U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____to____.
Commission file number 0-21998
K.L.S. ENVIRO RESOURCES, INC.
(Exact name of small business issuer as specified in its charter)
Nevada 75-2460365
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3220 North Freeway, Fort Worth, Texas 76111
(Address of principal executive offices and zip code)
(817) 624-4844
(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
As of August 11, 1997, the Registrant had outstanding 17,160,997 shares of
its common stock, par value $.0001.
Transitional Small Business Disclosure Format (Check One): Yes [ ] No [X]
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
K.L.S. ENVIRO RESOURCES, INC.
INDEX TO FINANCIAL INFORMATION
June 30, 1997
Page No.
--------
Condensed Consolidated Balance Sheets as of June 30, 1997
(unaudited) and September 30, 1996 (audited)............................3
Condensed Consolidated Statements of Operations (unaudited)
for the Three and Nine Months Ended June 30, 1997 and 1996..............4
Condensed Consolidated Statements of Cash Flows (unaudited) for
the Nine Months Ended June 30, 1997 and 1996............................5
Notes To Consolidated Financial Statements..............................6
Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................................9
2
<PAGE>
K.L.S. Enviro Resources, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
June 30, 1997 (unaudited) and September 30, 1996 (audited)
<TABLE>
<CAPTION>
June, 30 September 30,
1997 1996
-------------- --------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 250,568 $ 300,767
Accounts receivable-trade, net of allowance for
doubtful accounts of $123,402 1,327,920 1,050,371
Other receivables 755 13,274
Inventory 608,316 483,938
Prepaid expenses 85,872 5,975
-------------- --------------
Total current assets 2,273,431 1,854,325
Property, plant and equipment, net 6,402,968 2,604,510
Other assets
Intangible assets, net of accumulated amortization
$78,095 and $70,014, respectively 289,894 49,065
Deposits and other 20,678 20,777
-------------- --------------
Total other assets 310,572 69,842
-------------- --------------
Total assets $ 8,986,971 $ 4,528,677
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Notes payable $ 1,008,387 $ -
Notes payable-related parties 1,167,424 1,988,622
Current maturities of long-term debt 47,887 114,219
Accounts payable 459,463 412,487
Accounts payable-related parties 731,923 -
Accrued expenses and other current liabilities 170,633 188,628
Deferred revenues 9,943 -
-------------- --------------
Total current liabilities 3,595,660 2,703,956
Long-term Debt 251,955 270,995
-------------- --------------
Total liabilities 3,847,615 2,974,951
-------------- --------------
Shareholders' equity
Preferred stock 10 10
Common stock 1,716 1,093
Additional paid-in capital 9,916,399 6,101,057
Accumulated deficit (4,736,056) (4,505,721)
Foreign currency translation adjustments (4,213) (4,213)
-------------- --------------
5,177,856 1,592,226
Treasury stock-common shares held in the treasury, at cost (38,500) (38,500)
-------------- --------------
Total shareholders' equity 5,139,356 1,553,726
-------------- --------------
Total liabilities and shareholders' equity $ 8,986,971 $ 4,528,677
============== ==============
</TABLE>
3
The notes to Consolidated Financial Statements are an integral part of
these statements
<PAGE>
K.L.S. Enviro Resources, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
For the Three and Nine Months ended June 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
June 30, June 30,
----------------------------- -----------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales and revenues
Drilling and repair service revenues $ 2,095,290 $ 1,313,034 $ 4,844,101 $ 3,018,511
Cost of drilling and repair services 1,122,211 682,381 2,415,191 1,687,808
------------- ------------- ------------- -------------
Gross profit 973,079 630,653 2,428,910 1,330,703
------------- ------------- ------------- -------------
Operating expenses
Salaries, wages and related costs 186,112 208,265 479,824 459,991
Legal and professional fees 177,642 63,240 452,054 186,484
Rents 16,504 11,522 50,356 46,665
Repairs and maintenance 20,016 3,507 45,743 20,848
Taxes, licenses and permits 14,777 20,258 38,397 46,275
Advertising 2,223 1,444 6,473 7,635
Travel and lodging 23,806 8,489 108,434 70,229
Consulting 40,275 44,412 115,053 69,912
Development costs 45,693 4,733 206,233 (10,715)
Other operating expenses 83,598 52,595 555,913 192,248
Depreciation and amortization 182,325 98,009 394,442 237,552
