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, 1998
Commission file number 0-3492
RESERVE INDUSTRIES CORPORATION
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(Name of Small Business Issuer in its charter)
NEW MEXICO 85-0128783
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
20 First Plaza, Suite 308, Albuquerque, New Mexico 87102
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(Address of principal executive offices) (Zip Code)
505-247-2384
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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
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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
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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
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State the issuer's revenues from continuing operations for
its most recent fiscal year. $209,430
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 24, 1999 $221,462.
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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 24, 1999, 3,203,763 $1.00 Par Value
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<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 and
is transported to an adjacent sand processing plant both of
which are located on Reserve Silica's land. 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. In 1997, Reserve Silica
completed the basic upgrade of the wet plant and the
installation of a new dust control and air handling system for
the drying plant. During 1998, Reserve Silica investigated
methods to lower the sand's natural iron content, which effects
the color of the glass containers. By lowering the iron content
Reserve Silica hopes to maintain and broaden the market for its
dried sand. Reserve Silica has decided to make these changes to
both the wet plant and drying plant and estimates that these
improvements will cost approximately $550,000.
The Registrant, through its wholly owned subsidiaries Reserve
Rossborough Corporation (Reserve Rossborough) and Reserve
Rossborough Ventures Corporation (Reserve Rossborough Ventures),
owns a net 44% 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. It is a
major supplier of magnesium based reagent compounds used to
externally desulfurize hot iron metal and external
desulfurization is the primary business segment of the
Partnership. External desulfurization of hot iron metal is a
process in which specially sized reagents are pneumatically
injected into hot iron metal prior to transforming it into
steel. The primary components used in the process are various
blends of magnesium granules, calcium carbide, lime and other
minor compounds. The process is used by the primary steel
industry to improve the quality of its steel by lowering the
amount of sulfur contained in its finished products. 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, Belgium and China.
<PAGE>
In China, Rossborough has bid as a subcontractor on several
large desulfurization projects and is supplying co-injection
systems at the Benxi steel mill and the Baotou steel mill.
China is a large market producing as much steel as the United
States and needs to upgrade the quality of the steel through the
removal of excess sulfur. An affiliate of Rossborough also
purchased an operating magnesium smelter located near the city
of Taiyuan in the Shanxi province of China. The smelter was
shutdown due to litigation related to ownership of the smelter.
These problems were resolved to the satisfaction of Rossborough.
The smelter has remained shutdown and Rossborough's affiliate
is currently evaluating the direction of the project.. The
smelter has the capability to produce between 3,000 and 5,000
metric tons of magnesium per year. As a result of these
problems Rossborough wrote down the remainder of its loan ($2.7
million) during the fiscal year ended November 30, 1998.
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. As part of Rossborough's quality assurance program
it is certified, by a certified ISO auditor, as a supplier that
complies with the standards set by the global standardization
organization under the program entitled ISO 9001 and 9002.
This certification indicates to customers a certain level of
quality and process control and is becoming a requirement of the
primary steel industry in their selection of suppliers.
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%.
<PAGE>
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 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 Registrant is not
involved in the operation of the properties and the reserve and
resource information contained in the following paragraphs is
from the public announcements by the companies or organizations
operating the properties.
The Waterbury Lake Joint Venture includes the Cigar Lake
deposit, which contains approximately 1.176 million tons of
uranium reserves at a grade of 13.60%. This equates to
approximately 353 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.
Currently, the venture has made arrangements to have the
majority of the ore processed at the existing Rabbit Lake mill
with the remainder to processed at the McClean Lake mill
currently under construction. The project has been undergoing
the permitting process for number of years and in April 1998 the
federal and provincial governments approved the project with
certain conditions. The project to scheduled to begin
production in late 2001 or 2002.
The McArthur River Joint Venture uranium deposit was discovered
in 1988. As a result of underground exploration drilling, the
property now has uranium reserves of 457,000 tons at an average
grade of 18.74%, which equates to a reserve of 188 million
pounds of U3O8. In addition the property has uranium resources
of 859,000 tons at an average grade of 12.02%, which equates to
a reserve of 227 million pounds of U3O8. The operator of the
property has successfully completed the permitting process and
received a construction license in August 1997. Construction is
expected to continue until October 1999, when the mine is to
become operational. 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.
<PAGE>
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 appointed.
