U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________to_____________.
Commission file number 0-21998
K.L.S. ENVIRO RESOURCES, INC.
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(Exact name of small business issuer as specified in its charter)
Nevada 75-2460365
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3220 North Freeway, Fort Worth, Texas 76111
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(Address of principal executive offices and zip code)
(817) 624-4844
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(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
As of May 8, 1997, the Registrant had outstanding 16,935,997 shares of its
common stock, par value $.0001.
Transitional Small Business Disclosure Format (Check One): Yes [ ] No [X]
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
K.L.S. ENVIRO RESOURCES, INC.
INDEX TO FINANCIAL INFORMATION
March 31, 1997
Page No.
-----------
Condensed Consolidated Balance Sheets as of March 31, 1997
(unaudited) and September 30, 1996 (audited) 3
Condensed Consolidated Statements of Operations (unaudited)
for the Three and Six Months Ended March 31, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows (unaudited) for
the Six Months Ended March 31, 1997 and 1996 5
Notes To Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
2
<PAGE>
K.L.S. Enviro Resources, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
March 31, 1997 (unaudited) and September 30, 1996 (audited)
<TABLE>
<CAPTION>
March 31, September 30,
1997 1996
-------------- --------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 562,774 $ 300,767
Accounts receivable-trade, net of allowance for
doubtful accounts of $123,402 981,866 1,050,371
Other receivables - 13,274
Inventory 665,839 483,938
Prepaid expenses 31,153 5,975
-------------- --------------
Total current assets 2,241,632 1,854,325
Property, plant and equipment, net 5,371,902 2,604,510
Other assets
Intangible assets, net of accumulated amortization
$75,401 and $70,014, respectively 43,677 49,065
Deposits and other 127,426 20,777
-------------- --------------
Total other assets 171,103 69,842
-------------- --------------
Total assets $ 7,784,637 $ 4,528,677
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Notes payable-related parties $ 1,163,544 $ 1,988,622
Current maturities of long-term debt 47,204 114,219
Accounts payable 1,065,744 412,487
Accrued expenses and other current liabilities 220,920 188,628
Deferred revenues 19,835 -
-------------- --------------
Total current liabilities 2,517,247 2,703,956
Long-term Debt 242,671 270,995
-------------- --------------
Total liabilities 2,759,918 2,974,951
-------------- --------------
Shareholders' equity
Preferred stock 10 10
Common stock 1,692 1,093
Additional paid-in capital 9,861,423 6,101,057
Accumulated deficit (4,795,693) (4,505,721)
Foreign currency translation adjustments (4,213) (4,213)
-------------- --------------
5,063,219 1,592,226
Treasury stock-common shares held in the treasury, at cost (38,500) (38,500)
-------------- --------------
Total shareholders' equity 5,024,719 1,553,726
-------------- --------------
Total liabilities and shareholders' equity $ 7,784,637 $ 4,528,677
============== ==============
The notes to Consolidated Financial Statements are an integral part of these statements
</TABLE>
3
<PAGE>
K.L.S. Enviro Resources, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
For the Three and Six Months ended March 31, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
March 31, March 31,
------------------------------ ------------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales and revenues
Drilling and repair services revenues $ 1,175,493 $ 925,108 $ 2,748,811 $ 1,705,477
Cost of drilling and repair services 565,854 577,124 1,292,980 1,005,427
------------- ------------- ------------- -------------
Gross profit 609,639 347,984 1,455,831 700,050
------------- ------------- ------------- -------------
Cost and expenses
Salaries, wages and related costs 157,838 135,539 293,712 251,726
Legal and professional fees 177,280 80,058 274,412 123,244
Rents 21,115 12,643 33,852 35,143
Repairs and maintenance 10,726 5,736 25,727 17,341
Taxes, licenses and permits 16,008 12,809 23,620 26,017
Advertising 2,434 1,808 4,250 6,191
Travel and lodging 37,998 45,786 84,628 61,740
Consulting 40,889 11,000 74,778 25,500
Exploration costs 119,800 (46,354) 160,540 (15,448)
Other operating expenses 243,036 67,424 472,315 139,653
Depreciation and amortization 116,568 70,839 212,117 139,543
------------- ------------- ------------- -------------
