UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
Annual Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended July 31, 1996
Commission File Number: 0-98765
MAGNUM RESOURCES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 87-0368628
(State of incorporation) (I.R.S. Employer Identification No.)
2850 METRO DRIVE SUITE 509
Bloomington, MN 55425
(612) 854-1625
(Address, including zip code, and telephone number including area code,
of Issuer's executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK; 10% CONVERTIBLE PREFERRED STOCK; WARRANTS TO PURCHASE COMMON STOCK
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes __X__ No____
Check if there is no disclosure of delinquent filers in response to item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB[ ].
State issuer's revenues for its most recent fiscal year: $6,940,907
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days: (As of November 1, 1996) approximately $ 1,544,000
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of November 1, 1996 - 10,252,337.
Transitional Small Business Disclosure Format (Alternative 2):
Yes __X__ No ____
MAGNUM RESOURCES, INC.
AND SUBSIDIARIES
PART I
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW AND HISTORICAL BACKGROUND
Magnum Resources, Inc. ("Magnum") and its subsidiaries Hydra-Mac International,
Inc. ("Hydra-Mac") and D&E Machining, Inc. ("D&E")(collectively referred to as
the "Company") design, manufacture, distribute and sell skid steer loaders and
associated products. From 1991 until 1995 the Company also designed,
manufactured and sold rubber track crawler loaders.
Magnum was incorporated in Delaware in 1981 to pursue the possible development
of natural resources in the state of Nevada. In 1991, Magnum acquired Hydra-Mac
and D&E by means of a statutory merger. Since its inception in 1970, Hydra-Mac
has been engaged in the business of designing, manufacturing and selling skid
steer loaders. D&E, since its inception, has been engaged in the business of
manufacturing gear and machine parts, substantially for Hydra-Mac.
PRODUCTS
The following descriptions outline the products of the Company.
SKID STEER LOADERS - HYDRA-MAC
The Company designs, manufactures, and markets skid steer loaders and associated
products. Skid-steer loaders are small four-wheeled vehicles that were
originally designed and used as loaders, but in the last decade have become
increasingly popular with the availability of attachments such as backhoes,
forklifts, breakers, planers, rakes and augers. Today, skid steer loaders
provide users with a versatile, heavy duty, and durable vehicle to perform a
multitude of agricultural, construction and industrial work tasks. In addition,
most skid-steer attachments are designed to be used with an industry standard
quick-attach mechanism which allows attachments built by one manufacturer to be
used on vehicles manufactured by another.
Skid steer loaders are labor-saving machines that can do a variety of jobs that
are difficult to do manually, and that larger machines, such as tractors,
bulldozers, and other construction equipment, cannot do because of their size.
Characteristically, skid steer loaders have an independent drive system for the
left and right side of the unit, thereby allowing the machine to skid and thus
turn 360 degrees within their own tracks. This compact wheel turning ratio
allows the skid steer loader to operate effectively in confined spaces with
limited available maneuverability. Models vary in their physical length, width,
height and operating efficiency to lift a maximum amount of material within
specific work requirements that can be accomplished at a safe rate.
The Company's product line includes four models of the Hydra-Mac hydrostatic,
all-gear drive skid steer loaders. The machines range in size and capacity from
37 horsepower and 1300 pounds of operating capacity to an 88 horsepower diesel
engine with 2650 pounds operating capacity. Hydra-Mac's product line also
consists of two series. One series has Isuzu diesel engines and the other series
features John Deere engines, a heavier frame and a hydraulic pump system. In
addition, although there is no assurance that a new model will be introduced in
1997, the Company has made plans to introduce a new model to the marketplace to
provide a heavy duty skid steer loader with a mid-ranged price that will meet
specific needs of the customer. The Company believes that their 2650D model has
the largest SAE rated operating capacity of any skid steer loader in the
marketplace.
RUBBER TRACK CRAWLERS - COMMANDER
In 1991, the Company offered its rubber tracked crawler loader to the market.
The Commander rubber track crawler offered many of the characteristics of the
skid steer loader, but included the traction advantages of a rubber track system
generally associated with conventional steel track machines. The rubber track
enabled the loader to maneuver on soft surfaces more quickly and easily. At the
same time, the rubber track crawler did not leave the heavy wheel track "foot
print" commonly associated with front-end loaders. These features, along with
the all gear drive technology, enabled the Commander to fill a market niche
between the skid steer loader and other heavy duty front-end loading equipment.
In 1995, the Company decided to cease manufacturing the rubber track crawler
loader due to a management decision to concentrate efforts of the Company's
historical base of traditional skid steer loaders until it determined it could
effectively reintroduce and market the rubber track crawler loader. Currently,
although there can be assurance that the plans will be implemented, the Company
is reviewing a plan to form a strategic partnership with certain track designers
to reintroduce a model of the rubber track crawler to the marketplace during
fiscal year 1997. See "Risk Factors."
REPLACEMENT PARTS AND ATTACHMENTS
The Company offers a variety of loader replacement parts and attachments for all
current and previously produced skid steer and rubber track loaders. It
currently manufactures a wide range of buckets, pallet forks, augers,
scarifiers, outriggers, backhoes, as well as a wide selection of manufactured
replacement and service parts. Many of the replacement and service parts are
produced by the Company, however, a majority of the loader attachments are
purchased from external equipment manufacturers including sweepers, trenchers,
dozer blades, hammers, tracks, snow-blowers, tree-spades, cold-planers, concrete
crushers, and shears. Prices of parts and attachments are based on the normal
market competition since the end user can purchase attachments directly from
other manufacturers. The Company also stocks certain replacement parts for older
loaders to maintain the policy of lifetime serviceability. Prices for these
parts are based upon customer need and the availability of alternative parts
sources.
MARKETS
The skid steer loader market is highly competitive and dominated by several
large multinational companies, including: (1) Case International, (2) Clark
Equipment, (3) John Deere, (4) Koehring, (5) Gehl, (6) Ford New Holland and (7)
Takeuchi. The Company believes that the primary competitive factors affecting
the skid steer loader markets include: price, performance, quality, reliability,
technical innovation and ease of use.
