U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
Quarterly report under Section 13 or 15(d) of the Securities and
Exchange Act of 1934
For the quarterly period ended August 31, 1998
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 and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---- ----
State the number of shares of outstanding of each of the
issuer's classes of common equity, as of the latest practicable
date. As of October 13, 1998 - 3,203,763 shares $1.00 Par Value
<PAGE>
INDEX
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Page No.
-------
PART I. Financial Information
Consolidated Balance Sheets
August 31, 1998 and November 30, 1997 1
Consolidated Statements of Income
Third quarter and nine months ended
August 31, 1998 and 1997 2
Consolidate Statements of Cash Flows
Third quarter ended
August 31, 1998 and 1997 3
Footnotes to Consolidated Financial Statements 4
Management's Discussion and Analysis or
Plan of Operation 5
PART II. Other Information 7
<PAGE>
<TABLE>
<CAPTION>
RESERVE INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AUGUST 31, 1998 AND NOVEMBER 30, 1997
(UNAUDITED)
</CAPTION>
<S> <C> <C>
ASSETS 1998 1997
CURRENT ASSETS:
Cash and cash equivalents $ 31,294 $ 653,906
Receivables, less allowance for doubtful accounts
of $46,332 in 1998 and 1997 187,043 159,751
Receivables from affiliates and related parties 524,711 516,430
Inventories 152,106 99,493
Prepaid expenses and deposits 35,266 28,048
----------- ------------
Total current assets 930,420 1,457,628
PROPERTY, PLANT AND EQUIPMENT, at cost 4,210,585 4,119,171
Less accumulated depreciation and depletion (1,415,093) (1,252,112)
----------- -----------
Total property, plant and equipment 2,795,492 2,867,059
INVESTMENT IN UNCONSOLIDATED AFFILIATES 5,556,320 5,377,316
----------- -----------
Total assets $ 9,282,232 $ 9,702,003
=========== ===========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Short-term debt related party $ 145,000 $ 145,000
Short-term debt 47,581 47,581
Current portion of long-term debt 936,979 943,979
Trade accounts payable 165,317 396,985
Deferred obligations to related parties 2,482,365 2,340,310
Other current liabilities 671,184 593,560
----------- -----------
Total current liabilities 4,448,426 4,467,415
LONG-TERM DEBT, less current portion 134,900 269,464
DISCONTINUED OPERATIONS - L-Bar Products 973,245 973,246
STOCKHOLDERS' INVESTMENT:
Common stock, $1.00 par value. Authorized 6,000,000
shares, issued and outstanding 3,203,763 shares
in 1998 and 1997 3,203,763 3,203,763
Additional paid-in capital 7,458,718 7,458,718
Accumulated deficit (6,936,820) (6,670,603)
----------- -----------
Total stockholders' investment 3,725,661 3,991,878
----------- -----------
Total liabilities and stockholders' investment $ 9,282,232 $ 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 INCOME
FOR THE THIRD QUARTER AND NINE MONTHS ENDED AUGUST 31, 1998 AND 1997
(UNAUDITED)
Third Quarter Ended Nine Months Ended
AUGUST 31 AUGUST 31
1998 1997 1998 1997
</CAPTION>
<S> <C> <C> <C> <C>
REVENUES:
Sales $ 227,994 $ 453,547 $ 781,374 $ 1,187,858
Investment income 1,273 12,216 8,363 12,216
Gain on sales of property
and equipment 1,500 - 3,505 1,010
Gain on sale of stock - 408,245 - 408,425
Income from affiliates:
Interest Income - 2,987 - 7,746
Equity in earnings 88,123 181,638 511,908 665,660
Consulting fees 15,000 15,000 45,000 45,000
Other 11,011 - 11,298 -
---------- ---------- ---------- -----------
Total revenues 344,901 1,073,633 1,361,448 2,327,915
COSTS AND EXPENSES:
Cost of sales 171,298 362,477 697,777 971,469
General and administration 224,144 203,750 634,271 605,940
Interest 34,185 42,437 105,777 124,486
Depreciation and amortization 63,741 55,155 189,841 165,512
---------- ---------- ---------- -----------
Total costs and expenses 493,368 663,819 1,627,666 1,867,407
Income (loss) from
continuing operations (148,467) 409,814 (266,218) 460,508
PROVISION FOR INCOME TAXES: - 139,337 - 156,573
Income (loss) before ---------- ---------- ---------- -----------
extraordinary item (148,467) 270,477 (266,218) 303,935
EXTRAORDINARY ITEM:
Reduction of income taxes from
net operating loss carryforward - 139,337 - 156,573
---------- ---------- ----------- ----------
Net income (loss) $ (148,467)$ 409,814 $ (266,218)$ 460,508
EARNINGS (LOSS) PER SHARE:
Income (loss) before
extraordinary item $ (0.05) $ 0.09 $ (0.08) $ 0.09
Extraordinary item - 0.04 - 0.05
---------- ---------- ----------- ----------
Net income (loss) per share $ (0.05) $ 0.13 $ (0.08) $ 0.14
Weighted Average Number of Shares of
Common Stock Outstanding 3,203,763 3,203,763 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 NINE MONTHS ENDED AUGUST 31, 1998 AND 1997
(UNAUDITED)
</CAPTION>
Nine Months Ended
August 31
<S> <C> <C>
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income from continuing operations $ (266,218) $ 460,508
Adjustments to reconcile net income from continuing
operations to net cash provided by operating activities:
Depreciation and amortization 189,841 165,512
Equity in earnings of affiliates (556,908) (665,660)
Cash distribution from affiliates 377,904 939,516
Changes in assets and liabilities:
(Increase) in receivables (35,573) (73,693)
(Increase) in inventories (52,613) (18,826)
(Increase) in other current assets (7,218) (4,975)
Decrease in other investments - 55,710
(Decrease) in trade accounts payable (231,668) (89,091)
Increase in accrued officers salaries 142,055 179,236
Increase in other current liabilities 77,624 18,136
----------- ----------
Total adjustments (96,556) 505,865
Net cash (used) provided by operating activities (362,774) 966,373
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (118,274) (72,653)
----------- ----------
Net cash (used) by investing activities (118,274) (72,653)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) in long-term debt (141,564) (152,366)
----------- ----------
Net cash (used) by financing activities (141,564) (152,366)
Net (decrease) increase in cash
and cash equivalents $ (622,612) $ 741,354
Cash and cash equivalents at the beginning of the year 653,906 15,332
Cash and cash equivalents at the end of the quarter $ 31,294 $ 756,686
=========== ==========
The accompanying notes are an integral part of these consolidated
statements. The 1998 and 1997 financial information is unaudited.
