As filed with the Securities and Exchange Commission on April 29, 1997
Registration No. 33-23117
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form SB-2/A
Amendment No. 1
To
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
K.L.S. ENVIRO RESOURCES, INC.
(Name of small business issuer in its charter)
Nevada 1090 75-2460365
(State or other juris- (Primary Standard Industrial (IRS Employer
diction of incorporation) Classification Code Number) identification
number)
3220 North Freeway, Suite 105
Ft. Worth, Texas 76111
(817) 624-4844
(Address and telephone number of principal
executive offices and principal place of business)
-------------------------------
RAYMOND H. KURZON, PRESIDENT/CEO
K.L.S. ENVIRO RESOURCES, INC.
3220 North Freeway, Suite 105
Ft. Worth, Texas 76111
(817) 624-4844
(Name, address, and telephone number of agent for service)
-------------------------------
Copies to:
JEFFREY M. JONES, ESQ.
DURHAM, EVANS, JONES & PINEGAR, P.C.
50 South Main Street, Suite 850
Salt Lake City, Utah 84144
Approximate date of proposed sale to the public: As soon as possible after
the Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(c) under the Securities Act of 1933, check the following
box and list the Securities Act registration statement number of the earlier
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Section 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act of 1933, please check the following box. [ ]
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Title of Each Class Dollar Proposed Maximum Proposed Amount of
of Securities Amount to be Offering Price Maximum Registration
to be Registered Registered per Share (1) Aggregate Fee
Offering Price
- ------------------- -------------- ----------------- --------------- -------------
<S> <C> <C> <C> <C>
Common Stock $22,052,277.81 $4.0625 $22,052,277.81 $6,682.51
TOTAL $22,052,277.81 $4.0625 $22,052,277.81 $6,682.51
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933, based on average bid
and asked prices of the Company's Common Stock as reported by the OTC
Electronic Bulletin Board on April 21, 1997.
The Registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED April 29, 1997
PROSPECTUS
K.L.S. ENVIRO RESOURCES, INC.
5,428,253 SHARES
Common Stock, Par Value $.0001
------------------------------
This Prospectus relates to the offer of 5,428,253 shares (the "Shares") of
issued and outstanding Common Stock, par value $.0001 (see "Description of
Securities"), of K.L.S. Enviro Resources, Inc., a Nevada corporation (the
"Company" or "KLS") on behalf of certain shareholders of the Company (see
"Selling Shareholders"). The Company will not receive any of the proceeds
from the sale of the Shares by the Selling Shareholders.
The Common Stock of the Company presently trades in the over-the-counter
("OTC") market and is quoted on the OTC Electronic Bulletin Board under the
symbol KLSE. On April 21, 1997, the reported bid price of the Company's
Common Stock on the OTC Electronic Bulletin Board was $4.00 per share and the
reported ask price was $4.125 per share. The Shares may be sold by the
Selling Shareholders from time to time on terms not yet determined. Sales,
which may or may not involve cash consideration or sales on the OTC market,
may be made directly to other purchasers or through one or more underwriters
or broker-dealers. See "Plan of Distribution."
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" FOR INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
_________________________________________________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
================================================================================================================
Underwriting Discounts Proceeds to Proceeds to
Price to Public (1) and Commissions the Company (2) Selling Shareholders(3)
------------------ ---------------------- --------------- ----------------------
<S> <C> <C> <C> <C>
Per Share $ 4.0625 $ .__ $ 0.0 $ 4.0625
Total $22,052,277.81 $ .__ $ 0.0 $22,052,277.81
================================================================================================================
</TABLE>
(1) Based on the average bid and asked prices of the Company's Common Stock
on April 21, 1997 as required by SEC rules. The prices at which the Shares
may be sold will be dependent upon market prices and other factors on the date
of any such sale.
(2) The Company will receive no portion of the proceeds from the sale of
the Shares by the Selling Shareholders.
(3) The Selling Shareholders will be responsible for payment of any
commissions or discounts in connection with the sale of the Shares and such
amounts may vary. The Company is paying the cost of the preparation and
filing of the registration statement of which this Prospectus is a part. The
cost paid by the Company includes professional fees, filing fees, printing and
engraving expenses and other expenses. The total of such expenses associated
with the registration of the Shares is approximately $87,500.
The date of this Prospectus is April __, 1997.
<PAGE>
------------------------------------
AVAILABLE INFORMATION
The Company is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended, and in accordance therewith,
files reports, proxy statements and other information with the Securities and
Exchange Commission (Commission). Such reports, proxy statements and other
information, may be inspected and copied at the Public Reference Room of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
following regional offices of the Commission: Northeast Regional Office, 7
World Trade Center, Suite 1300, New York, New York, 10048, and the Midwest
Regional Office, 500 West Madison Street, Suite 1400, Chicago, Illinois
60611. Copies of such material can be obtained from the Public Reference
Section of the Commission at its Washington address at prescribed rates. The
Commission also maintains a web site on the world wide web (Internet) at
"http://www.sec.gov" where the public may access current and other reports
filed electronically with the Commission by the Company.
The Company furnishes annual reports to shareholders which contain
audited financial statements and such other periodic reports as the Company
may determine to be appropriate or as may be required by law.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the financial statements and notes thereto appearing elsewhere
in the Prospectus. Each prospective investor is encouraged to read this
Prospectus in its entirety and to carefully consider, among other things, the
information under the heading "RISK FACTORS." THE SECURITIES OFFERED HEREBY
INVOLVE A HIGH DEGREE OF RISK.
The Company
K.L.S. Enviro Resources, Inc. (sometimes referred to in this Prospectus
as "KLS" or the "Company") was incorporated under the laws of the State of
Nevada under the name K.L.S. Gold Mining Company on January 15, 1993. The
corporate name was changed to K.L.S. Enviro Resources, Inc. on September 10,
1993. As used in this Prospectus, the term the "Company" refers collectively
to KLS and its wholly-owned operating subsidiaries. Those subsidiaries are
identified as follows:
K.L.S. Co., Inc. ("KLS Co.") is a Nevada corporation formed by KLS in
January 1993. KLS Co. engages in hydraulics servicing and manufacturing,
including the service and repair of hydraulic systems, the design and
manufacture of specialized drilling rigs for the mining industry and related
operations. Its principal offices are located in Missoula, Montana and its
primary business activities are also conducted in that state.
Dateline Drilling, Inc. ("Dateline") is a Montana corporation formed in
1980. Dateline was acquired by KLS in January 1993. Since its formation,
Dateline has operated a production and exploration drilling business in the
precious metals mining industry. Its principal business offices are located
in Missoula, Montana. The business operations of Dateline are presently
conducted in North America and Mexico.
Dateline Internacional, S.A. de C.V. ("DIMSA") is a Mexico corporation
formed in April 1993 which is engaged in precious metals mining production and
exploration drilling in Mexico.
The Company designs, builds and refurbishes or purchases drill rigs which
it uses under contracts with third party gold and/or other precious metals
exploration companies. The Company also designs, manufactures, sells,
services and repairs drill rigs and other hydraulic equipment used in logging,
mining and related industries. The Company is also a manufacturer's
representative for a line of diesel products and equipment. In addition, the
Company intends to engage in the future on a broader scale in the exploration
for and production, processing and sale of gold and other precious metals for
its own account and to develop its own properties.
The drilling operations of the Company include both production mining
drilling and exploration drilling as a contractor to the hard rock mining
industry. The Company specializes in exploration and production drilling,
using reverse circulation drilling. Its current business operations are
located in the United States and Mexico and are expected to expand into
Africa. The Company's drill rigs are track-mounted, mobile, and compact.
These features permit the Company to use its rigs in relatively difficult and
remote terrain, in many cases without building new drill roads to access
remote drilling areas. These attributes provide certain competitive
advantages, avoid or reduce certain expenses for building roads, and also
minimize adverse environmental impact in those areas in which they are used.
The Company also owns certain inactive entities and has recently
discontinued some operations. See "Business" for a description of these
entities and the history of the Company's business development and
activities. The Company's principal offices are located at 3220 North
Freeway, Fort Worth, Texas 76111. Its telephone number is (817) 624-4844.
<PAGE>
The Offering
Securities offered 5,428,253 Shares of Common Stock
Common Stock, par value $.0001
outstanding 16,923,497 shares
to be outstanding
after the offering 16,923,497 shares
Use of proceeds The Company will not receive any of
the proceeds from the sale of Shares
by the Selling Shareholders
Risk Factors
The securities offered hereby involve a high degree of risk. See "Risk
Factors."
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Consolidated Statement of Operations Data:
Fiscal Year Ended September 30 Three Months Ended December 31,
1995 1996 1995 1996
---------------------------------- -------------------------------
<S> <C> <C> <C> <C>
(Audited) (Audited) (Unaudited) (Unaudited)
Net sales $ 3,019,597 $ 4,424,693 $ 780,368 $ 1,573,318
Net income (loss) from
operations ( 908,174) 117,158 ( 93,277) 129,933
Net income (loss)
(after tax) (1,185,850) ( 919,813) ( 68,978) 50,451
Primary earnings (loss)
per share ($ .13) $( .10) $( .01) $ .00
</TABLE>
<TABLE>
<CAPTION>
Consolidated Balance Sheet Data:
December 31, 1996 September 30, 1996
----------------- ------------------
<S> <C> <C>
(Unaudited) (Audited)
Total Assets $ 7,729,791 $ 4,528,677
Working capital (deficit) 1,818,016 ( 849,631)
Total Liabilities 3,052,148 2,974,951
Stockholders' Equity $ 4,677,643 $ 1,553,726
</TABLE>
RISK FACTORS
The Private Securities Litigation Reform Act of 1995 provides a "Safe
Harbor" for forward-looking statements. Certain information included in this
Prospectus contains statements that are forward-looking, such as statements
relating to plans for future production and development activities, as well as
other capital spending, financing sources and the effects of regulation. Such
forward-looking information involves important risks and uncertainties that
could significantly affect anticipated results in the future and, accordingly,
such results may differ from those expressed in any forward-looking statements
made herein. These risks and uncertainties include, but are not limited to,
those relating to the market price of metals, production rates, production
costs, the availability of financing, the ability to obtain and maintain
required permits, development and construction activities and dependence on
existing management. The Company cautions readers not to place undue reliance
on any such forward-looking statements and such statements speak only as of
the date made.
The securities being offered hereby are speculative, involve a high
degree of risk and should not be purchased by anyone who cannot afford the
loss of his, her or its entire investment. In addition to the other
information in this Prospectus, the following risk factors should be
considered carefully in evaluating an investment in the securities offered by
this Prospectus:
<PAGE>
Recent Net Losses
The Company had significant net operating losses in fiscal years 1994 and
1995. It also had operating losses in years prior to fiscal 1994. As a
result, the Company had an accumulated deficit of approximately ($2,310,000)
at September 30, 1994 and ($3,546,000) at September 30, 1995. Its accumulated
deficit at September 30, 1996 was ($4,505,721). Although the Company has
experienced revenue growth and net operating income in recent months, there
can be no assurance that such growth will continue, that net losses will not
be incurred in future operating periods, or that the Company will become
profitable in the foreseeable future, if at all.
Need for Additional Funding
The Company has operated with negative cash flow for several fiscal years
and has substantial accumulated operating deficits. In order to increase
revenues, the Company requires additional funding that will enable it to
purchase additional equipment and to engage in traditional exploration and
extraction activities. The Company may seek such funding through a future
public or private offering of its stock. Shares issued in such an offering
would substantially dilute the shareholdings of other shareholders, including
purchasers of the Shares offered by this Prospectus. There can be no
assurance that the Company will be successful in obtaining such financing or
that it will be available to the Company on terms and at rates that are
favorable to the Company. Absent the Company's receipt of such funding,
however, the Company's ability to continue its operations will be adversely
affected.
Volatility of the Special Metals Market
The profitability of the Company's operations can be significantly and
adversely affected by changes in the market price of gold and other precious
metals. The market price of gold has fluctuated widely and is affected by
numerous factors beyond the Company's control, including international
economic trends, currency exchange fluctuations, expectations for inflation,
speculative activities, consumption patterns (such as purchases of gold
jewelry, the development of gold coin programs, and trends in manufacturing
industries that use gold as a raw material, such as the computer electronics
and medical equipment markets), purchases and sales of gold bullion, holdings
by central banks and other large gold bullion holders or dealers 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. Similarly, if and when the Company acquires its own exploration
properties, the same factors may cause the Company to experience losses and/or
to cease exploration, development or production activities on its exploration
properties.
Continuation of Control
SMD L.L.C., ("SMD"), a significant shareholder of the Company that is
controlled and indirectly owned by certain officers and directors of the
Company, owns 2,581,500 shares (or approximately 15%) of the issued and
outstanding Common Stock of the Company. In addition, SMD has the right to
convert certain shares of Preferred Stock to 500,000 shares of Common Stock
and owns presently exercisable warrants to purchase an additional 6,600,000
shares of Common Stock. If the preferred shares were converted and the
warrants exercised at this time, SMD would own approximately 40% of the total
issued and outstanding shares of Common Stock of the Company. Officers and
directors of the Company presently own or have the right to acquire an
aggregate of 14,181,837 shares, or approximately 56% (assuming full exercise
of all options, warrants and conversion rights held by these individuals) of
the Company's issued and outstanding Common Stock. Three of the Company's
directors are also the managers and indirect owners of SMD and constitute
three of the four members of the Company's Executive Committee. The continued
ownership of a significant number of shares, the rights to purchase additional
shares of Common Stock and the board positions held by the SMD managers will
perpetuate and increase their ability to influence corporate policy and
management. Furthermore, the exercise of the warrants and other conversion
rights held by these officers and directors would likely be made at a time
when the Company could obtain equity financing at more favorable rates to the
Company and, regardless of when made, would likely have an immediate,
substantial dilutive effect on the persons holding stock in the Company,
including the purchasers of the Shares.
Potential Conflicts of Interest
Three of the nine members of the Company's Board of Directors are also
the indirect owners of and control a significant shareholder of the Company,
SMD, and a corporation providing management and strategic planning services
for the Company. [See, "Certain Transactions."] In addition, these three
persons and two other members of the Board of Directors sit on the board of
directors of another public company in an unrelated industry and the acting
chief financial officer of the Company is the chief financial officer of such
other company. Such associations and relationships may give rise to conflicts
of interest from time to time. If any such conflict does arise, the policy of
the Company, consistent with Section 78.140 of the Nevada Revised Statutes,
requires that the director who has a conflict will disclose the same to a
meeting of the directors of the Company and will abstain from voting for or
against approval of any matter in which such director may have a conflict.
Notwithstanding the adoption of the Company's conflict of interest policy,
there can be no assurance that all potential conflicts of interest will be
identified and appropriately resolved.
Exploration Activities
The Company presently plans to expand its operations into more
speculative and risky precious metal property acquisition and exploration, in
addition to its existing drilling services and equipment maintenance and
repair business. The Company presently plans to acquire interests in existing
gold and/or other precious metal properties with proven reserves or which are
in the final stages of proving such reserves. The Company may acquire such
interests on its own or with others as a joint venture partner. Exploration
for gold, silver and other precious metals is a highly speculative business,
with no assurance that meaningful volumes of ore can be extracted, refined or
sold at profitable rates, even where deposits or reserves are proven in
advance. In addition, the Company's present management has limited experience
in acquiring or operating precious metal mining properties. The successful
development and operation of any mineral property may be affected by a number
of factors beyond the control of management. Substantial expenditures are
required to establish ore reserves through drilling, to develop metallurgical
processes to extract metal from ore and, in the case of new properties, to
develop the mining and processing facilities and infrastructure at any chosen
site. Although substantial benefits may be derived from the acquisition of an
interest in a major mineralized deposit, no assurance can be given that
minerals can be produced in sufficient quantities to justify commercial
operations or that the funds required for development can be obtained on a
timely basis.
General Operations Risks
The Company has experienced and expects to continue to experience
significant fluctuations in its results of operations. Factors that affect
the Company's results of operations or that could cause actual results to
differ materially include, among others, the Company's ability to successfully
bid on new contracts, its ability to perform under contracts on a timely
basis, its access to suitable used or new equipment to fulfill contract
obligations, the ability to hire and retain skilled and properly trained
employees, industry conditions and world demand for precious metals, as well
as prices for such metals, the results of financing efforts and financial
market conditions and other factors mentioned above and the additional factors
discussed below.
Dependence on Precious Metals Mining Industry
The Company's operations are largely dependent upon the levels of activity
in precious metals exploration and development drilling. Such activity levels
are affected by trends in the precious metals industry and precious metals
prices. Historically, prices for precious metals have been volatile and are
subject to wide fluctuations in response to changes in the supply of and
demand for precious metals, market uncertainty and a variety of political,
economic and other factors beyond the control of the Company. The Company
cannot predict future price movements with any certainty. Any prolonged
reduction in precious metals prices, however, will depress the level of
exploration, development and production activity and result in a corresponding
decline in the demand for the Company's services and, therefore, have a
material adverse effect on the Company's revenues and profitability.
Competition
The contract drilling industry is a highly competitive and cyclical
business characterized by high capital and maintenance costs. Although
conditions in recent years in the precious metals mining industry have
precipitated consolidation of drilling industry participants, the Company
believes the competition for drilling contracts will continue to be intense
for the foreseeable future because of contractors' ability to move rigs from
areas of low activity and day rates to areas of greater activity and
relatively higher rates. In addition, there are a number of inactive rigs
that are being reactivated and upgraded, and additional rigs that could be
reactivated and upgraded, and new rigs that could be constructed, to meet 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 strong precious metals prices. Many
of the Company's principal competitors are substantially larger, have
substantially greater resources and have spent considerably larger sums of
capital than the Company for equipment, including drill rigs, development and
operations. These factors may enable those competitors to better withstand
industry downturns, compete on the basis of price, build new or more efficient
rigs or acquire existing rigs that become available for purchase.
Risk of Upgrade and Refurbishment of Drill Rigs
In connection with its plans to increase its fleet of drill rigs and the
upgrade and refurbishment of existing drill rigs and other rigs that the
Company may acquire in the future, the Company expects to make substantial
completion, upgrade and refurbishment capital expenditures. Such projects are
subject to the risks of delay or cost overruns inherent in any large
reconstruction project, including shortages of materials or skilled labor,
unforeseen engineering problems, latent damage to current equipment, work
stoppages and unanticipated cost increases. Significant cost overruns or
delays would adversely affect the Company's financial condition and results of
operation.
Equipment Costs
To date the Company has been able to meet its requirements for additional
equipment by acquiring and refurbishing used equipment. Such used equipment
is generally acquired at prices that are substantially less than the cost of
new equipment. Generally, after refurbishing the used equipment, the
Company's total cost therefor is less than the cost of new equipment.
However, to meet its expansion needs and to avoid delay if it is to take
advantage of new contract opportunities, the Company may be required to
purchase new drill rigs rather than used or refurbished drilling equipment.
The cost of new equipment can be as much as 40% greater than a comparable
refurbished rig, thereby increasing the Company's investment cost in new
operations and reducing the amount of capital available for other expansion
projects.
Dependence on Trained Personnel
The Company relies on the services of trained technicians and skilled
workers in many aspects of its operations. As its operations expand, the
Company will be required to seek, hire and retain persons with the requisite
expertise and experience to meet the Company's needs. The cost of training
and retaining such personnel may decrease operating margins and affect
profitability. There can be no assurance that qualified personnel are readily
available at costs that make it feasible for the Company to retain them. In
addition, the Company may experience delays in its expansion efforts as new or
current personnel are trained to perform at a level needed by the Company.
Government Regulation and Environmental Matters
The Company's domestic and foreign operations and mining operations in
general are subject to substantial government regulation including federal,
provincial, state and/or local laws concerning, but not limited to, such
factors as safety, land use and environmental protection. The Company also
must comply with local, state, provincial and/or federal requirements
regarding exploration and drilling operations, public safety, employee health
and safety, air quality, water pollution, noxious odor, noise and dust
control, reclamation, solid waste, hazardous waste and wildlife protection as
well as laws protecting the rights of other property owners and the public.
Although the Company is aware of no respect in which it is not in substantial
compliance with such regulations, laws and requirements, failure to comply
could have a material adverse effect on the Company including substantial
penalties, fees and expenses and could result in significant delays in the
Company's operations or a potential shutdown of some or all of its
operations. The Company also must obtain and comply with local, state,
provincial and federal permits, including waste discharge requirements, other
environmental permits, use permits, plans of operation and other
authorizations. Obtaining these permits can be very costly and take
significant amounts of time. Although the Company foresees no material
problems or delays, there can be no assurance that the Company can obtain the
necessary permits, commence new operations or continue existing operations or
that the Company can maintain economic production in compliance with the
necessary permits. Amendments to current laws and regulations governing
operations and activities of mining companies or more stringent implementation
of such laws are actively considered from time to time and could have a
material adverse impact on the Company. There can be no assurance that future
changes in existing law or new legislation will not limit or adversely impact
the Company's business operations.
