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 May 31,1999
[ ] 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 small business issuer as specified in its charter)
Utah 48-0836971
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(State of Incorporation) (IRS Employer Identification Number)
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
-
As of May 31, 1999, the Registrant had 1,876,227 shares of Common Stock and
165,412 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
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See attached Consolidated Financial Statements
2
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NACO Industries, Inc.
CONSOLIDATED FINANCIAL STATEMENTS
May 31, 1999
3
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PART 1 - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
NACO INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
May 31 November 30
----------- -----------
ASSETS 1999 1998
- ------ ----------- -----------
Current assets:
Cash $ 41,719 $ 112,362
Accounts receivable, net of allowances
of $105,231 / $100,193 1,079,767 803,165
Inventory 575,870 656,134
Other current assets 333,704 220,378
----------- -----------
Total current assets 2,030,460 1,792,039
----------- -----------
Property and equipment:
Land 40,700 40,700
Buildings and improvements 680,521 675,316
Equipment and vehicles 2,829,370 2,771,889
Equipment construction in progress 9,018 29,461
----------- -----------
Total property and equipment 3,559,609 3,517,366
Accumulated depreciation (1,965,501) (1,779,688)
----------- -----------
Net property and equipment 1,594,108 1,737,678
----------- -----------
Other assets:
Intangible and other assets 364,847 264,818
----------- -----------
Total other assets 364,847 264,818
----------- -----------
Total assets $ 3,989,415 $ 3,794,535
=========== ===========
See Notes to Consolidated Financial Statements
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<TABLE>
NACO INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<CAPTION>
May 31 November 30
----------- -----------
LIABILITIES: 1999 1998
- ------------ ----------- -----------
<S> <C> <C>
Current liabilities:
Accounts payable $ 1,124,924 $ 650,305
Accrued expenses 157,827 283,900
Income taxes payable (100) 0
Line of credit 480,479 849,326
Current portion of long-term obligations 72,270 300,582
----------- -----------
Total current liabilities 1,835,400 2,084,113
Long-term liabilities:
Long-term obligations, less current portion 1,181,853 673,922
Deferred income taxes 102,200 9,800
----------- -----------
Total long-term liabilities 1,284,053 683,722
----------- -----------
Total liabilities 3,119,453 2,767,835
Stockholders' equity:
Common stock, $.01 par value, 10,000,000 shares authorized; 18,762 21,472
1,876,227 shares and 2,147,102 shares issued respectively
(including 0 shares and 270,875 share respectively in treasury)
Preferred Stock, 7% Cumulative, convertible $3.00 par 496,236 496,236
value, 330,000 shares authorized, 165,412 and 165,412 shares
issued respectively (Aggregate liquidation preference
$1,096,195 and $1,061,744 respectively)
Additional paid-in capital 996,045 1,084,959
Retained earnings (deficit) (641,081) (484,342)
----------- -----------
869,962 1,118,325
Less: treasury stock - at cost 0 (91,625)
----------- -----------
Total stockholders' equity 869,962 1,026,700
----------- -----------
Total liabilities and
stockholders' equity $ 3,989,415 $ 3,794,535
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
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<TABLE>
NACO INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<CAPTION>
Three months ended Six months ended
May 31 May 31
---------------------------- -------------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales, net $ 2,674,604 2,175,256 4,527,624 3,686,412
Cost of goods sold 1,619,853 1,260,547 3,002,528 2,287,463
----------- ----------- ----------- -----------
Gross profit 1,054,751 914,709 1,525,096 1,398,949
Operating expenses:
Selling expenses 508,202 393,192 854,154 745,857
General and administrative expenses 317,811 318,165 650,815 658,560
----------- ----------- ----------- -----------
Total operating expenses 826,013 711,357 1,504,969 1,404,417
----------- ----------- ----------- -----------
Income (loss) from operations 228,738 203,352 20,127 (5,468)
Other income (expense):
Interest income 381 6,741 816 7,612
Interest expense (104,049) (55,991) (177,682) (107,462)
----------- ----------- ----------- -----------
Total other income (expense) (103,668) (49,250) (176,866) (99,850)
----------- ----------- ----------- -----------
Income (loss) before income taxes 125,070 154,102 (156,739) (105,318)
Income tax expense (benefit) 0 0 0 0
Net income (loss) $ 125,070 154,102 (156,739) (105,318)
