . . . . . . . . . . . . . . . . . . . .1
FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 1996 and 1995. . . . . .2
Consolidated Statements of Operations
for the Years Ended September 30, 1996 and 1995. . . . . . . . . . . . .3
Consolidated Statements of Shareholders' Equity
for the Years Ended September 30, 1996 and 1995. . . . . . . . . . . . .4
Consolidated Statements of Cash Flows
for the Years Ended September 30, 1996 and 1995. . . . . . . . . . . . .5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . .7
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
K. L. S. Enviro Resources, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of K. L. S. Enviro
Resources, Inc. and Subsidiaries (the Company) as of September 30, 1996 and
1995, and the related consolidated statements of operations, shareholders'
equity, and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
September 30, 1996 and 1995, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
/s/ Weaver and Tidwell, L.L.P.
WEAVER AND TIDWELL, L.L.P.
Fort Worth, Texas
December 31, 1996
2832
<PAGE>
K. L. S. ENVIRO RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS
1996 1995
------------ -------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 300,767 $ 174,479
Investment securities - 258,750
Accounts receivable - trade, net of allowance for
doubtful accounts $123,402 and $128,402, respectively 1,050,371 528,768
Other receivables 13,274 15,524
Inventory 483,938 708,872
Prepaid expense 5,975 5,655
------------ ------------
Total current assets 1,854,325 1,692,048
Property, Plant and Equipment, net 2,604,510 1,665,128
Other Assets
Intangible assets, net of accumulated amortization
$ 70,014 and $65,103, respectively 49,065 80,670
Deposits and other 20,777 22,101
------------ ------------
69,842 102,771
------------ ------------
Total Assets $ 4,528,677 $ 3,459,947
============ ============
</TABLE>
<PAGE>
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1995-Continued
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
1996 1995
------------ -------------
<S> <C> <C>
Current Liabilities
Notes payable - banks $ - $ 302,329
Notes payable - related parties 1,988,622 690,746
Current maturities of long-term debt 114,219 150,314
Accounts payable 412,487 674,301
Accrued expenses and other current liabilities 181,128 231,067
Deferred revenue - 29,616
Accrued dividends payable 7,500 66,615
------------ ------------
2,703,956 2,144,988
Long-term Debt 270,995 455,644
------------ ------------
2,974,951 2,600,632
------------ ------------
Commitments and Contingencies (Notes 10 and 12) -
Shareholders' Equity
Cumulative convertible preferred stock,
Series A and B, $.0001 par value; 1,000,000
shares authorized; 100,000 and 167,500 shares
issued and outstanding respectively; $5.00 stated value 10 17
Common stock, $.0001 par value; 50,000,000 shares
authorized; 10,931,497 and 8,947,494 shares issued,
respectively 1,093 894
Additional paid-in capital 6,101,057 4,417,724
Accumulated deficit ( 4,505,721) ( 3,545,782)
Foreign currency translation adjustments ( 4,213) ( 4,213)
Unrealized gain on securities available-for-sale - 29,175
------------ ------------
1,592,226 897,815
Treasury stock - common shares held in the treasury,
at cost (38,500 shares in 1996 and 1995) ( 38,500) ( 38,500)
------------ ------------
1,553,726 859,315
------------ ------------
Total Liabilities and Shareholders' Equity $ 4,528,677 $ 3,459,947
============ ============
</TABLE>
The Notes to Consolidated Financial Statement are
an integral part of these statements.
<PAGE>
K. L. S. ENVIRO RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended September 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Net Sales and Revenues
Drilling and repair service revenues 4,424,693 3,019,597
Cost of drilling and repair services 2,447,843 1,836,671
------------ -----------
Gross Profit 1,976,850 1,182,926
----------- -----------
Cost and Expenses
Salaries, wages and related costs 604,351 506,636
Legal and professional fees 265,232 363,191
Rents 65,361 72,564
Repairs and maintenance 27,048 8,974
Taxes, licenses and permits 54,608 30,729
Advertising 9,842 16,928
Travel and lodging 98,961 88,402
Consulting 106,701 124,837
Exploration costs 4,203 324,931
Other operating expenses 284,299 282,168
Depreciation and amortization 339,086 271,740
----------- -----------
Total cost and expenses 1,859,692 2,091,100
----------- -----------
Income (loss) from operations 117,158 ( 908,174)
Other Income (Expenses)
Interest expense ( 311,303) ( 144,835)
Other financing cost ( 1,024,322) -
Interest and other income, net 14,254 21,214
Gain on sale of investment securities 99,289 209,943
Gain (loss) on disposal of assets 25,158 ( 17,733)
Gain (loss) from foreign currency translation ( 9,544) 17,191
----------- -----------
Loss before income taxes ( 1,089,310) ( 822,388)
Income tax benefit - -
----------- -----------
Loss from continuing operations ( 1,089,310) ( 822,388)
Discontinued operations:
Loss from operations of discontinued segment ( 34,511) ( 363,462)
Gain on sale of discontinued segment 31,185 -
----------- -----------
( 3,326) ( 363,462)
----------- -----------
Loss before extraordinary item ( 1,092,636) ( 1,185,850)
Extraordinary Item, gain on forgiveness of debt 172,823 -
----------- -----------
Net Loss ($ 919,813) ($1,185,850)
=========== ===========
</TABLE>
<PAGE>
K. L. S. ENVIRO RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended September 30, 1996 and 1995-Continued
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Loss per weighted-average common share outstanding
Loss from continuing operations ($ .12) ($ .09)
Loss from operations of discontinued segment ( .00) ( .04)
Gain on sale of discontinued segment ( .00) -
----------- -----------
Loss before extraordinary item ($ .12) ($ .13)
Extraordinary item ( .02) -
----------- -----------
Net loss ($ .10) ($ .13)
=========== ===========
Weighted-average number of common shares outstanding 9,345,628 8,821,260
=========== ===========
</TABLE>
The Notes to Consolidated Financial Statements are
an integral part of these statements.
<PAGE>
K. L. S. ENVIRO RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended September 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
-------------- -------------
<S> <C> <C>
Cash Flows from Operating Activities
Net loss ( $ 919,813) ($ 1,185,850)
Adjustments to reconcile net loss to
net cash used in operating activities:
Discontinued operations 34,511 343,915
Common stock for services 163,665 33,768
Depreciation and amortization 339,086 271,741
Other financing cost 1,024,322
Gain on sale of investment securities ( 99,289) ( 209,943)
Gain on sale of discontinued segment ( 31,185) -
Loss on disposal of property, plant
and equipment ( 25,158) 17,733
Translation gain on foreign currency ( 9,544) ( 17,191)
Debt issued in litigation settlement - 30,000
Changes in:
Accounts and notes receivable ( 619,418) ( 90,154)
Inventory ( 112,502) ( 38,787)
Income tax receivable - 81,649
Prepaid expenses ( 4,516) ( 303)
Other assets 19,972 50,168
Accounts payable ( 47,810) 228,355
Accrued expenses ( 15,815) 82,972
Deferred revenue ( 40,742) 24,576
------------- ------------
Net cash used in operating activities ( 344,466) ( 377,351)
------------- ------------
Cash Flows from Investing Activities
Proceeds from sale of investment securities 328,864 659,905
Purchase of property, plant and equipment ( 1,314,204) ( 95,995)
Proceeds from sale of equipment 20,250 2,404
Proceeds from sale of discontinued segment 184,042 -
Advances to discontinued operations - ( 142,120)
------------- -----------
Net cash (used) provided by
investing activities ( 781,048) 424,194
------------- -----------
Cash Flows from Financing Activities
Net change in bank notes ( 196,505) ( 7,655)
Principal payments on long-term debt ( 249,588) ( 113,797)
Net (payments) advances (to) from shareholders 1,497,876 ( 71,254)
Sale of common stock, net of offering cost 200,000 150,000
Dividends paid - ( 6,750)
------------- -----------
Net cash provided (used) in
financing activities 1,251,783 ( 49,456)
Effect of exchange rate changes on cash 19 ( 11)
------------- -----------
Increase (decrease) in cash 126,288 ( 2,624)
Cash at beginning of period 174,479 177,103
------------- -----------
Cash at end of period $ 300,767 $ 174,479
============= ===========
</TABLE>
<PAGE>
K. L. S. ENVIRO RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
for the years ended September 30, 1996 and 1995
<TABLE>
<CAPTION>
Preferred Stock Common Stock
----------------------- ------------------------- Paid-in
Shares Amount Shares Amount Capital
--------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Balances at September 30, 1994 167,500 $ 17 8,743,486 $ 874 $ 4,233,976
Cumulative effect of change
in accounting principles
as of 10/1/94 - - - - -
Sale of common stock
to private placement - - 150,000 15 149,985
Exchange of stock for
services performed - - 54,008 5 33,763
Dividends on
preferred stock - - - - -
Net loss for the year - - - - -
Changes in unrealized gain on
securities available-for-sale - - - - -
--------- ----------- ------------ ----------- -------------
Balances at September 30, 1995 167,500 17 8,947,494 894 4,417,724
Sale of common stock
to private placements - - 500,000 50 199,950
Conversion of preferred
stock to common stock ( 67,500) ( 7) 337,500 34 ( 27)
Exchange of common stock
for services performed - - 585,781 59 1,187,929
Exchange of common
stock for debt - - 560,722 56 226,617
Dividends on
preferred stock - - - - -
Forgiveness of dividends - - - - 68,864
Net loss for the year - - - - -
Changes in unrealized gain on
securities available-for-sale - - - - -
--------- ----------- ------------ ----------- -------------
Balances at September 30, 1996 100,000 $ 10 10,931,497 $ 1,093 $ 6,101,057
========= =========== ============ =========== =============
</TABLE>
<PAGE>
The Notes to Consolidated Financial Statements are
an integral part of these statements.
K. L. S. ENVIRO RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
for the years ended September 30, 1996 and 1995--Continued
<TABLE>
<CAPTION>
Unrealized
Gains on
Foreign Securities
Accumulated Currency Available Treasury
Deficit Translation for-Sale Stock Total
-------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balances at September 30, 1994 ($ 2,309,682) ($ 4,213) $ - ($ 38,500) $ 1,882,472
Cumulative effect of change
in accounting principles
as of 10/1/94 - - 446,517 - 446,517
Sale of common stock
to private placement - - - - 150,000
Exchange of stock for
services performed - - - - 33,768
Dividends on
preferred stock ( 50,250) - - - ( 50,250)
Net loss for the year ( 1,185,850) - - - ( 1,185,850)
Changes in unrealized gain on
securities available-for-sale - - ( 417,342) - ( 417,342)
-------------- ------------- ------------- ------------- -------------
Balances at September 30, 1995 ( 3,545,782) ( 4,213) 29,175 ( 38,500) 859,315
Sale of common stock
to private placements - - - - 200,000
Conversion of preferred
stock to common stock - - - - -
Exchange of common stock
for services performed - - - - 1,187,988
Exchange of common
stock for debt - - - - 226,673
Dividends on
preferred stock ( 40,126) - - - ( 40,126)
Forgiveness of dividends - - - - 68,864
Net loss for the year ( 919,813) - - - ( 919,813)
Changes in unrealized gain on
securities available-for-sale - - ( 29,175) - ( 29,175)
-------------- ------------- ------------- ------------- -------------
Balances at September 30, 1996 ($ 4,505,721) ($ 4,213) - ($ 38,500) $ 1,553,726
============== ============= ============= ============= =============
</TABLE>
The Notes to Consolidated Financial Statements are
an integral part of these statements.
<PAGE>
K. L. S. ENVIRO RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended September 30, 1996 and 1995 - continued
<TABLE>
<CAPTION>
1996 1995
-------------- -------------
<S> <C> <C>
Supplemental disclosures of interest paid:
Continuing operations:
Interest paid 64,522 $ 65,247
Discontinued operations:
Interest paid - 11,228
Supplemental schedule of noncash
investing and financing activities:
Continuing operations:
Cumulative dividends not paid 40,126 $ 50,250
Acquisition of equipment for debt ( 56,667) ( 12,731)
Unrealized gain on investment securities - 29,175
Issuance of stock for debt 226,673 -
Forgiveness of dividends 68,864 -
Use of inventory for fixed assets 21,050 -
Discontinued operations:
Disposal of equipment on
settlement of accounts payable - ( 12,731)
Acquisition of equipment for debt - 36,901
</TABLE>
The Notes to Consolidated Financial Statements are
an integral part of these statements.
<PAGE>
K.L.S. ENVIRO RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Business and Organization
K. L. S. Enviro Resources, Inc. (KLS) and Subsidiaries, was
incorporated in the State of Nevada on January 15, 1993 for the
purpose of engaging in the exploration, production and sale of gold
and for the acquisition of businesses active in the general industry
of minerals mining and processing.
As of September 30, 1996, KLS had six wholly owned subsidiaries:
Dateline Drilling, Inc. (a Montana corporation) (Dateline) is in the
business of providing exploration reverse circulation drilling
services to other companies involved in mineral exploration and
development; K.L.S. Environmental, Inc. (a Nevada corporation)
(KLSEI), formed for the purpose of engaging in environmental
remediation; K.L.S. Co., Inc. (a Nevada corporation) (KLS Co), formed
for the purpose of hydraulic systems repair; Dateline International,
S.A. de C.V. (a Coahuila, Mexico corporation) (DIMSA), engaged in
exploration drilling in Mexico; KLS International, Inc. (a Nevada
corporation), (KLSI), formed as a holding company for operations in
Mexico; and Beloro, S.A. de C.V. (Beloro), (a Mexico City, Mexico
corporation), formed to carry out activities related to mining and
drilling projects in Mexico. The operations of KLSEI were abandoned
during 1995. In addition, Kel-Lite, a former subsidiary was sold
February 1, 1996, See note 14 for discussion of the discontinued
operations.
