THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER
THE SECURITIES LAWS OF ANY STATE, AND WILL BE OFFERED AND SOLD IN RELIANCE ON
EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF FEDERAL AND STATE LAW BY
VIRTUE OF THE COMPANY'S INTENDED COMPLIANCE WITH SECTION 4(2) OF THE ACT, THE
PROVISIONS OF REGULATION D PROMULGATED THEREUNDER AND PARALLEL EXEMPTIONS
UNDER STATE LAW. THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY ANY
REGULATORY AUTHORITY. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
3,750,000 to 5,000,000 Shares Common Stock
(Par Value $.0001 Per Share)
Securities Purchase Agreement
KLS Enviro Resources, Inc.
0000 Xxxxx Xxxxxxx, Xxxxx 000
Xxxx Xxxxx, XX 00000
Attn: Xxxxxxx X. Xxxxxx
President and Chief Executive Officer
Gentlemen:
In connection with the offer and proposed issuance of $3,000,000 up to
$4,000,000 in Common Stock (the "Offering") by KLS Enviro Resources, Inc., a
Nevada corporation ("KLS" or the "Company"), in reliance on exemptions from
the registration requirements of the U.S. Securities Act of 1933, as amended
(the "Act"), and similar provisions of state law, the undersigned purchasers
(collectively, the "Purchasers") and the Company hereby agree as follows:
1. Purchase of Securities. Subject to the terms and conditions of
this Agreement, each of the Purchasers hereby agrees to acquire, and the
Company agrees to sell that number of shares (the "Initial Share Number") of
the Company's Common Stock, par value $.0001 per share (the "Shares"), set
forth opposite such Purchaser's name on Schedule I to this Agreement, subject
to adjustment in the number of shares as provided in Section 2, below. The
consideration for the issuance of the Initial Share Number shall be $0.80 per
share (the "Initial Share Price"). The total purchase price for the minimum
of 3,750,000 Shares being purchased hereunder shall be Three Million Dollars
($3,000,000). The total purchase price for the maximum of 5,000,000 Shares
which may be purchased hereunder shall be Four Million Dollars ($4,000,000).
The total purchase price actually paid by the Purchasers at Closing (the
"Investment Amount") shall be set forth in Schedule I to this Agreement. Each
Purchaser shall pay his or its portion of the Investment Amount as set forth
in Schedule I to this Agreement in full at Closing, as hereinafter defined,
via wire transfer to the account of counsel for the Company on or before the
Closing Date, as that term is defined in Section 4 of this Agreement. Wire
instructions for the account of counsel to the Company are as follows:
Bank: Key Bank of Utah
Account Name: Durham, Evans, Xxxxx & Xxxxxxx, P.C. Trust Account
ABA No.: _____________
Account No.: ______________
2. Adjustment and Issuance of Additional Shares. The Initial Share
Number shall be subject to adjustment as provided in this Section 2. If the
Average Share Price, as that term is defined below, calculated for the
five-day-trading period immediately following the effective date of the
Registration Statement described in Section 4, below, shall be less than the
Initial Share Price, then, within three (3) business days after the expiration
of such five-trading-day period, the Company shall either deliver to
Purchasers one or more certificates evidencing such number of Shares as shall
be equal to the amount by which the result obtained by dividing (i) the
Investment Amount by (ii) the Average Share Price for the five-trading-day
period, shall exceed the Initial Share Number (the "Additional Shares") or, at
Purchasers' option, deposit the Additional Shares into such account or
accounts previously designated by Purchasers for this purpose; provided,
however, that no adjustment will be made which would be calculated based on an
Average Share Price of less than $.60 per share. For purposes of this
Agreement, the term "Average Share Price" shall mean the average of the per
share daily closing prices of the Shares during the applicable five-day
trading period provided herein.
3. Delivery of Share Certificates. At the Closing, the Company shall
deliver to Purchasers certificates representing the Initial Share Number,
which shall be fully paid and nonassessable upon issuance. The Shares shall
be issued in increments and in the names of the Purchasers as set forth in
Schedule I hereto, subject to adjustment as provided in Section 2, above.
4. Registration Rights and Exchange Filings. The Shares (including
the Additional Shares) shall be subject to certain registration rights, as
provided in that certain Registration Rights Agreement attached hereto as
Exhibit "B" and by reference made a part hereof. (Such Registration Rights
Agreement, together with this Securities Purchase Agreement, constitute the
"Transaction Documents"). The registration statement covering such Shares
shall be referred to herein as the "Registration Statement".
5. Closing. Payment of the Investment Amount as described in Section
1, above, and delivery of the Shares as described in Section 3, above, shall
be deemed to be the completion of the transactions contemplated by this
Agreement ("Closing"). Closing shall occur on or before 3:00 p.m. M.S.T. on
__________, 19__, or such later date as the parties may hereafter agree in
writing (the "Closing Date").
6. Failure of Any Purchaser to Close. The Company shall not be
obligated to issue and sell any of the Shares unless the minimum of 3,750,000
of the Shares to be purchased and sold hereunder are purchased by the
Purchasers. In the event any Purchaser fails to purchase at the Closing any
of the Shares scheduled to be purchased by him or it, the other Purchasers
shall have the right to purchase at the Closing (or on such other date as the
Company and such Purchaser(s) shall agree) the Shares that are not so
purchased, and the Company shall issue and sell such Shares to such other
Purchaser(s).