The Company believes that the prices for its products, which ranges from $13,000
to $29,000, are at the high end of the retail price range, but, given the
Company's other features, are acceptable to customers. The Company believes: (1)
its products' all gear drive and technical design features outperform other skid
steer loaders, (2) its products' extra heavy plate steel framing provides
additional durability beyond many competitors, (3) constant design improvements
have enabled the Company to produce skid steer loaders which outlast others in
the field, (4) engineering design changes have updated the skid steer loaders to
meet customer recommendations, and (5) its joystick control device makes the
Company's skid steer loaders easier to use than the competition. The Company
also believes that its units fit the market between the small skid steer loaders
produced by Case, Clark Equipment and Ford New Holland, and the large size earth
moving equipment manufactured by Komatsu and Caterpillar.
SALES AND MARKETING
The Company distributes its skid steer loaders under the Hydra-Mac name through
independent dealers and its own sales force. Historically, the Company has
obtained a majority of sales through an informal network of current owners and
word-of-mouth, relying on product quality, durability and performance to sustain
sales. During 1996, however, sales were increased through: (1) the hiring of
additional sales staff and support personnel to increase their coverage and
presence in all sales regions throughout the United States, (2) increased
participation in industry trade shows, and (3) the development of Internet
marketing presentations. Currently, the Company sells its products throughout
the United States through 150 active dealers and 50 lesser active dealers.
Dealers not included within the Regional organizations are serviced by the
Company as "in house" accounts. The Company has dealerships in several foreign
countries, including Canada, Korea, Europe, and Central and South America and
anticipates that sales and marketing in Central and South America will increase
significantly during 1997.
A majority of the fiscal 1996 skid steer loader sales were financed through a
third party leasing company offering retail financing to the Company's
customers. Beginning in fiscal 1997, the Company established relationships with
two other third party leasing companies to increase the dealer's leasing options
and reduce financing costs.
COMPETITION
The skid steer loader was pioneered by the Melroe Co. in the late 1950's. The
Melroe Co. Bobcat(R) unit is the standard of the industry and still leads in
market share under the current ownership of Clark Manufacturing Company.
Additional competitors currently include: (1) Case International, (2) John
Deere, (3) Koehring, (4) Gehl, (5) Ford New Holland and (6) Takeuchi. All these
companies have far greater experience than the Company as well as greater
financial resources and better development of manufacturing, marketing and
engineering capacities. In addition, the Company believes its skid steer loaders
are highly competitive in several key operating areas listed below:
Capacity: Within the industry, the weight which a particular model is
designed to lift within limits of safety is a relevant competitive
factor. A corollary of weight capacity is the amount of cubic yard
capacity of material which a vehicle is capable of handling. The
Company believes that its vehicles are comparable to those of its
competition.
Dimensions: Customers consider the length, width and height of units
important and place a premium on smaller size. The Company believes
that its vehicles are comparable to its competition.
Operating Efficiency. Vehicles are also judged by the speed within
which they perform specific work. Of particular emphasis is traveling
speed and boom cycle rate. The Company believes that its vehicles are
comparable to its competition.
Operating Cost: All customers pay attention to the costs associated
with operating vehicles. The Company believes its vehicles to be
relatively lower cost vehicles to operate than the Company's
competition primarily due to lower experienced lost down time,
efficiency, serviceability and product support.
Safety: Safety is always a concern. The Company believes that its
safety features provide for safe operation under all reasonable
conditions.
MANUFACTURING
The Company manufactures and assembles its products at its facility in Thief
River Falls, Minnesota. (See "Item 2. Description of Property.") Selected parts
and assemblies are fabricated and machined at its facility in Wahpeton, North
Dakota. Additional parts and accessories are purchased from outside vendors
based upon engineering design requirements and cost and delivery considerations.
To further reduce production costs and increase production capacity, the Company
has begun to place an increased emphasis on purchasing finished component
products from original equipment manufacturers. As of July 31, 1996, the Company
had a production backlog of approximately $1,000,000 consisting of firm orders
from customers. Although there can be no assurance, the Company expects the
orders will increase and that a backlog will be maintained.
ENGINEERING
The Company designs many of its own products. The Company's engineering staff
includes four engineers and two assistants. Engineering expenses for the past
two years were $140,000 in 1996 and $177,000 in 1995. The Company did not spend
any money during fiscal year 1996 on research activities relating to the
development of new products or services. Historically, the Company has dedicated
some funds to such development. For the most recent years, new product
development was almost exclusively incurred in developing the Company's rubber
track crawler. The Company's primary engineering efforts during 1996 were aimed
at (1) improving the current product line, (2) enhancing existing product
quality, and (3) lowering manufacturing costs. The Company expects to spend
additional money on improving the rubber track crawler for potential
re-introduction during 1997.
EMPLOYEES
The Company currently has 74 experienced employees including 53 employees at the
Hydra-Mac manufacturing facilities located in Thief River Falls, Minnesota, 16
employees at the D&E machining facilities located in Wahpeton, North Dakota,
and 5 employees at the corporate offices located in Bloomington, Minnesota. The
Company has attempted to maintain salary rates which are competitive with the
industry within the respective locations and believes its relationships with
employees is good.
PATENTS, TRADE SECRETS AND TRADEMARKS
Utility patents related to the rubber track crawler were issued to Power
Equipment. These patents will expire on July 21, 2009. Three additional patent
applications are currently pending, however, there can be no assurance that any
patents applied for will be granted or that any of the existing patents will be
valid or offer significant protection to the Company. These patents will only be
valuable in the event the Company continues the development and reintroduction
of the rubber track crawler, of which there can be no assurance.
ENVIRONMENTAL MATTERS
The Company does not believe that compliance with all federal, state and local
provisions regulating the discharge of materials into the environment which have
been enacted or adopted will have a material effect upon the capital
expenditures, earnings and competitive position of the Company. However, no
assurance can be given that there is no residual contingent risk associated with
the natural resource development work that may have been done before anyone
associated with the Company joined the Company in 1991.
