U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FROM ___________to_____________.
Commission file number 0-24152
K.L.S. ENVIRO RESOURCES, INC.
(Exact name of small business issuer as specified in its charter)
Nevada 75-2460365
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5500 East Loop 820 South, Suite 100, Fort Worth, Texas 76119
(Address of principal executive offices and zip code)
(817) 563-0086
(Issuer's telephone number, including area code)
3220 North Freeway, Fort Worth, Texas 76111
(Issuer's former address)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
As of August 12, 1998, the Registrant had outstanding 18,885,222 shares of
common stock, par value $.0001.
Transitional Small Business Disclosure Format (Check One): Yes [ ] No [X]
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1.Financial Statements.
K.L.S. ENVIRO RESOURCES, INC.
INDEX TO FINANCIAL INFORMATION
June 30, 1998
Page No.
--------
Consolidated Balance Sheets (unaudited) as of June 30, 1998
and September 30, 1997 . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations (unaudited)
for the Three and Nine Months Ended June 30, 1998 and 1997 . . . 4
Consolidated Statements of Cash Flows (unaudited) for
the Nine Months Ended June 30, 1998 and 1997 . . . . . . . . . . 5
Notes To Consolidated Financial Statements . . . . . . . . . . . 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . . . 9
2
<PAGE>
K.L.S. Enviro Resources, Inc. and Subsidiaries
Consolidated Balance Sheets
June 30, 1998 and September 30, 1997
<TABLE>
<CAPTION>
ASSETS
(Unaudited)
June 30, September 30,
1998 1997
----------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 289,860 $ 351,961
Accounts receivable-trade, net of allowance for doubtful
accounts of $45,000 639,340 1,233,487
Other receivables 1,685 -
Inventory 824,931 721,197
Prepaid expenses 77,459 120,609
---------- ----------
Total current assets 1,833,275 2,427,254
Property, plant and equipment, net 5,584,772 6,236,402
Other assets
Intangible assets, net of accumulated amortization of
$83,547 and $79,960, respectively 557,565 39,118
Deposits and other 25,223 25,837
---------- ----------
Total other assets 582,788 64,955
---------- ----------
$8,000,835 $8,728,611
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 658,387 $ 508,387
Notes payable-related parties 168,830 37,543
Current maturities of long-term notes 187,730 182,802
Accounts payable 723,252 647,624
Accounts payable-related parties 852,078 122,151
Accrued expenses and other current liabilities 362,421 492,018
Deferred revenues 116,318 8,838
--------- ---------
Total current liabilities 3,069,016 1,999,363
Long-term notes 426,125 581,700
Long-term notes-related party 2,398,794 2,223,483
--------- ---------
Total liabilities 5,893,935 4,804,546
Shareholders' equity:
Cumulative convertible preferred stock,
Series A, $.0001 par value; 1,000,000 shares
authorized; 100,000 shares issued and
outstanding at 6/30/98 and 9/30/97;
Redeemable at $5.00 per share 10 10
Common stock, $.0001 par value; 50,000,000 shares
authorized; 18,885,222 and 17,170,997 shares
issued at 6/30/98 and 9/30/97, respectively 1,889 1,717
Additional paid-in capital 10,949,644 9,923,898
Accumulated deficit (8,801,930) (5,958,847)
Foreign currency translation adjustments (4,213) (4,213)
----------- -----------
2,145,400 3,962,565
Treasury stock-common shares held in the treasury,
at cost (38,500) (38,500)
----------- -----------
Total shareholders' equity 2,106,900 3,924,065
----------- -----------
$8,000,835 $8,728,611
========== ===========
</TABLE>
3
The notes to Consolidated Financial Statements
are an integral part of these statements
<PAGE>
K.L.S. Enviro Resources, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Three and Nine Months Ended June 30, 1998 and 1997
((Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
June 30, June 30,
------------------------------ ------------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales and revenues:
Drilling and repair service revenues $ 507,298 $2,095,290 $2,491,833 $4,844,101
Cost of drilling and repair services 394,898 1,122,211 1,760,133 2,415,191
---------- ---------- ---------- ----------
Gross profit 112,400 973,079 731,700 2,428,910
