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FORM 10-K
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SECURITIES AND EXCHANGE COMMISSION
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WASHINGTON, D.C. 20549
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For the fiscal year ended December 31, 1998
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Commission File Number 0-21717
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CASCO INTERNATIONAL, INC.
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(Exact Name of Registrant as specified in its charter)
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Delaware 56-0526145
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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4205 East Dixon Boulevard, Shelby, North Carolina 28150
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(Address of principal executive offices)(Zip Code)
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Registrant's telephone number, including area code (704) 482-9591
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
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Common Stock, $0.01 par value
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(Title of Class)
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting shares held by non-affiliates of the
Registrant as of March 18, 1999 was $1,615,395 (computed by reference to the
average bid and asked prices of such shares on such date).
Number of Common Shares, each with $0.01 par value, of the Registrant
outstanding as of date: March 18, 1999: 1,783,200 Common Shares.
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PART I
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ITEM 1. BUSINESS.
GENERAL
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CASCO INTERNATIONAL, INC., (the "Company") was formed as a North Carolina
corporation in 1950. Pages, Inc., a Delaware Corporation ("Pages"), acquired all
of the issued and outstanding common stock of the Company in February, 1990. In
November, 1996, the Company reincorporated in the State of Delaware by merging
into Clyde A. Short Incorporated, a Delaware corporation which was the surviving
corporation in the merger and which, in conjunction with the merger, changed its
name to CA Short Company. Effective at the close of business on December 31,
1996, Pages distributed all of the Company's common stock $.01 par value
("common stock") to its shareholders. From January 1, 1997 until May 30, 1997
the common stock was traded on the OTC Bulletin Board under the symbol "CASC".
On June 2, 1997, the common stock began trading on The Nasdaq SmallCap market
under the same symbol. The Company's common stock and warrants are traded on The
Nasdaq SmallCap Market under the symbols "CASC" and "CASCW". In 1997, the
Company changed its name from CA Short Company to CASCO INTERNATIONAL, INC., but
the Company does business under the CA Short Company name.
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The Company designs, administers, and fulfills innovative and effective
associate recognition programs. Programs offered by the Company include safety,
service recognition, and a host of other programs that feature merchandise and
jewelry in a full color catalog. The Company is in the business of helping
clients maximize the efforts of their most valuable resource - their people.
The Company partners with clients to determine realistic performance goals
and establish an appropriate budget. Then, the Company and client select a
program that meets the client's unique needs. The Company is, to the best of its
knowledge, the only company in the recognition industry that has no product bias
with regard to the type of items incorporated in the client's program. This
distinctive competitive advantage allows the Company to build custom programs
with flexibility and allows the client to choose items their associates' truly
value. Upon approval, the Company publishes and distributes all materials
(including appealing, full color catalogs and brochures) necessary to execute
the program. As the client's associates become eligible to receive awards, the
Company processes their requests. In most cases, the items are shipped directly
to the associates from the Company's distribution center in Shelby, North
Carolina. The Company then invoices the client as the items are shipped.
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THE BUSINESS
The Company's programs fall into two broad categories; service recognition
and safety incentive and recognition. They include safety, sales incentive,
quality control, production, service recognition, attendance, birthday, and
corporate holiday gift programs. The common objective of all the Company's
programs is to satisfy a client's specific needs. Changes in the premium
incentive industry have permitted the Company to redefine its strategies, focus
on specific product lines, and exploit certain niches within its market. The
Company's adjustments include the installment of a total quality management
program, the development of a strategic marketing group, the implementation of
an aggressive cash management program,
and the development of new core capabilities necessary to promote growth. The
Company believes that with intense marketing and the employment of a skilled,
well-managed field sales organization, the Company will be able to increase the
brand recognition of it's products and increase it's penetration into specific
markets.
MERCHANDISE SELECTION AND BROCHURES
The Company's programs feature brand name merchandise from industry
leading manufacturers such as Sony, RCA, Waterford, Bulova, Minolta, and
Bushnell. The items in a client's program are separated into various price
levels, thus allowing the client to select price levels that fit their budget.
Featured in full color brochures, items are presented by award level.
The Company partners with clients to design and produce brochures that
reflect the client's corporate identity. These brochures are designed and
produced in-house by the Company's creative services department. The Company
also produces a catalog of pre-selected merchandise, arranged in various price
levels, from which clients may build programs.
SERVICE RECOGNITION PROGRAMS
In the past, there was a deeply ingrained corporate standard stating
"longevity-equals-seniority" -- the idea that the longer you work for a company,
the more seniority you earn. For decades, service recognition programs were
designed to reinforce this paradigm.
Today, as companies re-engineer and reorganize they realize that it has
never been more important to recognize their associates for their loyalty and
hard work. The standard has changed to "individual performance-equals-longevity"
- -- the better an associate performs, the more valuable he or she is to their
company. With this in mind, the entire recognition industry is changing, and
different types of programs are required to redefine recognition. As more and
more companies outsource the handling of recognition programs, the Company is
strategically positioning itself as the leader for the complete design,
administration, and fulfillment of innovative and effective recognition
programs. The Company's primary goal as it partners with its clients to develop
their own custom program is to increase "Recognitional Impact(TM)" --- the level
of satisfaction each client experiences with their program. Recognitional
Impact(TM) establishes a performance index that allows the Company to measure
the added value it provides both existing clients, as well as prospective
clients.
SAFETY AWARENESS/INCENTIVE AND RECOGNITION PROGRAMS
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Accidents in the workplace injure thousands of workers each year and cost
billions of dollars in worker's compensation premiums, health care costs, and
lost productivity. The Company designs, implements and administers safety
programs to reduce the direct and indirect costs associated with accidents or
lack of safety awareness. Coupled with worker safety training and work place
safety initiatives, safety incentive and recognition programs have proven to be
an essential contributor to overall safety awareness. By increasing awareness
and recognizing those in the workplace who have safe work habits, the successful
clients can achieve huge returns on their incentive investments. Because each
client has its own unique set of safety concerns, the Company designs each
safety awareness and recognition program to meet the specific needs and goals of
the client. A typical safety program would grant an award for each recipient who
met the client's specific goal. As a consequence of the present regulatory
environment, clients are placing increasing emphasis on safety and the Company
has received a number of client testimonials regarding the efficiency
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of the safety programs it has designed. The Company's market share of this
industry is minimal.
OTHER PROGRAMS
The Company utilizes its reputation in both outstanding merchandise
selection and the timely delivery of such merchandise to design, administer and
fulfill numerous types of customer specific programs for its clients. These
ancillary programs include attendance, holiday, birthday, sales incentive, and
generic points programs that add incremental revenue without diluting the
Company's focus on its core business. In developing close ties with the
Company's clients many opportunities for these types of programs become
apparent. The Company intends to continue to work in these ancillary markets as
long as its client's needs demand its services.
CLIENTS
The Company's client list represents a wide spectrum of performance driven
organizations throughout the United States. The Company's cross section of
industry representation minimizes cyclical downturns traditionally found in
industry specific business models. The client list includes DuPont, Pfizer,
Huntington Bank and Intel.
GROWTH STRATEGY
The Company has divided the country into specific territories. The
territories were defined by existing accounts and target prospects within each
area. Each territory is serviced by a full-time, Company- employed recognition
consultant. Within each territory area the Company has segmented the potential
clients into specific prospect groups based on size and type of program. Each
prospect group will be marketed in the method proven most likely to engage the
client. All recognition consultants receive intense training and are measured on
a number of criteria including sales performance and territory market share
penetration. The Company continues to work markets on a proactive, well planned,
systematic basis. The Company intends to augment internal growth through
value-added acquisitions and strategic alliances designed to increase
penetration in key market areas.
SALES AND MARKETING
In 1997, the Company redefined the way in which it markets its services. It
made a transition from independent sales reps to full-time company associates.
Further, the Company clearly defined and identified target prospects in
strategic markets across the country. In addition to prospecting activities, the
marketing and sales group developed an aggressive account initiative involving
account retention. This change in the Company's philosophy was needed due to a
significant change in its mission: "To have the best trained, most responsive,
performance based sales force in America." The Company realized the existing
sales force would never be able to take the Company to the next level of
performance. In the past 30 months the Company has identified major markets and
replaced 90% of its independent sales staff with employed full-time sales
people. The Company has prepared for any short term ramifications by developing
a fully staffed inside sales group to assist in regulating the change to an
employed field sales group, and will utilize independent field representatives
in special situations.
COMPETITION
The recognition industry includes two completely different markets that
must be sold and managed individually. The service recognition market is
approaching a billion dollar industry with three major competitors: O.C. Tanner,
Jostens, and The Robbins Company which have combined annual sales of $400-$500
million. All three of these competitors are strong companies with large jewelry
manufacturing facilities. The safety recognition industry is estimated to be a
billion-dollar industry. The industry is fragmented and there is no dominant
player in this industry. The Company is not aware of any competitor in the
safety industry possessing the same core competencies as the Company. The
Company competes on the basis of program design, customer service, product
quality, full program administration and flexibility.
