SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 31,1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 Commission File number 33-85044-d
NACO Industries, Inc.
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(Exact Name of small business issuer as specified in its charter)
Utah 48-0836971
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(State of Incorporation) (IRS Employer Identification Number)
395 West 1400 North, Logan, Utah 84341
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(Address of principal executive offices)(Zip Code)
Registrant's Telephone Number 435-753-8020
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Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes X No
As of August 31, 1999, the Registrant had 1,876,227 shares of Common Stock and
165,412 shares of Preferred Stock outstanding.
Transitional Small Business Disclosure Format Yes No X
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<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
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See attached Consolidated Financial Statements
2
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NACO Industries, Inc.
CONSOLIDATED FINANCIAL STATEMENTS
August 31, 1999
3
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PART 1 - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
NACO INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
August November 30
ASSETS 1999 1998
- ------ ----------- -----------
Current assets:
Cash $ 80,810 $ 112,362
----------- -----------
Accounts receivable, net of allowances
of $105,231 / $100,193 801,452 803,165
Inventory 520,568 656,134
Other current assets 279,398 220,378
----------- -----------
Total current assets 1,682,228 1,792,039
----------- -----------
Property and equipment:
Land 40,700 40,700
Buildings and improvements 611,374 675,316
Equipment and vehicles 2,745,488 2,771,889
Equipment construction in progress 9,018 29,461
----------- -----------
Total property and equipment 3,406,580 3,517,366
Accumulated depreciation (2,021,386) (1,779,688)
----------- -----------
Net property and equipment 1,385,194 1,737,678
----------- -----------
Other assets:
Intangible and other assets 362,653 264,818
----------- -----------
Total other assets 362,653 264,818
----------- -----------
Total assets $ 3,430,075 $ 3,794,535
=========== ===========
See Notes to Consolidated Financial Statement
4
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<TABLE>
NACO INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<CAPTION>
August 31 November 30
LIABILITIES: 1999 1998
- ------------ ----------- -----------
<S> <C> <C>
Current liabilities:
Accounts payable $ 975,111 $ 650,305
Accrued expenses 184,771 283,900
Income taxes payable (100) 0
Line of credit 505,218 849,326
Current portion of long-term obligations 84,492 300,582
----------- -----------
Total current liabilities 1,749,492 2,084,113
Long-term liabilities:
Long-term obligations, less current portion 1,153,858 673,922
Deferred income taxes 9,800
----------- -----------
Total long-term liabilities 1,163,658 683,722
----------- -----------
Total liabilities 2,913,150 2,767,835
Stockholders' equity:
Common stock, $.01 par value, 10,000,000 shares authorized; 18,762 21,472
Preferred Stock, 7% Cumulative, convertible $3.00 par 496,236 496,236
Additional paid-in capital 996,045 1,084,959
Retained earnings (deficit) (994,118) (484,342)
----------- -----------
516,925 1,118,325
Less: treasury stock - at cost 0 (91,625)
----------- -----------
Total stockholders' equity 516,925 1,026,700
----------- -----------
Total liabilities and
stockholders' equity $ 3,430,075 $ 3,794,535
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
5
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<TABLE>
NACO INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<CAPTION>
Three months ended Nine months ended
August 31 August 31
---------------------------- ----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales, net $ 1,752,404 1,572,404 5,796,937 4,803,088
Cost of goods sold 965,309 892,729 3,105,118 2,805,359
----------- ----------- ----------- -----------
Gross profit 787,095 679,675 2,691,819 1,997,728
Operating expenses:
Selling expenses 401,335 329,467 1,202,190 998,370
General and administrative expenses 314,696 286,863 909,983 910,197
----------- ----------- ----------- -----------
Total operating expenses 716,031 616,331 2,112,174 1,908,567
----------- ----------- ----------- -----------
Income (loss) from operations 71,064 63,344 579,645 89,161
Other (income) expense:
Interest income (3,021) (569) (3,837) 4,354
Interest expense 56,019 48,251 226,028 150,760
----------- ----------- ----------- -----------
Total other (income) expense 52,998 47,682 222,192 155,144
----------- ----------- ----------- -----------
Income (loss) from continuing operations 18,066 15,663 357,454 (65,953)
Income tax expense (benefit) 0 0 0 0
----------- ----------- ----------- -----------
Net income (loss) from continuing operations $ 18,066 15,663 357,454 (65,953)
Operating Loss from Discontinued Composites (189,573) (39,670) (685,425) (63,373)
Estimated Cost to Discontinue Composite (214,844) (214,844)
Net Income (Loss) (386,351) (24,007) (542,815) (129,326)
Adjustment for preferred dividends in arrears (138,947) (69,272) (138,917) (69,272)
----------- ----------- ----------- -----------
Adjusted net to Common Stockholders $ (525,298) (93,279) (681,732) (198,598)
----------- ----------- ----------- -----------
Earnings (loss) per common share:
Basic:
Earnings (loss) from net income $ (0.21) (0.01) (0.29) (0.07)
Dividends in arrears (0.07) (0.04) (0.07) (0.04)
----------- ----------- ----------- -----------
Net Earnings (loss) $ (0.28) (0.05) (0.36) (0.11)
=========== =========== =========== ===========
Diluted:
Earnings (loss) from net income $ (0.28) (0.05) (0.36) (0.11)
=========== =========== =========== ===========
Weighted average number of common shares
Basic 1,876,227 1,868,227 1,876,227 1,868,227
=========== =========== =========== ===========
Diluted 2,207,051 2,205,051 2,207,051 2,205,051
=========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
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<TABLE>
NACO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Nine months ended
----------------------------
August 31 August 31
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ (369,372) $ (129,326)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation 282,958 253,749
Amortization 12,454 4,436
(Increase) decrease in:
Accounts receivable, net 1,713 (3,320)
Inventory 135,566 166,603
Other (71,474) 12,193
Increase (decrease) in:
Accounts payable 324,806 105,485
Accrued expenses (121,129) (19,244)
Income taxes payable (100) (800)
----------- -----------
Net cash provided by (used in)
Operating activities 195,422 389,776
----------- -----------
Cash flows from investing activities
Net change property and equipment (48,878) (169,704)
Investment in intangible and other assets (97,835) (860)
----------- -----------
Net cash provided by (used in) investing activities (146,713) (170,564)
Cash flows from financing activities
Net change in line of credit (344,108) 50,000
Payments on related party loan 0 (104,194)
Payments on long-term debt (793,823) (216,955)
Payment of Preferred Stock Dividends 0 (34,482)
Proceeds from long-term loans 1,236,327 140,758
Proceeds from issuance of common stock 0 57,430
Proceeds from issuance of preferred stock 0 10,002
Purchase of treasury stock (178,657) 0
----------- -----------
Net cash provided by (used in) financing activities (80,261) (97,441)
----------- -----------
Increase (decrease) in cash (31,552) 121,771
Cash, beginning of period 112,362 75,378
----------- -----------
Cash, end of period $ 80,810 $ 197,149
=========== ===========
Supplemental disclosures:
Income taxes paid $ 0 $ 0
Interest Paid $ 237,125 $ 158,297
</TABLE>
See Notes to Consolidated Financial Statements
7
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NACO INDUSTRIES, INC.
Notes to Consolidated Financial Statements (Unaudited)
August 31, 1999
NOTE A - BASIS OF PRESENTATION
Management has elected to omit substantially all footnotes to these unaudited
consolidated quarterly financial statements. In the opinion of management, all
adjustments (consisting only of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the nine-month
period ended August 31, 1999 are not necessarily indicative of the results that
may be expected for the fiscal year ending November 30, 1999. These statements
should be read in conjunction with the consolidated financial statements and
related notes in the Company's Annual Report on Form 10-KSB for the year ended
November 30, 1998.
NOTE B - INVENTORY
Inventory consists of the following:
August 31, Nov. 30,
1999 1998
----------- -------------
Raw Materials $ 162,562 $ 231,895
Work in Process 1,029 13,598
Finished Goods 356,977 360,656
----------- -------------
Total $ 520,568 $ 606,149
NOTE C - DIVIDENDS
Dividends on the preferred stock are cumulative at 7%. At August 31,
1999, the cumulative amount of dividends accrued was $138,947. Of this amount,
$138,947 was in arrears.
