SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31,2000
[ ] 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)
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
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As of May 31, 2000, the Registrant had 1,902,268 shares of Common Stock and
165,412 shares of Preferred Stock outstanding.
Transitional Small Business Disclosure Format Yes No X
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1
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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.
FINANCIAL STATEMENTS
May 31, 2000
3
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<TABLE>
NACO INDUSTRIES, INC.
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BALANCE SHEETS
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<CAPTION>
May November 30
---------------- -----------------
2000 1999
---------------- -----------------
(Unaudited) (Audited)
ASSETS
-------
<S> <C> <C>
Current assets:
Cash $ 139,313 $ 58,073
Accounts receivable, net of allowance for doubtful
accounts of $79,791 and $67,753, respectively 963,065 862,913
Due from related parties 41,933 38,385
Inventory 537,799 528,461
Other current assets 104,044 41,283
Deferred income taxes -- 153,900
----------- -----------
Total current assets 1,786,154 1,683,015
----------- -----------
Property and equipment:
Land 40,700 40,700
Buildings and improvements 610,038 610,038
Equipment and vehicles 2,752,151 2,805,455
Equipment construction in process 6,083
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Total property and equipment 3,408,972 3,456,193
Less - accumulated depreciation (2,231,322) (2,076,200)
----------- -----------
Net property and equipment 1,177,650 1,379,993
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Other assets:
Accounts receivable from related parties 327,232 311,231
Intangible and other assets, net of accumulated
Amortization of $22,452 and 12,830, respectively 158,088 167,711
Deferred income taxes, net of allowance of $80,000 255,800 255,800
----------- -----------
Total other assets 741,120 734,742
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Total assets $ 3,704,924 $ 3,797,750
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</TABLE>
See Notes to Financial Statements
4
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<TABLE>
NACO INDUSTRIES, INC.
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BALANCE SHEETS
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<CAPTION>
May 31 November 30
---------------- ----------------
2000 1999
---------------- ----------------
(Unaudited) (Audited)
<S> <C> <C>
LIABILITIES:
Current liabilities:
Accounts payable $ 370,685 $ 769,056
Accrued expenses 196,272 231,720
Due to related parties 10,028 15,311
Line of credit 1,001,267
Current portion of long-term obligations 74,522 81,700
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Total current liabilities 1,652,774 1,097,787
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Long-term liabilities:
Warranty obligation 48,000 48,000
Long-term obligations, less current portion 1,025,887 1,928,763
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Total long-term liabilities 1,073,887 1,976,763
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Total liabilities 2,726,661 3,074,550
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Stockholders' equity:
Common stock, $.01 par value, 10,000,000 shares authorized; 1,902,268
shares and 1,902,268 shares issued respectively 19,023 19,023
Preferred Stock, 7% Cumulative, convertible $3.00 par value,
330,000 shares authorized, 165,412 and 165,412 shares issued
respectively (Aggregate liquidation preference $1,165,869 and
$1,131,418 respectively) 496,236 496,236
Additional paid-in capital 1,018,284 1,018,284
Accumulated deficit (555,280) (810,343)
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Total stockholders' equity 978,263 723,200
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Total liabilities and Stockholders' equity $ 3,704,924 $ 3,797,750
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</TABLE>
See Notes to Financial Statements
5
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<TABLE>
NACO INDUSTRIES, INC.