Total cost and expenses 943,692 397,288 1,659,951 810,650
------------- ------------- ------------- -------------
Loss from operations (334,053) (49,304) (204,120) (110,600)
Other income (expenses)
Interest expense (19,265) (32,360) (97,218) (68,290)
Interest and other income, net 36,370 1,877 38,904 5,312
Gain on sale of investment securities - 47,771 - 99,286
Gain on sale of assets - 21,366 - 21,366
Gain (loss) from foreign currency translation (8,476) 13,970 (12,539) 13,133
------------- ------------- ------------- -------------
Income (loss) before income taxes (325,424) 3,320 (274,973) (39,793)
Income taxes - - - -
------------- ------------- ------------- -------------
Income (loss) from continuing operations (325,424) 3,320 (274,973) (39,793)
Discontinued operations:
Loss from discontinued operations (8,646) (34,511)
Gain on sale of subsidiary - 379,935 379,935
------------- ------------- ------------- -------------
Net income (loss) $ (325,424) $ 374,609 $ (274,973) $ 305,631
============= ============= ============= =============
Income (loss) per weighted-average common share outstanding:
Income (loss) from continuing operations $ (0.02) $ 0.00 $ (0.02) $ (0.00)
Income from discontinued operations $ - $ 0.04 $ - $ 0.04
------------- ------------- ------------- -------------
Net income (loss) $ (0.02) $ 0.04 $ (0.02) $ 0.03
============= ============= ============= =============
Weighted-average number of common shares outstanding 16,550,608 9,039,494 13,710,959 8,993,243
============= ============= ============= =============
The Notes to Consolidated Financial Statements are an integral part of these statement
</TABLE>
4
<PAGE>
K.L.S. Enviro Resources, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
for the Six Months ended March 31, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
March 31,
--------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ (274,973) $ 305,631
Adjustments to reconcile net income (loss) to cash
used in operating activities:
Common stock for services 80,487 9,200
Depreciation and amortization 212,117 139,543
Gain on sale of investment securities - (99,286)
Gain on disposal of equipment (21,366)
Gain on sale of subsidiary (379,935)
Translation loss 9,555 805
Changes in
Accounts and other receivables 77,119 (42,493)
Inventory (183,223) 12,740
Prepaid expenses (25,178) (2,414)
Other assets (106,680) (2,447)
Accounts payable 650,199 (125,076)
Accrued expenses 24,244 48,622
Deferred revenue 13,444 10,572
-------------- --------------
Net cash provided by (used in) operating activities 477,111 (145,904)
-------------- --------------
Cash flows from investing activities:
Proceeds from sales of investment securities - 328,861
Proceeds from sale of subsidiary, net of selling costs 184,042
Proceeds from sale of equipment 14,750
Purchases of equipment (2,974,122) (146,682)
-------------- --------------
Net cash (used in) provided by investing activities (2,974,122) 380,971
-------------- --------------
Cash flows from financing activities:
Net change in bank notes - (196,505)
Principal payments on long-term debt (95,340) (66,685)
Net change in loans from related parties (555,078) (2,290)
Cash received from stock subscriptions and sales of common stock 3,410,478 -
-------------- --------------
Net cash provided by (used in) financing activities 2,760,060 (265,480)
-------------- --------------
Effect of exchange rate changes on cash (1,042) (8)
-------------- --------------
Increase (decrease) in cash 262,007 (30,421)
Cash at beginning of period 300,767 174,479
-------------- --------------
Cash at end of period $ 562,774 $ 144,058
============== ==============
The Notes to Consolidated Financial Statements are an integral part of these statements
</TABLE>
5
<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 eliminations of material intercompany sales and
purchases necessary to present fairly the financial condition, results of
operations and cash flows for the Company for the interim periods presented,
have been included. Operating results for the three and six months ended March
31, 1997, are not necessarily indicative of the results that may be expected
for the year ending September 30, 1997.
Principles of Consolidation - The accompanying unaudited consolidated
financial statements include all the accounts of K.L.S. Enviro Resources, Inc.
and its six wholly-owned subsidiaries, Dateline Drilling, Inc., K.L.S. Co.,
Inc., Kel-Lite Industries, Inc., Dateline Internacional, S.A. de C. V., K.L.S.
International, Inc., and Beloro, S.A. de C.V. The operations of Kel-Lite
Industries, Inc. were discontinued during 1996.
