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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, 1998
/ / 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 small business issuer specified in its charter)
UTAH 33-85044-D 48-0836971
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(State or other (Commission File No.) (IRS Employer
jurisdiction Identification No.)
of incorporation)
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
$7,200,308.
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, 1999 was $2,007,415.
As of February 20, 1999 the Registrant had 1,876,227 shares of
Common Stock outstanding, and 165,412 shares of Preferred Stock outstanding.
No documents are incorporated herein by reference.
Transitional Small Business Disclosure Format: YES / / NO /X/
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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 RISKS 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.
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., a Wyoming corporation ("VC Inc.") was formed as a Wyoming
holding company and acquired the stock of NACO, 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. ("NACO Composites"), 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 1998.
The Company manufactures molded fittings (4" through 10" in diameter),
fabricated fittings (4" through 30" in diameter), and PVC valves (4" through
12" in diameter). Molded fittings are manufactured by forcing liquefied 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 "-Products".
NACO Composites produces various products including molds, tooling,
fiberglass and urethane products. The composite products produced in NACO
Composites' Ogden, Utah facility 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.
These composite products are distributed primarily to the transportation,
amusement, recreation and architectural industries.
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INTRODUCTION TO PVC
The production of PVC products 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 ultraviolet light 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 is an affiliate of the Company. They are generally paid on
a per item or per pound basis net 30 days. The Company believes 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 times.
PRODUCTS
PVC PRODUCTS. The Company manufactures and sells molded PVC
fittings (4" through 10" in diameter), as well as fabricated PVC fittings (4"
through 30" 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 large percentage of its PVC products 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
COMPOSITE PRODUCTS. The Company manufactures and distributes
various composite products for the transportation, amusement, recreation and
architectural industry. 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.
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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 (typically 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 has been
patented by NACO. See "-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 engaged in 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 ten 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, the Company
typically increases its 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 of approximately ten percent for early payment
before March 15 and the amount of the discount decreases until the regular
price is charged after May 15.
The Company's manufacturing labor force involves both skilled and
semiskilled labor. The Company has implemented 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 warrants that all of its product lines will be free from workmanship
and material defects for a period of four months from date of delivery.
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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.
Over the past year, the Company has initiated a training program
designed to improve customer satisfaction, enhance product quality, eliminate
waste and foster continuous improvement in the Company's operations. Employee
training has been an integral part of this program. This program is
different from past years because training has utilized experts in the fields
of "the theory of constraints." This training has focused on management,
team building, communications, decision making and problem solving. It has
involved personnel from management to the production floor.
COMPOSITE PRODUCTS. The Company manufactures customized composite
products on a contract basis in response to specific customer orders. 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
fiberglass fibers.
The Company works closely with its customers through the conceptual
and developmental stages 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 product. 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 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 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 each part or batch of parts. Items which are not accepted by
the Company's quality control inspectors are either reworked or discarded 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
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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 its product quality and customer service justify a
higher price for its products; however, the Company's pricing structure
enables it to remain flexible enough to match the pricing of its competitors.
As a result of feedback from industry dealers, 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. With its manufacturing plants and warehouse
facilities located across the country, NACO strives to provide shorter
shipping times and better service than its competitors, which means quicker
response to customer needs. During the year ended November 30, 1998, the
Company achieved its goal to ship 90% of all orders within 48 hours of
receipt. The Company's next goal is to ship orders within 24 hours, which
will require careful inventory management, while maintaining manufacturing
flexibility. In an effort to facilitate on-time delivery, warehouse
operations have been upgraded. The Company now relies on more frequent
shipments of smaller volumes, which the Company believes will enable it to
maintain a favorable 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 times provided on larger projects.
In addition to its three PVC fittings 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; and Pasco, Washington. The warehouse agents are
paid on a commission basis for handling, storing 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 Tucker, Georgia; Washington,
Michigan; and Melbourne, Australia. The companies involved in this arrangement
purchase products from the Company, then 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 five to
ten percent of the cost of the product except in Australia, where freight is
sent collect. The use of the warehouse and buy-sell representatives allows
the Company to control shipping costs while providing timely delivery to its
customers.
COMPOSITE PRODUCTS. The Company directs its marketing efforts in
four 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; (3) amusement products for the
amusement park industry; and (4) products for the transportation industry.
The Company's products are sold through Company-paid sales
representatives. Each project is bid independently. The bidding process is
based on several factors such as material requirements, project complexity,
geographic 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.
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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, agricultural 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 ten percent lower in winter
months due to decreased demand and lower resin prices during which time the
Company will attempt to stockpile materials. See "-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 in foreign markets, as the Company faces stiff
overseas competition. The transportation industry is also somewhat seasonal,
with the winter months being the lowest months and spring and summer being
the highest.
COMPETITION.
PVC PRODUCTS. Many 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. (Ponce, 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 their 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 "-Patent and Copyright Protection".
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 diameter
fittings from one manufacturer and large diameter fittings 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 within 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), DaleBoot 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; and Bennetts
(Salt Lake City, Utah) and Fiberglass Systems
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(Boise, Idaho) for the transportation industry. The Company believes there
are numerous other small competitors, which typically employ fewer than ten
employees. There are various other composite shops, which make non-competing
products, in the intermountain area.
PLANNED OPERATIONAL GROWTH.
PRODUCT DEVELOPMENT. The Company has completed development of its
27" to 30" 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 utilizing fiberglass composite technology in the
development of new products, and improving quality and performance of
existing products. The Company is developing a composite slide gate valve,
six to twelve inches in diameter, which will be utilized in the irrigation,
industrial and utility markets. These products have been developed to the
testing stage and are anticipated to be completed within the 1999 fiscal
year.
NACO currently targets various distributors of PVC fittings in the
irrigation and utilities markets. Approximately 70% 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, 1998 and 1997 were $45,950 and
$16,009 respectively, of which 99% was spent in the plastics division and the
remaining 1% was spent in the composite segment. It is anticipated that
research and development expenditures for the year ended November 30, 1999
will be approximately at the same level as for the year ended November 30,
1998, however if cash flow permits The Company would like to increase
research & development of new products in the future.
MAJOR CUSTOMERS. During the year ended November 30, 1998, no
customer accounted for more than 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, 1998, NACO had 114 employees of whom
109 were full-time and five were part-time. All plant locations are
non-union. The Company anticipates it will add between four and ten
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 1998,
and has been extended until 2001. The patent was renewable for up to 17
years from the date of issuance (2001). 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 degree 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 believes 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.
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 lease for the Logan facility is with a related
party, and the Company does not anticipate any problems renewing this lease.
See "Item 12. Certain Relationships and Related Transactions." Lease payment
amounts on the Lodi, Logan, and Ogden facilities are $4,812, $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 $278,806.
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.
The Company's policies regarding real estate investments are
dictated primarily by the Company's operating requirements. It is not
currently the Company's policy to acquire assets primarily for capital gains
or income. The Company's real estate investments are limited to commercial
properties used in the Company's business operations. The Company has not
adopted limitations on the percentage of assets which may be invested in any
single investment or type of investment. The Company is not presently
invested, and does not presently intend that it will make future investments,
in real estate mortgages or real estate-based securities. Management does
not believe a vote of security holders would be required to modify the
Company's existing real estate investment policies.
The Company does not own any unimproved or undeveloped real property and does
not presently have any plans to develop any unimproved or undeveloped
property. In the opinion of the Company's management, the Company's
properties are adequately covered by insurance.
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, 1998.
8
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock (the "Common Stock") is held of record
by nineteen persons and is not publicly 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 a warrant to purchase 2 share of 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 Units,
for the fiscal years ended November 30, 1998 and 1997 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, 1998:
First Quarter . . . . . . $ 4.50 $ 4.50
Second Quarter . . . . . 4.50 4.50
Third Quarter . . . . . . 4.50 4.50
Fourth Quarter . . . . . 4.50 4.50
HIGH LOW
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
</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 $34,482 of dividends was paid on the Preferred Stock. There is $69,272
of dividends in arrears at November 30, 1998 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 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 molded PVC fittings (4"
through 10" in diameter), as well as fabricated PVC fittings (4" though 30"
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 products into the
agricultural market. The agricultural market is very seasonal. Product
sales occur principally during the spring and fall when crops are not being
grown. As the Company's product mix continues to diversify into the fittings
business, management anticipates that this diversification has and will
increase sales throughout the year. Historically, 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,
management anticipates that the Company's operating results will reflect less
fluctuation through the year.
The Company, through NACO Composites, also manufactures and sells
composite products. The composite business operates from the Company's
facility in Ogden, Utah, where the Company produces various composite
products. The Company started supplying composite products to customers in
March 1995.
