SEC File No. 33-85044-d
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 Commission File number 33-85044-d
NACO Industries, Inc.
--------------------------------------------------------------------------------
(Exact Name of small business issuer as specified in its charter)
Utah 48-0836971
---- ----------
(State of Incorporation) (IRS Employer Identification)
395 West 1400 North, Logan, Utah 84341
--------------------------------------
(Address of principal executive offices)(Zip Code)
Registrant's Telephone Number 435-753-8020
--------------------------------------------------------------------------------
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes X No
As of August 31, 2000, the Registrant had 1,902,268 shares of Common Stock and
165,412 shares of Preferred Stock outstanding.
Transitional Small Business Disclosure Format Yes [ ] No [X]
--------------------------------------------------------------------------------
1
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
--------------------------------------------------------------------------------
See attached Consolidated Financial Statements
2
<PAGE>
NACO Industries, Inc.
FINANCIAL STATEMENTS
August 31, 2000
3
<PAGE>
NACO INDUSTRIES, INC.
---------------------
BALANCE SHEETS
--------------
<TABLE>
<CAPTION>
August November
31, 30,
2000 1999
----------- -----------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
------
Current assets:
Cash $ 46,714 $ 58,073
Accounts receivable, net of allowance for doubtful
accounts of $91,002 and $67,753, respectively 568,345 862,913
Due from related parties 41,933 38,385
Inventory 549,267 528,461
Other current assets 36,390 41,283
Deferred income taxes 90,050 153,900
----------- -----------
Total current assets 1,332,699 1,683,015
----------- -----------
Property and equipment:
Land 40,700 40,700
Buildings and improvements 610,038 610,038
Equipment and vehicles 2,415,843 2,805,455
Equipment construction in process 11,644
----------- -----------
Total property and equipment 3,078,225 3,456,193
Less - accumulated depreciation (1,937,367) (2,076,200)
----------- -----------
Net property and equipment 1,140,858 1,379,993
----------- -----------
Other assets:
Accounts receivable from related parties 327,232 311,231
Intangible and other assets, net of accumulated
amortization of $14,433 and 12,830, respectively 153,277 167,711
Deferred income taxes, net of allowance of $80,000 230,400 255,800
----------- -----------
Total other assets 710,909 734,742
----------- -----------
Total assets $ 3,184,466 $ 3,797,750
=========== ===========
</TABLE>
See Notes to Financial Statements
4
<PAGE>
NACO INDUSTRIES, INC.
---------------------
BALANCE SHEETS
--------------
<TABLE>
<CAPTION>
August November
31, 30,
2000 1999
----------- -----------
(Unaudited) (Audited)
<S> <C> <C>
LIABILITIES:
-----------
Current liabilities:
Accounts payable $ 397,010 $ 769,056
Accrued expenses 195,734 231,720
Due to related parties 10,028 15,311
Line of credit 582,299
Current portion of long-term obligations 74,522 81,700
----------- -----------
Total current liabilities 1,259,593 1,097,787
----------- -----------
Long-term liabilities:
Warranty obligation 48,000 48,000
Long-term obligations, less current portion 1,004,865 1,928,763
----------- -----------
Total long-term liabilities 1,052,865 1,976,763
----------- -----------
Total liabilities 2,312,458 3,074,550
----------- -----------
Stockholders' equity:
Common stock, $.01 par value, 10,000,000 shares authorized; 1,902,268
shares issued 19,023 19,023
Preferred Stock, 7% Cumulative, convertible $3.00 par value, 330,000
shares authorized, and 165,412 shares issued. (Aggregate liquidation
preference $1,200,891 and $1,131,418 respectively) 496,236 496,236
Additional paid-in capital 1,018,284 1,018,284
Accumulated deficit (661,535) (810,343)
----------- -----------
Total stockholders' equity 872,008 723,200
----------- -----------
Total liabilities and Stockholders' equity $ 3,184,466 $ 3,797,750
=========== ===========
</TABLE>
See Notes to Financial Statements
5
<PAGE>
NACO INDUSTRIES, INC.