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EMPLOYEES
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As of February 18, 1999 the Company employed a total of 126 regular
employees. The number of seasonal employees fluctuated during 1998 from a high
of 80 in the months of November, December and January when the Company generates
approximately forty percent of its revenues and all of its profits to a low of 5
due to the seasonal nature of the Company's business. As a result the Company's
working capital requirements are highest during November and December. None of
the Company's employees are represented by a labor union. The Company considers
its relationship with its employees to be excellent. As of February 18, 1999,
the Company's health care plan covered 93 of its employees.
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ITEM 2. PROPERTIES.
Owned
Location Use Size Leased
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Shelby, North Carolina Warehouse & Office 134,000 sq.ft. Owned
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These facilities are located in appropriately designed buildings which are
kept in good repair. All of the properties owned by the Company are pledged to
various lenders. On March 4, 1998, the Company sold its 167,000 square foot
Kings Mountain warehouse for approximately $425,000.
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ITEM 3. LEGAL PROCEEDINGS.
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The Company is not involved in any material pending legal proceedings,
other than ordinary, routine litigation incidental to its business.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
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ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
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The Company was a wholly-owned subsidiary of Pages, Inc. until Pages, Inc.
distributed all of the shares of Company Common Stock to its stockholders,
effective at the close of business on December 31, 1996. The distribution was
made pursuant to a Securities and Exchange Commission no-action letter stating,
among other things, that the Securities and Exchange Commission will not
recommend enforcement action if the Common Stock is distributed without
registration under the Securities Act of 1933.
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Effective January 14, 1997, the Company's common stock began trading on the
NASD OTC Bulletin Board service under the symbol "CASC". On June 2, 1997, the
common stock began trading on the Nasdaq SmallCap market under the same symbol.
On September 19, 1997, the Company completed a public offering of 780,000 units,
each unit consisting of one share of common stock and two redeemable Class A
Warrants. The units traded under the symbol CASCU from September 19, 1997 until
October 21, 1997. On October 21, 1997 the units separated and the common stock
continued to trade under the symbol CASC and the warrants began trading under
the symbol CASCW. The following table sets forth, for the periods indicated the
high and the low sale prices for shares of the common stock, units and warrants.
Bulletin Board prices represent inter-dealer quotations, without adjustment for
retail markup, markdown or commissions and may not represent actual
transactions.
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Trade Price
Calendar Year Ended December 1998 1997
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High Low High Low
Fourth Quarter
CASC 1.625 1.594 6 7/16 2 5/8
CASCW .406 .406 3 5/8
CASCU N/A N/A 9 8 1/4
Third Quarter
CASC 1.594 1.594 5 5/8 4 5/8
CASCW .188 .188 N/A N/A
CASCU N/A N/A 8 1/4 7 7/8
Second Quarter
CASC 2.50 2.375 4.83 2.99
CASCW .438 .438 N/A N/A
CASCU N/A N/A N/A N/A
First Quarter
CASC 4.063 4.063 4.14 3.22
CASCW .688 .688 N/A N/A
CASCU N/A N/A N/A N/A
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As of March 18, 1999, the Company had approximately 551 holders of record
of its Common Stock.
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The Company has not declared or paid any cash dividends on the Common Stock
since it was acquired by Pages, Inc. in 1990. The Company anticipates that for
the foreseeable future it will retain earnings in order to finance the expansion
and development of its business, and no cash dividends will be paid on its
Common Stock. The Loan Agreement between the Company and Branch Banking & Trust
(the "Loan Agreement") does not allow the Company to pay cash dividends which
total in excess of $100,000 on its Common Stock and only then when the Company
is not in default under the Loan Agreement.
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ITEM 6. SELECTED FINANCIAL DATA.
(In thousands, except per share data)
Year Year Year Year Year
Ended Ended Ended Ended Ended
December December December December December
31, 31, 31, 31, 31,
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1998 1997 1996 1995 1994
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STATEMENT OF OPERATIONS DATA:
Revenues $21,718 $19,333 $21,959 $22,620 $25,158
Cost and expenses 22,102 20,007 22,542 23,296 25,635
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Loss before income taxes
and cumulative
effect of change in (384) (674) (583) (676) (477)
accounting principle
Benefit for income taxes 146 256 195 249 193
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Loss before extraordinary
gain and cumulative effect
of change in accounting (238) (418) (388) (427) (284)
principle
Cumulative effect of
change in accounting ----- ----- 597 ----- -----
principle
Extraordinary gain on 930 ----- ----- ----- -----
retirement of debt
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Net income (loss) $ 692 $(418) $ 209 $ (427) $ (284)
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PRO FORMA PER SHARE DATA:
Income (loss) before
cumulative effect $ (0.13) (0.34) $ (0.39) (0.43) (0.28)
of change in
accounting principle
Cumulative effect of change
in accounting principle ----- ----- 0.59 ----- -----
Extraordinary gain on 0.52 ----- ----- ----- -----
retirement of debt ------- ------- ------- ------- --------
Income (loss) per common $ 0.39 $(0.34) $ 0.20 $(0.43) $ (0.28)
share ======= ======= ======= ======= ========
Weighted average common and
common equivalent 1,783,200 1,225,447 1,003,431 1,003,431 1,003,431
shares ======= ======= ======= ======= ========
BALANCE SHEET
DATA:
Working capital (deficiency) $ 4,216 $7,202 $5,025 $3,774 $(1,790)
Total assets 18,533 16,148 18,249 19,512 23,584
Long-term debt 2,413 4,900 4,125 4,125 4,125
Stockholders' equity 5,748 5,188 3,328 3,119 3,547
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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The following discussion should be read in conjunction with the Selected
Financial Data and the Financial Statements and Notes contained elsewhere
herein. The Company's results of operations have been, and in certain cases are
expected to continue to be, affected by certain general factors.
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CAUTIONARY STATEMENT
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Statements included in this Management's Discussion and Analysis of
Financial Condition and Results of Operations, in other sections of this Annual
Report, and in future filings by the Company with the Securities and Exchange
Commission, in the Company's press releases and in oral statements made with the
approval of an authorized executive officer which are not historical or current
facts are "forward-looking statements" made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 and are
subject to certain risks and uncertainties that could cause actual results to
differ materially from historical results and those presently anticipated or
projected. Readers are cautioned not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. The following
important factors, among others, in some cases have affected and in the future
could affect the Company's actual results and could cause the Company's actual
financial performance to differ materially from that expressed in any
forward-looking statement: (i) the competitive conditions that currently exist
in the Company's industry, which could adversely impact sales and erode gross
margins; (ii) many of the Company's competitors are significantly larger and
better capitalized than the Company; (iii) the Company's loan agreement contains
a number of significant covenants that restrict the ability of the Company to
engage in certain activities, including the payment of dividends and requires
that the Company maintain specified financial ratios, including a minimum
capital base, and minimum pretax profits from operations; and (iv) the inability
to carry out marketing and sales plans would have a materially adverse impact on
the Company's profitability. The foregoing list should not be construed as
exhaustive and the Company disclaims any obligations subsequently to revise any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
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RESULTS OF OPERATIONS
The table below sets forth certain financial data expressed as a
percentage of revenues (Percentage may not total 100% due to rounding):
Percentage of Revenues
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Twelve Twelve Twelve
Months Months Months
Ended Ended Ended
December December December
31, 31, 31,
1998 1997 1996
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Total revenue 100.0% 100.0% 100.0%
Cost of goods sold 58.6% 59.1% 61.6%
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Gross profit 41.4% 40.9% 38.4%
Selling, general, and 38.6% 40.1% 36.7%
administrative
Interest 1.6% 2.4% 0.6%
Depreciation and 2.4% 1.9% 1.5%
amortization
Loss on Sale of Building 0.7% --- ---
Management Fee --- --- 2.3%
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Loss from continuing operations before
income taxes (1.7%) (3.5%) (2.7%)
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YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997.
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Revenues for the year ended December 31, 1998 approximated $21.7 million,
compared to $19.3 million in revenues for the year ended December 31, 1997, an
increase of 12.4% or approximately $2.4 million. The increase is attributable to
strong retention of existing customers coupled with new customers in the new
markets with employed recognition consultants and the acquisitions made by the
Company in 1998.
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Cost of goods sold for the year ended December 31, 1998 approximated $12.7
million, compared to approximately $11.4 million of cost of goods sold for the
year ended December 31, 1997, an increase of 11.4% or approximately $1.3
million. The increase in cost of goods sold was attributable to the increase in
revenues. As a percentage of revenues, cost of goods sold decreased to 58.6% in
1998 from 59.1% in 1997. The 0.50% decrease in cost of goods sold was
principally attributable to a change in product mix.
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Selling, general, and administrative expense for the year ended December
31, 1998 approximated $8.4 million for the year ended December 31, 1998,
compared to approximately $7.8 million for the year ended December 31, 1997, an
increase of 7.9% or approximately $600,000. The increase in selling, general and
administrative expenses was due to increased sales and the expansion of the
employee based sales force. As a percentage of revenues, selling, general and
administrative decreased to 38.6% in 1998 from 40.1% in 1997. The 1.5% decrease
as a percentage of revenues was principally attributable to benefits obtained
from aggressive cost containment policies.
