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U.S. 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, 1997
|_| 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 84341
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(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (435) 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 $7,579,631.
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, 1998 was $1,820,269.
As of February 20, 1998, the Registrant had 1,849,083 shares of Common
Stock outstanding, and 163,745 shares of Preferred Stock outstanding.
No documents are incorporated herein by reference.
Transitional Small Business Disclosure Format: YES |_| NO |X|
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<PAGE>
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.
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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
Industries, Inc. 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.
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. The existing fiberglass
operations of the Company were combined with this operation and moved to a new
facility in Ogden, Utah.
Current Business.
NACO is a manufacturing company which produces and sells polyvinyl
chloride (PVC) products and fiberglass and composite products. Now headquartered
in Logan, Utah the Company has branch manufacturing facilities in Garden City,
Kansas, Lodi, California, and Ogden, Utah, and 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
and accounted for 86% of the Company's revenues in fiscal 1997. 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 subcontractor and original equipment
manufacturer. See "BUSINESS -Products".
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 facility is capable of producing
various products including molds, tooling, fiberglass and urethane products. The
composite products produced in Ogden are a thermo chemical reaction composite
made through the reaction of mixing resin and a catalyst which combines to form
a liquid product mixture which can be reinforced with fiberglass fibers. This
new segment
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was organized as Naco Composites Inc., a fully owned subsidiary of Naco
Industries Inc. It is consolidated with Naco Industries Inc. for financial
reporting and taxes.
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. It is believed 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
PVC Products. NACO offers its customers a line of PVC 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
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.
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Composite Products. The Company manufactures and distributes various
composite products for the transportation, amusement, recreation and
architectural industry. These products include trailer tops, decorative building
parts, after market auto parts and amusement ride materials. The Company also
produces tooling and molds for other companies in various industries.
Manufacturing
PVC Products. 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 belling 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, 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, Royal Plastics, JM Manufacturing,
Diamond Pipe, Jet Stream, Apache Plastic, PW Pipe, IPEX, and Certainteed
Corporation. It is 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 10 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, with 7% plus 3% off. This discount decreases
until the regular price is paid after May 15.
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The Company's manufacturing labor force involves both skilled and
semiskilled 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, in order to
better able to serve this western market the Company increased the size and
capacity of the Logan facilities and began producing large diameter fittings
with the new equipment 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 still produces 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 six 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.
Composite Products. The Company manufactures customized composite
products and products on a contract basis pursuant to specific customer orders
for customized composite products and parts. The composite products produced by
the Company are a thermo chemical reaction composite made through a process of
mixing a resin and a catalyst which combine to form a liquid product mixture
which can be reinforced with fiberglas fibers.
The Company works closely with its customers through the concept and
developmental stage of a customer order. Generally, the Company receives a
preliminary sketch, drawing or verbal description of the desired parts from the
customer and works with the customer to develop the concept into drawings which
determine the design's requirements. When drawings are complete, the Company
manufactures a prototype of the part. Although parts are not actually in
production at this stage, the Company's design and prototype departments work
closely with the fabrication department in developing the prototype. When a
prototype part has been built and approved by the customer, a production mold is
made for purposes of manufacturing the product.
After the production mold is approved, the products are fabricated
using the mold by spraying gelcoat, which has been mixed to the proper color and
consistency, into molds and allowing it to cure. Once cured, the laminating
process begins. In the laminating process, the correct resin/catalyst ratio
based on the specifications for the part is determined, and fibers and resin are
applied to the mold via spray equipment until the desired thickness is reached.
If cut material is required, it is applied at this time. The part is then
allowed to cure, then inspected for defects requiring repair. Following the
lamination procedure, the parts are removed from the mold and at which time they
are finished.
The Company inspects parts at several times during the fabrication
process to maintain a high level of quality. Before parts can be released for
delivery to customers, they must be inspected and approved by the Company's
quality control department. A written set of specifications is checked off for
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each part or batch of parts. Items which are not accepted by Quality Control are
either reworked or written off as rejected parts. If a determination is made to
rework a part, the part must pass a second quality control inspection before it
can be released for delivery to customers.
The Company purchases raw materials from different suppliers. These
suppliers purchase bulk chemicals from large chemical companies. The suppliers
blend and repackage chemicals for resale. Fiberglass is manufactured at several
plants domestically and internationally. Currently there is excess capacity for
supplies in the industry. The Company believes that raw materials are
interchangeable and generally available from multiple sources.
Marketing
PVC Products. 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 time 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 91 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
maintains a certain level 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; 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.
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Composite Products. The Company directs its marketing efforts in three
main areas: (1) Urethane (Reaction Injection Molding) products in the fluid
handling industry and other specified industries; (2) Architectural products for
new and restoration construction; and (3) Amusement products for the amusement
park industry.
The Company's products are sold through Company-paid sales
representatives. Each project is bid independently of each other. The bidding
process is based on several factors such as materials, complexity of project,
geographical location and tooling requirements. The Company participates in
several international trade association expositions, such as Composite
Fiberglass Fabrication Association, Architectural Fiberglass Fabrication
Products Association and International Amusement Parks of America. In addition,
the Company advertises in various trade publications specific to the above
mentioned industries and utilizes promotional brochures and materials to aid in
the sales effort.
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
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 impact sales in the PVC industry.
Weather also plays a role. 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 10% 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".
Several factors have a direct impact on the Company's composite
business, such as the price of raw materials and interest rates. The
architectural building products segment of the market is seasonal. Sales are
heaviest during construction periods, which for most of the country runs spring
through fall. The amusement industry segment of the market is effected by the
dollar value overseas, as the Company faces stiff overseas competition.
Competition.
PVC Products. 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".
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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.
Composite Products. The Company has a number of competitors who
complete with each market segment or industry. Present competitors include
Western Architectural (Sandy, Utah), IDI (Salt Lake City, Utah) and Arrowtrans
(Salt Lake City, Utah) for the architectural industry; MCC Foam (Tremonton,
Utah), Urethan Products (Las Vegas, Nevada), Dale Boot Company (Salt Lake City,
Utah) and Need Speed (Portland, Oregon) for the urethane industry; Arrow
Dynamics (Clearfield, Utah), Beckoma Rides (Holland), Huss (Germany) and
Zamperta, Inc. (Italy) for the amusement industry.
Planned Operational Growth.
Product Development. The Company has completed development of the 27"
to 36" diameter fittings. The additional equipment required for these products
was completed in December 1996 and the company began marketing the large
diameter fittings to the irrigation and utilities markets in 1997. In addition,
the company is developing an expanded line of bolted repair couplers that fit
into both the targeted irrigation and utilities markets. These products have
been developed to the production stage and are anticipated to be completed
within the 1998 fiscal year. The Company is also working on an expanding the 6"
through 12" size lines of valves which would have applications in irrigation and
industrial markets. These products have been developed to the testing stage and
are anticipated to be completed within the 1998 fiscal yera. 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.
Research and Development. Research and development expenditures for the
fiscal years ended November 30, 1997, 1996 were $16,009 and $10,709
respectively, of which 99% was spent in the plastics division and the remaining
1% spent in the composite segment.
Major Customers. During the years ended November 30, 1997 and 1996 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, 1997, NACO had 100 employees of which 97
are full time and 3 are part time. All plant locations are nonunion. 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 intends to renew the patent in 1998. 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(0) 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 believe 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.
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Facilities. 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>
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 leas for the Logan facility is with a related party, and the Company
does not anticipate any problems renewing this lease. Leases on the Lodi, Logan,
and Ogden facilities are $4,658, $9,300, and $4,500 per month respectively. The
lease agreement on the Logan facility also includes personal property and
equipment at the facility. The Garden City, Kansas property is owned by the
Company and is subject to a lien which secures indebtedness in the principal
amount of approximately $220,000.
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.
Item 3. Legal Proceedings.
------------------
The Company is not a party to any material legal proceedings.
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 year ended November 30, 1997.
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PART II
Item 5. Market for Registrant's Common Equity sand Related Stockholder Matter
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The Company's Common Stock is held of record by five 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 89 persons and is traded as part of
a Unit, consisting of one share of the Preferred Stock and 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 years ended November 30, 1997 and
1996 as reported by the OTC Bulletin Board. The bid prices are market quotations
based on inter-dealer bid prices, without markup, markdown or commission, and
may not represent actual transactions.
<TABLE>
<CAPTION>
High Low
------------------- ---------------------
<S> <C> <C>
Year Ended November 30, 1997:
First Quarter ............................ $ 6.50 $ 6.00
Second Quarter ........................... 6.50 6.00
Third Quarter ............................ 6.50 6.00
Fourth Quarter ........................... 6.50 6.00
<CAPTION>
High Low
------------------- ---------------------
<S> <C> <C>
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
</TABLE>
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
$27,836 of dividends were paid on the Preferred Stock. There are $34,468 of
dividends in arrears at November 30, 1997 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.
9
<PAGE>
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 the
Company's operating results have 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.
The Company, through its subsidiary, also manufactures and sells
composite products. The composite business operates from the Company's facility
in Ogden, Utah, where the Company has the capability to produce various
composite products. The Company started supplying composite products to
customers in March 1995. Sales of composite products were $1,115,771 for Y97,
$341,561 for Y96 and $205,914 for Y95.
Results of Operations
The following discussion relates to the twelve months ended November
30, 1997 and November 30, 1996. For comparison purposes percent of sales will be
used rather than dollars. In the following discussion, the year ended November
30, 1997 and November 30, 1996 are referred to as Y97 and Y96, respectively.
Overview. The Company sustained an operating loss for the twelve month
period ending November 30, 1997. The loss is a result of several factors. First
the Company's composite products operations generated an operating loss of
approximately $235,000. Management believes such loss resulted primarily from
startup costs, increased manufacturing overhead expenses associated with the new
facilities and a large contract that was acquired as part of the acquisitions of
Dreager Manufacturing that was bid at a price which was below the Company's
actual cost to produce the products during the second quarter. A part of the
loss is from the additional overhead expense in expansion of the facilities and
the additional personnel to handle expansion. Management is addressing the loss
in two ways. First, the Company is trying to increase sales by continuing to
expand into the industrial and commercial markets. Second, the Company is
continually reviewing its operations to try and reduce expenses without
affecting quality and service to its customers.
Sales. Net sales for Y97 increased by 20.6% to $7,579,631 compared to
net sales of $6,283,634 for Y96. This increase resulted from both an increase in
volume and from a 5% increase in the price of the Company's PVC products in June
of 1997. Sales increased mainly due to new PVC product lines added during the
year which was possible because of the expansion of the manufacturing facilities
in the two previous years and the growth of the Company's composite products
business. Sales of composite products increased $774,210 or 226% over Y96. PVC
sales increased $521,787 or 8.7% over Y96.
Gross Margin. Gross margin as a percent of sales for Y97 was 36.0% compared to
41.1% Y96. The decrease in gross margin is mainly due to the higher percentage
of sales from the composite product line in Y97. Gross margin on composites was
$105,124 or 9.4% of sales primarily as a result of startup costs, increased
manufacturing overhead expenses associated with the new facilities and a large
contract that was acquired as part of the acquisition of Dreager Manufacturing
that was bid at a price which was below the Company's actual cost to produce the
products. The new facilities were acquired to provide the Company with
sufficient manufacturing facilities for the planned growth in this segment
10
<PAGE>
of its business. The contract acquired in connection with the acquisition was
completed in the 2nd quarter of Y97 and bidding procedures with checks and
balances have been updated to improve operations which management believes has
improved margins on composite products. The gross margin on the composite line
for the last six months of Y97 was $149,915 or 25.0% compared to $(44,791) or
(8.6)% during the first six months on Y97. Naco's plastics products gross margin
for Y97 and Y96 were 40.6% and 43.4% respectively. The decrease in gross margin
on the plastics products was mainly due to the higher percentage of sales of
sewer fittings during Y97. Because the sewer fittings are a relatively new
product line, there were additional costs associated with startup. In addition,
sewer fittings generally have a lower gross margin than the other fittings made
by the Company due to market pricing in the industry. The Company takes a
complete physical inventory once a year and a physical inventory of the top 80%
of the dollars in inventory every quarter. This helps to offset any inventory
adjustments at year end. Any year end adjustments are reflected during the
fourth quarter after the year end physical inventory is completed.
Selling. Selling expenses were 19.5% of net sales for Y97 compared to
21.5% for Y96. Advertising decreased .7% as a percent of sales from 1.0% in Y96
to .3% in Y97 primarily because catalogs for existing and new product lines were
produced in Y96, but not in Y97. Salaries and related benefits increased 22.%
from Y96 to Y97 mainly due to the addition of a salesman in the Naco Composites
division. Salaries and related benefits as a percent of sales remained at 6.5%
for both Y97 and Y96 mainly due to increased sales. Overall selling expenses
were lower in Y97 primarily due to increased sales.
General and Administrative. General and administrative expenses were
17.1% of net sales for Y97 compared to 18.3% for Y96. The decrease was due
mainly to the increased sales volume. As a percent of sales, salaries and
related benefits decreased .6% mainly due to greater sales volume even though
salaries and related benefits increased 14.2% from Y96 to Y97 due to the
addition of personnel in the Naco Composites division. Insurance expense
increased 60.2% from Y96 to Y97 or .2% as a percent of sales due to the addition
of Naco Composites and additions in fixed assets due to expansion of the
facilities.
Other. Other expenses/revenues were 2.8% for Y97 compared to 3.1% for
Y96. Interest expense went from 3.1% in Y96 to 2.7% in Y97 mainly because of
sales volume. The effective interest rates (interest expense divided by the
average debt balance for the period) for Y97 and Y96 were 11.31% and 11.17%,
respectively.
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
$384,494 in Y97. Cash as of 11-30-97 was $75,378 down $122,928 from Y96. 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 and working to reduce
expenses.
The Company continues to struggle with its liquidity position. With the
losses and the expansions, the Company has reduced its available working capital
significantly. The losses have been explained in above paragraphs. During the
expansion, part of the capital improvements and new equipment funding has been
from the line of credit and internal financing. The total cash paid for property
and equipment totals $514,408 in Y97 and $302,991 in Y96. The Company also
reduced trade payables by $292,952 from November 30, 1996 to November 30, 1997.
At November 30, 1996 the Company was out over 60 days on trade payables due to
lack of operating funds. At November 30, 1997 the Company was current on trade
payables.
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, 1997 the
revolving line of credit was $1,100,000 of which $824,326 was used leaving
$275,674 available. The availability of the line is based on a percent of
accounts receivable and inventory and the maturity date is August 31, 1998. At
November 30, 1997 the Company's current ratio was in breach of the line of
credit loan agreement and the Company also repurchased preferred stock without
obtaining written waiver from the lending institution. The Company received a
written waiver of these restrictive covenants for the period ending November 30,
11
<PAGE>
1997, and may need to obtain similar waivers in thefuture if operating results
do not improve. The Company is working on several options to improve working
capital including private placement of equity. In January 1996 the Company
entered into an agreement with Extol International Corporation "Extol" to
provide investor relations and financial consulting services to the Company.
During Y97 the Company received an additional $937,472 through a private
placement as a result of this arrangement and continues to pursue this avenue
for additional working capital.
The Company currently has plans to spend up to $150,000 in capital
expenditures to update and expand its operations. Under the terms of the
Company's line of credit, the Company is prohibited from making capital
expenditures in excess of $150,000 unless its working capital ratio improves.
Management believes that the actions presently being taken to revise
the Company's operating and financial requirements and to raise additional
capital, together with its capital resources on hand at November 30, 1997,
revenues from sales and bank resources, will be sufficient to satisfy its
working capital requirements for the foreseeable future. There can be no
assurance, however, that additional debt or equity 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, this will likely have a
material adverse effect on the Company's operations, financial condition, and
its ability to continue to grow and expand its operations.
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 the Company is not able to successfully secure sufficient
equity or debt financing to meet its working capital and operational
requirements as discussed above, 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.
Impact of the Year 2000 Issue
The Year 2000 issue is the result of computer programs, data bases,
operating systems and hardware utilizing two digits rather than four to define
the applicable year. Any of the Company's computer systems that have
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a system failure or miscalculations
causing disruptions of operation, including, among other things, a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities.
Beginning in the year 1996, the Company did an assessment and
determined that it would be required to modify or replace significant portions
of its software so that its computer systems will properly utilize dates beyond
December 31, 1999. In 1997, the Company purchased and received upgrade software
for its major computer programs for manufacturing and accounting. The migration
to implement these programs have been started and should be completed by
November 30, 1998. The Company presently believes that with modifications to
existing software and conversions to new software, the Year 2000 Issue can be
mitigated. However, if such modifications and conversions are not made, or are
not completed timely, the Year 2000 Issue could have a material impact on the
operations of the Company.