NOTE D - EARNINGS PER SHARE
Effective February 28, 1998, the Company adopted SFAS No. 128,
"Earnings Per Share," which establishes new standards for computing and
presenting earnings per share. No restatement was required for prior year's
earnings per share figures to conform to the new standard. Basic earnings per
common share are calculated by dividing adjusted net income by the average
shares of common stock outstanding during the period. The calculation of diluted
earnings per share of common stock assumes the diluting effect of the Company's
cumulative preferred stock, options and warrants. During the period the market
price did not exceed the option price for the outstanding options and warrants
and therefore no dilution occurred. When conversion of potential common shares
has an anti-dilutive effect no conversion is assumed in the diluted earnings per
share calculation.
NOTE E - PREFERRED STOCK AND WARRANTS
There were no shares of capital stock sold or warrants exercised during
the third quarter of 1999.
NOTE F - SEGMENT INFORMATION
The Company's operations are classified into two principal industry
segments, PVC fitting and valves sold through Naco Industries, Inc. and
composite products sold through the Naco Composites division which has been
discontinued as of September 30, 1999. The Company's reportable business
segments are strategic business units that offer different products and
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services. Each segment is managed separately because they require different
technologies and market to distinct classes of customers. No customers in either
segment accounted for 10% or more of consolidated revenue.
The segment accounting policies are the same as those described in the
Annual Report on Form 10-KSB in the summary of significant accounting policies.
Cost plus an estimated profit margin is used to report intersegment sales.
Profit for segment reporting includes allocated general corporate expenses,
other income and expense and income tax expense or benefit. Identifiable assets
are those used by each segment of the Company's operations. Corporate assets
primarily represent cash and are identified in the other column in the tables
below.
<TABLE>
<CAPTION>
- ----------------------------------------- --------------------- ------------------ ------------ --------------------
Quarter Ended 8/31/99 PVC Products Composite Products Other Total
- ----------------------------------------- --------------------- ------------------ ------------ --------------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers $ 1,752,678 $ 267,340 0 $ 2,020,018
- ----------------------------------------- --------------------- ------------------ ------------ --------------------
Intersegment Sales 0 0 0 0
- ----------------------------------------- --------------------- ------------------ ------------ --------------------
Depreciation Expense 89,262 7,883 0 97,145
- ----------------------------------------- --------------------- ------------------ ------------ --------------------
Interest Income 1,402 0 0 1,402
- ----------------------------------------- --------------------- ------------------ ------------ --------------------
Interest Expense 56,018 3,425 0 59,443
- ----------------------------------------- --------------------- ------------------ ------------ --------------------
Profit (Loss) $ 45,841 $ (258,474) 0 $ (212,633)
- ----------------------------------------- --------------------- ------------------ ------------ --------------------
Identifiable Assets $ 2,718,001 $ 514,822 $ 80,811 $ 3,313,634
- ----------------------------------------- --------------------- ------------------ ------------ --------------------
- ----------------------------------------- --------------------- ------------------ ------------ --------------------
Prior Year Quarter Ended 8/31/98
- ----------------------------------------- --------------------- ------------------ ------------ --------------------
Sales to unaffiliated customers $ 1,572,405 $ 208,524 0 $ 1,780,929
- ----------------------------------------- --------------------- ------------------ ------------ --------------------
Intersegment Sales 0 0 0 0
- ----------------------------------------- --------------------- ------------------ ------------ --------------------
Depreciation Expense 79,032 6,842 0 85,874
- ----------------------------------------- --------------------- ------------------ ------------ --------------------
Interest Income 569 593 0 1,162
- ----------------------------------------- --------------------- ------------------ ------------ --------------------
Interest Expense 54,502 1,489 0 55,991
- ----------------------------------------- --------------------- ------------------ ------------ --------------------
Profit (Loss) $ 57,568 $ (81,576) 0 $ (24,008)
- ----------------------------------------- --------------------- ------------------ ------------ --------------------
Identifiable Assets $ 2,560,975 $ 549,910 $ 197,149 $ 3,308,033
- ----------------------------------------- --------------------- ------------------ ------------ --------------------
</TABLE>
NOTE G - DEBT AND LOAN AGREEMENTS
At August 31, 1999, the outstanding balance of the Company's revolving
line of credit was $505,217. This line of credit was entered into on April 22,
1999 with Wells Fargo Credit. This facility is based on a percentage of accounts
receivable and inventories. The maximum line is $1,500,000 of which, based on
the "Collateral Report" there was $624,798 was available to borrow as of August
31, 1999. The original draw on this line was used to pay off most of the
previous revolving line of credit with Nations Bank.