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION RELATES TO THE TWELVE MONTH PERIODS ENDED
NOVEMBER 30, 1998 AND NOVEMBER 30, 1997. FOR COMPARISON PURPOSES, PERCENTAGES
OF SALES WILL BE USED RATHER THAN DOLLARS. IN THE FOLLOWING DISCUSSION, THE
YEAR ENDED NOVEMBER 30, 1998 AND NOVEMBER 30, 1997 MAY BE REFERRED TO AS Y98
AND Y97, RESPECTIVELY.
OVERVIEW. The Company sustained an operating loss of $230,515 for
the twelve month period ending November 30, 1998. The Company's plastic
products operations generated an operating profit of $69,714, but the
Company's composite products operations generated an operating loss of
$300,229. The loss is a result of several factors. First, the Company's
sales were down slightly and were insufficient to cover operating expenses.
Second, the cost of goods sold was high due to the increased expense of
inexperienced labor. Competition for experienced labor is strong and, as a
result, the Company lost some experienced employees in its composites
operations that were replaced by less experienced people, resulting in more
rework and scrap. Management is addressing the loss in two ways. First,
management believes that the Company's Ogden facility has capacity that will
accommodate much 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 has hired a new
production manager with more than 25 years of experience in the field of
composite product manufacturing. The Company hopes that the new manager will
be able to train and bring the new people up to the competency levels
required by the Company. The Company also hopes the new manager will be able
to address production problems and assist the Company's employees in meeting
the Company's standards for product quality and delivery deadlines.
Management has also addressed increased wage rates to make the Company more
competitive in the labor market. Management has also determined that the
Company's plastic fabrication facilities are underutilized and is focusing
efforts on marketing to fill that capacity. Management is continually
reviewing its operations to try and reduce expenses without affecting quality
and service to its customers.
SALES. Net sales for Y98 decreased by 5.0% to $7,200,308, compared
to net sales of $7,579,631 for Y97. This decrease resulted mainly from
unusually wet weather on the West Coast and Midwest regions during the spring
of Y98. Traditionally, the Company's highest sales are from March through
June, so the wet weather had a significant impact on the Company's sales.
Sales decreased most in the agricultural fittings market. This decrease was
offset somewhat by increased sales in the industrial and commercial markets.
Management believes composites sales were down primarily due to a decline in
the amusement ride market. In Y97, the Company received several
10
<PAGE>
large orders in the amusement ride market, but did not receive comparable
orders in Y98. Sales of composite products decreased $107,861, or 9.7%, from
Y97. PVC sales decreased $270,962, or 4.2%, from Y97.
GROSS MARGIN. Gross margin as a percentage of sales improved
slightly in Y98 to 37.0%, compared to 36.0% in Y97. The increase in gross
margin was mainly due to the lower percentage of sales from the composite
product line in Y98. Gross margin on composites was 9.2% of sales for Y98,
compared to 9.4% of sales for Y97. The low margins for the composite product
line was primarily a result of low volume of sales compared to the capacity
of the plant and inexperienced labor. The volume was insufficient to cover
the operating expenses. NACO's plastics products gross margin for Y98 and Y97
was 41.9% and 40.6%, respectively. Because the sewer fittings were a
relatively new product line in Y97, there were additional costs associated
with startup, which the Company did not have in Y98. 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.
No material inventory adjustments were made at year-end Y98 as a result
of the physical inventory.
SELLING. Selling expenses were 20.7% of net sales for Y98,
compared to 19.5% for Y97. Selling expenses in actual dollars decreased
$19,648. The increase as a percentage of sales was mainly due to lower sales
volumes. See "-Sales." Advertising expenses increased 82.4% to .5% of sales
in Y98 from .3% in Y97, primarily because catalogs for existing and new
product lines were produced in Y98, but not in Y97. Salaries and related
benefits decreased 7.0% from Y97 to Y98 mainly due to the departure of one
salesman. He was not replaced, but responsibilities were shifted between
current employees to cover his areas of responsibility.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
were 17.7% of net sales for Y98, compared to 17.1% for Y97. The increase was
due mainly to decreased sales volumes during Y98. In actual dollars, general
and administrative expense decreased by $38,468. As a percentage of sales,
salaries and related benefits decreased 3.7%, mainly due to a voluntary
reduction in force where duties were absorbed by existing employees rather
than hiring replacements. Research & development expenses increased from .2%
of sales to .4%, mainly due to the focus of additional efforts to develop a
new sliding gate valve. Legal and accounting expenses decreased $15,979 from
Y97 to Y98 or from 1.0% of sales to .9% of sales, mainly due to less legal
needs and more efficiency in the accounting audit. Administrative
depreciation expense increased from .8% of sales to 1.0%, mainly due to new
hardware and software purchases needed to bring the Company into Y2K
compliance.
OTHER. Other expenses/revenues were 2.6% for Y98, compared to 2.8%
for Y97. Interest expense increased from 2.7% in Y97 to 2.8% in Y97, mainly
because of sales volume. The effective interest rate (interest expense
divided by the average debt balance for the period) for Y98 and Y97 was
11.69% and 11.31%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity have been cash from
operations, credit facilities and equity financing. Cash provided in
operating activities was $645,501 in Y98. Cash as of November 30, 1998 was
$112,362, up $36,984 from Y97. Because of the continued losses and need for
capital, the Company is facing a cash flow shortage. The Company is
addressing the 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 Company's loss for Y98 and the expansion of the Company's operations, the
Company's working capital position has been reduced significantly. During the
Company's expansion, a substantial portion of the capital improvements and
new equipment have been funded through draws against the Company's line of
credit and internal financing. The total cash paid for property and
equipment totaled $68,237 in Y98, $514,408 in Y97 and $302,991 in Y96. The
Company increased trade payables by $485,037 from November 30, 1997 to
November 30, 1998. At November 30, 1997, the Company was current on trade
payables. At November 30, 1998, the Company was out over 60 days on trade
payables due to lack of operating funds. As of February 19, 1999, the Company
is out over 90 days on trade payables. 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. During January and February the Company
typically ships early orders to customers. The Company generally receives
payment for January and February shipments in March, therefore management
anticipates that cash flow will increase in
11
<PAGE>
March and continue at normal levels for the remainder of the Company's normal
busy season, which is typically from March to June.
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, 1998,
the outstanding balance of the Company's revolving line of credit was
$849,326. This line of credit expired as of August 31, 1998 and has not been
renewed. The Company is in the process of securing a new line of credit and
restructuring its term debt. Approval has been received from another lending
institution for a revolving line of credit pending the term debt approval.
The Company has a letter of intent from the lending institution to
restructure the term debt. The Company presently anticipates that execution
of the new line of credit and restructuring of the term debt will be
completed during March, 1999; however, both transactions are subject to
numerous conditions which, if not satisfied, could preclude funding. Pending
replacement of the Company's revolving line of credit and term debt, the
Company and Nations Bank, the lender under the Company's existing line of
credit, have entered into a Forbearance Agreement, which, among other things,
provides for an increase in the interest rate to the prime rate established
by Nations Bank, plus 3.5% and contains waivers by Nations Bank of all
defaults under the line of credit. During Y98, the Company received an
additional $57,430 from the exercise of warrants to purchase 19,144 shares of
Common Stock.
The Company currently has plans to spend up to $150,000 in capital
expenditures to update and expand its operations, subject to the Company's
receipt of a new line of credit and restructuring of its term debt as
described above.
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 November 30, 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 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 is 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 Company's 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
other events and factors discussed in this report, other filings with the
Securities and Exchange Commission and the Company's press releases.
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, an inability to process transactions, send invoices or engage in
similar normal business activities.
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
12
<PAGE>
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 Company's exposure to Year 2000 issues
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 will roll computer clocks
forward and perform tests ensuring Year 2000 compatibility. 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.
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 . . . . . 63 President and Chairman of the Board of Directors
Jeffrey J. Kirby . . . 36 Vice President, Secretary, Treasurer and Director
Daniel M. Gruber . . . 46 Vice President
Nina F. Birkle . . . . 65 Vice President
Bryce M. Petersen . . . 49 Vice President of Finance
Peter Heilmayr . . . . 65 Director
James C. Czirr . . . . 45 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., a manufacturer of PVC products. 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.
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 and has principal responsibility
for operations of the Lodi, California facility.
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 and has primary
responsibility for operations of the Garden City, Kansas facility. 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.
BRYCE M. PETERSEN was appointed Vice President of Finance in 1997.
He has been employed by the
14
<PAGE>
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., a manufacturer of all terrain vehicles, located
in Logan, Utah.