The Company will utilize both internal and external resources to
reprogram, or replace, and test the software for Year 2000 modifications. The
Company plans to complete the Year 2000 project by December 31, 1998. The total
remaining cost of the Year 2000 project is estimated at $23,000 and is being
funded through operating cash flows. The remaining $23,000 which will be
expended as incurred over the next year, is not expected to have a material
effect on the results of operations. To date the Company has incurred,
capitalized or expended approximately $129,000 related to the Year 2000 project.
The cost of the project and the date on which the Company plans to
complete the Year 2000 modifications are based on management's best estimates.
However, there can be no guarantee that these estimates will be achieved
12
<PAGE>
and actual results could differ from those plans. Specific factors that might
cause material differences include, but are not limited to, the availability and
cost of personnel trained in this area, the ability to locate and correct all
relevant computer codes, an similar uncertainties.
Item 7. Financial Statements
--------------------
See pages F-1 to F-27 hereof.
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 summary information on the executive
officers and directors of the Company:
<TABLE>
<CAPTION>
Name Age Position
- --------------------------- ----- ----------------------------------------------------
<S> <C> <C>
Verne E. Bray.............. 62 President and Chairman of the Board of Directors
Jeffrey J. Kirby........... 35 Vice President, Secretary, Treasurer and Director
Daniel M. Gruber........... 45 Vice President
Nina F. Birkle............. 64 Vice President
Bryce M. Petersen.......... 48 Vice President of Finance
Daniel E. Bray............. 36 Vice President of Sales
William M. Hopkins......... 39 Vice President of Marketing
Kenneth Nordlund........... 65 Director
Peter Heilmayr............. 64 Director
James C. Czirr............. 44 Director
</TABLE>
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 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.
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.
14
<PAGE>
Bryce M. Petersen was appointed Vice President of Finance in 1997. He
has been employed by the Company since 1995 and previously held the position of
Controller. Mr. Petersen received his B.S. in accounting from Utah State
University in 1975. Prior to joining the Company, Mr. Petersen was the Vice
President of Finance for Logan Manufacturing Co. of Logan, Utah.
Kenneth Nordlund was appointed a director during 1997. Since 1994, Mr.
Nordlund has been the President and a member of the Board of Directors of Kroy
Industries. Kroy Industries is a manufacture of PVC pipe and PVC fencing.
Between 1988 and 1994, Mr. Nordlund was General Manager and Vice President of
Kroy Industries/Alcan Pipe which was a division of Alcan Aluminum Corporation.
Jim Czirr was appointed as a director of the Company in 1997. 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.
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.
William M. Hopkins was appointed as Vice President of Marketing during
1997. Mr. Hopkins came to work for Naco in November, 1994. Prior to working for
Naco Mr. Hopkins worked in marketing and sales for Trade Shows West. He received
B.S. degree in Business Administration for the University of Phoenix. Mr.
Hopkins is the son-in-law of Verne Bray, the President and a director of the
Company.
Daniel E. Bray was appointed Vice President of Sales during 1997. He
has been employed with the Company in a variety of positions since 1983. In
March, 1988 he was hired full time and held positions in shipping and customer
service after which he moved into sales. Mr. Bray is the son of Verne Bray, the
President and a director of the Company.
Section 16(a) Beneficial Ownership 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.
No filing delinquencies are being reported herein.
Item 10. Executive Compensation
----------------------
The following table sets forth compensation paid or accrued by NACO
Industries, Inc. during the last three fiscal years to its Chief Executive
Officer, the only executive officer whose total annual salary and bonus exceeded
$ 100,000.
15
<PAGE>
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Annual Compensation
---------------------------------
Other Annual All Other
Name & Position Year Salary Bonus Compensation Compensation(1)
- ------------------------------------------- ------ ---------- ----- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Verne Bray 1995 $233,268 0 0 $4,050
Chief Executive Officer 1996 211,086 0 0 $3,906
and President 1995 214,931 0 0 2,645
</TABLE>
- ----------------------
(1) Includes Company contributions to a defined contribution plan.
There were no individual grants of stock options or freestanding stock
appreciation rights made by the Company during the last completed fiscal year to
the Chief Executive Officer.
Aggregated Option Exercises in Last Fiscal Year and Year End Option Values
The following table sets forth the aggregate value of unexercised options
to acquire shares of the Common Stock held by the Chief Executive Officer on
November 30, 1997.
<TABLE>
<CAPTION>
Number of Value of Unexercised
Unexercised Options In-the-Money Options at
at FY-End(#) FY-End($)(1)
--------------------- -------------------------
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise(#) Realized($) Unexercisable Unexercisable
- ----------------------------------- ---------------- -------------- --------------------- -------------------------
<S> <C> <C> <C> <C>
Verne Bray
Chief Executive Officer -- -- 20,000/0 $0/$0
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 does not
exceed the exercise price of the options
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.
Directory 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.
16
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management.
---------------------------------------------------------------
The following table sets forth, as of February 20, 1998, 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 each Director, 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.
<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) 1,486,667 80.5%
1367 E. 1980 North Preferred -- --
Logan, UT 84321
Britania Holding Limited............................................ Common(4) 687,500 31.7
Kings House, The Grange St. Peter Port,
Guernsey, Channel Islands GY12QJ
Jeffrey J. Kirby*................................................... Common(2) 29,217 1.6
285 East 400 North Preferred 60 **
Millville, UT 84321
Peter Heilmayr*..................................................... Common(3) 24,275 1.3
6925 Tumbling Trail Preferred 1,170 **
Fort Worth, TX 76116 --
Kenneth Nordund*.................................................... Common(5) 22,500 1.2
P.O. Box 273 Preferred 1,000 **
York, NE 68467
Jim C. Czirr*....................................................... Common(6 35,333 1.9
6070 Baldy Mtn. Rd. Preferred
Sandpoint, ID 83864
Gary Carson......................................................... Common(5) 28,000 1.5
4367 Bobwhite Ct. Preferred 11,200 6.8
Ogden, UT 84403-3262
Dan Bray*........................................................... Common(5) 31,250 1.7
1755 Shadow Ridge Circle Preferred 12,500 7.6
Ogden, UT 84403
Gary Gibbons........................................................ Common(5) 25,000 1.4
1606 North 1340 East Preferred 10,000 6.1
North Logan, UT 84341
Jack Prust.......................................................... Common(5) 21,250 1.2
P.O. Box 5135 Preferred 8,500 5.2
San Ramone, CA 94583
Wapiti Capital L.L.C................................................ Common(5) 60,000 3.3
1252 Tweedbrook Pl. 20,000 12.2
Virginia Beach, VA 23452
MSA Industrial Corporation.......................................... Common(5) 30,000 1.6
P.O. Box 688 Preferred 10,000 6.1
Benton Harbor, MI 49023
All Directors and Officers as a group (10 persons).................. Common(7) 1,580,067 82.1
Preferred 15,577 9.5
</TABLE>
- ----------------------
* Indicates current Director and/or officer
17
<PAGE>
** Less than 1 percent
(1) 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,
2,400 shares granted in employee stock incentive plan exercisable within 60
days. See "EXECUTIVE COMPENSATION."
(3) Includes 20,000 shares issuable upon presently exercisable options, 875
shares issuable upon exercise of presently exercisable Warrants, and 3,400
shares issuable upon conversion of Preferred Stock.
(4) Includes options to purchase 343,750 shares of Common Stock at $2.40 per
share, exercisable for a period of one year from March 5, 1997.
(5) Consists of shares issuable upon conversion of the Preferred Stock and upon
exercise of the related Warrants. (6) Includes 5,333 shares owned by Extol
Corp. of which Mr. Czirr has 50% ownership, and 30,000 shares
issuable upon exercise of presently exercisable options.
(7) Includes all in notes (1) through (6) plus includes 9,000 of Common Stock
shares granted in employee stock incentive plan exercisable with 60 days.
(8) As of the date hereof 344,713 shares of common stock not redeemed are held
as treasury stock and are security for the payment of the amounts owed
under a redemption and noncompetition agreement pursuant to which the stock
was acquired by the Company. See "CERTAIN TRANSACTIONS". If the Company
were to default on the payment of the obligation the stock would be
returned to sellers.
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.
During the fiscal year ended November 30, 1997 the Company granted 112,000
incentive options to certain employees with an exercise price of $3.00 per
share. During the year, 14,000 incentive options were forfeited due to
termination of employment. No options were exercised during the year.
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 were $111,600 for
fiscal years ended November 30, 1996 and 1997. 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, P.V.C., Inc. had loaned the Company $14,242 and as of
November 30, 1997, Naco Industries Inc. has loaned P.V.C., Inc. $15,704. 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
18
<PAGE>
$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 $4,500 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 which was completely paid during fiscal year ended November 30,
1997.
During the year ending November 30, 1997, and November 30, 1996, the
Company paid sales commissions of $20,121 and $12,865, respectively, to, Thomas
Christy, a sales representative who was also serving on the Board of Directors
until August 1997. The sales commissions were computed consistent with other
sales representatives of the Company.
In August 1996, the Company sold 150,000 non-qualified options to James C.
Czirr for $15,000 as a condition of his acceptance of nomination to the Board of
Directors. Thirty thousand options vest each year. 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. Payment of this was changed beginning on March 15, 1997 to
$1,000 cash and the equivalent of $2,000 of common stock per month.
On March 5, 1997, the Company entered into an offshore securities
subscription agreement with Britannia Holdings Ltd for 343,750 shares of Common
Stock. A commission of $82,500 was paid to Extol Corporation on this
transaction. James C. Czirr, appointed a member of the Board of Director in
August 1997 owns 50% of Extol Corporation.
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.
19
<PAGE>
PART IV
Item 13. Exhibits and Reports on Form 8-K.
(a) The following exhibits are submitted herewith:
<TABLE>
<CAPTION>
Description Exhibit No.
----------------------------------------------------------------------- -------------------
<S> <C> <C>
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 NationBank....................................... Filed herewith
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.............................. (4)
10.11 Stock Incentive Plan................................................. Filed herewith
21 Subsidiaries of Registrant........................................... Filed herewith
27 Financial Data Schedule.............................................. Filed herewith
</TABLE>
- -------------------------
(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.
(4) Filed as an Exhibit to the Company' Annual Report on Form 10-KSB for
the fiscal year ended November 30, 1996.
(b) The registrant did not file a report on Form 8-K in the fourth quarter
of its fiscal year ended November 30, 1997.
20
<PAGE>
INDEPENDENT AUDITOR'S REPORT
February 17, 1998
The Board of Directors and Stockholders
NACO Industries, Inc.
Logan, UT
We have audited the accompanying consolidated balance sheets of NACO
Industries, Inc. and subsidiary as of November 30, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. 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 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of NACO
Industries, Inc. and subsidiary at November 30, 1997 and 1996, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
JONES, WRIGHT, SIMKINS & ASSOCIATES LLP
Certified Public Accountants
Logan, Utah
F-1
<PAGE>
<TABLE>
NACO INDUSTRIES, INC.
---------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
November 30, 1997 and 1996
--------------------------
<CAPTION>
ASSETS 1997 1996
------
------------------- -------------------
<S> <C> <C>
Current assets:
Cash $ 75,378 198,306
Accounts receivable, net of allowances
of $69,750 and $73,570 671,562 615,775
Inventory 772,752 668,501
Taxes receivable 5,100 48,600
Receivable from related party 15,704
Other current assets 97,561 72,202
------------------- -------------------
Total current assets 1,638,057 1,603,384
------------------- -------------------
Property and equipment:
Land 40,700 40,700
Buildings and improvements 600,785 526,329
Equipment and vehicles 2,449,998 2,033,174
Equipment construction in progress 89,980 93,130
------------------- -------------------
Total property and equipment 3,181,463 2,693,333
Accumulated depreciation (1,456,133) (1,195,036)
------------------- -------------------
Net property and equipment 1,725,330 1,498,297
------------------- -------------------
Other assets:
Intangible and other assets 106,776 105,907
------------------- -------------------
Total other assets 106,776 105,907
------------------- -------------------
Total assets $ 3,470,163 3,207,588
=================== ===================
</TABLE>
The accompanying notes are an integral part of
these financial statements.
F-2
<PAGE>
<TABLE>
NACO INDUSTRIES, INC.
---------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
November 30, 1997 and 1996
--------------------------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
- ------------------------------------
------------------- -------------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 251,122 544,074
Accrued expenses 198,046 188,076
Line of credit 824,326 664,326
Payable to related parties 34,382
Notes payable 88,542 103,815
Current portion of long-term obligations 233,259 212,400
------------------- -------------------
Total current liabilities 1,595,295 1,747,073
------------------- -------------------
Long-term liabilities:
Long-term obligations, less current portion 664,001 896,379
Deferred income taxes 94,200 79,100
------------------- -------------------
Total long-term liabilities 758,201 975,479
------------------- -------------------
Total liabilities 2,353,496 2,722,552
------------------- -------------------
Stockholders' equity:
7%cumulative convertible preferred stock, $3 par
value; authorized 330,000 shares, 165,412 and
132,412 shares issued; including 1,667 shares in
treasury for 1997; aggregate liquidation
preference of $1,016,501 and $794,472 in 1997
and 1996, respectively 496,236 397,236
Common stock, $.01 par value; 10,000,000
shares authorized; 2,193,796 and 1,918,551
shares issued; including 344,713 and 418,551
shares in treasury 21,939 19,186
Additional paid-in capital 1,003,800 152,819
Retained earnings (deficit) (278,711) 57,364
------------------- -------------------
1,243,264 626,605
Less: treasury stock, at cost (126,597) (141,569)
------------------- -------------------
Total stockholders' equity 1,116,667 485,036
------------------- -------------------
Total liabilities and stockholders' equity $ 3,470,163 3,207,588
=================== ===================
</TABLE>
The accompanying notes are an integral part of
these financial statements.
F-3
<PAGE>
<TABLE>
NACO INDUSTRIES, INC.
---------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
For the Years Ended November 30, 1997 and 1996
----------------------------------------------
<CAPTION>
1997 1996
------------------- -------------------
<S> <C> <C>
Sales, net $ 7,579,631 6,283,634
Cost of goods sold 4,850,507 3,703,407
------------------- -------------------
Gross profit 2,729,124 2,580,227
------------------- -------------------
Operating expenses:
Selling expenses 1,476,174 1,351,801
General and administrative expenses 1,295,643 1,150,822
Research and development expenses 16,009 10,709
------------------- -------------------
Total operating expenses 2,787,826 2,513,332
------------------- -------------------
Income (loss) from operations (58,702) 66,895
------------------- -------------------
Other income (expense):
Interest income 2,030 1,510
Interest expense (208,287) (196,947)
Gain (loss) on sale of assets (2,846) 1,696
------------------- -------------------
Total other income (expense) (209,103) (193,741)
------------------- -------------------
Income (loss) before income taxes (267,805) (126,846)
Income tax expense (benefit) 16,200 (60)
------------------- -------------------
Net loss (284,005) (126,786)
Adjustment for preferred dividends (62,304) (34,481)
------------------- -------------------
Adjusted net loss to common stockholders $ (346,309) (161,267)
=================== ===================
Loss per common share:
Primary $ (0.20) (0.11)
Fully diluted (0.20) (0.11)
Weighted average number of common shares
outstanding (shares issued less shares in treasury) 1,754,195 1,500,000
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-4
<PAGE>
<TABLE>
NACO INDUSTRIES, INC.
---------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
For the Year Ended November 30, 1997 and 1996
---------------------------------------------
<CAPTION>
Preferred Stock Common Stock
----------------------- ----------------------- Additional Retained
Number of Number of Paid-in Earnings
Shares Amount Shares Amount Capital (Deficit)
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance,
November 30, 1996 132,412 $ 397,236 1,918,551 $ 19,186 152,819 $ 57,364
Dividends - preferred shares
($.21 per share) (27,836)
Issuance of preferred stock
in private placement, net of
issuance costs of $3,028 33,000 99,000 95,972
Issuance of common stock
in private placement, net of
issuance costs of $82,500 343,750 3,438 739,062
Issuance of common shares
for consulting services 5,333 53 15,947
Purchase of preferred shares
Treasury stock retired (73,838) (738) (24,234)
Net loss (284,005)
--------- --------- --------- --------- --------- ---------
Consolidated Balance,
November 30, 1997 165,412 $ 496,236 2,193,796 21,939 1,003,800 (278,711)
========= ========= ========= ========= ========= =========
<CAPTION>
Treasury Stock
----------------------- Total
Number of Stockholders'
Shares Amount Equity
========= ========= =========
<S> <C> <C> <C>
Consolidated Balance,
November 30, 1996 (418,551) $ (141,569) $ 485,036
Dividends - preferred shares
($.21 per share) (27,836)
Issuance of preferred stock
in private placement, net of
issuance costs of $3,028 194,972
Issuance of common stock
in private placement, net of
issuance costs of $82,500 742,500
Issuance of common shares
for consulting services 16,000
Purchase of preferred shares (1,667) (10,000) (10,000)
Treasury stock retired 73,838 24,972 0
Net loss (284,005)
========= ========= =========
Consolidated Balance,
November 30, 1997 (346,380) (126,597) 1,116,667
========= ========= =========
(continued)
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-5
<PAGE>
<TABLE>
NACO INDUSTRIES, INC.