An agreement to settle litigation related to the bankruptcy has
been submitted to the court. Matters pertaining to the L-Bar
Products bankruptcy case are more fully discussed below
(reference Item 3. Legal Proceedings).
(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. However, as described above it plans to install
equipment at its sand plant to lower the iron content of its dried sand.
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; Ball Foster Glass Container Co.
LLC and LaFarge Cement Company, which recently purchased the
Seattle cement plant owned by Holnan Ideal Cement Co. .
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 spent less than $100,000 during the past year
investigating methods to lower the iron content of its dried
silica sand. As a result of these efforts, the Registrant plans
purchase and install the necessary equipment. None of these
costs have been borne directly by the Registrant's customers.
11. Federal, state and local laws and regulations relating to
protection of the environment effect the Registrant in many
areas of its operations. Most of the cost and effects of these
laws, in the opinion of management, are currently contained in
the Registrant's financial statements. During 1997 and 1998,
Reserve Silica spent $184,000 to upgrade and improve the air
handling system at the drying plant.
12. The Registrant has 17 full time employees and 1 part time employee.
<PAGE>
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 555 50-100% 312 Mineral deed
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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
The Registrant and L-Bar Products, Inc., its wholly owned subsidiary, have
reached an agreement to settle all litigation with Northwest Alloys, Inc.
(lawsuits listed below). On February 8, 1999, a Notice of Intent to enter
into a settlement agreement and mutual release will be sent to all creditors
and interested parties by the Chapter 7 Trustee of the L-Bar bankruptcy.
Any creditor or interested party who objects to the settlement agreement
must do so in writing within 23 days of the date of mailing of the notice.
If there are no objections, the Court may enter an order approving the
settlement without further notice of a hearing.
Under the terms of the agreement, Northwest Alloys will be
allowed a $4.0 million nonrecourse claim against L-Bar, but may
execute its claim solely against L-Bar's property in Chewelah,
WA. Northwest Alloys will undertake to perform the remediation
activities at the site required by the Washington Department of
Ecology relating to flux bar residue and certain other
materials. L-Bar and NWA mutually release each other from any
and all actions, claims, liabilities, causes of action or any
rights any of them might have as of the effective date of the
settlement agreement. Similarly, with certain limited
exceptions, Reserve and Northwest Alloys release each other from
any and all actions, claims, liabilities, causes of action or
any rights any of them might have as of the effective date of
the settlement agreement.
<PAGE>
Northwest Alloys has agreed to use its best efforts to purchase
the claims of the former L-Bar employees by paying to such
employees the amount of each employee's wages which are entitled
to priority under the Bankruptcy Code. On the effective date of
the settlement Northwest Alloys will pay into the L-Bar estate
$300,000. Northwest Alloys will also return the 500,000 shares
of common stock issued by Reserve pursuant to the October 28,
1991 stock purchase
Litigation settled by the Settlement Agreement
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Northwest Alloys Inc. vs. Reserve Industries Corporation
On April 28, 1994, Northwest Alloys, a wholly owned subsidiary
of Alcoa, Inc., filed a complaint against the Registrant for
monetary and declaratory relief in the United States District
Court for the Eastern District of Washington.
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, 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.
(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. Under the terms of
the Settlement Agreement described above, Northwest Alloys has
agreed to clean up the site in accordance with a plan approved
by the WDOE. The WDOE has a right under Washington Model Toxics
Control Act (MTCA) to try to collect unreimbursed past
(estimated to be less than $200,000) and continuing oversight
costs from PLP's. The Registrant is not aware of what
arrangements the WDOE has made with Northwest Alloys in regard
to the payment of these oversight costs. In the event that
Northwest Alloys failed to perform under the cleanup agreement
with the WDOE, the WDOE would have a right under MTCA to try to
require the Registrant to pay for the cleanup. The Registrant
denies that it is a PLP for 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 any
costs related to the cleanup at the site..
Item 4. Submission of Matters to a Vote of Security Holders
The was no submission to the shareholders during the fourth quarter.
<PAGE>
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. Now that the litigation has
been settled the Registrant plans to file audited financial
statements later in the year. 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, 1999, 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, 1998, the Registrant had revenues of $209,430
which resulted in net loss of ($2,068,945) or ($0.65) per share. 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.