RISK FACTORS
As provided under the Private Securities Reform Act of 1995, set forth below are
important factors that could cause actual results to differ from those expected
by the Company and identified by the Company as forward-looking statements and
projections elsewhere in this report.
1. Rubber Track Crawler. The Company expects to reintroduce its rubber track
crawler to the public market in 1997. However, several important factors
may delay or impede this action. The Company intends to first secure and
negotiate a strategic partnership with a manufacturer of rubber tracks. No
assurance can be given that the Company will be able to do so. The Company
intends to redesign the rubber track crawler to better address requirements
identified by customers.
2. Working Capital. The Company may need additional working capital. The
Company has a revolving line-of-credit with Norwest Business Credit, Inc.
However, no assurance can be given that it will be able to secure
additional financing, if necessary, on terms satisfactory to it.
3. Backlog. The Company has recently experienced a backlog of orders. The
Company expects this backlog will continue during 1997. If the Company is
unable to meet these demand increases and the customer order schedules are
not met, the orders may be canceled and the Company's reputation for timely
delivery may be adversely affected. Factors which may affect such backlog
and demand are: the economy in general, interest rates, supply
availability, price changes, financing, dealer demand and customer
confidence.
4. Product Liability. The Company is subject to product liability suits during
the normal course of business. The Company maintains product liability
insurance to help mitigate its risk against product liability cases.
Management believes that the ultimate outcome of all outstanding matters
will not be material to the consolidated financial statements.
ITEM 2. DESCRIPTION OF PROPERTY
The Company owns substantially all its office and manufacturing facilities.
Hydra-Mac's principal offices and manufacturing facilities are located in an
80,000 square foot facility in Thief River Falls, Minnesota. Approximately 1500
square feet of the Thief River Falls facility is sub-leased to a non-related
business on a month to month leasing arrangement. D&E's corporate offices and
manufacturing facilities are located in a 22,000 square foot facility located in
Wahpeton, North Dakota. The Company also leases approximately 1200 square feet
of office space located in Bloomington, Minnesota under a three year lease.
Annual lease payments are approximately $14,000 and terminate in 1997. The
Company believes its current facilities will be adequate for its anticipated
needs.
ITEM 3. DIRECTORS, EXECUTIVE OFFICERS, AND SIGNIFICANT EMPLOYEES
Set forth below are the names, ages, positions and a brief summary of the
business experience of the directors, officers and significant employees of the
Company, Hydra-Mac, D&E and Power Equipment.
Name Age Position
- --------------------------------------------------------------------------------
John Luoma 56 Chief Executive Officer, President, and Director
of Magnum Resources; President, Treasurer and
Director of Hydra-Mac International; President
and Director of D&E; and President and
Director of Power Equipment.
Jerome W. Kutil 46 Director and Treasurer of Magnum Resources.
H. Vern Aaseby 43 General Manager of D&E.
Charles H. Kothe 61 Director and Chairman of the Board of Magnum
Resources.
John M. Warburton 45 Director of Magnum Resources.
Richard A. Foster 52 Chief Financial Officer and Secretary of Magnum
Resources, Secretary of Hydra-Mac International,
Vice President, Secretary and Treasurer of D&E,
and Vice President, Secretary and Treasurer of
Power Equipment.
Raymond Swick 43 General Manager of Hydra-Mac International.
SELECTED RESUMES
Effective May 13, 1994, the Company hired John Luoma as President and Chief
Executive Officer of Magnum Resources. Mr. Luoma became a Director of Magnum
Resources in July of 1996. He became the President, Treasurer and Director of
Hydra-Mac International in July of 1995. He also became the President and
Director of Power Equipment in February 1995 and the President and Director of
D&E in August of 1995. From 1986 to 1992, Mr. Luoma was the vice-president of
Supercycle, Inc., which is involved in the development of curbside recycling
services to approximately 350,000 residential units. Mr. Luoma was both a
co-founder and a vice-president of Supercycle, Inc., where his duties and
responsibilities included market assessment, planning, marketing and sales
development, and general administration.
Charles H. Kothe has been a Director of Magnum Resources since January 1991 and
became the Chairman of Magnum Resources' Board of Directors in June 1995. Since
1972, Mr. Kothe has been Vice President and General Manager of Murdo Motor Co.
of Murdo, South Dakota.
Jerome W. Kutil was the Chief Financial Officer of Magnum Resources from 1991
until June 1995. Mr. Kutil has been a Director of Magnum Resources since 1991.
Since August 1988, Mr. Kutil has been Vice President and a Director of United
States Capital Management (USC). Since 1980, Mr. Kutil has also been Vice
President and a Director of Tri-Star Brokerage Services. Mr. Kutil has also been
President of its affiliate, Tri-Star Financial Services, since 1980.
John M. Warburton was the Secretary of Magnum Resources from October 1992 until
June 1995. Mr. Warburton has been Secretary and Treasurer of USC since August
1988. Since 1979, Mr. Warburton has been associated with Tri-Star Financial
Services and has been involved in the areas of life, health and annuities. In
1981, Mr. Warburton founded and has functioned as Manager of New Concepts Agency
of Rushville, Nebraska which markets insurance and annuity programs.
Richard A. Foster, CPA, became the Chief Financial Officer and Secretary of
Magnum Resources in May of 1995. He also became Secretary of Hydra-Mac
International in July of 1995 and Vice President, Secretary and Treasurer of
Power Equipment and D&E in August of 1995. He previously served as Chief
Financial Officer of Braxton Industries from January of 1988 to February of
1990. Mr. Foster resigned his position as Chief Financial Officer of Magnum
Resources in July of 1996 but has continued to provide services to the Company
on a consulting basis.
H. Vern Aaseby was Vice President of D&E from 1983 to 1992. He became a Director
and the President of D&E in 1992.
Raymond Swick was Parts Manager for Hydra-Mac since 1983 and became General
Manager of Hydra-Mac in 1995.
ITEM 4. REMUNERATION OF DIRECTORS AND OFFICERS.