------------- ------------- ------------- -------------
Total operating expenses 792,971 516,474 2,452,922 1,327,124
------------- ------------- ------------- -------------
Income (loss) from operations 180,108 114,179 (24,012) 3,579
Other income (expenses)
Interest expense (68,693) (44,643) (165,911) (112,933)
Interest and other income, net 1,935 3,747 40,839 9,056
Gain on sale of investment securities - - - 99,289
Gain on sale of assets 4,500 3,792 4,500 25,158
Gain (loss) from foreign currency translation (1,018) (3,530) (13,557) 9,603
------------- ------------- ------------- -------------
Net other income or (expense) (63,276) (40,634) (134,129) 30,173
------------- ------------- ------------- -------------
Income (loss) before income taxes 116,832 73,545 (158,141) 33,752
Income taxes 49,693 - 49,693 -
------------- ------------- ------------- -------------
Income (loss) from continuing operations 67,139 73,545 (207,834) 33,752
Discontinued operations:
Loss from discontinued operations - - (34,511)
Gain on sale of subsidiary - - 379,935
------------- ------------- ------------- -------------
Net income (loss) $ 67,139 $ 73,545 $ (207,834) $ 379,176
============= ============= ============= =============
Income (loss) per weighted-average common share outstanding:
Income (loss) from continuing operations $ 0.00 $ 0.01 $ (0.01) $ 0.00
Income from discontinued operations $ - $ - $ - $ 0.04
------------- ------------- ------------- -------------
Net income (loss) $ 0.00 $ 0.01 $ (0.01) $ 0.04
============= ============= ============= =============
Weighted-average number of common shares outstanding 17,007,288 9,188,795 14,809,735 9,058,188
============= ============= ============= =============
</TABLE>
4
The Notes to Consolidated Financial Statements are an integral part
of these statements
<PAGE>
K.L.S. Enviro Resources, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
for the Nine Months ended June 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
June 30,
-------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ (207,836) $ 379,176
Adjustments to reconcile net income (loss) to cash
used in operating activities:
Common stock for services 80,487 84,466
Depreciation and amortization 394,442 237,552
Gain on sale of investment securities - (99,289)
Gain on disposal of equipment (4,500) (25,158)
Gain on sale of subsidiary (379,935)
Translation loss (gain) 1,616 (9,603)
Changes in
Accounts and other receivables (264,635) (204,507)
Inventory (124,379) (13,955)
Prepaid expenses (79,897) (89,363)
Other assets (248,808) (2,448)
Accounts payable 47,072 (41,105)
Accounts payable-related parties 731,923 -
Accrued expenses (42,936) 56,099
Deferred revenue 10,274 (29,616)
-------------- --------------
Net cash provided by (used in) operating activities 292,823 (137,686)
-------------- --------------
Cash flows from investing activities:
Proceeds from sales of investment securities - 328,861
Proceeds from sale of subsidiary, net of selling costs - 184,042
Proceeds from sale of equipment - 20,250
Purchases of equipment (4,180,319) (236,484)
-------------- --------------
Net cash (used in) provided by investing activities (4,180,319) 296,669
-------------- --------------
Cash flows from financing activities:
Net change in notes payable 1,008,387 52,559
Net change in long-term debt (85,373) (99,161)
Net change in loans from related parties (551,199) (3,495)
Cash received from stock subscriptions and sales of common stock 3,465,478 -
-------------- --------------
Net cash provided by (used in) financing activities 3,837,293 (50,097)
-------------- --------------
Effect of exchange rate changes on cash 4 33
-------------- --------------
Increase (decrease) in cash (50,199) 108,919
Cash at beginning of period 300,767 174,479
-------------- --------------
Cash at end of period $ 250,568 $ 283,398
============== ==============
</TABLE>
5
The Notes to Consolidated Financial Statements are an integral part
of these statements.
<PAGE>
K.L.S. ENVIRO RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General - The accompanying unaudited consolidated financial statements of
K.L.S. Enviro Resources, Inc. and Subsidiaries (collectively the "Company")
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-QSB and in accordance with Item 310 of Regulation S-B.
Accordingly, such unaudited financial statements do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. The Company suggests that
these financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's Form 10-KSB for the
year ended September 30, 1996.