Risks Associated with Mining Operations, Insurance Coverage and Uninsured
Losses
The Company's activities are subject to all the risks and hazards
commonly associated with mining operations, including, but not limited to,
unusual or unforeseen geological formations, flooding, cave-ins, environmental
concerns, personal injury, changes in technology or mining techniques, and
delays or periodic interruptions in operations due to inclement weather. The
Company has insurance covering personal injury, workers' compensation and
damage to property and equipment, although in view of recent trends in damage
awards in personal injury lawsuits, such insurance may be insufficient to
satisfy large losses or judgments against the Company. Furthermore, certain
types of insurance coverage (generally against losses caused by natural
disasters and acts of God) are either unattainable or prohibitively
expensive. Substantial damage awards against the Company or substantial
damages not covered by insurance will affect the Company's ability to continue
as a going concern.
Foreign Operations Risks Generally
The Company has recently expanded much of its operations to meet
increased demand for its services both inside and outside the United States.
The Company intends to expand operations into other parts of the world,
including Africa. There are numerous risks associated with conducting
business in foreign countries. The distance from corporate headquarters and
the often remote locations of drilling and mining sites in these foreign
countries exacerbates the difficulties discussed above. In addition, problems
associated with possible political risks, instability of local governments,
safety of personnel and equipment, the lack of spare parts or adequate service
assistance, the need for skilled labor and supervision, lack of infrastructure
and accessability to sources of power and other supplies necessary for
operations, tariff restrictions, currency control regulations, competing or
conflicting manufacturing and production standards, governmental approval,
licensing and permit requirements and procedures, high inflation and currency
fluctuations which may erode profitability levels, and the difficulty of
obtaining and enforcing judgments in foreign courts and under foreign legal
systems that differ substantially from the U.S., all add to the risk of
foreign operations.
Foreign Currency
The Company's operations in Mexico and its anticipated operations in
other countries render the Company subject to foreign currency fluctuations
which may materially affect its financial condition and results. The Company
does not presently engage in any currency hedging or other transactions to
offset any risk of fluctuations in foreign currency exchange rates, inflation
or interest rates. Contracts for drilling services are generally denominated
in and provide for payment with U.S. dollars. Accounting records of the
Company's Mexican subsidiaries, however, are maintained in Mexican pesos. The
financial statements of the Company which include those of its Mexican
subsidiaries have been prepared in accordance with GAAP and are stated in U.S.
dollars. At all times the functional currency of the Company is the U.S.
dollar because the majority of its revenues, costs, property and equipment
purchased and debt and trade liabilities are measured in U.S. dollars. To
minimize the risk of currency fluctuations and consequent devaluation, the
Company lists its fees for services in U.S. dollars, calculates its customers'
billing statements and invoices in U.S. dollars, and requests payment in U.S.
dollars (to the extent permitted by local law) or in local currency based on
the free market exchange rate on the date of payment. The Company also
maintains both dollar and peso bank accounts for receiving deposits and making
disbursements locally. See "Risks Related to Mexico," below.
Potential Depressive Effect of Sales of Shares by Present Stockholders
A substantial number of shares of the Company's Common Stock currently
issued and outstanding are "restricted securities" as that term is defined by
Rule 144 under the Securities Act of 1933, as amended. The Company believes
that a significant portion of such restricted securities presently are or in
the immediate future will be available for resale under Rule 144. Sales of
substantial amounts of Common Stock pursuant to Rule 144 or otherwise into the
public market could adversely affect the market price for the Company's
securities.
No Dividends
The Company has never declared or paid any cash dividends on its shares
and does not anticipate paying cash dividends in the foreseeable future.
Risk of Dilution by Future Issuance of Shares
The Company may use its securities, including shares of its Common Stock
or its Preferred Stock, to finance acquisitions or to obtain additional
capital for continued operations. In addition, the Company has granted
warrants and options to acquire a significant number of shares of Common Stock
of the Company at prices which are currently substantially less than the
prices quoted for the Company's securities in the OTC market. See "Certain
Transactions." The existence of these rights and the issuance by the Company
of its equity securities, including Common Stock or securities convertible
into Common Stock, in any such transaction will result in immediate and
possibly substantial dilution to the existing stockholders of the Company.
Effect of Certain Anti-Takeover Provisions
Nevada's "Combination with Interested Stockholders' Statute" and its
"Control Share Acquisition Statute" may have the effect in the future of
delaying or making it more difficult to effect a change in control of the
Company. See "Description of Securities," below. These statutory
antitakeover measures may have certain negative consequences, including an
effect on the ability of the stockholders of the Company or other individuals
to (i) change the composition of the incumbent Board of Directors of the
Company; (ii) benefit from certain transactions which are opposed by the
incumbent Board of Directors; and (iii) make a tender offer or attempt to gain
control of the Company, even if such attempt were beneficial to the Company
and its shareholders. Since such measures may also discourage the
accumulations of large blocks of the Company's Common Stock by purchasers
whose objective is to seek control of the Company or have such Common Stock
repurchased by the Company or other persons at a premium, these measures could
also depress the market price of the Company's Common Stock. Accordingly,
shareholders of the Company may be deprived of certain opportunities to
realize the "control premium" associated with takeover attempts.
Risks Related to Mexico
Economic, Political and Social Conditions. The Company has several
subsidiaries incorporated in Mexico and a significant amount of its drilling
operations are located in Mexico, although many of the Company's customers in
Mexico are headquartered outside Mexico, mostly in the United States and
Canada.
Because of the location of its drilling operations, the Company may be
affected by economic, political and social conditions in Mexico. For example,
the Company's financial condition and results of operations or the market
price of its Common Stock could be adversely affected if the current policies
of the Mexican government encouraging foreign investment and foreign trade are
reversed. Changes in policies by the U.S., Mexican or other governments
resulting in, among other things, increased duties, higher taxation, currency
conversion limitations, limitations on imports or exports or the expropriation
of private enterprises could have a material adverse effect on the Company's
results of operations. Furthermore, Mexico has experienced political,
economic and social uncertainty resulting from the assassination of political
leaders, government scandals, and peasant uprisings in certain states.
Since December 1994, Mexico has experienced an economic crisis
characterized by exchange rate instability and devaluation, increased
inflation, high domestic interest rates, negative economic growth, reduced
consumer purchasing power and high unemployment. Under its current
leadership, the Mexican government has been pursuing economic reform policies,
including the encouragement of foreign trade and investment and an exchange
rate policy of free market flotation. No assurance can be given however that
the Mexican government will continue to pursue such policies, that such
policies will be successful if pursued or that such policies will not be
significantly altered from time to time.
Exchange Rates; Inflation. While the Company transacts business
generally in U.S. dollars and its revenues are collected to the extent possible
in U.S. dollars, a portion of the Company's costs and expenses are not
denominated in U.S. dollars; substantially all of such non-U.S. dollar costs
and expenses to date are denominated in New Pesos. As a result, changes in
the relationship of the U.S. dollar to the New Peso could affect the Company's
cost of goods sold, operating expenses and operating margins. The devaluation
of the New Peso during late 1994 and early 1995 reduced the U.S. dollar cost
of the Company's New Peso expenses, but also had a negative impact on its New
Peso revenues. From December 18, 1994 through October 1, 1995, the U.S.
dollar appreciated approximately 84% in value against the New Peso. In
addition, inflation in the New Peso could affect the Company's cost of goods
sold and operating margins. Mexican inflation, as measured by the NCPI, the
Mexican government's consumer price index, was 51.9% for calendar 1995 and
27.7% in 1996. Inflation in Mexico may ultimately increase the cost of goods
and services purchased in Mexico with New Pesos and lead to higher wages and
salaries for the Company's employees in that country. Such increases may
adversely affect the Company's operating margins in the future. The impact of
future exchange rate fluctuations and inflation on the Company's results of
operations cannot be accurately predicted. The Mexican government is also
attempting to boost the economy by providing tax incentives for new business
investments, and utilizing wage and price controls to contain inflation. As
part of these policies, the Mexican government has committed to retaining a
free flotation system for the New Peso in international currency markets.
However, the impact of these policies on the Company or the Mexican economy
cannot be accurately predicted. See "Management's Discussion and Analysis of
Results of Operations and Financial Condition" and "Exchange Rates."
USE OF PROCEEDS
The Shares are being offered for sale or will be sold by the Selling
Shareholders. The Company will not receive any portion of the proceeds from
the sale of Shares by the Selling Shareholders.
DETERMINATION OF OFFERING PRICE
The Shares may be sold by the Selling Shareholders from time to time at
prices and on terms not yet determined. Sales, which may or may not involve
cash consideration or sales on the OTC market, may be made directly to other
purchasers or through one or more underwriters or broker-dealers at prices
quoted on the OTC Electronic Bulletin Board at the time of sale or on other
terms as agreed with such underwriters or broker-dealers as the case may be.
[See "Plan of Distribution."]
DILUTION
There is no dilution to existing shareholders generally which will result
from the sale of the Shares by the Selling Shareholders.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Trading in the Common Stock of the Company commenced over the counter in
January 1994. Trading of the Common Stock of the Company is quoted on the OTC
Electronic Bulletin Board under the symbol "KLSE." The range of high and low
bid quotations for each quarterly period since the Company's Common Stock
began trading in January 1994, as reported by the OTC Electronic Bulletin
Board, is as follows:
<TABLE>
<CAPTION>
FISCAL QUARTER ENDED HIGH LOW
-------------------- ------- -------
<S> <C> <C>
March 31, 1994 $1.88 $1.13
June 30 1.88 1.13
September 30 1.75 1.13
December 30, 1994 2.50 2.25
March 31, 1995 1.31 1.31
June 30 0.62 0.50
September 30 0.38 0.37
December 29, 1995 0.28 0.25
March 29, 1996 0.33 0.30
June 28 0.55 0.50
September 30 1.13 1.00
December 31, 1996 3.00 0.87
March 31, 1997 4.13 3.88
</TABLE>
On April 21, 1997, the last reported bid and ask prices for the Common
Stock were respectively $4.00 and $4.125 per share.
The above quotations reflect inter-dealer prices, without retail mark-up,
retail mark-down or commission, and may not represent actual transactions.
Holders. The approximate number of record holders of the Company's
Common Stock as of February 19, 1997 was 1,219.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1996 (audited) and December 31, 1996 (unaudited):
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1996
------------------ ------------------
(Audited) (Unaudited)
<S> <C> <C>
Long-term debt (less current portion),
including obligations
under capital leases,
less current portion $ 270,995 $ 258,308
Redeemable Common Stock 0 0
Stockholders' equity:
Cumulative convertible preferred
stock, par value $.0001 per share;
1,000,000 shares authorized, 100,000
shares outstanding, $5.00 stated value 10 10
Common Stock, par value
$.0001 per Share; 50,000,000
shares authorized, 10,931,497 and
15,761,497 outstanding, respectively 1,093 1,576
Additional paid-in capital 6,101,057 9,181,539
Retained earnings (deficit) (4,505,721) (4,462,769)
Cumulative translation adjustment (4,213) (4,213)
Treasury stock (38,500) (38,500)
Stockholders' equity 1,553,726 4,677,643
Total capitalization $ 1,824,721 $ 4,935,951
========== ==========
</TABLE>
See the Financial Statements included in this Prospectus and the notes
thereto. The above table does not include shares reserved for issuance upon
the exercise of options under stock plans of the Company or under certain
warrants held by an affiliate of the Company. [See "Description of
Securities," "Executive Compensation," and "Plan of Distribution."]
DIVIDEND POLICY
The Company has never declared or paid any dividends on its Common Stock
and does not anticipate the declaration or payment of cash dividends in the
foreseeable future. The Company intends to retain future earnings, if any, to
finance the development and expansion of its business. Future dividend policy
will be subject to the discretion of the Board of Directors and will be
contingent upon, among other things, future earnings, the Company's financial
condition, capital requirements, general business conditions, levels of
indebtedness, and contractual restrictions with respect to the payment of
dividends and other relevant factors.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
The following discussion and analysis should be read in conjunction with
the Company's consolidated financial statements and the notes thereto
contained elsewhere in this Prospectus.
Results of Operations
Three Months Ended December 31, 1996 Compared With Three Months Ended December
31, 1995 (Unaudited)
The Company's net income for the three months ended December 31, 1996 was
approximately $50,500 as compared to a loss of approximately $69,000 for the
three months ended December 31, 1995. The profit is attributable to increased
revenues over the comparable period of the prior year, and a reduction in the
direct costs of drilling and repair services as a percentage of revenue.
Selling, general and administrative expenses have decreased over the same
comparable period of the prior year as a percentage of revenues.
Total revenues from continuing operations for the three months ended
December 31, 1996 were $1,573,318, an increase of $792,950 or approximately
102 percent, over the three months ended December 31, 1995. The increase in
revenues is primarily due to an increase in drilling services revenues of
$321,045 in the U.S. and $437,458 in Mexico. The Company increased its
drilling fleet from five rigs to nine and added a machine shop division to its
hydraulic repair and fabrication operations during fiscal 1996. This
contributed to the increased revenues during the first quarter of fiscal 1997,
and the Company anticipates increased drilling and repair service revenues for
the remainder of fiscal 1997. Four additional rigs were added to the fleet in
the second and third quarters of fiscal 1997.
Total operating expenses from continuing operations increased by
approximately $570,000, or approximately 65 percent, to $1,443,385 for the
three months ended December 31, 1996, as compared to the three months ended
December 31, 1995. Revenues increased approximately 102 percent over the
comparable period. Direct costs of drilling and repair services were
$727,126, an increase of $298,823 over the comparable period of the prior
year. Selling, general and administrative expenses were $716,259, an increase
of $270,917 over the comparable period of the prior year. These expenses
decreased approximately 20 percent, when compared as a percentage of revenue
over the comparable period of fiscal 1996.
Mineral exploration expenditures are expensed as incurred. Expenditures
incurred on properties identified as having development potential are deferred
on a project basis until the viability of the project is determined. If a
project is abandoned, the accumulated costs are charged to operations in the
year in which the determination is made. Costs associated with economically
viable projects are capitalized and amortized over the estimated useful life.
There are no costs capitalized as of December 31, 1996 and 1995. Exploration
expenses were $40,740 and $30,906 for the three month periods ending December
31, 1996 and 1995, respectively.
Other net expenses increased $103,780 for the three months ended December
31, 1996 over the comparable period of the prior year. Of this amount,
interest expense increased by $42,023 and gains from the sale of marketable
securities decreased $51,515.
Fiscal Year Ended September 30, 1996 Compared With Fiscal Year Ended September
30, 1995
The Company had a net loss for the fiscal year ended September 30, 1996
of approximately $920,000 compared to a net loss of approximately $1,186,000
for the fiscal year ended September 30, 1995. Total sales and revenues from
continuing operations for the fiscal years ended September 30, 1996 and
September 30, 1995 were approximately $4,424,693 and $3,019,597, respectively,
an increase of $1,405,095 or approximately 47 percent. The increased revenues
were attributable to increased drilling service revenues in both Mexico and
the United States. The Company increased its available drill rig fleet from
five to nine rigs in fiscal 1996, and added a machine shop division to its
hydraulic repair and fabrication operations. The Company anticipates
increased revenues in fiscal 1997 from existing facilities as well as from
planned additions to the drill rig fleet.
Cost of sales for fiscal years ended September 30, 1996 and September 30,
1995 were $2,447,843 and $1,836,671, respectively. This represents an
increase in the gross profit margin from 39 percent to 45 percent. The
improved margin is attributable to upgraded equipment which requires less
repair and maintenance, and to longer-term drilling contracts which reduce
transportation costs by reducing the number of times equipment must be moved
between job sites. Selling, general and administrative expenses for fiscal
1996 and fiscal 1995 were $1,859,692 and $2,091,100, respectively, a decrease
of 27 percent expressed as a ratio to sales and revenues. The decrease was
primarily attributable to a reduction in exploration costs from $324,931 in
1995 to $4,203 in 1996. Legal and professional fees also decreased $97,959,
while salaries, wages and related costs increased $97,715 and taxes, licenses
and permits increased $23,879 as did depreciation and amortization, $67,346.
The Company has renewed its mining property exploration efforts in fiscal 1997
and expects exploration costs to increase in future periods for this program.
The Company's net income or (loss) from continuing operations for the
fiscal years ended September 30, 1996 and September 30, 1995 was $117,158 and
($908,174), respectively. The increase of $1,025,332 in income was
attributable to an increase in sales and revenues, the improvement in gross
profit margin, the reduction in exploration costs and decreased legal and
professional fees, but was partially offset by increases in salaries, wages
and related costs, depreciation and amortization expense, and taxes, licenses
and permits.
Net loss for the fiscal years ended September 30, 1996 and September 30,
1995 was ($919,813) and ($1,185,850), respectively, a reduction in loss of
$266,037. Interest expense for the fiscal years ended September 30, 1996 and
September 30, 1995 was $311,303 and $144,835, respectively, an increase due to
the use of debt financing to acquire additional equipment. The Company entered
into a financing arrangement on September 30, 1996 with a related party which
resulted in a charge to "other financing cost" of $1,024,322. [See "Certain
Transactions," below.] This transaction included the issuance of Common Stock
purchase warrants, the effect of which was an increase in stockholders' equity
of $1,024,322 and an offsetting finance charge on the income statement in the
same amount. Gain on sale of investment securities for the fiscal years ended
September 30, 1996 and 1995 was $99,289 and $209,943, respectively. The
balance of the Company's holdings of marketable securities was sold in fiscal
1996 to provide additional working capital. The Company will not have these
securities as a source of capital in future years. Loss from discontinued
operations for the fiscal years ended September 30, 1996 and September 30,
1995 was $3,326 and $363,462, respectively. The subsidiary responsible for
this loss was sold in fiscal 1996. Therefore, there will be no future
revenues or expenses incurred by the Company from that transaction. An
extraordinary item of income was recorded in the fiscal year ended September
30, 1996 in the amount of $172,823 as forgiveness of debt. This was primarily
the forgiveness of interest owed to the Bell Estate. [See "Certain
Transactions," below.]
The Company plans to expand its drill rig fleet during fiscal 1997 and is
working to improve the efficiency of its other operations. The Company
believes these efforts will improve operating results for fiscal 1997.
However, there is no assurance that this will occur.
Fiscal Year Ended September 30, 1995 Compared With Fiscal Year Ended September
30, 1994
The Company's net loss for the fiscal year ended September 30, 1995 was
approximately $1,186,000 as compared to approximately $1,811,000 for the
fiscal year ended September 30, 1994. The difference was attributable to an
increase in revenues and a decrease in expenses as a percentage of revenues.
Total sales and revenues from continuing operations for fiscal 1995 were
$3,019,597, an increase of $851,146, or 39 percent, over fiscal 1994. The
increased revenues were attributable to increases in revenues from both the
Company's drilling services and repair services segments.
Total costs and expenses from continuing operations decreased in fiscal
1995 approximately 1.7 percent to $3,932,743 when compared to fiscal 1994.
These decreased costs and expenses were attributable to decreases in legal and
other professional fees, rents, travel expenses, and consulting fees, which
were offset to an extent by increases in fuel, supply, and exploration costs
as a result of increased drilling and exploration activities.
The Company's loss from continuing operations decreased from $1,834,275
in fiscal 1994 to $913,146 in fiscal 1995 as a result of the items described
above. The decreased loss from operations for fiscal 1995 as compared to 1994
was offset by a $670,039 decrease in gain on sale of marketable securities.
The lower amount of gain on sale of marketable securities resulted from
smaller amounts of marketable securities being sold in fiscal 1995. At
September 30, 1995, the total value of the Company's marketable securities was
$258,750.
Liquidity and Capital Resources
September 30, 1996
As of September 30, 1996, the Company's current assets were $1,854,325
and its current liabilities were $2,703,956, resulting in an excess of
liabilities of $849,631. At September 30, 1995, the current liabilities
exceeded current assets by $452,940. The increase is due primarily to
additions to short-term debt from a related party. From September 30, 1995 to
September 30, 1996, cash and cash equivalents increased $126,288 to $300,767.
Net trade accounts receivable increased $521,603 to $1,050,371. These
increases are attributable to a 47 percent increase in revenues for the same
period. Inventory decreased $224,934 to $483,938, primarily due to the sale
of a manufacturing subsidiary. Accounts payable decreased during the period
by $261,814 to $412,487 and accrued expenses decreased $109,154 to $188,628,
due primarily to the sale of a subsidiary and to the availability of capital
provided by debt financing.
During the fiscal year ended September 30, 1996, total assets increased
$1,068,730 to $4,528,677. This included net additions to property, plant and
equipment of $939,382, due primarily to the purchase of additional drill
rigs. During fiscal 1996, total liabilities increased $374,319 to
$2,974,951. This included a reduction in long-term debt of $184,649 to
$270,995.
Stockholders' equity increased $694,411 during the fiscal year ended
September 30, 1996 to $1,553,726. To provide working capital for the Company,
stock and stock purchase warrants were sold in private placements and issued
in exchange for fees, services and debts of the Company. These issuances
resulted in an increase to working capital of $1,683,525. This capital
increase was partially offset by the Company's net loss for the period of
($919,813).
The Company realized positive earnings from its operating activities in
the last half of fiscal 1996. However, the Company will continue to need
infusions of equity or debt 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. These
four new rigs were acquired and constructed at an aggregate cost of
approximately $2,650,000.