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STATEMENT OF OPERATIONS
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(UNAUDITED)
-----------
<CAPTION>
Three months ended Six months ended
-------------------------------------- ----------------------------------
May 31 May 31 May 31 May 31
2000 1999 2000 1999
------------------- ---------------- --------------- --------------
<S> <C> <C> <C> <C>
Sales, net $ 2,360,625 $ 2,415,231 $ 4,557,662 $ 4,044,258
Cost of goods sold 1,359,778 1,142,916 2,640,504 2,139,809
----------- ----------- ----------- -----------
Gross profit 1,000,847 1,272,315 1,917,158 1,904,449
Operating expenses:
Selling expenses 442,719 479,404 804,250 800,855
General and administrative expenses 298,119 239,579 555,186 496,287
----------- ----------- ----------- -----------
Total operating expenses 740,838 718,983 1,359,436 1,297,142
Income (loss) from operations 260,009 553,332 557,722 607,307
Other income (expense):
Interest income 142 381 842 816
Other 10,569 -- 24,457 --
Interest expense (92,661) (99,033) (173,254) (170,009)
----------- ----------- ----------- -----------
Total other income (expense) (81,950) (98,652) (147,955) (169,193)
----------- ----------- ----------- -----------
Income (loss) before income taxes 178,059 454,680 409,767 438,114
Income tax (expense) benefit (76,700) (171,414) (154,700) (165,169)
----------- ----------- ----------- -----------
Net income (loss) 101,359 283,265 255,067 272,945
Adjustment for preferred dividends in arrears (173,397) (103,723) (173,397) (103,723)
----------- ----------- ----------- -----------
Income (loss) from continuing operations to
Common Stockholders (72,038) 179,542 81,670 169,222
Discontinued Operations:
Loss from operations of discontinued segment, net
of income tax benefits -- (158,195) -- (429,683)
----------- ----------- ----------- -----------
Adjusted net income (loss) to common stockholders $ (72,038) $ 21,348 $ 81,670 $ (260,461)
=========== =========== =========== ===========
Earnings (loss) per common share Basic:
Earnings (loss) from continuing operations $ (0.04) $ 0.09 $ 0.04 $ 0.09
Earnings (loss) from discontinued operations $ $ (.08) $ $ (.23)
Net Earnings (loss) $ (0.04) $ 0.01 $ 0.04 $ (0.14)
Earnings (loss) per common share Diluted:
Earnings (loss) from continuing operations $ (0.04) $ 0.08 $ 0.04 $ 0.09
Earnings (loss) from discontinued operations $ $ (.07) $ $ (.23)
Earnings (loss) from net income $ (0.04) $ 0.01 $ 0.04 $ (0.14)
Weighted average number of common
shares outstanding:
Basic 1,902,268 1,876,227 1,902,268 1,876,227
Diluted 2,233,092 2,207,051 2,233,092 2,207,051
</TABLE>
See Notes to Financial Statements
6
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<TABLE>
NACO INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Six months ended
---------------------------------------------
May 31 May 31
2000 1999
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<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ 255,067 $ 272,945
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation 163,661 160,412
Amortization 9,622 3,207
Deferred income taxes 153,900 --
(Increase) decrease in:
Accounts receivable, net (100,153) (555,194)
Receivable from related parties 336 (204,739)
Inventory (9,339) 7,978
Other (62,762) 27,480
Increase (decrease) in:
Accounts payable (446,371) 706,266
Accrued expenses 12,552 (55,530)
Income taxes payable -- (100)
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Net cash provided by (used in) continuing activities (23,487) 362,725
Net cash provided by (used in) discontinued activities -- (429,683)
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Net cash provided by (used in) operating activities (23,487) (66,958)
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Cash flows from investing activities
Net change property and equipment (16,827) (16,842)
Loan to related parties (16,001) --
Investment in intangible and other assets -- 60,395
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Net cash provided by (used in) investing activities (32,828) 43,553
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Cash flows from financing activities
Net change in line of credit 213,469 (368,847)
Decrease in related party loan (5,283) 0
Payments on long-term debt (70,631) (681,986)
Proceeds from long-term loans -- 1,018,529
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Net cash provided by (used in) financing activities 137,555 (32,304)
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Increase (decrease) in cash 81,240 (55,709)
Cash, beginning of period 58,073 97,428
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Cash, end of period $ 139,313 $ 41,719
=========== ===========
</TABLE>
See Notes to Financial Statements
7
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NACO INDUSTRIES, INC.Notes to Financial Statements (Unaudited)
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May 31, 2000
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NOTE A - INTERIM FINANCIAL STATEMENTS
-------------------------------------
In the opinion of management, the accompanying unaudited financial statements
include all necessary adjustments (consisting only of normal recurring accruals)
to present fairly the financial position of NACO Industries Inc. (the "Company")
as of May 31, 2000, the results of its operations for the three months and six
months ended May 31 1999 and 2000, and its cash flows for the six months ended
May 31, 2000 in conformity with generally accepted accounting principles for
interim financial information applied on a consistent basis. Operating results
for the six-month period ended May 31, 2000 are not necessarily indicative of
the results that may be expected for the fiscal year ending November 30, 2000.