In the opinion of management, all adjustments, consisting of normal
recurring adjustments and eliminations of material intercompany sales and
purchases necessary to present fairly the financial condition, results of
operations and cash flows for the Company for the interim periods
presented, have been included. Operating results for the three and nine
months ended June 30, 1997, are not necessarily indicative of the results
that may be expected for the year ending September 30, 1997.
Principles of Consolidation - The accompanying unaudited consolidated
financial statements include all the accounts of K.L.S. Enviro Resources,
Inc. and its six wholly-owned subsidiaries, Dateline Drilling, Inc., K.L.S.
Co., Inc., Kel-Lite Industries, Inc., Dateline Internacional, S.A. de C.
V., K.L.S. International, Inc., and Beloro, S.A. de C.V. The operations of
Kel-Lite Industries, Inc. were discontinued during fiscal 1996.
Income (Loss) Per Common Share - Income (loss) per share of common stock is
based on the weighted average number of shares outstanding during the three
and nine months ended June 30, 1997 and 1996.
NOTE 2. INVENTORY
<TABLE>
<CAPTION>
June 30, September 30,
Major classes of inventories are as follows: 1997 1996
--------------- ----------------
<S> <C> <C>
Consumable supplies $ 608,316 $ 483,938
Raw materials - -
Finished goods - -
--------------- ----------------
$ 608,316 $ 483,938
=============== ================
</TABLE>
NOTE 3. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
June 30, September 30,
Property, plant and equipment are as follows: 1997 1996
--------------- ----------------
<S> <C> <C>
Machinery and equipment $ 6,656,529 $2,763,188
Transportation equipment 584,522 433,514
Building and improvements 493,066 493,066
Furniture and fixtures 272,523 140,422
--------------- ----------------
Accumulated depreciation ( 1,753,672) ( 1,375,680)
--------------- ----------------
6,252,968 2,454,510
Land 150,000 150,000
--------------- ----------------
Property, plant and equipment, net $ 6,402,968 $2,604,510
============== ==============
</TABLE>
6
<PAGE>
NOTE 4. NOTES PAYABLE
Note Payable - At June 30, 1997, the Company had a note payable to an
unrelated party in the amount of $508,387 which bears interest at the rate
of 12%. This note payable is due and payable on demand and is secured by
the assets of the Company.
At June 30, 1997, the Company had a note payable to an unrelated party in
the amount of $500,000 which bears interest at the rate of 18%. This note
payable is due and payable on demand and is secured by the assets of the
Company.
Note Payable - Related Party - As of the fiscal year ended September 30,
1996, the Company had a note payable to a shareholder, bearing interest at
12 percent, due on demand, collateralized by all assets, except real
estate, in the amount of $1,673,730. On October 16, 1996, the shareholder
loaned an additional $100,000 to the Company under similar terms. Payments
were made by the Company to the shareholder from the proceeds of the sale
of stock (see Stockholders' Equity below) on December 31, 1996, reducing
the balance to $1,727,591 and on January 2, 1997, reducing the balance to
$186,343. During the six months ended June 30, 1997, the shareholder
loaned the Company an additional $942,140 in various transactions. At June
30, 1997, this note had a balance of $1,128,483.
As of June 30, 1997, the Company had a note payable to a shareholder in the
amount of $15,000, bearing interest at prime plus 1%, due on demand,
collateralized by Dateline's accounts receivable.
As of June 30, 1997, the Company had a note payable to a shareholder in the
amount of $23,941, bearing interest at prime plus 1%, due on demand,
collateralized by KLS Co.'s accounts receivable.
NOTE 5. STOCKHOLDERS' EQUITY
Issuance of Stock - In December 1996, the Company sold 4,990,500 shares of
restricted common stock for consideration of $0.80 per share pursuant to
Regulation D of the Securities Act of 1933. In connection with this
offering, in January 1997, the Company issued 100,000 shares of common
stock for finder's fees.
On December 31, 1996, a shareholder purchased $270,000 of a demand note of
the Company then held by an unrelated entity. Also on December 31, 1996,
the shareholder exercised the conversion rights associated with such note,
at an exchange rate of $0.30 per share, to acquire 900,000 shares of the
Company's restricted common stock.
Stock Options and Warrants - On December 31, 1996, the Company's board of
directors approved a stock option plan for directors, employees and other
persons acting on behalf of the Company, under which the aggregate number
of shares available for issuance is 2,230,000. The exercise price of any
options granted under the plan is the closing market price of the stock on
the date the options are granted. Options granted under the plan have a
maximum term of ten years after the grant date.
