U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly report under Section 13 or 15(d) of the Securities and
Exchange Act of 1934
For the quarterly period ended August 31, 1999
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)
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
---------- ---------
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date. As
of October 10, 1999 - 2,703,763 shares $1.00 Par Value
<PAGE>
<TABLE>
<CAPTION>
RESERVE INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AUGUST 31, 1999 AND NOVEMBER 30, 1998
(UNAUDITED)
</CAPTION>
<S> <C> <C>
ASSETS 1999 1998
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 6,281 $ 41,220
Receivables, less allowance for doubtful accounts
of $5,050 in 1999 and $46,332 in 1998 406,729 160,568
Receivables from affiliates and related parties 544,010 489,544
Inventories 240,861 216,950
Prepaid expenses and deposits 34,205 26,976
------------ ------------
Total current assets 1,232,086 935,258
PROPERTY, PLANT AND EQUIPMENT, at cost 2,973,504 3,778,532
Less accumulated depreciation and depletion (1,265,419) (1,131,668)
------------ ------------
Total property, plant and equipment 1,708,085 2,646,864
INVESTMENT IN UNCONSOLIDATED AFFILIATES 3,206,033 4,030,523
------------ ------------
Total assets $ 6,146,204 $ 7,612,645
============ ============
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Short-term debt related party $ 175,000 $ 175,000
Current portion of long-term debt 986,086 954,340
Trade accounts payable 279,119 295,206
Deferred obligations to related parties 2,952,273 2,658,110
Other current liabilities 833,894 601,441
------------ ------------
Total current liabilities 5,226,372 4,684,097
LONG-TERM DEBT, less current portion 463,166 32,369
DISCONTINUED OPERATIONS - L-Bar Products - 973,246
STOCKHOLDERS' INVESTMENT:
Common stock, $1.00 par value. Authorized 6,000,000
shares, issued and outstanding 2,703,763 shares in
1999 and 3,203,763 in 1998 2,703,763 3,203,763
Additional paid-in capital 7,958,718 7,458,718
Accumulated deficit (10,205,815) (8,739,548)
------------ ------------
Total stockholders' investment 456,666 1,922,933
Total liabilities and stockholders' investment $ 6,146,204 $ 7,612,645
============ ============
The accompanying notes are an integral part of these consolidated
statements. The 1999 and 1998 financial information is unaudited.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
RESERVE INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THIRD QUARTER AND NINE MONTHS ENDED AUGUST 31, 1999 AND 1998
(UNAUDITED)
</CAPTION>
Third Quarter Ended Nine Months Ended
AUGUST 31 AUGUST 31
1999 1998 1999 1998
<S> <C> <C> <C> <C>
REVENUES:
Sales $ 320,440 $ 227,994 $ 977,324 $ 781,374
Interest income 5,162 1,273 5,966 8,363
Gain on sale of equipment 3,465 1,500 3,465 3,505
Income (loss) from affiliates:
Equity in earnings (248,112) 88,123 (818,174) 511,908
Consulting fees 15,000 15,000 45,000 45,000
Other income 11,912 11,011 21,227 11,298
----------- ----------- ----------- -----------
Total revenues 107,867 344,901 234,808 1,361,448
COSTS AND EXPENSES:
Cost of sales 245,221 171,298 928,264 697,777
General and administration 204,071 224,144 532,728 634,271
Interest 76,565 34,185 141,385 105,777
Depreciation and amortization 52,421 63,741 153,833 189,841
Loss on investment - - 101,000 -
Loss on sale of property - - 817,110 -
----------- ----------- ----------- -----------
Total costs and expenses 578,278 493,368 2,674,320 1,627,666
Pretax income (loss) from
continuing operations (470,411) (148,467) (2,439,512) (266,218)
Provision for income taxes - - - -
----------- ----------- ----------- -----------
Net income (loss) from
continuing operations $ (470,411)$ (148,467) $(2,439,512)$ (266,218)
DISCONTINUED OPERATIONS:
Reduction in reserve for
estimated losses - - 973,246 -
----------- ----------- ----------- -----------
Net income (loss) $ (470,411)$ (148,467) $(1,466,266)$ (266,218)
=========== =========== =========== ===========
EARNINGS (LOSS) PER SHARE:
Income (loss) from
continuing operations $ (0.15)$ (0.05) $ (0.80)$ (0.08)
