ANNUAL REPORT FOR SMALL BUSINESS ISSUERS
SUBJECT TO THE 1934 ACT REPORTING REQUIREMENTS
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, 1997
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.)
1750 Yankee Doodle Road Suite 202
Eagan, MN 55121
(612) 405 9247
(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, $.01 PAR VALUE
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[ x ].
State issuer's revenues for its most recent fiscal year: $11,199,000
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 December 12, 1997) approximately $ 2,222,000
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of December 12, 1997 - 10,354,337.
Transitional Small Business Disclosure Format (Alternative 2):
Yes _X_ No ___
<PAGE>
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. The Company acquired Power Equipment Corporation ("Power
Equipment") in 1992 for the purposes of designing, manufacturing and selling
rubber track crawlers. The Company ceased manufacturing the rubber track crawler
in 1995 but may reintroduce it at a later date. In 1997, the Company began to
diversify its efforts by forming Magnum Business Systems, Inc., which resells
business automation equipment, such as electronic scanners, manufactured by
various domestic companies. Also, in 1997, sales increased and the Company had a
production backlog of approximately five hundred thousand dollars ($500,000)
consisting of firm orders from customers for skid steer 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, principally for Hydra-Mac.
PRODUCTS
The following descriptions outline the products of the Company.
SKID STEER LOADERS - HYDRA-MAC
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
equipment 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 perform a variety of jobs that
are difficult to accomplish manually, and that larger machines, such as
tractors, bulldozers, and other construction equipment, cannot complete 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 length,
width, height and operating
<PAGE>
efficiency, which allow them to lift a maximum amount of material within
specific work requirements and safety standards.
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 1,300 pounds of operating capacity to an 80 horsepower diesel
engine with 2,650 pounds operating capacity. Diesel engines made by Kubota,
Isuzu, and John Deere are found in the various models of the skid steer loaders
produced by the Company. The Company believes that their 2650D model has the
largest SAE rated operating capacity of any skid steer loader in the
marketplace. In 1997, the Company introduced 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. This new model (2250) utilizes an Isuzu 70
horsepower diesel engine.
RUBBER TRACK CRAWLERS
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 in order to concentrate efforts on the Company's historical base of
traditional skid steer loaders. The Company is currently evaluating the market
potential of the rubber track crawler. Regardless of whether or not the Crawler
is reintroduced, the Company plans on continuing to service and furnish repair
parts to existing Crawler owners. 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 markets a wide range of buckets, pallet forks, augers, scarifiers,
outriggers, backhoes, hammers, shears, trenchers, dozer blades, sweepers, as
well as a number of manufactured replacement and service parts. 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. For 1998, the Company plans to
increase attachment sales by promoting these items heavily through its existing
dealers.
BUSINESS AUTOMATION EQUIPMENT - MAGNUM BUSINESS SYSTEMS, INC. (MBS)
In 1997, the Company formed a subsidiary called Magnum Business Systems, Inc.
("MBS").
<PAGE>
MBS distributes a complete line of laser and CCD scanners, check readers and
portable data terminals (batch, radio frequency, and wireless networks). These
items are typically sold to businesses operating in an environment dependent
upon point of sale (POS) transactions. Most purchasers of this equipment are
retailers such as department stores and sporting goods dealers. The subsidiary
has three employees engaged in the sale of these products. The Company provides
management support and facilities. The results of operations for MBS through
July 31, 1997 were not material to the Company's consolidated financial results.
MARKETS - SKID STEER LOADERS
Approximately one-third of the Company's current skid steer loader sales are to
companies within the agriculture industry, primarily located in the upper
Midwest. The skid steer loaders are primarily for use in material handling and
facility cleaning. The units sold for agriculture uses are in the lower range of
size, horsepower, and operating capacity. The remainder of sales are to
companies within the construction, demolition, nursery, and waste management
industries. Less than six percent (6%) of total sales are to foreign markets.
The skid steer loader market is highly competitive and dominated by a number of
large, multinational companies, including: (1) Case International, (2) Melroe
Ingersall Rand, (3) John Deere, (4) Gehl, and (5) Ford New Holland. 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 list prices for its products, which range from
$20,000 to $40,000, 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 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, (5) its joystick control device makes the
Company's skid steer loaders easier to use than the competition, and, (6) for
users preferring control systems similar to those found on loaders made by other
companies, the Company's units can be ordered with those operating controls
factory installed. The Company also believes that its units fit the market
between the small skid steer loaders produced by Case, Melroe Ingersall Rand and
Ford New Holland, and the large size earth moving equipment manufactured by
Komatsu and Caterpillar.
