U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
Annual report pursuant to Section 13 or 15(d) of the
Securities and Exchange Act of 1934
For the fiscal year ended November 30, 1997
Commission file number 0-3492
RESERVE INDUSTRIES CORPORATION
(Name of Small Business Issuer in its charter)
NEW MEXICO 85-0128783
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
20 First Plaza, Suite 308, Albuquerque, New Mexico 87102
(Address of principal executive offices) (Zip Code)
505-247-2384
Issuer's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act: none
Securities registered pursuant to Section 12(g) of the Act:
Common stock, $1.00 Par Value
Title of each class
Check whether the issuer: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months and (2) has been subject
to such filing requirements for the past 90 days.
Yes X No
Check if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-B contained in this form,
And no disclosure will be contained, to the best of registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10KSB. X
State the issuer's revenues from continuing operations for
its most recent fiscal year. $3.6 million
State the aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which the
stock was sold, or the average bid and asked prices of such
stock, as of a specified date within the past 60 days. As of
February 19, 1998 $221,462.
State the number of shares outstanding of each of the
issuer's classes of common equity, as of the latest practicable
date. As of February 19, 1998, 3,203,763 $1.00 Par Value
<PAGE>
PART I
Item 1. Description of Business
(a) Business Development. Reserve Industries Corporation,
a New Mexico Corporation incorporated in 1957, (the "Registrant")
is engaged in the mining and sale of silica sand. The
Registrant conducts these operations in the USA. In addition,
the Registrant holds several properties with mineral potential
and has equity interests in operations that supply services and
products to the steel industry and in operations in the Far East
that process waste slag from the smelting of copper into various
abrasive products used by the ship repair industry.
The Registrant mines and processes silica sand, through its
wholly owned subsidiary Reserve Silica Corporation (Reserve
Silica), located in Ravensdale, Washington, southeast of Seattle,
. The mine run sand is extracted from open pit mines located on
Reserve Silica's land and is transported to an adjacent sand
processing plant. The wet plant crushes, washes and separates
the clay from the mine run sand and classifies the sand into
several products. The wet sand products are marketed to the
cement industry and to golf courses for sand traps. The facility
also incorporates a drying plant, which further processes the wet
sand into a dried silica sand for the glass container industry.
Reserve Silica is working to develop other silica sand products
to serve other markets. For the past two years, Reserve Silica
has been upgrading and replacing the equipment in both the wet
plant and drying plant. All of the equipment for the wet plant
upgrade was purchased and installed during 1996. The new dust
control and air handling equipment to upgrade the drying plant
was installed during 1997.
The Registrant, through its wholly owned subsidiaries
Reserve Rossborough Corporation (Reserve Rossborough) and
Reserve Rossborough Ventures Corporation (Reserve Rossborough
Ventures), owns an equity interest in Rossborough Manufacturing
Co. L.P. (Rossborough), of Avon Lake, Ohio. A description of
ownership is described in footnote 5 of the notes to the
consolidated financial statements. Rossborough provides products
and services to the primary steel industry and is a major
supplier of magnesium based reagent compounds used to externally
desulfurize hot iron metal. External desulfurization of hot
metal iron is its primary business segment of the Partnership.
Rossborough has a magnesium grinding facility located near
Walkerton, Indiana that processes both magnesium ingots and
secondary magnesium granules into a size suitable for use in iron
desulfurization. The magnesium granules are blended at both
Avon Lake and Walkerton with other materials to make the finished
desulfurization reagents. Rossborough is one of the three
primary suppliers of desulfurization services in North America.
It has been working to expand its international operations and is
currently operating internationally through joint ventures in
Japan, Slovakia and Belgium.<PAGE>
Rossborough's other business segments include the
manufacture of special refractory lances and slag skimmers used
in desulfurizing operations; the manufacture of custom
desulfurizing reagent injection equipment; the manufacture of
molten metal samplers and thermocouples; the exclusive
distribution of Bimac Inc. ladle powders and slag conditioning
agents; and the distribution of selected other purchased
products. Rossborough is certified under ISO 9001 and 9002
The Registrant owns a 20% stock interest in JPL Industries
Pte. Ltd., (JPL) a Singapore company organized in 1990. The
other shareholders are a subsidiary of Jurong Shipyards Ltd., a
Singapore company and two Japanese companies, Nippon Mining &
Metals Company, Ltd. and Mitsui & Company, Ltd. JPL is in the
waste management business. JPL operates as a collection and
treatment center for wastes generated by other industries. It
identifies wastes which have the potential to be recycled,
develops processes to recycle the wastes and coverts the wastes
into value added products.
JPL is also in the business of selling processed and
unprocessed copper slags that are used for abrasive blasting
purposes. It has a recycling facility that processes used
copper slag abrasives generated by the Singapore ship repairing
industry. The plant mechanically and hydraulically separates
contaminates from used abrasives. The recycled abrasives are
segregated into a coarse size fraction and a fine slag size
fraction. The coarse size fraction is combined with new copper
slag abrasives to make blasting abrasives. The fine slag
fraction is used as a raw material in other products such as
interlocking concrete pavers and as a partial replacement for
sand and aggregates in ready-mix concrete.
During the fall of 1995, JPL authorized the issuance of
S$12.5 million (Singapore dollars) of interest bearing redeemable
convertible unsecured loan stocks. All of these convertible loan
stocks were subscribed by the first quarter of 1996. The loan
was used to finance the second stage of the copper slag
processing and recycle facility and to expand the concrete paver
plant. If the all of the convertible loans are converted into
common stock, the Registrant's interest will be reduced to
approximately 7%.
The Registrant has a number of mineral interests that it
deals in the normal course of business and below is description
of the properties currently held.
The Registrant, through its wholly-owned subsidiary Reserve
Minerals Corporation (Reserve Minerals), has retained economic
interests in three uranium joint ventures located in northern
Saskatchewan, Canada. The retained interests in the Waterbury
Lake Joint Venture and the Dawn Lake Joint Venture are net profit
interests of approximately 0.75% and 1.5%, respectively. The<PAGE>
Registrant owns a 1% royalty on its former 9.063% interest on all
minerals produced in the McArthur River Joint Venture. Some or
all of the retained net profits and royalty interests may become
earning assets in the future.
The Waterbury Lake Joint Venture includes the Cigar Lake
deposit, which contains approximately 1.0 million tons of uranium
mineralization at a grade of 14% and an additional 1.1 million
tons of uranium mineralization at a grade of 4.5%. This equates
to approximately 385 million pounds of uranium concentrate, U3O8.
The deposit covers an area of approximately 40 acres. The Cigar
Lake Mining Corporation, formed by the Waterbury Lake Joint
Venture, has the responsibility of developing the Cigar Lake
property. A special underground remote mining and transport
method, which surpasses prevailing safety standards, has been
developed and successfully tested within the deposit. The
venture has made arrangements to have the ore processed at the
McClean Lake mill currently under construction and located
approximately 60 kilometers from the orebody. In 1995, an
environmental impact statement was submitted for review. The
report has been review and was tentatively approved subject to
certain conditions. Revisions have been submitted. Mining is
dependent on the successful completion of the permitting process
and the development of favorable markets, which could occur
before the end of the century.
The McArthur River Joint Venture continued exploration work
on the uranium deposit discovered in 1988. As a result of
underground exploration drilling, the geologic reserves in the
property have been increased to 416 million pounds of U3O8 at an
average grade of 15% U3O8. The operator of the property has
successfully completed the permitting process and has received a
construction license in August 1997. Construction is expected to
continue until October 1999. The mine would replace production
from the Key Lake deposit and the Key Lake processing mill will
be used to process the ore.
The Dawn Lake Joint Venture has a uranium deposit containing
755,900 tons of uranium mineralization at an average grade of
1.97%. This equates to approximately 29.8 million pounds of
uranium.
The Registrant holds various non-producing mineral
properties in the United States. In New Mexico it owns the
mineral rights in a 57,000 acre tract and an 8-1/3%
non-participating royalty on all the minerals in a 60,000 acre
tract. Prior drilling has located some uranium mineralization on
these tracts.
L-Bar Products Incorporated (L-Bar Products), a
wholly-owned subsidiary of the Registrant, operated a magnesium
recovery plant located at Chewelah, Washington, north of Spokane.
The plant was closed in December 1991. In March 1995 L-Bar
Products was placed in Chapter 7 liquidation and a trustee was<PAGE>
appointed. Matters pertaining to the L-Bar Products bankruptcy
case are more fully discussed below (reference Item 3. Legal
Proceedings).<PAGE>
(b) Business of Issuer. The business of the issuer is as
follows:
1. The Registrant primarily produces and sells silica sand
to the glass, cement and golf course industries. Further
descriptions of the businesses are contained in Item 1.