Income (Loss) Per Common Share - Income (loss) per share of common stock is
based on the weighted average number of shares outstanding during the three
and six months ended March 31, 1997 and 1996. Common Stock Equivalents have
not been included since their inclusion would be anti-dilutive.
NOTE 2. INVENTORY
<TABLE>
<S> <C> <C>
March 31, September 30,
Major classes of inventories are as follows: 1997 1996
-------------- --------------
Consumable supplies $ 665,839 $ 483,938
Raw materials - -
Finished goods - -
============== ==============
$ 665,839 $ 483,938
</TABLE>
NOTE 3. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<S> <C> <C>
March 31, September 30,
Property, plant and equipment are as follows: 1997 1996
-------------- --------------
Machinery and equipment $ 5,512,131 $ 2,763,188
Transportation equipment 531,305 433,514
Building and improvements 493,066 493,066
Furniture and fixtures 267,809 140,422
-------------- --------------
Accumulated depreciation ( 1,582,409) ( 1,375,680)
-------------- --------------
5,221,902 2,454,510
Land 150,000 150,000
-------------- --------------
Property, plant and equipment, net $ 5,371,902 $ 2,604,510
============== ==============
</TABLE>
NOTE 4. NOTES PAYABLE
Note Payable - As of the fiscal year ended September 30, 1996, the Company had
a note payable to fonix Corporation ("fonix"), bearing interest at 12 percent,
due on demand, collateralized by all assets, except real estate, in the amount
of $271,944. On October 21, 1996, fonix loaned an additional $200,000 to the
Company under similar terms. The additional loan of $200,000 was subsequently
repaid by the Company. On December 31, 1996, a shareholder of the Company
purchased $270,000 of the note balance and converted it to 900,000 shares of
common stock at a conversion rate of $.30 per share (see Stockholders' Equity
below). The balance of the note to fonix was paid December 31, 1996 from the
proceeds of the sale of stock (see Stockholders' Equity below).
Note Payable - Related Party - As of the fiscal year ended September 30, 1996,
the Company had a note payable to a shareholder, bearing interest at 12 percent,
due on demand, collateralized by all assets, except real estate, in the amount
of $1,673,730. On October 16, 1996, the shareholder loaned an additional
$100,000 to the Company under similar terms. Payments were made by the Company
to the shareholder from the proceeds of the sale of stock (see Stockholders'
Equity below) on December 31, 1996, reducing the balance to $1,727,591 and on
January 2, 1997, reducing the balance to $186,343. On March 25, 1997, the
shareholder loaned an additional $936,896 to the Company under similar terms.
At March 31, 1997, this note payable had a balance of $1,123,239. Subsequent to
March 31, 1997, the shareholder loaned an additional $263,104 to the Company.
(see Subsequent Events below).
As of March 31, 1997, the Company had a note payable to a shareholder in the
amount of $15,000, bearing interest at prime plus 1%, due on demand,
collateralized by Dateline's accounts receivable.
As of March 31, 1997, the Company had a note payable to a shareholder in the
amount of $25,305, bearing interest at prime plus 1%, due on demand,
collateralized by KLS Co.'s accounts receivable.
NOTE 5. STOCKHOLDERS' EQUITY
Issuance of Stock - In December 1996, the Company sold 4,990,500 shares of
restricted common stock for consideration of $0.80 per share pursuant to
Regulation D of the Securities Act of 1993. As part of this offering, in
January 1997, the Company issued 100,000 shares of common stock for finder's
fees.
On December 31, 1996, a shareholder purchased $270,000 of a demand note of the
Company from fonix. Also on December 31, 1996, the shareholder exercised the
conversion rights associated with such note, at an exchange rate of $0.30 per
share, to acquire 900,000 shares of restricted common stock.
Stock Options and Warrants - On December 31, 1996, the directors approved a
stock option plan for directors, employees and other persons acting on behalf
of the Company, under which the aggregate number of shares available for
issuance is 2,230,000. The exercise price of such options is the closing market
price of the stock on the date the options are granted. The term of each option
is ten years from the date of grant. In January 1997, options to purchase a
total of 1,000,000 shares were granted to certain directors and officers of the
Company with exercise prices ranging from $2.88 to $3.00. None of these options
have been exercised.