---------- ---------- ---------- ---------
Operating expenses:
Salaries, wages and related costs 207,059 186,112 587,905 479,824
Legal and professional fees 38,730 177,642 228,840 452,054
Rents 20,587 16,504 65,778 50,356
Repairs and maintenance 7,207 20,016 28,550 45,743
Taxes, licenses and permits 18,068 14,777 32,490 38,397
Advertising 2,260 2,223 21,842 6,473
Travel and lodging 31,518 23,806 100,893 108,434
Consulting 331,000 40,275 373,155 115,053
Development costs 30,500 45,693 94,324 206,233
Other operating expenses 466,718 83,598 960,225 555,913
Depreciation and amortization 212,811 182,325 648,652 394,442
---------- ---------- ---------- ----------
Total operating expenses 1,366,458 792,971 3,142,654 2,452,922
---------- ---------- ---------- ----------
Income (loss) from operations (1,254,058) 180,108 (2,410,954) (24,012)
Other income (expenses):
Interest expense (126,386) (68,693) (379,145) (165,911)
Interest and other income, net 5,103 1,935 6,438 40,839
Gain on sale of assets - 4,500 692 4,500
Loss from foreign currency translation (13,097) (1,018) (37,614) (13,557)
---------- ---------- ---------- ----------
Net other expense (134,380) (63,276) (409,629) (134,129)
Income (loss) before income taxes (1,388,438) 116,832 (2,820,583) (158,141)
Income taxes - 49,693 - 49,693
---------- ---------- ---------- ----------
Net income (loss) (1,388,438) 67,139 (2,820,583) (207,834)
Dividend on preferred stock 7,500 7,500 22,500 22,500
---------- ---------- ---------- ----------
Net income (loss) applicable
to common stock $(1,395,938) $59,639 $(2,843,083) $ (230,334)
========== ========== ============ ===========
Earnings per share:
Basic earnings (loss) per share (0.08) 0.00 (0.16) (0.01)
Diluted earnings (loss) per share (0.08) 0.00 (0.16) (0.01)
========== ========== ============ ===========
Common stock outstanding:
Basic 18,419,973 17,007,288 17,804,713 14,809,735
Diluted 18,419,973 23,526,212 17,804,713 14,809,735
========== ========== ========== ==========
</TABLE>
4
The Notes to Consolidated Financial Statements
are an integral part of these statements.
<PAGE>
K.L.S. Enviro Resources, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Nine Months Ended June 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
June 30,
----------------------------------
1998 1997
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,820,583) $ (207,834)
Adjustments to reconcile net loss to cash
used in operating activities:
Common stock for services 342,678 80,487
Non-cash expense related to acquisition 162,500 -
Depreciation and amortization 648,652 394,442
Gain on disposal of equipment (692) (4,500)
Translation loss 37,614 13,557
Changes in:
Accounts and other receivables 591,948 (265,947)
Inventory (105,297) (126,620)
Prepaid expenses 27,696 (83,661)
Other assets (521,657) (248,819)
Accounts payable 538,369 46,755
Accounts payable-related parties - 731,923
Accrued expenses and other current
liabilities 102,441 (46,138)
Deferred revenue 107,017 9,178
----------- ----------
Net cash provided by (used in)
operating activities (889,314) 292,823
----------- ----------
Cash flows from investing activities:
Purchases of property, plant and equipment (8,743) (4,180,319)
Proceeds from sale of equipment 16,000 -
----------- -----------
Net cash (used in) provided by
investing activities 7,257 (4,180,319)
----------- -----------
Cash flows from financing activities:
Net change in notes payable (350,000) 1,008,387
Net change in notes payable - related parties 131,287 (551,199)
Payments of long-term notes (150,647) (85,373)
Proceeds from long-term notes - related parties 683,061 -
Payments of long-term notes - related parties (7,750) -
Sale of common stock, net of offering cost 514,000 3,465,478
----------- ----------
Net cash provided by
financing activities 819,951 3,837,293
----------- ----------
Effect of exchange rate changes on cash 5 4
----------- ----------
Increase (decrease) in cash (62,101) (50,199)
Cash at beginning of period 351,961 300,767
----------- ----------
Cash at end of period $ 289,860 $ 250,568
=========== ==========
</TABLE>
5
The Notes to Consolidated Financial Statements
are an integral part of these statements.