7. Use and Disposition of Proceeds. The gross proceeds of this
transaction will be between Three Million Dollars ($3,000,000) (the "Minimum
Proceeds) and Four Million Dollars ($4,000,000) (the "Maximum Proceeds"). If
it receives no more than the Minimum Proceeds, the Company intends to use said
proceeds as follows:
Approximate
Application of Proceeds Dollar Amount Percentage
------------------------------------------- ------------- -------------
Partial payment of demand promissory notes
owing to SMD, LLC ("SMD") $1,500,000 50.00%
Partial payment of demand promissory notes
owing to fonix corporation 200,000 6.67%
Reserve for purchase of one (1) additional
drilling rig and associated equipment
and inventory 537,000 17.90%
Operating Capital and offering expenses 763,000 25.43%
Total $3,000,000 100.00%
If it receives the Maximum Proceeds, the Company intends to use said proceeds
as follows:
Approximate
Application of Proceeds Dollar Amount Percentage
--------------------------------------- ----------------- ----------
Full payment of demand promissory notes
owing to SMD $2,180,000 54.50%
Partial payment of demand promissory notes
owing to fonix corporation 200,000 5.00%
Reserve for purchase of two (2)
additional drilling rigs and associated
equipment and inventory 1,074,000 26.85%
Operating capital and offering expenses1 546,000 13.65%
Total $ 4,000,000 100.00%
------------------------
The foregoing represents the Company's present intention and best estimates
with respect to the use of the Minimum Proceeds and Maximum Proceeds.
Proceeds in excess of the Minimum Proceeds, but less than the Maximum
Proceeds, shall be allocated, first, toward full payment of the demand
promissory notes owing to SMD and, second, toward purchase of one (1)
additional drilling rig and associated equipment and inventory. Pending use
of the net proceeds for the above purposes, the Company intends to invest the
funds in certificates of deposit or other fully-insured investment grade
securities. Purchasers acknowledge and agree that the Company shall have
immediate access to such funds, according to the Company's management's
discretion, following the Closing and delivery of the Shares to Purchasers.
8. Special Covenants.
8.1 Nominees of Purchasers to Serve on Board of Directors.
Concurrent with the Closing of the transactions contemplated by this
Agreement, resolutions of the Board of Directors of the Company shall be
adopted which (i) increase the number of directors of the Company to nine (9)
and (ii) appoint Xxxxx X. Xxxxxx, Xxxxxxx X. Xxxxxxxx, Xxxxxx Xxxxxx Xxxx and
Xxxx X. Xxxxxxxx as directors of the Company.
8.2 Financial Reports. So long as the Purchasers are collectively
the beneficial owners of 5% or more of the issued and outstanding shares of
Common Stock of the Company, KLS shall provide the Purchasers with copies of
its annual report to shareholders, annual report on Form 10-KSB (or such other
form as KLS may be qualified to use for such purpose), quarterly reports on
Form 10-QSB (or such other form as may properly be available to KLS for such
reports), any report on Form 8-K, and internally prepared (unaudited) financial
statements, to the extent prepared by KLS. In the case of the reports
described above which are filed with the Securities and Exchange Commission,
copies of the same will be provided to the Purchasers within five
(5) working days of filing with the Commission. In the case of the other
documents, to the extent the same are prepared by KLS, they shall be provided
on or before the 20th day following the month then ended.
8.3 Amendment of Indemnification Rights of Directors. The Company
covenants and agrees that the By-laws of the Company shall be amended to
provide that, to the extent and in the manner provided by applicable law, any
expenses (including attorneys' fees) incurred by a director in connection with
any threatened, pending or completed action, suit or proceeding to which such
director is a party (or is threatened to be made a party) by reason of the
fact that such person is or was a director of the Company, shall be paid by
the Company in advance of the final disposition of such action, suit or
proceeding even if such director is alleged to have not met the applicable
standard of conduct required under the Company's By-laws or is alleged to have
committed conduct so that, if true, such director would not be entitled to
indemnification under the Company's By-laws, upon receipt of an undertaking,
which need not be secured, by or on behalf of the director to repay such
amount if it shall ultimately be determined that he is not entitled to be
indemnified by the Company as authorized in the Company's By-laws. This
covenant will constitute a contractual obligation on the part of KLS to
provide such indemnification and defense regardless of the modification of the
By-laws.
9. Representations and Warranties of Purchasers. To induce the
Company's acceptance of this Agreement, each Purchaser hereby represents and
warrants, severally as to itself or himself and not jointly, to the Company
and its agents and attorneys as follows (it being acknowledged that for
purposes of this Section 9 the term "Common Shares" shall mean the Shares
being purchased by such Purchaser hereunder):
9.1 Accredited Status. Purchaser is an "accredited investor" within
the meaning of Section 501(a) of Regulation D under the Act, because the
undersigned is [THE UNDERSIGNED MUST INITIAL ALL OF THE FOLLOWING PARAGRAPHS
WHICH ACCURATELY DESCRIBE THE UNDERSIGNED'S STATUS]:
Purchaser is an accredited person because Purchaser is:
(1) A director or executive officer of the Company.
(Initial)
(2) A natural person whose net worth (i.e. the excess of his/her
total assets over his/her total liabilities, including the value of his/her
personal residence), individually or jointly with his/her spouse, as of the
date hereof, exceeds $1,000,000.
(Initial)
(3) A natural person who had an individual income in excess of
$200,000 in each of the past two years, or whose joint income with that
person's spouse during each of the past two was in excess of $300,000, and who
reasonably expects to reach the same income level in the present year.
(Initial)
(4) A corporation or partnership, not formed for the specific
purpose of acquiring the securities offered, with total assets in excess of
$5,000,000.
(Initial)
(5) A broker or dealer registered pursuant to Section 15 of the
Securities Exchange Act of 1934.
(Initial)
(6) An entity in which all of the equity owners are "accredited
investors" pursuant to one of the categories set forth above.
(Initial)
(7) None of the above.