Adjustment for preferred dividends in arrears (103,723) (68,773) (103,723) (68,773)
----------- ----------- ----------- -----------
Adjusted net to Common Stockholders $ 21,347 85,329 (260,462) (174,091)
----------- ----------- ----------- -----------
Earnings (loss) per common share:
Basic:
Earnings (loss) from net income $ 0.07 0.08 (0.08) (0.06)
Dividends in arrears (0.06) (0.04) (0.06) (0.04)
----------- ----------- ----------- -----------
Net Earnings (loss) $ 0.01 0.05 (0.14) (0.09)
=========== =========== =========== ===========
Diluted:
Earnings (loss) from net income $ 0.01 0.04 (0.14) (0.09)
=========== =========== =========== ===========
Weighted average number of common shares
outstanding:
Basic 1,876,227 1,861,852 1,876,227 1,861,852
=========== =========== =========== ===========
Diluted 2,207,051 2,196,676 2,207,051 2,196,676
=========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
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<TABLE>
NACO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Three months ended
May 31 May 31
----------------------------
1999 1998
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ (156,739) $ (105,318)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation 185,813 167,875
Amortization 6,165 1,478
(Increase) decrease in:
Accounts receivable, net (276,602) (293,570)
Inventory 80,264 95,305
Other (26,491) 34,374
Increase (decrease) in:
Accounts payable 474,619 211,503
Accrued expenses (126,073) (47,779)
Income taxes payable (100) 0
----------- -----------
Net cash provided by (used in)
Operating activities 160,856 63,868
----------- -----------
Cash flows from investing activities
Net change property and equipment (42,243) (158,606)
Investment in intangible and other assets (100,029) (344)
----------- -----------
Net cash provided by (used in) investing activities (142,272) (158,950)
Cash flows from financing activities
Net change in line of credit (368,847) 225,000
Payments on related party loan 0 (4,504)
Payments on long-term debt (681,986) (147,631)
Payment of Preferred Stock Dividends 0 0
Proceeds from long-term loans 1,134,872 140,758
Proceeds from issuance of common stock 0 38,305
Proceeds from issuance of preferred stock 0 10,002
Purchase of treasury stock (173,266) 0
----------- -----------
Net cash provided by (used in) financing activities (89,227) 261,930
----------- -----------
Increase (decrease) in cash (70,643) 166,848
Cash, beginning of period 112,362 75,378
----------- -----------
Cash, end of period $ 41,719 $ 242,226
=========== ===========
See Notes to Consolidated Financial Statements
Supplemental disclosures:
Income taxes paid $ 0 $ 0
Interest Paid $ 126,912 $ 99,456
</TABLE>
See Notes to Consolidated Financial Statements
7
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NACO INDUSTRIES, INC.
Notes to Consolidated Financial Statements (Unaudited)
May 31, 1999
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 six-month
period ended May 31, 1999 are not necessarily indicative of the results that may
be expected for the fiscal year ending November 30, 1999. 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, 1998.
NOTE B - INVENTORY
Inventory consists of the following:
May 31, Nov. 30,
1999 1998
----------- -------------
Raw Materials $ 223,419 $ 231,895
Work in Process 22,154 13,598
Finished Goods 330,297 360,656
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Total $ 575,870 $ 606,149
NOTE C - DIVIDENDS
Dividends on the preferred stock are cumulative at 7%. At May 31, 1999,
the cumulative amount of dividends accrued was $103,723. Of this amount,
$103,723 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.
NOTE E - PREFERRED STOCK AND WARRANTS
There were no shares of capital stock sold or warrants exercised during
the second quarter of 1999.
NOTE F - SEGMENT INFORMATION
The Company's operations are classified into two principal industry
segments, PVC fitting and valves sold through Naco Industries, Inc. and
composite products sold through the Naco Composites division. The Company's
reportable business segments are strategic business units that offer different
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products and services. Each segment is managed separately because they require
different technologies and market to distinct classes of customers. No customers
in either segment accounted for 10% or more of consolidated revenue.
The segment accounting policies are the same as those described in the
Annual Report on Form 10-KSB in the summary of significant accounting policies.
Cost plus an estimated profit margin is used to report intersegment sales.
Profit for segment reporting includes allocated 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 and are identified in the other column in the tables
below.
