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 DECEMBER 31, 1996
[ ] 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
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State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3220 North Freeway, Fort Worth, Texas 76111
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(Address of principal executive offices) (Zip Code)
(817) 624-4844
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(Issuer's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) has 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 [ ]
Applicable only to corporate issuers:
As of February 13, 1997, the Registrant had outstanding 16,824,244 shares of
its common stock, par value $.0001.
Transitional Small Business Disclosure Format (Check One): Yes [ ] No [X]
1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
K.L.S. ENVIRO RESOURCES, INC.
INDEX TO FINANCIAL INFORMATION
December 31, 1996
Page No.
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Consolidated Balance Sheet as of December 31, 1996
(unaudited) and September 30, 1996 (audited) 3
Consolidated Statements of Operations (unaudited)
for the Three Months Ended December 31, 1996 and 1995 4
Consolidated Statements of Cash Flows (unaudited) for
the Three Months Ended December 31, 1996 and 1995 5
Notes To Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
2
K.L.S. Enviro Resources, Inc. and Subsidiarie
Consolidated Balance Sheets
December 31, 1996 (unaudited) and September 30, 1996 (audited)
December 31, September 30,
1996 1996
-------------- --------------
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
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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)
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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
============== ==============
The notes to Consolidated Financial Statements are an integral part of these statements
3
K.L.S. Enviro Resources, Inc. and Subsidiaries
Consolidated Statements of Operations
for the Three Months ended December 31, 1996 and 1995
(Unaudited)
1996 1995
-------------- --------------
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
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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
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Net income (loss) $ 50,451 $ (68,978)
============== ==============
Loss per weighted-average common share outstanding
Income (loss) from continuing operations $ 0.005 $ (0.008)
Loss from operations of discontinued segment - -
-------------- --------------
Net income (loss) $ 0.005 $ (0.008)
============== ==============
Weighted-average number of common shares outstanding 10,933,040 8,958,494
============== ==============
The Notes to Consolidated Financial Statements are an integral part of these statements.
4
K.L.S. Enviro Resources, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
for the Three Months ended December 31, 1996 and 1995
(Unaudited)
1996 1995
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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)
Inventory (194,073) 49,486
Prepaid expenses (282,169) (6,635)
Others assets 65 (1,728)
Accounts payable 363,927 11,733
Accrued expenses (43,864) 2,475
Deferred revenue 22,623 22,163
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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)
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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
============== ==============
The Notes to Consolidated Financial Statements are an integral part of these Statements
5
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.
6
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.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results Of Operations.
Results Of Operations
Three Months Ended December 31, 1996 Compared With Three Months Ended December
31, 1995
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 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
7
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 are expected to be added in the second
quarter 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.
Financial Condition
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. Four additional rigs with
support equipment are being acquired by purchase and in-house construction and
are expected to be available for operation by March 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
8
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.
Forward-looking Statements and Certain Risk Factors
Statements which are not historical facts contained in this report are
forward-looking statements. The Private Securities Litigation Reform Act of
1995 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 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.
9
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.
10
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.
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.
11
PART II - OTHER INFORMATION
Item 2. Changes In Securities
(c) Recent Sales of Unregistered Securities.
In November and December 1996, the Company undertook a private placement
of its 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 sold pursuant to exemptions from the
registration requirements of the Securities Act afforded to such offers and
sales under Sections 3(b) and 4(2) of the Securities Act 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 were $3,992,400. The Company paid a commission fee in stock and
cash totaling 10 percent of $3,142,000 of the proceeds to an unrelated
consulting firm, in connection with its efforts in assisting the Company in
placing some of the securities in the private offering. The Company also
agreed to pay Studdert Companies Corp., a Utah corporation ("SCC") owned and
controlled by Messrs. Studdert, Murdock and Dudley, each of whom is a director
of the Company, a fee of $250,000 for its services in structuring the offering.
The shares sold in the offering are "restricted" shares as defined by
the Securities Act, meaning that they cannot be resold by the original
purchasers unless they are first the subject of a registration statement filed
by the Company or an exemption from registration is available for the
transaction in which they are sold. The Company has agreed to register the
shares issued in the private placement under certain circumstances at its own
expense. At the time of the offering, the average bid price for the Company's
common stock in the public market was $1.00 per share. The proceeds of this
offering were used to acquire additional drill rigs and parts and inventory
relating to new and existing drill rigs, for operating capital and to pay a
portion of the loan balance due SMD as described above.
Item 5. Other Information.
In December 1996, after the end of the period that is the subject of
this report, the Company entered into a management services agreement with SCC.
Under this agreement, which was made effective as of October 1, 1996, SCC
will receive a monthly management fee of $50,000 and will provide investment
banking, investor relations, financial management and strategic planning
services for the Company for a term of five years. Fees payable to SCC for
the quarter ended December 31, 1996 totaled $150,000. The management services
agreement also provides for reimbursement of expenses incurred by SCC since
June 1996 in connection with services rendered to the Company and for similar
treatment of expenses incurred during the term of the agreement. The
management services agreement further provides that amounts payable by the
Company to SCC may be paid in cash, in stock of the Company or by a combination
of stock and cash, subject to the agreement of SCC and the Executive Committee
of the Company's Board of Directors. In the event such amounts are paid in
common stock, the conversion rate of such fees payable into shares of common
stock shall be the average closing bid price as quoted by the OTC Electronic
Bulletin Board for the month in which the fee is earned. To the extent the
Company issues to SCC restricted stock under the management agreement, such
shares will be subject to piggyback registration rights in favor of SCC.
12
Item 6. Exhibits And Reports On Form 8-K.
(a) Exhibits.
The following materials are filed as exhibits to this report:
Exhibit No. Description
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10 Management Services Agreement by and between the
Company and Studdert Companies Corp., a Utah
corporation, effective as of October 1, 1996,
with exhibit
(b) Reports on Form 8-K.
During the quarter for which this report is filed, the Company
filed no report on Form 8-K.
13
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: February 14, 1997 By: /s/ Raymond H. Kurzon
---------------------------------
Raymond H. Kurzon, President/CEO
Date: February 14, 1997 By: /s/ Roger D. Dudley
---------------------------------
Roger D. Dudley, Acting Chief
Financial Officer
14