The revenues in 1998 decreased from 1997 as a result of
decreased in sales from $1,492,238 to $1,133,280 and a decrease
in equity earnings from $1,625,515 to a loss of ($992,506). The
1997 revenues also contained a gain of $408,245 on the sale of
stock. The sales at the Registrant's silica sand operation
decreased primarily due to the reduction in purchases by its
glass customer. The Registrant has developed a plant
improvement program, with the customer to lower the sand's iron
content, which should as a minimum restore its sales volume to
the 1997 level (on a pro rata basis). The plant improvement
program is scheduled to be completed by mid-1999. The reduction
in equity income was caused by several factors: the writeoff of
Rossborough L.P.'s loan on the Chinese magnesium smelter,the
loss of two large accounts, the general slowdown in the steel
industry in the 4th quarter and the writedown of part of its
magnesium inventory.
The costs and expenses were $2,278,375 in 1998 and $2,588,165 in
1997. The costs increased as a result of the abandoment of the
Philippine operations in the amount of $75,545. The cost of
sales decreased by $362,196 from 1997 to 1998 due to the
reduction in sales described above. The G&A and interest costs
decreased slightly from 1997 to 1998.
Liquidity and Capital Resources.
The Registrant's net cash (used) provided by operating activities was
$(211,937) and $1,218,822 in 1998 and 1997, respectively. The net cash used
by investing activities was $156,434 and $373,029 1998 and 1997,
respectively. Most of the cash used by investing activities in
1998 and 1997 was for capital improvements to the sand project.
The Registrant reduced its debt by $244,315 and $207,219 in 1998
and 1997, respectively.
<PAGE>
The Registrant had working capital deficits of approximately
$3.7 million and $3.0 million in 1998 and 1997, respectively.
The working capital deficit increased as a result of the
operating losses. As part of the Registrant's program to
conserve cash in order to operate the company, 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 1998 and 1997. As of November 30, 1998, these
accruals (salaries, deferred compensation and deferred interest)
exceeded $2.7 million.
The Registrant plans to spend approximately $550,000 in 1999 on
capital improvements to the sand plant and expects to fund this
through additional borrowing. In 1999, the Registrant plans to
continue to accrue part of the obligations described in the
paragraph and expects to continue to generate sufficent cash
flow to operate.
Year 2000 (Y2K).
The Registrant uses a packaged accounting system, which the vendor has
represented to be Y2K compliant. However, the Registrant plans to purchase
and install some module upgrades later in the year. The Registrant is in
the process of receiving Y2K compliant software upgrades to its
payroll system. The Registrant in the process of contacting its
primary customers to determine if they are Y2K compliant.
The Company's significant subsidiary also uses a packaged
accounting software system, which the developer has represented
to be Y2K compliant. Affected systems include the significant
subsidiary's management information system, certain
manufacturing equipment, certain owned equipment in the field
and other office equipment. The significant subsidiary has
implemented a Y2K task force to address all related Y2K issues
and estimates it is 90% complete of all testing and corrections
as of November 30, 1998. The significant subsidiary also
believes it will be fully compliant by May 31, 1999.
Management believes that Y2K will not have a material effect on
the Registrant or its significant subsidiary or its results of
operation. Because the information technology system at the
significant subsidiary was recently upgraded in the normal
course of operations, the costs of Y2K compliance are not
expected to material.
The Registrant and its significant subsidiary are taking all
reasonable steps to ensure Y2K compliance. However, this
ability may be dependent on other parties and the Registrant and
its significant subsidiary can not provide assurance that there
will not be problems.
Forward-Looking Statements.
The Company may from time to time make written or oral "forward-looking
statements", within the meaning of the Private Securities Litigation Reform
Act of 1995, including statements contained in this Form 10KSB and in other
documents filed by the Company with the Securities and Exchange
Commission and in its reports to stockholders, as well as
elsewhere. "Forward-looking statements" are statements such as
those contained in projections, plans, objectives, estimates,
statements of future economic performance, and assumptions
related to any of the forgoing, and may be identified by the use
of forward-looking terminology, such as "may", "expect",
"anticipate", "estimate", "goal", "continued", or other
comparable terminology. By their very nature, forward-looking
statements are subject to known and unknown risks and
uncertainties relating to the Company's future performance that
may cause the actual results, performance or achievments of the
Company, or industry results, to differ materially from those
expressed or implied in such "forward-looking statements". Any
such statement is qualified by reference to the following
cautionary statements.
