SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1996
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ________
NACO INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
Utah 33-85044-D 48-0836971
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(State or other jurisdiction (Commission File No.) (IRS Employer
of incorporation) Identification No.)
395 West 1400 North
Logan, Utah 84321
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(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (801) 753-8020
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on Which
Title of Each Class Registered
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None None
Securities registered pursuant to Section 12(g) of the Act: None
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 |_|
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained herein, 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|
The issuer's revenues for its most current fiscal year were $6,283,634.
The aggregate market value of the Units held by non-affiliates based
upon the average of the bid and ask prices of the Units in over-the-counter
market on February 20, 1997 was $831,912.
As of February 20, 1997, the Registrant had 1,500,000 shares of Common
Stock outstanding, and 135,412 shares of Preferred Stock outstanding.
Traditional Small Business Disclosure Format: YES |_| NO |X|
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TABLE OF CONTENTS
Page
PART I .................................................................. 1
Item 1. Business.......................................................... 1
Organizational History............................................ 1
Introduction to PVC............................................... 2
Products.......................................................... 2
Manufacturing..................................................... 3
Marketing......................................................... 5
Economic Conditions, Market Fluctuations and Seasonality.......... 5
Competition....................................................... 6
Planned Operational Growth........................................ 6
Product Development........................................ 6
Research and Development................................... 7
Major Customers............................................ 7
Employees.................................................. 7
Patent and Copyright Protection............................ 7
Item 2. Properties........................................................ 8
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Item 3. Legal Proceedings................................................. 9
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Item 4. Submission of Matters to a Vote of Security Holders............... 9
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PART II .................................................................. 10
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters............................................... 10
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 10
Introduction...................................................... 10
Results of Operations............................................. 11
Sales .................................................. 12
Gross Margin............................................... 12
Selling .................................................. 12
General and Administrative................................. 12
Other .................................................. 12
Liquidity and Capital Resources................................... 12
Item 7. Financial Statements.............................................. 13
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures......................................... 13
PART III .................................................................. 14
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Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act................. 14
Item 10. Executive Compensation............................................ 15
Item 11. Security Ownership of Certain Beneficial Owners and Management.... 17
Item 12. Certain Relationships and Related Transactions.................... 19
PART IV .................................................................. 21
Item 13. Exhibits and Reports on Form 8-K.................................. 21
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Information contained in this Report contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, which can be identified by the use of forward- looking terminology such
as "may," "will," "should," "expect," "anticipate," "estimate," or "continue" or
the negative thereof or other variations thereon or comparable terminology.
These forward-looking statements are subject to risk and uncertainties that
include, but are not limited to, those identified in this report, described from
time to time in the Company's other Securities and Exchange Commission filings,
or discussed in the Company's press releases. Actual results may vary materially
from expectations.
PART I
Item 1. Business
Organizational History
NACO Industries, Inc. ("NACO" or the "Company") was organized under the
laws of Kansas, and began operations in Garden City, Kansas in 1976. In 1980,
the Company opened a new sales and warehouse division in Logan, Utah, operating
as NACO West. In 1984 NACO acquired 100% of the Valor Division of NACO
Industries, Inc., a California corporation (NACO California). In 1985, VC Inc.
was formed as a Wyoming holding company and acquired the stock of NACO as well
as assets of Kansas Partnership, a Kansas partnership which owned the real
estate and building used by the Company in Garden City, Kansas.
In November, 1990, NACO reorganized to consolidate the operations of
NACO, the Valor Division of NACO California and VC Inc. As one element of the
reorganization, NACO changed its state of domicile to Utah. The Company now
operates as a Utah corporation with facilities in Utah, Kansas and California.
The Company is qualified as a foreign corporation doing business in Kansas and
California.
Current Organization
NACO is a manufacturing company which produces and sells polyvinyl
chloride (PVC) products. Now headquartered in Logan, Utah the Company has branch
manufacturing facilities in Garden City, Kansas; Lodi, California; and Ogden,
Utah. The Company also has various warehouses located throughout the United
States. See "ITEM 2 - Properties".
NACO's primary line of products consists of PVC pipe fittings and
valves, which are sold throughout the United States through wholesale
distributors to the irrigation, industrial, construction and utility industries.
The Company manufactures molded fittings (4" through 10" in diameter),
fabricated fittings (4" through 36" in diameter), and PVC valves (4" through 12"
in diameter). Molded fittings are manufactured by forcing liquified PVC resin
into a mold. Fabricated fittings are manufactured by reshaping, cutting and
welding PVC pipe. In addition to manufacturing its own products, NACO works with
other organizations as a manufacturing sub-contractor and original equipment
manufacturer. See "BUSINESS -Products". The Company also began manufacturing
composite products in March, 1995.
The Company currently has the capacity to manufacture approximately
3,000,000 pounds of fittings, valves, and pipe per year. See "ITEM 2 -
Property". The Company completed its initial public offering in December 1996.
See "BUSINESS - Product Development", "Marketing", and "Manufacturing".
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On October 11, 1996, the Company purchased the assets of Dreager
Manufacturing Inc and combined its existing fiberglass operations with those in
the new facility in Ogden, Utah. This gave the Company the capability to produce
other related composite products.
Introduction to PVC
The production of polyvinyl chloride (PVC) originated in Germany and
Austria in the 1930's. PVC is produced through chemical, thermal and mechanical
reactions of ethylene, chlorine, celulosics, polyvinyl alcohol and peroxides.
These reactions produce a PVC resin. The PVC resin is mixed with stabilizers for
thermal sensitivity, lubricants to reduce metal adhesion during processing,
plasticizer for flexibility, fillers to reduce cost and increase UV and impact
resistance, impact modifiers for blocking the path of crack propagation,
processing aids for more efficient processing, inorganic and organic pigments
for coloring and other miscellaneous additives. The type of PVC compound mixture
depends upon the product requirements and the type of processing equipment to be
used.
PVC compounds can be processed on various types of plastic processing
equipment including extrusion, calendaring, injection molding, blow film, and
blow molding equipment. The PVC pipe which NACO uses is produced by an extrusion
process. In the extrusion process, PVC compound is fused in and extruded by heat
and pressure. The melt is forced through a die to produce a continuous flow of
the desired shape. NACO also produces injection molded parts. The injection
molding process develops a melt in a method similar to the extrusion process.
The melt is injected into a mold cavity by the forward movement of an extrusion
screw, filling the mold to form the part.
The Company engages subcontractors which make certain parts for valves
and injected fittings including foundries, injection molders, machine shops,
metal stampers, metal platers, rubber vulcanizers and others. The Company
generally owns the patterns and tooling that subcontractors use. As a result,
the tooling and patterns can be relocated if a subcontractor fails to provide
quality parts at competitive prices. None of the custom molders or
subcontractors are affiliates of the Company. They are generally paid on a per
item or per pound basis net 30 days. Management believes that there are numerous
custom molders and other subcontractors available, with the decision on which to
be used being dictated by cost, service and quality. Generally, quantities are
ordered for a six to eight month period in order to provide quantity discounts
and provide sufficient lead time.
Products
NACO offers its customers a line of PVC pipe fittings and valves. The
Company manufactures and sells molded fittings (4" through 10" in diameter), as
well as fabricated fittings (4" through 36" 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). Major valve product lines include low pressure butterfly valves
and air relief valves.
PVC fittings and valves are used to control the direction and flow of
fluids, dry products or gasses through a pipe network. Pipe fittings are also
used to extend or repair existing lines, and enable pipe lines to branch off
into different directions.
The PVC industry includes a number of industry market segments,
including construction, irrigation, utility and industrial markets. Products
such as heat and air fittings are used in the construction market. In the
irrigation market, farmers use fittings and valves to transport water for field
irrigation and drainage. In the utilities market, private contractors and
municipalities use fittings and valves in the installation and maintenance of
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sewer and water lines. In the industrial market, PVC fittings and valves are
used for removal of toxic fumes and the supply of heating and air conditioning
to commercial and residential buildings. Historically, the Company has sold a
majority of its product into the agricultural market. As the Company has
expanded its product line into the industrial, construction and utility markets,
the sales in the new markets have increased. The Company expects this trend to
continue.
In March 1995, the Company began manufacturing and distributing
composite products for the transportation, amusement, recreation and
architectural industry. These products include trailer tops and amusement ride
materials. The Company also produces tooling and molds for other companies in
various industries.
Manufacturing
The Company presently manufactures and sells both fabricated and
injection molded PVC fittings. The valves manufactured by the Company are
designed for low pressure uses. Low pressure uses include applications where
fluid pressures are below 50 pounds per square inch.
Fabricated fittings are made by cutting PVC pipe into specified lengths
and shapes and heating these into a pliable condition where they are formed and
assembled to make the desired product. Fittings can be connected by either
solvent weld or gasket. A gasketed fitting has a pocket for a rubber gasket. The
gasket pocket is formed on a gasket cavity balling machine. Solvent weld ends
are formed in a similar manner.
In fabricating a tee, the pipe is heated to a pliable state, then an
opening is formed in the side of the piece, and a piece of pipe or an insert is
inserted into the side opening of the tee forming a spout. Another piece of pipe
is then heat formed over the top of the spout, forming a custom fit and a third
wall of strength. The tee is then cooled to allow the fitting to hold its shape.
It is then solvent welded into place. This method is patented by NACO. See
"BUSINESS - Patent and Copyright Protection". The Company believes that the
patented method produces a high quality product because the third layer provides
added reinforcement. The Company's competition manufactures tees with only two
layers of plastic in the tee area. The design is such that a visual comparison
with competitors products will show the added reinforcement. The Company uses
the patented method as a selling feature in its marketing campaign.
Molded fittings are produced through an injection molding process which
involves forcing a plasticized resin compound into fitting molds. Injection
molding equipment uses heat and pressure to plasticize the resin compound, which
is transferred into molds or dies of the desired shape. Cooling then takes place
and the part is ejected from the mold cavity. Injection molding process
equipment uses similar compounds as extrusion process equipment. At the present
time the Company subcontracts this work to custom molders. However, the Company
owns the molds and can move them upon 30 days notice.
The Company also acts as a manufacturing subcontractor for other
companies for the fabrication of custom PVC applications. Subcontracting
activities may include assistance in the design layout and establishment of a
manufacturing process. The Company subcontracts for non-competing products and,
as a result, does not believe that acting as a subcontractor increases
competition in its markets.
The Company purchases PVC pipe from various pipe manufacturers. Major
suppliers include Kroy/Alcan Industries, JM Manufacturing, Diamond Pipe, Jet
Stream, Apache Plastic, PW Pipe, IPEX, and Certainteed Corporation. It is
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believed that the raw materials are interchangeable and generally readily
available from multiple sources; however, at times, the industry experiences
shortages in the supply of raw materials for pipe based on excess demand. The
Company attempts to maintain sufficient raw material inventory to avoid the
effect of these shortages, although shortages can occur in certain products
during these periods. Pipe prices are as much as 20 percent lower during the
winter months due to decreased demand and lower resin prices. The Company
attempts to take advantage of these lower prices each winter by purchasing a
sufficient quantity to meet the spring and early summer demands. In addition, as
a result of seasonal market aspects of the Company's business it will stockpile
additional inventory of finished goods in winter months for sale in spring. The
Company generally allows customers to return standard inventory items, subject
to restocking fees. In addition, the Company has a special ordering program for
agricultural dealers in the winter. This program allows the Company to maintain
production levels during this time and also allows dealers to have their stock
at the beginning of their busy season in February. Special terms are given on
the orders over a specific amount. Dealers receive discounts for early payment
before March 15. This discount decreases until the regular price is paid after
May 15.
The Company's manufacturing labor force involves both skilled and
semi-skilled labor. The Company has in place a quality control system in the
manufacturing process to ensure fittings meet or exceed all of the applicable
specifications of the Soil Conservation Service (SCS), National Sanitation
Foundation (NSF), and American Society of Testing Materials (ASTM). All product
lines randomly undergo testing including burst tests, sustained pressure tests,
heat inversion tests, and impact tests. Field tests are also conducted to ensure
products meet customer requirements. The Company provides a warranty on all of
its product lines that they are free from workmanship and material defects for a
period of four months. The Company has not had any material warranty expense to
date.
PVC product usage differs with geographical location and season of the
year. The Company utilizes its three manufacturing facilities to produce the
products most appropriate for the geographical locations in which the plants are
located. This selective production of PVC products minimizes shipping costs and
allows for optimization of manufacturing capacity.
The Company previously produced all large diameter fittings at its
Garden City, Kansas facility. The irrigation market in the western states,
Mexico, and Canada is stimulated by the need to be able to move larger volumes
of water greater distances than that required in other areas. Midwestern states
are able to draw needed water from conveniently located wells, and then
manipulate the flow direction thereafter. Western states require being able to
draw large volumes of water from lakes, rivers and streams in order to
accommodate the irrigation needs of various areas. As a result, the Company
believed it could better serve this western market by increasing the size and
capacity of the Logan facilities and producing the large diameter fittings at
its Logan, Utah facility. This was completed in December 1996. In addition,
because the Company believes that there will be an increased demand and markup
of larger sizes, the Company will still produce large diameter fittings in the
Garden City facility through 24 inches. Increased capacity in large diameter
fittings is seen as the way to cater to the increased demands of the fitting
market.