---------------------
STATEMENTS OF OPERATIONS
------------------------
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
Three months ended Nine months ended
August 31, August 31, August 31, August 31,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales, net $ 1,554,361 $ 1,752,679 $ 6,112,023 $ 5,796,937
Cost of goods sold 983,490 985,309 3,623,994 3,125,118
----------- ----------- ----------- -----------
Gross profit 570,871 767,370 2,488,029 2,671,819
Operating expenses:
Selling expenses 382,354 401,335 1,186,604 1,202,190
General and administrative expenses 297,562 267,196 852,748 763,483
----------- ----------- ----------- -----------
Total operating expenses 679,916 668,531 2,039,352 1,965,673
Income (loss) from operations (109,045) 98,839 448,677 706,146
Other income (expense):
Interest income 1,211 784 2,053 1,600
Other 3,977 2,237 28,434 2,237
Interest expense (67,050) (56,020) (240,305) (226,029)
----------- ----------- ----------- -----------
Total other income (expense) (61,862) (52,999) (209,818) (222,192)
----------- ----------- ----------- -----------
Income (loss) before income taxes (170,907) 45,840 238,859 483,954
Income tax (expense) benefit 64,650 (17,282) (90,050) (182,451)
----------- ----------- ----------- -----------
Net income (loss) (106,257) 28,558 148,809 301,503
Adjustment for preferred dividends in arrears (208,419) (138,947) (208,419) (138,947)
----------- ----------- ----------- -----------
Income (loss) from continuing operations to
common stockholders (314,676) (110,389) (59,610) 162,556
Discontinued operations:
Loss from operations of discontinued segment, net
of income tax benefits -- (241,192) -- (670,875)
----------- ----------- ----------- -----------
Adjusted net income (loss) to common stockholders $ (314,676) $ (351,581) $ (59,610) $ (508,319)
=========== =========== =========== ===========
Earnings (loss) per common share basic:
Earnings (loss) from continuing operations $ (0.17) $ (0.06) $ (0.03) $ 0.09
Earnings (loss) from discontinued operations $ -- $ (0.13) $ -- $ (0.36)
Net Earnings (loss) $ (0.17) $ (0.19) $ (0.03) $ (0.27)
Earnings (loss) per common share diluted:
Earnings (loss) from continuing operations $ (0.17) $ (0.05) $ (0.03) $ 0.09
Earnings (loss) from discontinued operations $ -- $ (0.13) $ -- $ (0.36)
Net Earnings (loss) $ (0.17) $ (0.19) $ (0.03) $ (0.27)
Weighted average number of common
shares outstanding:
Basic 1,902,268 1,876,227 1,902,268 1,876,227
Diluted 2,233,092 2,207,051 2,233,092 2,207,051
</TABLE>
See Notes to Financial Statements
6
<PAGE>
NACO INDUSTRIES, INC.
---------------------
STATEMENTS OF CASH FLOWS
------------------------
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
Nine months ended
Augusts 31, August 31,
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net income $ 148,809 $ 301,503
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation 208,028 282,958
Amortization 14,432 12,454
Deferred income taxes 89,250
(Increase) decrease in:
Accounts receivable, net 294,567 (276,879)
Receivable from related parties (3,548) (102,689)
Inventory (20,805) 63,280
Other 4,893 (3,734)
Increase (decrease) in:
Accounts payable (372,046) 556,454
Accrued expenses (35,986) (50,586)
Income taxes payable -- (100)
----------- -----------
Net cash provided by (used in) continuing activities 327,594 782,661
Net cash provided by (used in) discontinued activities -- (670,875)
----------- -----------
Net cash provided by (used in) operating activities 327,594 111,786
----------- -----------
Cash flows from investing activities
Net change property and equipment (20,518) (48,878)
Loan to related parties (16,001) 99,461
Investment in intangible and other assets -- (155,649)
----------- -----------
Net cash provided by (used in) investing activities (36,519) (105,066)
----------- -----------
Cash flows from financing activities
Net change in line of credit (205,498) (344,108)
Decrease in related party loan (5,283) 0
Payments on long-term debt (91,653) (793,823)
Proceeds from long-term loans -- 1,114,593
----------- -----------
Net cash provided by (used in) financing activities (302,434) (23,338)
----------- -----------
Increase (decrease) in cash (11,359) (16,618)
Cash, beginning of period 58,073 97,428
----------- -----------
Cash, end of period $ 46,714 $ 80,810
=========== ===========
Supplemental Disclosures:
Interest Paid $ 237,125 158,297
Income Taxes Paid 0 0
</TABLE>
See Notes to Financial Statements
7
<PAGE>
NACO INDUSTRIES, INC.