(a) above.
2. In the majority of cases, the Registrant distributes its
products directly to its customers by truck or rail.
Some of the golf course bunker sand is sold to
distributors.
3. The Registrant has not publicly announced any new
products or services.
4. For the silica sand operation numerous competitors exist,
however competition is limited to regions by the cost of
shipping. The Registrant competes on the basis of
keeping prices in line with the competition and
maintaining the quality and consistency of the products.
5. The Registrant acquires the raw materials for the silica
sand operation from a silica sand deposit owned by the
Registrant and the mine is operated to provide mine run
sand as required by operations.
6. The Registrant deals with relatively few customers. For
the silica sand business, approximately two-thirds of the
sales are made to two long term customers.
7. There are no patents or trademarks of material importance
to the Registrant's business. Mining claims, leases and
crown grants are believed to be held under valid
contracts or other evidence of title.
8. The Registrant does not currently require any new
government approval in order to conduct its business.
9. As with all small and large businesses, the existing and
probable governmental regulations are a significant
burden, and the cumulative effects are potentially
detrimental to business expansion.
10. The Registrant has not spent a material amount of funds
on research and development.
11. Federal, state and local laws and regulations relating to
protection of the environment effect the Registrant in
many areas of its operations. Except for L-Bar Products,
the cost and effects of these laws, in the opinion of
management, are currently contained in the Registrant's
financial statements. The State of Washington Department
of Ecology (WDOE) (Reference Item 3. Legal Proceedings)
requested that L-Bar Products provide financial assurance
that the residue pile, accumulated at the Chewelah plant
by the previous owners of the plant, can be removed from
the site. L-Bar Products is currently in Chapter 7
bankruptcy liquidation, and this matter is currently
unresolved. It is management's opinion that the Company
will not be liable for this matter, and in any event any
liability can not be estimated, therefore, no amounts
have been accrued for this matter in the accompanying
financial statements. The Registrant has also been sued
by Northwest Alloys, the generator of the material at the
Chewelah plant, to provide reimbursement for its costs
for the site remediation that Northwest Alloys has agreed
to perform (Reference Item 3. Legal Proceedings).
12. The Registrant has 19 full time employees and 1 part time
employee.
Item 2. Description of Properties
(a) Information as to the location of the principal plants
is forth under Item l. above. The silica sand mine and
processing facility is situated on approximately 340 acres and
is owned by Reserve Silica. The mineral property interests are
described in the table below.
RESERVE INDUSTRIES CORPORATION
MINERAL INTERESTS
Gross % Net Type of
Location and Mineral Acres Interest Acres Interest
New Mexico - Uranium
L-Bar Ranch
Reserve Tract 57,000 100.00% 57,000(1) Mineral deed
Exxon Tract 60,000 8.33% 5,000 Royalty
Other 552 50-100% 312 Mineral deed
117,552 62,312
Saskatchewan Canada *
Waterbury Lake Project 234,300 (2)
Dawn Lake Project 386,800 (2)
McArthur River Project 211,400 (2)
* Approximate
(1) Subject to a 1/24 royalty interest
(2) The company's interest in these projects is described in
Item 1.
(b) Investment Policies. In the normal course of business,
the Registrant currently does not deal in investments in real
estate or real estate mortgages.
(c) Description of Real Estate and Operating Data. The
Registrant does not deal in Real Estate investments and a
description of its operating properties is contained above. The
Registrant believes that its operating properties are adequately
insured.
Item 3. Legal Proceedings
(a) Pending legal proceedings
Northwest Alloys Inc. vs. Reserve Industries Corporation
On April 28, 1994, a complaint for monetary and declaratory
relief was filed in the United States District Court for the
Eastern District of Washington by Northwest Alloys, a wholly
owned subsidiary of Alcoa, Inc. against the Registrant.<PAGE>
The complaint alleges causes of action for monetary and
declaratory relief for breach of contract and statutory
contribution under the Washington Model Toxics Control Act
(MTCA). For its breach of contract claim, Northwest Alloys seeks
to rely upon an August 2, 1990 guaranty signed by the Registrant,
which Northwest Alloys claims guarantees payment of the greater
of (i) up to $2,000,000 for environmental cleanup at the
Chewelah, Washington site owned and operated by L-Bar Products,
or (ii) certain loan funds in excess of $2.5 million, plus
interest, related to L-Bar Products' alleged obligation to repay
certain loans from Northwest Alloys (estimated by Northwest
Alloys to be $1,291,481 plus accrued and accruing interest). For
the statutory contribution action under the MTCA, Northwest
Alloys seeks contribution for ongoing remedial costs for alleged
soil and ground water contamination at the L-Bar Products site in
Chewelah, Washington. Contribution is sought from the Registrant
for past and present costs incurred, and future costs to be
incurred, by Northwest Alloys to address the alleged soil and
ground water contamination at the L-Bar Products site.
The Registrant denies any and all liability alleged in the
complaint and is contesting the claims. On June 17, 1994, the
Registrant filed a counterclaim against Northwest Alloys seeking
damages for breach of contract, breach of fiduciary duty, and
declaratory relief regarding environmental cleanup costs at the
site.
Northwest Alloys filed a motion for summary judgment to
enforce the August 2, 1990 guaranty. The motion was heard before
the Court on October 4, 1994 and Northwest Alloys' motion was
denied. On December 6, 1994 an order was entered staying all
further proceedings pending the completion of adversary
proceedings involving the Registrant in L-Bar Product's
bankruptcy proceedings (see below).
L-Bar Products Inc. Bankruptcy Proceedings
On December 13, 1991 L-Bar Products was notified that a
petition was filed against it for an order of relief under
Chapter 7 of the United States Bankruptcy Code, in the United
States Bankruptcy Court for the Eastern District of Washington.
This petition was filed on behalf of three creditors that had
performed work on the capital improvements at the L-Bar Products
plant, prior to plant closure. On July 13, 1992 L-Bar Products
filed a reorganization petition under Chapter 11 of the U.S.
Bankruptcy Code. The case was consolidated in the Bankruptcy
Court for the Eastern District of Washington. On March 15, 1995,
the bankruptcy was converted to Chapter 7 and a trustee was
appointed.
L-Bar Products is continuing to pursue resolution of certain
claims against Northwest Alloys (see below).
L-Bar Products, Inc. vs. Northwest Alloys Inc.
On August 31, 1994, L-Bar Products filed a complaint for
breach of contract, breach of fiduciary duty, equitable
subordination, declaratory relief and recovery of environmental
cleanup costs against Northwest Alloys. The complaint was filed
in the United States Bankruptcy Court for the Eastern District of
Washington. On October 21, 1994 Northwest Alloys filed a third
party claim against the Registrant seeking the same relief as
requested in the case described above. On December 30, 1994, the
Registrant filed a counterclaim against Northwest Alloys seeking
relief similar to that contained in its counterclaim in the case
described above. Because the District Court has stayed all
proceedings in that action, matters involving claims by and
against the Registrant, L-Bar Products and Northwest Alloys are
proceeding in the United States District Court for the Eastern
District of Washington. Pre-trial discovery has been underway
since early 1996 and is expected to be completed in 1998. The
trial is scheduled to begin in April 1999. The court has
required that each party file its estimate of damages, which are
subject to further modification. Northwest Alloys has filed a
damage claim of approximately $3.4 million for the loan guarantee
and $4.8 million for environmental cleanup expenses expended
through December 31, 1997. The Registrant has filed a damage
claim for approximately $850,000 and L-Bar Products has filed a
damage claim in the amount of approximately $22.5 million plus
punitive damages. The amount of damages will ultimately be
determined by the decision of the Court.
(b) Pending governmental legal proceedings
WDOE Proceedings
The `Washington Department of Ecology (WDOE) named the
Registrant and L-Bar Products as potentially liable persons (PLP)
for part of the cleanup related to the Chewelah site. The basis
for naming L-Bar Products was its status as site owner/operator.
The basis for naming the Registrant is the alleged responsibility
of the parent corporation. It is management's opinion that the
Registrant was a separate entity from L-Bar Products and is not
responsible as a PLP for site contamination.
The WDOE has entered into an administrative order with
Northwest Alloys under which Northwest Alloys has agreed to
undertake testing at the Chewelah site and prepare a proposed
remedial plan for cleanup. L-Bar Products has petitioned the
Bankruptcy Court for approval to agree to the same order in order
to cooperate with WDOE. The WDOE objected to L-Bar's motion and
no further action has been taken. The Registrant has declined to
enter into the order due to its insistence that it is not a PLP
under the MTCA.