NOTE 6. INCOME TAXES
At March 31, 1997, deferred tax assets were approximately $1,600,000 and
deferred tax liabilities were approximately $60,000. The amount of and
ultimate realization of the benefits from the deferred tax assets for income
tax purposes is dependent, in part, upon the tax laws in effect, the Company's
future earnings, and other future events, the effects of which cannot be
determined.
Because of the uncertainty surrounding the realization of the loss carryforwards
the Company has established a valuation allowance for all net deferred tax
assets of approximately $1,540,000. The net change in the valuation allowance
was approximately $91,000 for the six months ended March 31, 1997.
The Company has available at March 31, 1997, net operating tax loss
carryforwards of approximately $4,300,000, some of which has been used to
reduce the Company's deferred income taxes payable. These carryforwards expire
beginning in 2008 except for $427,209 of the loss which expires beginning in
2004.
NOTE 7. RELATED PARTY
Fees totaling $24,660 for the six months ended March 31, 1997 were paid to a
shareholder for advisory and accounting services performed and lease of office
space.
The Company has a consulting agreement with a shareholder of the Company to
provide management advice. The agreement has a three year term and requires
monthly payments of approximately $2,000. Total payments for the six months
ended March 31, 1997 approximated $12,000.
The Company has a $50,000 per month consulting agreement with an affiliated
company to provide the Company with management services over a 5 year period
beginning October 1, 1996. No payments have been made during the six months
ended March 31, 1997.
NOTE 8. COMMITMENTS AND CONTINGENCIES
Dateline has instituted arbitration proceedings against a former customer
seeking the recovery of approximately $123,000 wrongfully withheld. An
allowance for $123,000 offsetting the customer receivable is recorded on the
financial statements. The former customer has filed a lawsuit against Dateline
and KLS alleging a violation of their contractual obligations. This lawsuit is
being vigorously contested by the Company.
The ultimate outcome of this lawsuit cannot be predicted and no provision for
liability has been made in the accompanying consolidated financial statements.
It is management's belief that the outcome is not likely to have a material
adverse effect on the Company's financial position.
NOTE 9. SUBSEQUENT EVENTS
As of March 31, 1997, the Company was obligated to a shareholder in the amount
of $1,123,239 under the terms of a demand note, interest at 12 percent,
collateralized by all assets, except real estate. Subsequent to March 31, 1997,
the shareholder loaned to the Company an additional $263,104 making a balance of
$1,386,343.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results Of Operations.
Results Of Operations
Three Months Ended March 31, 1997 Compared With Three Months Ended March 31,
1996
The Company had a net loss for the three months ended March 31, 1997 of
$325,424 compared to net income of $374,609 for the three months ended March
31, 1996. The difference is attributable to a $379,935 gain on the sale of a
subsidiary during the three months ended March 31, 1996 and to increased
exploration costs, legal fees, management fees and other operating expenses for
the three months ended March 31, 1997. The Company had a loss from continuing
operations of $325,424 for the three months ended March 31, 1997 compared to
income of $3,320 for the comparable period in 1996. This loss from continuing
operations is due to increased exploration costs, legal fees, management fees
and other operating expenses.
Total revenues from continuing operations for the three months ended March
31, 1997 were $1,175,493, an increase of $250,385 or approximately 27 percent,
over the three months ended March 31, 1996. The increase in revenues is
primarily due to an increase in drilling services revenues of $294,032 in
Mexico. For operations in the United States, revenues decreased $43,647, $1,154
from drilling services and $42,493 from hydraulic services. 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 second quarter of fiscal
1997, and the Company anticipates increased drilling and repair service revenues
for the remainder of fiscal 1997. Two additional rigs were added in March, 1997
and two more in April, 1997. The company now has a total of 13 drill rigs.
Total operating expenses from continuing operations increased by $535,134,
or approximately 55 percent, to $1,509,546 for the three months ended March 31,
1997, as compared to the three months ended March 31, 1996. Revenues increased
approximately 27 percent over the comparable period. Direct costs of drilling
and repair services were $565,854, a decrease of $11,270 over the comparable
period of the prior year. This is a decrease of approximately 14 percent when
compared as a percentage of revenue over the comparable period of fiscal 1996.