(Initial)
9.2 Liquidity. Purchaser presently has sufficient liquid assets to
pay that portion of the Investment Amount to be paid by such Purchaser
hereunder. Purchaser's overall commitments to investments that are not
readily marketable is not disproportionate to Purchaser's total assets, and
Purchaser's investment in the Company will not cause such overall commitment
to become excessive. Purchaser has adequate means of providing for its
current needs and contingencies and has no need for liquidity in its
investment in the Company or for a source of income from the Company.
Purchaser is capable of bearing the economic risk and the burden of the
investment contemplated by this Agreement, including, but not limited to, the
possibility of the complete loss of the value of the Common Shares and the
limited transferability of the Common Shares, which may make the liquidation
of the Common Shares impossible in the near future.
9.3 Organization, Standing, Authorization. If not an individual,
Purchaser is duly organized, validly existing, and in good standing under the
laws of the country of organization described in Schedule I hereto and has the
requisite power and authority to enter into this Agreement, acquire the Common
Shares and execute and deliver any documents or instruments in connection with
this Agreement. The execution and delivery of this Agreement, and all other
documents and instruments executed by Purchaser in connection with any of the
transactions contemplated by this Agreement have been duly authorized by all
required action of Purchaser's members or managers. The person executing, on
Purchaser's behalf, this Agreement and any other documents or instruments
executed by Purchaser in connection with this Agreement is duly authorized to
do so.
9.4 Absence of Conflicts. Purchaser represents and warrants that the
execution and delivery of this Agreement and any other document or instrument
executed in connection with this Agreement, and the consummation of the
transactions contemplated thereby, and compliance with the requirements
thereof, will not violate any law, rule, regulation, order, writ, judgment,
injunction, decree or award binding on Purchaser, or the provision of any
indenture, instrument or agreement to which Purchaser is a party or is
subject, or by which Purchaser or any of their properties is bound, or
conflict with or constitute a material default thereunder, or result in the
creation or imposition of any lien pursuant to the terms of any such
indenture, instrument or agreement, or constitute a breach of any fiduciary
duty owed by such Purchaser to any third party, or require the approval of any
third-party pursuant to any material contract, agreement, instrument,
relationship or legal obligation to which Purchaser are subject or to which
any of their properties, operations or management may be subject.
9.5 Sole Party in Interest. Purchaser represents that it is the sole
and true party in interest, and no other person or entity has or will have
upon the issuance of the Common Shares any beneficial ownership interest in
the Common Shares or any portion of the Common Shares, whether direct or
indirect, other than the equity holders or beneficiaries of such Purchaser.
9.6 Investment Purpose. Purchaser represents that it is acquiring
the Common Shares for its own account and for investment purposes and not on
behalf of any other person or entity or for or with a view to resale or
distribution.
9.7 Knowledge and Experience. Purchaser is experienced in evaluating
and making speculative investments, and has the capacity to protect
Purchaser's interests in connection with the acquisition of the Common
Shares. Purchaser has such knowledge and experience in financial and business
matters in general, and investments in the drilling and mining industry in
particular, that Purchaser is capable, on Purchaser's behalf, of evaluating
the merits and risks of Purchaser's investment in the Company. Purchaser has
been informed that an investment in the Company is speculative and has
concluded that Purchaser's proposed investment is appropriate in light of its
overall investment objectives and financial situation.
9.8 Investment Advisors. No party has received or will receive any
compensation or other remuneration for advising Purchaser with respect to this
investment, and Purchaser represents that no investment advisor or purchaser
representative has been consulted or retained in connection with Purchaser's
decision to invest in the Company. As of the date of execution of this
Agreement, Purchaser has no relationship whatsoever with the Company, and has
had no relationship with the Company at any time in the past.
9.9 Disclosure, Access to Information. Purchaser confirms that it
has received and thoroughly read and is familiar with and understands this
Agreement, and that all documents, records, books and other information
pertaining to Purchaser's investment in the Company requested by Purchaser
have been made available for inspection and copying and that there are no
additional materials or documents that have been requested by Purchaser that
have not been made available by the Company. Purchaser further acknowledges
that any decision not to ask questions of the Company's representatives was a
conscious decision on Purchaser's part and reflects Purchaser's belief that no
additional information is necessary in order to make an informed decision
about investing in the Company. Purchaser further acknowledges that it
understands that the Company is subject to the periodic reporting requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
Purchaser has reviewed or received copies of any such reports that have been
requested by it. Without limiting the generality of the foregoing, Purchaser
acknowledges that it has received and has reviewed copies of the following
documents and materials, all of which are incorporated herein by reference:
(1) Articles of Incorporation of the Company, as amended;
(2) By-laws of the Company;
(3) Annual Report on Form 10-KSB for the fiscal year ended September 30,
1995;
(4) Quarterly Reports on Form 10-QSB for the quarters ended December 31,
1995, March 31, 1996 and June 30, 1996; and
(5) Reports of Form 8-K filed July 2, 1996 and September 4, 1996.
The statements contained in the above-described Reports on Forms 10-QSB,
10-KSB and 8-K that are not purely historical are forward looking statements
within the meaning of Section 27A of the Act and Section 21E of the Exchange
Act, including statements regarding the Company's expectations, hopes,
intentions or strategies regarding the future. Forward looking statements
include: statements regarding future drilling and/or mining development;
statements regarding future drilling and/or mining spending and the Company's
drilling and/or mining development strategy; and statements regarding the
levels of international sales. All forward looking statements included in
this document and the above-described Reports on Forms 10-QSB, 10-KSB and 8-K
are based on information available to the Company on the date hereof, and the
Company assumes no obligation to update any such forward looking statements.
It is important to note that the Company's actual results could differ
materially from those in such forward looking statements. Some of the factors
that could cause actual results to differ materially are set forth in Section
10 below.