---------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
For the Years Ended November 30, 1997 and 1996
----------------------------------------------
<CAPTION>
Preferred Stock Common Stock
---------------------- -------------------- Additional
Number of Number of Paid-in Retained '
Shares Amount Shares Amount Capital Earnings
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, November 30, 1995 $ 2,004,695 $ 20,047 0 $ 246,904
Initial public offering of
preferred stock, net of
issuance costs of $286,399 113,412 340,236 53,837
Issuance of preferred stock
in private placement, net of
issuance costs of $10,200 19,000 57,000 46,800
Sale of options for common
stock 15,000
Contributed capital - equipment
sold to related party 37,182
Dividends - preferred shares
($.304 per share) (34,481)
Treasury stock retired (86,144) (861) (28,273)
Net loss (126,786)
--------- --------- --------- --------- --------- ---------
Consolidated Balance,
November 30, 1996 132,412 $ 397,236 1,918,551 $ 19,186 152,819 $ 57,364
========= ========= ========= ========= ========= =========
<CAPTION>
Treasury Stock
----------------------- Total
Number of Stockholders
Shares Amount Equity
--------- --------- ---------
<S> <C> <C> <C>
Balance, November 30, 1995 (504,695) $(170,703) $ 96,248
Initial public offering of
preferred stock, net of
issuance costs of $286,399 394,073
Issuance of preferred stock
in private placement, net of
issuance costs of $10,200 103,800
Sale of options for common
stock 15,000
Contributed capital - equipment
sold to related party 37,182
Dividends - preferred shares
($.304 per share) (34,481)
Treasury stock retired 86,144 29,134 0
Net loss (126,786)
--------- --------- ---------
Consolidated Balance,
November 30, 1996 (418,551) $(141,569) $ 485,036
========= ========= =========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-6
<PAGE>
<TABLE>
NACO INDUSTRIES, INC.
---------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
For the Year Ended November 30, 1997 and 1996
---------------------------------------------
<CAPTION>
1997 1996
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities
Net loss $ (284,005) (126,786)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 284,889 235,923
Amortization 5,915 986
Consulting for common stock 16,000
Deferred income taxes 15,100 (2,150)
(Gain) loss on sale of assets 2,486 (1,696)
(Increase) decrease in:
Accounts receivable, net (55,787) (170,805)
Inventory (104,251) (20,482)
Taxes receivable 43,500 71,626
Other current assets (25,359) (20,747)
Increase (decrease) in:
Accounts payable (292,952) 400,811
Accrued expenses 9,970 7,156
----------------- -----------------
Net cash provided by (used in) operating activities (384,494) 373,836
----------------- -----------------
Cash flows from investing activities
Purchase of property and equipment (514,408) (302,991)
Loans to related party (15,704)
Proceeds on sale of equipment 3,292
Investment in intangible and other assets (6,784) (3,818)
----------------- -----------------
Net cash used in investing activities (536,896) (303,517)
----------------- -----------------
Cash flows from financing activities
Net borrowings on line of credit 160,000 79,756
Proceeds from preferred stock issuance 194,972 708,621
Purchase of preferred stock (10,000)
Proceeds from common stock issuance 742,500
Proceeds from related party loans 5,036
Payments on related party loan (34,382) (5,000)
Proceeds from short-term notes 17,271 83,006
Payments on short-term note (32,544) (68,022)
Payments on long-term debt (211,519) (774,410)
Dividend payments (27,836) (34,481)
----------------- -----------------
Net cash provided by (used in) financing activities 798,462 (5,494)
----------------- -----------------
Increase (decrease) in cash (122,928) 64,825
Cash, beginning of period 198,306 133,481
----------------- -----------------
Cash, end of period $ 75,378 198,306
================= =================
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-7
<PAGE>
<TABLE>
NACO INDUSTRIES, INC.
---------------------
STATEMENTS OF CASH FLOWS
------------------------
For the Year Ended November 30, 1997 and 1996
---------------------------------------------
1997 1996
----------------- -----------------
<S> <C> <C>
Supplemental disclosures:
Income taxes paid $ 900 48,500
================= =================
Interest paid $ 200,411 217,934
================= =================
Noncash investing and financing activities:
Issuance of common stock for services:
Issuance of common stock $ 16,000
Consulting expenses (16,000)
----------------- -----------------
Cash paid for certain consulting services -0-
================= =================
Acquisition of property and equipment:
Cost of property and equipment $ 414,147
Debt obligations assumed (103,816)
Increase in related party loan (7,340)
----------------- -----------------
Cash paid for property and equipment $ 302,991
================= =================
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 credit $ (140,674)
Net borrowings on line of credit refinanced by proceeds
from long-term debt 220,430
----------------- -----------------
Net borrowings on line of credit $ 79,756
================= =================
Stock transactions:
Net proceeds from stock issuance $ 512,873
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 $ 392,996
================= =================
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-8
<PAGE>
<TABLE>
NACO INDUSTRIES, INC.
---------------------
STATEMENTS OF CASH FLOWS
------------------------
For the Year Ended November 30, 1997 and 1996
---------------------------------------------
<CAPTION>
1997 1996
----------------- -----------------
<S> <C> <C>
Supplemental disclosures: (continued)
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>
<PAGE>
NACO INDUSTRIES, INC.
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note 1 - Summary of Significant Accounting Policies
- ---------------------------------------------------
Nature of Operations
- --------------------
NACO Industries, Inc. and its subsidiary NACO Composites, Inc. (the
"Company") are manufacturing companies, which produce and sell polyvinyl
chloride (PVC), and composite 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. 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-10
<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. Revenue is
recognized under these arrangements upon the sale of the inventory.
Stock Based Compensation
- ------------------------
The Company accounts for stock option grants in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees" and accordingly,
recognizes no compensation expense for the stock option grants.
Research and Development
- ------------------------
Research and development costs are expensed when incurred.
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
inventory capitalization requirements used for income tax purposes.
F-11
<PAGE>
NACO INDUSTRIES, INC.
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note 1 - Summary of Significant Accounting Policies (continued)
- ---------------------------------------------------------------
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).
Impact of Recently Issued Accounting Standards
- ----------------------------------------------
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128 "Earnings Per Share", and SFAS No. 129, "Disclosure of Information about
Capital Structure". Both statements are effective for financial statements for
periods ending after December 15, 1997. SFAS No. 128 specifies the computation,
presentation and disclosure requirements for earnings per share for entities
with publicly held common stock or potential common stock. Early adoption of
SFAS No. 128 is not permitted. SFAS No. 129 requires an entity to explain the
permanent rights and privileges of outstanding securities. The Company believes
that adoption of these statements will not have a material affect on its
earnings per share disclosures.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". This Statement is effective for fiscal years beginning after December
15, 1997. The adoption of SFAS No. 130 will require reporting unrealized gains
and losses on future investments in debt and equity securities in comprehensive
income.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information". SFAS No. 131 establishes standards
for reporting information about operating segments in annual financial
statements and requires selected information about operating segments in interim
financial reports issued to stockholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. Operating segments are defined as components of an enterprise about
which separate financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate resources and in
assessing performance. SFAS No. 131 requires reporting segment profit or loss,
certain specific revenue and expense items and segment assets. It also requires
reconciliations of total segment revenues, total segment profit or loss, total
segment assets and other amounts disclosed for segments to corresponding amounts
reported in the financial statements. This statement is effective for fiscal
years beginning after December 15, 1997. The Company's reportable operating
segments are not expected to change as a result of the adoption of SFAS No. 131.
F-12
<PAGE>
NACO INDUSTRIES, INC.
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note 2 - 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.
Year Ending Nine Months Ending
November 30, 1996 November 30, 1995
----------------- -----------------
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)
Note 3 - Concentrations of Credit Risk
- --------------------------------------
At November 30, 1997 and November 30, 1996, bank balances in excess of
depository insurance limits were approximately $78,000 and $306,000,
respectively.
Note 4 - Inventory
- ------------------
Inventory consists of the following:
Nov. 30, Nov. 30,
1997 1996
---- ----
Raw materials $ 309,193 242,388
Work in process 12,276 3,750
Finished goods 451,283 422,363
----------- -------
Total $ 772,752 668,501
=========== ===========
F-13
<PAGE>
NACO INDUSTRIES, INC.
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note 4 - Inventory (continued)
- ------------------
At November 30, 1997 and 1996, inventory is presented net of valuation
allowances of $110,000 and $90,000, respectively.
Note 5 - Intangible and Other Assets
- ------------------------------------
Intangible and other assets consist of the following:
Nov. 30, Nov. 30,
1997 1996
----- -----
Goodwill, net of accumulated amortization of
$6,901 and $986, respectively $ 81,817 87,732
Cash surrender value of life insurance 16,174 9,390
Deposits 8,785 8,785
--------- ---------
Total $ 106,776 105,907
======= ========
Note 6 - Revolving Line of Credit and Short-term Notes Payable
- --------------------------------------------------------------
At November 30, 1997, the Company had borrowed $824,326 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, 1998. The revolving line of credit loan agreement
contains covenants pertaining to compliance with the bank's borrowing base
requirements. The line of credit agreement also contains covenants pertaining to
working capital, debt, dividends and capital purchases. 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, before issuing or
repurchasing Company stock, and before paying dividends on capital stock. The
lending institution has waived its restriction on paying dividends on the
Company's preferred stock. At November 30, 1996, the Company had borrowed
$664,326 on its line of credit.
At November 30, 1997, the Company's working capital ratio was in breach
of the line of credit loan agreement. The Company also repurchased preferred
stock without obtaining a written waiver from the lending institution. The
Company received a written waiver of these restrictive covenants for the period
ending November 30, 1997.
Short-term notes payable at November 30, 1997 and 1996 consist of a
demand note payable to a bank and a 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
F-14
<PAGE>
NACO INDUSTRIES, INC.
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note 6 - Revolving Line of Credit and Short-term Notes Payable (continued)
- --------------------------------------------------------------------------
payable to the insurance company bears interest at 8.15%, is due January, 1998
and is secured by life insurance. The outstanding balance due to the bank at
November 30, 1997 and 1996 was $71,271 and $85,000, respectively. The note
payable to the insurance company at November 30, 1996 bore interest at 6.85%.
Note 7 - Long-Term Obligations
- ------------------------------
<TABLE>
<CAPTION>
Long-term obligations consists of: Nov. 30, Nov. 30,
1997 1996
---- ----
<S> <C> <C>
Installment notes payable, secured by vehicles.
Payable monthly at 8.50% - 9.75% interest.
Maturities from July, 1999 to May, 2001. $ 38,048 52,800
Notes payable to finance operations and capital
additions, secured by current and fixed assets
and life insurance. Payable at 8.75% to 10.25%
interest with maturities through February, 2010. 533,465 637,462
Notes payable for redemption of Company
stock and non-competition agreement, secured
by treasury stock. Payable monthly at 8.25%
through June, 2002. 194,847 229,216
Capital equipment leases, secured by
related equipment. Payable monthly at
12.52% - 23.44% interest, with maturities
through October, 2000. 130,900 189,301
------- -------
Total long-term obligations 897,260 1,108,779
Less: current portion (233,259) (212,400)
----------- --------
Long-term portion $ 664,601 896,379
========= =========
</TABLE>
At November 30, 1997 and 1996, the book value of the Company's
long-term obligations excluding capital leases is $766,360 and $919,478,
respectively. Fair value using current market rates is approximately $758,000
and $913,000, respectively. Borrowings from Nations Bank, Kansas for short-term
and long-term debt are $1,357,791 and $1,301,788, respectively. During fiscal
year 1996, the Company received a commitment from a leasing company for
financing in the amount of $258,000 and the unused portion of this commitment at
year end was $184,900. The unused commitment lapsed during fiscal year 1997.
F-15
<PAGE>
NACO INDUSTRIES, INC.
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note 7 - Long-Term Obligations (continued)
- ------------------------------
At November 30, 1997, current maturities of long-term obligations (both
long-term debt and capital lease obligations) are as follows:
Period ending
November 30
-----------
1998 $ 233,259
1999 226,400
2000 175,100
2001 62,900
2002 39,700
Thereafter 159,901
-------
Total $ 897,260
=========
At November 30, 1997 and 1996, the cost and amortization (or
depreciation) of capitalized leased equipment are as follows:
Nov. 30, Nov. 30,
1997 1996
---- ----
Cost $ 244,293 249,160
Current year depreciation 39,234 29,950
Accumulated depreciation 104,461 65,227
Annual lease payments under leases in effect at November 30, 1997 are
as follows:
Period ending
November 30
-----------
1998 $ 77,200
1999 48,600
2000 22,900
2001 3,318
Less amount representing interest (21,118)
-------
Present value of obligations under capital
leases (interest at 12.52% to 23.44%) $ 130,900
=======
F-16
<PAGE>
NACO INDUSTRIES, INC.
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note 8 - 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 16). Rental expense under these operating leases for the year ended
November 30, 1997 and 1996 was approximately $219,000 and $171,000,
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 annual option for renewal through October 1999. 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. The lease for the California facility is adjusted annually for changes
in the consumer price index for the San Francisco Bay Area.
Minimum future rental payments on non-cancelable leases as of November
30, 1997 for each of the next 5 years and in the aggregate are:
Period ending
November 30
-----------
1998 $ 167,496
1999 158,180
2000 9,300
2001
2002 _______
Total minimum future rentals $ 334,976
=======
Note 9 - 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 the shares of preferred stock are cumulative
from the date of first issuance and will be payable semi-annually at the rate of
F-17
<PAGE>
NACO INDUSTRIES, INC.
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note 9 - Preferred Stock, Units and Warrants (continued)
- --------------------------------------------
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. Dividends in arrears were $34,468
($.21 per share) at November 30, 1997. 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.
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 per unit. 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 was made on a "best efforts" basis and continued
until June 30, 1997. Selling commissions equal to 10% of the offering price of
the units were paid to certain placement agents participating in the offering.
The Company sold 52,000 units and received net proceeds of $295,800.
On March 5, 1997, the Company entered into an offshore securities
subscription agreement with Britannia Holdings Ltd. Of England (Britannia) 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 one 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.
F-18
<PAGE>
NACO INDUSTRIES, INC.
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note 9 - Preferred Stock, Units and Warrants (continued)
- --------------------------------------------
In connection with the sale of the above units, the Company also
granted Britannia the option to purchase 343,750 additional units for up to
twelve months. If Britannia purchases all of the units subject to the option,
the Company will extend the exercise period of all of the warrants issued as
part of the units from three years to seven 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 24,062 additional shares of common stock per year to Britannia
if the Company does not establish a market for its common stock that trades for
at least $6.00 per share for any ten consecutive days within twenty-four months
after March 5, 1997.
Warrants:
At November 30, 1997 and 1996, the Company had outstanding warrants to
purchase 107,879 and 75,713 shares of the Company's common stock, respectively.
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.
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 years from
the date of issuance, and will carry "piggyback" registration rights. Extol has
agreed to take common stock and cash for payment of services. Jim Czirr the
majority shareholder in Extol became a board member August 27, 1997 (See Note
16).
Note 10 - Stock Options
- -----------------------
The Company has outstanding non-qualified stock options for 60,000
common shares to its directors with an option price of $3 per share. During the
year, 40,000 options expired due to changes in directors. The remaining
outstanding options may be exercised through the year 2005. 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.
F-19
<PAGE>
NACO INDUSTRIES, INC.
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note 10 - Stock Options (continued)
- -----------------------
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. A
committee appointed by the Board determines the exercise price of options
granted under the Plan. 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 December of 1996, the Company granted 112,000 incentive options to
certain employees with an exercise price of $3.00 per share. During the year,
14,000 incentive options were forfeited due to termination of employment. No
compensation expense has been charged to operations.
