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 quarterly period ended August 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 offices) (Zip Code)
Registrant's Telephone Number 801-753-8020
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 such
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
As of August 31, 1996, the Registrant had 1,500,000 shares of Common
Stock and 126,412 shares of Preferred Stock outstanding.
1
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
See attached Financial Statements for August 31, 1996.
2
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NACO Industries, Inc.
FINANCIAL STATEMENTS
August 31, 1996
3
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PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
(UNAUDITED)
NACO INDUSTRIES, INC.
BALANCE SHEETS (UNAUDITED)
Aug. 31 November 30
--------- ------------
ASSETS 1996 1995
- ------ ------ ------
Current assets:
Cash $ 248,402 $ 133,481
Accounts receivable, net of
allowances of $72,075 / $47,257 499,881 444,970
Inventory 596,312 644,711
Prepaid income taxes 0 120,226
Deferred income taxes 17,440 0
Other current assets 138,641 51,455
----------- ----------
Total current assets 1,500,676 1,394,843
----------- ----------
Property and equipment:
Land 40,700 40,700
Buildings and improvements 516,889 508,978
Equipment and vehicles 1,770,306 1,692,388
Equipment construction in progress 116,718 28,438
----------- -----------
Total property and equipment 2,444,613 2,270,504
Accumulated depreciation (1,180,416) (1,022,553)
---------- ----------
Net property and equipment 1,264,197 1,247,951
---------- ----------
Other assets:
Intangible and other assets 18,175 210,105
---------- ----------
Total other assets 18,175 210,105
---------- ----------
Total assets $ 2,783,048 $ 2,852,899
================== =================
4
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NACO INDUSTRIES, INC.
BALANCE SHEETS (UNAUDITED)
Aug. 31 November 30
--------- -------------
LIABILITIES: 1996 1995
- -------------- ------- -------
Current liabilities:
Accounts payable $ 347,410 $ 81,289
Accrued expenses 106,104 144,700
Income taxes payable 200 0
Line of credit 684,756 805,000
Current portion of long-term
obligations 187,817 344,727
Payable to related party 4,649 9,206
-------------- --------------
Total current liabilities 1,330,936 1,384,922
Long-term liabilities:
Long-term obligations, less
current portion 745,662 1,290,479
Deferred income taxes 75,000 81,250
------------- -------------
Total long-term liabilities 820,662 1,371,729
------------- -------------
Total liabilities 2,151,598 2,756,651
Stockholder's equity:
Common stock, $.01 par value;
10,000,000 shares authorized;
2,060,073 and 2,127,758 shares
issued (including 504,695 and
560,073 shares in treasury) 20,047 20,047
Preferred Stock, 7% Cummulative,
convertible $3.00 par value
Shares authortized; 330,000.
Shares issued 126,412
(Aggregate liquidation preference
$758,472) 379,236 0
Additional paid-in capital 85,037 0
Retained earnings 317,833 246,904
------------ ------------
802,153 266,951
Less: treasury stock - at cost,
504,695 and 560,073 shares (170,703) (170,703)
------------ ------------
Total stockholder's equity 631,450 96,248
------------ ------------
Total liabilities and
stockholder's equity $ 2,783,048 $ 2,852,899
=============== ==============
See Notes to Financial Statements.