9.10 Exclusive Reliance on this Agreement. In making the decision to
purchase the Common Shares, Purchaser has relied exclusively upon information
included in this Agreement or incorporated herein by reference pursuant to
Section 9.9, and not on any other representations, promises or information,
whether written or verbal, by any person.
9.11 Accuracy of Unincorporated Documents and Other Unincorporated
Materials. To the extent Purchaser has received documents or other materials,
other than as expressly incorporated herein by reference pursuant to Section
9.9, Purchaser acknowledges the following with respect to such documents and
materials:
(1) Such documents and materials and any projections contained
therein may be incomplete, may contain errors or misstatements, and do not
purport to adequately describe the transactions contemplated by this Agreement
or the status of the development of the Company's business and business
opportunities. Purchaser agrees that such documents and materials cannot be
relied upon in making a decision as to whether to purchase the Common Shares
and acknowledges that there can be no assurance that any of the projections
contained therein will be accomplished by the Company; and
(2) Purchaser has been advised and fully understands that any
summaries, projections, forecasts or estimates included in such documents and
materials, including those relating to product development schedules and
projections, possible revenues, income, profitability of the Company or an
investment therein inherently involve uncertainties and may be affected by
circumstances in the future which cannot be reasonably predicted and are
beyond the control of the Company. Further, the projections, forecasts and
estimates are speculative and may be optimistic, and there can be no assurance
that any of the projections, forecasts or estimates will be reached, or that
the Company will successfully produce a commercially viable product or that
the Company will realize any income or profits or that any dividends or
distributions of profits will be paid on the Company's securities. The use of
the words "believes," "estimates," "anticipates" and similar expressions are
intended to identify forward-looking statements, all of which are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those projected. Purchaser should not place undue reliance on
such forward-looking statements, which speak only as of the date(s) made. The
Company undertakes no obligation to publicly release the result of any
revisions to these forward-looking statements that may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
9.12 Residency. Each Purchaser has its principal place of business
as set forth in Schedule I hereto.
9.13 Advice of Counsel. Purchaser understands the terms and
conditions of this Agreement, has investigated all issues to Purchaser's
satisfaction, has consulted with such of Purchaser's own legal counsel or
other advisors as Purchaser deems necessary, and is not relying, and has not
relied on the Company for an explanation of the terms or conditions of this
Agreement or any document or instrument related to the transactions
contemplated thereby. Purchaser further acknowledges, understands and agrees
that, in arranging for the preparation of this Agreement and all other
documents and materials related thereto, the Company has not attempted to
procure, and has not procured, legal representation for Purchaser.
9.14 Accuracy of Representations and Information. All representations
made by Purchaser in this Agreement and all documents and instruments related
to this Agreement, and all information provided by Purchaser to the Company
concerning Purchaser and its financial position is correct and complete in all
material respects as of the date hereof. If there is any material change in
such information before the actual issuance of the Common Shares, Purchaser
immediately will provide such information to the Company.
9.15 No Representations. None of the following have ever been
represented, guaranteed, or warranted to Purchaser by the Company or any of
its employees, agents, representatives or affiliates, or any broker or any other
person, expressly or by implication:
(1) The approximate or exact length of time that Purchaser will be
required to remain as owner of the Common Shares;
(2) The percentage of profit or amount of or type of consideration,
profit or loss (including tax write-offs or other tax benefits) to be
realized, if any, as a result of an investment in the Common Shares; or
(3) The past performance or experience on the part of the Company or
any affiliate or their associates, agents or employees, or of any other person
as being indicative of future results of an investment in the Common Shares.
9.16 Federal Tax Matters. Purchaser has reviewed and understands the
federal income tax aspects of its purchase of the Common Shares, and has
received such advice in this regard as Purchaser deems necessary from
qualified sources such as attorneys, tax advisors or accountants, and is not
relying on any representative or employee of the Company for such advice.
10. Certain Risk Factors. Purchasers have been informed about and
fully understand that there are risks associated with an investment in the
Company. Such risks may include, but not necessarily be limited to, the
following:
10.1 Recent Net Losses. The Company had significant net operating
losses in fiscal years 1994 and 1995. It also had operating losses in prior
years. As a result, the Company had an accumulated deficit of approximately
($2,300,000) at September 30, 1994 and ($3,545,000) at September 30, 1995.
Although the Company has experienced revenue growth and net operating income
in the six-months ending June 30, 1995, there can be no assurance that such
growth will continue or that net losses will not be incurred in future
operating periods. Indeed, the Company anticipates that it will have a
significant loss for the fiscal year ending September 30, 1996.
10.2 Need for Additional Funding. The Company has operated in a
negative cash flow position for several years and has substantial accumulated
operating deficits. In order to increase revenues and improve cash flow, the
Company requires additional funding that will enable it to repay current and
long-term debt and purchase additional equipment. The Company may seek such
funding through a public or future private offering of its stock. Shares
issued in such an offering may substantially dilute the shareholdings of other
shareholders, including the Purchasers.
10.3 Continuation of Control. At the time of this offering, SMD, a
significant shareholder of the Company, owns 2,561,000 shares of Common Stock,
including 500,000 shares of Common Stock issuable to SMD upon conversion of
100,000 shares of preferred stock, or more than 23% of the issued and
outstanding common stock of the Company. SMD also has the right to acquire an
additional 6,600,000 shares of Common Stock or up to an additional 36.6% of
the Company. In addition, the principals SMD are now or following the Closing
will be directors of the Company. The continued ownership of a significant
number of shares, the rights to purchase additional shares of Common Stock and
the board positions occupied by the SMD principals will perpetuate and
increase SMD's ability to influence corporate policy and management.