During fiscal 1996, the Company incurred short-term debt with Common
Stock conversion rights from an unrelated entity. The first loan of $710,000
was obtained in May 1996. Subsequent notes were executed and funds borrowed
from the same entity in June ($450,000), July 10 ($150,000) and July 16, 1996
($590,000). These notes were partially refinanced on September 30, 1996 with
the execution of a short-term note in the amount of $1,673,730 from a related
party, coupled with the issuance to the related party lender of Common Stock
purchase warrants. Subsequent to the fiscal year end on September 30, 1996,
the Company borrowed an additional $200,000 from the same unrelated party on a
short-term basis. Approximately $1,842,400 of this short-term debt was repaid
by January 2, 1997 from the proceeds of an offering selling approximately
4,000,000 restricted shares of the Company's Common Stock. [See "Certain
Transactions" and "Recent Sales of Unregistered Securities," below.]
December 31, 1996 (Unaudited)
At December 31, 1996, the Company's current assets exceeded its current
liabilities by $1,818,016 as compared with current liabilities exceeding
current assets by $849,631 at September 30, 1996. The current ratio of assets
to liabilities was 1.65 at December 31, 1996 as compared with .69 at September
30, 1996. Current assets increased by $2,757,531 to $4,611,856 from September
30, 1996 to December 31, 1996. Current liabilities increased by $89,884
during the same period. The significant increase in working capital over this
period is primarily attributable to the sale of Common Stock in December
1996.
Total assets were $7,729,791 at December 31, 1996 as compared to
$4,528,677 at September 30, 1996. The increase of $3,201,114 is due to the
sale of stock described above and additions to fixed assets of $446,253,
primarily additions to the drill rig fleet and supporting equipment.
For the three-month period ended December 31, 1996, the Company continued
to have positive cash flow from operations. The Company anticipates continual
increases in revenues and cash flow from operations as it expands its drill
rig fleet for the balance of fiscal 1997. Two additional rigs with support
equipment were purchased during the second quarter of fiscal 1997 and two rigs
being completed by in-house construction are expected to be available for
operation by May 31, 1997. This will increase the Company's fleet of drill
rigs to thirteen. As the Company continues to expand, it endeavors to
maintain its positive cash flow from operations, although there can be no
assurance of this. The Company is also increasing its efforts to acquire
mining properties, and it will continue to need additional sources of funds in
order to pursue gold exploration and development and expand its drilling and
repair services. The Company expects to obtain such financing through bank
borrowings or through the sale of its debt or equity securities. However,
there is no assurance that the Company will obtain such financing.
Forward-looking Statements
The forward-looking statements contained in this Management's Discussion
and Analysis of Operation section and in the section labeled "Business,"
elsewhere in this Prospectus, involve a number of risks and uncertainties.
Some of the factors that could cause actual results to differ materially are
set forth above under the caption "Risk Factors." In addition, the risk
factors discussed below may also affect actual operating results in the
future.
The Company has experienced and expects to continue to experience
significant fluctuations in its results of operations. Factors that affect
the Company's results of operations include its ability to successfully bid on
new contracts, its ability to perform contracts on a timely basis, its access
to suitable used or new equipment to fulfill contract obligations, the ability
to hire and retain skilled and properly trained employees, industry conditions
and world demand for precious metals, as well as prices for such metals. In
addition, the exploration and production of gold is a highly speculative and
competitive business into which the Company expects to expand. As a result of
the foregoing and other factors, there can be no assurance that the Company
will not experience material fluctuations in future operating results on a
quarterly or annual basis which would materially and adversely affect the
Company's business, financial condition and results of operation.
The Company has recently expanded much of its operations to meet
increased demand for its services both inside and outside the United States.
There are numerous risks associated with conducting business in foreign
countries. The distance from corporate headquarters and the often remote
locations of drilling and mining sites in these foreign countries exacerbates
the difficulties discussed above. In addition, problems associated with
possible political risks, instability of local governments, safety of
personnel and equipment, the lack of spare parts or adequate service
assistance, the need for skilled labor and supervision, all add to the risk of
foreign operations. [See, "Risk Factors."]
BUSINESS
The primary business of the Company is providing drilling services for
companies engaged in the exploration for, production and sale of gold and
other precious metals associated with gold, as well as the design,
manufacture, sale, service and repair of drilling rigs and hydraulic equipment
used in logging, mining and related industries. In addition, the Company
intends to engage in the future on a broader scale in the exploration for and
production, processing and sale of gold and other precious metals for its own
account and to develop its own properties.
Drilling Operations
The drilling operations of the Company include both production mining
drilling and exploration drilling as a drilling contractor to the precious
metals mining industry. The Company specializes in exploration and production
drilling, using reverse circulation drilling, performing work in the United
States and Mexico. The Company also designs, manufactures, sells, services
and repairs drill rigs and other hydraulic equipment used in the logging,
mining and related industries. It is anticipated that it may also soon
commence operations in Africa. The Company's drill rigs are track-mounted,
mobile, and compact, and the Company believes that their usage does not result
in significant adverse environmental impact. Because of their mobility, track
mounting, small size, and capability of drilling to 1,500 feet in most
environments, these rigs can be positioned and operated in relatively
difficult terrain without requiring the building of drill roads. Based on its
experience in the industry, Management believes that these attributes provide
competitive advantages in terms of avoiding certain expenses for building
roads and also minimizing adverse environmental impact.
The Company submits written bids for drilling projects and negotiates
written contracts with the mining company prior to commencement of any
drilling project. During drilling operations, the driller, or supervisor, is
responsible for maintaining drill logs. Invoices for services rendered by the
Company are submitted for payment to the mining company on a weekly basis.
Given the intensely competitive market for its contract drilling services, the
Company emphasizes timely completion of its projects, meticulous maintenance
of its equipment and retention of experienced employees.
In 1993, as governments in the United States and Canada raised taxes and
introduced more stringent mining regulations, many mining companies sought
opportunities to shift their mining efforts to South and Central America and
Mexico, where the regulatory regimes are more conducive to mining activities.
Improved political stability in these regions also made expansion there more
attractive to North American mining companies. Changes in the laws regarding
foreign ownership in Mexico prompted an increase in the number of
foreign-owned mining concessions in that country. Privatization of mineral
lands subject to previously low levels of prior mineral extraction activity
and the Mexican government's provision of incentives to companies willing to
operate in Mexico have further encouraged the expansion of foreign company
interests. Increased activities in Mexico by the Company's clients has
resulted in a greater percentage of the Company's services being provided
there.
The Company presently has thirteen drill rigs in use. Six of those drill
rigs are operating in Mexico and three are operating in Alaska. The Company
also recently took delivery of two additional drill rigs it purchased during
the second fiscal quarter of 1997 and it completed construction of two
additional rigs at the Missoula, Montana, facility in April 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 used
in logging, mining and construction. The Company is the exclusive authorized
dealer and repair center for Denison Hydraulics of Cleveland, Ohio, for the
state of Montana. KLS Co. also offers specialty manufacturing services,
including pump installation and modification, with an emphasis on hydraulic
systems. To date, KLS Co. has performed specialty manufacturing services
primarily for Dateline.
Precious Metals Exploration
The Company is not presently engaged in any exploration or production on
its own properties or with respect to its own extraction rights. In February
1994, the Company, through Beloro, entered into a joint venture (the "La
Cienega Agreement") with Pacific Rainier De Mexico, S.A. de C.V. ("Pacific"),
a subsidiary of Nevada Star Resources Corp., to pursue the development of
property located at La Cienega, Sonora, Mexico, and a potential placer gold
deposit on the Rio Yaqui, approximately 80 miles east of Hermosillo, Mexico.
The Company formed Beloro to own its interests in the joint venture. As of
January 1996, Beloro had contributed cash, property and services valued at
approximately $475,000 to this project. Pacific's initial contribution was
its title to mining claims covering the mineral rights in the land. The
Company terminated its rights and obligations under the La Cienega Agreement
in February 1996, largely because performance did not meet expectations and
because the feasibility studies for future undertakings by the joint venture
indicated that continued participation was not in the best interests of the
Company.
The Company intends to expand its operations in the exploration and
production drilling field by entering into joint ventures or similar
arrangements with the owners of properties containing mineable ore reserves
consisting of both proven and probable ore reserves. As used in this
Prospectus, the term "mineable ore reserves" includes both proven and probable
reserves. The term reserves means that part of a mineral deposit which can be
reasonably assumed to be economically extracted or produced at the time of the
reserve's determination. The term economically, as used in the definition of
reserves, implies that profitable extraction or production under defined
investment assumptions has been established or analytically demonstrated. The
assumptions made must be reasonable, including assumptions concerning the
prices and costs that will prevail during the life of the project.
The term proven reserves means reserves for which (a) quantity is
computed from dimensions revealed in outcrops, trenches, workings and drill
holes; grade and/or quality are computed from the results of detailed
sampling; and (b) the sites for inspection, sampling and measurement are
spaced so closely and the geologic character is so well defined that size,
shape, depth and mineral content of reserves are well established.
The term probable reserves means reserves for which quantity and grade
and/or quality are computed from information similar to that used for
reserves, but the sites for inspection, sampling and measurement are farther
apart or are otherwise less adequately spaced. The degree of assurance,
although lower than that for proven reserves, is high enough to assume
continuity between points of observation. Despite the best efforts of the
owners of these properties or the Company to estimate or measure reserves, no
assurance can be given in any case that the indicated amount of gold or other
minerals may be economically recovered. Reserve estimates may from time to
time require revisions based on actual production experience. The ore grade
actually recovered by the Company may differ from the estimated grade of the
reserves. Reserve estimates generally are revised annually based on the
previous year's operating history. Many factors relating to each mine, such
as the design of the mine plan, unexpected operating and processing problems,
increases in the stripping ratio in open pit mines, unforeseen geotechnical
conditions which may result in increased ground support or dilution in
underground operations, and the complexity of the metallurgy of an ore body,
may adversely affect cash costs. Moreover, fluctuations in the market price of
gold or other minerals, as well as increased production costs or reduced
recovery rates, may render reserves containing relatively lower grades of
mineralization uneconomical to recover and may ultimately result in a
restatement of reserves.
Domestic/Foreign Revenues
During the fiscal years ended September 30, 1996 and 1995, the Company
had business operations in the United States and Mexico. The Company expects
to increase its foreign activity in the future. The following table sets
forth the revenues from all domestic and foreign sources of the Company for
those years:
<TABLE>
<CAPTION>
Fiscal Year Ending Fiscal Year Ending
September 30, 1996 September 30, 1995
------------------ ------------------
<S> <C> <C>
From Domestic Sources
Continuing Operations $1,742,318 $1,593,439
Discontinued Operations 374,233 899,253
From Foreign Sources
Continuing Operations 2,682,375 1,426,158
TOTALS $4,798,926 $3,918,850
========== ==========
</TABLE>
Discontinued Operations
KLS has an inactive subsidiary, known as K.L.S. Environmental, Inc., a
Nevada corporation ("KLSEI"), that was formed in 1993 for the purpose of
engaging in the business of remediating contaminated soils. The Company
subsequently suspended that business. KLSEI does not conduct any business
operations at this time.
During the fiscal year ended September 30, 1996, KLS sold Kel-Lite
Industries, Inc., a Texas corporation ("Kel-Lite"), which was formed in 1994
to acquire the business of a defunct company and to manufacture flashlights.
KLS is no longer pursuing the flashlight business.
In September 1994, the Company formed K.L.S. International, Inc., a
Nevada corporation, as a holding company for pursuing precious metals
exploration operations in Mexico. KLSII has no operations presently. KLS
also owns Beloro, S.A. de C.V. ("Beloro"), a Mexico corporation formed by KLS
in 1994 to pursue gold exploration and development in a joint venture with an
unrelated entity. In February 1996 Beloro withdrew from the joint venture.
Although it plans to expand its precious metals exploration business,
particularly outside of the United States, KLS determined that it would not be
in the Company's best interests to pursue those activities through the joint
venture. In the future the Company will target medium size properties that
may be too small for most major mining companies and too large for most
independent mining companies to cost-effectively exploit. While the Company
is actively pursuing several properties which may meet these criteria, the
Company owns no exploration properties or claims at this time.
Competition
Drilling Operations. The customers for the Company's drilling operations
include many precious metal mining companies in North, Central and South
America. The Company also expects to expand its services to Africa. The
Company is presently pursuing mining and drilling concessions and
opportunities in the United Republic of Tanzania ("Tanzania") and Cote
d'Ivoire ("The Ivory Coast"). However, as of the date of this Prospectus it
has no agreements for any business in these countries and there can be no
assurance that it will.
In recent years, approximately 150 mining companies have opened or
greatly expanded mining operations in Mexico. Marketing of the Company's
drilling services is done through direct mail, mining convention attendance
and direct personal contacts. There are several large companies with whom the
Company competes for drilling contracts. The basis of competition is usually
price, service and timeliness. With respect to service and speed, the Company
believes it is able to compete effectively, based on its understanding of the
industry, and its competition's business practices, as well as the limitations
of its competition's equipment. The Company has observed that there is little
effective competition in Mexico for the reverse circulation drilling
capability possessed by the Company and that U.S.-based companies are the
principal competitors to the Company for drilling contracts in Mexico. Many
of the Company's competitors possess greater financial resources, larger work
forces, and more highly developed marketing programs than the Company. A
number of smaller companies also compete with the Company for this business.
Much of the drilling work performed by the Company is in remote,
mountainous areas. With its track-mounted, compact, and highly mobile
drilling equipment, the Company can perform drilling work in these remote
areas more easily and efficiently than other companies that do not have such
equipment. Some of the Company's drill rigs are specially designed to
minimize both adverse impact on the environment and the need for construction
or improvement of roads to access mining sites. The Company's rigs can be
used in soft-soil conditions with less damage to the environment than
equipment used by its competitors. Based upon drilling contracts previously
awarded to the Company, and the circumstances under which they were awarded,
the Company believes these capabilities give the Company a competitive
advantage when bidding for contracts which require drilling in remote,
mountainous or unstable geographic regions, although no assurance can be given
that the Company will be able to continue to exploit this perceived advantage
in a profitable manner.
Acquisition of Precious Metals Properties or Interests. The Company
competes with substantially larger companies as well as experienced smaller
companies for the acquisition of properties or interests in properties with
precious metals reserves. Those competitors that are significantly larger
than the Company have far greater financial, management and exploration
resources than the Company to search for, acquire and develop these
properties. However, the Company currently is focusing its efforts on medium
size properties in which it believes it may have a competitive advantage
because properties of this size generally are too small for most major mining
companies and too large for most independent mining companies to develop
effectively.
Specialty Manufacturing and Hydraulic Services. The primary markets for
the Company's specialty manufacturing and hydraulic repair services consist of
logging, mining, and construction companies in the Missoula, Montana area.
These services are marketed through direct contact, attendance at mining
conventions, and direct mail. There are several companies with whom the
Company competes for specialty manufacturing and hydraulic repair services,
and many of those companies have significantly greater financial resources
than the Company.
Equipment
Drilling Equipment. The Company owns thirteen functional drill rigs,
ten of which were either designed and manufactured by Dateline or were
substantially redesigned and remanufactured by the Company. The drill rigs
are highly mobile and compact and are able to access remote areas with
relatively low environmental impact. The Company employs the reverse
circulation method of drilling in its drilling operations. This method of
drilling entails directing the drilling medium (air or mud) through the
annulus (the space between the drill pipe and the drill pipe cover) outside
the drill pipe, causing the cuttings to come to the surface through the center
of the drill pipe. In conventional drilling, the air or mud is forced down
the interior of the drill pipe and the cuttings come to the surface through
the annulus. The cuttings derived from the reverse circulation method are
cleaner, less damaged and easier to analyze and/or assay. Additionally, to
the extent the Company's drilling methods are used in lieu of core drilling,
they offer a significantly less costly service alternative to the customer.
The Company believes that the combination of greater mobility, compactness and
comparatively low environmental impact is a competitive advantage, despite the
fact that the rigs are not able to drill to the depth of larger drills.
In addition to its drill rigs, the Company owns drill pipe, tools and
replacement parts used in reverse circulation drilling operations.
Other Equipment. The Company owns office equipment and machines,
including a computer system, telephone and facsimile equipment, furniture and
supplies sufficient for its operations. It also owns equipment needed in its
manufacture and repair operations, including metal lathes, drill presses,
welding equipment, hoists, and other equipment. The Company maintains
approximately 35 vehicles, primarily trucks, which are used in its drilling
and other operations.
Marketing
During fiscal 1996, the Company provided its drilling services for
approximately 36 different entities on 40 sites. Principal customers of the
Company include Phelps Dodge Corp., FMC Gold Company, Placer Dome USA, Inc.
and USMX. The customers of the Company are primarily gold and precious metal
producers and the services of the Company are provided under contract.
Contracts for drilling services are obtained through responding to invitations
for bids, attendance at trade shows, personal contacts and direct mail
contacts.
The Company is the exclusive service representative and dealer of the
Denison Hydraulics Company of Cleveland, Ohio for the state of Montana. Under
its arrangement with Denison Hydraulics, the Company services Denison
Hydraulics products used primarily by logging interests in the state of
Montana. Other repair, design and manufacturing projects are obtained through
participation in and attendance at trade shows, direct mail and personal
contact.
Reliance On Major Customers
During the fiscal years ended September 30, 1995 and 1996, no customer of
the Company accounted for more than 10 percent of the Company's revenues from
continuing operations. For the fiscal year ended September 30, 1995, there
was one customer of the Company's now discontinued flashlight business that
was responsible for more than 10 percent of the Company's revenues from that
now-discontinued operation of the Company.
Properties
Drill Rig Manufacturing and Maintenance Facilities. The Company owns an
industrial tract of land constituting approximately 3.11 acres, located at
3560 North Grant Creek Road, Missoula, Montana. The Company's KLS Co. and
Dateline operations are generally conducted from that property. Located on
the property in Missoula are: (i) a single-story building of frame
construction containing approximately 3,600 square feet of office space, (ii)
a single-story cold-storage facility containing approximately 5,000 square
feet, which subsequently was converted to an inventory and environmental
equipment storage facility, (iii) a steel building containing approximately
5,000 square feet, which houses the manufacturing and repair activities, and
(iv) a 7,500 square foot building which is used by KLS Co. in its specialty
manufacturing and hydraulic systems repair activities.
Corporate Office. The Company's headquarters are located at 3220 North
Freeway, Fort Worth, Texas 76111 and consist of approximately 2,000 square
feet of rented office space. The Company leases this property on a
month-to-month basis for $1,110 per month from a partnership that is 50
percent owned by Merlyn Dahlin, the former Chief Financial Officer, Treasurer
and director of the Company. The Company believes that the rent agreement
respecting its headquarters is as favorable as an arms-length-transaction,
however, the Company will shortly vacate these facilities and move to a
smaller facility in the Dallas, Texas area which is more centrally located,
modern and efficient.
The Company believes the other facilities and properties described above
to be sufficient for its immediate needs and for the next twelve months. In
addition to these properties, the Company from time to time may acquire
interests in mining properties.
Employees
As of April 21, 1997, the Company employed approximately 56 full-time
employees and no part-time employees. In addition, the Company employed two
outside consultants. From time to time the Company employs additional outside
consultants as needed. The Company believes that it will be able to attract
qualified personnel to fill any job openings. None of the Company's employees
is a member of a union, and neither the Company nor any subsidiary has
experienced a work stoppage. The Company also pays for certain strategic
planning, investment planning and management services under a contract with a
related party. [See, "Certain Relationships."]
In December 1996, the Company entered into a management contract with
Studdert Companies Corp. ("SCC"), a Utah corporation owned and controlled by
Stephen M. Studdert, Thomas A. Murdock and Roger D. Dudley. Under the
management agreement, SCC will receive a monthly management fee of $50,000
payable in stock of the Company or in cash and will provide investment
banking, investor relations, financial management and strategic planning
services for the Company for a term of five years. If the fee is paid in
shares of stock of the Company, the number of shares issuable would be
determined with reference to the average trading price of the Company's Common
Stock during the month for which the services were provided in consideration
for such fee. The agreement also provides for reimbursement of expenses
incurred by SCC since June 1996 in connection with services rendered to the
Company and for similar treatment of expenses incurred during the term of the
agreement.
Legal Proceedings
As of March 5, 1997, the Company was involved in the following legal
proceedings:
PanAmerican Mineral Services, Inc. v. KLS Enviro Resources, Inc.,
Dateline Drilling, Inc., and Dateline Internacional S.A. De C.V. (the "Texas
Litigation"). This action is filed in the District Court of Dallas County,
Texas. The Texas Litigation is related to litigation (the "Wyoming
Litigation) and an arbitration proceeding between one or more of the
defendants and the plaintiff in the state of Wyoming. In 1991, before KLS
acquired any interest in Dateline, Dateline allegedly entered into a contract
with PanAmerican Mineral Services, Inc. ("PanAmerican"). PanAmerican was to
perform certain services and render certain consultation with reference to
business to be conducted by Dateline in Mexico. PanAmerican was to bill for
services performed by Dateline and then remit to Dateline. After the
acquisition of Dateline by KLS, it was discovered that PanAmerican had not
performed as required under the contract and was holding funds due Dateline.
