<PAGE>
Sec File No. 33-85044-d
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended May 31, 1996
Commission File number 33-85044-D
NACO Industries, Inc.
(Exact Name of Registrant as specified in its charter)
Utah 48-0836971
(State of Incorporation) (Federal I.R.S. No.)
395 West 1400 North, Logan, Utah 84341
(Address of principal executive office) (Zip Code)
Registrant's Telephone Number (801) 753-8020
Check whether the issuer (1) filed all reports required by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 30
days. Yes X No___
As of May 31, 1996, the Registrant had 1,500,000 shares of Common
Stock and 113,412 shares of Preferred Stock outstanding.
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDTIED)
NACO INDUSTRIES, INC.
BALANCE SHEETS (UNAUDITED)
May 31 May 31
----------------------------------
1996 1995
ASSETS ------- -------
Current assets:
Cash $ 102,365 148,611
Accounts recivable, net allowances
of $70,721/$61,500 1,101,886 806,945
Inventory 563,259 1,066,379
Prepaid income taxes 0 0
Income taxes receivable 0 0
Deferred income taxes 6,091 42,100
Other current assets 112,091 81,934
----------- ----------
Total current assets 1,885,692 2,145,969
----------- ----------
Property and equipment
Land 40,700 40,700
Buildings and improvements 511,747 482,222
Equipment and vehicles 1,735,225 1,593,410
Equipment construction in progress 73,574 40,940
----------- ----------
Total property and equipment 2,361,246 2,157,272
Accumulated depreciation (1,126,117) (922,240)
----------- ----------
Net property and equipment 1,235,129 1,235,032
----------- ----------
Other assets:
Intangible and other assets 16,304 153,054
---------- ----------
Total other assets 16,304 153,054
---------- ----------
Total assets $ 3,137,125 3,534,055
=========== ==========
<PAGE>
NACO INDUSTRIES, INC.
BALANCE SHEETS (UNAUDITED)
May 31 May 31
---------------------------------
LIABILITIES: 1996 1995
------ ------
Current liabilities:
Accounts payable $ 421,583 551,762
Accrued expenses 102,080 166,113
Income taxes payable 72,468 15,339
Line of credit 835,000 1,100,000
Current portion of
long-term obligations 216,919 116,975
Payable to related party 6,723 14,347
----------- ----------
Total current liabilities 1,654,773 1,964,536
Long-term liabilities:
Long-term obligations,
less current portion 784,380 943,010
Deferred income taxes 79,100 81,250
----------- ----------
Total long-term liabilities 863,480 1,024,260
----------- ----------
Total liabilities 2,518,253 2,988,796
Stockholder's equity:
Common stock, $.01 par value;
10,000,000 shares authorized;
2,060,073 and 2,127,758 shares
issued (including 560,073 and
627,75 shares in treasury) 20,047 20,601
Preferred Stock, 7% Cumulative,
convertible $3.00 par value
Shares authorized; 330,000, shares
issued 113,412 (aggregate
liquidation preference $680,000) 340,236 0
Additional paid-in capital 53,837 0
Retained earnings 375,455 714,090
---------- ---------
789,575 714,691
Less: treasury stock - at cost,
560,073 and 627,758 shares (170,703) (189,432)
---------- ---------
Total stockholder's equity 618,872 545,259
---------- ---------
Total liabilities and
stockholder's equity $ 3,137,125 3,534,055
============= ===========
See Notes to Financial Statements
<PAGE>
NACO INDUSTRIES, INC.