The following table sets forth the annual remuneration paid to the two highest
paid employees for all services rendered to the Company. The Company reimburses
its officers and directors for all out-of-pocket expenses incurred by them in
connection with the performance of their assigned responsibilities. Directors
currently receive no compensation for their services as directors.
NAME AND FISCAL
PRINCIPAL POSITION YEAR SALARY BONUS
------------------ ---- ------ -----
Two highest paid officers 1996 $ 140,000 $ -0-
1995 $ 127,000 $ 40,000
ITEM 5. SECURITY OWNERSHIP OF CERTAIN SECURITY HOLDERS AND MANAGEMENT
a. SECURITY OWNERSHIP OF MANAGEMENT. The following table sets forth certain
information regarding the Company's equity securities owned by the
Company's directors and executive officers, as of July 31, 1996:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE PERCENT
TITLE OF CLASS BENEFICIAL OWNER OF BENEFICIAL OWNER OF CLASS
-------------- ---------------- ------------------- --------
<S> <C> <C> <C>
Common John F. Louma 600,000 6.0%
4021 Coachman Lane
Prior Lake, MN 55327
Common Jerome W. Kutil 261,250 2.5%
1217 West Blvd.
Rapid City, SD 57701
Common Charles H. Kothe 274,447 2.6%
1026 Woodridge Drive
Rapid City, SD 57701
Common John M. Warburton 261,248 2.5%
Route 8, Box 910
Rapid City, SD 57702
Common All Directors & Officers 1,465,963 14.3%
as a Group (6 persons)
</TABLE>
b. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS. Persons known to the
Company to be the beneficial owner of more than five percent of any
class of the Company's voting securities as of July 31, 1996: None,
except persons listed in item (a), above.
c. NON-VOTING SECURITIES. Other persons holding non-voting securities of
the Company, as of July 31, 1996: None.
d. OPTION, WARRANTS AND RIGHTS. Persons holding options, warrants or rights
of the Company, as of July 31, 1996:
<TABLE>
<CAPTION>
AMOUNT OF OPTIONS,DATE OF EXERCISE
NAME OF HOLDER WARRANTS OR RIGHTS EXERCISE PRICE (ON OR BEFORE)
-------------- ------------------ -------------- --------------
<S> <C> <C> <C>
Officers/Directors 20,000 $ .25 8/01/00
</TABLE>
ITEM 6. INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS
The following describes all transactions during the previous two years in which
the Company, or any of its subsidiaries, officers, directors, principal security
holders, or any relative, spouse, or relative of a spouse of the foregoing, had
or has any direct or indirect material interest.
PAYMENTS TO CERTAIN OFFICERS AND DIRECTORS AND EXPENSE REIMBURSEMENT
In the fiscal year ending July 31, 1996, the Company settled a workman's
compensation lawsuit claim with a current Director, Mr. John M. Warburton, in
which the Company has agreed to pay $61,637, including an initial $25,000
payment and the remaining payments to be paid over the next 24 months. See Part
II, Item 2. "Legal Proceedings."
REORGANIZATION OF CORPORATION STRUCTURE AND SALE OF HYDRA-MAC
During the fiscal year ended July 31, 1994, the Company purchased all rights of
Hydra-Mac, Inc.'s former commercial banker in a loan and related security
agreements encumbering all of Hydra-Mac, Inc.'s assets. During the fiscal year
ended July 31, 1995, the Company organized Hydra-Mac International, Inc. and
enforced its rights under the acquired loan and security agreements on
Hydra-Mac, Inc.'s assets and transferred all of its assets to the Company. The
Company has subsequently leased certain of these assets to Hydra-Mac
International, Inc. Effective July 31, 1995, the Company sold the outstanding
shares of Hydra-Mac, Inc. to Hydra-Mac Holding Corporation, which is wholly
owned by Mr. John Luoma, Hydra-Mac president and Chief Executive Officer of the
Company, for a nominal amount. Prior to making the sale of all of its interest
in Hydra-Mac, Inc., the Company secured a fairness opinion from a securities
broker-dealer to the effect that Hydra-Mac, Inc. had little or no value to the
Company.
Conversion of Outstanding Preferred Stock
During the fiscal year ended July 31, 1995, the Company converted all of the
outstanding 873 shares of preferred stock to 581,945 shares of common stock to
the following list of shareholders:
PREFERRED COMMON
SECURITY OWNER SHARES OWNED SHARES ISSUES
-------------- ------------ -------------
Douglass Steiger 391 260,665
Ponderosa Trust 98 65,320
John M. Warburton 98 65,320
Jerome W. Kutil 98 65,320
Charles H. Kothe 98 65,320
U.S. Capital Management 90 60,000
--- ------
Totals 873 581,945
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER STOCKHOLDER MATTERS
The principal market where the Company's Common Stock is traded is the
over-the-counter market using the call letters of MGRI. There are approximately
3,500 holders of the Company's Common Stock. The following includes the high \
low bid information for each quarter in the last two fiscal years:
Fiscal Year 1996 Fiscal Year 1995
---------------- ----------------
Quarter High Bid Low Bid Quarter High Bid Low Bid
------- -------- ------- ------- -------- -------
First .25 .125 First .25 .125
Second .25 .125 Second .25 .125
Third .25 .125 Third .125 .125
Fourth .25 .125 Fourth .125 .125
These quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not represent actual transactions. The holders of Common
Stock are entitled to receive dividends when they are declared by the Board of
Directors. To date, the Company has not paid any dividends. The Company
currently intends to retain all future earnings to finance its growth in
operations.
ITEM 2. LEGAL PROCEEDINGS
In September 1991, Hydra-Mac and one of its dealers were sued in the State of
New York for alleged product liability arising from the death of the user of the
Hydra-Mac skid steer loader occurring in 1991. Hydra-Mac tendered this suit to
its insurance carrier for defense. In 1995 the case was settled for $900,000,
all of which was paid by the insurance carrier.