Principles of Consolidation
The accompanying consolidated financial statements include all the
accounts of KLS, and its wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in
consolidation. The consolidated group is referred to as the
"Company".
Cash and Temporary Investments
The Company considers short-term investments with maturities of three
months or less when purchased to be cash equivalents. Cash
equivalents are stated at cost, which approximates market value.
The Company maintains its cash in bank deposit accounts which, at
times, may exceed federally insured limits. The Company has not
experienced any losses in such accounts. The Company believes it is
not exposed to any significant credit risk on cash.
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued:
Investment Securities
The Company's investment securities are classified as available for
sale. Accordingly, unrealized gains and losses and the related
deferred income tax effects are excluded from earnings and reported
in a separate component of shareholders' equity. Realized gains or
losses are computed based on the average cost method of the
securities sold.
Accounts and Notes Receivable
The Company performs ongoing credit evaluations of its customers'
financial condition and extends credit to virtually all of its
customers on an uncollateralized basis. Customers are headquartered
throughout the United States, Mexico and Canada. Because of the
credit risk involved, management has provided an allowance for
doubtful accounts which reflects its opinion of amounts which will
eventually become uncollectible.
Inventory
Inventory consists of two components: (1) raw materials, work in
process and finished goods related to the Company's manufacturing
subsidiary and (2) consumable supplies and repair parts for mobile
exploration reverse circulation sample drilling rigs, hydraulic
components, and other related support equipment and vehicles.
Inventory is valued at the lower of cost, using the first-in, first-
out method, or market. Cost includes material, labor and
manufacturing overhead cost.
Property, Plant and Equipment
Property, plant and equipment are recorded at historical cost. These
costs are depreciated over the estimated useful lives of the
individual assets using the straight-line method.
Significant additions from periodic renovations of drilling rigs are
capitalized and the related unamortized basis at such time is charged
to repairs and maintenance expense. Normal repairs and maintenance
items are charged to expense as incurred. Gains and losses from
disposition of property and equipment are recognized as incurred and
are included in operations.
The Company, as lessee, entered into a capital lease during 1995 and
such lease is considered to be an installment purchase for accounting
presentation, and is included in property, plant and equipment. The
related lease obligation, less current installments, is included in
long-term debt in the accompanying balance sheets.
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued:
Intangible Assets
Intangible assets consist of organizational costs, patents, and a
covenant not to compete.
Organization costs are amortized over five to twenty year periods on
a straight-line basis. The amount of these costs capitalized as of
September 30, 1996 and 1995 was $81,517, before related accumulated
amortization of $ 52,513 and $30,924, respectively.
Patents obtained for the design and manufacture of flashlights
totaled $8,492 for the year ended September 30, 1995, before
accumulated amortization of $708. Amortization is over the 17 year
life of the patents.
The covenant not to compete given by a former owner of Dateline is
valued at $55,764, before accumulated amortization of $35,702 and
$33,471 at September 30, 1996 and 1995, respectively, and is being
amortized over the 25 year life of the covenant on a straight-line
basis.
Revenue Recognition
The Company recognizes revenues related to drilling and other related
services under the respective terms of each drilling contract,
generally on a "per foot drilled" basis as periodically billed to the
customer. As of September 30, 1996 and 1995, no significant revenues
were attributable to either KLS, KLSEI or KLSI. Revenues
attributable to KLS Co are recognized at the point of sale.
Mineral Exploration
Mineral exploration expenditures are charged to income as incurred.
Expenditures incurred on properties identified as having development
potential are deferred on a project basis until the viability of the
project is determined. If a project is abandoned, the accumulated
project costs are charged to operations in the year in which the
determination is made. Costs associated with economically viable
projects are depreciated and amortized in accordance with the
policies described above. There are no costs capitalized as of
September 30, 1996 and 1995.
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued:
Income Taxes
The Company has adopted the liability method of accounting for income
taxes in accordance with Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" (SFAS No. 109). Deferred
income taxes are recognized for temporary differences between
financial statement and income tax bases of assets and liabilities
and net operating loss carryforwards for which income tax benefits
will be realized in future years.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Loss Per Common Share
Loss per share has been computed by dividing net loss by the weighted
average number of shares of common stock outstanding during the year.
Reclassifications
Certain amounts have been reclassified from previously presented
financial statements to conform with the September 30, 1996
presentation.
NOTE 2. INVESTMENT SECURITIES
Equity securities at September 30 are as follows:
1996 1995
------------- -----------
Cost $ - $ 229,575
Market value at balance sheet date - 258,750
Unrealized gains - 29,175
<PAGE>
NOTE 3. INVENTORY
Major classes of inventories are as follows:
1996 1995
-------------- ------------
Consumable supplies $ 483,938 $ 384,568
Raw materials - 314,842
Finished goods - 9,462
-------------- ------------
$ 483,938 $708,872
============== ============
NOTE 4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at September 30:
1996 1995
--------------- ---------------
Machinery and equipment $ 2,763,188 $ 1,727,526
Transportation equipment 433,514 215,962
Buildings and improvements 493,066 518,977
Furniture and fixtures 140,422 154,178
--------------- ---------------
3,830,190 2,616,643
Accumulated depreciation ( 1,375,680) ( 1,101,515)
--------------- ---------------
2,454,510 1,515,128
Land 150,000 150,000
--------------- ---------------
Property, plant and equipment, net $ 2,604,510 $1,665,128
=============== ===============
At September 30, 1995, property, plant and equipment includes property
with a cost of $36,901 and accumulated depreciation of $5,989 obtained
under a capital lease. Additionally, at September 30, 1996 and 1995,
property includes $150,000 and $ 223,843, respectively, of net assets held
for sale.
Total depreciation expense for the years ended September 30, 1996 and 1995
was $328,310 and $290,763, respectively.
<PAGE>
NOTE 5. NOTES PAYABLE - BANKS
Notes payable to banks consist of the following at September 30:
1996 1995
-------------- ------------
Note payable to bank,
retired February 1996. $ - $ 100,000
$250,000 revolving line of credit,
retired February 1996. - 180,000
Note payable to vendor, assumed by
purchaser of Kel-Lite, retired
February 1996. - 22,329
--------------- ------------
$ - $ 302,329
=============== ============
NOTE 6. NOTES PAYABLE TO RELATED PARTIES
Listed below are related party notes payable at September 30:
1996 1995
-------------- -------------
Notes payable to shareholder,
retired August 1996. $ - $ 623,000
Notes payable to shareholder,
interest at prime plus 1%, due
on demand, collateralized by
Dateline's accounts receivable. 15,000 15,000
Notes payable to shareholder,
interest at prime plus 1%, due
on demand, collateralized by
KLS Co.'s accounts receivable. 27,948 32,746
Notes payable to shareholder,
retired February 1996. - 20,000
<PAGE>
NOTE 6. NOTES PAYABLE TO RELATED PARTIES - continued
1996 1995
-------------- -------------
Notes payable to related company,
interest at 12% due on demand,
collateralized by all assets
except real estate 271,944 -
Notes payable to related company,
interest at 12% due on demand,
collateralized by all assets,
except real estate (See Note 17) 1,673,730 -
-------------- -------------
$ 1,988,622 $ 690,746
============== =============
The notes payable to a related companies are related through common
stockholders and officers. The debt with a September 30, 1996 balance of
$271,944 is convertible to common stock at $.30 per share.
Related party interest expense for the years ended September 30, 1996 and
1995 was $109,922 and $ 68,332, respectively. Unpaid interest to related
parties of $3,167 and $111,432 is included in accrued expenses at
September 30, 1996 and 1995, respectively.
NOTE 7. LONG-TERM DEBT
Long-term debt consists of the following at September 30:
1996 1995
-------------- --------------
Installment loan payable to finance
company; interest at 8.15%; payable
in aggregate monthly installments of
$15,043, including interest; due
February 1997; collateralized by
drilling equipment and office
furniture and equipment. $ 72,991 $ 197,858
Installment loan payable to a
shareholder, interest at 9.25%;
payable in monthly installments of
approximately $3,297, including
interest; due February 2003;
collateralized by property. 234,225 341,499
Note payable to an individual;
interest at 10%; payable in monthly
installments of $968, including
interest; due April 1998;
guaranteed by KLS. 16,952 26,349
<PAGE>
NOTE 7. LONG-TERM DEBT - continued
1996 1995
-------------- --------------
Installment loan payable to finance
company; interest at 9.75%; payable
in monthly installments of $265,
including interest; due October
1999; collateralized by vehicle. 8,447 10,310
Installment loan payable to credit
institution, interest at 9.75%,
payable in monthly installments of
$434, including interest, due
January 2000, collateralized by
vehicle 14,371 -
Installment loan payable to bank,
interest at 9.50%, payable in
monthly installments of $379,
including interest, due July 2001,
collateralized by vehicle 17,437 -
Installment loan payable to credit
institution, interest at 9.75%,
payable in monthly installments of
$543, including interest, due July
2000, collateralized by vehicle 20,791 -
Capital lease obligation - 29,942
------------- ------------
Total long-term debt 385,214 605,958
Current maturities ( 114,219) ( 150,314)
------------- ------------
Long-term portion $ 270,995 $ 455,644
============= ============
Future maturities of long-term debt for years ended September 30 are as
follows:
Year ending
1997 $ 114,219
1998 44,643
1999 39,643
2000 35,285
2001 30,427
Thereafter 120,997
-------------
$ 385,214
=============
NOTE 8. INCOME TAXES
Due to the provisions of SFAS No. 109, the Company is not eligible to
recognize any income tax benefits. Accordingly, no current or deferred
income tax benefits have been recorded for the years ended September 30,
1996 and 1995.
The Company's income tax benefit for the years ended September 30 differed
from the statutory federal rate of 34% as follows:
<TABLE>
<CAPTION>
1996 1995
---------------------- ------------------------
Amount Percent Amount Percent
----------- --------- -------------- ---------
<S> <C> <C> <C> <C>
Statutory rate applied to
loss from continuing
operations before income
taxes ($370,365) (34.00%) ($ 279,612) (34.00%)
Increase (decrease) in in-
come taxes resulting from:
State income taxes, net
of federal tax benefit - - - -
Other ( 19,625) ( 1.80 ) ( 9,472) ( .80 )
Net operating loss not
utilized 389,990 35.80 289,084 34.80
----------- --------- -------------- --------
Total income tax
expense (benefit) $ - - % $ - - %
=========== ========= =============== ========
</TABLE>
The tax effects of significant items comprising of the Company's
continuing operations net deferred tax liability as of September 30 under
SFAS No. 109, are as follows:
1996 1995
------------- --------------
Taxable differences:
Depreciation $ 17,110
--------------
Deductible differences:
Net operating losses ( 1,073,506)
Other ( 114,990)
--------------
Total deductible differences ( 1,188,496)
Less valuation allowance 1,171,386
--------------
Net deductible differences ( 17,110)
--------------
Total deferred income taxes $ -
==============
The Company has available as of September 30, 1996, net operating tax loss
carryforwards of approximately $4,100,000, some of which has been used to
reduce the Company's deferred income taxes payable. These carryforwards
expire beginning in 2008 except for $427,209 of the loss which expires
beginning in 2004.
NOTE 9. CAPITAL STOCK TRANSACTIONS
During the years ended September 30, 1996 and 1995, the Company sold
500,000 and 150,000 shares, respectively, of unregistered common stock at
$.40 and $1.00 per share, respectively.
During the years ended September 30, 1996 and 1995, the Company issued
325,000 and 525 shares, respectively, of its unregistered common stock for
services rendered by a shareholder. The Company also issued 260,781 and
53,483 shares, respectively, of unregistered common stock to employees,
for bonuses and other services.
The Company is to issue dividends on Series A and Series B preferred stock
on a quarterly basis at a rate of 6% per annum. Dividends on preferred
stock for the year ended September 30, 1996 and 1995 totaled $40,126 and
$50,250, respectively. Accrued dividends payable at September 30, 1996
and 1995 are $7,500 and $66,615, respectively.
NOTE 10. RELATED PARTY TRANSACTIONS
Fees totaling $49,320 for the years ended September 30, 1996 and 1995,
respectively, were paid to a shareholder and director for advisory and
accounting services performed and lease of office space.
In 1996, the Company has entered into a consulting agreement with a
officer and director of the Company to provide management advice. The
agreement has a three year term and requires monthly payments of $2,000.
Total payments in 1996 approximated $9,700.
See other footnotes to the consolidated financial statements for additional
related party transactions.
NOTE 11. CONTINGENCIES
Dateline has instituted arbitration proceedings against a former customer
seeking the recovery of approximately $123,000 wrongfully withheld. An
allowance for $123,000 offsetting the customer receivable is recorded on
the financial statements. The former customer has filed a counterclaim
against Dateline and KLS for violation of their contractual obligations.
This counterclaim is being vigorously contested by the Company.