The Company's results of operations for the three month and six month periods
ending May 31, 1999 have been restated to reflect the discontinued operations of
the Company's wholly owned subsidiary, NACO Composites, Inc. The results of
operations of the discontinued segment are shown separately as discontinued
operations, net of applicable income taxes.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted. Accordingly, these financial statements should be read in
conjunction with the Company's financial statements and related notes in the
Company's Annual Report on Form 10-KSB for the year ended November 30, 1999.
NOTE B - INVENTORY
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Inventory consisted of the following:
May 31, November 30,
2000 1999
---- ----
Raw materials $ 246,764 187,813
Finished goods 371,035 401,608
Less - valuation allowance (80,000) (60,960)
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Total $ 537,799 528,461
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NOTE C - DIVIDENDS
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Dividends on the preferred stock are cumulative at 7%. At May 31, 2000, the
cumulative amount of dividends accrued was $173,397. Of this amount, $173,397
was in arrears.
NOTE D - EARNINGS PER SHARE
---------------------------
The Company has 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 number of shares of common stock outstanding during
the period. The calculation of diluted earnings per share of common stock
assumes the dilative effect of the Company's cumulative preferred stock, options
and warrants. During the six month period ending May 31, 2000, 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.
8
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NACO INDUSTRIES, INC.Notes to Financial Statements (Unaudited)
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May 31, 2000
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NOTE E - PREFERRED STOCK AND WARRANTS
-------------------------------------
There were no shares of capital stock sold or warrants exercised during the
three months ending May 31, 2000.
NOTE F - DEBT AND LOAN AGREEMENTS
---------------------------------
At May 31, 2000, the outstanding balance of the Company's revolving line of
credit was $1,001,267. This line of credit was entered into on April 22, 1999
with Wells Fargo Business Credit. The amounts, available under the facility, are
based on a percentage of accounts receivable and inventories. This line of
credit matures April 30, 2002. As of May 31, 2000 the Company was technically
not in compliance with the "Minimum [Pre-tax] Net Income" covenant and the
"Minimum Net Worth" covenant. The $1,001,267 line of credit balance has been
classified as current because of the technical non-compliance. The Company is
working with Wells Fargo Credit to reset the covenants.
NOTE G - STOCK OPTIONS
----------------------
In May 2000, the Company granted a non-qualified stock option for $20,000 shares
to Jack Prust, a new director of the Company. The options vested on the grant
date, and are exercisable anytime while serving as a director for up to ten
years. The options have an exercise price of $3.00.
NOTE H - RELATED PARTY OPERATING LEASES
---------------------------------------
In December 1999, the Company entered into two related-party lease agreements
for land, building and equipment with PVC, Inc., a company owned by Verne Bray,
the President, Chairman of the Board, and majority stockholder of the Company.
The terms of the leases are for a period of five years commencing December 1999.
Rentals begin at $13,500 per month for the land and building, and $9,500 per
month for various pieces of equipment. Upon each annual anniversary date, the
monthly rentals for each lease shall be adjusted by the amount of any increase
in the Consumer Price Index over the preceding year. The previous lease for
land, building and equipment, which was executed by the Company and Mr. Bray and
expired December 31, 1999, required lease payments of $9,300 per month. The
lease amounts were negotiated at the fair-market rental value and approved by
Company's Board of Directors.