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, a producer of trade shows. 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.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
At the present time, the Company files reports with the Securities
and 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 the total compensation paid or
accrued by the Company on behalf of the Chief Executive Officer and President
of the Company during the last three fiscal years. No other executive
officer of the Company received total annual salary and bonus in excess of
$100,000 for services rendered during the year ended November 30, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------------
NAME & POSITION YEAR SALARY BONUS OTHER ANNUAL ALL OTHER
COMPENSATION COMPENSATION(1)
- ------------------------------ ---- -------- ----- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Verne E. Bray 1998 $149,934 0 0 $6,877
Chief Executive Officer 1997 233,268 0 0 4,050
and President 1996 211,086 0 0 3,906
</TABLE>
- -------------------
(1) Consists of Company contributions to a defined contribution plan.
The Company did not grant any stock options or stock appreciation
rights to Mr. Bray during the year ended November 30, 1998.
15
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR END OPTION VALUES
The following table sets forth the aggregate value of unexercised
options to acquire shares of Common Stock held by the Chief Executive Officer
and President on November 30, 1998.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
AT FY-END(#) FY-END($)(1)
------------------- -----------------------
SHARES ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE
- ------------------------- ------------------ ----------- ------------------- -----------------------
<S> <C> <C> <C> <C>
Verne E. Bray -- -- 20,000/0 $0/$0
Chief Executive Officer
and President
</TABLE>
- -------------------
(1) The 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
warrant to acquire one-half of a 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 E. 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. Mr. Bray
voluntarily reduced his salary in 1998 to $150,000. This reduction will
continue in 1999.
DIRECTOR COMPENSATION
In August 1996, the Company granted a non-qualified option 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 19, 1999, certain
information with respect to the beneficial ownership of Common Stock and
Preferred Stock, by each person known by the Company to own beneficially more
than five percent of the Common Stock or Preferred Stock, by each director,
by the Chief Executive Officer and by all directors and executive 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 PERCENTAGE
OF CLASS OF NUMBER OF OF
BENEFICIAL OWNER STOCK SHARES OWNED CLASS(12)
- ----------------------------------------------------------------- -------- ------------ ----------
<S> <C> <C> <C>
Verne E. Bray* . . . . . . . . . . . . . . . . . . . . . . . . . Common 1,486,667(1) 78.4
1367 E. 1980 North
Logan, UT 84321
Britania Holding Limited . . . . . . . . . . . . . . . . . . . . Common 343,750 18.3
Kings House, The Grange St. Peter Port,
Guernsey, Channel Islands GY12QJ
Jeffrey J. Kirby* . . . . . . . . . . . . . . . . . . . . . . . . Common 31,587(2) 1.7
285 East 400 North Preferred 60 **
Millville, UT 84321
Peter Heilmayr* . . . . . . . . . . . . . . . . . . . . . . . . . Common 24,250(3) 1.3
6925 Tumbling Trail Preferred 1,170 **
Fort Worth, TX 76116
Jim C. Czirr* . . . . . . . . . . . . . . . . . . . . . . . . . . Common 73,333(4) 3.8
6070 Baldy Mtn. Rd.
Sandpoint, ID 83864
Gary Carson . . . . . . . . . . . . . . . . . . . . . . . . . . . Common 22,400(5) 1.2
4367 Bobwhite Ct. Preferred 11,200 6.8
Ogden, UT 84403-3262
Dan Bray* . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common 25,000(6) 1.3
1755 Shadow Ridge Circle Preferred 12,500 7.6
Ogden, UT 84403
Gary Gibbons . . . . . . . . . . . . . . . . . . . . . . . . . . Common 30,418(7) 1.4
1606 North 1340 East Preferred 11,667 7.1
North Logan, UT 84341
Jack Prust . . . . . . . . . . . . . . . . . . . . . . . . . . . Common 17,000(8) .9
P.O. Box 5135 Preferred 8,500 5.2
San Ramone, CA 94583
Wapiti Capital L.L.C. . . . . . . . . . . . . . . . . . . . . . . Common 40,000(9) 3.1
1252 Tweedbrook Pl. Preferred 20,000 12.2
Virginia Beach, VA 23452
MSA Industrial Corporation . . . . . . . . . . . . . . . . . . . Common 20,000(10) 1.6
P.O. Box 688 Preferred 10,000 6.1
Benton Harbor, MI 49023
All directors and executive officers as a group (10 persons) . . Common 1,630,570(11) 80.9
Preferred 15,577 9.5
</TABLE>
- -------------------
* Indicates current director and/or executive officer.
** Less than 1 percent.
(1) Includes 20,000 shares of Common Stock issuable upon exercise of
presently exercisable options.
17
<PAGE>
(2) Includes 20,000 shares of Common Stock issuable upon exercise of
presently exercisable options, 120 shares of Common Stock issuable upon
conversion of 60 shares of Preferred Stock and 2,400 shares of Common
Stock granted pursuant to the Company's employee stock incentive plan
which are exercisable within 60 days.
(3) Includes 20,000 shares of Common Stock issuable upon presently
exercisable options and 3,400 shares of Common Stock issuable upon
conversion of 1,700 shares of Preferred Stock.
(4) Includes 13,333 shares owned by Extol Corp., of which Mr. Czirr has 50%
ownership, and 60,000 shares issuable upon exercise of presently
exercisable options.
(5) Consists of 22,400 shares of Common Stock issuable upon conversion of
11,200 shares of Preferred Stock.
(6) Consists of 25,000 shares of Common Stock issuable upon conversion of
12,500 shares of Preferred Stock.
(7) Includes 23,334 shares of Common Stock issuable upon conversion of
11,667 shares of Preferred Stock.
(8) Consists of 17,000 shares of Common Stock issuable upon conversion of
8,500 shares of Preferred Stock.
(9) Consists of 40,000 shares of Common Stock issuable upon conversion of
20,000 shares of Preferred Stock.
(10) Consists of 20,000 shares of Common Stock issuable upon conversion of
10,000 shares of Preferred Stock.
(11) Includes 139,200 shares of Common Stock issuable upon exercise of
presently exercisable options, 3,854 shares of Common Stock issuable
upon conversion of 1,927 shares of Preferred Stock and 19,200 shares
of Common Stock granted pursuant to the Company's employee stock
incentive plan which are exercisable with 60 days.
(12) As of the date hereof 270,875 shares of Common Stock 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
Company acquired the stock. See "Item 12. Certain Relationships and
Related 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 Common Stock. The exercise price
of options granted under the Plan is determined by a committee appointed by
the Board of Directors. The exercise price of incentive options must not be
less than the fair market value of the underlying share of Common Stock as of
the date of grant. The maximum term of the options is six years and they vest
over a five-year period. The Plan also allows for granting of stock
appreciation rights. Upon exercise of a stock appreciation right, the holder
may receive shares of Common Stock (and, with respect to fractional shares,
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 year ended November 30,
1998, 19,000 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 E. Bray is an officer, director and the sole
shareholder. Mr. Bray is also the Chief Executive Officer, President,
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 each of the fiscal years ended
November 30, 1997 and 1998. The lease provides that the premises may only be
used for operating the business of the Company. 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 of the lease to be fair and
reasonable.
As of November 30, 1997, the Company had loaned P.V.C., Inc.
$15,704 and as of November 30, 1998, the Company had loaned P.V.C. $56,627.
The loan does not bear interest and is payable on demand.
During the years ending February 28, 1995, the Company supervised
the expansion of the Company's Logan, Utah facility. Building and equipment
costs totaling $210,700 through February 20, 1995 were paid by the Company,
representing the construction cost of the building which is owned by P.V.C.,
Inc. Upon obtaining permanent financing, P.V.C., Inc. reimbursed the amount
paid out by the Company for the construction and
18
<PAGE>
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, bears interest at two percent
over prime and is payable in monthly installments of $2,629 through May,
2010. The guarantee was taken into account in determining the lease payments
on the facility described above.
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 for a period
of five years. Mr. Czirr is a 50% shareholder in an investor relations
consulting firm retained by the Company. Mr. Czirr's firm provides investor
relations consulting for a retainer of $3,000 per month through August, 2000.
Effective March 15, 1997, Mr. Czirr and the Company modified the amount of
compensation payable under the agreement to provide for monthly payments of
$1,000 cash and the equivalent of $2,000 of Common Stock.