MARKETS - MAGNUM BUSINESS SYSTEMS
The markets for automation equipment are very large and pricing is highly
competitive. MBS represents a number of manufacturers and offers customer -
specific application products. MBS markets its products to department stores,
distribution centers, convenience stores, and medical institutions.
SALES AND MARKETING
<PAGE>
The Company distributes its skid steer loaders under the Hydra-Mac name through
independent dealers and through 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 1997, sales growth was created 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 additional 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 1998.
Sales to companies within the agricultural and construction industries are
affected by the cyclical nature of those industries. Weather conditions,
interest rates, and farm production affect purchases by those companies. The
Company believes the versatility of its products and their suitability for
multiple purposes helps to minimize these factors.
The Company offers financing for its dealers through arrangements with two
finance companies. A majority of the fiscal 1997 skid steer loader dealer sales
were financed through these companies. One of these arrangements requires the
Company to repurchase goods and pay the finance company for the unpaid balance
due them from the dealer, along with repossession costs, in the event of default
by the dealer. The Company has not incurred any material costs associated with
this agreement. As of July 31, 1997, this finance company had balances due from
dealers totaling approximately $501,000.
Sales of business automation equipment are handled primarily through three
direct sales employees. These employees are based in the Eagan facility and rely
heavily on telemarketing for prospective sales. MBS has agreements with a number
of manufacturers of automation equipment, which provide for distribution of
their products. The business is not capital intensive but requires the Company
to retain technically trained personnel to accurately determine which products
address the customer's needs. There is no assurance that MBS will be able to
retain or hire technical sales personnel.
COMPETITION - SKID STEER LOADERS
The Melroe Bobcat(R) unit is the standard of the industry and still leads in
market share under the current ownership of Ingersoll Rand. Additional
competitors include: (1) Case International, (2) John Deere, (3) Gehl, and (4)
Ford New Holland. 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 markets
for the Company's products are intensely competitive. The Company, however,
believes its skid steer loaders are highly competitive in the following key
operating areas:
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
<PAGE>
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 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 less down time, easier 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 skid steer 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, 1997, the Company had a production backlog of approximately $500,000
consisting of firm orders from customers for skid steer loaders. 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 skid steer products and accessories. The
Company's engineering staff includes three engineers and two assistants.
Engineering expenses for the past two years were $223,000 in 1997 and $140,000
in 1996. Prior to 1996, new product development was almost exclusively incurred
in developing the Company's rubber track crawler. The Company's primary
engineering efforts during 1997 were aimed at (1) improving the current product
line, (2) enhancing existing product quality, (3) lowering manufacturing costs,
and, (4) developing new products. Two new products were developed in 1997. Model
2250 was introduced to the marketplace in December 1996 and Model 2550 will be
introduced in October 1997.
EMPLOYEES
<PAGE>
The Company currently has 109 employees including, 71 employees at the Hydra-Mac
manufacturing facility located in Thief River Falls, Minnesota, 30 employees at
the D & E machining facilities located in Wahpeton, North Dakota, and 8
employees at the corporate offices located in Eagan, Minnesota, three of which
perform services for Magnum Business Systems. The Company attempts to maintain
salary rates, which are competitive with the industry within the respective
locations and believes its relationships with employees is good. No employee
groups are members of a collective bargaining organization.
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. These patents are pledged
as collateral securing payment of Hydramac International's revolving note with a
lender. (See below, "Risk Factors"). 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 believes that compliance with all federal, state and local
provisions regulating the discharge of materials into the environment which have
been enacted or adopted will not 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
currently associated with the Company joined the Company in 1991.
RISK FACTORS
As provided under the Private Securities Litigation 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. Working Capital. The Company may need additional working capital. The
Company has a revolving line-of-credit facility with Norwest Business
Credit, Inc. ("Bank"). However, the Company has on occasion been in default
with respect to certain covenants and conditions contained in the credit
facility. The Bank has waived compliance with these covenants and
reestablished the covenants such that the Company is in compliance with all
covenants. No assurance can be given that the Company will be able to
obtain waivers for any future instances of default, should they occur. In
addition, the Bank may cease to make advances and demand payment of the
line of credit under circumstances where no default exists. Management
believes that the Company will be able to maintain the current credit
facility or one with substantially similar terms; however, no assurance
can be given that this will be accomplished.
