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 August 31,1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File number 33-85044-d
NACO Industries, Inc.
---------------------
(Exact Name of small business issuer as specified in its charter)
Utah 48-0836971
---- ----------
(State of Incorporation) (IRS Employer Identification No.)
395 West 1400 North, Logan, Utah 84341
- -------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number 435-753-8020
------------
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
---
As of August 31, 1998, the Registrant had 1,868,227 shares of Common
Stock and 165,412 shares of Preferred Stock outstanding.
Transitional Small Business Disclosure Format Yes No X
---
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
- -----------------------------
See attached Consolidated Financial Statements
<PAGE>
NACO Industries, Inc.
CONSOLIDATED FINANCIAL STATEMENTS
August 31, 1998
<PAGE>
PART 1 - FINANCIAL INFORMATION
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NACO INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
August 31 November 30
------------- ------------
ASSETS 1998 1997
- ------ ------------- ------------
Current assets:
Cash $ 197,149 75,378
Accounts receivable, net of allowances
of $70,093 / $45,102 674,882 671,562
Inventory 606,149 772,752
Income Taxes Receivable 5,900 5,100
Other current assets 80,932 97,561
----------- -----------
Total current assets 1,565,012 1,622,353
----------- -----------
Property and equipment:
Land 40,700 40,700
Buildings and improvements 659,773 600,786
Equipment and vehicles 2,612,352 2,449,997
Equipment construction in progress 38,342 89,980
----------- -----------
Total property and equipment 3,351,167 3,181,463
Accumulated depreciation (1,709,882) (1,456,133)
----------- -----------
Net property and equipment 1,641,285 1,725,330
----------- -----------
Other assets:
Intangible and other assets 107,636 106,776
----------- -----------
Total other assets 107,636 106,776
----------- -----------
Total assets $ 3,313,933 3,454,459
=========== ===========
4
<PAGE>
NACO INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
August 31 November 30
------------ ------------
LIABILITIES: 1998 1997
- ------------ ------------ ------------
Current liabilities:
Accounts payable $ 356,607 251,122
Accrued expenses 178,802 198,046
Line of credit 874,326 824,326
Current portion of long-term obligations 283,410 321,801
Payable to related party (119,898) (15,704)
----------- -----------
Total current liabilities 1,573,247 1,579,591
Long-term liabilities:
Long-term obligations, less current portion 626,195 664,001
Deferred income taxes 94,200 94,200
----------- -----------
Total long-term liabilities 720,395 758,201
----------- -----------
Total liabilities 2,293,642 2,337,792
Stockholders' equity:
Common stock, $.01 par value, 10,000,000
shares authorized; 2,212,940 shares
and 2,193,796 shares issued respectively
(including 344,713 shares and 344,713
share respectively in treasury) 22,131 21,939
Preferred Stock, 7% Cumulative, convertible
$3.00 par value, 330,000 shares authorized,
165,412 shares issured. (Aggregate liquidation
preference $1,061,744 and $1,026,940
respectively) 496,236 496,236
Additional paid-in capital 1,036,558 1,003,800
Retained earnings (deficit) (408,037) (278,711)
----------- -----------
1,146,888 1,243,264
Less: treasury stock - at cost (126,597) (126,597)
----------- -----------
Total stockholders' equity 1,020,291 1,116,667
----------- -----------
Total liabilities and
stockholders' equity $ 3,313,933 3,454,459
=========== ===========
See Notes to Consolidated Financial Statements.