</TABLE>
<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, 1997 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) necessary for a fair
presentation of such periods have been included.
The Consolidated Financial Statements prepared for fiscal years
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.
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation
Results of Operations
Third quarter ended August 31, 1998 compared
with the third quarter ended August 31, 1997
For the third quarter ended August 31, 1998 the Company had a
net loss from operations of $148,467 or $0.05 per share as
compared to net income from operations of $409,814 or $0.13 per
share for the same period last year.
The Company's revenues for the third quarter were $344,901 as
compared to $1,073,633 for the same period last year. The
revenues decreased because of decreased sales and equity
earnings, and a decrease in the gain from the sale of stock.
The general and administration costs increased from last year to
$224,144 from $203,750. 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, 1998 compared
with the Nine months ended August 31, 1998
For the nine months ended August 31, 1998 the Company had a net
loss from operations of $266,218 or $0.08 per share as compared
to net income from operations of $460,508 or $0.14 per share
for the same period last year.
The Company's revenues for the nine months were $1,316,448 as
compared to $2,327,915 for the same period last year. The
revenues decreased because of decreased sales and equity
earnings, and a decrease in the gain from the sale of stock.
The general and administration costs increased from last year to
$634,271 from $605,940. 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.
Liquidity and Capital Resources
Period from December 1, 1997 to August 31, 1998
Working capital decreased $508,219 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 Company made net capital
improvement expenditures of $118,274 and net reductions in long
term debt of $141,564 during this period.
<PAGE>
Year 2000 (Y2K)
The company uses a packaged accounting system, which the
vendor has represented to be Y2K compliant. The Company is in the
process of recieving Y2K compliant software upgrades to its payroll
system. The Company in the process of contacting its primary customers
to dtermine if they are Y2K compliant.
The Company's significant subsidary also uses a packaged
accounting software system, which the developer has represented to be
Y2K compliant. Affected systems include the significant subsidary's
management information system, certain manufacturing equipment, certain
owned equipment in the field and other office equipment. The
significant subsidary 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 subsidary also
believes it will be fully compliant by May 31, 1999.
Management believes that Y2K will not have a material effect
on the Company or its results of operation. Because the information
technology system at its significant subsidiary was recently upgraded in
the normal course of operations, the costs of Y2K compliance are not
expected to material.
The Company and its significant subsidary are taking all
reasonable steps to ensure Y2K compliance. However, this ability may be
dependent on othe parties and the Company and its significant subsidary
can not provide assurance that there will not be problems.
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Reserve Industries Corporation and L-Bar Products, Inc.,
its wholly owned subsidiary, have reached an agreement to settle all
litigation with Northwest Alloys, Inc. In early February 1999, a
Notice of Intent to enter into a settlemant 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.
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
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
<PAGE>
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - Exhibit 27
Exhibit 10.19 - Settlement and Release Agreement between
Reserve Indusries Corporation and Northwest
Alloys, Inc, dated January 28, 1999
(b) Reports - none
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: January 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 9-MOS 9-MOS
<FISCAL-YEAR-END> NOV-30-1998 NOV-30-1997 NOV-30-1998 NOV-30-1997
<PERIOD-END> AUG-31-1998 AUG-31-1997 AUG-31-1998 AUG-31-1997
<CASH> 31,294 653,906 31,924 653,906
<SECURITIES> 0 0 0 0
<RECEIVABLES> 757,481 722,513 757,481 722,513
<ALLOWANCES> 46,332 46,332 46,332 46,332
<INVENTORY> 152,106 99,493 152,106 99,493
<CURRENT-ASSETS> 930,420 1,457,628 930,420 1,457,628
<PP&E> 4,210,585 4,119,171 4,210,585 4,119,171
<DEPRECIATION> (1,415,093) (1,252,112) (1,415,093) (1,252,112)
<TOTAL-ASSETS> 9,282,232 9,702,003 9,282,232 9,703,003
<CURRENT-LIABILITIES> 4,448,426 4,467,415 4,448,426 4,467,415
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 3,203,763 3,203,763 3,203,763 3,203,763
<OTHER-SE> 521,898 788,115 521,898 788,115
<TOTAL-LIABILITY-AND-EQUITY> 9,282,232 9,702,003 9,282,232 9,702,003
<SALES> 227,994 453,547 781,374 1,187,858
<TOTAL-REVENUES> 344,901 1,073,633 1,361,448 2,327,915
<CGS> 171,298 362,477 697,777 971,469
<TOTAL-COSTS> 459,183 621,382 1,521,889 1,742,921
<OTHER-EXPENSES> 0 0 0 0
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 34,185 42,437 105,777 124,486
<INCOME-PRETAX> (148,467) 409,814 (266,218) 460,508
<INCOME-TAX> 0 139,337 0 156,573
<INCOME-CONTINUING> (148,467) 270,477 (266,218) 303,935
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 139,337 0 156,573
<CHANGES> 0 0 0 0
<NET-INCOME> (148,467) 409,814 (266,218) 460,508
<EPS-PRIMARY> (0.05) 0.13 (0.08) 0.14
<EPS-DILUTED> (0.05) 0.13 (0.08) 0.14
</TABLE>
SETTLEMENT AGREEMENT AND MUTUAL RELEASE
THIS SETTLEMENT AGREEMENT (this "Settlement Agreement") is
entered into by Northwest Alloys, Inc. ("Northwest Alloys"),
Reserve Industries Corporation ("Reserve"), Bruce Boyden,
Chapter 7 Trustee of L-Bar Products, Inc. (the "Trustee") Frank
Melfi, William Melfi and James Melfi (Reserve, the Trustee,
Frank Melfi, William Melfi and James Melfi shall be collectively
referred to as the "L-Bar Parties").