Over the past four years, the Company has initiated a total quality
management program designed to improve customer satisfaction, enhance product
quality, eliminate waste, and foster continuous improvement. Employee training
has been an integral part of this program. Training has utilized experts in the
fields of total quality management, team building, communications, decision
making and problem solving.
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Marketing
The Company directs its marketing efforts at wholesale pipe
distributors. These distributors service the irrigation, construction and
utility industries throughout the United States, and portions of Mexico and
Canada.
The Company's products are sold by its network of independent sales
representatives on a commission basis. These representatives work closely with
customers to ensure they receive necessary support, information and service. In
recent years, the Company has supplemented its sales effort through a
telemarketing campaign, designed to increase customer contact and ensure broader
distribution of NACO catalog literature.
Pricing information is made available to dealers through catalog
literature. Quantity discounts are offered on larger projects or orders. The
Company feels that because of the quality and service it has to offer, it can
justify a higher price for its products while at the same time, remaining
flexible enough to match the pricing of its competitors.
As a result of feedback from dealers in the industry in which the
Company competes, the Company believes that the PVC pipe and fitting industry
has a reputation for long lead times and late deliveries. The Company, however,
has implemented procedures to increase on-time deliveries. In this regard,
customer orders are monitored to ensure they arrive on time. With its
manufacturing plants and warehouse facilities located across the country, NACO
can provide quick shipping times and better service, which means quicker
response to customer needs. The Company's goal is to have shipments take place
within 48 hours after the order has been placed. This requires careful inventory
management, while maintaining manufacturing flexibility. Over the past year,
on-time delivery has improved to approximately 90 percent. In an effort to
facilitate on-time delivery, warehouse operations have been upgraded. The
Company now relies on more frequent shipments of a smaller volume, which allows
the Company to maintain lower levels of inventory. The Company guarantees
shipping dates on small orders (under $1,500) or it pays the freight for any
late shipment. Assuring on time delivery on larger orders is generally not as
difficult because of the longer lead time provided on larger projects.
In addition to its three manufacturing facilities, the Company
contracts with various warehouse owners to maintain and distribute its products.
Warehouse locations include Grand Island, Nebraska; Lubbock, Texas; Phoenix,
Arizona; Tucker, Georgia; Sebring, Florida; and Pasco, Washington. The warehouse
agents are paid on a commission basis for handling, storage and shipping
inventory. Generally, a customer will call the warehouse with an order which is
then shipped directly to the customer by the warehouse agent from the inventory
at the agent's location. Invoices are sent from the Company. NACO offers
customers a right to return products subject to a 20% restocking fee. Non-stock
items are generally not returnable. The Company also has contracted with
buy-sell representatives in Bohemia, New York; Little Rock, Arkansas; and
Minneapolis, Minnesota. The companies involved in this arrangement purchase
products from the Company, and sell them out of their own inventory to
distributors. The Company provides the buy-sell representatives with a special
discount based on volume. Returns by the buy-sell representatives are subject to
a restocking fee. Shipping costs generally run from 5 to 10 percent of the cost
of the product. The use of the warehouse and buy-sell representatives allows the
Company to control shipping costs while providing timely delivery to its
customers.
Economic Conditions, Market Fluctuations and Seasonality
Several external factors have an indirect impact upon the business of
the Company. The PVC industry in which the Company competes is dependent upon
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the health of the utility, industrial, agriculture and construction sectors.
Rising interest rates, and reduction in government subsidy programs for housing,
farming and public works can significantly adversely affect sales in the PVC
industry. Weather also plays a role as sales tend to be heaviest during the
spring, summer and fall, and decrease during the winter months when cold and
freezing temperatures impact northern regions of the market. Other factors
influencing the industry include fluctuations in the price of raw materials and
the price of substitute products such as steel fittings and valves. In addition,
pipe prices are as much as 20% lower in winter months due to decreased demand
and lower resin prices during which time the Company will attempt to stockpile
materials. See "BUSINESS Manufacturing".
Competition
Some of the Company's competitors are substantially larger than the
Company, and have greater resources. As a maturing industry, the market for
fittings and valves is highly competitive. In addition, as a result of competing
in a maturing industry annual percentage increases in industry sales will be
lower than if the Company were operating in a developing industry. Therefore,
the Company must rely on its ability to increase its market share and develop
new products to increase sales. Competition within the PVC fittings industry is
based on price, quality, breadth of product line, and timeliness of delivery.
While there are several national producers, competition generally occurs on a
region by region basis. This is due to existence of several regional competitors
and the fact that shipping represents a significant cost factor in the industry.
The Company has a number of competitors who compete with the Company both at the
regional level and with respect to various product lines. Present competitors
include Galt Pipe and Construction (Galt, CA), Spear Manufacturing Company
(Sylmar, CA), Head Manufacturing, Inc. (Preston, ID), Sioliou Industries Inc.
(Ville Plattle, LA), and PVC Fittings (Hereford, TX). As greater penetration of
the utility market is pursued, the Company will face competition from additional
competitors in the drain, waste and vent (DWV) and sewer markets. These include
Industries Vassallo Inc. (Poncey, Puerto Rico), GPK Products Inc. (Fargo, ND),
Freedom Plastics Inc. (Janesville, WI) and Multi Fittings (Toronto, Ontario,
Canada).
Based on feedback from dealers who sell products manufactured by
competitors, the Company feels that the strongest attribute of its products is
its quality. NACO is careful to ensure that all products meet or exceed industry
standards. In this regard, the Company has patented the design of the NACO
fabricated tee. While some competitors use only two layers of plastic in the
design and construction of their tees, NACO uses three layers to ensure maximum
strength. See "BUSINESS - Patent and Copyright Protection".
Management believes the breadth of the Company's product line also
represents a strategic advantage. Because of price incentives offered on large
orders, many purchasing agents are reluctant to order small sized fittings from
one manufacturer and large diameter from another. Thus, firms having a broad
product line tend to have a stronger position when bidding pipe projects. In
addition, the Company believes its prompt delivery time provides it with a
competitive advantage.
Planned Operational Growth
Product Development. The Company has completed development of 27" to
36" diameter fittings. The additional equipment required for these products was
completed in December 1996. The large diameter fittings will be targeted for the
irrigation and utilities markets. In addition, an expanded line of bolted repair
couplers fits into both the targeted irrigation and utilities markets. These
products have been developed to the production stage and are anticipated to be
completed within 6 months. The Company is also working on an expanding the 6"
through 12" size lines of valves which would have applications in irrigation and
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industrial markets. These products have been developed to the testing stage and
are anticipated to be completed within nine months. Further, the Company is
developing reinforced fiberglass fittings for high pressure applications which
would target the utilities and industrial markets.
NACO currently targets various distributors of PVC fittings in the
irrigation and utilities markets. Approximately 70 percent of the Company's
current customers are in these markets. NACO's plans for expansion will increase
sales efforts in industrial and building construction markets.
The Company, on October 11, 1996, formed a wholly owned subsidiary,
NACO Composites, Inc., and acquired the assets of Dreager Manufacturing in a
business combination accounted for as a purchase. The existing fiberglass
operations was combined with this operation and moved to a new facility in
Ogden, Utah. This gives the Company the capability to produce other related
composite products and increased capacity.
Research and Development. Research and development expenditures for the
fiscal years ended November 30, 1996, 1995 and February 28, 1995, 1994 and 1993
were $10,709, $12,752, $14,314, $59,262 and $14,045 respectively. The Company
had no customer sponsored research activities during these periods.
Major Customers. During the years ended November 30, 1996 and 1995 no
customer accounted for more then 10% of the sales of the Company and it is not
anticipated that the loss of any one customer would have a material impact on
the revenues of the Company.
Employees. As of November 30, 1996, NACO had 92 employees of which 84
are full time and 8 are part time. All plant locations are non-union. The
Company anticipates it will add between 4 and 10 additional employees in various
areas in the next twelve months.
Patent and Copyright Protection. The Company filed a utility patent for
its plastic tee fitting in 1984. The patent was renewed in 1991, and has been
extended into 1998. The patent is renewable for up to 17 years from the date of
issuance (2001). The Company believes that the patented technology provides an
improved product and a competitive selling edge for NACO. The design of the
patented tee creates a stronger product for higher pressure applications.
Approximately 70% of the tees sold by the Company are manufactured using the
patented process.
The Company also filed a patent on a one piece 90(degree) fabricated
elbow fitting on November 18, 1994, and the patent can be extended through 2015.
This elbow uses less material & labor and has better flow characteristics. The
Company believes this will be an advantage in the market.
NACO regularly copyrights its literature, catalogs, advertising and
other proprietary information as it deems necessary.
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Item 2. Properties
The Company operates the following facilities:
<TABLE>
<CAPTION>
Approximate
Floor Space
Location (square feet) Present Use
- ---------------------------------------- ------------- ------------------------------------------
<S> <C> <C>
Logan, Utah (leased).................... 23,025 Manufacturing, Warehouse & Office
Garden City, Kansas..................... 21,326 Manufacturing, Warehouse & Office
Lodi, California (leased)............... 15,800 Manufacturing, Warehouse & Office
Ogden, Utah (leased).................... 15,870 Manufacturing, Warehouse & Office
</TABLE>
In July 1994 an 11,400 square foot addition to the leased Logan, Utah
facilities was completed adding a machine shop and expanding manufacturing and
warehousing capabilities. The Company owns the Garden City, Kansas property and
completed a 5,000 square foot addition in January 1995. This has added
additional manufacturing and warehouse capabilities. In addition, the existing
manufacturing area in the Garden City facility was remodeled to increase the
efficiency of the operation and the yard was redone in order to eliminate a
problem of drainage. The Garden City, Kansas property is subject to a lien which
secures indebtedness in the principal amount of approximately $230,000. In 1996,
NACO Composites, a subsidiary of NACO Industries leased the Ogden, Utah facility
for the fiberglass and composites production.
The Logan, Lodi, and Ogden facilities are occupied under leases which
expire in 1999. The Ogden facility has an option for renewal for a period of two
years. The lease for the Logan facility is with a related party, and the Company
does not anticipate any problems renewing this lease. Lease payments on the
Lodi, Logan, and Ogden facilities are $4,496, $9,300, and $3,500 per month
respectively. The lease agreement on the Logan facility also includes personal
property and equipment at the facility. See "CERTAIN TRANSACTIONS". In order to
increase operating effectiveness the Company moved its Lodi, California
facilities to newer facilities having increased square footage, manufacturing
and warehouse space as well as additional yard area in September 1994. Before
the additions described above, the facilities had a production capacity of
approximately 1,500,000 pounds of pipe per year. The Company feels that capacity
has now doubled to approximately 3,000,000 pounds per year.
The Company also uses the services of warehouses located in Grand
Island, Nebraska; Lubbock, Texas; Phoenix, Arizona; and Pasco, Washington. The
warehouses are paid 5% of sales for warehousing services. The Company also has
contracted with buy-sell representatives in Bohemia, New York; Little Rock,
Arkansas; and Minneapolis, Minnesota. The Company feels that its facilities are
suitable and adequate for its current needs.
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Item 3. Legal Proceedings
The Company is not a party to any material legal proceedings and, to
the best of its knowledge, no action by or against the Company or its properties
has been threatened.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the security holders during the
fourth quarter of the fiscal year ended November 30, 1996.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock is held of record by three persons and is
not traded. The Company's Series 1 Class A 7% Cumulative Convertible Preferred
Stock (the "Preferred Stock") is held of record by 87 persons and is traded as
part of a Unit, consisting of one share of the Preferred Stock and a 1/2 Warrant
to buy shares of the Company's Common Stock, in the over-the-counter market. The
Units opened for trading in the over-the-counter market on February 26, 1996.
The following table sets forth, for the periods indicated, the high and low bid
prices for the Company's Units, for the fiscal year ended November 30, 1996 as
reported by the OTC Bulletin Board. The bid prices are market quotations based
on interdealer bid prices, without markup, markdown or commission, and may not
represent actual transactions.
High Low
------------- ------------
Year Ended November 30, 1996:
First Quarter* ........................... $ 5.50 $ 5.50
Second Quarter ........................... 5.50 5.50
Third Quarter ............................ 5.50 5.50
Fourth Quarter ........................... 5.50 5.50
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* Trading in the first quarter did not begin until February 26, 1996.
No dividends were paid on the Common Stock in the last two fiscal
years. The Company is restricted from paying dividends on its Common Stock under
the terms of the Preferred Stock and its revolving credit agreement. A total of
$34,481 of dividends were paid on the Preferred Stock. The Company's revolving
credit agreement restricts the Company's ability to pay dividends. However, the
lender has waived this restriction with respect to the Preferred Stock.
