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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
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NACO INDUSTRIES, INC.
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(Exact name of small business issuers specified in its charter)
Utah 33-85044-D 48-0836971
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(State or other jurisdiction (Commission File No.) (IRS Employer
of incorporation) Identification No.)
395 West 1400 North
Logan, Utah 84341
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(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (435) 753-8020
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on Which
Title of Each Class Registered
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None None
Securities registered pursuant to Section 12(g) of the Act: None
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained herein, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
The issuer's revenues for its most current fiscal year were $7,432,130.
The aggregate market value of the Preferred Shares held by
non--affiliates based upon the average of the bid and ask prices of the
Preferred Shares in over-the-counter market on February 20, 1999 was $206,765.
As of February 20, 1999 the Registrant had 1,902,268 shares of Common
Stock outstanding, and 165,412 shares of Preferred Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 2000 Annual
Meeting of Shareholders to be held May 18, 2000 are incorporated by reference in
Part III of this Report.
<PAGE>
This Report contains "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995, which can be identified by
the use of forward-looking terminology such as "may," "will," "should,"
"expect," "anticipate," "estimate," or "continue" or the negative thereof or
other variations thereon or comparable terminology. These forward-looking
statements are subject to risks and uncertainties that include, but are not
limited to, those identified in this report, described from time to time in the
Company's other Securities and Exchange Commission filings, or discussed in the
Company's press releases. Actual results may vary materially from expectations.
PART I.
Item 1. Business.
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Organizational History.
NACO Industries, Inc. ("NACO" or the "Company") was organized under the
laws of Kansas, and began operations in Garden City, Kansas in 1976. In 1980,
the Company opened a new sales and warehouse division in Logan, Utah, operating
as NACO West. In 1984, NACO acquired 100% of the Valor Division of NACO
Industries, Inc., a California corporation ("NACO California"). In 1985, VC
Inc., a Wyoming corporation ("VC Inc.") was formed as a Wyoming holding company
and acquired the stock of NACO, as well as assets of Kansas Partnership, a
Kansas partnership which owned the real estate and building used by the Company
in Garden City, Kansas.
In November 1990, NACO reorganized to consolidate the operations of
NACO, the Valor Division of NACO California and VC Inc. As one element of the
reorganization, NACO changed its state of domicile to Utah. The Company now
operates as a Utah corporation with facilities in Utah, Kansas and California.
The Company is qualified as a foreign corporation doing business in Kansas,
California and Texas.
On October 11, 1996, the Company, formed a wholly owned subsidiary,
NACO Composites, Inc. ("NACO Composites"), and acquired the assets of Dreager
Manufacturing in a business combination accounted for as a purchase. The
existing fiberglass operations of the Company were combined with this operation
and moved to a new facility in Ogden, Utah. Effective April 21, 1999, NACO
Composites, Inc. was merged into NACO Industries, Inc. From April 21, 1999,
through August 31, 1999, the merged operations of NACO Composites, Inc.
continued as a business segment of NACO Industries, Inc. On August 31, 1999, the
management of NACO Industries, Inc. made the decision to discontinue the
operations of the merged composite and fiberglass segment.
Current Business.
NACO is a manufacturing company, which produces and sells polyvinyl
chloride ("PVC") products and fiberglass and composite products. Now
headquartered in Logan, Utah, the Company has branch-manufacturing facilities in
Garden City, Kansas, Lodi, California, and various warehouses located in
Nebraska, Arizona, Washington and Texas. See "Item 2 - Properties".
NACO's primary line of products consists of PVC pipe fittings and
valves, which are sold throughout the United States through wholesale
distributors to the irrigation, industrial, construction and utility industries
and accounted for 86% of the Company's revenues in fiscal 1998. The Company
manufactures molded fittings (4" through 10" in diameter), fabricated fittings
(4" through 30" in diameter), and PVC valves (4" through 12" in diameter).
Molded fittings are manufactured by forcing liquefied PVC resin into a mold.
Fabricated fittings are manufactured by reshaping, cutting and welding PVC pipe.
In addition to manufacturing its own products, NACO works with other
organizations as a manufacturing subcontractor and original equipment
manufacturer. See "Products".
Discontinued Operations.
The physical operations of NACO Composites were discontinued as of
September 30, 1999. NACO Composites 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. NACO Composites also produced tooling
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and molds for other companies in various industries. NACO Composites operations
generated an operating loss of $(535,455), net of related income tax benefit of
$320,200, for the ten months ended September 30,1999, and the Company incurred
an additional loss due to estimated costs to discontinue the operations of
$(214,995) net of related income tax benefit of $128,600. The costs attributed
to the discontinuation of the operations of NACO Composites relate to
discontinued use of certain assets, labor expense, legal and accounting fees,
and payment of rental obligations. During the months prior to discontinuing the
operations of NACO Composites, the Company's senior management spent a
substantial amount of time at the NACO Composite facility, during which time
they worked to reduce direct labor costs and train employees. 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. From October 1999 until February 2000, the Company outsourced the
manufacture of certain composite products. As of February 17, 2000, the Company
discontinued the outsourcing of composite products and will no longer sell
composite products. The lease on the NACO Composites facility expired on
September 30, 1999 and the Company did not renew the lease.
Introduction to PVC
The production of PVC products originated in Germany and Austria in the
1930's. PVC is produced through chemical, thermal and mechanical reactions of
ethylene, chlorine, celulosics, polyvinyl alcohol and peroxides. These reactions
produce a PVC resin. The PVC resin is mixed with stabilizers for thermal
sensitivity, lubricants to reduce metal adhesion during processing, plasticizer
for flexibility, fillers to reduce cost and increase ultraviolet light and
impact resistance, impact modifiers for blocking the path of crack propagation,
processing aids for more efficient processing, inorganic and organic pigments
for coloring and other miscellaneous additives. The type of PVC compound mixture
depends upon the product requirements and the type of processing equipment to be
used.
PVC compounds can be processed on various types of plastic processing
equipment including extrusion, calendaring, injection molding, blow film, and
blow molding equipment. An extrusion process produces the PVC pipe, which NACO
uses. In the extrusion process, PVC compound is fused in and extruded by heat
and pressure. The melt is forced through a die to produce a continuous flow of
the desired shape. NACO also produces injection-molded parts. The injection
molding process develops a melt in a method similar to the extrusion process.
The melt is injected into a mold cavity by the forward movement of an extrusion
screw, filling the mold to form the part.
The Company engages subcontractors to produce certain parts for valves
and injected fittings, including foundries, injection molders, machine shops,
metal stampers, metal platers, rubber vulcanizers and others. The Company
generally owns the patterns and tooling that it's subcontractors use. As a
result, the tooling and patterns can be relocated if a subcontractor fails to
provide quality parts at competitive prices. None of the custom molders or
subcontractors is an affiliate of the Company. They are generally paid on a per
item or per pound basis net 30 days. The Company believes there are numerous
custom molders and other subcontractors available, with the decision on which to
be used being dictated by cost, service and quality. Generally, quantities are
ordered for a six- to eight-month period in order to provide quantity discounts
and provide sufficient lead-time for production.
Products
PVC Products. The Company manufactures and sells molded PVC fittings
(4" through 10" in diameter), as well as fabricated PVC fittings (4" through 30"
in diameter). 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's primary valve
product lines include low pressure butterfly valves and air relief valves.
PVC fittings and valves are generally used to control the direction and
flow of fluids, dry products or gasses through a pipe network. Pipefittings are
also used to extend or repair existing lines, and enable pipelines to branch off
into different directions.
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The PVC industry includes a number of industry market segments
including construction, irrigation, utility and industrial markets. Products
such as heat and air fittings are used in the construction market. In the
irrigation market, farmers use fittings and valves to transport water for field
irrigation and drainage. In the utilities market, private contractors and
municipalities use fittings and valves in the installation and maintenance of
sewer and water lines. In the industrial market, PVC fittings and valves are
used for removal of toxic fumes and the supply of heating and air conditioning
to commercial and residential buildings. Historically, the Company has sold a
majority of its PVC products into the agricultural market. For the year ended
November 30, 1999, agricultural product sales accounted for approximately 74% of
the Company's PVC sales, compared to industrial, construction and utility sales
of 26%. The Company currently expects this trend to continue.
Manufacturing
PVC Products. The Company presently manufactures and sells both
fabricated and injection molded PVC fittings. The valves manufactured by the
Company are designed for low pressure uses (typically applications where fluid
pressures are below 50 pounds per square inch.)
Fabricated fittings are made by cutting PVC pipe into specified lengths
and shapes and heating these into a pliable condition where they are formed and
assembled to make the desired product. Fittings can be connected by either
solvent weld or gasket. A gasketed fitting has a pocket for a rubber gasket. The
gasket pocket is formed on a gasket cavity-belling machine. Solvent weld ends
are formed in a similar manner.
In fabricating a tee, the pipe is heated to a pliable state, then an
opening is formed in the side of the piece, a piece of pipe or an insert is
inserted into the side opening of the tee forming a spout. Another piece of pipe
is then heat formed over the top of the spout forming a custom fit and a third
wall of strength. The tee is then cooled to allow the fitting to hold its shape.
It is then solvent welded into place. This method is patented by NACO. See
"-Patent and Copyright Protection". The Company believes that the patented
method produces a high quality product, in part because the third layer provides
added reinforcement. The Company's competition manufactures tees with only two
layers of plastic in the tee area. The design is such that a visual comparison
with competitor's products will show the added reinforcement. The Company uses
the patented method as a selling feature in its marketing campaign.
Molded fittings are produced through an injection molding process which
involves forcing a plasticized resin compound into fitting molds. Injection
molding equipment uses heat and pressure to plasticize the resin compound, which
is transferred into molds or dies of the desired shape. Cooling then takes place
and the part is ejected from the mold cavity. Injection molding process
equipment uses similar compounds as extrusion process equipment. At the present
time the Company subcontracts this work to custom molders. However, the Company
owns the molds and can move them upon 30 days' notice.
The Company also acts as a manufacturing subcontractor for other
companies engaged in the fabrication of custom PVC applications. Subcontracting
activities may include assistance in the design, layout and establishment of a
manufacturing process. The Company subcontracts for non-competing products and,
as a result, does not believe that acting as a subcontractor increases
competition in its markets.
The Company purchases PVC pipe from various pipe manufacturers. Major
suppliers include Kroy Industries, Royal Plastics, JM Manufacturing, Diamond
Pipe, Jet Stream, Apache Plastic, PW Pipe, IPEX and Certainteed Corporation. The
Company believes that the raw materials are interchangeable and generally
readily available from multiple sources, however, at times, the industry
experiences shortages in the supply of raw materials for pipe based on excess
demand. The Company attempts to maintain sufficient raw material inventory to
avoid the effect of these shortages, although shortages can occur in certain
products during these periods. Pipe prices are as much as ten percent lower
during the winter months due to decreased demand and lower resin prices. The
Company attempts to take advantage of these lower prices each winter by
purchasing a sufficient quantity to meet the spring and early summer demands. In
addition, as a result of seasonal market aspects of the Company's business the
Company typically increases its inventory of finished goods during winter months
for sale in spring. The Company generally allows customers to return standard
inventory items, subject to restocking fees. In addition, the Company has a
special ordering program for agricultural dealers in the winter. This program
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allows the Company to maintain production levels during this time and also
allows dealers to have their stock at the beginning of their busy season in
February. Special terms are given on the orders over a specific amount. Dealers
receive discounts for early payment before March 15 and this discount decreases
until the regular price is paid after May 15.
The Company's manufacturing labor force involves both skilled and
semiskilled labor. The Company has implemented a quality control system in the
manufacturing process to ensure fittings meet or exceed all of the applicable
specifications of the Soil Conservation Service ("SCS"), National Sanitation
Foundation ("NSF"), and American Society of Testing Materials ("ASTM"). All
product lines randomly undergo testing, including burst tests, sustained
pressure tests, heat inversion tests, and impact tests. The Company also
conducts field tests to confirm that it's products meet customer requirements.
The Company warrants that all of its product lines will be free from workmanship
and material defects for a period of four months from date of delivery.
PVC product usage differs with geographical location and season of the
year. The Company utilizes its three manufacturing facilities to produce the
products most appropriate for the geographical locations in which the plants are
located. This selective production of PVC products minimizes shipping costs and
allows for optimization of manufacturing capacity.
Marketing
PVC Products. The Company directs its principal marketing efforts at
wholesale pipe distributors. These distributors service the irrigation,
construction and utility industries in the United States, and portions of Mexico
and Canada.
The Company's products are sold by its network of independent sales
representatives on a commission basis. These representatives work closely with
customers to ensure they receive product support, information and service. In
recent years, the Company has supplemented its sales effort through a
telemarketing campaign designed to increase customer contact and encourage
broader distribution of NACO catalog literature.
The Company provides pricing information to dealers through catalog
literature. Quantity discounts are offered on larger projects or orders. The
Company feels that its product quality and customer service justify a higher
price for its products, however the Company's pricing structure enables it to
remain flexible enough to match the pricing of its competitors.
Based on feedback from industry dealers, the Company believes that the
PVC pipe and fitting industry has a reputation for long lead times and late
deliveries. The Company, however, has implemented procedures to increase on-time
deliveries. With its manufacturing plants and warehouse facilities located
across a broad geographic area, NACO believes it can provide shorter shipping
times and better service, which means improved response to customer needs.
During the year ended November 30, 1999, the Company achieved its goal to ship
90% of all orders within 48 hours of receipt. The Company's next goal is to ship
orders within 24 hours, which will require careful inventory management, while
maintaining manufacturing flexibility. In an effort to facilitate on-time
delivery, the Company has warehouse operations. The Company now relies on more
frequent shipments of a smaller volume, which enables the Company to maintain a
favorable level of inventory. The Company guarantees shipping dates on small
orders (under $1,500) or it pays the freight for any late shipment. Assuring on
time delivery on larger orders is generally not as difficult because of the
longer lead-time provided on larger projects.
The Company has three PVC fittings manufacturing facilities, and leases
a warehouse in Lubbock, Texas. The Company contracts with various warehouse
owners to maintain and distribute its products. Contracted warehouse locations
include Grand Island, Nebraska; Phoenix, Arizona; and Pasco, Washington. The
warehouse agents are paid on a commission basis for handling, storing and
shipping inventory. Generally, a customer will call the warehouse with an order,
which is then shipped directly to the customer by the warehouse agent from the
inventory at the agent's location. Invoices are sent from the Company. NACO
offers customers a right to return products subject to a 20% restocking fee.
Non-stock items are generally not returnable. The Company also has contracted
with buy-sell representatives in Tucker, Georgia; Washington, Michigan and
Melbourne, Australia. The companies involved in this arrangement purchase
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products from the Company, then sell them out of their own inventory to
distributors. The Company provides the buy-sell representatives with a special
discount based on volume. Returns by the buy-sell representatives are subject to
a restocking fee. Shipping costs generally run from five to ten percent of the
cost of the product except in Australia, where freight is sent collect. The use
of the warehouse and buy-sell representatives improves the Company's ability to
control shipping costs while providing timely delivery to its customers.
Economic Conditions, Market Fluctuations and Seasonality
Several external factors have an indirect impact upon the business of
the Company. The PVC industry in which the Company competes is dependent upon
the utility, industrial, agricultural and construction sectors. Rising interest
rates and reduction in government subsidy programs for housing, farming and
public works can significantly impact sales in the PVC industry. Weather also
plays a role. Sales tend to be heaviest during the spring, summer and fall, and
decrease during the winter months when cold and freezing temperatures impact
northern regions of the market. Other factors influencing the industry include
fluctuations in the price of raw materials and the price of substitute products
such as steel fittings and valves. In addition, pipe prices are as much as ten
percent lower in winter months due to decreased demand and lower resin prices.
As a consequence the Company generally attempts to stockpile materials during
the winter months. See "-Manufacturing".
Competition.
PVC Products. Many of the Company's competitors are substantially
larger than the Company, and have greater resources. As a maturing industry, the
market for fittings and valves is highly competitive. In addition, as a result
of competing in a maturing industry, annual percentage increases in industry
sales will be lower than if the Company were operating in a developing industry.
Therefore, the Company must rely on its ability to increase its market share and
develop new products to increase sales. Competition within the PVC fittings
industry is based on price, quality, breadth of product line and timeliness of
delivery. While there are several national producers, competition generally
occurs on a region-by-region basis. This is due to existence of several regional
competitors and the fact that shipping represents a significant cost factor in
the industry. The Company has a number of competitors who compete with the
Company both at the regional level and with respect to various product lines.