STATEMENT OF OPERATIONS (UNAUDITED)
Three months ended Six months ended
May 31, May 31,
------------------ ---------------
1996 1995 1996 1995
----- ----- ----- -----
Sales, net $2,312,664 $1,815,133 $3,455,621 $3,052,317
Cost of goods sold 1,275,865 1,043,099 1,981,023 1,753,951
---------- ---------- ---------- ---------
Gross profits 1,036,799 772,034 1,474,598 1,298,366
Operating expenses:
Selling expenses 339,178 308,254 615,191 645,880
General and
administrative
expenses 248,239 313,940 550,840 516,792
Other 0 (5,784) 0 (8,854)
---------- ---------- --------- ----------
Total operating
expenses 587,417 616,410 1,166,031 1,153,818
---------- ---------- --------- ----------
Income (loss)
from
operations 449,382 155,624 308,567 144,548
Other income (expenses):
Interest income 438 1,643 1,506 2,001
Interest expense (56,189) (53,884) (112,363) (96,243)
---------- ----------- --------- ----------
Total other income
(expense) (55,751) (52,241) (110,857) (94,242)
---------- ----------- --------- ----------
Income (loss) before
income taxes 393,631 103,383 197,710 50,306
Income tax expense
(benefit) 69,159 32,632 69,159 (11,968)
---------- ---------- -------- ---------
Net income (loss) $324,472 $70,751 $128,551 $62,274
========== ========== ======== =========
Earnings per common share:
Primary:
Earning from net
income $0.22 $0.05 $0.09 $0.04
Dividends in
arrears (0.01) (0.01)
--------- --------- -------- --------
Net Earnings $0.21 $0.05 $0.08 $0.04
========= ========= ======== ========
Fully Diluted:
Earning from net
income $0.19 $0.07
Dividends in
arrears (0.01) (0.01)
Net Earnings $0.18 $0.06
======== ========
Weighted average
number of common
shares outstanding:
Primary 1,500,000 1,500,000 1,500,000 1,500,000
Fully Diluted 1,716,854 1,716,854
See Notes to Financial Statements
<PAGE>
NACO INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
Six months ended
May 31 May 31
----------------------------
1996 1995
------ ------
Cash flows from operating activities
Net income $ 128,551 62,274
Adjustments to reconcile net
income to net cash provided
by (used in) operating activities:
Depreciation 107,141 98,478
Amortization 0 22,222
Deferred income taxes (8,241) 1,550
(increase) decrease in:
Accounts receivable, net (656,916) (329,012)
Inventory 81,452 (253,628)
Prepaid income taxes 120,226 0
Taxes Receivable 0 0
Other (60,636) (48,197)
Increase (decrease) in:
Accounts payable 340,294 102,376
Accrued expenses (42,620) (1,883)
Income taxes payable 72,468 (15,603)
---------- ----------
Net cash provided by (used in)
operating activities 81,719 (361,423)
---------- ----------
Cash flows from investing activities
Net change property and equipment (94,319) (418,135)
Investment in intangible
and other assets 193,801 (22,686)
---------- ----------
Net cash used in investing activities 99,482 (440,821)
-------- ---------
Cash flows from financing activities
Net change in line of credit 30,000 520,000
Payment on related party loan (2,483) (23,277)
Payments on long-term debt (633,907)
Proceeds from short term notes payable
Proceeds from long-term loans (0) 443,521
Proceeds from issuance of common stock (677)
Proceeds from issuance
of preferred stock 394,073 (13,449)
Purchase of treasury stock 0 22,891
--------- ---------
Net cash provided by (used in)
financing activities (212,317) 949,009
--------- ---------
Increase (decrease) in cash (31,116) 146,765
Cash, beginning of period 133,481 1,846
--------- ---------
Cash, end of period $ 102,365 148,611
=========== =========
See Notes to Financial Statements
<PAGE>
NACO INDUSTRIES, INC.
Notes to Financial Statements (Unaudited)
May 31, 1996
NOTE A - BASIS OF PRESENTATION
Management has elected to omit substantially all footnotes to these
unaudited quarterly financial statements. In the opinion of management,
all adjustments (consisting only of normal recurring accruals)
considered necessary for a fair presentation have been included.
Operating results for the three and six month periods ended May 31, 1996
are not necessarily indicative of the results that may be expected for
the year ending November 30, 1996.
NOTE B - DIVIDENDS
Dividends on the preferred stock are cumulative at 7%. At May 31, 1996
the cumulative amount of dividends in arrears was $10,701
NOTE C - EARNINGS PER SHARE
Primary earnings per common share is calculated by dividing adjusted net
income by the average shares of common stock of the Company and Common
Stock equivalents outstanding during the period. Net income has been
adjusted for dividends in arrears as of May 31, 1996. Common stock
equivalents represent certain outstanding stock options and warrants.
