SEC File No. 33-85044-d
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For
the quarterly period ended February 28,1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 Commission File number 33-85044-d
NACO Industries, Inc.
- --------------------------------------------------------------------------------
(Exact Name of small business issuer as specified in its charter)
Utah 48-0836971
------------------------ ----------------------------
(State of Incorporation) (IRS Employer Identification
395 West 1400 North, Logan, Utah 84341
--------------------------------------------------
(Address of principal executive offices)(Zip Code)
Registrant's Telephone Number 435-753-8020
- --------------------------------------------------------------------------------
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes X No
--- ---
As of February 28, 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
- --------------------------------------------------------------------------------
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
- --------------------------------------------------------------------------------
See attached Consolidated Financial Statements
2
<PAGE>
NACO Industries, Inc.
CONSOLIDATED FINANCIAL STATEMENTS
February 28, 1999
3
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NACO INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
February 28 November 30
------------ ------------
ASSETS 1999 1998
- ------ ------------ ------------
Current assets:
Cash $ 53,488 $ 112,362
Accounts receivable, net of allowances
of $71,593 / $69,750 1,146,000 803,165
Inventory 548,866 656,134
Other current assets 203,096 220,378
------------ -----------
Total current assets 1,951,450 1,792,039
------------ -----------
Property and equipment:
Land 40,700 40,700
Buildings and improvements 679,751 675,316
Equipment and vehicles 2,818,486 2,771,889
Equipment construction in progress 9,018 29,461
------------ -----------
Total property and equipment 3,547,955 3,517,366
Accumulated depreciation (1,874,586) (1,779,688)
------------ -----------
Net property and equipment 1,673,369 1,737,678
------------ -----------
Other assets:
Intangible and other assets 258,839 264,818
------------ -----------
Total other assets 258,839 264,818
------------ -----------
Total assets $ 3,883,658 $ 3,794,535
============ ===========
See Notes to Consolidated Financial Statements
4
<PAGE>
<TABLE>
NACO INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<CAPTION>
February 28 November 30
----------- -----------
LIABILITIES: 1999 1998
- ------------ ----------- -----------
<S> <C> <C>
Current liabilities:
Accounts payable $ 1,130,032 $ 650,305
Accrued expenses 243,656 283,900
Income taxes payable (100) 0
Line of credit 849,326 849,326
Current portion of long-term obligations 300,582 300,582
Payable to related party 401 0
----------- -----------
Total current liabilities 2,523,897 2,084,113
Long-term liabilities:
Long-term obligations, less current portion 605,069 673,922
Deferred income taxes 9,800 9,800
----------- -----------
Total long-term liabilities 614,869 683,722
----------- -----------
Total liabilities 3,138,766 2,767,835
Stockholders' equity:
Common stock, $.01 par value, 10,000,000 shares authorized; 2,147,102 21,472 21,472
shares and 2,147,102 shares issued respectively (including 270,875 shares
and 270,875 share respectively in treasury)
Preferred Stock, 7% Cumulative, convertible $3.00 par value, 330,000 496,236 496,236
shares authorized, 165,412 and 165,412 shares issued respectively
(Aggregate liquidation preference $1,096,195 and $1,061,744 respectively)
Additional paid-in capital 1,084,959 1,084,959
Retained earnings (deficit) (766,151) (484,342)
----------- -----------
836,516 1,118,325
Less: treasury stock - at cost (91,624) (91,625)
----------- -----------
Total stockholders' equity 744,892 1,026,700
----------- -----------
Total liabilities and
stockholders' equity $ 3,883,658 $ 3,794,535
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE>
NACO INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
Three months ended
February 28
----------------------------
1999 1998
----------- -----------
Sales, net $ 1,853,020 $ 1,511,156
Cost of goods sold 1,382,675 1,026,916
----------- -----------
Gross profit 470,345 484,240
Operating expenses:
Selling expenses 345,952 352,665
General and administrative expenses 333,004 340,395