In March 2000, Mr. Verne Bray, Chairman of the Board and CEO, signed an
indemnification agreement to hold the Company harmless for funds paid on behalf
of Rimshot, a limited liability company owned by a son of Mr. Bray. The
agreement covers $259,144 of costs advanced to Rimshot for startup operations,
and $52,087 for principal and interest payments made on leased machinery used by
Rimshot through November 30, 1999. The agreement calls for monthly payments of
$2,500 beginning October 1, 2000. After October 1, 2001, the note bears interest
at the applicable federal rate. Pursuant to the indemnification agreement, Mr.
Bray conveyed to the Company a security interest in all PVC. Inc. lease
receivables from the Company. The board of directors approved the Company's
execution of the indemnification agreement. The Company also signed a security
agreement with PVC, Inc. which allows the Company to offset payments due to PVC,
Inc. in the event of default on the indemnification agreement.
The Company as paid as of May 31, 2000 an additional $16,001 for principle and
interest payments on leased machinery used by Rimshot. This amount has been
added to the amount recorded as due from Mr. Bray in accordance with the
indemnification agreement.
In May 2000 one of the two lease agreements NACO has for equipment being used by
Rimshot was transferred to PVC, Inc. a Company owned by Mr. Bray.
9
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NACO INDUSTRIES, INC.Notes to Financial Statements (Unaudited)
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May 31, 2000
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NOTE I - PROVISION FOR INCOME TAXES
-----------------------------------
The Company has loss carryforwards from previous fiscal years of approximately
$1,285,000 that may be applied against future taxable income. These operating
loss carryforwards expire in the years 2009 through 2020. The interim financial
statements reflect a tax provision for net income to date and deferred tax
assets have been adjusted accordingly.
NOTE J - CONTINGINCIES
----------------------
The Company is a defendant in a lawsuit filed by one of its former employees who
owned a building that had been leased by the Company. The suit asks for damages
of approximately $41,000. The Company believes the suit is completely without
merit and has filed a counter-suit and intends to vigorously defend its
position.
10
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Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
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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 manufactures and sells PVC valves (4" through 12" in
diameter).
Results of Operations
The following discussion relates to the three months and six months ended
May 31, 2000 and May 31, 1999, respectively. For comparison purposes,
percentages of sales will be used rather than dollars. In the following
discussion, the three months ended May 31, 2000 and May 31, 1999 are referred to
as 2Q00 and 2Q99, respectively. The six months ended May 31, 2000 and May
31,1999 are referred to as 6M00 and 6M99, respectively. Readers are cautioned
that results of operations for the three and six months periods ended May 31,
2000 are not necessarily indicative of the results that may be expected for the
fiscal year ending November 30, 2000.
Overview. The Company sustained an operating profit after taxes of $101,359
for 2Q00 compared to an operating profit after taxes of $283,265 for 2Q99. Gross
margin as a percentage of sales for 2Q00 and 2Q99 was 42.4% and 52.7%,
respectively. The reduction in the Company's operating profit and gross margins
was mainly due to two factors. 1) Management feels that a warm mild winter
resulted in a shift of sales to the first quarter that normally would have been
placed in the second quarter and 2) Increases in raw material costs during the
past year have continued to put downward pressure on the Company's gross margin.
(explained below).
Net Sales: Net sales for 2Q00 decreased by 6.6% to $2,360,625, compared to
net sales of $2,415,231 for 2Q99. There are several factors that contributed to
decreased sales. Management feels that a warm mild winter resulted in a shift of
sales to the first quarter that normally would have been in the second quarter.
Net sales for 1Q00 were $2,197,038, up $568,011 from $1,629,027 in 1Q99. For
6M00, net sales were $4,557,662, up $513,404 from 6M99. Management believes
these results reflect an increase in overall sales, but that an apparent shift
from 2Q00 to 1Q00 has occurred. Another factor that may have contributed is the
increase in the price of PVC pipe from 2Q99 to 2Q00. Marketing reports indicate
that bigger projects may have been postponed or cancelled due to higher costs.