---------------------
Notes to Financial Statements (Unaudited)
-----------------------------------------
August 31, 2000
---------------
NOTE A - INTERIM FINANCIAL STATEMENTS
-------------------------------------
In the opinion of management, the accompanying unaudited financial statements
include all necessary adjustments (consisting only of normal recurring accruals)
to present fairly the financial position of NACO Industries Inc. (the "Company")
as of August 31, 2000, the results of its operations for the three months and
nine months ended August 31, 1999 and 2000 respectively and its cash flows for
the nine months ended August 31, 1999 and 2000 respectively in conformity with
generally accepted accounting principles for interim financial information
applied on a consistent basis. Operating results for the nine-month period ended
August 31, 2000 are not necessarily indicative of the results that may be
expected for the fiscal year ending November 30, 2000.
The Company's results of operations for the three month and nine month periods
ending August 31, 1999 have been restated to reflect the discontinued operations
of the Company's wholly owned subsidiary, NACO Composites, Inc. The results of
operations of the discontinued segment are shown separately as discontinued
operations, net of applicable income taxes.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted. Accordingly, these financial statements should be read in
conjunction with the Company's financial statements and related notes in the
Company's Annual Report on Form 10-KSB for the year ended November 30, 1999.
NOTE B - INVENTORY
------------------
Inventory consisted of the following:
August 31, November 30,
2000 1999
------- -------
Raw materials $ 233,751 187,813
Work In Process 884 0
Finished goods 394,632 401,608
Less - valuation allowance (80,000) (60,960)
------- -------
Total $ 549,267 528,461
======= =======
NOTE C - DIVIDENDS
------------------
Dividends on the preferred stock are cumulative at 7%. At August 31, 2000, the
cumulative amount of dividends accrued was $208,419. Of this amount, $208,419
was in arrears.
NOTE D - EARNINGS PER SHARE
---------------------------
The Company has adopted SFAS No. 128, "Earnings Per Share," which establishes
new standards for computing and presenting earnings per share. No restatement
was required for prior year's earnings per share figures to conform to the new
standard. Basic earnings per common share are calculated by dividing adjusted
net income by the average number of shares of common stock outstanding during
the period. The calculation of diluted earnings per share of common stock
assumes the dilative effect of the Company's cumulative preferred stock, options
and warrants. During the nine-month period ending August 31, 2000, the market
price did not exceed the option price for the outstanding options and warrants
and therefore no dilution occurred. When conversion of potential common shares
has an anti-dilutive effect, no conversion is assumed in the diluted earnings
per share calculation.
8
<PAGE>
NACO INDUSTRIES, INC.
---------------------
Notes to Financial Statements (Unaudited)
-----------------------------------------
August 31, 2000
---------------
NOTE E - PREFERRED STOCK AND WARRANTS
-------------------------------------
There were no shares of capital stock sold or warrants exercised during the
three months ending August 31, 2000.
NOTE F - DEBT AND LOAN AGREEMENTS
---------------------------------
At August 31, 2000, the outstanding balance of the Company's revolving line of
credit was $582,299. This line of credit was entered into on April 22, 1999 with
Wells Fargo Business Credit. The amounts, available under the facility, are
based on a percentage of accounts receivable and inventories. This line of
credit matures April 30, 2002. As of August 31, 2000 the Company was technically
not in compliance with the "Minimum [Pre-tax] Net Income" covenant and the
"Minimum Net Worth" covenant. The $582,299 line of credit balance has been
classified as current because of the technical non-compliance. At the present
time Wells Fargo Business Credit has not granted a waiver, however the Company
is currently working with Wells Fargo Business Credit to reset the covenants.
NOTE G - STOCK OPTIONS
----------------------
In May 2000, the Company granted a non-qualified stock option for 20,000 shares
to Jack Prust, a new director of the Company. The options vested on the grant
date, and are exercisable anytime while serving as a director for up to ten
years. The options have an exercise price of $3.00.
NOTE H - RELATED PARTY OPERATING LEASES
---------------------------------------
In December 1999, the Company entered into two related-party lease agreements
for land, building and equipment with PVC, Inc., a company owned by Verne Bray,
the CEO, Chairman of the Board, and majority stockholder of the Company. The
terms of the leases are for a period of five years commencing December 1999.