Selling, general and administrative expenses were $943,692, an increase of
$546,404 over the comparable period of the prior year. Total operating
expenses increased approximately 23 percent, when compared as a percentage of
revenue over the comparable period of fiscal 1996. The increase in selling,
general and administrative expenses was due primarily to increased exploration
costs, legal fees and management fees.
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 March 31, 1997 and 1996. Exploration
expenses were $119,800 and $(46,354) for the three months ending March 31, 1997
and 1996, respectively.
Net income from other income and expenses decreased $43,995 for the
three months ended March 31, 1997 over the comparable period of the prior year.
Of this amount, interest expense decreased by $13,095 and interest and other
income increased $34,493. Gains from the sale of investment securities
decreased $47,771 and gains from the sale of assets decreased by $21,366. Also,
the Company recorded a loss from foreign currency translation of $8,476 for the
three months ended March 31, 1997, compared to a gain of $13,970 for the three
months ended March 31, 1996.
Financial Condition
At March 31, 1997, the Company's current liabilities exceeded its current
assets by $275,615 as compared with current liabilities exceeding current assets
by $849,631 at September 30, 1996. The current ratio of assets to liabilities
was .89 at March 31, 1997 as compared with .69 at September 30, 1996. Current
assets increased by $387,307 to $2,241,632 from September 30, 1996 to March 31,
1997. Current liabilities decreased by $186,709 during the same period. The
significant increase in working capital over this period is primarily
attributable to the sale of restricted common stock in December, 1996 and
January, 1997.
Total assets were $7,784,637 at March 31, 1997 as compared to $4,528,677
at September 30, 1996. The increase of $3,255,960 is due to the sale of
restricted common stock described above and additions to fixed assets of
approximately $2,975,000, primarily additions to the drill rig fleet and
supporting equipment.
For the three-month period ended March 31, 1997, the Company operated on
a negative cash flow from operations. The negative cash flow was due to an
increase in exploration costs, management fees, legal fees and other operating
expenses. The Company anticipates substantial increases in revenues and cash
flow from operations as it expands its drill rig fleet for the balance of fiscal
1997. Two drill rigs with support equipment were purchased in March, 1997 and
two additional rigs were constructed in-house and placed into service in April,
1997. This increases the Company's fleet of drill rigs to thirteen. As the
Company continues to expand, it endeavors to achieve a positive cash flow from
operations, although there can be no assurance that the Company will achieve a
positive cash flow from operations. The Company is also increasing its efforts
to acquire mining properties, and it will continue to require additional sources
of funds in order to pursue precious metals exploration and development and
expand its drilling and repair services. Such funding may come from debt or the
sale of the Company's equity securities, but there is no assurance that the
Company will obtain the funds needed to supplement the shortfall in its cash
flow as and when needed.
In January 1997, the Company granted options to acquire an aggregate of
1,000,000 shares of the Company's common stock to certain officers and directors
of the Company. These options are exercisable for a period of ten years at
prices ranging from $2.88 to $3.00 per share, which represented the fair value
of the underlying common stock on the date of grant. None of these options have
been exercised and there were no other sales of unregistered securities by the
Company during the quarter. The grant of these options was made without
registration under the Securities Act of 1933, as amended in reliance upon
exemptions under Section 4(2) and other provisions of such Act, including rules
and regulations promulgated thereunder relative to sales of securities not
involving a public offering.
Forward-looking Statements and Certain Risk Factors
Statements which are not historical facts contained in this report are
forward-looking statements. Section 27A of the Securities Act of 1933, as
amended provides a safe harbor for forward-looking statements. In order to
comply with the terms of the safe harbor, the Company cautions that a variety of
factors could cause the Company's actual results to differ materially from
anticipated results or other expectations expressed in this report. The
forward-looking statements contained in this Management's Discussion and
Analysis of Financial Condition and Results of Operations involve a number of
risks and uncertainties that could cause actual results to differ from
projected or anticipated results. Some of the risks and uncertainties are set
forth below. In addition, the risk factors discussed in Part I, Item 1
("Business") and in the "Management's Discussion and Analysis of Operations"
(Item 6) of the Company's recently filed annual report on Form 10-KSB for the
fiscal year ending September 30, 1996 may also affect actual operating results,
as could the following:
General Operations Risks
The Company has experienced and expects to continue to experience
significant fluctuations in its results of operations. Factors that affect the
Company's results of operations or that could cause actual results to differ
materially include, among others, the Company's ability to successfully bid on
new contracts, its ability to perform under the terms of drilling contracts on
a timely basis, its access to suitable used or new equipment to fulfill contract
obligations, the ability to hire and retain skilled and properly trained
employees, industry conditions and world demand for precious metals, as well as
prices for such metals, the results of financing efforts and financial market
conditions and other factors discussed in the Form 10-KSB mentioned above and
the additional factors discussed below.