10.4 Dependency on Trained Personnel. The Company relies on the
services of trained technicians and skilled workers in many aspects of its
operations. As its operations expand, the Company will be required to seek,
hire and retain persons with the requisite expertise and experience to meet
the Company's needs. The cost of training and retaining such personnel may
decrease operating margins and affect profitability until the expansion
operations begin operating at capacity. There can be no assurance that
qualified personnel are readily available at costs that make it feasible for
the Company to retain them. In addition, the Company may experience delays in
its expansion efforts as new or current personnel are trained to perform at a
level needed by the Company.
10.5 Equipment Costs. To date the Company has been able to meet its
requirements for additional equipment by acquiring used equipment which it has
thereafter refurbished. Such used equipment is generally acquired at prices
that are substantially less than the cost of new equipment. Generally, after
refurbishing the used equipment, the Company's total cost therefor is less
than the cost of new equipment. However, to meet its expansion needs and to
avoid delay if it is to take advantage of new contract opportunities, the
Company may be required to purchase new, rather than used or refurbished
drilling equipment. The cost of new equipment can be as much as 40% greater
than a comparable refurbished rig, thereby increasing the Company's investment
cost in new operations and reducing the amount of capital available for other
expansion projects.
10.6 Government Regulation and Environmental Matters. The Company's
operations and mining operations in general are subject to substantial
government regulation including federal, state and local laws concerning
safety, land use and environmental protection. The Company must comply with
local, state and federal requirements regarding exploration and drilling
operations, public safety, employee health and safety, air quality, water
pollution, noxious odor, noise and dust control, reclamation, solid waste,
hazardous waste and wildlife as well as laws protecting the rights of other
property owners and the public. Although the Company believes it is in
substantial compliance with such regulations, laws and requirements with
respect to its operations failure to comply could have a material adverse
effect on the Company including substantial penalties, fees and expenses and
could result in significant delays in the Company's operations or a potential
shutdown of some or all of its operations. The Company must also obtain and
comply with local, state and federal permits, including waste discharge
requirements, other environmental permits, use permits, plans of operation and
other authorizations. Obtaining these permits can be very costly and takes
significant amounts of time. Although the Company foresees no material
problems or delays, no assurances can be given that the Company can obtain the
necessary permits, commence new operations or continue existing operations or
that the Company can maintain economic production in compliance with the
necessary permits. There can be no assurance that future changes in existing
law or new legislation will not limit or adversely impact the Company's
business operations.
10.7 Competition. The Company operates in an industry that is
characterized by intense competition for resources, equipment and personnel.
Some 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 drilling rigs, development
and operations.
10.8 Risks Associated with Mining Operations, Insurance Coverage and
Uninsured Losses. The Company's activities are subject to all the risks and
hazards commonly associated with mining operations, including, but not limited
to, unforeseen geological formations, environmental concerns and personal
injury. The Company has insurance covering personal injury, worker's
compensation and damage to property and equipment, although in view of recent
trends in damage awards in personal injury lawsuits, such insurance may be
insufficient to satisfy large losses or judgments against the Company.
Furthermore, certain types of insurance coverage (generally against losses
caused by natural disasters and acts of God) are either unattainable or
prohibitively expensive. Substantial damage awards against the Company or
substantial damages not covered by insurance will affect the Company's ability
to continue as a going concern.
10.9 Exploration Activities. The Company presently plans to expand
its operations in more speculative and risky precious metal exploration, in
addition to its existing drilling services and equipment maintenance and
repair business. Exploration for gold, silver and other precious metals is a
highly speculative business, with no assurance that adequate deposits or
reserves can be located or that if located, meaningful volumes of ore can be
extracted, refined or sold at profitable rates. In addition, the Company's
present management has limited experience in acquiring or operating previous
metal mining properties.
10.10 Volatility of the Special Metals Market. The profitability of
the Company's operations can be significantly affected by changes in the
market price of gold and other precious metals. The market price of gold has
fluctuated widely and is affected by numerous factors beyond the Company's
control, including international economic trends, currency exchange
fluctuations, expectations for inflation, speculative activities, consumption
patterns (such as purchases of gold jewelry and the development of gold coin
programs), purchases and sales of gold bullion, holdings by central banks and
other large gold bullion holders or dealers and global or regional political
events, particularly in major gold producing countries such as South Africa
and some of the countries that formerly comprised the Soviet Union. Gold
market prices are also affected by worldwide production levels which have
increased in recent years. The aggregate effect of these factors, all of
which are beyond the Company's control, is impossible for the Company to
predict. In addition, the market price of gold has, on occasion, been subject
to rapid short-term changes because of market speculation. If the price for
precious metals such as gold is below the Company's customers' cash production
costs and remains below such level for any sustained period, the Company's
customers could experience losses and could determine that it is not
economically feasible to continue to engage the Company for performance of its
operations and services, or to continue to develop some or all of their
projects.
10.11 Foreign Operations. The Company's operations include precious
metals exploration in the country of Mexico where the Company is required to
comply with various environmental and other laws, rules and regulations. The
Company's business is or may become subject to many other risks of
international operations, including potential tariff restrictions, currency
fluctuations, currency control regulations, competing or conflicting
manufacturing standards, government regulation and approval policies and
licensing and permit requirements. In recent years the economic situation in
Mexico has been subject to volatile change. In addition, political and
economic changes in the future could adversely affect the Company's investment
and operations in Mexico.