Rentals begin at $13,500 per month for the land and building, and $9,500 per
month for various pieces of equipment. Upon each annual anniversary date, the
monthly rentals for each lease will be adjusted by the amount of any increase in
the Consumer Price Index over the preceding year. The previous lease for land,
building and equipment, which was executed by the Company and Mr. Bray and
expired December 31, 1999, required lease payments of $9,300 per month. The
lease amounts were negotiated at the fair-market rental value and approved by
the disinterested members of the Company's Board of Directors.
In March 2000, Mr. Verne Bray, Chairman of the Board and CEO, signed an
indemnification agreement to hold the Company harmless for funds paid on behalf
of Rimshot, a limited liability company owned by a son of Mr. Bray. The
agreement covers $259,144 of costs advanced to Rimshot for startup operations,
and $52,087 for principal and interest payments made on leased machinery used by
Rimshot through November 30, 1999. The agreement calls for monthly payments of
$2,500 beginning October 1, 2000. After October 1, 2001, the note bears interest
at the applicable federal rate. Pursuant to the indemnification agreement, Mr.
Bray conveyed to the Company a security interest in all PVC. Inc. lease
receivables from the Company. The board of directors approved the Company's
execution of the indemnification agreement. The Company also signed a security
agreement with PVC, Inc. which allows the Company to offset payments due to PVC,
Inc. in the event of default on the indemnification agreement.
The Company has paid as of August 31, 2000 an additional $16,001 for principle
and interest payments on leased machinery used by Rimshot. This amount has been
added to the amount recorded as due from Mr. Bray in accordance with the
indemnification agreement.
In May 2000, one of the two lease agreements NACO has for equipment being used
by Rimshot was transferred to PVC, Inc. a Company owned by Mr. Bray. On
September 5, 2000 the second lease was transferred to PVC, Inc. also. These
leases are now the sole obligation of PVC, Inc. and the Company was completely
released from further obligations.
9
<PAGE>
NACO INDUSTRIES, INC.
---------------------
Notes to Financial Statements (Unaudited)
-----------------------------------------
August 31, 2000
---------------
NOTE I - PROVISION FOR INCOME TAXES
-----------------------------------
The Company has loss carry forwards from previous fiscal years of approximately
$1,285,000 that may be applied against future taxable income. These operating
loss carry forwards expire in the years 2009 through 2020. The interim financial
statements reflect a tax provision for net income to date and deferred tax
assets have been adjusted accordingly.
NOTE J - CONTINGINCIES
----------------------
The Company is a defendant in a lawsuit filed by one of its former employees who
owned a building that had been leased by the Company. The suit asks for damages
of approximately $41,000. The Company believes the suit is completely without
merit and has filed a counter-claim and intends to vigorously defend its
position.
The Company has submitted a dispute with a subcontractor to arbitration before
the American Arbitration Association. Management and its legal council are of
the opinion that funds in escrow, approximately $64,500, are properly the funds
of the Company, and that the Company should be entitled to substantially all of
such funds.
10
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
NACO Industries, Inc. ("NACO" or the "Company") is a manufacturing company,
which produces and sells polyvinyl chloride "PVC" and composite products. The
Company's primary line of business consists of manufacturing PVC pipe fittings
and valves, which are sold throughout the United States through wholesale
distributors to irrigation, industrial, construction and utility industries. The
Company manufactures and sells fabricated fittings (4" through 30" in diameter),
as well as molded fittings (4" though 10" in diameter). Pipefittings produced by
the Company include tees, reducers, elbows, couplers, end caps, and bolted
repair couplers. NACO also manufactures and sells PVC valves (4" through 12" in
diameter).
Results of Operations
The following discussion relates to the three months and nine months ended
August 31, 2000 and August 31, 1999, respectively. For comparison purposes,
percentages of sales will be used rather than dollars. In the following
discussion, the three months ended August 31, 2000 and August 31, 1999 are
referred to as 3Q00 and 3Q99, respectively. The nine months ended August 31,
2000 and August 31,1999 are referred to as 9M00 and 9M99, respectively. Readers
are cautioned that results of operations for the three and nine months periods
ended August 31, 2000 are not necessarily indicative of the results that may be
expected for the fiscal year ending November 30, 2000.