During the period the market price did not exceed the option price for
the outstanding options and warrants and therefore no dilution occured.
The calculation of fully diluted earnings per share of Common Stock
assumes the dilutive effect of the Company's Cumulative Preferred Stock.
NOTE D - CONSULTING AGREEMENTS, WARRANTS AND OPTIONS
In January 1996 the Company entered into an agreement with Extol
International Corporation ("Extol") to provide investor relations and
financial consulting services to the Company. As compensation for its
services, Extol will be paid a monthly retainer of $3,000, for an
initial term of six (6) months, beginning January 1,1 996. Thereafter,
it shall continue on a month to month basis. Out of pocket expenses for
travel, telephone and postage will also be reimbursed. In addition,
Extol will purchase for $100, a warrant to purchase 50,000 shares of the
Company's Common Stock at $3.50 per share. This warrant will be
exercisable for five (5) years from the date of issuance, and will carry
"piggyback" registration rights.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Introduction
NACO Industries, Inc., (NACO or the Company) is a manufacturing company
which produces and sells polyvinyl chloride (PVC) products. The
Company's primary line of business consists of PVC pipe fittings and
valves, which are sold throughout the United States through wholesale
distributors to irrigation, industrial, construction and utility
industries. The Company manufactures and sells fabricated fittings (4"
through 27" in diameter), as well as molded fittings (4" through 10" in
diameter). Pipe fittings produced by the Company include tees,
reducers, elbows, couplers, end caps, and bolt couplers. NACO also
manufacturers and sells PVC valves (4" through 12" in diameter).
RESULTS OF OPERATIONS
For the three and six months ended May 31, 1996 and 1995
The Company's fiscal year ends on November 30. The Company changed
fiscal years to November 30, 1995. Previously the fiscal year ended
February 28. The following discussion, the quarters ended May 31, 1996
and May 31, 1995 are the second quarter of the Company's fiscal year
ending November 30, 1996 and the first quarter of the fiscal year ended
November 30, 1995 respectively. These are referred to as 2Q 96 and 2Q
95 respectively.
NEW OPERATION
Early in 1995, the Company completed remolding it's Logan facility and
installing the equipment for fiberglass reinforced fittings. This gave
the Company the capability to produce other related composite products.
The addition of composite lines contributions to the results of
operations has improved over last year and is anticipated my management
to have a positive impact on future operating results.
GENERAL DISCUSSION OF QUARTERS OPERATING RESULTS
During the three months ended May 31, 1996, the Company sustained a
substantial operating profit. The quarter of March to May is typically
the best quarter of the year due to the seasonality of the agricultural
market.
SALES
Net sales of $2,312,664 for 2Q 96 increased by 27% compared to net sales
of $1,815,133 in 2Q 95. In 2Q 96 the Company had a large sell to a
foreign exporter that had a very positive impact on the results of
operations for the quarter.
GROSS MARGIN
Gross margins as a percent of sales for 2Q 96 was 44.8% compared to
42.5% in 2Q 95. The increase in gross margin is mainly due to the
higher volume of production during 2Q 96 which absored more overhead and
spread fixed costs over the larger volume. The larger volume was due to
increased sales over the previous year and the fact that the Company had
reduced inventories by $503,000 compared to 2Q 95 which resulted in a
need to produce more in 2Q 96 to meet demand. For purposes of
calculating cost of goods sold, the Company uses the gross margin
method. Under the gross margin method cost of goods sold is calculated
by multiplying sales by the annual gross percentage. Inventories are
adjusted up or down based on the costs of goods sold. In using the
gross margin method, inventory and gross margin can be misstated when
costs fluctuate. If price increases cannot be passed on to the
customer, costs of goods sold increases as a percentage of sales. These
costs include raw materials, labor and overhead costs. The Company
takes a complete physical inventory once a year and calculates gross
margin at that time and uses that rate for costs of goods sold for the
rest of the year. However, the Company takes a physical inventory of
the top 80% of the dollars in inventory every quarter. This helps to
offset any inventory adjustments at year end. Any year end adjustments
are reflected during the fourth quarter after the year end physical
inventory is completed.