Present competitors include Galt Pipe and Construction (Galt, CA), Spear
Manufacturing Company (Sylmar, CA), Head Manufacturing, Inc. (Preston, ID),
Sioliou Industries Inc. (Ville Plattle, LA), and PVC Fittings (Hereford, TX). As
greater penetration of the utility market is pursued, the Company will face
competition from additional competitors in the drain, waste and vent (DWV) and
sewer markets. These competitors may include Industries Vassallo Inc. (Ponce,
Puerto Rico), GPK Products Inc. (Fargo, ND), Freedom Plastics Inc. (Janesville,
WI) and Multi Fittings (Toronto, Ontario, Canada).
Based on feedback from dealers who sell products manufactured by
certain of the Company's competitors the Company feels that the strongest
attribute of its products is their quality. NACO strives to manufacture products
that meet or exceed industry standards. In this regard, the Company has patented
the design of the NACO fabricated tee. While some of the Company's competitors
use only two layers of plastic in the design and construction of their tees,
NACO uses three layers to provide additional strength. See "-Patent and
Copyright Protection".
Management believes the breadth of the Company's product line also
represents a strategic advantage. Because of price incentives offered on large
orders, many purchasing agents are reluctant to order small sized fittings from
one manufacturer and large diameter fittings from another. Thus, firms having a
broad product line tend to have a stronger position when bidding pipe projects.
In addition, the Company believes its prompt delivery practices provide it with
a competitive advantage.
Planned Operational Growth.
Product Development. The Company is developing a slide gate valve, six
to twelve inches in diameter, which could be utilized in the irrigation,
industrial and utility markets. These products have been developed to the
testing stage and management intends to move the new products into production as
soon as capital is available to produce the molds. The molds are anticipated to
be completed within the 2000 fiscal year.
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NACO currently targets various distributors of PVC fittings in the
irrigation and utilities markets. Approximately 70% of the Company's current
customers are in these markets. NACO's plans for expansion will increase sales
efforts in industrial and building construction markets.
Research and Development. Research and development expenditures for the
fiscal years ended November 30, 1999 and 1998 were $31,751 and $45,950
respectively, all of which was spent in the plastics division. It is anticipated
that research and development expenditures for the year ended November 30, 2000
will be approximately at the same level as for the year ended November 30, 1999,
however, if cash flow permits the company would like to increase research and
development of new products in the future.
Major Customers. During the year ended November 30, 1999, no customer
accounted for more than 10% of the sales of the Company and it is not
anticipated that the loss of any one customer would have a material adverse
impact on the revenues of the Company.
Employees. As of November 30, 1999, NACO had 75 employees of whom 74
were full time and 1 was part time. All plant locations are nonunion. The
Company anticipates it will add between four and ten additional temporary
employees in various areas during the busy seasons of the coming year.
Patent and Copyright Protection. The Company filed a utility patent for
its plastic tee fitting in 1984. The patent was renewed in 1998, and has been
extended until 2001. The patent was renewable for up to 17 years from the date
of issuance. The 17 years will be up in the year 2001. The Company believes that
the patented technology provides an improved product and a competitive selling
edge for NACO. The design of the patented tee creates a stronger product for
higher pressure applications. Approximately 70% of the tees sold by the Company
are manufactured using the patented process.
The Company also filed a patent on a one-piece 90(0) fabricated elbow
fitting on November 18, 1994, and the patent can be extended through 2015. This
elbow uses less material and labor and the Company believes the elbow has better
flow characteristics. The Company believes this will be an advantage in the
market.
NACO regularly copyrights its literature, catalogs, advertising and
other proprietary information, as it deems necessary.
Item 2. Properties.
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Facilities. The Company operates the following facilities:
<TABLE>
<CAPTION>
Approximate
Floor Space
Location (square feet) Present Use
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<S> <C> <C>
Logan, Utah (leased).................... 23,025 Manufacturing, Warehouse & Office
Garden City, Kansas..................... 21,326 Manufacturing, Warehouse & Office
Lodi, California (leased)............... 15,800 Manufacturing, Warehouse & Office
Lubbock, Texas (leased)................. 3,750 Warehouse & Office
</TABLE>
The Logan and Lodi facilities, which are occupied under leases that
expire in 2004, are used for the Company's business operations. The Lubbock
facility, which is occupied under lease that expires in 2001, is used as a
warehouse. The lease for the Logan facility is with a related party. See item 12
"Certain Relationships and Related Transactions." Lease payment amounts on the
Lodi, Logan, and Lubbock facilities are $5,217, $13,500 and $1,250 per month
respectively. The Company also leases personal property and equipment from a
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related party at $9,500 per month. See item 12 "Certain Relationships and
Related Transactions." The Garden City, Kansas property is owned by the Company
and is subject to a lien, which secures indebtedness in the principal amount of
approximately $1,086,588.
The Company also uses the services of warehouses located in Grand
Island, Nebraska; Phoenix, Arizona; and Pasco, Washington. As consideration for
such services, the Company pays to each warehouse an amount equal to 5% of sales
revenues generated by the applicable warehouse. The Company also has contracted
with buy-sell representatives in Bohemia, New York; Little Rock, Arkansas; and
Minneapolis, Minnesota. The Company feels that its facilities are suitable and
adequate for its current needs.
The Company's policies regarding real estate investments are dictated
primarily by the Company's operating requirements. It is not currently the
Company's policy to acquire assets primarily for capital gains or income. The
Company's real estate investments are limited to commercial properties used in
the Company's business operations. The Company has not adopted limitations on
the percentage of assets, which may be invested in any single investment, or
type of investment. The Company is not presently invested, and does not
presently intend that it will make future investments, in real estate mortgages
or real estate-based securities. Management does not believe a vote of security
holders would be required to modify the Company's existing real estate
investment policy.
The Company does not own any unimproved or undeveloped real property
and does not presently have any plans to develop any unimproved or undeveloped
property. In the opinion of the Company's management, the Company's properties
are adequately covered by insurance.
Item 3. Legal Proceedings.
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The Company is not a party to any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
No matters were submitted to a vote of the security holders during the
fourth quarter of the year ended November 30, 1999.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
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The Company's Common Stock (the "Common Stock") is held of record by 19
persons and is not publicly traded. The Company's Series 1 Class A 7% Cumulative
Convertible Preferred Stock (the "Preferred Stock") is held of record by 89
persons or entities, in the over-the counter market. The Preferred Stock opened
for trading in the over-the-counter market on February 26, 1996. The following
table sets forth, for the periods indicated, the high and low bid prices for the
Company's Preferred Stock, for the fiscal years ended November 30, 1999 and 1998
as reported by the OTC Bulletin Board. The bid prices are market quotations
based on inter-dealer bid prices, without markup, markdown or commission, and
may not represent actual transactions.
<TABLE>
<CAPTION>
High Low
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Year Ended November 30, 1999:
<S> <C> <C>
First Quarter .......................... $No bids $ No bids
Second Quarter ......................... No bids No bids
Third Quarter .......................... 4.25 4.00
Fourth Quarter ......................... 5.75 1.25
High Low
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Year Ended November 30, 1998:
First Quarter .......................... $ 4.50 $ 4.00
Second Quarter ......................... 4.50 4.00
Third Quarter .......................... 4.50 4.00
Fourth Quarter ......................... 4.50 4.00
</TABLE>
No dividends were paid on the Common Stock in the last two fiscal
years. The Company is restricted from paying dividends on its Common Stock under
the terms of the Preferred Stock and its revolving credit agreement. No
dividends were paid on the Preferred Stock during the last fiscal year. There is
$138,946 of dividends in arrears at November 30, 1999 on the Preferred Stock.
The Company is more than two years in arrears in the payment of cumulative
dividends therefore, holders of the Preferred Stock have the right, voting as a
class, to elect two members of the Company's board of directors at the next
annual meeting held subsequent to the arrearage. The next annual meeting will be
held May 18, 2000. The Company's existing revolving credit agreement restricts
the Company's ability to pay dividends. However, the lender has waived this
restriction with respect to the Preferred Stock.
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Item 6 Management's Discussion and Analysis of Financial Condition and Results
of Operations
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Introduction
NACO is a manufacturing company that produces and sells PVC products.
The Company's primary line of business consists of PVC pipe fittings and valves,
which are sold throughout the United States through wholesale distributors to
irrigation, industrial, construction and utility industries. The Company
manufactures and sells 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).
Historically, the Company sold a majority of its products into the
agricultural market. The agricultural market is very seasonal. Sales occur
mainly during the spring and fall when crops are not being grown. As the
Company's product mix continues to diversify in the fittings business,
management anticipates that this diversification has increased and will continue
to increase sales all year round. Management believes this diversification will
offset, in part, current seasonal fluctuations in the Company's operating
results, with significantly higher sales in the spring than in other seasons.
With the increasing business in other markets, management anticipates that the
Company's future operating results will fluctuate less in the future.
The Company, through its subsidiary, also manufactured and sold
composite products. The composite business operated from a leased facility in
Ogden, Utah. The Company discontinued operations at this facility on September
30, 1999 due to on going losses. The Company retained contracts to manufacture
composite products at the time the facility was closed; therefore, the Company
outsourced the completion of these contracts and obligations to various vendors.
As of February 17, 2000, the Company has completed all of these obligations and
has discontinued the production and sale of composite products.
Results of Operations
The following discussion relates to the twelve months ended November
30, 1999 and November 30, 1998. For comparison purposes, percentages of sales
will be used rather than dollars in most cases. In the following discussion, the
fiscal years ended November 30, 1999 and November 30, 1998 may be referred to as
Y99 and Y98, respectively.
Overview. The Company's continuing operations sustained an operating
profit of $424,449 for the twelve-months ended November 30, 1999. Management has
determined that the Company's plastic fabrication facilities are underutilized
and is focusing efforts on marketing to fill that capacity. Management is
continually reviewing its operations to try and reduce expenses without
affecting quality and service to its customers.
Discontinued Operations. Effective April 21, 1999, NACO Composites,
Inc. "NACO Composites" was merged into NACO Industries, Inc. From April 21, 1999
through August 31, 1999 the operations previously conducted by NACO Composites,
continued as a business segment of NACO Industries, Inc. On August 31, 1999, the
management of the Company made the decision to discontinue the operations of the
merged composite and fiberglass segment. 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.
NACO Composites also produced tooling and molds for other companies in various
industries. The Company's composite products operation generated an operating
loss of $(535,455), net of related income tax benefit of $320,200, for the ten
months ended September 30, 1999, and there was an additional loss due to costs
to discontinue the operations of $(214,995) net of related income tax benefit of
$128,600. These costs relate to discontinued use of certain assets, labor, legal
fees, accounting review, and rental obligations. During the months prior to
discontinuing the operations of NACO Composites, the Company's top management
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 was no longer in the
Company's best interest to continue manufacturing composite products. As of
10
<PAGE>
February 17, 2000, the Company has also discontinued the outsourcing of products
and will no longer sell composite products. The lease on the Ogden facility
utilized by NACO Compositesended September 30, 1999, and the Company did not
renew the lease.
Sales Net sales from continuing operations for Y99 increased by 20.0%
to $7,432,130, compared to net sales of $6,192,398 for Y98. There are several
factors that contributed to increased sales. The market has been stronger during
the past year and the Company's increased manufacturing capacity 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.
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 Y99 compared to Y98. Management anticipates that
additional utility representatives will be added during the current fiscal year.
Gross Margin. Continuing operations gross margin as a percentage of
sales improved in Y99 to 44.1% compared to 41.9% in Y98. The margin had
increased mainly due to improved manufacturing efficiencies and sales volume.
The Company takes a complete physical inventory once a year and a physical
inventory of the top 80% of the dollars in inventory every quarter. This helps
to offset any inventory adjustments at year-end. Any year-end adjustments are
reflected during the fourth quarter after the year-end physical inventory is
completed. No material inventory adjustments were made at year-end of Y99 as a
result of the physical inventory.
Selling. Continuing operations selling expenses were 21.4% of net sales
for Y99 compared to 21.4% for Y98. Selling expenses in actual dollars increased
$261,738. Advertising expenses decreased 39.0% in Y98, primarily because
catalogs for existing and new product lines were produced in Y98, but not in
Y99. Salaries and related benefits increased 12.9% from Y98 to Y99, mainly due
to the addition of a salesman and a warehouse operator in Texas and an annual
wage increase of approximately 3.5% for the existing workforce. Freight expense
increased from 6.92% of sales in Y98 to 7.71% of net sales in Y99 mainly due to
increased volume in the utility and sewer market. In these markets the supplier
typically pays freight.
General and Administrative. Continuing operations general and
administrative expenses were 13.0% of net sales for Y99 compared to 15.6% for
Y98. The decrease was due mainly to the increased sales volume during Y99. In
actual dollars, general and administrative expenses were $83 less in Y99 from
Y98. As a percentage of sales, salaries and related benefits increased 3.9%,
mainly due to an annual salary increase of approximately 3.5%. Legal and
accounting expenses increased $11,059 from Y98 to Y99, mainly due to legal needs
and related party issues in the accounting audit.
Other. Continuing operations of other expenses/revenues were 3.7% for
Y99 compared to 3.0% for Y98. Interest and bank charges expense increased from
3.1% in Y98 to 4.4% in Y99 mainly because of the increased expense of the
Company's new debt facilities with Wells Fargo Credit and Webbank. The Wells
Fargo Credit facility costs are significantly higher than the facility the
Company had with Nations Bank. These changes and impact are explained in the
Liquidity and Capital Resources section that follows. The effective interest
rate (interest expense divided by the average debt balance for the period) for
Y99 and Y98 was 14.91% and 11.69%, 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 continuing
operating activities was $504,087 during Y99. Cash as of November 30, 1999 was
$58,073, down $39,355 from Y98. Because of the continued losses in the
discontinued NACO Composites operations and need for capital, the Company is
facing a cash flow shortage. The Company is addressing the cash flow shortage by
managing inventories, increasing the sales effort and working to reduce
operating expenses. Also, on October 7, 1999, Wells Fargo Business Credit
increased advance rates on accounts receivable from 80% to 85% and on
inventories from 50% to 70%. This has helped the Company's ability to meet it's
cash obligations.
11
<PAGE>
The Company continues to struggle with its liquidity position. With the
Company's loss for Y99 in the discontinued NACO Composites operations, the
Company's working capital position has been reduced significantly. The Company's
trade payables increased by $350,398 from November 30, 1998 to November 30,
1999. On November 30, 1999, the Company was out over 90 days on trade payables
due to lack of operating funds. As of February 18, 2000, the Company's 90-days
trade payables had been reduced $165,362 to $98,137. Management has been in
contact with the Company's vendors and most are working with the Company to keep
supplying needed raw materials for production. During January and February the
Company typically ships early orders to customers. The Company has been able to
borrow against these receivables, which has helped to reduce the payables
outstanding. The Company generally receives payment for January and February
shipments in March; cash flow generally increases in March and for the remainder
of the Company's normal busy season which is typically from March to June.
On November 30, 1999, the outstanding balance of the Company's
revolving line of credit was $787,798. This line of credit was entered into on
April 22, 1999 with Wells Fargo Business Credit. The amount available under the
facility is based on a percentage of accounts receivable and inventories.
On August 31, 1999, the Company was in default of the loan covenants
with Wells Fargo Business Credit "Wells Fargo". The Company submitted new
projections to Wells Fargo,, who reset the covenants contained in the Company's
line of credit documents so that the Company currently is not in default. The
Company paid $10,000 plus a 1.5% higher interest rate (as adjusted 4% over prime
rate) to reset the covenants. Wells Fargo has agreed to lower the interest rate
1/2% if the Company reaches year-to-date profitability of $150M, and if
year-to-date profitability of $300M is achieved, Wells Fargo has agreed to lower
the interest rate an additional 1/2%. If 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 $894,203 available to borrow as of November 30, 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 "Webbank" to restructure the Company's long-term debt. This facility
was for $1,100,000, and the proceeds of the facility were 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 with the proceeds provided by this facility. The outstanding balance of
the facility was $1,086,588 as of November 30, 1999.
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.
These waivers were given because the bank determined that there was sufficient
evidence that compliance was probable within the grace periods. The Company
received a waiver of the default and has been given a twelve-month` grace
period.
Management believes that the actions that have been taken to revise the
Company's operating and financial requirements, together with its capital
resources on hand at November 30, 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.