<TABLE>
<CAPTION>
- ----------------------------------------- ---------- ---------- ---------- ----------
Quarter Ended 5/31/99 PVC Products Composite Products Other Total
- ----------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers $2,415,231 $ 259,373 0 $2,674,604
- ----------------------------------------- ---------- ---------- ---------- ----------
Intersegment Sales 0 0 0 0
- ----------------------------------------- ---------- ---------- ---------- ----------
Depreciation Expense 71,524 13,432 0 84,956
- ----------------------------------------- ---------- ---------- ---------- ----------
Interest Income 381 0 0 381
- ----------------------------------------- ---------- ---------- ---------- ----------
Interest Expense 99,035 5,014 0 104,049
- ----------------------------------------- ---------- ---------- ---------- ----------
Profit (Loss) $ 454,679 $ (329,609) 0 $ 125,070
- ----------------------------------------- ---------- ---------- ---------- ----------
Identifiable Assets $3,220,907 $ 726,789 $ 41,719 $3,989,415
- ----------------------------------------- ---------- ---------- ---------- ----------
- ----------------------------------------- ---------- ---------- ---------- ----------
Prior Year Quarter Ended 5/31/98
- ----------------------------------------- ---------- ---------- ---------- ----------
Sales to unaffiliated customers $1,906,826 $ 268,430 0 $2,175,256
- ----------------------------------------- ---------- ---------- ---------- ----------
Intersegment Sales 0 0 0 0
- ----------------------------------------- ---------- ---------- ---------- ----------
Depreciation Expense 79,166 6,958 0 86,124
- ----------------------------------------- ---------- ---------- ---------- ----------
Interest Income 0 6,741 0 6,741
- ----------------------------------------- ---------- ---------- ---------- ----------
Interest Expense 54,502 1,489 0 55,991
- ----------------------------------------- ---------- ---------- ---------- ----------
Profit (Loss) $ 189,679 $ (35,577) 0 $ 154,102
- ----------------------------------------- ---------- ---------- ---------- ----------
Identifiable Assets $2,896,569 $ 630,900 $ 242,226 $3,769,695
- ----------------------------------------- ---------- ---------- ---------- ----------
</TABLE>
NOTE G - DEBT AND LOAN AGREEMENTS
At May 31, 1999, the outstanding balance of the Company's revolving
line of credit was $480,479. This line of credit was entered into on April 22,
1999 with Wells Fargo Credit. This facility is based on a percentage of accounts
receivable and inventories. The maximum line is $1,500,000 of which, based on
the "Collateral Report" there was $759,245 was available to borrow as of May 31,
1999. The original draw on this line was used to pay off most of the previous
revolving line of credit with Nations Bank.
Also on April 22, 1999 a second facility was closed with WebBank
Corporation to restructure the term-debt. This facility is for $1,100,000 and
was used to pay off long-term debt of the Company with Nations Bank and several
other small lenders. A portion of the revolving line that was previously with
Nations Bank was also paid off by this facility.
The line of credit with Wells Fargo and the long-term note with WebBank
Corporation contain covenants pertaining to current ratio, working capital,
debt, dividends and capital purchases.
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NOTE H - STOCK PERFORMANCE AGREMENT
Under a stock purchase agreement date March 5, 1997 with Britannia
Holding Limited, NACO Industries, Inc. agreed as part of the original
consideration for the stock purchase agreement, and in the event that NACO
Industries, Inc. did not during the first twenty four months of the agreement,
establish a market for NACO Industries, Inc. Common Stock that traded for at
least $6.00 per share for any 10 consecutive day, to credit additional shares of
its $.01 par value common stock to Britannia starting at the end of the twenty
fifth month following the closing date of the agreement, and until NACO
Industries, Inc. has an established public market for its common stock trading
for $6.00 or more for at least 10 consecutive trading days. NACO Industries,
Inc. agreed to issue all credited and unissued shares to Britannia within 30
days following the yearly anniversary of the agreement. The crediting of
additional shares under this agreement started in the month of April 1999.
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 30" 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 NACO Composites, an operating division which was formerly a
wholly owned subsidiary of the Company and was merged into the Company in 1999,
also manufactures and sells composite products for the transportation,
amusement, recreation and architectural industries. These products include
transportation parts, decorative building parts, after-market auto parts 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 six months ended May
31, 1999 and May 31, 1998, respectively. For comparison purposes, percentages of
sales will be used rather than dollars. In the following discussion, the three
months ended May 31, 1999 and May 31, 1998 are referred to as 2Q99 and 2Q98,
respectively, and the six months ended May 31, 1999 and May 31, 1998 are
referred to as 6M99 and 6M98, respectively.