A summary of the status of the Company's stock option plan for the nine
months ended June 30, 1997 is presented below:
Stock Wt. Ave.
Options Exercise Price
------------- -----------------
Outstanding at beginning of period 560,000 $ 0.46
Granted 1,050,000 3.00
Exercised (125,403) .40
Forfeited - -
Canceled - -
------------- -----------------
Outstanding at end of period 1,484,597 $ 2.25
============= =================
Exercisable at end of period 1,284,597 $ 2.14
============= =================
7
<PAGE>
A summary of the status of the Company's warrants for the nine months ended
June 30, 1997 is presented below:
Wt. Ave.
Warrants Exercise Price
------------- -----------------
Outstanding at beginning of period 6,725,000 $ .40
Granted - -
Exercised 125,000 .40
Forfeited - -
Canceled - -
------------- -----------------
Outstanding at end of period 6,600,000 $ .40
============= =================
NOTE 6. INCOME TAXES
At June 30, 1997, deferred tax assets were approximately $2,130,000 and
deferred tax liabilities were approximately $65,000. The amount of and
ultimate realization of the benefits from the deferred tax assets for
income tax purposes is dependent, in part, upon the tax laws in effect, the
Company's future earnings, and other future events, the effects of which
cannot be determined. Because of the uncertainty surrounding the
realization of the loss carryforwards the Company has established a
valuation allowance for all net deferred tax assets of approximately
$2,065,000. The net change in the valuation allowance was approximately
$616,000 for the nine months ended June 30, 1997.
The Company has available at June 31, 1997, net operating tax loss
carryforwards of approximately $4,300,000, some of which has been used to
reduce the Company's deferred income taxes payable. These carryforwards
expire beginning in 2008 except for $427,209 of the loss which expires
beginning in 2004.
NOTE 7. RELATED PARTY
Fees totaling approximately $33,990 for the nine months ended June 30, 1997
were paid to a shareholder for advisory and accounting services performed
and lease of office space.
The Company has a consulting agreement with a shareholder of the Company to
provide management advice. The agreement has a three year term and
requires monthly payments of approximately $2,000. Total payments for the
nine months ended June 30, 1997 approximated $18,000.
The Company has a $50,000 per month consulting agreement with an entity
affiliated with certain shareholders, directors and officers of the Company
to provide the Company with management and advisory services over a 5 year
period beginning October 1, 1996. No payments have been made under this
agreement during the nine months ended June 30, 1997.
NOTE 8. COMMITMENTS AND CONTINGENCIES
KLS Enviro Resources, Inc., Dateline Drilling, Inc. ("Dateline") and
Dateline Internacional S.A. De C.V. engaged in a dispute with a former
customer over a contract entered into between Dateline and the former
customer. An arbitration in Wyoming and a lawsuit in Texas have been
filed. The arbitration is inactive and the Company is vigorously
contesting the claims of the former customer asserted in the lawsuit. The
ultimate outcome of this dispute cannot be predicted and no provision for
liability has been made in the accompanying consolidated financial
statements. A receivable from the former customer in the amount of
$123,000 has not been paid pending resolution of the dispute and an
allowance of $123,000 has been provided in the accompanying financial
statements. The legal costs of this litigation have been expensed as
incurred.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results Of Operations.
Results Of Operations
Three Months Ended June 30, 1997 Compared With Three Months Ended June 30,
1996
The Company's net income for the three months ended June 30, 1997 was
$67,139 compared to net income of $73,545 for the three months ended June
30, 1996. Although revenues increased significantly during the period
ending June 30, 1997, so did total expenses, resulting in a slight decrease
in net income of $6,406, as compared to the period ending June 30, 1996.
Total revenues from continuing operations for the three months ended
June 30, 1997 were $2,095,290, an increase of $782,256 or approximately 60
percent, over the three months ended June 30, 1996. The increase in
revenues is primarily attributable to an increase in drilling and hydraulic
services in the United States of $776,901 and $61,304, respectively.
Drilling services revenues in Mexico increased $33,832, from $887,744 to
$921,576. The Company has increased its drilling fleet from nine rigs to
fourteen rigs during fiscal 1997. This expansion contributed to the
increase in revenues for the three months ended June 30, 1997 over the
three months ended June 30, 1996.