Income (loss) from
discontinued operations - - 0.32 -
----------- ----------- ----------- -----------
Net income (loss) per share $ (0.15)$ (0.05) $ (0.48)$ (0.08)
=========== =========== =========== ===========
Weighted Average Number of
Shares of Common Stock
Outstanding 3,035,270 3,203,763 3,035,270 3,203,763
=========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated
statements. The 1999 and 1998 Financial Information is Unaudited.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
RESERVE INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED AUGUST 31, 1999 AND 1998
(UNAUDITED)
</CAPTION>
Nine Months Ended
AUGUST 31
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(1,466,266) $ (266,218)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization 153,833 189,841
Loss from sale of property 817,110 -
Decrease in reserve for losses from
discontinued operations (973,246) -
Equity decrease (increase) in earnings
of affiliates 818,174 (556,908)
Cash distribution from affiliates 6,316 377,904
Changes in current assets and liabilities:
(Increase) in receivables (300,628) (35,573)
(Increase) in inventories (23,911) (52,613)
(Increase) in other current assets (7,229) (7,218)
(Decrease) in trade accounts payable (16,087) (231,668)
Increase in accrued officers salaries
& director fees 294,163 142,055
Increase in other current liabilities 232,453 77,624
----------- -----------
Total adjustments 1,000,948 (96,556)
Net cash provided (used) by operating activities (465,318) (362,774)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property 600,000 -
Capital expenditures (632,164) (118,274)
----------- -----------
Net cash provided (used) by investing activities (32,164) (118,274)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in short-term debt 31,746 -
Increase (decrease) in long-term debt 430,797 (141,564)
----------- -----------
Net cash provided (used) by financing activities 462,543 (141,564)
Net increase (decrease) in cash and cash equivalents $ (34,939) $ (622,612)
Cash and cash equivalents at the beginning of the year 41,220 653,906
----------- -----------
Cash and cash equivalents at the end of the quarter $ 6,281 $ 31,294
=========== ===========
The accompanying notes are an integral part of these consolidated
statements. The 1999 and 1998 financial information is unaudited.
</TABLE>
<PAGE>
INDEX
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Page No.
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PART I. Financial Information
Consolidated Balance Sheets
August 31, 1999 and November 30, 1998 1
Consolidated Statements of Income
Third quarter and nine months ended
August 31, 1999 and 1998 2
Consolidated Statements of Cash Flows
Nine months ended
August 31, 1999 and 1998 3
Footnotes to Consolidated Financial Statements 4
Management's Discussion and Analysis or
Plan of Operation 5-7
PART II. Other Information 8
<PAGE>
FOOTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
The accompanying statements, which should be read in conjunction with the
Consolidated Financial Statements included in the November 30, 1998 fiscal
year end Annual Report filed on Form 10-KSB, are unaudited but have been
prepared in the ordinary course of business for the purpose of providing
information with respect to the interim periods, and are subject to audit
at the close of the year. However, it is the opinion of the management
of the Company that all adjustments (none of which were other than normal
recurring accruals except as disclosed herein) necessary for a fair
presentation of such periods have been included.
The Consolidated Financial Statements prepared for fiscal years 1998, 1997,
1996, 1995,1994, 1993, 1992 and 1991 were unaudited because the Company
elected to not incur the expense of an audit and to conserve its cash for
other corporate requirements.
In November 1992, the Company determined to discontinue the operations of
L-Bar Products Incorporated (L-Bar), a wholly owned subsidiary. As described
in Legal Proceedings below, the litigation with Northwest Alloys was settled.