5
<PAGE>
NACO INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
August 31 August 31
------------------------------- --------------------------------
1998 1997 1998 1997
------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Sales, net $ 1,780,929 1,815,298 5,467,341 5,796,356
Cost of goods sold 1,080,879 1,236,670 3,368,342 3,724,261
------------- -------------- -------------- --------------
Gross profit 700,050 578,628 1,113,948 1,117,607
Operating expenses:
Selling expenses 368,091 362,606 1,113,948 1,117,607
General and administrative expenses 306,294 340,091 964,854 986,968
------------- -------------- -------------- --------------
Total operating expenses 674,385 702,697 2,078,802 2,104,575
------------- -------------- -------------- --------------
Income (loss) from operations 25,665 (124,069) 20,197 (32,480)
Other income (expense):
Interest income 1,162 603 8,774 1,322
Interest expense (50,835) (46,705) (158,297) (156,512)
------------- -------------- -------------- --------------
Total other income (expense) (49,673) (46,102) (149,523) (155,190)
------------- -------------- -------------- --------------
Income (loss) before income taxes (24,008) (170,171) (129,326) (187,670)
Income tax expense (benefit) 0 (900) 0 0
------------- -------------- -------------- --------------
Net income (loss) $ (24,008) (169,271) (129,326) (187,670)
Adjustment for preferred dividends in arrears (69,272) (17,335) (69,272) (34,468)
------------- -------------- -------------- --------------
Adjusted net to Common Stockholders $ (93,280) (186,606) (198,598) (222,138)
------------- -------------- -------------- --------------
Earnings (loss) per common share:
Basic:
Earnings (loss) from net income $ (0.01) (0.10) (0.07) (0.11)
Dividends in arrears (0.04) (0.01) (0.04) (0.02)
------------- -------------- -------------- --------------
Net Earnings (loss) $ (0.05) (0.11) (0.11) (0.13)
============= ============== ============== ==============
Diluted:
Earnings (loss) from net income $ (0.05) (0.11) (0.11) (0.13)
============= ============== ============== ==============
Weighted average number of common shares outstanding:
Basic 1,868,227 1,722,057 1,868,227 1,722,057
============= ============== ============== ==============
Diluted 2,205,051 2,033,723 2,205,051 2,033,723
============= ============== ============== ==============
</TABLE>
See Notes to Consolidated Financial Statements
6
<PAGE>
NACO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
August 31 August 31
---------------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $(129,326) (187,670)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation 253,749 183,887
Amortization 4,436 4,436
Deferred income taxes 0 0
(Increase) decrease in:
Accounts receivable, net (3,320) (185,370)
Inventory 166,603 (19,890)
Taxes Receivable (800) 39,300
Other 12,193 (73,672)
Increase (decrease) in:
Accounts payable 105,485 (219,243)
Accrued expenses (19,244) (29,646)
Income taxes payable 0 0
--------- ---------
Net cash provided by (used in)
operating activities 389,776 (487,868)
--------- ---------
Cash flows from investing activities
Net change property and equipment (169,704) (420,435)
Investment in intangible and other assets (860) (1,148)
--------- ---------
Net cash provided by (used in) investing activities (170,564) (421,583)
Cash flows from financing activities
Net change in line of credit 50,000 160,000
Payments on related party loan (104,194) (48,703)
Payments on long-term debt (216,955) (214,301)
Payment of Preferred Stock Dividends (34,482) (27,837)
Proceeds from long-term loans 140,758 64,524
Proceeds from issuance of common stock 57,430 742,500
Proceeds from issuance of preferred stock 10,002 192,972
Purchase of treasury stock 0 (5,000)
--------- ---------
Net cash provided by (used in) financing activities (97,441) 864,155
--------- ---------
Increase (decrease) in cash 121,771 (45,296)
Cash, beginning of period 75,378 198,306
--------- ---------
Cash, end of period $ 197,149 153,010
========= =========
See Notes to Consolidated Financial Statements
Supplemental disclosures:
Income taxes paid $ 0 0
Interest Paid $ 158,297 148,153
</TABLE>
7
<PAGE>
NACO INDUSTRIES, INC.