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Interest expense was approximately $336,000 for the year ended December 31,
1998, compared to $469,000 for the year ended December 31, 1997, a decrease of
28% or approximately $133,000. The average outstanding debt by month in 1998
approximated $3.4 million compared to $1.1 million for 1997. The average
outstanding balance on the subordinated debenture by month in 1998 was $0
compared to $5 million in 1997. Additionally, the average interest rate for 1998
approximated 8.91% compared to approximately 9.42% for 1997 on the debt. The
interest rate on the subordinated debenture for 1998 and 1997 approximated 7%.
The decrease in interest was mainly attributable to the interest paid in 1997 on
a subordinated debenture given to Pages, Inc. when the Company was spun off.
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Depreciation and amortization expense was approximately $520,000 for the
year ended December 31, 1998, compared to $359,000 for the year ended December
31, 1997, an increase of 44.9% or approximately $161,000. The increase in
depreciation and amortization expense was principally attributable to the
depreciation of newly acquired assets in 1997 and 1998. The increase was also
attributable to the amortization of the goodwill on the acquisitions made by the
Company in 1998.
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Income tax benefit was $145,500 for the year ended December 31, 1998,
compared to $256,000 for the year ended December 31, 1997. The provisions for
income tax benefit were calculated through the use of estimated income tax rates
based upon the loss before taxes.
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YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996.
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Revenues for the year ended December 31, 1997 approximated $19.3 million,
compared to $22.0 million in revenues for the year ended December 31, 1996, a
decrease of 12% or approximately $2.7 million. The decline in revenue was due to
disappointing year-end holiday sales and a decrease in volume on certain
existing customers coupled with delayed redemption on new accounts, as well as
the Company repositioning itself in more profitable business segments.
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Cost of goods sold for the year ended December 31, 1997 approximated $11.4
million, compared to approximately $13.5 million of cost of goods sold for the
year ended December 31, 1996, a decrease of 15.6% or approximately $2.1 million.
The decrease in cost of goods sold was attributable to the decrease in revenues.
As a percentage of revenues, cost of goods sold decreased to 59.1% in 1997 from
61.6% in 1996. The 2.51% decrease in cost of goods sold was principally
attributable to a change in product mix.
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Selling, general, and administrative expense for the year ended December
31, 1997 approximated $7.8 million for the year ended December 31, 1998,
compared to approximately $8.1 million for the year ended December 31, 1996, a
decrease of 3.7% or approximately $300,000. The decrease in selling, general and
administrative expenses was due to decreased sales and continued cost reduction
efforts implemented by the Company.
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Interest expense was approximately $469,000 for the year ended December 31,
1997, compared to $129,000 for the year ended December 31, 1996, an increase of
264% or approximately $340,000. The average outstanding debt on the credit
facility by month in 1997 approximated $1.1 million compared to $1.9 million for
1996. The average outstanding balance on the subordinated debenture by month in
1997 approximated $5 million compared to $0 in 1996. Additionally, the average
interest rate for 1997 approximated 9.42% compared to approximately 9.15% for
1996 on the credit facility. The interest rate on the subordinated debenture for
1997 approximated 7% compared to 0% in 1996. The increase in interest was
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mainly attributable to the interest paid on a subordinated debenture given to
Pages, Inc. when the Company was spun off.
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Depreciation and amortization expense was approximately $359,000 for the
year ended December 31, 1997, compared to $338,200 for the year ended December
31, 1996, an increase of 6.2% or approximately $21,000. The increase in
depreciation and amortization expense was principally attributable to the
depreciation of newly acquired assets in 1996.
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Income tax benefit was $256,000 for the year ended December 31, 1997,
compared to $195,100 for the year ended December 31, 1996. The provisions for
income tax benefit were calculated through the use of estimated income tax rates
based upon the loss before taxes.
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LIQUIDITY AND CAPITAL RESOURCES
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The Company's primary sources of liquidity have been cash generated from
operating activities and amounts available under its existing credit facility
and proceeds from the public offering of units consisting of common stock and
warrants during the third quarter of 1997. The Company's primary uses of funds
consist of financing inventory, receivables and for acquisitions.
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Net working capital decreased to $4,206,000 as of December 31, 1998 from
net working capital of $7,202,000 as of December 31, 1997. The decrease was
primarily attributed to increased borrowings in 1998 in order to fund the
acquisitions made by the Company.
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The Company has adopted a growth strategy which will be accomplished
through increased efforts of the Company's existing highly trained sales force
in order to expand current market share and enter into new markets.
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The Company anticipates that operating cash flows during the next twelve
months, coupled with its ability to borrow under the credit facility and the
proceeds from the sale of the Kings Mountain facility of $425,000 and the first
deed of trust on the Shelby facility of $2,362,500, will cover operating
expenditures and meet the short-term debt obligations. The Company's credit
facility is due and payable in full on July 30, 1999. Although the lender has
not issued a commitment to do so, the Company's relationship with it's lender is
favorable and the Company anticipates that the credit facility will be renewed
when due.
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Current assets increased approximately $1,374,000 due mostly from increases
in accounts receivable ($497,000), inventory ($595,000), and prepaid expenses
($123,000) offset by increases in cash of ($34,000). The increase in accounts
receivable is due to the increase in revenues. The increase in inventory is due
to year end inventory build up. The increase in cash is due to the cash
generated from the continuing operations of the acquisitions. Current
liabilities increased approximately $4,000,000 due mostly from increases in
short-term debt obligations ($3,900,000) and accounts payable ($173,000) offset
by a decrease in short-term subordinated debenture ($100,000). The increase in
short-term debt obligations was due to the funding of the Company's acquisitions
from the line of credit and the increase in inventory. The increase in accounts
payable was due to the increase in the inventory.
Cash increased approximately $34,000. Net use of funds from operating
activities was approximately $697,000. Net cash used in investing activities was
approximately $310,000 due to payments for purchases of the information systems.
Net cash provided by financing activities was approximately $1,041,000 which was
due to proceeds obtained from the line of credit.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
On July 30, 1998 the Company entered into an agreement with Awards & Gifts,
Inc. and Richard W. Terlau, Jr., providing for the purchase of substantially all
assets and certain liabilities of Awards & Gifts by the Company. Under the terms
of the Asset Purchase Agreement, the assets included Awards & Gifts customer
list, machinery and equipment, inventories, Awards & Gifts intellectual property
assets, prepaid expenses, and a real property lease. The purchase price for the
assets was $1.5 million with certain adjustments made for pro-rated items, with
$1.3 million paid in cash and a $200,000 promissory note. The note is secured by
an Irrevocable Standby Letter of Credit issued by Branch Banking & Trust
Company. The purchase price under the Asset Purchase Agreement was determined by
arm's length negotiations between the parties based on the market value of the
assets purchased and sold. The goodwill acquired in this transaction will be
amortized over fifteen years using the straight-line method. The acquisition was
financed with proceeds from the Company's revolving credit facility with Branch
Banking & Trust Company.
On October 1, 1998 the Company entered into an agreement with American
Awards & Gifts, Inc. and Frank G. and Judith J. McGinnis, providing for the
purchase of substantially all assets and certain liabilities of American Awards
& Gifts, Inc. by the Company. Under the terms of the Asset Purchase Agreement,
the assets included American Awards & Gifts customer list, machinery and
equipment, tools and dies, inventories, intellectual property assets, and
general intangibles, the liabilities included the assumption of certain accounts
payable. The purchase price for the assets was $255,177 with $100,000 in cash
and a $155,177 promissory note. The purchase price under the Asset Purchase
Agreement was determined by arm's length negotiations between the parties based
on the market value of the assets purchased and sold. The goodwill acquired in
this transaction will be amortized over fifteen years using the straight-line
method.
Effective at the close of business on December 31, 1996, a tax free spin
off of the Company's common stock from its parent, Pages, was completed (the
"Distribution"). In the Distribution, for every ten shares of Pages common stock
outstanding on the record date, one and one-half shares of the Company's common
stock was distributed to Pages' stockholders. The Company entered into a $5
million, 7% subordinated debenture with Pages simultaneously with the
Distribution in satisfaction of amounts due to Pages by the Company. The excess
of the amount due to Pages as of the Distribution over the $5 million
subordinated debenture was recorded as paid in capital. Principal payments will
be $100,000 per year for the first four years, and a final payment due at the
end of the fifth year for the remaining principal balance. Interest is at 7% per
annum, payable quarterly. Based on the consummation of the Distribution
effective January 1, 1997, the amounts due to Pages previously recorded as
current have been reclassified to long term, thus significantly increasing the
Company's net working capital, as described earlier in this section. The Company
discharged the debenture in full in January 1998 for $3.5 million. The Company
realized an extraordinary gain on retirement of debt of $1.5 million on this
transaction.
