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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
|X| AMENDMENT NO. 1 TO 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
- --------------------------- --------------------- -------------------------
(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
- ----------------------------------- ---------------------------------------
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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<PAGE>
Item 6, Item 7 and Item 12 of the Registrant's Annual Report on Form
10-KSB are hereby amended to read in their entirety as follows:
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).
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.
1
<PAGE>
Net loss (after tax) for the fourth quarter of fiscal 1996 was
approximately $161,000 compared to a net loss (after tax) of approximately
$323,000 for the fourth quarter of fiscal 1995. The Company's net loss for the
fourth quarter of the fiscal year ended November 30, 1996 increased by $102,910
over the third quarter primarily as a result of the seasonality of the business
as disussed above. Generally, the first and fourth quarters of the Company's
fiscal year are the lowest in sales volume because of the winter months. Fourth
quarter operating results were also adversely affected by a Company wide pay
increase of approximately 5% effective September 1, 1996, which resulted in an
increase in compensation expense of approximately $26,000 during the quarter.
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
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.
2
<PAGE>
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% of net sales for Y96 compared
to 4.1% for Y95. Interest expense went from 4.3% of net sales in Y95 to 3.1% in
Y96 mainly because of sales volume. The effective interest rates (interest
expense divided by the average debt balance for the period) for Y96 and Y95 were
11.0% and 11.13% respectively.
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.
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.
3
<PAGE>
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 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.
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.
4
<PAGE>
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 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.
Exhibits
An Amended Financial Data Schedule is filed herewith as Exhibit 27.
5
<PAGE>
JONES, WRIGHT, SWENSON & SIMKINS LLP
Certified Public Accountants
Logan, Utah
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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 related consolidated statements
of income, stockholders' equity and cash flows for the year then ended. We have
also audited the balance sheet as of November 30, 1995, and the related
statements of income, stockholder's equity and cash flows for the nine months
they 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 93,130 28,438
progress
----------------- ------------------
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 152,819
Retained earnings 57,364 246,904
----------------- ------------------
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 1,696 3,957
----------------- -----------------
Total other income (expense) (193,741) (171,789)
----------------- -----------------
Income (loss) before income taxes (126,846) (434,060)
Income tax expense (benefit) (60) (55,800)
----------------- -----------------
Net income (loss) (126,786) (378,260)
Adjustment for preferred dividends (34,481)
----------------- -----------------
Adjusted net loss to Common Stockholders $ (161,267) (378,260)
================= =================
Earnings (loss) per common share:
Primary $ (0.11) (0.25)
Fully diluted (0.11)
Weighted average number of common shares
outstanding (shares issued less shares in
treasury): 1,500,000 1,500,000
</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 Additional Treasury Stock 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 $10,200 19,000 57,000 46,800 103,800
Sale of options for common
stock 15,000 15,000
Contributed Capital - equipment
sold to related party 37,182
Dividends - preferred shares
($.304 per share) (34,481) (34,481)
Treasury stock retired (86,144) (861) (28,273) 86,144 29,134 0
Net loss (126,786) (89,604)
--------- ------- --------- ------ ------------ -------- --------- --------- -------------
Consolidated Balance,
November 30, 1996 132,412 $397,236 1,918,551 $19,186 152,819 $ 57,364 (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) $ (126,786) (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 (1,696) (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 $ 1,696
Contributed capital - sale of equipment to related party 37,182
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 (loss) (162,114) (432,254)
Net loss available to common
shareholders (196,595)
Earnings (loss) per common share:
Primary (.13) (.28)
Fully diluted (.13)
</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> <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
Installment notes payable, secured by vehicles
Payable monthly at 8.50% - 9.75% interest.
<S> <C> <C>
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)
Notes payable for redemption of Company
stock and non-competition agreement, secured
by treasury stock. Payable monthly at 8.25%
<S> <C> <C>
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
of preferred stock. Dividends on
F-16
<PAGE>
NACO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 - Preferred Stock Units and Warrants (continued)
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. For
earnings per share calculation purposes, net income is reduced by cumulative
dividends on preferred stock. 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. During a loss period, the assumed
conversion of convertible preferred stock has an antidilutive effect. As a
result, these shares have not been included in the calculation of fully diluted
earnings per share.
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) $ (32,700) (147,580)
State income tax expense (benefit), net of
federal income tax benefit (4,500) (16,250)
Valuation allowance on deferred tax assets 18,600 102,100
Non-deductible items 3,250 1,400
Taxable sale of assets to related party 14,500
Rate differences and other 790 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 capital contribution by the majority
shareholder for $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
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this Amendment No.1 on Form 10-KSB\A to
be signed on its behalf by the undersigned, thereunto duly authorized, on May 7,
1997.
NACO INDUSTRIES, INC.
By: /s/ Jeffrey J. Kirby
Vice President
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