The market has been strong during the past year, but appears to be softening.
The Company increased prices on its products by 5% in October 1999 and
implemented another 5% price increase effective April 1, 2000 in an effort to
mitigate the continuing rise in raw material prices.
Gross Margin. Gross margin as a percentage of sales for 2Q00 and 2Q99 was
42.2% and 52.7%, respectively. Margins decreased mainly due to increases in raw
material costs, labor and rent. Raw material prices continued to rise during
2Q00. Raw materials as a percentage of sales for 2Q00 and 2Q99 were 30.4% and
23.9% respectively. The Company increased prices on its products by 5% in
October 1999 and another 5% effective April 1, 2000 to help offset this
continuing rise in raw material prices. However, because of competitive pressure
the Company hasn't been able to raise prices sufficiently to completely offset
the rise in raw material costs. Labor and related expenses increased 3.0%, or
$11,917, from 2Q99 to 2Q00 mainly due to an average of 3.5% increases in wages,
effective December 1, 1999. Rent expense as a percentage of net sales for 2Q00
and 2Q99 was 3.0% and 1.6% respectively. Rent expense increased 86.2% or $32,527
from 2Q99 to 2Q00 primarily due to lease payments associated with lease
agreements with PVC, Inc. Verne Bray, the Chairman of the Board and Chief
Executive Officer of the Company is the principal shareholder of PVC, Inc. The
terms of the leases are for a period of five years commencing December 1999.
Rentals begin at $13,500 per month for the land and building, and $9,500 per
month for various pieces of equipment. Upon each annual anniversary date, the
monthly rentals for each lease shall be adjusted by the amount of any increase
in the Consumer Price Index over the preceding year. The previous lease for
land, building and equipment, which was executed by the Company and Mr. Bray and
expired December 31, 1999, required lease payments of $9,300 per month. The
lease amounts were negotiated at rates considered by the Company's Board of
Directors to represent the fair-market rental value and were approved by the
Company's Board of Directors. 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.
11
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Selling: Selling expenses were 18.8% of net sales for 2Q00, compared to
19.9% for 2Q99. In actual dollars, selling expenses decreased $36,686, or 7.7%,
from 2Q99 to 2Q00. The decrease in selling expenses as a percentage of sales was
mainly due to decreased freight costs. Freight as a percentage of net sales for
2Q00 and 2Q99 was 6.9% and 7.9% respectively, partially due to receiving
quantity discounts on freight on larger shipments. Commission expense decreased
.2% on net sales, mainly due to a higher percentage of sales to in house
accounts where a lower commission is paid.
General and administrative: General and administrative expenses represented
12.6% of net sales for 2Q00, compared to 9.9% for 2Q99. The increase was mainly
due to decreased sales volume and an increase in legal and outside consulting
fees. Overall, general and administrative expenses increased $58,540 from
$239,579 to $298,119 from 2Q99 to 2Q00. Legal, accounting and outside services
as a percentage of net sales was 1.2% and 3.5% for 2Q99 and 2Q00 respectively.
The increase in dollars for legal, accounting and outside services was $55,069
from 2Q99 to 2Q00. During 2Q00 the Company's management hired a consulting firm
to identify opportunities to reduce operating expenses, increase efficiencies
and improve management training. Legal expenses also increased $4,868, mainly
due to legal expenses occurred to defend against two law suits filed against the
Company by a former vendor and a former landlord. (See Part II, Item 1 for
details on these law suits) R & D expenses decreased $4,369 mainly because of
the departure of the Company's only engineer that was not replaced. Management
believes that the Company can out source its engineering requirements in the
future. Salaries, as a percentage of net sales, decreased from 6.4% in 2Q99 to
5.3% in 2Q00 mainly due to two factors: 1) The executive officers received no
increase in pay this past year and 2) a voluntary reduction in the salary of the
CEO. Lease expenses increased $4,022 due to new lease agreements between NACO
Industries, Inc. and PVC Inc.