Notes to Consolidated Financial Statements (Unaudited)
August 31, 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 nine month period ended August 31, 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:
August 31, Nov. 30,
1998 1997
----------- -------------
Raw Materials $ 231,895 $ 309,193
Work in Process 13,598 12,276
Finished Goods 360,656 451,283
----------- -------------
Total $ 606,149 $ 772,752
NOTE C - DIVIDENDS
Dividends on the preferred stock are cumulative at 7%. At August 31,
1998, the cumulative amount of dividends accrued was $69,272. Of this amount,
$69,272 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
<PAGE>
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.
NOTE E PREFERRED STOCK AND WARRANTS
The Company raised $19,125 from warrants exercised for 6,375 shares of
the Company's common stock during the quarter ended August 31, 1998.
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
Introduction
NACO Industries, Inc. ("NACO" or the "Company") is a manufacturing
company, which produces and sells polyvinyl chloride (PVC) and composite
products. The Company's primary line of business consists of manufacturing 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).
Pipefittings 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 for the transportation, amusement, recreation and
architectural industries. These products include trailer tops and amusement ride
materials. The Company also produces tooling and molds for other companies in
various industries.
Results of Operations
The following discussion relates to the three months and nine months
ended August 31, 1998 and August 31, 1997, respectively. For comparison
purposes, percentages of sales will be used rather than dollars. In the
following discussion, the three months ended August 31, 1998 and August 31, 1997
are referred to as 3Q98 and 3Q97, respectively, and the nine months ended August
31, 1998 and August 31, 1997 are referred to as 9M98 and 9M97, respectively.
Overview. The Company sustained an operating loss of $(24,008) for 3Q98
and an operating loss of $(129,326) for 9M98, compared to an operating loss of
$(169,271) for 3Q97 and an operating loss of $(187,670) for 9M97. The Company's
plastic products operations generated a profit of $65,162 for 3Q98, compared to
a loss of $(134,768) for 3Q97. The Company's composite products operation
generated an operating loss of $(89,170) and $(34,503) for 3Q98 and 3Q97,
respectively. The improvement in the Company's plastic products operations was
mainly due to an small increase in sales and a significant increase in gross
margin due to improvements in manufacturing (explained below). The Company's
composite products sales were down $98,759 from 3Q97 to 3Q98 mainly due to
decreased sales to the amusement ride market. 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 .9% of
total revenues in 9M97 to 9.6% in 9M98. The Company also continues to review its
operations in an effort to reduce expenses without affecting quality and service
to its customers.
Sales. Net sales for 3Q98 decreased by 1.9% to $1,780,929, compared to
net sales of $1,815,298 for 3Q97. Net sales for the plastics segment increased
<PAGE>
by 4.3% to $1,572,405 in 3Q98, compared to net sales of $1,508,015 for 3Q97. Net
sales for the composite segment decreased by 32.1% to $208,524 in 3Q98, compared
to net sales of $307,283 for 3Q97. The increase in sales in the Company's
plastic products was mainly due to increased sales in the sewer market as the
Company continued to expand its sales to that market. Management believes that
sales were down in the Company's composite products due primarily to a drop off
in the amusement ride market. In 3Q97, the Company received several large orders
in the amusement ride market, but did not receive comparable orders during 3Q98.
Gross Margin. Gross margin as a percentage of sales for 3Q98 and 3Q97
was 39.3% and 31.9%, respectively, and for 9M98 and 9M97 gross margin was 38.4%
and 35.7%, respectively. Gross margin for plastics and composites as a
percentage of sales for 3Q98 was 43.2% and 10.4%, respectively, compared to
34.9% and 16.8%, respectively, for 3Q97. In 3Q97 the Company realized lower
margins on its sewer product line mainly because of costs incurred to gear up
for higher volumes. As the Company's production force has developed additional
experience and sales volumes for plastic products have increased, gross margins
on these products have improved. The lower margins currently generated by the
Company's composite products reflect the Company's low volume of composite
product sales. Management believes that increased sales volumes of composite
products will improve the Company's ability to cover fixed costs and generate
higher margins. Currently, the Company has a backlog of composite orders of
approximately $450,000. Management believes the Company can fill these orders
during the fourth fiscal quarter of 1998, which, together with improving
throughput, should improve gross margins. Depreciation expense increased $8,269
or 18% from 3Q97 to 3Q98 due primarily to the increase in capital equipment of
$169,704 from August 31, 1997 to August 31, 1998. 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 20.7% of net sales for 3Q98, compared to
20.0% for 3Q97. The increase in selling expenses as a percentage of sales was
mainly due to decreased sales volume. In actual dollars, selling expenses
increased $5,485 or 1.4% from 3Q97 to 3Q98. Freight expense increased as a
percentage of sales from 5.6% in 3Q97 to 6.1% in 3Q98 primarily because the
Company paid the freight for most of the sewer products sold during the quarter.