<PAGE>
K.L.S. ENVIRO RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General - The accompanying unaudited consolidated financial statements of
K.L.S. Enviro Resources, Inc. ("KLS") and Subsidiaries (collectively the
"Company") have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-QSB and in accordance with Item 310 of Regulation S-B. Accordingly, such
unaudited financial statements do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The Company suggests that these financial statements
be read in conjunction with the financial statements and notes thereto
included in the Company's Form 10-KSB for the year ended September 30, 1997.
In the opinion of management, all adjustments, consisting of normal recurring
adjustments and eliminations of material intercompany sales and purchases
necessary to present fairly the financial condition, results of operations
and cash flows for the Company for the interim periods presented, have been
included. Operating results for the three and nine months ended June 30, 1998,
are not necessarily indicative of the results that may be expected for the
fiscal year ending September 30, 1998.
Principles of Consolidation - The accompanying consolidated financial
statements include all the accounts of the Company. All significant
intercompany transactions and balances have been eliminated in consolidation.
Recently Enacted Accounting Standards - In February 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 128, Earnings per Share (SFAS 128). SFAS 128 became effective for
financial statements with interim and annual periods ending after December 15,
1997. Accordingly, the Company has adopted SFAS 128.
Earnings Per Common Share - SFAS 128 established a different method of
computing earnings (loss) per share than was required under the provisions of
Accounting Principles Board Opinion No. 15. Under SFAS 128, entities with
publicly held common stock are required to present basic earnings (loss) per
share and diluted earnings (loss) per share. Basic earnings per share is the
amount of earnings (loss) for the period available to each share of common
stock outstanding during the reporting period. Diluted earnings per share is
the amount of earnings (loss) for the period available to each share of common
stock outstanding during the reporting period and to each share that would
have been outstanding assuming the issuance of common shares for all dilutive
potential common shares consisting of options, warrants and convertible
preferred stock outstanding during the period.
For the three and nine months ended June 30, 1998 and for the nine months
ended June 30, 1997, there were outstanding common stock equivalents to
purchase 8,839,597 , 8,839,597 and 8,584,597 shares of common stock,
respectively, that were not included in the computation of diluted net loss
per common share as their effect would have been anti-dilutive, thereby
decreasing the net loss per common share.
A reconciliation between the basic and diluted weighted average number of
common shares for the three months ended June 30, 1997 is summarized as
follows:
<TABLE>
<CAPTION>
June 30,
1997
---------
<S> <C>
Basic weighted average number of common shares
outstanding during the period 17,007,288
Weighted average number of common stock
equivalents outstanding during the period
6,518,924
----------
Diluted weighted average number of common shares
outstanding during the period 23,526,212
==========
</TABLE>
The difference between basic net income (loss) per common share and diluted
net income (loss) per common share is for dividends on preferred stock as
6
<PAGE>
disclosed on the face on the income statement. Net loss per common share
amounts and share data have been restated for all periods presented to reflect
basic and diluted per share presentations.
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income", effective January 1, 1998. This Statement
establishes standards for reporting and display of comprehensive income and
its components in financial statements. The adoption of this statement had no
affect on the Company's comprehensive income.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The Statement
establishes accounting and reporting standards requiring that derivative
instruments be recorded in the balance sheet as either an asset or liability
measured at its fair value and that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Statement 133 is effective for fiscal years beginning after June 15,
1999. The adoption of this statement will not have a material effect of the
Company's consolidated financial statements as the Company is not currently
involved in any derivative instruments or hedging activities.
