U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
z Quarterly report under Section 13 or 15(d) of the Securities
and Exchange Act of 1934
For the quarterly period ended August 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 October 10, 2002 - 2,803,763 shares $1.00 Par Value
INDEX
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Page No.
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PART I. Financial Information
Consolidated Balance Sheets
August 31, 2002 and November 30, 2001 1
Consolidated Statements of Income
Third quarter and nine months ended
August 31, 2002 and 2001 2
Consolidated Statements of Cash Flows
Third quarter ended
August 31, 2002 and 2001 3
Footnotes to Consolidated Financial Statements 4
Management's Discussion and Analysis or
Plan of Operation 5 - 7
Controls and Procedures 7
PART II. Other Information 8
RESERVE INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AUGUST 31, 2002 AND NOVEMBER 30, 2001
ASSETS 2002 2001
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CURRENT ASSETS:
Cash and cash equivalents $ 51,622 $ 76,223
Receivables, less allowance for
doubtful accounts - $1,501 188,959 177,698
Receivables from affiliates and
related parties 717,618 634,548
Inventories 325,080 298,357
Prepaid expenses and deposits 68,744 55,674
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Total current assets 1,352,023 1,242,500
PROPERTY, PLANT AND EQUIPMENT, at cost 3,304,638 3,262,771
Less accumulated depreciation
and depletion (1,692,290) (1,505,484)
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Total property, plant and equipment 1,612,348 1,757,287
INVESTMENT IN UNCONSOLIDATED AFFILIATES (741,454) 117,541
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Total assets $ 2,222,917 $ 3,117,328
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LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Trade accounts payable $ 243,423 $ 143,306
Short-term debt related party 1,139,018 1,043,000
Current portion of long-term debt 240,842 251,812
Deferred obligations to related parties 5,316,591 4,910,582
Other current liabilities 64,215 145,791
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Total current liabilities 7,004,089 6,494,491
LONG-TERM DEBT, less current portion 308,858 383,963
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 (13,365,011) (12,036,107)
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Total stockholders' investment (5,090,030) (3,761,126)
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Total liabilities and
stockholders' investment $ 2,222,917 $ 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 THIRD QUARTERS AND NINE MONTHS ENDED AUGUST 31, 2002 AND 2001
Third Quarter Ended Nine Months Ended
AUGUST 31 AUGUST 31
2002 2001 2002 2001
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REVENUES & OTHER ITEMS:
Sales $ 544,783 $ 555,385 $ 1,563,727 $ 1,576,404
Royalties 45,792 66,339 145,606 95,764
Interest income 159 1,238 1,241 10,865
Gain on sale of equipment - - - 19,555
Equity in earnings (445,920) (235,812) (858,975) (669,308)
Other income 45 (67,254) (1,156) (42,472)
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Total revenues 144,859 319,896 850,443 990,808
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EXPENSES & OTHER ITEMS:
Cost of sales 437,758 363,383 1,237,951 1,449,121
General and administration 176,427 203,445 534,533 543,989
Interest expense 65,157 67,520 200,054 215,066
Depreciation and amortization 70,383 70,269 206,809 206,039
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Total costs and expenses 749,725 704,617 2,179,347 2,414,215
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Pretax income (loss) from
continuing operations (604,866) (384,721) (1,328,904) (1,423,407)
Provision for income taxes - - - -
Net income (loss) from
continuing operations $ (604,866)$ (384,721)$(1,328,904)$(1,423,407)
=========== =========== =========== ===========
EARNINGS (LOSS) PER SHARE:
Income (loss) from
continuing operations (0.22) (0.14) (0.47) (0.51)
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Net income (loss) per share $ (0.22)$ (0.14)$ (0.47)$ (0.51)
=========== =========== =========== ===========
Weighted Average Number of Shares
of Common Stock Outstanding 2,803,763 2,803,763 2,803,763 2,803,763
=========== =========== =========== ===========
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 NINE MONTHS ENDED AUGUST 31, 2002 AND AUGUST 31, 2001
Nine Months Ended
August 31
2002 2001
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) from continuing operations $(1,328,904) $(1,423,407)
Adjustments to reconcile net income from continuing
operations to net cash provided by operating activities:
Depreciation and amortization 206,809 206,039
Equity in (gain) loss from affiliates 858,975 669,308
(Gain) loss on disposition of fixed assets - (19,555)
(Gain) loss on sale of investment - 67,254
Changes in assets and liabilities:
(Increase) decrease in receivables (11,261) 192,379
(Increase) decrease in inventories (26,723) (222,038)
(Increase) decrease in other current assets (13,070) 34,410
Increase (decrease) in trade accounts payable 100,117 (89,680)
Increase (decrease) in deferred obligations
to related parties 322,939 290,037
Increase (decrease) in other current liabilities (81,576) 24,163
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Total adjustments 1,356,210 1,152,317
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Net cash provided (used) by
operating activities 27,306 (271,090)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of property - 656,897
Capital expenditures (61,850) (153,631)
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Net cash provided (used) by
investing activities (61,850) 503,266
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term debt 85,048 (15,832)
Increase (decrease) in long-term debt (75,105) (116,941)
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Net cash provided (used) by
financing activities 9,943 (132,773)
Net increase (decrease) in cash
and cash equivalents (24,601) 99,403
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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 $ 51,622 $ 106,132
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 44,078 $ 87,119
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The accompanying notes are an integral part of these consolidated
statements. The 2002 and 2001 financial information is unaudited.
FOOTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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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
Third quarter ended August 31, 2002 compared
to the third quarter ended August 31, 2001
For the third quarter ended August 31, 2002, the Registrant
had revenues of $144,859, which resulted in a net loss of
$604,866 or $0.22 per share. For the third quarter ended August
31, 2001, the Registrant had revenues of $319,896, which
resulted in a net loss of $384,721 or $0.14 per share.
The revenues in the third quarter of 2002 decreased from
2001 as a result of a decrease in sand sales of $10,602, a
decrease in royalty income of $20,547, and an increase in equity
losses of $210,108. The sales at the Registrant's silica sand
operation were similar to the prior year's quarter. The plant
improvement program was completed during the third quarter of
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 second quarter, which reduced the losses. However, the
continued losses after the final consolidation were
unsustainable, and R-R has undertaken an aggressive cost
reduction program to bring the operation to positive cash flow.
During the quarter, R-R reached an agreement with its bank to
provide continued financing, pursuant to R-R achieving its cost
reduction goals. As part of the financing arrangement, R-R is to
sell part of its international operations to reduce bank debt.
The sale is expected to be completed within the next 30 days.
The operations of R-R will require continued cooperation from its
suppliers, and R-R is negotiating with them to reduce past due
unsecured debt. R-R is continuing to evaluate all its options
including bankruptcy.
The costs and expenses of the Registrant were $749,725 and
$704,617 in the third quarter of 2002 and 2001, respectively.
The cost of sales for the sand operation increased by $74,375
from 2001 to 2002, due to increased mining and tailing costs.
The G&A cost decreased and the interest costs were comparable to
last year. 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.
Nine months ended August 31, 2002 compared
to the nine months ended August 31, 2001
For the nine months ended August 31, 2002, the Registrant
had revenues of $850,443, which resulted in a net loss of
$1,328,904 or $0.47 per share. For the nine months ended August
31, 2001, the Registrant had revenues of $990,808, which
resulted in a net loss of $1,423,407 or $0.51 per share.
The revenues in the nine months ended August 31, 2002
decreased from 2001 primarily as a result of an increase in
equity losses of $189,667. As described above, the Registrant's
equity losses reflect unsustainable losses by R-R, and efforts
to reduce costs to a breakeven cash flow are being pursued by R-
R.
The costs and expenses were $2,179,347 and $2,414,215 for
the nine months ended August 31, 2002 and 2001, respectively.
For the current nine month period, the cost of sales decreased by
$211,170 from 2001 to 2002 as a result of completion of the sand
plant improvements. However, as noted above, some of the
improvements in plant efficiencies have been offset by higher
mining and tailing costs. The G&A decreased slightly in 2002,
along with 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 August 31, 2002
The Company's net cash provided (used) by operating
activities was $27,306 and $(271,090) for the nine months ended
August 31, 2002 and 2001, respectively. The net cash (used)
provided by investing activities was $(61,850) and $503,266 for
the same nine months in 2002 and 2001, respectively. For 2001,
the cash provided by investing activities was from the sale of
surplus equipment and the sale of the Company's stock in JPL
Industries. For both years, the capital expenditures were for
capital improvements to the sand project. The Company decreased
its long-term debt by $75,105 and $116,941 for the nine months
ended August 31, 2002 and 2001, respectively. The Company's net
cash and cash equivalents decreased by $24,601 and increased by
$99,403for the nine months ended August 31, 2002
and 2001, respectively.
The Company had working capital deficits of approximately
$5.65 million and $5.25 million for the nine months ended August
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 nine months ended August
31, 2002. As of August 31, 2002, these accruals (salaries,
deferred compensation and deferred interest) exceeded $5.3
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.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the
participation of the Registrant's management, including the Chief
Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of
the effectiveness of the design and operation of the Registrant's
disclosure controls and procedures within 90 days of this report.
Based on that evaluation, the Registrant's management, including
the CEO and CFO, concluded that the Registrant's disclosure
controls and procedures were effective as of August 31, 2002.
Changes in Internal Controls
There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect
internal controls subsequent to the date of their evaluation.
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: October 15, 2002
CERTIFICATIONS
I, William J. Melfi, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of
Reserve Industries Corporation;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-
14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent valuation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: October 15, 2002
/s/ William J. Melfi
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William J. Melfi
Vice President Finance and Administration
and Chief Financial Officer
I, Frank C. Melfi, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of
Reserve Industries Corporation;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-
14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent valuation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: October 15, 2002
/s/ Frank C Melfi
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President and
Chief Executive Officer