From June 28, 1996 through November 30, 1996, the Company sold in a private
placement a total of 19,000 Units to nine persons. Each Unit consists of one
share of Preferred Stock and a warrant to purchase one share of Common Stock at
an exercise price of $3.75 per share. Each share of Preferred Stock is
convertible into two shares of Common Stock. The sales were part of a private
offering of up to 175,000 Units. The offering price of the Units was $6.00 per
Unit. Each of the purchasers was an accredited investor as defined under
Regulation D. The transaction was effected in reliance upon Regulation D. The
Company engaged Extol Corporation to provide financial consulting services in
connection with the private placement.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
NACO 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
36" 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).
10
<PAGE>
Historically, the Company sold a majority of its product into the
agricultural market. The agricultural market is very seasonal. The sales are
mainly during the spring and fall when crops are not being grown. As the
Company's product mix diversifies in the fittings business, this diversification
has and will increase sales all year round. This is significant because in the
past the Company's operating results fluctuated greatly, with significantly
higher sales in the spring than in other seasons. With the increasing business
in other markets, the Company's operating results will have less fluctuation
through the year.
On October 11, 1996, the Company purchased the assets of Dreager
Manufacturing Inc and combined its existing fiberglass operations with those in
the new facility in Ogden, Utah. This gave the Company the capability to produce
other related composite products. The Company started supplying composite
products to customers in March 1995. Sales of composite products were $341,561
for Y96 and $205,914 for Y95.
Results of Operations
Due to the change in fiscal year end in 1995 the following discussion
relates to the twelve months ended November 30, 1996 and to the nine months
ended November 30, 1995. For comparison purposes percent of sales will be used
rather than dollars because of the difference in number of months being compared
between the two periods. In the following discussion, the year ended November
30, 1996 and November 30, 1995 are referred to as Y96 and Y95, respectively.
Overview. The Company sustained an operating loss for the twelve month
period ending November 30, 1996. The loss is a result of several factors. First,
the Company's composite products operations generated an operational loss of
approximately $97,000. Management believes such loss resulted primarily from the
fact that such business is in the start-up stage and sales have not reached a
break-even point yet. Part of the loss is also attributed to the additional
overhead expense associated with the expansion of the Company's facilities and
the additional personnel required to handle the expansion. Management is
addressing the loss in two ways. First, the Company has reduced head count and
reduced some variable expenses and is trying to find other ways to reduce
certain expenses without affecting quality and service to customers and the
Company's ability to increase sales. The Company is also managing it's inventory
better without affecting service and delivery time.
The Company is also focusing on increasing its sales. The Company is
making a strong effort to expand into the industrial and commercial markets.
Arrangements are being made for two new warehouses and new buy sell agreements.
These arrangements are in the industrial and commercial markets. These sales
will not have an impact on the Company's operating results, however, until the
second quarter of 1997. Possible increase in sales will reduce the per unit
overhead cost and also provide more money in the gross margin, by volume and per
unit. With the changes mentioned above, management believes the Company will be
profitable in the fiscal year 1997, starting in second quarter of 1997.
The Company's operating results, however, are subject to certain
inherent risks that could adversely affect the Company's operating results and
its ability to operate profitably. If the Company is not able to successfully
secure sufficient equity or debt financing to meet its working capital and
operational requirements as discussed below, this will likely have a material
adverse effect on the Company's operating results. In addition, the Company's
operating results also could be adversely affected by increased competition in
the markets, competitors offering products at prices below the Company's prices,
manufacturing delays and inefficiencies associated with expanding the Company's
manufacturing capacity, adverse weather conditions, changes in economic
11
<PAGE>
conditions in its markets, unanticipated expenses or events and other factors
discussed in this report. Accordingly there can be no assurance that the Company
will be profitable in 1997.
Sales. Net sales for Y96 was $6,283,634 compared to net sales of
$4,175,547 for the short year, Y95. Sales increased mainly due to new product
lines added during the year which was possible because of the expansion of the
manufacturing facilities in the two previous years. A salesman was added to
cover the midwest and south which also contributed to the increase in sales. The
additional $135,000 sales of composite products also contributed to the
increase.
Gross Margin. Gross margin as a percent of sales for Y96 was 41.1%
compared to 34.9% Y95. The increase in gross margin is mainly due to the higher
volume of production during Y96 which absorbed more overhead and spread fixed
costs over the larger volume. The higher volume was mainly due to increased
sales and increased manufacturing capacity. Gross margins in Y95 were also
adversely affected by a reduction in inventory levels which resulted in a lower
volume of production with respect to sales in such year. The Company reduced
inventories by $487,000 in Y95. During Y96 the Company was able to better manage
inventories to remain at the lower level without any negative effect on delivery
of quality products to the customer in a timely manner. This resulted in greater
production during Y96.
Selling. Selling expenses were 21.5% of net sales for Y96 compared to
20.7% for Y95. Salaries increased .7% as a percent of sales 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. An
additional salesman was added for the composite line of products also.
Advertising increased .4% as a percent of sales from Y95 primarily due to
printing new catalogs for existing and new product lines. Management believes
that advertising expenses should not be as high in 1997 unless the Company needs
to print new catalogs.
General and Administrative. General and administrative expenses were
18.3% of net sales for Y96 compared to 20.2% for Y95. The decrease was due
mainly to the increased sales volume. As a percent of sales, salaries decreased
1.3% mainly due to greater sales volume.
Other. Other expenses/revenues were 2.5% for Y96 compared to 4.1% for
Y95. Interest expense went from 4.3% in Y95 to 3.1% in Y96 mainly because of
sales volume. Also a contributing factor was the gain on sale of assets during
Y96 of $38,878 or .6% of sales.
Liquidity and Capital Resources
In analyzing the Company's liquidity, the following discussion
highlights material changes in working capital. Cash as of 11-30-96 was
$198,306, up $64,825 from Y95. During the 1st quarter of Y96, 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 11-30-95 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 Y96. Cash also 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 11- 30-95. Because of the continued growth and need for
capital, the Company is facing a potential cash flow shortage. The Company is
addressing the potential cash flow shortage by managing inventories, increasing
the sales effort, reducing expenses, and seeking funds in the equity market.
12
<PAGE>
The Company has been struggling with its liquidity position. With the
losses and the expansion, the Company has reduced its available working capital
significantly. During the expansion, part of the capital improvements and new
equipment funding has come from the Company's working capital line of credit and
internal financing. In examining the statement of cash flow at November 30 1996
and November 30, 1995, the total cash paid for property and equipment totals
$414,147 during Y96.
Management believes that external financing or additional capital is
necessary to replenish working capital to permit the Company to meet its
obligations on a timely basis and to provide the additional working capital
which will be required to sustain the expected growth. At November 30, 1996, the
revolving line of credit limit was $1,100,000 of which $664,326 was used leaving
$435,674 available. The revolving line of credit expires in August 1997 and
bears interest at the rate of 1.75% over the prime rate. The availability of the
line is based on a percent of accounts receivable and inventory. The Company is
working on several options for obtaining additional working capital. The Company
is also working on private placement of equity. In January 1996, the Company
entered into an agreement with an investor relations firm to provide investor
relations and financial consulting services to the Company. During Y96, the
Company received an additional $114,000 through a private placement as a result
of this arrangement and continues to pursue this avenue for additional working
capital. The Company will also be receiving a tax refund of approximately
$48,000 within a short period from federal and state revenue agencies. If the
Company is unable to secure additional financing, it could have a material
adverse effect on the Company operations and financial condition.
Management believes that the actions presently being taken to obtain
additional financing or capital will meet the Company's future needs for working
capital. There can be no assurance, however, that additional capital or
financing will be available on terms favorable to the Company, if at all. If the
Company is unable to secure additional financing or raise additional capital, it
will have a material adverse effect on the Company's operations and financial
condition.
Item 7. Financial Statements
See pages F-1 through F-23.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
Not applicable.
13
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
All members of the Board of Directors hold office until the
annual meeting of shareholders or until their successors are duly elected and
qualified. The executive officers serve at the pleasure of the Board of
Directors. The following table sets forth information concerning the Company's
directors and executive officers.
Name Age Position
- --------------------------- ----- ------------------------------------------
Verne E. Bray.............. 61 President and Chairman of the Board of
Directors
Jeffrey J. Kirby........... 34 Vice President, Secretary, Treasurer and
Director
Daniel M. Gruber........... 44 Vice President
Nina F. Birkle............. 63 Vice President
Thomas Christy............. 67 Director
Kent A. Webb............... 45 Director
Peter Heilmayr............. 63 Director
James C. Czirr............. 43 Nominated to be a Director
The business experience and brief resumes on each of the Directors, Executive
Officers, and significant employees are as follows:
Verne Bray has been President of the Company since 1988, a director
since 1985 and Chairman of the Board of Directors since 1988. Mr. Bray joined
the Company in 1980 and started the NACO West operation in Logan. In 1982 he was
appointed sales manager of all divisions. Prior to joining NACO Mr. Bray was
sales manager and general manager of Head Manufacturing, Inc. Mr. Bray is the
father- in-law of Jeffrey Kirby, an officer and director of the Company. Mr.
Bray is employed full time by the Company. In March 1995 Mr. Bray had a heart
attack and underwent a seven way cardio-bypass - surgery. He is now back to work
full time and his present health is good.
Jeffrey J. Kirby has been Executive Vice President of the Company since
1992, Secretary since 1992 and Treasurer since March, 1994. He has been a
director since 1992. Mr. Kirby is employed full time by the Company. Prior to
joining the Company Mr. Kirby from 1988 to 1991 was a senior accountant with
Ernst and Young in Long Beach, California. Mr. Kirby received his B.S. in
accounting and finance from Utah State University in 1987 and his MBA from the
same institution in March 1988. Mr. Kirby is the son-in-law of Verne Bray, the
President and a director of the Company.
Daniel M. Gruber has been Vice President of the Company since 1988. He
was a director from 1988 to March 1994. Since 1984 Mr. Gruber has been the
Division Manager of the Lodi, California Division of the Company. Mr. Gruber is
employed full time by the Company.
14
<PAGE>
Nina Birkle has been Vice President of the Company since 1988, and was
Treasurer from 1988 to March 1994. She was a director from 1988 to March 1994.
Ms. Birkle is employed full time by the Company. Ms. Birkle joined NACO
Industries in Garden City, Kansas in 1981 and held positions as Credit and
Accounting Manager prior to being appointed Vice President and Division Manager
of the Garden City Kansas, manufacturing facility.
Thomas Christy has been a director of the Company since 1992. Since
1979 Mr. Christy has been President of T. Christy Enterprises, Inc. which acts
as a manufacturers' agent representative for several companies, including the
Company, in Southern California serving the waterworks, plumbing, industrial and
irrigation markets. Mr. Christy received his bachelors degree in economics from
DePaul University in 1954. Mr. Christy from 1974 to 1975 was the President of
the Plastic Pipe Institute and from 1971 to 1972 was President of the Uni-Bell
Plastic Pipe Association. Mr. Christy is also a member of the American Water
Works Association (AWWA).
Kent Webb was appointed as a director of the Company in March, 1994.
Since May 1995, Mr. Webb has been a loan officer at Cache Mortgage Corporation.
From October 1994 until May of 1995, Mr. Webb was employed full time by the
Company as Director of Business Development. Prior to joining the Company and
from December 1993 to October 1994 Mr. Webb was Chief Executive Officer of Logan
Manufacturing Company engaged in the manufacturing of snow groomers and utility
vehicles in Logan, Utah. From 1991 to 1993 Mr. Webb was a Director, Executive
Vice President and Chief Operating Officer of First Commerce Bank in Logan,
Utah. Prior to 1991 he was a Director, President and Chief Executive Officer of
Cache Valley Bank in Logan, Utah. Mr. Webb received his bachelors degree from
the University of Utah in 1975.
Dr. Peter Heilmayr was appointed as a director of the Company in March
1994. Since 1991 Dr. Heilmayr has been Vice Chairman of American Maplan
Corporation, a manufacturer of twin screw extrudes and extension tooling for the
production of PVC pipe, PVC siding and PVC profiles. From 1978 through 1991 Dr.
Heilmayr was President of American Maplan Corporation. Dr. Heilmayr is also an
owner of PVC Consulting Corporation engaged in PVC consulting services. Dr.
Heilmayr received, his PhD from the University of Vienna, Austria in 1962.
James C. Czirr was recently nominated to serve as a director of the
Company. His nomination will be voted upon at the next meeting of shareholders.
Since 1989, Mr. Czirr has been providing investor relations and consulting
services for various companies in connection with business strategies,
marketing, incentive programs, and finance and capital formation. He previously
served as President of Extol Energy Corporation, a syndicator of oil and gas
wells from 1982 to 1988.