During the period ending June 30, 1997, direct costs of drilling and
repair services were $1,122,211, an increase of $439,830 over the
comparable period of the prior year. This is an increase of approximately
1.5 percent when compared as a percentage of revenue over the comparable
period of fiscal 1996. Total operating expenses were $792,971, an increase
of $276,497 over the comparable period of the prior year. The increase in
operating expenses was due primarily to increased development costs, legal
fees and other operating expenses. Total operating expenses were
approximately 38 and 39 percent, respectively, for the three months ended
June 30, 1997 and 1996.
Development expenditures are expensed as incurred and are comprised
of costs associated with the Company's efforts to develop new international
markets and other revenue sources for its drilling operations.
Development expenses were $45,693 and $4,733 for the three months ending
June 30, 1997 and 1996, respectively.
Net other expense increased $22,642 for the three months ended
June 30, 1997 over the comparable period of the prior year. Of this
amount, interest expense increased $24,050 and interest and other income
decreased $1,812. Gains from the sale of assets decreased $708 and the
Company recorded a loss from foreign currency translation of $1,018 and
$3,530 for the three months ended June 30, 1997 and 1996, respectively.
Financial Condition
At June 30, 1997, the Company's current liabilities exceeded its
current assets by $1,322,229 as compared with current liabilities exceeding
current assets by $849,631 at September 30, 1996. The current ratio of
assets to liabilities was .63 at June 30, 1997 as compared with .69 at
September 30, 1996. Current assets increased by $419,106 to $2,273,431
from September 30, 1996 to June 30, 1997. Current liabilities increased by
$891,704 during the same period. The decrease in working capital over this
period is primarily attributable to increases in notes payable for the
purchase of new equipment. The Company is pursuing plans to replace short-
term notes with long-term financing.
Total assets were $8,986,971 at June 30, 1997 as compared to
$4,528,677 at September 30, 1996. The increase of $4,458,294 is due to an
increase in net fixed assets of approximately $3,800,000, consisting
primarily of additions to the drill rig fleet and supporting equipment.
For the three months ended June 30, 1997, the Company had a positive
cash flow from operations. The Company anticipates increases in revenues
and cash flow from operations due to its recently expanded fleet of drill
rigs. Two drill rigs with support equipment were purchased and placed into
service in March, 1997. Two rigs were constructed in-house and another
rig was purchased and placed into service during the three months ended
June 30,
9
<PAGE>
1997. This expansion increases the Company's fleet of drill rigs to
fourteen. As the Company continues to expand, it endeavors to maintain a
positive cash flow from operations, although there can be no assurance that
the Company will achieve a positive cash flow from operations. The Company
also is increasing its efforts to acquire mining properties, and it will
continue to require additional sources of funds in order to pursue precious
metals exploration and development and expand its drilling and repair
services. Such funding may come from debt or the sale of the Company's
equity securities, but there can be no assurance that the Company will
obtain the funds needed to supplement any shortfall in its cash flow as and
when needed or on terms that will be satisfactory to the Company.
In January 1997, and April 1997, the Company granted options to
acquire an aggregate of 1,000,000 and 50,000 shares of the Company's common
stock to certain officers and directors of the Company. These options are
exercisable for a period of ten years at prices ranging from $2.88 to $3.06
per share, which represented the fair value of the underlying common stock
on the date of grant. None of these options have been exercised and there
were no other sales of unregistered securities by the Company during the
quarter. The grant of these options was made without registration under
the Securities Act of 1933, as amended, in reliance upon exemptions under
Section 4(2) and other provisions of such Act, including rules and
regulations promulgated thereunder relative to sales of securities not
involving a public offering.
Forward-looking Statements and Certain Risk Factors
Statements which are not historical facts contained in this report
are forward-looking statements. Section 27A of the Securities Act of
1933, as amended, provides a safe harbor for forward-looking statements.