Also on April 22, 1999 a second facility was closed with WebBank
Corporation to restructure the term-debt. This facility is for $1,100,000 and
was used to pay off long-term debt of the Company with Nations Bank and several
other small lenders. A portion of the revolving line that was previously with
Nations Bank was also paid off by this facility.
The line of credit with Wells Fargo and the long-term note with WebBank
Corporation contain covenants pertaining to current ratio, working capital,
debt, dividends and capital purchases.
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NOTE H - STOCK PERFORMANCE AGREMENT
Under a stock purchase agreement dated March 5, 1997 with Britannia
Holding Limited, NACO Industries, Inc. agreed as part of the original
consideration for the stock purchase agreement, and in the event that NACO
Industries, Inc. did not during the first twenty four months of the agreement,
establish a market for NACO Industries, Inc. Common Stock that traded for at
least $6.00 per share for any 10 consecutive day, to credit additional shares of
its $.01 par value common stock to Britannia starting at the end of the twenty
fifth month following the closing date of the agreement, and until NACO
Industries, Inc. has an established public market for its common stock trading
for $6.00 or more for at least 10 consecutive trading days. NACO Industries,
Inc. agreed to issue all credited and unissued shares to Britannia within 30
days following the yearly anniversary of the agreement. The crediting of
additional shares under this agreement started in the month of April 1999.
NOTE I - DISCONTINUED OPERATIONS
NACO Composites, a division of NACO Industries, Inc. was discontinued
as of September 30, 1999. This division manufactured and sold composite products
for the transportation, amusement, recreation and architectural industries.
These products included transportation parts, decorative building parts,
after-market auto parts and amusement ride materials. The Company also produced
tooling and molds for other companies in various industries. The manufacturing
operations at the NACO Composites division was closed due to continued losses.
The Company's composite products operation generated an operating loss of
$(685,425) for the nine months ended August 31,1999 compared to a loss of
$(63,373) for the nine months ended August 31, 1998. During the past several
months the Company's top management has spent the majority of their time at the
facility, during which time they worked to reduce direct labor and increase
training. After considerable effort by management to turn the operation around
it was decided that is was no longer in the Company's best interest to continue
manufacturing composite product. The Company has out sourced certain products to
vendors that the Company will continue to sell. The company will no longer
manufacture composite products. The lease on the Ogden facility ended September
30, 1999 and the Company did not renewing the lease. It is estimated that the
known costs to discontinue this operation will cost $214,844. These costs relate
to discontinued use of certain assets, labor, legal fees, accounting review, and
rental obligations.
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
NACO Industries, Inc. ("NACO" or the "Company") is a manufacturing company,
which produces and sells polyvinyl chloride (PVC) and composite products. The
Company's primary line of business consists of manufacturing PVC pipe fittings
and valves, which are sold throughout the United States through wholesale
distributors to irrigation, industrial, construction and utility industries. The
Company manufactures and sells fabricated fittings (4" through 30" in diameter),
as well as molded fittings (4" though 10" in diameter). Pipefittings produced by
the Company include tees, reducers, elbows, couplers, end caps, and bolted
repair couplers. NACO also manufacturers and sells PVC valves (4" through 12" in
diameter).
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NACO Composites, a division, which was formerly a wholly owned subsidiary of the
Company and was merged into the Company in 1999, was discontinued as of
September 30, 1999. This division manufactured and sold composite products for
the transportation, amusement, recreation and architectural industries. These
products included transportation parts, decorative building parts, after-market
auto parts and amusement ride materials. The Company also produced tooling and
molds for other companies in various industries. The manufacturing operations at
the NACO Composites division was closed at the end of September 1999 due to
continued losses.