Pursuant to an arbitration agreement between Dateline and PanAmerican,
Dateline began an arbitration proceeding in the state of Wyoming. PanAmerican
has filed documents in the arbitration proceeding indicating that it intends
to assert a counterclaim against Dateline, DIMSA and KLS. PanAmerican
contends that it performed all of its obligations under the contract with
Dateline and alleges that Dateline and the Company are in violation of their
contractual obligations. PanAmerican seeks to recover damages in an
unspecified amount. The Wyoming Litigation was dismissed for lack of
jurisdiction over KLS and DIMSA. That decision was reversed on appeal by the
Wyoming Supreme Court. KLS, Dateline and/or DIMSA anticipate that one or more
of them will file a counterclaim against PanAmerican in the Texas Litigation.
The officers of the Company vigorously dispute that there is any merit to any
claim by PanAmerican. KLS, as well as Dateline and DIMSA, are vigorously
defending themselves in the Texas Litigation.
EXCHANGE RATES
From late 1982 until November 11, 1991, Mexico maintained a dual foreign
exchange rate system, consisting of a "controlled" exchange rate and a "free"
exchange rate. The controlled rate applied to specified transactions and the
free exchange rate applied to all other transactions. Mexico repealed its
exchange control rules effective November 11, 1991 and now has a free market
for foreign exchange.
Prior to December 21, 1994, Banco de Mexico sought to keep the New
Peso-U.S. dollar exchange rate within a range prescribed by the Mexican
government through intervention in the foreign exchange market. Under its
policy guidelines, Banco de Mexico generally intervened to reduce day-to-day
fluctuations in the exchange rate. From November 11, 1991 through October 20,
1992, the upper limit of the prescribed range, expressed in terms of New Pesos
("Nps") per U.S. dollar, rose by 0.0002 per day, equivalent to a maximum
devaluation of the New Peso with respect to the U.S. dollar of approximately
2.4 percent per year. From October 20, 1992 until December 19, 1994, the
upper limit of the central bank's accepted range increased by Nps 0.0004 per
day, equivalent to a maximum devaluation of the New Peso of approximately 4.6
percent per year. On December 20, 1994, the Mexican government increased the
ceiling by Nps 0.53 per day, equivalent to an effective devaluation of 15.3
percent.
On December 21, 1994, the Mexican government announced its decision to
suspend intervention by Banco de Mexico and to allow the New Peso to float
freely against the U.S. dollar. Factors contributing to the decision included
the growing size of Mexico's current account deficit, the declining level of
Banco de Mexico's foreign exchange reserves, rising interest rates for other
currencies, especially the U.S. dollar, and reduced confidence in the Mexican
economy on the part of international investors due to political uncertainty.
By December 31, 1994, the exchange rate was Nps 5.0 per U.S. dollar, compared
to Nps 3.5 per U.S. dollar on December 19, 1994. On May 31, 1995, as part of
Mexico's National Plan for Development 1995-2000, the Mexican government
announced its intention to maintain a free-floating exchange rate regime. The
New Peso was highly volatile throughout 1995, and fluctuated between Nps 5.27
and Nps 8.14 per U.S. dollar. During 1996, however, the exchange of the Nps
against the U.S. dollar continued to perform in a more stable manner,
depreciating approximately 1.7 percent. As of March 15, 1997, the rate of
exchange was approximately Nps 8.00 to the dollar. There can be no assurance
that the Mexican government will maintain its current policies with regard to
the New Peso or that the New Peso will not further depreciate significantly in
the future.
In recent months the Company has been investigating possible drilling
services and exploration opportunities in The Ivory Coast and Tanzania. The
economics of these and other African countries have been depressed for many
years and these two countries are among the poorest in the world,
notwithstanding they may have abundant natural resources. Both Tanzania and
The Ivory Coast have experienced high inflation and fluctuations in currency
valuation.
The currency exchange rates for the past several years for the Tanzanian
shilling ("TZS") to the U.S. dollar are as follows:
Year TZS per $1.00
------ ---------------
1991 219.16
1992 297.71
1993 405.27
1994 509.63
1995 574.76
1996 595.00
As of April 21, 1997, the rate was U.S. $1.00 = 599 TZS.
The Ivory Coast franc ("Communaute Financiere Africaine franc" or "CFA")
was devalued 50% against the French franc in 1994, after being fixed at 50 CFA
per French franc since 1948. The exchange rates for the CFA to the U.S.
dollar for the past several years were as follows:
Year CFA per $1.00
------ ---------------
1991 282.11
1992 264.69
1993 283.16
1994 555.20
1995 499.15
1996 524.40
As of April 21, 1997, the rate of exchange of CFA per U.S. $1.00 was 570
CFA.
MANAGEMENT
Directors and Executive Officers
The following table sets forth the executive officers and directors of
the Company, a key executive officer of a significant subsidiary, and a
significant employee of the Company:
<TABLE>
<CAPTION>
Name Age Position
------------------------ ----- ---------------------
<S> <C> <C>
Stephen M. Studdert 48 Director, Chairman
Raymond H. Kurzon 48 President and Director
Charles E. Nuanez 39 Vice President and Director
Wyman Au 57 Director
Philip B. Smith 61 Director
Thomas A. Murdock 52 Director
Roger D. Dudley 44 Director, Acting Chief Financial Officer
Joseph Verner Reed 60 Director
Rick D. Nydegger 48 Director
Adam Taylor 58 Chief Metallurgist
</TABLE>
Stephen M. Studdert was appointed a director and elected by the Board of
Directors as its chairman in December 1996. Mr. Studdert is the chairman of
the Board of Directors and chief executive officer of fonix corporation
("fonix"), a publicly-held research and development company engaged in the
development of automatic speech recognition technology. Mr. Studdert is also
chairman and CEO of SCC, and a manager and member of SMD, L.L.C. ("SMD"), a
Utah limited liability company that has previously made loans to the Company
and is a substantial shareholder of the Company. SCC has contracted with the
Company to provide certain management and consulting services to the Company.
[See "Certain Transactions."] Mr. Studdert was a White House advisor to U.S.
Presidents Bush, Reagan and Ford and he served as a member of the President's
Export Council and the Foreign Trade Practices Subcommittee. He is a director
and former chairman of the Federal Home Loan Bank of Seattle and from October
1993 until March 10, 1995, Mr. Studdert also served briefly as a director of
Seiler Pollution Control Systems, Inc., a company having a class of securities
registered under the Securities Exchange Act of 1934.
Raymond H. Kurzon has been President and a director of the Company since
its formation in 1993. From May 1990 to March 1992, he was a partner/manager
in Golden Corral Corp., a joint venture operating a restaurant in McKinney,
Texas. From May 1991 until July 1992, Mr. Kurzon was assistant to the
president of Gateway Mining Company, a Nevada corporation. Mr. Kurzon left
Gateway to work on the formation of the Company.
Charles E. Nuanez has been Vice President and a director of the Company
since January 1993. From 1980 through June 1990, Mr. Nuanez was employed by
Pacific Silver Corp. and Silver King Mines Inc. as mine superintendent and
mine manager at different locations. From June 1990 to September 1991, Mr.
Nuanez was employed by Alta Gold Co. as General Manager of certain mining
prospects and, from October 1991 to March 1993, as manager of Alta's Nevada
operations. Since October 1991, Mr. Nuanez has been employed by Dateline in
various capacities. He currently serves as its President.
Wyman Au has been a director of the Company since November 1993. For
more than 30 years, Mr. Au has been employed as a meteorologist by the
National Weather Service in Honolulu, Hawaii. Mr. Au currently is a director
(Vice Chairman) of the Honolulu Federal Employees Credit Union, a director and
secretary of the Hawaii Credit Union League, and a national director of the
Credit Union National Association.
Philip B. Smith has been a director of the Company since February 1995.
Mr. Smith served as the managing director of Prudential Securities in its
merchant bank from 1986 until 1988. Mr. Smith is a founding general partner
of Lawrence Venture Associates, a venture capital limited partnership based in
New York, New York, where Mr. Smith has served as general partner from 1984 to
the present time. Mr. Smith is presently managing general partner of The
Private Equity Partnership based in New York, New York, which was formed in
1988. He is also vice chairman of Spencer Trask, Inc. in New York, New York,
and is a special limited partner and founder of Utech Venture Capital Fund
located in Washington, D.C. Mr. Smith also serves on the Board of Directors
of Movie Gallery Inc., American Family Restaurants, StarPress Inc., Digital
Video Inc., AstroSciences, Inc., and several private companies. In addition,
Mr. Smith previously has worked with Citibank where he founded Citicorp
Venture Capital for which he served as president and chief executive officer,
and he served as executive vice president and group executive of the Worldwide
Corporate Group at Irving Trust Company. Mr. Smith received a BSE in Chemical
Engineering from Princeton University and a Masters of Business Administration
from the Harvard Business School and is an adjunct professor at Columbia
Business School.
Thomas A. Murdock has been a director of the Company since July 1996.
Since June 1994, Mr. Murdock has been an officer and director of fonix and
currently is the president and chief operating officer of that company. Mr.
Murdock is President of SCC and Assistant to the Chairman and director of
Synergetics, Inc., a private research and development company. For much of
his career, Mr. Murdock has been a commercial banker and a senior corporate
executive with significant international emphasis and experience. Mr. Murdock
is a manager and owner of SMD.
Roger D. Dudley was appointed acting chief financial officer and a
director of the Company on December 31, 1996. He has been a director and
officer of fonix since June 1994, presently in the capacity of executive vice
president and chief financial officer of that company. Mr. Dudley is also
executive vice president of SCC and a manager and indirect owner of SMD.
After several years at IBM in marketing and sales, Mr. Dudley began his career
in the investment banking and asset management industry. He has extensive
experience in real estate asset management and in project development. He
also serves as executive vice president of an international investment fund,
and has managed assets in excess of $200 million. From February 1995 to
November 1995, Mr. Dudley served as a director for Pacific Aerospace &
Electronics, Inc., a Nevada corporation, which has a class of securities
registered under the Securities Exchange Act of 1934.
Joseph Verner Reed was Under Secretary General of the United Nations in
New York for more than ten years until his retirement from that post effective
January 31, 1997. Following a career as a senior advisor to the chairman of
the Chase Manhattan Bank, Ambassador Reed became the United States Ambassador
to Morocco. He subsequently served as United States Ambassador to the United
Nations and Chief of Protocol of the United States. He holds honorary degrees
from several universities. Since June 1994, Ambassador Reed has also served
as a director of fonix. Ambassador Reed became a director of the Company on
December 31, 1996.
Rick D. Nydegger is a patent and trademark attorney. Mr. Nydegger is a
founding shareholder and director of the law firm Workman, Nydegger & Seeley
in Salt Lake City, Utah, a firm specializing in patent, trademark, copyright,
trade secret, unfair competition, licensing and intellectual property
matters. Mr. Nydegger received his law degree from the J. Reuben Clark Law
School (cum laude, 1974)in Provo, Utah. He has published numerous articles in
trade journals and law reviews on the subject of computer law and intellectual
property. Mr. Nydegger is registered to practice before the U.S. Patent and
Trademark Office, and has been admitted to practice before the U.S. Court of
Appeals in the Federal Circuit and the Fifth and Tenth Circuits, as well as
the U.S. Supreme Court. Mr. Nydegger also joined the Board of Directors of
fonix in December 1996. He also became a director of the Company on December
31, 1996.
The Board of Directors has an Executive Committee comprised of Messrs.
Kurzon, Studdert, Murdock and Dudley. Mr. Kurzon, president and CEO of the
Company, is also the chairman of the Executive Committee. Under the bylaws of
the Company (Article V, Section 5.1), the Executive Committee has the
authority to exercise all powers of the Board of Directors of the Company
except the power to declare dividends, issue stock, recommend to shareholders
any matter requiring shareholder approval, change the membership of the
Executive Committee, fill vacancies on the committee or discharge any
committee member. The Executive Committee is appointed by the Board of
Directors to facilitate company management between regularly scheduled and
special meetings of the full Board.
During fiscal 1996, the Company had no other committees of the Board of
Directors. On December 31, 1996, the board appointed an Audit Committee and a
Compensation Committee. The Audit Committee is chaired by Mr. Dudley, who is
also the acting CFO of the Company. Also, serving on this board committee are
Mr. Smith and Mr. Au. The Compensation Committee is chaired by Ambassador
Reed and is also comprising Mr. Nuanez and Mr. Murdock.
No family relationships exist between or among any of the Company's
officers and directors.
In addition to the previously named directors and executive officers, the
Company expects the following individual to make significant contributions to
the Company's business:
Adam Taylor has been Chief Metallurgist of the Company since January
1993. For more than the past 30 years and since he joined the Company, Mr.
Taylor has worked in metallurgy, principally in the processing of base and
precious metals, environmentally sound mining practices, and the design of
equipment and systems for the remediation of contaminated soil and water.
From 1990 to 1993, Mr. Taylor served as project manager of La Teko Resources,
Inc., where he directed the planning, control and remediation of hazardous
waste at a mining property in Fairbanks, Alaska, work for which he received a
commendation from the Alaska Department of Environmental Conservation. From
1987 to 1990, Mr. Taylor served as Chief Metallurgist of Coral Gold Resources
Corporation where he directed mining projects and developed systems to
optimize metals recovery and minimize environmental impact. Before 1987, Mr.
Taylor held positions with various mining companies, one of which included the
management of the processing department of a 3.5 million-ton-per-year
silver/gold mine.
Directors of the Company hold office until the next annual meeting of the
Company's shareholders and until their successors have been elected and duly
qualified. Notwithstanding that certain of the board members are also
directors of fonix, there is no present relationship, contractual or otherwise
between the Company and fonix and no relationship is intended or expected to
develop in the future. During the Company's fiscal year ended September 30,
1996, fonix made a series of short-term loans to the Company totaling
approximately $1,900,000 dollars. All but $270,000 in principal was repaid by
the Company by September 30, 1996, with the balance being converted by an
assignee of fonix to shares of Common Stock of the Company on December 31,
1996. The Company is not indebted to fonix at this time and it is not
anticipated that there will be any further transactions between the two
corporations in the future. The Company owes SMD a total of approximately
$185,191 for sums previously lent by SMD to the Company. [See "Certain
Transactions" for a discussion of these related transactions and for
disclosure of potential conflicts of interest created by these relationships.]
Board of Director Compensation
On December 31, 1996, the Board of Directors approved the material terms
of a Director's and Employee's Stock Option Plan (the "1997 Plan"). Directors
of the Company participate in the 1997 Plan as discussed below under
"Executive Compensation -- 1997 Stock Option and Incentive Plan."
During fiscal year 1996, the Company had no standard arrangement pursuant
to which directors of the Company were compensated for any services as a
director or for committee participation or special assignments performed in
the capacity of director of the Company. During fiscal 1996, options to
acquire shares of the Company's Common Stock were granted to certain members
of the Board of Directors as described below.
On February 24, 1995, the Board of Directors approved the issuance to
Philip B. Smith of options to purchase 200,000 restricted shares of the Common
Stock of the Company at a purchase price of $1 per share. These options were
subsequently canceled and replaced by options granted April 18, 1996, which
are exercisable until April 18, 1998 at a price of $.40 per share. Also on
April 18, 1996, the Board approved a grant of options to acquire 25,000
restricted shares of stock to Wyman Au, a member of the Board. These options
were issued in place of other options granted in February 1995 at a higher
exercise price. Like those granted to Mr. Smith, the options granted to Mr.
Au will expire at April 18, 1998 and are exercisable at a price of $.40 per
share. The repricing of the option exercise price of the options held by Mr.
Au and Mr. Smith was done to bring the exercise price closer to the market
price of the Company's Common Stock as of the date of the repricing, to
encourage the exercise of the options and ownership of the underlying shares
of stock. (See, also, "Certain Transactions.")
On July 11, 1996, the Board granted options to Mr. Au to purchase an
additional 75,000 restricted shares of the Company's Common Stock at a price
of $.50 per share. At the same time, the Board also approved the grant of
options to Merlyn Dahlin, then a director and CFO of the Company, to purchase
100,000 restricted shares of stock at $.50 per share and to Mr. Nuanez to
purchase 50,000 restricted shares of the Company's Common Stock at a price of
$.50 per share. All of these options were granted subject to subsequent
approval of the shareholders to be obtained within one year of the date of
grant. [See "Option/SAR Grants in Last Fiscal Year" below for information
regarding additional options granted to officers of the Company during fiscal
1996.]
In December 1996, options were granted to all directors of the Company.
[See "Security Ownership of Certain Beneficial Owners and Management" for a
description of these grants.]
During fiscal year 1996, the Board of Directors held three regular
meetings and took action three times by unanimous consent resolution. No
director attended fewer than 75% of these meetings.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who beneficially own more than
10 percent of a registered class of the Company's equity securities, to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission. Officers, directors and greater than ten-percent shareholders are
required by regulation of the Securities and Exchange Commission to furnish
the Company with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms furnished to the
Company during the fiscal year ended September 30, 1996 and representations
made by certain persons subject to this obligation that such filings were not
required to be made, the Company believes that all of the reports required to
be filed by these individuals and persons under Section 16(a) were filed in a
timely manner except as follows: (1) fonix was deemed to be the beneficial
owner of more than 10% of the Company's Common Stock by virtue of certain
conversion rights attached to demand notes given by the Company to secure
short-term financing from fonix. fonix was late in filing a Form 5 reporting
a change in its beneficial ownership of these derivative securities which
resulted from the repayment of a substantial portion of the amounts owed by
the Company and in a corresponding termination of a portion of the
aforementioned conversion rights which resulted in reducing fonix's beneficial
ownership of the Company's securities below 10%; (2) Thomas A. Murdock, a
director of the Company and the controlling shareholder of fonix is deemed to
beneficially own securities held by fonix and therefore had an obligation to
file a Form 4 reporting the change in the conversion rights held by fonix,
which change was reported by Mr. Murdock on an untimely filed Form 5; (3) SMD,
which acquired warrants to purchase approximately 6,600,000 shares of the
Company's Common Stock on September 30, 1996, was delinquent in filing a Form
4 to report the change in its beneficial ownership as a result of such
transaction; and (4) similarly, Messrs. Studdert, Murdock and Dudley, who are
the ultimate beneficial owners of SMD, were delinquent in their filing of an
annual report of change in beneficial ownership on Form 5 to report their
proportionate beneficial ownership of the warrants acquired by SMD on
September 30, 1996. All filings referenced above were made and the Company is
not aware of any filings required to be made under Section 16(a) by reporting
persons of the Company which were not made for fiscal year 1996.
EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to the
compensation of the Chief Executive Officer and the only executive officer of
the Company and its subsidiaries who earned $100,000 or more during the three
most recent fiscal years of the Company (the "Named Officers"), ending
September 30, 1996, 1995 and 1994 and the amounts earned:
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
---------------------------------------
Long-term
Name and Other Annual Compensation Awards All other
Principal Salary Bonus Compensation Of Stock Options Compensation
Position Year ($) ($) ($) (#) ($)
- -------------------- ---- --------- --------- ------------ ------------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Raymond H. Kurzon
CEO/President 1996 $ 90,000 $ 0 $83,375(1) 0 $1,000 (2)
1995 60,000 0 0 0 0
1994 60,000 0 0 0 0
Charles E. Nuanez
Vice President 1996 100,075 1,500 1,875(3) 50,000 (4) 0
1995 96,402 0 0 0 0
1994 99,999 0 0 0 0
</TABLE>
- -------------------
(1) Represents a bonus paid as 225,000 restricted shares of Common Stock
of the Company valued at $.375 per share, granted April 18, 1996.
(2) Represents fair market value of employee's personal use of
Company-owned vehicle.
(3) Represents a bonus paid as 5,000 restricted shares of Common Stock
of the Company valued at $.375 per share granted April 18, 1996.
(4) Represents options to acquire 50,000 shares of Common Stock of the
Company at a price of $.50 per share. On the date of grant (July 11, 1996),
the bid price of the Company's Common Stock was $.375 per share.
Employment Contracts and Termination of Employment and Change-In-Control
Arrangements.
The Company does not have any written employment contracts with any of
its executive officers. The Company has no compensatory plan or arrangement
that results or will result from the resignation, retirement, or any other
termination of an executive officer's employment with the Company and its
subsidiaries or from a change in control of the Company or a change in an
executive officer's responsibilities following a change-in-control. The
Company has entered into a management agreement with SCC pursuant to which SCC
has agreed to provide administrative, strategic planning, management
consulting, investor relations, investment banking and other services. Under
the agreement, which has a five-year term, SCC receives a management fee of
$50,000 per month, payable in Common Stock of the Company or in cash. The
Company also reimburses or otherwise pays all SCC expenses incurred in
connection with the services provided on behalf of the Company by SCC. SCC
provides similar services for other corporations and entities and its
agreement with the Company requires only that SCC devote such time as it
reasonably deems necessary to provide the services required to be provided to
the Company under the agreement. [See "Certain Transactions" for additional
information concerning this agreement and the other relationships involving
SCC, SMD and its principals.]
Option/SAR Grants in Last Fiscal Year
The following table sets forth certain information with respect to
options granted to the Named Officers during the fiscal year ended September
30, 1996. The Company has never granted any stock appreciation rights
("SARs"). No options were exercised during fiscal year 1996.