Overview. The Company sustained an operating profit of $125,070 for 2Q99
compared to an operating profit of $154,102 for 2Q98. The Company's plastic
products operations generated an operating profit of $454,679 for 2Q99, compared
to an operating profit of $189,679 for 2Q98. The Company's composite products
operation generated an operating loss of $(329,609) for 2Q99, compared to a loss
of $(35,577) for 2Q98. The improvement in the Company's plastic products
operations was mainly due to a 26.7% increase in net sales and an increase in
gross margin due primarily to improvements in manufacturing (explained below).
The Company's composite products sales were down 3.4% from 2Q98 to 2Q99, and
costs (explained below) were up 130%, which caused a major deterioration in
gross margins and profits in the Company's composite products. The Company
continues to expand into the industrial and commercial plastic markets. Although
these markets tend to generate lower sales during winter months, they are less
seasonal than the Company's agricultural markets. Sales in these markets
increased from 9.8% of total revenues in 2Q98 to 15.4% in 2Q99.
Net Sales: Net sales for 2Q99 increased by 23.0% to $2,674,604, compared to net
sales of $2,175,256 for 2Q98. Net sales for the plastics segment increased by
26.7% to $2,415,231 in 2Q99, compared to net sales of $1,906,826 for 2Q98. Net
sales for the composite segment decreased by 3.4% to $259,373 in 2Q99, compared
to net sales of $268,430 for 2Q98.
There are several factors that contributed to the increase in the plastics
segment:
Agricultural & Industrial Market:
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Increased manufacturing capacities and throughput has decreased
delivery time resulting in a quicker turnaround to the distributor than many of
the Company's competitors have been able to offer. In addition, the formation of
an sales offering to the distributor, which allows us to help solve their
problems with product distribution, has also contributed to increase sales.
During the last quarter of fiscal year 1998, one of the Company's
warehouses located in Washington was re-evaluated to better serve the
distributors of the Company in that area. Non-moving inventory was removed and
an improved product mix was introduced into the warehouse, allowing for
increased distribution from the warehouse.
A salesperson covering a key agricultural market in the intermountain
region was replaced with an individual who has substantially increased the
coverage of the territory. Substantial improvements were noticed immediately as
relationships with distributors within the territory were improved.
An independent manufacturer's representative covering a territory in
the Southern States region was terminated and replaced with a NACO salesperson
and company-run warehouse. This was a region in which sales have been stagnant
for several years.
Utility Market:
Towards the end of fiscal year 1998, eighteen new independent utility
representatives were established to expand sales into the utility market (sewer
and drainage). These representatives are strategically located throughout the
country, allowing for more effective coverage of the utility market.
Management feels that the major expansion into the utility market,
including the addition of these new representatives has enabled the Company to
increase utility sales by approximately 100% for the 2Q99.
Management anticipates that a few more utility representatives will be
added during the current fiscal year.
Gross Margin. Gross margin as a percentage of sales for 2Q99 and 2Q98 was
39.4% and 42.1%, respectively. Gross margin for plastics and composites as a
percentage of sales for 2Q99 was 52.7% and (83.9)%, respectively, compared to
44.8% and 22.9%, respectively, for 2Q98. As the Company's plastic products
production force has developed additional experience and sales volumes for
plastic products have increased, gross margins on these products have improved.
The negative margins currently generated by the Company's composite products
were do to a large extent to a combination of the Company's low volume of
composite product sales, inexperienced labor and lack of management knowledge of
how to produce certain composite products for which the Company had orders..
During 1Q99 the Company hired a new production manager to help with these
problems, but his employment was terminated in 2Q99 when it was obvious that he
did not have the expertise needed to produce the products the Company was trying
to produce. Competition for experienced labor is strong and, as a result during
the last six months of last year, the Company lost some experienced employees in
its composites operations that were replaced by less experienced people,
resulting in more rework and scrap. Because of more rework and scrap, material
costs increased from 25.8% of sales in 2Q98 to 42.6% of sales in 2Q99 and direct
labor increased from 32.1% of sales in 2Q98 to 77.9% of sales in 2Q99.