Item 4. Submission of Matters to a Vote of Security Holders<PAGE>
The was no submission to the shareholders during the fourth
quarter.
PART II
Item 5. Market For Common Equity and Related Shareholders
Matters.
(a) Market Information. The Registrant's common stock is
currently not publicly traded because the Registrant has elected
to forgo an audit in order to conserve capital for necessary
plant improvements and legal fees. Once the Registrant is in a
position to do so, it plans to file audited financial statements.
Prior to August 1992, the Registrant was listed on the NASDAQ
National Over-the-Counter Market. Since the Registrant's stock
is not quoted, the Registrant can not list current prices for its
stock.
(b) Holders. On February 19, 1998, the Registrant had
approximately 800 shareholders.
(c) Dividends. The Registrant has never paid a dividend. There
are currently no restrictions or covenants to limit the ability
to pay a dividend.
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Results of Operations. For the year ended November 30,
1997, the Registrant had revenues of $3,618,847 which resulted in
net income of $1,030,682 or $0.28 per share. For the year ended
November 30, 1997, the Registrant had revenues of $2,688,392
which resulted in net income of $207,463 or $0.06 per share.
The revenues in 1997 increased from 1996 as a result of
increased equity earnings and a gain on the sale of stock. The
sales at the Registrant's silica sand operation decreased by
$33,696. The renovation of the sand plant was begun in mid-1995
and the wet plant was completed during 1997. The plant
renovation has improved the efficiency of the wet and dry plant.
In 1997, approximately $460,000 of the income is attributable to
reversal of the LIFO inventory valuation by an affiliate (see
footnote 5 of the notes to the consolidated financial
statements).
Liquidity and Capital Resources. The Registrant's net cash
(used) provided by operating activities was $1,218,822 and
$(7,875) in 1997 and 1996, respectively. The net cash used by
investing activities was $373,029 and $300,629 1996 and 1996,
respectively. Most of the cash used by investing activities in
1997 and 1996 was for capital improvements to the sand project.
The Registrant reduced its debt by $207,219 in 1997 and increased
its debt by $287,453 1996.<PAGE>
The Registrant had working capital deficits of approximately
$3.0 million and $2.4 million in 1997 and 1996, respectively. As
part of the Registrant's program to conserve cash, part of the
salaries due to the officers of the Registrant, all of the
deferred compensation due to the deceased chairman's spouse and
the part of the interest due on certain loans were accrued but
not paid in 1997 and 1996. As of November 30, 1997, these
accruals (salaries, deferred compensation and deferred interest)
exceeded $1.9 million.<PAGE>
Item 7. Financial Statements.
The following Consolidated Financial Statements of the
Registrant and its subsidiaries are filed as a part of the report
and are attached:
Consolidated Balance Sheets as of November 30, 1997 and 1996
Consolidated Statements of Operations for the Years Ended
November 30, 1997 and 1996
Consolidated Statements of Stockholders' Investment for the
Years Ended November 30, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended
November 30, 1997 and 1996
Notes to Consolidated Financial Statements
Because the financial statements are not audited there is no
report of independent accountants.
All other schedules are omitted, as the required information
is not required, or the information is presented in the financial
statements or related notes.
Item 8. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure.
Because of the Registrant's program to conserve cash, it was
not able to retain an independent accountant to audit the
financial statements for the fiscal years of 1997, 1996, 1995,
1994, 1993, 1992 and 1991. The Registrant has previously used
Arthur Andersen & Co. and may retain them in the future.
While the Registrant has not used an independent accountant
for the fiscal years listed above, the Registrant is not aware of
any disagreements with accountants as contemplated by item 304 of
SEC Regulation S-B.
PART III
Item 9. Directors, Executives Officers, Promoters and Control
Persons; Compliance With Section 16(c) of the Exchange Act.
(a) Identify Directors and Executive Officers.
The following paragraphs list the names, ages and business
experience of the directors, each of whom is an executive officer
of the Registrant.
James J. Melfi, Jr., age 69, is Chairman of the Board of the
Registrant. Mr. Melfi was elected Chairman of the Board in April.
1985, and he was President from December 1975 to December 1985.
He has been a director of the Registrant since 1970.
Frank C. Melfi, age 61, is President of the Registrant, a
position he has held since December 1985. From 1976 through
December 1985, he was Executive Vice President of the Registrant.
He has been a director of the Registrant since April 1985.
William J. Melfi, age 55, is Vice President of Finance and
Administration of the Registrant, a position he has held since
December 1985. He is also Treasurer of the Registrant, a
position he assumed in July 1995. For more than five years prior
to 1985, he was manager of operations. He has been a director of
the Registrant since January 1993.
All of these directors have been with the Registrant for
several years and are knowledgeable about the Registrant's
operations, problems and opportunities.
The executive officers of the Registrant are elected
annually and serve until such time as their respective successors
are elected and qualified.
(b) Identification of certain significant employees. Not
applicable.
(c) Family Relationships. James J. Melfi, Jr., Frank C. Melfi
and William J. Melfi are brothers.
(d) Involvement in certain legal proceedings. See Legal
Proceedings.
(1) Frank C. Melfi and William J. Melfi were executive
officers of L-Bar Products, a wholly owned subsidiary, which in
currently in Chapter 7 bankruptcy liquidation as described in
Legal Proceedings.
(2), (3), and (4). Not applicable.
Based solely on a review of applicable forms provided to the
Registrant, the Registrant believes that the officers, directors
and beneficial owners of the Registrant were all in timely
compliance with Section 16(a) of the Exchange Act.
Item 10. Executive Compensation
(a) General. The following text and tables provide information
on the compensation of the Chief Executive Officer and those
officers whose salary and bonus compensation equaled or exceeded
$100,000 for the fiscal years ended November 30, 1997, 1996, and
1995.
(b) Summary Compensation Table.
<TABLE>
Summary Compensation Table
Annual Long-term
Compensation Compensation All
Other Restrict Other
Annual Stock Options/ LTIP Compen
Name and Principal Year Salary Bonus Compe Awards Sars Payouts sation
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Position $ $ $ $ # $ $
Frank C. Melfi 1997 135,000 27,000 752 - - - -
CEO 1996 135,000 27,000 635 - - - -
1995 135,000 27,000 674 - - - -
James J. Melfi,Jr 1997 135,000 27,000 517 - - - -
Chairman 1996 135,000 27,000 520 - - - -
1995 135,000 27,000 635 - - - -
William J. Melfi 1997 100,000 20,000 2,385 - - - -
Vice President 1996 100,000 20,000 2,165 - - - -
1995 100,000 20,000 1,663 - - - -
</TABLE>
The amounts of salary and bonus stated for Mr. Frank C.
Melfi, Mr. James J. Melfi, Jr. and Mr. William J. Melfi represent
the amounts due to them and accrued by the Registrant during the
year. As part of the Registrant's program to conserve cash, all
three individuals accrued part of their annual compensation. Mr.
Frank C. Melfi, Mr. James J. Melfi, Jr. and Mr. William J. Melfi
were paid $73,992, $66,757 and $67,887, respectively of the
annual compensation due them in 1997.
(c) Option/SAR Grants Table. This table is omitted because
there was no activity in the 1997 fiscal year.
(d) Aggregated Option/SAR Exercises and Fiscal Year-End
Option/SAR Value Table.
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR Value Table.
Value of
Number of Unexercisde
Shares Unexercised in-the Money
Acquired Value Options/SARs Options/SARs
on Realized at FY-End at FY-end
Name Excercise ($) Excercisable Excercisable/
(#) Unexcercisable Unexcercisable
Excer/ Unexcer
</CAPTION>
<S> <C> <C> <C> <C>
Frank C. Melfi - - 7,500 / 0 -
CEO
James J. Melfi, Jr - - 7,500 / 0 -
Chairman
William J. Melfi - - 6,500 / 0 -
Vice President
</TABLE>
The Registrant has two active stock option plans, which are
described in footnote 7 of the notes to the consolidated
financial statements.
(e) Long-term Incentive Plans. This table is omitted because
the Registrant currently does not have a long-
term incentive plan.
(f) Compensation of Directors. The Registrant did not pay any
fees to directors, as such, as it does not have any directors who
are not employees of the Registrant.
(g) Employment Contracts and Termination of Employment, and
Change-in-Control Arrangements. N/A.