Results of Operations
The following discussion relates to the three months and nine months ended
August 31, 1999 and August 31, 1998, respectively. For comparison purposes,
percentages of sales will be used rather than dollars. In the following
discussion, the three months ended August 31, 1999 and August 31, 1998 are
referred to as 3Q99 and 3Q98, respectively, and the nine months ended August 31,
1999 and August 31, 1998 are referred to as 9M99 and 9M98, respectively.
Overview. The Company's continuing plastic products operations
generated an operating profit of $18,066 and $15,663 for 3Q99 and 3Q98
respectively. The continuing plastic products operations generated an operating
profit of $357,454 for 9M99 compared to an operating loss of ($65,953) for 9M98.
The Company continues to expand into the industrial and commercial plastic
markets. Although these markets tend to generate lower sales during winter
months, they are less seasonal than the Company's agricultural markets. Sales in
these markets increased from 11.8% of total revenues in 9M98 to 14.9% in 9M99.
The Company's discontinued composite products operation generated an
operating loss of $(189,573) for3Q99, compared to a loss of $(63,373) for 3Q98.
The losses generated by the Company's composite products were due, to a large
extent, to a combination of the Company's low volume of composite product sales,
inexperienced labor and lack of production knowledge of how to produce certain
composite products for which the Company had orders. During the first quarter of
1999 the Company hired a new production manager to help with these problems, but
his employment was terminated in the 2nd quarter of 1999 when the Company
determined that he lacked expertise needed to produce the products the Company
was trying to produce. Competition for experienced labor is strong and, as a
result during the last six months of fiscal 98, the Company lost some
experienced employees in its composites operations that were replaced by less
experienced people, resulting in more rework and scrap. Because of more rework
and scrap, material costs increased from 24.9% of sales in 9M98 to 51.1% of
sales 9M99 and direct labor increased from 20.1% of sales in 9M98 to 51.3% of
sales in 9M99. During the past several months the Company's top management has
spent the majority of their time at the facility, during which time they worked
to reduce direct labor and increase training. After considerable effort by
management to turn the operation around it was decided that is was no longer in
the Company's best interest to continue manufacturing composite products. The
Company has out sourced certain products to vendors that the Company will
continue to sell. The Company will no longer manufacture composite products. The
lease on the Ogden facility ended September 30, 1999 and the Company did not
renew the lease. Management believes that these changes will control the losses
in the composites division. The Company's composite products sales were up 28.2%
from 3Q98 to 3Q99, but costs (explained below) were up 119%, which caused a
major deterioration in gross margins and profits in the Company's composite
products.
Net Sales: Continuing operations net sales for 3Q99 increased by 11.5% to
$1,752,404 compared to net sales of $1,572,404 for 3Q98. Net sales for 9M99
increased by 20.7% to $5,796,937 compared to net sales of $4,803,088 for 9M98.
There are several factors that contributed to increased sales in the plastics
segment:
Agricultural & Industrial Market:
Increased manufacturing capacities and throughput has decreased
delivery time, resulting in a quicker turnaround to the Company's distributors
than many of the Company's competitors have been able to offer. In addition, the
formation of a sales offering to distributors, which allows the Company to help
solve the distributors problems with product distribution, has also contributed
to increase sales.
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During the last quarter of fiscal year 1998, one of the Company's
warehouses located in Washington was re-evaluated to better serve the Company's
distributors in that area. Non-moving inventory was removed and an improved
product mix was introduced into the warehouse, allowing for increased
distribution from the warehouse.
Utility Market:
Towards the end of fiscal 1998, eighteen new independent utility
representatives were established to expand sales into the utility market (sewer
and drainage). These representatives are strategically located throughout the
country, allowing for more effective coverage of the utility market.
Management believes that this expansion into the utility market,
including the addition of these new representatives has enabled the Company to
increase utility sales by approximately 52% for the 9M99 compared to 9M98.
Management anticipates that a few more utility representatives will be
added during the current fiscal year.
Gross Margin. Gross margin as a percentage of sales for 3Q99 and 3Q98 was
44.9% and 43.5%, respectively. Gross margins as a percentage of sales for 9M99
and 9M98 were 46.4% and 41.6% respectively. The increase is gross margin
percentage was mainly due to increased sales during the period which would cover
more of the fixed costs such and rent, depreciation and others.