Foreign Operations Risks
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, lack of infrastructure and accessability to sources of
power and other supplies necessary for operations, high inflation and currency
fluctuations which may erode profitability levels, and the difficulty of
obtaining and enforcing judgments in foreign courts and under foreign legal
systems that differ substantially from the U.S., all add to the risk of foreign
operations.
Dependence on Precious Metals Mining Industry
The Company's operations are largely dependent upon the levels of activity
in precious metals exploration and development drilling. Such activity levels
are affected by trends in the precious metals industry and precious metals
prices. Historically, prices for precious metals have been volatile and are
subject to wide fluctuations in response to changes in the supply of and demand
for precious metals, market uncertainty and a variety of political, economic
and other factors beyond the control of the Company. The Company cannot
predict future price movements with any certainty. Any prolonged reduction in
precious metals prices, however, will depress the level of exploration,
development and production activity and result in a corresponding decline in
the demand for the Company's services and, therefore, have a material adverse
effect on the Company's revenues and profitability.
Competition
The contract drilling industry is a highly competitive and cyclical
business characterized by high capital and maintenance costs. Although
conditions in recent years in the precious metals mining industry have
precipitated consolidation of drilling industry participants, the Company
believes the competition for drilling contracts will continue to be intense for
the foreseeable future because of contractors' ability to move rigs from areas
of low activity and day rates to areas of greater activity and relatively higher
rates. In addition, there are a number of inactive rigs that are being
reactivated and upgraded, and additional rigs that could be reactivated and
upgraded, and new rigs that could be constructed, to meet an increase in demand
for drilling rigs in any given market. Such movement, reactivation, new
construction or a decrease in drilling activity in any major market could
depress rates and could adversely affect utilization of the Company's rigs even
in an environment of stronger precious metals prices. Many of the Company's
principal competitors are substantially larger, have substantially greater
resources and have spent considerably larger sums of capital than the Company
for equipment, including drill rigs, development and operations. These factors
may enable those competitors to better withstand industry downturns, compete on
the basis of price, build new rigs or acquire existing rigs that become
available for purchase.
Risk of Upgrade and Refurbishment of Drill Rigs
In connection with its plans to increase its fleet of drill rigs and the
upgrade and refurbishment of existing drill rigs and other rigs that the Company
may acquire in the future, the Company expects to make substantial completion,
upgrade and refurbishment capital expenditures. Such projects are subject to
the risks of delay or cost overruns inherent in any large reconstruction
project, including shortages of materials or skilled labor, unforeseen
engineering problems, latent damage to current equipment, work stoppages and
unanticipated cost increases. Significant cost overruns or delays would
adversely affect the Company's financial condition and results of operation.
Risk of Potential Conflicts of Interest
Three of the nine members of the Company's board of directors are also
indirect owners of and control a significant shareholder of the Company and a
corporation providing management and strategic planning services to the
Company. In addition, these three persons and two other members of the board
of directors sit on the board of directors of another public company in an
unrelated industry. The acting CFO of the Company is also the CFO of the other
public company. Such associations and relationships may give rise to conflicts
of interest from time to time. If any such conflict does arise, the policy of
the Company, consistent with Section 78.140 of the Nevada Revised Statutes,
requires that the director who has a conflict will disclose the same to a
meeting of the directors of the Company and will abstain from voting for or
against approval of any matter in which such director may have a conflict.
Notwithstanding the adoption of such a policy, there can be no assurance that
all possible conflicts of interest will be identified and appropriately
resolved.