Other: Other expenses/revenues were 3.5% for 2Q00, compared to 4.1% for
2Q99 mainly due to $10,569 in lease revenue from equipment leased to Rimshot
LLC, a related party. Interest expense went from 4.1% in 2Q99 to 3.9% in 1Q00.
Interest decreased $6,372 from 2Q99 to 2Q00 mainly due to decreased borrowings.
The effective interest rates (interest expense divided by the average debt
balance for the period) for 6M00 and 6M99 were 11.94% and 15.14%, 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 $4,626 in 2Q00. Cash as of May 31, 2000 was $139,313, up $81,240
from November 30, 1999.
With the loss incurred by the Company during the fiscal year ended
11/30/99 primarily as a result of the discontinued NACO Composites operation,
the Company's working capital position was reduced significantly. The Company's
liquidity position improved during 6M00, due primarily to increased sales and
net income for the period. The Company decreased trade payables by $398,374 from
November 30, 1999 to May 31, 2000. At November 30, 1999, the Company was out
over 90 days on trade payables, due principally to a lack of operating funds. As
of May 31, 2000, the Company was current on its trade payables.
At May 31, 2000, the outstanding balance of the Company's revolving
line of credit was $1,001,267. This line of credit was entered into on April 22,
1999 with Wells Fargo Business Credit. The amounts available under the facility
are based on a percentage of accounts receivable and inventories. It matures
April 30, 2002. As of May 31, 2000 the Company was technically not in compliance
with the "Minimum [Pre-tax] Net Income" covenant and the "minimum net worth"
covenant. The covenant pre-tax income was $515,000 and the Company's actual
pre-tax net income was $409,767. The minimum net worth covenant was $1,000,000;
the company's actual net-worth was $978,263. The Company is working with Wells
Fargo Credit to reset the covenants.
Also, on April 22, 1999, a second facility was closed with WebBank
Corporation. This facility was for $1,100,000. It is secured by current assets,
property and equipment, and life insurance. It is payable with interest at 1.5%
over the banks prime rate and matures April 30, 2014. On November 30, 1999, the
Company was in default of WebBank's loan covenants. In a letter dated February
18, 2000, WebBank provided a waiver that extended a grace period to the Company
with respect to meeting certain ratio requirements and advances to affiliates
until August 31, 2000. The waiver also extended a grace period for the
debt-worth requirement until November 30, 2000. The Company received a waiver of
the default and has been given a twelve-month grace period.
The Company currently has plans to spend up to $150,000 in capital
expenditures to update and expand its operations on the condition that in so
doing it will not adversely effect loan covenants.
Management believes that its capital resources on hand at May 31, 2000,
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.
12
<PAGE>
Factors Affecting Future Results
The Company's operating results are subject to certain risks that could
adversely affect the Company's operating results and its ability to operate
profitably. The Company's operating results could 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 1 - Legal Proceedings
Item 1--Lund Engineering.: During its fiscal year ending
November 30, 1999, and in the ordinary course of its business, NACO
Industries, Inc. (Company) entered into a series of contracts with a
Contractor in Bountiful, Utah known as WCI, LLC ("WCI"), for the
manufacture of various premanufactured fiberglass materials and parts
to be used in construction. In order to meet its contract requirements,
the Company outsourced production under these contracts to a
subcontractor known as LUND ENGINEERING AND MANUFACTURING, Inc., a Utah
corporation in Salt Lake City ("LUND"). As of November 30, 1999 the
Company had timely paid all of the LUND invoices submitted to it for
jobs performed by LUND, and believed that it had paid for such work in
full. However, on December 31, 1999, LUND forwarded to the Company a
demand for approximately $70,000 of additional amounts which it
claimed, based upon invoices dated December 31, 1999, and pertaining to
jobs performed and completed much earlier in the year. The majority of
LUND's claims appear to be based on overtime it claims that it was
required to work for the Company's jobs, and for which it claims it was
entitled because a Company employee allegedly agreed that the Company
would pay it.