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of % of Total
Securities Options/SARs
Underlying Granted to
Options/SAR's Employees Exercise or Base
Name Granted (#) in Fiscal Year Price ($/Sh) Expiration Date
- --------------------- ------------- -------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Raymond H. Kurzon 0 0 n/a n/a
Charles E. Nuanez 50,000 100% $.50 July 11, 1998
</TABLE>
1997 Stock Option and Incentive Plan
On December 31, 1996, the Board of Directors approved the material terms
of a Director's and Employee's Stock Option Plan (the "1997 Plan"). Under the
terms of the 1997 Plan, the Company may grant options to purchase up to an
aggregate of 2,230,000 shares of the Company's Common Stock as either
incentive options or non-qualified stock options. All incentive stock options
are structured to qualify for favorable tax treatment provided for incentive
stock options by Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code"). The Plan is administered by an Option Committee comprising Mr.
Reed, as Chairman and Messrs. Murdock and Nuanez. The Option Committee has
discretion to select persons to whom options are granted, the number of shares
to be granted, the term of each option, and the exercise price of each option;
provided, however, that no option may be exercisable more than 10 years after
the date the option is granted and no option may be granted after December 31,
2006. For fiscal 1997, each director will receive 50,000 options to purchase
Common Stock at an exercise price of $3.00 per share, except for the members
of the Executive Committee of the Board of Directors, which consists of
Messrs. Studdert, Kurzon, Murdock and Dudley, who will receive options to
purchase 150,000 shares of Common Stock at an exercise price of $3.00 per
share.
Options under the 1997 Plan may be granted to employees of the Company,
including officers. Directors may participate in the Plan. The Committee has
the discretion to select individuals from among those eligible for
participation in the 1997 Plan to receive options, determine the terms of the
options granted (which need not be identical), determine when options will be
granted, and determine the number of shares subject to each option. Despite
the Committee's flexibility in setting the terms of each option, the price at
which the option is exercisable may not be lower than the market price of the
Common Stock of the Company on the day the option is granted. If not
terminated earlier by the Board, the Plan will terminate on December 31,
2006. The exercise of any option at a price below the per share net tangible
book value of the Company's Common Stock on the date of exercise will dilute
the net tangible book value of all common shares outstanding on the exercise
date.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table summarizes certain information as of April 21, 1997
with respect to the beneficial ownership of the Company's Common Stock (i) by
the Company's officers and directors, (ii) by stockholders known by the
Company to own 5 percent or more of the Company's Common Stock and (iii) by
all officers and directors as a group. At February 19, 1997, there were
approximately 16,923,497 shares of Common Stock issued and outstanding.
<TABLE>
<CAPTION>
Number of Shares
of Common Stock
Name and Address of 5% Beneficial Owners, Beneficially Owned
Executive Officers and Directors at December 31, 1996(1) Percent of Class(2)
- ----------------------------------------- ----------------------- -------------------
<S> <C> <C>
Stephen M. Studdert , Director 3,377,167(3) 17.5%
60 East South Temple Street, Suite 1225
Salt Lake City, UT 84111
Raymond H. Kurzon 2,321,784(4) 13.6
President, CEO and Director
3220 North Freeway
Ft. Worth, TX 76111
Charles E. Nuanez, Director 505,000 3.0
3650 N. Grant Creek
Missoula, MT 59802
Wyman Au, Director 786,265(5) 4.6
3419 Ala Ilima St.
Honolulu, HI 96818
Philip B. Smith, Director 250,000 1.5
535 Madison Avenue
New York, NY 10022
Roger D. Dudley, Director and CFO 3,377,167(3) 17.5
60 East South Temple Street, Suite 1225
Salt Lake City, UT 84111
Thomas A. Murdock, Director 3,382,515(6) 17.5
60 East South Temple Street, Suite 1225
Salt Lake City, UT 84111
Joseph Verner Reed, Director 50,000 *
73 Sterling Road
Greenwich, CT 06831
Rick D. Nydegger, Director 50,000 *
10217 North Oak Creek Lane
Highland, Utah 84003
SMD LLC 9,681,500(7) 41.1
60 East South Temple Street, Suite 1225
Salt Lake City, UT 84111
Ballard Investment Company 1,567,381(8) 9.3
145 South Fairway Drive
North Salt Lake, Utah 84054
Thurgauer Kantonalbank 1,250,000(9) 7.4
Weinfelden, Switzerland
Officers and Directors as a Group 14,099,900(9) 56.0%(10)
(9 Persons)
- ---------------------------------
</TABLE>
(*) Less than 1 percent.
(1) The number of shares indicated includes the following number of
shares underlying options that currently are exercisable or that become
exercisable at various strike prices within the next sixty (60) days held by
each of the following persons:
Raymond Kurzon 150,000 shares
Charles E. Nuanez 100,000 shares
Philip B. Smith 250,000 shares
Wyman Au 125,000 shares
Stephen M. Studdert 150,000 shares
Thomas A. Murdock 150,000 shares
Roger D. Dudley 150,000 shares
Joseph Verner Reed 50,000 shares
Rick D. Nydegger 50,000 shares
(2) Percentages rounded to nearest 1/10th of 1 percent. Except as
indicated in the footnotes below, each of the persons listed exercises sole
voting and investment power over the shares of the Company's Common Stock
listed for each such person in the table. The percentage of any person's
ownership of issued and outstanding shares is calculated by assuming the
exercise in full of all options, warrants and conversion rights held by such
person without regard to such rights held by others.
(3) Messrs. Studdert, Murdock and Dudley each owns or controls,
(directly or indirectly) one-third of the ownership interest of SMD and each
is a manager and control person of SMD. Consequently, their respective
individual totals in the table include a proportionate share of the shares
beneficially owned by SMD as well as any shares or rights to acquire shares
beneficially owned by them individually. [See "Certain Transactions."]
(4) The amount shown includes 2,171,784 shares owned of record by Mr.
Kurzon, in addition to the options discussed above.
(5) Of the total shown in the table, 633,921 shares are held jointly
and Mr. Au shares voting and dispositive power over the shares with his wife,
Elizabeth Au. The amount also includes 27,344 shares held of record in Mr.
Au's name.
(6) In addition to currently exercisable options held by Mr. Murdock
and his proportionate interest in the shares and warrants held by SMD (see
note (3), above), the amount indicated includes 5,350 shares owned by Mr.
Murdock's wife which were acquired in open market purchases.
(7) 2,561,000 shares of record are held by SMD. The amount shown also
includes (a) 20,500 shares of stock owned by a trust controlled by or under
common control with SMD, (b) 500,000 shares issuable upon conversion of
Preferred Stock owned by SMD, and (c) 6,600,000 shares of Common Stock
issuable to SMD under a presently exercisable warrant.
(8) Includes 900,000 shares issued upon conversion of a promissory
note made by the Company and purchased by Ballard Investment Company ("BIC").
BIC exercised the conversion right on December 31, 1996.
(9) Eliminates duplicate entries and assumes exercise of all
conversion rights, options, warrants and similar rights held by the officers
and directors.
(10) Fully diluted, based on total issued and outstanding shares of
25,198,967.
SELLING SHAREHOLDERS
The Shares which are being or which may be offered pursuant to this
Prospectus are held by the Selling Shareholders identified below and will be
held for resale by the Selling Shareholders. A total of 5,428,253 Shares have
been registered and may be offered by the Selling Shareholders on a delayed or
continuous basis. A total of 328,341 of such Shares were issued in private
transactions by the Company during 1994, 1995 and 1996. A total of 4,990,500
shares were issued in a private placement conducted by the Company in November
1996 through January 1997. Pursuant to the terms of the stock purchase
agreements entered into with the purchasers in the latter offering, the
Company agreed to file the registration statement of which this Prospectus
forms a part.
The following table sets forth the number of Shares held for resale
hereunder by the Selling Shareholders and the percentage of the total issued
and outstanding Common Stock held by each Selling Shareholder (prior to any
sale of the Shares by such person). Sales of Shares by the Selling
Shareholders will result in a corresponding decrease in their respective
percentage ownership of the Company's securities. Except for this
transaction, none of the Selling Shareholders has any material relationship
with the Company within the past three years and no officer, director or
shareholder of any Selling Shareholder is an officer, director or affiliate of
the Company.
<TABLE>
<CAPTION>
Name and Address of Selling Shareholder Shares Held for Resale Percentage of Class
- --------------------------------------- ---------------------- -------------------
<S> <C> <C>
Carsten-Dirk Schulte 250,000 1.5%
Stefan Giacomuzzi 30,000 *
Guy Klement 20,000 *
Claudio Blank 20,000 *
Beat Jakob 30,000 *
Rene Bleisch 50,000 *
Markus Wassmer 50,000 *
Bruno D. Tambini 250,000 1.5
Roger Fischer 687,500 4.1
Kai Wunsche 500,000 3.0
Thomas Bierwagen 10,000 *
Hartwig Drager 52,500 *
Jorg Holz 25,000 *
Trappli Stiftung 50,000 *
Thurgauer Kantonalbank 1,250,000 7.4
Stefan Mattich 15,000 *
Bank Leumi Le-Israel 625,000 3.7
Erich Gujer 13,000 *
Enhanced Invest Foundation 100,000 *
Tuscan Finance & Trade 189,412 *
Capital International Fund 160,000 *
Optimum Fund 250,000 1.5
Kalera Foundation 50,000 *
Basler Kantonalbank 150,000 *
Wimer AG 50,000 *
Peter Maron 80,000 *
Larrabee Foundation 72,000 *
Polsa Management Ltd. 125,000 *
Carpenter Properties, Ltd. 62,500 *
Principal Financial Securities, Inc. 62,500 *
Michael Ames 50,000 *
John L. Anderson 30,000 *
Friedland Associates, Ltd. 23,841 *
Ballard Investment Co. 80,000 *
--------- -----
TOTALS 5,428,253 31.4%
</TABLE>
(*) Less than 1 percent.
PLAN OF DISTRIBUTION
The Shares may be sold by and for the account of the Selling Shareholders
as discussed below. The Shares were originally issued in connection with
private transactions pursuant to exemptions from the registration provisions
of the securities laws of the United States. At such time as the registration
statement of which this Prospectus forms a part has been declared effective by
the Securities and Exchange Commission and thereafter so long as the
registration statement will continue effective, the Selling Shareholders may
offer and sell the Shares at such times and in such amounts as they may
respectively determine in their sole discretion. The Company has been advised
by the Selling Shareholders that the Shares may be sold by or on their behalf
through one or more broker-dealers or underwriters or directly to investors
pursuant to this Prospectus or in transactions that are exempt from the
requirements of registration under the Securities Act. As of the date hereof,
none of the Selling Shareholders has advised the Company that it has entered
into any agreement or understanding with any broker-dealer for the offer or
sale of the Shares. The Selling Shareholders may enter into such agreements
or understandings in the future. Such brokers may act as dealers by
purchasing any or all of the Shares covered by the Prospectus.
Under the Exchange Act and the regulations thereunder, persons engaged in
a distribution of the Shares offered hereby may not simultaneously engage in
market making activities with respect to the Common Stock of the Company
during the applicable "cooling off" periods prior to the commencement of such
distribution. In addition, and without limiting the foregoing, the Selling
Shareholders will be subject to applicable provisions of the Exchange Act and
the rules and regulations thereunder, including, without limitation,
Regulation M, which provisions may limit the timing of purchases and sales of
Common Stock of the Company by the Selling Shareholders. Regulation M
contains certain limitations and prohibitions intended to prevent issuers and
selling security holders and other participants in a distribution of
securities from conditioning the market through manipulative or deceptive
devices to facilitate the distribution. The Selling Shareholders and any
broker-dealer who may act in connection with the sale of the Shares hereunder
may be deemed to be "underwriters" as that term is defined in Section 2(11) of
the Securities Act, as amended. Offers and sales may also be made into
markets outside the United States.
The Selling Shareholders may offer the Shares through market transactions
at prices prevailing in the OTC market or at negotiated prices, which may be
fixed or variable and which may differ substantially from OTC prices.
Moreover, the Selling Shareholders may receive cash or other forms of
consideration in exchange for the Shares. The Selling Shareholders have not
advised the Company that they anticipate paying any consideration, other than
usual and customary brokers' commissions, in connection with sales of the
Shares. The Selling Shareholders are acting independently of the Company in
making such decisions with respect to the timing, manner and size of each
sale.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 78.751 of Chapter 78 of the Nevada Revised Statutes and Article
VIII of the Company's Bylaws contain provisions for indemnification of the
officers, directors, employees and agents of the Company. The Bylaws require
the Company to indemnify such persons to the full extent permitted by Nevada
law. The bylaws, as amended, with certain exceptions, eliminate any personal
liability of a director to the Company or its shareholders for monetary
damages to the Company or its shareholders for gross negligence or lack of due
care in carrying out the director's fiduciary duties as such. The Company's
articles of incorporation also provide for indemnification to the full extent
permitted by Nevada law, which includes all liability, damages and costs or
expenses arising from or in connection with service for, employment by, or
other affiliation with the Company. Nevada law permits such indemnification
if a director or officer acted in good faith in a manner reasonably believed
to be in, or not opposed to, the best interests of the corporation. A
director or officer must be indemnified as to any matter in which he
successfully defends himself. The Company may also purchase and maintain
insurance on behalf of present and past directors or officers insuring against
any liability asserted against such person incurred in the capacity of
director or officer or arising out of such status, whether or not the Company
would have the power to indemnify such person.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, or persons controlling the
Company pursuant to the foregoing provisions, or otherwise, the Company has
been informed that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
DESCRIPTION OF SECURITIES
The following descriptions are qualified in their entirety by reference
to the detailed provisions of the Company's articles of incorporation and
bylaws, copies of which will be furnished to any prospective investor upon
written request. [See "Additional Information."]
Common Stock
The Company's authorized capital stock consists of 50,000,000 shares of
Common Stock, par value $.0001. As of the date of this Prospectus, there are
16,923,497 shares issued and outstanding. Holders of the Common Stock are
entitled to one vote for each share held of record on matters submitted to a
vote of stockholders. Each share is entitled to share pro rata in dividends
and distributions with respect to the shares when, as and if declared by the
Board of Directors from funds legally available therefor.
The articles of incorporation of the Company do not grant any shareholder
of the Company preemptive rights to subscribe for any of the Company's
securities. Upon dissolution, liquidation or winding up of the Company, the
assets will be divided pro rata on a share-for-share basis among the holders
of the Common Stock, subject to the rights of creditors. The outstanding
shares of the Company's Common Stock are fully paid and non-assessable.
The Shareholders of the Company are not entitled to cumulative voting in
the election of directors. Accordingly, the holders of more than 50% of the
shares voting for the election of directors can elect all of the directors if
they choose to do so; in such event, the holders of the remaining shares
voting for the election of the directors will be unable to elect any person or
persons to the Board of Directors.
The Board of Directors has authority to issue the authorized but unissued
shares of Common Stock without action by the Shareholders. Future issuance of
shares, whether by exercise of outstanding options, warrants or conversion
rights or otherwise, would reduce the percentage ownership held by existing
Shareholders, including persons purchasing the Shares.
Preferred Stock
The Company is authorized to issue up to 1,000,000 shares of Preferred
Stock, par value $.0001. There are presently 100,000 shares of Series A Preferr
ed Stock issued and outstanding, which are convertible into shares of the
Company's Common Stock. From time to time the Board of Directors may
designate the rights, privileges and classifications of additional series of
Preferred Stock and could issue additional series of Preferred Stock with such
voting and conversion rights and privileges as it may determine, without
further action by the holders of the Common Stock. Presently there are no
plans to issue any additional shares of Preferred Stock. Any future issuance
of Preferred Stock could occur in such a manner as to impede a change in
control of the Company and could adversely affect the voting power and rights
of the holders of Common Stock.
The Company has 100,000 issued and outstanding shares of Series A
Preferred Stock which are convertible into shares of Common Stock. If all of
the outstanding shares of Series A Preferred Stock were converted into Common
Stock of the Company pursuant to their terms, a total of 500,000 shares of
Common Stock would be issued to the holder(s) thereof. Any or all of the
shares of Series A Preferred Stock may be converted into Common Stock at any
time. The holders of the Series A Preferred Stock are entitled to receive a
cash dividend at the rate of 6 percent per annum, payable quarterly, with
cumulative rights. Holders of the Series A Preferred Stock are not entitled
to vote on matters upon which holders of Common Stock have the right to vote;
provided, however, that, upon default in payment of any dividend payment,
which default continues for a period of sixty (60) days, the Series A
Preferred Stock will be entitled to vote, pari passu, with the Company's
Common Stock until such default is cured. Upon dissolution of the Company,
holders of the Series A Preferred Stock are entitled, before any payment will
be made to the holders of the Common Stock, to be paid an amount equal to $5.00
per share, on 30 days notice.
The foregoing statements are summaries of the rights and privileges of
the holders of the Company's securities. They do not purport to be complete
and are subject to the terms of the Nevada General Corporation Law and the
Company's Articles of Incorporation, as amended.
Nevada Laws
The Nevada Business Corporation Law (Nevada Revised Statutes, Sections
78.378 to 78.3793, inclusive) contains a provision governing "Acquisition of
Controlling Interest" (the "Control Share Acquisition Act"). This law
provides generally that any person or entity that acquires 20% or more of the
outstanding voting shares of a publicly-held Nevada corporation in the
secondary public or private market may be denied voting rights with respect to
the acquired shares, unless a majority of the disinterested shareholders of
the corporation elects to restore such voting rights in whole or in part. The
Control Share Acquisition Act provides that a person or entity acquires
"control shares" whenever it acquires shares that, but for the operation of
the Control Share Acquisition Act, would bring its voting power within any of
the following three ranges: (i) 20 to 331/3%, (ii) 331/3 to 50%, or (iii) more
than 50%. A "control share acquisition" is generally defined as the direct or
indirect acquisition of either ownership or voting power associated with
issued and outstanding control shares. The shareholders or board of directors
of a corporation may elect to exempt the stock of the corporation from the
provisions of the Control Share Acquisition Act through adoption of a
provision to that effect in the articles of incorporation or bylaws of the
corporation. The Company's articles of incorporation and bylaws do not exempt
the Company's Common Stock from the Control Share Acquisition Act.
The Control Share Acquisition Act is applicable only to shares of
"Issuing Corporations" as defined by the Act. An Issuing Corporation is a
Nevada corporation which (1) has 200 or more stockholders, with at least 100
of such stockholders being both stockholders of record and residents of
Nevada; and (2) does business in Nevada directly or through an affiliated
corporation. At this time, the Company does not have 100 stockholders of
record resident of Nevada, nor does the Company do any business in the state
of Nevada. Therefore, the provisions of the Control Share Acquisition Act do
not apply to acquisitions of the Company's shares and will not until such time
as these requirements have been met.
At such time as they may apply to the Company, the provisions of the
Control Share Acquisition Act may discourage companies or persons interested
in acquiring a significant interest in or control of the Company, regardless
of whether such acquisition may be in the interest of the Company's
shareholders.
The Nevada "Combination with Interested Stockholders Statute" (Sections
78.411 to 78.444, inclusive, Nevada Revised Statutes) may also have an effect
of delaying or making it more difficult to effect a change in control of the
Company. This Statute prevents an "interested stockholder" and a resident
domestic Nevada corporation from entering into a "combination," unless certain
conditions are met. The Statute defines "combination" to include any merger
or consolidation with an "interested stockholder," or any sale, lease,
exchange, mortgage, pledge, transfer or other disposition, in one transaction
or a series of transactions with an "interested stockholder" having (i) an
aggregate market value equal to 5 percent or more of the aggregate market
value of the assets of the corporation; (ii) an aggregate market value equal
to 5 percent or more of the aggregate market value of all outstanding shares
of the corporation; or (iii) representing 10 percent or more of the earning
power or net income of the corporation. An "interested stockholder" means the
beneficial owner of 10 percent or more of the voting shares of a resident
domestic corporation, or an affiliate or associate thereof. A corporation
affected by the Statute may not engage in a "combination" within three years
after the interested stockholder acquires its shares unless the combination or
purchase is approved by the board of directors before the interested
stockholder acquired such shares. If approval is not obtained, then after the
expiration of the three-year period, the business combination may be
consummated with the approval of the board of directors or a majority of the
voting power held by disinterested stockholders, or if the consideration to be
paid by the interested stockholder is at least equal to the highest of (i) the
highest price per share paid by the interested stockholder within the three
years immediately preceding the date of the announcement of the combination or
in the transaction in which he became an interested stockholder, whichever is
higher; (ii) the market value per common share on the date of announcement of
the combination or the date the interested stockholder acquired the shares,
whichever is higher; or (iii) if higher for the holders of Preferred Stock,
the highest liquidation value of the Preferred Stock.
The Company presently is not resident in Nevada and conducts no
operations there. Should this Statute affect the Company in the future
because of a change in its status or operations, it may have the effects
described above on the ability of the Company to enter into certain
transactions with related parties, even if the terms of such transactions may
be more favorable to the Company than those it could obtain from unrelated
parties at that time.