Section 16(a) Beneficial Reporting Compliance
At the present time, the Company files reports with the Securities &
Exchange Commission pursuant to Section 15(d) of the Securities Exchange Act of
1934 (the "Exchange Act"), has no class of its securities registered under
either Section 12(b) or 12(g) of the Exchange Act, and is not subject to Section
16(a) of the Exchange Act. Consequently, the officers and directors or 10%
shareholders are not presently required to file Section 16 reports.
Item 10. Executive Compensation
The following table sets forth compensation paid or accrued by NACO
Industries, Inc. during the last two fiscal years to its Chief Executive
Officer, the only executive officer whose total annual salary and bonus exceeded
$ 100,000.
15
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
---------------------------------
Other Annual All Other
Name & Position Year Salary Bonus Compensation Compensation(1)
- ----------------------------------------------------- ------ ---------- ----- ------------ ----------------
Verne Bray
<S> <C> <C> <C> <C> <C>
Chief Executive Officer 1996 $211,086 0 0 $3,906
and President 1995 214,931 0 0 2,645
</TABLE>
- ----------------------
(1) Includes Company contributions to a defined contribution plan.
There were no individual grants of stock options or freestanding stock
appreciation rights made by the Company during the last completed fiscal year to
the Chief Executive Officer.
Aggregated Option Exercises in Last Fiscal Year and Year End Option Values
The following table sets forth the aggregate value of unexercised
options to acquire shares of the Common Stock held by the Chief Executive
Officer on November 30, 1996.
<TABLE>
<CAPTION>
Number of Value of Unexercised
Unexercised Options In-the-Money Options at
at FY-End(#) FY-End($)(1)
--------------------- -------------------------
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise(#) Realized($) Unexercisable Unexercisable
- ----------------------------------- ---------------- -------------- --------------------- -------------------------
<S> <C> <C> <C> <C>
Verne Bray -- -- 20,000/0 $0/$0
Chief Executive Officer
and President
</TABLE>
- ---------------------------
(1) The Company's Common Stock is not publicly traded. Based on the average of
the bid and ask prices of the Units, which consist of a share of Preferred Stock
which is convertible into two shares of Common Stock and a half of warrant to
acquire one share of common stock at an exercise price of $3.00, the Company has
determined the per share value of the Common Stock is less than the exercise
price of the options
16
<PAGE>
Employment Agreements
In September 1994 the Company entered into an employment contract with
Verne Bray, President and Chief Executive Officer. The contract is for a term of
5 years and provides for a base salary of $224,000 with a cost of living
adjustment based on the increase in the consumer price index yearly. In the
event the Company is more than two years in arrears in the payment of cumulative
dividends to the holders of the Preferred Stock the salary will be reduced by
$74,000 annually until the dividends are paid in full. Mr. Bray is entitled to
receive a payment of $100,000 if his employment is terminated in violation of
the terms of the employment agreement.
Director Compensation
In August 1996, the Company granted non-qualified options to purchase
150,000 shares of Common Stock to James C. Czirr as a condition of acceptance of
nomination to the Board of Directors. The exercise price of the option is $4.00
per share. Directors do not receive any annual fee or compensation for serving
on the Board of Directors. They are, however, reimbursed for their costs in
attending board meetings.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of February 20, 1997, certain
information with respect to the beneficial ownership of Common Stock and
Preferred Stock of the Company, by the person known by the Company to own
beneficially more than five percent of the Company's Common Stock or Preferred
Stock, by the Chief Executive Officer and by all Officers and Directors as a
group. Unless otherwise indicated, all persons have sole voting and investment
powers over such shares, subject to community property laws.
17
<PAGE>
<TABLE>
<CAPTION>
Name and Address Percent
of Number of of
Beneficial Owner Class of Stock Shares Owned Class(8)
- -------------------------------------------------------------------- ------------- ------------- ----------
<S> <C> <C> <C>
Verne Bray*......................................................... Common(1) 1,466,667 96.4%
1367 E. 1980 North Preferred -- --
Logan, UT 84321
Jeffrey J. Kirby*................................................... Common(2) 26,817 1.8
285 East 400 North Preferred 60 **
Millville, UT 84321
Thomas Christy*..................................................... Common(3) 20,000 1.3
2011 Omega Drive Preferred -- --
Santa Anna, CA 92705
Kent A. Webb*....................................................... Common(3) 20,000 1.3
96 North 1250 East Preferred -- --
Logan, UT 84321
Peter Heilmayr*..................................................... Common(4) 24,275 1.6
6925 Tumbling Trail Preferred 1,700 1.3
Fort Worth, TX 76116
Gary Carson......................................................... Common(5) 28,000 1.8
4367 Bobwhite Ct. Preferred 11,200 8.3
Ogden, UT 84403-3262
Dan Bray............................................................ Common(5) 31,250 2.0
1755 Shadow Ridge Circle Preferred 12,500 9.2
Ogden, UT 84403
Gary Gibbons........................................................ Common(5) 25,000 1.6
1606 North 1340 East Preferred 10,000 7.4
North Logan, UT 84341
Jack Prust.......................................................... Common(5) 21,250 1.4
P.O. Box 5135 Preferred 8,500 6.3
San Ramone, CA 94583
James C. Czirr (nominee for director)............................... Common(6) 30,000 1.9
6070 Baldy Mountain Road
Sandpoint, ID 83864
All Directors and Officers as a group (5 persons)................... Common(7) 1,557,759 97.1
Preferred 1,760 1.3
</TABLE>
- ----------------------
* Indicates current Director and/or officer
** Less than 1 percent
(1) The shares owned by Verne Bray are subject to a Loan Agreement and Pledge
Agreement with Bank IV, Kansas N.A. bank. The current balance of the loan
at February 20, 1997, is $24,948. Also includes 20,000 shares issuable upon
exercise of presently exercisable options.
(2) Includes 20,000 shares issuable upon exercise of presently exercisable
options, 30 shares issuable upon exercise of presently exercisable
Warrants, and 120 shares issuable upon conversion of the Preferred Stock.
(3) Includes 20,000 shares issuable upon presently exercisable options.
(4) Includes 20,000 shares issuable upon exercise of presently exercisable
options, 875 shares issuable upon exercise of presently exercisable
Warrants, and 3,400 shares issuable upon conversion of the Preferred Stock.
(5) Consists of shares issuable upon conversion of the Preferred Stock and upon
exercise of the related warrants.
(6) Includes 30,000 shares issuable upon excercise of presently exercisable
options.
(7) Includes 100,000 shares issuable upon exercise of presently exercisable
options, 905 shares issuable upon exercise of presently exercisable
warrants, and 3,520 shares issuable upon conversion of the Preferred Stock.
(8) As of the date hereof 418,551 shares of common stock redeemed are held as
treasury stock and are security for the payment of the amounts owed under a
redemption and non-competition agreement pursuant to which the stock was
acquired by the Company. See "CERTAIN TRANSACTIONS". If the Company were to
18
<PAGE>
default on the payment of the obligation the stock would be returned to
sellers. These shares have not been taken into consideration in determining
the percent of Common Stock beneficially owned.
Item 12. Certain Relationships and Related Transactions
The Company leases its Logan, Utah facility from P.V.C., Inc., a
corporation of which Verne Bray is an officer, director, and sole shareholder.
Mr. Bray is also the Chief Executive Officer, a director, and a controlling
shareholder of the Company. The rental on the Logan, Utah facility was $4,000
per month through February 1994, and with the addition of facilities and
equipment in 1994, the lease payment was increased to $6,000 per month in March,
1994. The lease payments increased to $9,300 per month in June 1994 and continue
at that rate through the remainder of the lease term. The lease expires in
December 1999. No renewal options are provided. Lease payments for the fiscal
years ended February 28, 1993 and 1994 were $48,000 per year, $101,700 for
fiscal year ended February 28, 1995, and $83,700 for period consisting of the
nine months ended November 30, 1995 and $111,600 for fiscal year end November
30, 1996. The lease provides that the premises may only be used for operating
the business of NACO Industries, Inc. The Company is required to maintain fire,
casualty and liability insurance on the property. The lessor is responsible for
repair and maintenance of the parking area and structural components of the
building. The Company is responsible for all other maintenance, utilities and
all real and personal property taxes.
The lease terms were approved by the members of the Board of Directors,
after reviewing several factors including appraisals on comparable buildings,
rental costs of commercial buildings and replacement building costs. Based on
this review management believes the terms and conditions to be fair and
reasonable.
At November 30, 1996 and 1995, P.V.C., Inc. had loaned the Company
$14,242 and $9,206, respectively. The loan is payable on demand. During the year
ending November 30, 1996, the Company sold to P.V.C., Inc. equipment for
$42,705. The sales price approximated fair value based upon comparisons with
similar property. The Company recorded a gain of $37,182.
During the years ending February 28, 1995, the Company supervised the
expansion of the Logan, Utah facility. Building and equipment costs totaling
$210,700 through February 20, 1995, were paid. The Company paid the costs of the
construction of the building which is owned by P.V.C., Inc., during the
construction phase. Upon obtaining permanent financing, P.V.C., Inc. reimbursed
the amount paid out by the Company for the construction and equipment. In
connection with financing the expansion, P.V.C., Inc. obtained a second mortgage
which the Company has guaranteed. The $275,000 mortgage, which is also secured
by the leased property, is at two percent over prime and is payable in monthly
installments of $2,629 through 2009. The guarantee was taken into account in
determining the lease payments on the facility described above.
The Company leases the Ogden, Utah manufacturing and sales facility
from Ronald L. Dreager, an employee and director of NACO Composites, Inc.
Monthly rentals are due in the amount of $3,500 and may be increased pursuant to
the mutual agreement of both parties. At November 30, 1996, the Company owed
Ronald L. Dreager $20,140 in connection with the asset purchase of Dreager
Manufacturing.
During the year ending November 30, 1996, and the nine months ending
November 30, 1995, the Company paid sales commissions of $12,865 and $8,096,
19
<PAGE>
respectively, to Thomas Christy, a sales representative who was also serving on
the Board of Directors. The sales commissions were computed consistent with
other sales representatives of the Company.
Mr. Czirr is a 50% shareholder in an investor relations consulting firm
retained by the Company; which provides investor relations consulting for a
retainer of $3,000 per month through August, 2000.
The transactions described in this section were on terms believed by
the Company to be at least as favorable as could be obtained by the Company from
unaffiliated, independent third parties. However, in none of the transactions
was there an independent determination of fairness and reasonableness of the
terms of the transaction with the affiliates. The protection to the Company and
the shareholders of Board approval of transactions is limited since Mr. Bray
controls the election of the directors as a result of his controlling ownership
interest in the Company. Any future transactions between the Company and any
affiliate will only be entered into on terms believed to be least as favorable
as could be obtained from unaffiliated independent third parties. In an effort
to determine the fairness of the terms of any transaction with affiliates and in
order for the Company to attempt to protect its own best interest in
transactions with affiliates, other similar non-affiliated transactions will be
obtained and compared. If such a transaction is real estate related, this
information will be obtained from real estate companies that deal with
commercial properties and/or commercial property management companies. When
appropriate, appraisals by certified appraisers will be obtained. If the Company
desires to enter into a transaction with an affiliate that is non-real estate
related, the Board of Directors will attempt to document the fairness of such a
transaction with a similar nonaffiliated transactions. The Company does not
currently anticipate making any loans to affiliates in the future. Any future
loans to officers, directors, five percent shareholders or their affiliates will
not occur unless approved by a majority of the disinterested Board of Directors
and for a bona fide business purpose.
20
<PAGE>
PART IV
Item 13. Exhibits and Reports on Form 8-K
(a) Documents Filed as Part of this Report:
Description Exhibit No.
-------------------------------------------------------- -----------
3(i) Articles of Incorporation of the Company (1)
3(ii) Bylaws of the Company................................ (1)
3 Instruments Defining Rights of Security Holders...... (2)
10.1 Employment Agreement of Verne Bray, as amended....... (3)
10.2 Nonqualified Stock Option Agreement.................. (1)
10.3 Lease Agreement on Logan, Utah Facility.............. (1)
10.4 Lease Agreement on Lodi, California Facility......... (1)
10.5 Promissory Note with P.V.C., Inc..................... (1)
10.6 Sales Representation Agreement with Thomas Christy... (1)
10.7 Loan Agreement with Bank IV.......................... (1)
10.8 Stock Redemption Agreement with Maurice A. Coen,
David Coen and Kirk Coen............................. (1)
10.9 Agreements with warehouse agents..................... (2)
10.10 Lease Agreement in Ogden, Utah facility.............. Filed herewith
21 Subsidiaries of Registrant........................... Filed herewith
27 Financial Data Schedule.............................. Filed herewith
- -------------------------
(1) Filed as an Exhibit in the original filing of the SB-2 Registration
Statement filed with the Securities and Exchange Commission on October
12, 1994, SEC file number 3385044-D.
(2) Filed as an Exhibit to Amendment Number 1 of the SB-2 Registration
Statement filed with the Securities and Exchange Commission on December
28, 1994.