During the year ended November 30, 1998, the Company entered into
two lease financing agreements for equipment that is being used in the
operation of Rimshot L.L.C., a limited liability company owned by Dan Bray, a
son of Verne E. Bray, the Chief Executive Officer, President, director and a
controlling shareholder of the Company ("Rimshot"). The Company recorded
assets of $139,048 and related debt of $133,048. As of November 30, 1998,
Rimshot owed the Company $252,000 in connection with financing startup
operations. Subsequent to year-end, an indemnification agreement was signed
by Rimshot agreeing to hold the Company harmless for the cost of the leased
equipment. Subsequent to year-end, Dan Bray also signed a pledge agreement
on 12,500 shares of Preferred Stock and signed security agreements covering
Rimshot equipment and receivables to collateralize the amount due to the
Company. The Company benefits from the existence of Rimshot in several ways.
First, to the Company's knowledge, the closest machines of this size are
located in San Francisco and Texas. The Company has certain products that
are made from urethane that Rimshot is now able to run for the Company at a
substantial savings in freight. Second, one of the new products that the
Company has in development will require the use of one of the machines leased
by Rimshot. Third, Rimshot has the ability to assist in developing prototype
products for the Composites, which saves both time and costs because of the
close proximity of Rimshot to NACO Composites in locality and the personal
relationship.
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. . . . . . . . . . . . . . . . (5)
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 . . . . . . . . . . . . . . . . . . . . (5)
10.12 Pledged Stock and Security Agreement between the Company,
Dan Bray and Rimshot LLC . . . . . . . . . . . . . . . . . . Filed herewith
10.13 Security Agreement between the Company, Dan Bray and Rimshot
LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Filed herewith
10.14 Assumption and Indemnification Agreement between the Company
and Rimshot LLC . . . . . . . . . . . . . . . . . . . . . . . Filed herewith
21 Subsidiaries of Registrant . . . . . . . . . . . . . . . (5)
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.
20
<PAGE>
(5) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for
the fiscal year ended November 3, 1997.
(b) The registrant did not file a report on Form 8-K in the fourth quarter
of its fiscal year ended November 30, 1997.
21
<PAGE>
JONES WRIGHT
SIMKINS & [LETTERHEAD]
ASSOCIATES LLP
INDEPENDENT AUDITOR'S REPORT
February 24, 1999
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, 1998 and 1997, 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, 1998 and 1997, 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>
NACO INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
------ ----------- ------------
<S> <C> <C>
Current assets:
Cash $ 112,362 75,378
Accounts receivable, net of allowances
of $100,193 and $69,750 803,165 671,562
Inventory 656,134 772,752
Taxes receivable 5,100
Receivable from related parties 164,873 15,704
Other current assets 55,505 97,561
----------- -----------
Total current assets 1,792,039 1,638,057
----------- -----------
Property and equipment:
Land 40,700 40,700
Buildings and improvements 675,316 600,785
Equipment and vehicles 2,771,889 2,449,998
Equipment construction in progress 29,461 89,980
----------- -----------
Total property and equipment 3,517,366 3,181,463
Accumulated depreciation (1,779,688) (1,456,133)
----------- -----------
Net property and equipment 1,737,678 1,725,330
----------- -----------
Other assets:
Receivable from related parties 152,203
Intangible and other assets 112,615 106,776
----------- -----------
Total other assets 264,818 106,776
----------- -----------
Total assets $ 3,794,535 3,470,163
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-2
<PAGE>
NACO INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
- ------------------------------------ ----------- ------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 650,305 251,122
Accrued expenses 283,900 198,046
Line of credit 849,326 824,326
Notes payable 88,542
Current portion of long-term obligations 300,582 233,259
----------- -----------
Total current liabilities 2,084,113 1,595,295
----------- -----------
Long-term liabilities:
Long-term obligations, less current portion 673,922 664,001
Deferred income taxes 9,800 94,200
----------- -----------
Total long-term liabilities 683,722 758,201
----------- -----------
Total liabilities 2,767,835 2,353,496
----------- -----------
Stockholders' equity:
7%cumulative convertible preferred stock,
$3 par value; authorized 330,000 shares,
165,412 shares issued including 1,667 in
treasury for 1997; aggregate liquidation
preference of $1,061,744 and $1,044,774
in 1998 and 1997, respectively 496,236 496,236
Common stock, $.01 par value; 10,000,000
shares authorized; 2,147,102 and
2,193,796 shares issued; including
270,875 and 346,380 shares in treasury 21,472 21,939
Additional paid-in capital 1,084,959 1,003,800
Retained earnings (deficit) (484,342) (278,711)
----------- -----------
1,118,325 1,243,264
Less: treasury stock, at cost (91,625) (126,597)
----------- -----------
Total stockholders' equity 1,026,700 1,116,667
----------- -----------
Total liabilities and stockholders' equity $ 3,794,535 3,470,163
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of
these financial statements.
F-3
<PAGE>
NACO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED NOVEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- ------------
<S> <C> <C>
Sales, net $ 7,200,308 7,579,631
Cost of goods sold 4,510,662 4,850,507
----------- ---------
Gross profit 2,689,646 2,729,124
----------- ---------
Operating expenses:
Selling expenses 1,456,526 1,476,174
General and administrative expenses 1,227,234 1,295,643
Research and development expenses 45,950 16,009
----------- ---------
Total operating expenses 2,729,710 2,787,826
----------- ---------
Income (loss) from operations (40,064) (58,702)
----------- ---------
Other income (expense):
Interest income 10,732 2,030
Interest expense (202,846) (208,287)
Gain (loss) on sale of assets 1,663 (2,846)
----------- ---------
Total other income (expense) (190,451) (209,103)
----------- ---------
Income (loss) before income taxes (230,515) (267,805)
Income tax expense (benefit) (83,600) 16,200
----------- ---------
Net loss (146,915) (284,005)
Adjustment for preferred dividends (69,272) (62,304)
----------- ---------
Adjusted net loss to common stockholders $ (216,187) (346,309)
----------- ---------
----------- ---------
Loss per common share:
Primary $ (0.12) (0.20)
Fully diluted (0.12) (0.20)
Weighted average number of common shares
outstanding (shares issued less shares
in treasury) 1,862,690 1,754,195
</TABLE>
The accompanying notes are an integral part of
these financial statements.
F-4
<PAGE>
NACO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED NOVEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
Preferred Stock Common Stock Treasury Stock
------------------- -------------------- Additional Retained -------------------- Total
Number of Number of Paid-in Earnings Number of Stockholders'
Shares Amount Shares Amount Capital (Deficit) Shares Amount Equity
--------- -------- --------- --------- ---------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Balance,
November 30, 1997 165,412 $496,236 2,193,796 $ 21,939 $1,003,800 $(278,711) (346,380) $(126,597) $ 1,116,667
Issuance of common stock
for warrants exercised 19,144 191 57,239 57,430
Issuance of common shares
for consulting services 8,000 80 23,920 24,000
Dividends - preferred shares
($.21 per share) (34,482) (34,482)
Sale of preferred shares 1,667 10,000 10,000
Treasury stock retired (73,838) (738) (24,234) 73,838 24,972 0
Net loss (146,915) (146,915)
--------- -------- --------- --------- ---------- --------- --------- --------- -------------
Consolidated Balance,
November 30, 1998 165,412 $496,236 2,147,102 $ 21,472 $1,084,959 $(484,342) (270,875) $ (91,625) $ 1,026,700
--------- -------- --------- --------- ---------- --------- --------- --------- -------------
--------- -------- --------- --------- ---------- --------- --------- --------- -------------
</TABLE>
(continued)
The accompanying notes are an integral part
of these financial statements.
F-5
<PAGE>
NACO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED NOVEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
Preferred Stock Common Stock Treasury Stock
------------------- -------------------- Additional -------------------- Total
Number of Number of Paid-in Retained Number of Stockholders'
Shares Amount Shares Amount Capital Earnings Shares Amount Equity
--------- -------- --------- --------- ---------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Balance,
November 30, 1996 132,412 $397,236 1,918,551 $ 19,186 $ 152,819 $ 57,364 (418,551) $(141,569) $ 485,036
Dividends - preferred
shares ($.21 per share) (27,836) (27,836)
Issuance of preferred stock
in private placement,
net of issuance costs
of $3,028 33,000 99,000 95,972 194,972
Issuance of common stock
in private placement,
net of issuance costs
of $82,500 343,750 3,438 739,062 742,500
Issuance of common shares
for consulting services 5,333 53 15,947 16,000
Purchase of preferred shares (1,667) (10,000) (10,000)
Treasury stock retired (73,838) (738) (24,234) 73,838 24,972 0
Net loss (284,005) (284,005)
--------- -------- --------- --------- ---------- --------- --------- --------- -------------
Consolidated Balance,
November 30, 1997 165,412 $496,236 2,193,796 $ 21,939 $1,003,800 $(278,711) (346,380) $(126,597) $ 1,116,667
--------- -------- --------- --------- ---------- --------- --------- --------- -------------
--------- -------- --------- --------- ---------- --------- --------- --------- -------------
</TABLE>
The accompanying notes are an integral part of
these financial statements.