This is a common industry practice for sewer products. Commission expense
decreased from 3.1% in 3Q97 to 2.8% in 3Q98 primarily due to lower sales in
those areas where commissions are paid. Telephone expense increased from .3% in
3Q97 to .9% in 3Q98 due principally to increased sales efforts by the Company.
Selling expenses as a percentage of sales were 20.4% of net sales for 9M98,
compared to 19.3% for 9M97. The increase in selling expenses as a percentage of
net sales was due primarily to decreased sales volumes during 9M98.
General and administrative. General and administrative expenses
represented 17.2% of net sales for 3Q98, compared to 18.7% for 3Q97. As a
percentage of sales, salaries and related benefits decreased from 10.7% in 3Q97
to 9.8% in 3Q98 mainly because the President of the Company temporarily reduced
his salary. Professional fees decreased $5.553 or 42% from 3Q97 to 3Q98. General
and administrative expenses as a percentage of sales were 17.6% of net sales for
9M98, compared to 17.0% for 9M97. The increase was attributable primarily to the
decreased sales volume in 9M98 compared to 9M97. The actual dollar amount of
general and adminsitrative expenses was $ 22,114 less in 9M98, compared to 9M97,
due primarily to a temporary reduction of the salary of the Company's President
and decreased insurance premiums.
Other. Other expenses/revenues were 2.8% for 3Q98, compared to 2.6% for
3Q97. Interest expense went from 2.6% in 3Q97 to 2.9% in 3Q98, due to an
increase in the average debt load for 3Q98 over 3Q97 by $68,500. The effective
interest rates (interest expense divided by the average debt balance for the
period) for 9M98 and 9M97 were 11.02% and 11.30%, respectively.
<PAGE>
Liquidity and Capital Resources
The Company's sources of liquidity have been cash from operations,
credit facilities and equity financing. Cash provided by operating activities
was $389,776 in 9M98. Cash as of August 31, 1998 was $197,149, an increase of
$121,771 from November 30, 1997. The increase resulted primarily from a decrease
in inventory and an increase in payables. Because of the slower sales and need
for capital, the Company is facing a potential cash flow shortage. The Company
raised $19,125 from warrants exercised for 6,375 shares of common stock during
3Q98.
The Company continues to seek to improve its liquidity position. In the
course of the Company's expansion, the Company has incurred losses, which have
significantly reduced the Company's available working capital. The losses have
been explained in above paragraphs and the Company's Annual Report on Form
10-KSB. During the expansion, the capital improvements and new equipment
acquired by the Company have been financed through draws against the Company's
line of credit, as well as internal financing. The total cash paid for property
and equipment amounted to $169,704 in 9M98 and $420,435 in 9M97. The Company
also increased trade payables by $105,485 from November 30, 1997 to August 31,
1998. At August 31, 1998, the Company was current on trade payables. Cash flow
is traditionally slow during the 1st quarter and improves during the 2nd and 3rd
quarters, and this year was not an exception. The Company is addressing the
potential cash flow shortage by managing inventories, increasing its sales
efforts, and working to reduce expenses.