5
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NACO INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine months ended
August 31 August 31
-----------------------------
1996 1995
------- -------
Cash flows from operating activities
Net income $ 70,929 $ (63,563)
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Depreciation 161,441 149,351
Amortization 0 22,222
Deferred income taxes (23,690) 1,550
(Increase) decrease in:
Accounts receivable, net (54,911) (30,897)
Inventory 48,399 (88,241)
Prepaid income taxes (21,893)
Taxes Receivable 120,226 0
Other (87,186) (49,567)
Increase (decrease) in:
Accounts payable 266,121 (136,198)
Accrued expenses (38,596) (54,808)
Income taxes payable 200 (30,942)
------------ -------------
Net cash provided by (used
in) operating activities 462,933 (302,986)
------------ -------------
Cash flows from investing activities
Net change property and equipment (177,687) (494,259)
Investment in intangible and other
assets 191,930 (54,912)
------------ --------------
Net cash used in investing
activities 14,243 (549,171)
Cash flows from financing activities
Net change in line of credit (120,244) 520,000
Payments on related party loan (4,557) (27,556)
Payments on long-term debt (815,452)
Proceeds from short term notes
payable
Proceeds from long-term loans 113,725 428,936
Proceeds from issuance of common stock (677)
Proceeds from issuance of preferred stock 464,273 (13,449)
Purchase of treasury stock 0 22,891
------------ ------------
Net cash provided by (used in)
financing activities (362,255) 930,145
------------ ------------
Increase (decrease) in cash 114,921 77,988
Cash, beginning of period 133,481 1,846
------------ ------------
Cash, end of period $ 248,402 $ 79,834
============= ============
See Notes to Financial Statements
6
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NACO INDUSTRIES, INC.
STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
August 31, August 31,
-------------------------------- ------------------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales, net $ 1,488,340 $ 1,278,521 $ 4,943,961 $ 4,330,838
Cost of goods sold 866,258 803,307 2,847,281 2,557,258
--------------- --------------- --------------- ----------------
Gross profit 622,082 475,214 2,096,680 1,773,580
Operating expenses:
Selling expenses 400,947 297,835 1,016,138 943,715
General and administrative
expenses 276,178 270,851 827,018 787,646
Other 0 0 0 (8,857)
--------------- --------------- --------------- ----------------
Total operating expenses 677,126 568,686 1,843,156 1,722,504
--------------- --------------- --------------- ----------------
Income (loss) from operations (55,044) (93,472) 253,524 51,076
Other income (expense):
Interest income 491 507 1,997 2,508
Interest expense (45,229) (65,604) (157,592) (161,847)
--------------- --------------- --------------- ----------------
Total other income (expense) (44,738) (65,097) (155,595) (159,339)
--------------- --------------- --------------- ----------------
Income (loss) before income taxes (99,782) (158,569) 97,929 (108,263)
Income tax expense (benefit) (42,159) (32,732) 27,000 (44,700)
--------------- --------------- --------------- ----------------
Net income (loss) $ (57,623) $ (125,837) $ 70,929 $ (63,563)
=============== =============== =============== ================
Earning per common share:
Primary:
Earning from net income $ (0.04) (0.08) 0.05 (0.04)
Dividends in arrears (0.02) (0.02)
-------------- ------------- -------------- ----------------
Net Earnings $ (0.06) (0.08) 0.03 (0.04)
============== ============= ============== ================
Fully Diluted:
Earning from net income $ (0.03) $ (0.08) $ 0.04 $ (0.04)
Dividends in arrears (0.02) (0.02)
Net Earnings $ (0.05) $ (0.08) $ 0.02 $ (0.04)
============== ============== ============== ===============
Weighted average number of common
shares outstanding:
Primary 1,500,000 1,500,000 1,500,000 1,500,000
Fully Diluted 1,752,824 1,500,000 1,752,824 1,500,000
</TABLE>
See Notes to Financial Statements
7
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NACO INDUSTRIES, INC.
Notes to Financial Statements (Unaudited)
August 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 nine month
periods ended August 31, 1996 are not necessarily indicative of the results that
may be expected for the fiscal year ending November 30, 1996.
NOTE B - DIVIDENDS
Dividends on the preferred stock are cumulative at 7%. At August 31, 1996 the
cumulative amount of dividends in arrears was $34,452.
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 August 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 occurred,
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 Jan
1, 1996. 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.
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NOTE E - DEBT
Subsequent to quarter end the Company has restructured it's debt with Bank IV to
better meet the cash flow needs of the Company. Two hundred and twenty thousand
dollars ($220,000) was moved from the short term revolver to a four (4) year
long term note. Some of the growth over the past two years was financed from the
short term line. This restructure will free up that line for operating capital.
