<PAGE>
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 May 31, 1999
Commission file number 0-3492
RESERVE INDUSTRIES CORPORATION
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(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
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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 July 8, 1999 - 2,703,763 shares $1.00 Par Value
<PAGE>
<TABLE>
<CAPTION>
RESERVE INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 31, 1999 AND NOVEMBER 30, 1998
(UNAUDITED)
</CAPTION>
<S> <C> <C>
ASSETS 1999 1998
CURRENT ASSETS: ----------- -----------
Cash and cash equivalents $ 52,324 $ 41,220
Receivables, less allowance for doubtful accounts
of $5,050 in 1999 and $46,332 in 1998 455,536 160,568
Receivables from affiliates and related parties 527,544 489,544
Inventories 78,451 216,950
Prepaid expenses and deposits 22,091 26,976
----------- -----------
Total current assets 1,135,946 935,258
PROPERTY, PLANT AND EQUIPMENT, at cost 2,736,067 3,778,532
Less accumulated depreciation and depletion (1,234,561) (1,131,668)
----------- -----------
Total property, plant and equipment 1,501,506 2,646,864
INVESTMENT IN UNCONSOLIDATED AFFILIATES 3,460,461 4,030,523
Total assets $ 6,097,913 $7,612,645
=========== ===========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Short-term debt related party $ 175,000 $ 175,000
Current portion of long-term debt 880,403 954,340
Trade accounts payable 475,230 295,206
Deferred obligations to related parties 2,853,560 2,658,110
Other current liabilities 651,138 601,441
----------- -----------
Total current liabilities 5,035,331 4,684,097
LONG-TERM DEBT, less current portion 136,854 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 (9,736,753) (8,739,548)
----------- -----------
Total stockholders' investment 925,728 1,922,933
Total liabilities and stockholders' investment $ 6,097,913 $ 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 SECOND QUARTER AND SIX MONTHS ENDED
MAY 31, 1999 AND 1998
(UNAUDITED)
</CAPTION>
Second Quarter Ended Six Months Ended
MAY 31 MAY 31
<S> <C> <C> <C> <C>
1999 1998 1999 1998
REVENUES: ---------- ---------- ---------- ----------
Sales $ 293,371 $ 266,630 $ 656,884 $ 553,380
Interest income 775 3,197 804 7,090
Gain on sale of equipment - 2,006 - 2,006
Income (loss) from affiliates:
Equity in earnings (270,064) 183,885 (570,062) 423,785
Consulting fees 15,000 15,000 30,000 30,000
Other income - - 9,315 287
---------- ---------- ---------- ----------
Total revenues 39,082 470,718 126,941 1,016,548
COSTS AND EXPENSES:
Cost of sales 305,306 236,668 683,042 526,479
General and administration 162,847 208,772 328,656 410,128
Interest 32,167 35,087 64,819 71,593
Depreciation and amortization 50,284 63,478 101,415 126,100
Loss on investment - - 101,000 -
Loss on sale of property 817,110 - 817,110 -
----------- ---------- ---------- ----------
Total costs and expenses 1,367,714 544,005 2,096,042 1,134,300
Pretax income (loss)
from continuing operations (1,328,632) (73,287)(1,969,101) (117,752)
Provision for income taxes - - - -
Net income (loss)
from continuing operations $(1,328,632)$ (73,287)$(1,969,101)$(117,752)
DISCONTINUED OPERATIONS:
Reduction in reserve for
estimated losses 973,246 - 973,246 -
Net income (loss) $ (355,386)$ (73,287)$ (995,855)$(117,752)
EARNINGS (LOSS) PER SHARE:
Income (loss) from
continuing operations $ (0.42) $ (0.02) $ (0.62) $ (0.04)
Income from
discontinued operations 0.31 - 0.31 -
---------- --------- ---------- --------
Net income (loss) per share $ (0.11) $ (0.02) $ (0.32) $ (0.04)
Weighted Average Number of Shares of
Common Stock Outstanding 3,161,297 3,203,763 3,161,297 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 SIX MONTHS ENDED MAY 31, 1999 AND 1998
(UNAUDITED)
</CAPTION>
Six Months Ended
May 31
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: ---------- ----------
Net income (loss) $ (995,855) $ (117,752)
Adjustments to reconcile net income (loss)
to net cash provided (used) by operating activities:
Depreciation and amortization 101,415 126,100
Loss from sale of property 817,110 -
Decrease in reserve for losses from
discontinued operations (973,246) -
Equity decrease (increase) in
earnings of affiliates 570,062 (453,785)
Cash distribution from affiliates - 303,005
Changes in current assets and liabilities:
(Increase) in receivables (294,968) (18,174)
Decrease (increase) in inventories 138,499 (28,749)
Increase in other current assets (33,115) (13,091)
Increase (decrease) in trade accounts payable 180,024 (269,290)
Increase in accrued officers salaries
& director fees 195,450 86,955
Increase in other current liabilities 49,697 24,290
---------- ----------
Total adjustments 750,928 (242,739)
Net cash provided (used) by operating activities (244,927) (360,491)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property 600,000 -
Capital expenditures (374,517) (53,980)
---------- ----------
Net cash provided (used) by investing activities 225,483 (53,980)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) in short-term debt (73,937) -
Increase (decrease) in long-term debt 104,485 (93,139)
---------- -----------
Net cash provided (used) by financing activities 30,548 (93,139)
Net increase (decrease) in cash and
cash equivalents $ 11,104 $ (507,610)
Cash and cash equivalents at the beginning of the year 41,220 653,906
Cash and cash equivalents at the end of the quarter $ 52,324 $ 146,296
The accompanying notes are an integral part of these consolidated
statements. The 1999 and 1998 financial information is unaudited.