In November 1994, John M. Warburton, a Director of the Company, brought a
worker's compensation claim against the Company before the Minnesota Department
of Labor and Industry - Worker's Compensation Division, seeking to recover
disability, medical and rehabilitation benefits for a claimed back injury. In
March of 1995, Mr. Warburton amended his claim to add Hydra-Mac, Inc., as a
party. During fiscal 1996, the Company agreed to pay Mr. Warburton $61,637. Of
this amount, $25,000 was paid during 1996 and $36,637 will be paid over the next
two fiscal years on a monthly basis.
The Company is a defendant in various other actions relating to the business,
some of which involve claims for unspecified damages. Although the ultimate
outcome of these claims cannot be predicted with certainty, the Company believes
that the outcome will not have a material effect on the Company's consolidated
financial statements.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
During 1995, Company management determined the need to return to Grant Thornton
LLP for its financial auditing and SEC reporting experience and expertise. The
Company informed Brady, Martz & Associates of the decision in March 1995, and
authorized and instructed Brady, Martz & Associates to respond fully to all
inquiries of the Company's successor accountants, Grant Thornton LLP, who were
engaged by the Company, on July 31, 1995, as described in a Report on Form 8-K
filed on July 31, 1995. The Company did not consult with Grant Thornton LLP
regarding the application of accounting principles to any specific, completed,
or contemplated transaction, or the type of audit opinion which might be
rendered on the Company's financial statements, nor was any written or oral
advice provided that was an important factor to be considered by the Company in
reaching a decision as to an accounting, auditing, or financial reporting issue.
Neither did the Company discuss with Grant Thornton LLP any accounting,
auditing, or financial reporting issue that was the subject to disagreement
between the Company and Brady, Martz & Associates, as there were no such
disagreements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the Company's fiscal year, no matters were
submitted to a vote of security holders through the solicitation of proxies or
otherwise.
ITEM 5. COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
During the fiscal years ended July 31, 1995 and July 31, 1996, the Company was
not aware of any persons who were required to file Form 3 but did not. Also, the
Company has not received any Statements of Changes of Beneficial Ownership of
Securities on Form 4 from any person during the fiscal years ended July 31, 1995
and July 31, 1996. Finally, the Company has not received, and is not aware of,
any Annual Statements of Beneficial Ownership of Securities from any person.
ITEM 6. REPORTS ON FORM 8-K.
On or about July 10, 1996, the Company filed a report on Form 8-K, with the
Commission regarding the financing agreement with Norwest Business Credit, Inc.
PART III
ITEM 1. INDEX TO EXHIBITS ITEM #
Charter and Bylaws 2
Instrument Defining the Rights of Security Holders 3
Voting Trust Agreements 5
Material Contracts 6
Additional Exhibits 99
ITEM 2. DESCRIPTION OF EXHIBITS
Item 2. Charter and Bylaws:
2.1 (a) Certificate of Incorporation recorded January 23, 1991, at
the Office of the Secretary of State for the State of Delaware
in Book R132, Page 209, Document No. 31035.(1)
2.2 (b) Certificate of Merger of Magnum Resources, Inc., a Utah
corporation, with and into Magnum Resources, Inc., a Delaware
corporation, recorded February 11, 1991, at the Office of the
Secretary of State for the State of Delaware in Book 1117,
Page 0694, Document No. 002794.(1)
2.3 (c) Bylaws of Magnum Resources, Inc.(1)
Item 3. Instruments Defining the Rights of Security Holders:
3.1 (a) Final Revised Third Amended Plan of Reorganization dated
March 23, 1987, and signed by Douglass W. Steiger, President,
Hydra-Mac, Inc.(1)
3.2 (b) Agreement and Plan of Reorganization dated February 1,
1991, and signed by Jack Johnson, President, Magnum Resources,
Inc., and Douglass W. Steiger, President, Hydra-Mac, Inc.(1)
3.3 (c) Articles of Merger of Hydra-Mac, Inc., a Minnesota
corporation, into Hydra-Mac, Inc., a Delaware corporation,
signed August 1991, by Douglass W. Steiger, President,
Hydra-Mac, Inc.(1)
3.4 (d) Articles of Merger of Magnum Resources, Inc., a Utah
corporation, with and into Magnum Resources, Inc., a Delaware
corporation, dated January 25, 1991, and signed by N. Thomas
Steele, Vice President, Magnum Resources, Inc.(1)
3.5 (e) Restated Certificate of Incorporation of Magnum Resources,
Inc., dated January 25, 1991, and signed by N. Thomas Steele,
Vice President, Magnum Resources, Inc., and signed by Tori
Thurston, Secretary, Magnum Resources, Inc.(1)
Item 5. Voting Trust Agreements:
5.1 (a) Voting Agreement between Douglass W. Steiger, MaJeanna
Hallstrom, Pamela Lien, Angela Steiger, Vicki Steiger,
Minnesota Foundation, Evangelical Free Church of Thief River
Falls, Magnum Resources, Inc. and United Services Capital
Management Corporation, dated January 14, 1991.(1)
5.2 (b) Amended Voting agreement between Douglass W. Steiger,
MaJeanna Hallstrom, Pamela Lien, Angela Steiger, Vicki
Steiger, Minnesota Foundation, Evangelical Free Church of
Thief River Falls, Magnum Resources, Inc. and United Services
Capital Management Corp, dated January 14, 1991.(1)
5.3 (c) Agreement between Douglass W. Steiger and Magnum
Resources, Inc., dated August 12, 1991.(1)
5.4 (d) Amended Voting Agreement between Douglass W. Steiger,
individually and on behalf of the Steiger Family Shareholders
and Magnum Resources, Inc., dated February 7, 1992.(1)
5.5 (e) Extension and Amendment of Amended Voting Agreement
between Douglass W. Steiger, individually and on behalf of the
Steiger Family Shareholders and Magnum Resources, Inc., dated
September 1992.(1)
5.6 (f) Stock Purchase Agreement with Hydra-Mac Holding
Corporation, a Minnesota corporation, to purchase Hydra-Mac,
Inc., a Delaware corporation, from Magnum Resources, Inc., a
Delaware corporation, dated July 31, 1995.(2)
Item 6. Material Contracts:
6.1 (a) Stock Redemption Agreement between United States Capital
Management Corporation and Magnum Resources, Inc., (undated
and unsigned).(1)
6.2 (b) Stock Distribution Agreement between Magnum Resources,
Inc. and SST, Inc., (undated and unsigned).(1)
6.3 (c) Manufacturing Contract, Service Contract and Sales and
Marketing Contract between Hydra-Mac, Inc. and Power Equipment
Corporation.(1)
6.4 (d) Employment Agreement between John Luoma and Magnum
Resources, Inc.(1)
6.5 (e) Asset Sale Agreement by and between Bank of American
National Trust and Savings Association and Magnum Resources,
Inc.(1)
6.6 (f) Agreement in Lieu of Foreclosure dated July 28, 1995
enforcing rights under a Mortgage and security interest.(2)
6.7 (g) Assignment and Consulting Agreement with Hydra-Mac
International, Inc., a Delaware corporation, to provide
insurance and consulting services for product liabilities for
Hydra-Mac, Inc., a Delaware corporation.(2)
Item 99. Additional Exhibits:
99.1 (a) Letter regarding change in certifying accountant. (2)
(1) Previously filed with the Company's Registration Statement on Form
10-SB, as amended, and incorporated herein by reference pursuant to
Rule 12b.32.
