SEC File No. 33-85044-d
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 28,1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File number 33-85044-d
NACO Industries, Inc.
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(Exact Name of Registrant as specified in its charter)
Utah 48-0836971
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(State of Incorporation) (Federal IRS No.)
395 West 1400 North, Logan, Utah 84341
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number 435-753-8020
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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
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As of February 28, 1998, the Registrant had 1,849,083 shares of Common
Stock and 163,745 shares of Preferred Stock outstanding.
Transitional Small Business Disclosure Format Yes No X
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<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
See attached Consolidated Financial Statements for February 28, 1998
1
<PAGE>
NACO Industries, Inc.
CONSOLIDATED FINANCIAL STATEMENTS
February 28, 1997
2
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
<TABLE>
NACO INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<CAPTION>
February 28 November 30
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ASSETS 1998 1997
- ------
------------------ -------------------
<S> <C> <C>
Current assets:
Cash $ 91,573 75,378
Accounts receivable, net of allowances
of $70,250 / $69,750 868,045 671,562
Inventory 920,063 772,752
Income taxes receivable 5,100 5,100
Other current assets 71,735 97,561
------------------ -------------------
Total current assets 1,956,516 1,622,353
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Property and equipment:
Land 40,700 40,700
Buildings and improvements 604,437 600,786
Equipment and vehicles 2,594,766 2,449,997
Equipment construction in progress 32,385 89,980
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Total property and equipment 3,272,288 3,181,463
Accumulated depreciation (1,537,882) (1,456,133)
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Net property and equipment 1,734,406 1,725,330
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Other assets:
Intangible and other assets 105,297 106,776
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Total other assets 105,297 106,776
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Total assets $ 3,796,219 3,454,459
================== ===================
</TABLE>
3
<PAGE>
<TABLE>
NACO INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<CAPTION>
February 28 November 30
------------------ -------------------
LIABILITIES: 1998 1997
- ------------ ------------------ -------------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 736,970 251,122
Accrued expenses 168,788 198,046
Line of credit 999,326 824,326
Current portion of long-term obligations 266,637 321,801
Due to (from) related party (17,815) (15,704)
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Total current liabilities 2,153,906 1,579,591
Long-term liabilities:
Long-term obligations, less current portion 690,866 664,001
Deferred income taxes 94,200 94,200
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Total long-term liabilities 785,066 758,201
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Total liabilities 2,938,972 2,337,792
Stockholders' equity:
Common stock, $.01 par value; 10,000,000
shares authorized; 2,193,796 and 2,193,796 shares issued
(including 344,713 and 244,713 shares shares in treasury) 21,939 21,939
Preferred Stock, 7% Cumulative, convertible $3.00 par value
Shares authorized; 330,000 shares issued 165,412 and
165,412, respectively (including 1,667 shares in treasury)
(Aggregate liquidation preference $1,051,243 and
$1,016,501, respectively) 496,236 496,236
Additional paid-in capital 1,003,800 1,003,800
Retained earnings (deficit) (538,131) (278,711)
------------------ -------------------
983,844 1,243,264
Less: treasury stock - at cost (126,597) (126,597)
------------------ -------------------
Total stockholders' equity 857,247 1,116,667
------------------ -------------------
Total liabilities and
stockholders' equity $ 3,796,219 3,454,459
================== ===================
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
<TABLE>
NACO INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<CAPTION>
Three months ended
February 28
--------------------------------
1998 1997
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<S> <C> <C>
Sales, net $ 1,511,156 1,531,195
Cost of goods sold 1,026,916 959,306
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Gross profit 484,240 571,889
Operating expenses:
Selling expenses 352,665 346,173
General and administrative expenses 340,395 342,202
Other 0 0
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Total operating expenses 693,060 688,375
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Income (loss) from operations (208,820) (116,486)
Other income (expense):
Interest income 871 436
Interest expense (51,471) (55,782)
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Total other income (expense) (50,600) (55,346)