NOTE 2. COSTS OF PENDING ACQUISITION
As of June 30, 1998, $522,033 in direct costs associated with a potential
acquisition of Britton Bros. Diamond Drilling, Ltd. are included in intangible
assets. These direct costs will be included in the purchase price if and when
the acquisition is consummated. There can be no assurance the acquisition
will be consummated. The Company had a deadline to fund the cash portion of
the acquisition price of $16.5 million no later than July 22, 1998. The
Company was not able to secure adequate financing by July 22, 1998 due to a
decline in accounts receivable of the Company and Britton Bros. and reduced
world-wide demand for drilling services. As a result, the Company agreed to
pay a breakup fee. The Company paid $50,000 in cash and a director and
executive officer of the Company contributed 200,000 shares of Common Stock as
full payment of the breakup fee. During the three months ended June 30, 1998,
the Company recorded total expense for the breakup fee of $212,500 and a
contribution to paid in capital of $162,500 in connection with the 200,000
shares contributed by the director and executive officer of the Company. The
Company continues to attempt to secure adequate financing to complete the
acquisition. If the acquisition is not completed, all of these expenses will
be charged to expense in the period in which management determines that it is
unlikely that the acquisition will be consummated.
NOTE 3. NOTES PAYABLE
At June 30, 1998, the Company has a note payable to an unrelated party in the
amount of $150,000 which bears interest at 18 percent, is due September 9,
1998 and is secured by certain assets of the Company. Interest is payable
monthly on the first day of each month.
NOTE 4. NOTE PAYABLE - RELATED PARTY
At June 30, 1998, the Company had an unsecured note payable to a director of
the Company in the amount of $45,000, bearing interest at 12 percent per
annum, and is due on demand.
At June 30, 1998, the Company had an unsecured note payable to another
director of the Company in the amount of $90,000, bearing interest at 12
percent per annum, and was due March 1, 1998. Subsequent to June 30, 1998, the
due date of the note was extended to January 15, 1999.
At June 30, 1998, the Company had an unsecured note payable to a corporation
related through common directors and significant shareholders, bearing
interest at 12 percent per annum, due July 15, 1999, in the amount of
$850,000.
At June 30, 1998, the Company had a note payable to an entity related through
common directors and significant shareholders, bearing interest at 12 percent,
due July 15, 1999, collateralized by all assets of the Company, except real
estate, in the amount of $1,548,794 with interest accrued thereon in the
amount of $206,304.
7
<PAGE>
NOTE 5. STOCKHOLDERS' EQUITY
Issuance of Stock - During the nine months ended June 30, 1998, the Company
received net cash proceeds of $514,000 from the issuance of 1,285,000 shares
of restricted Common Stock as the result of the exercise of warrants and
options. The Company also issued 423,833 shares of restricted Common Stock
for services and issued 5,392 restricted shares in payment of debt.
Stock Options - During the nine months ended June 30, 1998, the Company
granted options for the purchase of 1,275,000 shares of Common Stock to three
individuals who are directors of the Company and who each beneficially own
more than 10 percent of the Company's Common Stock at an exercise price of
$0.91 per share. These options have a ten-year life.
NOTE 6. COMMITMENTS AND CONTINGENCIES
KLS and two of its subsidiaries, Dateline Drilling, Inc. ("Dateline") and
Dateline Internacional S.A. de C.V. ("DIMSA"), were engaged in a lawsuit with
a former customer over a contract entered into between Dateline and the former
customer. The matter was settled in 1997, in connection with which Dateline
and DIMSA agreed to pay $325,000 to the former customer. KLS guaranteed the
settlement payments. Payment of the settlement amount is secured by a drill
rig of the Company. To date, KLS has paid the former customer $140,000.
$90,000 was due on May 1, 1998. In April 1998, the parties agreed to extend
the due date for the May 1, 1998 payment to June 15, 1998 in exchange for an
increase in the amount of the payment from $90,000 to $95,000. This payment
has not been paid and is technically in default. However, the parties are
currently negotiating new payment terms. There can be no assurance that the
parties will agree upon new terms or that such terms will be favorable to KLS,
Dateline and/or DIMSA. If the parties cannot agree upon new payment terms,
the former customer may declare a default and pursue claims against KLS,
Dateline and DIMSA, including litigation or foreclosure proceedings with
respect to its collateral. The final payment of $95,000 is due on November 1,
1998. The Company accrued the $325,000 settlement costs and expensed all
other costs associated with this lawsuit during fiscal 1997.