Accordingly, the reserve for estimated losses related to L-Bar Products was
reduced. The Company also received and canceled the 500,000 shares of common
stock it had issued to Northwest Alloys pursuant to the October 28, 1991
stock purchase agreement.
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation
Results of Operations
---------------------
Third quarter ended August 31, 1999 compared
with the third quarter ended August 31, 1998
For the third quarter ended August 31, 1999, the Company had a net loss of
$470,411 or $0.15 per share as compared to a net loss from operations of
$148,467 or $0.05 per share for the same period last year.
The Company's revenues for the third quarter were $107,867 as compared to
$344,901 for the same period last year. The revenues decreased because of
equity losses from affiliates, which are not expected to improve until the
first quarter of the next fiscal year. The sales at the Company's silica
sand operation increased primarily due to an increase in purchases by
its glass customer. Sales to this customer should remain the same during
the fourth quarter and improve in the first quarter of the next fiscal year.
In September, the Company completed the installation of equipment to lower
the sand's iron content. Sales volume should begin to increase in late
October, and by November, return to 1997 levels (on a pro rata basis).
The current general and administration costs decreased to $204,071 from
$224,144 due to a reduction in legal expenses. Some of the expenses contained
in the general and administrative costs, pertaining to salaries of the
officers and deferred compensation, have been accrued but not paid, as the
Company is conserving its cash.
Nine months ended August 31, 1999 compared
with the nine months ended August 31, 1998
For the nine months ended August 31, 1999, the Company had a net loss of
$1,466,266 or $0.48 per share as compared to a net loss from operations of
$266,218 or $0.08 per share for the same period last year. Included in the
current nine months are nonrecurring losses of $817,110 and $101,000 from
the sale of a property and from the settlement of certain obligations related
to L-Bar Products, respectively. There was also a nonrecurring gain of
$973,246 from the reduction in reserves for estimated losses related to
discontinued operations at L-Bar Products.
The Company's revenues for the nine months were $234,808 as compared to
$1,361,448 for the same period last year. The sales at the Company's silica
sand operation increased primarily due to an increase in purchases by its
glass customer.
The current general and administration costs decreased to $532,728 from
$634,271 due to a reduction in legal and deferred compensation expenses.
Some of the expenses contained in the general and administrative costs
pertaining to salaries of the officers and deferred compensation have been
accrued but not paid as the Company is conserving its cash.
<PAGE>
Liquidity and Capital Resources
-------------------------------
Nine month period from December 1, 1998 to August 31, 1999
The Company's net cash used by operating activities was $465,318 and
$362,774 for the nine months ended August 31, 1999 and 1998, respectively.
The net cash used by investing activities was $32,164 and $118,274 for the
nine months ended August 31, 1999 and 1998, respectively. Most of the cash
used by investing activities in 1999 and 1998 was for capital improvements
to the sand project. The Company increased its long term debt by $430,797
and reduced its long term debt by $141,564 for the nine months ended
August 31, 1999 and 1998, respectively. The proceeds of the debt were used
for capital improvements to the sand project.
Working capital decreased $245,447 for the nine months. The decrease in
working capital includes salaries, directors fees, deferred compensation
and certain interest charges which have been accrued but not paid. The
working capital deficit increased as a result of the operating losses. As
part of the Company's program to conserve cash in order to operate the
Company, part of the salaries due to the officers of the Company, all of
the deferred compensation due to the deceased chairman's spouse (ending in
January 1998) and part of the interest due on certain loans were accrued
but not paid. As of August 31, 1999, these accruals (salaries, deferred
compensation and deferred interest) exceeded $2.9 million.
The Company has spent approximately $632,000 in 1999 on capital improvements
to the sand plant, which was partially funded through additional borrowing.
The Company plans to continue to accrue part of the obligations described in
the above paragraph and expects to continue to generate sufficient cash flow
to operate.