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Income (loss) before income taxes (259,420) (171,832)
Income tax expense (benefit) 0 0
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Net income (loss) $ (259,420) (171,832)
============== ==============
Adjustment for preferred dividends in arrears (68,773) (10,701)
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Adjusted net to Common Stockholders $ (328,193) (182,533)
============== ==============
Earnings (loss) per common share:
Basic:
Earnings (loss) from net income $ (0.14) (0.11)
Dividends in arrears (0.04) (0.01)
-------------- --------------
Net Earnings (loss) $ ($0.18) ($0.12)
============== ==============
Diluted:
Earnings (loss) from net income $ (0.18) (0.12)
============== ==============
Weighted average number of common
shares outstanding:
Basic 1,849,083 1,500,000
============== ==============
Diluted 2,176,573 1,771,735
============== ==============
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE>
<TABLE>
NACO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Three months ended
February 28 February 28
------------------------------------------
1998 1997
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<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ (259,420) (171,832)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation 81,751 59,041
Amortization 1,479 1,479
Deferred income taxes 0 0
(Increase) decrease in:
Accounts receivable, net (196,483) (95,376)
Inventory (147,311) (212,758)
Taxes Receivable 0 200
Other 25,826 21,341
Increase (decrease) in:
Accounts payable 485,848 356,671
Accrued expenses (29,258) (22,686)
Income taxes payable 0 0
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Net cash provided by (used in)
operating activities (37,568) (63,920)
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Cash flows from investing activities
Net change property and equipment (90,827) (156,189)
Investment in intangible and other assets 0 (10,717)
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Net cash provided by (used in) investing activities (90,827) (166,906)
Cash flows from financing activities
Net change in line of credit 175,000 190,000
Payments on related party loan (2,111) (35,119)
Payments on long-term debt (76,538) (74,049)
Payment of Preferred Stock Dividends 0 0
Proceeds from long-term loans 48,239 18,468
Proceeds from issuance of common stock 0 0
Proceeds from issuance of preferred stock 0 48,000
Purchase of treasury stock 0 0
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Net cash provided by (used in) financing activities 144,590 147,300
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Increase (decrease) in cash 16,195 (83,526)
Cash, beginning of period 75,378 198,306
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Cash, end of period $ 91,573 114,780
=================== =================
See Notes to Consolidated Financial Statements
Supplemental disclosures:
Income Taxes Paid $ 0 0
Interest Paid $ 37,926 39,667
</TABLE>
6
<PAGE>
NACO INDUSTRIES, INC.
Notes to Consolidated Financial Statements (Unaudited)
February 28, 1998
NOTE A - BASIS OF PRESENTATION
Management has elected to omit substantially all footnotes to these
unaudited consolidated quarterly financial statements. In the opinion of
management, all adjustments (consisting only of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three month period ended February 28, 1998, are not necessarily
indicative of the results that may be expected for the fiscal year ending
November 30, 1998. These statements should be read in conjunction with the
consolidated financial statements and related notes in the Company's Annual
Report on Form 10-KSB for the year ended November 30, 1997.
NOTE B - INVENTORY
Inventory consists of the following:
February 28, Nov. 30,
1998 1997
---- ----
Raw Materials $309,240 $309,193
Work In Process 12,169 12,276
Finished goods 598,654 451,283
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Total $920,063 $772,752
NOTE C - DIVIDENDS
Dividends on the preferred stock are cumulative at 7%. At February 28,
1998, the cumulative amount of dividends accrued was $68,773. Of this amount
$68,773 was in arrears.
NOTE D - EARNINGS PER SHARE
Effective February 28, 1998 the Company adopted SFAS No. 128, "Earnings Per
Share:, which establishes new standards for computing and presenting earnings
per share. No restatement was required for prior year's earnings per share
figures to conform to the new standard. Basic earnings per common share are
calculated by dividing adjusted net income by the average shares of common stock
outstanding during the period. The calculation of diluted earnings per share of
common stock assumes the diluting effect of the Company's cumulative preferred
stock, options and warrants. During the period the market price did not exceed
the option price for the outstanding options and warrants and therefore no
dilution occurred. When conversion of potential common shares has an
anti-dilutive effect no conversion is assumed in the diluted earnings per share
calculation.
