U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly report under Section 13 or 15(d) of the Securities and Exchange
Act of 1934
For the quarterly period ended May 31, 2002
Commission file number 0-3492
RESERVE INDUSTRIES CORPORATION
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(Name of Small Business Issuer in its charter)
NEW MEXICO 85-0128783
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
20 First Plaza, Suite 308, Albuquerque, New Mexico 87102
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(Address of principal executive offices) (Zip Code)
505-247-2384
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Issuer's telephone number, including area code
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months and (2) has been subject to such filing requirements for the past
90 days.
Yes X No
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State the number of shares of outstanding of each of the issuer's classes
of common equity, as of the latest practicable date.
As of July 10, 2002 - 2,803,763 shares $1.00 Par Value
INDEX
Page No.
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PART I. Financial Information
Consolidated Balance Sheets
May 31, 2002 and November 30, 2001 1
Consolidated Statements of Income
Second quarter ended
May 31, 2002 and 2001 2
Consolidated Statements of Cash Flows
Second quarter ended
May 31, 2002 and 2001 3
Footnotes to Consolidated Financial Statements 4
Management's Discussion and Analysis or
Plan of Operation 5 - 7
PART II. Other Information 8
RESERVE INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 31, 2002 AND NOVEMBER 30, 2001
ASSETS 2002 2001
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CURRENT ASSETS:
Cash and cash equivalents $ 56,048 $ 76,223
Receivables, less allowance for doubtful
accounts - $1,501 177,258 177,698
Receivables from affiliates and related parties 684,135 634,548
Inventories 339,043 298,357
Prepaid expenses and deposits 86,934 55,674
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Total current assets 1,343,418 1,242,500
PROPERTY, PLANT AND EQUIPMENT, at cost 3,265,970 3,262,771
Less accumulated depreciation and depletion (1,641,909) (1,505,484)
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Total property, plant and equipment 1,624,061 1,757,287
INVESTMENT IN UNCONSOLIDATED AFFILIATES (295,534) 117,541
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Total assets $ 2,671,945 $ 3,117,328
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LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Trade accounts payable $ 297,983 $ 143,306
Short-term debt related party 335,300 348,000
Current portion of long-term debt 986,812 946,812
Deferred obligations to related parties 5,165,639 4,910,582
Other current liabilities 37,360 145,791
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Total current liabilities 6,823,094 6,494,491
LONG-TERM DEBT, less current portion 334,014 383,963
STOCKHOLDERS' INVESTMENT:
Common stock, $1.00 par value. Authorized 6,000,000
shares, issued and outstanding 2,803,763 shares
in 2002 and 2001 2,803,763 2,803,763
Additional paid-in capital 5,471,218 5,471,218
Accumulated deficit (12,760,144) (12,036,107)
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Total stockholders' investment (4,485,163) (3,761,126)
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Total liabilities and stockholders' investment $ 2,671,945 $ 3,117,328
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The accompanying notes are an integral part of these consolidated
statements. The 2002 and 2001 financial information is unaudited.
RESERVE INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SECOND QUARTER AND SIX MONTHS ENDED MAY 31, 2002 AND 2001
Second Quarter Ended Six Months Ended
MAY 31 MAY 31
2002 2001 2002 2001
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REVENUES & OTHER ITEMS:
Sales $ 608,025 $ 511,608 $ 1,018,945 $ 1,021,019
Royalties 48,360 17,437 99,814 29,425
Interest income 243 9,590 1,082 9,626
Gain on sale of equipment - - - 19,555
Income (loss) from affiliates:
Equity in earnings (189,854) (353,991) (413,055) (433,496)
Other income (1,456) 24,782 (1,201) 24,782
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Total revenues 465,318 209,426 705,585 670,911
EXPENSES & OTHER ITEMS:
Cost of sales 451,557 478,392 800,194 1,085,738
General and administration 180,971 168,357 358,105 340,544
Interest expense 68,633 78,206 134,897 147,546
Depreciation and amortization 68,856 68,151 136,426 135,771
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Total costs and expenses 770,017 793,106 1,429,622 1,709,599
Pretax income (loss) from
continuing operations (304,699) (583,680) (724,037) (1,038,688)
Provision for income taxes - - - -
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Net income (loss) from
continuing operations $ (304,699) $ (583,680) $ (724,037) $(1,038,688)
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EARNINGS (LOSS) PER SHARE:
Income (loss) from
continuing operations (0.11) (0.21) (0.26) (0.37)
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Net income (loss) per share $ (0.11) $ (0.21) $ (0.26) $ (0.37)
=========== =========== =========== ===========
Weighted Average Number of Shares of
Common Stock Outstanding 2,803,763 2,803,763 2,803,763 2,803,763
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The accompanying notes are an integral part of these consolidated
statements. The 2002 and 2001 financial information is unaudited.