</TABLE>
<PAGE>
INDEX
Page No.
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PART I. Financial Information
Consolidated Balance Sheets
May 31, 1999 and November 30, 1998 1
Consolidated Statements of Income
Second quarter and six months ended
May 31, 1999 and 1998 2
Consolidated Statements of Cash Flows
Six months ended
May 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 theNovember 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
Second quarter ended May 31, 1999 compared
with the second quarter ended May 31, 1998
For the second quarter ended May 31, 1999, the Company had a net loss
of $355,386 or $0.11 per share as compared to a net loss from operations
of $73,287 or $0.02 per share for the same period last year. Included
in the current quarter is a nonrecurring loss of $817,110 from the sale
of a property and 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 second quarter were $39,082 as compared
to $470,718 for the same period last year. The revenues decreased because
of equity losses from affiliates, which are not expected to improve until
the fourth quarter. 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 begin to improve in the fourth quarter, as
the Company is nearly finished installation of equipment to lower the
sand's iron content. Upon completion of the project, sales volume should,
as a minimum, return to 1997 levels (on a pro rata basis). The plant
improvement program is scheduled to be completed by the end of third quarter.
The current general and administration costs decreased to $162,847 from
$208,772 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.
Six months ended May 31, 1999 compared
with the six months ended May 31, 1998
For the six months ended May 31 1999 the Company had a net loss of $995,855
or $0.32 per share as compared to a net loss from operations of $117,752 or
$0.04 per share for the same period last year. Included in the current
six 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 six months were $126,941 as compared to
$1,016,548 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 $328,656
from $410,128 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
Period from December 1, 1998 to May 31, 1999
The Company's net cash used by operating activities was $244,927 and
$360,491 for the six months ended May 31, 1999 and 1998, respectively.
The net cash provided by investing activities was $225,483 and used by
investing activities was $53,980 for the six months ended May 31, 1999
and 1998, respectively. Most of the cash used by investing activities in
1998 and 1997 was for capital improvements to the sand project. The Company
increased its long term debt $104,485 and reduced its long term debt by
$93,139 for the six months ended May 31, 1999 and 1998, respectively.
Working capital decreased $150,546 for the six 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 May 31, 1999, these accruals (salaries,
deferred compensation and deferred interest) exceeded $2.8 million.
The Company has spend approximately $550,000 in 1999 on capital improvements
to the sand plant and expects to fund this 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 plans to
purchase and install some module upgrades later in the year. The Company
has implemented Y2K compliant software upgrades to its payroll system. The
Company's 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 thesignificant 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 May 31, 1999. The significant
subsidiary also believes it will be fully compliant by August 31, 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.
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.
<PAGE>
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.
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.
<PAGE>
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
The Company has engaged Atkinson & Co. Ltd., Certified Public Accountants
as an independent principal accountant to perform an audit of its financial
statements as required by Regulation S-B. The appointment of
Atkinson & Co. Ltd. was approved by the Company's Board of Directors.
The financial statements have not been audited since 1990 due to the
Company's need to conserve cash, and the Company is not aware of any disputes
with its former principal accountant.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - Exhibit 27
(b) Reports - none
<PAGE>
SIGNATURE
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: July 13, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 6-MOS 6-MOS
<FISCAL-YEAR-END> NOV-30-1999 NOV-30-1998 NOV-30-1999 NOV-30-1998
<PERIOD-END> MAY-31-1999 MAY-31-1998 MAY-31-1999 MAY-31-1998
<CASH> 52,324 41,220 52,324 41,220
<SECURITIES> 0 0 0 0
<RECEIVABLES> 988,130 696,440 988,130 696,440
<ALLOWANCES> (5,050) (46,332) (5,050) (46,332)
<INVENTORY> 78,451 216,950 78,451 216,950
<CURRENT-ASSETS> 1,135,946 935,259 1,135,946 935,258
<PP&E> 2,736,067 3,778,532 2,736,067 3,778,532
<DEPRECIATION> (1,234,561) (1,131,668) (1,234,561) (1,131,668)
<TOTAL-ASSETS> 6,097,913 7,612,645 6,097,913 7,612,645
<CURRENT-LIABILITIES> 5,035,331 4,684,097 5,035,331 4,684,097
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 2,703,763 3,203,763 2,703,763 3,203,763
<OTHER-SE> (1,778,035) (1,280,830) (1,778,035) (1,280,830)
<TOTAL-LIABILITY-AND-EQUITY> 6,097,913 7,612,645 6,097,913 7,612,645
<SALES> 293,371 266,630 656,884 553,380
<TOTAL-REVENUES> 39,082 470,718 126,941 1,016,548
<CGS> 305,306 236,668 683,042 526,479
<TOTAL-COSTS> 550,604 508,918 1,214,113 1,062,707
<OTHER-EXPENSES> 817,110 0 817,110 0
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 32,167 35,087 64,819 71,593
<INCOME-PRETAX> (1,335,547) (73,287) (1,969,101) (117,752)
<INCOME-TAX> 0 0 0 0
<INCOME-CONTINUING> (1,335,547) (73,287) (1,969,101) (117,752)
<DISCONTINUED> 973,246 0 973,246 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (355,386) (73,287) (995,855) (117,752)
<EPS-BASIC> (0.11) (0.02) (0.32) (0.04)
<EPS-DILUTED> (0.11) (0.02) (0.32) (0.04)
</TABLE>