<PAGE>
The Company's business operates in highly competitive markets
and is subject to changes in general economic conditions,
competition, customer and market preferences, government
regulation, the impact of tax regulation, foreigh exchange rate
fluctuations, the degree of market acceptance of the products,
the uncertainties of potential litigation, as well as other
risks and uncertainties detailed elsewhere herein and from time
to time in the Company's Securities and Exchange Commission
filings. This Form 10KSB contains forward looking statements,
particularly in the following sections: Item 1. Business
descriptions, Item 3. Litigation, Item 6 Management's Discussion
and Analysis of Financial Condition and Results of Operations
and in some of the footnotes to the financial statements.
Actual results could differ materially from those projected in
the forward looking statements as a result of known and unknown
risks, uncertainties, and other factors, including but not
limited to the plans to lower the iron content of the dried sand
and the Court approval of the Agreement to Settle litigation,
market acceptance of the Company's products and services,
changes in expected research and development requirements, and
the effects of changing economic conditions and business
conditions generally. The Company does not undertake and
assumes no obligation to update any forward-looking statement
that may be made from time to time by or on behalf of the
Company.
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, 1998 and 1997
Consolidated Statements of Operations for the Years Ended
November 30, 1998 and 1997
Consolidated Statements of Stockholders' Investment for the
Years Ended November 30, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended
November 30, 1998 and 1997
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 1998, 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.
<PAGE>
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 70, 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 62, 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 56, 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.
<PAGE>
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, 1998, 1997, and
1996.
(b) Summary Compensation Table.
Summary Compensation Table
Annual Compensation Long-term Compensation All Other
Name and Principal Year Salary Bonus Other Restricted Options LTIP All
$ $ Compen Stock Sars Pay Other
sation awards # $ Comp
$
Frank C. Melfi 1998 135,000 27,000 1,340 - - - -
1997 135,000 27,000 752 - - - -
1996 135,000 27,000 635 - - - -
James J. Melfi, Jr. 1998 135,000 27,000 1,000 - - - -
Chairman 1997 135,000 27,000 517 - - - -
1996 135,000 27,000 520 - - - -
William J. Melfi 1998 100,000 20,000 2,630 - - - -
Vice President 1997 100,000 20,000 2,385 - - - -
1996 100,000 20,000 2,165 - - - -
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 $58,115, $57,775 and $59,103, respectively of
the annual compensation due them in 1998.
(c) Option/SAR Grants Table. This table is omitted because
there was no activity in the 1998 fiscal year.
(d) Aggregated Option/SAR Exercises and Fiscal Year-End
Option/SAR Value Table.
Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR Value Table.
Shares Value Number of Value of Unexecised
Acquires Realized Unexercised in-the-Money Options/
on ($) Options/SAR's SAR's at FY-End ($)
Excercise at FY-End (#) Excer/Unexcer
Name # Excer/Unexcer
Frank C. Melfi - - 7,500/0 -
CEO
James J. Melfi, Jr.
Chairman - - 7,500/0 -
William J. Melfi - - 6,500/0 -
Vice President
The Registrant has two active stock option plans, which are described
in footnote 7 of the notes to the consolidated financial statements.
<PAGE>
(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 1998, 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
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 24, 1999:
Amount and Nature of Percent
Name and Address Beneficial Ownership of Class
- ----------------------------------------------------------------------------
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
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.
<PAGE>
(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 24, 1999.
Amount and Nature of Percent
Name and Address Beneficial Ownership of Class
- -------------------------------------------------------------------------
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%
(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.
<PAGE>
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, 1998 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, and
Reserve Rossborough Ventures Corporation.
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, 1998, L-Bar Products owed Northwest Alloys $3.7
million plus accrued interest (before the settlement agreement
related to the bankruptcy as described in Item 3 above).
(b) Pursuant to certain promissory notes to the Registrant,
James J. Melfi, Jr., Frank C. Melfi and William J. Melfi have
borrowed $113,745, $220,140 and $144,900, respectively between
1991 and 1998. The notes are unsecured with an interest rate of
7% and are due January 31, 2000.
(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
-------------------------------
Willian J. Melfi, Vice President
Finance and Administration
(Principal Financial Officer)
Date February 25, 1999
-------------------
In accordance with 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 25, 1999 By /s/ James J. Melfi, Jr.