On June 20, 1997, the Company granted 20,000 options to purchase common
stock to an individual who was appointed as a director of the Company during the
year. The exercise price of the options is $3.00 per share. The options vested
on the grant date and have a ten year contractual life. No compensation expense
has been charged to operations.
The following is a summary of the status of the Company's stock
options:
Number Weighted Average
of Shares Exercise Price
--------- --------------
Outstanding at 12/1/95 100,000 $ 3.00
Granted 150,000 4.00
------- ----
Outstanding at 11/30/96 250,000 $ 3.60
======= ====
Options exercisable at 11/30/96 100,000 $ 3.00
======= ====
Fair value of options granted during 1996 $ 0.00
====
Outstanding at 12/1/96 250,000 $ 3.60
Granted 132,000 3.00
Forfeited (54,000) 3.00
---------- ----
Outstanding at 11/30/97 328,000 $ 3.46
======= ====
Options exercisable at 11/30/97 110,000 $ 3.27
========= ====
F-20
<PAGE>
NACO INDUSTRIES, INC.
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note 10 - Stock Options (continued)
- -----------------------
Fair value of options granted during 1997 $ 117,600
=======
Weighted-average remaining contractual life
of outstanding options 5.85 years
No options were exercised during the year.
In October, 1995, the Financial Accounting Standards Board issued
Statement 123, Accounting for Stock-Based Compensation (SFAS 123). This
Statement is effective for transactions that are entered into in fiscal years
beginning after December 15, 1995. SFAS 123 establishes a fair value-based
method of accounting for employee stock options. This method provides for
compensation cost to be charged to results of operations at the grant date.
However, the statement allows companies to continue to follow the accounting
treatment prescribed by Accounting Principles Board Opinion 25 and provide in
the footnotes pro forma net income and earnings per share information as if the
SFAS 123 method had been adopted.
In compliance with SFAS No. 123, the Company is providing the following
pro forma disclosure:
1997 1996
---- ----
Net loss:
As reported (284,005) (126,786)
Pro forma (295,605) (126,786)
Loss per share:
As reported (.20) (.11)
Pro forma (.20) (.11)
The fair value of stock options granted in fiscal years 1997 and 1996
was estimated on the date of grant using the Black-Scholes option-pricing model.
The weighted average fair values and related assumptions were:
1997 1996
---- ----
Weighted average fair value $ 3.00 3.00
Expected volatility 1.00% 1.00%
Risk free interest rate 6.15% 6.64%
Expected life in years 5.85 4.0
Dividend yield none none
F-21
<PAGE>
NACO INDUSTRIES, INC.
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note 11 - 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 7). As
payments are made on the note, collateral is released and the corresponding
treasury stock is retired. The Company retired 73,838 and 86,144 treasury shares
in the years ending November 30, 1997, and 1996, respectively. Treasury shares
outstanding at year-end represent the remaining shares pledged as collateral on
the note agreement.
During fiscal year 1997, the Company purchased 1,667 shares of
preferred stock from a former employee. The purchased shares have been recorded
as treasury stock of the Company.
Note 12 - 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 exceeded 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 anti-dilutive effect. As a
result, these shares have not been included in the calculation of fully diluted
earnings per share.
Note 13 - Pension Plan
- ----------------------
The Company sponsors an IRC Sec. 401(k) deferred compensation plan that
covers all employees over age 21 with over one year of service. The Company
makes matching contributions, at 50% of the employee's deferral up to 4% of
gross wages for employees who elect salary deferral. The amount of pension
expense for the years ending November 30, 1997 and 1996 was $22,355 and $17,129,
respectively.
Note 14 - Advertising
- ---------------------
Advertising costs are charged to operations when the advertising first
takes place. Advertising expense for the years ending November 30, 1997 and 1996
was $21,105 and $59,780, respectively.
F-22
<PAGE>
NACO INDUSTRIES, INC.
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note 15 - Income Taxes
- ----------------------
<TABLE>
<CAPTION>
Income tax expense consists of the following: Nov. 30, Nov, 30,
1997 1996
---- ----
<S> <C> <C>
Currently payable:
Federal $ 0 0
State 1,100 2,090
---------- ---------
1,100 2,090
Deferred (86,200) (20,750)
Valuation allowance 101,300 18,600
---------- -------
Income tax expense (benefit) $ 16,200 ( 60)
=========== =========
</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 carryforward can be
offset.
The deferred tax asset and deferred tax liability was comprised of the
following items at November 30, 1997 and 1996:
<TABLE>
<CAPTION>
Nov. 30, Nov. 30,
1997 1996
---- ----
<S> <C> <C>
Deferred tax asset:
Inventory $ 59,600 50,500
Net operating loss carryforward 137,000 45,900
Other 25,400 24,300
------ --------
222,000 120,700
Valuation allowance (222,000) (120,700)
-------- --------
Net deferred tax asset $ 0 0
========= =========
Deferred tax liability:
Tax over book depreciation $ 94,200 79,100
======== =======
</TABLE>
F-23
<PAGE>
NACO INDUSTRIES, INC.
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note 15 - Income Taxes (continued)
- ----------------------
The Company has available at November 30, 1997, approximately $363,000
of unused operating loss carryforwards that may be applied against future
taxable income and that expire in the years 2010 and 2012.
Income tax expense differs from the customary effective United States
rate, primarily as a result of the following:
<TABLE>
<CAPTION>
Nov. 30, Nov. 30,
1997 1996
---- ----
<S> <C> <C>
Computed "expected" tax expense (benefit) $ (87,700) (32,700)
State income tax expense (benefit), net of
federal income tax benefit (10,300) (4,500)
Valuation allowance on deferred tax assets 101,300 18,600
Non-deductible items 2,100 3,250
Taxable sale of assets to related party 14,500
Rate differences and other 10,800 790
------------ --------
Income tax expense $ 16,200 (60)
============ ========
</TABLE>
Note 16 - 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, 1997 and 1996, the outstanding mortgage
balance was approximately $240,00 and $253,000, respectively. 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-24
<PAGE>
NACO INDUSTRIES, INC.
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note 16 - Related-Party Transactions (continued)
- ------------------------------------
At November 30, 1997, the Company had loaned P.V.C. Inc. $15,704. At
November 30, 1996, the Company had borrowed $14,242 from P.V.C., Inc.
Intercompany loans are non-interest bearing and payable on demand. During the
year ending November 30, 1996, the Company sold to P.V.C., Inc. equipment for
$42,705. In connection with this sale the Company recorded a capital
contribution 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 $4,500 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 years ending November 30, 1997 and 1996, the Company paid
sales commissions of $21,264 and $12,865, respectively, to a sales
representative who served on the Board of Directors through August 27, 1997. The
sales commissions were computed consistent with other sales representatives of
the Company.
In August 1996, the Company issued non-qualified options to James C.
Czirr as a condition of acceptance of nomination to the Board of Directors (See
Note 10). Mr. Czirr is a 50% shareholder in Extol International Corporation
(Extol) a consulting firm retained by the Company to provide investor relations
and financial consulting services. In September 1996, the Company signed an
agreement with Extol, which provides for a retainer of $3,000 per month through
August, 2000. During fiscal year 1997, Mr. Czirr was appointed as a director of
the Company and Extol agreed to take common stock and cash for services. Extol
International received $27,900 for consulting services during fiscal year 1997
and 5,333 shares of the Company's common stock. The stock had an estimated grant
date fair value of $3.00 per share. A finder's fee of ten percent was paid to
Extol, in connection with the Units sold to Brittania Holdings Ltd. of England
(See Note 10).
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.
F-25
<PAGE>
NACO INDUSTRIES, INC.
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note 17 - Segment Information
- -----------------------------
The Company's operations are classified into two principal industry
segments, PVC fittings and valves sold through NACO Industries, Inc. and
composite and fiberglass products sold through NACO Composites, Inc. During
1997, the Company's fiberglass operations were moved to 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 years
1997 and 1996.
<TABLE>
<CAPTION>
Fiberglass &
PVC Composite
Fiscal year 1997: Products Products Eliminations Consolidated
- ----------------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers: $ 6,463,860 1,115,771 7,579,631
Intersegment sales 16,141 (16,141)
----------- ---------- ------- ---------
Total revenue $ 6,480,001 1,115,771 (16,141) 7,579,631
========= ========= ======= =========
Operating profit (loss) $ 336,566 (235,593) (9,675) 91,298
========== ========== ========
Other income and expense, net (209,103)
General corporate expenses (150,000)
--------
Loss before income tax $ (267,805)
========
Identifiable assets $ 2,938,816 451,347 3,390,163
========= =========
Corporate assets 80,000
------
Total assets $ 3,470,163
=========
Depreciation $ 263,976 20,913 284,889
========= ========= =======
Capital expenditures $ 407,183 107,225 514,408
========= ======== =======
</TABLE>
Total revenue by industry includes both sales to unaffiliated customers
and intersegment sales. Cost plus an estimated profit margin is used to report
intersegment sales. Operating profit is total revenue less operating expenses.
Operating profit for segment reporting excludes general corporate expenses,
other income and expense and income tax expense or benefit. Identifiable assets
are those used by each segment of the Company's operations. Corporate assets
primarily represent cash.
F-26
<PAGE>
NACO INDUSTRIES, INC.
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note 17 - Segment Information (continued)
- -----------------------------
<TABLE>
<CAPTION>
Fiberglass &
PVC Composite
Fiscal year 1996: Products Products Eliminations Consolidated
- ----------------- -------- -------- ------------ ------------
<S> <C> <C> <C>
Sales to unaffiliated customers: $ 5,942,074 341,560 6,283,634
Intersegment sales --------- --------- ----------- ---------
Total revenue $ 5,942,074 341,560 6,283,634
========= ========= =========== =========
Operating profit (loss) $ 394,446 (97,551) 296,895
========== ========= ===========
Other income and expense, net (193,741)
General corporate expenses (230,000)
--------
Loss before income tax $ (126,846)
=========
Identifiable assets $ 2,736,454 271,134 3,007,588
========= =========
Corporate assets 200,000
-------
Total assets $ 3,207,588
=========
Depreciation $ 223,320 12,603 235,923
========= ========= =======
Capital expenditures $ 399,278 113,230 512,508
========= ======== =======
</TABLE>
Note 20 - Capital Resources
- ---------------------------
The Company has incurred significant costs the past two years for
capital additions to increase production capacity and diversify into a broader
mix of product line. These costs combined with increases in costs incurred in
the acquisition of a new subsidiary and subsequent operations have caused the
Company's profitability to decline. Management believes that the Company can
continue to diversify sales in new and expanded product lines and improve the
subsidiary's gross margin. It is not possible to predict at this time the
success of these efforts.
F-27
<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 27, 1998.
NACO INDUSTRIES, INC.
/s/ Verne E. Bray
-------------------------------------
Verne E. Bray, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed 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
- ----------------------- (Principal Executive Officer) February 27, 1998
Verne E. Bray
/s/ Jeffrey J. Kirby Vice President,
- ----------------------- Secretary and Director February 27, 1998
Jeffrey J. Kirby (Principal Accounting Officer)
- ----------------------- Director February 27, 1998
Jim C. Czirr
/s/ Peter Heilmayr Director February 27, 1998
- -----------------------
Peter Heilmayr
- ----------------------- Director February 27, 1998
Kenneth Nordlund
Supplemental Information to be Furnished with Reports
Filed Pursuant to Section 15(d) of the
Exchange Act by Non-Reporting Issuers.
The Company currently does not intend to prepare and distribute a
separate annual report to shareholders. A copy of an information statement
relating to a meeting of the shareholders of the Company held in August, 1997 is
being furnished supplementally to the Commission pursuant to the requirements of
Form 10-KSB.
21
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Description Exhibit No.
----------------------------------------------------------------------- -------------------
<S> <C> <C>
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 NationBank....................................... 10.7
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.............................. (4)
10.11 Stock Incentive Plan................................................. 10.11
21 Subsidiaries of Registrant........................................... 21
27 Financial Data Schedule.............................................. 27
</TABLE>
- -------------------------
(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.
(4) Filed as an Exhibit to the Company' Annual Report on Form 10-KSB for
the fiscal year ended November 30, 1996.
PROMISSORY NOTE
..........
..........
..........
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
Borrower: NACO Industries, Inc. (TIN: 48-0836971)
395 West 1400 North
Logan, UT 84321
Lender: NationsBank, N.A.
NationsBank - Garden City
1515 Kansas Ave.
Garden City, KS 67846
Principal Amount: $1,100,000.00 Initial Rate: 10.250% Date of Note:
August 31, 1997
PROMISE TO PAY. NACO Industries, Inc. ("Borrower") promises to pay to
NationsBank, N.A. ("Lender"), or order, In lawful money of the United States of
America, the principal amount of One Million One Hundred Thousand & 00/100
Dollars ($1,100,000.00) or so much as may be outstanding, together with interest
on the unpaid outstanding principal balance of each advance. Interest shall be
calculated from the date of each advance until repayment of each advance.
PAYMENT. Borrower will pay this loan in one payment of all outstanding principal
plus all accrued unpaid interest on August 31, 1998. In addition, Borrower will
pay regular monthly payments of accrued unpaid interest beginning September 30,
1997, and all subsequent interest payments are due on the last day of each month
after that. The annual interest rate for this Note is computed on a 365/360
basis; that is, by applying the ratio of the annual interest rate over a year of
360 days, multiplied by the outstanding principal balance, multiplied by the
actual number of days the principal balance is outstanding. Borrower will pay
Lender at Lender's address shown above or at such other place as Lender may
designate in writing. Unless otherwise agreed or required by applicable law,
payments will be applied first to any unpaid collection costs and any late
charges, then to any unpaid interest, and any remaining amount to principal.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from
time to time based on changes in an index which is the Prime Rate as established
by Lender, at its discretion, whether or not such rate shall be otherwise
published (the "Index"). The Index is not necessarily the lowest rate charged by
Lender on its loans and is set by Lender in its sole discretion. If the Index
becomes unavailable during the term of this loan, Lender may designate a
substitute index after notifying Borrower. Lender will tell Borrower the current
Index rate upon Borrower's request. Borrower understands that Lender may make
loans based on other rates as well. The interest rate change will not occur more
often than each day. The Index currently Is 8.500% per annum. The Interest rate
to be applied to the unpaid principal balance of this Note will be at a rate of
1.750 percentage points over the Index, resulting In an Initial rate of 10.250%
per annum. NOTICE: Under no circumstances will the interest rate on this Note be
more than the maximum rate allowed by applicable law.
PREPAYMENT. Borrower may pay without penalty all or a portion of the amount owed
earlier than it is due. Early payments will not, unless agreed to by Lender in
writing, relieve Borrower of Borrower's obligation to continue to make payments
of accrued unpaid interest. Rather, they will reduce the principal balance due.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform when
<PAGE>
due any other term, obligation, covenant, or condition contained in this Note or
any agreement related to this Note, or in any other agreement or loan Borrower
has with Lender. (c) Borrower defaults under any loan, extension of credit,
security agreement, purchase or sales agreement, or any other agreement, in
favor of any other creditor or person that may materially affect any of
Borrower's property or Borrower's ability to repay this Note or perform
Borrower's obligations under this Note or any of the Related Documents. (d) Any
representation or statement made or furnished to Lender by Borrower or on
Borrower's behalf is false or misleading in any material respect either now or
at the time made or furnished. (e) Borrower becomes insolvent, a receiver is
appointed for any part of Borrower's property, Borrower makes an assignment for
the benefit of creditors, or any proceeding is commenced either by Borrower or
against Borrower under any bankruptcy or insolvency laws. (f) Any creditor tries
to take any of Borrower's property on or in which Lender has a lien or security
interest. This includes a garnishment of any of Borrower's accounts with Lender.
(g) Any guarantor dies or any of the other events described in this default
section occurs with respect to any guarantor of this Note. (h) A material
adverse change occurs in Borrower's financial condition, or Lender believes the
prospect of payment or performance of the Indebtedness is impaired.
(i) Lender in good faith deems itself insecure.