Year 2000 (Y2K). The Company uses a packaged accounting system, which the
vendor has represented to be Y2K compliant. However, the Company has
purchased and will install certain module upgrades later in the year.
The Company has implemented Y2K compliant software upgrades to its payroll
system. The Company Is 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.
Potentially 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 over 95% compliant as of August 31, 1999. A few minor changes are in
the process of being implemented and it believes it will be fully compliant
by November 30, 1999.
Management believes that Y2K will not have a material effect on the Company
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 be material.
<PAGE>
The Company and its significant subsidiary are taking all reasonable steps
to ensure Y2K compliance. However, this ability may be dependent on other
parties, and the Company 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 achievements 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.
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,
foreign 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 10QSB
contains forward-looking statements, particularly in the following
sections: Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, in some of the footnotes to the
financial statements and in Part II, Item 1 Litigation. 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, 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.
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
The Company and L-Bar Products, Inc., its wholly owned subsidiary, have
reached an agreement to settle all litigation with Northwest Alloys, Inc.
On March 12, 1999 the United States Bankruptcy Court for the Eastern
District of Washington Court approved the settlement. On April 29, 1999 the
litigation was dismissed with prejudice by the United States District Court
for the Eastern District of Washington. Pursuant to the settlement agreement
Northwest Alloys has paid the funds due under the agreement and has returned
to the Company the 500,000 shares of common stock issued by Company pursuant
to the October 28, 1991 stock purchase agreement. The Trustee is proceeding
to carry out the terms of the agreement.
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - Exhibit 27
(b) Reports - none
<PAGE>
SIGNATURES
In accordance with the requirements 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)
/s/ William J. Melfi
-------------------------------
William J. Melfi, Vice President
Finance and Administration
(Principal Financial and Accounting
Officer and Authorized Officer)
Date: October 11, 1999
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 9-MOS 9-MOS
<FISCAL-YEAR-END> NOV-30-1999 NOV-30-1998 NOV-30-1999 NOV-30-1998
<PERIOD-END> AUG-31-1999 AUG-31-1998 AUG-31-1999 AUG-31-1998
<CASH> 6,281 41,220 6,281 41,220
<SECURITIES> 0 0 0 0
<RECEIVABLES> 955,789 696,444 955,789 696,444
<ALLOWANCES> 5,050 46,332 5,050 46,332
<INVENTORY> 240,861 216,950 240,861 216,950
<CURRENT-ASSETS> 1,232,086 935,258 1,232,086 935,258
<PP&E> 2,973,504 3,778,532 2,973,504 3,778,532
<DEPRECIATION> (1,265,416) (1,131,668) (1,265,419) (1,131,668)
<TOTAL-ASSETS> 6,146,204 7,612,645 6,146,204 7,612,645
<CURRENT-LIABILITIES> 5,226,372 4,684,097 5,226,372 4,684,097
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 2,703,763 3,203,736 2,703,763 3,203,763
<OTHER-SE> (2,247,097) (1,280,830) (2,247,097) (1,280,830)
<TOTAL-LIABILITY-AND-EQUITY> 6,146,207 7,612,645 6,145,204 7,612,645
<SALES> 320,440 227,994 977,324 781,374
<TOTAL-REVENUES> 107,867 344,901 234,808 1,361,448
<CGS> 245,221 171,298 928,264 697,777
<TOTAL-COSTS> 501,713 459,183 1,614,825 1,521,889
<OTHER-EXPENSES> 0 0 918,110 0
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 76,565 34,185 141,385 105,777
<INCOME-PRETAX> (470,411) (148,467) (2,439,512) (266,218)
<INCOME-TAX> 0 0 0 0
<INCOME-CONTINUING> (470,411) (148,467) (2,439,512) (266,218)
<DISCONTINUED> 0 0 973,246 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (470,411) (148,467) (1,466,266) (266,218)
<EPS-BASIC> (0.15) (0.05) (0.48) (0.08)
<EPS-DILUTED> (0.15) (0.05) (0.48) (0.08)
</TABLE>