RECITALS
A. On or about December 13, 1991, an involuntary bankruptcy
case (the "Bankruptcy Case") was filed against L-Bar Products,
Inc. ("L-Bar") under Chapter 7 of the United States Bankruptcy
Code (the "Code") in the United States Bankruptcy Court for the
Eastern District of Washington (the "Bankruptcy Court"). On or
about July 29, 1992, L-Bar consented to the Bankruptcy Court's
entry of an order for relief under Chapter 11 of the Code. On
or about March 15, 1995, the Bankruptcy Court converted the
Bankruptcy Case to a case under Chapter 7 of the Code and the
Trustee was appointed Chapter 7 Trustee of L-Bar's estate.
B. All of the issued and outstanding stock in L-Bar is owned by
Reserve. Frank Melfi, William Melfi and James Melfi are each an
officer of Reserve.
C. Among the assets of L-Bar's estate is certain real property
located in the vicinity of Chewelah, Washington (the "Chewelah
Site"). The Chewelah Site is composed of five parcels of real
property, commonly referred to as Parcels A, B, C, D and E and
more particularly described on the attached Exhibit A.
D. L-Bar, and a prior owner of the Chewelah Site, operated a
magnesium recovery and fertilizer business at the Chewelah Site.
L-Bar and the prior owner purchased flux bars from Northwest
Alloys, crushed and screened the flux bars to remove entrained
magnesium and processed the residue to produce fertilizer. As a
result of these operations, substantial quantities of flux bar
and flux bar residue were accumulated at the Chewelah Site.
E. In about August 1988, the Washington Department of Ecology
("Ecology") filed a civil action against L-Bar, Northwest Alloys
and others for alleged violations of the environmental laws
relative to the flux bar and flux bar residue which had been
accumulated at the Chewelah Site. This action has been
dismissed.
<PAGE>
F. In August 1993, Ecology concluded that the conditions at the
Chewelah Site posed a threat to the environment and that
remedial action was required. On or about September 23, 1993,
Ecology notified Reserve, L-Bar and Northwest Alloys that each
of them had been identified as a potentially liable person under
the Washington Model Toxic Control Act, Revised Code of
Washington $$ 70.105D.010, et seq. with respect to the Chewelah
Site. Effective March 17, 1994, Ecology issued an Emergency
Enforcement Order, No. DE 94TC-E102 (the "Emergency Order").
The Emergency Order directed Northwest Alloys, Reserve and L-Bar
to take certain remedial actions at the Chewelah Site.
Northwest Alloys undertook performance of the remedial actions
required by the Emergency Order.
G. Effective January 5, 1995, Ecology issued Agreed Order No.
DE 94TC-E104 (the "Agreed Order"). The Agreed Order directs
Northwest Alloys, Reserve and L-Bar to undertake certain interim
remedial actions at the Chewelah Site and to perform a remedial
investigation and feasibility study (the "Chewelah Site RIFS").
Northwest Alloys and L-Bar executed the Agreed Order.
H. Northwest Alloys caused the Chewelah Site RIFS to be
performed and has performed, and continues to perform, the
remedial work required pursuant to the Agreed Order. Northwest
Alloys estimates that the cost to remediate the Chewelah Site in
compliance with the Agreed Order will exceed $13 million.
I. Additionally, L-Bar transported fertilizer from the Chewelah
Site to warehouses owned by Grant County Port District No. 9
(the "Port of Ephrata"), Beazer West, Inc. ("Beazer West"), the
Inland Empire Pea Growers, United Security Bank and Emmitt
Burley (collectively, the "Warehouses"). Ecology has not
requested or directed L-Bar, Reserve or Northwest Alloys to
address the fertilizer at the Warehouses. Nonetheless,
Northwest Alloys has voluntarily undertaken to remove the
fertilizer from the Warehouses. In consideration for Northwest
Alloys' agreement to remove the material from the warehouses
owned by them, the Port of Ephrata and Beazer West have assigned
to Northwest Alloys all of their claims against L-Bar.
J. Pursuant to a Loan Agreement dated May 24, 1990 (the "May
Loan Agreement"), Northwest Alloys agreed to lend funds to
L-Bar. The May Loan Agreement was superseded by a Loan
Agreement dated August 2, 1990 (the "August Loan Agreement").