F-6
<PAGE>
NACO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED NOVEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(146,915) (284,005)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 331,356 284,889
Amortization 5,915 5,915
Consulting for common stock 24,000 16,000
Deferred income taxes (84,400) 15,100
(Gain) loss on sale of assets (1,663) 2,486
(Increase) decrease in:
Accounts receivable, net (131,603) (55,787)
Inventory 116,618 (104,251)
Taxes receivable 5,100 43,500
Other current assets 42,056 (25,359)
Increase (decrease) in:
Accounts payable 399,183 (292,952)
Accrued expenses 85,854 9,970
---------- ---------
Net cash provided by (used in)
operating activities 645,501 (384,494)
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (68,237) (514,408)
Loans to related parties (301,372) (15,704)
Investment in intangible and other assets (11,754) (6,784)
---------- ---------
Net cash used in investing activities (381,363) (536,896)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings on line of credit 25,000 160,000
Proceeds from preferred stock issuance 194,972
Sale (purchase) of preferred stock 10,000 (10,000)
Proceeds from common stock issuance 57,430 742,500
Payments on related party loan (34,382)
Proceeds from short-term notes 17,271
Payments on short-term note (32,544)
Payments on long-term debt (285,102) (211,519)
Dividend payments (34,482) (27,836)
---------- ---------
Net cash provided by (used in)
financing activities (227,154) 798,462
---------- ---------
Increase (decrease) in cash 36,984 (122,928)
Cash, beginning of period 75,378 198,306
---------- ---------
Cash, end of period $ 112,362 75,378
---------- ---------
---------- ---------
(continued)
</TABLE>
The accompanying notes are an integral part of
these financial statements.
F-7
<PAGE>
NACO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED NOVEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES:
Income taxes paid $ 1,100 900
---------- ---------
---------- ---------
Interest paid $ 204,159 200,411
---------- ---------
---------- ---------
NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock for services:
Issuance of common stock $ 24,000 16,000
Consulting expenses (24,000) (16,000)
---------- ---------
Cash paid for certain consulting services $ -0- -0-
---------- ---------
---------- ---------
Acquisition of property and equipment:
Cost of property and equipment $ 342,041
Debt obligations assumed (273,804)
---------- ---------
Cash paid for property and equipment $ 68,237
---------- ---------
---------- ---------
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-8
<PAGE>
<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-9
<PAGE>
NACO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
INVENTORY
Raw material inventory and goods purchased for resale are recorded
at the lower of cost (first-in, first-out method) or market. Manufactured
finished goods and work in process inventory are recorded at the lower of
cost (standard cost method) or market which represents management's estimate
of its net realizable value.
FIXED ASSETS AND DEPRECIATION
Items capitalized as buildings, vehicles and equipment are carried
at cost. Maintenance and repairs are charged to expenses as incurred. Costs
of major renewals or betterments are capitalized by charges to the
appropriate property account and depreciated over the remaining useful life.
Depreciation is computed by using the straight-line method for financial
reporting purposes and accelerated cost recovery methods for federal income
tax purposes. Buildings are depreciated over lives of twenty-five to thirty
years. Purchased and constructed equipment is depreciated over lives of three
to ten years. The cost of property disposed of and related accumulated
depreciation are removed from the accounts at time of disposal, and gain or
loss is credited or charged to operations.
REVENUE RECOGNITION
Inventory is shipped to and held by warehouse agents. 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.
ADVERTISING COSTS
Advertising costs are expensed when incurred.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed when incurred.
F-10
<PAGE>
NACO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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, net operating loss carryforwards and from inventory capitalization
requirements used for income tax purposes.
EARNINGS PER SHARE
Earnings per share amounts are computed based on the weighted
average number of shares actually outstanding (shares issued less shares in
treasury).
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
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.
In February 1998, the FASB issued SFAS No. 132, "Employers
Disclosures about Pensions and Other Postretirement Benefits". SFAS No. 132
revises disclosures about pension and other postretirement benefit plans.
This statement is effective for fiscal years beginning after December 15,
1997. The adoption of this statement will not have a material effect on the
Company's pension disclosures.
F-11
<PAGE>
NACO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and hedging
activities and requires the recognition of all derivatives in the balance
sheet at their fair market values. This statement is effective for fiscal
years beginning after June 15, 1999. The adoption of this statement will not
have a material effect on Company's balance sheet.
NOTE 2 - SUBSIDIARY
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.
manufactures composite and fiberglass products. The results of operations of
NACO Composites, Inc. are 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.
NOTE 3 - CONCENTRATIONS OF CREDIT RISK
At November 30, 1998 and November 30, 1997, bank balances in excess
of depository insurance limits were approximately $156,000 and $78,000,
respectively.
NOTE 4 - INVENTORY
Inventory, net of valuation allowances, consists of the following:
<TABLE>
<CAPTION>
Nov. 30, Nov. 30,
1998 1997
----- ----
<S> <C> <C>
Raw materials $260,808 309,193
Work in process 9,150 12,276
Finished goods 386,176 451,283
-------- --------
Total $656,134 772,752
-------- --------
-------- --------
</TABLE>
At November 30, 1998 and 1997 the valuation allowances on inventory
were $92,000 and $110,000, respectively.
F-12
<PAGE>
NACO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - INTANGIBLE AND OTHER ASSETS
Intangible and other assets consist of the following:
<TABLE>
<CAPTION>
Nov. 30, Nov. 30,
1998 1997
----- ----
<S> <C> <C>
Goodwill, net of accumulated amortization of
$12,815 and $6,901, respectively $ 75,903 81,817
Cash surrender value of life insurance 23,427 16,174
Deposits 13,285 8,785
-------- --------
Total $112,615 106,776
-------- --------
-------- --------
</TABLE>
NOTE 6 - REVOLVING LINE OF CREDIT AND SHORT-TERM NOTES PAYABLE
At November 30, 1998, the Company had borrowed $849,326 on its line
of credit. The line of credit, which matured August 1, 1998, bore 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. 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 loans to another or guaranteeing or otherwise
becoming liable for the undertaking of others, before issuing or repurchasing
capital 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, 1997, the Company had borrowed $824,326 on
its line of credit.
At November 30, 1998, the Company had not renewed its line of credit
agreement with Nation's Bank. As a result all the debt with Nation's Bank was
due. Subsequent to year-end the Company signed a forbearance agreement, which
waived the cross default provisions for the period ending November 30, 1998.
The Agreement changed the interest rate on all outstanding notes due to
Nation's Bank, including the line of credit, to bear interest at prime plus
three and one-half percent (3.5%) from the date of signature. In addition,
the Company agreed to pay a forbearance fee and the expenses and fees
associated with negotiating the agreement.
Short-term notes payable at November 30, 1997 consisted of a demand
note payable to a bank and a note payable to an insurance company. The
outstanding balance due to the bank at November 30, 1997 was $71,271. The
note payable to the insurance company was paid in January of 1998. In March
of 1998, the Company received an unconditional written waiver of the demand
clause on the note. The Company has classified this note as long-term debt
since that time.
F-13
<PAGE>
NACO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - LONG-TERM OBLIGATIONS
<TABLE>
<CAPTION>
Nov. 30, Nov. 30,
Long-term obligations consists of: 1998 1997
---- ----
<S> <C> <C>
Installment notes payable, secured by
vehicles. Payable monthly at 8.50% - 9.95%
interest. Maturities from July, 1999
to March, 2003. $ 37,806 38,048
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. 579,427 533,465
Notes payable for redemption of Company
stock and non-competition agreement, secured
by treasury stock. Payable monthly at 8.25%
through June, 2002. 157,552 194,847
Capital equipment leases, secured by
related equipment. Payable monthly at
12.52% - 26.05% interest, with maturities
through October, 2003. 199,719 130,900
--------- --------
Total long-term obligations 974,504 897,260
Less: current portion (300,582) (233,259)
--------- --------
Long-term portion $ 673,922 664,001
--------- --------
</TABLE>
At November 30, 1998 and 1997, the book value of the Company's
long-term obligations excluding capital leases is $774,785 and $766,360,
respectively. Fair value using current market rates is approximately $770,500
and $758,000, respectively. Borrowings from Nations Bank for short-term and
long-term debt at year end are $1,336,379 and $1,357,791, respectively.