As a result of the foregoing and other factors, there can be no assurance
that the Company will not experience material fluctuations in future operating
results on a quarterly or annual basis which would materially and adversely
affect the Company's business, financial condition and results of operation.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
During the quarter ended March 31, 1997, the Company was involved in the
following legal proceedings:
PanAmerican Mineral Services, Inc. v. KLS Enviro Resources, Inc., Dateline
Drilling, Inc., and Dateline Internacional S.A. De C.V. (the "Texas
Litigation"). This action was filed in the District Court of Dallas County,
Texas. The Texas Litigation is related to litigation (the "Wyoming Litigation")
and an arbitration proceeding between one or more of the defendants and the
plaintiff in the State of Wyoming. In 1991, before KLS acquired any interest
in Dateline, Dateline allegedly entered into a contract with PanAmerican
Mineral Services, Inc. ("PanAmerican"). PanAmerican was to perform certain
services and render certain consultation with reference to business to be
conducted by Dateline in Mexico. PanAmerican was to bill for services performed
by Dateline and then remit to Dateline. After the acquisition of Dateline by
KLS, it was discovered that PanAmerican had not performed as required under
the contract and was holding funds due Dateline.
Pursuant to an arbitration agreement between Dateline and PanAmerican,
Dateline began an arbitration proceeding in the State of Wyoming. PanAmerican
has filed documents in the arbitration proceeding indicating that it intends to
assert a counterclaim against Dateline, Dateline Internacional S.A. De C.V.
("DIMSA") and the Company. 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 anticipation
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.
Item 2. Changes in Securities.
c. Recent Sales of Unregistered Securities.
During the quarter ended March 31, 1997, the Company sold the following
equity securities that were not registered under the Securities Act of 1933, as
amended (the "Act"), other than pursuant to Regulation S under the Act:
In January 1997, the Company granted options to acquire an aggregate of
1,000,000 shares of the Company's common stock to certain officers and directors
of the Company. These options are exercisable for a period of ten years at
prices ranging from $2.88 to $3.00 per share, which represented the fair value
of the underlying common stock on the date of grant. None of these options have
been exercised and there were no other sales of unregistered securities by the
Company during the quarter. The grant of these options was made without
registration under the Securities Act of 1933, as amended in reliance upon
exemptions under Section 4(2) and other provisions of such Act, including rules
and regulations promulgated thereunder relative to sales of securities not
involving a public offering.
Item 4. Submission of Matters to a Vote of Security Holders.
On March 10, 1997, the Company conducted its 1997 annual meeting of
stockholders. At the meeting the following were elected as directors: Stephen
M. Studdert, Raymond H. Kurzon, Charles E. Nuanez, Wyman Au, Philip B. Smith,
Thomas A. Murdock, Roger D. Dudley, Joseph Verner Reed and Rick D. Nydegger. In
addition to electing the foregoing directors, the Company shareholders ratified
the appointment of Weaver & Tidwell as the Company's independent auditors for
the fiscal year ending September 30, 1997. A tabulation of the voting in
connection with the election of the director nominees is as follows:
Name For Against Abstain
Raymond H. Kurzon 9,806,067 7,903 8
Stephen M. Studdert 9,806,067 7,903 8
Charles E. Nuanez 9,806,067 7,903 8
Wyman Au 9,806,067 7,903 8
Philip B. Smith 9,806,067 7,903 8
Thomas A. Murdock 9,806,067 7,903 8
Roger D. Dudley 9,806,067 7,903 8
Joseph Verner Reed 9,806,067 7,903 8
Rick D. Nydegger 9,806,067 7,903 8
With regard to the ratification of the appointment of Weaver & Tidwell as
the Company's independent auditors, the voting was as follows: For - 9,781,584;
Against - 10; Abstain - 24,473.
Item 6. Exhibits and Reports on Form 8-K
a. Regulation S-K Exhibits:
Exhibit No. Description
- ----------- -----------------------
27 Financial Data Schedule
b. Reports on Form 8-K.
On January 6, 1997, the Company filed a Current Report on Form 8-K that was
dated as of December 31, 1996. That report contained Item 5 disclosure
pertaining to the restructuring of the Company's board of directors. That
report was amended on January 8, 1997.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
K.L.S. ENVIRO RESOURCES, INC.
Date: May 15, 1997 By: /s/ Raymond H. Kurzon
-------------- -------------------------------
Raymond H. Kurzon, President/CEO
Date: May 15, 1997 By: /s/ Roger D. Dudley
-------------- -------------------------------
Roger D. Dudley, Acting Chief
Financial Officer
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