10.12 Risk of Litigation. The Company organized its flashlight
business under the name "Kel-Lite" in April 1994 when it acquired certain
assets, including certain machinery, from an insolvent California-based
flashlight manufacturing business for a cash payment of $200,000. The
acquired assets included a line of flashlight products previously manufactured
and marketed by G.T. Price Products, Inc., which is now defunct, including
plastic and metal lines of flashlight products. In February 1996, the Company
sold the outstanding shares of Kel-Light to Nordic Industries Inc. As
consideration for the purchase of Kel-Lite, the buyer paid to the Company
$250,000 and agreed to pay the Company a royalty equal to two percent of the
gross sales received by Kel-Lite, which royalty shall begin to accrue in
February 1997 and will continue for ten years thereafter. If an aggregate of
$600,000 in royalties is not paid prior to the expiration of the 10-year
royalty period, then the buyer is to pay to the Company the difference between
the gross royalties paid and $600,000 at the expiration of the 10-year
period. The buyer agreed not to sell substantially all the shares of Kel-Lite
or substantially all the assets of Kel-Lite on or before January 31, 2002.
Upon the sale of substantially all the shares or substantially all the assets
of Kel-Lite after January 31, 2002 and on or before January 31, 2007, the
buyer agreed to pay to the Company an amount equal to the excess, if any, of
$600,000 over the sum of all royalties previously paid to the Company,
together with an amount equal to five percent of any consideration paid for
the shares or the assets being sold by the buyer. In connection with the sale
of Kel-Lite, the Company agreed to issue to the buyer warrants to purchase up
to 250,000 shares of the Company's restricted common stock at an exercise
price of $.40 per share, exercisable until February 1997, and to grant to the
buyer registration rights to register the transfer of the common stock
underlying those warrants. The buyer has recently informed the Company that
it believes that another Company may have a patent which is substantially
similar to one of the patents owned by Kel-Lite. The buyer claims that it did
not receive the value for the Company that it bargained for because of the
potentially infringing third-party patent. The Company has responded to the
buyer that the potentially infringing patent was applied for and issued after
the date of one of patents owned by Kel-Lite and that the Company will honor
its obligations to the buyer to defend against any infringement claims
concerning the Kel-Lite patent, including the potentially infringing
third-party patent. The buyer has also informed the Company that it believes
the inventory of Kel-Lite was overstated at the time it acquired Kel-Lite.
The buyer claims that a substantial portion of finished goods were obsolete,
of little or no value and that the Company had failed to properly reserve for
or write down inventory to reflect that obsolescence. The Company has advised
the buyer that it believes the inventory was property recorded on its
financial statements and that the buyer received compensation for potential
inventory obsolescence in the form of warrants to purchase up to 250,000
shares of the Company's restricted common stock at an exercise price of $.40
per share. The buyer and the Company are continuing discussions with respect
to the buyer's claims. The buyer has indicated to the Company that it may
file a lawsuit against the Company if its claims against the Company described
above are not resolved in a manner satisfactory to the buyer. While the
Company believes, based upon the facts presently known to it and described
above, that any lawsuit filed by the buyer would not result in any material
liability to the Company, there can be no assurance that such an action may
not result in an award of damages against the Company in an amount that may be
material.
10.13 Potential Depressive Effect of Sales of Shares by Present
Stockholders. As of the date of this Agreement, a substantial number of shares
of the Company's common stock currently issued and outstanding are "restricted
securities" as that term is defined by Rule 144 under the Securities Act of
1933, as amended. Sales of substantial amounts of common stock into the
public market following this offering could adversely affect the market price
for the Company's securities.
10.14 No Dividends. The Company has never declared or paid any cash
dividends on its shares and does not anticipate paying cash dividends in the
foreseeable future.
10.15 Risk of Dissolution by Future Issuance of Shares. The Company
may use its securities, including shares of its common stock or its preferred
stock, to finance acquisitions. The issuance by the Company of its equity
securities, including common stock or securities convertible into common
stock, in any such transaction will result in immediate and possibly
substantial dilution to the existing stockholders of the Company, including
the Purchasers.
11. Manner of Sale. At no time were the Purchasers presented with or
solicited by or through any leaflet, public promotional meeting, television
advertisement or any other form of general solicitation or advertising.
12. Restricted Shares. The Purchasers understand and acknowledge
that the Shares have not been registered under the Act, or any state
securities laws, and that they will be issued in reliance upon certain
exemptions from the registration requirements of those laws, and thus cannot
be resold unless they are registered under the Act or unless the Company has
first received an opinion of competent securities counsel that an exemption
from registration is available for such resale. With regard to the
restrictions on resales of the Shares, the Purchasers are aware (i) of the
limitations and applicability of Securities and Exchange Commission Rule 144;
(ii) that the Company will issue stop transfer orders to its stock transfer
agent in the event of attempts to improperly transfer any such securities; and
(iii) that a restrictive legend will be placed on certificates representing
the Shares, which legend will read substantially as follows:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ISSUED PURSUANT TO A
CLAIM OF EXEMPTION FROM THE REGISTRATION OR QUALIFICATION PROVISIONS OF THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND STATE SECURITIES LAWS AND
THEREFORE HAVE NOT BEEN REGISTERED UNDER THE ACT OR UNDER THE SECURITIES LAWS
OF ANY STATE. THESE SECURITIES MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED
OR HYPOTHECATED WITHOUT COMPLIANCE WITH THE REGISTRATION OR QUALIFICATION
PROVISIONS OF THE ACT OR APPLICABLE STATE LAWS, OR PURSUANT TO AN AVAILABLE
EXEMPTION FROM SUCH REGISTRATION REQUIREMENTS. FURTHERMORE, THE COMPANY WILL
INSTRUCT ITS STOCK TRANSFER AGENT NOT TO RECOGNIZE ANY SALE OF THESE
SECURITIES UNLESS THE COMPANY HAS FIRST RECEIVED AN OPINION OF COUNSEL,
SATISFACTORY TO THE COMPANY AND ITS SECURITIES COUNSEL, THAT AN EXEMPTION FROM
SUCH REGISTRATION REQUIREMENTS IS AVAILABLE.