(h) Report on Repricing of Options/SARs. During 1997, none of
the outstanding Options were repriced.
Item 11. Security Ownership of Certain Beneficial Owners and
Management.
(a) Security Ownership of Certain Beneficial Owners. The
following tabulation sets forth the number of shares of Common<PAGE>
Stock held by each person who owned of record, or is known by the
Registrant to own beneficially, five percent (5%) or more of the
Registrant's Common Stock. Included in the table for certain
individuals are the maximum number of shares of the Registrant's
Common Stock which might be deemed to be beneficially owned under
the rules of the Securities and Exchange Commission by those
individuals. The number of shares beneficially owned by those
individuals includes shares subject to option to purchase, and
the computation of the percentage owned assumes exercise of such
options The information is as of February 19, 1998:
<TABLE>
<CAPTION>
Amount and Nature of Percent
Name and Address Beneficial Ownership of Class
</CAPTION>
<S> <C> <C>
Northwest Alloys Inc. Direct
P.O. Box 115 500,000 15.6%
Addy, Washington 99101
Melfi Corporation Direct
Suite 308, 20 First Plaza 198,500 6.2%
Albuquerque, New Mexico 87102
James J. Melfi, Jr. (1) Direct, Indirect and Option
Suite 308, 20 first Plaza 287,049 8.9%
Albuquerque, New Mexico 87102
Frank C. Melfi (2) Direct, Indirect and Option
Suite 308, 20 First Plaza 299,169 9.3%
Albuquerque, New Mexico 87102
William J. Melfi (3) Direct, Indirect and Option
Suite 308 20 First Plaza 168,849 5.2%
Albuquerque, New Mexico 87102
</TABLE>
To the best of the Registrant's knowledge, the principal
shareholders listed have sole voting and investment power with
respect to the shares of the Registrant's Common Stock owned by
such shareholders, except as noted below.
(1) Included in the number of shares opposite Mr. James J.
Melfi, Jr.'s name in the table above are 7,500 shares subject to
purchase under an option held by him and 26,700 shares owned by
his wife, for which beneficial ownership is disclaimed. Mr.
Melfi has sole voting and investment power with respect to the
shares owned by him. James J. Melfi, Jr. and members of his
immediate family own 25 percent of the issued and outstanding
stock of Melfi Corporation, which owns 198,500 shares of Common
Stock of the Registrant, for which he may be deemed to share
voting and investment power. James J. Melfi, Jr. is also an
officer and director of Melfi Corporation.
(2) Included in the number of shares opposite Mr. Frank C.
Melfi's name in the table above are 7,500 shares subject to
purchase under an option held by him. Mr. Melfi has sole voting
and investment power with respect to the shares owned by him.
Frank C. Melfi and members of his immediate family own 25 percent
of the issued and outstanding stock of Melfi Corporation, which
owns 198,500 shares of Common Stock of the Registrant, for which
he may be deemed to share voting and investment power. Frank C.
Melfi is also an officer and director of Melfi Corporation.
(3) Included in the number of shares opposite Mr. William J.
Melfi's name in the table above are 6,500 shares subject to
purchase under an option held by him, 7,790 shares owned by his
wife for which beneficial ownership is disclaimed. Mr. Melfi has
sole voting and investment power with respect to the shares owned
by him. William J. Melfi and members of his immediate family own
25 percent of the issued and outstanding stock of Melfi
Corporation, which owns 198,500 shares of Common Stock of the
Registrant, for which he may be deemed to share voting and
investment power. William J. Melfi is also an officer and
director of Melfi Corporation.
(b) Security Ownership of Management. The ownership of
Common Stock by officers and directors is set forth in the table
below. Included in the table are the maximum number of shares of
the Registrant's Common Stock which might be deemed to be
beneficially owned under the rules of the Securities and Exchange
Commission by each nominee and director and by the officers and
the directors of the Registrant as a group. The number of shares
beneficially owned by each individual and each group includes
shares subject to option to purchase and the computation of the
percentage owned assumes exercise of such options. The text
below the table sets forth certain information as to the extent
to which beneficial ownership consists of the right to acquire
the Registrant's Common Stock. The information is as of February
19, 1998.
<TABLE>
<CAPTION>
Amount and Nature of Percent
Name and Address Beneficial Ownership of Class
</CAPTION>
<S> <C> <C>
James J. Melfi, Jr. (1) Direct, Indirect and Option
Suite 308, 20 first Plaza 287,049 8.9%
Albuquerque, New Mexico 87102
Frank C. Melfi (2) Direct, Indirect and Option
Suite 308, 20 First Plaza 299,169 9.3%
Albuquerque, New Mexico 87102
William J. Melfi(3) Direct, Indirect and Option
Suite 308 20 First Plaza 168,849 5.2%
Albuquerque, New Mexico 87102
Officers and Directors Direct, Indirect and Option
as a group (4) 755,067 23.2%
</TABLE>
(1) Reference is made to "Security Ownership of Certain
Beneficial Owners" herein for information regarding the shares of
Common Stock of the Registrant beneficially owned by James J.
Melfi, Jr.
(2) Reference is made to "Security Ownership of Certain
Beneficial Owners" herein for information regarding the shares of
Common Stock of the Registrant beneficially owned by Frank C.
Melfi.
(3) Reference is made to "Security Ownership of Certain
Beneficial Owners" herein for information regarding the shares of
Common Stock of the Registrant beneficially owned by William J.
Melfi.
(4) Included in the number of shares owned by officers and
directors as a group in the table above are 21,500 shares subject
to purchase under options.
(c) Changes in control. Not applicable.
Item 12. Certain Relationships and Related Transactions.
(a) Transactions with management and others. The Melfi
Family Trust, which is part of the estate of Mr. James J. Melfi,
Sr., loaned the Registrant $695,000 in 1991. These funds were
used by the Registrant to purchase 20% of the stock in JPL
Industries Pte. Ltd., a Singapore company organized in 1991. The
terms of the agreement between the Melfi Family Trust and the
Registrant call for a five year note at 10% interest, which was
prime plus 0.5% at the time of the loan, and a warrant to
purchase 60,000 shares of the common stock of the Registrant. In
addition, several times during 1991, Ruth Ann Melfi, deceased,
the wife of the Registrant's former Chairman James J. Melfi, Sr.,
lent the Registrant working capital. In order to conserve cash
the Registrant has not fully repaid this loan. The outstanding
balance of the loan at November 30, 1997 was $145,000, interest
was paid through November 30, 1996. The interest rate on this
loan is 10% per annum. Both of these loans are secured by the
stock in JPL Industries, Reserve Minerals Corporation, Reserve
Rossborough Corporation, Reserve Rossborough Ventures Corporation
and Industrial Mineral Products (Phil), Inc., the Registrant's
wholly owned Philippine subsidiary.
One of the Registrant's subsidiaries, L-Bar Products, Inc.,
which is currently in Chapter 7 bankruptcy liquidation, had a
supply arrangement with Northwest Alloys, Inc., to process and
market certain waste products from Northwest Alloys' magnesium
plant in Addy Washington. Northwest Alloys lent funds to L-Bar
for the rehabilitation of L-Bar's Chewelah Washington facility.
At November 30, 1997, L-Bar Products owed Northwest Alloys $3.7
million plus accrued interest (before any adjustments related to
the bankruptcy).
(b) Pursuant to certain promissory notes to the Registrant,
James J. Melfi, Jr., Frank C. Melfi and William J. Melfi have
borrowed $102,745, $214,640 and $131,900, respectively.
(c) Parents of Registrant. Not applicable
(d) Transactions with promoters. Not applicable.
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits. See the attached Index to Exhibits.
(b) Reports on Form 8K. There were no reports on Form 8K
filed during the last quarter.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act,
the Registrant caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
RESERVE INDUSTRIES CORPORATION
(Registrant)
By /s/ William J. Melfi
---------------------------
William J. Melfi, Vice President Finance and Administration
(Principal Financial Officer)
Date February 19, 1998
In accordance with the Exchange Act, this report has been
signed below by the following persons on behalf of the Registrant
and the capacities and on the dates indicated.
Date February 19, 1998 By /s/ James J. Melfi, Jr.