LENDERIS RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. Upon default, including failure
to pay upon final maturity, Lender, at its option, may also, if permitted under
applicable law, increase the variable interest rate on this Note to 25.000% per
annum. The interest rate will not exceed the maximum rate permitted by
applicable law. Lender may hire or pay someone else who is not a salaried
employee of Lender to help collect this Note if Borrower does not pay. Borrower
will be liable for all reasonable costs incurred in the collection of this Note,
including but not limited to, court costs, attorneys' fees, and collection
agency fees, except that such costs of collection shall not include the recovery
of both attorneys' fees and collection agency fees. This Note has been delivered
to Lender and accepted by Lender In the State of Kansas. If there Is a lawsuit,
Borrower agrees upon Lender's request to submit to the jurisdiction of the
courts of Finney County, the State of Kansas. Lender and Borrower hereby waive
the right to any jury trial In any action, proceeding, or counterclaim brought
by either Lender or Borrower against the other. Subject to the provisions on
arbitration, this Note shall be governed by and construed In accordance with the
laws of the State of Kansas.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA and Keogh accounts,
and all trust accounts for which the grant of a security interest would be
prohibited by law. Borrower authorizes Lender, to the extent permitted by
applicable law, to charge or setoff all sums owing on this Note against any and
all such accounts, and, at Lender's option, to administratively freeze all such
accounts to allow Lender to protect Lender's charge and setoff rights provided
on this paragraph.
LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under
this Note, as well as directions for payment from Borrower's accounts, may be
requested orally or in writing by Borrower or by an authorized person. Lender
may, but need not, require that all oral requests be confirmed in writing.
Borrower agrees to be liable for all sums either: (a) advanced in accordance
with the instructions of an authorized person or (b) credited to any of
Borrower's accounts with Lender. The unpaid principal balance owing on this Note
at any time may be evidenced by endorsements on this Note or by Lender's
internal records, including daily computer print-outs. Lender will have no
obligation to advance funds under this Note if: (a) Borrower or any guarantor is
in default under the terms of this Note or any agreement that Borrower or any
guarantor has with Lender, including any agreement made in connection with the
signing of this Note; (b) Borrower or any guarantor ceases doing business or is
insolvent; (c) any guarantor seeks, claims or otherwise attempts to limit,
modify or revoke such guarantor's guarantee of this Note or any other loan with
Lender; (d) Borrower has applied funds provided pursuant to this Note for
purposes other than those authorized by Lender; or (e) Lender in good faith
deems itself insecure under this Note or any other agreement between Lender and
Borrower.
<PAGE>
ARBITRATION. Lender and Borrower agree that all disputes, claims and
controversies between them, whether individual, joint, or class in nature,
arising from this Note or otherwise, Including without limitation contract and
tort disputes, shall be arbitrated pursuant to the Rules of the American
Arbitration Association, upon request of either party. No act tu take or dispose
of any collateral securing this Note shall constitute a waiver of this
arbitration agreement or be prohibited by this arbitration agreement. This
includes, without limitation, obtaining injunctive relief or a temporary
restraining order; invoking a power of sale under any deed of trust or mortgage;
obtaining a writ of attachment or imposition of a receiver; or exercising any
rights relating to personal property, including taking or disposing of such
property with or without judicial process pursuant to Article 9 of the Uniform
Commercial Code. Any disputes, claims, or controversies concerning the
lawfulness or reasonableness of any act, or exercise of any right, concerning
any collateral securing this Note, including any claim to rescind, reform, or
otherwise modify any agreement relating to the collateral securing this Note,
shall also be arbitrated, provided however that no arbitrator shall have the
right or the power to enjoin or restrain any act of any party. Judgment upon any
award rendered by any arbitrator may be entered in any court having
jurisdiction. Nothing in this Note shall preclude any party from seeking
equitable relief from a court of competent jurisdiction. The statute of
limitations, estoppel, waiver, laches, and similar doctrines which would
otherwise be applicable in an action brought by a party shall be applicable in
any arbitration proceeding, and the commencement of an arbitration proceeding
shall be deemed the commencement of an action for these purposes. The Federal
Arbitration Act shall apply to the construction, interpretation, and enforcement
of this arbitration provision.
PREDECESSOR BANK NAME EXHIBIT. An exhibit, titled "PREDECESSOR BANK NAME
EXHIBIT," is attached to this Note and by this reference is made a part of this
Note just as if all the provisions, terms and conditions of the Exhibit had been
fully set forth in this Note.
<PAGE>
08-31-1997 PROMISSORY NOTE Page 2
Loan No 9005 (Continued)
GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or
remedies under this Note without losing them. Borrower and any other person who
signs, guarantees or endorses this Note, to the extent allowed by law, waive
presentment, demand for payment, protest and notice of dishonor. Upon any change
in the terms of this Note, and unless otherwise expressly stated in writing, no
party who signs this Note, whether as maker, guarantor, accommodation maker or
endorser, shall be released from liability. All such parties agree that Lender
may renew or extend (repeatedly and for any length of time) this loan, or
release any party or guarantor or collateral; or impair, fail to realize upon or
perfect Lender's security interest in the collateral; and take any other action
deemed necessary by Lender without the consent of or notice to anyone. All such
parties also agree that Lender may modify this loan without the consent of or
notice to anyone other than the party with whom Ihe modification is made.
Borrower's Initials
Lender's Initials
NO ORAL AGREEMENTS. This written agreement Is the final expression of the
agreement between Lender and Borrower and may not be contradicted by evidence of
any prior oral agreement or of a contemporaneous oral agreement between Lender
and Borrower.
NONSTANDARD TERMS. The following space contains all nonstandard terms, including
all previous oral agreements, If any, between Lender and Borrower:
By Initialing the boxes to the left, Lender and Borrower affirm that no
unwritten oral agreement exists between them.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
BORROWER:
NACO Industries, Inc.
<PAGE>
BY: /s/ Verne Bray
Verne Bray, President
Variable Rate. Line of Credit.
LASER PRO, Reg. U.S. Pat. & T.M. Off., Ver. 3.24 (c) 1997 CF] ProServices, Inc.
All rights reserved. IKS-D20 SD922064.LN C29.OVLI
<PAGE>
PREDECESSOR BANK NAME EXHIBIT
Borrower: NACO Industries, Inc. (TIN: 48-0836971)
39S West 1400 North
Logan, UT 84321
Lender: NationsBank, N.A. NationsBank - Garden City 1515 Kansas Ave.
Garden City, KS 67846
This PREDECESSOR BANK NAME EXHIBIT Is attached to and by this reference Is made
a part of each Promissory Note or Credit Agreement, dated August 31, 1997, and
executed In connection with a loan or other financial accommodations between
NationsBank, N.A. and NACO Industries, Inc..
This Promissory Note is in renewal and/or extension but not in satisfaction of
that certain promissory note between Borrower and predecessor bank # 341 date
09-26-96, in the original principal amount of $1,100,000-00 (the referenced
number applies and indicates the appropriate predecessor bank name below that is
applicable to the Promissory Note being renewed and/or extended: #1-BANK IV
Kansas, N.A., #2-Boatmen's First National Bank of Kansas City
THIS PREDECESSOR BANK NAME EXHIBIT IS EXECUTED ON AUGUST 31,1997.
BORROWER:
NACO lndustries, Inc.
By:
Verne Bray, President
LENDER:
NatlonsBank, N.A.
Authorized Offlcw
LASER PRO, Reg. U.S. Pat. & T.M. Off., Ver. 3.24 (c) 19
CFI ProServices, Inc. All rights reserved. JKS-G60 S0922064.LN C29.OVLI
<PAGE>
LOAN AGREEMENT
LENDER: NationsBank, N.A., Garden City, Kansas (Bank)
BORROWER: NACO Industries, Inc.
THIS AGREEMENT is supplemental to and incorporated by reference in the loan
instrument to be executed concurrently herewith between the parties hereto
evidencing the loan(s) herein described. BORROWER SHOULD READ THE ENTIRE
AGREEMENT BEFORE SIGNING.
Inc.
1) TERMS OF LOAN(S):
$1,100,000.00 Revolving Line of Credit (RLC) with a maturity date of August 31,
1998 at 10.25i variable daily at NationsEank Prime plus 1 3/4%.
Borrower will pay this loan in one payment of all outstanding principal plus all
accrued unpaid interest on August 31, 1998. In addition, Borrower will pay
regular monthly payments of accrued unpaid interest beginning September 30 '
1997 and all subsequent interest payments are due on the last day of each month
after that. All advances shall require submission of a Borrowing Base
Certificate (See Attached Exhibit) requesting any advance. No advances will be
made unless the borrowing base provides availability based on the formula set
forth in the Borrowing Base Certificate. At such time that the loan balance
shall exceed the availability as set forth in the Borrowing Base Certificate,
the loan shall be deemed in default. Such Borrowing Base Certificates shall be
duly completed and signed by an officer duly authorized to request funds.
2) INTEREST: Interest on the above loan (s) shall be paid monthly and
shall be computed as follows:
10.25% NationsBank Prime Rate plus 1 3/40-.; A Rate based on the Prime Rate of
the Bank will change each time and as of the date that the Prime Rate of the
Bank changes, without prior notice to the Borrower.
[X] The unpaid principal balance of Borrower(s) note(s) shall bear interest
after final maturity, including maturity by acceleration, at the annual rate of
250-. in excess of the interest rate therein provided, but not to exceed the
maximum interest rate allowed by law.
3) LINE OF CREDIT LOAN(S):
<PAGE>
[]| With and only with regard to Borrower's line of credit loan(s) described in
Paragraph 1 of the Loan Agreement, Bank agrees to make line of credit loans to
Borrower in an aggregate principal amount at any one time outstanding up to but
not exceeding the face amount of the note (s) . Within such limit, Borrower may
borrow, repay and reborrow at any time from the date hereof to the maturity date
of the note (s) or to the earlier maturity date of the note (s) by acceleration,
whichever is sooner. Subject to the conditions herein set forth, advancements
will be made by Bank from time to time as required by Borrower and upon receipt
of executed Loan Requests on forms to be furnished by Bank. Borrower shall apply
all proceeds received from the sale of pledged collateral to the loan(s) before
any new loan advances will be made.
4) BORROWING BASE CERTIFICATE:
Borrowing Base: The borrowing base formula has been modified as follows:
Advances will not exceed the total of: 80'-. of current (less than GO days past
due) receivables; 50'i of raw material inventory based on the lower of cost or
market; 50'-. against finished goods (work in process is excluded from both raw
materials and finished goods inventory figures) with a maximum of $1,100M to be
advanced against finished goods inventory. Total borrowings will fall within
this formula, not to exceed $1,100M.
A copy of the Borrowing Base Certificate will be sent or faxed with each request
for draws against the line. On a quarterly basis, the borrower will submit a
current balance sheet and income statement, a current listing and aging of the
receivables, and a current Borrowing Base Certificate reflecting the appropriate
figures in the aging report and financial statement. A copy of the revised
Borrowing Base Certificate and Draw Request Form is attached for reference.
5) COLLATERAL:
[X] Borrower shall be required to execute security instruments for such loan (s)
as required by Bank necessary to grant to Bank a perfected security interest in
the following described personal and/or real property, as to which Borrower must
have full and complete title, to-wit:
Security Agreement Dated September 25, 1995.
All of Debtor' s right, title and interest now owned and/or hereafter acquired
in and to the following, to-wit: (a) Accounts receivable, contract rights and
general intangibles; (b) Business and manufacturing equipment, machinery, tools,
parts, office equipment, furniture and fixtures, furnishings and supplies,
including all replacements, substitutions and additions thereto; (c) All
inventories of raw materials, work in process and finished products, wherever
located, including locations at 3445 W. Jones Ave., Garden City, Finney County,
Kansas 67846; 2395 Maggio Circle, Lodi, San Joaquin County, California 95240 and
395 West 1400 North, Logan, Cache County, Utah 84321 and (d) All fixtures
attached and/or hereafter affixed to Debtor's business premises at 3445 W. Jones
Ave., Garden City, Finney County, Kansas 67846.
Real Estate Mortgage Dated May 20, 1995.
Beginning at a point of 60 feet North and 1,080 feet West of the Southeast
corner of Section Three (3), Township Twenty-four (24) South, Range Thirty-three
(33) West of the 6th P.M., in Finney County, Kansas, for the point of beginning;
<PAGE>
thence West on a line parallel to and 60 feet North of the South line of said
Section 3 a distance of 420 feet; thence North at an interior angle of 890071 a
distance of 360 feet; thence East at an interior angle of 900531 a distance of
420 feet; thence South at an interior angle of 890071 a distance of 360 feet to
the point of beginning; also described as Tracts 8, 9 and 10 in the Larson
Survey of such real estate dated February 23, 1966, prepared by Robert H. Jones,
P.E., and filed for record in the County Engineer's Office of Finney County,
Kansas, in Survey Book 3.
6) INSURANCE AND TAXES: During the entire term of the loan (s) , Borrower shall
provide proof of and maintain in force the following insurance and taxes:
[X] Fire, lightning and extended coverage for the maximum insurable amount, but
not to exceed the outstanding balance of the loan(s), on all real estate
property securing such loan(s).
[X] Life insurance in the amounts and for the person indicated, if
insurable, and the policies to be assigned to Bank, to-wit:
Name Amount
Verne E. Bray $250,000.00
[X] To pay all Real Estate Taxes and Special Assessments for 1997 and all
subsequent years which are not yet due and payable.
7) FINANCIAL INFORMATION REQUIRED: During the entire term of such loan(s)
Borrower shall furnish to Bank, in form and content satisfactory to Bank, the
following:
[X] Balance Sheets, monthly and year td date Profit and Loss Statements and
Accounts Receivable Agings, to be furnished monthly in a timely manner.
[X] Interim financial data should include prior year comparisons and year to
date comparisons versus budget projections, both broken out by division.
[X] Borrower shall maintain the following financial ratios or financial
requirements on a calendar quarter basis.
[X] NACO's current ratio will equal or exceed 1.25/1 at each calendar quarter.
[X] NACO's debt/tangible net worth shall not exceed 2.5/1.
<PAGE>
[X] NACO shall maintain a minimum net worth of $1,000,000-00.
[X] NACO's maximum capital expenditure shall be limited to $150M during the next
12 months unless NACO's net working capital is equal to or exceeds $500M at the
most recent calendar quarter. Waivers of this requirement may be requested in
writing to the bank should the NWC fail to meet the $500M threshold at a time
when such expenditures are deemed necessary to the company.
[X] Audited Balance Sheets and Profit and Loss Statements according to GAAP by a
Certified Public Accountant within 90 days following the close of each fiscal
year and a copy of NACO's Federal Tax Return annually.
[X] SEC 10Q reports as submitted to the SEC on a quarterly basis; 10K reports
annually as submitted to the SEC.
[X] Borrower's loan(s) shall continue to be Guaranteed by Verne E.
Bray and Beverly L. Bray.
[X] Personal Financial Statements and Income Tax Returns to be furnished
annually by Verne E. Bray and Beverly L. Bray.
Borrower will permit a representative of Bank to examine and audit Borrower's
books upon request and will promptly advise Bank of any litigation in which
Borrower may become involved.
8) NEGATIVE COVENANTS: Until payment in full of all Borrower's notes outstanding
hereunder, Borrower will not, unless otherwise agreed by Bank in writing:
[X] Make loans to another or others, or guarantee or otherwise become liable
(except by endorsement for deposit in the ordinary course of business) for the
undertaking of another.
[X] Declare or pay dividends upon or acquire to retire its capital
stock, or authorize or issue any additional stocks or reclassify
any stock outstanding. It is agreed that Naco has the express
consent of Bank IV to issue convertible preferred stock with
<PAGE>
warrants as outlined in the Naco Prospectus dated July 12, 1995
and should the underwriting be successful, pay dividends on the
preferred stock at the 7% rate.
9) No consent or waiver under this Agreement shall be effective unless in
writing. No waiver of any breach or default shall be deemed a waiver of any
breach or default thereafter occurring.
10) Failure on the part of Borrower to pay any sum of interest and/or principal
of the loan(s) when due, or any breach or default by Borrower of or under any
term, condition, provision, warranty or representation made in this Agreement,
any appointment of a receiver or trustee as to a substantial portion of the
assets of Borrower, or any levy of attachment, execution or similar process, any
act on the part of Borrower of insolvency, general assignment for the benefit of
creditors, voluntary or involuntary filing under any bankruptcy law, or any
attachment or suit for taxes against the Borrower, by the Federal or State
government, or any department thereof, or if for any reason Bank shall deem
itself insecure, shall, at the option of Bank, make immediately due and payable
all sums loaned hereunder, without presentation, demand, protest or further
notice of any kind, regardless of the terms of any promissory note and/or
security instrument evidencing the loan.
11) The provisions hereof shall extend to and be binding upon the heirs,
personal representatives and assigns of the parties hereto.
This document, together with other written agreements of the parties, is the
final expression of the agreement between the parties. This document may not be
contradicted by evidence of prior or contemporaneous oral agreements of the
parties. Any credit agreement not contained in the printed fo= must be inserted
below to be enforceable.
There are no unwritten oral agreements between the parties.