F-14
<PAGE>
NACO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - LONG-TERM OBLIGATIONS (continued)
At November 30, 1998, current maturities of long-term obligations
(both long-term debt and capital lease obligations) are as follows:
<TABLE>
<CAPTION>
Period ending
November 30
-------------
<S> <C>
1999 $300,582
2000 262,900
2001 145,700
2002 78,500
2003 41,500
Thereafter 145,322
--------
Total $974,504
--------
</TABLE>
At November 30, 1998 and 1997, the cost and amortization (or
depreciation) of capitalized leased equipment are as follows:
<TABLE>
<CAPTION>
Nov. 30, Nov. 30,
1998 1997
---- ----
<S> <C> <C>
Cost $364,702 244,293
Current year depreciation 34,825 39,234
Accumulated depreciation 129,759 104,461
</TABLE>
Annual lease payments under leases in effect at November 30, 1998 are as
follows:
<TABLE>
<CAPTION>
Period ending
November 30
-------------
<S> <C>
1999 $ 97,300
2000 77,300
2001 52,300
2002 21,500
2003 18,750
Less amount representing interest (67,431)
--------
Present value of obligations under capital
leases (interest at 12.52% to 26.05%) $199,719
--------
--------
</TABLE>
F-15
<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
years ended November 30, 1998 and 1997 was approximately $223,000 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, 1998 for each of the next 5 years and in the aggregate are:
<TABLE>
<CAPTION>
Period ending
November 30
- -------------
<S> <C>
1999 $162,300
2000 11,900
2001 2,600
2002 0
2003 0
--------
Total minimum future rentals $176,800
--------
</TABLE>
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 for one share
of preferred stock. The preferred stock and common stock are entitled to one
vote per share.
F-16
<PAGE>
NACO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - PREFERRED STOCK, UNITS AND WARRANTS (continued)
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 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 on 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. At November 30, 1998, and 1997
dividends in arrears were $69,272 ($ .42 per share) and $34,468, ($ .21)
respectively. Dividends paid during fiscal year 1998 and 1997 were paid out
of the retained earnings of the parent corporation.
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 33,000 units and received net
proceeds of $194,972 during fiscal year 1997.
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 warrants will expire March 5, 2000. 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.
As part of the consideration for the stock subscription 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, 1998, the Company has outstanding 47,525 full
warrants. Each full warrant has a right to purchase one share of common stock
at an exercise price of $3.75 per share. The Company also had 343,750
forty-four one hundredth (.44) warrants outstanding to purchase 151,250
additional shares of common stock at an exercise price of $3.50 per share.
F-17
<PAGE>
NACO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - PREFERRED STOCK, UNITS AND WARRANTS (continued)
The full warrants expire three years from the date of the purchase of the
associated unit. The (.44) warrants expire March 5, 2000.
During fiscal year 1998, the Board of Directors extended the life of
the one-half (1/2) warrants issued with preferred shares issued in 1996 to
August 28, 1998 and changed the exercise price from $3.75 to 3.00 per common
share. During fiscal year 1998, the Company received $57,432 and issued
19,144 additional common shares and the remaining one-half (1/2) warrants
expired.
At November 30, 1997, the Company had outstanding 111,758 one-half
(1/2) warrants and 52,000 full warrants to purchase 107,879 shares of common
stock. Each full warrant entitled 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 were redeemable by the Company at any time after
January 1, 1997. The redemption price for the warrants was $.10 per warrant.
In addition the Company had 343,750 forty-four one hundredth (.44) warrants
to purchase 151,250 additional shares of common stock at an exercise price of
$3.50 per share.
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
on August 27, 1997 (See Note 16).
NOTE 10 - STOCK OPTIONS
At November 30, 1998 and 1997, the Company had outstanding
non-qualified stock options for 60,000 and 80,000 shares of common stock,
respectively to certain directors with an option price of $3 per share. These
options vested on the grant date and are exercisable anytime while serving as
a director for up to ten years. The outstanding options expire in the year
2005. No compensation expense has been charged to operations.
At November 30, 1998 and 1997, the Company has outstanding
non-qualified options for 150,000 shares of common stock to a director with
an option price of $4.00 per share. At November 30, 1998 and 1997, vested and
exercisable options were 60,000 and 30,000, respectively. 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-18
<PAGE>
NACO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - STOCK OPTIONS (continued)
The Company has 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 common stock. 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 share of common stock as of the date of grant. The maximum term
of the options is six years and they vest over a five-year period. The 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.
At November 30, 1998, employee incentive options for 79,000 common
shares are outstanding and 15,800 options have vested. During the year 19,000
options were forfeited due to termination of employment. No new incentive
options were granted during the year.
At November 30, 1997 employee incentive options for 98,000 shares
were outstanding. In December of 1996, the Company granted 112,000 incentive
options to certain employees with an exercise price of $3.00 per share. No
compensation expense was charged to operations during fiscal year 1997.
During the year, 14,000 incentive options were forfeited due to termination
of employment.
The following is a summary of the status of the Company's stock
options:
<TABLE>
<CAPTION>
Number Weighted Average
of Shares Exercise Price
<S> <C> <C>
Options exercisable at 11/30/97 110,000 $ 3.27
------- ------
------- ------
Options exercisable at 11/30/98 120,000 $ 3.27
------- ------
------- ------
Outstanding at 11/30/96 250,000 $ 3.60
Granted during 1997 132,000 3.00
Forfeited during 1997 (54,000) 3.00
------- ------
Outstanding at 11/30/97 328,000 $ 3.46
Granted during 1998 -0-
Forfeited during 1998 (39,000) $ 3.00
-------
Outstanding at 11/30/98 289,000 $ 3.52
------- ------
------- ------
</TABLE>
F-19
<PAGE>
NACO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - STOCK OPTIONS (continued)
<TABLE>
<S> <C>
Fair value of options granted during 1998 $-0-
Weighted-average remaining contractual life
of outstanding options 4.9 years
</TABLE>
No options were exercised during the year.
The Company applies APB 25 in accounting for its stock options.
Accordingly, no compensation cost has been recognized for 1998 or 1997. Had
compensation cost been determined on the basis of fair value pursuant to FASB
Statement No. 123, net income and earnings per share would have been reduced
as follows:
In compliance with SFAS No. 123, the Company is providing the
following pro forma disclosure:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net loss:
As reported (146,915) (284,005)
Pro forma (159,415) (295,605)
Loss per share:
As reported (.12) (.20)
Pro forma (.12) (.20)
</TABLE>
The fair value of stock options granted in fiscal year 1997 was
estimated on the date of grant using the Black-Scholes option-pricing model.
The weighted average fair values and related assumptions were:
<TABLE>
<CAPTION>
1997
----
<S> <C>
Weighted average fair value $ 3.00
Expected volatility 1.00%
Risk free interest rate 6.15%
Expected life in years 5.85
Dividend yield none
</TABLE>
F-20
<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 treasury
shares in fiscal year 1998 and 73,838 treasury shares in fiscal year 1997.
Treasury shares outstanding at year-end represent the remaining shares
pledged as collateral on the note agreement.
During fiscal year 1998, the Company sold 1,667 shares of preferred
stock out of the treasury, which had been purchased from a former employee.
NOTE 12 - EARNINGS PER SHARE
Basic earnings per common share are computed using the weighted average
number of shares of common stock outstanding during the period. For earnings
per share calculation purposes, net income is reduced by cumulative dividends
on preferred stock.
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 and the exercise of stock options and warrants.
The market price has not exceeded the option price for the outstanding
options and warrants and therefore no dilution has occurred. 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 diluted earnings per share. The securities that could
potentially dilute basic earnings per share in the future but that were not
included in the diluted earnings per share calculation are as follows:
<TABLE>
<CAPTION>
Common Common
Shares Shares
Security 1998 1997
-------- ---- ----
<S> <C> <C>
Options 120,000 110,000
Warrants 198,775 259,129
Convertible preferred stock 330,824 330,824
</TABLE>
F-21
<PAGE>
NACO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1998 and 1997 was $22,246 and
$22,355, respectively.
NOTE 14 - ADVERTISING
Advertising expense for the years ending November 30, 1998 and 1997 was
$38,488 and $21,105, respectively.
NOTE 15 - INCOME TAXES
<TABLE>
<CAPTION>
Income tax expense consists of the following: Nov. 30, Nov, 30,
1998 1997
---- ----
<S> <C> <C>
Currently payable:
Federal $ 0 0
State 800 1,100
-------- -------
800 1,100
Deferred (84,400) (86,200)
Valuation allowance 101,300
-------- -------
Income tax expense (benefit) $(83,600) 16,200
-------- -------
-------- -------
</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.