12
<PAGE>
Factors Affecting Future Results
The Company's operating results are subject to certain inherent risks
that could adversely affect the Company's operating results and its ability to
operate profitably. If the Company is not able to successfully secure sufficient
equity or debt financing to meet its working capital and operational
requirements as discussed above, this will likely have a material adverse effect
on the Company's operating results. In addition, the Company's operating results
also could be adversely affected by increased competition in the Company's
markets, competitors offering products at prices below the Company's prices,
manufacturing delays and inefficiencies associated with expanding the Company's
manufacturing capacity, adverse weather conditions, changes in economic
conditions in its markets, unanticipated expenses or events and other factors
discussed in this report, other filings with the Securities and Exchange
Commission and the Company's press releases.
Impact of the Year 2000 Issue
The Company did not experience any material consequences associated
with the advent of the Year 2000. Management believes the Company undertook
adequate efforts to prepare for issues associated with the occurrence of the
Year 2000. The Company did not experience any material problems with computer
hardware or software. Also, management is not aware of any Year 2000 problems
related to the Company's suppliers and customers.
Item 7. Financial Statements
--------------------
See pages F-1 to F-28 hereof.
13
<PAGE>
NACO INDUSTRIES, INC.
Index to Financial Statements
For The Years Ended November 30, 1999 and 1998
Page
----
Independent Auditor's Report F-1
Financial Statements:
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-9
<PAGE>
INDEPENDENT AUDITOR'S REPORT
March 10, 2000
The Board of Directors and Stockholders of
NACO Industries, Inc.
Logan, UT
We have audited the accompanying consolidated balance sheets of NACO Industries,
Inc. and subsidiary as of November 30, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of NACO Industries,
Inc. and subsidiary at November 30, 1999 and 1998, and the consolidated results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
By:Jones, Wright, Simkins & Associates LLP
------------------------------------------
JONES, WRIGHT, SIMKINS & ASSOCIATES LLP
Certified Public Accountants
Logan, Utah
F-1
<PAGE>
<TABLE>
NACO INDUSTRIES, INC.
---------------------
CONSOLIDATED BALANCE SHEETS
-----------------------------------------------
For the Years Ended November 30, 1999 and 1998
----------------------------------------------
,<CAPTION>
ASSETS 1999 1998
------------------ ------------------
<S> <C> <C>
Current assets:
Cash $ 58,073 97,428
Accounts Receivable-
Trade, less allowance for doubtful accounts of
$67,753 and $52,193 in 1999 and 1998, respectively 862,913 524,573
Related parties 38,385 64,873
Inventories, net 528,461 583,848
Other current assets 41,283 47,763
Deferred income taxes 153,900
Net current assets of discontinued operations 52,859
------------------ ------------------
Total current assets 1,683,015 1,371,344
------------------ ------------------
Property and equipment:
Land 40,700 40,700
Buildings and improvements 610,038 603,440
Equipment and vehicles 2,805,455 2,590,472
Net property and equipment of discontinued operations 202,465
------------------ ------------------
Total property and equipment 3,456,193 3,437,077
Less - Accumulated depreciation and amortization (2,076,200) (1,728,860)
------------------ ------------------
1,379,993 1,708,217
Equipment construction in progress 29,461
------------------ ------------------
Net property and equipment 1,379,993 1,737,678
------------------ ------------------
Other assets:
Accounts receivable from related parties 311,231 50,153
Intangible and other assets, less accumulated amortization
of $12,830 in 1999 167,711 33,212
Deferred income taxes, net of allowance of $80,000 255,800
Net related party assets of discontinued operations 208,991
Net other assets of discontinued operations 34,043
------------------ ------------------
Total other assets 734,742 326,399
------------------ ------------------
Total assets $ 3,797,750 3,435,421
================== ==================
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-2
<PAGE>
<TABLE>
NACO INDUSTRIES, INC.
---------------------
CONSOLIDATED BALANCE SHEETS
-----------------------------------------------
For the Years Ended November 30, 1999 and 1998
----------------------------------------------
(continued)
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
------------------- -------------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 769,056 418,658
Accrued liabilities 231,720 213,357
Due to related parties 15,311
Line of credit 849,326
Current portion of long-term obligations 81,700 282,077
------------------- -------------------
Total current liabilities 1,097,787 1,763,418
------------------- -------------------
Long-term liabilities:
Accrued expenses 48,000
Long-term obligations, less current portion 1,928,763 635,503
Deferred income taxes 9,800
------------------- -------------------
Total long-term liabilities 1,976,763 645,303
------------------- -------------------
Total liabilities 3,074,550 2,408,721
------------------- -------------------
Stockholders' equity:
7% cumulative convertible preferred stock, $3 par
value; 330,000 shares authorized, 165,412 shares
issued; aggregate liquidation preference of $1,131,418
and $1,061,774 in 1999 and 1998, respectively 496,236 496,236
Common stock, $.01 par value; 10,000,000
shares authorized; 1,902,268 shares and 2,147,102
shares issued, and 1,902,268 shares and 1,876,227
shares outstanding in 1999 and 1998, respectively 19,023 21,472
Additional paid-in capital 1,018,284 1,084,959
Accumulated (deficit) (810,343) (484,342)
------------------- -------------------
723,200 1,118,325
Less: treasury stock, at cost (270,875 shares in 1998) (91,625)
------------------- -------------------
Total stockholders' equity 723,200 1,026,700
------------------- -------------------
Total liabilities and stockholders' equity $ 3,797,750 3,435,421
=================== ===================
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-3
<PAGE>
<TABLE>
NACO INDUSTRIES, INC.
---------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
For the Years Ended November 30, 1999 and 1998
----------------------------------------------
<CAPTION>
1999 1998
------------------- -------------------
<S> <C> <C>
Sales, net $ 7,432,130 6,192,398
Cost of goods sold 4,114,266 3,595,115
------------------- -------------------
Gross profit 3,317,864 2,597,283
------------------- -------------------
Operating expenses:
Selling expenses 1,590,216 1,328,478
General and administrative expenses 966,275 966,358
Research and development expenses 31,751 45,950
------------------- -------------------
Total operating expenses 2,588,242 2,340,786
------------------- -------------------
Income from operations 729,622 256,497
------------------- -------------------
Other income (expense):
Interest income 2,142 4,994
Interest expense (309,203) (193,440)
Other non-operating income (expense), net 32,188 1,663
------------------- -------------------
Total other income (expense) (274,873) (186,783)
------------------- -------------------
Income before income taxes 454,749 69,714
Income tax expense (30,300) (15,000)
------------------- -------------------
Income from continuing operations 424,449 54,714
Less - adjustment for preferred dividends (138,946) (69,272)
------------------- -------------------
Income (loss) from continuing operations to common stockholders 285,503 (14,558)
Discontinued operations:
Loss from operations of discontinued segment, net of
related income tax benefit of $320,200 and $98,600 in 1999
and 1998, respectively (535,455) (201,629)
Loss on disposal of discontinued segment,
net of related income taxes of $128,600 (214,995)
------------------- -------------------
Adjusted net loss to common stockholders $ (464,947) (216,187)
=================== ===================
Earnings per common share from continuing operations:
Basic and fully diluted $ 0.15 (0.01)
=================== ===================
Weighted average number of common shares
outstanding (shares issued less shares in treasury) 1,887,326 1,862,690
=================== ===================
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
<PAGE>
<TABLE>
NACO INDUSTRIES, INC.
---------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
For the Years Ended November 30, 1999 and 1998
----------------------------------------------
(continued)
<CAPTION>
Preferred Stock Common Stock
------------------------------- ------------------------------
Number of Number of
Shares Amount Shares Amount
--------------- -------------- --------------- ------------
Consolidated Balance,
<S> <C> <C> <C> <C> <C>
November 30, 1998 165,412 $ 496,236 2,147,102 $ 21,472
Issuance of common stock:
Exchange for equipment 10,000 100
Subscription agreement 16,041 161
Treasury stock retired (270,875) (2,710)
Net (loss) --------------- -------------- --------------- ------------
Consolidated Balance,
November 30, 1999 165,412 $ 496,236 1,902,268 $ 19,023
=============== ============== =============== ============
Treasury Stock
Additional ----------------------------------- Total
Paid-in Accumulated Number of Stockholders'
Capital (Deficit) Shares Amount Equity
---------------- ------------------ ----------------- --------------- -------------------
$ 1,084,959 $ (484,342) (270,875) $ (91,625) $ 1,026,700
Consolidated Balance,
November 30, 1998 22,401 22,501
(161) 0
Issuance of common stock:
Exchange for equipment (88,915) 270,875 91,625 0
Subscription agreement
(326,001) (326,001)
Treasury stock retired ---------------- ------------------ ----------------- --------------- -------------------
Net (loss)
$ 1,018,284 $ (810,343) $ $ 723,200
================ ================== ================= =============== ===================
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
<PAGE>
<TABLE>
NACO INDUSTRIES, INC.
---------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
For the Years Ended November 30, 1999 and 1998
----------------------------------------------
<CAPTION>
Preferred Stock Common Stock
------------------------------- ------------------------------
Number of Number of
Shares Amount Shares Amount
--------------- -------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Consolidated Balance,
November 30, 1997 165,412 $ 496,236 2,193,796 $ 21,939
Issuance of common stock:
Warrants exercised 19,144 191
Consulting services 8,000 80
Dividends - preferred shares
($.21 per share)
Sale of preferred stock
Treasury stock retired (73,838) (738)
Net (loss)
--------------- -------------- --------------- ------------
Consolidated Balance,
November 30, 1998 165,412 $ 496,236 2,147,102 $ 21,472
=============== ============== =============== ============
Treasury Stock
Additional ----------------------------------- Total
Paid-in Accumulated Number of Stockholders'
Capital (Deficit) Shares Amount Equity
---------------- ------------------ ----------------- --------------- ------------------
Consolidated Balance,
November 30, 1997 $ 1,003,800 $ (278,711) (346,380) $ (126,597) $ 1,116,667
Issuance of common stock:
Warrants exercised
Consulting services 57,239 57,430
23,920 24,000
Dividends - preferred shares
($.21 per share)
(34,482) (34,482)
Sale of preferred stock
1,667 10,000 10,000
Treasury stock retired
(24,234) 73,838 24,972
Net (loss)
(146,915) (146,915)
---------------- ------------------ ----------------- --------------- ------------------
Consolidated Balance,
November 30, 1998
$ 1,084,959 $ (484,342) (270,875) $ (91,625) $ 1,026,700
================ ================== ================= =============== ==================
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-6
<PAGE>
<TABLE>
NACO INDUSTRIES, INC.
---------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
For the Years Ended November 30, 1999 and 1998
----------------------------------------------
<CAPTION>
1999 1998
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income from continuing operations $ 424,449 54,714
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 299,250 303,968
Amortization 12,830
Write-off of equipment construction in progress 4,971
Consulting for common stock 24,000
Deferred income taxes (419,500) 14,300
Warranty reserve 80,000
(Gain) on sale of assets (1,663)
(Increase) decrease in:
Accounts receivable, net (338,340) 30,596
Receivable from related parties 41,799
Inventories, net 55,387 150,047
Income taxes receivable 5,100
Other current assets 6,480 39,215
Increase (decrease) in:
Accounts payable 350,398 190,864
Accrued liabilities (13,637) 46,602
----------------- -----------------
Net cash provided by continuing operating activities 504,087 857,743
Net cash (used in) discontinued operating activities (488,483) (212,242)
----------------- -----------------
Net cash provided by operating activities 15,604 645,501
----------------- -----------------
Cash flows from investing activities:
Purchases of property and equipment (99,100) (42,322)
Loans to related parties (52,087) (99,321)
Investment in intangible and other assets (147,329) (7,253)
----------------- -----------------
Net cash (used in) continuing investing activities (298,516) (148,896)
Net cash (used in) discontinued investing activities (232,467)
----------------- -----------------
Net cash (used in) investing activities (298,516) (381,363)
----------------- -----------------
Cash flows from financing activities:
Payoff of Nation's Bank line of credit (849,326)
Net borrowings on Wells Fargo line of credit 787,798 25,000
Proceeds from sale of preferred stock 10,000
Proceeds from issuance of common stock 57,430
Proceeds from long-term obligations 1,108,552
Payments on long-term obligations (803,467) (267,377)
Payments of preferred stock dividends (34,482)
----------------- -----------------
Net cash provided by (used in) continuing financing activities 243,557 (209,429)
Net cash (used in) discontinued financing activities (17,725)
----------------- -----------------
Net cash provided by (used in) financing activities 243,557 (227,154)
----------------- -----------------
(continued)
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-7
<PAGE>
<TABLE>
NACO INDUSTRIES, INC.
---------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
For the Years Ended November 30, 1999 and 1998
----------------------------------------------
(continued)
<CAPTION>
1999 1998
----------------- -----------------
<S> <C> <C>
Net increase (decrease) in cash (39,355) 36,984
Cash, beginning of period 97,428 60,444
----------------- -----------------
Cash, end of period $ 58,073 97,428
================= =================
Supplemental Disclosures of Cash Flow Information:
Cash paid for:
Income taxes - continuing operations $ (100) (1,100)
================= =================
Interest:
For continuing operations $ (311,783) (195,079)
For discontinued operations (14,745) (9,080)
----------------- -----------------
Total interest paid $ (326,528) (204,159)
================= =================
Supplemental Schedules of Noncash Investing and Financing Activities:
Issuance of common stock for services:
Issuance of common stock $ 24,000
Consulting expenses (24,000)
----------------- -----------------
Cash paid for certain consulting services $ -0-
================= =================
Purchases of property and equipment:
Additions of property and equipment $ (202,088) (316,126)
Exchange of common stock for equipment 22,501
Transfer of property and equipment
from discontinued operations 75,503
Write-off of equipment construction in progress and other 4,984
Debt obligations assumed 273,804
----------------- -----------------
Cash paid for property and equipment $ (99,100) (42,322)
================= =================
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-8
<PAGE>
NACO INDUSTRIES, INC.
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
November 30, 1999 and 1998
--------------------------
Note 1 - Summary of Significant Accounting Policies
- ---------------------------------------------------
Nature of Operations
- --------------------
NACO Industries, Inc. (the "Company"), manufactures, produces, and sells
polyvinyl chloride ("PVC") products. The Company's primary line of business
consists of PVC pipe fittings and valves which are sold throughout the United
States by wholesale distributors. The manufacturing facilities of the Company
are located in Garden City, Kansas; Lodi, California; and, Logan, Utah.
Effective April 21, 1999, NACO Composites, Inc. a wholly owned subsidiary of the
Company was merged into the Company. From April 21, 1999, through August 31,
1999, the merged operations of NACO Composites, Inc. continued as a business
segment of the Company. On August 31, 1999, the management of the Company made
the decision to discontinue the operations of the merged composite and
fiberglass segment. As such, the accompanying consolidated financial statements
present as discontinued operations: (i) the subsidiary operations of NACO
Composites, Inc. from December 1, 1998, through April 20, 1999, and (ii) the
related composite and fiberglass segment operations of NACO Industries, Inc.
from April 21, 1999, through August 31, 1999.
Basis of Presentation
- ---------------------
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary, NACO Composites, Inc. All significant intercompany
accounts and transactions have been eliminated. The Company's fiscal year ends
on November 30th.
Concentrations of Credit Risk
- -----------------------------
The Company sells PVC products nationwide to customers in the agribusiness and
industrial economic sectors. Most of the Company's accounts receivable, which
are unsecured, are with customers in these sectors. Historically, the Company
has not experienced significant losses related to receivables from individual
customers or groups of customers in any particular industry or geographic area.
The Company maintains cash balances with several banks. Accounts at each
institution are insured by the Federal Deposit Insurance Corporation up to
$100,000.
Use of Estimates in the Preparation of Financial Statements
- -----------------------------------------------------------
The process of preparing financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
regarding certain types of assets, liabilities, revenues, and expenses. Such
estimates primarily relate to unsettled transactions and events as of the date
of the financial statements. Accordingly, upon settlement, actual results may
differ from estimated amounts.
F-9
<PAGE>
NACO INDUSTRIES, INC.
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
November 30, 1999 and 1998
--------------------------
Note 1 - Summary of Significant Accounting Policies (continued)
- ---------------------------------------------------------------
Financial Instruments
- ---------------------
Cash and cash equivalents are determined by the Company to be cash and
short-term highly liquid investments with initial maturity dates of three months
or less that are readily convertible to cash. The carrying amount approximates
fair value for cash and cash equivalents, accounts receivable, accounts payable,
the Company's line of credit and short-term notes payable. The fair value of
long-term obligations is based on current rates at which the Company could
borrow funds with similar remaining maturities.