Management is addressing the loss in several ways. First, management believes
that the Company's Ogden facility has capacity that will accommodate higher
sales volumes and that the market for the Company's products is more than
adequate to fill this capacity. Therefore, management has focused greater
efforts on selling. Second, the Company's top management has spent the majority
of their time at the facility, during which time they have reduced direct labor
by an average of 270 hours per week and increased training. They have farmed out
certain products to vendors until the work force is trained sufficient to bring
them back in house. They have implemented procedures for measuring material
usage on a daily basis in order to reduce usage and in turn reduce costs.
Management believes that increased sales volumes of composite products for which
the Company has the knowledge, experience and training and that the workforce is
trained to produce will improve the Company's ability to cover fixed costs and
generate satisfactory margins.
Selling: Selling expenses were 19.0% of net sales for 2Q99, compared to
18.1% for 2Q98. The increase in selling expenses as a percentage of sales was
mainly due increased freight and supplies expenses. Freight expenses represented
7.3% of sales for 2Q99 compared to 5.5% of sales for 2Q98, mainly due to
increased sales in the utility market where it is standard in the industry to
prepay freight on orders over $1,000. Sales supplies expenses increased from
2.0% of sales in 2Q98 to 2.5% in 2Q99, mainly due also to the increase in sales
in the utility market where large wood crates are require to ship product to the
customer.
General and Administrative: General and administrative expenses represented
11.8% of net sales for 2Q99, compared to 14.6% for 2Q98. Overall, general and
administrative expenses remained level from 2Q98 to 2Q99. As a percentage of
sales, salaries and related benefits decreased from 7.6% of net sales in 2Q98 to
5.6% in 2Q99, mainly due to increased sales volume.
Other: Other expenses/revenues were 3.9% for 2Q99, compared to 2.3% for
2Q98. Interest expense went from 2.6% in 2Q98 to 3.9% in 1Q99. The effective
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interest rates (interest expense divided by the average debt balance for the
period) for 2Q99 and 2Q98 were 15.4% and 11.02%, respectively.
Liquidity and Capital Resources
The Company's principal sources of liquidity have been cash from
operations, credit facilities. Cash provided by operating activities was
$160,856 in 6M99. Cash as of May 31, 1999 was $41,719, down $70,643 from
November 30, 1998. At May 31, 1999, the outstanding balance of the Company's
revolving line of credit was $480,479. This line of credit was entered into on
April 22, 1999 with Wells Fargo Credit. This facility is based on a percentage
of accounts receivable and inventories. The maximum line is $1,500,000 of which,
based on the "Collateral Report", prepared by the VP of Finance of the Company,
there was $759,245 available to borrow as of May 31, 1999. The original draw on
this line was used to pay off most of the previous revolving line of credit with
Nations Bank.
Also on April 22, 1999 a second facility was closed with WebBank
Corporation to restructure the Company's long-term debt. This facility is for
$1,100,000 and was used to pay off long-term debt of the Company with Nations
Bank and several other small lenders. A portion of the revolving line that was
previously with Nations Bank was also paid off by this facility.
The Company continues to struggle with its liquidity position. Even
with the new line of credit and the restructuring of the Company's long-term
debt, the Company has been unable to pay trade payables current. The Company
increased trade payables by $474,619 from November 30, 1998 to May 31, 1999. At
November 30, 1998, .8% of the Company's trade payables were out over 60 days.
due principally to lack of operating funds. As of February 28, 1999 and May 31,
1999, 43.7% and 31.4%, respectively, of the Company's trade payables were out
over 60 days. Management has been in contact with the Company's vendors and most
are working with the Company to keep supplying needed raw materials for
production. The continuing struggle with the Company's liquidity has primarily
been caused by continued and increased losses in the Company's composites
division. How the Company is addressing these losses is explained in the section
entitled "Gross Margin" above.
The Company currently has plans to spend up to $150,000 in capital
expenditures to update and expand its operations. This will only be done on the
condition that cash flow is adequate and that such purchases will not adversely
affect the bank covenants entered into during the past quarter with regards to
the credit facilities.
Management believes that the actions presently being taken to revise
the Company's operating and financial requirements, together with its capital
resources on hand at May 31, 1999, 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 may not be required or that, if such financing is required, it will be
available on terms favorable to the Company, if at all. The Company's inability
to secure additional financing or raise additional capital would 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 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.
Impact of the Year 2000 Issue
The Year 2000 issue is the result of computer programs, databases,
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.