Management believes that present resources will meet anticipated
requirements for operations of the business.
The Company does not anticipate any material expenditures for property and
equipment during the next twelve months, out of the ordinary course of business.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
The Company is aware of no trends or demands, commitments or uncertainties
that will result in, or that management believes are reasonably likely to result
in, the Company's liquidity increasing or decreasing in any material way. The
Company is aware of no legal or other contingencies, the effect of which are
believed by management to be reasonably likely to have a material adverse effect
on the Company's financial statements.
- -------------------------------------------------------------------
A potential problem exists for all companies that rely on computers as the
year 2000 approaches. The "Year 2000" problem is the result of the past practice
in the computer industry of using two digits rather than four to identify the
applicable year. This practice could result in incorrect results when the
company's computers or those of the third parties with which it deals perform
arithmetic operations, comparisons or data field sorting involving years later
than 1999.
The Company has conducted a preliminary assessment of its computer systems
to identify items that could be impacted by the Year 2000 issue and formulated
the following course of action. The Company will begin reviewing its
non-information technology systems in mid-1999. Although the Company does not
anticipate that non-information technology systems will pose a major problem, as
its reliance on such systems is relatively small; non-information technology
systems are more difficult to evaluate and repair than information technology
systems and may require replacement. The Company has already begun its review of
its information technology systems and will make necessary software upgrades in
1999. In addition, the Company has been separately evaluating its accounting
software and is currently in the process of implementing a new system with
implementation anticipated to be complete during the second quarter of 1999.
The most reasonably likely worst case scenario the Company faces in
regards to Year 2000 problems is a lack of compliance on the part of the third
parties with which it deals. Though not highly dependent on any particular
vendor, the failure on the part of its vendors could result in the Company not
being able to get those supplies it needs to administer its business. The
Company is prepared to find alternative vendors should this problem result and
is considering building up an inventory of any necessary supplies to prevent any
shortage if such an eventuality were to occur.
The Company will utilize both internal and external resources to reprogram
or replace and test all of its software. The Company preliminarily estimates
that it will cost $5,000 to evaluate, reprogram and replace equipment and
software to ensure Year 2000 compliance, of which all $5,000 will likely be
spent on outside consultants. In addition, as discussed above, the Company is
going to spend $40,000 to replace its existing accounting system. Such costs are
being financed through an existing line of credit and will not have a material
adverse effect on the Company's financial condition or results of operations.
The Company is addressing its Year 2000 compliance needs by implementing a
new Enterprise Resource Planning (ERP) application on a new IBM AS/400 platform.
Since its custom written software will be modified to work with its new ERP
system, the Company will design and test its systems to be Year 2000 compliant
during 1999.
SEASONALITY
- -------------------------------------------------------------------
The Company's business is highly seasonal, with approximately 40% of its
revenues and most of its profits recorded in the months of November, December,
and January. As a result, the Company's working capital requirements are highest
during November and December when the combination of receivables and inventory
are at peak levels. The Company typically experiences losses in its second and
third quarters.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
As the results from the Company's growth strategy develop, the effects of
seasonality should be diminished. The business segments on which the Company has
chosen to focus offer steadier revenue flows, as well as more consistent
requirements for working capital.
- -------------------------------------------------------------------
INFLATION
- -------------------------------------------------------------------
Although the Company cannot determine the precise effects of inflation,
inflation has an influence on the cost of the Company's products and services,
supplies, salaries, and benefits. The Company attempts to minimize or offset the
effects of inflation through increased sales volumes and sales prices, improved
productivity, alternative sourcing of products and supplies, and reduction of
other costs. The Company generally has been able to offset the impact of price
increases from suppliers by increases in the selling prices of the Company's
products and services.
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- -------------------------------------------------------------------
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
The Company is exposed to the impact of interest rate changes on its debt
obligations. The Company is not exposed to foreign currency exchange rate risk
or investment risk.
Interest Rate Risk. The Company's exposure to market rate risk for changes in
interest rates relates primarily to the Company's short-term debt obligation
line of credit. The interest rate on this line of credit is prime plus 1/2
percent. The prime interest rate at December 31, 1998 was 7 3/4 percent. The
Company's line of credit is renewable and negotiable yearly. The fluctuation of
the interest rate may increase interest expense if the prime interest rate
increases before the line of credit could be renegotiated to a fixed rate loan.
- -------------------------------------------------------------------
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- -------------------------------------------------------------------
See Index to Financial Statements and Financial Statement
schedule.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
None.
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PART III
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
The following table sets forth certain information concerning the directors
and executive officers of the Company:
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
Director or
Executive
Name Age Position Officer Since
S. Robert Davis(1) 60 Chairman of the Board 1990 (2)
Charles R. Davis(1) 37 President and Director 1990 (2)
Robert V. Boylan(3) 35 Chief Operating Officer 1997
and Director
Jeffrey A. Ross 31 Chief Financial Officer 1996
and Secretary
David J. Richards 46 Director 1997
Michael P. Beauchamp 52 Director 1997
- -------------------------------------------------------------------
- -------------------------------------------------------------------
(1) S. Robert Davis is the father of Charles R. Davis.
(2) Including the period prior to the Company's domicile change merger in 1996.
(3) Mr. Boylan resigned his position as Chief Operating Officer and Director
effective January 28, 1999.
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- -------------------------------------------------------------------
- -------------------------------------------------------------------
Executive officers are elected by the Board of Directors and serve until their
successors are duly elected and qualify, subject to earlier removal by the Board
of Directors. Directors are elected at the annual meeting of shareholders to
serve for one year and until their respective successors are duly elected and
qualify, or until their earlier resignation, removal from office, or death. The
remaining directors may fill any vacancy in the Board of Directors for an
unexpired term.
BUSINESS EXPERIENCE OF DIRECTORS AND EXECUTIVE OFFICERS
- -------------------------------------------------------------------
S. ROBERT DAVIS is the Chairman of the Board and President of Pages, Inc.,
a Company with a class of securities registered pursuant to Section 12 of the
Securities Exchange Act of 1934 ("Pages"). Prior to his election to the Board of
Directors of Pages, he served as Assistant to the President of Pages from
January, 1988, to March, 1990, on a part-time basis. Additionally, during the
past five years Mr. Davis has operated several private businesses involving the
developing, sale, and/or leasing of real estate.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
CHARLES R. DAVIS was elected President of the Company in September, 1992.
Additionally, during the past five years Mr. Davis has operated several private
businesses involving the developing, sale and/or leasing of real estate but
devotes substantially all of his business time to the Company.
- -------------------------------------------------------------------
ROBERT V. BOYLAN joined the Company in August, 1996, as Executive Vice
President of Sales, and was promoted to Chief Operating Officer in March of 1997
and was elected to the board of directors in May, 1997. Mr. Boylan resigned his
position with the Company effective January 1999. Prior to joining the Company,
Mr. Boylan served in various sales and marketing capacities with Certainteed
Corporation, a diversified building products manufacturer. Certainteed is not a
parent, subsidiary, or other affiliate of the Company. Mr. Boylan has also
served as a contract consultant for the American Management Association, as well
as Beauvestco Consulting, specializing in sales development and sales
management. Mr. Boylan received his MBA from Wake Forest University.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
JEFFREY A. ROSS is a certified public accountant. He joined the Company as
its controller in June, 1993. Mr. Ross was employed as an accountant by Hausser
+ Taylor, LLP a large public accounting and consulting firm from September,
1989, until June, 1993.
- -------------------------------------------------------------------
DAVID J. RICHARDS has been the President and a director of NetMed, Inc. for
over five years. NetMed is not a parent, subsidiary or other affiliate of the
Company. NetMed is a company with a class of securities registered pursuant to
Section 12 of the Securities Exchange Act of 1934.
- -------------------------------------------------------------------
MICHAEL P. BEAUCHAMP has been the President of Beauvestco, a management
consulting firm, since 1989. Beauvestco is not a parent, subsidiary, or other
affiliate of the Company.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
SECTION 16 (a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
- -------------------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires the Company's officers and directors, and persons who
own more than ten percent of a registered class of the Company's equity
securities, to file reports of ownership and changes in ownership of equity
securities of the Company with the Securities and Exchange Commission ("SEC").
Officers, directors, and greater than ten percent shareholders are required by
SEC regulations to furnish the Company with copies of all Section 16 (a) forms
they file.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
Based solely upon a review of such forms furnished to the Company pursuant
to Rule16a-3 under the Exchange Act, the Company believes that all such forms
required to be filed pursuant to Section 16 (a) of the Exchange Act were timely
filed, as necessary, by the officers, directors and security holders required to
file the same.
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- -------------------------------------------------------------------
- -------------------------------------------------------------------
ITEM 11. EXECUTIVE COMPENSATION.