Overview. The Company sustained an operating loss after taxes of $(106,257)
for 3Q00 compared to an operating profit after taxes of $28,559 for 3Q99. The
Company sustained an operating profit after taxes of $148,809 for 9M00 compared
to an operating profit after taxes of $301,503 for 9M99. Gross margin as a
percentage of sales for 3Q00 and 3Q99 was 36.7% and 43.8%, respectively. Gross
margin as a percentage of sales for 9M00 and 9M99 was 40.7% and 46.1%,
respectively. The reduction in the Company's operating profit and gross margins
was mainly due to two factors. 1) As described in greater detail below,
increases in raw material costs during the past year have continued to put
downward pressure on the Company's gross margin and 2) the Company believes
demand for PVC products in the Company's industry is lower than it was in 1999
Net Sales: Net sales for 3Q00 decreased by 11.3% to $1,554,360, compared to
net sales of $1,752,679 for 3Q99. Management believes the increase in the price
of PVC pipe from 3Q99 to 3Q00 contributed to the decline in sales. Marketing
reports indicate that bigger projects may have been postponed or cancelled due
to higher costs. The PVC fittings market has been strong during the past year,
but appears to be softening. Another contributing factor was the acquisition by
one of the Company's large customers of a fitting manufacturer. In the period
since the acquisition, the Company's customer has significantly reduced its
orders to the Company, and appears to be purchasing most of its fittings from
the acquired manufacturer. The Company increased prices on its products by 5% in
October 1999 and implemented another 5% price increase effective April 1, 2000
in an effort to mitigate the continuing rise in raw material prices. Net sales
for 9M00 increased 5.4% from 9M99. Net sales were $6,112,023 and $5,796,937 for
9M00 and 9M99 respectively.
Gross Margin. Gross margin as a percentage of sales for 3Q00 and 3Q99 was
36.7% and 43.8%, respectively. Margins decreased mainly due to increases in raw
material costs, and rent. Raw material prices continued to rise during 2Q00. Raw
materials as a percentage of sales for 3Q00 and 3Q99 were 29.6% and 24.4%
respectively. The Company increased prices on its products by 5% in October 1999
and another 5% effective April 1, 2000 in an effort to offset this continuing
rise in raw material prices. However, because of competitive pressure the
Company hasn't been able to raise prices sufficiently to completely offset the
rise in raw material costs. Rent expense as a percentage of net sales for 3Q00
and 3Q99 was 4.2% and 2.1% respectively. Rent expense increased 75.7% or $28.014
from 3Q99 to 3Q00 primarily due to lease payments associated with lease
agreements with PVC, Inc. Verne Bray, the Chairman of the Board and Chief
Executive Officer of the Company is the principal shareholder of PVC, Inc. The
11
<PAGE>
terms of the leases are for a period of five years commencing December 1999.
Rentals begin at $13,500 per month for the land and building, and $9,500 per
month for various pieces of equipment. Upon each annual anniversary date, the
monthly rentals for each lease will be adjusted by the amount of any increase in
the Consumer Price Index over the preceding year. The previous lease for land,
building and equipment, which was executed by the Company and Mr. Bray and
expired December 31, 1999, required lease payments of $9,300 per month. The
lease amounts were negotiated at rates considered by the Company's Board of
Directors to represent the fair-market rental value and were approved by the
disinterested members of the Company's Board of Directors. Labor and related
expenses decreased 6.2%, or $23,639, from 3Q99 to 3Q00 mainly due to less
overtime and lower production expenses, mainly due to lower sales volume for
3Q00 compared to 3Q99.
Selling: Selling expenses were 24.6% of net sales for 3Q00, compared to
22.9% for 3Q99. In actual dollars, selling expenses decreased $18,981, or 4.7%,
from 3Q99 to 3Q00. The increase in selling expenses as a percentage of sales was
mainly due to the decline in the Company's sales identified above. Freight as a
percentage of net sales for 3Q00 and 3Q99 was 7.4% and 7.6% respectively,
partially due to receiving quantity discounts on larger freight shipments.
Selling supplies expense decreased $14,497 from 2.7% in 3Q99 to 2.1% of net
sales in 3Q00 mainly due to timing of supply purchases. For 9M00 selling
supplies expense decreased only $8,297.
General and administrative: General and administrative expenses represented
19.1% of net sales for 3Q00, compared to 15.3% for 3Q99. The increase was mainly
due to decreased sales volume and an increase in legal and outside consulting
fees. Overall, general and administrative expenses increased $30,366 from
$267,196 to $297,562 from 3Q99 to 3Q00. Legal, accounting and outside services
as a percentage of net sales were 3.3% and 4.9% for 3Q99 and 3Q00 respectively.