RESERVE INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MAY 31, 2002 AND MAY 31, 2001
Six Months Ended
May 31 May 31
2002 2001
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) from continuing operations $ (724,037) $(1,038,688)
Adjustments to reconcile net income from continuing
operations to net cash provided by
operating activities:
Depreciation and amortization 136,426 135,771
Equity in (gain) loss from affiliates 413,055 433,496
(Gain) loss on disposition of fixed assets - (19,555)
Changes in assets and liabilities:
(Increase) decrease in receivables (49,128) 235,816
(Increase) decrease in inventories (40,686) (20,452)
(Increase) decrease in other current assets (31,260) 27,500
Increase (decrease) in trade accounts payable 154,677 (54,349)
Increase (decrease) in deferred obligations
to related parties 242,357 441,786
Increase (decrease) in other
current liabilities (68,431) 33,158
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Total adjustments 757,010 1,213,171
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Net cash provided (used) by operating activities 32,973 174,483
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of equipment - 31,912
Capital expenditures (3,199) (115,299)
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Net cash provided (used) by investing activities (3,199) (83,387)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in long-term debt (49,949) (93,175)
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Net cash provided (used) by financing activities (49,949) (93,175)
Net increase (decrease) in cash and
cash equivalents (20,175) (2,079)
Cash and cash equivalents at the beginning of the year 76,223 6,729
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Cash and cash equivalents at the end of the year $ 56,048 $ 4,650
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 30,446 $ 62,248
The accompanying notes are an integral part of these consolidated
statements. The 2002 and 2001 financial information is unaudited.
FOOTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying statements, which should be read in conjunction with the
Consolidated Financial Statements included in the November 30, 2001 fiscal
year end Annual Report filed on Form 10-KSB, are unaudited but have been
prepared in the ordinary course of business for the purpose of providing
information with respect to the interim periods, and are subject to audit at
the close of the year. However, it is the opinion of the management of the
Company that all adjustments (none of which were other than normal recurring
accruals) necessary for a fair presentation of such periods have been included.
The Consolidated Financial Statements prepared for fiscal years 2001, 2000,
1999, 1998, 1997, 1996, 1995, 1994, 1993, 1992 and 1991 were unaudited because
the Company elected to not incur the expense of an audit and to conserve its
cash for other corporate requirements.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations
Second quarter ended May 31, 2002 compared
to the second quarter ended May 31, 2001
For the second quarter ended May 31, 2002, the Registrant had revenues of
$465,318, which resulted in a net loss of $304,699 or $0.11 per share. For
the second quarter ended May 31, 2001, the Registrant had revenues of
$209,426, which resulted in a net loss of $583,680 or $0.21 per share.
The revenues in the second quarter of 2002 increased from 2001 as a result
of an increase in sales from $511,608 to $608,025, an increase in royalty
income of $30,929, and a decrease in equity losses from $353,991 to
$189,854. The sales at the Registrant's silica sand operation increased
as a result of an increase in demand for the Registrant's low iron glass
sand. The plant improvement program was completed during the second quarter
2001. The Registrant's equity earnings from its affiliated venture
Rossborough-Remacor LLC (R-R) remained in a loss position, as sales have not
recovered due to the loss of several steel customers to bankruptcy and
the slowness in the economy. R-R completed the consolidation of last
summer's merger during the quarter, which reduced the losses. However,
R-R's continued losses are unsustainable, and R-R is undertaking an
aggressive cost reduction program to bring the operation to positive cash
flow. To be successful, R-R will require continued cooperation from its
bank and suppliers, and R-R is evaluating all options including bankruptcy.
The costs and expenses were $770,017 and $793,106 in the second quarter of
2002 and 2001, respectively. The cost of sales for the sand operation
decreased by $26,835 from 2001 to 2002. The G&A cost increased slightly
and was partially offset by lower interest costs. Some of the expenses
contained in the general and administrative costs pertaining to salaries
of the officers have been accrued but not paid, as the Company is
conserving its cash.