DIRECTOR COMPENSATION
- -------------------------------------------------------------------
Each director who is not an officer of the Company receives a fee of $500
for attendance at each Board meeting, a fee of $250 for attendance at each
telephonic Board meeting, and a fee of $250 for attendance at each meeting of a
Board committee of which he is a member. Directors who are also officers of the
Company receive no additional compensation for their services as directors. The
Company has adopted a Non-Employee Director Stock Option Plan, which provides
for the grant, at the discretion of the Company's Board of Directors, of options
to purchase up to 90,000 shares of Company common stock upon such terms as are
determined by the Board in its discretion. In June, 1997, options to purchase
10,800 shares of common stock at a purchase price of $4.17 per share were
granted under the Director Option Plan.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
In January 1998 and September 1998 options to purchase 10,000 and 5,000
shares of common stock, respectively at a purchase price of $2.8125 and $2.000,
respectively were granted under the Non-Employee Director Stock Option Plan.
EXECUTIVE COMPENSATION
- -------------------------------------------------------------------
The following table shows, for the fiscal years ended December 31, 1998;
1997; and 1996 the cash compensation paid by the Company, as well as certain
other compensation paid for those years to the Company's President and C.E.O.
and to the Chief Operating Officer. No other executive officers had total salary
and bonus that exceeded $100,000 during the years ended 1998, 1997 and 1996.
None of the Company's executive officers have employment agreements with the
Company.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
Summary Compensation Table
- -------------------------------------------------------------------
Annual Compensation Long-Term Compensation
------------------------ ----------------------
Name and Other Annual Number of
Principal Position Year Salary Bonus Compensation Options Awarded(1)
- ------------------ ---- ------ ----- ------------ ------------------
Charles R. Davis 1998 $178,325 $0 $0 80,000
President and 1997 $155,000 $25,000 $0 37,800(3)
Chief Executive 1996 $132,315 $0 $134,040(2) 0
Officer
Robert V. Boylan 1998 $109,000 $0 $0 20,000
Chief Operating 1997 $107,000 $1,000 $0 12,500
Officer
- -------------------------------------------------------------------
- -------------------------------------------------------------------
(1) Stock options previously granted to the named Executive
Officers, by their terms, automatically adjust to reflect
certain changes in the outstanding Common Shares of the
Company, including stock dividends.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
(2) Reflects the difference between the fair market value of the
Common Shares received and the stock option exercise price on the date of
exercise.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
(3) On July 17, 1997, the Company agreed to grant to Mr. Davis
performance options to purchase 200,000 shares of Company
common stock, 50,000 of which will be granted if the Company
has pre-tax earnings of at least $1 million in any fiscal
year, 75,000 of which will be granted if the Company has
pre-tax earnings of at least $1.5 million in any fiscal year,
and 75,000 of which will be granted if the Company has
pre-tax earnings of at least $2 million in any fiscal year,
in each case as long as Mr. Davis was employed by the Company
at the end of the applicable fiscal year. The performance
options are exercisable at the market price of the common
stock at the date of grant, which will be the date the
Company files its Form 10-K with its audited financial
statements showing that the required earnings plateau is
satisfied.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
Stock Option Grants in Last Fiscal Year
- --------------------------------------------------------------------------
Individual Grants
-------------------------------------
Potential Realized
Number of Percent of Total at Assumed Annual Rate of Stock
Options Options Granted Exercise or Price Appreciation for Option
Granted to Employees Base Price Expiration Term(1)
Name in 1998 in 1998 per share Date 5% 10%
- ---- ------- ------- ---------- ---- --- ---
Charles R. 50,000(2) 26.5% $2.8750 01/20/03 39,715 87,760
Davis
30,000(3) 15.9% 2.0000 09/02/03 16,576 36,631
Robert V. 5,000(2) 2.6% 2.8750 01/20/03 3,972 8,776
Boylan
10,000(2) 5.3% 2.8125 03/03/03 7,770 17,171
5,000(3) 2.6% 2.0000 09/02/03 2,763 6,105
- -------------------------------------------------------------------
- -------------------------------------------------------------------
(1) These assumed appreciation rates are not derived from the historical or
projected prices of the Company's Common Stock or results of operations or
financial condition and they should not be viewed as a prediction of
possible prices of value for the Company's Common Stock in the future.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
(2) The stock options were granted under the Company's 1997 Incentive Stock
Option Plan, and are exercisable commencing July 20, 1998, September 3,
1998 and March 2, 1999.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
(3) The stock options were granted under the Company's 1997
Incentive Stock Option Plan, and are exercisable commencing March 2, 1999
and April 10, 1999.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
Aggregated Options/SAR Exercises with Last Fiscal Year
And Fiscal Year End Options/SAR Values
Number of Shares Value of Unexercised
Shares Underlying Unexercised In-the-Money
Acquired Value Options/SAR's at FY End Options/SAR's at FY End
Name or Exercised Realize Exercisable Unexercisable Exercisable Unexercisable
- ---- ------------ ------- ----------- ------------- ----------- -------------
Charles R. None N/A 117,800 0 N/A N/A
Davis
Robert V. None N/A 33,500 0 N/A N/A
Boylan
- -------------------------------------------------------------------
- -------------------------------------------------------------------
No options at year end were in the money options.
1996, 1997 AND 1998 INCENTIVE STOCK OPTION PLANS
- -------------------------------------------------------------------
The Company has adopted a 1996 Incentive Stock Option Plan and a 1997 and
1998 Employee Stock Option Plan (the "Incentive Plans") which provide for the
grant, at the discretion of the Board of Directors, of options to purchase up to
85,000 and 150,000 and 100,000 shares, respectively, of Common Stock to key
employees of the Company. It is intended that options granted under the
Incentive Plans qualify as incentive stock options under Section 422 of the
Internal Revenue Code of 1986, as amended. The selection of participants,
allotment of shares, determination of exercise price and other considerations
relating to the grant of options under the Incentive Plans is determined by the
Board of Directors, at its discretion. Options granted under the Incentive Plans
are exercisable for a period of up to ten years and five years, respectively,
after the date of grant at an exercise price which is not less than the fair
market value of the shares on the date of grant, except that the term of an
incentive stock option granted under the Incentive Plans to a shareholder owning
more than 10% of the outstanding shares may not exceed five years and its
exercise price may not be less than 110% of the fair market value of the shares
on the date of grant. In January, 1997, the Company granted options under the
1996 Incentive Plan to purchase 29,500 shares of Common Stock at a purchase
price of $3.7037 per share, on two different occasions in March, 1997, the
Company granted options under the 1997 Employee Plan to purchase 40,000 shares
of Common Stock at a purchase price of $3.50 per share and 5,000 shares of
Common Stock at a purchase price of $3.7037 per share. In December, 1997, the
Company granted options under the Incentive Plan to purchase 13,000 shares of
Common Stock at a purchase price of $3.0625 per share. On four different
occasions in 1998 the Company granted options under the 1997 Incentive Stock
Option Plan. In January 1998, the Company granted 70,000 shares of Common Stock
at a purchase price of $2.875 per share. On March 3, 1998, the Company granted
40,000 shares of Common Stock at a purchase price of $2.8125 per share. On March
10, 1998, the Company granted 3,000 shares of Common Stock at a purchase price
of $3.00 per share. On two different occasions in 1998 the Company granted
options under the 1998 Incentive Stock Option Plan. In September, the Company
granted 65,000 shares of Common Stock at a purchase price of $2.00 per share. In
October, the Company granted 5,000 shares of Common Stock at a purchase price of
$1.00 per share. Options currently outstanding under the 1996 Incentive Plan are
not exercisable until the expiration of one year after the date of grant.
Options currently outstanding under the 1997 Incentive Plan are exercisable
based on the following schedule.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
Cumulative Percentage of Aggregate
Number of Shares of Stock Covered
Exercise Period by an Option Which May be Exercised
Beginning on the one year
anniversary date from date of grant 33%*
Beginning on the second
anniversary date from date of grant 33%*
Beginning on the third
anniversary date from date of grant 33%*
- -------------------------------------------------------------------
- -------------------------------------------------------------------
*less, in the case of each exercise period, the number of Shares, if any,
previously purchased under the Option.
- -------------------------------------------------------------------
Options currently outstanding under the 1998 Incentive Plan
are not exercisable until the expiration of six months after
the date of grant.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
COMMITTEES OF THE BOARD OF DIRECTORS
- -------------------------------------------------------------------
In May 1997 the Company formed a compensation committee. The Compensation
Committee consisted of S. Robert Davis, David J. Richards, and Michael P.
Beauchamp during the last fiscal year. Neither Mr. Davis, Mr. Richards or Mr.
Beauchamp serves as an employee of the Company.
- -------------------------------------------------------------------
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Under the Rules of the Securities and Exchange Commission, the Company is
required to provide certain information concerning compensation provided to the
Company's Chief Executive Officer and its executive officers. The disclosure
requirements for the executive officers include the use of tables in a report of
the committee responsible for compensation decisions for the named executive
officers, explaining the rationale and considerations that lead to those
compensation decisions. Therefore, the Executive Compensation Committee of the
Board of Directors has prepared the following report for inclusion in this Proxy
Statement.