In order to comply with the terms of the safe harbor, the Company cautions
that a variety of factors could cause the Company's actual results to
differ materially from anticipated results or other expectations expressed
in this report. The forward-looking statements contained in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations involve a number of risks and uncertainties that could cause
actual results to differ from projected or anticipated results. Some of
the risks and uncertainties are set forth below. In addition, the risk
factors discussed in Part I, Item 1 ("Business") and in the "Management's
Discussion and Analysis of Operations" (Item 6) of the Company's annual
report on Form 10-KSB for the fiscal year ending September 30, 1996 may
also affect actual operating results, as could the following:
General Operations Risks
The Company has experienced and expects to continue to experience
significant fluctuations in its results of operations. Factors that affect
the Company's results of operations or that could cause actual results to
differ materially include, among others, the Company's ability to
successfully bid on new contracts, its ability to perform under the terms
of drilling contracts on a timely basis, its access to suitable used or new
equipment to fulfill contract obligations, the ability to hire and retain
skilled and properly trained employees, industry conditions and world
demand for precious metals, as well as prices for such metals, the results
of financing efforts and financial market conditions and other factors
discussed in the Form 10-KSB mentioned above and the additional factors
discussed below. Such factors are beyond the control of the Company and
there can be no assurance that the Company's results and financial
condition will not be adversely affected by such factors.
Foreign Operations Risks
The Company recently has expanded much of its operations to meet
increased demand for its services both in the United States and abroad.
There are numerous risks associated with conducting business in foreign
countries. The distance from corporate headquarters and the often remote
locations of drilling and mining sites in these foreign countries
exacerbates the difficulties referred to above. In addition, problems
associated with possible political risks, instability of local governments,
safety of personnel and equipment, the lack of spare parts or adequate
service assistance, the need for skilled labor and supervision, lack of
infrastructure and accessability to sources of power and other supplies
necessary for operations, high inflation and currency fluctuations which
may erode profitability levels,
10
<PAGE>
and the difficulty of obtaining and enforcing judgments in foreign courts
and under foreign legal systems that differ substantially from the U.S.,
all add to the risk of foreign operations.
Dependence on Precious Metals Mining Industry
The Company's operations are largely dependent upon the levels of
activity in precious metals exploration and development drilling. Such
activity levels are affected by trends in the precious metals industry and
precious metals prices. Historically, prices for precious metals have been
volatile and are subject to wide fluctuations in response to changes in the
supply of and demand for precious metals, market uncertainty, the
performance of certain major mining companies and a variety of political,
economic and other factors beyond the control of the Company. The Company
cannot predict future price movements with any certainty. Any prolonged
reduction in precious metals prices, however, will depress the level of
exploration, development and production activity and result in a
corresponding decline in the demand for the Company's services and,
therefore, have a material adverse effect on the Company's revenues and
profitability.
Competition
The contract drilling industry is a highly competitive and cyclical
business characterized by high capital and maintenance costs. Although
conditions in recent years in the precious metals mining industry have
precipitated consolidation of drilling industry participants, the Company
believes the competition for drilling contracts will continue to be intense
for the foreseeable future because of contractors' ability to move rigs
from areas of low activity and day rates to areas of greater activity and
relatively higher rates. In addition, there are a number of inactive rigs
that are being reactivated and upgraded, and additional rigs that could be
reactivated and upgraded, and new rigs that could be constructed, to meet
an increase in demand for drilling rigs in any given market. Such
movement, reactivation, new construction or a decrease in drilling activity
in any major market could depress rates and could adversely affect
utilization of the Company's rigs even in an environment of stronger
precious metals prices. Many of the Company's principal competitors are
substantially larger, have substantially greater resources and have spent
considerably larger sums of capital than the Company for equipment,
including drill rigs, development and operations. These factors may enable
those competitors to better withstand industry downturns, compete on the
basis of price, build new rigs or acquire existing rigs that become
available for purchase.
Risk of Potential Conflicts of Interest
Three of the nine members of the Company's board of directors are
also indirect owners of and control a significant shareholder of the
Company and a corporation providing management and strategic planning
services to the Company. In addition, these three persons and two other
members of the board of directors sit together on the board of directors of
another public company in an unrelated industry. The CFO of the Company is
also the CFO of the other public company. Such associations and
relationships may give rise to conflicts of interest from time to time. If
any such conflict does arise, the policy of the Company, consistent with
Section 78.140 of the Nevada Revised Statutes, requires that the director
who has a conflict will disclose the same to a meeting of the directors of
the Company and will abstain from voting for or against approval of any
matter in which such director may have a conflict. Notwithstanding the
adoption of such a policy, there can be no assurance that all possible
conflicts of interest will be identified and appropriately resolved.
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.
11
<PAGE>
PART II - OTHER INFORMATION
Item 2. Changes in Securities
c. Unregistered sales of equity securities during quarter (other
than in reliance on Regulation S).