The increase in dollars for legal, accounting and outside services was $18,387
from 3Q99 to 3Q00. Legal expenses increased mainly due to legal expenses
occurred to defend against two lawsuits filed against the Company by a former
vendor and a former landlord. (See Part II, Item 1 for details on these
lawsuits). Salaries, as a percentage of net sales, decreased from 8.5% in 3Q99
to 7.1% in 3Q00 mainly due to two factors: 1) Salaries paid to the Company's
executive officers were held to the same levels as in fiscal 1999 and 2) salary
paid to the Company's CEO was voluntarily reduced by the CEO. Lease expenses
increased $7,322 due to new lease agreements between NACO Industries, Inc. and
PVC Inc.
Other: Other expenses/revenues were 3.9% for 3Q00, compared to 3.1% for
3Q99 mainly due to increases in interest expense. Interest increased $11,031
from 3Q99 to 3Q00 mainly due to increased borrowings on the line of credit
compared to 3Q99. The effective interest rates (interest expense divided by the
average debt balance for the period) for 9M00 and 9M99 were 11.87% and 13.58%,
respectively.
Liquidity and Capital Resources
The Company's principal sources of liquidity have been cash from
operations, credit facilities and equity financing. Cash provided from operating
activities was $327,594 in 3Q00. Cash as of August 31, 2000 was $46,714, down
$11,359 from November 30, 1999.
With the loss incurred by the Company during the fiscal year ended
November 30, 1999, primarily as a result of the discontinued NACO Composites
operation, the Company's working capital position was reduced significantly. The
Company's liquidity position improved during 9M00, due primarily to increased
sales and net income for the period. The Company decreased trade payables by
$372,046 from November 30, 1999 to August 31, 2000. At November 30, 1999, the
Company was out over 90 days on trade payables, due principally to a lack of
operating funds. As of August 31, 2000, the Company was current on its trade
payables.
At August 31, 2000, the outstanding balance of the Company's revolving
line of credit was $582,299. This line of credit was entered into on April 22,
1999 with Wells Fargo Business Credit. The amounts available under the facility
are based on a percentage of accounts receivable and inventories. The line of
credit matures April 30, 2002. As of August 31, 2000 the Company was technically
not in compliance with the "Minimum [Pre-tax] Net Income" covenant and the
"Minimum Net Worth" covenant. The covenant pre-tax income was $615,000 and the
Company's actual pre-tax net income was $238,859. The minimum net worth covenant
was $1,100,000; the Company's actual net worth was $872,007. At the present time
Wells Fargo has not granted a waiver for these defaults, however the Company is
working with Wells Fargo to reset the covenants.
12
<PAGE>
Also, on April 22, 1999, a second facility was closed with WebBank
Corporation. This facility was for $1,100,000 and is secured by the Company's
current assets, property and equipment, and life insurance. It is payable with
interest at 1.5% over the banks prime rate and matures April 30, 2014. On
November 30, 1999, the Company was in default of WebBank's loan covenants. In a
letter dated February 18, 2000, WebBank provided a waiver that extended a grace
period to the Company with respect to meeting certain ratio requirements and
advances to affiliates until August 31, 2000. The waiver also extended a grace
period for the debt-worth requirement until November 30, 2000. The Company
received a waiver of the default and has been given a twelve-month grace period.
The Company currently has plans to spend up to $150,000 in capital
expenditures to update and expand its operations on the condition that in so
doing it will not adversely effect loan covenants.
Management believes that its capital resources on hand at August 31,
2000, revenues from sales and bank resources will be sufficient to satisfy its
working capital requirements for the foreseeable future. There can be no
assurance, however, that additional debt or equity financing may not be required
or that, if such financing is required, it will be available on terms favorable
to the Company, if at all. The Company's inability to secure additional
financing or raise additional capital would likely have a material adverse
effect on the Company's operations, financial condition, and its ability to
continue to grow and expand its operations.
Factors Affecting Future Results
The Company's operating results are subject to certain risks that could
adversely affect the Company's operating results and its ability to operate
profitably. The Company's operating results could be adversely affected by
increased competition in the markets in which the Company's products compete,
manufacturing delays and inefficiencies associated with expanding the Company's
manufacturing capacity, adverse weather conditions, increases in labor or raw
materials, changes in economic conditions in its markets, unanticipated expenses
or events and other factors discussed in this report and the Company's other
filings with the Securities and Exchange Commission.