The Compensation Committee has designed its executive compensation policies
to provide incentives to its executives to focus on both current and long-term
Company goals, with an overriding emphasis on the ultimate objective of
enhancing stockholder value. The Compensation Committee has followed an
executive compensation program, comprised of cash and equity-based incentives,
which recognizes individual achievement and encourages executive loyalty and
initiative. The Compensation Committee considers equity ownership to be an
important factor in providing executives with a closer orientation to the
Company and its shareholders. Accordingly, the Compensation Committee encourages
equity ownership by its executives through the grant of options to purchase
Common Stock.
The Company believes that providing attractive compensation opportunities
is necessary to assist the Company in attracting and retaining competent and
experienced executives. Base salaries for the Company's executives have
historically been established on a case-by-case basis by the Board, based upon
current market practices and the executive's level of responsibility, prior
experience, breadth of knowledge, and salary requirements. The base salaries of
executive officers have historically been reviewed annually by the Board.
Adjustments to such base salaries have been made considering: (a) historical
compensation levels; (b) the overall competitive environment for executives; and
(c) the level of compensation necessary to attract and retain executive talent.
Stock options have historically been awarded upon hiring, promotion, or based
upon merit considerations. The Compensation Committee, formed in 1997, has
assumed the Board's functions with respect to the matters described above. As
the value of a stock option is directly related to the market price of the
Company's Common Stock, the Compensation Committee believes the grant of stock
options to executives encourages executives to take a view toward the long-term
performance of the Company. Other benefits offered to executives are generally
the same as those offered to the Company's other employees.
The Compensation Committee utilizes the same policies and consideration
enumerated above with respect to compensation decisions regarding the President,
Charles R. Davis and the Chief Operating Officer, Robert V. Boylan. Mr. Davis'
and Mr. Boylan's 1997 base salaries were determined primarily by reference to
historical compensation, scope of responsibility, and the Company's desire to
retain their services. The Compensation Committee believes its compensation
policies with respect to the Company's executive officers promote the interests
of the Company and its shareholders through current motivation of the executive
officers coupled with an emphasis on the Company's long-term success.
Compensation Committee: S. Robert Davis
David J. Richards
Michael P. Beauchamp
- -------------------------------------------------------------------
Stock Price Performance Graph
- -------------------------------------------------------------------
The following graph represents a comparison of the cumulative total
shareholder return on the Common Stock, assuming dividend reinvestment, with The
NASDAQ Composite Index and The NASDAQ Industrial Index. This graph assumes that
$100 was invested on January 15, 1997, the first day of trading after the
effective date of the spin-off of the Company from Pages, Inc. The Company paid
and 8 percent stock dividend on August 1, 1997, which was included in the 1997
total shareholder return. The stock price performance shown below is not
necessarily indicative of future performance.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
1/15/97 3/31/97 6/30/97 9/30/97 12/31/97 3/31/98 6/30/98
CASCO 100 27.000 149.000 172.000 90.000 133.000 80.000
Nasdaq Composite 100 91.604 108.096 126.387 117.691 137.631 142.054
Nasdaq Industrials 100 88.986 103.409 120.192 106.731 119.056 116.608
9/30/98 12/31/98
CASCO 52.000 52.000
Nasdaq Composite 126.987 164.393
Nasdaq Industrials 90.210 113.986
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
- -------------------------------------------------------------------
MANAGEMENT.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
The following table sets forth, to the best of the Company's knowledge,
certain information with respect to the beneficial ownership of shares of the
Company's common stock owned beneficially by (i) each person who beneficially
owns more than 5% of the outstanding Common Stock, (ii) each director of the
Company, (iii) the President and Chief Operating Officer of the Company (the
only executive officers of the Company whose cash and non-cash compensation for
services rendered to the Company for the year ended December 31, 1998, exceeded
$100,000) and (iv) all directors and executive officers of the Company as a
group: -------------------------------------------------------------------
Amount and Nature of Percent of
Name and Address Beneficial Class (2)
- ---------------- ----------- ---------
Ownership (1)
-------------
S. Robert Davis 270,354 (3) 13.4%
801 94th Avenue North
St. Petersburg, Florida 33702
Charles R. Davis 231,316 (4) 11.5%
4205 East Dixon Blvd.
Shelby, North Carolina 28150
Robert V. Boylan 39,036 2%
4205 East Dixon Blvd.
Shelby, North Carolina 28150
All directors and 646,113 (5) 32%
executive officers as
a group (6 persons)
- -------------------------------------------------------------------
- -------------------------------------------------------------------
(1) Represents sole voting and investment power unless otherwise
indicated.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
(2) Based on 1,783,200 shares of Company common stock outstanding as of
December 31, 1998, plus, as to each person listed, that portion of the
233,580 unissued shares of Company common stock subject to outstanding
options which may be exercised by such person within the next 60 days; and
as to all directors and executive officers as a group, unissued shares of
common stock as to which the members of such group have the right to
acquire beneficial ownership upon the exercise of stock options within the
next 60 days.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
(3) Includes 4,066 shares owned by Mr. Davis' wife as to which Mr. Davis
disclaims beneficial ownership and includes 15,000 unissued shares of
Company Common Stock as to which Mr. Davis has the right to acquire
beneficial ownership upon the exercise of stock options within the next 60
days.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
(4) Includes 936 shares owned by Mr. Davis' wife and 725 shares
owned by Mr. Davis' children as to which Mr. Davis disclaims
beneficial ownership and includes 117,800 unissued shares of
Company common stock as to which Mr. Davis has the right to
acquire beneficial ownership upon the exercise of stock options within the
next 60 days.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
(5) The number of shares of Common Stock beneficially owned
by all directors and executive officers as a group includes
all the shares of Common Stock listed above including 40,800
unissued shares of Common Stock as to which the Company's two
non-employee directors have the right to acquire beneficial
ownership upon the exercise of stock options within the next
60 days, 27,709 shares of Common Stock owned by Mr. Richards,
a director of the Company, and 8,323 shares of Common Stock
owned by Mr. Beauchamp, a director of the Company, 5,536
shares of Common Stock owned by Robert V. Boylan, an
executive officer and director of the Company, and includes
33,500 unissued shares of Company Common Stock as to which
Mr. Boylan has the right to acquire beneficial ownership upon
the exercise of stock options within the next 60 days and
2,095 shares of Common Stock owned by Jeffrey A. Ross, an
executive officer of the Company and includes 26,480 unissued
shares of Company Common Stock as to which Mr. Ross has the
right to acquire beneficial ownership upon the exercise of stock options
within the next 60 days.
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- -------------------------------------------------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- -------------------------------------------------------------------
As of December 31, 1997, the Company was indebted to Pages in the
principal amount of $5,000,000 pursuant to a subordinated debenture dated
December 31, 1996 executed by the Company in conjunction with the distribution
by Pages of the common stock of the Company to the Pages shareholders. S. Robert
Davis is a director, officer and shareholder of Pages. On January 23, 1998, the
Company purchased the subordinated debenture in the original principal amount of
$5 million for $3.5 million.
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- -------------------------------------------------------------------
PART IV
- -------------------------------------------------------------------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.
(a) 1. Financial Statements:
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- -------------------------------------------------------------------
See Index to Financial Statements and Financial
Statement Schedule.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
2. Financial Statement Schedule:
- -------------------------------------------------------------------
See Index to Financial Statements and Financial Statement
Schedule.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
3. Exhibits:
- -------------------------------------------------------------------
Exhibit Method
- -------------------------------------------------------------------
Number Description of filing
- -------------------------------------------------------------------
1 Underwriting Agreement 1
- -------------------------------------------------------------------
- -------------------------------------------------------------------
2 Agreement and Plan of Merger 1
- -------------------------------------------------------------------
- -------------------------------------------------------------------
3 (i) .1 Certificate of Incorporation 1
- -------------------------------------------------------------------
- -------------------------------------------------------------------
3 (i) .2 Certificate of Amendment to Certificate of
Incorporation 1
- -------------------------------------------------------------------
3 (ii) Bylaws 1
- -------------------------------------------------------------------
- -------------------------------------------------------------------
4.1 Form of Stock Certificate 1
- -------------------------------------------------------------------
4.2 Warrant Agreement 1
4.3 Form of Warrant Certificate 3
4.4 Form of Warrant-R.L. Renck & Company 3
- -------------------------------------------------------------------
- -------------------------------------------------------------------
*10.1 1996 Incentive Stock Option Plan 1
*10.2 Employee Stock Option Plan 1
- -------------------------------------------------------------------
*10.3 Non-Employee Director Stock Option Plan 1
- -------------------------------------------------------------------
*10.4 Amendment to 1996 Incentive Stock Option Plan 2
*10.5 1997 Incentive Stock Option Plan 3
*10.6 Charles R. Davis' Performance Option Agreement 2
10.7 First National Bank Loan Document 2
10.8 Branch Banking and Trust Loan Document 2
*10.9 1998 Incentive Stock Option Plan 2
*10.10 Non-Employee Director Stock Option Plan 2
10.11 Asset Purchase Agreement Awards and Gifts 2
27 Financial Data Schedule 3
- -------------------------------------------------------------------
- -------------------------------------------------------------------
1. Incorporated by reference to the Company's registration statement on Form
10, file number 0-21717, filed in Washington, D.C.
