SEC File No. 33-85044-d
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 28,1997
[X] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File number 33-85044-d
NACO Industries, Inc.
(Exact Name of Registrant as specified in its charter)
Utah 48-0836971
(State of Incorporation) (Federal I.R.S. No.)
395 West 1400 North, Logan, Utah 84341
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number 801-753-8020
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
As of February 28, 1997, the Registrant had 1,500,000 shares of Common
Stock and 140,412 shares of Preferred Stock outstanding.
Transitional Small Business Disclosure Format Yes No X
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
See attached Financial Statements for February 28, 1997.
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NACO Industries, Inc.
FINANCIAL STATEMENTS
February 28, 1997
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PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
NACO INDUSTRIES, INC.
BALANCE SHEETS (UNAUDITED)
February 28 November 30
ASSETS 1997 1996
Current assets:
Cash $ 114,780 198,306
Accounts receivable, net of allowances
of $84,781 / $73,570 711,151 614,775
Inventory 881,259 668,501
Prepaid income taxes 48,400 48,600
Other current assets 50,861 72,202
Total current assets 1,806,451 1,602,384
Property and equipment:
Land 40,700 40,700
Buildings and improvements 555,822 526,329
Equipment and vehicles 2,075,193 2,033,174
Equipment construction in progress 177,807 93,130
Total property and equipment 2,849,522 2,693,333
Accumulated depreciation (1,254,077) (1,195,036)
Net property and equipment 1,595,445 1,498,297
Other assets:
Intangible and other assets 115,145 105,907
Total other assets 115,145 105,907
Total assets $ 3,517,041 3,206,588
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NACO INDUSTRIES, INC.
BALANCE SHEETS (UNAUDITED)
February 28 November 30
LIABILITIES: 1997 1996
Current liabilities:
Accounts payable $ 900,746 544,074
Accrued expenses 165,390 188,076
Income taxes payable 0 0
Line of credit 854,326 664,326
Current portion of long-term obligations 251,784 316,215
Payable to related party (737) 34,382
Total current liabilities 2,171,509 1,747,073
Long-term liabilities:
Long-term obligations, less current
portion 905,229 896,379
Deferred income taxes 79,100 79,100
Total long-term liabilities 984,329 975,479
Total liabilities 3,155,838 2,722,552
Stockholders' equity:
Common stock, $.01 par value; 10,000,000
shares authorized; 1,918,951 issued
(including 418,551 shares in treasury)
in treasury) 19,186 19,186
Preferred Stock, 7% Cummulative,
convertible $3.00 par value Shares
authorized; 330,000. shares issued
140,412 and 132,412, respectively.
(Aggregate liquidation preference
$842,472 and $794,472, respectively) 421,236 397,236
Additional paid-in capital 139,637 115,637
Retained earnings (77,287) 94,546
502,772 626,605
Less: treasury stock - at cost, 418,551. (141,569) (141,569)
Total stockholders' equity 361,203 485,036
Total liabilities and
stockholders' equity $ 3,517,041 3,207,588
See Notes to Financial Statements.
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NACO INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
February 28 February 29
1997 1996
Cash flows from operating activities
<S> <C> <C>
Net income $ (171,832) (195,921)
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation 59,041 42538
Amortization 1,479
Deferred income taxes
(Increase) decrease in:
Accounts receivable, net (95,376) (194,959)
Inventory (212,758) (12,199)
Prepaid income taxes 48,600 120,226
Taxes Receivable (48,400) (105,226)
Other 21,341 18,218
Increase (decrease) in:
Accounts payable 356,671 396,301
Accrued expenses (22,686) (13,398)
Income taxes payable 0
Net cash provided by (used in)
operating activities (63,920) 55,580
Cash flows from investing activities
Net change property and equipment (156,189) (15,478)
Investment in intangible and other assets (10,717) 194,465
Net cash provided by (used in) investing activities (166,906) 178,987
Cash flows from financing activities
Net change in line of credit 190,000 0
Payments on related party loan (35,119) (1,878)
Payments on long-term debt (74,049) (672,441)
Proceeds from short term notes payable
Proceeds from long-term loans 18,468 0
Proceeds from issuance of common stock
Proceeds from issuance of preferred stock 48,000 394,073
Purchase of treasury stock 0 0
Net cash provided by (used in) financing activities 147,300 (280,246)
Increase (decrease) in cash (83,526) (45,679)
Cash, beginning of period 198,306 133,481
Cash, end of period $ 114,780 87,802
See Notes to Financial Statements
Supplemental disclosures:
Income taxes paid $ 0 0
Interest Paid $ 39,667 65,905
</TABLE>
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NACO INDUSTRIES, INC.