Pursuant to the August Loan Agreement, as amended, Northwest
Alloys lent $6.5 million to L-Bar. L-Bar's obligations to repay
such loans and to perform under the August Loan Agreement were
secured by a deed of trust encumbering the Chewelah Site and by
a security interest in all of L-Bar's inventory, accounts
receivable, machinery and equipment.
<PAGE>
K. Reserve guaranteed performance of L-Bar's obligations under
the August Loan Agreement pursuant to a Guaranty dated August 2,
1990 (the "Reserve Guaranty"). In addition, Reserve
subordinated all of its claims against L-Bar pursuant to a
Subordination Agreement dated August 2, 1990 (the "August
Subordination Agreement").
L. Also on August 2, 1990, L-Bar and Northwest Alloys entered
into a Supply Agreement (the "Supply Agreement") under which
L-Bar agreed to buy, and Northwest Alloys agreed to sell, all
flux bar produced by Northwest Alloys.
M. On October 28, 1991, Reserve, L-Bar and Northwest Alloys
entered into a Stock Purchase Agreement (the "Stock Purchase
Agreement") under which Reserve issued 500,000 shares of Reserve
common stock to Northwest Alloys and Northwest Alloys reduced
the principal amount due under the August Loan Agreement to
$3.25 million. After October 28, 1991, Northwest Alloys
advanced additional funds to L-Bar pursuant to the August Loan
Agreement in the principal amount of $541,481. Concurrently,
Reserve subordinated all of its claims against L-Bar pursuant to
a Subordination Agreement dated October 28, 1991 (the "October
Subordination Agreement"). (The May Loan Agreement, the August
Loan Agreement and all amendments thereto, the Reserve Guaranty,
the August Subordination Agreement, the Supply Agreement, the
Stock Purchase Agreement and the October Subordination Agreement
shall be collectively referred to as the "Loan Documents").
N. L-Bar is indebted to Northwest Alloys in the principal sum
of $3,791,481 plus accrued interest pursuant to the August Loan
Agreement.
O. On April 28, 1994, Northwest Alloys filed suit in the United
States District Court for the Eastern District of Washington
(the "District Court") against Reserve (the "Reserve Guaranty
Action"). In the Reserve Guaranty Action, Northwest Alloys
sought damages for Reserve's breach of the Reserve Guaranty and
contribution and declaratory relief with respect to the remedial
action costs incurred or to be incurred by Northwest Alloys at
the Chewelah Site. Reserve answered the complaint and
counterclaimed against Northwest Alloys, alleging that Northwest
Alloys breached the August Loan Agreement and the Supply
Agreement. Reserve also sought a declaration that Northwest
Alloys was solely responsible to perform all remedial work at
the Chewelah Site. The Reserve Guaranty Action subsequently was
stayed in favor of the litigation described below.
<PAGE>
P. On August 31, 1994, L-Bar filed suit against Northwest
Alloys in the Bankruptcy Court (the "L-Bar Action"). The
District Court later withdrew the reference of the L-Bar Action
to the Bankruptcy Court, and the action is now pending in the
District Court. In the L-Bar Action, L-Bar alleged that
Northwest Alloys had breached the August Loan Agreement, the
Supply Agreement and certain fiduciary duties which L-Bar
claimed Northwest Alloys owed to it. L-Bar sought actual and
punitive damages, equitable subordination of Northwest Alloys'
claims and a declaration that Northwest Alloys was solely
responsible to perform all remedial work at the Chewelah Site.
Q. Northwest Alloys answered L-Bar's complaint and filed a
third party claim against Reserve, asserting the claims which
Northwest Alloys had asserted in the Reserve Guaranty Action.
Reserve filed a counterclaim against Northwest Alloys, asserting
the claims Reserve had asserted in the Reserve Guaranty Action.
(The claims asserted by the L-Bar Parties in the Reserve
Guaranty Action and the L-Bar Action shall be referred to as the
"L-Bar Parties' Claims").
R. On April 3, 1998, Northwest Alloys filed in the Bankruptcy
Court a request that all remedial action costs incurred or to be
incurred by Northwest Alloys be allowed as an administrative
priority expense in the Bankruptcy Case. As of April 3, 1998,
the amount of such expenses was $3,965,942. In addition,
Northwest Alloys contends that L-Bar is liable to it for damages
caused by L-Bar's breach of the Supply Agreement.
S. Among the claims against L-Bar's estate are wage claims held
by former employees of L-Bar in the amount of $141,335. Of that
amount, the sum of $92,691 is entitled to priority pursuant to
section 507(a)(3) of the Code (the "Priority Wage Claims").
T. The claims against L-Bar's estate also include two
administrative priority claims filed by Reserve. Northwest
Alloys filed in the Bankruptcy Court an objection to the
allowance of one of such administrative claims.
U. Northwest Alloys and the L-Bar Parties have been actively
engaged in settlement negotiations and desire to resolve all
disputes among them by entering into this Settlement Agreement.
SETTLEMENT AGREEMENT
NOW, THEREFORE, Northwest Alloys and the L-Bar Parties agree as
follows:
<PAGE>
1. Payment by Northwest Alloys. On the Settlement Effective
Date (as defined below), Northwest Alloys shall pay to the
Trustee the sum of $300,000.
2. Return of Reserve Stock. On the Settlement Effective Date
Northwest Alloys shall endorse and deliver to Reserve the stock
certificates evidencing 500,000 shares of Reserve common stock.