2. Order Fulfillment. The Company has recently experienced a backlog of
orders. The Company expects this backlog will continue during 1998. If the
Company is unable to meet demand increases and customer order schedules are
not met, orders may be canceled and the Company's reputation for timely
delivery may be adversely affected. Factors
<PAGE>
which may affect such backlog and demand are: the economy in general,
interest rates, supply availability, price changes, financing, dealer
demand and customer confidence.
3. 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.
4. Rubber Track Crawler. The Company did not reintroduce its rubber track
crawler in fiscal year 1997 as planned. The Company is still evaluating
current market conditions to determine if reintroducing the crawler would
be prudent.
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 1,500
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 4,000 square feet
of office space located in Eagan, Minnesota under a three year lease. Annual
lease payments are approximately $34,000 and terminate in 2000. The Company
believes its current facilities will be adequate for its anticipated needs.
Substantially all of the assets, such as accounts receivable, inventory, fixed
assets, and patents, are pledged as collateral to secure payment of its notes
with its lender and finance institution. In the event of default on these
obligations, the lenders may take possession of each premises where Hydramac
conducts business. (See "Risk Factors")
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, Power Equipment and Magnum Business Systems.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Name Age Position
<S> <C> <C>
John F. Luoma 57 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 and Magnum Business Systems.
(Father of Eric Luoma)
Jerome W. Kutil 47 Director and Treasurer of Magnum Resources.
<PAGE>
H. Vern Aaseby 44 General Manager of D&E Machining.
Charles H. Kothe 64 Director and Chairman of the Board of Magnum Resources.
John M. Warburton 46 Director of Magnum Resources.
David M. Eichers 50 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 and Magnum Business Systems.
Raymond Swick 44 General Manager of Hydra-Mac International.
Eric Luoma 29 Vice President of Magnum Business Systems.
(Son of John F. Luoma)
</TABLE>
SELECTED RESUMES
John Luoma has served as President and Chief Executive Officer of Magnum
Resources since May, 1994. Mr. Luoma became a Director of Magnum Resources in
July of 1996 and 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. He
became President and Director of MBS in July 1997. From 1986 to 1992, Mr. Luoma
was co-founder and vice-president of Supercycle, Inc., which is involved in the
development of curbside recycling services. His duties and responsibilities
included market assessment, planning, marketing and sales development, and
general administration. He is the father of Eric Luoma.
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 and Treasurer 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
<PAGE>
insurance and annuity programs.
David M. Eichers, CPA, became the Chief Financial Officer and Secretary of
Magnum Resources in January of 1997. He also became Secretary of Hydra-Mac
International in January of 1997 and Vice President, Secretary and Treasurer of
Power Equipment and D&E in January of 1997. He became Vice President, Secretary,
and Treasurer of MBS in July 1997. He previously served as Director of Finance
of Cesco Products, a Minneapolis-based sheetmetal fabricator from 1991 to
November 1996.
H. Vern Aaseby was Vice President of D&E from 1983 to 1992. He became the
General Manager as well as Director and the President of D&E in 1992. He
currently holds the sole title of General Manager.
Raymond Swick was Parts Manager for Hydra-Mac since 1983 and became General
Manager of Hydra-Mac in 1995.
Eric Luoma became an employee of the Company in January 1997. He was elected
Vice President of Magnum Business Systems, Inc., on July 31, 1997 with the
formation of that business. He previously held sales positions with another
business automation reseller and with a major air transportation company. He is
the son of John F. Luoma.
ITEM 4. REMUNERATION OF DIRECTORS AND OFFICERS.
The following table sets forth the annual remuneration paid to the two highest
paid officers 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
Two highest paid officers 1997 $ 118,000
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, 1997:
<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
<PAGE>
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 holding or
sharing the power to vote, or to direct the voting of securities described
above; or persons known to the Company to be the beneficial owner of more
than ten (10%) percent of any class of the Company's voting securities as
of July 31, 1997: 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, 1997: None.
d. OPTION, warrants and rights. Persons holding options, warrants or rights of
the Company, as of July 31, 1997: None
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 agreed to pay $61,637, including an initial $25,000 payment
with remaining payments to be paid over the following 24 months. See Part II,
Item 2. "Legal Proceedings."