1
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Item 2 - Management's Discussion and Analysis of Financial Condition and Results
- ------ -----------------------------------------------------------------------
of Operations
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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). The Company, through its subsidiary, also
manufacturers and sells composite products.
Results of Operations
The following discussion relates to the three months ended February 28,
1998 and February 28, 1997. For comparison purposes percent of sales will be
used rather than dollars. In the following discussion, the three months ended
February 28, 1998 and February 28, 1997 are referred to as 1Q98 and 1Q97,
respectively.
Overview. The Company sustained an operating loss for the three-month
period ending February 28, 1998. The loss is a result of several factors. First
the Company's plastics and composite products operations generated an operating
loss of $193,352 and $66,068 respectively. Management believes such losses
resulted primarily from the seasonal nature of these businesses and poor weather
conditions. The unusually wet weather in the West Coast and Midwest regions was
a material factor in lower sales of the Company's agricultural fittings
products. Installation of an irrigation system is very difficult if not possible
in extremely wet weather. The Composites segment relies heavily on the
construction industry, which is adversely affected by cold winter weather. The
Company is continuing to diversify and expand into the industrial and commercial
markets. Although these markets tend to have lower sales during winter months,
they are less seasonal than the Company's current markets. Sales in these
markets increased from 2.2% of total revenues in 1Q97 to 10.1% in 1Q98. The
Company also continues to review its operations to try and reduce expenses
without affecting quality and service to its customers.
Sales. Net sales for 1Q98 decreased by 1.3% to $1,511,156 compared to
net sales of $1,531,195 for 2Q97. Net sales for the plastics segment increased
by 0.6% to $1,323,858 in 1Q98 compared to net sales of $1,316,555 for 1Q97. Net
sales for the composite segment decreased by 12.7% to $187,299 in 1Q98 compared
to net sales of $214,641 for 1Q97. These decreases resulted primarily from both
a decrease in volume primarily due to the unusually wet weather on the West
Coast and Midwest regions. Weather traditionally can move sales a month or two
earlier or later in the season depending whether the weather is harsh or mild.
If weather continues to be unseasonably wet, some irrigation projects may be put
off until fall, which could also affect the 2nd quarter sales in plastic
fittings. Sales decreased mostly in the agricultural line of fittings, but was
offset by an increase mainly in the sewer line of fittings so overall sales
remained very close to the previous year sales.
Gross Margin. Gross margin, as a percent of sales for 1Q98 was 32.0%
compared to 37.4% 1Q97. Gross margin for plastics and composites respectively as
a percent of sales for 1Q98 was 35.1% and 10.4% respectively compared to 42.5%
and 5.7% for 1Q97. The decrease in gross margin in plastics is mainly due to the
higher percentage of sales from the sewer product line in 1Q98 compared to 1Q97.
Sewer as a percent of total sales increased from 2.2% in 1Q97 to 10.1% in 1Q98.
Gross margins on sewer fittings are generally lower than on the other fittings
made by the Company due to market pricing in the industry. The composites gross
margin continues to be low because of low volumes and fixed overhead cost.
Management believes that increases in volume along with improving through put
should improve gross margins in both areas. 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 23.3% of net sales for 1Q98 compared to
22.6% for 1Q97. Advertising increased as a percent of sales from .2% in 1Q97 to
.8% in 1Q98 primarily because brochures were produced for the composite product
lines during 1Q98, which was not done a year ago in 1Q97. Salaries and related
2
<PAGE>
benefits increased 10.5.% from 1Q97 to 1Q98 mainly due to the addition of a
salesman in the Naco Composites division and an average 3.2% pay increase.