STATEMENT OF OPERATIONS (UNAUDITED)
Three months ended
February 28
1997 1996
Sales, net $ 1,531,195 1,142,957
Cost of goods sold 959,306 705,158
Gross profit 571,889 437,799
Operating expenses:
Selling expenses 346,173 276,013
General and administrative expenses 342,202 302,601
Other 0 0
Total operating expenses 688,375 578,614
Income (loss) from operations (116,486) (140,815)
Other income (expense):
Interest income 436 1,068
Interest expense (55,782) (56,174)
Total other income (expense) (55,346) (55,106)
Income (loss) before income taxes (171,832) (195,921)
Income tax expense (benefit) 0 0
Net income (loss) $ (171,832) (195,921)
Earning (loss) per common share:
Primary:
Earning from net income $ (0.11) (0.13)
Dividends in arrears (0.02) (0.01)
Net Earnings $ (0.13) (0.14)
Fully Diluted:
Earning from net income $ (0.10) (0.12)
Dividends in arrears (0.02) (0.01)
Net Earnings $ (0.12) (0.13)
Weighted average number of common
shares outstanding:
Primary 1,500,000 1,500,000
Fully Diluted 1,771,735 1,602,071
See Notes to Financial Statements
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NACO INDUSTRIES, INC.
Notes to Financial Statements (Unaudited)
February 28, 1997
NOTE A - BASIS OF PRESENTATION
Management has elected to omit substantially all footnotes to these unaudited
consolidated quarterly financial statements. In the opinion of management, all
adjustments (consisting only of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the three
month period ended February 28, 1997 are not necessarily indicative of the
results that may be expected for the fiscal year ending November 30, 1997. These
statements should be read in conjunction with the consolidated financial
statements and related notes in the Company's Annual Report on Form 10-KSB for
the year ended November 30, 1996.
NOTE B - DIVIDENDS
Dividends on the preferred stock are cumulative at 7%. At February 28, 1997 the
cumulative amount of dividends in arrears was $28,183.
NOTE C - EARNINGS PER SHARE
Primary earnings per common share is calculated by dividing adjusted net income
by the average shares of common stock of the Company and Common Stock
equivalents outstanding during the period. Net income has been adjusted for
dividends in arrears as of February 28, 1997. Common stock equivalents represent
certain outstanding stock options and warrants. During the period the market
price did not exceed the option price for the outstanding options and warrants
and therefore no dilution occurred.
The calculation of fully diluted earnings per share of Common Stock assumes the
dilutive effect of the Company's Cumulative Preferred Stock.
NOTE D - CONSULTING AGREEMENTS, WARRANTS AND OPTIONS
In September 1996 the Company entered into an agreement with Extol International
Corporation ("Extol") to provide investor relations and financial consulting
services to the Company. As part of this agreement, Extol has the right to
purchase for $100, a warrant to purchase 50,000 shares of the Company's Common
Stock at $3.50 per share. This warrant is exercisable for five (5) years from
the date of issuance, and will carry "piggyback" registration rights.
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NOTE E - COMMON STOCK
Subsequent to quarter end, the Company entered into an offshore securities
subscription agreement with Britannia Holdings Ltd. of England and on March 5,
1997, the Company sold 343,750 Units for an aggregate purchase price of
$825,000. The sale was made without registration under the Securities Act of
1933 in reliance upon Regulation S. Each Unit consists of one share of Common
Stock and forty four hundredth (.44) of a warrant to purchase an additional
share of Common Stock at an exercise price of $3.50 per share. The Warrant will
expire in three years, subject to extension as described below. The Warrants are
currently callable by the Registrant anytime after its Common Stock trades for a
bid price of $7.50 or higher for 30 trading days in a row.
The Company also granted Britannia Holdings Ltd. a 12 month option to purchase
an additional 343,750 Units in connection with the sale of the above Units. If
the Purchaser purchases all of the Units subject to the Option, the Registrant
will extend the exercise period of all of the Warrants issued as part of Units
(including the Units issued on March 5, 1997) from 3 years to 7 years, and
increase the call price on such Warrants from $7.50 to $15.00.