(3) Filed as an Exhibit to Amendment Number 3 of the SB-2 Registration
Statement filed with the Securities and Exchange Commission on April 5,
1995.
(b) The registrant did not file a report on Form 8-K in the fourth quarter of
its fiscal year ended November 30, 1996.
21
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Report of Certified Public Accountants.......................................F-1
Balance Sheets as of November 30, 1996 and 1995..............................F-2
Statements of Income For the Year Ended November 30, 1996 and
for the Nine Months Ended November 30, 1995...............................F-4
Statements of Stockholders' Equity...........................................F-5
Statements of Cash Flows For the Year Ended November 30, 1996 and
for the Nine Months Ended November 30, 1995...............................F-6
Notes to Consolidated Financial Statements...................................F-9
22
<PAGE>
JONES, WRIGHT, SWENSON & SIMKINS LLP
Certified Public Accountants
Logan, Utah
- --------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT
February 20, 1997
The Board of Directors and Stockholders
NACO Industries, Inc.
Logan, UT
We have audited the accompanying consolidated balance sheet of NACO
Industries, Inc. as of November 30, 1996 and the balance sheet as of November
30, 1995, and the related statements of income, stockholder's equity and cash
flows for the year and the nine months then ended. These financial statements
are the responsibility of the management of NACO Industries, Inc. 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 consolidated financial statements and financial
statements referred to above present fairly, in all material respects, the
financial position of NACO Industries, Inc. as of November 30, 1996 and 1995,
and the results of its operations and its cash flows for the year and the nine
months then ended in conformity with generally accepted accounting principles.
JONES, WRIGHT, SWENSON & SIMKINS LLP
Certified Public Accountants
Logan, Utah
F-1
<PAGE>
NACO INDUSTRIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
(Consolidated)
November 30, November 30,
ASSETS 1996 1995
------
----------------- ------------------
Current assets:
<S> <C> <C>
Cash $ 198,306 133,481
Accounts receivable, net of
allowances of $73,570 and $47,257 615,775 444,970
Inventory 668,501 644,711
Taxes receivable 48,600 120,226
Other current assets 72,202 51,455
----------------- ------------------
Total current assets 1,603,384 1,394,843
----------------- ------------------
Property and equipment:
Land 40,700 40,700
Buildings and improvements 526,329 508,978
Equipment and vehicles 2,033,174 1,692,388
Equipment construction in progress 93,130 28,438
----------------- ------------------
Total property and equipment 2,693,333 2,270,504
Accumulated depreciation (1,195,036) (1,022,553)
----------------- ------------------
Net property and equipment 1,498,297 1,247,951
----------------- ------------------
Other assets:
Intangible and other assets 105,907 210,105
----------------- ------------------
Total other assets 105,907 210,105
----------------- ------------------
Total assets $ 3,207,588 2,852,899
================= ==================
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-2
<PAGE>
NACO INDUSTRIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
(Consolidated)
November 30, November 30,
LIABILITIES AND STOCKHOLDER'S EQUITY 1996 1995
- ------------------------------------
----------------- ------------------
Current liabilities:
<S> <C> <C>
Accounts payable $ 544,074 99,289
Accrued expenses 188,076 144,700
Line of credit 664,326 805,000
Payable to related parties 34,382 9,206
Notes payable 103,815 3,440
Current portion of long-term obligations 212,400 341,287
----------------- ------------------
Total current liabilities 1,747,073 1,402,922
----------------- ------------------
Long-term liabilities:
Long-term obligations, less current portion 896,379 1,272,479
Deferred income taxes 79,100 81,250
----------------- ------------------
Total long-term liabilities 975,479 1,353,729
----------------- ------------------
Total liabilities 2,722,552 2,756,651
----------------- ------------------
Stockholders' equity:
7%cumulative convertible preferred stock,
$3 par value; authorized 330,000 shares,
132,412 shares issued and outstanding (aggregate
liquidation preference of $794,472 in 1996) 397,236
Common stock, $.01 par value; 10,000,000
shares authorized; 1,918,551 and 2,004,695
shares issued (including 418,551 and 504,695
shares in treasury) 19,186 20,047
Additional paid-in capital 115,637
Retained earnings 94,546 246,904
----------------- ------------------
626,605 266,951
Less: treasury stock, at cost (141,569) (170,703)
----------------- ------------------
Total stockholders' equity 485,036 96,248
----------------- ------------------
Total liabilities and stockholders' equity $ 3,207,588 2,852,899
================= ==================
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-3
<PAGE>
NACO INDUSTRIES, INC.
STATEMENTS OF INCOME
For The Year Ended November 30, 1996
And The Nine Months Ended November 30, 1995
<TABLE>
<CAPTION>
(Consolidated)
November 30, November 30,
1996 1995
----------------- -----------------
<S> <C> <C>
Sales, net $ 6,283,634 4,175,547
Cost of goods sold 3,703,407 2,716,378
----------------- -----------------
Gross profit 2,580,227 1,459,169
----------------- -----------------
Operating expenses:
Selling expenses 1,351,801 863,491
General and administrative expenses 1,150,822 845,197
Research and development expenses 10,709 12,752
----------------- -----------------
Total operating expenses 2,513,332 1,721,440
----------------- -----------------
Income (loss) from operations 66,895 (262,271)
----------------- -----------------
Other income (expense):
Interest income 1,510 3,464
Interest expense (196,947) (179,210)
Gain (loss) on sale of assets 38,878 3,957
----------------- -----------------
Total other income (expense) (156,559) (171,789)
----------------- -----------------
Income (loss) before income taxes (89,664) (434,060)
Income tax expense (benefit) (60) (55,800)
----------------- -----------------
Net income (loss) $ (89,604) (378,260)
================= =================
Earnings (loss) per common share:
Primary $ (0.06) (0.25)
Fully diluted (0.05)
Weighted average number of common shares
outstanding (shares issued less shares in
treasury):
Primary 1,500,000 1,500,000
Fully diluted 1,729,107
</TABLE>
The accompanying notes are an integral part of
these financial statements.
F-4
<PAGE>
NACO INDUSTRIES, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
Preferred Stock Common Stock Treasury Stock
------------------ ------------------ Additional -------------------- Total
Number of Number of Paid-in Retained Number of Stockholder's
Shares Amount Shares Amount Capital Earnings Shares Amount Equity
--------- ------ --------- ------ ------------ -------- --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, February 28, 1995 $ 2,060,073 $20,601 $643,339 (560,073) $(189,432) $ 474,508
Treasury stock retired (55,378) (554) (18,175) 55,378 18,729 0
Net loss (378,260) (378,260)
--------- ------- --------- ------ ------------ -------- --------- -------- -------------
Balance, November 30, 1995 2,004,695 20,047 0 246,904 (504,695) (170,703) 96,248
Initial public offering of
preferred stock, net of
issuance costs of $286,399 113,412 340,236 53,837 394,073
Issuance of preferred stock
in private placement, net of
issuance costs of $10,200 19,000 57,000 46,800 103,800
Sale of options for common
stock 15,000 15,000
Dividends - preferred shares
($.304 per share) (34,481) (34,481)
Treasury stock retired (86,144) (861) (28,273) 86,144 29,134 0
Net loss (89,604) (89,604)
--------- ------- --------- ------ ------------ -------- --------- --------- -------------
Consolidated Balance,
November 30, 1996 132,412 $397,236 1,918,551 $19,186 115,637 $ 94,546 (418,551) $(141,569) $ 485,036
========= ======= ========= ====== ============ ======== ========= ========= =============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-5
<PAGE>
NACO INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
For The Year Ended November 30, 1996
And The Nine Months Ended November 30, 1995
<TABLE>
<CAPTION>
(Consolidated)
November 30, November 30,
1996 1995
----------------- -----------------
Cash flows from operating activities
<S> <C> <C>
Net income (loss) $ (89,604) (378,260)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation 235,923 181,470
Amortization 986 22,222
Deferred income taxes (2,150) 42,100
Gain on sale of assets (38,878) (3,957)
(Increase) decrease in:
Accounts receivable, net (170,805) 367,857
Inventory (20,482) 487,625
Taxes receivable 71,626 (102,833)
Other current assets (20,747) (8,532)
Increase (decrease) in:
Accounts payable 400,811 (453,004)
Accrued expenses 7,156 (71,975)
----------------- -----------------
Net cash provided by operating activities 373,836 82,713
----------------- -----------------
Cash flows from investing activities
Purchase of property and equipment (302,991) (173,573)
Proceeds on sale of equipment 3,292 10,153
Investment in intangible and other assets (3,818) (73,180)
----------------- -----------------
Net cash used in investing activities (303,517) (236,600)
----------------- -----------------
Cash flows from financing activities
Net borrowings on line of credit 79,756 5,000
Proceeds from stock issuance 708,621
Net borrowings on line of credit refinanced by
proceeds from stock issuance 295,000
Proceeds from related party loans 5,036
Payments on related party loan (5,000) (5,727)
Proceeds from short-term notes 83,006 26,695
Payments on short-term note (68,022) (23,255)
Payments on long-term debt (774,410) (78,389)
Dividend payments (34,481)
----------------- -----------------
Net cash provided by (used in) financing activities (5,494) 219,324
----------------- -----------------
Increase in cash 64,825 65,437
Cash, beginning of period 133,481 68,044
----------------- -----------------
Cash, end of period $ 198,306 133,481
================= =================
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-6
<PAGE>
NACO INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
For The Year Ended November 30, 1996
And The Nine Months Ended November 30, 1995
<TABLE>
<CAPTION>
(Consolidated)
November 30, November 30,
1996 1995
----------------- -----------------
Supplemental disclosures:
<S> <C> <C>
Income taxes paid, net $ 48,500 4,500
================= =================
Interest paid $ 217,934 177,390
================= =================
Noncash investing and financing activities:
Short term debt refinanced after year end:
Reduction in accounts payable $ 768,629
Net proceeds from stock issuance used to pay
accounts payable (315,625)
----------------- -----------------
Adjustment to reconcile the change in accounts
payable to net loss $ 453,004
================= =================
Acquisition of property and equipment:
Cost of property and equipment $ 414,147 257,403
Debt obligations assumed (103,816) (83,830)
Increase in related party loan (7,340)
----------------- -----------------
Cash paid for property and equipment $ 302,991 173,573
================= =================
Sale of property and equipment:
Gain on sale of fixed assets $ 38,878
Book value of assets disposed 26,239
Debt assumed by purchasers (61,825)
----------------- -----------------
Proceeds from sale of assets $ 3,292
================= =================
Borrowings on line of credit:
Net increase (decrease) in borrowings on line of $ (140,674 300,000
credit
Net borrowings on line of credit refinanced by
proceeds from long-term debt 220,430
Net borrowings on line of credit refinanced by
proceeds from stock issuance (295,000)
----------------- -----------------
Net borrowings on line of credit $ 79,756 5,000
================= =================
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-7
<PAGE>
NACO INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
For The Year Ended November 30, 1996
And The Nine Months Ended November 30, 1995
<TABLE>
<CAPTION>
(Consolidated)
November 30, November 30,
1996 1995
----------------- -----------------
Supplemental disclosures: (continued)
Stock transactions:
<S> <C> <C>
Net proceeds from stock issuance $ 512,873 610,625
Prepaid stock issuance costs applied against proceeds 195,748
Accounts payable refinanced with proceeds from
stock issuance (315,625)
----------------- -----------------
Net borrowings on line of credit refinanced by
proceeds from stock issuance $ 708,621 295,000
================= =================
Purchase of subsidiary:
Value of inventory received $ 3,308
Value of equipment purchased 105,701
Goodwill purchased 88,718
Accounts payable assumed (43,975)
Accrued expenses assumed (36,220)
Note to related party (25,139)
Short term debt assumed (85,391)
Long term debt assumed (7,002)
----------------- -----------------
Cash used to purchase subsidiary $ 0
================= =================
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-8
<PAGE>
NACO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
Nature of Operations
NACO Industries, Inc. is a manufacturing company which produces and
sells polyvinyl chloride (PVC), composite and fiberglass 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. Manufacturing
and distributing facilities are located in Garden City, Kansas; Logan, Utah;
Ogden, Utah and Lodi, California.
Basis of Presentation
The consolidated financial statements include the accounts of NACO
Industries, Inc. and its subsidiary NACO Composites, Inc. (the "Company"). All
significant intercompany accounts and transactions have been eliminated. The
Company's fiscal year ends November 30th each year.
Concentration of Credit Risk
The Company sells nationwide to customers in the agribusiness and
industrial economic sectors. Most of the Company's accounts receivable, which
are unsecured, are with customers in these sectors. Historically, the Company
has not experienced significant losses related to receivables for individual
customers or groups of customers in any particular industry or geographic area.
The Company maintains cash balances with several banks. Accounts at each
institution are insured by the Federal Deposit Insurance Corporation up to
$100,000.