----------- -----------
Total operating expenses 678,956 693,060
----------- -----------
Income (loss) from operations (208,611) (208,820)
Other income (expense):
Interest income 435 871
Interest expense (73,633) (51,471)
----------- -----------
Total other income (expense) (73,198) (50,600)
----------- -----------
Income (loss) before income taxes $ (281,809) $ (259,420)
Income tax expense (benefit) 0 0
----------- -----------
Net income (loss) $ (281,809) $ (259,420)
Adjustment for preferred dividends in arrears (103,723) (68,773)
----------- -----------
Adjusted net to Common Stockholders $ (385,532) $ (328,193)
----------- -----------
Earnings (loss) per common share:
Basic:
Earnings (loss) from net income $ (0.15) $ (0.14)
Dividends in arrears (0.06) (0.04)
=========== ===========
Net Earnings (loss) $ (0.21) $ (0.18)
=========== ===========
Diluted:
Earnings (loss) from net income $ (0.21) $ (0.18)
=========== ===========
Weighted average number of common
shares outstanding:
Basic 1,876,227 1,849,083
=========== ===========
Diluted 2,207,051 2,176,573
=========== ===========
See Notes to Consolidated Financial Statements
6
<PAGE>
<TABLE>
NACO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Three months ended
February 28 February 28
-----------------------------
1999 1998
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $(281,809) $(259,420)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation 100,857 81,751
Amortization 1,479 1,479
(Increase) decrease in:
Accounts receivable, net (342,835) (196,483)
Inventory 107,268 (147,311)
Other 17,282 25,826
Increase (decrease) in:
Accounts payable 479,727 485,848
Accrued expenses (40,244) (29,258)
Income taxes payable (100) 0
---------
---------
Net cash provided by (used in)
Operating activities 41,625 (37,568)
--------- ---------
Cash flows from investing activities
Net change property and equipment (36,548) (90,827)
Investment in intangible and other assets 4,500 0
--------- ---------
Net cash provided by (used in) investing activities (32,048) (90,827)
Cash flows from financing activities
Net change in line of credit 0 175,000
Payments on related party loan 401 (2,111)
Payments on long-term debt (68,852) (76,538)
Payment of Preferred Stock Dividends 0 0
Proceeds from long-term loans 48,239
Proceeds from issuance of common stock 0 0
Proceeds from issuance of preferred stock 0 0
Purchase of treasury stock 0 0
--------- ---------
Net cash provided by (used in) financing activities (68,451) 144,590
--------- ---------
Increase (decrease) in cash (58,874) 16,195
Cash, beginning of period 112,362 75,378
--------- ---------
Cash, end of period $ 53,488 $ 91,573
========= =========
See Notes to Consolidated Financial Statements
Supplemental disclosures:
Income taxes paid $ 0 $ 0
Interest Paid $ 44,939 $ 37,926
</TABLE>
See Notes to Consolidated Financial Statements
7
<PAGE>
NACO INDUSTRIES, INC.
Notes to Consolidated Financial Statements (Unaudited)
February 28, 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
three-month period ended February 28, 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:
February 28, Nov. 30,
1999 1998
----------- -------------
Raw Materials $ 176,511 $ 231,895
Work in Process 17,703 13,598
Finished Goods 354,652 360,656
----------- -------------
Total $ 548,869 $ 606,149
NOTE C - DIVIDENDS
Dividends on the preferred stock are cumulative at 7%. At February 28,
1999, the cumulative amount of dividends accrued was $103,723. Of this amount,
$103,723 was in arrears.
NOTE D - EARNINGS PER SHARE
Effective February 28, 1998, the Company adopted SFAS No. 128,
"Earnings Per Share," which establishes new standards for computing and
presenting earnings per share. No restatement was required for prior year's
earnings per share figures to conform to the new standard. Basic earnings per
common share are calculated by dividing adjusted net income by the average
shares of common stock outstanding during the period. The calculation of diluted
earnings per share of common stock assumes the diluting effect of the Company's
cumulative preferred stock, options and warrants. During the period the market
price did not exceed the option price for the outstanding options and warrants
and therefore no dilution occurred. When conversion of potential common shares
has an anti-dilutive effect no conversion is assumed in the diluted earnings per
share calculation.