The ultimate outcome of these lawsuits cannot be predicted and no
provision for liability has been made in the accompanying consolidated
financial statements. It is management's belief that the outcomes are not
likely to have a material adverse effect on the Company's financial
position.
NOTE 12. SEGMENT INFORMATION,
FOREIGN OPERATIONS AND MAJOR CUSTOMERS
The Company's continuing operations are classified into two business
segments as follows:
Production and exploration Included are all drilling operations in
drilling the United States and Mexico
Hydraulic repairs and Includes replacement parts and repair
specialty services for an array of hydraulic
equipment utilized in logging, mining,
and construction. Additionally, pump
installation and modification related to
hydraulic systems.
For the year ended September 30, 1996:
<TABLE>
<CAPTION>
Production and Exploration
Drilling Hydraulic
--------------------------- Repairs & Corporate Consolidated
Domestic Foreign Spec. Mfg. & Other Total
----------- ------------ ---------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Revenues/sales $ 969,937 $ 2,682,375 $ 772,381 $ - $ 4,424,693
Income (loss) from
operations (249,153) 958,352 3,671 (595,712) 117,158
Identifiable assets 1,780,639 1,378,953 1,151,249 217,836 4,528,677
Depreciation and
amortization expense 235,502 47,382 46,561 9,641 339,086
Capital expenditures 1,021,177 319,998 64,836 - 1,406,011
</TABLE>
For the year ended September 30, 1995:
<TABLE>
<CAPTION>
Production and Exploration
Drilling Hydraulic
--------------------------- Repairs & Corporate Consolidated
Domestic Foreign Spec. Mfg. & Other Total
----------- ------------ ---------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Revenues/sales 9,744 $ 1,426,158 $ 893,695 $ - $ 3,019,597
Income (loss) from
operations ( 376,799) 47,671 71,998 ( 656,016) ( 913,146)
Identifiable assets 870,946 509,875 1,156,974 296,201 2,833,996
Depreciation and
amortization expense 229,485 11,234 21,097 9,925 271,741
Capital expenditures 56,304 35,650 20,502 366 112,822
</TABLE>
For the years ended September 30, 1996 and 1995, there were no customers
in continuing operations responsible for more than 10% of sales and
revenues.
At September 30, 1996, the foreign currency exchange rate with Mexico was
7.534 pesos for one dollar.
NOTE 13. STOCK OPTIONS AND WARRANTS
The Company has issued exercisable stock options for the following numbers
of shares and exercise prices at September 30, 1996:
Number Exercise
of Shares Price
------------ ------------
325,000 $ 0.40
225,000 0.50
10,000 0.75
Stock options for 225,000 shares at $ 0.40 and 225,000 shares at $ 0.50
were issued to directors and shareholders of the company. Additionally
stock options for 100,000 shares at $0.40 were issued to a shareholder of
the company. No options were exercised during the years ended September
30, 1996 and 1995.
The Company has issued stock purchase warrants for the following numbers
of shares and exercise prices at September 30, 1996:
Number Exercise
of Shares Price
------------ ------------
6,600,000 $ 0.40
125,000 0.40
All stock purchase warrants were issued to companies related through
common shareholders. No warrants were exercised during the years ended
September 30, 1996.
NOTE 14. DISCONTINUED OPERATIONS
Effective February 1, 1996, the Company sold all of the issued and
outstanding capital stock of Kel-Lite. As consideration for the stock
purchase, the buyer agreed to pay a cash purchase price of $250,000 and a
deferred purchase price representing royalty payments as further described
in a royalty agreement. The royalty agreement originally provided for
such payments to begin one year from closing (February 6, 1996) and ending
ten years thereafter. Minimum royalty payments due under the royalty
agreement were $600,000. Additionally, the buyer has agreed to an early
termination payment if Kel-Lite should be sold or substantially disposes
of all its assets prior to January 31, 2007. Notwithstanding any early
termination payment, the buyer remained liable for the minimum royalty
payments of $600,000. In connection with the sale of Kel-Lite, the
Company agreed to issue to the buyer warrants to purchase up to 250,000
shares of the Company's restricted common stock at an exercise price of
$.40 per share, exercisable until February 1997, and to grant to the buyer
registration rights to register the transfer of the common stock issued
upon the exercise of those warrants. Subsequent to the date of sale, the
purchaser expressed dissatisfaction with the original agreement and voiced
certain claims against the Company.
Subsequent to September 30, 1996, the company reached an agreement with
the purchaser of Kel-Lite whereby all royalty payment obligations by the
purchaser were cancelled and warrants issued to the purchaser were reduced
to 125,000 shares. Accordingly, the gain on sale of Kel-Lite has been
decreased by $ 348,750 in the accompanying financial statements as a
result of the subsequent agreement with the purchaser.
As a result of the sale, activities of Kel-Lite have been accounted for as
discounted operations in the accompanying financial statements. The
results are presented as net amounts in the Consolidated Statements of
Operations, with prior periods restated to conform to the current
presentation.
Additionally, operations of KLSEI were abandoned in 1995; accordingly,
their results are accounted for as discontinued operations and presented
as net amounts and combined with Kel-Lite, in the Consolidated Statements
of Operations. Selected operating results for Kel-Lite and KLSEI are
presented in the following tables:
<TABLE>
<CAPTION>
Kel-Lite KLSEI
------------------------- -----------------------
1996 1995 1996 1995
------------ ------------ ---------- -----------
<S> <C> <C> <C> <C>
Revenues $ 374,233 $ 899,253 $ - $ -
Income tax benefit (provision) - - - -
Net losses ( 34,511) ( 337,351) - ( 26,111)
</TABLE>
Net assets of discontinued operations, which are included in the various
asset and liability amounts in the Consolidated Balance Sheets at
September 30, are as follows:
<TABLE>
<CAPTION>
Kel-Lite KLSEI
------------------------- -----------------------
1996 1995 1996 1995
------------ ------------ ---------- -----------
<S> <C> <C> <C> <C>
Current assets $ - $ 471,912 $ - $ -
Property, plant and equipment, net - 129,137 - -
Other assets - 24,904 - -
Current liabilities - ( 422,701) - ( 7,747)
Long-term debt - ( 23,347) - -
------------ ------------ ---------- -----------
Net liabilities $ - $ 179,905 $ - ($ 7,747)
============ =========== ========= ==========
</TABLE>
NOTE 15. FINANCIAL INSTRUMENTS
Financial instruments of the Company include cash, accounts receivable,
accounts payable, notes payable and long-term debt. The carrying value of
cash, accounts receivables and accounts payable approximates fair value
because of the short maturities of those instruments. The fair value of
notes receivable, notes payable and long-term debt, calculated using
current interest rates for instruments with similar maturities,
approximates their carrying values.
NOTE 16. EXTRAORDINARY ITEM
In August 1996, the company entered into an agreement with the estate of a
former shareholder. The provisions of the agreement allowed the company
to receive forgiveness on $ 172,823 of accrued interest expense by
retiring the related party notes payable. The $172,823 of accrued
interest forgiveness has been recorded as an extraordinary item in the
financial statements.
NOTE 17. SUBSEQUENT EVENT
On November 20, 1996, the company entered into an agreement to purchase
drilling equipment from a supplier for approximately $ 1,300,000.
In December, 1996, the Company instituted a stock option and incentive
plan authorizing the issuance of stock options to purchase a maximum of
2,230,000 shares of the Company's $0.001 par value common stock to
employees and directors. The exercise price of options granted pursuant
to the plan are determined by an option committee designated by the board
of directors.
In December, 1996, the Company sold 4,990,500 shares of common stock for
consideration of $0.80 per share. All shares issued were pursuant to
Regulation D of the Securities Act of 1933. A portion of the proceeds was
used to pay $1,542,400 of the debt to a related company. (See Note 6.)
In December, 1996, the Company entered into a five-year management
agreement with a company related through common directors. The agreement
provides for a monthly fee of $50,000 payable by the Company for
investment banking, investor relations, and financial management services.
THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE
NOT BEEN AND WILL NOT BE, AS OF THE TIME OF ISSUANCE, REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY COMPARABLE STATE LAW, AND MAY NOT
BE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM
UNDER SUCH ACT. THIS WARRANT AND SUCH SHARES MAY BE TRANSFERRED ONLY IN
COMPLIANCE WITH THE CONDITIONS SPECIFIED IN THIS WARRANT
KLS ENVIRO RESOURCES, INC.
COMMON STOCK PURCHASE WARRANT
Expiring September 30, 2000
September 30, 1996
KLS Enviro Resources, Inc., a Nevada corporation (the "Company"), for
value received, hereby certifies that SMD, L.L.C., a Utah limited liability
company, or its registered assigns, is entitled to purchase from the Company
at any time from time to time prior to 5:00 p.m., Fort Worth, Texas time, on
September 30, 1996, 6,600,000 duly authorized shares of the Company's common
stock, par value $.0001 per share (the "Warrant Stock") at a purchase price
per share of $.40, all subject to the terms and conditions set forth below.
1. Exercise of Warrant.
1.1 Manner of Exercise. The holder of this Warrant may exercise
it, in whole or in part, during normal business hours on any business day by
surrendering this Warrant to the Company at the Company's principal office,
accompanied by an executed subscription agreement in substantially the form
annexed hereto as Exhibit A and by payment, in cash or by certified or
official bank check payable to the order of the Company, or by any combination
of such methods, in the amount obtained by multiplying (a) the number of
shares of Warrant Stock designated in such subscription by (b) $.40, whereupon
such holder shall be entitled to receive the number of duly authorized,
validly issued, fully paid and nonassessable shares of Warrant Stock as is
indicated on the subscription.
1.2 When Exercise Effective. Each exercise of this Warrant shall
be deemed to have been effected immediately prior to the close of business on
the business day on which this Warrant shall have been surrendered to the
Company as provided in Section 1.1, and at such time the person or persons in
whose name or names any certificate or certificates for shares of Warrant
Stock shall be issued upon such exercise shall be deemed for all corporate
purposes to have become the holder of record thereof.
1.3 Delivery of Stock Certificates. As soon as practicable after
each exercise of this Warrant, and in any event within five business days
thereafter, the Company at its expense (including the payment by it of any
applicable issue taxes) will cause to be issued in the name of and delivered
to the holder hereof or to the person or entity such holder may direct (and
upon payment by such holder of any applicable transfer taxes), a certificate
or certificates for the number of duly authorized, validly issued, fully paid
and nonassessable shares of Warrant Stock to which the holder or its designee
shall be entitled upon such exercise.
1.4 Partial Exercise.
1.4.1 Fractional Shares. In the event of any partial
exercise of this Warrant, the Company will not issue certificates for any
fractional shares of the Warrant Stock to which the holder otherwise may be
entitled, and the Company shall not be obligated to refund an amount of cash
comprising the market value of any fractional share of Warrant Stock for which
the Company will not issue a certificate.
1.4.2 Replacement Warrant. In the event of any partial
exercise of this Warrant, upon tender of this Warrant to the Company, the
Company shall issue a new Warrant containing the same terms and conditions as
this Warrant but calling on the face thereof for the number of shares of
Warrant Stock equal to the number of shares called for on the face of this
Warrant minus the number of shares of Warrant Stock issued upon the partial
exercise of this Warrant.
2. Adjustment of Warrant Stock Issuable Upon Exercise. If the
Company at any time or from time to time after the date of this Warrant but
before expiration effects a split or subdivision of the outstanding shares of
its then outstanding common stock into a greater number of shares of common
stock, or if the Company effects a reverse split of the outstanding shares of
its common stock into a lesser number of shares of common stock, (by
reclassification or otherwise than by payment of a dividend in common stock),
then, and in each such case, the number of shares called for on the face of
this Warrant (or the face of any replacement Warrant issued upon partial
exercise) shall be adjusted proportionally, and the exercise price with
respect to such adjusted number of shares also shall be adjusted
proportionally.
3. Restrictions on Transfer.
3.1 Restrictive Legends. Each replacement Warrant issued upon
partial exercise or the transfer of any Warrant shall contain a legend in
substantially the following form:
THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE
SECURITIES LAWS OF ANY STATE AND MAY NOT BE TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT. THIS WARRANT AND SUCH
SHARES MAY BE TRANSFERRED ONLY IN COMPLIANCE WITH THE CONDITIONS SPECIFIED IN
THIS WARRANT.
Each certificate for Common Stock issued upon the exercise of any Warrant, and
each certificate issued upon the transfer of any such Common Stock, shall be
stamped or otherwise imprinted with a legend in substantially the following
form:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE SECURITIES LAWS OF ANY
STATE. THESE SECURITIES MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF REGISTRATION, OR THE AVAILABILITY OF AN
EXEMPTION FROM REGISTRATION, UNDER THE SECURITIES ACT OF 1933 AND APPROPRIATE
STATE SECURITIES LAWS. FURTHERMORE, NO OFFER, SALE, TRANSFER, PLEDGE OR
HYPOTHECATION IS TO TAKE PLACE UNLESS THE COMPANY RECEIVES AN OPINION OF
COUNSEL AT SHAREHOLDER'S EXPENSE, AND SATISFACTORY TO IT, THAT AN EXEMPTION
FROM REGISTRATION IS AVAILABLE.