Recent Sales of Unregistered Securities. During the quarterly period
ended June 30, 1997, the Company issued equity securities that were not
registered under the Securities Act of 1933, as amended (the "Act"), other
than unregistered sales in reliance on Regulation S under the Act, as
follows:
On April 11, 1997, the Company issued 12,500 shares of common stock
to a director upon the exercise of previously granted options. The
consideration received by the Company upon the exercise of such warrants
was $5,000. The Company issued such shares without registration under the
Act in reliance on Section 3(b) and 4(2) of the Act. Such shares of common
stock were issued as restricted securities and the certificates
representing such shares were stamped with a restrictive legend to prevent
any resale without registration under the Act or compliance with an
exemption.
On May 12, 1997, the Company issued 85,000 shares of common stock to
an individual upon the exercise of a previously granted warrant. The
consideration received by the Company upon the exercise of such options was
$44,000. The Company issued such shares without registration under the
Act in reliance on Section 3(b) and 4(2) of the Act. Such shares of common
stock were issued as restricted securities and the certificates
representing such shares were stamped with a restrictive legend to prevent
any resale without registration under the Act or compliance with an
exemption.
On May 27, 1997, the Company issued 40,000 shares of common stock to
an individual upon the exercise of a previously granted warrant. The
consideration received by the Company upon the exercise of such options was
$6,000. The Company issued such shares without registration under the Act
in reliance on Section 3(b) and 4(2) of the Act. Such shares of common
stock were issued as restricted securities and the certificates
representing such shares were stamped with a restrictive legend to prevent
any resale without registration under the Act or compliance with an
exemption.
On June 19, 1997, the Company issued 100,000 shares of common stock
to a director upon the exercise of previously granted options. The
Company retired an additional 12,903 of this individual's previously
granted options as consideration for the exercise of the 100,000 shares of
common stock. The Company issued such shares without registration under
the Act in reliance on Section 4(2) of the Act. Such shares of common
stock were issued as restricted securities and the certificates
representing such shares were stamped with a restrictive legend to prevent
any resale without registration under the Act or compliance with an
exemption.
On April 29, 1997 the Company granted options to purchase 50,000
shares of common stock to an employee. All of such options were issued
under the Company's 1997 Stock Incentive Plan without registration under
the Act in reliance on Sections 3(b) and 4(2) of the Act and the rules and
regulations promulgated thereunder. The exercise price of such options is
$3.06, which was the closing market price on the date of grant.
On July 7, 1997 the Company granted options to purchase 50,000
shares of common stock to an employee. All of such options were issued
under the Company's 1997 Stock Incentive Plan without registration under
the Act in reliance on Sections 3(b) and 4(2) of the Act and the rules and
regulations promulgated thereunder. The exercise price of such options is
$2.81, which was the closing market price on the date of grant.
12
<PAGE>
Item 6. Exhibits Required by Item 601 of Regulation S-B
(a) Exhibits Required by Item 601 of Regulation S-B
Exhibit No. Description
---------- --------------
27 Financial Data Schedule
13
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
K.L.S. ENVIRO RESOURCES, INC.
Date: August 14, 1997 By: /s/ Raymond H. Kurzon
----------------------------------
Raymond H. Kurzon, President/CEO
Date: August 14, 1997 By: /s/ Douglas L. Rex
----------------------------------
Douglas L. Rex, Chief Financial Officer
14
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 250,568
<SECURITIES> 0
<RECEIVABLES> 1,452,077
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<INVENTORY> 608,316
<CURRENT-ASSETS> 2,273,431
<PP&E> 8,156,640
<DEPRECIATION> 1,753,672
<TOTAL-ASSETS> 8,986,971
<CURRENT-LIABILITIES> 3,595,660
<BONDS> 0
0
10
<COMMON> 1,716
<OTHER-SE> 5,176,130
<TOTAL-LIABILITY-AND-EQUITY> 8,986,971
<SALES> 0
<TOTAL-REVENUES> 4,844,101
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<TOTAL-COSTS> 2,415,191
<OTHER-EXPENSES> 2,452,922
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 165,911
<INCOME-PRETAX> (158,141)
<INCOME-TAX> 49,693
<INCOME-CONTINUING> (207,834)
<DISCONTINUED> 0
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<CHANGES> 0
<NET-INCOME> (207,834)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
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