General and Administrative. General and administrative expenses
remained relatively level as a percent of sales. They were 22.5% of net sales
for 1Q98 compared to 22.4% for 1Q97. As a percent of sales, salaries and related
benefits increased 3% mainly due to a average pay increase of 3.2% over 1Q97.
Insurance expense increased $4,244 from 1Q97 to 1Q98 or 24.3% as a percent of
sales due to the addition of Naco Composites and additions in fixed assets due
to expansion of the facilities. Professional fees, telephone, and utilities all
decreased from 1Q97.
Other. Other expenses/revenues were 3.3% for 1Q98 compared to 3.6% for
1Q97. Interest expense went from 3.6% in 1Q98 to 3.4% in 1Q98 mainly because of
a decrease in the overall debt load of the Company. The effective interest rates
(interest expense divided by the average debt balance for the period) for 1Q98
and 1Q97 were 11.14% and 11.42%, 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
$37,568 in 1Q98. Cash as of 2-28-98 was $91,573, an increase of $16,195 from
November 30, 1997. The increase resulted primarily from an increase in payables.
Because of the continued growth and need for capital, the Company is facing a
potential cash flow shortage.
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 $90,827 in 1Q98 and $166,906 in 1Q97. The Company also
increased trade payables by $485,848 from November 30, 1997 to February 28,
1998. At November 30, 1997 the Company was current on trade payables, but at
February 28, 1998 the Company was out 60 days. Cash flow traditionally is always
slow during the 1st quarter and improves during the 2nd quarter. The Company is
addressing the potential cash flow shortage by managing inventories, increasing
the sales effort and working to reduce expenses.
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 February 28, 1998 the
revolving line of credit was $1,100,000 of which $999,326 was used leaving only
$100,674 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
February 28, 1998 the Company's current ratio was in breach of the line of
credit loan agreement. The Company received a written waiver of this restrictive
covenant for the period ending February 28, 1998, and may need to obtain similar
waivers in the future if operating results do not improve. The Company is
working on several options to improve working capital including private
placement of equity.
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 February 28, 1998,
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. If the Company raises
capital through equity financing, this may result in dilution to existing
holders of common stock and preferred stock.
Factors Affecting Future Results
3
<PAGE>
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, increases in labor or raw
materials, changes in economic conditions in its markets, unanticipated expenses
or events and other factors discussed in this report and the Company's other
filings with the Securities and Exchange Commission.
4
<PAGE>
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
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(a) Exhibits. The following are filed as exhibits to this Report.
Regulation S-K
Exhibit No. Description
--------------- -------------------------------------
27 Financial Data Schedule
(b) Reports on Form 8-K. None
5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Naco Industries, Inc.
Registrant
By /s/ VERNE E. BRAY April 7, 1998
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Verne E. Bray Date
President
By /s/ JEFFREY J. KIRBY April 7, 1998
------------------------------------------- -------------
Jeffrey J. Kirby Date
Principal Financial Officer
6
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-END> FEB-28-1998
<CASH> 91573
<SECURITIES> 0
<RECEIVABLES> 938295
<ALLOWANCES> 70250
<INVENTORY> 920063
<CURRENT-ASSETS> 1956516
<PP&E> 3272288
<DEPRECIATION> 1537882
<TOTAL-ASSETS> 3796219
<CURRENT-LIABILITIES> 2153906
<BONDS> 0
0
496236
<COMMON> 21939
<OTHER-SE> 339072
<TOTAL-LIABILITY-AND-EQUITY> 3796219
<SALES> 1511156
<TOTAL-REVENUES> 1511156
<CGS> 1026916
<TOTAL-COSTS> 1026916
<OTHER-EXPENSES> 693060
<LOSS-PROVISION> 937
<INTEREST-EXPENSE> 51471
<INCOME-PRETAX> (259420)
<INCOME-TAX> 0
<INCOME-CONTINUING> (259420)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (259420)
<EPS-PRIMARY> (0.18)
<EPS-DILUTED> (0.18)
</TABLE>