Use of Estimates in the Preparation of Financial Statements
The process of preparing financial statements in conformity with
generally accepted accounting principles requires the use of estimates and
assumptions regarding certain types of assets, liabilities, revenues, and
expenses. Such estimates primarily relate to unsettled transactions and events
as of the date of the financial statements. Accordingly, upon settlement, actual
results may differ from estimated amounts.
Financial Instruments
Cash and cash equivalents are determined by the Company to be cash and
short-term highly liquid investments with maturity dates of three months or less
that are readily convertible to cash. The carrying amount approximates fair
value for cash and equivalents, accounts receivable, accounts payable, the
Company's line of credit and short-term notes payable. The fair value of
long-term debt is based on current rates at which the Company could borrow funds
with similar remaining maturities.
F-9
<PAGE>
NACO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies (continued)
Inventory
Raw material inventory and goods purchased for resale are recorded at
the lower of cost (first-in, first-out method) or market. Manufactured finished
goods and work in process inventory are recorded at the lower of cost (standard
cost method) or market which represents management's estimate of its net
realizable value.
Fixed Assets and Depreciation
Items capitalized as buildings, vehicles and equipment are carried at
cost. Maintenance and repairs are charged to expenses as incurred. Costs of
major renewals or betterments are capitalized by charges to the appropriate
property account and depreciated over the remaining useful life. Depreciation is
computed by using the straight-line method for financial reporting purposes and
accelerated cost recovery methods for federal income tax purposes. Buildings are
depreciated over lives of twenty-five to thirty years. Purchased and constructed
equipment is depreciated over lives of three to ten years. The cost of property
disposed of and related accumulated depreciation are removed from the accounts
at time of disposal, and gain or loss is credited or charged to operations.
Revenue Recognition
Inventory is shipped to and held by warehouse agents subject to rights
of return. Revenue is recognized under these arrangements upon the sale of the
inventory.
Income Taxes
The Company and its subsidiary file consolidated federal and state tax
returns. Deferred income taxes are provided for differences between financial
statement and income tax reporting. These differences occur primarily from the
use of the accelerated cost methods to depreciate fixed assets and from
differing inventory capitalization requirements used for income tax purposes.
Earnings Per Share
Earnings per share amounts are computed based on the weighted average
number of shares actually outstanding (shares issued less shares in treasury).
Research and Development
Research and development costs are expensed when incurred.
F-10
<PAGE>
NACO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies (continued)
Change in Year End
Effective October 23, 1995, the Company adopted a November 30 fiscal
year end. The accompanying financial statements include audited financial
statements for the nine month transition period ending November 30, 1995.
Note 2 - Comparative Information
Unaudited information for the comparable period ending November 30,
1995, is as follows:
(Unaudited)
Sales, net $ 5,412,731
Cost of goods sold 3,468,103
---------
Gross profit 1,944,628
Operating expenses 2,261,918
---------
Loss from operations (317,290)
Total other income and
expense (210,720)
---------
Loss before income taxes (528,010)
Income tax benefit (55,800)
---------
Net loss $ (472,210)
=============
Net loss per common share $ (0.31)
=============
Weighted average number of
shares outstanding (shares
issued less shares in treasury) 1,500,000
In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered for a fair presentation have been included.
The above unaudited information is presented for comparative information only.
The results of operations for the nine months ending November 30, 1995, are not
necessarily indicative of the operating results for the full fiscal year.
F-11
<PAGE>
NACO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Acquisitions
On October 11, 1996, the Company formed a wholly owned subsidiary, NACO
Composites, Inc., and acquired the assets of Dreager Manufacturing in a business
combination accounted for as a purchase. NACO Composites, Inc. is a manufacturer
of composite and fiberglass products. The results of operations of NACO
Composites, Inc. is included in the accompanying financial statements since the
date of acquisition. The total cost of the acquisition was $197,727 which
exceeds the fair value of the net assets acquired by $88,718. The excess,
recorded as goodwill, is being amortized using the straight-line method over
fifteen years.
The following summarized pro forma (unaudited) information assumes the
acquisition had occurred on December 1, 1995. Dreager Manufacturing began
operations July 15, 1994.
<TABLE>
<CAPTION>
Year Ending Nine Months Ending
November 30, 1996 November 30, 1995
------------------ -------------------
<S> <C> <C>
Net Sales $ 6,724,737 4,526,813
Net income (124,932) (432,254)
Earnings (loss) per common share:
Primary (.08) (.28)
Fully diluted (.07)
</TABLE>
Note 4 - Concentrations of Credit Risk
At November 30, 1996 and November 30, 1995, bank balances in excess of
depository insurance limits were approximately $306,000 and $63,000,
respectively.
Note 5 - Inventory
Inventory consists of the following:
<TABLE>
<CAPTION>
Nov. 30, Nov. 30,
1996 1995
---------- ----------
<S> <C> <C>
Raw materials $ 242,388 227,103
Work in process 3,750 3,100
Finished goods 422,363 414,508
----------- ----------
Total $ 668,501 644,711
============ ==========
</TABLE>
F-12
<PAGE>
NACO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Intangible and Other Assets
Intangible and other assets consist of the following:
<TABLE>
<CAPTION>
Nov. 30, Nov. 30,
1996 1995
--------- ---------
<S> <C> <C>
Goodwill, net of accumulated amortization of $986 $ 87,732 -0-
Cash surrender value of life insurance 9,390 4,972
Deferred stock offering costs 195,748
Deposits 8,785 9,385
--------- ---------
Total $ 105,907 210,105
======= ========
</TABLE>
Deferred stock offering costs were charged against the proceeds of the
public offering in December 1995.
Note 7 - Revolving Line of Credit and Short-term Notes Payable
At November 30, 1996, the Company had borrowed $664,326 on its line of
credit. The line of credit bears interest at 1.75% over prime and is
collateralized by accounts receivable, intangibles, inventory, equipment, real
estate and life insurance. The line of credit limit is $1,100,000 and the
maturity date is August 31, 1997.
Short-term notes payable consist of a $85,000 demand note payable to a
bank and a $18,815 note payable to an insurance company. If demand is not made,
the note payable to the bank is due in monthly installments of $1,796 with
interest at 1.5% over prime and is secured by equipment. The note payable to the
insurance company bears interest at 6.85%, is due January, 1997, and is secured
by life insurance.
Note 8 - Long-Term Obligations
Long-term obligations consists of:
<TABLE>
<CAPTION>
Nov. 30, Nov. 30,
1996 1995
--------- ----------
<S> <C> <C>
Installment notes payable, secured by vehicles
Payable monthly at 8.50% - 9.75% interest.
Maturities from July, 1999 to May, 2001. $ 52,800 106,619
Notes payable to finance operations and capital
additions, secured by current and fixed assets
and life insurance. Payable at 8.75% to 10.0%
interest with maturities through February, 2010. 637,462 483,158
</TABLE>
F-13
<PAGE>
NACO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Note 8 - Long-Term Obligations (continued)
<S> <C> <C>
Notes payable for redemption of Company
stock and non-competition agreement, secured
by treasury stock. Payable monthly at 8.25%
through June, 2002. 229,216 265,861
Capital equipment leases, secured by
related equipment. Payable monthly at
12.52% - 23.44% interest, with maturities
through October, 2000. 189,301 147,503
Net proceeds from issuance of Units used to
refinance short-term obligations 0 610,625
---------- ----------
Total long-term obligations 1,108,779 1,613,766
Less: current portion (212,400) (341,287)
---------- ----------
Long-term portion $ 896,379 1,272,479
========== ==========
</TABLE>
At November 30, 1996 and 1995, the book value of the Company's
long-term obligations excluding capital leases and refinanced short-term debt is
$919,478 and $855,638, respectively. The fair value using current market rates
is approximately $913,000 and $823,000, respectively. The accompanying balance
sheet includes short-term and long-term debt of $1,301,788 relating to
borrowings from Bank IV, Kansas. During the year the Company received a
commitment from a leasing company for financing in the amount of $258,000. As of
November 30, 1996, the unused portion of this commitment is $184,900.
The revolving line of credit loan agreement contains covenants
pertaining to compliance with the bank's borrowing base requirements. Under the
terms of a long-term note agreement, the Company is required to obtain written
prior bank approval before making or guaranteeing loans to others and before
issuing or repurchasing Company stock, before paying dividends on capital stock,
and before issuing or repurchasing Company stock. The lending institution has
waived its restriction on paying dividends on the Company's preferred stock.
At November 30, 1995, the Company's receivables and inventory were not
sufficient to meet the bank's borrowing base requirements and the Company was in
breach of the loan agreement. The Company reduced the line of credit with
proceeds from the public offering (See Note 10) and has maintained compliance
with the bank's borrowing base requirements since that time.
F-14
<PAGE>
NACO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Long-Term Obligations (continued)
At November 30, 1996, current maturities of long-term obligations (both
long-term debt and capital lease obligations) are as follows:
Period ending
November 30
1997 $ 212,400
1998 234,000
1999 221,600
2000 173,800
2001 62,500
Thereafter 204,479
-------
Total $ 1,108,779
==========
At November 30, 1996 and 1995, the cost and amortization (or
depreciation) of capitalized leased equipment are as follows:
Nov. 30, Nov. 30,
1996 1995
---- ----
Cost $ 249,160 166,262
Current year depreciation 29,950 23,074
Accumulated depreciation 65,166 26,577
Annual lease payments under leases in effect at November 30, 1996, are
as follows:
Period ending
November 30
1997 $ 82,500
1998 78,800
1999 48,600
2000 21,300
Less amount representing interest (41,899)
-------
Present value of obligations under capital
leases (interest at 12.52% to 23.44%) $ 189,301
=======
F-15
<PAGE>
NACO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Operating Leases
The Company leases its Logan, Utah and Lodi, California facilities and
certain equipment under non-cancelable operating leases. The Company leases its
Ogden, Utah facility under a cancelable operating lease. The lease for the Logan
facility, Ogden facility and certain equipment are with related parties (See
Note 17). Rental expense under these operating leases for the year ended
November 30, 1996, and the nine months ending November 30, 1995, was
approximately $171,000 and $126,800, respectively.
The lease for the Logan facility and certain equipment does not provide
for a renewal option, however, since the lease is with a related party renewal
is considered likely. Under the terms of the lease for the Ogden facility, the
Company has an option for renewal for a period of two years. The Company has an
option to purchase the facility for $325,000 if the lessors are unable to obtain
financing for any necessary expansion of the improvements on the leased
premises.
Minimum future rental payments on non-cancelable leases as of November
30, 1996, for each of the next 5 years and in the aggregate are:
Period ending
November 30
1997 $ 165,552
1998 165,552
1999 156,560
2000 9,300
2001
-------
Total minimum future rentals $ 496,964
=======
Note 10 - Preferred Stock, Units and Warrants
Preferred stock:
In February 1995, the Company amended its Articles of Incorporation to
authorize 330,000 shares of Series 1, Class A, 7% Cumulative Convertible
Preferred Stock, $3 par value per share. In the event of liquidation of the
Company, the preferred stock will have a liquidation preference to the extent of
$6 per share plus accrued and unpaid dividends. The preferred stock is
convertible at any time after January 1, 1996, into shares of the Company's
common stock at a conversion rate of two shares of common stock from one share
F-16
<PAGE>
NACO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 - Preferred Stock Units and Warrants (continued)
of preferred stock. Dividends on the shares of preferred stock are cumulative
from the date of first issuance and will be payable semi-annually at the rate of
7% per annum of the stated unit value of $6 per share on February 28 and August
31 of each year. No dividends may be paid to common shareholders until all
cumulative dividends and preferred shares have been declared and paid. The
preferred stock may be redeemed at any time after January 1, 1996, at $6 per
share plus all accrued and unpaid dividends. The preferred stock and common
stock are entitled to one vote per share.
Units:
During fiscal year 1996, the Company completed a public offering of
units consisting of one share cumulative convertible preferred stock and 1/2
Warrant to purchase one share of Common Stock. The Company received
subscriptions for 116,412 Units. The Company received proceeds of $698,472 and
paid commissions to the underwriter in the amount of $69,847. The proceeds were
used for marketing expenses, new equipment and working capital. The Company
applied $295,000 of the proceeds against the line of credit.
In connection with the public offering the Company loaned three
individuals $6,000 for an aggregate of $18,000 which was used to purchase Units
in the Company's public offering. Upon further reflection. the Company elected
to rescind these investments and refunded the $18,000 paid for the 3,000 Units.
The loans were repaid in full by the borrowers. In addition, the Company loaned
$25,000 to an employee who also purchased Units in the Offering. The employee
repaid the Company the amount loaned and retained his Units.
During fiscal year 1996, the Company also 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. As of November
30, 1996, the Company has sold 19,000 Units and received net proceeds of
$102,600. The Company sold an additional 8,000 Units subsequent to year end
bringing the total Units sold under this offering to 27,000.