Registration Rights
The Selling Shareholders' Shares have been registered for offer and sale
pursuant to this Prospectus under the terms of certain registration rights
granted to the Selling Shareholders. Such rights are contained in agreements
entered into by the Company and the Selling Shareholders. In addition to the
registration rights of the Selling Shareholders which are fulfilled with the
filing of the registration statement, of which this Prospectus forms a part,
the Company has granted limited registration rights to SCC, an affiliate of
the Company which is controlled by three members of the Company's Board of
Directors. See "Certain Transactions." Pursuant to the terms of a Management
Services Contract entered into with SCC, the SCC may accept payment of its
management fees and expenses in the form of Common Stock instead of cash. If
the management fee is paid in shares of Common Stock, the Company has agreed
it will register such stock by filing with the Securities and Exchange
Commission a registration statement at its own expense. Furthermore, the
Company has agreed to register the stock underlying certain warrants held by
SMD, an affiliate of the Company that is controlled by three members of the
Company's Board of Directors. See "Certain Transactions." The existence
and/or the exercise of these rights could adversely affect the market price of
the Company's Common Stock and could impair the Company's future ability to
raise capital through an offering of its equity securities.
Transfer Agent
The transfer agent and registrar for the Company is Securities Transfer
Corporation, 16910 Dallas Parkway, Suite 100, Dallas, Texas 75248.
CERTAIN TRANSACTIONS
Over the course of fiscal years 1994, 1995 and 1996, the Company borrowed
funds from J. R. Bell ("Bell"), a former officer and director of the Company.
Bell died in February 1996 and all obligations of the Company to Bell were
thereafter owed to his estate (the "Bell Estate"). As of August 16, 1996, the
principal amount owing to the Bell Estate was $623,000, together with interest
on the outstanding balance at the rate of the bank prime rate plus 1 percent.
The loans from the Bell Estate were secured by second liens on real and
personal property of the Company. All obligations of the Company to the Bell
Estate were retired in August 1996 as a result of certain transactions
described below.
Merlyn W. Dahlin, formerly an officer and director of the Company, lent
the Company money in a series of transactions during fiscal years 1994 and
1995 and in previous years. Mr. Dahlin resigned as an officer and director of
the Company in November 1996. As of September 30, 1995, all sums previously
loaned by Mr. Dahlin to the Company had been repaid. Total payments to Mr.
Dahlin during fiscal 1995 were approximately $167,000. During fiscal year
1996 Mr. Dahlin lent the Company $20,000, which was repaid. The Company has
no presently outstanding obligation to Mr. Dahlin.
In several loan transactions during fiscal years 1994 and 1995, the
Company borrowed money from Wyman Au, one of its directors. As of September
30, 1995, the Company owed Mr. Au $47,746, with interest at the prime rate
plus 1 percent. As of September 30, 1996, the Company owed Mr. Au $42,948.
Pursuant to its understanding with Mr. Au, the Company is making regular
monthly payments to Mr. Au to retire this obligation.
The Company leases approximately 2,000 square feet of office space in Ft.
Worth, Texas, from a partnership that is owned 50 percent by Merlyn W. Dahlin,
formerly an officer and director of the Company. The lease term is
month-to-month and the rate is $1,110 per month. The Company believes this
rate and these terms to be commercially reasonable and at least as favorable
to the Company as it could obtain from an unaffiliated third party.
On August 16, 1996, SMD acquired 2,561,000 shares of the Company's Common
Stock and 100,000 shares of Preferred Stock from the Bell Estate at a price of
$.48 per share (including the 500,000 shares of Common Stock into which the
Preferred Stock may be converted). The purchase price is payable by SMD in
four installments on February 12, 1997, August 12, 1997, February 12, 1998 and
August 12, 1998. Messrs. Studdert, Murdock and Dudley, directors of the
Company, are the managers and beneficial owners of SMD. Mr. Dudley is also
the acting Chief Financial Officer of the Company. The first installment was
paid on February 10, 1997.
As a party to the same transaction by which SMD acquired its interest in
the Company from the Bell Estate, Raymond H. Kurzon, the President and a
director of the Company, acquired 1,000,000 shares of Common Stock of the
Company from the Bell Estate at a price and upon terms identical to SMD. In
connection with the transaction among the Bell Estate, SMD and Mr. Kurzon, the
Company and Mr. Kurzon agreed to convert $180,000 of the Company's debt owed
to Mr. Kurzon into 450,000 shares of restricted Common Stock of the Company.
In a series of transactions between May and August 1996, the Company
borrowed an aggregate of $1,900,000 from fonix, a Delaware corporation of
which Messrs. Studdert, Murdock and Dudley are directors, executive officers
and significant shareholders, and of which Mr. Reed and Mr. Nydegger are
directors. Prior to the time of the first loan made by fonix in May 1996,
there was no existing relationship between the Company and fonix. Mr.
Murdock, an officer, director and the controlling shareholder of fonix became
a director of the Company in July 1996 in connection with the provision to the
Company of debt financing by fonix. Each of the loans was due on demand, bore
interest at the rate of 12 percent per annum, required the payment of certain
loan origination fees to fonix and was secured by substantially all of the
assets of the Company, except its real property. The proceeds of these loans
were used by the Company to retire the balance of the amount owing under the
$623,000 note to the Bell Estate as described above, to acquire and refurbish
drill rigs, acquire inventory and parts necessary to operate new and existing
drill rigs and as operating capital. On September 30, 1996, the Company paid
fonix $1,673,700 in satisfaction of substantially all loans from fonix except
for a balance of $272,156 due and owing under the first promissory note from
the Company to fonix ("Note 1"). The funds used to make this partial
repayment came from the proceeds of a loan to the Company from SMD, described
below.
Pursuant to the terms of Note 1, all or part of the indebtedness owed to
fonix was convertible at the option of the holder to shares of the Company's
Common Stock at the rate of $.30 per share. (If fonix had elected to exercise
this conversion right under Note 1, it could have acquired up to 2,366,667
shares of the Company's Common Stock. Similarly, the remaining $1,190,000
owed to fonix, represented by four separate promissory notes, was convertible
into a total of 2,975,000 shares of the Company's restricted Common Stock at
the rate of $.40 per share.) On December 31, 1996 fonix sold and assigned
$270,000 of the balance due under Note 1 to Ballard Investment Company
("BIC"), a shareholder of the Company that is not affiliated with either SMD,
SCC or fonix. On the same day, BIC gave notice to the Company that it had
elected to convert its interest in Note 1 into 900,000 shares of restricted
Common Stock of the Company. Also, on December 31, 1996, the Company paid
fonix the final balance of approximately $10,500 due and owing fonix. Thus, as
of December 31, 1996, the Company was not indebted to fonix in any amount nor
did fonix have any interest in the Company. On December 31, 1996, Messrs.
Studdert, Dudley, Reed and Nydegger joined the Board of Directors of the
Company. All four of these gentlemen, as well as Mr. Murdock, are also
members of the fonix Board of Directors. No future transactions are
contemplated between fonix and the Company.
On September 30, 1996, SMD advanced debt financing to the Company (the
"SMD Loan") in the amount of $1,673,730. The SMD Loan was due on demand, bore
interest at the rate of 12 percent per annum and was secured by substantially
all of the assets of the Company, except its real property. Also on September
30, 1996, the Company issued to SMD warrants to purchase up to 6,600,000
shares of restricted Common Stock at an exercise price of $.40 per share. The
proceeds from the SMD Loan were used to repay fonix as indicated above.
Without these additional funds, the Company would have been unable to pay all
or a significant part of the loans owed fonix as requested. The warrants held
by SMD have not been exercised. On October 16, 1996, SMD advanced the Company
an additional $100,000 on the same terms. On December 31, 1996, the Company
paid SMD $100,000 and on January 2, 1997, the Company paid SMD $1,542,400. As
a result of these payments, on January 2, 1997, the balance due and owing SMD
from the Company under the loan described above was approximately $185,191.
The funds to make these repayments to SMD were provided by the proceeds from
the private placement of Common Stock to accredited investors conducted by the
Company during November and December 1996 and concluded in January 1997.
In December 1996, the Company entered into a management contract with
SCC, a Utah corporation owned and controlled by Messrs. Studdert, Murdock and
Dudley. Under the management agreement, SCC will receive a monthly management
fee of $50,000 payable in stock of the Company or in cash and will provide
investment banking, investor relations, financial management and strategic
planning services for the Company for a term of five years. If the fee is
paid in shares of stock of the Company, the number of shares issuable would be
determined with reference to the average trading price of the Company's Common
Stock during the month for which the services were provided in consideration
for such fee. The agreement also provides for reimbursement of expenses
incurred by SCC since June 1996 in connection with services rendered to the
Company and for similar treatment of expenses incurred during the term of the
agreement. Also, in December 1996, Messrs. Studdert and Dudley joined Mr.
Murdock as members of the Board of Directors of the Company and Mr. Dudley
became the acting CFO of the Company. The management agreement was approved
by vote of the disinterested members of the Board of Directors. Subsequent to
the end of the fiscal year ended September 30, 1996, the Company paid SCC a
fee of $250,000 for its services in structuring a private placement of the
Company's securities in November and December 1996 and for arranging for the
services of the Company's primary placement agent in that offering.
The Company believes that the terms of the above transactions with fonix,
SMD and SCC were at least as favorable as could have been obtained from
unaffiliated third parties.
SHARES ELIGIBLE FOR FUTURE SALE
As of the date hereof, 5,824,900 shares of Common Stock of the Company
(approximately 34.4%) are owned by officers, directors and certain
stockholders of the Company or are otherwise "restricted securities" as that
term is defined in the Securities Act and rules and regulations under such
act. As of the date of this offering, a significant number of shares
(including those owned by the officers and directors described above) are
eligible for sale in the public market pursuant to Rule 144, as amended ("Rule
144"). In general, Rule 144 allows a person holding restricted securities for
a period of at least one year to sell within any three-month period, that
number of shares which does not exceed the greater of 1% of the Company's then
outstanding shares, or the average weekly trading volume of the shares during
the four calendar weeks preceding such sale. Rule 144 also permits, under
certain circumstances, the sale of shares by a person who is not an affiliate
of the Company and who has satisfied a two-year holding period without any
volume limitations, manner of sale provisions or current information
requirements. As defined by Rule 144, an affiliate of an issuer is a person
who directly or indirectly, through one or more intermediaries, controls, or
is controlled by, or is under common control with, such issuer, and generally
includes members of the Board of Directors and senior management. Sales,
pursuant to Rule 144, or otherwise, if in sufficient volume, could have a
depressive effect on the market price of the Company's securities. Moreover,
the possibility of such sales may have a depressive effect on market prices.
[See "Risk Factors."]
LEGAL MATTERS
The validity of the issuance of the Shares offered hereby will be passed
upon for the Company by Durham, Evans, Jones & Pinegar, P.C., Salt Lake City,
Utah.
EXPERTS
The consolidated financial statements of the Company included in this
Prospectus and registration statement have been audited by Weaver & Tidwell,
independent auditors, to the extent and for the periods indicated in their
reports thereon also appearing elsewhere herein and in the registration
statement. Such consolidated financial statements have been included herein
in reliance upon such reports given upon the authority of said firm as experts
in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed a registration statement on Form SB-2 (the
"Registration Statement") with respect to the Shares offered hereby by the
Selling Shareholders with the Securities and Exchange Commission (the
"Commission"), under the Securities Act of 1933, as amended. This Prospectus,
which constitutes a part of the Registration Statement, does not contain all
of the information set forth in the Registration Statement, certain items of
which are contained in exhibits to the Registration Statement as permitted by
the rules and regulations of the Commission. Statements contained in this
Prospectus as to the contents of any contract, agreement or other document
referred to are not necessarily complete; however, the Company believes that
the descriptions set forth in this Prospectus are accurate summaries of the
material terms of such documents. With respect to each such contract,
agreement or other document filed as an exhibit to the Registration Statement,
reference is made to the exhibit for a more complete description of the matter
involved.
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended, and, in accordance therewith, files reports,
proxy statements and other information with the Commission. The Registration
Statement and the exhibits forming a part thereof, as well as such reports,
proxy statements and other information, may be inspected and copied at the
Public Reference Room of the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the following regional offices of the Commission:
Northeast Regional Office, 7 World Trade Center, Suite 1300, New York, New
York, 10048, and the Midwest Regional Office, 500 West Madison Street, Suite
1400, Chicago, Illinois 60611. Copies of such material can be obtained from
the Public Reference Section of the Commission at its Washington address at
prescribed rates. In addition, the Commission maintains a "web site" on the
Internet at "http://www.sec.gov" where electronically filed documents such as
the quarterly and annual reports of the Company and the Registration Statement
may be viewed and retrieved.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.]
<PAGE>
K. L. S. ENVIRO RESOURCES, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL REPORT
SEPTEMBER 30, 1996
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditor's Report F-2
FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 1996 and 1995 F-3
Consolidated Statements of Operations
for the Years Ended September 30, 1996 and 1995 F-4
Consolidated Statements of Shareholders' Equity
for the Years Ended September 30, 1996 and 1995 F-5
Consolidated Statements of Cash Flows
for the Years Ended September 30, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-8
INTERIM FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1996 (unaudited)
and September 30, 1996 (audited) F-21
Consolidated Statements of Operations for the
Three Months ended December 31, 1996 and 1995 (unaudited) F-22
Consolidated Statements of Cash Flows for the
Three Months ended December 31, 1996 and 1995 (unaudited) F-23
Notes to Consolidated Financial Statements F-24
F-1<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
K. L. S. Enviro Resources, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of K. L. S.
Enviro Resources, Inc. and Subsidiaries as of September 30, 1996 and 1995, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of K.L.S. Enviro Resources, Inc. and Subsidiaries as of September 30, 1996 and
1995, and the results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles.
/s/ Weaver and Tidwell, L.L.P.
WEAVER AND TIDWELL, L.L.P.
Fort Worth, Texas
December 31, 1996
F-2<PAGE>
K. L. S. ENVIRO RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS
1996 1995
------------ -------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 300,767 $ 174,479
Investment securities - 258,750
Accounts receivable - trade, net of allowance for
doubtful accounts $123,402 and $128,402, respectively 1,050,371 528,768
Other receivables 13,274 15,524
Inventory 483,938 708,872
Prepaid expense 5,975 5,655
------------ ------------
Total current assets 1,854,325 1,692,048
Property, Plant and Equipment, net 2,604,510 1,665,128
Other Assets
Intangible assets, net of accumulated amortization
$ 70,014 and $65,103, respectively 49,065 80,670
Deposits and other 20,777 22,101
------------ ------------
69,842 102,771
------------ ------------
Total Assets $ 4,528,677 $ 3,459,947
============ ============
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
1996 1995
------------ -------------
<S> <C> <C>
Current Liabilities
Notes payable - banks $ - $ 302,329
Notes payable - related parties 1,988,622 690,746
Current maturities of long-term debt 114,219 150,314
Accounts payable 412,487 674,301
Accrued expenses and other current liabilities 181,128 231,067
Deferred revenue - 29,616
Accrued dividends payable 7,500 66,615
------------ ------------
2,703,956 2,144,988
Long-term Debt 270,995 455,644
------------ ------------
2,974,951 2,600,632
------------ ------------
Commitments and Contingencies (Notes 10 and
12) -
Shareholders' Equity
Cumulative convertible preferred stock,
Series A and B, $.0001 par value; 1,000,000
shares authorized; 100,000 and 167,500 shares
issued and outstanding respectively; $5.00 stated value 10 17
Common stock, $.0001 par value; 50,000,000 shares
authorized; 10,931,497 and 8,947,494 shares issued,
respectively 1,093 894
Additional paid-in capital 6,101,057 4,417,724
Accumulated deficit ( 4,505,721) ( 3,545,782)
Foreign currency translation adjustments ( 4,213) ( 4,213)
Unrealized gain on securities available-for-sale - 29,175
------------ ------------
1,592,226 897,815
Treasury stock - common shares held in the treasury,
at cost (38,500 shares in 1996 and 1995) ( 38,500) ( 38,500)
------------ ------------
1,553,726 859,315
------------ ------------
Total Liabilities and Shareholders' Equity $ 4,528,677 $ 3,459,947
============ ============
</TABLE>
The Notes to Consolidated Financial Statement are an integral part of these
statements.
F-3<PAGE>
K. L. S. ENVIRO RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended September 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Net Sales and Revenues
Drilling and repair service revenues 4,424,693 3,019,597
Cost of drilling and repair services
(exclusive of items shown separately below) 2,447,843 1,836,671
------------ -----------
Gross Profit 1,976,850 1,182,926
----------- -----------
Cost and Expenses
Salaries, wages and related costs 604,351 506,636
Legal and professional fees 265,232 363,191
Rents 65,361 72,564
Repairs and maintenance 27,048 8,974
Taxes, licenses and permits 54,608 30,729
Advertising 9,842 16,928
Travel and lodging 98,961 88,402
Consulting 106,701 124,837
Exploration costs 4,203 324,931
Other operating expenses 284,299 282,168
Depreciation and amortization 339,086 271,740
----------- -----------
Total cost and expenses 1,859,692 2,091,100
----------- -----------
Income (loss) from operations 117,158 ( 908,174)
Other Income (Expenses)
Interest expense ( 311,303) ( 144,835)
Other financing cost ( 1,024,322) -
Interest and other income, net 14,254 21,210
Gain on sale of investment securities 99,289 209,943
Gain (loss) on disposal of assets 25,158 ( 17,733)
Gain (loss) from foreign currency transactions ( 9,544) 17,191
----------- -----------
Loss before income taxes ( 1,089,310) ( 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) ($1,185,850)
=========== ===========
Loss per weighted-average common share outstanding
Loss from continuing operations ($ .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.
F-4<PAGE>
K. L. S. ENVIRO RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
for the years ended September 30, 1996 and 1995
<TABLE>
<CAPTION>
Preferred Stock Common Stock
----------------------- ------------------------- Paid-in
Shares Amount Shares Amount Capital
--------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Balances at September 30, 1994 167,500 $ 17 8,743,486 $ 874 $ 4,233,976
Cumulative effect of change
in accounting principles
as of 10/1/94 - - - - -
Sale of common stock - - 150,000 15 149,985
Exchange of stock for services - - 54,008 5 33,763
Dividends on
preferred stock - - - - -
Net loss - - - - -
Changes in unrealized gain - - - - -
--------- ----------- ------------ ----------- -------------
Balances at September 30, 1995 167,500 17 8,947,494 894 4,417,724
Sale of common stock - - 500,000 50 199,950
Conversion of preferred
stock to common stock ( 67,500) ( 7) 337,500 34 ( 27)
Exchange of common stock
for services - - 585,781 59 163,607
Issuance of warrants for debt
renewal - - - - 1,024,322
Exchange of common
stock for debt - - 560,722 56 226,617
Dividends on
preferred stock - - - - 68,864
Forgiveness of dividends - - - - -
Net loss - - - - -
Changes in unrealized gain - - - - -
--------- ----------- ------------ ----------- -------------
Balances at September 30, 1996 100,000 $ 10 10,931,497 $ 1,093 $ 6,101,057
========= =========== ============ =========== =============
</TABLE>
<TABLE>
<CAPTION>
Foreign Unrealized
Accumulated Currency Gains on Treasury
Deficit Translation Securities Stock Total
-------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balances at September 30, 1994 ($ 2,309,682) ($ 4,213) $ - ($ 38,500) $ 1,882,472
Cumulative effect of change
in accounting principles
as of 10/1/94 - - 446,517 - 446,517
Sale of common stock - - - - 150,000
Exchange of stock for
services - - - - 33,768
Dividends on
preferred stock ( 50,250) - - - ( 50,250)
Net loss ( 1,185,850) - - - ( 1,185,850)
Changes in unrealized gain - - ( 417,342) - ( 417,342)
-------------- ------------- ------------- ------------- -------------
Balances at September 30, 1995 ($ 3,545,782) ($ 4,213) $ 29,175 ($ 38,500) $ 859,315
Sale of common stock - - - - 200,000
Conversion of preferred
stock to common stock - - - - -
Exchange of common stock
for services - - - - 163,666
Issuance of warrants for
debt renewal - - - - 1,024,322
Exchange of common
stock for debt - - - - 226,673
Dividends on
preferred stock ( 40,126) - - - ( 40,126)
Forgiveness of dividends - - - - 68,864
Net loss ( 919,813) - - - ( 919,813)
Changes in unrealized gain - - ( 29,175) - ( 29,175)
-------------- ------------- ------------- ------------- -------------
Balances at September 30, 1996 ($ 4,505,721) ($ 4,213) - ($ 38,500) $ 1,553,726
============== ============= ============= ============= =============
</TABLE>
The Notes to Consolidated Financial Statements are an integral part
of these statements.
F-5
<PAGE>
K. L. S. ENVIRO RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended September 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
-------------- -------------
<S> <C> <C>
Cash Flows from Operating Activities
Net loss ( $ 919,813) ($ 1,185,850)
Adjustments to reconcile net loss to
net cash used in operating activities:
Discontinued operations 34,511 343,915
Common stock for services 163,666 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) -
Gain (Loss) on disposal of property, plant
and equipment ( 25,158) 17,733
Translation (gain) loss on foreign currency 9,544 ( 17,191)
Debt issued in litigation settlement - 30,000
Changes in:
Accounts and notes receivable ( 614,521) ( 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 ( 54,825) 228,355
Accrued expenses ( 55,310) 82,972
Deferred revenue ( 18,448) 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>
The Notes to Consolidated Financial Statements are
an integral part of these statements.