During the spring of 2000, Lund has filed a number of
materialmen's or mechanics liens against the properties where these
materials were supplied. Also, WCI, with whom the Company was
contracting on these projects, withheld substantial payments to the
Company. Accordingly, in an effort to resolve this matter, the Company
has now entered into an Arbitration Agreement, effective May 15, 2000,
with Lund, whereby this dispute has been submitted to arbitration. In
connection with the arbitration, all of the various mechanics' and
materialmen's liens were released; and, in exchange for the deposit
into escrow of $64,478.70 by WCI, the Company and WCI have entered into
a mutual release of claims against each other pertaining to this
project. This matter has now been submitted to arbitration before the
American Arbitration Association, and the Company's legal council hopes
to be scheduling the dates for arbitration in the near future.
Management and its legal council are still of the opinion that the
funds in escrow are properly the funds of the Company, and that the
Company should be entitled to substantially all of such funds; and, the
Company in addition is asserting counterclaims against Lund, but
management does not believe that Lund has the financial capacity to
satisfy any significant judgment. The Company is primarily seeking the
release of the escrowed funds in the arbitration to NACO.
Item 2--Draegers: In October of 1996, NACO COMPOSITES, INC., a
wholly owned subsidiary of NACO Industries, Inc., entered into a lease
agreement for the use of a building in Ogden, Utah as a manufacturing
facility for the production of certain fiberglass products. That
subsidiary has since been merged into NACO Industries, Inc., and the
lease expired on September 30, 1999. In connection with that lease,
Ronald and Rita Draeger, the owners and landlord of the property, have
now filed suit against NACO Industries, Inc. in the Second District
Court of Weber County, State of Utah on or about April 3, 2000 in the
amount of $41,305, or the amount to be proven at Court, plus interest,
costs of Court and a reasonable attorney's fee. NACO Industries, Inc.
has in turn answered this lawsuit, and filed a Counterclaim against the
Draegers on May 4, 2000 for an amount in excess of $240,000, based upon
alleged agreements by Draegers to reimburse NACO for certain
improvements made to the building, and based upon Draegers' alleged
breach of contract for repudiating NACO's option to purchase the
building, and for violation of covenant not to compete, and other
miscellaneous damages. Although it may be too early in the litigation
to predict the outcome, with discovery still to take place prior to any
trial, it does not appear at this time that the Company has significant
risk of liability for material amounts in this suit, aside from the
cost of the litigation itself. It may be that the Company is
responsible for certain repair, fix-up or clean-up expenses. Management
is hopeful that this action can be settled by the parties' good faith
efforts to resolve the matter before trial. Management and legal
council believes that the Company has a reasonable basis for its
defense to this action, and reasonable grounds for its Counterclaim.
Item 2 - Changes in Securities and Use of Proceeds none
Item 5 - Other
14
<PAGE>
In the Company's Board meeting following the annual stockholders
meeting held May 18,2000, the Board made the following changes in management.
Verne Bray was named the Chairman of the Board and CEO. W. Michael Hopkins was
named President. Jeff Kirby was name Executive Vice President and CFO.
Item 6 - Exhibits and Reports on Form 8-K
Exhibit No. Description
----------- -----------
(a) Exhibits. The following are files as exhibits to this report.
27 Financial Data Schedule
(b) Reports on Form 8-K. None
15
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Naco Industries, Inc.
Registrant
By /s/ VERNE E. BRAY July 12, 2000
---------------------------------- ---------------
Verne E. Bray Date
CEO (Principal executive officer)
By /s/ W. MICHAEL HOPKINS July 12, 2000
---------------------------------- ---------------
W. Michael Hopkins Date
President
By /s/ JEFFREY J. KIRBY July 12, 2000
---------------------------------- ---------------
Jeffrey J. Kirby Date
Executive Vice President/CFO
(Principal financial and accounting officer)