13. Indemnification. The Company agrees to indemnify each of the
Purchasers and their respective officers, employees and agents, and hold them
harmless from and against any and all liability, damage, cost or expense,
including attorney's fees, incurred on account or arising out of any
inaccuracy in or breach of the declarations, covenants, agreements,
representations, and warranties by the Company set forth herein.
14. Representations and Warranties of the Company. The Company
hereby represents and warrants to Purchasers as follows:
14.1 Organization, Standing, Etc. The Company is duly organized,
validly existing, and in good standing under the laws of the State of Nevada,
and has the requisite power and authority to enter into and perform this
Agreement and to execute and perform under the documents, instruments and
agreements related to this Agreement.
14.2 Authorization. The execution and delivery of this Agreement and
the consummation of the transactions contemplated herein have been duly
authorized by all required action of the Company, including any necessary
approval by its Board of Directors or shareholders, and each of the
Transaction Documents and all instruments and agreements to be delivered in
connection therewith constitute its legal, valid and binding obligation,
enforceable against the Company in accordance with their respective terms,
subject to laws of general application relating to the rights of creditors
generally.
14.3 Absence of Conflicts. Neither the execution and delivery of the
Transaction Documents or any other agreement or instrument to be delivered to
the Purchasers in connection therewith, nor the consummation of the
transactions contemplated thereby, by the Company, shall (i) conflict with or
result in a breach of or constitute a violation or default under (A) any
provision of the Articles of Incorporation, as amended, or By-laws of the
Company, or (B) the provision of any indenture, instrument or agreement to
which the Company is a party or by which it or any of its properties is bound,
or (C) any order, writ, judgment, award, injunction, decree, law, statute,
rule or regulation, license or permit applicable to the Company; (ii) result
in the creation or imposition of any lien pursuant to the terms of any such
indenture, instrument or agreement, or constitute a breach of any fiduciary
duty owned by the Company to any third party, or (iii) require the approval of
any third party pursuant to any materials contract, agreement, instrument,
relationship or legal obligation to which the Company is subject or to which
it or any of its properties, operations or management may be subject.
14.4 Capitalization. The authorized capital stock of the Company
consists of 50,000,000 shares of Common Stock par value $.0001 per share and
1,000,000 shares of Preferred Stock par value $.0001 per share. As of
November 1, 1996, 10,933,744 shares of Common Stock were issued and
outstanding, 212,500 shares of Preferred Stock were issued and outstanding, no
shares were held in the Company's treasury, and 6,600,000 shares were reserved
for issuance in connection with options previously granted by the Company.
All of the outstanding shares of Common Stock are, and the Shares will be,
when paid for and issued, duly authorized, validly issued, fully paid and
non-assessable free of any preemptive rights.
14.5 Financial Statements. The Company's annual report on Form
10-KSB for the fiscal year ended September 30, 1995 (the "1995 10-K"), and its
quarterly reports on Form 10-QSB for the periods ended December 31, 1995,
March 31, 1996 and June 30, 1996 (the "1996 10-Qs"), and all Current Reports
on Form 8-K filed by the Company since December 31, 1995 (the "8-K's) copies
of which have been filed with or furnished to the Securities and Exchange
Commission, were when filed or furnished, accurate in all material respects
and did not include any untrue statement of material fact or omit to state
material facts necessary to make the statements therein not misleading. The
financial statements included in the 1995 10-K and the 1995 10-Qs present
fairly the financial position of the Company at such dates and the results of
its operations and cash flows for the periods then ended, in conformity with
generally accepted accounting principles applied on a consistent basis
throughout the periods covered by such statements.
14.6 Litigation, Etc. Except as disclosed in the 1995 10-K and the
1996 10-Qs and 8-Ks, there are no suits, actions or legal, administrative,
arbitration or other proceedings or governmental investigations or other
controversies pending, or to the knowledge of the Company threatened, or as to
which the Company has received any notice, claim or assertion, which involve a
potential cost or liability to the Company which would singly or in the
aggregate, materially or adversely affect the financial condition, results of
operations, business or prospects of the company. The Company is not in
default with respect to any order, writ, injunction or decree of any court or
before any federal, state, municipal or other governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign
affecting or relating to it which is material to the financial condition,
results of operations or business of the Company.
14.7 No Material Adverse Change. Since September 30, 1995, other
than as disclosed in 1996 10-Qs and 8-Ks, there has been no material adverse
change in the assets, business, prospects, operations or financial condition
of the Company.
14.8 Unincorporated Documents or Materials. With respect to any
document or other materials received by the Purchasers from the Company or its
representatives which are incorporated herein by reference pursuant to Section
8.9 hereof, (i) the Company has no reason to believe any of such documents and
materials or any projections contained therein contain errors or misstatements
or do not adequately describe the transactions contemplated by this Agreement
or the status of the development of the Company's technology, and (ii) such
documents, materials and projections were prepared by the Company and its
management in good faith.
14.9 Information. The information concerning the Company set forth
in this Agreement is complete and accurate in all material respects and does
not contain any untrue statement of a material fact or omit to state a
material fact required to make the statements made, in light of the
circumstances under which they were made, not misleading. The Company is not
aware of any facts or circumstances existing or any event which has had or
which reasonably could be expected to have in the future a material adverse
effect with respect to the financial condition, business, affairs or prospects
of the Company since the last day of its most recent fiscal year which is not
otherwise disclosed in the documents provided to Purchasers hereunder.