F-6<PAGE>
K. L. S. ENVIRO RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended September 30, 1996 and 1995 -- continued
<TABLE>
<CAPTION>
1996 1995
-------------- -------------
<S> <C> <C>
Supplemental disclosures of interest paid:
Continuing operations:
Interest paid $ 64,522 $ 65,247
Discontinued operations:
Interest paid - 11,228
Supplemental schedule of noncash
investing and financing activities:
Continuing operations:
Cumulative dividends not paid 40,126 50,250
Acquisition of equipment for debt 56,667 12,731
Unrealized gain on investment securities - 29,175
Issuance of stock for debt 226,673 -
Forgiveness of dividends 68,864 -
Use of inventory for fixed assets 21,050 -
Discontinued operations:
Disposal of equipment on
settlement of accounts payable - 12,731
Acquisition of equipment for debt - 36,901
</TABLE>
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.]
The Notes to Consolidated Financial Statements are
an integral part of these statements.
F-7<PAGE>
K.L.S. ENVIRO RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Business and Organization
K. L. S. Enviro Resources, Inc. (KLS) 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.
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.
F-8<PAGE>
K.L.S. ENVIRO RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued:
Inventory
Inventory consists of two components: (1) raw materials, work in process
and finished goods related to the Company's manufacturing subsidiary and (2)
consumable supplies and repair parts for mobile exploration reverse
circulation sample drilling rigs, hydraulic components, and other related
support equipment and vehicles. Inventory is valued at the lower of cost,
using the first-in, first-out method, or market. Cost includes material,
labor and manufacturing overhead cost.
Property, Plant and Equipment
Property, plant and equipment are recorded at historical cost. These
costs are depreciated over the estimated useful lives of the individual assets
using the straight-line method. Estimated useful lives are as follows:
Years
-----
Machinery and equipment 5-10
Transportation equipment 3-7
Buildings and improvements 10-32
Furniture and fixtures 5-7
Significant additions from periodic renovations of drilling rigs are
capitalized and amortized over the remaining useful life of the rig. The
related unamortized basis at such time is charged to repairs and maintenance
expense. Normal repairs and maintenance items are charged to expense as
incurred. Gains and losses from disposition of property and equipment are
recognized as incurred and are included in operations.
The Company, as lessee, entered into a capital lease during 1995 and such
lease is considered to be an installment purchase for accounting presentation,
and is included in property, plant and equipment. The related lease
obligation, less current installments, is included in long-term debt in the
accompanying balance sheets.
Intangible Assets
Intangible assets consist of organizational costs, patents, and a covenant
not to compete.
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.
F-9
K.L.S. ENVIRO RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued:
Revenue Recognition
The Company recognizes revenues related to drilling and other related
services under the respective terms of each drilling contract, generally on a
"per foot drilled" basis as earned. As of September 30, 1996 and 1995, no
significant revenues were attributable to either KLS, KLSEI or KLSI.
Revenues attributable to KLS Co are recognized at the point of sale.
Mineral Exploration
Mineral exploration expenditures are charged to income as incurred until a
property is identified as having development potential. Development costs are
deferred and amortized to expense on a units of production method based on
proven and probable reserves. Expenditures incurred on properties identified
as having development potential are deferred on a project basis until the
viability of the project is determined. If a project is abandoned, the
accumulated project costs are charged to operations in the year in which the
determination is made. There are no development costs deferred as of September
30, 1996 and 1995.
Foreign Currency Translation
For non-U.S. subsidiaries which operate in a local currency environment,
assets and liabilities are translated to U.S. dollars at year-end exchange
rates and income and expense items are translated at average rates of exchange
prevailing during the year. Translation adjustments are accumulated in a
separate component of stockholders' equity. When the economic environment of
a non-U.S. subsidiary is considered highly inflationary, transactions are
remeasured as if the U.S. dollar were the reporting currency and gains and
losses which result from remeasurement are included in earnings.
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. Common
stock equivalents have not been included since the effect of inclusion would
be antidilutive.
F-10
K.L.S. ENVIRO RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued:
Reclassifications
Certain amounts have been reclassified from previously presented
financial statements to conform with the September 30, 1996
presentation.
Recently Issued Accounting Pronouncements
The Financial Accounting Standards Board (FASB) has recently issued
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." SFAS 121 requires that long-lived assets and certain intangibles be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable and that long-lived assets and
certain intangibles to be disposed of be reported at the lower of carrying
amount or fair value less costs to sell. The Company is required to adopt
SFAS 121 for its fiscal year beginning October 1, 1996. The initial adoption
is not expected to have a material impact on the Company's financial position
or results of operation.
The FASB has also issued SFAS 123, "Accounting for Stock Based
Compensation" which establishes a fair value based method of accounting for
stock based compensation plans. As permitted under SFAS 123, the Company does
not intend to adopt the recognition or accounting requirements of this
statement and will continue to recognize stock based compensation using the
intrinsic value method in accordance with Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees. The Company will be required
to adopt the disclosure requirements of SFAS 123 for its fiscal year beginning
October 1, 1996. The disclosures will include the difference between the
compensation amounts recorded using the intrinsic value method and the pro
forma amounts calculated as if the measurement requirements of SFAS 123 had
been adopted. Since the measurement principles of SFAS 123 will not be
adopted, adoption of the disclosure requirements will not have a material
impact on the Company's financial position or results of operations.
NOTE 2. INVESTMENT SECURITIES
Equity securities at September 30 are as follows:
1996 1995
------------- -----------
Cost $ - $ 229,575
Market value at balance sheet date - 258,750
Unrealized gains - 29,175
NOTE 3. INVENTORY
Major classes of inventories are as follows:
1996 1995
-------------- ------------
Consumable supplies $ 483,938 $ 384,568
Raw materials - 314,842
Finished goods - 9,462
-------------- ------------
$ 483,938 $708,872
============== ============
F-11<PAGE>
K.L.S. ENVIRO RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Assets held for sale are carried at estimated net realizable value.
Total depreciation expense for the years ended September 30, 1996 and 1995
was $328,310 and $290,763, respectively.
NOTE 5. NOTES PAYABLE - BANKS
Notes payable to banks consist of the following at September 30:
1996 1995
-------------- ------------
Note payable to bank,
retired February 1996. $ - $ 100,000
$250,000 revolving line of credit,
retired February 1996. - 180,000
Note payable to vendor, assumed by
purchaser of Kel-Lite, retired
February 1996. - 22,329
--------------- ------------
$ - $ 302,329
=============== ============
F-12
<PAGE>
K.L.S. ENVIRO RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. NOTES PAYABLE TO RELATED PARTIES
Listed below are related party notes payable at September 30:
1996 1995
-------------- -------------
Notes payable to shareholder,
retired August 1996. $ - $ 623,000
Notes payable to shareholder,
interest at prime plus 1%, due
on demand, collateralized by
Dateline's accounts receivable. 15,000 15,000
Notes payable to shareholder,
interest at prime plus 1%, due
on demand, collateralized by
KLS Co.'s accounts receivable. 27,948 32,746
Notes payable to shareholder,
retired February 1996. - 20,000
Notes payable to related company,
interest at 12% due on demand,
collateralized by all assets
except real estate 271,944 -
Notes payable to related company,
interest at 12% due on demand,
collateralized by all assets,
except real estate (See Note 17) 1,673,730 -
-------------- -------------
$ 1,988,622 $ 690,746
============== =============
During fiscal 1996, the Company borrowed an aggregate of $1,900,000 from
fonix, a corporation related through common directors, officers and
significant shareholders. The proceeds of these loans were used to retire the
$623,000 note payable to a former shareholder's estate, to refurbish drilling
rigs and as operating capital. Each of the loans were due on demand with
interest at 12 percent and collateralized by substantially all assets except
real property. On September 30, 1996, SMD, L.L.C. (SMD), a significant
shareholder of the Company, loaned the Company $1,673,730 the proceeds of
which were used to repay fonix all except approximately $272,000 following a
demand for payment by fonix. SMD is owned by certain directors and officers
of the Company. In connection with the loan from SMD, the Company issued to
SMD warrants to purchase 6,600,000 shares of restricted common stock at an
exercise price of $.40 per share. (See Note 13).
The notes payable to related companies are related through common
stockholders and officers. The debt with a September 30, 1996 balance of
$271,944 is convertible to common stock at $.30 per share.
Related party interest expense for the years ended September 30, 1996 and
1995 was $109,922 and $ 68,332, respectively. Unpaid interest to related
parties of $3,167 and $111,432 is included in accrued expenses at September
30, 1996 and 1995, respectively.
F-13<PAGE>
K.L.S. ENVIRO RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. LONG-TERM DEBT
Long-term debt consists of the following at September 30:
1996 1995
-------------- --------------
Installment loan payable to finance
company; interest at 8.15%; payable
in aggregate monthly installments of
$15,043, including interest; due
February 1997; collateralized by
drilling equipment and office
furniture and equipment. $ 72,991 $ 197,858
Installment loan payable to a
shareholder, interest at 9.25%;
payable in monthly installments of
approximately $3,297, including
interest; due February 2003;
collateralized by property. 234,225 341,499
Note payable to an individual;
interest at 10%; payable in monthly
installments of $968, including
interest; due April 1998;
guaranteed by KLS. 16,952 26,349
Installment loan payable to finance
company; interest at 9.75%; payable
in monthly installments of $265,
including interest; due October
1999; collateralized by vehicle. 8,447 10,310
Installment loan payable to credit
institution, interest at 9.75%,
payable in monthly installments of
$434, including interest, due
January 2000, collateralized by
vehicle 14,371 -
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
============= ============
F-14
K.L.S. ENVIRO RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. LONG-TERM DEBT - continued
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>
F-15
<PAGE>
K.L.S. ENVIRO RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. INCOME TAXES - continued
The tax effects of significant items comprising of the Company's continuing
operations net deferred tax liability as of September 30 under SFAS No. 109,
are as follows:
1996 1995
------------- -------------
Deferred tax liabilities
Inventory ($ 54,474) $
Depreciation ( 8,143) ( 17,110)
-------------- -------------
Gross deferred tax liabilities ( 62,617) ( 17,110)
Deferred tax assets:
Net operating losses 1,401,595 1,073,506
Other 110,087 114,990
-------------- -------------
Gross deferred tax assets 1,511,682 1,188,496
Less valuation allowance ( 1,449,065) 1,171,386
-------------- -------------
Net deferred tax assets 62,617 17,110
-------------- -------------
Net deferred income taxes $ - $ -
============== =============
The Company has available as of September 30, 1996, net operating tax loss
carryforwards of approximately $4,100,000, some of which has been used to
reduce the Company's deferred income taxes payable. These carryforwards
expire beginning in 2008 except for $427,209 of the loss which expires
beginning in 2004.
NOTE 9. CAPITAL STOCK TRANSACTIONS
During the years ended September 30, 1996 and 1995, the Company sold 500,000
and 150,000 shares, respectively, of unregistered common stock at $.40 and
$1.00 per share, respectively.
During the years ended September 30, 1996 and 1995, the Company issued
325,000 and 525 shares, respectively, of its unregistered common stock for
services rendered by a shareholder. The Company also issued 260,781 and
53,483 shares, respectively, of unregistered common stock to employees, for
bonuses and other services.
During the year ended September 30, 1996, the Company converted 67,500 of its
convertible preferred stock to 337,500 shares of its unregistered common
stock. The Company also issued 560,722 shares of its unregistered common
stock for the extinguishment of debt of $226,673. The number of shares issued
was determined by the most recent cash sale of unregistered common stock of
approximately $.40 per share.
The Company is to issue dividends on Series A and Series B preferred stock on
a quarterly basis at a rate of 6% per annum. Dividends on preferred stock for
the year ended September 30, 1996 and 1995 totaled $40,126 and $50,250,
respectively. Accrued dividends payable at September 30, 1996 and 1995 are
$7,500 and $66,615, respectively.
F-16
K.L.S. ENVIRO RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 or results
of operation.
NOTE 12. SEGMENT INFORMATION,
FOREIGN OPERATIONS AND MAJOR CUSTOMERS
The Company's continuing operations are classified into two business segments
as follows:
Production and exploration Included are all drilling operations in
drilling the United States and Mexico
Hydraulic repairs and 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>
F-17
K.L.S. ENVIRO RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. SEGMENT INFORMATION, FOREIGN OPERATIONS AND MAJOR CUSTOMERS -
continued
For the year ended September 30, 1995:
<TABLE>
<CAPTION>
Production and Exploration
Drilling Hydraulic
--------------------------- Repairs & Corporate Consolidated
Domestic Foreign Spec. Mfg. & Other Total
----------- ------------ ---------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Revenues/sales 9,744 $ 1,426,158 $ 893,695 $ - $ 3,019,597
Income (loss) from
operations ( 376,799) 47,671 71,998 ( 656,016) ( 913,146)
Identifiable assets 870,946 509,875 1,156,974 296,201 2,833,996
Depreciation and
amortization expense 229,485 11,234 21,097 9,925 271,741
Capital expenditures 56,304 35,650 20,502 366 112,822
</TABLE>
For the years ended September 30, 1996 and 1995, there were no customers in
continuing operations responsible for more than 10% of sales and revenues.
NOTE 13. STOCK OPTIONS AND WARRANTS
The Company has issued exercisable stock options for the following numbers of
shares and exercise prices at September 30, 1996:
Number Exercise
of Shares Price
------------ ------------
325,000 $ 0.40
225,000 0.50
10,000 0.75
All stock options were issued with exercise prices equal to or exceeding the
fair market value of the common stock at the date of issuance.
Stock options for 200,000 shares at $ 0.40 and 225,000 shares at $ 0.50 were
issued to directors and shareholders of the Company. Additionally stock
options for 100,000 shares at $0.40 were issued to a shareholder of the
Company. No options were exercised during the years ended September
30, 1996 and 1995.
The Company has issued stock purchase warrants for the following numbers of
shares and exercise prices at September 30, 1996:
Number Exercise
of Shares Price
------------ ------------
6,600,000 $ 0.40
125,000 0.40
The warrants to purchase 125,000 shares of the Company's common stock issued
to the purchaser of Kel-Lite (see Note 14) were issued with an exercise price
equal to or exceeding the fair value of the common stock at the date of
issuance. Therefore, no value was assigned to these warrants. The warrants
to purchase 6,600,000 shares of common stock were issued with an exercise
price below the fair market value of the common stock at the date of issuance
and $1,024,322 has been charged to operations as an "Other financing cost."
F-18<PAGE>
K.L.S. ENVIRO RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. STOCK OPTIONS AND WARRANTS - continued
The warrants to purchase 6,600,000 shares were issued to a company related
through common shareholders. No warrants were exercised during the year ended
September 30, 1996.
NOTE 14. DISCONTINUED OPERATIONS
Effective February 1, 1996, the Company sold all of the issued and
outstanding capital stock of Kel-Lite. As consideration for the stock
purchase, the buyer agreed to pay a cash purchase price of $250,000 and a
deferred purchase price representing royalty payments as further described in
a royalty agreement. The royalty agreement originally provided for such
payments to begin one year from closing (February 6, 1996) and ending ten
years thereafter. Minimum royalty payments due under the royalty agreement
were $600,000. Additionally, the buyer has agreed to an early termination
payment if Kel-Lite should be sold or substantially disposes of all its assets
prior to January 31, 2007. Notwithstanding any early termination payment, the
buyer remained liable for the minimum royalty payments of $600,000. In
connection with the sale of Kel-Lite, the Company agreed to issue to the buyer
warrants to purchase up to 250,000 shares of the Company's restricted common
stock at an exercise price of $.40 per share, exercisable until February 1997,
and to grant to the buyer registration rights to register the transfer of the
common stock issued upon the exercise of those warrants. Subsequent to the
date of sale, the purchaser expressed dissatisfaction with the original
agreement and voiced certain claims against the Company.
Subsequent to September 30, 1996, the Company reached a settlement agreement
with the purchaser of Kel-Lite whereby all royalty payment obligations by the
purchaser were canceled and warrants issued to the purchaser were reduced to
125,000 shares. Accordingly, the 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>
F-19
K.L.S. ENVIRO RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. DISCONTINUED OPERATIONS - continued
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>
<CAPTOIN>
Kel-Lite KLSEI
------------------------- -----------------------
1996 1995 1996 1995
------------ ----------- ---------- -----------
<S> <C> <C> <C> <C>
Current assets $ - $ 471,912 $ - $ -
Property, plant and equipment, net - 129,137 - -
Other assets - 24,904 - -
Current liabilities - ( 422,701) - ( 7,747)
Long-term debt - ( 23,347) - -
------------ ------------ ---------- -----------
Net liabilities $ - $ 179,905 $ - ($ 7,747)
============ =========== ========== ============
</TABLE>
NOTE 15. FINANCIAL INSTRUMENTS
Financial instruments of the Company include cash, accounts receivable,
accounts payable, notes payable and long-term debt. The carrying value of
cash, accounts receivable and accounts payable approximates fair value
because of the short maturities of those instruments. The fair value of notes
payable and long-term debt, calculated using current interest rates for
instruments with similar maturities, approximates their carrying values.
NOTE 16. EXTRAORDINARY ITEM
In August 1996, the Company entered into an agreement with the estate of a
former shareholder. The provisions of the agreement allowed the Company to
receive forgiveness on $ 172,823 of accrued interest expense by retiring the
related party notes payable. The $172,823 of accrued interest forgiveness has
been recorded as an extraordinary item in the financial statements.
NOTE 17. SUBSEQUENT EVENTS
On November 20, 1996, the Company entered into an agreement to purchase
drilling equipment from a supplier for approximately $ 1,300,000.
In December, 1996, the Company instituted a stock option and incentive plan
authorizing the issuance of stock options to purchase a maximum of 2,230,000
shares of the Company's $0.0001 par value common stock to employees and
directors. The exercise price of options granted pursuant to the plan are
determined by an option committee designated by the board of directors.
In December, 1996, the Company sold 4,990,500 shares of common stock for
consideration of $0.80 per share. All shares issued were pursuant to
Regulation D of the Securities Act of 1933. A portion of the proceeds was
used to pay $1,542,400 of the debt to a related company. See Note 6.
In December, 1996, the Company entered into a five-year management agreement
with a company related through common directors. The agreement provides for a
monthly fee of $50,000 payable by the Company for investment banking, investor
relations, and financial management services.
F-20<PAGE>
K.L.S. Enviro Resources, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 1996 (unaudited) and September 30, 1996 (audited)
<TABLE>
<CAPTION>
December 31, September 30,
1996 1996
-------------- --------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 2,800,590 $ 300,767
Accounts receivable-trade, net of allowance
for doubtful accounts of $123,402 831,203 1,050,371
Other receivables 13,908 13,274
Inventory 678,011 483,938
Prepaid expenses 288,144 5,975
------------ -------------
Total current assets 4,611,856 1,854,325
Property, plant and equipment, net 3,050,763 2,604,510
Other assets
Intangible assets, net of accumulated amortization
$72,601 and $70,014, respectively 46,478 49,065
Deposits and other 20,694 20,777
------------- -------------
Total other assets 67,172 69,842
Total assets $ 7,729,791 $ 4,528,677
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Notes payable-related parties $ 1,769,241 $ 1,988,622
Current maturities of long-term debt 71,777 114,219
Accounts payable 775,374 412,487
Accrued expenses and other current liabilities 148,412 188,628
Deferred revenues 29,036 -
------------- -------------
Total current liabilities 2,793,840 2,703,956
Long-term Debt 258,308 270,995
------------- -------------
Total liabilities 3,052,148 2,974,951
Shareholders' equity
Cumulative convertible preferred stock, Series A and
B, $.0001 par value: 1,000,000 shares authorized:
167,500 issued and outstanding, respectively: $5.00
stated value 10 10
Common stock, $.0001 par value; 50,000,000 shares
authorized; 15,761,497 and 10,931,497 issued and
outstanding, respectively 1,576 1,093
Additional paid-in capital 9,181,539 6,101,057
Accumulated deficit (4,462,769) (4,505,721)
Foreign currency translation adjustments (4,213) (4,213)
------------- -------------
4,716,143 1,592,226
Treasury stock-common shares held in the treasury, at
cost (38,500) (38,500)
------------- -------------
Total shareholders' equity 4,677,643 1,553,726
------------- -------------
Total liabilities and shareholders' equity $ 7,729,791 $ 4,528,677
============= =============
</TABLE>
The notes to Consolidated Financial Statements are an integral part of
these statements
F-21<PAGE>
K.L.S. Enviro Resources, Inc. and Subsidiaries
Consolidated Statements of Operations
for the Three Months ended December 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Net sales and revenues
Drilling and repair services revenues $ 1,573,318 $ 780,368
Cost of drilling and repair services 727,126 428,303
------------- -------------
Gross profit 846,192 352,065
Cost and expenses
Salaries, wages and related costs 135,874 116,188
Legal and professional fees 97,132 54,166
Rents 12,737 22,500
Repairs and maintenance 15,001 11,605
Taxes, licenses and permits 7,612 13,208
Advertising 1,816 4,384
Travel and lodging 46,630 15,953
Consulting 33,889 35,500
Exploration costs 40,740 30,906
Other operating expenses 229,279 72,227
Depreciation and amortization 95,549 68,705
------------- -------------
Total cost and expenses 716,259 445,342
Income (loss) from operations 129,933 (93,277)
Other income (expenses)
Interest expense (77,953) (35,930)
Interest and other income, net 2,534 3,436
Gain on sale of investment securities - 51,515
Loss from foreign currency translation (4,063) (837)
------------- -------------
Income (Loss) before income taxes 50,451 (75,093)
Income taxes - -
------------- -------------
Income (Loss) from continuing operations 50,451 (75,093)
Discontinued operations - 6,115
------------- -------------
Net income (loss) $ 50,451 $ (68,978)
============= =============
Income (Loss) per weighted-average common share
outstanding
Income (loss) from continuing operations $ 0.00 $ (0.01)
Loss from operations of discontinued segment - -
------------- -------------
Net income (loss) $ 0.00 $ (0.01)
============= =============
Earnings (Loss) per share
Primary $ 0.00 $ (0.01)
============= =============
Fully diluted $ 0.00 -
============= =============
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of
these statements.