3.2 Notice of Proposed Transfer; Opinions of Counsel. Prior to
the transfer of any shares of Common Stock issued upon the exercise of this
Warrant and during any period during which such shares of Common Stock are not
registered by the Company under an effective registration statement filed
pursuant to the Securities Act of 1933, the holder thereof shall give written
notice to the Company, which notice shall (a) state such holder's intention to
transfer such restricted shares and to comply in all other respects with the
transfer requirements of this Warrant; (b) describe the circumstances of the
proposed transfer in sufficient detail to enable counsel to render the
opinions referred to below, and (c) designate counsel for the holder giving
such notice. The holder giving such notice shall submit a copy thereof to the
counsel designated in such notice and the Company will promptly submit a copy
thereof to its counsel. The following provisions shall then apply:
3.2.1 If (a) in the opinion of counsel for the holder
designated in the notice the proposed transfer may be effected without
registration of such shares of Common Stock under the Securities Act of 1933
and any applicable state securities laws, and (b) counsel for the Company
shall not have rendered an opinion within 15 days after receipt by the Company
of such written notice that such registration is required, such holder shall
thereupon be entitled to transfer such shares of Common Stock in accordance with
the terms of the notice delivered by such holder to the Company. Each
Warrant or certificate, if any, issued upon or in connection with such
transfer shall bear the appropriate restrictive legend set forth in Section
3.1, unless in the opinion of each such counsel such legend is no longer
required to insure compliance with the Securities Act. If for any reason
counsel for the Company (after having been furnished with the information
required to be furnished by clause (a) of this Section 3.2) shall fail to
deliver an opinion to the Company as aforesaid, then for all purposes of this
Warrant the opinion of counsel for the Company shall be deemed to be the same
as the opinion of counsel for such holder.
3.2.2 If in the opinion of either or both of such counsel the
proposed transfer may not legally be effected without registration of such
shares of Common Stock under the Securities Act of 1933 or applicable state
securities laws (such opinion or opinions to state the basis of the legal
conclusions reached therein), the Company will promptly so notify the holder
thereof and thereafter such holder shall not be entitled to transfer such
shares of Common Stock until receipt of a further notice from the holder under
Section 3.2.1 above or until registration of such shares of Common Stock
under the Securities Act or applicable state law has become effective.
4. Reservation of Shares. The Company will at all times reserve and
keep available, solely for issuance and delivery upon the exercise of the
Warrants, the number of shares of Warrant Stock that would be issuable upon
the exercise of all Warrants at the time outstanding. All such shares shall
be duly authorized and, when issued upon such exercise, shall be validly
issued, fully paid and nonassessable with no liability on the part of the
holders thereof.
5. Ownership, Transfer and Substitution of Warrants.
5.1 Ownership of Warrants. The Company may treat the person in
whose name any Warrant is registered on the Company's records as the owner and
holder thereof for all purposes, notwithstanding any notice to the contrary.
Nevertheless, when a Warrant is properly assigned in blank, the holder thereof
may exercise the Warrant without first having a new Warrant issued.
5.2 Transfer and Exchange of Warrants. Upon the surrender of
any Warrant, properly endorsed, for registration of transfer of exchange at
the principal office of the Company, the Company will execute and (upon
payment by such holder of any applicable transfer taxes) deliver to any person
specified by the holder of the Warrant a new Warrant or Warrants of like
tenor, calling in the aggregate on the face or faces of such replacement
Warrants for the number of shares of Warrant Stock called for on the face or
faces of the Warrant or Warrants so surrendered.
5.3 Replacement of Warrants. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
any Warrant and, in the case of any such loss, theft of destruction of any
Warrant, upon delivery of indemnity reasonably satisfactory to the Company in
form and amount or, in the case of any such mutilation, upon surrender of such
the Company at its expense will execute and deliver, in lieu thereof, a new
Warrant of like tenor.
6. No Rights or Liabilities as Stockholder. Nothing herein shall
give or shall be construed to give the holder of this Warrant any of the
rights of a shareholder of the Company including, without limitation, the
right to vote on matters requiring the vote of shareholders, the right to
receive any dividend declared and payable to the holders of common stock, and
the right to a pro-rata distribution upon the Company's dissolution.
7. Notices. All notices and other communications provided for
herein shall be delivered or mailed by first class mail, postage prepaid,
addressed (a) if to the holders of any Warrant, at the registered address of
such holder as set forth in the register kept at the principal office of the
Company, or (b) if to the Company, at its principal office, 3220 North
Freeway, Fort Worth, Texas 76111, or at the address of such other principal
office of the Company as the Company shall have furnished to each holder of
any Warrants in writing, provided that the exercise of any Warrants shall be
effective only in the manner provided in Section 1.
8. Miscellaneous. This Warrant and any term hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by
the party against which enforcement of such change, waiver, discharge or
termination is sought. This Warrant shall be governed by the laws of the
State of Utah. The headings of this Warrant are inserted for convenience only
and shall not be deemed to constitute a part hereof.
9. Expiration. The right to exercise this Warrant shall expire at 5:00
p.m., Fort Worth, Texas time, on September 30, 2000.
KLS Enviro Resources, Inc.
By: _____________________________
Raymond H. Kurzon, President
<PAGE>
Exhibit A
SUBSCRIPTION
(To be executed by the holder of the Warrant to exercise the right to
purchase common stock evidenced by the Warrant)
To:KLS Enviro Resources, Inc.
3220 North Freeway
Fort Worth, Texas 76111
The undersigned hereby irrevocably subscribes for ________ shares of the
Common Stock, par value $.0001 per share, of KLS Enviro Resources, Inc., a
Nevada corporation, pursuant to and in accordance with the terms and
conditions of a Warrant dated September 30, 1996 (the "Warrant"), and tenders
with the Warrant and this Subscription Agreement payment of $_____________ as
payment for the shares, and requests that a certificate for such shares be
issued in the name of the undersigned and be delivered to the undersigned at
the address stated below.
__________________________________________________
NAME
__________________________________________________
ADDRESS
__________________________________________________
__________________________________________________
SOCIAL SECURITY NUMBER
__________________________________________________
Signed
__________________________________________________
Dated
THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER
THE SECURITIES LAWS OF ANY STATE, AND WILL BE OFFERED AND SOLD IN RELIANCE ON
EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF FEDERAL AND STATE LAW BY
VIRTUE OF THE COMPANY'S INTENDED COMPLIANCE WITH SECTION 4(2) OF THE ACT, THE
PROVISIONS OF REGULATION D PROMULGATED THEREUNDER AND PARALLEL EXEMPTIONS
UNDER STATE LAW. THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY ANY
REGULATORY AUTHORITY. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
3,750,000 to 5,000,000 Shares Common Stock
(Par Value $.0001 Per Share)
Securities Purchase Agreement
KLS Enviro Resources, Inc.
3220 North Freeway, Suite 105
Fort Worth, TX 76111
Attn: Raymond S. Kurzon
President and Chief Executive Officer
Gentlemen:
In connection with the offer and proposed issuance of $3,000,000 up to
$4,000,000 in Common Stock (the "Offering") by KLS Enviro Resources, Inc., a
Nevada corporation ("KLS" or the "Company"), in reliance on exemptions from
the registration requirements of the U.S. Securities Act of 1933, as amended
(the "Act"), and similar provisions of state law, the undersigned purchasers
(collectively, the "Purchasers") and the Company hereby agree as follows:
1. Purchase of Securities. Subject to the terms and conditions of
this Agreement, each of the Purchasers hereby agrees to acquire, and the
Company agrees to sell that number of shares (the "Initial Share Number") of
the Company's Common Stock, par value $.0001 per share (the "Shares"), set
forth opposite such Purchaser's name on Schedule I to this Agreement, subject
to adjustment in the number of shares as provided in Section 2, below. The
consideration for the issuance of the Initial Share Number shall be $0.80 per
share (the "Initial Share Price"). The total purchase price for the minimum
of 3,750,000 Shares being purchased hereunder shall be Three Million Dollars
($3,000,000). The total purchase price for the maximum of 5,000,000 Shares
which may be purchased hereunder shall be Four Million Dollars ($4,000,000).
The total purchase price actually paid by the Purchasers at Closing (the
"Investment Amount") shall be set forth in Schedule I to this Agreement. Each
Purchaser shall pay his or its portion of the Investment Amount as set forth
in Schedule I to this Agreement in full at Closing, as hereinafter defined,
via wire transfer to the account of counsel for the Company on or before the
Closing Date, as that term is defined in Section 4 of this Agreement. Wire
instructions for the account of counsel to the Company are as follows:
Bank: Key Bank of Utah
Account Name: Durham, Evans, Jones & Pinegar, P.C. Trust Account
ABA No.: _____________
Account No.: ______________
2. Adjustment and Issuance of Additional Shares. The Initial Share
Number shall be subject to adjustment as provided in this Section 2. If the
Average Share Price, as that term is defined below, calculated for the
five-day-trading period immediately following the effective date of the
Registration Statement described in Section 4, below, shall be less than the
Initial Share Price, then, within three (3) business days after the expiration
of such five-trading-day period, the Company shall either deliver to
Purchasers one or more certificates evidencing such number of Shares as shall
be equal to the amount by which the result obtained by dividing (i) the
Investment Amount by (ii) the Average Share Price for the five-trading-day
period, shall exceed the Initial Share Number (the "Additional Shares") or, at
Purchasers' option, deposit the Additional Shares into such account or
accounts previously designated by Purchasers for this purpose; provided,
however, that no adjustment will be made which would be calculated based on an
Average Share Price of less than $.60 per share. For purposes of this
Agreement, the term "Average Share Price" shall mean the average of the per
share daily closing prices of the Shares during the applicable five-day
trading period provided herein.
3. Delivery of Share Certificates. At the Closing, the Company shall
deliver to Purchasers certificates representing the Initial Share Number,
which shall be fully paid and nonassessable upon issuance. The Shares shall
be issued in increments and in the names of the Purchasers as set forth in
Schedule I hereto, subject to adjustment as provided in Section 2, above.
4. Registration Rights and Exchange Filings. The Shares (including
the Additional Shares) shall be subject to certain registration rights, as
provided in that certain Registration Rights Agreement attached hereto as
Exhibit "B" and by reference made a part hereof. (Such Registration Rights
Agreement, together with this Securities Purchase Agreement, constitute the
"Transaction Documents"). The registration statement covering such Shares
shall be referred to herein as the "Registration Statement".
5. Closing. Payment of the Investment Amount as described in Section
1, above, and delivery of the Shares as described in Section 3, above, shall
be deemed to be the completion of the transactions contemplated by this
Agreement ("Closing"). Closing shall occur on or before 3:00 p.m. M.S.T. on
__________, 19__, or such later date as the parties may hereafter agree in
writing (the "Closing Date").
6. Failure of Any Purchaser to Close. The Company shall not be
obligated to issue and sell any of the Shares unless the minimum of 3,750,000
of the Shares to be purchased and sold hereunder are purchased by the
Purchasers. In the event any Purchaser fails to purchase at the Closing any
of the Shares scheduled to be purchased by him or it, the other Purchasers
shall have the right to purchase at the Closing (or on such other date as the
Company and such Purchaser(s) shall agree) the Shares that are not so
purchased, and the Company shall issue and sell such Shares to such other
Purchaser(s).
7. Use and Disposition of Proceeds. The gross proceeds of this
transaction will be between Three Million Dollars ($3,000,000) (the "Minimum
Proceeds) and Four Million Dollars ($4,000,000) (the "Maximum Proceeds"). If
it receives no more than the Minimum Proceeds, the Company intends to use said
proceeds as follows:
<TABLE>
<CAPTION>
Approximate
Application of Proceeds Dollar Amount Percentage
- ------------------------------------------- ------------- -------------
<S> <C> <C>
Partial payment of demand promissory notes
owing to SMD, LLC ("SMD") $1,500,000 50.00%
Partial payment of demand promissory notes
owing to fonix corporation 200,000 6.67%
Reserve for purchase of one (1) additional
drilling rig and associated equipment
and inventory 537,000 17.90%
Operating Capital and offering expenses<F1> 763,000 25.43%
Total $3,000,000 100.00%
</TABLE>
If it receives the Maximum Proceeds, the Company intends to use said proceeds
as follows:
<TABLE>
<CAPTION>
Approximate
Application of Proceeds Dollar Amount Percentage
- --------------------------------------- ----------------- ----------
<S> <C> <C>
Full payment of demand promissory notes
owing to SMD $2,180,000 54.50%
Partial payment of demand promissory notes
owing to fonix corporation 200,000 5.00%
Reserve for purchase of two (2)
additional drilling rigs and associated
equipment and inventory 1,074,000 26.85%
Operating capital and offering expenses1 546,000 13.65%
Total $ 4,000,000 100.00%
</TABLE>
- ------------------------
The foregoing represents the Company's present intention and best estimates
with respect to the use of the Minimum Proceeds and Maximum Proceeds.
Proceeds in excess of the Minimum Proceeds, but less than the Maximum
Proceeds, shall be allocated, first, toward full payment of the demand
promissory notes owing to SMD and, second, toward purchase of one (1)
additional drilling rig and associated equipment and inventory. Pending use
of the net proceeds for the above purposes, the Company intends to invest the
funds in certificates of deposit or other fully-insured investment grade
securities. Purchasers acknowledge and agree that the Company shall have
immediate access to such funds, according to the Company's management's
discretion, following the Closing and delivery of the Shares to Purchasers.