---------------------------
James J. Melfi, Jr. Director,
Chairman of the Board
Date February 19, 1998 By /s/ Frank C. Melfi
--------------------------------
Frank C. Melfi, Director and President
(Principal Executive Officer)
Date February 19, 1998 By /s/ William J. Melfi
--------------------------------
William J. Melfi, Director and Vice
President Finance and Administration
(Principal Financial Officer)
<PAGE>
RESERVE INDUSTRIES CORPORATION
EXHIBIT INDEX
Exhibit
Number Description
3.l Articles of Incorporation**
August 28, l957
3.2 By-Laws of Reserve Industries Corporation as amended
on June 8, l987**
4.1 Loan Agreement with the Key Bank of Puget Sound
(formerly the Seattle Trust & Savings Bank) dated
February 28, 1986**
4.2 Amendment No. 4 to the Loan Agreement with the Key
Bank of Puget Sound dated June 15, 1987**
4.3 Loan Agreement between Northwest Alloys, Inc. and
L-Bar Products dated August 2, 1990**
4.4 Stock Purchase Agreement with Northwest Alloys,
Inc. dated October 28, 1991**
4.5 Loan Agreement with the Melfi Family Trust dated
October 31, 1991**
4.6 Supplemental Security Agreement with the Melfi
Family Trust dated January 31, 1994**
4.7 Second Supplemental Security Agreement with the
Melfi Family Trust dated May 6, 1996**
9 Not Applicable
10.1 Sohio Agreement (Settlement) dated September 9,l982**
10.2 Amendment to Employment Agreement, J. J. Melfi, Sr.
dated June 20, l978**
10.3 l977 Stock Option Plan**
10.4 Agreement between Central Electricity Generating
Board Exploration (Canada) Limited and Registrant
dated March 23, 1984**
10.5 Agreement between Cogema and Registrant dated
May 17, 1984**
10.6 Agreement between 413418 Ontario Limited and
Registrant dated August 31, 1984**
10.7 Agreement to purchase the assets of Industrial
Mineral Products, Incorporated dated March 3, 1986**
10.8 Agreement with Northwest Alloys dated January 1,1985**
10.9 Agreement with Meridian Minerals Company dated
July 1, 1987**
10.10 Agreement and Plan of Acquisition of Interest of
Rossborough Manufacturing Company dated
August 11, 1987**
10.11 Sales agreement between L-Bar Product, Incorporated
and La Porte Metal Processing Venture dated
September 1, 1987, subject to confidential treatment**
10.12 1987 Incentive Stock Option Plan**
10.13 1987 Nonqualified Stock Option Plan**
10.14 Sales agreement between Rossborough Manufacturing
Company and La Porte Metal Processing Venture
dated September 1, 1987, subject to
confidential treatment**
10.15 Grinding Joint Venture Agreement between L-Bar
Grinding Corporation and La Porte Metal
Processing Company dated September 1, 1987**
10.16 Agreement between L-Bar Canada, Inc. and Norsk
Hydro Canada, Inc. dated March 23, 1989**
10.17 Dispute Resolution Agreement between Reserve
Industries Corporation and Rossborough et al,
dated October 11, 1993**
10.18 Settlement and Release Agreement between L-Bar
Products, Inc. and La Porte Metal Processing Venture
et al, dated September 1, 1993**
11. Not Applicable
12. Not Applicable
13. Not Applicable
16. Not Applicable
18. Not Applicable
19. Not Applicable
21. List of Subsidiaries*
22. Not Applicable
23. Not Applicable
24. Not Applicable
25. Not Applicable
28. Not Applicable
29. Not Applicable
* These exhibits are filed electronically with the report.
** These exhibits were filed as indicated below and are
incorporated herein by this reference thereto:
3.1 1982 10K - Exhibit 3.1
3.2 1987 10K - Exhibit 3.2
4.1 1986 10K - Exhibit 4.1
4.2 1987 10K - Exhibit 4.2
4.3 8K filed August 1990
4.4 1991 10K - Exhibit 4.4
4.5 1992 10K - Exhibit 4.5
10.1 1982 10K - Exhibit 10.6
10.2 1982 10K - Exhibit 10.7
10.3 l976 Proxy Statement
10.4 1984 10K - Exhibit 10.13
10.5 1984 10K - Exhibit 10.14
10.6 1984 10K - Exhibit 10.15
10.7 1986 10k - Exhibit 10.7
10.8 1986 10k - Exhibit 10.8
10.9 1987 10K - Exhibit 10.9
10.10 1987 10K - Exhibit 10.10
10.11 1987 10K - Exhibit 10.11
10.12 1987 10K - Exhibit 10.12
10.12 1986 Proxy Statement
10.13 1986 Proxy Statement
10.14 1987 10K - Exhibit 10.14
10.15 1987 10K - Exhibit 10.15
10.16 1989 10K - Exhibit 10.16
10.17 1993 10KSB - Exhibit 10.17
10.18 1993 10KSB - Exhibit 10.18
<PAGE>
RESERVE INDUSTRIES CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Page
Consolidated Balance Sheets - November 30, 1997 and 1996 1
Consolidated Statements of Income - For the years ended
November 30, 1997 and 1996 2
Consolidated Statements of Stockholders' Investment -
For the years ended November 30, 1997 and 1996 3
Consolidated Statements of Cash Flows - For the years ended
November 30, 1997 and 1996 4
Notes to Consolidated Financial Statements 5-13
All other schedules are omitted as the required information is
not applicable or the information is presented in the
accompanying consolidated financial statements or related notes.
<PAGE>
<TABLE>
<CAPTION>
RESERVE INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 1997 AND 1996
</CAPTION>
<S> <C> <C>
ASSETS 1997 1996
CURRENT ASSETS:
Cash and cash equivalents (Note 2) $ 653,906 $ 15,332
Receivables, less allowance for doubtful
accounts of $46,332 in 1997 and $45,582 in 1996 159,751 202,819
Receivables from affiliates and
related parties (Note 12) 516,430 464,655
Inventories (Notes 1 and 3) 99,493 92,573
Prepaid expenses and deposits 28,048 28,481
----------- -----------
Total current assets 1,457,628 803,860
PROPERTY, PLANT AND EQUIPMENT,
at cost (Notes 1 and 4) 4,119,171 3,772,373
Less accumulated depreciation and depletion (1,252,112) (1,053,114)
----------- ------------
2,867,059 2,719,259
INVESTMENT IN UNCONSOLIDATED AFFILIATES (Note 5) 5,377,316 4,864,179
OTHER ASSETS - 55,710
----------- ------------
Total assets $ 9,702,003 $ 8,443,008
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Short-term debt related party $ 145,000 $ 145,000
Short-term debt 47,581 47,581
Current portion of long-term debt (Note 10) 943,979 237,463
Trade accounts payable 396,985 267,863
Deferred obligations to related parties (Note 12) 2,340,310 2,046,358
Other current liabilities (Note 9) 593,560 547,101
----------- ------------
Total current liabilities 4,467,415 3,291,366
LONG-TERM DEBT, less current portion (Note 10) 269,464 1,183,199
DISCONTINUED OPERATIONS - L-Bar Products (Note 6) 973,246 973,246
STOCKHOLDERS' INVESTMENT:
Common stock,$1.00 par value. Authorized
6,000,000 shares, issued and outstanding
3,203,763 shares in 1997 and 1996 (Note 7) 3,203,763 3,203,763
Additional paid-in capital 7,458,718 7,458,718
Accumulated deficit (6,670,603) (7,667,284)
----------- ------------
Total stockholders' investment 3,991,878 2,995,197
Total liabilities and stockholders' investment $ 9,702,003 $ 8,443,008
The accompanying notes are an integral part of these consolidated
statements. The 1997 and 1996 financial information is unaudited.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
RESERVE INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED NOVEMBER 30, 1997 AND 1996
1997 1996
REVENUES:
</CAPTION>
<S> <C> <C>
Sales $ 1,492,238 $ 1,525,934
Investment income 12,396 8,800
Gain on sales:
Stock 408,245 -
Property and equipment 1,510 200
Income from affiliates:
Interest income 18,827 28,320
Equity in earnings 1,625,515 1,055,106
Consulting fees 60,000 60,000
Other 116 10,032
----------- -----------
Total revenues 3,618,847 2,688,392
COSTS AND EXPENSES:
Cost of sales 1,310,268 1,148,404
General and administration 891,396 895,945
Interest 161,272 168,652
Depreciation and amortization 225,229 217,928
Abandonment - 50,000
----------- -----------
Total costs and expenses 2,588,165 2,480,929
Income from continuing operations (Note 6) 1,030,682 207,463
PROVISION FOR INCOME TAXES: 130,000 -
Income before extraordinary item 900,682 207,463
EXTRAORDINARY ITEM:
Reduction of income taxes from net operating
loss carryforward 96,000 -
----------- -----------
Net income $ 996,682 $ 207,463
EARNINGS PER SHARE:
Income before extraordinary item $ 0.28 $ 0.06
Extraordinary item 0.04 -
----------- -----------
Net income per share $ 0.31 $ 0.06
Weighted Average Number of Shares of
Common Stock Outstanding 3,203,763 3,192,219
The accompanying notes are an integral part of these consolidated
statements. The 1997 and 1996 financial information is unaudited.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
RESERVE INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED NOVEMBER 30, 1997 AND 1996
</CAPTION>
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income from continuing operations $ 996,682 $ 207,463
Adjustments to reconcile net income from
continuing operations to net cash provided by
operating activities:
Partial abandonment Philippine assets - 50,000
Depreciation and amortization 225,229 217,928
Equity in (earnings) of affiliates (1,625,515) (1,055,106)
(Increase) in interest receivable from affiliate - (28,320)
Cash distribution from affiliates 1,112,377 389,974
Changes in assets and liabilities:
(Increase) in receivables (8,707) (84,836)
(Increase) in inventories (6,920) (30,022)
Decrease in other current assets 433 2,492
Decrease in other investment 55,710 -
Increase (decrease) in trade accounts payable 129,122 (182,922)
Increase in accrued officer salaries 293,952 394,821
Increase in other current liabilities 46,459 110,653
----------- -----------
Total adjustments 222,140 (215,338)
Net cash provided (used) by operating activities $ 1,218,822 $ (7,875)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures - Net $ (373,029) $ ( 300,806)
Discontinued operations -L-Bar Products - 177
----------- -----------
Net cash (used) by investing activities $ (373,029) $ (300,629)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in common stock issued $ - $ 46,430
(Decrease) increase in long-term debt (207,219) 241,023
----------- -----------
Net cash (used) provided by
financing activities $ (207,219) $ 287,453
Net increase (decrease) in cash
and cash equivalents $ 638,574 $ (21,051)
Cash and cash equivalents at the
beginning of the year 15,332 36,383
Cash and cash equivalents at the
end of the year $ 653,906 $ 15,332
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 61,662 $ 70,426
Common stock issued during the year for interest $ - $ 46,430
</TABLE>
The accompanying notes are an integral part of these consolidated
statements. The 1997 and 1996 financial information is unaudited.