The Company is involved in various other claims and actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not materially affect the consolidated
financial position or results of operations of the Company.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Results of Operations
Nine Months Ended June 30, 1998 Compared With Nine Months Ended June 30, 1997
The Company had a net loss for the nine months ended June 30, 1998 of
$2,820,583 compared to a net loss of $207,834 for the nine months ended June
30, 1997. Revenues decreased significantly during the nine months ended June
30, 1998, resulting in an increase in net loss of $2,612,749, as compared to
the nine months ended June 30, 1997.
Total revenues for the nine months ended June 30, 1998 were $2,491,833,
a decrease of $2,352,268 or approximately 49 percent, from the nine months
ended June 30, 1997. The decrease in revenues is primarily attributable to
a decrease in drilling services revenues due to the effect on mining companies
of depressed market prices of base metals, including gold. Drilling services
revenues from operations in Mexico decreased $1,643,669 from $2,651,053 for
the nine months ended June 30, 1997 to $1,007,384 for the nine months ended
June 30, 1998. Drilling services revenues from operations in the United
States decreased from $1,615,721 for the nine months ended June 30, 1997 to
$924,714 for the nine months ended June 30, 1998. Revenues from hydraulic
services were $559,735 and $577,327 for the nine months ended June 30, 1998
and 1997, respectively.
During the nine months ended June 30, 1998, and 1997 direct costs of
drilling and repair services were $1,760,133 and $2,415,191, or 71 percent and
50 percent of revenues, respectively. This represents an increase in costs
of drilling and repair services of approximately 21 percent over the nine
months ended June 30, 1997. This increase in direct costs as a percentage of
revenue is primarily attributable to increased rig transportation costs and
subsistence pay as a result of substantial down time of the drill rigs due to
the lack of drilling opportunities in the currently depressed base metals
market.
Total operating expenses for the nine months ended June 30, 1998 were
$3,142,654, an increase of $689,732 over the nine months ended June 30, 1997.
The increase in operating expenses is primarily attributable to increases in
salaries, wages and related costs of $108,081, consulting expense of $258,102,
other operating expense of $404,312 and depreciation and amortization of
$254,210. The Company recorded a consulting expense of $325,000 in connection
with the issuance of 400,000 shares of common stock for services and an
expense to other operating expense of $212,500 for the breakup fee associated
with the Britton Bros. acquisition (see below). The substantial increase in
depreciation and amortization expense is related to drilling equipment
purchased in fiscal 1997. Additionally, legal and accounting fees for the
nine months ended June 30, 1998 were $228,840, a decrease of $223,214 from the
nine months ended June 30, 1997. Total operating expenses were approximately
126 and 51 percent of total revenues, respectively, for the nine months ended
June 30, 1998 and 1997.
The Company recorded a net loss from operations of $2,410,954 and
$24,012 for the nine months ended June 30, 1998 and 1997, respectively. This
$2,386,942 increase in net loss is attributable to substantial decreases in
revenues, and certain increases in operating expense as described above.
Net other expense increased $275,500 for the nine months ended June 30,
1998 over the nine months ended June 30, 1997. This is primarily attributable
to an increase in interest expense of $213,234 over the comparable reporting
period.
Financial Condition
At June 30, 1998, the Company's current liabilities exceeded its current
assets by $1,235,741 as compared with current assets exceeding current
liabilities by $427,891 at September 30, 1997. The current ratio of assets
to liabilities was .60 at June 30, 1998 as compared with 1.21 at September 30,
1997. Current assets decreased by $593,979 to $1,833,275 from September 30,
1997 to June 30, 1998. Current liabilities increased by $1,069,653 during the
9
<PAGE>
same period. The decrease in working capital over this period is primarily
attributable to a decrease in accounts receivable of $594,147 due to the lack
of revenues and to substantial increases in related party accounts payable.
Total assets were $8,000,835 at June 30, 1998 as compared to $8,728,611
at September 30, 1997. The decrease of $727,776 is attributable to a decrease
in accounts receivable and the depreciation of property, plant and equipment.
For the nine months ended June 30, 1998, the Company had a negative cash
flow from operations resulting from substantially reduced demand for the
Company's drilling services as a consequence of depressed precious metals
prices.