Six months ended May 31, 2002 compared
to the six months ended May 31, 2001
For the six months ended May 31, 2002, the Registrant had revenues of
$705,585, which resulted in a net loss of $724,037 or $0.26 per share.
For the six months ended May 31, 2001, the Registrant had revenues of
$670,911, which resulted in a net loss of $1,038,688 or $0.37 per
share.
The revenues in the six months ended May 31, 2002 increased over 2001
as a result of a decrease in equity losses of $20,441 and an increase
in royalty income of $70,389, which was offset by reductions in the other
line items. As described above, the Registrant's equity losses are not
sustainable, and efforts to reduce costs to a breakeven cash flow are
being pursued by R-R.
The costs and expenses were $1,429,622 and $1,709,599 for the six months
ended May 31, 2002 and 2001, respectively. For the current six month
period, the cost of sales decreased by $285,544 from 2001 to 2002 as a
result of completion of the sand plant improvements. The G&A was
increased slightly in 2002, and this was offset by reduced interest
expense. Some of the expenses contained in the general and administrative
costs pertaining to salaries of the officers have been accrued but not
paid, as the Company is conserving its cash.
Liquidity and Capital Resources
Period from December 1, 2001 to May 31, 2002
The Company's net cash provided by operating activities was $32,973 and
$174,483 for the six months ended May 31, 2002 and 2001, respectively. The
net cash used by investing activities was $3,199 and $83,387 for the same
six months in 2002 and 2001, respectively. For 2001, the cash provided
by investing activities was from the sale of surplus equipment, and the
capital expenditures were for capital improvements to the sand project.
The Company decreased its long-term debt by $49,949 and $93,175 for the
six months ended May 31, 2002 and 2001, respectively. The Company's
cash and cash equivalents decreased by $20,175 and $2,079 for the
six months ended May 31, 2002 and 2001, respectively.
The Company had working capital deficits of approximately $5.48 million
and $5.25 million for the six months ended May 31, 2002 and the year ended
November 30, 2001, respectively. The working capital deficit increased
as a result of the operating losses. As part of the Company's program
to conserve cash in order to operate the company, part of the salaries due
to the officers of the Company, and part of the interest due on certain
loans were accrued but not paid for the six months ended May 31, 2002.
As of May 31, 2002, these accruals (salaries, deferred compensation
and deferred interest) exceeded $5.1 million.
For the current year, the Company plans to continue to accrue part of
the obligations described in the preceding paragraph and expects to
continue to generate sufficient cash flow to operate.
Forward-Looking Statements. The Company may from time to time make
written or oral "forward-looking statements", within the meaning of
the Private Securities Litigation Reform Act of 1995, including
statements contained in this Form 10QSB and in other documents filed by the
Company with the Securities and Exchange Commission and in its reports
to stockholders, as well as elsewhere. "Forward-looking statements"
are statements such as those contained in projections, plans, objectives,
estimates, statements of future economic performance, and assumptions related
to any of the forgoing, and may be identified by the use of forward-looking
terminology, such as "may", "expect", "anticipate", "estimate", "goal",
"continued", or other comparable terminology. By their very nature,
forward-looking statements are subject to known and unknown risks and
uncertainties relating to the Company's future performance that may
cause the actual results, performance or achievements of the Company,
or industry results, to differ materially from those expressed or
implied in such "forward-looking statements". Any such statement
is qualified by reference to the following cautionary statements.
The Company's business operates in highly competitive markets and is
subject to changes in general economic conditions, competition, customer
and market preferences, government regulation, the impact of tax
regulation, foreign exchange rate fluctuations, the degree of market
acceptance of the products, the uncertainties of potential litigation,
as well as other risks and uncertainties detailed elsewhere herein and
from time to time in the Company's Securities and Exchange Commission
filings. This Form 10QSB contains forward looking statements,
particularly in the section: Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations, Part II Item 5. Other
information, and in some of the footnotes to the financial statements.
Actual results could differ materially from those projected in the forward
looking statements as a result of known and unknown risks, uncertainties,
and other factors, including but not limited market acceptance of the
Company's products and services, changes in expected research and
development requirements, and the effects of changing economic conditions
and business conditions generally. The Company does not undertake and
assumes no obligation to update any forward-looking statement that may be
made from time to time by or on behalf of the Company.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports - None
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
RESERVE INDUSTRIES CORPORATION
(Registrant)
/s/ William J. Melfi
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William J. Melfi, Vice President Finance
and Administration
(Principal Financial and Accounting
Officer and Authorized Officer)
Date: July 15, 2002