F-22
<PAGE>
NACO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - INCOME TAXES (continued)
The deferred tax asset and deferred tax liability was comprised of the
following items at November 30, 1998 and 1997:
<TABLE>
<CAPTION>
Nov. 30, Nov. 30,
1998 1997
---- ----
<S> <C> <C>
Deferred tax asset:
Inventory $ 50,100 59,600
Net operating loss carryforward 224,800 137,000
Allowances against receivables 25,600 13,700
Other 13,900 11,700
--------- ---------
314,400 222,000
Valuation allowance (222,000) (222,000)
--------- ---------
Net deferred tax asset $ 92,400 0
--------- ---------
--------- ---------
Deferred tax liability:
Tax over book depreciation $ 102,200 94,200
--------- ---------
--------- ---------
</TABLE>
The Company has available at November 30, 1998, approximately $593,000
of unused operating loss carryforwards that may be applied against future
taxable income and that expire in the years 2010 through 2013.
Income tax expense differs from the customary effective United States
rate, primarily as a result of the following:
<TABLE>
<CAPTION>
Nov. 30, Nov. 30,
1998 1997
---- ----
<S> <C> <C>
Computed "expected" tax expense (benefit) $(73,000) (87,700)
State income tax expense (benefit), net of
federal income tax benefit (8,500) (10,300)
Valuation allowance on deferred tax assets 101,300
Non-deductible items 3,200 2,100
Rate differences and other (5,300) 10,800
-------- --------
Income tax expense $(83,600) 16,200
-------- --------
-------- --------
</TABLE>
F-23
<PAGE>
NACO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - RELATED-PARTY TRANSACTIONS
The Company leases the Logan, Utah manufacturing and sales facility and
certain equipment from P.V.C., Inc., (PVC) a corporation owned by the
Company's majority shareholder. In July 1994, the Company extended its lease
with PVC 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 PVC. At November 30, 1998 and 1997,
the outstanding mortgage balance was approximately $228,000 and $240,000,
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 $3,150 through 2009. At November 30, 1998 and 1997, the
Company had borrowed from PVC $51,185 and $15,704, respectively. Intercompany
loans are non-interest bearing and payable on demand. During fiscal year
1998, PVC became a 51% owner of a new corporation, named Advantage Molds,
Inc. Advantage Molds, Inc. operates a machine shop inside the Logan faculty
leased to the Company. At November 30, 1998, Advantage Molds, Inc. owed the
Company $13,688.
The Company leases the Ogden, Utah manufacturing and sales facility from
Ronald L. Dreager, a former employee and director of NACO Composites, Inc.
Mr. Dreager discontinued his employment and service as a director in June of
1998. Monthly rentals are due in the amount of $4,500 and may be increased
pursuant to the mutual agreement of both parties.
During fiscal year 1998, the Company paid a monthly retainer of $2,000
in common stock and $1,000 in cash to Extol International Corporation (Extol)
to provide investor relations and financial consulting services. Extol
International received $12,000 for consulting services during fiscal year
1998 and 8,000 shares of the Company's common stock. The stock has an
estimated grant date fair value of $3.00 per share. Mr. Czirr, a director of
the Company, is a 50% shareholder in Extol. The Company's agreement with
Extol 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. 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 Britannia
Holdings Ltd. of England (See Note 9).
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. During fiscal year 1998, with the consent of Mr. Bray
the Company reduced his salary to $150,000 for services as president of the
Company. The Board has the determined that payments in accordance the
employment contract may be paid at a future date but Mr. Bray has waived his
right to demand payment and therefore no liability has been recorded.
F-24
<PAGE>
NACO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - RELATED-PARTY TRANSACTIONS (continued)
During the year ending November 30, 1998, the Company entered into two
lease financing agreements for equipment that is being used in the operation
of a limited liability company (Rimshot) owned by a son of the majority
shareholder. The Company recorded assets of $139,048 and related debt of
$133,048. As of November 30, 1998, Rimshot owed the Company approximately
$252,000 in connection with financing startup operations. Of the amount due
$152,000 is classified as long-term. At year-end, payment terms including an
interest rate had not been established. Verne Bray, President of the Company,
personally guaranteed the lease agreements. Subsequent to year-end, an
indemnification agreement was signed by Rimshot agreeing to hold the Company
harmless for the cost of the leased equipment. Subsequent to year-end the son
also signed a pledge agreement on 12,500 shares of NACO preferred stock and
signed security agreements covering Rimshot equipment and receivables to
collateralize the amount due to the Company.
During the year ending November 30, 1997 the Company paid sales
commissions of $21,264 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.
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 reportable business segments are strategic business units that
offer different 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 segments accounting policies are the same as those described 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.
F-25
<PAGE>
NACO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - SEGMENT INFORMATION (continued)
<TABLE>
<CAPTION>
Fiberglass &
PVC Composite
Fiscal Year 1998: Products Products Other Total
- ----------------- -------- ------------ ----- -----
<S> <C> <C> <C> <C>
Sales to unaffiliated customers $6,214,324 1,007,910 7,222,234
Intersegment sales 21,926 21,926
Depreciation Expense 303,968 27,388 331,356
Interest income 4,994 5,738 10,732
Interest expense 193,440 9,406 202,846
Profit (loss) 152,888 (292,129) (139,241)
Identifiable assets 2,833,996 843,539 117,000 3,794,535
Capital expenditures 316,126 25,915 342,041
</TABLE>
Following are reconciliations to corresponding totals in the
accompanying consolidated financial statements.
<TABLE>
<S> <C>
Revenues:
Total for reportable segments $ 7,222,234
Intersegment revenue (21,926)
-----------
Total consolidated revenues $ 7,200,308
-----------
-----------
Profit or Loss:
Total for reportable segments $ (139,241)
Intersegment profit (7,674)
-----------
Net income (loss) $ (146,915)
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
Fiberglass &
PVC Composite
Fiscal Year 1997: Products Products Other Total
- ----------------- -------- ------------ ----- -----
<S> <C> <C> <C> <C>
Sales to unaffiliated customers $6,480,001 1,115,771 7,595,772
Intersegment sales 16,141 16,141
Depreciation 263,976 20,913 284,889
Interest revenue 2,007 23 2,030
Interest expense 197,078 11,209 208,287
Profit (loss) (10,447) (263,883) (274,330)
Identifiable assets 2,938,816 451,347 80,000 3,470,163
Capital expenditures 407,183 107,225 514,408
</TABLE>
F-26
<PAGE>
NACO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - SEGMENT INFORMATION (continued)
Following are reconciliations to corresponding totals in the
accompanying consolidated financial statements.
<TABLE>
<S> <C>
Revenues:
Total for reportable segments $ 7,595,772
Intersegment revenue (16,141)
-----------
Total consolidated revenues $ 7,579,631
-----------
-----------
Profit or Loss:
Total for reportable segments $ (274,330)
Intersegment profit (9,675)
-----------
Net income (loss) $ (284,005)
-----------
-----------
</TABLE>
NOTE 18 - CAPITAL RESOURCES
During the past two years, the Company has incurred significant costs
for capital additions to increase production capacity and diversify into a
broader mix of product line. These costs combined with lower sales volume and
continued losses in the subsidiary have negatively impacted the Company's
profitability and liquidity. 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 Exchange
Act, 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 Exchange Act, this report has
been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Verne E. Bray President and Director February 27, 1998
- --------------------- (Principal Executive Officer)
Verne E. Bray
/s/ Jeffrey J. Kirby Vice President, February 27, 1998
- --------------------- Secretary and Director
Jeffrey J. Kirby (Principal Accounting Officer)
/s/ Jim C. Czirr Director February 27, 1998
- ---------------------
Jim C. Czirr
/s/ Peter Heilmayr Director February 27, 1998
- ---------------------
Peter Heilmayr
</TABLE>
<PAGE>
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.
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. . . . . . . . . . . . . . . (5)
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. . . . . . . . . . . . . . . . . . . . (5)
10.12 Pledged Stock and Security Agreement between the
Company, Dan Bray and Rimshot LLC . . . . . . . . . . . . . 10.12
10.13 Security Agreement between the Company, Dan Bray
and Rimshot LLC . . . . . . . . . . . . . . . . . . . . . . 10.13
10.14 Assumption and Indemnification Agreement. . . . . . . . . . 10.14
21 Subsidiaries of Registrant. . . . . . . . . . . . . . . . . (5)
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's Annual Report on Form 10-KSB for
the fiscal year ended November 30, 1996.
(5) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for
the fiscal year ended November 30, 1997.