NOTE E - PREFERRED STOCK AND WARRANTS
There were no shares of capital stock sold or warrants exercised during
the first 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 Naco Composites, Inc. The Company's reportable
business segments are strategic business units that offer different products and
8
<PAGE>
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 2/28/99 PVC Products Composite Product Other Total
- ---------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers $ 1,629,027 $ 223,993 0 $ 1,853,020
- ---------------------------------------- ----------- ----------- ----------- -----------
Intersegment Sales 0 0 0 0
- ---------------------------------------- ----------- ----------- ----------- -----------
Depreciation Expense 82,928 13,448 0 96,396
- ---------------------------------------- ----------- ----------- ----------- -----------
Interest Income 435 0 0 435
- ---------------------------------------- ----------- ----------- ----------- -----------
Interest Expense 43,892 1,047 0 44,939
- ---------------------------------------- ----------- ----------- ----------- -----------
Profit (Loss) $ (16,566) $ (265,243) 0 $ (281,809)
- ---------------------------------------- ----------- ----------- ----------- -----------
Identifiable Assets $ 2,998,930 $ 655,872 $ 53,489 $ 3,708,291
- ---------------------------------------- ----------- ----------- ----------- -----------
- ---------------------------------------- ----------- ----------- ----------- -----------
Prior Year Quarter Ended 2/28/98
- ---------------------------------------- ----------- ----------- ----------- -----------
Sales to unaffiliated customers $ 1,323,858 $ 187,299 0 $ 1,511,156
- ---------------------------------------- ----------- ----------- ----------- -----------
Intersegment Sales 0 6,845 0 6,845
- ---------------------------------------- ----------- ----------- ----------- -----------
Depreciation Expense 75,192 8,036 0 83,228
- ---------------------------------------- ----------- ----------- ----------- -----------
Interest Income 834 37 0 871
- ---------------------------------------- ----------- ----------- ----------- -----------
Interest Expense 45,277 3,115 0 48,391
- ---------------------------------------- ----------- ----------- ----------- -----------
Profit (Loss) $ (193,352) $ (66,113) 0 $ (259,466)
- ---------------------------------------- ----------- ----------- ----------- -----------
Identifiable Assets $ 3,199,253 $ 501,294 $ 91,574 $ 3,792,121
- ---------------------------------------- ----------- ----------- ----------- -----------
</TABLE>
NOTE G - DEBT AND LOAN AGREEMENTS
At February 28, 1999, 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 the new revolving line of credit. Also the
Company has obtained the approval from a second 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 by
the middle of April 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 as of April 1,
1999, plus 3.5% and contains waivers by Nations Bank of all defaults under the
line of credit.
9
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
NACO Industries, Inc. ("NACO" or the "Company") is a manufacturing company,
which produces and sells polyvinyl chloride (PVC) and composite products. The
Company's primary line of business consists of manufacturing PVC pipe fittings
and valves, which are sold throughout the United States through wholesale
distributors to irrigation, industrial, construction and utility industries. The
Company manufactures and sells fabricated fittings (4" through 30" in diameter),
as well as molded fittings (4" though 10" in diameter). Pipefittings produced by
the Company include tees, reducers, elbows, couplers, end caps, and bolted
repair couplers. NACO also manufacturers and sells PVC valves (4" through 12" in
diameter).
The Company, through NACO Composites, Inc., a wholly owned subsidiary, also
manufactures and sells composite products for the transportation, amusement,
recreation and architectural industries. These products include transportation
parts, decorative building parts, after-market auto parts and amusement ride
materials. The Company also produces tooling and molds for other companies in
various industries.
Results of Operations
The following discussion relates to the three months ended February 28, 1999 and
February 28, 1998, respectively. For comparison purposes, percentages of sales
will be used rather than dollars. In the following discussion, the three months
ended February 28, 1999 and February 28, 1998 are referred to as 1Q99 and 1Q98,
respectively.
Overview. The Company sustained an operating loss of $(281,809) for 1Q99
compared to an operating loss of $(259,420) for 1Q98. The Company's plastic
products operations generated a operating loss of $(16,566) for 1Q99, compared
to a loss of $(193,352) for 1Q98. The Company's composite products operation
generated an operating loss of $(265,243) for 1Q99, compared to a loss of
$(66,068) for 1Q98. The improvement in the Company's plastic products operations
was mainly due to a 22.6% increase in net sales and an increase in gross margin
due primarily to improvements in manufacturing (explained below). The Company's
composite products sales were up $36,694 from 1Q98 to 1Q99, but increased costs
(explained below) caused a major deterioration in gross margins and profits in
the Company's composite products. The Company continues to expand into the
industrial and commercial plastic markets. Although these markets tend to
generate lower sales during winter months, they are less seasonal than the
Company's agricultural markets. Sales in these markets increased from 10.4% of
total revenues in 1Q98 to 12.2% in 1Q99.