Inventories
- -----------
Raw material inventories and goods purchased for resale are recorded at the
lower of cost (first-in, first-out method) or market. Manufactured finished
goods and work in process inventory are recorded at the lower of cost (standard
cost method) or market which represents management's estimate of its net
realizable value.
Property, Equipment and Depreciation
- ------------------------------------
Items capitalized as buildings, equipment and vehicles are carried at cost.
Maintenance and repairs are charged to expense as incurred. Costs of major
renewals or betterments are capitalized by charges to the appropriate property
account and depreciated over the remaining useful lives of the related assets.
Depreciation and amortization are computed by using the straight-line method for
financial reporting purposes and modified accelerated cost recovery methods for
federal income tax purposes. Buildings are depreciated over lives of twenty-five
to thirty years. Purchased and constructed equipment is depreciated over lives
of three to ten years. The cost of property disposed of and related accumulated
depreciation or amortization are removed from the accounts at time of disposal,
and gain or loss is credited or charged to operations.
Amortization of Intangible Assets
- ---------------------------------
The portion of intangible assets represented by debt issuance costs is amortized
as additional interest expense over the specific term of the related
indebtedness using the straight-line method.
Revenue Recognition
- -------------------
Inventory is shipped to and held by warehouse agents. Revenue is recognized
under these arrangements upon the sale of the inventory.
F-10
<PAGE>
NACO INDUSTRIES, INC.
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
November 30, 1999 and 1998
--------------------------
Note 1 - Summary of Significant Accounting Policies (continued)
- ---------------------------------------------------
Stock Based Compensation
- ------------------------
The Company accounts for stock option grants in accordance with APB Opinion No.
25, "Accounting for Stock Issued to Employees" and accordingly, recognizes no
compensation expense for such stock option grants.
Advertising Costs
- -----------------
Advertising costs are expensed when incurred.
Research and Development Costs
- ------------------------------
Research and development costs are expensed when incurred.
Income Taxes
- ------------
The Company files consolidated federal and state income tax returns. Deferred
income taxes are provided for items reported in different periods for income tax
purposes than for financial reporting purposes. The principal differences relate
to the use of the modified accelerated cost recovery methods to depreciate
property and equipment, inventory valuation allowance, net operating loss
carryforwards, and from inventory capitalization requirements.
Earnings Per Share
- ------------------
Earnings per share amounts are computed based on the weighted average number of
shares outstanding during the periods (shares issued less shares in treasury).
Impact of Recently Issued Accounting Standards
- ----------------------------------------------
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
hedging activities and requires the recognition of all derivatives in the
balance sheet at their fair market values. This statement is effective for
fiscal years beginning after June 15, 1999. The adoption of this statement will
not have a material effect on the Company's balance sheet.
Reclassifications
- -----------------
Certain reclassifications were made to the 1998 consolidated financial
statements to conform to the presentation used in the 1999 consolidated
financial statements.
F-11
<PAGE>
NACO INDUSTRIES, INC.
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
November 30, 1999 and 1998
--------------------------
Note 2 - Discontinued Segment
- -----------------------------
On October 11, 1996, NACO Industries, Inc. (the "Parent Company") formed a
wholly-owned subsidiary, NACO Composites, Inc. (the "Subsidiary"). The
Subsidiary acquired the assets of Dreager Manufacturing in a business
combination accounted for as a purchase. The Subsidiary manufactured composite
and fiberglass products.
As explained in Note 1, effective April 21, 1999, the Subsidiary was merged into
the Parent Company under a Plan of Merger. From April 21, 1999, through August
31, 1999, the merged composite and fiberglass operations of the Subsidiary
continued as a segment of the Parent Company. On August 31, 1999, the management
of the Parent Company made the decision to discontinue the operations of the
composite and fiberglass segment and either sell its assets or transfer them to
the Parent Company. As such, the accompanying consolidated financial statements
present as discontinued operations: (i) the Subsidiary operations from December
1, 1998, through April 20, 1999, and (ii) the composite and fiberglass segment
operations of the Parent Company from April 21, 1999, through August 31, 1999,
(together considered as the "Discontinued Segment").
The Parent Company completed the shut down of the composite and fiberglass
segment operations and either disposed of its assets or transferred them to
other Parent Company divisions by November 30, 1999. The assets sold consisted
of equipment. The selling price of the equipment was $32,200 and was evidenced
by a promissory note.
The Company's operations have been classified into two principal industry
segments, PVC fittings and valves sold through the Parent Company, and composite
and fiberglass products sold through the Subsidiary and the Parent Company,
subsequent to April 21, 1999. Information associated with the Discontinued
Segment has been presented as discontinued operations for 1999 and 1998, and
thus, no reconciliation of segment information to operations has been presented.
Net assets of the Discontinued Segment have been separately classified and the
consolidated balance sheet has been restated for the year ended November 30,
1998. The results of operations of the Discontinued Segment are shown separately
as discontinued operations in the accompanying consolidated statements of
operations for the nine months ended August 31, 1999, and the twelve months
ended November 30, 1998, net of applicable income taxes. Net sales of the
Discontinued Segment for the nine months ended August 31, 1999, and the twelve
months ended November 30, 1998, were $871,224 and $1,007,910, respectively.
These amounts are not included in "Sales, net" in the accompanying consolidated
statements of operations. All comparative information presented in the Notes to
Consolidated Financial Statements for fiscal year 1998 has been restated to
reflect the effects of discontinued operations.
F-12
<PAGE>
NACO INDUSTRIES, INC.
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
November 30, 1999 and 1998
--------------------------
Note 2 - Discontinued Segment (continued)
- ------------------------------
The total cost of the original acquisition of the assets of the Subsidiary was
$197,727, which exceeded the fair value of the net assets acquired by $88,718.
The excess of purchase price over the fair value of net assets acquired,
recorded as Goodwill, was being amortized using the straight-line method over
fifteen years until August 31, 1999. The remaining balance of Goodwill was
charged to operations as a loss on the disposal of the Discontinued Segment.
Note 3 - Concentration of Credit Risk
- -------------------------------------
At November 30, 1999 and 1998, bank balances in excess of depository insurance
limits were approximately $154,000 and $156,000, respectively.
Note 4 - Inventories, net
- -------------------------
At November 30, 1999 and 1998, inventories, net of valuation allowances,
consisted of the following:
1999 1998
---- ----
Raw materials $187,813 228,269
Work in process 0 3,750
Finished goods 401,608 443,829
Less - valuation allowance (60,960) (92,000)
-------- --------
Total inventories, net $528,461 583,848
======= =======
Note 5 - Intangible and Other Assets, net
- -----------------------------------------
At November 30, 1999 and 1998, intangible and other assets, net, consisted of
the following:
1999 1998
---- ----
Debt issuance costs, net of accumulated
amortization of $12,830 in 1999 $97,865 0
Cash surrender value of life insurance 59,535 23,427
Deposits 10,311 9,785
------- -------
Total intangible and other assets, net $167,711 33,212
======== ======
F-13
<PAGE>
NACO INDUSTRIES, INC.
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
November 30, 1999 and 1998
--------------------------
Note 6 - Revolving Line of Credit and Short-term Notes Payable
- --------------------------------------------------------------
At November 30, 1998, the Company had borrowed $849,326 on its line of credit
with Nation's Bank. The line of credit, which matured August 1, 1998, bore
interest at 1.75 percent over prime rate, and was collateralized by accounts
receivable, intangible assets, inventories, equipment, real estate and life
insurance. The line of credit limit was $1,100,000. The revolving line of credit
loan agreement contained covenants pertaining to compliance with the bank's
borrowing base requirements. The line of credit agreement also contained
covenants pertaining to working capital, debt, dividends, and property and
equipment purchases. Under the terms of a long-term note agreement, the Company
was required to obtain prior written approval from the bank before making loans
to another or guaranteeing or otherwise becoming liable for the undertakings of
others, before issuing or repurchasing capital stock, and before paying
dividends on capital stock. The bank waived its restriction on paying dividends
on the Company's preferred stock.
At November 30, 1998, the Company had not renewed its line of credit agreement
with Nation's Bank. As a result, all of the debt with Nation's Bank was due.
Subsequent to November 30, 1998, the Company signed a forbearance agreement,
which waived the cross default provisions for fiscal year 1998. The forbearance
agreement changed the interest rate on all outstanding notes due to Nation's
Bank, including the line of credit, to bear interest at prime plus three and
one-half percent (3.5%) from the date of signature. In addition, the Company
agreed to pay a forbearance fee and the expenses and fees associated with
negotiating the agreement.
Note 7 - Long-Term Obligations
- ------------------------------
At November 30, 1999 and 1998, long-term obligations consisted of:
1999 1998
---- ----
Installment notes payable, secured by vehicles;
payable monthly at 8.50% - 9.95% interest;
maturities from July, 1999 to May, 2003. $ 20,738 37,806
Revolving line of credit agreement, secured
by current assets, property and equipment, and
life insurance; payable monthly with interest at
1.5% over prime; matures April 30, 2002. 787,798
Note payable, secured by current assets,
property and equipment, and life insurance;
payable monthly With interest at 1.5 % over prime;
maturities through February, 2018. 1,093,454
F-14
<PAGE>
NACO INDUSTRIES, INC.
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
November 30, 1999 and 1998
--------------------------
<TABLE>
<CAPTION>
Note 7 - Long-term Obligations (continued)
- ------------------------------
<S> <C> <C>
1999 1998
----- ----
Notes payable, secured by current assets, property
and equipment, and life insurance; payable at 8.75%
to 10.50% interest; maturities through February, 2010. 523,306
Notes payable for redemption of Company stock and
non-competition agreement, secured by treasury stock;
payable monthly at 8.25% through June, 2002. 157,552
Capital equipment leases, secured by related
equipment; payable monthly at 12.52% - 26.05% interest;
maturities through November, 2003. $ 108,473 198,916
--------- ---------
Total long-term obligations 2,010,463 917,580
Less - current portion (81,700) (282,077)
--------- ---------
Long-term obligations, less current portion $ 1,928,763 635,503
========= =========
</TABLE>
During fiscal year 1999, the Company entered into a $1,500,000 revolving line of
credit loan agreement with Wells Fargo Business Credit, Inc ("Wells Fargo"). The
line of credit bears interest at 2.5 percent over Wells Fargo's prime lending
rate, and is collateralized by accounts receivable, inventories, equipment, real
estate and life insurance. The line of credit agreement contains covenants
pertaining to compliance with the lender's borrowing base requirements. The line
of credit agreement also contains covenants pertaining to minimum net worth,
minimum net income, debt, dividends and capital purchases. Total advances
outstanding on the line of credit cannot exceed the borrowing base limit. The
line of credit agreement requires a minimum interest charge of $20,000 per
calendar quarter. The original draw on this line of credit was used to pay off
most of the previous revolving line of credit with Nations Bank. The line of
credit is personally guaranteed by the majority shareholder. The line of credit
matures April 20, 2002.
In August 1999, the Company was in default of the loan covenants with Wells
Fargo. Wells Fargo reset the covenants contained in the Company's line of credit
agreement. The Company paid a $10,000 fee and interest was adjusted on the line
of credit to 4 percent over Wells Fargo's prime lending rate. Wells Fargo has
agreed to reduce the interest rate back to 2.5 percent over Wells Fargo's prime
lending rate if the Company meets profitability targets. At November 30, 1999,
the Company was not in violation of the amended terms of the line of credit
agreement.
F-15
<PAGE>
NACO INDUSTRIES, INC.
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
November 30, 1999 and 1998
--------------------------
Note 7 - Long-term Obligations (continued)
- ------------------------------
During April 1999, the Company entered into a term loan agreement with WebBank
Corporation ("WebBank") for $1,100,000. The loan proceeds were used to refinance
outstanding debt and capital leases. The loan is secured by machinery,
equipment, inventories, and accounts receivable. The loan is guaranteed by the
majority shareholder. The interest rate on the loan is 1.5 percent over the Wall
Street Journal prime rate. The loan agreement contains various covenants
pertaining to working capital, debt, dividends and capital purchases. At
November 30, 1999, the Company was in violation of certain 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 to worth requirement until November 30, 2000. These
waivers were given because the bank determined there was sufficient evidence
that compliance was probable within the grace periods.
At November 30, 1999 and 1998, the carrying value of the Company's long-term
obligations, excluding capital leases, was $1,901,990 and $718,664,
respectively. Fair value of outstanding debt using current market rates was
approximately the same as the carrying value of the debt. At November 30, 1999,
short-term and long-term debt due to WebBank was $1,086,588. At November 30,
1998, short-term and long-term debt (including lines of credit) due to Nation's
Bank was $1,336,379.
At November 30, 1999, current maturities of long-term obligations (both
long-term debt and capital lease obligations) were as follows:
Period ending
November 30,
2000 $ 81,700
2001 90,900
2002 855,398
2003 68,200
2004 54,600
Thereafter 859,665
--------
Total $ 2,010,463
==========
At November 30, 1999 and 1998, the cost and amortization (or depreciation) of
equipment under capital leases were as follows:
1999 1998
---- ----
Cost $ 139,048 364,702
Current year depreciation 13,905 34,825
Accumulated depreciation 13,905 129,759
F-16
<PAGE>
NACO INDUSTRIES, INC.
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
November 30, 1999 and 1998
--------------------------
Note 7 - Long-term Obligations (continued)
- ------------------------------
Annual lease payments under capital leases in effect at November 30, 1999 were
as follows:
Period ending
November 30,
2000 $ 52,300
2001 52,300
2002 24,300
2003 18,750
-------
147,650
Less amount representing interest (39,177)
-------
Present value of obligations under capital
leases (interest at 16% to 26%) $ 108,473
Less - current portion (32,763)
-------
Capital lease obligations - less current portion $ 75,710
=======
Note 8 - Operating Leases
- -------------------------
The Company leases its Lodi, California, facility and certain equipment under
non-cancelable operating leases. The lease agreement for the Lodi, California,
facility was renewed in September, 1999, for a period of five years. The lease
for the Lodi, California, facility is adjusted annually for changes in the
consumer price index for the San Francisco Bay Area.
The Company leases its Logan, Utah, facility and certain equipment from related
parties (see Note 16). The Company's lease agreement for the Logan, Utah,
facility expires in December 1999. The Company leased a facility in Ogden, Utah,
through September 1999, and during fiscal year 1998, under a cancelable lease.
The Company leases vehicles under cancelable lease agreements. The Company
leases warehouse space in Lubbock, Texas, under a cancelable lease. Rental
expense under all operating leases for the years ended November 30, 1999 and
1998, was approximately $235,000 and $223,000, respectively.
F-17
<PAGE>
NACO INDUSTRIES, INC.
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
November 30, 1999 and 1998
--------------------------
Note 8 - Operating Leases (continued)
- -------------------------
Minimum future rental payments under non-cancelable leases as of November 30,
1999, for each of the next 5 years and in the aggregate are estimated as
follows:
Period ending
November 30,
2000 $ 60,500
2001 62,000
2002 60,900
2003 62,400
2004 63,400
--------
Total minimum future rentals $309,200
========
Subsequent to November 30, 1999, the Company entered into two new related-party
lease agreements with 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. Both lease
payment amounts are adjusted annually based on changes in the consumer price
index. The lease agreements contain five-year renewal clauses.
Note 9 - Preferred Stock, Units and Warrants
- --------------------------------------------
Preferred stock:
In February 1995, the Company amended its Articles of Incorporation to authorize
330,000 shares of Series 1, Class A, 7% Cumulative Convertible Preferred Stock,
with a par value of $3.00 per share. In the event of liquidation of the Company,
the preferred stock will have a liquidation preference to the extent of $6.00
per share plus accrued and unpaid dividends. The preferred stock is convertible
at any time after January 1, 1996, into shares of the Company's common stock at
a conversion rate of two shares of common stock for one share of preferred
stock. The preferred stock and common stock are entitled to one vote per share.
Dividends on the shares of preferred stock are cumulative from the date of first
issuance and are payable semi-annually at the rate of 7 percent per annum of the
stated unit value of $6.00 per share on February 28 and August 31 of each year.
No dividends may be paid to common shareholders until all cumulative dividends
on preferred shares have been declared and paid. The preferred stock may be
redeemed at any time after January 1, 1996, at the discretion of the Company, at
$6.00 per share plus all accrued and unpaid dividends.