3. Payment of Wage Claims. Promptly upon the execution of
this Agreement, Northwest Alloys shall use its best efforts to
purchase the Priority Wage Claims at the face amount of the
priority portion of each such claim. Northwest Alloys shall
negotiate with appropriate representatives of the holders of
Priority Wage Claims an appropriate mechanism to implement such
purchase, but in no event shall Northwest Alloys be obligated to
make more than $92,691 available to the holders of Priority Wage
Claims, nor shall Northwest Alloys have any obligation for any
state or federal withholding, payroll or other taxes or
impositions payable on account of such wages.
4. Allowance of Claims. Northwest Alloys shall be allowed a
non-recourse secured claim in the amount of $4 million (the
"Allowed Non-Recourse Claim") in full satisfaction of any and
all claims Northwest Alloys holds against L-Bar, including all
claims Northwest Alloys has acquired or will acquire by
assignment. The Allowed Claim shall be secured by the existing
deed of trust encumbering the Chewelah Site and the existing
security interest in all of L-Bar's inventory. Northwest Alloys
shall have recourse only to the Chewelah Site and L-Bar's
inventory. L-Bar and its estate shall have no liability to
Northwest Alloys for any deficiency on the Allowed Non-Recourse
Claim.
5. Disposition of the Chewelah Site.
a. After the Settlement Effective Date, Northwest Alloys
shall, at such time prior to the closing of the Case as
Northwest Alloys may determine in its sole discretion, accept
fee title to the Chewelah Site other than the portion of the
Chewelah Site composing a portion of Parcel A and a portion of
Parcel B and more particularly described in the attached Exhibit
B (the "Excluded Real Property"). At Northwest Alloys'
election, Northwest Alloys may acquire title either through
foreclosure of the deed of trust or through a conveyance by the
Trustee. Notwithstanding any other provision of this Settlement
Agreement, Northwest Alloys is not obligated to accept title to
the Excluded Real Property.
<PAGE>
b. Promptly after the Settlement Effective Date, the Trustee
shall take all steps necessary to obtain all needed governmental
and other approvals to convey the Chewelah Site independently of
the Excluded Real Property. Northwest Alloys shall provide
reasonable cooperation and assistance to the Trustee to obtain
such approvals. Notwithstanding section 5.a of this Settlement
Agreement, Northwest Alloys shall not be required to accept
legal title to any of the Chewelah Site until all governmental
and other approvals needed to convey the Chewelah Site
independently of the Excluded Real Property have been obtained.
c. Upon the written request of Northwest Alloys, and after
such notice to parties in interest as may be necessary under the
Code, the Trustee shall convey the Chewelah Site (or any portion
thereof designated by Northwest Alloys) to Northwest Alloys or
its designee free and clear of any and all liens, claims and
encumbrances as provided in section 363(f) of the Code,
including, without limitation, the lien of any property tax for
any period prior to the date of such conveyance. In any such
request, Northwest Alloys shall specify the purchase price for
the portion of the Chewelah Site to be conveyed to it, and
Northwest Alloys shall be entitled to offset the purchase price
against the Allowed Non-Recourse Claim as provided in section
363(k) of the Code. The Trustee shall convey the property
pursuant to an order of the Bankruptcy Court authorizing the
conveyance of the Chewelah Site free and clear of liens, claims
and encumbrances, which order shall be in form and substance
satisfactory to Northwest Alloys.
d. The automatic stay shall be terminated on the Settlement
Effective Date to permit (but not to require) Northwest Alloys
to foreclose on the Chewelah Site, or any portion of it.
e. Notwithstanding anything in this section 5 to the
contrary, Northwest Alloys shall not be obligated to accept
title to any of the Chewelah Site unless Northwest Alloys shall
first have obtained a policy of title insurance insuring
Northwest Alloys' title against all defects, liens, claims and
encumbrances other than any exceptions agreed to in writing by
Northwest Alloys. Such policy shall include appropriate
endorsements insuring that the Chewelah Site can legally be
conveyed independent of the Excluded Real Property.
f. Promptly after the Trustee shall have obtained all needed
governmental and other approvals to convey the Chewelah Site
independent of the Excluded Real Property, Northwest Alloys
shall execute and record a reconveyance of its deed of trust
upon the Excluded Real Property.
<PAGE>
g. The Trustee shall convey to Northwest Alloys such
easements over the Excluded Real Property as Northwest Alloys
may reasonably request.
6. Remediation of the Chewelah Site and the Warehouses.
a. Northwest Alloys shall perform all remediation activities
at the Chewelah Site which are required to be performed pursuant
to the Agreed Order, any other agreement between Northwest
Alloys and Ecology for the remediation of flux bar, flux bar
residue, magnesium chloride or dicalcium silicate slag at the
Chewelah Site consistent with the Chewelah Site RIFS, or any
order by an agency or court of competent jurisdiction directing
Northwest Alloys to remediate flux bar, flux bar residue,
magnesium chloride or dicalcium silicate slag at the Chewelah
Site consistent with the Chewelah Site RIFS, and shall continue
to remove and complete the removal of the fertilizer from the
Warehouses.
b. Northwest Alloys shall remove from the Chewelah Site at
such time and in such manner as Northwest Alloys shall determine
in its sole discretion any barrels or other containers of
sulfuric acid, muriatic acid, zinc sulfate and sodium
hexemetaphosphate.