The Company owns 14 reverse circulation drill rigs. Of the 14 drill
rigs owned by the Company, at June 30, 1998, three were operating under
contracts with various mining companies, all in the United States. At August
12, 1998, four drill rigs were operating under contracts with mining
companies, three of which were in the United States and one in a foreign
country. Three of the 14 total drill rigs with support equipment were
purchased and an additional two rigs were constructed in-house and placed into
service during the year ended September 30, 1997. There were no new drill
rigs purchased or constructed by the Company during the nine months ended June
30, 1998.
While the Company endeavors to achieve a positive cash flow from
operations by aggressively seeking new drilling contracts and opportunities,
there can be no assurance that the Company will be successful in achieving
that objective. The Company has sustained ongoing losses during the nine
months ended June 30, 1998 as well as the fiscal years ended September 30,
1996 and September 30, 1997. While the Company anticipates that its marketing
efforts will result in increased revenues, there can be no assurance that
losses of the magnitude suffered in the present and prior periods will not
continue. The Company must secure additional financing to fund losses from
operations. However, should precious metal prices continue to be depressed,
the Company's mining customers may not require the Company's drilling services
at current or expected higher levels and may further reduce such requirements.
Thus, there can be no assurance that drilling revenues will increase.
Additional funding may come from debt or the sale of the Company's equity
securities, but there can be no assurance that the Company will obtain the
funds needed to supplement shortfalls in its cash flow as and when needed or
on terms that will be satisfactory to the Company.
During the nine months ended June 30, 1998, the Company received net cash
proceeds of $514,000 from the issuance of 1,285,000 shares of restricted
Common Stock as the result of the exercise of warrants and options. The
Company also issued 423,833 shares of restricted Common Stock for services and
issued 5,392 restricted shares in payment of debt.
In January 1998, the Company announced that it had entered into an
agreement to purchase all of the capital stock of Britton Bros. Diamond
Drilling, Ltd., its subsidiaries and affiliates, headquartered in British
Columbia, Canada. The transaction was valued at $16.5 million and was to be
paid for by the Company with a combination of cash and newly issued shares of
Common Stock. The transaction was contingent upon the Company's obtaining
adequate financing to fund the cash obligations under the purchase agreement.
The Company intended to obtain the cash portion of the purchase price through
a loan from a New York-based bank and through a private placement of its debt
and/or equity securities. It was anticipated that the transaction would close
no later than July 22, 1998. However, due to a decline in accounts receivable
for both the Company and Britton Bros. as a result of reduced demand for
drilling services, the total loan proceeds available to the Company under the
terms of the anticipated loan from the New York - based bank were materially
reduced. Further, because of presently depressed prices for precious metals
the Company was not able to identify investors or lenders willing to provide
the financing for the balance of the cash portion of the purchase price due
Britton Bros. at prices and on terms satisfactory to the Company. Given these
circumstances the Company was not able to close the acquisition of Britton
Bros. Because the Company did not close the acquisition by July 22, 1998, the
Company paid Britton Bros. $50,000 in cash and a director and executive
officer paid 200,000 shares of Common Stock of the Company as a breakup fee.
The Company continues, however, to attempt to locate the financing necessary
to acquire Britton Bros. There is no assurance, however, that the Company
will obtain the necessary funding or that the transaction will close at the
price or the terms previously agreed to by Britton Bros.
10
<PAGE>
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 materially
from projected or anticipated results. Some of the risks and uncertainties
are set forth below. In addition, the risk factors discussed in Part I, Item
1 ("Business") and in the "Management's Discussion and Analysis of Operations"
(Item 6) of the Company's annual report on Form 10-KSB for the fiscal year
ended September 30, 1997 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 base and
industrial metals, as well as prices for such metals, the results of financing
efforts and financial market conditions and other factors discussed in the
Form 10-KSB mentioned above and the additional factors discussed below. Such
factors are beyond the control of the Company and there can be no assurance
that the Company's results and financial condition will not be adversely
affected by such factors.
Dependence on Base Metals Mining Industry
The Company's operations are largely dependent upon the levels of
activity in exploration and development drilling for the precious, base and
industrial metals industries. Such activity levels are affected by trends in
the base metals industry and base metals prices. Historically, prices for
base metals have been volatile and are subject to wide fluctuations in
response to changes in the supply of and demand for base metals, market
uncertainty, the performance of certain major mining companies and a variety
of political, economic and other factors beyond the control of the Company.