NOTE F - PREFERRED STOCK
On March 7, 1996 the Company initiated an offering of Units exempt from
registration under the Securities Act of 1933. The offering consists of 175,000
Units at an offering price of $6.00. Each Unit consists of one share of Series 1
Class A 7% Cumulative Convertible Preferred Stock and a Warrant to purchase one
share of Common Stock at an exercise price of $3.75 per common share. The
offering is being made on a "best efforts" basis and will continue until the
earlier of sales of a maximum of 175,000 Units, or December 31, 1996. Selling
commissions equal to 10% of the offering price of the Units will be paid to
Placement Agents participating in the offering.
During the third quarter, the Company sold 13,000 units and received net
proceeds of $70,200.
9
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ITEM 2. MANAGEMENTS'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"
though 10" in diameter). Pipe fittings produced by the Company include tees,
reducers, elbows, couplers, end caps, and bolted repair couplers. NACO also
manufacturers and sells PVC valves (4" through 12" in diameter).
RESULTS OF OPERATIONS
For the three and nine months ended August 31, 1996 and 1995.
The Company's fiscal year ends on November 30. In 1995 the company changed its
fiscal year end to November 30. Previously the fiscal year ended February 28. In
the following discussion, the quarters ended August 31, 1996 and August 31, 1995
are the third quarter of the Company's fiscal year ending November 30, 1996 and
the second quarter of the fiscal year ended November 30, 1995 respectively. The
year ended November 30, 1995 was a short year due to the change in fiscal year
end. The two quarters are referred to herein as 3Q 96 and 3Q 95, respectively.
The nine months ended August 31, 1996 and August 31, 1995 are referred to herein
as 9M 96 and 9M 95 respectively.
NEW OPERATION
Early in 1995 the Company completed remodeling 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 products in March 1995 represented an expansion of the Company's
product line. The composite lines contribution to the results of operations has
improved over last year and is anticipated by management to have a positive
impact on future operating results.
GENERAL DISCUSSION OF QUARTERS OPERATING RESULTS
During the three months ended August 31, 1996,(3Q 96), the Company sustained an
operating loss before tax of $(99,782) compared to an operating loss before tax
of $(158,569) for 3Q 95.
The quarter of June to August is typically a slow quarter due to the seasonality
of the agricultural market. For the nine months ended August 31, 1996,(9M 96),
the Company had a pre tax income of $97,929 compared to a pre tax operating loss
of $(108,263) for the nine months ended August 31, 1995,(9M 95), primarily as a
result of increased sales volume during 9M 96.
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SALES
Net sales of $1,488,340 for 3Q 96 increased by 16% compared to net sales of
$1,278,521 in 3Q 95 due mainly to increased volume. For 9M 96 net sales of
$4,943,961 increased 14% over 9M 95. This is mainly due to increased volume. In
2Q 96 the Company had a large sale to a foreign exporter that had a very
positive impact on the results of operations. The Company expects other similar
large sales in the future, but not on a regular or predictable basis. There can
be no assurance, however, that the Company will have similar large sales in the
future.
GROSS MARGIN
Gross margin as a percent of sales for 3Q 96 was 41.8% compared to 37.2% 3Q 95.
The increase in gross margin is mainly due to the higher volume of production
during 3Q 96 which absorbed 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 during 3Q 95 by $151,618 and
increased inventory during 3Q 96 by $36,553. The result was increased production
during 3Q 96 of an estimated $188,000 over the production for 3Q 95. Gross
margin for 9M 96 was 42.4% compared to 40.9% for 9M 95. This is also mainly due
to increased production due to increased sales and lower inventories during 9M
96. The Company takes a physical inventory of the top 80% of the dollars in
inventory every quarter and adjusts perpetual inventory to actual. This helps to
offset any inventory adjustments at year end. At year end the Company takes a
complete physical inventory. Any year end adjustments are reflected during the
fourth quarter after the year end physical inventory is completed.