14.10 Nature of Company. The Company is not an open ended investment
company or a unit investment trust, registered or required to be registered,
or a closed end investment company required to be registered, but not
registered, under the Investment Company Act of 1940.
15. Confidentiality. The Purchasers acknowledge and agree that the
Company has provided them with certain information about the Company that is
proprietary and confidential in connection with the consummation of the
transactions contemplated by this Agreement (the "Confidential Information").
The Purchasers covenant to preserve the confidentiality of the Confidential
Information and to use the Confidential Information only for the purpose of
determining to proceed with the transactions contemplated by this Agreement,
except that information (i) in the public domain without violation of any
confidentiality agreement, if known by the party receiving it before receipt,
or (ii) received from a third party without violation of a non-disclosure
obligation of that third party of the party delivering or disclosing
information shall not be considered Confidential Information subject to this
Section 15.
16. Nondisclosure. Except as required by applicable securities laws,
rules and regulations, prior to the Closing Date, no press release or other
announcement concerning the proposed transactions will be issued except by
mutual consent of the parties. This Agreement and all negotiations and
discussions between the parties in connection with this Agreement shall be
strictly confidential and will not be disclosed in any manner prior to the
Closing Date, except to employees and agents of the parties on a need-to-know
basis, as required by applicable law or regulations or as otherwise agreed by
the parties. After Closing, disclosure shall be at the sole discretion of the
Company.
17. Conditions to Closing. Closing of the transactions contemplated
by this Agreement shall be contingent upon the satisfaction of the following
conditions precedent:
17.1 Approvals, Waivers, Etc. KLS shall have delivered to the
Purchasers evidence of all approvals of its board of directors, government or
third-parties which may be required for the sale of the Shares, in full force
and effect as of the Closing Date.
18. General Provisions.
18.1 Attorneys' Fees. In the event of a default in the performance
of this Agreement or any document or instrument executed in connection with
this Agreement, the defaulting party, in addition to all other obligations of
performance hereunder, shall pay reasonable attorneys' fees and costs incurred
by the non-defaulting party to enforce performance of this Agreement.
18.2 Choice of Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Utah, including choice
of law rules.
18.3 Counterparts. This Agreement may be executed in one or more
counterparts, each of which when so signed shall be deemed to be an original,
and such counterparts together shall constitute one and the same instrument.
18.4 Entire Agreement. This Agreement, and the Exhibits, Schedules
and other attachments referred to herein (all of which are incorporated in
this Agreement by reference) collectively set forth the entire agreement
between the parties as to the subject matter hereof, supersede any and all
prior or contemporaneous agreements or understandings of the parties relating
to the subject matter of this Agreement, and may not be amended except by an
instrument in writing signed by all of the parties to this Agreement.
18.5 Expenses. The parties shall be responsible for and shall pay
their own costs and expenses, including without limitation attorneys' fees and
accountants' fees and expenses, in connection with the conduct of the due
diligence inquiry, negotiation, execution and delivery of this Agreement and
the instruments, documents and agreements executed in connection with this
Agreement. Notwithstanding the foregoing, the Company shall pay any stock
transfer taxes payable in connection with the issue and sale of the Shares to
the Purchasers.
18.6 Headings. The headings of the sections and paragraphs of this
Agreement have been inserted for convenience of reference only and do not
constitute a part of this Agreement.
18.7 Notices. All notices or other communications provided for under
this Agreement shall be in writing, and mailed, telecopied or delivered by
hand delivery or by overnight courier service, to the parties at their
respective addresses as indicated below or at such other address as the
parties may designate in writing:
(1) If to Purchasers, then to their respective addresses set forth
in Schedule I hereto.
(2) If to the Company:
K.L.S. Enviro Resources, Inc.
0000 Xxxxx Xxxxxxx, Xxxxx 000
Xxxx Xxxxx, XX 00000
Attn: Xxxxxxx X. Xxxxxx, President
Fax: (000) 000-0000
With a copy to:
Xxxxxxx X. Xxxxx, Esq.
DURHAM, EVANS, XXXXX & XXXXXXX, P.C.
Key Bank Tower, Suite 850
00 Xxxxx Xxxx Xxxxxx
Xxxx Xxxx Xxxx, Xxxx 00000
Fax: (000) 000-0000
All notices and communications shall be effective as follows: When mailed,
upon three (3) business days after deposit in the mail (postage prepaid); when
telecopied, upon confirmed transmission of the telecopied notice; when hand
delivered, upon delivery; and when sent by overnight courier, the next
business day after deposit of the notice with the overnight courier.
18.8 Severability. Should any one or more of the provisions of this
Agreement be determined to be illegal or unenforceable, all other provisions
of this Agreement shall be given effect separately from the provision or
provisions determined to be illegal or unenforceable and shall not be affected
thereby.
18.9 Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of the parties and their successors, but shall not be
assignable by Purchasers without the prior written consent of the Company.
18.10 Survival of Representations, Warranties and Covenants Closing.
All warranties, representations, indemnities and agreements made in this
Agreement by a party hereto shall survive the date of this Agreement, the
Closing Date, the consummation of the transactions contemplated by this
Agreement, and the issuance by the Company of the Shares.
IN WITNESS WHEREOF, the party named below has caused this Agreement to be
executed, as of the date first above written.
BY: _____________________________________
NAME:___________________________________
TITLE:___________________________________
DATE: December 31, 1996
ACCEPTED AND AGREED:
KLS ENVIRO RESOURCES, INC.
BY:__________________________________
DATE: December 31, 1996
SCHEDULE I
TO THE SECURITIES PURCHASE AGREEMENT
PURCHASERS SIGNATORY THERETO AND
KLS ENVIRO RESOURCES, INC.
Name and Address Number of Shares Purchase Price Residency
of Purchaser Purchased Paid or Incorp.