<PAGE>
<TABLE>
<CAPTION>
RESERVE INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
FOR THE YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
Common Stock Additional
$1 Par Value Paid-In Accumulated
Shares Amount Capital Deficit Total
</CAPTION>
<S> <C> <C> <C> <C> <C>
BALANCES: November 30, 1995 3,157,333 $ 3,157,333 $ 7,458,718 $ (7,874,747 $ 2,741,304
Common stock issued during
1996: (Note 12)
For deferred compensation 46,430 46,430 - - -
Net income - - - 207,463 207,463
BALANCES: November 30, 1996 3,203,763 $ 3,203,763 $ 7,458,718 $ (7,667,284) $ 2,995,197
Common stock issued
during 1997: (Note 12) - - - - -
Net income - - - 996,682 996,682
BALANCES: November 30, 1997 3,203,763 $ 3,203,763 $ 7,458,718 $ (6,670,602) $ 3,991,879
The accompanying notes are an integral part of these consolidated
statements. The 1997, 1996 and 1995 financial information is unaudited.
</TABLE>
<PAGE>
RESERVE INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED NOVEMBER 30, 1997 AND 1996
(l) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of Reserve Industries Corporation, a New Mexico
corporation, and its wholly owned subsidiaries, Reserve Silica
Corporation, Reserve Abrasives Limited, Incorporated, Industrial
Mineral Products (Phil.), Inc., Reserve Rossborough Corporation,
Reserve Rossborough Ventures Corporation, Reserve Minerals
Corporation , Reserve Trisal, Inc., L-Bar Canada Inc., and L-Bar
Products Incorporated, (collectively "the Company").
All significant intercompany accounts and transactions have been
eliminated in the accompanying consolidated financial statements.
Investments in unconsolidated affiliates are accounted for by the
equity method (see Note 5) and are stated at cost plus equity in
undistributed earnings.
Marketable Securities
Marketable securities are stated at the lower of aggregate cost
or market value. The cost of securities sold is determined using
the specific identification method.
Inventories
Inventories, consisting principally of raw materials, finished
products and supplies, are valued using the average cost method
at the lower of cost or market value. Production costs included
in inventories represent actual operating labor, raw materials
and supply costs.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost. Betterment's,
renewals and extraordinary repairs that extend the life of the
asset are capitalized; other repair and maintenance costs are
expensed. The cost and accumulated depreciation applicable to
assets sold or retired are removed from the accounts, and the
related gain or loss on disposition is recognized in operations.
Mineral Properties
Mineral properties, acquisition costs and all subsequent direct
costs incurred in retaining, exploring and developing the
properties are capitalized in property, plant and equipment until
production is attained. If management determines that
development and production are not economically feasible, or that
capitalized costs exceed net realizable values, such costs are
charged to operations in the period such determination is made.
Depreciation, Depletion, and Amortization
The cost of machinery, equipment and buildings is depreciated
over the estimated useful lives of the assets using the
straight-line method. Organization costs and goodwill are
amortized using the straight-line method over 60 months and 120
months, respectively. As reflected in note 6, operations at
L-Bar Products, Inc. (L-Bar Products) were suspended in December
1991 and L-Bar Products was determined in November 1992 to be a
discontinued operation.
Income Taxes
The Company and its domestic subsidiaries file a consolidated
income tax return. Separate tax returns are filed for the
Company's foreign subsidiaries and the corporate entities in
which the Company has equity interests.
Deferred taxes, which result from the effect of temporary
differences in reporting transactions for financial and tax
reporting purposes, will be provided when the Company exhausts
its net operating loss carryforwards.
Earnings (loss) per share
Earnings (loss) per share were computed using the weighted
average number of shares outstanding during each fiscal year.
Shares issuable upon the exercise of options have not been
included in the computation because they would not have a
material impact on earnings (loss) per share.
Business Segments
The Company operates in two different industry segments; the
corporate operations segment and the industrial products segment
which contains silica sand operations. The silica sand
industrial products operation produces various sand products for
use by the glass, concrete and golf course industries. The
corporate segment includes partnership and equity income.
Statement of Cash Flows
For purposes of the statement of cash flows, the Company
considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Reclassifications
Certain reclassifications have been made to prior year balances
to conform to current year financial statement presentation.
(2) CASH AND CASH EQUIVALENTS:
At November 30, 1997 and 1996, the Company had on deposit in a
foreign country $10,177, which is restricted from transfer out of
the country to the extent of the foreign subsidiary's retained
earnings. Cash transfers out of the foreign country are subject
to a withholding tax.
(3) INVENTORIES:
Inventories consist of the following at November 30:
1997 1996
Raw materials $ 101 $ 101
Finished products 62,327 50,255
Supplies and packaging 37,065 42,217
---------- ----------
$ 99,493 $ 92,573
(4) PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following a November 30:
1997 1996
Machinery and equipment $ 2,212,769 $ 2,055,530
Mineral properties 1,906,402 1,716,843
----------- -----------
$ 4,119,171 $ 3,772,373
(5) INVESTMENT IN UNCONSOLIDATED AFFILIATES:
Rossborough Manufacturing Company and Rossborough Manufacturing
Co. L. P. The Company owns a 40% stock interest in Rossborough
Manufacturing Company (Rossborough Co.), through its wholly owned
subsidiary, Reserve Rossborough Corporation and a 20% limited
partnership interest in Rossborough Manufacturing Co. L.P.
(Rossborough L.P.) , through its wholly owned subsidiary, Reserve
Rossborough Ventures Corporation. Rossborough Co. is the general
partner of and owns 60% of Rossborough L.P. Rossborough L.P. is
in the business of providing products and services to the steel
and foundry industries.
Investment in unconsolidated affiliates includes equity in
undistributed earnings and long-term interest bearing notes
receivable from Rossborough L.P. Such notes receivable, which
were paid in 1997, amounted to $186,000 and $189,000 at November
30, 1996 and the accrued interest receivable on these notes
amounted to $212,125. Included in the Company's earnings are
equity in earnings of affiliates and consulting income and the
Company plans to reinvest its undistributed equity earnings in
those affiliates. At November 30, 1997 and 1996 the Company had
$3,359,537 and $2,838,692 of undistributed earnings of
Rossborough Co. and Rossborough L.P. included in retained
earnings, respectively. The equity in undistributed earnings of
Rossborough Co. and Rossborough L.P. recorded by the Company are
based on financial statements audited by independent public
accountants.