IN WITNESS WHEREOF, the parties hereto, having read this Agreement, do hereby
accept all of the terms and conditions thereof and have each hereunto set their
hands on this 31st day of August, 1997.
NationsBank, m
Garden City,
NACO Industries, Inc.
By:
Verne E. Bray, President
Bank Borrower
<PAGE>
BORROWING BASE CERTIFICATE #
NACO INDUSTRIES, INC.
DATE: -1 19 -
1. Value of Accounts Receivable $ x 80% =
(Excluding any receivables over 60 days PAST DUE)
2. Inventory at Cost or market value (A) Raw $ x 50t = (whichever
is less) Use only Raw Material Material and finished goods. Work in
progress is not included in (B) Finished $ x 5096 = this figure. Goods
($1,100M Maximum)
3. Totals 1+2 (Total of #2 (B) not to exceed $1,100M) (3) $
4. Total NACO Industries, Inc. (4) $ Line of Credit Loan Balance
as of this request
5. Amount Available to Borrow (Line (3) - Line (4)) (5) $
6. Amount of Draw Requested this date:(6) $
7. New Balance Outstanding on RLC: (Line (4) + Line (6)) (7) $
(NOT TO EXCEED $1,100M)
Borrower hereby assigns and grants a security interest to bank, free and clear
of all liens, claims, and encumbrances, and all rights to the accounts
receivable and inventory securing this revolving line of credit as represented
by this Borrowing Base Certificate. The figures stated herein are certified
correct by the undersigned.
Borrower represents and warranties that all eligible receivables and inventory f
igures constituting the totals given above are valid and binding obligations
rising out of transactions in which the required performance by Borrower has
been duly completed, and The Borrower has no knowledge that the purchaser has
any basis for set-off, reduction, or counterclaim against The Borrower; and that
The Borrower has good title to such receivables free and clear of all liens,
claims and encumbrances, and has no knowledge of any fact which would lead it to
expect that such receivables will not be paid in full when due.
Borrower also af f irms that all payroll taxes are paid current, that the
proceeds of this draw are not for the specific purpose of paying federal,
payroll taxes, and that Borrower shall advise bank of any adverse developments
or lawsuits which might materially affect The Bank' s collateral or ability to
collect the sums advanced to Borrower under this revolving line of credit.
<PAGE>
NACO Industries, Inc.
BY: TITLE: DATE:
(Revised 9-97)
NACO INDUSTRIES, INC.
STOCK INCENTIVE PLAN
November 5, 1996
<PAGE>
NACO INDUSTRIES, INC.
STOCK INCENTIVE PLAN
TABLE OF CONTENTS
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Page
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1. BACKGROUND AND PURPOSE...............................................1
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2. DEFINITIONS..........................................................1
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(a) "Award" or "Awards".........................................1
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(b) "Board......................................................1
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(c) "Cause" and/or "Forfeiture Event"...........................1
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(d) "Change in Control".........................................1
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(e) "Code"......................................................2
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(f) "Committee".................................................2
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(g) "Common Stock"..............................................2
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(h) "Corporation"...............................................2
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(i) "Disability"................................................2
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(j) "Employee"..................................................2
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(k) "Exchange Act"..............................................2
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(l) "Fair Market Value".........................................2
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(m) "Forfeiture Event"..........................................3
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(n) "Incentive Stock Option"....................................3
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(o) "Nonstatutory Stock Option".................................3
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(p) "Optionee"..................................................3
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(q) "Participant"...............................................3
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(r) "Retirement"................................................3
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(s) "Rules".....................................................3
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(t) "Share......................................................3
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(u) "Stock Appreciation Right...................................3
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(v) "Stock Option"..............................................3
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(w) "Stock Option Agreement"....................................3
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(x) "Subsidiary"................................................3
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3. ADMINISTRATION.......................................................4
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(a) Composition of the Committee................................4
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(b) Actions by the Committee....................................4
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(c) Powers of the Committee.....................................4
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(d) Liability of Committee Members..............................4
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4. DURATION OF THE PLAN AND SHARES SUBJECT TO THE PLAN..................4
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(a) Duration of the Plan........................................4
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(b) Shares Subject to the Plan..................................5
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(c) Source of Stock Issued Under the Plan.......................5
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5. PERSONS ELIGIBLE FOR AWARDS...........................................5
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6. STOCK OPTIONS.........................................................5
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(a) Awards of Stock Options......................................5
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(b) Number of Shares.............................................5
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(c) Exercise Price...............................................5
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(d) Method of Payment............................................6
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(e) Term and Exercise of Stock Options; Nontransferability of
Stock Options................................................6
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(f) Termination of Employment....................................6
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(g) Forfeiture...................................................7
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(h) Rights as a Shareholder......................................7
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(i) Stock Appreciation Rights....................................8
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7. RECAPITALIZATION......................................................8
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8. CHANGE IN CONTROL.....................................................9
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9. SECURITIES LAW REQUIREMENTS...........................................9
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10. AMENDMENTS OF THE PLAN AND AWARDS.....................................9
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(a) Plan Amendments..............................................9
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(b) Amendments of Awards.........................................9
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(c) Rights of Participant.......................................10
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11. GENERAL PROVISIONS...................................................10
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(a) Application of Funds........................................10
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(b) Employment Rights...........................................10
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(c) Shareholders' Rights........................................10
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(d) No Obligation to Exercise Stock Option......................10
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(e) Withholding Taxes...........................................10
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(i) General............................................10
(ii) Stock Withholding..................................10
(f) Other Corporation Benefit and Compensation Programs.........10
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(g) Costs of the Plan...........................................11
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(h) Participant's Beneficiary...................................11
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(i) Awards in Foreign Countries.................................11
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(j) Severability................................................11
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(k) Binding Effect of Plan......................................11
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(l) No Waiver of Breach.........................................11
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12. APPROVAL OF SHAREHOLDERS.............................................12
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13. ADOPTION.............................................................12
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NACO INDUSTRIES, INC.
STOCK INCENTIVE PLAN
1. BACKGROUND AND PURPOSE. Effective November 5, 1996, the Board of
Directors of the Corporation adopted the NACO Industries, Inc. Stock Incentive
Plan (the "Plan"). The purpose of the Plan, as amended from time to time, is to
promote and advance the interests of the Corporation and its shareholders by
strengthening the ability of the Corporation to attract, motivate and retain
directors, managerial and other employees and others, and to strengthen the
mutuality of interests between such persons and the Corporation's shareholders.
Certain capitalized terms used in the Plan have the meanings set forth in
Section 2.
2. DEFINITIONS. For purposes of the Plan, the following terms shall
have the meanings set forth below:
(a) "Award" or "Awards" means a grant of a Stock Option or
Stock Appreciation Right under the Plan.
(b) "Board" means the Board of Directors of the Corporation.
(c) "Cause" and/or "Forfeiture Event" mean the engagement by a
Participant or his/her assignee in any activity in competition with any activity
of the Corporation, or inimical, contrary or harmful to the interests of the
Corporation, including, but not limited to (i) conduct related to the
Participant's employment for which either criminal or civil penalties may be
sought, (ii) the commission of an act of fraud or intentional misrepresentation,
(iii) embezzlement or misappropriation or conversion of assets or opportunities
of the Corporation, (iv) accepting employment with or serving as a consultant,
adviser or in any other capacity to an employer that is in competition with or
acting against the interest of the Corporation, (v) disclosing or misusing any
confidential or proprietary information of the Corporation, (vi) violation of
the Corporation's policies, including, without limitation, the Corporation's
insider trading policy, or (vii) participating in a hostile takeover attempt.
(d) "Change in Control" means the occurrence of any of the
following events:
(i) An acquisition by any person of beneficial
ownership of the shares of Common Stock of the Corporation then outstanding (the
"Corporation Common Stock Outstanding") or the voting securities of the
Corporation then outstanding entitled to vote generally in the election of
directors (the "Corporation Voting Securities Outstanding"); provided such
acquisition of beneficial ownership would result in the person's beneficially
owning (within the meaning of Rule 13d-3 promulgated under the Exchange Act)
twenty-five percent (25%) or more of the Corporation Common Stock Outstanding or
twenty-five (25%) or more of the combined voting power of the Corporation Voting
Securities Outstanding; and provided further, that immediately prior to such
acquisition such person was not a direct or indirect beneficial owner of
twenty-five percent (25%) or more of the Corporation Common Stock Outstanding or
twenty-five (25%) or more of the combined voting power of Corporation Voting
Securities Outstanding, as the case may be; or
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(ii) A change in the composition of the Board
such that the individuals who, as of the effective date of this Plan ,
constitute the Board (such Board shall be hereinafter referred to as the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board; provided, however, for purposes of this Section 2(d), that any individual
who becomes a member of the Board subsequent to the effective date whose
election, or nomination for election by the Corporation's stockholders, was
approved by a vote of at least a majority of those individuals who are members
of the Board and who were also members of the Incumbent Board (or deemed to be
such pursuant to this provision) shall be considered as though such individual
were a member of the Incumbent Board; but, provided, further, that any such
individual whose initial assumption of office occurs as a result of either an
actual or threatened election contest (as such terms are used in Rule 14a-11 of
Regulation 14A promulgated under the Exchange Act, including any successor to
such Rule) or other actual or threatened solicitation of proxies or consents by
or on behalf of a person other than the Board shall not be so considered as a
member of the Incumbent Board.
(e) "Code" means the Internal Revenue Code of 1986, as
amended.
(f) "Committee" means the committee appointed by the Board to
administer the Plan as provided in Section 3.
(g) "Common Stock" means the Common Stock, $.01 par value, of
the Corporation or any security of the Corporation identified by the Committee
as having been issued in substitution, exchange or in lieu thereof.
(h) "Corporation" means NACO Industries, Inc., a Utah
corporation, or any successor corporation.
(i) "Disability" means that because of an injury or sickness
the Participant is unable to perform any occupation for which the Participant is
qualified or may reasonably become qualified by reason of education, training,
or experience, whether or not a job involving such occupation is available
within the Corporation.
(j) "Employee" means any individual who is a salaried
employee on the payroll of the Corporation or any Subsidiary.
(k) "Exchange Act" means the Securities Exchange Act of 1934,
as amended from time to time, or any successor statute.
(l) "Fair Market Value" means, as of any date, the value of a
Share determined as follows:
(i) If the Common Stock is listed on any
established stock exchange or a national market system, including without
limitation the National Market System of the National Association of Securities
Dealers, Inc. Automated Quotation ("NASDAQ") System, its Fair Market Value shall
be the closing sales price for such Common Stock (or the closing bid, if no
sales were reported) as quoted on such system or exchange for the last market
trading day prior to the time of determination as reported in The Wall Street
Journal or such other source as the Committee deems reliable;
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(ii) If the Common Stock is quoted on the NASDAQ
System (but not on the National Market System thereof) or regularly quoted by a
recognized securities dealer but selling prices are not reported, its Fair
Market Value shall be the mean between the high and low asked prices for the
Common Stock; or
(iii) In the absence of an established market of
the Common Stock, the Fair Market Value thereof shall be determined in good
faith by the Committee.
(m) "Forfeiture Event" has the same meaning as Cause as
defined above.
(n) "Incentive Stock Option" means any Stock Option granted
pursuant to the Plan that is intended to be and is specifically designated as an
"Incentive Stock Option" within the meaning of Section 422 of the Code.
(o) "Nonstatutory Stock Option" means any Stock Option granted
pursuant to the provisions of the Plan that is not an Incentive Stock Option.
(p) "Optionee" means an Employee, Director or other person who
has received the grant of a Stock Option.
(q) "Participant" means an Employee, Director or other
individual who is granted an Award under the Plan.
(r) "Retirement" means any termination of employment or
service on the Board (other than by death, Disability or Cause) by an employee
or a director who is at least 65 years of age or 55 years of age with at least
10 years of employment with or service on the Board of the Corporation or a
Subsidiary.
(s) "Rules" means regulations and rules adopted from time to
time by the Committee.
(t) "Share" means one share of Common Stock, adjusted in
accordance with Section 7 (if applicable).
(u) "Stock Appreciation Right" means a stock appreciation
right as provided in Section 6(h).
(v) "Stock Option" means an Incentive Stock Option or a
Nonstatutory Stock Option granted pursuant to Section 6 of the Plan.
(w) "Stock Option Agreement" means the agreement between the
Corporation and the Optionee that contains the terms and conditions pertaining
to a Stock Option.
(x) "Subsidiary" means any corporation or entity in which the
Corporation directly or indirectly controls 50% or more of the total voting
power of all classes of its stock having voting power and which the Board has
designated as a Subsidiary for purposes of the Plan.
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3. ADMINISTRATION.
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(a) Composition of the Committee. The Plan shall be
administered by a Committee appointed by the Board, consisting of not less than
a sufficient number of non-employee directors so as to qualify the committee to
administer the Plan and approve the grant of stock options as contemplated by
Rule 16b-3 promulgated by the Securities and Exchange Commission pursuant to the
Exchange Act, or any successor or replacement rule adopted by the Commission
("Rule 16b-3"). The Board may from time to time remove members from, or add
members to, the Committee. Vacancies on the Committee, however caused, shall be
filled by the Board. The Board shall appoint one of the members of the Committee
as Chairman. The term "non-employee director" shall be interpreted pursuant to
the provisions defining "non-employee director" under Rule 16b-3.
(b) Actions by the Committee. The Committee shall hold
meetings at such times and places as it may determine. Acts approved by a
majority of the members of the Committee present at a meeting at which a quorum
is present, or acts reduced to or approved in writing by a majority of the
members of the Committee, shall be the valid acts of the Committee.
(c) Powers of the Committee. The Committee shall have the
authority to administer the Plan in its sole discretion. To this end, the
Committee is authorized to construe and interpret the Plan, to promulgate, amend
and rescind Rules relating to the implementation of the Plan and to make all
other determinations necessary or advisable for the administration of the Plan,
including the selection of Participants who shall be granted Awards, the number
of Shares or Share equivalents to be subject to each Award, the Award price, if
any, the vesting or duration of Awards, the designation of Stock Options as
Incentive Stock Options or Nonstatutory Stock Options, and any and all other
terms and conditions of Awards. Subject to the requirements of applicable law,
the Committee may designate persons other than members of the Committee to carry
out its responsibilities and may prescribe such conditions and limitations as it
may deem appropriate, except that the Committee may not delegate its authority
with regard to the selection for participation in the Plan, or with respect to
decisions concerning the granting timing, pricing and amount of any Awards for
persons subject to Section 16 of the Exchange Act. Any determination, decision
or action of the Committee in connection with the construction, interpretation,
administration, or application of the Plan shall be final, conclusive and
binding upon all persons participating in the Plan and any person validly
claiming under or through persons participating in the Plan.
(d) Liability of Committee Members. No member of the Board or
the Committee will be liable for any action or determination made in good faith
by the Board or the Committee with respect to the Plan or any Award under it.
4. DURATION OF THE PLAN AND SHARES SUBJECT TO THE PLAN.
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(a) Duration of the Plan. The Plan was adopted by the Board on
November 5, 1996, to be effective upon that date subject to approval by the
shareholders of the Corporation within twelve months of that date. The Plan
shall remain in effect until terminated by the Board; provided, however, that no
Incentive Stock Options may be granted on or after November 4, 2006.
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(b) Shares Subject to the Plan. The maximum number of Shares
that may be issued pursuant to Stock Options granted under this Plan is 200,000
Shares. The limitations set forth in this Section 4(b) shall be subject to
adjustment as provided in Section 7. Notwithstanding the foregoing, the maximum
number of Shares for which Stock Options may be granted to a single participant
in a single calendar year shall be 50,000, subject to adjustments contemplated
by Section 7. If any Awards are forfeited or if any Awards terminate for any
other reason before being exercised, then the Shares subject to such Awards
shall again become available for Awards under the Plan. However, if Stock
Options are surrendered upon the exercise of related Stock Appreciation Rights,
then such Shares shall not be restored to the pool available for Awards.
(c) Source of Stock Issued Under the Plan. Common Stock issued
under the Plan may be either authorized and unissued Shares or issued Shares
that have been reacquired by the Corporation, as determined in the sole
discretion of the Committee. No fractional Shares of Common Stock shall be
issued under the Plan.
5. PERSONS ELIGIBLE FOR AWARDS. Persons eligible for Awards under the
Plan shall consist of each director of the Corporation and each managerial and
other Employee of the Corporation and its Subsidiaries who hold positions of
significant responsibility or whose performance or potential contribution, in
the judgment of the Committee, would benefit the future success of the
Corporation. The Committee may also, in its discretion, select other individuals
who have made or are expected to make significant contributions to the
Corporation to receive Nonstatutory Stock Options and Stock Appreciation Rights.