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Beginning in the year 1996, the Company undertook 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 Company
went "live" on all critical software on December 1, 1998. This software includes
network operating systems, workstation operating systems critical to business
operations, accounting and manufacturing software. The Company has received
certification of Year 2000 compliance from its accounting and manufacturing
providers. All custom software is written internally and is Year 2000 compliant.
The Company believes that with modifications to existing software and
conversions to new software, the Year 2000 Issue has been mitigated. However
there can be no guarantee that everything has been completely covered.
In January, 1999, the Company sent surveys to critical vendors and
customers to ensure smooth transition to the year 2000. Survey results will be
reviewed and an assessment will be made on the reliability of suppliers past the
year 1999. On March 20, 1999, the Company rolled computer clocks forward and
performed tests on Year 2000 compatibility. No problems were found in the
software tested. The Company will also continue to test existing systems though
out the year. In the event the Company finds issues related to the Year 2000
problem, corrective measures will be taken. To date, the Company has incurred,
capitalized or expended approximately $152,000 on Year 2000 compliance. The only
Non-Year 2000 compliant software currently being used is the Company's server
backup software. An upgrade will be purchased by July, 1999 for approximately
$500.
PART II - OTHER INFORMATION
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
- --------------- -----------------------
2.1 Article of Merger
2.2 Agreement and Plan of Merger
27 Financial Data Schedule
(b) Reports on Form 8-K. None
13
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, as
amended, 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 July 13, 1999
----------------------------------------- ---------------
Verne E. Bray Date
President
By /s/ JEFFREY J. KIRBY July 13, 1999
----------------------------------------- ---------------
Jeffrey J. Kirby Date
Principal Financial Officer
14
ARTICLES OF MERGER
OF
NACO COMPOSITES, INC.
WITH AND INTO
NACO INDUSTRIES, INC.
Pursuant to the provisions of Section 16-10a-1104 and Section
16-10a-1105 of the Utah Revised Business Corporation Act (the "Utah Act"), NACO
Industries, Inc., a Utah corporation ("Industries") and NACO Composites, Inc., a
Utah corporation ("Composites"), hereby execute the following Articles of
Merger:
1. Attached hereto as Exhibit A, and incorporated herein by this
reference, is the Agreement and Plan of Merger dated April 20, 1999 (the "Plan
of Merger"), which sets forth the terms of the merger of Composites, a
wholly-owned subsidiary of Industries, with and into Industries (the "Merger").
2. Approval of the Plan of Merger by the shareholders of Composites
was not required because immediately prior to the filing of these Articles of
Merger, Industries owned all of the outstanding shares of each class of the
capital stock of its subsidiary, Composites.
3. Pursuant to Section 16-10a-1104(3) of the Utah Act, the approval of
the Plan of Merger by the shareholders of Industries was not required.
4. The merger of Composites with and into Industries shall become
effective immediately upon the filing of these Articles of Merger and Plan of
Merger with the Utah Department of Commerce, Division of Corporations and
Commercial Code (the "Effective Time").
5. The Effective Time complies with the requirements of Subsection
16-10a-1104(5) of the Utah Act.
ARTICLES OF MERGER
<PAGE>
EXECUTED as of the 20th day of April, 1999.
NACO INDUSTRIES, INC.,
a Utah corporation
By /s/ Verne E. Bray
- -------------------------------------------------
Verne E. Bray, President
NACO COMPOSITES, INC.,
a Utah corporation
By /s/ Jeffrey J. Kirby
- -------------------------------------------------
Jeffrey J. Kirby, President
ARTICLES OF MERGER
2
<PAGE>
Exhibit A
Plan of Merger
[see Agreement and Plan of Merger attached hereto]
ARTICLES OF MERGER
3
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Plan") is entered into as of
the 20th day of April, 1999, by and among NACO Industries, Inc., a Utah
corporation ("Industries") and NACO Composites, Inc., a Utah corporation
("Composites").
Recitals:
A. Industries is a corporation originally incorporated under the laws
of the State of Kansas but that has been duly domesticated and is validly
existing and in good standing under the laws of the State of Utah.
B. Composites is a corporation duly incorporated, validly existing and
in good standing under the laws of the State of Utah.
C. The respective Boards of Directors of Industries and Composites
deem it advisable for the mutual benefit of Industries and Composites that
Composites be merged with and into Industries (the "Merger") upon the terms and
subject to the conditions set forth herein and in accordance with the Utah
Revised Business Corporation Act (the "Utah Act").