c. The L-Bar Parties shall cooperate with Northwest Alloys
with respect to any environmental assessment and remediation
activities that Northwest Alloys might undertake at the Chewelah
Site, whether voluntarily or under the direction of Ecology or
other governmental agencies with jurisdiction over the Chewelah
Site. Such cooperation shall include, but not be limited to,
(i) providing Northwest Alloys, its contractors, agents and
assigns access to any portions of the Chewelah Site to which
Northwest Alloys does not hold title, including any portions of
the Excluded Real Property, (ii) supporting as the final remedy
for the Chewelah Site any remedy proposed by Northwest Alloys
which is approved by Ecology, and (iii) not advocating before or
seeking from Ecology or any other governmental agency a remedy
different from that proposed by Northwest Alloys.
d. The L-Bar Parties acknowledge that nothing in this
Settlement Agreement obligates Northwest Alloys (i) to perform
any environmental assessment or remediation activities at the
Chewelah Site which are beyond the scope of the Agreed Order,
any other agreement between Northwest Alloys and Ecology for the
remediation of flux bar, flux bar residue, magnesium chloride or
dicalcium silicate slag at the Chewelah Site consistent with the
Chewelah Site RIFS, or any order by an agency or court of
competent jurisdiction directing Northwest Alloys to remediate
flux bar, flux bar residue, magnesium chloride or dicalcium
silicate slag at the Chewelah Site consistent with the Chewelah
Site RIFS, (ii) to take any action, or to perform any
environmental assessment or remediation activities at the
Chewelah Site, with respect to any sulfuric acid, muriatic acid,
zinc sulfate or sodium hexemetaphosphate other than removal of
any barrels or other containers in which any such substances are
contained at such time and in such manner as Northwest Alloys
shall determine in its sole discretion, (iii) or to perform any
activities at any of the Warehouses other than removal of
fertilizer.
<PAGE>
7. Dismissal of Lawsuits.
a. On the Settlement Effective Date, the L-Bar Parties shall
deliver to Northwest Alloys the original of each of the
following, all of which shall be in form suitable for filing
with the District Court and which shall be in form and substance
satisfactory to Northwest Alloys:
(1) Voluntary dismissal with prejudice of all complaints or
counterclaims filed by the L-Bar Parties in the L- Bar Action.
(2) Voluntary dismissal with prejudice of all counterclaims
filed by the L-Bar Parties in the Reserve Guaranty Action.
b. On the Settlement Effective Date, Northwest Alloys shall
deliver to the L-Bar Parties the original of each of the
following, all of which shall be in form suitable for filing
with the District Court or the Bankruptcy Court, as the case may
be, and which shall be in form and substance satisfactory to
L-Bar Parties:
(1) Voluntary dismissal with prejudice of all third party
complaints or counterclaims filed by Northwest Alloys in the
L-Bar Action.
(2) Voluntary dismissal with prejudice of all complaints
filed by Northwest Alloys in the Reserve Guaranty Action.
(3) Withdrawal of Northwest Alloys' objection to the
allowance of Reserve's administrative claim.
8. Releases by Northwest Alloys.
a. On the Settlement Effective Date Northwest Alloys shall be
deemed to irrevocably generally release any and all actions,
claims, liabilities, causes of action or other rights it might
have as of the Settlement Effective Date against L-Bar, the
Trustee, Frank Melfi, James Melfi and William Melfi, any of L-
Bar's affiliates, any of their property or any of their
officers, employees, shareholders, directors, agents,
representatives, heirs or assigns, including any and all claims
acquired by Northwest Alloys by assignment from any third party
prior to the Settlement Effective Date. Northwest Alloys
understands and expressly agrees that the release in this
section 8.a extends to all claims of every nature and kind
whatsoever, known or unknown, suspected or unsuspected, past or
present, including claims which were not known or suspected to
exist at the time of executing this release, which, if known,
would have materially affected this settlement. Notwithstanding
anything to the contrary, nothing in this section 8.a shall
release, affect or impair any actions, claims, liabilities,
causes of action or other rights Northwest Alloys might have
against Reserve. The release of any such actions, claims,
liabilities, causes of action or other rights is addressed in
section 8.b of this Settlement Agreement.
<PAGE>
b. On the Settlement Effective Date Northwest Alloys shall be
deemed to irrevocably generally release any and all actions,
claims, liabilities, causes of action or other rights it might
have against Reserve any of its property or any of its officers,
employees, shareholders, directors, agents, representatives,
heirs or assigns, including any and all claims which arise out
of or relate to (i) any of the Loan Documents, (ii) any
remediation activities at the Chewelah Site which were
performed, or are required to be performed, pursuant to the
Emergency Order or the Agreed Order, any other agreement between
Northwest Alloys and Ecology for the remediation of flux bar,
flux bar residue, magnesium chloride or dicalcium silicate slag
at the Chewelah Site consistent with the Chewelah Site RIFS or
any order by an agency or court of competent jurisdiction
directing Northwest Alloys to remediate flux bar, flux bar
residue, magnesium chloride or dicalcium silicate slag at the
Chewelah Site consistent with the Chewelah Site RIFS, or (iii)
the storage or removal of fertilizer from the Warehouses.