F-17
<PAGE>
NACO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 - Preferred Stock Units and Warrants (continued)
Warrants:
At November 30, 1996, the Company had outstanding Warrants to purchase
75,713 shares of the Company's common stock. Each full Warrant entitles the
holder to purchase one share of Common Stock at an exercise price of $3.75 per
share at any time after May 31, 1996 and for two years thereafter unless
extended by the Company or earlier called for redemption. The Warrants are
redeemable by the Company at any time after January 1, 1997. The redemption
price for the Warrants is $.10 per Warrant.
Note 11 - Stock Options
In July 1994, the Company issued non-qualified stock options for
100,000 common shares to its directors with an option price of $3 per share. The
options may be exercised after July, 1995, and they expire in ten years. No
compensation expense has been charged to operations.
In August 1996, the Company issued non-qualified options for 150,000
common shares to an individual as a condition of acceptance of nomination to the
Board of Directors. The exercise price of the options is $4.00 per share. The
options may be exercised after August 1, 1997. The maximum term of the options
is six years and they vest over a five year period. Vested options expire after
24 months. No compensation expense has been charged to operations.
In November 1996, the Company adopted a Stock Incentive Plan, (the
"Plan"), whereby certain employees may be granted incentive or non-qualified
options to purchase up to 200,000 shares of the common stock of the Company. The
exercise price of options granted under the Plan is determined by a committee
appointed by the Board. The exercise price of incentive options must not be less
than the fair market value of the common share as of the date of grant. The
maximum term of the options is six years and they vest over a five year period.
The Company's stock incentive plan allows for granting of stock appreciation
rights. Upon exercise of a stock appreciation right, the holder may receive
shares of common stock and cash equal to the excess of the fair market value of
the common stock at the date of exercise over the option price.
In October, 1995, the FASB issued SFAS 123, "Accounting for Stock-Based
Compensation." The Company has not elected early adoption of SFAS 123.
Subsequent to year end the Company granted 112,000 incentive options to certain
employees with an exercise price of $3.00 per share.
F-18
<PAGE>
NACO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 - Treasury Stock
On June 30, 1992, the Company purchased 1,197,675 (8,759 before stock
split) of its own outstanding shares of common stock from a former
officer/shareholder and two minority shareholders at an average price of $.34
($46.25 before stock split) per share.
The treasury stock serves as collateral on a note outstanding to a
former officer and shareholder (See Note 8). As payments are made on the note,
collateral is released and the corresponding treasury stock is retired. The
Company retired 86,144 treasury shares in the year ending November 30, 1996, and
55,378 treasury shares in the nine months ending November 30, 1995. Treasury
shares outstanding at year end represent the remaining shares pledged as
collateral on the note agreement.
Note 13 - Earnings Per Share
Earnings per common share are computed using the weighted average
number of common and common equivalent shares outstanding during the period. The
Company's stock options and warrants are considered to be common stock
equivalents. The market price has not exceed the option price for the
outstanding options and warrants and therefore no dilution has occurred.
Fully diluted earnings per share are computed based on an increased
number of shares that would be outstanding assuming the conversion of the
Company's cumulative preferred stock.
Note 14 - Pension Plan
The Company sponsors a IRC Sec. 401(k) deferred compensation plan that
covers all employees with over one year of service. The Company makes matching
contributions, at 50% of the employee's deferral up to 2% of gross wages for
employees who elect salary deferral. The amount of pension expense was $17,129
for the year ended November 30, 1996, and $11,866 for the nine months ending
November 30, 1995.
Note 15 Advertising
Advertising costs are charged to operations when the advertising first
takes place. Advertising expense for the year ending November 30, 1996 and the
nine months ending November 30, 1995, was $59,780 and $25,137, respectively.
F-19
<PAGE>
NACO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16 - Income Taxes
<TABLE>
<CAPTION>
Income tax expense consists of the following: Nov. 30, Nov, 30,
1996 1995
------ ------
Currently payable:
<S> <C> <C>
Federal $ 0 0
State 2,090 0
---------- ------
2,090
Net operating loss carryback (97,900)
Deferred (20,750) (60,000)
Valuation allowance 18,600 102,100
--------- -------
Income tax expense (benefit) $ (60) (55,800)
============ =========
</TABLE>
Taxes identified as currently payable are the taxes due on the
Company's income tax returns before estimated payments and other credits.
Deferred income taxes arise mainly because certain items of expense are
recognized in different periods for financial
reporting and income tax purposes. Although the Company expects to benefit from
its deferred tax assets, realization of deferred tax assets is dependent upon
the Company generating sufficient future taxable income against which its loss
carry forward can be offset.
The deferred tax asset and deferred tax liability was comprised of the
following items at November 30, 1996 and 1995:
<TABLE>
<CAPTION>
Nov. 30, Nov. 30,
1996 1995
------ ------
Deferred tax asset:
<S> <C> <C>
Inventory $ 50,500 45,125
Net operating loss carryforward 45,900 42,000
Other 24,300 14,975
------ --------
120,700 102,100
Valuation allowance (120,700) (102,100)
-------- --------
Net deferred tax asset $ 0 0
========= ========
Deferred tax liability:
Tax over book depreciation $ 79,100 81,250
======== =======
</TABLE>
F-20
<PAGE>
NACO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16 - Income Taxes (continued)
The Company has available at November 30, 1996, approximately $87,000
of unused operating loss carryforwards that may be applied against future
taxable income and that expire in the years 2010 and 2011.
Income tax expense differs from the customary effective United States
rate, primarily as a result of the following:
<TABLE>
<CAPTION>
Nov. 30, Nov. 30,
1996 1995
---- ----
<S> <C> <C>
Computed "expected" tax expense (benefit) $ (18,750) (147,580)
State income tax expense (benefit), net of
federal income tax benefit (3,400) (16,250)
Valuation allowance on deferred tax assets 18,600 102,100
Non-deductible items 3,250 1,400
Rate differences and other 240 4,530
--------- --------
Income tax expense $ (60) (55,800)
========== ========
</TABLE>
Note 17 - Related-Party Transactions
The Company leases the Logan, Utah manufacturing and sales facility and
certain equipment from P.V.C., Inc., a corporation owned by the Company's
majority shareholder. In July 1994, the Company extended its lease with P.V.C.,
Inc. through December 31, 1999. The lease agreement currently requires rents in
the amount of $9,300 per month.
The Company has guaranteed a second mortgage on the facilities it
leases from P.V.C. , Inc. At November 30, 1996, the outstanding mortgage balance
is approximately $253,000. The mortgage is secured by the leased property, bears
an interest rate of two percent over prime and is payable in monthly
installments of $2,629 through 2009.
F-21
<PAGE>
NACO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17 - Related-Party Transactions (continued)
At November 30, 1996 and 1995, P.V.C., Inc. has loaned the Company
$14,242 and $9,206, respectively. The loan is payable on demand. During the year
ending November 30, 1996, the Company sold to P.V.C., Inc. equipment for
$42,705. The sales price approximated fair value based upon comparisons with
similar property. The Company recorded a gain of $37,182.
The Company leases the Ogden, Utah manufacturing and sales facility
from Ronald L. Dreager, an employee and director of NACO Composites, Inc.
Monthly rentals are due in the amount of $3,500 and may be increased pursuant to
the mutual agreement of both parties. At November 30, 1996, the Company owed
Ronald L. Dreager $20,140 in connection with the asset purchase of Dreager
Manufacturing.
During the year ending November 30, 1996, and the nine months ending
November 30, 1995, the Company paid sales commissions of $12,865 and $8,096,
respectively, to a sales representative who was also serving on the Board of
Directors. The sales commissions were computed consistent with other sales
representatives of the Company.
In August 1996, the Company sold non-qualified options to James C.
Czirr as a condition of acceptance of nomination to the Board of Directors (See
Note 11). Mr. Czirr is a 50% shareholder in an investor relations consulting
firm retained by the Company (See Note 18).
In September 1994, the Company entered into an employment contract with
Verne Bray, President, Chief Executive Officer and majority shareholder. The
contract is for a term of five years and provides for a base salary of $224,000
with a cost of living adjustment based on the yearly increase in the consumer
price index.
Note 18 - Other Commitments
In September, 1996, the Company entered into a consulting agreement
with an investor relations consulting firm which provides for a retainer of
$3,000 per month though August, 2000.
Note 19 - Segment Information
The Company's operations are classified into two principal industry
segments, PVC fittings and valves sold primarily through NACO Industries, Inc.
and composite and fiberglass products which will be sold through NACO
Composites, Inc. The Company's composite and fiberglass operations were not
significant prior to fiscal year 1996. Following is a summary of segment
information for fiscal year 1996.
F-22
<PAGE>
NACO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 19 - Segment Information (continued)
1996
Net sales to unaffiliated customers:
PVC products $ 5,942,074
Composite and fiberglass products 341,560
Income (loss) from operations:
PVC products 164,446
Composite and fiberglass products (97,551)
Other income (expense):
PVC products (149,703)
Composite and fiberglass products (6,856)
Identifiable assets:
PVC products 2,372,763
Composite and fiberglass products 120,570
General corporate assets: 200,000
Depreciation:
PVC products 223,320
Composite and fiberglass products 12,603
Capital Expenditures:
PVC products 399,278
Composite and fiberglass products 113,230
Note 20 - Capital Resources
The Company has incurred significant costs the past two years to
increase production capacity and diversify into a broader mix of product line.
These costs combined with increases in raw material prices, costs relating to
restructuring management and costs incurred in the acquisition of a new
subsidiary have caused the Company to incur operating losses for the past two
years. Management believes that as the Company continues to diversify, sales in
new and expanded product lines profitability will continue to improve. The
Company is also pursuing additional funds in the equity market to improve
working capital. It is not possible to predict at this time the success of these
efforts.
F-23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on February 26, 1997.
NACO INDUSTRIES INC.
By:/s/ Verne E. Bray
----------------------------
Verne E. Bray, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Verne E. Bray President and Director February 26, 1997
- -------------------- (Principal Executive
Verne E. Bray Officer)
/s/ Jeffrey J. Kirby Vice President, February 26, 1997
- -------------------- Secretary and Director
Jeffrey J. Kirby (Principal Accounting
Officer)
/s/ Thomas Christy Director February 26, 1997
- --------------------
Thomas Christy
/s/ Kent A. Webb Director February 26, 1997
- --------------------
Kent A. Webb
/s/ Peter Heilmayr Director February 26, 1997
- ---------------------
Peter Heilmayr
Supplemental information to be Furnished With Reports Filed Pursuant to Section
15(d) of the Exchange Act by Non-reporting Issuers.
No annual report to shareholders or a proxy or information statement has
been sent to shareholders of the Company.
<PAGE>
LEASE AGREEMENT
and
OPTION TO PURCHASE
This Lease Agreement, effective the 1st day of October, 1996, by and
between RONALD L. DRAEGER and RITA M. DRAEGER, hereinafter collectively called
"Lessor," and NACO COMPOSITES, INC., a Utah corporation with principal offices
in Logan, Utah, hereinafter called "Lessee."
1. PROPERTY LEASED. Lessor, in consideration of the rents and
agreements to be paid and performed by Lessee, does lease to Lessee those
premises situated at 812 West 17th Street, Ogden, Utah, and further described on
Exhibit "A" attached hereto and by this reference incorporated herein.
2. TERM OF LEASE AND RENTAL. The term of this lease shall be for a
period of three (3) years, commencing on the 1st day of October, 1996, and
ending on the last day of September, 1999. Lessee will pay as rental for the
first five (5) months hereof the sum of THREE THOUSAND FIVE HUNDRED DOLLARS
($3,500.00) per month, all rental to be payable monthly in advance in such
amount; and, thereafter, the monthly rental amount may be increased from time to
time pursuant to the mutual agreement of the parties.
3. RIGHT TO RENEW. Lessee shall have the right to renew this lease
agreement at the expiration thereof for an additional period of at least two (2)
years on the same terms and conditions as set forth herein except for the rental
amount which shall be a fair market rental amount to be mutually agreed upon
between the parties. Lessee must give written notice of intention to renew at
least sixty (60) days prior to the end of the term.
4. USE OF PREMISES. The premises shall be used for the purpose of
operating a manufacturing facility for the production of fiberglass products and
related items, and such other products as may be produced or marketed by Lessee,
and for no other purposes without the prior consent of Lessor.
Lessee shall not commit or permit to be committed any waste upon the
premises. Lessee shall not use the premises, or any part thereof, for any
purpose other than the purpose or purposes for which said premises are leased,
and no use in any event shall be made of the premises, nor acts done, which will
increase the hazard of damage to the premises, or injury to those in or about
the premises, or the existing rate of insurance upon the building, nor shall
Lessee sell, keep or use in or about said premises any article which may limit
the coverage afforded by the Utah Standard Form fire insurance policy, or the
sale, presence, or use of which is prohibited by law.
Lessee shall, at Lessee's sole cost and expense, without obligation to
Lessor, observe in the use of the premises all municipal, county, state and
federal regulations, ordinances and statutes now in force, or which may
hereafter be in force, and failure to do so shall be a material breach of this
agreement.