F-18
<PAGE>
NACO INDUSTRIES, INC.
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
November 30, 1999 and 1998
--------------------------
Note 9 - Preferred Stock, Units and Warrants (continued)
- --------------------------------------------
At November 30, 1999 and 1998, dividends in arrears were $138,946 ($ .84 per
share) and $69,272, ($ .42), respectively. At November 30, 1999, the Company's
preferred dividends were more than two years in arrears. As a result, the
holders of the preferred stock have the right, voting as a class, to elect two
members of the Company's board of directors at the next annual meeting.
Dividends paid during fiscal year 1998 were paid out of retained earnings of the
Parent Company.
Units:
On March 5, 1997, the Company entered into an offshore securities subscription
agreement with Britannia Holdings Ltd. of England ("Britannia"), and on March 5,
1997, the Company sold to Britannia 343,750 units for an aggregate purchase
price of $825,000. The sale was made without registration under the Securities
Act of 1933 in reliance upon Regulation S promulgated thereunder. Each unit
consists of one share of common stock and forty-four one hundredths (.44) of a
warrant to purchase an additional share of common stock at an exercise price of
$3.50 per share. The warrants will expire March 5, 2000. The warrants are
currently callable by the Company anytime after its common stock trades for a
bid price of $7.50 or higher for 30 consecutive trading days.
As part of the consideration for the stock subscription agreement, the Company
agreed to credit 24,062 additional shares of common stock per year to Britannia
if the Company does not establish a market for its common stock that trades for
at least $6.00 per share for any ten consecutive trading days within twenty-four
months after March 5, 1997. Subsequent to March 1999, the Company issued 16,041
shares of common stock to Britannia as consideration under the stock
subscription agreement.
Warrants:
At November 30, 1999, the Company had outstanding to Britannia 343,750
forty-four one hundredths (.44) warrants to purchase 151,250 additional shares
of common stock at an exercise price of $3.50 per share. Subsequent to November
30, 1999, all of the (.44) warrants expired.
During fiscal year 1999, all of the Company's outstanding full warrants expired.
At November 30, 1998, the Company had 47,525 full warrants outstanding. Each
full warrant had a right to purchase one share of common stock at an exercise
price of $3.75 per share. The Company also had outstanding to Britannia 343,750
forty-four one hundredth (.44) warrants to purchase 151,250 additional shares of
common stock at an exercise price of $3.50 per share.
During fiscal year 1998, the board of directors extended the life of the
Company's one-half (1/2) warrants issued with preferred shares in fiscal year
1996 to August 28, 1998, and changed the exercise price from $3.75 to $3.00 per
common share. The Company received $57,430 in
F-19
<PAGE>
NACO INDUSTRIES, INC.
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
November 30, 1999 and 1998
--------------------------
Note 9 - Preferred Stock, Units and Warrants (continued)
- --------------------------------------------
proceeds from exercise of one-half (1/2) warrants, and issued 19,144 additional
shares of common stock. The remainder of the one-half (1/2) warrants expired.
The Company had an agreement with Extol International Corporation ("Extol") to
provide investor relations and financial consulting services to the Company. As
part of the agreement, Extol had the right to purchase for $100 a warrant to
acquire 50,000 shares of the Company's common stock at $3.50 per share. This
warrant was exercisable for five years from the date of issuance, with
"piggyback" registration rights. Extol agreed to take common stock and cash as
payment for investor relations and consulting services. Jim Czirr, the majority
shareholder in Extol, became a member of the board of directors on August 27,
1997, and during 1998, received stock and cash for consulting services (see Note
16). As of November 30, 1999, the Company had cancelled its agreement with
Extol. No cash or common stock was paid during fiscal year 1999, and the right
to purchase 50,000 shares of common stock was rescinded.
Note 10 - Stock Options
- -----------------------
At November 30, 1999 and 1998, the Company had outstanding non-qualified stock
options for 60,000 shares of common stock, respectively, to certain directors
with an option price of $3.00 per share. These options vested on the grant date,
and are exercisable anytime while serving as a director for up to ten years. The
outstanding options expire in the years 2005 and 2009. No compensation expense
related to such non-qualified stock options has been charged to operations.
At November 30, 1999 and 1998, the Company has outstanding non-qualified options
for 150,000 and 120,000 shares, respectively, of common stock to a director with
an option price of $4.00 per share. At November 30, 1999 and 1998, 60,000
options were vested and exercisable.
The maximum term of the options is six years, and they vest over a five-year
period. Vested options expire after 24 months. No compensation expense related
to such non-qualified stock options has been charged to operations.
The Company has adopted a Stock Incentive Plan, (the "Plan"), whereby certain
employees may be granted incentive or non-qualified stock options to purchase up
to 200,000 shares of common stock. A committee appointed by the Board determines
the exercise price of options granted under the Plan. The exercise price of
incentive options must not be less than the fair market value of the share of
common stock as of the date of grant. The maximum term of the options is six
years and they vest over a five-year period. The Plan also allows for granting
of stock appreciation rights. Upon exercise of a stock appreciation right, the
holder may receive shares of common stock and cash equal to the excess of the
fair market value of the common stock at the date of exercise over the option
price.
F-20
<PAGE>
NACO INDUSTRIES, INC.
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
November 30, 1999 and 1998
--------------------------
Note 10 - Stock Options (continued)
- -----------------------
At November 30, 1999 and 1998, 91,000 and 79,000 employee incentive stock
options, respectively, were outstanding. Of the outstanding options, 31,200
options and 15,800 options, respectively, had vested. During fiscal years 1999
and 1998, 4,000 and 19,000 options, respectively, were forfeited due to
termination of employment. During fiscal year 1999, 16,000 new incentive stock
options were granted. No compensation expense related to such incentive stock
options was charged to operations.
<TABLE>
<CAPTION>
The following is a summary of the status of the Company's stock options:
Number Weighted Average
of Shares Exercise Price
--------- --------------
<S> <C> <C>
Options exercisable at 11/30/99 120,000 $ 3.27
======= ====
Options exercisable at 11/30/99 151,200 $ 3.40
======= ====
Outstanding at 11/30/97 328,000 $ 3.46
Granted during 1998 -0-
Forfeited during 1998 (39,000) $ 3.00
-------
Outstanding at 11/30/98 289,000 $ 3.52
Granted during 1999 16,000 $ 3.00
Forfeited during 1999 (34,000) 3.00
-------
Outstanding at 11/30/99 271,000 $ 3.44
======= ====
Fair value of options granted during 1999 $ 0
Weighted-average remaining contractual life
of outstanding options 3.6 years
No options were exercised during the year.
</TABLE>
The Company applies APB Opinion No. 25 in accounting for its stock options.
Accordingly, no compensation cost has been recognized in fiscal years 1999 or
1998. Had compensation cost been determined on the basis of fair value pursuant
to FASB Statement No. 123, net income and earnings per share would have been
reduced as follows:
F-21
<PAGE>
NACO INDUSTRIES, INC.
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
November 30, 1999 and 1998
--------------------------
Note 10 - Stock Options (continued)
- -----------------------
In compliance with SFAS No. 123, the Company is providing the following pro
forma disclosure on the adjusted net loss to common shareholders:
1999 1998
---- ----
Net loss:
As reported (464,947) (216,187)
Pro forma (479,647) (228,687)
Loss per share:
As reported (.25) (.12)
Pro forma (.25) (.12)
The fair value of stock options granted in fiscal year 1999 was estimated on the
date of grant using the Black-Scholes option-pricing model. The weighted average
fair values and related assumptions were:
1999
----
Weighted average fair value $ 2.23
Expected volatility 1.00%
Risk free interest rate 6.14%
Expected life in years 5.0
Dividend yield none
Note 11 - Treasury Stock
- ------------------------
On June 30, 1992, the Company purchased 1,197,675 shares (8,759 before stock
split) of its own outstanding common stock from a former officer/shareholder and
two minority shareholders at an average price of $.34 ($46.25 before stock
split) per share. During fiscal year 1999, the Company refinanced its debt and
the former officer/shareholder note was paid. As such, all remaining treasury
shares were retired. During fiscal year 1998, the treasury stock served as
collateral on the note outstanding to a former officer and shareholder (See Note
7). As payments were made on the note, collateral was released and the
corresponding treasury stock was retired. During fiscal year 1998, the Company
retired 73,838 treasury shares. Treasury shares outstanding at November 30,
1998, represented the remaining shares pledged as collateral on the note
agreement.
During fiscal year 1998, the Company sold 1,667 shares of preferred stock for
$10,000 out of the treasury, which had been purchased from a former employee.
F-22
<PAGE>
NACO INDUSTRIES, INC.
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
November 30, 1999 and 1998
--------------------------
Note 12 - Earnings Per Share
- ----------------------------
Basic earnings per common share are computed using the weighted average number
of shares of common stock outstanding during the period. For earnings per share
calculation purposes, net income is reduced by cumulative dividends on preferred
stock.
Diluted earnings per share are computed based on an increased number of shares
that would be outstanding assuming the conversion of the Company's cumulative
preferred stock and the exercise of stock options and warrants. The market price
has not exceeded the option price for the outstanding options and warrants and
therefore no dilution has occurred. During a loss period, and periods where
significant preferred dividends are in arrears, the assumed conversion of
convertible preferred stock has an anti-dilutive effect. As a result, these
shares have not been included in the calculation of diluted earnings per share.
The securities that could potentially dilute basic earnings per share in the
future, but were not included in the diluted earnings per share calculation, are
as follows:
Common Common
Shares Shares
Security 1999 1998
-------- ---- ----
Options 151,200 120,000
Warrants 151,250 198,775
Convertible preferred stock 330,824 330,824
Basic and Fully Diluted earnings (loss) per common share for the various
components of income and loss were as follows:
Income from continuing operations to
common stockholders $ .15 (.01)
Loss from operations of discontinued
segment (.28) (.11)
Loss on disposal of discontinued segment (.11)
Adjusted net loss to common stockholders (.25) (.12)
Note 13 - Pension Plan
- ----------------------
The Company sponsors an IRC Sec. 401(k) deferred compensation plan that covers
all employees over age 21 with over one year of service. The Company makes
matching contributions, at 50 percent of the employee's deferral, up to 4
percent of gross wages for employees who elect salary deferral. The amount of
pension expense for the years ended November 30, 1999 and 1998, was $25,017 and
$22,246, respectively.
F-23
<PAGE>
NACO INDUSTRIES, INC.
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
November 30, 1999 and 1998
--------------------------
Note 14 - Income Taxes
- ----------------------
For the years ended November 30, 1999 and 1998, income tax expense (benefit)
consisted of the following:
1999 1998
---- ----
Currently payable:
Federal $ 0 0
State (900) (800)
---- --------
(900) (800)
Deferred (29,400) (14,200)
------ --------
Income tax expense (benefit) $(30,300) (15,000)
======= ========
Income taxes identified as currently payable are the taxes due on the Company's
income tax returns before estimated payments and other credits.
Deferred income taxes arise mainly because certain items of expense are
recognized in different periods for
financial reporting and income tax purposes. Although the Company expects to
benefit from its deferred tax assets, realization of deferred tax assets is
dependent upon the Company generating sufficient future taxable income against
which its loss carryforward can be offset.
The deferred tax asset and deferred tax liability was comprised of the following
items at November 30, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
----- -----
<S> <C> <C>
Deferred tax asset:
Inventories $ 35,200 50,100
Net operating loss carryforwards 484,400 224,800
Allowances against receivables 15,800 25,600
Warranty reserve 30,100
Other 13,700 13,900
------- --------
579,200 314,400
Less - valuation allowance (80,000) (222,000)
------- --------
Net deferred tax asset $ 499,200 92,400
======= ========
Deferred tax liability:
Tax over book depreciation $ (89,700) (102,200)
======= ========
</TABLE>
F-24
<PAGE>
NACO INDUSTRIES, INC.
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
November 30, 1999 and 1998
--------------------------
Note 14 - Income Taxes (continued)
- ----------------------
At November 30, 1999, the Company had available approximately $1,285,000 of
unused net operating loss carryforwards that may be applied against future
taxable income, and expire in the years 2009 through 2020.
Income tax expense differs from the customary effective federal income tax rate
primarily as a result of the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Computed "expected" tax (expense) benefit $ (160,600) (12,400)
State income tax (expense) benefit, net of
federal income tax benefit (16,900) (2,600)
Change in valuation allowance on deferred tax assets 142,000
Rate differences and other 5,200
-------
Income tax expense $ (30,300) (15,000)
======== =======
</TABLE>
Note 15 - Advertising
- ---------------------
Advertising expenses for the years ended November 30, 1999 and 1998, were
$19,389 and $38,388, respectively.
Note 16 - Related-Party Transactions
- ------------------------------------
The Company leases its Logan, Utah, manufacturing and sales facility and certain
equipment from P.V.C., Inc., a corporation owned 100 percent by the Company's
majority shareholder. In July 1994, the Company extended its lease with PVC,
Inc. through December 31, 1999. The lease agreement requires rents in the amount
of $9,300 per month. The Company has guaranteed a second mortgage on the
facilities it leases from PVC, Inc. At November 30, 1999 and 1998, the
outstanding mortgage balance was approximately $216,600 and $228,000,
respectively. The mortgage is secured by the leased property, bears an interest
rate of two percent over prime, and is payable in monthly installments of $3,150
through 2009. At November 30, 1999 and 1998, the Company had loaned to PVC, Inc.
$38,385 and $51,185, respectively. Intercompany loans are non-interest bearing
and payable on demand.
F-25
<PAGE>
NACO INDUSTRIES, INC.
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
November 30, 1999 and 1998
--------------------------
Note 16 - Related-Party Transactions (continued)
- ------------------------------------
During fiscal year 1998, PVC, Inc. became a 51 percent owner of a new
corporation, named Advantage Molds, Inc. ("Advantage"). Advantage operated a
machine shop inside the Logan faculty until November 30, 1999. Subsequent to
November 30, 1999, the Company took over operation of the machine shop, and
Advantage began leasing its equipment to PVC Inc. At November 30, 1999, the
Company owed Advantage $15,311. At November 30, 1998, Advantage owed the Company
$13,688.
Through September, 1999, the Company leased a manufacturing and sales facility
in Ogden, Utah, from Ronald L. Dreager, a former employee and director of NACO
Composites, Inc. Mr. Dreager discontinued his employment and service as a
director in June 1998. Monthly rentals were due in the amount of $4,500.
Operations were discontinued during fiscal year 1999 at the Ogden, Utah
facility.
During fiscal year 1998, the Company paid a monthly retainer of $2,000 in common
stock and $1,000 in cash to Extol to provide investor relations and financial
consulting services. Extol received $12,000 for consulting services during
fiscal year 1998 and 8,000 shares of the Company's common stock. The stock has
an estimated grant date fair value of $3.00 per share. Jim Czirr, a director of
the Company, is a 50 percent shareholder in Extol. The Company discontinued its
investor relations agreement with Extol during fiscal year 1999, and no cash or
common stock was paid.
In September 1994, the Company entered into an employment contract with Verne
Bray, President, Chief Executive Officer, and majority shareholder. The contract
was for a term of five years and provided for a base salary of $224,000 with a
cost of living adjustment based on the yearly increase in the consumer price
index. During fiscal year 1998, with the consent of Mr. Bray, the Company
reduced his salary to $150,000 for services as President of the Company. The
board of directors determined that payments in accordance with the employment
contract may be paid at a future date, but Mr. Bray waived his right to demand
payment, and therefore, no liability has been recorded. As of November 30, 1999,
a salary agreement had not been renegotiated.
During the year ended November 30, 1998, the Company entered into two lease
financing agreements for equipment that is being used in the operation of a
limited liability company ("Rimshot") owned by a son of Mr. Bray. Mr. Bray
personally guaranteed the lease agreements. The Company recorded assets of
$139,048 and related debt of $133,048. As of November 30, 1998, Rimshot owed the
Company $250,000 for advances made to start its operations.
F-26
<PAGE>
NACO INDUSTRIES, INC.
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
November 30, 1999 and 1998
--------------------------
Note 16 - Related-Party Transactions (continued)
- ------------------------------------
At November 30, 1998, payment terms, including an interest rate, had not been
established for the advances made to Rimshot. Subsequent to November 30, 1998,
an indemnification agreement was signed by Rimshot agreeing to hold the Company
harmless for the cost of the leased equipment. The son of Mr. Bray also signed a
pledge agreement on his 12,500 shares of Company preferred stock. His son also
signed security agreements covering Rimshot equipment and receivables to
collateralize the amount due to the Company.