A Participant may receive more than one Award, including Awards of the same type
subject to the restrictions of the Plan. Only Employees shall be eligible to
receive Incentive Stock Options.
6. STOCK OPTIONS. Stock Options granted under the Plan may be in the
form of Incentive Stock Options or Nonstatutory Stock Options and shall be
subject to the following terms and conditions and shall contain such additional
terms and conditions, not inconsistent with the express provisions of the Plan,
as the Committee in its sole discretion shall deem desirable:
(a) Awards of Stock Options. Subject to the terms of the Plan,
the Committee shall have complete authority in its sole discretion to determine
the persons to whom and the time or times at which grants of Stock Options will
be made. The terms of each Stock Option shall be set forth in a Stock Option
Agreement, which shall contain such provisions not inconsistent with the terms
of the Plan, including, without limitation, restrictions upon the exercise of
the Stock Option or restrictions on the transferability of Shares issued upon
the exercise of a Stock Option, as the Committee shall deem advisable in its
sole discretion. Stock Options may be granted alone or in tandem with other
Awards under the Plan.
(b) Number of Shares. Each Stock Option Agreement shall state
the number of Shares to which it pertains and shall provide for the adjustment
thereof in accordance with the provisions of Section 7. No fractional Shares
will be issued pursuant to the exercise of a Stock Option.
(c) Exercise Price. Each Stock Option Agreement shall state
the price per Share, determined by the Committee in its sole discretion, at
which the Stock Option may be exercised; provided, however, that in the case of
an Incentive Stock Option the exercise price shall not be less than the Fair
Market Value of a Share on the date of grant.
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(d) Method of Payment. A Stock Option may be exercised, in
whole or in part, by giving written notice of exercise to the Corporation
specifying the number of Shares to be purchased. Such notice shall be
accompanied by payment in full of the purchase price in cash or, if acceptable
to the Committee in its sole discretion, and in accordance with its Rules, (i)
in Shares already owned by the Participant or (ii) by the withholding and
surrender of the Shares subject to the Stock Option. The Committee in its sole
discretion, and in accordance with its Rules, may also permit payment to be made
by delivery (on a form prescribed by the Committee) of an irrevocable direction
to a securities broker approved by the Committee to sell Shares and to deliver
all or part of the sales proceeds to the Corporation in payment of all or part
of the purchase price and any withholding taxes. The Committee in its sole
discretion, and in accordance with its Rules, may also permit payment to be made
by the delivery (on a form prescribed by the Committee) of an irrevocable
direction to pledge Shares to a securities broker or lender approved by the
Committee as security for a loan and to deliver all or part of the loan proceeds
to the Corporation in payment of all or part of the purchase price and any
withholding taxes. Payment may also be made in any other form approved by the
Committee, consistent with applicable law, regulations and rules.
(e) Term and Exercise of Stock Options; Nontransferability of
Stock Options. Each Stock Option Agreement shall state the time or times when
Stock Options become exercisable and the time or times when any Stock
Appreciation Right granted with Stock Options may be exercised, which shall be
determined by the Committee in its sole discretion. No Incentive Stock Option
shall be exercisable after the expiration of ten (10) years from the date it is
granted. During the lifetime of the Optionee, the Stock Option shall be
exercisable only by the Optionee and shall not be assignable or transferable
except as otherwise provided by the Committee in a Stock Option Agreement, or
amendment thereto, governing a Nonstatutory Stock Option as provided below. The
Committee, in its sole discretion, may provide in a Stock Option Agreement, or
an amendment thereto, that a Nonstatutory Stock Option may be transferred to a
spouse, sibling, child or grandchild of the Optionee, to a trust for the benefit
of such persons, or to a limited partnership, limited liability company or
corporation controlled by the Optionee; provided, however, that the Stock Option
shall remain subject to termination and forfeiture upon the termination of the
Optionee's employment with the Corporation or upon the occurrence of a
Forfeiture Event involving the Optionee or any other event that may cause a
termination or forfeiture under the terms of the Plan or the Stock Option
Agreement, notwithstanding the transfer of such Stock Option by the Optionee.
(f) Termination of Employment. Except as otherwise expressly
provided by the Committee in a Stock Option Agreement, or an amendment thereto,
and subject to the provisions of Subsection 6(g):
(i) If an Optionee's service on the Board or
employment with the Corporation or a Subsidiary terminates for any reason other
than death, Disability, Retirement or Cause, (A) all unvested Stock Options
shall immediately terminate in full, and (B) the Optionee may for a period of
ninety (90) days after such termination, or until the expiration of the stated
term of such Stock Option, whichever period is shorter, exercise his or her
Stock Options, or portion thereof, that were vested and exercisable as of the
date the Optionee's service on the Board or employment with the Corporation or a
Subsidiary terminated, after which time the unexercised portion of any Stock
Options shall automatically terminate in full; provided, however, that if an
Optionee should die within such ninety (90) day period, any Stock Options may be
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exercised for a period of one year from the date of the termination of the
Optionee's service on the Board or employment with the Corporation or a
Subsidiary, or the stated term of such Stock Option, whichever period is
shorter, to the extent, and only to the extent, that such Stock Option or
portion thereof were vested and exercisable as of the date of the death of the
Optionee, after which time the unexercised portion of any Stock Options shall
automatically terminate in full.
(ii) If a Participant's service on the Board or
employment by the Corporation or a Subsidiary terminates by reason of death,
Disability or Retirement, (A) all unvested Stock Options shall immediately
terminate in full, and (B) any Stock Options held by such Participant that were
vested and exercisable as of the date of such death, Disability or Retirement
may be exercised by the Participant, or by the Participant's beneficiary or
legal representative, for a period of one year from the date of such death,
Disability or Retirement or until the expiration of the stated term of such
Stock Option, whichever period is shorter, after which time the unexercised
portion of any Stock Options shall automatically terminate in full.
(iii) If an Optionee's service as a Director or
employment with the Corporation or a Subsidiary terminates for Cause, the
unexercised portion of any Options granted to the Optionee hereunder shall
immediately terminate in full and no rights or Options thereunder may be
exercised.
(g) Forfeiture. Unless otherwise determined by the Committee,
in it sole discretion, the following forfeiture provisions shall apply to each
Stock Option:
(i) If at anytime within the term of a Stock
Option a Forfeiture Event shall occur, then all outstanding Stock Options shall
be terminated in full. If at anytime within 12 months after the exercise of any
portion of a Stock Option a Forfeiture Event shall occur, the Participant shall
pay to the Corporation an amount equal to the "Option Gain" with respect to such
portion of the Stock Option. If at any time within 12 months after a Participant
terminates his/her employment or service on the Board a Forfeiture Event shall
occur, the Participant shall pay to the Corporation an amount equal to the
"Option Gain" on any Stock Options exercised after the termination of the
Participant's employment or service as a director or during the 12 month period
preceding such termination of employment or service as a director. For purposes
of the Plan, "Option Gain" shall mean the Fair Market Value of a Share on the
date of exercise over the exercise price, multiplied by the number of Shares
purchased upon exercise of the Stock Option, or portion thereof.
(ii) Except as otherwise provided by the
Committee, the forfeiture provisions shall terminate upon a Change of Control
and upon a dissolution or liquidation of the Corporation or a merger,
consolidation or other reorganization in which the Corporation is not the
surviving entity.
(iii) The Committee, in its sole discretion, may
waive or modify the forfeiture provisions for a Participant and may also release
a Participant from liability under any forfeiture provisions.
(h) Rights as a Shareholder. An Optionee or a transferee of an
Optionee shall have no rights as a shareholder with respect to any Shares
covered by his or her Stock Option until the date of the issuance of a stock
certificate for such Shares. No adjustment shall be made for
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dividends (ordinary or extraordinary, whether in cash, securities or other
property) or distributions or other rights for which the record date is prior to
the date such stock certificate is issued, except as provided in Section 7.
(i) Stock Appreciation Rights. In connection with the grant of
any Stock Option pursuant to the Plan, the Committee, in its sole discretion,
may also grant a Stock Appreciation Right pursuant to which the Optionee shall
have the right to surrender all or part of the unexercised portion of such Stock
Option, exercise the Stock Appreciation Right, and thereby obtain payment of an
amount equal to (or less than, if the Committee shall so determine in its sole
discretion at the time of grant) the difference obtained by subtracting the
aggregate exercise price of the Shares subject to the Stock Option (or the
portion thereof) so surrendered from the Fair Market Value of such Shares on the
date of such surrender. The exercise of such Stock Appreciation Right shall be
subject to such limitations (including, but not limited to, limitations as to
time and amount) as the Committee shall deem appropriate. The payment of a Stock
Appreciation Right may be made in Shares (determined with reference to its Fair
Market Value on the date of exercise), or in cash, or partly in cash and in
Shares, as determined in the sole discretion of the Committee. In the event of
the exercise of a Stock Appreciation Right, the underlying Stock Option will be
deemed to have been exercised for all purposes under the Plan, including Section
4.
7. RECAPITALIZATION. Subject to any required action by the shareholders
of the Corporation, the number of Shares covered by the Plan as provided in
Section 4, the number of Shares covered by or referred to in each outstanding
Award and the exercise price of each outstanding Stock Option shall be
proportionately adjusted for: (a) any increase or decrease in the number of
issued Shares resulting from a subdivision or consolidation of Shares, (b) the
payment of a stock dividend (but only of Common Stock) or any other increase or
decrease in the number of such Shares effected without receipt of consideration
by the Corporation, or (c) the declaration of a dividend payable in cash that
has a material effect on the price of issued Shares.
Subject to any required action by the shareholders, if the Corporation
shall be the surviving corporation in any merger, consolidation or other
reorganization, each outstanding Award shall pertain and apply to the securities
to which a holder of the number of Shares subject to the Award would have been
entitled. In the event of a dissolution or liquidation of the Corporation or a
merger, consolidation or other reorganization in which the corporation is not
the surviving entity, each outstanding Award shall become fully vested and
exercisable and shall be handled in accordance with the terms of the agreement
of liquidation, dissolution, merger, consolidation or reorganization which may
provide, without limitation, for the cashout or assumption of such Awards.
In the event of a change in the Common Stock, which is limited to a
change of all of the Corporation's authorized shares into the same number of
shares with a different par value, the shares resulting from any such change
shall be deemed to be the Common Stock within the meaning of the Plan.
The Committee may make appropriate adjustments in the number of Shares
covered by the Plan and the price or other value of any outstanding Awards in
the event of a spin-off or other distribution (other than normal cash dividends)
of Corporation assets to shareholders.
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To the extent that the foregoing adjustments relate to stock or
securities of the Corporation, such adjustments shall be made by the Committee
in its sole discretion, and its determination in that respect shall be final,
binding and conclusive, provided that each Incentive Stock Option granted
pursuant to the Plan shall not be adjusted in a manner that causes the Stock
Option to fail to continue to qualify as an incentive stock option within the
meaning of Section 422 of the Code.
Except as expressly provided in this Section 7, a Participant shall
have no rights by reason of any subdivision or consolidation of shares of stock
of any class or the payment of any stock dividend or any other increase or
decrease in the number of shares of stock of any class or by reason of any
dissolution, liquidation, merger or consolidation or spin-off of assets or stock
of another corporation, and any issuance by the Corporation of shares of stock
of any class or securities convertible into shares of stock of any class, shall
not affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of Shares subject to the Stock Option.
The grant of an Award pursuant to the Plan shall not affect in any way
the right or power of the Corporation to make adjustments, reclassifications,
reorganizations or changes of its capital or business structure or to merger or
consolidate or to dissolve, liquidate, sell or transfer all or any part of its
business or assets.
In the event that another corporation or business entity is acquired by
the Corporation and the Corporation agrees to assume outstanding stock options
under the terms of this Plan, the aggregate number of Shares available for
Awards under Section 4 shall be increased accordingly.
8. CHANGE IN CONTROL. In the event of a Change in Control of the
Corporation, any Stock Options outstanding on the date of such Change in Control
that are not yet vested or exercisable on such date shall become fully vested
and exercisable. The Committee in its sole discretion may adopt Rules setting
forth additional provisions to take effect upon a Change in Control, provided
such provisions are not inconsistent with this Section 8(a).
9. SECURITIES LAW REQUIREMENTS. No Shares shall be issued and no Stock
Options shall become exercisable pursuant to the Plan unless and until the
Corporation has determined that: (i) it and the Participant have taken all
actions required to register the Shares under the Securities Act of 1933 or
perfect an exemption from the registration requirements thereof; (ii) any
applicable listing requirement of any stock exchange or quotation system on
which the Common Stock is listed or quoted has been satisfied; and (iii) any
other applicable provision of state or federal law has been satisfied.
10. AMENDMENTS OF THE PLAN AND AWARDS.
----------------------------------
(a) Plan Amendments. The Board may, insofar as permitted by
law, from time to time, suspend or discontinue the Plan with respect to any
Shares at the time not subject to Awards, or revise or amend the Plan in any
respect whatsoever.
(b) Amendments of Awards. Subject to the terms and conditions
and within the limitations of the Plan, the Committee may amend, cancel, modify,
extend or renew outstanding Awards granted under the Plan, or accept the
9
<PAGE>
exchange of outstanding Awards (to the extent not theretofore exercised) for the
granting of new Awards (at the same or a different price, if applicable) in
substitution therefor.
(c) Rights of Participant. No amendment, suspension or
termination of the Plan nor any amendment, cancellation or modification of any
Award outstanding under it that would adversely affect the right of any
Participant in an Award previously granted under the Plan will be effective
without the written consent of the affected Participant.
11. GENERAL PROVISIONS.
-------------------
(a) Application of Funds. The proceeds received by the
Corporation from the sale of Common Stock pursuant to the exercise of a Stock
Option will be used for general corporate purposes.
(b) Employment Rights. Neither the Plan nor any Award granted
under the Plan shall be deemed to give any individual a right to remain employed
by the Corporation or a Subsidiary. The Corporation and its Subsidiaries reserve
the right to terminate the employment of any Employee at any time and for any
reason, which right is hereby reserved.
(c) Shareholders' Rights. A Participant shall have no dividend
rights, voting rights or other rights as a shareholder with respect to any
Shares covered by his or her Award prior to the issuance of a stock certificate
for such Shares. No adjustment shall be made for cash dividends or other rights
for which the record date is prior to the date when such certificate is issued.
(d) No Obligation to Exercise Stock Option. The granting of a
Stock Option shall impose no obligation upon the Optionee to exercise such Stock
Option.
(e) Withholding Taxes.
(i) General. To the extent required by
applicable federal, state, local or foreign law, the recipient of any payment or
distribution under the Plan shall make arrangements satisfactory to the
Corporation for the satisfaction of any withholding tax obligations that arise
by reason of such payment or distribution. The Corporation shall not be required
to make such payment or distribution until such obligations are satisfied.
(ii) Stock Withholding. The Committee in its sole
discretion may permit a Participant to satisfy all or part of his or her
withholding tax obligations incident to the exercise of a Nonstatutory Stock
Option by having the Corporation withhold a portion of the Shares that otherwise
would be issued to him or her. Such Shares shall be valued at their Fair Market
Value on the date when taxes otherwise would be withheld in cash. The payment of
withholding taxes by surrendering Shares to the Corporation, if permitted by the
Committee, shall be subject to such restrictions as the Committee may impose,
including any restrictions required by rules of the Securities and Exchange
Commission.
(f) Other Corporation Benefit and Compensation Programs.
Payment and other benefits received by a Participant under the Plan shall not be
deemed a part of a Participant's regular, recurring compensation for purposes of
10
<PAGE>
the termination, indemnity or severance pay law of any country, state or
political subdivision thereof and shall not be included in, nor have any effect
on, the determination of benefits under any other employee benefit plan or
similar arrangement provided by the Corporation or a Subsidiary unless expressly
so provided by such other plan or arrangement, or except where the Committee
expressly determines that inclusion of an Award or portion of an Award is
necessary to accurately reflect competitive compensation practices or to
recognize that an Award has been made in lieu of a portion of competitive annual
cash compensation. Awards under the Plan may be made in combination with or in
tandem with, or as alternatives to, grants, awards or payments under any
Corporation or Subsidiary plans. The Plan notwithstanding, the Corporation or
any Subsidiary may adopt such other compensation programs and additional
compensation arrangements as it deems necessary to attract, retain and reward
employees for their service with the Corporation and its Subsidiaries.
(g) Costs of the Plan. The costs and expenses of administering
the Plan shall be borne by the Corporation.