8. Special Covenants.
8.1 Nominees of Purchasers to Serve on Board of Directors.
Concurrent with the Closing of the transactions contemplated by this
Agreement, resolutions of the Board of Directors of the Company shall be
adopted which (i) increase the number of directors of the Company to nine (9)
and (ii) appoint Roger D. Dudley, Stephen M. Studdert, Joseph Verner Reed and
Rick D. Nydegger as directors of the Company.
8.2 Financial Reports. So long as the Purchasers are collectively
the beneficial owners of 5% or more of the issued and outstanding shares of
Common Stock of the Company, KLS shall provide the Purchasers with copies of
its annual report to shareholders, annual report on Form 10-KSB (or such other
form as KLS may be qualified to use for such purpose), quarterly reports on
Form 10-QSB (or such other form as may properly be available to KLS for such
reports), any report on Form 8-K, and internally prepared (unaudited) financial
statements, to the extent prepared by KLS. In the case of the reports
described above which are filed with the Securities and Exchange Commission,
copies of the same will be provided to the Purchasers within five
(5) working days of filing with the Commission. In the case of the other
documents, to the extent the same are prepared by KLS, they shall be provided
on or before the 20th day following the month then ended.
8.3 Amendment of Indemnification Rights of Directors. The Company
covenants and agrees that the By-laws of the Company shall be amended to
provide that, to the extent and in the manner provided by applicable law, any
expenses (including attorneys' fees) incurred by a director in connection with
any threatened, pending or completed action, suit or proceeding to which such
director is a party (or is threatened to be made a party) by reason of the
fact that such person is or was a director of the Company, shall be paid by
the Company in advance of the final disposition of such action, suit or
proceeding even if such director is alleged to have not met the applicable
standard of conduct required under the Company's By-laws or is alleged to have
committed conduct so that, if true, such director would not be entitled to
indemnification under the Company's By-laws, upon receipt of an undertaking,
which need not be secured, by or on behalf of the director to repay such
amount if it shall ultimately be determined that he is not entitled to be
indemnified by the Company as authorized in the Company's By-laws. This
covenant will constitute a contractual obligation on the part of KLS to
provide such indemnification and defense regardless of the modification of the
By-laws.
9. Representations and Warranties of Purchasers. To induce the
Company's acceptance of this Agreement, each Purchaser hereby represents and
warrants, severally as to itself or himself and not jointly, to the Company
and its agents and attorneys as follows (it being acknowledged that for
purposes of this Section 9 the term "Common Shares" shall mean the Shares
being purchased by such Purchaser hereunder):
9.1 Accredited Status. Purchaser is an "accredited investor" within
the meaning of Section 501(a) of Regulation D under the Act, because the
undersigned is [THE UNDERSIGNED MUST INITIAL ALL OF THE FOLLOWING PARAGRAPHS
WHICH ACCURATELY DESCRIBE THE UNDERSIGNED'S STATUS]:
Purchaser is an accredited person because Purchaser is:
(1) A director or executive officer of the Company.
(Initial)
(2) A natural person whose net worth (i.e. the excess of his/her
total assets over his/her total liabilities, including the value of his/her
personal residence), individually or jointly with his/her spouse, as of the
date hereof, exceeds $1,000,000.
(Initial)
(3) A natural person who had an individual income in excess of
$200,000 in each of the past two years, or whose joint income with that
person's spouse during each of the past two was in excess of $300,000, and who
reasonably expects to reach the same income level in the present year.
(Initial)
(4) A corporation or partnership, not formed for the specific
purpose of acquiring the securities offered, with total assets in excess of
$5,000,000.
(Initial)
(5) A broker or dealer registered pursuant to Section 15 of the
Securities Exchange Act of 1934.
(Initial)
(6) An entity in which all of the equity owners are "accredited
investors" pursuant to one of the categories set forth above.
(Initial)
(7) None of the above.
(Initial)
9.2 Liquidity. Purchaser presently has sufficient liquid assets to
pay that portion of the Investment Amount to be paid by such Purchaser
hereunder. Purchaser's overall commitments to investments that are not
readily marketable is not disproportionate to Purchaser's total assets, and
Purchaser's investment in the Company will not cause such overall commitment
to become excessive. Purchaser has adequate means of providing for its
current needs and contingencies and has no need for liquidity in its
investment in the Company or for a source of income from the Company.
Purchaser is capable of bearing the economic risk and the burden of the
investment contemplated by this Agreement, including, but not limited to, the
possibility of the complete loss of the value of the Common Shares and the
limited transferability of the Common Shares, which may make the liquidation
of the Common Shares impossible in the near future.
9.3 Organization, Standing, Authorization. If not an individual,
Purchaser is duly organized, validly existing, and in good standing under the
laws of the country of organization described in Schedule I hereto and has the
requisite power and authority to enter into this Agreement, acquire the Common
Shares and execute and deliver any documents or instruments in connection with
this Agreement. The execution and delivery of this Agreement, and all other
documents and instruments executed by Purchaser in connection with any of the
transactions contemplated by this Agreement have been duly authorized by all
required action of Purchaser's members or managers. The person executing, on
Purchaser's behalf, this Agreement and any other documents or instruments
executed by Purchaser in connection with this Agreement is duly authorized to
do so.
9.4 Absence of Conflicts. Purchaser represents and warrants that the
execution and delivery of this Agreement and any other document or instrument
executed in connection with this Agreement, and the consummation of the
transactions contemplated thereby, and compliance with the requirements
thereof, will not violate any law, rule, regulation, order, writ, judgment,
injunction, decree or award binding on Purchaser, or the provision of any
indenture, instrument or agreement to which Purchaser is a party or is
subject, or by which Purchaser or any of their properties is bound, or
conflict with or constitute a material default thereunder, or result in the
creation or imposition of any lien pursuant to the terms of any such
indenture, instrument or agreement, or constitute a breach of any fiduciary
duty owed by such Purchaser to any third party, or require the approval of any
third-party pursuant to any material contract, agreement, instrument,
relationship or legal obligation to which Purchaser are subject or to which
any of their properties, operations or management may be subject.
9.5 Sole Party in Interest. Purchaser represents that it is the sole
and true party in interest, and no other person or entity has or will have
upon the issuance of the Common Shares any beneficial ownership interest in
the Common Shares or any portion of the Common Shares, whether direct or
indirect, other than the equity holders or beneficiaries of such Purchaser.
9.6 Investment Purpose. Purchaser represents that it is acquiring
the Common Shares for its own account and for investment purposes and not on
behalf of any other person or entity or for or with a view to resale or
distribution.
9.7 Knowledge and Experience. Purchaser is experienced in evaluating
and making speculative investments, and has the capacity to protect
Purchaser's interests in connection with the acquisition of the Common
Shares. Purchaser has such knowledge and experience in financial and business
matters in general, and investments in the drilling and mining industry in
particular, that Purchaser is capable, on Purchaser's behalf, of evaluating
the merits and risks of Purchaser's investment in the Company. Purchaser has
been informed that an investment in the Company is speculative and has
concluded that Purchaser's proposed investment is appropriate in light of its
overall investment objectives and financial situation.
9.8 Investment Advisors. No party has received or will receive any
compensation or other remuneration for advising Purchaser with respect to this
investment, and Purchaser represents that no investment advisor or purchaser
representative has been consulted or retained in connection with Purchaser's
decision to invest in the Company. As of the date of execution of this
Agreement, Purchaser has no relationship whatsoever with the Company, and has
had no relationship with the Company at any time in the past.
9.9 Disclosure, Access to Information. Purchaser confirms that it
has received and thoroughly read and is familiar with and understands this
Agreement, and that all documents, records, books and other information
pertaining to Purchaser's investment in the Company requested by Purchaser
have been made available for inspection and copying and that there are no
additional materials or documents that have been requested by Purchaser that
have not been made available by the Company. Purchaser further acknowledges
that any decision not to ask questions of the Company's representatives was a
conscious decision on Purchaser's part and reflects Purchaser's belief that no
additional information is necessary in order to make an informed decision
about investing in the Company. Purchaser further acknowledges that it
understands that the Company is subject to the periodic reporting requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
Purchaser has reviewed or received copies of any such reports that have been
requested by it. Without limiting the generality of the foregoing, Purchaser
acknowledges that it has received and has reviewed copies of the following
documents and materials, all of which are incorporated herein by reference:
(1) Articles of Incorporation of the Company, as amended;
(2) By-laws of the Company;
(3) Annual Report on Form 10-KSB for the fiscal year ended September 30,
1995;
(4) Quarterly Reports on Form 10-QSB for the quarters ended December 31,
1995, March 31, 1996 and June 30, 1996; and
(5) Reports of Form 8-K filed July 2, 1996 and September 4, 1996.
The statements contained in the above-described Reports on Forms 10-QSB,
10-KSB and 8-K that are not purely historical are forward looking statements
within the meaning of Section 27A of the Act and Section 21E of the Exchange
Act, including statements regarding the Company's expectations, hopes,
intentions or strategies regarding the future. Forward looking statements
include: statements regarding future drilling and/or mining development;
statements regarding future drilling and/or mining spending and the Company's
drilling and/or mining development strategy; and statements regarding the
levels of international sales. All forward looking statements included in
this document and the above-described Reports on Forms 10-QSB, 10-KSB and 8-K
are based on information available to the Company on the date hereof, and the
Company assumes no obligation to update any such forward looking statements.
It is important to note that the Company's actual results could differ
materially from those in such forward looking statements. Some of the factors
that could cause actual results to differ materially are set forth in Section
10 below.
9.10 Exclusive Reliance on this Agreement. In making the decision to
purchase the Common Shares, Purchaser has relied exclusively upon information
included in this Agreement or incorporated herein by reference pursuant to
Section 9.9, and not on any other representations, promises or information,
whether written or verbal, by any person.
9.11 Accuracy of Unincorporated Documents and Other Unincorporated
Materials. To the extent Purchaser has received documents or other materials,
other than as expressly incorporated herein by reference pursuant to Section
9.9, Purchaser acknowledges the following with respect to such documents and
materials:
(1) Such documents and materials and any projections contained
therein may be incomplete, may contain errors or misstatements, and do not
purport to adequately describe the transactions contemplated by this Agreement
or the status of the development of the Company's business and business
opportunities. Purchaser agrees that such documents and materials cannot be
relied upon in making a decision as to whether to purchase the Common Shares
and acknowledges that there can be no assurance that any of the projections
contained therein will be accomplished by the Company; and
(2) Purchaser has been advised and fully understands that any
summaries, projections, forecasts or estimates included in such documents and
materials, including those relating to product development schedules and
projections, possible revenues, income, profitability of the Company or an
investment therein inherently involve uncertainties and may be affected by
circumstances in the future which cannot be reasonably predicted and are
beyond the control of the Company. Further, the projections, forecasts and
estimates are speculative and may be optimistic, and there can be no assurance
that any of the projections, forecasts or estimates will be reached, or that
the Company will successfully produce a commercially viable product or that
the Company will realize any income or profits or that any dividends or
distributions of profits will be paid on the Company's securities. The use of
the words "believes," "estimates," "anticipates" and similar expressions are
intended to identify forward-looking statements, all of which are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those projected. Purchaser should not place undue reliance on
such forward-looking statements, which speak only as of the date(s) made. The
Company undertakes no obligation to publicly release the result of any
revisions to these forward-looking statements that may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
9.12 Residency. Each Purchaser has its principal place of business
as set forth in Schedule I hereto.
9.13 Advice of Counsel. Purchaser understands the terms and
conditions of this Agreement, has investigated all issues to Purchaser's
satisfaction, has consulted with such of Purchaser's own legal counsel or
other advisors as Purchaser deems necessary, and is not relying, and has not
relied on the Company for an explanation of the terms or conditions of this
Agreement or any document or instrument related to the transactions
contemplated thereby. Purchaser further acknowledges, understands and agrees
that, in arranging for the preparation of this Agreement and all other
documents and materials related thereto, the Company has not attempted to
procure, and has not procured, legal representation for Purchaser.
9.14 Accuracy of Representations and Information. All representations
made by Purchaser in this Agreement and all documents and instruments related
to this Agreement, and all information provided by Purchaser to the Company
concerning Purchaser and its financial position is correct and complete in all
material respects as of the date hereof. If there is any material change in
such information before the actual issuance of the Common Shares, Purchaser
immediately will provide such information to the Company.
9.15 No Representations. None of the following have ever been
represented, guaranteed, or warranted to Purchaser by the Company or any of
its employees, agents, representatives or affiliates, or any broker or any other
person, expressly or by implication:
(1) The approximate or exact length of time that Purchaser will be
required to remain as owner of the Common Shares;
(2) The percentage of profit or amount of or type of consideration,
profit or loss (including tax write-offs or other tax benefits) to be
realized, if any, as a result of an investment in the Common Shares; or
(3) The past performance or experience on the part of the Company or
any affiliate or their associates, agents or employees, or of any other person
as being indicative of future results of an investment in the Common Shares.
9.16 Federal Tax Matters. Purchaser has reviewed and understands the
federal income tax aspects of its purchase of the Common Shares, and has
received such advice in this regard as Purchaser deems necessary from
qualified sources such as attorneys, tax advisors or accountants, and is not
relying on any representative or employee of the Company for such advice.