SELLING
Selling expenses were $1,016,130 or 20.6% of net sales for 9M 96 compared to $
$943,715 or 21.8% for 9M 95. The main reason for the decrease as a percentage of
net sales is increased sales. Salaries costs increased $283,777 or 11.9% from 9M
95 to 9M 96 primarily as a result of the addition of a salesman to cover the
midwest and south. Management believes this area has a greater potential and
needs more coverage. Taxes and benefits increased along with salaries from 9M 95
to 9M 96 due to the additional salesman. Sales supplies increased $33,252 or 34%
from 9M 95 to 9M 96 mainly due to costs for publishing and distributing new
product catalogs and due to increased sales.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $827,018 or 16.7% of net sales for 9M
96 compared to $787,646 or 18.2% of net sales for 9M 95. The main reason for the
decrease as a percentage of net sales is increased sales.
11
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Interest expense for 9M 96 was $157,592 or 3.2% of net sales compared to
$161,847 or 3.7% of net sales for 9M 95. Interest expense is down for 3Q 96
primarily because the operating line was $415,000 less during 3Q 96 compared to
3Q 95. This is primarily due to the improved cash flow from increased sales and
to the public offering explained under the paragraph "Liquidity and Capital
Resources" that follows.
LIQUIDITY AND CAPITAL RESOURCES
Cash as of 9M 96 was $248,402, up $114,921 from the end of the Company's
previous fiscal year, November 30, 1995. During the quarter 1Q 96 the Company
closed its initial public offering of preferred stock after receiving funds in
the equity market of $680,472. After payment of commissions and offering costs,
the Company netted $394,073 from the offering. These net offering proceeds have
been applied to marketing expenses (approximately $40,000), new equipment
(approximately $250,000), and working capital (approximately $104,000). The cost
of the offering was stated on the year ended November 30, 1995 balance sheet
under intangible assets. Following the offering the costs were netted against
the offering proceeds resulting in the decrease in intangible assets on the
balance sheet for 9M 96. Cash also was increased during the current year by
$120,226 for refunds of taxes paid in the prior year because of the net
operating loss for the short year ended November 30, 1995. The Company is
current in all of its financial obligations to vendors and lending institutions.
The company continues to address cash flows by controlling inventory levels,
increasing the sales effort, and reducing expenses. Subsequent to quarter end
the Company has restructured it's debt with Bank IV to better meet the cash flow
needs of the Company. Two hundred and twenty thousand dollars ($220,000) was
moved from the short term revolver to a four (4) year long term note. Some of
the growth over the past two years was financed from the short term line. This
restructure frees up that line of credit for operating capital.
The Company believes that its capital resources on hand at August 31, 1996,
together with on going revenues from sales, and it's lending arrangements will
be sufficient to satisfy its working capital requirements for the foreseeable
future.
12
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
27.1 Financial Data Schedule
b) Reports for Form 8-K
No reports on Form 8-K were filed during the quarter ended
August 31, 1996.
13
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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 to the requirements of the Securities Exchange Act, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NACO Industries, Inc.
Registrant
By /s/ Verne E. Bray 10/14/96
Verne E. Bray Date
President
By /s/ Jeffrey J. Kirby 10/14/96
Jeffrey J. Kirby Date
Principal Financial Officer
14
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-END> AUG-31-1996
<CASH> 248,402
<SECURITIES> 0
<RECEIVABLES> 571,956
<ALLOWANCES> 72,075
<INVENTORY> 596,312
<CURRENT-ASSETS> 1,500,675
<PP&E> 2,444,613
<DEPRECIATION> 1,180,416
<TOTAL-ASSETS> 2,783,048
<CURRENT-LIABILITIES> 1,330,936
<BONDS> 0
0
379,236
<COMMON> 20,047
<OTHER-SE> 402,870
<TOTAL-LIABILITY-AND-EQUITY> 2,783,048
<SALES> 4,943,961
<TOTAL-REVENUES> 4,943,961
<CGS> 2,847,281
<TOTAL-COSTS> 2,847,281
<OTHER-EXPENSES> 1,843,156
<LOSS-PROVISION> 15,533
<INTEREST-EXPENSE> 157,592
<INCOME-PRETAX> 97,929
<INCOME-TAX> 27,000
<INCOME-CONTINUING> 70,929
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 70,929
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
15
</TABLE>