During fiscal year 1999, the Company was unable to collect from Rimshot the
advances owed for startup operations. The Company did not receive any payments
for the equipment used by Rimshot. Subsequent to November 30, 1999, the Company
obtained a promissory note from Rimshot for $333,689. The note calls for monthly
principal and interest payments of $6,565 beginning February 1, 2000, with
interest at 10.75 percent.
Subsequent to November 30, 1999, Mr. Bray signed an indemnification agreement to
hold the Company harmless for funds paid on behalf of Rimshot. 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. Bran
conveyed to the Company a security interest in all PVC, Inc. lease receivables
from the Company. Subsequent to November 30, 1999, the board of directors
approved the Company's execution of the indemnification agreement. Also
subsequent to November 30, 1999, the Company signed a security agreement with
PVC, Inc. that allows the Company to offset payments due to PVC, Inc. in the
event of default on the indemnification agreement.
During fiscal year 1999, the Company issued 10,000 common shares to a former
director for equipment with a fair value of $22,501.
Note 17 - Contingencies and Commitments
- ---------------------------------------
The Company is working to clear a dispute with one of its subcontractors for
alleged non-payment for work performed. The Company believes the claim is
completely without merit and intends to vigorously defend its position.
The Company's composite and fiberglass products were sold with a five-year
repair warranty. The accompanying consolidated financial statements for the year
ended November 30, 1999, include a provision of $80,000 for estimated warranty
claims based on the Company's experience of the amount of claims actually made.
F-27
<PAGE>
NACO INDUSTRIES, INC.
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
November 30, 1999 and 1998
--------------------------
Note 18 - Significant Risks and Uncertainties
- ---------------------------------------------
Included in the accompanying consolidated balance sheet as of November 30, 1999,
is a net deferred tax asset of $499,200. Realization of that net asset is
dependent upon the Company generating sufficient future taxable income against
which its net operating loss carryforwards can be offset. Although the Company
expects to realize the benefit of the net deferred tax asset, such expectation
could change if estimates of future taxable income during the carry-forward
period are reduced.
The majority shareholder signed an indemnification agreement for obligations
incurred in behalf of Rimshot in the amount of $311,231. The majority
shareholder has pledged the lease receivable of PVC, Inc. to collateralize the
debt. No amount has been accrued against the collection of this obligation based
upon the majority shareholder's agreement to indemnify the Company with the
lease payments due to PVC, Inc. The majority shareholder has represented to the
board of directors of the Company his intent to seek re-financing of certain
debts in PVC, Inc. to provide an increased cashflow to the Company for the
Rimshot indemnification.
Note 19 - Capital Resources
- ---------------------------
During the year ended November 30, 1999, the Company incurred a significant loss
in the operation and closure of its Subsidiary corporation and segment
operations in composite and fiberglass products. In addition, the Company
incurred significant financing costs for non-compliance with debt covenants to
Nation's bank. Financing costs were also incurred to refinance the Company's
long-term debt and line of credit. These costs combined with borrowing base
restrictions on the Company's new line of credit with Wells Fargo, and
non-collection of related party loans have negatively impacted the Company's
profitability and liquidity. Management believes that continued growth in the
plastics industry, combined with the discontinuance of the composite and
fiberglass segment, will significantly improve the Company's profitability. At
November 30, 1999, it was not possible to predict the business outcome of these
efforts.
F-28
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.
-----------------------------------------------------------------------
Not applicable.
13
<PAGE>
PART III
The information required by this Part III is omitted from this Report
in that the Company will file with the Securities and Exchange Commission a
definitive proxy statement for the Annual Meeting of Shareholders of the Company
to be held on May 18, 2000 (the "Proxy Statement"), not later than 120 days
after November 30, 1999, and certain information included therein is
incorporated herein by reference. Only those sections of the Proxy Statement
specifically identified below which address the items set forth herein are
incorporated by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The information required by this Item is incorporated by reference to
the sections entitled "Election of Directors" and "Executive Officers" in the
Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The information required by this Item is incorporated by reference to
the sections entitled "Election of Directors-Director Compensation" and
"Executive Officers-Executive Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The information required by this Item is incorporated by reference to
the sections entitled "Principal Holders of Voting Securities" in the
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The information required by this Item is incorporated by reference to
the sections entitled "Certain Relationships and Related Transactions" in the
Proxy Statement.
14
<PAGE>
Supplemental Information to be furnished with Reports Filed Pursuant to Section
15(d) Of the Exchange Act by Non-Reporting Issuers.
The Company currently does not intend to prepare and distribute a
separate annual report to shareholders.
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Description Exhibit No.
--------------------------------------------------------------------- -----------------
<S> <C>
3(i) Articles of Incorporation of the Company (1)
3(ii) Bylaws of the Company............................................... (1)
4 Instruments Defining Rights of Security Holders..................... (2)
10.1 Employment Agreement of Verne Bray, as amended...................... (3)
10.2 Nonqualified Stock Option Agreement................................. (1)
10.3 Lease Agreement on Logan, Utah Facility............................. (1)
10.4 Lease Agreement on Lodi, California Facility........................ (1)
10.5 Promissory Note with P.V.C., Inc.................................... (1)
10.6 Sales Representation Agreement with Thomas Christy.................. (1)
10.7 Loan Agreement with Nations Bank.................................... (4)
10.8 Stock Redemption Agreement with Maurice A. Coen, David Coen and
Kirk Coen........................................................... (1)
10.9 Agreements with warehouse agents.................................... (2)
10.10 Stock Incentive Plan................................................ (4)
10.11 Indemnification Agreement........................................... 10.11
10.12 Commercial Property Lease Agreement................................. 10.12
10.13 Equipment Lease Agreement........................................... 10.13
21 Subsidiaries of Registrant.......................................... (4)
27 Financial Data Schedule............................................. 27
-------------------------
</TABLE>
(1) Filed as an exhibit in the original filing of the SB-2 Registration
Statement filed with the Securities and Exchange Commission on October
12, 1994, SEC file number 3385044-D.
(2) Filed as an exhibit to Amendment Number 1 of the SB-2 Registration
Statement filed with the Securities and Exchange Commission on December
28, 1994.
(3) Filed as an exhibit to Amendment Number 3 of the SB-2 Registration
Statement filed with the Securities and Exchange Commission on April 5,
1995.
(4) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for
the fiscal year ended November 30, 1997.
15
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Exchange
Act, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, on March 14, 2000
NACO INDUSTRIES, INC.
/s/ Verne E. Bray
------------------
Verne E. Bray, President
Pursuant to the requirements of the Exchange Act, this report has been
signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Verne E. Bray President and Chairman of the
- --------------------
Verne E. Bray Board, Principal Executive March, 14, 2000
Officer)
/s/ Jeffrey J. Kirby Exec. Vice President, Treasurer March 14, 2000
- --------------------
Jeffrey J. Kirby and Director
/s/ Jim C. Czirr Director March 14, 2000
- --------------------
Jim C. Czirr
/s/ Jack Prust Director March 14, 2000
- --------------------
Jack Prust
/s/ Michael Hopkins Vice President, Secretary and March 14, 2000
- --------------------
Michael Hopkins Director
</TABLE>
16
Indemnification Agreement
This Agreement is entered into effective the 13th day of March, 2000 by
and between VERNE E. BRAY, a resident of North Logan, Utah (hereinafter
"Shareholder"), and NACO INDUSTRIES INC., a Utah corporation with principal
offices in Logan, Utah (hereinafter "NACO").
WHEREAS, since the time of its formation years ago, Shareholder has
been a principal officer, director and shareholder of NACO, working successfully
toward its growth and expansion in the manufacture and national marketing of pvc
pipe fittings; and
WHEREAS, during the course of NACO's growth and expansion, the
corporation has employed many people at various levels of the organization,
including Shareholder's son Dan Bray; and
WHEREAS, during the summer and fall of 1998, Dan Bray desired to leave
the employment of NACO and begin his own business operations in the area of
manufacturing and marketing of plastic composites, while at the same time NACO
desired to expand its operations into the manufacture and/or marketing of
plastic composites, which NACO intended to do through a wholly owned subsidiary
known as NACO COPOSITES, INC., each party hoping to profit through business
transactions with each other, as well as with third parties; and
WHEREAS, in November of 1998 Dan Bray established a Utah limited
liability company known as RIMSHOT, L.C., in which he is believed to have been
the sole owner and member, for the purposes set forth above (hereinafter
"Rimshot"); and
WHEREAS, after having obtained some initial contract work and in
anticipation of substantial financing for which Dan Bray indicated that he had
applied and with respect to which he was optimistic about receiving, NACO
provided financial accommodations to Rimshot and Dan Bray by (1) entering into
two leases, one dated September 24, 1998 for a term of 60 Months, and the other
dated November 25, 1998, for a term of 36 Months, for certain equipment, which
equipment was to be used by Rimshot, in the approximate total principal amount
of $135,000.00 (hereinafter the "Rimshot Equipment Leases"), and (2) by issuing
NACO purchase orders and making payments to third party vendors or other
creditors of Rimshot, in the approximate amount of $311,231.02 (hereinafter the
"Rimshot Creditor Payments"), all with the hope and expectation that Dan Bray
and Rimshot would soon obtain sufficient financing to repay NACO and hold NACO
harmless from further expense or obligation regarding such accommodations; and,
WHEREAS, perhaps due to a misunderstanding but in any event apparently
without the knowledge of NACO, when Dan Bray entered into a written lease
agreement dated September 4, 1998, for a building located at 1055 West 2700
South, Ogden, Utah, with WADMAN INVESTMENTS, a Utah limited partnership, as
Lessor, for the business operations of Rimshot, Dan Bray executed such lease
agreement (hereinafter the "Rimshot Building Lease") in the name of NACO
COMPOSITES, INC., as Tenant; and
1
<PAGE>
WHEREAS, at the urging and insistence of NACO's lenders, NACO
COMPOSITES, INC. was merged up into NACO in 1999; and
WHEREAS, although Dan Bray is still manufacturing and doing business
through Rimshot, he has not yet been able to obtain the desired financing
necessary to repay NACO for the Rimshot Creditor Payments, or for rentals paid
by NACO under the Rimshot Equipment Leases; and
WHEREAS, although Dan Bray and Rimshot are making rental payments for
the Rimshot Building Lease, it is likely that Rimshot is in arrears in such
payments, and the lease is written to continue through September of this year,
at the rate of $2,000.00 rental per month, for which rents the landlord may seek
recourse against NACO in the event of Rimshot's default, inasmuch as NACO
COMPOSITES, INC. is shown under the lease as the tenant, and it has now been
merged into NACO, with NACO becoming responsible for whatever liabilities NACO
COMPOSITES, INC. had, as a result of such merger; and
WHEREAS, NACO is now a publicly held corporation, in which Shareholder
is the principal shareholder, and the independent auditors for NACO are
suggesting that on the basis of the foregoing facts, it may be necessary to
write down the NACO assets relating to Rimshot (such as the equipment leased by
NACO, and the receivable from Rimshot for the Rimshot Creditor Payments), with
the resulting charge against equity in the financial statements for NACO, unless
this matter can otherwise be resolved to protect the position of NACO; and
WHEREAS, Shareholder does not wish to see NACO shareholders adversely
affected by the Dan Bray and Rimshot transactions involving NACO, particularly
since these transactions involve Shareholder's son and Shareholder was serving
as an officer and director of NACO at the time when these transactions occurred,
and accordingly Shareholder has agreed to indemnify and hold NACO harmless from
liability, expense, and obligations pertaining to the Rimshot Equipment Leases,
the Rimshot Creditor Payments, and the Rimshot Building Lease, as set forth in
this agreement; and
WHEREAS, NACO desires to obtain such indemnity from Shareholder, and
hopes to avoid the charge against equity on its financial statements which it
might otherwise have to accept, but for such indemnity;
IT IS THEREFOR AGREED AS FOLLOWS:
1. Indemnification: In exchange for good and valuable consideration,
the receipt and sufficiency of which is hereby acknowledged, Shareholder agrees,
pursuant to the terms set forth herein, to indemnify and hold NACO harmless from
any and all expense or obligation incurred as a result of the Rimshot Equipment
Leases and the Rimshot Building Lease, and by reimbursement to further indemnify
and hold NACO harmless from all amounts paid by NACO as and for the Rimshot
2
<PAGE>
Creditor Payments. A copy of the Rimshot Equipment Leases is attached hereto as
Exhibits "A" and "B", and a copy of the Rimshot Building Lease is attached
hereto as Exhibit "C", and a detail sheet reflecting the Rimshot Creditor
Payments is attached hereto as Exhibit "D", all of which Exhibits are
incorporated by this reference as though fully set forth herein.
2. Payments by Shareholder: Shareholder is presently the sole
shareholder of PVC, Inc., a Utah corporation with principal offices in Logan,
Utah (hereinafter "PVC"), which corporation is the owner of much of the land,
buildings and equipment leased by NACO for use in its business. Shareholder is
presently in the process of seeking to refinance the debt within PVC, Inc.,
based upon its asset values, in order to obtain funds which can be made
available to Shareholder and assist in repayments to NACO in fulfillment of
Shareholder's indemnity hereunder. Shareholder shall continue to diligently
pursue such financing through PVC, Inc., which funds may be used in part, at
least, to acquire additional needed equipment for lease to NACO, thereby
generating additional rentals which may be used to reimburse NACO under
Shareholder's indemnity. Accordingly, the parties hereto agree upon the
following payment schedule by Shareholder, in meeting his obligation of
indemnity hereunder:
a. Assumption of Prospective Leasehold Obligations: Beginning March 15,
2000, Shareholder shall assume and perform all obligations of the
Lessee under the Rimshot Equipment Leases and the Rimshot Building
Lease, making sure that NACO is not called upon to make any further
such payments. Shareholder shall attempt to obtain the Lessors'
approvals for his assumption and substitution as the Lessee under such
leases, but in any event, Shareholder shall see that such payments are
made, even if the rents must be paid by Shareholder as a Sublessee to
NACO, with NACO then making payment to the Lessor(s).
b. Rimshot Creditor Payments: Shareholder shall reimburse NACO for the
Rimshot Creditor Payments by making payments of TWO THOUSAND FIVE
HUNDRED DOLLARS ($2,500.00) per month, commencing on October 1, 2000,
and continuing on the same day of each month thereafter, without
interest, for a period of one (1) year, with additional such monthly
payments of principal, without interest, thereafter until paid;
provided, however, that:
1. Shareholder shall attempt to increase these monthly
payments upon obtaining the PVC financing to the sum of SIX
THOUSAND DOLLARS ($6,000.00) per month; however, if
Shareholder is unable to increase the monthly payments by the
end of the first year of such payments, to equal at least the
sum of FIVE THOUSAND DOLLARS ($5,000.00) per month, the then
remaining balance of the Rimshot Creditor Payments shall
thereafter bear interest at the Applicable Federal Rate
designated at such time for federal tax purposes; and
3
<PAGE>
2. Shareholder shall reimburse to NACO the entire balance of
the Rimshot Creditor Payments, with payments as set forth in
this Paragraph 2.b., subject to Shareholder's right to prepay
all or part at any time without penalty, and subject to the
addition of interest after the first year as set forth in
Paragraph 2.b.1. above.
3. Naco's Assignment of Interest to Shareholder: In exchange for
Shareholder's indemnity as set forth herein, NACO hereby assigns to Shareholder,
with recourse, its entire right, title and interest in and to the Rimshot
Equipment Leases, the Rimshot Building Lease, and the account or note receivable
from Rimshot for the Rimshot Creditor Payments.
4. Mutual Release: In consideration of the terms set forth herein, and
contingent upon the timely performance thereof, Shareholder expressly releases
NACO, and NACO expressly releases Shareholder and all other members of its Board
of Directors and Officers, from any further claim, obligation or liability of
any kind, known or unknown, arising from or in connection with the Rimshot
Equipment Leases, the Rimshot Creditor Payments and the Rimshot Building Lease.
5. Enforcement: If any legal action or any arbitration or other
proceeding is brought for the enforcement of this agreement, or because of an
alleged dispute, breach, default, or misrepresentation in connection with any of
the provisions of this agreement, the successful or prevailing party or parties
shall be entitled to recover reasonable attorney's fees and other costs incurred
in that action or proceeding, in addition to any other relief to which it or
they may be entitled.