Gross margin for the discontinued composites division as a percentage of
sales for 3Q99 was (53.2)% compared to 10.4%for 3Q98. The negative margins
generated by the Company's composite products were do to a large extent to a
combination of the Company's low volume of composite product sales,
inexperienced labor and lack of management knowledge of how to produce certain
composite products for which the Company had orders. During 1Q99 the Company
hired a new production manager to help with these problems, but his employment
was terminated in 2Q99 when the Company determined that he lacked the expertise
needed to produce the products the Company was trying to produce. Competition
for experienced labor is strong and, as a result during the last six months of
last year, the Company lost some experienced employees in its composites
operations that were replaced by less experienced people, resulting in more
rework and scrap. During the past several months the Company's top management
has spent the majority of their time at the facility, during which time they
worked to reduce direct labor and increase training. After considerable effort
by management to turn the operation around it was decided that is was no longer
in the Company's best interest to continue manufacturing composite product. The
Company has out sourced certain products to vendors that the Company will
continue to sell. The company will no longer manufacture composite products. The
lease on the Ogden facility ends September 30, 1999 and the Company is not
renewing the lease. Management feels that with these changes the Company will
have stopped the losses in the composites division.
Selling: Selling expenses were 23% of net sales for 3Q99, compared to 21%
for 3Q98. Selling expenses for 9M98 and 9M99 were 21% of net sales. The increase
in selling expenses as a percentage of sales was mainly due to increased freight
and supplies expenses. Freight expenses represented 6.6% of sales for 3Q99
compared to 6.1% of sales for 3Q98, mainly due to increased sales in the utility
market where it is standard in the industry to prepay freight on orders over
$1,000. Sales supplies expenses increased from 2.2% of sales in 3Q98 to 2.7% of
sales in 3Q99, mainly due also to the increase in sales in the utility market
where large wood crates are required to ship products to the customer.
General and Administrative: General and administrative expenses represented
18% of net sales for 3Q99, compared to 18% for 3Q98. Overall, general and
administrative expenses increased $27,833 from 3Q98 to 3Q99 and remained
relatively the same from 9M98 to 9M99.
Other: Other expenses/revenues were 3.0% for 3Q99, compared to 3.0% for
3Q98. Interest expense, as a percent of sales was 3.1% in 3Q98 and 3.2% in 3Q99.
The effective interest rates (interest expense divided by the average debt
balance for the period) for 9M99 and 9M98 were 13.9% and 10.3%, respectively.
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Liquidity and Capital Resources
The Company's principal sources of liquidity have been cash from
operations and credit facilities. Cash provided by operating activities was
$195,422 in 9M99. Cash as of August 31, 1999 was $80,810, down $31,552 from
November 30, 1998. At August 31, 1999, the outstanding balance of the Company's
revolving line of credit was $505,218. This line of credit was entered into on
April 22, 1999 with Wells Fargo Credit. This facility is based on a percentage
of accounts receivable and inventories.
At August 31, 1999 the Company was in default of several of the loan
covenants. The Company has submitted new projections to Wells Fargo Credit, who
has agreed to reset the covenants contained tin the Company's line of credit
documents so that the Company will not be in default. The Company has to pay
$10,000 plus 1.5% higher interest rate (as adjusted 4% over prime rate) to reset
the covenants. When the Company reaches year-to-date profitability of $150M,
Wells Fargo will lower the interest rate 1/2%, and when year-to-date
profitability of $300M is achieved, Wells Fargo will lower the interest rate and
additional 1/2%. When profitability reaches $453M, the interest rate will be
lowered and additional 1/2%, which would bring it back to the original interest
rate of 2.5% over prime rate. The maximum line is $1,500,000 of which, based on
the "Collateral Report", prepared by the Company, there was $624,798 available
to borrow as of August 31, 1999. The original draw on this line was used to pay
off most of the previous revolving line of credit with Nations Bank.
As of October 7, 1999, the Company has received approval from Wells
Fargo Credit to increase the advance rates on accounts receivable and inventory.
These changes will give the Company approximately $200,000 more in additional
availability on the line of credit.