------------------ ----------------------------
James J. Melfi, Jr. Director
Chairman of the Board
Date February 25, 1999 By /s/ Frank C. Melfi
------------------ ----------------------------
Frank C. Melfi, Director and
President (Principal Executive
Officer)
Date February 25, 1999 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 Products, Incorporated and
La Porte Metal Processing Venture dated September 1, 1987,
subject to confidential treatment**
<PAGE>
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**
10.19 Settlement and Release Agreement between Reserve Industries
Corporation and Northwest Alloys, Inc., dated January 28, 1999**
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
27. Financial Data Schedule*
28. Not Applicable
29. Not Applicable
<PAGE>
* 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
10.19 August 31, 1998 10QSB/A - Exhibit 10.19
<PAGE>
RESERVE INDUSTRIES CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Page
----
Consolidated Balance Sheets - November 30, 1998 and 1997 1
Consolidated Statements of Income - For the years ended
November 30, 1998 and 1997 2
Consolidated Statements of Cash Flows - For the years ended
November 30, 1998 and 1997 3
Consolidated Statements of Stockholders' Investments -
For the years ended November 30, 1998 and 1997 4
Notes to Consolidated Financial Statements 5-12
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, 1998 AND 1997
</CAPTION>
<S> <C> <C>
ASSETS 1998 1997
CURRENT ASSETS:
Cash and cash equivalents (Note 2) $ 41,220 $ 653,906
Receivables, less allowance for
doubtful accounts of $46,332 in 1998 and 1997 160,568 159,751
Receivables from affiliates and
related parties (Note 12) 489,544 516,430
Inventories (Notes 1 and 3) 216,950 99,493
Prepaid expenses and deposits 26,976 28,048
----------- -----------
Total current assets 935,258 1,457,628
PROPERTY, PLANT AND EQUIPMENT, at cost
(Notes 1 and 4) 3,778,532 4,119,171
Less accumulated depreciation and depletion (1,131,668) (1,252,112)
----------- -----------
2,646,864 2,867,059
INVESTMENT IN UNCONSOLIDATED AFFILIATES (Note 5) 4,030,523 5,377,316
----------- -----------
Total assets $ 7,612,645 $ 9,702,003
=========== ===========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Short-term debt related party $ 175,000 $ 145,000
Short-term debt - 47,581
Current portion of long-term debt (Note 10) 954,340 943,979
Trade accounts payable 295,206 396,985
Deferred obligations to related parties (Note 12) 2,658,110 2,340,310
Other current liabilities (Note 9) 601,441 593,560
----------- -----------
Total current liabilities 4,684,097 4,467,415
LONG-TERM DEBT, less current portion (Note 10) 32,369 269,464
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
1998 and 1997 (Note 7) 3,203,763 3,203,763
Additional paid-in capital 7,458,718 7,458,718
Accumulated deficit (8,739,548) (6,670,603)
----------- -----------
Total stockholders' investment 1,922,933 3,991,878
Total liabilities and stockholders' investment $ 7,612,645 $ 9,702,003
=========== ===========
The accompanying notes are an integral part of these consolidated
statements. The 1998 and 1997 financial information is unaudited.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
RESERVE INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED NOVEMBER 30, 1998 AND 1997
</CAPTION>
<S> <C> <C>
1998 1997
REVENUES:
Sales $ 1,133,280 $ 1,492,238
Investment income 8,396 12,396
Gain (loss) on sales:
Stock - 408,245
Property and equipment (11,092) 1,510
Income (loss) from affiliates:
Dividends and interest 11,011 18,827
Equity in earnings (992,506) 1,625,515
Consulting fees 60,000 60,000
Other 341 116
----------- -----------
Total revenues 209,430 3,618,847
COSTS AND EXPENSES:
Cost of sales 948,072 1,310,268
General and administration 865,784 891,396
Interest 145,761 161,272
Depreciation and amortization 243,213 225,229
Abandonment of foreign operations 75,545 -
----------- -----------
Total costs and expenses 2,278,375 2,588,165
Income from continuing operations (2,068,945) 1,030,682
PROVISION FOR INCOME TAXES: - 130,000
----------- -----------
Income before extraordinary item (2,068,945) 900,682
EXTRAORDINARY ITEMS:
Reduction of income taxes from
net operating loss carryforward - 96,000
----------- -----------
Net income $(2,068,945) $ 996,682
=========== ===========
EARNINGS PER SHARE:
Income before extraordinary item $ (0.65 $ 0.28
Extraordinary item - 0.03