6. Corporate Authorization: The party executing this Agreement on
behalf of NACO represents and warrants that the Board of Directors of NACO has
duly authorized and approved the execution and delivery of this agreement and
all corporate action necessary or proper to fulfill the obligations of NACO to
be performed under this agreement.
7. Effect of Headings: The subject headings of the paragraphs of this
agreement are included for purposes of convenience only, and shall not affect
the construction or interpretation of any of its provisions.
8. Entire Agreement; Modification; Waiver: This agreement constitutes
the entire agreement between the parties pertaining to the subject matter
contained in it and supersedes all prior and contemporaneous agreements,
representations, and understandings of the parties. No supplement, modification,
or amendment of this agreement shall be binding unless executed in writing by
all the parties. No waiver of any of the provisions of this agreement shall be
deemed, or shall constitute, a waiver of any other provision, whether or not
similar, nor shall any waiver constitute a continuing waiver. No waiver shall be
binding unless executed in writing by the party making the waiver.
4
<PAGE>
9. Parties in Interest: Nothing in this agreement, whether express or
implied, is intended to confer any rights or remedies under or by reason of this
agreement on any persons other than the parties to it and their respective
successors and assigns, nor is anything in this agreement intended to relieve or
discharge the obligation or liability of any third persons to any party to this
agreement, nor shall any provisions give any third persons any right of
subrogation or action over against any party to this agreement.
10. Assignment: This agreement shall be binding on, and shall inure to
the benefit of, the parties to it and their respective heirs, legal
representatives, successors, and assigns; provided, however, that neither party
hereunder may assign their rights or delegate their duties hereunder without the
express prior written consent of the other party.
11. Governing Law: This agreement shall be construed in accordance
with, and governed by, the laws of the State of Utah, and in the event of a
dispute hereunder, the parties hereto consent to jurisdiction and venue in Cache
County, State of Utah.
12. Further Assurances: The parties mutually acknowledge their intent
to accomplish the assumption of the various Rimshot liabilities by Shareholder
and reimbursement and indemnity of NACO pursuant to the terms set forth herein.
Each party agrees to take whatever steps or further assurances, including the
execution of documents, are reasonably necessary in order to accomplish this
objective.
13. Pledge of PVC Lease Receivables: In consideration of the terms of
this agreement, Shareholder shall, as the sole shareholder, officer and director
of PVC, cause PVC to convey to NACO a security interest in all of the PVC lease
receivables from NACO, whether from real or personal property leases, which
security interest shall remain effective during the period in which there remain
balances unpaid hereunder with respect to the Rimshot Equipment Leases, Rimshot
Building Lease, or the Rimshot Creditor Payments. Upon the expiration of the
initial term of the present lease of real property from PVC to NACO, if such
lease is not renewed by NACO pursuant to its option therein contained,
Shareholder shall at such time pledge additional collateral, which may include
Shareholder's stock in PVC and/or NACO, of sufficient value to at least equal
the remaining balance owed by Shareholder hereunder at such time.
IN WITNESS WHEREOF, the parties hereto have set their hands, effective
the date and year first set forth above.
NACO INDURSTRIES, INC.
By:/s/Vernie E. Bray
- --------------------
VERNE E. BRAY
5
COMMERCIAL PROPERTY LEASE AGREEMENT
This Lease Agreement is made and entered into at Logan, Utah effective the 1st
day of December, 1999, by and between PVC, Incorporated, a Utah corporation with
principal offices in Logan, Utah (hereinafter "Lessor"), and NACO INDUSTRIES,
INC., a Utah corporation with principal offices in Logan, Utah (hereinafter
"Lessee").
1. PROPERTY LEASED. Lessor, in consideration of the rents and
agreements to be paid and performed by Lessee, does lease to Lessee those
premises situated at 395 West 1400 North, in Logan, Cache County, State of Utah,
and further described on Exhibit "A" attached hereto and by this reference
incorporated herein.
2. TERM. This lease shall continue for the term of ten (10) years,
commencing on December 1, 1999 and continuing thereafter through November 30,
2009, or until earlier terminated as set forth herein. However, in the event
that Lessee shall notify Lessor in writing of its intention to renew this lease,
which notice must be given not less than ninety (90) days prior to the
expiration of the initial term hereof, then this lease shall be renewed under
the same terms as set forth herein, including the annual adjustments of the
rentals hereunder, for an additional period of sixty (60) months.
3. RENTAL. Rental payments shall become due and payable hereunder on a
monthly basis, payable in advance, commencing on the first day of December, 1999
and continuing on the first day of each month thereafter until November 1, 2004,
when the last of such monthly rental payments shall be paid. Rental payments
shall initially commence at the rate of $13,500.00 per month; and, upon each
annual anniversary date of this lease agreement, the monthly rentals shall be
adjusted by the amount of any increase in the Consumer Price Index over the
immediately preceding year. Rentals shall be payable to the Lessor at its
office, or to such person or at such other place as the Lessor may from time to
time designate in writing.
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4. USE OF PREMISES. The premises shall be used for the purpose of
operating the Lessee's business of manufacturing and marketing pvc pipe fittings
and related products, and for no other purposes without the prior consent of
Lessor. Lessee shall not commit or permit to be committed any waste upon the
premises. Lessee shall not use the premises, or any part thereof, for any
purpose other than the purpose or purposes for which said premises are leased,
and no use in any event shall be made of the premises, nor acts done, which will
increase the hazard of damage to the premises, or injury to those in or about
the premises, or the existing rate of insurance upon the building, nor shall
Lessee sell, keep or use in or about said premises any article which may limit
the coverage afforded by the Utah Standard Form fire insurance policy, or the
sale, presence, or use of which is prohibited by law.
Lessee shall keep said premises open for business during usual business
hours and failure to do so for more than thirty (30) days, other than for repair
or remodeling, may be deemed a breach of lease by Lessee at Lessor's election.
Lessee shall, at Lessee's sole cost and expense, without obligation to Lessor,
observe in the use of the premises all municipal, county, state and federal
regulations, ordinances and statutes now in force, or which may hereafter be in
force, and failure to do so shall be a material breach of this agreement.
5. POSSESSION. The date of possession of said leased premises by
Lessee pursuant to this lease shall be the lst day of December, 1999.
6. INSURANCE. Lessee shall maintain fire and casualty insurance on the
real and personal property subject to this lease and shall hold Lessor harmless
from any loss in connection therewith. Lessee further agrees to take out and
keep in force during the life hereof, at Lessee's expense, public liability
insurance to protect against any liability to the public, incident to the use of
or resulting from any occurrence in or about said premises. The liability under
such insurance shall be not less than $500,000.00 combined single limit or the
equivalent on bodily injury and property damage.
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7. REPAIR AND MAINTENANCE. The repair, maintenance and upkeep of the
leased premises shall be as follows: Lessor shall be responsible for: Structural
components in the buildings, except as may be required to maintain or repair the
same as the result of the use or damage thereof by Lessee or others in the
conduct of Lessee's business. Lessee shall be responsible for: All other
maintenance.
8. ALTERATIONS. Lessee shall not make or permit to be made any
additions or alterations of the premises or any part thereof without the written
consent of Lessor, and any additions to or alterations of said premises, when
permitted to be made, except movable furniture, trade fixtures, and drapery
installed by Lessee, shall become at once a part of the realty and belong to
Lessor and shall not be removed by Lessee at the end of his occupancy, or
otherwise, except upon written consent or order of Lessor. Any linoleum, rubber
tile or other floor covering affixed to the floors shall become at once a part
of the realty and belong to Lessor and shall not be removed by Lessee at the end
of his occupancy, or otherwise, except upon written consent or order of Lessor.
9. MECHANIC'S LIENS. It is expressly agreed that if any work that is
performed by Lessee or Lessee's agents, employees or representatives, either
prior to or subsequent to the possession by Lessee of the above-described
premises, shall give rise to any lien against the leased premises, Lessee shall
indemnify Lessor against and save Lessor harmless from any and all mechanic's
liens or claims of liens and all attorney fees, costs and expenses which may
accrue, grow out of, or be incurred by reason of said work performed by Lessee
or Lessee's agents, employees or representatives.
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10. UTILITIES. Lessee shall pay for all gas, heat, light, power, water,
rubbish removal, telephone service, and all other services supplied to said
premises.
11. INSPECTION AND ENTRY BY OWNER. Lessee shall permit Lessor and
Lessor's agents to enter into and upon the premises at all reasonable times for
the purpose of inspecting the same, or for the purpose of making reasonable
repairs, alterations or additions to any portion of said premises which Lessor
may see fit to make, including installation of pipes, conduits, etc. to service
adjacent property, without any reduction or rebate of rent to Lessee for loss of
occupancy or quiet enjoyment of the premises thereby occasioned, and Lessee
shall permit Lessor at any time after sixty (60) days prior to expiration of the
leasehold term to place upon the premises "for rent," "for lease," or other
signs.
12. BANKRUPTCY OR INSOLVENCY. Should the Lessee become bankrupt or
insolvent, either voluntarily or involuntarily, or a receiver be appointed to
take charge of Lessee's assets, or general assignment be made for the benefit of
creditors, the same shall constitute a breach of the terms of this lease and the
Lessor may declare the lease terminated, and the Lessee shall have no right,
title or interest in the property, and the Lessor may keep as damages any
advanced rental.
13. DEFAULT. Lessee shall pay rent to Lessor at such place as may be
assigned from time to time by Lessor, at the time provided as aforesaid, without
deduction or delay. In the event of failure of Lessee so to do, or in the event
of a breach of any other condition or agreement by Lessee, it shall be lawful
for Lessor, after giving to Lessee a fifteen (15) day written notice of default,
and after failure by Lessee within said fifteen (15) days to remedy or cure said
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default, and after the lapse of said fifteen (15) days, to re-enter and take
possession of the said premises and to remove all persons and property therefrom
and to repossess said premises. Any such re-entry or repossession or any notice
served in connection therewith shall not operate to release Lessee from any
obligations for rental or otherwise under this lease, and shall be in addition
to any available remedies and time set forth for notices given pursuant to the
Utah unlawful detainer statutes.
If Lessee shall be in default in performance of any condition or
agreement, or shall abandon or vacate the premises, Lessor shall have the right,
after giving the required written notice of default, and after failure by Lessee
to timely remedy or cure said default, to relet the said premises, or any
portion thereof, for such rent and upon such terms as Lessor may see fit. Lessee
shall pay the expenses of such reletting, including any and all real estate
broker's commissions.
All remedies herein given Lessor shall be cumulative and in addition to
other legal and equitable rights which Lessor may have, and if Lessor institutes
legal action to collect the total or balance of the rent hereby reserved, the
filing of such action prior to the expiration of the full leasehold term shall
not be deemed premature as a matter of law irrespective of whether Lessor has
retaken possession and relet the premises for his own account or for the account
of Lessee.
14. ATTORNEY FEES. Should either party employ an attorney in connection
with the violation of the terms of this lease, or for the preparation and
serving of notice or other matters, and whether suit is filed or not, the party
so employing an attorney and the prevailing party shall be entitled to
reasonable costs and attorney fees in addition to all other amounts as provided
for in this lease.
15. ASSIGNMENT AND SUBLEASE. Lessee shall not assign this lease, or any
interest therein, and shall not lease or sublet the premises, or any part
thereof, or any right of privilege appurtenant thereof, or mortgage or
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hypothecate the leasehold, without the prior written consent of Lessor, which
consent shall not be unreasonably withheld. A consent to one assignment,
subletting or hypothecation shall not be construed as a consent to any
subsequent assignment, subletting or hypothecation. Unless such written consent
has been had and obtained, any assignment or transfer of this lease, or of any
interest therein, or any subletting or hypothecation, either by voluntary or
involuntary act of Lessee or by operation of law, or otherwise, may be deemed a
breach of lease by Lessee at Lessor's election and any such purported
assignment, transfer, subletting or hypothecation without such consent may be
deemed by Lessor to be null and void. Lessor's consent to any such assignment,
transfer, subletting or hypothecation shall relieve Lessee from any obligation
under this lease.
16. DESTRUCTION OF PREMISES. In the event of a partial destruction of
the said premises during the said term, from any cause, Lessor shall forthwith
repair the same, provided such repair can be made within ninety (90) days under
the laws and regulations of state, federal, county or municipal authorities, but
such partial destruction shall in no way annul or void this lease, except that
Lessee shall be entitled to a proportionate deduction of rent while such repairs
are being made unless the Lessee was the cause of the destruction. Such
proportionate deduction of rent to be based upon the extent to which the making
of such repairs shall interfere with the business carried on by Lessee in the
said premises, but in no event shall it be more than the monthly rental. If such
repairs cannot be made in ninety (90) days, Lessor may, at his option, make same
within a reasonable time, this lease continuing in full force and effect and the
rent to be proportionately rebated as aforesaid in this paragraph. In the event
that Lessor does not so elect to make such repairs which cannot be made under
such laws and regulations, this lease may be terminated at the option of either
party. In the event that the building is destroyed in which the demised premises
may be situated to the extent of not less than 33 1/3 percent of the replacement
costs thereof, Lessor may elect to terminate this lease, whether the demised
premises be injured or not. A total destruction of the building in which the
said premises may be situated shall terminate this lease.
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17. CONDEMNATION. If the whole or any part of the premises shall be
taken by any public authority under the power of eminent domain, then the terms
of this lease shall cease as to the part so taken from the day possession of
that part shall be required for any public purpose, and rent shall be paid up to
that day, and on or before that day Lessee shall elect, in writing, either to
cancel this lease or to continue in possession of the remainder of the premises
under the terms herein provided, except that rent shall be reduced in proportion
to the amount of the premises taken. All damages awarded for such taking shall
belong to and be the property of Lessor, whether such damages be awarded as
compensation for diminution in value to the leasehold or to the fee of the
premises. Lessee hereby irrevocably assigns to Lessor any right to compensation
or damages to which Lessee may become entitled by reason of the condemnation of
all or a part of the demised premises.
18. DAMAGE LIABILITY. Lessee assumes all risks of injury or damage to
all persons and property, excluding injuries or damage caused by pre-existing
structural defects or Lessor's negligent conduct, including, but not limited to,
all property of Lessee and Lessor in or about the premises, and Lessee shall
hold Lessor harmless for any such damage or injury; except that Lessee shall not
be liable to Lessor for damage or injury to Lessor's property caused by
earthquakes, other acts of God, or Lessor's negligent conduct.
It is further understood and agreed that the provision herein in
connection with the Lessor being insured against liability shall in no way be
construed as creating liability upon its part or admission of liability upon its
part, but is merely for the protection of Lessor.
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19. OUTSIDE STORAGE. There shall be no storage of any kind of material
on the outside of the building herein described, except as incident to the
normal operation of Lessee's business, and except as may be expressly permitted
or allowed by permission of Lessor.
20. TERMINATION. On the last day of the term, or sooner termination,
the Lessee shall peaceably and quietly leave and yield the premises to Lessor,
with fixtures and appurtenances in good condition and repair, reasonable wear
and tear excepted. Lessee shall leave the premises and appurtenances free and
clear of rubbish and clean; and in the event Lessee fails to do so, Lessor may
charge Lessee for the reasonable cost incurred by Lessor in having the same
done.
21. WAIVER. Waiver by Lessor of any breach of any condition or
agreement of this lease by Lessee shall not be deemed to be a waiver of any
subsequent breach of the same or any other condition or agreement by Lessee.
22. SUCCESSOR. The condition and agreements herein contained shall
apply to and bind the heirs, personal representatives, and successors in
interest of the parties hereto.
23. TAXES.
(a) Payment of Taxes. Lessee shall pay all real property taxes
applicable to the premises during the term of this lease.
(b) Definition of Real Property Tax. As used herein, the term "real
property tax" shall include any form of assessment, levy, penalty, or tax (other
than inheritance or estate taxes) imposed by any authority having the direct or
indirect power to tax, including any city, county, state or federal government,
or any school, agricultural, lighting, drainage or other improvement district
thereof, as against any legal or equitable interest of Lessor in the premises or
on the real property of which the premises are a part, or as against Lessor's
right to rent or other income.
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(c) Personal Property Taxes. Lessee shall pay prior to delinquency
all taxes assessed against and levied upon trade fixtures, furnishings,
equipment and all other personal property of Lessee, and all personal property
leased to Lessee hereunder, whether such property is contained in the premises
or elsewhere. When possible, Lessee shall cause said trade fixtures,
furnishings, equipment and all other personal property to be assessed and billed
separately from the real property of Lessor.