10. Certain Risk Factors. Purchasers have been informed about and
fully understand that there are risks associated with an investment in the
Company. Such risks may include, but not necessarily be limited to, the
following:
10.1 Recent Net Losses. The Company had significant net operating
losses in fiscal years 1994 and 1995. It also had operating losses in prior
years. As a result, the Company had an accumulated deficit of approximately
($2,300,000) at September 30, 1994 and ($3,545,000) at September 30, 1995.
Although the Company has experienced revenue growth and net operating income
in the six-months ending June 30, 1995, there can be no assurance that such
growth will continue or that net losses will not be incurred in future
operating periods. Indeed, the Company anticipates that it will have a
significant loss for the fiscal year ending September 30, 1996.
10.2 Need for Additional Funding. The Company has operated in a
negative cash flow position for several years and has substantial accumulated
operating deficits. In order to increase revenues and improve cash flow, the
Company requires additional funding that will enable it to repay current and
long-term debt and purchase additional equipment. The Company may seek such
funding through a public or future private offering of its stock. Shares
issued in such an offering may substantially dilute the shareholdings of other
shareholders, including the Purchasers.
10.3 Continuation of Control. At the time of this offering, SMD, a
significant shareholder of the Company, owns 2,561,000 shares of Common Stock,
including 500,000 shares of Common Stock issuable to SMD upon conversion of
100,000 shares of preferred stock, or more than 23% of the issued and
outstanding common stock of the Company. SMD also has the right to acquire an
additional 6,600,000 shares of Common Stock or up to an additional 36.6% of
the Company. In addition, the principals SMD are now or following the Closing
will be directors of the Company. The continued ownership of a significant
number of shares, the rights to purchase additional shares of Common Stock and
the board positions occupied by the SMD principals will perpetuate and
increase SMD's ability to influence corporate policy and management.
10.4 Dependency 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 until the expansion
operations begin operating at capacity. 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.
10.5 Equipment Costs. To date the Company has been able to meet its
requirements for additional equipment by acquiring used equipment which it has
thereafter refurbished. 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, 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.
10.6 Government Regulation and Environmental Matters. The Company's
operations and mining operations in general are subject to substantial
government regulation including federal, state and local laws concerning
safety, land use and environmental protection. The Company must comply with
local, state and 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 as well as laws protecting the rights of other
property owners and the public. Although the Company believes it is in
substantial compliance with such regulations, laws and requirements with
respect to its operations 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 must also obtain and
comply with local, state and federal permits, including waste discharge
requirements, other environmental permits, use permits, plans of operation and
other authorizations. Obtaining these permits can be very costly and takes
significant amounts of time. Although the Company foresees no material
problems or delays, no assurances can be given 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. 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.
10.7 Competition. The Company operates in an industry that is
characterized by intense competition for resources, equipment and personnel.
Some of the Company's principal competitors are substantially larger, have
substantially greater resources and have spent considerably larger sums of
capital than the Company for equipment, including drilling rigs, development
and operations.
10.8 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, unforeseen geological formations, environmental concerns and personal
injury. The Company has insurance covering personal injury, worker's
compensation and damage to property and equipment, although in view of recent
trends in damage awards in personal injury lawsuits, such insurance may be
insufficient to satisfy large losses or judgments against the Company.
Furthermore, certain types of insurance coverage (generally against losses
caused by natural disasters and acts of God) are either unattainable or
prohibitively expensive. Substantial damage awards against the Company or
substantial damages not covered by insurance will affect the Company's ability
to continue as a going concern.
10.9 Exploration Activities. The Company presently plans to expand
its operations in more speculative and risky precious metal exploration, in
addition to its existing drilling services and equipment maintenance and
repair business. Exploration for gold, silver and other precious metals is a
highly speculative business, with no assurance that adequate deposits or
reserves can be located or that if located, meaningful volumes of ore can be
extracted, refined or sold at profitable rates. In addition, the Company's
present management has limited experience in acquiring or operating previous
metal mining properties.
10.10 Volatility of the Special Metals Market. The profitability of
the Company's operations can be significantly affected by changes in the
market price of gold and other precious metals. The market price of gold has
fluctuated widely and is affected by numerous factors beyond the Company's
control, including international economic trends, currency exchange
fluctuations, expectations for inflation, speculative activities, consumption
patterns (such as purchases of gold jewelry and the development of gold coin
programs), purchases and sales of gold bullion, holdings by central banks and
other large gold bullion holders or dealers and global or regional political
events, particularly in major gold producing countries such as South Africa
and some of the countries that formerly comprised the Soviet Union. Gold
market prices are also affected by worldwide production levels which have
increased in recent years. The aggregate effect of these factors, all of
which are beyond the Company's control, is impossible for the Company to
predict. In addition, the market price of gold has, on occasion, been subject
to rapid short-term changes because of market speculation. If the price for
precious metals such as gold is below the Company's customers' cash production
costs and remains below such level for any sustained period, the Company's
customers could experience losses and could determine that it is not
economically feasible to continue to engage the Company for performance of its
operations and services, or to continue to develop some or all of their
projects.
10.11 Foreign Operations. The Company's operations include precious
metals exploration in the country of Mexico where the Company is required to
comply with various environmental and other laws, rules and regulations. The
Company's business is or may become subject to many other risks of
international operations, including potential tariff restrictions, currency
fluctuations, currency control regulations, competing or conflicting
manufacturing standards, government regulation and approval policies and
licensing and permit requirements. In recent years the economic situation in
Mexico has been subject to volatile change. In addition, political and
economic changes in the future could adversely affect the Company's investment
and operations in Mexico.
10.12 Risk of Litigation. The Company organized its flashlight
business under the name "Kel-Lite" in April 1994 when it acquired certain
assets, including certain machinery, from an insolvent California-based
flashlight manufacturing business for a cash payment of $200,000. The
acquired assets included a line of flashlight products previously manufactured
and marketed by G.T. Price Products, Inc., which is now defunct, including
plastic and metal lines of flashlight products. In February 1996, the Company
sold the outstanding shares of Kel-Light to Nordic Industries Inc. As
consideration for the purchase of Kel-Lite, the buyer paid to the Company
$250,000 and agreed to pay the Company a royalty equal to two percent of the
gross sales received by Kel-Lite, which royalty shall begin to accrue in
February 1997 and will continue for ten years thereafter. If an aggregate of
$600,000 in royalties is not paid prior to the expiration of the 10-year
royalty period, then the buyer is to pay to the Company the difference between
the gross royalties paid and $600,000 at the expiration of the 10-year
period. The buyer agreed not to sell substantially all the shares of Kel-Lite
or substantially all the assets of Kel-Lite on or before January 31, 2002.
Upon the sale of substantially all the shares or substantially all the assets
of Kel-Lite after January 31, 2002 and on or before January 31, 2007, the
buyer agreed to pay to the Company an amount equal to the excess, if any, of
$600,000 over the sum of all royalties previously paid to the Company,
together with an amount equal to five percent of any consideration paid for
the shares or the assets being sold by the buyer. 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
underlying those warrants. The buyer has recently informed the Company that
it believes that another Company may have a patent which is substantially
similar to one of the patents owned by Kel-Lite. The buyer claims that it did
not receive the value for the Company that it bargained for because of the
potentially infringing third-party patent. The Company has responded to the
buyer that the potentially infringing patent was applied for and issued after
the date of one of patents owned by Kel-Lite and that the Company will honor
its obligations to the buyer to defend against any infringement claims
concerning the Kel-Lite patent, including the potentially infringing
third-party patent. The buyer has also informed the Company that it believes
the inventory of Kel-Lite was overstated at the time it acquired Kel-Lite.
The buyer claims that a substantial portion of finished goods were obsolete,
of little or no value and that the Company had failed to properly reserve for
or write down inventory to reflect that obsolescence. The Company has advised
the buyer that it believes the inventory was property recorded on its
financial statements and that the buyer received compensation for potential
inventory obsolescence in the form of warrants to purchase up to 250,000
shares of the Company's restricted common stock at an exercise price of $.40
per share. The buyer and the Company are continuing discussions with respect
to the buyer's claims. The buyer has indicated to the Company that it may
file a lawsuit against the Company if its claims against the Company described
above are not resolved in a manner satisfactory to the buyer. While the
Company believes, based upon the facts presently known to it and described
above, that any lawsuit filed by the buyer would not result in any material
liability to the Company, there can be no assurance that such an action may
not result in an award of damages against the Company in an amount that may be
material.
10.13 Potential Depressive Effect of Sales of Shares by Present
Stockholders. As of the date of this Agreement, 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. Sales of substantial amounts of common stock into the
public market following this offering could adversely affect the market price
for the Company's securities.
10.14 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.
10.15 Risk of Dissolution by Future Issuance of Shares. The Company
may use its securities, including shares of its common stock or its preferred
stock, to finance acquisitions. 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, including
the Purchasers.
11. Manner of Sale. At no time were the Purchasers presented with or
solicited by or through any leaflet, public promotional meeting, television
advertisement or any other form of general solicitation or advertising.
12. Restricted Shares. The Purchasers understand and acknowledge
that the Shares have not been registered under the Act, or any state
securities laws, and that they will be issued in reliance upon certain
exemptions from the registration requirements of those laws, and thus cannot
be resold unless they are registered under the Act or unless the Company has
first received an opinion of competent securities counsel that an exemption
from registration is available for such resale. With regard to the
restrictions on resales of the Shares, the Purchasers are aware (i) of the
limitations and applicability of Securities and Exchange Commission Rule 144;
(ii) that the Company will issue stop transfer orders to its stock transfer
agent in the event of attempts to improperly transfer any such securities; and
(iii) that a restrictive legend will be placed on certificates representing
the Shares, which legend will read substantially as follows:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ISSUED PURSUANT TO A
CLAIM OF EXEMPTION FROM THE REGISTRATION OR QUALIFICATION PROVISIONS OF THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND STATE SECURITIES LAWS AND
THEREFORE HAVE NOT BEEN REGISTERED UNDER THE ACT OR UNDER THE SECURITIES LAWS
OF ANY STATE. THESE SECURITIES MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED
OR HYPOTHECATED WITHOUT COMPLIANCE WITH THE REGISTRATION OR QUALIFICATION
PROVISIONS OF THE ACT OR APPLICABLE STATE LAWS, OR PURSUANT TO AN AVAILABLE
EXEMPTION FROM SUCH REGISTRATION REQUIREMENTS. FURTHERMORE, THE COMPANY WILL
INSTRUCT ITS STOCK TRANSFER AGENT NOT TO RECOGNIZE ANY SALE OF THESE
SECURITIES UNLESS THE COMPANY HAS FIRST RECEIVED AN OPINION OF COUNSEL,
SATISFACTORY TO THE COMPANY AND ITS SECURITIES COUNSEL, THAT AN EXEMPTION FROM
SUCH REGISTRATION REQUIREMENTS IS AVAILABLE.
13. Indemnification. The Company agrees to indemnify each of the
Purchasers and their respective officers, employees and agents, and hold them
harmless from and against any and all liability, damage, cost or expense,
including attorney's fees, incurred on account or arising out of any
inaccuracy in or breach of the declarations, covenants, agreements,
representations, and warranties by the Company set forth herein.
14. Representations and Warranties of the Company. The Company
hereby represents and warrants to Purchasers as follows:
14.1 Organization, Standing, Etc. The Company is duly organized,
validly existing, and in good standing under the laws of the State of Nevada,
and has the requisite power and authority to enter into and perform this
Agreement and to execute and perform under the documents, instruments and
agreements related to this Agreement.
14.2 Authorization. The execution and delivery of this Agreement and
the consummation of the transactions contemplated herein have been duly
authorized by all required action of the Company, including any necessary
approval by its Board of Directors or shareholders, and each of the
Transaction Documents and all instruments and agreements to be delivered in
connection therewith constitute its legal, valid and binding obligation,
enforceable against the Company in accordance with their respective terms,
subject to laws of general application relating to the rights of creditors
generally.
14.3 Absence of Conflicts. Neither the execution and delivery of the
Transaction Documents or any other agreement or instrument to be delivered to
the Purchasers in connection therewith, nor the consummation of the
transactions contemplated thereby, by the Company, shall (i) conflict with or
result in a breach of or constitute a violation or default under (A) any
provision of the Articles of Incorporation, as amended, or By-laws of the
Company, or (B) the provision of any indenture, instrument or agreement to
which the Company is a party or by which it or any of its properties is bound,
or (C) any order, writ, judgment, award, injunction, decree, law, statute,
rule or regulation, license or permit applicable to the Company; (ii) result
in the creation or imposition of any lien pursuant to the terms of any such
indenture, instrument or agreement, or constitute a breach of any fiduciary
duty owned by the Company to any third party, or (iii) require the approval of
any third party pursuant to any materials contract, agreement, instrument,
relationship or legal obligation to which the Company is subject or to which
it or any of its properties, operations or management may be subject.
14.4 Capitalization. The authorized capital stock of the Company
consists of 50,000,000 shares of Common Stock par value $.0001 per share and
1,000,000 shares of Preferred Stock par value $.0001 per share. As of
November 1, 1996, 10,933,744 shares of Common Stock were issued and
outstanding, 212,500 shares of Preferred Stock were issued and outstanding, no
shares were held in the Company's treasury, and 6,600,000 shares were reserved
for issuance in connection with options previously granted by the Company.