Management believes that external financing or additional capital will
be necessary to replenish working capital to permit the Company to meet its
obligations on a timely basis and to provide additional working capital which
will be required to sustain any future growth. On August 31, 1998, the Company's
revolving line of credit was $1,100,000, of which $874,326 was used, leaving
only $225,674 available. The availability of the line is based on a percentage
of accounts receivable and inventory and the maturity date was August 31, 1998.
The Company is currently working with the bank to renew this revolving line of
credit. On August 31, 1998, the Company's current ratio was in breach of certain
covenants set forth in the line of credit loan agreement. The Company received a
written waiver of this restrictive covenant for the period ending February 28,
1998, and needs to obtain similar waivers for the current period and may need
similar waivers in the future if operating results do not continue to improve.
The Company is working on several options to improve working capital, including
a potential private placement of equity; however, the Company has not obtained
any commitment or agreement to provide such funding and can give no assurance
that such a financing transaction can be completed.
Under the terms of the Company's line of credit, the Company is
prohibited from making capital expenditures in excess of $150,000 without
written authorization from the bank unless its working capital ratio improves.
The Company has received written authorization from the bank for all
expenditures over the $150,000 limit, up to $244,300. The increase was needed to
secure equipment needed to increase production in response to orders for the
Company's products.
Management believes that the actions presently being taken to obtain
waivers with respect to the Company's operating and financial covenants and to
raise additional capital, together with its capital resources on hand at August
31, 1998, and anticipated sales revenues 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 expand its business operations. If the Company
raises capital through equity financing, this may result in dilution to existing
holders of common stock and preferred stock.
<PAGE>
Factors Affecting Future Results
The Company's operating results are subject to certain risks that could
adversely affect the Company's operating results and its ability to operate
profitably. If the Company is not able to 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
operations and financial results. In addition, the Company's operating results
could also be adversely affected by increased competition in the markets in
which the Company's products compete, 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.
<PAGE>
PART II - OTHER INFORMATION
Item 2 - Changes in Securities and Use of Proceeds
- ------ -----------------------------------------
During June 1998, the Company sold 6,375 shares of its Common Stock,
$.01 par value (the "Common Stock"), to ten existing shareholders of the Company
upon the exercise of outstanding warrants to purchase Common Stock. The warrant
exercise price paid by the shareholders was $3.00 per share, resulting in total
proceeds to the Company of $19,125. The Company did not engage an underwriter in
connection with the warrant exercises. Based upon the Company's pre-existing
relationship with each of the purchasing shareholders, the access of such
shareholders to information regarding the Company, the absence of any general
solicitation activities and other factors deemed relevant by the Company, the
Company relied upon the exemption from registration set forth in Section 4(2) of
the Securities Act of 1933, as amended (the "Securities Act") in selling the
shares of Common Stock described above.
Item 6 - Exhibits and Reports on Form 8-K
- ------ --------------------------------
(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
<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 October 1, 1998
----------------------------------------- ---------------
Verne E. Bray Date
President
By /s/ JEFFREY J. KIRBY October 1, 1998
----------------------------------------- ---------------
Jeffrey J. Kirby Date
Principal Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-END> AUG-31-1998
<CASH> 197149
<SECURITIES> 0
<RECEIVABLES> 744975
<ALLOWANCES> 70093
<INVENTORY> 606149
<CURRENT-ASSETS> 1565012
<PP&E> 3351167
<DEPRECIATION> 1709882
<TOTAL-ASSETS> 3313933
<CURRENT-LIABILITIES> 1573247
<BONDS> 626195
0
496236
<COMMON> 22131
<OTHER-SE> 456817
<TOTAL-LIABILITY-AND-EQUITY> 3313933
<SALES> 5467341
<TOTAL-REVENUES> 5467341
<CGS> 3368342
<TOTAL-COSTS> 3368342
<OTHER-EXPENSES> 2228325
<LOSS-PROVISION> 4400
<INTEREST-EXPENSE> 158297
<INCOME-PRETAX> (129326)
<INCOME-TAX> 0
<INCOME-CONTINUING> (129326)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (129,326)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