AGREEMENT OF CERTAIN OFFICERS AND DIRECTORS RELATIVE TO A BONUS
During fiscal year 1995, the Company accrued a $40,000 bonus to be paid to Mr.
John Luoma, an officer and director of the Company. During fiscal 1997, the
Company determined that the bonus had not been fully earned and as such, the
bonus accrual was reversed.
<PAGE>
REORGANIZATION OF CORPORATION STRUCTURE AND SALE OF HYDRA-MAC
During the fiscal year ended July 31, 1994, the Company purchased all of the
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.
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 registered holders of the Company's Common Stock. The following includes
the high \ low bid information for each quarter in the last two fiscal years.
The information for the fiscal year 1997 was obtained from a securities
monitoring service on the Internet. The prices for fiscal year 1996 came from
the prior year financial reports:
Fiscal Year 1997 Fiscal Year 1996
---------------- ----------------
Quarter High Bid Low Bid Quarter High Bid Low Bid
------- -------- ------- ------- -------- -------
First .41 .13 First .25 .13
Second .38 .13 Second .25 .13
Third .50 .19 Third .25 .13
Fourth .50 .19 Fourth .25 .13
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 November 1994, John M. Warburton, a Director of the Company, brought a
worker's
<PAGE>
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 fiscal 1996 with the remaining balance to be paid over
the following two fiscal years on a monthly basis.
In May 1997, the Company was named as a fourth party defendant in a lawsuit
brought by the estate of a user of a skid steer loader manufactured by its
former subsidiary, Hydramac, Inc. This case was settled in September 1997 at a
cost of approximately $84,000.
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
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of fiscal year 1997, 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, 1996 and 1997, 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, 1996 and 1997.
Finally, the Company has not received, and is not aware of, any Annual
Statements of Beneficial Ownership of Securities on Form 5 from any person.
ITEM 6. REPORTS ON FORM 8-K.
There were no reports on Form 8-K filed during the fourth quarter of fiscal year
1997.
PART III
ITEM 1. INDEX TO EXHIBITS ITEM #
Charter and Bylaws 2
Instrument Defining the Rights of Security Holders 3
<PAGE>
Voting Trust Agreements 5
Material Contracts 6
Financial Data Schedule 27
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)
<PAGE>
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 Corporation, 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 (c) Manufacturing Contract, Service Contract and
Sales and Marketing Contract between Hydra-Mac, Inc.
and Power Equipment Corporation. (1)
6.2 (d) Employment Agreement between John Luoma and
Magnum Resources, Inc. (1)
6.3 (e) Asset Sale Agreement by and between Bank of
American National Trust and Savings Association and
Magnum Resources, Inc. (1)
6.4 (f) Agreement in Lieu of Foreclosure dated July 28,
1995 enforcing rights under a Mortgage and security
interest. (2)
<PAGE>
6.5 (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 27. Additional Exhibits
27.1 Financial Data Schedule
(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.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MAGNUM RESOURCES, INC.
BY: /s/ John Luoma
John Luoma, President and
Chief Executive Officer
DATE: December 12, 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: December 12, 1997
BY: /s/ David M. Eichers
David M. Eichers, Secretary and Chief
Financial Officer and Chief
Accounting Officer
DATE: December 12, 1997
BY: /s/ Charles H. Kothe
Charles H. Kothe, Director and
Chairman of the Board
DATE: December 12, 1997
BY: /s/ Jerome W Kutil
Jerome W. Kutil, Director
DATE: December 12, 1997
BY: /s/ John M Warburton
John M. Warburton, Director
DATE: December 12, 1997
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Magnum Resources, Inc.
We have audited the accompanying consolidated balance sheets of
Magnum Resources, Inc. (a Delaware corporation) and subsidiaries as of July 31,
1997 and 1996, and the related consolidated statements of operations,
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, 1997 and 1996, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended in conformity with generally accepted accounting
principles.