5. POSSESSION. The date of possession of said leased premises by Lessee
pursuant to this lease shall be the 1st day of October, 1996.
6. INSURANCE. Lessee shall maintain fire and casualty insurance on the
real and personal property subject to this lease and shall hold Lessor harmless
from any loss in connection therewith. Lessee further agrees to take out and
keep in force during the life hereof, at Lessee's expense, public liability
insurance to protect against any liability to the public, incident to the use of
or resulting from any occurrence in or about said premises. The liability under
such insurance shall be not less than $300,000.00 combined single limit or the
equivalent on bodily injury and property damage.
7. REPAIR AND MAINTENANCE. Lessee shall be responsible for all routine
maintenance of the property, and Lessor shall be responsible for structural
component maintenance, such as the roof, heating and ventilation, etc.
<PAGE>
8. ALTERATIONS. Lessee shall not make or permit to be made any
additions or alterations of the premises or any part thereof without the written
consent of Lessor, and any additions to or alterations of said premises, when
permitted to be made, except movable furniture and trade fixtures, shall become
at once a part of the realty and belong to Lessor and shall not be removed by
Lessee at the end of its occupancy, or otherwise, except upon written consent or
order of Lessor. Any linoleum, rubber tile or other floor covering affixed to
the floors shall become at once a part of the realty and belong to Lessor and
shall not be removed by Lessee at the end of its occupancy, or otherwise, except
upon written consent or order of Lessor.
9. MECHANIC'S LIENS. It is expressly agreed that if any work that is
performed by Lessee or Lessee's agents, employees or representatives, either
prior to or subsequent to the possession by Lessee of the above described
premises, shall give rise to any lien against the leased premises, Lessee shall
indemnify Lessor against and save Lessor harmless from any and all mechanic's
liens or claims of liens and all attorney fees, costs and expenses which may
accrue, grow out of, or be incurred by reason of said work performed by Lessee
or Lessee's agents, employees or representatives.
10. UTILITIES. Lessee shall pay for all gas, heat, light, power, water,
rubbish removal, telephone service, and all other services supplied to said
premises.
11. INSPECTION AND ENTRY BY OWNER. Lessee shall permit Lessor and
Lessor's agents to enter into and upon the premises at all reasonable times for
the purpose of inspecting the same, or for the purpose of making reasonable
repairs, alterations or additions to any portion of said premises which Lessor
may see fit to make, including installation of pipes, conduits, etc. to service
adjacent property, without any reduction or rebate of rent to Lessee for loss of
occupancy or quiet enjoyment of the premises thereby occasioned, and Lessee
shall permit Lessor at any time after thirty (30) days prior to expiration of
the leasehold term to place upon the premises "for rent," "for lease," or other
signs.
12. BANKRUPTCY OR INSOLVENCY. Should the Lessee become bankrupt or
insolvent, either voluntarily or involuntarily, or a receiver be appointed to
take charge of Lessee's assets, or general assignment be made for the benefit of
creditors, the same shall constitute a breach of the terms of this lease and the
Lessor may declare the lease terminated, and the Lessee shall have no right,
title or interest in the property, and the Lessor may keep as damages any
advanced rental.
13. DEFAULT. Lessee shall pay rent to Lessor at such place as may be
assigned from time to time by Lessor, at the time provided as aforesaid. In the
event of failure of Lessee so to do, or in the event of a breach of any other
condition or agreement by Lessee, it shall be lawful for Lessor, after giving to
Lessee a fifteen (15) day written notice of default, and after failure by Lessee
within said fifteen (15) days to remedy or cure said default, and after the
lapse of said fifteen (15) days, to reenter and take possession of the said
premises and to remove all persons and property therefrom and to repossess said
premises. Any such reentry or repossession or any notice served in connection
therewith shall not operate to release Lessee from any obligations for rental or
otherwise under this lease, and shall be in addition to any available remedies
and time set forth for notices given pursuant to the Utah unlawful detainer
statutes.
If Lessee shall be in default in performance of any condition or
agreement, or shall abandon or vacate the premises, Lessor shall have the right,
after giving the required written notice of default, and after failure by Lessee
to timely remedy or cure said default, to relet the said premises, or any
portion thereof, for such rent and upon such terms as Lessor may see fit. Lessee
shall pay the expenses of such reletting, including any and all real estate
broker's commissions.
All remedies herein given Lessor shall be cumulative and in addition to
other legal and equitable rights which Lessor may have, and if Lessor institutes
legal action to collect the total or balance of the rent hereby reserved, the
filing of such action prior to the expiration of the full leasehold term shall
not be deemed premature as a matter of law irrespective of whether Lessor has
retaken possession and relet the premises for his own account or for the account
of Lessee.
<PAGE>
14. ATTORNEY FEES. Should either party employ an attorney in connection
with the violation of the terms of this lease, or for the preparation and
serving of notice or other matters, and whether suit is filed or not, the party
so employing an attorney and the prevailing party shall be entitled to
reasonable costs and attorney fees in addition to all other amounts as provided
for in this lease.
15. ASSIGNMENT AND SUBLEASE. Lessee shall not assign this lease, or any
interest therein, and shall not lease or sublet the premises, or any part
thereof, or any right of privilege appurtenant thereof, or mortgage or
hypothecate the leasehold, without the prior written consent of Lessor, which
consent shall not be unreasonably withheld. A consent to one assignment,
subletting or hypothecation shall not be construed as a consent to any
subsequent assignment, subletting or hypothecation. Unless such written consent
has been had and obtained, any assignment or transfer of this lease, or of any
interest therein, or any subletting, either by voluntary or involuntary act of
Lessee or by operation of law, or otherwise, may be deemed a breach of lease by
Lessee at Lessor's election and any such purported assignment, transfer or
subletting without such consent may be deemed by Lessor to be null and void.
Lessor's consent to any such assignment, transfer or subletting shall relieve
Lessee from any obligation under this lease.
16. DESTRUCTION OF PREMISES. In the event of a partial destruction of
the said premises during the said term, from any cause, Lessor shall forthwith
repair the same, provided such repair can be made within ninety (90) days under
the laws and regulations of state, federal, county or municipal authorities, but
such partial destruction shall in no way annul or void this lease, except that
Lessee shall be entitled to a proportionate deduction of rent while such repairs
are being made unless the Lessee was the cause of the destruction. Such
proportionate deduction of rent to be based upon the extent to which the making
of such repairs shall interfere with the business carried on by Lessee in the
said premises, but in no event shall it be more than the monthly rental. If such
repairs cannot be made in ninety (90) days, Lessor may, at his option, make same
within a reasonable time, this lease continuing in full force and effect and the
rent to be proportionately rebated as aforesaid in this paragraph. In the event
that Lessor does not so elect to make such repairs which cannot be made under
such laws and regulations, this lease may be terminated at the option of either
party. In the event that the building is destroyed in which the demised premises
may be situated to the extent of not less than 33 1/3 percent of the replacement
costs thereof, Lessor may elect to terminate this lease, whether the demised
premises be injured or not. A total destruction of the building in which the
said premises may be situated shall terminate this lease.
17. CONDEMNATION. If the whole or any part of the premises shall be
taken by any public authority under the power of eminent domain, then the terms
of this lease shall cease as to the part so taken from the day possession of
that part shall be required for any public purpose, and rent shall be paid up to
that day, and on or before that day Lessee shall elect, in writing, either to
cancel this lease or to continue in possession of the remainder of the premises
under the terms herein provided, except that rent shall be reduced in proportion
to the amount of the premises taken. All damages awarded for such taking shall
belong to and be the property of Lessor, whether such damages be awarded as
compensation for diminution in value to the leasehold or to the fee of the
premises. Lessee hereby irrevocably assigns to Lessor any right to compensation
or damages to which Lessee may become entitled by reason of the condemnation of
all or a part of the demised premises.
18. DAMAGE LIABILITY. Lessee assumes all risks of injury or damage to
all persons and property, excluding injuries or damage caused by preexisting
structural defects or Lessor's negligent conduct, including, but not limited to,
all property of Lessee and Lessor in or about the premises, and Lessee shall
hold Lessor harmless for any such damage or injury; except that Lessee shall not
be liable to Lessor for damage or injury to Lessor's property caused by
earthquakes, other acts of God, or Lessor's negligent conduct.
<PAGE>
It is further understood and agreed that the provision herein in
connection with the Lessor being insured against liability shall in no way be
construed as creating liability upon its part or admission of liability upon its
part, but is merely for the protection of Lessor.
19. OUTSIDE STORAGE. There shall be no storage of any kind of material
on the outside of the buildings herein described, except as incident to the
normal operation of Lessee's business.
20. TERMINATION. On the last day of the term, or sooner termination,
the Lessee shall peaceably and quietly leave and yield the premises to Lessor,
with fixtures and appurtenances in good condition and repair, reasonable wear
and tear excepted. Lessee shall leave the premises and appurtenances free and
clear of rubbish and clean; and in the event Lessee fails to do so, Lessor may
charge Lessee for the reasonable cost incurred by Lessor in having the same
done. In the event that Lessee shall exercise its purchase option hereunder,
however, this paragraph shall not apply with respect to the termination of the
lease as a result of such purchase.
21. WAIVER. Waiver by Lessor of any breach of any condition or
agreement of this lease by Lessee shall not be deemed to be a waiver of any
subsequent breach of the same or any other condition or agreement by Lessee.
22. SUCCESSOR. The condition and agreements herein contained shall
apply to and bind the heirs, personal representatives, and successors in
interest of the parties hereto.
23. TAXES.
(a) Payment of Taxes. Lessee shall pay all real property taxes
applicable to the premises during the term of this lease.
(b) Definition of Real Property Tax. As used herein, the term
"real property tax" shall include any form of assessment, levy, penalty, or tax
(other than inheritance or estate taxes) imposed by any authority having the
direct or indirect power to tax, including any city, county, state or federal
government, or any school, agricultural, lighting, drainage or other improvement
district thereof, as against any legal or equitable interest of Lessor in the
premises or on the real property of which the premises are a part, or as against
Lessor's right to rent or other income.
(c) Personal Property Taxes. Lessee shall pay prior to
delinquency all taxes assessed against and levied upon trade fixtures,
furnishings, equipment and all other personal property of Lessee, and all
personal property leased to Lessee hereunder, whether such property is contained
in the premises or elsewhere. When possible, Lessee shall cause said trade
fixtures, furnishings, equipment and all other personal property to be assessed
and billed separately from the real property of Lessor.
24. HOLDING OVER. Holding over after the expiration of the term or any
extension thereof with the consent of Lessor shall be a tenancy from month to
month at a minimum monthly rental of the then prevailing rent.
25. SERVING OF NOTICE. All notices as provided for in this lease or by
law shall be in writing and shall be served either personally or by mail, and
shall be made upon the parties at the following address unless a party serves
written notice upon the other party of a change of address:
Lessor: Ronald L. Draeger and Rita M. Draeger
P.O. Box 945
Eden, Utah 84310
Lessee: NACO COMPOSITES, INC.
395 West 1400 North
Logan, Utah 84341
26. TOTAL AGREEMENT. It is understood and agreed between Lessor and
Lessee that this written lease agreement is the total agreement between Lessor
and Lessee and that there are no other agreements, oral or otherwise.
<PAGE>
27. DEFINITIONS. As used herein, the term "Lessor" shall include all
lessors, whether one or more; the term "Lessee" shall include all lessees,
whether one or more; the masculine gender shall be deemed to include the
feminine and vice versa.
28. PURCHASE OPTION. During the first year of the term of this lease
agreement, in the event Lessors are unable to obtain financing for any necessary
expansion of the improvements on the leased premises, Lessors, as the sole
owners of the leased premises, hereby grant and convey to Lessee, or its
assigns, a Purchase Option in the leased premises, entitling Lessee to purchase
said property for the sum of THREE HUNDRED TWENTY-FIVE THOUSAND DOLLARS
($325,000.00), this sum being based on the appraisal dated the 1st day of
October, 1995, in exchange for which Lessors shall convey to Lessee by warranty
deed marketable title to the property, free and clear of all liens, adverse
claims and encumbrances. However, in the event that Lessee shall exercise said
option at any time, said purchase price shall be adjusted to reflect inflation,
as measured by the appropriate consumer price index, from the date of the
appraisal dated the 1st day of October, 1995 to the date of the exercise of the
purchase option which shall not be predicated on Lessor's ability to finance
expansion. Lessee may exercise the option by giving Lessor written notice
thereof not less than sixty (60) days prior to the desired date of closing for
such purchase.
<PAGE>
IN WITNESS WHEREOF, the parties have hereunto executed this document
through agents properly authorized as of the day and year first above written.
LESSOR: LESSEE:
RONALD L. DRAEGER NACO COMPOSITES, INC.
______________________________ By:___________________________
Title:
RITA M. DRAEGER
- ------------------------------
The Company's only subsidiary is Naco Composites, Inc.
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