----------- -----------
Net income per share $ (0.65) $ 0.31
=========== ===========
Weighted Average Number of Shares of
Common Stock Outstanding 3,203,763 3,203,763
=========== ===========
The accompanying notes are an integral part of these consolidated
statements. The 1998 and 1997 financial information is unaudited.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
RESERVE INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED NOVEMBER 30, 1998 AND 1997
</CAPTION>
<S> <C> <C>
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income from continuing operations $(2,068,945) $ 996,682
Adjustments to reconcile net income from continuing
operations to net cash provided by operating
activities:
Depreciation and amortization 243,213 225,229
Equity in loss (earnings) of affiliates 992,506 (1,625,515)
Cash distribution from affiliates 354,287 1,112,377
Foreign fixed asset abandonment 61,911 -
Cash received on sale of fixed assets 60,413 -
Loss on sale of fixed assets 11,092 -
Changes in assets and liabilities:
Decrease (increase) in receivables 26,069 (8,707)
(Increase) in inventories (5,395) 6,920)
(Increase) decrease in other current assets (110,990) 433
Decrease in other investment - 55,710
Increase (decrease) in trade accounts payable (101,779) 129,122
Increase in accrued officer salaries 317,800 293,952
Increase in other current liabilities 7,881 46,459
----------- -----------
Total adjustments 1,857,008 222,140
Net cash provided (used) by operating activities $ (211,937) $ 1,218,822
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures - Net $ (156,434) $ (373,029)
----------- -----------
Net cash (used) by investing activities $ (156,434) $ (373,029)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) in short-term debt $ (17,581) $ -
(Decrease) in long-term debt (226,734) (207,219)
----------- -----------
Net cash (used) provided by financing
activities $ (244,315) $ (207,219)
Net (decrease) increase in cash and cash
equivalents $ (612,686) $ 638,574
Cash and cash equivalents at the beginning of the year 653,906 15,332
Cash and cash equivalents at the end of the year $ 41,220 $ 653,906
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 46,657 $ 61,662
The accompanying notes are an integral part of these consolidated
statements. The 1998 and 1997 financial information is unaudited.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
RESERVE INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
FOR THE YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
Common Stock Additional
$1 Par Value Paid-In Accumulated
Shares Amount Capital Deficit Total
</CAPTION>
<S> <C> <C> <C> <C> <C>
BALANCES:
November 30, 1996 3,203,763 $ 3,203,763 $ 7,458,718 $(7,667,284) $ 2,995,197
Common stock issued
during 1997 - - - - -
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
Common stock issued
during 1998: - - - - -
Net income - - - (2,068,945) (2,068,945)
--------- ----------- ----------- ----------- -----------
BALANCES:
November 30, 1998 3,203,763 $ 3,203,763 $ 7,458,718 $(8,739,547) $ 1,922,934
========= =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated
statements. The 1998, 1997 and 1996 financial information is unaudited.
</TABLE>
<PAGE>
INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED NOVEMBER 30, 1998 AND 1997
(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, 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, 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:
1998 1997
----------- ----------
Raw materials $ 112,062 $ 101
Finished products 102,091 62,327
Supplies and packaging 2,797 37,065
----------- ----------
$ 216,950 $ 99,493
(4) PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following at November 30:
1998 1997
----------- -----------
Machinery and equipment $ 1,872,130 $ 2,212,769
Mineral properties 1,906,402 1,906,402
----------- -----------
$ 3,778,530 $ 4,119,171
(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. As a
result the Company's net interest in Rossborough L.P. is 44%.
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. 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, 1998 and 1997 the Company had
$2,012,744 and $3,359,537 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.
Certain parts of raw material inventory is accounted for using
the last-in, first-out (LIFO) method to more appropriately
reflect the inflationary cost increases of certain products.