All of the outstanding shares of Common Stock are, and the Shares will be,
when paid for and issued, duly authorized, validly issued, fully paid and
non-assessable free of any preemptive rights.
14.5 Financial Statements. The Company's annual report on Form
10-KSB for the fiscal year ended September 30, 1995 (the "1995 10-K"), and its
quarterly reports on Form 10-QSB for the periods ended December 31, 1995,
March 31, 1996 and June 30, 1996 (the "1996 10-Qs"), and all Current Reports
on Form 8-K filed by the Company since December 31, 1995 (the "8-K's) copies
of which have been filed with or furnished to the Securities and Exchange
Commission, were when filed or furnished, accurate in all material respects
and did not include any untrue statement of material fact or omit to state
material facts necessary to make the statements therein not misleading. The
financial statements included in the 1995 10-K and the 1995 10-Qs present
fairly the financial position of the Company at such dates and the results of
its operations and cash flows for the periods then ended, in conformity with
generally accepted accounting principles applied on a consistent basis
throughout the periods covered by such statements.
14.6 Litigation, Etc. Except as disclosed in the 1995 10-K and the
1996 10-Qs and 8-Ks, there are no suits, actions or legal, administrative,
arbitration or other proceedings or governmental investigations or other
controversies pending, or to the knowledge of the Company threatened, or as to
which the Company has received any notice, claim or assertion, which involve a
potential cost or liability to the Company which would singly or in the
aggregate, materially or adversely affect the financial condition, results of
operations, business or prospects of the company. The Company is not in
default with respect to any order, writ, injunction or decree of any court or
before any federal, state, municipal or other governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign
affecting or relating to it which is material to the financial condition,
results of operations or business of the Company.
14.7 No Material Adverse Change. Since September 30, 1995, other
than as disclosed in 1996 10-Qs and 8-Ks, there has been no material adverse
change in the assets, business, prospects, operations or financial condition
of the Company.
14.8 Unincorporated Documents or Materials. With respect to any
document or other materials received by the Purchasers from the Company or its
representatives which are incorporated herein by reference pursuant to Section
8.9 hereof, (i) the Company has no reason to believe any of such documents and
materials or any projections contained therein contain errors or misstatements
or do not adequately describe the transactions contemplated by this Agreement
or the status of the development of the Company's technology, and (ii) such
documents, materials and projections were prepared by the Company and its
management in good faith.
14.9 Information. The information concerning the Company set forth
in this Agreement is complete and accurate in all material respects and does
not contain any untrue statement of a material fact or omit to state a
material fact required to make the statements made, in light of the
circumstances under which they were made, not misleading. The Company is not
aware of any facts or circumstances existing or any event which has had or
which reasonably could be expected to have in the future a material adverse
effect with respect to the financial condition, business, affairs or prospects
of the Company since the last day of its most recent fiscal year which is not
otherwise disclosed in the documents provided to Purchasers hereunder.
14.10 Nature of Company. The Company is not an open ended investment
company or a unit investment trust, registered or required to be registered,
or a closed end investment company required to be registered, but not
registered, under the Investment Company Act of 1940.
15. Confidentiality. The Purchasers acknowledge and agree that the
Company has provided them with certain information about the Company that is
proprietary and confidential in connection with the consummation of the
transactions contemplated by this Agreement (the "Confidential Information").
The Purchasers covenant to preserve the confidentiality of the Confidential
Information and to use the Confidential Information only for the purpose of
determining to proceed with the transactions contemplated by this Agreement,
except that information (i) in the public domain without violation of any
confidentiality agreement, if known by the party receiving it before receipt,
or (ii) received from a third party without violation of a non-disclosure
obligation of that third party of the party delivering or disclosing
information shall not be considered Confidential Information subject to this
Section 15.
16. Nondisclosure. Except as required by applicable securities laws,
rules and regulations, prior to the Closing Date, no press release or other
announcement concerning the proposed transactions will be issued except by
mutual consent of the parties. This Agreement and all negotiations and
discussions between the parties in connection with this Agreement shall be
strictly confidential and will not be disclosed in any manner prior to the
Closing Date, except to employees and agents of the parties on a need-to-know
basis, as required by applicable law or regulations or as otherwise agreed by
the parties. After Closing, disclosure shall be at the sole discretion of the
Company.
17. Conditions to Closing. Closing of the transactions contemplated
by this Agreement shall be contingent upon the satisfaction of the following
conditions precedent:
17.1 Approvals, Waivers, Etc. KLS shall have delivered to the
Purchasers evidence of all approvals of its board of directors, government or
third-parties which may be required for the sale of the Shares, in full force
and effect as of the Closing Date.
18. General Provisions.
18.1 Attorneys' Fees. In the event of a default in the performance
of this Agreement or any document or instrument executed in connection with
this Agreement, the defaulting party, in addition to all other obligations of
performance hereunder, shall pay reasonable attorneys' fees and costs incurred
by the non-defaulting party to enforce performance of this Agreement.
18.2 Choice of Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Utah, including choice
of law rules.
18.3 Counterparts. This Agreement may be executed in one or more
counterparts, each of which when so signed shall be deemed to be an original,
and such counterparts together shall constitute one and the same instrument.
18.4 Entire Agreement. This Agreement, and the Exhibits, Schedules
and other attachments referred to herein (all of which are incorporated in
this Agreement by reference) collectively set forth the entire agreement
between the parties as to the subject matter hereof, supersede any and all
prior or contemporaneous agreements or understandings of the parties relating
to the subject matter of this Agreement, and may not be amended except by an
instrument in writing signed by all of the parties to this Agreement.
18.5 Expenses. The parties shall be responsible for and shall pay
their own costs and expenses, including without limitation attorneys' fees and
accountants' fees and expenses, in connection with the conduct of the due
diligence inquiry, negotiation, execution and delivery of this Agreement and
the instruments, documents and agreements executed in connection with this
Agreement. Notwithstanding the foregoing, the Company shall pay any stock
transfer taxes payable in connection with the issue and sale of the Shares to
the Purchasers.
18.6 Headings. The headings of the sections and paragraphs of this
Agreement have been inserted for convenience of reference only and do not
constitute a part of this Agreement.
18.7 Notices. All notices or other communications provided for under
this Agreement shall be in writing, and mailed, telecopied or delivered by
hand delivery or by overnight courier service, to the parties at their
respective addresses as indicated below or at such other address as the
parties may designate in writing:
(1) If to Purchasers, then to their respective addresses set forth
in Schedule I hereto.
(2) If to the Company:
K.L.S. Enviro Resources, Inc.
3220 North Freeway, Suite 105
Fort Worth, TX 76111
Attn: Raymond S. Kurzon, President
Fax: (817) 624-1032
With a copy to:
Jeffrey M. Jones, Esq.
DURHAM, EVANS, JONES & PINEGAR, P.C.
Key Bank Tower, Suite 850
50 South Main Street
Salt Lake City, Utah 84144
Fax: (801) 538-2425
All notices and communications shall be effective as follows: When mailed,
upon three (3) business days after deposit in the mail (postage prepaid); when
telecopied, upon confirmed transmission of the telecopied notice; when hand
delivered, upon delivery; and when sent by overnight courier, the next
business day after deposit of the notice with the overnight courier.
18.8 Severability. Should any one or more of the provisions of this
Agreement be determined to be illegal or unenforceable, all other provisions
of this Agreement shall be given effect separately from the provision or
provisions determined to be illegal or unenforceable and shall not be affected
thereby.
18.9 Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of the parties and their successors, but shall not be
assignable by Purchasers without the prior written consent of the Company.
18.10 Survival of Representations, Warranties and Covenants Closing.
All warranties, representations, indemnities and agreements made in this
Agreement by a party hereto shall survive the date of this Agreement, the
Closing Date, the consummation of the transactions contemplated by this
Agreement, and the issuance by the Company of the Shares.
<PAGE>
IN WITNESS WHEREOF, the party named below has caused this Agreement to be
executed, as of the date first above written.
BY: _____________________________________
NAME:___________________________________
TITLE:___________________________________
DATE: December 31, 1996
ACCEPTED AND AGREED:
KLS ENVIRO RESOURCES, INC.
BY:__________________________________
DATE: December 31, 1996
<PAGE>
SCHEDULE I
TO THE SECURITIES PURCHASE AGREEMENT
PURCHASERS SIGNATORY THERETO AND
KLS ENVIRO RESOURCES, INC.
Name and Address Number of Shares Purchase Price Residency
of Purchaser Purchased Paid or Incorp.
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT ("Agreement") between K.L.S. Enviro
Resources, Inc., a Nevada corporation (the "Company"), and SMD, L.L.C., a Utah
limited liability company ("Holder").
Recitals
A. The Company has executed and delivered to Holder a warrant
pursuant to which Holder may acquire up to 6,600,000 shares of the Company's
common stock, $.0001 par value, at an exercise price of $.40 per share.
B. Upon the issuance of any shares of the Company's common stock upon
exercise of the warrant, such shares will be unregistered and restricted.
C. Holder would not have agreed to accept the warrant unless the
Company had agreed to enter into this Agreement.
Agreement
In consideration of the promises contained in this Agreement and in the
warrant , and for other good and valuable consideration, the receipt and
sufficiency of which the parties acknowledge by their signatures below, the
Company and Holder agree as follows:
1. Piggyback Registrations. If the Company at any time proposes to
file a registration statement covering proposed sales by it or any of its
shareholders of shares of its capital stock in a manner which would permit
registration of shares of common stock for sale to the public (other than a
registration statement (i) covering only shares issuable upon the exercise of
employee stock options or pursuant to an employee stock purchase, dividend
reinvestment or similar plan, (ii) on Form S-4 or S-8 or any similar form)
under the U.S. Securities Act of 1933, as amended (the "Act"), (iii) in
connection with a registered public offering of the Company's capital stock,
or (iv) pursuant to Section 2 hereof, the Company will give prompt notice to
Holder of such proposed registration (which notice shall describe the proposed
filing date and the date by which the registration rights granted pursuant to
this Section 1 must be exercised, the nature and method of any such sale or
disposition of securities and shall include a listing of the jurisdictions, if
any, in which the Company proposes to register or qualify the securities under
the applicable state securities or "Blue Sky" laws of such jurisdictions). At
the request of Holder given within thirty (30) calendar days after the receipt
of such notice by Holder (which request shall specify the number of shares
Holder requests to be included in such registration), the Company will use its
best efforts to cause all shares as to which registration has been requested
by Holder to be included in such registration statement for sale or
disposition in accordance with the method described in the initial notice
given to Holder and subject to the same terms and conditions as the other
shares of capital stock being sold, and thereafter shall cause such
registration statement to be filed and become effective; provided, however,
that the Company shall be permitted to (A) withdraw the registration statement
for any reason in its sole and exclusive discretion and upon the written
notice of such decision to Holder shall be relieved of all of its obligations
under this Section 1 with respect to that particular registration; or (B)
exclude all or any portion of the shares sought to be registered by Holder
from such registration statement if the offering of the shares is an
underwritten offering and to the extent that, in the judgment of the managing
underwriter of the offering, the inclusion of such shares would be materially
detrimental to the offering of the remaining shares of capital stock, or such
delay is necessary in light of market conditions. Any shares sought to be
registered by Holder so excluded from a registration statement shall be
excluded pro rata based on the total number of shares of capital stock being
sold by all selling Holders (other than the Company).
2. Demand Registration. If at any time from and after the date of
this Agreement, the Company shall be requested in writing by Holder to effect
the registration under the Act of shares of the Company's common stock then
owned by Holder (which request shall specify the aggregate number of shares
intended to be offered and sold by Holder, shall describe the nature or method
of the proposed offer and sale thereof and shall contain an undertaking by
Holder to cooperate fully with the Company in order to permit the Company to
comply with all applicable requirements of the Act and the rules and
regulations thereunder and to obtain acceleration of the effective date of the
registration statement contemplated thereby), the Company shall effect the
registration of such securities on an appropriate form under the Act, provided
that (i) Holder may exercise the right to request registration pursuant to
this Section 2 only with respect to those shares that, at the time such
request for registration is delivered to the Company, may not be sold to the
public pursuant to Rule 144 under the Act or any similar or successor rule;
(ii) Holder's rights under this Section 2 shall be exercisable only if the
shares as to which Holder requests registration have an aggregate value of at
least $250,000 based on the average of the closing bid price for the Company's
common stock as listed on any exchange on which the Company's common stock
then may be traded for the thirty (30) trading-day period immediately
preceding the date of such request for registration; (iii) the Company shall
be entitled to postpone the filing of any registration statement otherwise
required to be prepared and filed by it pursuant to this Section 2, if at the
time it receives a request for such registration, the Company's underwriter
determines that such registration and offering would materially interfere with
any existing or then presently contemplated financing, acquisition, corporate
reorganization or other material transaction involving the Company, and the
Company promptly gives the Holder written notice of such determination,
provided, however, that such postponement shall not extend beyond the time
that such material interference continues to exist; and (iv) Holder shall have
no right to demand registration with respect to any shares within ninety (90)
calendar days after the effective date of any registration statement filed by
the Company.