Northwest Alloys understands and expressly agrees that except
for any Excluded Claim (as defined in section 8.e hereof), the
release in this section 8.b extends to all claims of every
nature and kind whatsoever, known or unknown, suspected or
unsuspected, past or present, including claims which were not
known or suspected to exist at the time of executing this
release, which, if known, would have materially affected this
settlement.
c. Any Priority Wage Claim that is acquired by Northwest
Alloys after the Settlement Effective Date shall be deemed to
have been released by Northwest Alloys on the Settlement
Effective Date.
d. On the Settlement Effective Date Northwest Alloys shall be
deemed to have waived and released any lien or security interest
which it might have in any cash collateral (as defined in
section 363(a) of the Code) held by the Trustee.
e. Notwithstanding Sections 8.a and 8.b of this Settlement
Agreement, nothing in this Settlement Agreement shall constitute
a release of, or adversely affect or otherwise impair, (i) the
Allowed Non-Recourse Claim or realization upon the security
therefor (except that any deficiency claim shall be deemed to
have been waived and released), (ii) any claim by Northwest
Alloys against Reserve arising out of or relating to any
environmental assessment or remediation activities (other than
claims arising from the storage or removal of fertilizer from
the Warehouses) which are beyond the scope of (w) the Emergency
Order, (x) the Agreed Order, (y) any other agreement between
Northwest Alloys and Ecology for the remediation of flux bar,
flux bar residue, magnesium chloride or dicalcium silicate slag
at the Chewelah Site consistent with the Chewelah Site RIFS, or
(z) any order by an agency or court of competent jurisdiction
directing Northwest Alloys to remediate flux bar, flux bar
residue, magnesium chloride or dicalcium silicate slag at the
Chewelah Site consistent with the Chewelah Site RIFS, or (iii)
any claim by Northwest Alloys against Reserve which relates to
the removal from the Chewelah Site of any barrels or other
containers of sulfuric acid, muriatic acid, zinc sulfate and
sodium hexemetaphosphate or to any environmental assessment or
remediation activities relating to such substances
(collectively, the "Excluded Claims").
<PAGE>
9. Releases by the L-Bar Parties.
a. On the Settlement Effective Date the L-Bar Parties shall be
deemed hereby to irrevocably generally release any and all
actions, claims, liabilities, causes of action or other rights
any of them might have as of the Settlement Effective Date
against Northwest Alloys, its corporate parent, any of Northwest
Alloys' affiliates, any of their property or any of their
officers, employees, shareholders, directors, agents,
representatives, heirs or assigns. Without limiting the
generality of the foregoing, this release shall extend to all
claims which were, or which could have been, asserted by any of
the L-Bar Parties in the Reserve Guaranty Action or the L-Bar
Action.
b. The L-Bar Parties understand and expressly agree that this
release extends to all claims of every nature and kind
whatsoever, known or unknown, suspected or unsuspected, past or
present, including claims which were not known or suspected to
exist at the time of executing this release, which, if known,
would have materially affected this settlement.
10. Conditions Precedent.
a. This Settlement Agreement is contingent upon (i) execution
by all parties, (ii) each of the representations and warranties
by the L-Bar Parties shall be true, correct and accurate as of
the Settlement Effective Date (as defined below), (iii) the
Bankruptcy Court shall have entered, after due notice and an
opportunity to be heard, an order in form and substance
satisfactory to Northwest Alloys approving this Settlement
Agreement and authorizing the Trustee to execute this Settlement
Agreement and to take all actions necessary to perform all of
his obligations under this Settlement Agreement and any related
document, agreement or instrument and such order shall have
become final, and (iv) the L-Bar Parties shall have delivered to
Northwest Alloys each of the items listed in section 7.a of this
Settlement Agreement. (The date of the occurrence of the last
of (i), (iii) and (iv) to occur is the "Settlement Effective
Date").
b. Each of the conditions in this section 10 is for the sole
benefit of Northwest Alloys and may be waived by Northwest
Alloys in writing in its sole discretion. If this Settlement
Agreement does not become effective in accordance with its
terms, this Settlement Agreement shall be of no further force
and effect, and no person shall be entitled to rely upon the
provisions hereof, and the parties shall be restored to their
prior positions.
<PAGE>
11. Representations and Warranties.
a. Representations and Warranties by the L-Bar Parties. The
L-Bar Parties represent and warrant to Northwest Alloys that:
(1) Subject only to the approval of the Bankruptcy Court, the
Trustee has all requisite power and authority to execute,
deliver and perform this Settlement Agreement and the
transactions contemplated herein;
(2) Reserve has all requisite corporate power and authority
to execute, deliver and perform this Settlement Agreement and
the transactions contemplated herein and the execution, delivery
and performance by it of this Settlement Agreement and the
consummation of the transactions contemplated herein have been
duly authorized by all necessary corporate action on the part of
Reserve;
(3) The execution, delivery and performance by the L-Bar
Parties of this Settlement Agreement and the consummation of the
transactions contemplated herein will not, with or without the
giving of notice or the lapse of time, or both, require any
consent, approval (other than, with respect to the Trustee,
approval of the Bankruptcy Court), authorization, exemption or
waiver; violate any provision of any law, rule, regulation or
any order, judgment or decree to which any of them may be
subject; or conflict with, or result in, a breach or default
under any term or condition of any agreement or instrument to
which any of them is a party or by which any of them may be
bound;
(4) The L-Bar Parties are the legal and beneficial owners of
the L-Bar Parties' Claims and, prior to the Settlement Effective
Date, have not assigned, transferred or encumbered any of such
claims;
(5) Northwest Alloys has made available to Reserve the
Chewelah Site RIFS and all other studies, reports and other
documents in Northwest Alloys' possession relating to the
environmental condition of the Chewelah Site, and Reserve has
made such review of such documents as Reserve deems appropriate;
and
(6) Except for the representations and warranties set forth
in this Settlement Agreement, Reserve has not relied in any way
upon any representation, warranty or other information (whether
written or oral) made or furnished by Northwest Alloys or any of
its agents, including, without limitation, any information
regarding the environmental condition of the Chewelah Site.
<PAGE>
b. Representations and Warranties by Northwest Alloys.