/s/ Grant Thornton LLP
Minneapolis, Minnesota
September 12, 1997 (except for note C as to
which the date is October 21, 1997)
<PAGE>
MAGNUM RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
JULY 31,
<TABLE>
<CAPTION>
ASSETS (note C) 1997 1996
----------- -----------
CURRENT ASSETS
<S> <C> <C>
Cash $ 7,000 $ 12,000
Accounts receivable, less allowance for doubtful
accounts of $24,000 in 1997 and $12,000 in 1996
(note A) 1,455,000 501,000
Inventories (notes A and B) 1,845,000 1,299,000
Prepaid expenses and other 66,000 104,000
----------- -----------
Total current assets 3,373,000 1,916,000
PROPERTY, PLANT AND EQUIPMENT - AT COST
Land 98,000 98,000
Buildings and improvements 1,295,000 1,287,000
Machinery and equipment (note D) 2,522,000 1,750,000
----------- -----------
3,915,000 3,135,000
Accumulated depreciation and amortization (note A) (1,906,000) (1,611,000)
----------- -----------
2,009,000 1,524,000
OTHER ASSETS 41,000 38,000
----------- -----------
$ 5,423,000 $ 3,478,000
=========== ===========
</TABLE>
<PAGE>
MAGNUM RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS - CONTINUED
JULY 31,
<TABLE>
<CAPTION>
LIABILITIES AND
STOCKHOLDERS' EQUITY 1997 1996
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES
Revolving note payable to bank (note C) $ 1,190,000 $ 117,000
Current maturities of long-term obligations (note D) 144,000 243,000
Accounts payable (note A) 1,187,000 630,000
Accrued liabilities
Compensation and related costs 156,000 148,000
Warranty costs (note A) 70,000 70,000
Real estate taxes 37,000 139,000
Other 226,000 211,000
----------- -----------
Total current liabilities 3,010,000 1,558,000
LONG-TERM OBLIGATIONS, less current
maturities (note D) 434,000 63,000
DEFERRED INCOME TAXES (note E) 84,000 96,000
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,
10,354,337 in 1997; 10,252,337 in 1996 104,000 103,000
Additional paid-in capital 7,872,000 7,831,000
Accumulated deficit (6,081,000) (6,173,000)
----------- -----------
1,895,000 1,761,000
----------- -----------
$ 5,423,000 $ 3,478,000
=========== ===========
</TABLE>
<PAGE>
MAGNUM RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JULY 31,
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Net sales (notes A and H) $ 11,199,000 $ 6,941,000
Cost of goods sold 8,771,000 5,492,000
------------ ------------
Gross profit 2,428,000 1,449,000
Operating expenses
Selling, general and administrative 1,995,000 1,596,000
Research, development and engineering 223,000 140,000
------------ ------------
2,218,000 1,736,000
------------ ------------
Operating income (loss) 210,000 (287,000)
Other income (expense)
Interest expense (148,000) (33,000)
Other 18,000 59,000
------------ ------------
(130,000) 26,000
------------ ------------
Earnings (loss) before income taxes 80,000 (261,000)
Income tax benefit (note E) 12,000 15,000
------------ ------------
NET EARNINGS (LOSS) $92,000 $(246,000)
============ ============
Net earnings (loss) per common share (note A) $ .01 $ (.02)
============ ============
Weighted average common shares outstanding 10,252,677 10,252,337
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
MAGNUM RESOURCES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JULY 31, 1997 AND 1996
<TABLE>
<CAPTION>
Common stock Additional
------------------------- paid-in Accumulated
Shares Amount capital deficit Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balances at August 1, 1995 10,252,337 $ 103,000 $ 7,831,000 $(5,927,000) $ 2,007,000
Net loss -- -- -- (246,000) (246,000)
----------- ----------- ----------- ----------- -----------
Balances at July 31, 1996 10,252,337 103,000 7,831,000 (6,173,000) 1,761,000
Settlement of note payable
(notes D and G) 63,000 1,000 41,000 -- 42,000
Shares issued for services
related to an offering (note G) 39,000 -- -- -- --
Net earnings -- -- -- 92,000 92,000
----------- ----------- ----------- ----------- -----------
Balances at July 31, 1997 10,354,337 $ 104,000 $ 7,872,000 $(6,081,000) $ 1,895,000
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
MAGNUM RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JULY 31,
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 92,000 $ (246,000)
Adjustments to reconcile net earnings (loss) to
net cash from operating activities:
Depreciation and amortization 305,000 253,000
Other - 18,000
Deferred income taxes (12,000) (16,000)
Changes in operating assets and liabilities:
Accounts receivable (954,000) (45,000)
Inventories (546,000) 187,000
Prepaid expenses and other 38,000 (45,000)
Accounts payable 625,000 (250,000)
Accrued liabilities (79,000) 69,000
----------- -----------
Net cash used in operating activities (531,000) (75,000)
Cash flows from investing activities:
Purchase of property, plant and equipment (516,000) (87,000)
Proceeds from sale of property, plant and equipment - 61,000
Other assets (6,000) -
----------- -----------
Net cash used in investing activities (522,000) (26,000)
Cash flows from financing activities:
Cash overdraft (68,000) 216,000
Borrowings on revolving note payable to bank 9,612,000 304,000
Payments on revolving note payable to bank (8,539,000) (187,000)
Proceeds from issuance of long-term obligations 319,000 -
Payments on long-term obligations (276,000) (289,000)
----------- -----------
Net cash provided by financing activities 1,048,000 44,000
----------- -----------
Net decrease in cash (5,000) (57,000)
Cash at beginning of year 12,000 69,000
----------- -----------
Cash at end of year $ 7,000 $ 12,000
=========== ===========
</TABLE>
<PAGE>
MAGNUM RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
YEARS ENDED JULY 31,
<TABLE>
<CAPTION>
1997 1996
------ -----
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 161,000 $ 28,000
Supplemental schedule of noncash investing and financing activities:
Capital lease obligations incurred for machinery
and equipment 271,000 -
Note payable settled through the issuance of common stock and
options to purchase common stock 42,000 -
Notes payable issued in satisfaction of accounts payable - 148,000
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
MAGNUM RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1997 AND 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Magnum Resources, Inc. ("MRI"), through its subsidiaries in Thief River
Falls, Minnesota, and Wahpeton, North Dakota (collectively, the "Company"),
manufacture skid-steer loaders for commercial and agricultural use. The
Company's products are sold predominately throughout the United States
utilizing an independent dealer network and in-house sales people. During
1997, the Company, through its subsidiary, Magnum Business Systems, Inc.,
also began marketing a variety of business automation products, such as
hand-held scanners and barcode readers, manufactured by others.
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, which have been
sufficient for losses recognized due to uncollected accounts.
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.
<PAGE>
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Cash Overdraft
The Company, at times, issues checks prior to funding the bank account the
checks are drawn on. The Company funds the cash overdraft through additional
borrowings on the revolving note payable to bank (note C). Cash overdrafts
are classified with accounts payable on the balance sheet at July 31, 1997
and 1996.
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 Earnings (Loss) Per Common Share
Net earnings (loss) per common share is calculated by dividing net earnings
(loss) by the weighted average common shares outstanding and common share
equivalents, when dilutive.
Stock-Based Compensation
The Company utilizes the intrinsic value method of accounting for its
employee stock-based compensation.
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.
Reclassifications
Certain 1996 amounts have been reclassified to conform with the 1997
presentation.
<PAGE>
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
New Accounting Standards
The Financial Accounting Standards Board (FASB) issued Statement No. 128,
EARNINGS PER SHARE, which is effective for periods ending after December 15,
1997. Early adoption of the new standard is not permitted. The new standard
eliminates primary and fully diluted earnings per share and requires
presentation of basic and diluted earnings per share together with disclosure
of how the per share amounts were computed. The effect of adopting this new
standard would not affect the reported net earnings (loss) per common share.
The FASB also issued Statement No. 130, REPORTING COMPREHENSIVE INCOME, and
Statement No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION, which are effective for fiscal years beginning after December
15, 1997. Statement No. 130 will require a company to display an amount
representing total comprehensive income, as defined by the statement, as part
of a company's basic financial statements. Statement No. 131 will require a
company to disclose financial and other information about its business
segments. The adoption of these statements should not affect the Company's
consolidated financial statements.
NOTE B - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Service parts and raw and work-in-process materials $1,077,000 $ 866,000
Work-in-process labor and overhead 170,000 152,000
Finished goods 598,000 281,000
---------- ----------
$1,845,000 $1,299,000
========== ==========
</TABLE>
<PAGE>
NOTE C - REVOLVING NOTE PAYABLE TO BANK
Revolving note payable to bank consists of borrowings under a revolving note
arrangement which is due on demand. The total funds available under this note
are the lesser of $1,200,000 or a defined borrowing base of 80% of eligible
receivables and 60% of finished goods inventory. Interest is payable monthly
at 6.5% over the bank's prime rate (effective rates of 15.0% and 14.8% at
July 31, 1997 and 1996), subject to a minimum interest charge of $37,500 per
year.