As part of the consideration for the stock agreement, the Company has agreed to
credit additional shares of common stock to Britannia Holdings Ltd of England if
the Company does not establish a market for NACO Common Stock that trades for at
least $6.00 per share for any 10 consecutive days within twenty four months
after March 5, 1997.
A finders fee of 10% was paid to James Czirr who is an employee of Extol and is
nominated to the board of directors of the Company.
NOTE F - PREFERRED STOCK
On March 7, 1996 the Company initiated an offering of Units exempt from
registration under the Securities Act of 1933. The offering consisted 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 made on a "best efforts" basis and will continue until the earlier
of the sale of a maximum of 175,000 Units, or June 30, 1997. Selling commissions
equal to 10% of the offering price of the Units will be paid to placement agents
participating in the offering.
Through February 28, 1997, the Company sold 27,000 units and received net
proceeds of $145,800. Subsequent to quarter end an additional 25,000 units were
sold with net proceeds of $135,000.
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ITEM 2. MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
NACO Industries, Inc., (NACO or the Company) is a manufacturing company which
produces and sells polyvinyl chloride (PVC) products. The Company's primary line
of business consists of PVC pipe fittings and valves, which are sold throughout
the United States through wholesale distributors to irrigation, industrial,
construction and utility industries. The Company manufactures and sells
fabricated fittings (4" through 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). NACO
Composites, Inc., a wholly owned subsidiary of NACO produces related and
non-related composite products.
RESULTS OF OPERATIONS
The Company's fiscal year ends on November 30, therefore the two quarters
presented here are referred to herein as 1Q97 and 1Q96, respectively.
NEW OPERATION
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 of
the Company were combined into the new subsidiary and moved to a new facility in
Ogden, Utah. The creation of NACO Composites, Inc. gives the Company the
capability to produce other related composite products and increased
manufacturing capacity for exiting products. The contribution of composite
products to the results of operations has improved over last year and is
anticipated by management to have a positive impact on future operating results.
GENERAL DISCUSSION OF QUARTERS OPERATING RESULTS.
During the three months ended February 28, 1997,(1Q97), the Company sustained an
operating loss before tax of $(171,832) compared to an operating loss before tax
of $(195,921) for 1Q96. The quarter of December to February is typically the
slowest quarter of the year due to the seasonality of the agricultural market
and the cold temperatures.
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SALES
Net sales increased by 34% to $1,531,195 for 1Q97 compared to net sales of
$1,142,957 in 1Q96 due mainly to increased volume. Plastics sales in 1Q97
increased $227,081 or 21% compared to 1Q96. The increased volume was due partly
to the addition of large diameter fittings from 27" to 36" to the Company's
product line. Composite products sales in 1Q97 increased $161,157 or 401% over
1Q96 primarily as a result of the acquisition of the assets of Dreager
Manufacturing and the Company's new facilities for NACO Composites Inc.
Composite sales increased to 14.0% of total revenues in 1Q97 compared to 4.7% in
1Q96.
GROSS MARGIN
Gross margin as a percent of sales for 1Q97 was 37.3% compared to 38.3% for
1Q96. The decrease in gross margin is mainly due to the higher percentage of
sales from the composites product lines. Gross margin on composites was only
5.7% for 1Q97 primarily as a result of start-up costs and increased overhead
expenses associated with the new facilities which were acquired to provide the
Company with sufficient manufacturing facilities for the planned growth in this
segment of its business. Gross margin on plastics sales for 1Q97 was 42.5%
compared to 40.7% for 1Q96. The increase is mainly due to increased volume
during the quarter. The Company believes that gross margin will improve as sales
of composites increase in the future. Gross margin, however, could be adversely
affected by lower than anticipated growth, increased overhead expenses,
increased competition, and lower than anticipated sales prices.
SELLING
Selling expenses were $346,173 or 22.6% of net sales for 1Q97 compared to
$276,013 or 24.1% for 1Q96. The main reason for the decrease as a percentage of
net sales is increased sales. Salaries increased $25,218 mainly due to the
addition of a salesman for composite products, and the addition of a salesman in
plastics in January of 1Q96. Freight expense increased $26,199 mainly due to
increased sales volume.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $342,202 or 22.4% of net sales for 1Q97
compared to $302,601 or 26.4% of net sales for 1Q96. The main reason for the
decrease as a percentage of net sales is increased sales. Salaries increased
$6,340 or 4.8% from 1Q96 to 1Q97 mainly due to annual pay increases given in
September 1996. Employee benefits were up 81% or $8,570 from 1Q96 to 1Q97 mainly
due to several management personnel having completed a year of employment during
1996 making them eligible for certain benefits.