The effect of the change in 1998 and 1997 was to increase
(reduce) the carrying value of inventory and net income by
approximately $466,000 and $811,000, respectively. At November
30, 1998 and 1997, 79% and 78%, 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:
1998 1996
------------ ------------
Net sales $ 49,970,066 $ 56,072,769
Gross profit $ 7,489,949 $ 10,722,902
Net partnership Income (loss) $ (2,858,231) $ 3,661,131
============ ============
Total current assets $ 13,295,859 $ 20,282,759
Fixed and other assets 6,169,279 6,147,480
------------ ------------
Total assets $ 19,803,430 $ 26,430,439
============ ============
Current liabilities $ 5,356,464 $ 11,425,644
Total long-term liabilities 8,767,147 6,030,289
Minority Interest 959,101 865,468
Total partnership capital 4,720,718 8,109,038
------------ ------------
Total liabilities and partnership capital $ 19,803,430 $ 26,430,439
============ ============
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.
Subsequent to the fiscal year end, an agreement to settle the
litigation related to L-Bar Products was reached and notice was
sent to the creditors (as described in Item 3 of the Form
10KSB). If the settlement agreement is approved by the court,
the Trustee will proceed to liquidate L-Bar Products.
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. Under the terms of the agreement, Northwest
Alloys will be allowed a $4.0 million nonrecourse claim against
L-Bar, but may execute its claim solely against L-Bar's property
in Chewelah, WA.
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:
1998 1997
----------- -----------
Current assets $ 454,194 $ 454,194
Plant, Property & Equip, net of depreciation 6,082,181 6,593,313
Contractual rights and other assets 810,956 810,956
----------- -----------
$ 7,347,331 $ 7,347,331
=========== ===========
Current liabilities $ 3,342,770 $ 3,342,770
Long-term debt, less current portion 3,477,807 3,477,807
Deferred gain on issuance of stock for debt 1,500,000 1,500,000
----------- -----------
$ 8,320,577 $ 8,320,577
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, 1998, 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 1998 and 1997.
(8) INCOME TAXES:
At November 30, 1998 the Company had net operating loss
carryforwards of approximately $10.6 million 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, 1998 the Company had investment
tax and new jobs tax credit carryforwards of approximately
$8,125 which will expire between 1998 and 2001.
Due to losses from continuing operations in 1998, 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):
1998 1997
-------- --------
Current federal income tax $ (630.7) $ (18.0)
Accrual for wages not yet paid 123.9 114.0
Partnership income in excess of equity income - -
Accrual for State Income tax 80.8 34.0
(Reduction) addition to federal
income tax loss carryforward 426.0 (96.0)
-------- --------
$ - $ 34.0
======== ========
(9) OTHER CURRENT LIABILITIES:
Other current liabilities consist of the following at November 30:
1998 1997
---------- ----------
Accrued interest $ 469,597 $ 380,882
Other current liabilities 131,844 579,101
---------- ----------
$ 601,441 $ 959,986
========== ==========
(10) DEBT:
Long-term debt consists of the following at November 30:
1998 1997
----------- -----------
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 119,218 119,218
Capital leases 172,491 399,225
----------- -----------
986,709 1,213,443
Less current portion 954,340 943,979
----------- -----------
$ 32,369 $ 269,464
=========== ===========
The long-term debt payment schedule consists of the following at
November 30, 1998
1999 $ 954,340
2000 32,369
2001 or later -
-----------
$ 986,709
The net book value of the assets leased pursuant to capital
lease arrangements was $394,751 as of November 30, 1998.