(2) Previously filed on Form 8-K and incorporated by reference pursuant to
Rule 12b.32.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MAGNUM RESOURCES, INC.
BY: /s/ John Luoma
-----------------------------------------
John Luoma, President and Chief Executive
Officer
DATE: February 14, 1997
-----------------------------------------
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
BY: /s/ John Luoma
-----------------------------------------
John Luoma, President and Chief Executive
Officer
DATE: February 14, 1997
-----------------------------------------
BY: /s/ David M. Eichers
-----------------------------------------
David M. Eichers, Secretary and Chief
Accounting Officer
DATE: February 14, 1997
-----------------------------------------
BY:
-----------------------------------------
Charles H. Kothe, Director and Chairman
of the Board
DATE:
-----------------------------------------
BY: /s/ Jerome W Kutil
-----------------------------------------
Jerome W. Kutil, Director
DATE: February 14, 1997
-----------------------------------------
BY: /s/ John M Warburton
-----------------------------------------
John M. Warburton, Director
DATE: February 14, 1997
-----------------------------------------
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Magnum Resources, Inc.
We have audited the accompanying consolidated balance sheets of
Magnum Resources, Inc. (a Delaware corporation) and Subsidiaries as of July 31,
1996 and 1995, and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Magnum Resources, Inc. and Subsidiaries as of July 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
/s/ Grant Thornton LLP
Minneapolis, Minnesota
October 8, 1996 (except for note C, as to
which the date is January 8, 1997)
MAGNUM RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31,
<TABLE>
<CAPTION>
ASSETS (note C) 1996 1995
------ ------
<S> <C> <C>
CURRENT ASSETS
Cash $ 12,011 $ 69,203
Accounts receivable, less allowance for doubtful
accounts of $11,701 in 1996 and $11,047 in 1995
(note A) 500,649 455,989
Inventories (notes A and B) 1,298,903 1,485,906
Prepaid expenses and other 104,500 58,997
----------- -----------
Total current assets 1,916,063 2,070,095
PROPERTY, PLANT AND EQUIPMENT - AT COST
Land 98,015 98,560
Buildings and improvements 1,286,971 1,175,084
Machinery and equipment (note D) 1,750,062 1,871,780
----------- -----------
3,135,048 3,145,424
Accumulated depreciation and amortization (note A) (1,611,465) (1,388,356)
----------- -----------
1,523,583 1,757,068
OTHER ASSETS 38,388 41,298
----------- -----------
$ 3,478,034 $ 3,868,461
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<TABLE>
<CAPTION>
MAGNUM RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31,
LIABILITIES AND
STOCKHOLDERS' EQUITY 1996 1995
------ ------
<S> <C> <C>
CURRENT LIABILITIES
Revolving note payable to bank (note C) $ 117,286 $ --
Current maturities of long-term obligations (note D) 242,535 210,110
Bank overdraft (note A) 215,964 --
Accounts payable 414,577 812,406
Accrued liabilities
Compensation and related costs 147,999 202,950
Warranty costs (note A) 70,000 69,799
Real estate taxes 139,285 117,464
Other 211,213 109,294
----------- -----------
Total current liabilities 1,558,859 1,522,023
LONG-TERM OBLIGATIONS, less current
maturities (note D) 62,621 227,704
DEFERRED INCOME TAXES (note E) 96,000 112,000
COMMITMENTS AND CONTINGENCIES (note F) -- --
STOCKHOLDERS' EQUITY (note G)
Preferred stock, par value $.01 per share; 5,000,000
shares authorized; no shares issued or outstanding -- --
Common stock, par value $.01 per share; 50,000,000
shares authorized; shares issued and outstanding,
10,252,337 in 1996 and 1995 102,523 102,523
Additional paid-in capital 7,830,602 7,830,602
Accumulated deficit (6,172,571) (5,926,391)
----------- -----------
1,760,554 2,006,734
----------- -----------
$ 3,478,034 $ 3,868,461
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
MAGNUM RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JULY 31,
1996 1995
------ -----
Net sales (notes A and H) $ 6,940,907 $ 6,331,406
Cost of goods sold 5,491,706 5,544,582
------------ ------------
Gross profit 1,449,201 786,824
Operating expenses
Selling, general and administrative 1,596,605 1,238,014
Research, development and engineering 139,833 177,110
------------ ------------
1,736,438 1,415,124
------------ ------------
Operating loss (287,237) (628,300)
Other income (expense)
Interest expense (33,171) (45,131)
Other 59,228 24,829
------------ ------------
26,057 (20,302)
------------ ------------
Loss before income taxes (261,180) (648,602)
Income tax benefit (note E) 15,000 17,769
------------ ------------
NET LOSS $ (246,180) $ (630,833)
============ ============
Net loss per common share (note A) $ (.02) $ (.06)
============ ============
Weighted average common shares outstanding 10,252,337 10,122,802
============ ============
The accompanying notes are an integral part of these statements.