2. Incorporated by reference to the Company's registration
statement of Form 10-Q for the quarter ended September 30, 1998, filed in
Washington, D.C.
- -------------------------------------------------------------------
3. Filed herewith.
Compensatory Plan
(b) Reports on Form 8-K
- -------------------------------------------------------------------
A report on Form 8-K was dated and filed on August 14, 1998,
under item 2 on the acquisition of all the assets of Awards &
Gifts, Inc.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
A report on Form 8-K was dated and filed on July 23, 1997,
under Item 4 dismissing Deloitte & Touche, LLP as its principal
independent accountant, and the engagement of Hausser + Taylor,
LLP as its new independent accountants.
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- -------------------------------------------------------------------
- -------------------------------------------------------------------
SIGNATURES
- -------------------------------------------------------------------
- -------------------------------------------------------------------
Pursuant to the requirements of Section 13 or 15(d) of the
Securities and Exchange Act of 1934, the Registrant has duly
caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
- -------------------------------------------------------------------
CASCO INTERNATIONAL, INC.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
(Registrant)
- -------------------------------------------------------------------
Dated: March 30, 1999 By: /s/ Charles R. Davis
---------------- -----------------------------
Charles R. Davis
President
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act
of 1934, this Report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on
the dates indicated.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
Dated: March 30, 1999 By: /s/ S. Robert Davis
---------------- -----------------------------
S. Robert Davis
Chairman of the Board, and
Director
Dated: March 30, 1999 By: /s/ Charles R. Davis
---------------- -----------------------------
Charles R. Davis
President, and Director
(Principal Executive
Officer)
Dated: March 30, 1999 By: /s/ Jeffrey A. Ross
---------------- -----------------------------
Jeffrey A. Ross
Chief Financial Officer,
and Secretary
(Principal Accounting and
Financial Officer)
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- -------------------------------------------------------------------
- -------------------------------------------------------------------
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- -------------------------------------------------------------------
- -------------------------------------------------------------------
CASCO INTERNATIONAL, INC.
- -------------------------------------------------------------------
(formerly CA Short Company)
INDEX TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------
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- -------------------------------------------------------------------
Page
- -------------------------------------------------------------------
- -------------------------------------------------------------------
Independent Auditors' Report-- 25
Hausser + Taylor LLP - for the years ended
December 31, 1998, 1997 and 1996.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
Statements of operations-- 26
Years ended December 31, 1998, 1997 and 1996.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
Balance sheets-- 27
December 31, 1998 and December 31, 1997.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
Statements of cash flows-- 29
Years ended December 31, 1998, 1997 and 1996.
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- -------------------------------------------------------------------
- -------------------------------------------------------------------
Statements of stockholders' equity-- 30
Years ended December 31, 1998, 1997 and 1996.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
Notes to the financial statements-- 31
Years ended December 31, 1998, 1997 and 1996.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
All schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
are not required under the related instructions or are
inapplicable, and therefore have been omitted.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
To the Board of Directors and Stockholders of
CASCO INTERNATIONAL, INC.
Shelby, North Carolina
We have audited the accompanying balance sheets of CASCO INTERNATIONAL, INC.,
(the "Company"), as of December 31, 1998 and 1997, and the related statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the 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, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1998 and
1997, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
- -------------------------------------------------------------------
/s/ Hausser + Taylor LLP
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
Columbus, Ohio
March 4, 1999
- -------------------------------------------------------------------
- -------------------------------------------------------------------
CASCO INTERNATIONAL, INC.
STATEMENT OF OPERATIONS
For the years ended December 31, 1998, 1997 and 1996
1998 1997 1996
-------- -------- -------
Revenue ........................... $ 21,718,213 $ 19,332,922 $ 21,959,396
Operating costs and expenses:
Cost of goods sold.............. 12,716,740 11,417,111 13,523,932
Selling, general and ........... 8,377,665 7,761,328 8,051,446
administrative
Depreciation and amortization... 520,027 358,855 338,234
----------- ----------- -----------
Total operating costs ..... 21,614,432 19,537,294 21,913,612
and expenses
Operating income (loss)............ 103,781 (204,372) 45,784
Other expense:
Interest expense................ 335,871 469,355 128,965
Management fee paid to Pages.... -- -- 500,000
Loss on sale of building........ 151,144 -- --
----------- ----------- -----------
total other expenses ...... 487,015 469,355 628,965
Loss before income taxes and
extraordinary item and change in
accounting principle ........ (383,234) (673,727) (583,181)
Benefit for income taxes .......... 145,500 256,000 195,100
----------- ----------- -----------
Loss before extraordinary gain on
retirement of debt and change in
accounting principle ........... (237,734) (417,727) (388,081)
----------- ----------- -----------
Extraordinary gain on retirement of debt
(less income taxes of $570,000) 930,000 -- --
Cumulative effect of a change in
accounting principle (less
income taxes of $397,850) -- -- 596,814
----------- ----------- -----------
Net Income (Loss).................. $ 692,266 $ (417,727) $ 208,733
=========== =========== ===========
EARNINGS PER SHARE BASIC AND DILUTIVE
Loss before extraordinary
item and change in ................ $ (0.13) $ (0.34) $ (0.39)
accounting principle
Cumulative effect of a change in.... -- -- 0.59
accounting principle
Extraordinary gain on .............
retirement of debt ............. 0.52 -- --
----------- ----------- -----------
Net Income (Loss).................. $ 0.39 $ (0.34) $ 0.20
=========== =========== ===========
Weighted average common shares .... 1,783,200 1,225,447 1,003,200
outstanding
=========== =========== ===========
The accompanying notes are an integral part of the
financial statements.
- -------------------------------------------------------------------
CASCO INTERNATIONAL, INC.
BALANCE SHEETS
December 31, 1998 and 1997
ASSETS 1998 1997
--------- ---------
Current Assets:
Cash ................................. $ 107,482 $ 73,516
Accounts receivable................... 5,540,162 5,043,423
Inventory ............................ 5,265,797 4,545,752
Prepaid expenses...................... 1,096,277 973,329
------------ ------------
Total current assets........... 12,009,718 10,636,020
------------ ------------
Buildings and equipment:
Buildings ............................ 2,602,793 3,194,058
Equipment ............................ 2,819,104 2,025,552
------------ ------------
5,421,897 5,219,610
Less accumulated depreciation......... (1,974,403) (1,664,540)
------------ ------------
3,447,494 3,555,070
Land ..................................... 111,468 211,468
------------ ------------
Total property and ............ 3,558,962 3,766,538
equipment, net
------------ ------------
Other assets:
Cost in excess of net assets
acquired, net of accumulated
amortization of $342,244 and
$267,608 respectively 2,541,899 1,098,859
Other ................................ 732,024 646,256
------------ ------------
3,273,923 1,745,115
============ ============
TOTAL ASSETS ............................. $ 18,842,603 $ 16,147,673
============ ============
The accompanying notes are an integral part of the
financial statements.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
CASCO INTERNATIONAL, INC.
BALANCE SHEETS
December 31, 1998 and 1997
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
--------- ---------
Liabilities:
Accounts payble ........................ $ 1,234,869 $ 1,062,112
Short-term debt obligations............. 3,882,269 --
Short-term subordinated debenture....... -- 100,000
Accrued liabilities..................... 360,370 320,157
Advanced deposits-current............... 1,926,406 1,951,471
------------ ------------
Total current liabilities........ 7,403,914 3,433,740
------------ ------------
Long-term debt ............................. 2,413,154 --
Advanced deposits-noncurrent................. 2,653,353 2,558,517
Subordinated debenture....................... -- 4,900,000
Deferred tax liabilitiy...................... 492,150 67,650
------------ ------------
Total Liabilities ........... ............... 12,962,571 10,959,907
------------ ------------
Commitments and contingencies.. ............. -- --
Stockholders' equity:
Preferred shares: $.01 par value;
authorized 300,000 shares; none issued
and outstanding -- --
Common shares par value $.01, authorized
5,000,000, issued 1,783,200 ........... 17,832 17,832
Capital in excess of par value........... 6,417,586 6,417,586
Accumulated deficit..................... (555,386) (1,247,652)
------------ ------------
Total stockholders' equity........ 5,880,032 5,187,766
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .. $ 18,842,603 $ 16,147,673
============ ============
The accompanying notes are an integral part of the
financial statements.