(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 1998, the
Company had three customers in the industrial products segment
that accounted for net sales of 39.7% ($471,438), 17.8%
($211,141) and 11.7% ($138,993), respectively. In fiscal year
1997, the Company had two customers in the industrial products
segment that accounted for net sales of 57.9% ($887,036) and
18.2% ($279,572), 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:
1998 1997
----------- -----------
Net sales and revenues:
Industrial Products - Silica sand $ 1,133,280 $ 1,492,238
Industrial Products - Abrasives/Other 8,396 12,396
Corporate 260 428,698
Equity in earnings from affiliates (932,506) 1,685,515
----------- -----------
$ 209,430 $ 3,618,847
Segment operating income:
Industrial Products - Silica sand $ 185,207 $ 181,549
Industrial Products - Abrasives/Other 8,396 12,396
Corporate 260 429,119
Equity in (loss) earnings from affiliates (932,506) 1,685,515
----------- -----------
(738,643) 2,308,579
Corporate and other expenses:
General and administration 865,784 891,396
Depreciation and amortization - Industrial products 224,084 215,659
Depreciation and amortization - Corporate 19,128 9,570
Interest expense 145,761 161,272
Abandonment Foreign assets 75,545 -
----------- -----------
1,330,302 1,277,897
(Loss) income from continuing operations $(2,068,945) $ 1,030,682
=========== ===========
Identifiable assets - Industrial Products $ 1,982,747 $ 2,701,224
Identifiable assets - Corporate 5,629,898 7,000,779
----------- -----------
$ 7,612,645 $ 9,702,003
=========== ===========
Capital expenditures - Industrial Products $ 129,327 $ 373,029
Capital expenditures - Corporate 27,110 -
----------- -----------
$ 156,434 $ 373,029
=========== ===========
The following table summarizes financial data by geographic area
as of November 30:
Sales:
United States $ 1,133,280 $ 1,492,238
Far East 8,396 12,396
----------- -----------
$ 1,141,676 $ 1,504,634
=========== ===========
Operating profit (loss):
United States $ (747,039) $ 2,296,183
Far East 8,396 12,396
----------- -----------
$ (738,643) $ 2,308,579
=========== ===========
Identifiable Assets:
United States $ 6,920,406 $ 8,841,630
Far East 692,239 860,373
----------- -----------
$ 7,612,645 $ 9,702,003
=========== ===========
(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. Under the terms of the Settlement Agreement
described above, Northwest Alloys has agreed to clean up the
site in accordance with a plan approved by the WDOE. The WDOE
has a right under MTCA to try to collect unreimbursed past
(estimated to be less than $200,000) or continuing oversight
costs from PLP's. The Registrant is not aware of what
arrangements the WDOE has made with Northwest Alloys in regard
to the payment of these oversight costs. In the event that
Northwest Alloys failed to perform under the cleanup agreement
with the WDOE, the WDOE would have a right under MTCA to try to
require the Company to pay for the cleanup. The Registrant
denies that it is a PLP for 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 any costs related
to the cleanup at the site. Therefore no amounts have been
accrued for this matter in the accompanying financial statements.
Deferred Compensation
The Company has a deferred compensation plan for its deceased
chairman's spouse who died during January 16, 1998 and the plan
was terminated on that date. 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 1998, 1997, 1996, 1995, 1993 and 1992 because the
Company has been conserving its cash. In 1998 and 1997, the
accrued deferred compensation amounted to $296,228 and $285,521,
respectively.
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 1998 and 1997, the accrued compensation due to
the officers and directors amounted to $2,301,650 and
$2,011,899, 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 1998 and 1997, the accrued
interest on the loan amounted to $448,867 and $377,087,
respectively.
The 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 1998 and 1997, the
accrued interest on these working capital loans amounted to
$43,500 and $29,000, respectively.
Pursuant to promissory notes to the Company, officers have loans
amounting to $478,785 and $449,285 in 1998 and 1997,
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.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> NOV-30-1998 NOV-30-1997
<PERIOD-END> NOV-30-1998 NOV-30-1997
<CASH> 41,220 653,906
<SECURITIES> 0 0
<RECEIVABLES> 696,434 722,513
<ALLOWANCES> 46,332 46,332
<INVENTORY> 216,950 99,493
<CURRENT-ASSETS> 935,258 1,457,628
<PP&E> 3,778,532 4,119,171
<DEPRECIATION> (1,131,688) (1,252,112)
<TOTAL-ASSETS> 7,612,645 9,702,003
<CURRENT-LIABILITIES> 4,684,097 4,467,415
<BONDS> 0 0
0 0
0 0
<COMMON> 3,203,763 3,203,763
<OTHER-SE> (1,280,830) (788,115)
<TOTAL-LIABILITY-AND-EQUITY> 7,612,645 9,702,003
<SALES> 1,133,280 1,492,238
<TOTAL-REVENUES> 209,430 3,618,847
<CGS> 948,072 1,310,268
<TOTAL-COSTS> 2,057,069 2,426,893
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 75,545 0
<INTEREST-EXPENSE> 145,761 161,272
<INCOME-PRETAX> (2,068,945) 1,030,682
<INCOME-TAX> 0 130,000
<INCOME-CONTINUING> (2,068,945) 996,682
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 96,000
<CHANGES> 0 0
<NET-INCOME> (2,068,945) 996,682
<EPS-PRIMARY> (0.65) 0.31
<EPS-DILUTED> (0.65) 0.31
</TABLE>
Exhibit No. 21
Subsidiaries of Reserve Industries Corporation as of November 30, 1998
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
L-Bar Canada Inc. Canada