Also on April 22, 1999 a second facility was closed with WebBank
Corporation to restructure the Company's long-term debt. This facility is for
$1,100,000 and was used to pay off long-term debt of the Company with Nations
Bank and several other lenders. A portion of the revolving line that was
previously with Nations Bank was also paid off by this facility.
The Company continues to struggle with its liquidity position. Even
with the new line of credit and the restructuring of the Company's long-term
debt, the Company has been unable to pay trade payables current. The Company
increased trade payables by $324,806 from November 30, 1998 to August 31, 1999.
At November 30, 1998, .8% of the Company's trade payables were out over 60 days.
due principally to lack of operating funds. As of February 28, 1999, May 31,
1999, and August 31, 1999, 43.7%, 31.4%, and 46.7% respectively, of the
Company's trade payables were out over 60 days. Management has been in contact
with the Company's vendors and most are working with the Company to keep
supplying needed raw materials for production. The continuing struggle with the
Company's liquidity has primarily been caused by continued and increased losses
in the Company's composites division.
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 August 31, 1999, revenues from sales and bank resources
will be sufficient to satisfy its working capital requirements for the
foreseeable future. There can be no assurance, however, that additional debt or
equity financing may not be required or that, if such financing is required, it
will be available on terms favorable to the Company, if at all. The Company's
inability to secure additional financing or raise additional capital would
likely have a material adverse effect on the Company's operations, financial
condition and its ability to continue to grow and expand its operations.
13
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Factors Affecting Future Results
The Company's operating results are subject to certain risks that could
adversely affect the Company's operating results and its ability to operate
profitably. If the Company is not able to secure sufficient equity or debt
financing to meet its working capital and operational requirements as discussed
above, this will likely have a material adverse effect on the Company's
operations and financial results. In addition, the Company's operating results
could also be adversely affected by increased competition in the markets in
which the Company's products compete, manufacturing delays and inefficiencies
associated with expanding the Company's manufacturing capacity, adverse weather
conditions, increases in labor or raw materials, changes in economic conditions
in its markets, unanticipated expenses or events and other factors discussed in
this report and the Company's other filings with the Securities and Exchange
Commission.
Impact of the Year 2000 Issue
The Year 2000 issue is the result of computer programs, databases,
operating systems and hardware utilizing two digits rather than four to define
the applicable year. Any of the Company's computer systems that have
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a system failure or miscalculations
causing disruptions of operation, including, among other things, a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities.
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 would properly utilize dates beyond
December 31, 1999. In 1997, the Company purchased and received upgraded software
for its major computer programs for manufacturing and accounting. The Company
went "live" on all critical software on December 1, 1998. This software includes
network operating systems, workstation operating systems critical to business
operations, accounting and manufacturing software. The Company has received
certification of Year 2000 compliance from its accounting and manufacturing
providers. All custom software is written internally and is Year 2000 compliant.
The Company believes that with modifications to existing software and
conversions to new software, the Year 2000 Issue has been mitigated. However
there can be no guarantee that everything has been completely covered.
In January, 1999, the Company sent surveys to critical vendors and
customers to ensure smooth transition to the year 2000. Survey results will be
reviewed and an assessment will be made on the reliability of suppliers past the
year 1999. On March 20, 1999, the Company rolled computer clocks forward and
performed tests on Year 2000 compatibility. No problems were found in the
software tested. The Company will also continue to test existing systems though
out the year. In the event the Company finds issues related to the Year 2000
problem, corrective measures will be taken. To date, the Company has incurred,
capitalized or expended approximately $152,000 on Year 2000 compliance. The only
Non-Year 2000 compliant software currently being used is the Company's server
backup software. An upgrade will be purchased by November 1999 for approximately
$500.
14
<PAGE>
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits. The following are filed as exhibits to this Report.
Regulation S-K
Exhibit No. Description
- --------------- -----------------------
27 Financial Data Schedule
(b) Reports on Form 8-K. None
15
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Naco Industries, Inc.
Registrant
By /s/VERNE E. BRAY Oct. 14, 1999
----------------------------------------- ---------------
Verne E. Bray Date
President
By /s/ JEFFREY J. KIRBY Oct. 14, 1999
----------------------------------------- ---------------
Jeffrey J. Kirby Date
Principal Financial Officer
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