<TABLE>
<CAPTION>
MAGNUM RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED JULY 31, 1996 AND 1995
Preferred stock Common stock Additional
--------------- ------------ paid-in Accumulated
Shares Amount Shares Amount capital deficit Total
------ ------ ------------ -------- --------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at August 1, 1994 873 $ 9 9,442,058 $ 94,421 $ 7,648,914 $(5,295,558) $ 2,447,786
Stock issued in settlement of
-- -- 255,000 2,550 194,731 -- 197,281
Conversion of preferred stock
(note G) (873) (9) 581,945 5,819 (5,810) -- --
Net loss -- -- -- -- -- (630,833) (630,833)
Other -- -- (26,666) (267) (7,233) -- (7,500)
------- -------- ----------- ----------- ----------- ----------- -----------
Balances at July 31, 1995 -- -- 10,252,337 102,523 7,830,602 (5,926,391) 2,006,734
Net loss -- -- -- -- -- (246,180) (246,180)
------- -------- ----------- ----------- ----------- ----------- -----------
Balances at July 31, 1996 -- $ -- 10,252,337 $ 102,523 $ 7,830,602 $(6,172,571) $ 1,760,554
======= ======== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these statements.
</TABLE>
MAGNUM RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JULY 31,
1996 1995
------ -----
Cash flows from operating activities:
Net loss $(246,180) $(630,833)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 253,491 330,602
Other 8,624 --
Loss on sale of property, plant and equipment 8,836 76,429
Deferred income taxes (16,000) (10,000)
Changes in assets and liabilities:
Accounts receivable (44,660) 288,900
Inventories 187,003 445,196
Prepaid expenses and other (45,503) (11,717)
Accounts payable (250,166) (116,594)
Accrued liabilities 68,990 (33,072)
--------- ---------
Net cash provided by (used in)
operating activities (75,565) 338,911
Cash flows from investing activities:
Purchase of property, plant and equipment (87,104) (175,278)
Proceeds from sale of property, plant and equipment 61,172 180,710
Other -- (13,494)
--------- ---------
Net cash used in investing activities (25,932) (8,062)
Cash flows from financing activities:
Bank overdraft 215,964 --
Net proceeds from revolving note payable to bank 117,286 --
Proceeds from revolving long-term obligations -- 27,058
Payments on long-term obligations (288,945) (281,804)
Other -- (7,500)
--------- ---------
Net cash provided by (used in)
financing activities 44,305 (262,246)
--------- ---------
Net increase (decrease) in cash (57,192) 68,603
Cash at beginning of year 69,203 600
--------- ---------
Cash at end of year $ 12,011 $ 69,203
========= =========
The accompanying notes are an integral part of these statements.
<TABLE>
<CAPTION>
MAGNUM RESOURCES, INC. AND SUBSIDIARIES
YEARS ENDED JULY 31,
1996 1995
------ -----
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 28,153 $ 40,980
Supplemental schedule of noncash investing and
financing activities:
Issuance of common stock in satisfaction of notes
and accounts payable -- 197,281
Notes payable issued in satisfaction of accounts payable 147,663 247,760
</TABLE>
MAGNUM RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1996 AND 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Magnum Resources, Inc. ("MRI") and subsidiaries (collectively, the "Company")
manufacture skid-steer loaders for commercial and agricultural use through
their manufacturing facilities in Thief River Falls, Minnesota, and Wahpeton,
North Dakota. The Company's products are sold predominately throughout the
United States utilizing an independent dealer network and in-house sales
people.
A summary of the Company's significant accounting policies consistently
applied in the preparation of the accompanying consolidated financial
statements follows:
Principles of Consolidation
The consolidated financial statements include the accounts of MRI and its
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Accounts Receivable
The Company grants credit to customers in the normal course of business, but
generally does not require collateral or any other security to support
amounts due. Management performs on-going credit evaluations of customers.
The Company maintains allowances for potential credit losses.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
Property, Plant and Equipment
Depreciation is provided in amounts that relate the cost of depreciable
assets to operations over their estimated service lives on a straight-line
basis. Estimated service lives are 30 years for buildings, 20 years for
building improvements and 3-7 years for machinery and equipment.
Straight-line and accelerated methods are used for income tax reporting
purposes.
Bank Overdraft
Bank overdraft represents checks written in advance of funding to specific
accounts. The Company intends to fund the bank overdraft through additional
borrowings on the revolving note payable to bank (note C).
Product Warranties
The Company provides for estimated warranty costs at the time of sale.
Revenue Recognition
The Company recognizes revenue at the time the goods are shipped to its
customers.
Net Loss Per Common Share
Net loss per common share is calculated by dividing net loss by the weighted
average common shares outstanding and common share equivalents, when
dilutive.
Use of Estimates
Preparation of the Company's financial statements requires management to make
estimates and assumptions that affect reported amounts of assets and
liabilities and related revenues and expenses. Actual results could differ
from the estimates used by management.
New Accounting Standards
The Company is required to adopt two new accounting standards as of August 1,
1996. The first standard establishes guidance on when and how to measure
impairment of long-lived assets and how to value long-lived assets to be
disposed of. The second standard establishes accounting and reporting for
stock-based compensation plans. The Company intends to continue to use the
intrinsic value method, as permitted by the second standard, while adding
additional disclosures concerning its stock-based compensation plans.
Management believes the adoption of these new standards will not have a
material effect on the Company's financial statements.
NOTE B - INVENTORIES
Inventories consist of the following at July 31:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Service parts and raw and work-in-process materials $ 866,340 $1,039,811
Work-in-process labor and overhead 151,651 112,656
Finished goods 280,912 333,439
-------- ----------
$1,298,903 $1,485,906
========== ==========
</TABLE>
NOTE C - REVOLVING NOTE PAYABLE TO BANK
Note payable to bank consists of borrowings under a revolving note
arrangement which is due on demand. The total funds available under this note
is the lesser of $800,000 or a defined borrowing base of 80% of eligible
receivables. Interest is payable monthly at 6.5% over the bank's prime rate
(effective rate of 14.75% at July 31, 1996), subject to a minimum interest
charge of $37,500 per year.