The revolving note is collateralized by a significant portion of all assets
of the Company and contains certain restrictive covenants, including minimum
net worth levels among other items. At July 31, 1997, the Company was not in
compliance with a covenant. On October 21, 1997, the Company received a
waiver for this covenant.
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
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
1997 1996
------ -----
<S> <C> <C>
Note payable to finance company, due in monthly installments through
March 2002, including interest at 12.5%, collateralized by equipment $275,000 $ -
Capital lease obligations for equipment - due various dates through May
2002, payable in monthly installments including imputed interest
ranging from 12.5% to 16% 274,000 56,000
Uncollateralized non-interest bearing obligations to vendors - due in
various monthly installments 5,000 69,000
Uncollateralized 8% notes payable to corporate legal counsel - settled
in 1997 with cash, common stock and options to purchase common stock
(note G) - 129,000
Other 24,000 52,000
-------- --------
578,000 306,000
Less current maturities 144,000 243,000
-------- --------
$434,000 $ 63,000
======== ========
</TABLE>
<PAGE>
NOTE D - LONG-TERM OBLIGATIONS - Continued
Annual maturities of long-term obligations are as follows:
1998 $144,000
1999 118,000
2000 114,000
2001 115,000
2002 87,000
-------
$578,000
========
Management believes the fair value of long-term obligations approximates the
carrying value based upon rates currently available for debt with similar
terms.
Machinery and equipment includes the following amounts under capitalized
leases:
1997 1996
------ -----
Cost $379,000 $108,000
Accumulated amortization (97,000) (54,000)
-------- --------
$282,000 $ 54,000
======== ========
NOTE E - INCOME TAXES
Income tax benefit (expense) consists of the following:
1997 1996
------ -----
Current $ - $ (1,000)
Deferred 12,000 16,000
------ ------
$12,000 $15,000
====== ======
<PAGE>
NOTE E - INCOME TAXES - Continued
The effective income tax rates are less than the Federal statutory income tax
rate due primarily to net operating losses incurred for which no benefit has
been provided in 1996 and to the subsequent utilization of the net operating
loss carryforwards in 1997.
The tax effects of cumulative temporary differences are as follows:
1997 1996
--------- ---------
Deferred tax assets
Inventory reserves and capitalization $ 105,000 $ 116,000
Accrued warranty 28,000 28,000
Other 24,000 16,000
Net operating loss carryforwards 406,000 464,000
--------- ---------
563,000 624,000
Valuation allowance (382,000) (432,000)
--------- ---------
Net deferred tax asset 181,000 192,000
Deferred tax liabilities
Depreciation (265,000) (288,000)
--------- ---------
Net deferred tax liability $ (84,000) $ (96,000)
========= =========
Management believes it is more likely than not that the net deferred tax
asset will be realized.
At July 31, 1997, the Company has net operating loss carryforwards, which
expire beginning in 2008. Due to changes in the Company's stock ownership,
utilization of the Company's have been restricted to approximately
$1,000,000.
<PAGE>
NOTE F - COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases equipment and office space under operating leases expiring
on various dates through July 2001. In addition to rent, the Company is
generally required to pay insurance, taxes and other operating and
maintenance costs. Rent expense totaled $58,000 and $63,000 in 1997 and 1996.
Future minimum rental commitments under these operating leases are as
follows:
1998 $40,000
1999 38,000
2000 39,000
2001 1,000
Litigation
During 1997, the Company was named as a defendant in a lawsuit brought by the
estate of a user of a skid steer manufactured by a former subsidiary of MRI.
Subsequent to July 31, 1997, this case was settled. The Company's portion of
the settlement was approximately $84,000, which was expensed during 1997.
MRI was named in a workers' compensation claim by a director of the Company.
MRI settled the case in 1996 with its portion of the settlement totaling
approximately $62,000.
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.