For the year ended November 30, 1994, Rossborough L.P. changed
its method of determining the cost of certain raw material
inventory from the first-in, first-out (FIFO) to the last-in,
first-out (LIFO) method to more appropriately reflect the
inflationary cost increases of certain products. The effect of
the change in 1997 and 1996 was to increase (reduce) the carrying
value of inventory and net income by approximately $1,045,000 and
($19,000), respectively. At November 30, 1997 and 1996, 78% and
77%, respectively, of the inventory is valued using the LIFO
method of accounting.
The financial information of Rossborough L.P. is summarized
below for the periods ended November 30:
1997 1996
Net sales $ 56,072,769 $ 63,216,650
Gross profit $ 10,722,902 $ 9,735,322
------------ ------------
Net partnership Income $ 3,672,875 $ 3,210,377
Total current assets $ 20,282,759 $ 17,686,945
Fixed and other assets 6,147,480 6,601,460
------------ ------------
Total assets $ 26,430,439 $ 24,288,405
Current liabilities $ 11,425,644 $ 11,445,292
Total long-term liabilities 6,030,289 5,776,156
Minority Interest 865,468 615,385
Total partnership capital 8,109,038 6,451,572
------------ ------------
Total liabilities and
partnership capital $ 26,430,439 $ 24,288,405
JPL Industries Pte. Ltd.
The Company owns a 20% stock interest in JPL Industries Pte. Ltd.
(JPL), a Singapore company organized in 1991. The Company's
investment is $692,239 and is included in investment in
unconsolidated affiliates.
(6) DISCONTINUED OPERATIONS:
Plant Closure
On December 6, 1991 L-Bar Products suspended operations at its
Chewelah, Washington facility because L-Bar lacked the necessary
funds to continue operation. In November 1992, it was determined
to discontinue the operations of L-Bar Products.
Litigation
On December 13, 1991, L-Bar Products was notified that a petition
was filed against it for an order of relief under Chapter 7 of
the United States Bankruptcy Code, in the United States
Bankruptcy Court for the Eastern District of Washington. This
petition was filed on behalf of three creditors that had
performed work on the capital improvements at the L-Bar Products
plant, prior to plant closure. On July 13, 1992 L-Bar Products
filed a reorganization petition under Chapter 11 of the U.S.
Bankruptcy Code. The case was consolidated in the Bankruptcy
Court for the Eastern District of Washington. On March 15, 1995,
the bankruptcy was converted to Chapter 7 and a trustee was
appointed.
On August 31, 1994, L-Bar Products filed a complaint for breach
of contract, breach of fiduciary duty, equitable subordination,
declaratory relief and recovery of environmental cleanup costs
against Northwest Alloys. The complaint was filed in the United
States Bankruptcy Court for the Eastern District of Washington.
Pre-trial discovery commenced in early 1996 and is expected to be
completed in 1998.
Long-term debt
A term loan with an outstanding amount of $3.77 million plus
interest is owed to Northwest Alloys by L-Bar Products. The loan
is secured by the assets of L-Bar Products and bears interest at
the prime rate. The purpose of the loan was to fund certain
plant improvements in process at the time of the closure of the
plant, as discussed in Note 12. As security for the loan,
Northwest Alloys has a mortgage on all of the assets of L-Bar
Products. In addition, the Company, subject to the Loan
Agreement, signed a guaranty as discussed in Note 12. The loan
is subject to certain covenants and restrictions which relate to
maintenance of working capital, net worth, and accounts payable
of L-Bar Products. L-Bar Products has not made any principal or
interest payments on the loan and is not in compliance with the
loan covenants.
A term loan by L-Bar Products in the amount of $312,192 plus
interest at prime was due November 30, 1991. The loan is secured
by certain mineral rights of the Company with a book value of
$1,417,000. L-Bar Products has numerous other unsecured
creditors.
Summary financial information
The balance sheet of L-Bar Products is summarized below for the
periods ended November 30:
1997 1996
Current assets $ 454,194 $ 412,235
Plant, Property & Equip,
net of depreciation 6,082,181 6,593,313
Contractual rights and other assets 810,956 810,956
----------- -----------
$ 7,347,331 $ 7,816,504
Current liabilities $ 3,342,770 $ 3,741,972
Long-term debt, less current portion 3,477,807 3,547,778
Deferred gain on issuance of
stock for debt 1,500,000 1,500,000
----------- -----------
$ 8,320,577 $ 8,789,750
Net liability $ 973,246 $ 973,246
=========== ===========
(7) STOCK OPTIONS:
The Company has two active stock option plans; the 1987 Incentive
Stock Option Plan (1987 ISO Plan) and the 1987 Non qualified
Stock Option Plan (1987 Non qualified Plan). The 1987 ISO Plan
provides for the issuance of options to key employees to purchase
up to 90,000 shares in aggregate of the Company's common stock.
Under the 1987 ISO Plan options for 55,500 shares were
outstanding at $1.00 to $3.25 per share, all of which are
exercisable. The 1987 Non qualified Plan provides for the
issuance of options to officers and directors, who can not
participate in the 1987 ISO Plan, to purchase up to 25,000 shares
in aggregate of the Company's common stock. Under the 1987 Non
qualified Plan, at November 30, 1997, options for 21,500 shares
were outstanding at $1.625 to $3.00 per share, all of which are
exercisable. All option plans provide that the option price must
be equal to or greater than the market price at the date of
grant. No options were exercised under the plans during 1997 and
1996.
(8) INCOME TAXES:
At November 30, 1997 the Company had net operating loss
carryforwards of approximately $4.4 million (net of $6.1 million
related to L-Bar Products) which will expire between 2000 and
2012. Certain differences exist between the net operating loss
carryforwards available for financial statement purposes and for
Federal income tax return purposes due to differing treatments of
dividend income, depreciation, exploration and development costs,
goodwill and deferred compensation. At November 30, 1997 the
Company had investment tax and new jobs tax credit carryforwards
of approximately $8,125 which will expire between 1996 and 2001.
Due to losses from continuing operations in 1996, there is no tax
expense computed for that year. Because of the Company's net
operating loss carryforward, the Company did not present the net
tax effect of the losses from discontinued operations. Due to
timing differences, the taxable income for 1997 is approximately
$314,000. The table below shows the composition of the income
tax expense (benefit):
1997 1996
Current federal income tax $ (18.0) $ (46.0)
Accrual for wages not yet paid 114.0 147.0
Partnership income in excess of
equity income - -
Accrual for State Income tax 34.0 -
(Reduction) addition to federal
income tax loss carryforward (96.0) (101.0)
--------- --------
$ 34.0 $ 0
(9) OTHER CURRENT LIABILITIES:
Other current liabilities consist of the following at November 30:
1997 1996
Accrued interest $ 380,882 $ 314,528
Other current liabilities 579,101 232,573
----------- -----------
$ 959,986 $ 547,101
(10) DEBT:
Long-term debt consists of the following at November 30:
1997 1996
Term loan, due December 31, 1997, with annual
interest payments at 10% secured by the stock in
JPL Industries, Reserve Minerals Corporation,
Reserve Rossborough Corporation, Reserve Rossborough
Ventures Corporation and Industrial Mineral Products (Phil)
see Notes 5 and 12. $ 695,000 $ 695,000
Other notes 119,218 68,399
Capital leases $ 399,225 $ 657,263
----------- -----------
1,213,443 1,420,662
Less current portion 943,979 237,463
----------- -----------
$ 269,464 $ 1,183,199
The long-term debt payment schedule consists of the following at
November 30, 1997:
1998 $ 943,979
1999 205,795
2000 or later 63,669
-----------
$ 1,213,443
The net book value of the assets leased pursuant to capital lease
arrangements was $520,931 as of November 30, 1997.
(11) BUSINESS SEGMENTS:
The Company operates in the industrial products and corporate
business segments. These business segments are described in Note
1 under Business Segments. In fiscal year 1997, the Company had
three customers in the industrial products segment that accounted
for net sales of 57.9% ($887,036) and 18.2% ($279,572),
respectively. In fiscal year 1996, the Company had three
customers in the industrial products segment that accounted for
net sales of 53.5% ($833,145) 17.1% ($265,338), and 11.2%
($173,789), respectively.
Identifiable assets by segment are those assets involved in the
operation of the segment. Corporate assets are cash and cash
equivalents, security investments, mineral properties, equity
investments and other assets.