D. Industries and Composites and their respective Boards of Directors
have approved this Plan.
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual covenants contained herein, the parties hereto agree as follows:
1. The Merger. At the Effective Time (as hereinafter defined),
Composites shall be merged with and into Industries in accordance with the Utah
Act, and the separate corporate existence of Composites shall cease. (Industries
and Composites are sometimes referred to herein as the "Constituent
Corporations," and Industries, in its capacity as the corporation surviving the
Merger, is sometimes referred to herein as the "Surviving Corporation.")
2. Effective Time. The Merger shall become effective immediately upon
the filing of this Plan, together with appropriate Articles of Merger, with the
Utah Department of Commerce, Division of Corporations and Commercial Code (the
?Utah Division?), in accordance with the Utah Act. The date and time of such
filing are sometimes referred to herein as the "Effective Time."
3. Effect of the Merger. The Merger shall have the effects set forth
in Section 1106 of the Utah Act.
4. Articles of Incorporation. The Articles of Incorporation of
Industries as in effect immediately prior to the Effective Time shall continue
in full force and effect as the Articles of Incorporation of the Surviving
Corporation until duly amended in accordance with the provisions thereof and
applicable law, and shall not be affected by the Merger.
<PAGE>
5. Bylaws. The Bylaws of Industries as in effect immediately prior to
the Effective Time shall continue in full force and effect as the Bylaws of the
Surviving Corporation until duly amended in accordance with the provisions
thereof and applicable law.
6. Directors and Officers.
(a) At the Effective Time, the board of directors of the Surviving
Corporation shall consist of the members of the board of directors of
Industries immediately prior to the Merger, to serve thereafter in
accordance with the Bylaws of the Surviving Corporation and until their
respective successors shall have been duly elected and qualified in
accordance with such Bylaws and the laws of the State of Utah.
(b) At the Effective Time, the officers of the Surviving
Corporation shall be the officers of Industries immediately prior to the
Merger, with such officers to serve thereafter in accordance with the
Bylaws of the Surviving Corporation and until their respective successors
shall have been duly elected and qualified in accordance with such Bylaws
and the laws of the State of Utah.
7. Cancellation of Composites Shares. At the Effective Time, by virtue
of the Merger and without any action on the part of Composites, or the holders
thereof, each share of the common stock of Composites (the "Composites Common
Stock") issued and outstanding immediately prior to the Effective Time, shall be
cancelled and extinguished without consideration.
8. Industries Shares. All of the issued and outstanding shares of the
Common Stock, $.01 par value per share, (the "Industries Common Stock") and all
of the issued and outstanding shares of the Series 1 Class A 7% Cumulative
Convertible Preferred Stock, $3.00 par value, (the "Industries Preferred Stock")
of Industries shall remain issued and outstanding and shall not be converted,
exchanged or cancelled.
9. Shareholder Approval. Pursuant to the provisions of the Utah Act,
this Plan is not required to be submitted to the holders of the Composites
Common Stock for their approval. Pursuant to the provisions of the Utah Act,
this Plan is not required to be submitted to the holders of the Industries
Common Stock nor the holders of the Industries Preferred Stock for their
approval. This Plan and the Articles of Merger shall be executed and filed, and
all required acts shall be done in order to accomplish the Merger under the
provisions of the Utah Act and all other applicable laws and regulations of the
State of Utah.
10. Termination or Abandonment. This Plan may be terminated and the
Merger abandoned at any time prior to the Effective Time by the mutual written
consent of the respective Boards of Directors of the Constituent Corporations.
In the event of termination of this Plan as herein provided, Industries and
Composites and their respective Boards of Directors and shareholders shall not
be liable to each other or the directors or shareholders of each other.
PLAN-MERGER
2
<PAGE>
11. Other Provisions.
(a) Governing Law. This Plan shall be governed in all respects by
the laws of the State of Utah.
(b) Counterparts. This Plan may be executed in counterparts, each
of which shall be an original, but all of which together shall constitute
one and the same agreement.
IN WITNESS WHEREOF, the parties have executed this Plan by their duly
authorized officers as of the date first above written.
NACO INDUSTRIES, INC.,
a Utah corporation
By: /s/ Verne E. Bray
------------------------------------------
Verne E. Bray, President
NACO COMPOSITES, INC.,
a Utah corporation
By: /s/ Jeffrey J. Kirby
------------------------------------------
Jeffrey J. Kirby, President
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