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INTEREST EXPENSE
Interest expense for 1Q97 was $55,782 or 3.6% of net sales compared to $56,174
or 4.9% of net sales for 1Q96. Interest expense decrease as a percentage of
revenues mainly due to increased sales volume.
FACTORS AFFECTING FUTURE RESULTS
The Company's operating results are subject to certain inherent risks
that could adversely affect the Company's operating results and its ability to
operate profitably. If cash generated by operations, or available from current
debt and equity financing sources is not sufficient to meet the Company's
working capital and operational requirements, 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
conditions in its markets, unanticipated expenses or events and other factors
discussed in this report.
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of liquidity have been cash from operations, credit
facilities and equity financing. Cash used in operating activities was $63,920
in 1Q97 primarily because the first quarter typically has less sales as a result
of the seasonality of the Company's business. Cash as of 1Q97 was $121,848, down
$76,458 from the end of the Company's previous fiscal year.
During 1Q97, the Company sold an additional 5,000 units of preferred stock and
warrants for net proceeds of $30,000. Subsequent to the end of 1Q97 (i) an
additional 25,000 units of preferred stock and warrants were sold for net
proceeds of $135,000 and (ii) 343,750 units consisting of common stock and
warrants were sold for net proceeds of $742,500. The additional capital from
these equity financings is being used to finance continued growth and to reduce
debt. The Company at quarter end was current in all of its financial obligations
to lending institutions, but was not current in it financial obligations to its
trade vendors. Subsequent to quarter end, with the additional working capital
from the above sale of stock, the Company is current in all of its financial
obligations to vendors and lending institutions. The Company still has
$445,674 available under its line of credit. In addition, the Company
continues to address cash flows by controlling inventory levels, increasing the
sales effort, and reducing expenses.
The Company believes that its capital resources on hand at February 28, 1997,
together with anticipated revenues from sales, its lending arrangements and
equity financings will be sufficient to satisfy its working capital requirements
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for the remainder of the fiscal year. However, if the Company's operating
results are lower than currently anticipated, the Company may require additional
debt or equity financing in order to fund its working capital requirements. In
addition, the Company may require additional financing to finance the growth of
the Company. If such financing is required, there can be no assurance that the
Company will be able to obtain financing on terms favorable to the Company, if
at all.
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PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
During the quarter ended February 28, 1997, the Company sold the
following units of preferred stock and warrants (the "Units") pursuant to a
private offering of Units being made to accredited investors in reliance upon
Regulation D as described in Footnote F to the financial statements contained
herein:
1. 5,000 Units on December 16, 1996 at a purchase price of
$30,000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
27.1 Financial Data Schedule
b) Reports for Form 8-K
None
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SIGNATURES
In accordance with to the requirements of the Securities Exchange Act, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NACO Industries, Inc.
Registrant
By /s/ Verne E. Bray April 11, 1997
----------------------------------- --------------
Verne E. Bray Date
President
By /s/ Jeffrey J. Kirby April 11, 1997
----------------------------------- --------------
Jeffrey J. Kirby Date
Principal Financial Officer
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-START> DEC-01-1996
<PERIOD-END> FEB-28-1997
<CASH> 114780
<SECURITIES> 0
<RECEIVABLES> 795932
<ALLOWANCES> 84781
<INVENTORY> 881258
<CURRENT-ASSETS> 1806451
<PP&E> 2849522
<DEPRECIATION> 1254077
<TOTAL-ASSETS> 3517041
<CURRENT-LIABILITIES> 2171509
<BONDS> 0
0
421236
<COMMON> 19186
<OTHER-SE> 62350
<TOTAL-LIABILITY-AND-EQUITY> 3517041
<SALES> 1524955
<TOTAL-REVENUES> 1531195
<CGS> 959306
<TOTAL-COSTS> 959306
<OTHER-EXPENSES> 688375
<LOSS-PROVISION> 44781
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<INCOME-PRETAX> (171832)
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