Net Sales: Net sales for 1Q99 increased by 22.6% to $1,853,020, compared to net
sales of $1,511,156 for 1Q98. Net sales for the plastics segment increased by
23.0% to $1,629,027 in 1Q99, compared to net sales of $1,323,858 for 1Q98. Net
sales for the composite segment increased by 19.6% to $223,994 in 1Q99, compared
to net sales of $187,299 for 1Q98.
There are several factors that contributed to the increase in the plastics
segment:
Agricultural & Industrial Market:
Increased manufacturing capacities and throughput has decreased
delivery time resulting in a quicker turnaround to the distributor than many of
the Company's competitors have been able to offer. In addition, the formation of
an offering to the distributor, which allows us to help solve their problems
with product distribution, has also contributed to increase sales.
During the last quarter of fiscal year 1998, one of the Company's
warehouses located in Washington was re-evaluated to better serve the
distributors of the Company in that area. Non-moving inventory was removed and
an improved product mix was introduced into the warehouse, allowing for
increased distribution from the warehouse.
A salesperson covering a key agricultural market in the intermountain
region was replaced with an individual who has substantially increased the
coverage of the territory. Substantial improvements were noticed immediately as
relationships with distributors within the territory were improved.
10
<PAGE>
An independent manufacturer's representative covering a territory in
the Southern States region was terminated and replaced with a NACO salesperson
and company-run warehouse. This was a region in which sales have been stagnant
for several years.
As a result of these changes along with other changes, agricultural and
industrial sales increased to approximately 19% for the first quarter of fiscal
year 1999. Other improvements are scheduled for the current fiscal year.
Utility Market:
Towards the end of fiscal year 1998, eighteen new independent utility
representatives were established to expand sales into the utility market (sewer
and drainage). These representatives are strategically located throughout the
country, allowing for more effective coverage of the utility market.
Management feels that the major expansion into the utility market,
including the addition of these new representatives has enabled the Company to
increase utility sales by approximately 42% for the first quarter of fiscal year
1999.
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 1Q99 and 1Q98 was 25.4%
and 32.0%, respectively. Gross margin for plastics and composites as a
percentage of sales for 1Q99 was 38.8% and (72.2)%, respectively, compared to
35.1% and 10.2%, respectively, for 1Q98. As the Company's production force has
developed additional experience and sales volumes for plastic products have
increased, gross margins on these products have improved. The negative margins
currently generated by the Company's composite products reflect the Company's
low volume of composite product sales and inexperienced labor. 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. Management is addressing the loss in two ways. First, management believes
that the Company's Ogden facility has capacity that will accommodate higher
sales volumes and that the market for the Company's products is more than
adequate to fill this capacity. Therefore, management has focused greater
efforts on selling. Second, the Company 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 new personnel 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 believes that increased sales
volumes of composite products will improve the Company's ability to cover fixed
costs and generate satisfactory margins. Currently, the Company has a backlog of
composite orders of approximately $300,000. Management believes the Company can
fill these orders during the second quarter of fiscal 1999, which, together with
improving throughput, and controlling labor and material cost should improve
gross margins. Labor and related expenses increased from $92,470 in 1Q98 to
$214,239 in 1Q99 for several reasons. One was the inexperience of Company
personnel discussed above. Two, because of inexperienced people in tool making,
the tools or molds for one major product were prepared improperly. As a result
there was an extraordinary amount of scrap and what wasn't scraped had to have a
large amount of labor expended to finish the product to quality standards. This
problem is being addressed by reworking the molds for these products, which
management hopes will reduce both scrap and labor to an acceptable level. The
Company takes a complete physical inventory once a year and a physical inventory
of the top 80% of the dollars in inventory every quarter. This helps to offset
any inventory adjustments at year-end. Any year-end adjustments are reflected
during the fourth quarter after the year-end physical inventory is completed.
Selling: Selling expenses were 18.7% of net sales for 1Q99, compared to
23.3% for 3Q98. The decrease in selling expenses as a percentage of sales was
mainly due to increased sales volume. In actual dollars, selling expenses
decreased $6,759, or 1.9%, from 1Q98 to 1Q99. Freight expense remained constant
as a percentage of sales at 6.0% in 1Q98 and 1Q99. Advertising expenses
decreased $12,436, mainly due to the printing of product catalogs during 1Q98
for which there was no matching expense in 1Q99.