F-22
<PAGE>
K.L.S. Enviro Resources, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
for the Three Months ended December 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 50,453 $ (68,978)
Adjustments to reconcile net income (loss) to cash
used in operating activities:
Common stock for services 487 9,200
Depreciation and amortization 95,548 75,253
Gain on sale of marketable securities - (51,515)
Translation loss 4,213 837
Changes in:
Accounts and other receivables 215,819 (18,306)
Inventor (194,073) 49,486
Prepaid expenses (282,169) (6,635)
Other assets 65 (1,728)
Accounts payable 363,927 11,733
Accrued expenses (43,864) 2,475
Deferred revenue 22,623 22,163
-------------- --------------
Net cash provided by operating activities 233,029 23,985
Cash flows from investing activities:
Proceeds from sales of marketable securities - 197,911
Purchases of equipment (539,214) (85,416)
-------------- --------------
Net cash (used in) provided by investing activities (539,214) 112,495
-------------- --------------
Cash flows from financing activities:
Net change in bank notes - (97,085)
Principal payments on long-term debt (55,129) (30,280)
Net change in loans from related parties 50,619 (1,144)
Cash received from stock subscriptions and sales of common stock 2,810,478 -
-------------- --------------
Net cash provided by (used in) financing activities 2,805,968 (128,509)
-------------- --------------
Effect of exchange rate changes on cash 40 3
-------------- --------------
Increase in cash 2,499,823 7,974
Cash at beginning of period 300,767 174,479
-------------- --------------
Cash at end of period $ 2,800,590 $ 182,453
============== ==============
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of
these Statements.
F-23
<PAGE>
K.L.S. ENVIRO RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
The accompanying unaudited consolidated financial statements of K.L.S. Enviro
Resources, Inc. and Subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Article 10 of
Regulation S-X. Accordingly, such unaudited financial statements do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. It is suggested that
these financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's September 30, 1996
audited financial statements.
In the opinion of management, all adjustments, consisting only of normal
recurring adjustments and elimination of material intercompany sales and
purchases necessary to present fairly the financial condition, results of
operations and cash flows for the Company for the interim periods presented,
have been included. Operating results for the three months ended December 31,
1996, are not necessarily indicative of the results that may be expected for
the year ending September 30, 1997.
Principles of Consolidation
The accompanying unaudited consolidated financial statements include all the
accounts K.L.S. Enviro Resources, Inc. and its six wholly-owned subsidiaries,
Dateline Drilling, Inc., K.L.S. Co., Inc., Kel-Lite Industries, Inc., Dateline
Internacional, S.A. de C. V., K.L.S. International, Inc., and Beloro, S.A. de
C.V. The operations of Kel-Lite Industries, Inc. were discontinued during 1996.
Note Payable
As of the fiscal year ended September 30, 1996 the Company had a note payable
to fonix Corporation ("fonix"), bearing interest at 12 percent, due on demand,
collateralized by all assets, except real estate, in the amount of $271,944.
On October 21, 1996 fonix loaned an additional $200,000 to the Company under
similar terms. On December 31, 1996 a shareholder of the Company purchased
$270,000 of the note and converted it to 900,000 shares of common stock at a
conversion rate of $.30 per share (see Capital Stock below). The balance of
the note to fonix was paid December 31, 1996 from the proceeds of the sale of
stock (see Capital Stock below).
Note Payable - Related Party
As of the fiscal year ended September 30, 1996 the Company had a note payable
to a shareholder, bearing interest at 12 percent, due on demand,
collateralized by all assets, except real estate, in the amount of
$1,673,730.
F-24
<PAGE>
K.L.S. ENVIRO RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
On October 16, 1996 the shareholder loaned an additional $100,000 to the
Company under similar terms. A payment was made by the Company to the
shareholder from the proceeds of the sale of stock (see Capital Stock below)
on December 31, 1996 reducing the balance to $1,727,591. This note was
substantially reduced by a payment on January 2, 1997 (see Subsequent Events
below).
Capital Stock
In December 1996, the Company sold 4,990,500 shares of common stock for
consideration of $0.80 per share pursuant to Regulation D of the Securities
Act of 1993.
On December 31, 1996 a shareholder purchased $270,000 of a demand note of the
Company from fonix. Also on December 31, 1996, the shareholder exercised the
conversion rights associated with such note, at an exchange rate of $0.30 per
share, to acquire 900,000 shares of common stock.
Subsequent Events
As of December 31, 1996, the Company was obligated to a shareholder in the
amount of $1,727,591 under the terms of a demand note, interest at 12 percent,
collateralized by all assets, except real estate. A payment was made on
January 2, 1997, reducing principal by $1,541,248 and paying then-accrued
interest of $1,152. The balance due the shareholder following this payment of
principal and interest was $185,191. The funds for such payment were obtained
from the sale of common stock (see Capital Stock above).
Income Per Common Share
Income per share of common stock is based on the weighted average number of
shares outstanding during the periods ended December 31, 1996 and 1995.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.]
F-25
<PAGE>
No dealer, salesperson or other person has been authorized to give any
information or make any representation not contained in this Prospectus. If
given or made, such information or representation must not be relied upon as
having been authorized by the Company or any Underwriter. This Prospectus
does not constitute an offer to sell or a solicitation of an offer to buy
shares of common stock or other securities to any person in any jurisdiction
or in any circumstance in which such offer would be unlawful. Neither
delivery of this Prospectus nor any sale made hereunder shall under any
circumstances create an implication that there has been no change in the
affairs of the Company since the date of this Prospectus or that the
information contained herein is correct as of any time subsequent to its date.
________________________________________________
TABLE OF CONTENTS
PROSPECTUS SUMMARY...........................................................3
SUMMARY CONSOLIDATED FINANCIAL DATA..........................................4
RISK FACTORS.................................................................4
USE OF PROCEEDS.............................................................11
DETERMINATION OF OFFERING PRICE.............................................11
DILUTION....................................................................11
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS....................12
DIVIDEND POLICY.............................................................12
CAPITALIZATION..............................................................12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..............................................12
BUSINESS....................................................................16
EXCHANGE RATES..............................................................22
MANAGEMENT..................................................................23
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT...........................27
EXECUTIVE COMPENSATION......................................................27
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT..................................................29
SELLING SHAREHOLDERS........................................................31
PLAN OF DISTRIBUTION........................................................32
INDEMNIFICATION OF DIRECTORS AND OFFICERS...................................33
DESCRIPTION OF SECURITIES...................................................33
CERTAIN TRANSACTIONS........................................................36
SHARES ELIGIBLE FOR FUTURE SALE.............................................38
LEGAL MATTERS...............................................................38
EXPERTS.....................................................................38
ADDITIONAL INFORMATION......................................................39
FINANCIAL STATEMENTS........................................................40
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
The Nevada Business Corporation Act and the Registrant's Articles of
Incorporation and Bylaws under certain circumstances provide for the
limitation of liability and indemnification of the Registrant's directors
against liabilities which they may incur in the course of acting in such
capacity. A summary of the circumstances in which such indemnification is
provided for is contained in this Item, but that description is qualified in
its entirety by reference to the Registrant's Articles of Incorporation. The
Bylaws of the Registrant extend the same limitation of liability and
indemnification to the executive officers of the Registrant.
In general, under these provisions, any officer, director, employee or
agent may be indemnified against expenses, fines, settlements or judgments
arising in connection with a legal proceeding to which such person is a
party, as a result of such relationship, except in relation to matters in which
such person is adjudged to be liable for his own negligence or intentional
misconduct in the performance of his duty.
Indemnification may also be granted pursuant to the terms of agreements
which may be entered into in the future of pursuant to a vote of stockholders
or directors. This indemnification is in addition to any other right of the
indemnified person under any such contract or any law, bylaw, agreement, vote
of stockholders or otherwise.
Item 25. Other Expenses of Issuance and Distribution.
The following is an itemization of all expenses (subject to future
contingencies) incurred or to be incurred by the Registrant in connection
with the issuance and distribution of the securities of the Registrant being
offered hereby. Some of the expenses included below may be prepaid by the
Registrant prior to the effective date of the Registration Statement. All
expenses are estimated:
Registration and filing fee(*) $ 7,000
Transfer agent's fee(*) 1,500
Printing and engraving(*) 3,000
Accounting fees and expenses(*) 10,000
Legal fees and expenses(*) 45,000
Blue sky fees and expense(*) 20,000
Miscellaneous expenses(*) 1,000
------
Total(*) $ 87,500
======
_________________
(*) Estimated.
Item 26. Recent Sales of Unregistered Securities.
Within the past three calendar years, the Registrant has issued
securities in transactions summarized below:
1994
The Company issued a total of 149,750 shares of Common Stock in
connection with a private placement during the months of January through May
of 1994. The gross proceeds from the sale of such shares was $299,500 ($2.00
II-1
<PAGE>
per share). In May 1994, the Company sold 100,000 shares of convertible
Preferred Stock to a shareholder and director for $500,000 cash. In June
1994, the Company issued 225,000 shares of Common Stock to a shareholder upon
conversion of preferred shares. From time to time during calendar 1994, the
Company paid certain expenses, including fees for services, in stock in order
to preserve its cash for operations. A total of 31,588 shares of Common Stock
were issued in such transactions. The Company also exchanged a total of
283,105 shares of Common Stock for certain shares of common stock in unrelated
corporations.
1995
During calendar 1995, the Company sold 150,000 shares of Common Stock
for $1 per share in a private offering. In addition, the Company issued a
total of 54,003 shares in exchange for services.
1996
In August 1996, the Company sold 500,000 shares for a total of $200,000
cash to two accredited investors. In connection with that offering, the
Company granted these two investors certain registration rights. These
investors are also Selling Shareholders as identified in the Prospectus
forming a part of this Registration Statement. During calendar 1996, the
Company issued a total of 585,781 shares of Common Stock in exchange for
services. The Company also issued a total of 337,500 shares of Common Stock
upon conversion of Preferred Stock. In addition, the Company issued
1,460,722 shares of Common Stock in conversion of debt.
In November and December 1996, the Company undertook a private placement
of up to 5,000,000 shares of Common Stock to accredited investors as that
term is defined in Item 501 of Regulation D under the Securities Act of 1933,
as amended (the "Securities Act"). The shares were to be sold pursuant to
exemptions from the registration requirements of the Securities Act afforded
to such offers and sales under Section 4(b) and Regulation D, promulgated
under the Securities Act. A total of 4,990,500 shares were sold to
approximately 19 accredited investors at $.80 per share. Gross proceeds of
the offering as of such date were $3,992,400. The Company paid a commission
fee in stock and cash totaling 10% of $3,142,000 of the proceeds to Enhanced
Invest Foundation ("EIF"), a Liechtenstein foundation, in connection with its
efforts in assisting the Company in placing some of the securities in the
private offering. The Company also paid SCC a fee of $250,000 for its
services in structuring the offering and for arranging for the services of
EIF. The Company has agreed to register the shares issued in the private
placement under certain circumstances at its own expense. At the time of the
offering, the average bid price for the Company's Common Stock in the public
market was $1.00 per share. The proceeds of this offering were used to pay a
portion of the loan balance due SMD, to acquire additional drill rigs and
parts and inventory relating to new and existing drill rigs and for operating
capital.
Each of the transactions described above was entered into and concluded
by the Company pursuant to exemptions from the registration requirements of
the Securities Act and similar exemptions available under state securities
laws, afforded to offers and sales of securities not involving a public
offering. The shares issued in such transactions are "restricted
securities" as defined by rules promulgated under the Securities Act, meaning
that they cannot be resold by the original purchaser unless they are first the
subject of a registration statement filed by the Company or an exemption from
registration is available for the transaction in which they are sold.
II-2
<PAGE>
Item 27. Exhibits
Exhibits not filed herewith will be filed by future amendment.
Index to Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description
- ----------- -----------------------------------------------------------
<S> <C>
3.1 Articles of Incorporation of Company (incorporated by reference from
Exhibit 3.1 of Registrant's Registration Statement on Form S-1 filed May 5,
1993).
3.2 Amendment to Articles of Incorporation (incorporated by reference from
Exhibit 3.1 of Registrant's Current Report on Form 8-K reporting an event
occurring on September 29, 1993).
3.3 Certificate of Resolution to Change the Resident Agent and Change of
Location of Principal Office of Registrant (incorporated by reference from
Exhibit 3.2 of Registrant's Registration Statement on Form S-1 filed May 5,
1993).
3.4 Bylaws of Registrant (incorporated by reference from Exhibit 3.3 of
Registrant's Registration Statement on Form S-1 filed May 5, 1993).
3.5 Certificate of Designation, Voting Powers, Preferences and Rights of the
Series of the Preferred Stock of K.L.S. Enviro Resources, Inc. to be
Designated Series "A" Preferred Stock filed March 30, 1994 (incorporated by
reference from Exhibit 3.1 of Registrant's Quarterly Report on Form 10-QSB for
the Quarterly Period Ended March 31, 1994).
3.6 Certificate of Designation, Voting Powers, Preferences and Rights of the
Series of the Preferred Stock of K.L.S. Enviro Resources, Inc. to be
Designated Series "B" Preferred Stock, filed April 8, 1994 (incorporated by
reference from Exhibit 3.2 of Registrant's Quarterly Report on Form 1O-QSB for
the Quarterly Period Ended March 31, 1994).
3.7 First Amendment to Bylaws of the Registrant, dated March 10, 1997.
4.1 Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1
of Registrant's Registration Statement on Form S-1 filed May 5, 1993).
4.2 Specimen of stock purchase warrant issued to SMD September 30, 1996,
incorporated by reference to Exhibit 4-2 to Registrant's Annual Report on Form
10-KSB for the fiscal year ended September 30, 1996, filed January 13, 1997.
5.1 Opinion of Counsel(*)
10.1 Pre-incorporation Agreement and Subscription (incorporated by reference
from Exhibit 10.1 of Registrant's Registration Statement on Form S-1 filed May
5, 1993).
10.2 Contract with Studdert Companies Corp. For Management Services
(incorporated by reference from Exhibit 10.1 to Registrant's Annual Report on
Form 10-KSB for the fiscal year ended September 30, 1996, filed January 13,
1997).
22.1 Subsidiaries of Registrant (incorporated by reference from Exhibit 22.1
of Registrant's Annual Report on Form 10-KSB for the year ended September 30,
1994).
24.1 Consent of Weaver & Tidwell
24.2 Consent of Durham, Evans, Jones & Pinegar, P.C. (included in 5.1,
above)(*)
25.1 Powers of Attorney (included at signature page)**
</TABLE>________________________
(*) To be filed by amendment.
(**) Previously filed
II-3
<PAGE>Item 28. Undertakings.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(a) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(b) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement;
(c) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination
of the offering.
The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements
certificates in such denominations and registered in such names as required
by the underwriter to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. If a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant has duly caused this amendment to its registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Salt Lake City, State of Utah, on April 28, 1997.
K.L.S. ENVIRO RESOURCES, INC.
(Registrant)
By: /s/ Raymond H. Kurzon*
-------------------------
Raymond H. Kurzon,
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement amendment has been signed by the following persons
in the capacities and on the dates indicated.
Signature Capacity Date
- ----------------------- ------------------ -------------
/s/ Stephen M. Studdert Director, Chairman April 28, 1997
- -----------------------
Stephen M. Studdert
/s/ Raymond H. Kurzon* President, CEO April 28, 1997
- ----------------------- and Director
Raymond H. Kurzon
/s/ Roger D. Dudley Acting Chief Financial April 28, 1997
- ----------------------- Officer and Director
Roger D. Dudley
/s/ Charles E. Nuanez* Director April 28, 1997
- -----------------------
Charles E. Nuanez
/s/ Thomas A. Murdock* Director April 28, 1997
- -----------------------
Thomas A. Murdock
/s/ Wyman Au* Director April 28, 1997
- -----------------------
Wyman Au
/s/ Joseph Verner Reed Director April 28, 1997
- -----------------------
Joseph Verner Reed
/s/ Rick D. Nydegger Director April 28, 1997
- ------------------------
Rick D. Nydegger
* By: /s/ Stephen M. Studdert
-----------------------
Attorney in fact
II-5
FIRST AMENDMENT
TO
THE BYLAWS
OF
K.L.S. ENVIRO RESOURCES, INC.
The Bylaws of K.L.S. Enviro Resources, Inc., a Nevada corporation (the
"Corporation") hereby amends its Bylaws as follows:
The Bylaws of the Corporation are hereby amended by deleting Article VIII
and replacing it with the following:
Section 8.1 Indemnification. The Corporation shall indemnify its
directors, officers, employees, fiduciaries and agents (collectively
"director" or "officer") to the full extent permitted by the Nevada Revised
Statutes or any successor statute. In particulary, and not in derogation of
the generality of the foregoing, except as provided in this section, the
Corporation shall indemnify an individual made a party to a proceeding because
he/she is or was a director or officer, against liability incurred in the
proceeding if:
(a) his/her conduct was in good faith;
(b) he/she reasonably believed that his/her conduct was in, or not
opposed to, the Corporation's best interests; and
(c) in the case of any criminal proceeding, he/she had no reasonable
cause to believe his/her conduct was unlawful.
The Corporation shall not indemnify a director or officer under this
section in connection with an action, suit or proceeding by or in the right of
the Corporation in which the director or officer was adjudged by a court of
competent jurisdiction after exhaustion of all appeals to be liable to the
Corporation.
Section 8.2 Determination. To the extent that a director or officer of
the Corporation has been successful on the merits or otherwise in defense of
any action, suit or proceeding, he/she shall be indemnified against expenses
(including attorneys' fees) which he/she actually and reasonably incurred in
connection therewith. Any other indemnification shall be made by the
Corporation upon a determination that indemnification of the director or
officer is proper in the circumstances. Such determination shall be made
either by the Board of Directors by a majority vote of a quorum consisting of
Directors who were not parties to such action, suit or proceeding, by
independent legal counsel in a written opinion, or by the shareholders by a
majority vote of a quorum of shareholders at any meeting duly called for such
purpose.
Section 8.3 General Indemnification. The indemnification and advancement
of expenses provided by this Article may not be construed to be exclusive of
any of the rights to which a person seeking indemnification or advancement of
expenses may be entitled under any by-law, agreement, vote of shareholders or
disinterested directors or otherwise, both as to an action in his official
capacity and as to an action in another capacity while holding office.
Section 8.4 Advances. Expenses incurred in defending a civil or criminal
action, suit or proceeding shall be paid by the Corporation in advance of the
final disposition of the action, suit or proceeding upon receipt of an
undertaking, which need not be secured, by or on behalf of the director or
officer that he/she shall repay the amount advanced if it is ultimately
determined that he/she is not entitled to be indemnified by the Corporation as
authorized by this Article.
Section 8.5 Scope of Indemnification. The indemnification and
advancement of expenses authorized by this Article shall apply to all present
and future directors or officers of the Corporation and shall continue as to
such persons who cease to be directors or officers of the Corporation and
shall inure to the benefit of the heirs, executors, the administrators of all
such persons and shall be in addition to all other indemnification and
advancement of expenses provided by law.
Section 8.6 Insurance. The Corporation may purchase and maintain
insurance on behalf of any person who is or was a director or officer of the
Corporation, or is or was serving at the request of the Corporation as a
director or officer of another corporation, partnership, joint venture, trust
or other enterprise against any liability asserted against him and incurred by
him in any such capacity or arising out of his status in any such capacity,
whether or not such corporation would have the power to indemnify him against
any such liability under the provisions of this Article VIII or the laws of
the State of Nevada, as the same may hereafter be amended or modified.
Adopted by resolution of the Board of Directors March 10, 1997.
/s/ Jeffrey N. Clayton
-----------------------------
Jeffrey N. Clayton, Secretary
INDEPENDENT AUDITOR'S CONSENT
We consent to the use in this Registration Statement of K.L.S. Enviro
Resources, Inc. on Form SB-2/A of our report dated December 31, 1996 appearing
in the Prospectus which is a part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ Weaver and Tidwell, L.L.P.
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Weaver and Tidwell, L.L.P.
Ft. Worth, Texas
April 29, 1997
Fort Worth Office
307 West Seventh Street
Suite 1500
Fort Worth, Texas 76102