(h) Participant's Beneficiary. The Rules may provide that in
the case of an Award that is not forfeitable by its terms upon the death of the
Participant, the Participant may designate a beneficiary with respect to such
Award in the event of death of a Participant. If such beneficiary is the
executor or administrator of the estate of the Participant, any rights with
respect to such Award may be transferred to the person or persons or entity
(including a trust) entitled thereto by bequest of or inheritance from the
holder of such Award.
(i) Awards in Foreign Countries. The Committee shall have the
authority to adopt such modifications, procedures and subplans as may be
necessary or desirable to comply with provisions of the laws of foreign
countries in which the Corporation or its Subsidiaries may operate to assure the
viability of the benefits of Awards made to Participants employed in such
countries and to meet the intent of the Plan.
(j) Severability. The provisions of the Plan shall be deemed
severable and the validity or unenforceability of any provision shall not affect
the validity or enforceability of the other provisions hereof.
(k) Binding Effect of Plan. The Plan shall be binding upon and
shall inure to the benefit of the Corporation, its successors and assigns and
the Corporation shall require any successor or assign to expressly assume and
agree to perform the Plan in the same manner and to the same extent that the
Corporation would be required to perform it if no such succession or assignment
had taken place. The term "the Corporation" as used herein shall include
successors and assigns. The term "successors and assigns" as used herein shall
mean a corporation or other entity acquiring all or substantially all the assets
and business of the Corporation (including the Plan) whether by operation of law
or otherwise.
(l) No Waiver of Breach. No waiver by either party hereto at
any time of any breach by the other party hereto of, or compliance with, any
condition or provision of the Plan to be performed by such other party shall be
deemed a waiver of similar or dissimilar provisions or conditions at the same or
at any prior or subsequent time.
11
<PAGE>
12. APPROVAL OF SHAREHOLDERS. Adoption of the Plan shall be subject to
approval by affirmative vote of the shareholders of the Corporation in
accordance with applicable law.
13. ADOPTION. To Plan as set forth herein was adopted by the Board as
of November 5, 1996 subject to approval by the shareholders within twelve months
of such date.
EXECUTED this 5th day of November, 1996.
NACO INDUSTRIES, INC.
By: /s/ JEFFREY J. KIRBY
--------------------
Its: Vice President
---------------
12
The Company's only subsidiary is NACO Composites, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-END> NOV-30-1997
<CASH> 75378
<SECURITIES> 0
<RECEIVABLES> 741312
<ALLOWANCES> 69750
<INVENTORY> 772752
<CURRENT-ASSETS> 1638057
<PP&E> 3181463
<DEPRECIATION> 1456133
<TOTAL-ASSETS> 3470163
<CURRENT-LIABILITIES> 1595295
<BONDS> 0
0
496236
<COMMON> 21939
<OTHER-SE> 725089
<TOTAL-LIABILITY-AND-EQUITY> 3470163
<SALES> 7579631
<TOTAL-REVENUES> 7579631
<CGS> 4850507
<TOTAL-COSTS> 4850507
<OTHER-EXPENSES> 2787826
<LOSS-PROVISION> 69750
<INTEREST-EXPENSE> 208287
<INCOME-PRETAX> (267805)
<INCOME-TAX> 16200
<INCOME-CONTINUING> (284005)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (284005)
<EPS-PRIMARY> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
NACO INDUSTRIES, INC.
-----------------------------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held August 27, 1997
-----------------------------------------------
TO THE SHAREHOLDERS:
NACO Industries, Inc. (the "Company") will hold its Annual Meeting of
Shareholders (the "Annual Meeting") at the Bullen Center, located at 43 South
Main Street, Logan, Utah, on August 27, 1997, at 7:00 p.m. local time, for the
following purposes, as more fully described in the accompanying Information
Statement:
(1) To elect 5 members of the Board of Directors, each to
serve until the next annual meeting of shareholders
and until their respective successors have been duly
elected and qualified.
(2) To consider, approve, and adopt the Company's Stock
Incentive Plan.
(3) To transact such other business as may properly come
before the meeting or at any adjournment or
postponement thereof.
The Board of Directors has fixed the close of business on July 28,
1997, as the record date for the determination of shareholders entitled to
receive notice of and to vote at the Special Meeting. Accordingly, only
shareholders of record of the Company at the close of business on that date will
be entitled to vote at the meeting, or any adjournment or postponement thereof.
All shareholders are urged to attend the meeting.
BY ORDER OF THE BOARD OF DIRECTORS
----------------------------------
Secretary
Date: August 4, 1997
<PAGE>
NACO INDUSTRIES, INC.
395 West 1400 North
Logan, Utah 84321
-----------------------------------------------
INFORMATION STATEMENT
-----------------------------------------------
NACO Industries, Inc., a Utah corporation (the "Company"), is
furnishing this Information Statement to shareholders of the Company in
connection with the Annual Meeting of Shareholders (the "Annual Meeting") to be
held on August 27, 1997. At the Annual Meeting, shareholders will consider and
vote upon the following matters: (i) to elect 5 members of the Board of
Directors each to serve until the next annual meeting of shareholders and until
their respective successors have been duly elected and qualified; (ii) to
consider, approve, and adopt the Company's Stock Incentive Plan; and (iii) to
transact such other business as may properly come before the meeting or at any
adjournment or postponement thereof. The Company is first providing this
Information Statement and the attached Notice of Special Meeting of Shareholders
to the Company's shareholders on or about August 4, 1997. We are not asking you
for a proxy and you are requested not to send us a proxy.
VOTING
As of the close of business on August 4, 1997 (the "Record Date"),
there were 1,843,750 shares of Common Stock (the "Common Stock") outstanding and
165,412 shares of Series 1 Class A 7% Cumulative Convertible Preferred Stock
(the "Class A Preferred Stock") outstanding. The holders of the Common Stock and
the Class A Preferred Stock will vote as a single voting group at the Annual
Meeting. The holders of record of the shares of Common Stock and Class A
Preferred Stock on the Record Date entitled to be voted at the Annual Meeting
are entitled to cast one vote per share on each matter submitted to a vote at
the Annual Meeting.
A majority of the outstanding shares of Common Stock and Class A
Preferred Stock entitled to vote, represented in person or by proxy, shall
constitute a quorum at the Annual Meeting. Abstentions and broker non-votes,
which are indications by a broker that it does not have discretionary authority
to vote on a particular matter, will be counted as "represented" for the purpose
of determining the presence or the absence of a quorum. Under Utah corporate
law, once a quorum is established, shareholder approval with respect to a
particular proposal is generally obtained when the votes cast in favor of the
proposal exceed the votes cast against such proposal.
In the election of directors, shareholders will not be allowed to
cumulate their votes. The 5 nominees receiving the highest number of votes will
be elected. The approval and adoption of the Stock Incentive Plan and any other
matter presented for approval by the shareholders will be approved, in
accordance with Utah law, if the votes cast in favor of a matter exceed the
votes cast opposing such matter. Accordingly, abstentions and broker non-votes
will not affect the outcome of the election of directors, the approval of the
Stock Incentive Plan or any other matter presented for approval by the
shareholders.
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of August 4, 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, by all nominees for director, and by all
directors and officers as a group. Unless otherwise indicated, all persons have
sole voting and investment powers over such shares, subject to community
property laws.
<TABLE>
<CAPTION>
Name and Address Percent
of Number of Shares of
Beneficial Owner Class of Owned Class
Stock
------------------------------------------------------------------- ------------ ---------------- -------
<S> <C> <C> <C>
Verne Bray* Common(1) 1,466,667 76.9%
1367 E. 1980 North Preferred -- --
Logan, UT 84321
Jeffrey J. Kirby* Common(2) 26,817 1.4
285 East 400 North Preferred 60 **
Millville, UT 84321
Peter Heilmayr* Common(3) 24,275 1.3
6925 Tumbling Trail Preferred 1,700 1.0
Forth Worth, TX 76116
Britannia Holding Ltd. Common 343,750 18.0
Kings House Preferred --
The Grange, St. Peter Port
Guerney Channel Islands GY12QJ
Gary Carson Common(4) 28,000 1.5
4367 Bobwhite Ct. Preferred 11,200 6.8
Ogden, UT 84403-3262
Dan Bray Common(4) 31,250 1.6
1755 Shadow Ridge Circle Preferred 12,500 7.6
Ogden, UT 84403
Gary Gibbons Common(4) 25,000 1.3
1606 North 1340 East Preferred 10,000 6.0
North Logan, UT 84341
Jack Prust Common(4) 21,250 1.1
P.O. Box 5135 Preferred 8,500 5.1
San Ramone, CA 94583
James C. Czirr (Nominee for Director) Common(5) 30,000 1.6
6070 Baldy Mountain Road Preferred --
Sandpoint, ID 83864
All Directors and Officers as a group (5 persons) Common(6) 1,557,759 79.5
Preferred 1,760 1.1
</TABLE>
- ---------------------
* Indicates current director and/or officer
** Less than 1 percent
<PAGE>
(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 June 10, 1997, is $12,739. 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 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.
(4) Consists of shares issuable upon conversion of the Preferred Stock and upon
exercise of the related Warrants.
(5) Includes 30,000 shares issuable upon exercise of presently exercisable
options.
(6) Includes 60,000 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.
ELECTION OF DIRECTORS
At the Annual Meeting, a board of 5 directors will be elected to serve
until the next annual meeting of shareholders and until their successors are
duly elected and qualified. The following sets forth information about each
nominee for election as a director:
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.
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.
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.
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.
<PAGE>
Kenneth Nordlund was recently nominated as a director of the Company.
His nomination will be voted upon at the next meeting of shareholders. Since
1994, Mr. Nordlund has been the President and a member of the Board of Directors
of Kroy Industries. Kroy Industries is a manufacture of PVC pipe and PVC
fencing. Between 1988 and 1994, Mr. Nordlund was General Manager and Vice
President of Kroy Industries/Alcan Pipe which was a division of Alcan Aluminum
Corporation.
Information concerning compensation of executive officers is contained
in the Company's Annual Report on Form 10-KSB, a copy of which accompanies this
Information Statement.
APPROVAL OF STOCK INCENTIVE PLAN
Introduction
The Company's Stock Incentive Plan (the "Plan") was adopted by the
Board of Directors on November 5, 1996, and became effective on such date
subject to receipt of shareholder approval. The Plan will remain in effect until
terminated by the Board of Directors. The Plan provides that options to purchase
shares of Common Stock and stock appreciation rights may be granted to key
employees and directors of the Company. The purpose of the Plan is to promote
the long-term success of the Company and the creation of incremental shareholder
value by encouraging the attraction and retention of key employees with
exceptional qualifications, and linking the interests of key employees of the
Company directly to shareholder interests through increased stock ownership. The
following summary of certain provisions of the Plan does not purport to be
complete and is subject to, and is qualified in its entirety by reference to,
the terms of the Plan, a copy of which will be provided to any shareholder upon
written request.
Summary of Plan
Administration of Plan. The Plan is administered by a committee of
members of the Board (the "Committee"). The Committee is authorized to construe
and interpret the Plan, to promulgate, amend, and rescind rules relating to the
implementation of the Plan, and to make all other determinations necessary or
advisable for the administration of the Plan, including the selection of
participants and the amount and terms of awards granted under the Plan.
Limitation on Number of Shares. The Plan imposes a maximum limitation
of 200,000 shares that may be issued pursuant to options granted under the Plan.
The maximum number of shares for which options may be granted to a single
participant in a single calendar year is 50,000. If any options are forfeited or
terminated for any reason before being exercised, the shares subject to such
options shall again become available for awards under the Plan. If any options
are surrendered because corresponding stock appreciation rights are exercised,
however, the shares subject to such options shall not become available again for
awards under the Plan. The maximum number of shares issuable under the Plan is
subject to adjustment upon certain capital transactions such as stock dividends,
stock splits and similar transactions as more fully described in the Plan.
Eligibility. Directors and managerial and other employees of the
Company who hold positions of significant responsibility or whose performance or
potential contribution, in the judgment of the Committee, would benefit the
future success of the Company are eligible to receive options and stock
appreciation rights under the Plan. Only employees of the Company are eligible
to receive Incentive Options (as defined below). In addition the Committee may
also, select other individuals who have made or are expected to make significant
<PAGE>
contributions to the Corporation to receive options or stock appreciation
rights.
Options. The Plan provides for the issuance of incentive stock options
("Incentive Options"), as that term is defined in Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), and nonstatutory stock options
which are not governed by the provisions of Section 422 of the Code
("Nonstatutory Options"). The Committee will have complete authority, subject to
the terms of the Plan, to determine the persons to whom and the time or times at
which grants of options will be made. The terms of each option including,
without limitation, the exercise price of options, restrictions upon the
exercise of options and restrictions on the transferability of shares issued
upon the exercise of options, shall be determined by the Committee and set forth
in a Stock Option Agreement.
The Committee, shall determine the time or times when each option vests
and becomes exercisable. Except as otherwise provided by the Committee, during
the lifetime of the person receiving an option (the "Optionee"), the option
shall be exercisable only by the Optionee and shall not be assignable or
transferable except as otherwise provided by the Committee. Unless the Committee
provides otherwise in a Stock Option Agreement, or an amendment thereto, if an
employee's employment terminates for any reason other than death, disability,
retirement or cause, the employee may exercise any vested options for a period
of ninety days following such termination of employment, after which time the
options shall terminate in full. In the event the employment is terminated by
reason of death, disability or retirement, the Optionee, or his representative
or beneficiary, may exercise any vested options for a period of one year from
the date of death, disability or retirement. Unless otherwise determined by the
Committee, if a "Forfeiture Event" occurs all outstanding options shall
terminate in full and an Optionee may be required to reimburse the Company for
any gain on options exercised after the termination of employment or during the
12 month period preceding such termination. For purposes of the Plan, a
Forfeiture Event, means the engagement of the Optionee in any activity in
competition with the Company or inimical, contrary or harmful to the interests
of the Company.
Stock Appreciation Rights. In connection with the grant of any Option,
the Committee may also grant a stock appreciation right (a "SAR"), which shall
relate to a specific option granted to the Optionee. Such SAR shall entitle the
Optionee to surrender to the Company, unexercised, all or any part of that
portion of the option which is then exercisable, and to receive instead from the
Company the difference between the aggregate exercise price of the shares of
Common Stock subject to the option, and the fair market value, as determined
under the Plan, of such shares on the date of such exercise. Payment by the
Company of any amount owing pursuant to the exercise of an SAR may be made in
shares of Common Stock, cash, or any combination of cash and shares, as
determined by the Committee.
Change in Control. In the event of a change in control of the Company
as defined in the Plan, any Options outstanding on the date of such Change in
Control that are not yet vested or exercisable on such date shall be fully
vested and exercisable. The Committee, in its sole discretion, may adopt rules
setting forth additional provisions to take effect upon a Change in Control.
Amendment. The Board may, insofar as permitted by law, suspend or
discontinue the Plan or revise or amend it in any respect whatsoever. Subject to
the terms and conditions of the Plan, the Committee may, in its discretion,
amend, cancel, modify, extend or renew any outstanding options or SARs. In no
event, however, shall any amendment, suspension or termination of the Plan or
any option or SAR granted thereunder that would adversely affect the rights of
any Optionee be effective without the written consent of the affected Optionee.
<PAGE>
Interest of Certain Persons in Proposal
In considering the recommendation of the Board of Directors with
respect to the proposed adoption of the amendment to the Plan, shareholders
should be aware that members of the Board of Directors have certain interests
which may present them with conflicts of interest in connection with such
proposal. As discussed above, all directors are eligible to receive options and
SARs under the Plan. The Board of Directors recognizes that adoption of the Plan
will benefit individual directors of the Company and their successors, but it
believes that adoption of the Plan will strengthen the Company's ability to
continue to attract, motivate and retain qualified officers and directors.
Furthermore, the Board of Directors believes that adoption of the Plan will
advance the interests of the Company and its shareholders by encouraging key
employees to make significant contributions to the long-term success of the
Company. The Board of Directors believes that adoption of the Plan is in the
best interests of the Company and its shareholders and, therefore, unanimously
recommends a vote FOR the proposal to adopt the Plan. In considering the
foregoing recommendation of the Board of Directors, shareholders should be aware
that the current members of the Board of Directors own, in the aggregate,
approximately 79% of the outstanding shares of Common Stock and Class A
Preferred Stock.
OTHER PROPOSED ACTION
The Company is unaware of any other proposed action to be presented at
the Annual Meeting of Shareholders.
In conjunction with this Information Statement, the Company is
providing to its shareholders a copy of its Annual Report on Form 10-KSB for the
fiscal year ended November 30, 1996, including financial statements and
schedules thereto.