SELLING
Selling expenses were 14.% of net sales for 2Q 96 compared to 17.0% for
2Q 95. Salaries costs increased $22,042 or 32% from 2Q 95 to 2Q 96. A
salesmen was add to cover the midwest and south. Management felt this
area has a greater potential and needs more coverage. Taxes and
benefits increased along with salaries from 2Q 95 to 2Q 96 due to the
additional salesman. Commissions decreased $6,406 from 2Q 95 to 2Q 96
because a larger portion of the sales were house sales and not through
dealers. Sales supplies increased $16,623 or 72% from 2Q 95 to 2Q 95
mainly due to costs for publishing and distributing new product catalogs
in 2Q 96 which was not done in 2Q 95.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $248,239 or 10% of net sales
for 2Q 96 compared to $313,940 or 17.3% for 2Q 95. The decrease was due
mainly to two items. There was a shift of audit expenses from 2Q 96 to
1Q 96 due to the Company changing its fiscal year end to November 30
from February 28. The increase in audit expenses in 1Q 96 due to the
fiscal year end change was a timing increase of $50,834 in 1Q 96
compared to 1Q 95. The quarter ended May 31, 1996, 2Q 96, has a
corresponding decrease of $36,691 compared to 2Q 95. Amortization
expenses in 2Q 95 were $16,667 compared to -0- in 2Q 96. Also the
percentage decrease was in part due to increased sales for 2Q 96
compared to 2Q 95.
LIQUIDITY AND CAPITAL RESOURCES
Cash as of 2Q 96 was $102,365, down $46,246 from 2Q 95. During the
quarter 1Q 96 the Company closed its initial public offering after
receiving funds in the equity market of $698,472. After payment of
commissions and offering costs, the Company netted $628,625 from the
offering. These new offering proceeds have been applied to marketing
expenses (approximately $40,000), new equipment (approximately
$250,000), and working capital (approximately $98,000). The Company is
current in all of its financial obligations to vendors and lending
institutions. The Company continues to address cash flow by controlling
inventory levels, increasing the sales efforts, and reducing expenses.
The Company is currently working with its banking relations to
restructure it's debt to better meet the cash flow needs of the Company.
The Company believes that its capital resources on hand at May 31, 1996,
together with ongoing revenues from sales, and it's lending arrangements
will be sufficient to satisfy its working capital requirements for the
foreseeable future.
<PAGE>
PART II - OTHER INFORMATION
SIGNATURES
The unaudited interim financial statements furnished by management
reflect all adjustments which are, in the position of management,
necessary for a fair presentation of financial position and results of
operation.
In accordance with the requirements of the Securities and Exchange Act,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereto duly authorized.
NACO Industries, Inc.
Registrant
By: /S/ Verne E. Bray
President
By: /S/ Jeffrey J. Kirby
Principal Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S MAY 31, 1996 UNAUDITED FINANCIAL STATEMENTS, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-END> MAY-31-1996
<CASH> 102,365
<SECURITIES> 0
<RECEIVABLES> 1,172,607
<ALLOWANCES> 70,721
<INVENTORY> 563,529
<CURRENT-ASSETS> 1,885,692
<PP&E> 2,361,246
<DEPRECIATION> 1,126,117
<TOTAL-ASSETS> 3,137,125
<CURRENT-LIABILITIES> 1,654,773
<BONDS> 784,380
0
340,236
<COMMON> 20,047
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,137,125
<SALES> 3,455,621
<TOTAL-REVENUES> 3,455,621
<CGS> 1,981,023
<TOTAL-COSTS> 1,166,031
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 110,857
<INCOME-PRETAX> 197,910
<INCOME-TAX> 69,159
<INCOME-CONTINUING> 128,551
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 128,551
<EPS-PRIMARY> .08
<EPS-DILUTED> .06
</TABLE>