11
<PAGE>
General and administrative: General and administrative expenses represented
17.2% of net sales for 1Q99, compared to 22.3% for 1Q98. Overall, general and
administrative expenses decreased $7,391 from 1Q98 to 1Q99. As a percentage of
sales, salaries and related benefits decreased from 13.4% of net sales in 1Q98
to 11.0% in 1Q99 mainly due to increased sales volume. Professional fees
decreased $16,104, or 59%, from 1Q98 to 1Q99, mainly due to timing of the audit
during 98 and 99. Insurance expenses decreased $9,287 mainly due to reduced
rates on the Company's general liability and property polices.
Other: Other expenses/revenues were 4.7% for 1Q99, compared to 3.7% for
3Q98. Interest expense went from 3.4% in 1Q98 to 4.0% in 1Q99. The effective
interest rates (interest expense divided by the average debt balance for the
period) for 1Q99 and 1Q98 were 9.72% and 10.89%, respectively.
Liquidity and Capital Resources
The Company's principal sources of liquidity have been cash from
operations, credit facilities and equity financing. Cash provided by operating
activities was $41,625 in 1Q99. Cash as of February 28, 1999 was $53,488, down
$58,874 from November 30, 1998. 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,
working to reduce expenses and working to secure additional financing.
The Company continues to struggle with its liquidity position. With the
Company's continued losses over the past four years 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 were 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 $479,727 from November 30, 1998 to
February 28, 1999. At November 30, 1998, the Company was out over 60 days on
trade payables, due principally to lack of operating funds. As of February 28,
1999, the Company is generally 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 1999, the Company typically ships early orders to customers. The
Company generally receives payment for January and February shipments in March,
therefore cash flow has been good in March and should be good 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 potential growth. At February 28, 1999, 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 the
new revolving line of credit. Also the Company has obtained the approval from a
second 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 by the middle of April, 1999; however, both
transactions are subject to 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.
12
<PAGE>
The Company currently has plans to spend up to $150,000 in capital
expenditures to update and expand its operations on the condition of securing a
new line of credit and restructuring 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 February 28, 1999, revenues from sales and bank resources,
will be sufficient to satisfy its working capital requirements for the
foreseeable future. There can be no assurance, however, that additional debt or
equity financing may not be required or that, if such financing is required, it
will be available on terms favorable to the Company, if at all. The Company's
inability to secure additional financing or raise additional capital would
likely have a material adverse effect on the Company's operations, financial
condition, and its ability to continue to grow and expand its operations.
Factors Affecting Future Results
The Company's operating results are subject to certain risks that could
adversely affect the Company's operating results and its ability to operate
profitably. If the Company is not able to secure sufficient equity or debt
financing to meet its working capital and operational requirements as discussed
above, this will likely have a material adverse effect on the Company's
operations and financial results. In addition, the Company's operating results
could also be adversely affected by increased competition in the markets in
which the Company's products compete, manufacturing delays and inefficiencies
associated with expanding the Company's manufacturing capacity, adverse weather
conditions, increases in labor or raw materials, changes in economic conditions
in its markets, unanticipated expenses or events and other factors discussed in
this report and the Company's other filings with the Securities and Exchange
Commission.
13
<PAGE>
PART II - OTHER INFORMATION
Item 2 - Changes in Securities and Use of Proceeds
none
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
14
<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 April 13, 1999
----------------------------------------- ---------------
Verne E. Bray Date
President
By /s/ JEFFREY J. KIRBY April 13, 1999
----------------------------------------- ---------------
Jeffrey J. Kirby Date
Principal Financial Officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1999
<PERIOD-END> FEB-28-1999
<CASH> 53488
<SECURITIES> 0
<RECEIVABLES> 1217593
<ALLOWANCES> 71593
<INVENTORY> 548866
<CURRENT-ASSETS> 2043850
<PP&E> 3547955
<DEPRECIATION> 1874586
<TOTAL-ASSETS> 3976058
<CURRENT-LIABILITIES> 2523897
<BONDS> 707269
0
496236
<COMMON> 21472
<OTHER-SE> 227184
<TOTAL-LIABILITY-AND-EQUITY> 3976058
<SALES> 1853020
<TOTAL-REVENUES> 1853020
<CGS> 1382675
<TOTAL-COSTS> 1382675
<OTHER-EXPENSES> 678956
<LOSS-PROVISION> 1500
<INTEREST-EXPENSE> 73198
<INCOME-PRETAX> (281809)
<INCOME-TAX> 0
<INCOME-CONTINUING> (281809)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
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