The following tables summarize the operations, identifiable
assets and capital expenditures by industry segment as of
November 30:
1997 1996
Net sales and revenues:
Industrial Products - Silica sand $ 1,492,238 $ 1,525,934
Industrial Products - Abrasives/Other 12,396 8,800
Corporate 428,698 10,232
Equity in earnings from affiliates 1,685,515 1,143,426
----------- -----------
$ 3,618,847 $ 2,688,392
Segment operating income:
Industrial Products - Silica sand $ 181,549 $ 377,530
Industrial Products - Abrasives/Other 12,396 8,800
Corporate 429,119 10,232
Equity in earnings from affiliates 1,685,515 1,143,426
----------- -----------
2,308,579 1,539,988
Corporate and other expenses:
General and administration 891,396 895,945
Depreciation and amortization
- Industrial products 215,659 210,394
Depreciation and amortization - Corporate 9,570 7,534
Interest expense 161,272 168,652
Abandonment-Foreign assets - 50,000
----------- -----------
1,277,897 1,332,526
Income from continuing operations $ 1,030,682 $ 207,463
Identifiable assets - Industrial Products $ 2,701,224 $ 2,897,529
Identifiable assets - Corporate 7,000,779 5,545,479
----------- -----------
$ 9,702,003 $ 8,443,008
Capital expenditures - Industrial Products $ 373,029 $ 300,806
Capital expenditures - Corporate - -
----------- -----------
$ 373,029 $ 300,806
The following table summarizes financial data by geographic area
as of November 30:
Sales:
United States $ 1,492,238 $ 1,525,934
Far East 12,396 8,800
----------- -----------
$ 1,504,634 $ 1,534,734
Operating profit (loss):
United States $ 2,296,183 $ 1,531,188
Far East 12.396 8,800
----------- -----------
$ 2,308,579 $ 1,539,988
Identifiable Assets:
United States $ 8,206,706 $ 7,196,658
Far East 1,495,297 1,495,297
----------- -----------
$ 9,702,003 $ 8,692,009
(12) COMMITMENTS AND CONTINGENCIES:
Environmental Matters
The WDOE named the Company and L-Bar Products as potentially
liable persons (PLP) for part of the cleanup related to the
Chewelah site. The basis for naming L-Bar Products was its
status as site owner/operator. The basis for naming the Company
is the alleged responsibility of the parent corporation. It is
management's opinion that the Company was a separate entity from
L-Bar Products and is not responsible as a PLP for site
contamination.
The WDOE has entered into an administrative order with Northwest
Alloys under which Northwest Alloys has agreed to undertake
testing at the Chewelah site and prepare a proposed remedial plan
for cleanup. L-Bar Products has petitioned the Bankruptcy Court
for approval to agree to the same order in order to cooperate
with WDOE. The WDOE objected to L-Bar's motion and no further
action has been taken. The Registrant has declined to enter into
the order due to its insistence that it is not a PLP under the
MTCA.
It is management's opinion that the Company will not be liable
for the matter discussed above, and in any event, any liability
can not be estimated. Therefore no amounts have been accrued for
this matter in the accompanying financial statements.
Northwest Alloys Inc. vs. Reserve Industries Corporation
On April 28, 1994, a complaint for monetary and declaratory
relief was filed in the United States District Court for the
Eastern District of Washington by Northwest Alloys, a wholly
owned subsidiary of Alcoa Inc., against the Company.
The complaint alleges causes of action for monetary and
declaratory relief for breach of contract and statutory
contribution under the Washington Model Toxics Control Act
(MTCA). For its breach of contract claim, Northwest Alloys seeks
to rely upon an August 2, 1990 guaranty signed by the Company
which Northwest Alloys claims guarantees payment of the greater
of (i) up to $2,000,000 for environmental cleanup at the
Chewelah, Washington site owned and operated by L-Bar Products,
or (ii) certain loan funds in excess of $2.5 million, plus
interest, related to L-Bar Products' alleged obligation to repay
certain loans from Northwest Alloys (estimated by Northwest
Alloys to be $1,291,481 plus accrued and accruing interest). For
the statutory contribution action under the MTCA, Northwest
Alloys seeks contribution for ongoing remedial costs for alleged
soil and ground water contamination at the L-Bar Products site in
Chewelah, Washington. Contribution is sought from the Company
for past and present costs incurred, and future costs to be
incurred, by Northwest Alloys to address the alleged soil and
ground water contamination at the L-Bar Products site.
A further description of the litigation is contained in Item 3 of
the Company's annual report 10KSB.
Deferred Compensation
The Company has a deferred compensation plan for its deceased
chairman's spouse. The payment of this benefit is pursuant to a
management contract which provides for monthly disbursements.
adjusted annually for inflation. The obligation, originally
recorded based on applicable mortality rates, was exhausted
during the fiscal year ended November 30, 1991. Payments made in
excess of the obligation recorded have been expensed when either
paid or accrued.
Amounts due under the plan were accrued, but no payments were
made in 1997, 1996, 1995, 1993 and 1992 because the Company has
been conserving its cash. In 1997 and 1996, the accrued
deferred compensation amounted to $285,521 and $199,865,
respectively. Subsequent, to the year end the recipient died and
the plan was terminated as of January 16, 1998.
Cash Flow Requirements
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. The Company
is generating revenues from its continuing operations and the
current level of cash flow is sufficient to sustain operations
and a portion of its general and administrative expenses. The
Company is conserving its cash and has not paid all of the
compensation due to the officers and directors and, as described
above, has accrued part of the deferred compensation. In 1997
and 1996, the accrued compensation due to the officers and
directors amounted to $2,011,899 and $1,794,781, respectively.
During 1991, the Company borrowed $695,000 from the Melfi Family
Trust, which is part of the estate of Mr. James J. Melfi, Sr., in
order to purchase the equity interest in JPL Industries Pte. Ltd.
In order to conserve cash. the Company has not paid all of the
interest due on this loan. In 1997 and 1996, the accrued
interest on the loan amounted to $377,087 and $305,307,
respectively.
The other Melfi family members have loaned working capital to the
Company. The Company currently owes $145,000 plus accrued
interest on these working capital loans. In 1997 and 1996, the
accrued interest on these working capital loans amounted to
$29,000 and $14,500, respectively.
Pursuant to promissory notes to the Company, officers have loans
amounting to $449,285 and $396,985 in 1997 and 1996,
respectively.
Other
During the normal course of business, the Company has other
commitments, lawsuits, claims and contingent liabilities.
However, Company management does not expect that any sum it may
have to pay in connection with any of these matters would have a
materially adverse effect on the consolidated financial position.<PAGE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> NOV-30-1997 NOV-30-1996
<PERIOD-END> NOV-30-1997 NOV-30-1996
<CASH> 653,906 15,332
<SECURITIES> 0 0
<RECEIVABLES> 722,513 713,051
<ALLOWANCES> 46,332 45,582
<INVENTORY> 99,493 92,573
<CURRENT-ASSETS> 1,457,628 803,860
<PP&E> 4,119,171 3,772,373
<DEPRECIATION> (1,252,112) (1,053,114)
<TOTAL-ASSETS> 9,702,003 8,443,008
<CURRENT-LIABILITIES> 4,467,415 3,291,366
<BONDS> 0 0
0 0
0 0
<COMMON> 3,203,763 3,203,763
<OTHER-SE> 788,115 (208,566)
<TOTAL-LIABILITY-AND-EQUITY> 9,702,003 8,443,008
<SALES> 1,492,238 1,525,934
<TOTAL-REVENUES> 3,618,847 2,688,392
<CGS> 1,310,268 1,148,404
<TOTAL-COSTS> 2,426,893 2,312,277
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 161,272 168,652
<INCOME-PRETAX> 1,030,682 207,463
<INCOME-TAX> 130,000 0
<INCOME-CONTINUING> 900,682 207,463
<DISCONTINUED> 0 0
<EXTRAORDINARY> 96,000 0
<CHANGES> 0 0
<NET-INCOME> 996,682 207,463
<EPS-PRIMARY> 0.31 0.06
<EPS-DILUTED> 0.31 0.06
</TABLE>
Exhibit No. 21
Subsidiaries of Reserve Industries Corporation as of November 30,1997
Name State of Incorporation
Reserve Silica Corporation Washington
Reserve Minerals Corporation Delaware
Reserve Abrasives Ltd., Inc. New Mexico
Reserve Rossborough Ventures Corporation New Mexico
Reserve Rossborough Corporation New Mexico
Reserve Trisal, Inc. New Mexico
L-Bar Products, Inc. Washington
Country of Incorporation
Industrial Mineral Products (Phil.) Inc.
Philippines
L-Bar Canada Inc. Canada