Dealer Financing
The Company has an agreement with a financing company (the "Creditor"),
whereby the Creditor extends credit to the Company's dealers to finance goods
sold to the dealers (floor plan financing). The agreement requires the
Company to repurchase goods and pay the Creditor for the unpaid balance due
them from the dealer, along with repossession costs, in the event of default
by the dealer. The Company has not incurred any material costs associated
with this agreement. As of July 31, 1997, the Creditor had balances due from
dealers totaling approximately $501,000.
<PAGE>
NOTE G - STOCKHOLDERS' EQUITY
Common Stock Issuances
During 1997, the Company settled a note payable to its corporate legal
counsel through the issuance of common stock and an option to purchase common
stock. The excess of the note payable balance over the fair value of the
issued common stock and options to purchase common stock has been recorded as
additional paid-in capital.
During 1997, the Company issued 39,000 shares of common stock to its
corporate counsel in exchange for services to be performed relating to a
future financing transaction. The shares are forfeitable back to the Company
if certain future events do not occur prior to July 31, 1998. The Company has
recorded the issuance of the common stock in its consolidated financial
statements with the value of the services received being recorded as a
reduction of additional paid-in capital pending completion of the financing
transaction.
Stock Options
The Company issued an option in August 1995 to an executive for the purchase
of 20,000 shares of common stock. The option was fully vested on the date of
grant and contained an exercise price of $.25 per share, which was the market
value on the date of grant. This option expired in early 1997 when the
executive ceased employment with the Company. The pro forma effect of
applying the fair value based method to this option would not have a material
affect on the reported net earnings (loss) and would not change the net
earnings (loss) per share for 1997 and 1996. The fair value of this option
was computed by applying the following assumptions to the Black Scholes
options pricing model: no dividends; risk-free interest rate of 6%;
volatility of 50%; and an average term of 5 years.
In conjunction with the issuance of Company common stock for the
extinguishment of a note payable during 1997 (see note D and above), the
Company granted an option for the purchase of 63,000 shares of the Company's
common stock. The option has an exercise price of $.32, is fully vested on
the date of grant, and expires on July 31, 1998. The effect of applying the
fair value based method to this option did not have an impact on the
Company's 1997 net earning and net earning per share. The fair value of this
option has been included in additional paid-in capital. The fair value of
this option was computed by applying the following assumptions to the Black
Scholes options pricing model: no dividends; risk-free interest rate of 5.5%;
volatility of 50%; and an average term of 1 year.
NOTE H - EXPORT SALES
The Company had export sales totaling $658,000 in 1997 and $236,000 in 1996
to customers located in the following geographic areas:
1997 1996
-------- --------
Canada $283,000 $106,000
Caribbean 224,000 -
Other (primarily Europe and South America) 151,000 130,000
-------- --------
$658,000 $236,000
======== ========
All export sales are denominated in U.S. currency.
NOTE I - EMPLOYEE BENEFIT PLAN
The Company adopted a 401(k) employee savings and profit sharing plan
effective January 1, 1997. The plan covers employees who have completed six
months of service, as defined in he plan, and who have attained the age of
20. The plan provides for employee salary deferrals and discretionary Company
matching and profit sharing contributions. During 1997, the Company matched
100% of employee salary deferrals, up to 3% of the employees' salaries. Total
Company contributions for the year ended July 31, 1997 were $32,000.
<PAGE>
NOTE J - 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.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
MAGNUM RESOURCES, INC.
FINANCIAL DATA SCHEDULE
7/31/97
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MAGNUM
RESOURCES, INC. CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-END> JUL-31-1997
<CASH> 7,000
<SECURITIES> 0
<RECEIVABLES> 1,479,000
<ALLOWANCES> 24,000
<INVENTORY> 1,845,000
<CURRENT-ASSETS> 3,373,000
<PP&E> 3,915,000
<DEPRECIATION> 1,906,000
<TOTAL-ASSETS> 5,423,000
<CURRENT-LIABILITIES> 3,010,000
<BONDS> 434,000
0
0
<COMMON> 104,000
<OTHER-SE> 1,791,000
<TOTAL-LIABILITY-AND-EQUITY> 5,423,000
<SALES> 11,199,000
<TOTAL-REVENUES> 11,199,000
<CGS> 8,771,000
<TOTAL-COSTS> 8,771,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 12,000
<INTEREST-EXPENSE> 148,000
<INCOME-PRETAX> 80,000
<INCOME-TAX> 12,000
<INCOME-CONTINUING> 92,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 92,000
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