3. Registration Procedures. If and whenever this Agreement
contemplates that the Company will effect the registration under the Act of
any shares held by the Holder, the Company shall:
3.1 prepare and file with the Securities and Exchange Commission
(the "SEC") a registration statement on the appropriate form with respect to
such shares and use its best efforts to cause such registration statement to
become effective;
3.2 prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in
connection therewith and to take such other action as may be necessary to keep
such registration statement effective until the earlier of (i) the completion
of the distribution of shares so registered, or (ii) expiration of the ninety
(90) day period following immediately the effective date of such registration
statement (at which time unsold shares may be deregistered), and otherwise
comply with applicable provisions of the Act and the rules and regulations
promulgated under the Act;
3.3 furnish to Holder and its counsel, and to each underwriter
of the shares to be sold by the Holder, without charge, such number of copies
of one or more preliminary prospectuses, any supplements thereto and a final
prospectus and any supplements thereto in conformity with the requirements of
the Act, and such other documents as the Holder or such underwriter may
reasonably request, in order to facilitate the public sale or other
disposition of such shares;
3.4 if, during any period in which, in the opinion of the
Company's counsel, a prospectus relating to the shares is required to be
delivered under the Act in connection with any offer or sale contemplated by
any registration statement, any event known to the Company occurs as a result
of which the prospectus would include an untrue statement of material fact or
omit to state any material fact necessary to make the statements made therein,
in light of the circumstances under which they were made, not misleading, or
if it is necessary at any time to amend or supplement the related prospectus
to comply with the Act, the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), or the respective rules and regulations thereunder, to notify
the Holder promptly and to prepare and file with the SEC an amendment or
supplement, whether by filing such documents pursuant to the Act or the
Exchange Act as may be necessary to correct such untrue statement or omission
or to make any registration statement or the related prospectus comply with
such requirements and to furnish to Holder and its counsel such amendment or
supplement to such registration statement or prospectus;
3.5 timely to file with the SEC (i) any amendment or supplement
to any registration statement or to any related prospectus that is required by
the Act or the Exchange Act or requested by the SEC, and (ii) all documents
(and any amendments to previously filed documents) required to be filed by the
Company pursuant to Section 13(a), 13(c), 14 and 15(d) of the Exchange Act;
3.6 within five days of filing with the SEC of (i) any amendment
or supplement to any registration statement, (ii) any amendment or supplement
to the related prospectus, or (iii) any document incorporated by reference in
any of the foregoing or any amendment of or supplement to any such incorporated
document, to furnish a copy thereof to Holder;
3.7 to advise Holder and its counsel promptly (i) when any
post-effective amendment to any registration statement becomes effective and
when any further amendment of or supplement to the prospectus shall be filed
with the SEC, (ii) of any request or proposed request by the SEC for an
amendment or supplement to any registration statement, to the related
prospectus, to any document incorporated by reference in any of the foregoing
or for any additional information, (iii) of the issuance by the SEC of any
stop order suspending the effectiveness of any registration statement or any
order directed to the related prospectus or any document incorporated therein
by reference or the initiation or threat of any stop order proceeding or of
any challenge to the accuracy or adequacy of any document incorporated by
reference in such prospectus, (iv) of receipt by the Company of any
notification with respect to the suspension of the qualification of the shares
for sale in any jurisdiction or the initiation or threat of any proceeding for
such purpose, and (v) of the happening of any event which makes untrue any
statement of a material fact made in any registration statement or the related
prospectus as amended or supplemented or which requires the making of a change
in such registration statement or such prospectus as amended or supplemented
in order to make any material statement therein not misleading;
3.8 use its reasonable best efforts to register or qualify the
shares covered by such registration statement under the securities or blue sky
laws of such jurisdictions as the Holder shall reasonably request considering
the nature and size of the offering and do such other acts and things as may
be reasonably necessary to enable the Holder to consummate the public sale or
other disposition in each such jurisdiction of such shares; provided, however,
that the Company shall not be obligated to qualify as a foreign corporation to
do business under the laws of any jurisdiction in which it has not been
qualified or to file any general consent to service of process; and
3.9 use its best efforts to cause all shares sold pursuant to
any registration statement to be listed on each national securities exchange,
if any, on which such shares are then listed.
4. Agreements of Holder. Holder (i) upon receipt of a notice from
the Company of the occurrence of any event of the kind described in Subsection
3.4 shall forthwith discontinue Holder's disposition of securities included in
the registration statement until Holder receives copies of the supplemented or
amended prospectus, and (ii) if so directed by the Company, shall deliver to
the Company, at the Company's expense, all copies (other than permanent file
copies) then in Holder's possession of the prospectus covering such securities
that was in effect at the time of receipt of such notice.
5. Withdrawal. If Holder disapproves of the terms of any offering,
the sole remedy of Holder shall be to withdraw Holder's securities therefrom
by giving written notice to the Company and any managing underwriter (if
any). Holder's securities of the Company so withdrawn from the offering also
shall be withdrawn from registration.
6. Participation in Underwritten Registrations. In the case of any
registration under Section 2, if Holder or the Company determines to enter
into an underwriting agreement in connection therewith, or in the case of a
registration under Section 1, if the Company determines to enter into an
underwriting agreement in connection therewith, (i) all shares of Holder's
securities to be included in such registration shall be subject to an
underwriting agreement, which shall be in customary form and contain such
terms as are customarily contained in such agreements, and (ii) no person may
participate in any such registration unless such person (A) agrees to sell
such person's securities on the basis provided in such underwriting
arrangement, and (B) completes and executes all questionnaires,
powers-of-attorney, indemnities, underwriting agreements and other documents
reasonably required under the terms of such underwriting arrangements.
7. Registration Expenses. With respect to each registration effected
pursuant to Section 1 and Section 2 of this Agreement, the Company shall pay
the following fees, disbursements and expenses: all registration and filing
fees, printing expenses, auditors' fees, listing fees, registrar and transfer
agent's fees, fees and disbursements of counsel to the Company, expenses
(including reasonable fees and disbursements of counsel) of complying with
applicable securities or "Blue Sky" laws and the fees of any securities
exchange in connection with the review of such offering. The underwriting
discounts and commissions allocable to the shares included in any offering
shall be borne by the holders thereof.
8. Rule 144 Sales.
8.1 The Company covenants that it will file the reports required
to be filed by the Company under the Securities Act and the Exchange Act so as
to enable any Holder to sell Shares pursuant to Rule 144 under the Securities
Act.
8.2 In connection with any sale, transfer or other disposition
by any Holder of any shares pursuant to Section 4(1) of the Securities Act or
Rule 144 thereunder, the company shall cooperate with such Holder to
facilitate the timely preparation and delivery of certificates representing
shares to be sold and not bearing any Securities Act legend, and enable
certificates for such shares to be for such number of shares and registered in
such names as the selling Holders may reasonably request at least two business
days prior to any sale of shares.
9.Indemnification.
9.1 In each case of a registration of shares under the
Securities Act pursuant to this Agreement, the Company will indemnify and hold
harmless the Holder, its officers and directors, each underwriter (as defined
in the Act) and each other person, if any, who controls any of the Holder or
any such underwriter within the meaning of the Act or the Exchange Act from
and against any and all losses, claims, damages and liabilities (including the
fees and expenses of counsel in connection therewith in connection with any
governmental or regulatory investigation or proceeding), arising out of any
untrue statement or alleged untrue statement of a material fact contained in
any registration statement under which such shares were registered under the
Act, any prospectus or preliminary prospectus contained therein or any
amendment or supplement thereto (including, in each case, documents
incorporated by reference therein), or arising out of any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements made therein not misleading, except insofar
as such losses, claims, damages or liabilities arise out of any such untrue
statement or omission or alleged untrue statement or omission based upon
information relating to any of the Holder, Holder's counsel or any underwriter
and furnished to the Company in writing by any of the Holder or such counsel
or underwriter; provided that the foregoing indemnification with respect to a
preliminary prospectus shall not inure to the benefit of any underwriter (or
the benefit of any person controlling such underwriter) from whom the person
asserting any such losses, claims, damages or liabilities purchased shares to
the extent such losses, claims, damages or liabilities result from the fact
that a copy of the final prospectus had not been sent or given to such person
at or prior to written confirmation of the sale of such shares to such person.
9.2 In each case of a registration of shares under the Act
pursuant to this Agreement, Holder will indemnify and hold harmless the
Company, its directors, its officers who sign the registration statement, its
attorneys, each underwriter and each person, if any, who controls the Company
or such underwriter within the meaning of the Act or the Exchange Act, to the
same extent as the foregoing indemnity from the Company to the Holder, but
only with reference to information provided to the Company in writing by the
Holder and furnished to the Company by the Holder expressly for use in the
registration statement, any publicly available report of the Holder published
within the time frame of the registration statement, any prospectus or
preliminary prospectus contained therein or any amendment or supplement
thereto.
9.3 In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of which
indemnity may be sought pursuant to this Section 9, such person (the
"Indemnified Party") shall promptly notify the person against whom such
indemnity may be sought (the "Indemnifying Party") in writing and the
Indemnifying Party, upon request of the Indemnified Party, shall retain
counsel reasonably satisfactory to the Indemnified Party to represent the
Indemnified Party and any others the Indemnifying Party may designate in such
proceeding and shall pay the fees and disbursements of such counsel related to
such proceeding. In any such proceeding, any Indemnified Party shall have the
right to retain its own counsel, but the fees and expenses of such counsel
shall be at the expense of such Indemnified Party unless (i) the Indemnifying
Party has agreed to the retention of such counsel at its expense, or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the Indemnifying Party and the Indemnified Party, the Indemnifying Party
proposes that the same counsel represent both the Indemnified Party and the
Indemnifying Party and representation of both parties by the counsel would be
inappropriate due to actual or potential differing interests between them. It
is understood, where the expense of separate counsel shall be borne by the
Indemnifying Party pursuant to the foregoing sentence, that the Indemnifying
Party shall not, in connection with any proceeding or related proceedings in
the same jurisdiction, be liable for the fees and expenses of more than one
separate firm qualified in such jurisdiction to act as counsel for such
Indemnified Party. The Indemnifying Party shall not be liable for any
settlement of any proceeding effected without its written consent, but if
settled with such consent or if there be a final judgment for the plaintiff,
the Indemnifying Party agrees to indemnify the Indemnified Party from and
against any loss or liability by reason of such settlement or judgment.
9.4 The indemnification pursuant to this Section 8 shall be on
such other terms and conditions as are at the time customary and reasonably
required by underwriters in public offerings, including providing for
contribution in the event indemnification provided in this Section 9 is
unavailable or insufficient.
10. Holdback Agreement. Holder agrees not to effect any public sale
or distribution of the Company's shares of capital stock during the seven (7)
calendar days prior to and the ninety (90) calendar day period beginning on
the effective date of any underwritten registration statement effected
pursuant to this Agreement (except as part of such underwritten registration)
unless the managing underwriter or underwriters with respect to such offering
otherwise agree.
11. Selection of Underwriters. The Company will have the right to
select the investment banking firm(s) acting as managing underwriter in
connection with any underwritten public offering.
12. Termination. This Agreement and all rights and obligations of
the parties to this Agreement shall terminate four (4) years after the date of
this Agreement; provided, however, that the indemnification provisions of
Section 9 shall not terminate and shall survive forever.
13. General.
13.1 Assignment. Holder's rights under this Agreement shall not
be transferable without the written consent of the Company, which consent
shall not be unreasonably withheld.
13.2 Counterparts. This Agreement may be executed in one or
more counterparts, each of which when so signed shall be deemed to be an
original, and such counterparts together shall constitute one and the same
instrument.
13.3 Entire Agreement. This Agreement sets forth the entire
agreement between the parties as to the subject matter hereof, supersedes any
and all prior or contemporaneous agreements or understandings of the parties
relating to the subject matter of this Agreement, and may not be amended
except by an instrument in writing signed by all of the parties to this
Agreement.
13.4 Governing Law. The laws of the State of Utah (without
giving effect to the choice of law provisions thereof) shall govern the
interpretation and enforcement of this Agreement.
13.5 Headings. The headings of the sections and paragraphs of
this Agreement have been inserted for convenience of reference only and do not
constitute a part of this Agreement.
13.6 Notices. All notices or other communications provided for
under this Agreement shall be in writing, and mailed, telecopied or delivered
by hand delivery or by overnight courier service, to the parties at their
respective addresses as indicated below or at such other address as the
parties may designate in writing:
If to the Company, to it at:
K.L.S. Enviro Resources, Inc.
3220 North Freeway
Fort Worth, TX 76111
Attn: Raymond H. Kurzon
If to Holder, to it at:
SMD, L.L.C.
1225 Eagle Gate Tower
60 East South Temple
Salt Lake City, Utah 84111
Attn: Thomas A. Murdock
All notices and communications shall be effective as follows: When mailed,
upon three (3) business days after deposit in the mail (postage prepaid); when
telecopied, upon confirmed transmission of the telecopied notice; when hand
delivered, upon delivery; and when sent by overnight courier, the next
business day after deposit of the notice with the overnight courier.
13.7 Remedies. Any person having rights under any provision of
this Agreement will be entitled to enforce such rights specifically, to
recover damages caused by reason of any breach of any provision of this
Agreement and to exercise all other rights granted by law.
DATED: September 30, 1996.
K.L.S. ENVIRO RESOURCES, INC.,
a Nevada corporation
By _______________________________
Raymond H. Kurzon, President
SMD, L.L.C.,
a Utah limited liability company
By_______________________________
Thomas A. Murdock, Manager
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