The Company cannot predict future price movements with any certainty.
Prolonged reduction in base metals prices, however, will continue to depress
the level of exploration, development and production activity and result in
a continuing reduced demand for the Company's services and, therefore, have
a material adverse effect on the Company's revenues and profitability.
Foreign Operations Risks
In 1997 the Company expanded much of its operations to meet increased
demand for its services both in the United States and abroad. There are
numerous risks associated with conducting business in foreign countries. The
distance from corporate headquarters and the often remote locations of
drilling and mining sites in these foreign countries exacerbate the
difficulties referred to above. In addition, problems associated with
possible political risks, instability of local governments, safety of
personnel and equipment, the lack of spare parts or adequate service
assistance, the need for skilled labor and supervision, lack of infrastructure
and accessability to sources of power and other supplies necessary for
operations, high inflation and currency fluctuations which may erode
profitability levels, and the difficulty of obtaining and enforcing judgments
in foreign courts and under foreign legal systems that differ substantially
from the United States all add to the risk of foreign operations. There can
be no assurance that the Company will adequately and timely respond to any one
or all of these risks.
11
<PAGE>
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 base 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 many inactive rigs that are
available because of depressed drilling demand, additional rigs that could be
activated and upgraded if demand significantly increases, 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 further
decrease in drilling activity in any major market could further depress rates
and could adversely affect utilization of the Company's rigs. Many of the
Company's principal competitors are substantially larger, have substantially
greater resources and have spent considerably larger sums of capital than the
Company for equipment, including drill rigs, development and operations.
These factors may enable those competitors to better withstand industry
downturns, compete on the basis of price, build new rigs or acquire existing
rigs that become available for purchase.
Risk of Potential Conflicts of Interest
Three of the nine members of the Company's board of directors are also
indirect owners of and control a significant shareholder of the Company and
a corporation providing management and strategic planning services to the
Company. In addition, these three persons and two other members of the board
of directors sit together on the board of directors of another public company
in an unrelated industry. The CFO of the Company is also the CFO of the other
public company. Such associations and relationships may give rise to
conflicts of interest from time to time. If any such conflict does arise, the
policy of the Company, consistent with Section 78.140 of the Nevada Revised
Statutes, requires that the director who has a conflict will disclose the same
to a meeting of the directors of the Company and will abstain from voting for
or against approval of any matter in which such director may have a conflict.
Notwithstanding the adoption of such a policy, there can be no assurance that
all possible conflicts of interest will be identified and appropriately
resolved.
As a result of the foregoing and other factors, there can be no
assurance that the Company will not experience material fluctuations in future
operating results on a quarterly or annual basis which would materially and
adversely affect the Company's business, financial condition and results of
operation.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
In April, May and June 1998, separate individuals not affiliated with
the Company exercised warrants to purchase 362,500 shares of the Company's
restricted Common Stock. The warrants had an exercise price of $.40 per
share. As a result of the exercise, the Company received proceeds of
$145,000. These persons acquired the warrants from SMD, L.L.C., a Utah
limited liability company, which is the beneficial owner of more than 10% of
the Company's issued and outstanding shares of common stock. SMD, L.L.C.
received no consideration whatsoever from the transaction and conveyed the
warrants to these individuals to assist the Company in obtaining the proceeds
from the exercise of the warrants to fund operating losses.
On June 11, 1998, the Company entered into an agreement with an unrelated
third party whereby that party agreed to provide independent investment
management services to the Company. Pursuant to this agreement, the Company
issued 400,000 shares of its common stock to the third party as compensation
for the services to be rendered, When issued, the shares were registered on
a Registration Statement on form S-8.
12
<PAGE>
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27--Financial Data Schedule
13
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
K.L.S. ENVIRO RESOURCES, INC.
Date: August 13, 1998 By: /s/ Raymond H. Kurzon
---------------------------
Raymond H. Kurzon, President/CEO
Date: August 13, 1998 By: /s/ Douglas L. Rex
---------------------------
Douglas L. Rex, Chief Financial
Officer
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