(1) Northwest Alloys has all requisite power and authority to
execute, deliver and perform this Settlement Agreement and the
transactions contemplated herein and the execution, delivery and
performance by it of this Settlement Agreement and the
consummation of the transactions contemplated herein have been
duly authorized by all necessary corporate action on the part of
Northwest Alloys;
(2) The execution, delivery and performance by Northwest
Alloys of this Settlement Agreement and the consummation of the
transactions contemplated herein will not, with or without the
giving of notice or the lapse of time, or both, require consent,
approval, authorization, exemption or waiver, violate any
provision of law, rule or regulation to which Northwest Alloys
may be subject or any order, judgment or decree to which it may
be subject, or conflict with, or result in, a breach or default
under, any term or condition of any agreement or instrument to
which it is a party or by which it may be bound;
(3) Northwest Alloys has carefully reviewed all information
that Northwest Alloys deems appropriate regarding the
environmental condition of the Chewelah Site, including the
Chewelah Site RIFS, and Northwest Alloys is not aware of any
condition at the Chewelah Site which in Northwest Alloys'
judgment poses a substantial threat to the environment other
than those conditions disclosed in the Chewelah Site RIFS, the
other studies, reports and documents in Northwest Alloys'
possession relating to the environmental condition of the
Chewelah Site, or in any publicly available document; and
(4) Except for the representations and warranties set forth
in this Settlement Agreement, Northwest Alloys has not relied in
any way upon any representation, warranty or other information
(whether written or oral) made or furnished by Reserve or any of
its agents, including, without limitation, any information
regarding the environmental condition of the Chewelah Site.
12. Further Assurances. The parties agree that they will
cooperate in executing all documents and taking all reasonable
actions necessary to effectuate this Settlement Agreement.
Northwest Alloys shall not object to any claim or request for
administrative expenses filed or to be filed by Reserve in the
Bankruptcy Case nor shall Northwest Alloys object to any request
or application by Reserve to Ecology to rescind or revoke
Ecology's designation of Reserve as a potentially liable party
in respect of the Chewelah Site.
<PAGE>
13. Other Litigation.
a. The L-Bar Parties shall, on the request of Northwest
Alloys and at Northwest Alloys' sole cost and expense, cooperate
with and assist Northwest Alloys to the fullest extent that is
commercially reasonable in connection with any threatened or
asserted claim or litigation relating to flux bar, flux bar
residue, magnesium chloride or dicalcium silicate slag.
Northwest Alloys recognizes that after his discharge as trustee
of L-Bar's estate, the Trustee shall have no further obligation
to the L-Bar estate. Notwithstanding the foregoing, after such
discharge, the Trustee agrees, at Northwest Alloys' sole cost
and expense, reasonably to cooperate with and assist Northwest
Alloys in connection with any threatened or asserted claim or
litigation relating to flux bar, flux bar residue, magnesium
chloride or dicalcium silicate slag.
b. Notwithstanding any confidentiality agreements which may
exist, Northwest Alloys and Reserve may use and disclose any
documents produced in the L-Bar Action or the Reserve Guaranty
Action in connection with any threatened or asserted claim or
litigation relating to flux bar, flux bar residue, magnesium
chloride or dicalcium silicate slag.
14. Modification and Amendment. This Settlement Agreement is
an integrated agreement and supersedes all prior discussions,
negotiations and agreements by and among Northwest Alloys and
the L-Bar Parties. Without limiting the generality of the
foregoing, this Settlement Agreement supersedes and replaces the
Loan Documents in their entirety. This Settlement Agreement may
not be amended, altered, modified or otherwise changed except by
writing executed by a duly authorized representative of each of
the parties hereto.
15. Time. Time is of the essence.
16. No Admission. This Settlement Agreement is a settlement of
disputed claims. Nothing contained herein shall be deemed an
admission of liability or an admission against interest, nor
shall this Settlement Agreement be admissible in any litigation
among the parties except litigation to enforce this Settlement
Agreement.
17. Confidentiality. Northwest Alloys and the L-Bar Parties
shall keep the terms of this Settlement Agreement confidential,
except that nothing in this Settlement Agreement shall require
any party to keep confidential the provisions regarding the
treatment of the holders of Priority Wage Claims. Nothing in
this Settlement Agreement shall prohibit any party from making
such disclosures regarding this Settlement Agreement as may be
required by law.
<PAGE>
18. Counterparts. This Settlement Agreement may be executed
in any number of counterparts, each of which shall be an
original, and all of which when taken together shall constitute
one and the same document.
19. Successors and Assigns. This Settlement Agreement shall be
binding on and inure to the benefit of the parties hereto and
their successors and assigns. No third party shall have any
rights hereunder, whether as a third party beneficiary or
otherwise, except as expressly provided herein.
20. Governing Law. This Settlement Agreement shall be governed
by and construed in accordance with the laws of the State of
Washington.
21. Recitals and Exhibits. Each of the foregoing Recitals and
any and all Exhibits to this Settlement Agreement are an
integral part of this Settlement Agreement.
SETTLED AND AGREED TO BY:
Reserve Industries, Inc.
By: /s/ Frank C. Melfi
--------------------
Northwest Alloys, Inc.
By: /s/ Gerald A. Turnbow
----------------------
/s/ Bruce Boyden
- --------------------
Bruce Boyden, Chapter 7
Trustee of L-Bar Products, Inc.
/s/ Frank C. Melfi
- ----------------------
Frank Melfi
/s/ James J. Melfi
- ----------------------
James Melfi
/s/ William J. Melfi
- ------------------------
William Melfi