13
<PAGE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Lund Engineering. During its fiscal year ending November 30,
1999, and in the ordinary course of its business, NACO Industries, Inc.
(Company) entered into a series of contracts with a Contractor in
Bountiful, Utah known as WCI, LLC ("WCI"), for the manufacture of
various premanufactured fiberglass materials and parts to be used in
construction. In order to meet its contract requirements, the Company
outsourced production under these contracts to a subcontractor known as
Lund Engineering and Manufacturing, Inc., a Utah corporation ("LUND").
As of November 30, 1999 the Company had timely paid all of the LUND
invoices submitted to it for jobs performed by LUND, and believed that
it had paid for such work in full. However, on December 31, 1999, LUND
forwarded to the Company a demand for approximately $70,000 of
additional amounts which it claimed, based upon invoices dated December
31, 1999, and pertaining to jobs performed and completed earlier in the
year. The majority of LUND's claims appear to be based on overtime it
claims that it was required to work for the Company's jobs, and for
which it claims it was entitled because a Company employee allegedly
agreed that the Company would pay it.
During the spring of 2000, Lund has filed a number of
materialmen's or mechanics liens against the properties where these
materials were supplied. Also, WCI, with whom the Company was
contracting on these projects, withheld substantial payments to the
Company. Accordingly, in an effort to resolve this matter, the Company
has now entered into an Arbitration Agreement, effective May 15, 2000,
with Lund, whereby this dispute has been submitted to arbitration. In
connection with the arbitration, all of the various mechanics' and
materialmen's liens were released; and, in exchange for the deposit
into escrow of $64,478.70 by WCI, the Company and WCI have entered into
a mutual release of claims against each other pertaining to this
project. This matter has now been submitted to arbitration before the
American Arbitration Association, and the Company's legal counsel hopes
to schedule the dates for arbitration in the near future. Management
and its legal council are still of the opinion that the funds in escrow
are properly the funds of the Company, and that the Company should be
entitled to substantially all of such funds; and, the Company in
addition is asserting counterclaims against LUND, but management does
not believe that LUND has the financial capacity to satisfy any
significant judgment. The Company is primarily seeking the release of
the escrowed funds in the arbitration.
Draegers: In October of 1996, NACO Composites, Inc., a wholly
owned subsidiary of the Company, entered into a lease agreement for the
use of a building in Ogden, Utah as a manufacturing facility for the
production of certain fiberglass products. That subsidiary has since
been merged into the Company, and the lease expired on September 30,
1999. In connection with that lease, Ronald and Rita Draeger, the
owners and landlord of the property, have now filed suit against the
Company in the Second District Court of Weber County, State of Utah on
or about April 3, 2000 in the amount of $41,305, or the amount to be
proven at Court, plus interest, costs of Court and a reasonable
attorney's fee. The Company has in turn answered this lawsuit, and
filed a counterclaim against the Draegers on May 4, 2000 for an amount
in excess of $240,000, based upon alleged agreements by Draegers to
reimburse the Company for certain improvements made to the building,
and based upon Draegers' alleged breach of contract for repudiating the
Company's option to purchase the building, and for violation of a
covenant not to compete, and other miscellaneous damages. Although it
may be too early in the litigation to predict the outcome, with
discovery still to take place prior to any trial. Management is hopeful
that this action can be settled by the parties' good faith efforts to
resolve the matter before trial. Management and legal counsel believe
that the Company has a reasonable basis for its defense to this action,
and reasonable grounds for its counterclaim.
Item 2 - Changes in Securities and Use of Proceeds
None
14
<PAGE>
Item 6 - Exhibits and Reports on Form 8-K
Exhibit No. Description
----------- -----------
(a) Exhibits. The following are files as exhibits to this report.
27 Financial Data Schedule
(b) Reports on form 8-K. None
15
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Naco Industries, Inc.
Registrant
By:/s/ VERNE E. BRAY October 12, 2000
-------------------- ----------------
Verne E. Bray Date
CEO (Principal executive officer)
By:/s/ W. MICHAEL HOPKINS October 12, 2000
------------------------- ----------------
W. Michael Hopkins Date
President
By:/s/ JEFFREY J. KIRBY October 12, 2000
----------------------- ----------------
Jeffrey J. Kirby Date
Executive Vice President/CFO
(Principal financial and accounting officer)
16