<PAGE>
PLEDGED STOCK AND SECURITY AGREEMENT
This agreement is made this 24th day of February, 1999, at Logan, Utah
between NACO Industries, Inc. (hereinafter "Secured Party"), and Dan Bray
and Rimshot, LLC of Ogden, Utah (hereinafter "Indemnitor").
WHEREAS, on even date herewith the Indemnitor hereto has executed a
certain "Assumption and Indemnification Agreement"; and
WHEREAS, the parties desire to allow Secured Party the use of Dan Bray's
shares of Secured Party as collateral for the "Assumption and Indemnification
Agreement;
NOW, THEREFORE, IT IS AGREED as follows:
1. PLEDGE OF SHARES: Dan hereby assigns and delivers to the Secured
Party Stock Certificates numbered 1246 of the Corporation representing 12,500
shares therein, duly noted on the books of the Corporation to be held by
Secured Party and registered in the name of Dan Bray. Dan Bray grants
Secured Party a security interest in the above-described shares to secure the
performance and payment of all obligations and indebtedness to the Secured
Party relating to the Assumption and Indemnification Agreement entered into
by and between the parties on even date herewith.
2. VOTING RIGHTS: Provided that Indemnitor is not in default in the
performance of any terms of the Assumption and Indemnification Agreement or
this Agreement, Indemnitor shall retain all voting rights of the pledged
shares.
<PAGE>
3. DIVIDENDS: All amounts paid as dividends on the pledged shares
shall be the property of Secured Party and shall be applied to the payment of
principal and interest indebtedness of Secured Party.
4. ADJUSTMENTS: In the event that any options, warrants, or other
rights are issued in connection with the pledged shares during the terms of
this agreement, such options, warrants, or rights may be exercised by
Indemnitor and if so executed, all new shares or other security so acquired
shall be assigned to the Secured Party to be held in the same manner as the
shares originally pledged hereunder. In the event that a share
reclassification, readjustment, or other change is made in the capital
structure of the Corporation, any additional or substituted shares issued
with respect to the shares pledged hereunder shall be assigned to the Secured
Party to be held in the same manner as the shares originally pledged under
this agreement.
5. DEFAULT: In the event that the Indemnitor defaults in the
performance or payment of any of the terms of this agreement not secured
hereby, the Secured Party shall have all the rights and remedies provided in
the Uniform Commercial Code as effective in the State of Utah at the date of
this agreement.
IN WITNESS WHEREOF, the parties have signed this agreement on the date
first above written.
INDEMNITOR: SECURED PARTY:
/s/ Daniel Bray by /s/ Jeffrey J. Kirby
- ----------------------------- ---------------------------
DAN BRAY, INDIVIDUALLY
/s/ Daniel Bray
- -----------------------------
MEMBER OF RIMSHOT, LLC
<PAGE>
SECURITY AGREEMENT
Agreement made this 24th day of February, 1999, between RIMSHOT, LLC. a
Utah Limited Liability Company and Dan Bray (herein referred to as "Debtor"),
and NACO INDUSTRIES, INC. a Utah Corporation (herein referred to as "Secured
Party").
In consideration of the mutual covenants and promises herein contained,
Debtor and Secured Party agree:
SECTION ONE
CREATION OF SECURITY INTEREST
Debtor hereby assigns and transfers to Secured Party a security interest
in the following described personal property (herein referred to as
"Collateral"): All equipment, machinery, leasehold improvements, inventory,
accounts, general intangibles, instruments, investment property and proceeds
now owned or hereafter acquired.
SECTION TWO
RIGHT OF SALE
The possession by Debtor of inventory shall be for purposes of retail
sale in the ordinary course of business. All risk of loss or destruction of
inventory is to be borne by Debtor, while the inventory is under the direct
control and possession of Debtor. Debtor may sell, at retail in the ordinary
course of business, any of inventory or any part thereof.
<PAGE>
SECTION THREE
DISPOSITION OF PROCEEDS
Any and all cash proceeds of any retail sale permitted by Section Two shall
be fully accounted for by Debtor.
SECTION FOUR
PROTECTION OF COLLATERAL
Secured Party shall have the right to inspect collateral at any
reasonable time during the term of this Security Agreement. Debtor shall not
transfer or otherwise dispose of collateral, except as provided in Section
Two.
SECTION FIVE
DEFAULT
Occurrence of any of the following events shall constitute a default
under this Security Agreement:
1. The failure of Debtor promptly to pay the indebtedness hereunder
according to the attached Assumption and Indemnification Agreement.
2. The failure of Debtor promptly to perform or comply with any of the
terms, provisions, or conditions of this Security Agreement.
3. The institution of a proceeding in bankruptcy, insolvency,
receivership, or reorganization by or against Debtor or the property of
Debtor.
4. The liquidation in any way of the business of Debtor.
5. A determination by Secured Party that it is insecure or inventory
or any part thereof is in danger of loss, misuse, seizure, or confiscation.
<PAGE>
SECTION SIX
REMEDIES
On default hereunder, Secured Party may take immediate possession of
inventory, including any attachments or accessories thereto, without demand
or further notice and without legal process. For this purpose and in
furtherance thereof, Debtor shall, if Secured Party so requests, assemble
collateral and make it available to Secured Party at a reasonably convenient
place designated by Secured Party, and Secured Party shall have the right,
and is hereby authorized and empowered by Debtor, to enter the premises where
collateral is located and remove it. In the event of repossession of
inventory, Secured Party shall have such rights and remedies as are provided
and permitted by the Uniform Commercial Code.
SECTION SEVEN
SEVERABILITY
Any provision of this Security Agreement prohibited by law shall be
ineffective to the extent of such prohibition without invalidating the
remaining provisions hereof.
SECTION EIGHT
BINDING EFFECT OF OBLIGATION
No transfer, renewal, extension, or assignment of this Security
Agreement or any interest hereunder and no loss, damage, or destruction of
inventory shall release Debtor from the obligation secured under this
Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Security Agreement at
RIMSHOT, the day and year first above written.
DEBTOR:
RIMSHOT, LLC.
By: /s/ Daniel Bray
-----------------------
DAN BRAY
/s/ Daniel Bray
-----------------------
DAN BRAY, INDIVIDUALLY
SECURED PARTY:
NACO INDUSTRIES, INC.
By: /s/ Verne Bray
-----------------------
President
<PAGE>
ASSUMPTION AND INDEMNIFICATION AGREEMENT
This agreement is entered into this 24th day of February 1999, by and
between NACO Industries, Inc. a Utah corporation and RIMSHOT, LLC a Utah limited
liability company.
RECITALS
1. NACO Industries, Inc. and Verne Bray as guarantor have entered into
two lease agreements, copies of which are attached hereto.
2. RIMSHOT, LLC has agreed to assume said leases and to pay to NACO
Industries, Inc. any and all costs associated therewith.
AGREEMENT
RIMSHOT, LLC shall indemnify, defend, and hold NACO Industries, Inc.
harmless from any and all claims and damages (including reasonable attorneys'
fees and costs arising from the leases attached hereto and incorporated by
reference herein. RIMSHOT, LLC shall further indemnify, defend, and hold
lessor harmless from any and all claims and damages (including reasonable
attorneys' fees and costs) arising from any breach or default in the terms of
said lease agreements, or arising from any act, negligence, fault, or
omission of RIMSHOT or RIMSHOT'S agents, employees, or invitees, and from and
against any and all costs, reasonable attorneys' fees, expenses, and
liabilities incurred on or about such claim or any action or proceeding
brought on such claim.
NACO Industries, Inc.
By /s/ Jeffery J. Kirby
---------------------------
RIMSHOT, LLC
By /s/ Daniel Bray
---------------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-END> NOV-30-1998
<CASH> 112,362
<SECURITIES> 0
<RECEIVABLES> 903,358
<ALLOWANCES> 100,193
<INVENTORY> 656,134
<CURRENT-ASSETS> 1,692,039
<PP&E> 3,517,366
<DEPRECIATION> 1,779,688
<TOTAL-ASSETS> 3,794,535
<CURRENT-LIABILITIES> 2,084,113
<BONDS> 683,722
0
496,236
<COMMON> 21,472
<OTHER-SE> 600,617
<TOTAL-LIABILITY-AND-EQUITY> 3,794,535
<SALES> 7,200,308
<TOTAL-REVENUES> 7,200,308
<CGS> 4,510,662
<TOTAL-COSTS> 4,510,662
<OTHER-EXPENSES> 2,729,710
<LOSS-PROVISION> 5,900
<INTEREST-EXPENSE> 202,846
<INCOME-PRETAX> (230,515)
<INCOME-TAX> (69,272)
<INCOME-CONTINUING> (146,915)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (146,915)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