The revolving note is collateralized by substantially all assets of the
Company and contains certain restrictive covenants which provide for, among
other items, minimum net worth levels. At July 31, 1996, the Company was not
in compliance with certain covenants. On January 8, 1997, the Company
received waivers for these covenants. In addition, the bank amended certain
covenants, increased the revolving note arrangement to $1,200,000, and
expanded the borrowing base to include 60% of finished goods inventory, up to
a maximum of $250,000.
Management believes that the Company will be able to maintain the above
revolving note arrangement, or one with substantially similar terms.
NOTE D - LONG-TERM OBLIGATIONS
<TABLE>
<CAPTION>
Long-term obligations consist of the following at July 31:
1996 1995
------ ------
<S> <C> <C>
Uncollateralized 8% notes payable to corporate legal
counsel - due March through October 1997, payable in
variable installments $128,581 $192,481
Uncollateralized non-interest bearing notes payable
to vendors - due in various monthly installments through
June 1997 69,113 --
Capital lease obligation for equipment - due November
1998, payable in monthly installments including imputed
interest at 12.5% 56,045 76,185
12% note - due June 1997, payable in monthly installments
including interest, collateralized by equipment 28,996 56,604
10% notes payable to stockholder -- 46,217
Other 22,421 66,327
------- -------
305,156 437,814
Less current maturities 242,535 210,110
------- -------
$ 62,621 $227,704
======== ========
</TABLE>
Annual maturities of long-term obligations are as follows:
Year ending July 31,
--------------------
1997 $242,535
1998 54,731
1999 7,890
--------
$305,156
========
Management believes the fair value of long-term obligations approximates the
carrying value based upon rates currently available for debt with similar
terms.
NOTE E - INCOME TAXES
Income tax expense (benefit) consists of the following for the years ended
July 31:
1996 1995
------ ------
Current $ 1,000 $ (7,769)
Deferred (16,000) (10,000)
-------- --------
$(15,000) $(17,769)
======== ========
The effective income tax rates for 1996 and 1995 are less than the Federal
statutory income tax rate due mostly to losses incurred for which no benefit
has been provided.
The tax effects of cumulative temporary differences are as follows at July
31;
1996 1995
------ -----
Deferred tax assets
Inventory reserves and capitalization $ 116,000 $ 134,200
Accrued warranty 28,000 27,900
Other 16,000 12,600
Net operating loss carryforwards 464,400 428,000
-------- --------
624,400 602,700
Valuation allowance (431,800) (361,100)
-------- --------
Net deferred tax asset 192,600 241,600
Deferred tax liabilities
Depreciation (288,600) (353,600)
-------- --------
Net deferred tax liability $ (96,000) $(112,000)
========= =========
Management believes it is more likely than not that the net deferred tax
asset will be realized.
At July 31, 1996, the Company had approximately $1,161,000 of net operating
loss carryforwards, which expire beginning in 2008. Due to changes in the
Company's stock ownership, utilization of the Company's losses prior to 1995
have been restricted.
NOTE F - COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases equipment and office space under operating leases expiring
on various dates through March 1998. In addition to rent, the Company is
generally required to pay insurance, taxes and other operating and
maintenance costs. Rent expense totaled $63,036 and $27,212 in 1996 and 1995.
Future minimum rental commitments under these operating leases are $39,700 in
1997 and $10,900 in 1998.
Litigation
MRI was named in a workers' compensation claim by a director of the Company.
Subsequent to July 31, 1996 the claim was settled. MRI's portion of the
settlement was approximately $62,000, which was expensed during 1996.
The Company is subject to legal proceedings and claims which arise in the
ordinary course of business. In the opinion of management, the ultimate
outcome of these matters will not be material to the consolidated financial
statements.
NOTE G - STOCKHOLDERS' EQUITY
Preferred Stock
Prior to 1995, the Company had 873 shares of preferred stock outstanding.
This stock carried an annual 10% cumulative dividend, liquidation
preferences, dividend preferences and conversion to common stock features.
The preferred stock was convertible by the holders within two years of
issuance into common stock at a conversion price of $.15 per share. The
preferred stock was non-voting and was redeemable by the Company at $100 per
share, together with accrued and unpaid dividends. During 1995, the preferred
stockholders converted the 873 preferred shares into 581,945 shares of common
stock.
Warrants and Options
At July 31, 1995, the Company had warrants outstanding for the purchase of
1,130,362 shares of Company common stock at prices ranging from $1.50 to
$6.00 per share. During 1996, these warrants expired. No common stock
purchase warrants were issued or exercised during 1996 or 1995.
In August 1995, the Company issued options to purchase 20,000 shares of
common stock at $.25 per share, which was the market value upon grant, to a
Company executive. These options were fully vested at the time of grant and
expire in July 2000.
NOTE H - EXPORT SALES
The Company had foreign sales totaling $235,668 in 1996 and $144,615 in 1995
to customers located in the following geographic areas:
1996 1995
------ -----
Canada $105,946 $100,386
Europe 45,058 3,333
Far East 16,008 24,610
Middle East 3,088 16,286
South America 65,568 --
-------- --------
$235,668 $144,615
======== ========
All sales to foreign customers are denominated in U.S. currency.
NOTE I - 1996 YEAR-END ADJUSTMENTS
The Company recorded fourth quarter costs and expenses in 1996, totaling
approximately $300,000, relating to inventory, depreciation expense, accounts
payable and accrued liabilities. A substantial portion of these costs and
expenses related to prior quarters in fiscal 1996. However, the Company is
unable to identify specifically which quarter these amounts relate to. Had
these costs and expenses been properly recorded in the 1996 quarterly
financial statements, the results of operations for those interim periods
could have been significantly different than what was reported.
NOTE J - RECLASSIFICATIONS
Certain 1995 amounts have been reclassified to conform with the 1996
presentation.