24. HOLDING OVER. Holding over after the expiration of the term or any
extension thereof with the consent of Lessor shall be a tenancy from month to
month at a minimum monthly rental of the then prevailing rent.
25. SERVING OF NOTICE. All notices as provided for in this lease or by
law shall be in writing and shall be served either personally or by mail, and
shall be made upon the parties at the following address unless a party serves
written notice upon the other party of a change of address:
Lessor: PVC, Inc.
395 West 1400 North
Logan, Utah 84341
Lessee: NACO INDUSTRIES, Inc.
395 West 1400 North
Logan, Utah 84341
26. TOTAL AGREEMENT. It is understood and agreed between Lessor and
Lessee that this written lease agreement is the total agreement between Lessor
and Lessee with respect to the lease of the property described herein, and that
there are no other agreements, oral or otherwise, between them affecting the
same.
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IN WITNESS WHEREOF, the parties hereto have executed this document by
officers duly authorized to do so, effective as of the date and year first set
forth above.
LESSOR: LESSEE:
By/s/PVC, Inc. By:/s/Naco Industries, Inc.
-------------- ---------------------------
Title:PVC, Inc. Title:NACO INDUSTRIES, Inc.
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EXHIBIT "A"
Legal Description
11
EQUIPMENT LEASE AGREEMENT
This Lease Agreement is made and entered into at Logan, Utah effective
the 1st day of December, 1999, by and between PVC, Incorporated, a Utah
corporation with principal offices in Logan, Utah (hereinafter "Lessor"), and
NACO INDUSTRIES, INC., a Utah corporation with principal offices in Logan, Utah
(hereinafter "Lessee").
l. LEASE. Lessor hereby leases to Lessee, and the Lessee rents from
the Lessor, all of that certain personal property and equipment described in
Exhibit "A", which is attached hereto and incorporated by this reference as
though fully set forth herein (hereinafter the "Equipment").
2. TERM. This lease shall continue for the term of five (5) years,
commencing on December 1, 1999 and continuing thereafter through November 30,
2004, or until earlier terminated as set forth herein. However, in the event
that Lessee shall notify Lessor in writing of its intention to renew this lease,
which notice must be given not less than ninety (90) days prior to the
expiration of the initial term hereof, then this lease shall be renewed under
the same terms as set forth herein, including the annual adjustments of the
rentals hereunder, for an additional period of sixty (60) months.
3. RENTAL. Rental payments shall become due and payable hereunder on a
monthly basis, payable in advance, commencing on the first day of December, 1999
and continuing on the first day of each month thereafter until November 1, 2004,
when the last of such monthly rental payments shall be paid. Rental payments
shall initially commence at the rate of $9,500.00 per month; and, upon each
annual anniversary date of this lease agreement, the monthly rentals shall be
adjusted by the amount of any increase in the Consumer Price Index over the
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immediately preceding year. Rentals shall be payable to the Lessor at its
office, or to such person or at such other place as the Lessor may from time to
time designate in writing.
4. SELECTION OF EQUIPMENT. The Lessee has selected and inspected the
Equipment and accepts the Equipment AS IS, in its present condition.
THE LESSOR MAKES NO WARRANTY, DIRECTLY OR INDIRECTLY, EXPRESS OR
IMPLIED, AS TO THE EQUIPMENT OR ANY PART THEREOF, AS TO ITS DURABILITY,
CONDITION, MERCHANTABILITY, OR FITNESS FOR ANY PARTICULAR PURPOSE
EXCEPT THAT THE LESSOR WARRANTS THAT IT HAS TITLE TO OR PROPER
AUTHORIZATION TO LEASE EACH ITEM OF EQUIPMENT AS OF THE DATE HEREOF.
The parties agree that the Lessee may from time to time wish to
replace, or add to, the Equipment leased hereunder. Any such replacement or
addition shall occur only upon the prior written agreement of the parties
hereto, and the amount of the monthly rental payments shall be increased
accordingly, pursuant to the mutual agreement of the parties hereto. Consent to
make such replacements or additions, however, shall not be unreasonably withheld
by Lessor.
5. CREDIT AND FINANCIAL INFORMATION. The Lessee warrants that all
credit and financial information submitted to the Lessor herewith or at any
other time during the term of this lease is true and correct in all details and
complete for the purpose of inducing the Lessor to enter into this lease, or
consent to the addition or replacement of Equipment.
6. LESSEE'S INSPECTION AND ACCEPTANCE. Lessee acknowledges receipt of
the Equipment in good condition and working order and as satisfactory in all
respects for the purpose of this lease.
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7. INSTALLMENT, MAINTENANCE AND REPAIR. Neither the Lessor nor its
assignee shall have any obligation to install, erect, test, adjust, or service
the equipment. The Lessee, at its own cost and expense shall:
(a) Pay all charges in connection with the maintenance and
operation of the equipment;
(b) Comply with all laws, ordinances, regulations,
requirements, and rules with respect to the use, maintenance, and operation of
the equipment;
(c) Take good and proper care of the equipment and make all
repairs and replacements necessary to maintain, preserve, and keep the equipment
in good condition and working order. The Lessee shall not make any alterations,
additions, or improvements to the equipment without the prior written consent of
the Lessor. All repairs, replacements, parts, devices, accessories, and
improvements of whatsoever kind or nature furnished or affixed to the equipment
shall belong to and become part of the property of the Lessor.
8. INSURANCE AND INDEMNITY. The Lessee assumes the entire risk of loss,
theft, or damage to the equipment, whether or not covered by insurance, and no
such loss, theft, or damage shall relieve the Lessee of its obligations
hereunder except as set forth in paragraph 12. The Lessee agrees to and does
hereby indemnify and hold the Lessor harmless of, from, and against all claims,
costs, expenses, damages, and liabilities, including reasonable attorney's fees
resulting from or incident to the use, operation, or storage of the equipment
during the term of this lease. While the equipment is in the possession or
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control of the Lessee, the Lessee agrees, at its own cost and expense, to keep
the equipment insured to protect all interests of the lessor, against all risks
of loss, theft, or damage from every cause whatsoever for not less than the then
current value of the equipment and in addition shall purchase insurance in an
amount reasonable under the circumstances to cover the liability of the Lessor
for public liability and property damage. The Lessor shall be named as an
insured in all such policies and as loss payee thereunder. Each insurer shall
agree by endorsement upon the policy or policies issued by it, that it will give
the Lessor 30 days prior written notice of the effective date of any alteration
or cancellation. The proceeds of such insurance, whether resulting from loss,
theft, or damage or return premium or otherwise, shall be applied toward the
replacement or repair of the equipment or the payment of the obligations of the
Lessee hereunder at the option of the Lessor. The Lessee hereby appoints the
Lessor as Lessee's attorney-in-fact to make claim for, receive payment of, and
execute or endorse all documents, checks, or drafts for loss or damage or return
premium under any insurance policy issued on the equipment.
9. LOSS, THEFT OR DAMAGE. In the event of loss, theft, or damage to
the equipment in whole or in part, the Lessee shall promptly so notify the
Lessor and, at the Lessor's option shall:
(a) Place such equipment in good condition and working
order; or
(b) Replace such equipment with like equipment in good
condition and working order and furnish the Lessor with necessary documents to
vest good and marketable title thereto in the Lessor; or
(c) If the Lessor determines that any item of equipment is
beyond repair, pay to the Lessor, within ten days of such notification, the loss
value thereof which shall be an amount equal to the sum of:
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(1) All rents and other amounts due and owing under
this lease thereon at the time of such payment; plus;
(2) The sum of the rents and other amounts to become
payable for same during the balance of the lease, plus;
(3) The reversionary value of such item of equipment
at the end of the lease had such loss not occurred. Upon such payment the lease
shall terminate with respect to the item of equipment so paid for and the Lessee
shall thereupon become the owner thereof.
10. OWNERSHIP. The equipment shall at all times remain the property of
the Lessor and the Lessee shall have no right or property interest therein but
only the right to use the same under this lease. The Lessor shall have the right
to display notice of its ownership by affixing to the equipment an identifying
plate, stencil, or other indicia of ownership. Nevertheless, in order to protect
the interest of the Lessor, Lessee agrees to execute UCC-1 Forms as a protective
measure, conferring a Security Interest in the Equipment to Lessor.
11. PERSONAL PROPERTY. The equipment shall at all times remain personal
property regardless of the manner affixed to the realty. The Lessee shall
maintain each item so that it may be removed from any building in which it is
placed without damaging such building.
12. USE, LOCATION, REMOVAL AND INSPECTION. The equipment shall be used
only in the lawful business of the Lessee and located at Lessee's place of
business as approved by Lessor. The Lessee, without the written consent of the
Lessor, shall not remove the equipment from such location nor part with
possession or control thereof. The Lessor, upon prior reasonable notice to the
Lessee, shall have the right to inspect the equipment during the Lessee's normal
business hours.
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13. TAXES AND LICENSES. The Lessee shall pay all taxes, license fees,
and assessments, levied on the equipment, or relating to this lease, exclusive
of franchise taxes and taxes measured by the income of the Lessor. The Lessee
shall file all returns required therefor and furnish copies thereof to the
Lessor. The Lessor will cooperate with the Lessee and furnish the Lessee with
any information available to the Lessor in connection with the Lessee's
obligations under this paragraph.
14. LESSOR'S PAYMENT. In the case of the failure of the Lessee to
procure or maintain the required insurance, pay taxes, license fees, or
assessments as required or to keep the equipment in good condition and working
order as hereinbefore specified, the Lessor shall have the right, but not the
obligation to effect such insurance, pay such taxes, license fees, and
assessments and keep the equipment in good condition and working order, as the
case may be. In such event, the costs thereof shall be repayable by the Lessee
to the Lessor with the next installment of rent, and failure to do so shall
carry the same consequence as failure to pay any installment of rent when due
hereunder.
15. LATE CHARGES. Should the Lessee fail to pay any rental or other
charges provided for in this lease when due, there shall be imposed a late fee
of 5% of such late payment, and such payment and late fee shall thereafter bear
interest at 1 1/2% per month (18 month per annum).
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16. ENCUMBRANCES. Lessee shall keep the equipment free and clear of all
levies, liens and encumbrances.
17. RETURN OF EQUIPMENT, REPOSSESSION. Upon termination of this lease
for any reason, the Lessee, at its own expense, will forthwith return the
equipment to the Lessor at Lessor's property in Logan, Utah. Should the Lessee
fail or refuse to so return and deliver the equipment, the Lessor shall have the
right without notice or demand, to enter the premises where the equipment may be
found and take possession of and remove any equipment without legal process. The
Lessee hereby releases any claim or right of action for trespass arising from
such entry or removal. The equipment, upon its return, will be in good condition
and working order.
18. ASSIGNMENT. Without the Lessor's prior written consent, the Lessee
shall not assign, transfer, pledge, hypothecate, or otherwise dispose of this
lease or any interest therein or sublet or lend the equipment or permit it to be
used by anyone other than the Lessee and Lessee's employees.
19. DEFAULT. Any of the following events or conditions shall constitute
a default of the Lessee under this lease:
(a) Default in the payment of rent or
any other sums due hereunder for a period of ten days after the same becomes
due;
(b) Any other breach of the terms and conditions of this
lease;
(c) If any writ or order of attachment, execution, or other
legal action against the Lessee is levied on any or all equipment and not
released or satisfied within ten days;
(d) Death or judicial incompetency of the Lessee if an
individual;
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(e) The institution of a proceeding in bankruptcy,
receivership, or insolvency against the Lessee or its property or if the Lessee
shall enter into an agreement or composition with its creditors;
(f) The occurrence of any event described in subdivisions (d)
or (e) of this paragraph with respect to any guarantor of the Lessee;
(g) If any certificate, statement, representation, or warranty
furnished by the Lessee or any of the Lessee's guarantors proves to be false in
any material respect; or
(h) If the condition of the affairs of the Lessee or any of
the Lessee's guarantors shall so change as to, in the sole opinion of the
Lessor, impair the Lessor's security or increase the credit risk involved.
20. REMEDIES. Upon the happening of any event of default as set forth
in paragraph 19, the Lessor shall have the right to do the following without
demand or notice of any kind:
(a) Declare due, sue for, and receive from the Lessee the sum
of all rents and other amounts due and owing under this lease plus the sum of
the rents and other amounts to become payable during the balance of the term of
this lease;
(b) Retake possession of any and all equipment without any
court order or other process of law. For such purpose, the Lessor may enter upon
any premises where such equipment is located and remove the same therefrom
without being liable to any suit, action, or other proceedings by the Lessee.
The Lessor may, at its option, sell the equipment at public or private sale for
cash or on credit and by itself become the purchaser at such sale. The Lessee
shall be liable for arrears of rent, if any, the expense of retaking possession,
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and the removal of the equipment, court costs, in addition to the balance of the
rentals provided for herein, or in any renewal hereof, less the net proceeds of
the sale of the equipment, if any, after deducting all costs of taking, storage,
repair and sale and reasonable attorney's fees.
THE LESSEE WAIVES ANY AND ALL RIGHTS TO NOTICE AND TO A JUDICIAL
HEARING WITH RESPECT TO THE REPOSSESSION OF THE EQUIPMENT BY THE
LESSOR.
(c) Terminate this lease as to any or all equipment.
(d) Terminate any other lease between the Lessor and Lessee;
or
(e) Pursue any other remedy at law or in equity.
21. CONCURRENT REMEDIES. The rights granted to the Lessor under
paragraph 20 shall be cumulative and action on one shall not be deemed to
constitute an election or waiver of any other right to which the Lessor may be
entitled. The Lessee waives trial by jury in any action or proceeding arising
hereunder.
22. NOTICE AND WAIVERS. All notices relating hereto shall be delivered
in person to an officer of the Lessor or Lessee or shall be mailed certified or
registered to the Lessor or Lessee at their respective addresses or at any other
address hereinafter furnished by notice given in like manner. A waiver of a
specific default shall not be a waiver of any other or subsequent default. No
waiver by the Lessor or any provisions hereof shall constitute a waiver of any
other matter and all waivers shall be in writing and executed by an officer of
the Lessor. No failure on the part of the Lessor to exercise, and no delay in
exercising, any right or remedy hereunder shall operate as a waiver thereof.
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23. ENTIRE AGREEMENT. This instrument constitutes the entire agreement
between the parties and may not be modified except by a written instrument
signed by the parties. Any representation or statement made by the Lessor or
Lessee not stated herein shall not be binding.
24. ADDITIONAL DOCUMENTS. At the request of the Lessor, the Lessee
shall execute and deliver to the Lessor such documents as the Lessor shall deem
necessary or desirable for the purpose of recording or filing.
25. MISCELLANEOUS. Any provision of this instrument prohibited by law
in any state shall, as to such state, be ineffective to the extent of such
prohibition without invalidating the remaining provisions of this instrument.
This instrument shall be governed and construed in accordance with the laws of
the State of Utah.
IN WITNESS WEHREOF, the parties hereto have set their hands as of the
date and year first set forth above.
LESSOR:
By/s/PVC, Inc.
--------------
PVC, Inc.
LESSEE:
By/s/NACO INDUSTRIES, Inc.
--------------------------
Naco Industries, Inc.
10
<PAGE>
EXHIBIT "A"
List of Personal Property and Equipment Subject to Lease
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1999
<PERIOD-END> NOV-30-1999
<CASH> 58073
<SECURITIES> 0
<RECEIVABLES> 930666
<ALLOWANCES> 67753
<INVENTORY> 528461
<CURRENT-ASSETS> 1683015
<PP&E> 3456193
<DEPRECIATION> 2076200
<TOTAL-ASSETS> 3797750
<CURRENT-LIABILITIES> 1097787
<BONDS> 1928763
0
496236
<COMMON> 19023
<OTHER-SE> 207941
<TOTAL-LIABILITY-AND-EQUITY> 723200
<SALES> 7432130
<TOTAL-REVENUES> 7432130
<CGS> 4114266
<TOTAL-COSTS> 4114266
<OTHER-EXPENSES> 2588242
<LOSS-PROVISION> 28741
<INTEREST-EXPENSE> 309203
<INCOME-PRETAX> 454749
<INCOME-TAX> (30300)
<INCOME-CONTINUING> 424449
<DISCONTINUED> (750,450)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (464947)
<EPS-BASIC> 0.15
<EPS-DILUTED> 0.15
</TABLE>