CASCO INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
For the years ended December 31, 1998, 1997 and 1996
1998 1997 1996
-------- --------- --------
Cash flows from operating activities:
Net income (loss) $ 692,266 $ (417,727) $ 208,733
Adjustments to reconcile net income
(loss) to cash provided by
operating activities:
Depreciation and amortization 520,027 358,855 338,234
Loss of sale of building 151,144 -- --
Extraordinary gain on retirement (1,500,000) -- --
of debt
Deferred provision (benefit) 424,500 (256,000) 202,750
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (496,739) (399,396) 1,457,602
Inventory (595,713) 2,422,613 (187,953)
Prepaid expenses and other assets (174,792) (179,221) (18,377)
Increase (decrease)in liabilities:
Accounts payable and accrued
liabilities 212,970 (531,907) 243,124
Advance deposits 69,771 (377,955) (760,164)
-------- --------- --------
Total adjustments (1,388,832) 1,036,989 1,275,216
-------- --------- --------
Net cash provided by (used in) (696,566) 619,262 1,483,949
operating activities -------- --------- --------
Cash flows from investing activities:
Sale of building 421,187 -- --
Payments for purchases of (731,436) (159,430) (421,740)
property and equipment -------- --------- --------
Cash used in investing activities (310,249) (159,430) (421,740)
Cash flows from financing activities:
Proceeds from debt obligation 13,759,044 14,905,007 24,813,186
Principal payments on debt (12,718,263) (18,574,753) (25,971,102)
Issuance of Common Stock Units -- 3,152,459 --
-------- --------- --------
Cash provided by (used in)
financing activities 1,040,781 (517,287) (1,157,916)
Increase (decrease) in cash 33,966 (57,455) (95,707)
Cash, beginning of year 73,516 130,971 226,678
-------- --------- --------
Cash, end of year $ 107,482 $ 73,516 $ 130,971
======== ========= ========
Other Cash Flow Information:
Cash payments during the year for:
Interest $ 307,156 $ 469,355 $ 166,657
Income taxes, net of refunds -- -- --
Noncash Financing Activities:
Payment of subordinated debt $ 3,500,000 $ -- $ --
Subordinated debt replaced with $ 3,500,000 $ -- $ --
line of credit
Acquisitions of assets and $ 1,745,642 $ -- $ --
Increase in line of credit for $ 1,745,642 $ -- $ --
acquisitions
Subordinated debenture with $ -- $ 5,000,000 $ --
Pages assumed at spin-off
Due to Pages replaced with $ -- $ 4,124,975 $ --
subordinated debenture
Decrease in capital in excess $ -- $ 875,025 $ --
of par value and common stock from
spin-off
The accompanying notes are an integral part of the
financial statements.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
CASCO INTERNATIONAL, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1998, 1997 and 1996
Capital in
Common Excess of Accumulated
Shares Stock Par Value Deficit Total
-------- ------- ------- ---------- --------
Balance December 31, 1995 334.91 $ 33,491 $4,124,494 $(1,038,658) $3,119,327
Change in par value of (33,488) 33,488
common stock
Net income 208,733 208,733
-------- ------- ------- ---------- --------
Balance December 31, 1996 334.91 3 4,157,982 (829,925) 3,328,060
Spinoff from Pages (334.91) (3) (884,313) ----- (884,316)
Distribution to Pages 929,103 9,291 ----- ----- 9,291
stockholders
Stock Dividend 74,097 741 (741) ----- -----
Offering 780,000 7,800 3,144,658 ----- 3,152,458
Net loss ----- ----- ----- (417,727) (417,727)
-------- ------- ------- ---------- --------
Balance December 31, 1997 1,783,200 17,832 6,417,586 (1,247,652) 5,187,766
Net Income ----- ----- ----- 692,266 692,266
-------- ------- ------- ---------- --------
Balance December 31, 1998 1,783,200 $17,832 $6,417,586 $ (555,386) $5,880,032
======== ======= ======= ========== ========
The accompanying notes are an integral part of the financial statements.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- --------------------------------------------------------------------------
CASCO INTERNATIONAL, INC.
- --------------------------------------------------------------------------
(formerly CA Short Company)
- -------------------------------------------------------------------
- -------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- -------------------------------------------------------------------
- -------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
NATURE OF BUSINESS
- -------------------------------------------------------------------
The Company is engaged in the design, implementation, and fulfillment of
incentive awards and recognition programs for businesses throughout the United
States. The Company's corporate headquarters is located in Shelby, North
Carolina.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
BASIS OF PRESENTATION
- -------------------------------------------------------------------
On February 28, 1990, in a transaction accounted for as a purchase, all of
the outstanding stock of the Company was acquired by Pages, Inc. ("Pages").
These financial statements were prepared under the resulting new basis of
accounting that reflects the fair values of assets acquired and liabilities
assumed.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
On July 30, 1998 the Company entered into an agreement with Awards & Gifts,
Inc. and Richard W. Terlau, Jr., providing for the purchase of substantially all
assets and certain liabilities of Awards & Gifts by the Company. The Company
utilized purchase accounting for this acquisition. Under the terms of the Asset
Purchase Agreement, the assets included Awards & Gifts customer list, machinery
and equipment, inventories, Awards & Gifts intellectual property assets, prepaid
expenses, and a real property lease. The purchase price for the assets was $1.5
million with certain adjustments made for pro-rated items, with $1.3 million in
cash and a $200,000 promissory note. The note is secured by an Irrevocable
Standby Letter of Credit issued by Branch Banking & Trust Company. The purchase
price under the Asset Purchase Agreement was determined by arm's length
negotiations between the parties based on the market value of the assets
purchased and sold. The goodwill acquired in this transaction will be amortized
over fifteen years using the straight-line method. The acquisition was financed
with proceeds from its revolving credit facility with Branch Banking & Trust
Company.
- -------------------------------------------------------------------
On October 1, 1998 the Company entered into an agreement with American
Awards & Gifts, Inc. and Frank G. and Judith J. McGinnis, providing for the
purchase of substantially all assets and certain liabilities of American Awards
& Gifts, Inc. by the Company. The Company utilized purchase accounting for this
acquisition. Under the terms of the Asset Purchase Agreement, the assets
included American Awards & Gifts customer list, machinery and equipment, tools
and dies, inventories, intellectual property assets, and general intangibles,
the liabilities included the assumption of certain accounts payable. The
purchase price for the assets was $255,177 with $100,000 in cash and a $155,177
promissory note. The purchase price under the Asset Purchase Agreement was
determined by arm's length negotiations between the parties based on the market
value of the assets purchased and sold. The goodwill acquired in this
transaction will be amortized over fifteen years using the straight-line method.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
Effective at the close of business on December 31, 1996, a tax free spin
off of the Company's common stock from it's parent, Pages, was completed (the
"Distribution"). In the Distribution, for every ten shares of Pages common stock
outstanding on the record date, one and one-half shares of the Company's common
stock was distributed to Pages' stockholders.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
USE OF MANAGEMENT ESTIMATES
- -------------------------------------------------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires that management make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. The reported amounts of revenues and expenses during the reporting
period may be affected by the estimates and assumptions management is required
to make. Actual results could differ from those estimates.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
REVENUE RECOGNITION
- -------------------------------------------------------------------
Revenues from the sale of incentive awards are generally recognized upon
shipment and delivery of the related merchandise except for revenue recognized
relating to advanced deposits. Revenues from services are insignificant. Returns
from the sales of incentive awards and from services are insignificant.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
Effective January 1, 1996, the Company changed its method of accounting for
the recognition of revenues relating to advanced deposits. Previously, the
Company recognized such deferred revenue at the conclusion of the respective
prepaid safety award programs. Effective with the change, revenues are
recognized over the course of the programs based on the Company's historical and
expected redemption percentages. The corresponding deferred commission costs
have also been recognized in association with this change in the same direct
proportion as the revenue recognition.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
The effect of this accounting change in 1996 was to increase income before
income taxes and cumulative effect of change in accounting principle by
$209,190, net of associated commission expense of $32,704 for the year ended
December 31, 1996.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
ACCOUNTS RECEIVABLE
- -------------------------------------------------------------------
The Company sells its products to numerous commercial and industrial
customers, across the United States and Canada. The accounts receivable are well
diversified and are expected to be repaid in the normal course of business.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
INVENTORY
- -------------------------------------------------------------------
Inventory consists of general retail merchandise. Inventory is valued at
the lower of cost or market using the first-in, first-out (FIFO) method.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
PREPAID EXPENSES
- -------------------------------------------------------------------
Prepaid expenses at December 31, 1998 and 1997 include $694,338 and
$651,359, respectively, of prepaid selling costs that include costs for
commissions paid to salespeople that relate to advanced deposits for the sales
of incentive and recognition awards programs. Such costs are directly
attributable to obtaining specific future commitments and are expensed in the
year the related revenue is recorded.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
BUILDINGS AND EQUIPMENT
- -------------------------------------------------------------------
Buildings and equipment are recorded at cost and depreciated over their
estimated useful life on the straight-line method. Estimated useful lives range
from three to thirty-one years. Major repairs and betterments are capitalized;
minor repairs are expensed as incurred. Depreciation expense for the years ended
December 31, 1998, 1997 and 1996, totaled $438,681, $324,691 and $302,832,
respectively.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
COST IN EXCESS OF NET ASSETS ACQUIRED AND OTHER ASSETS
- -------------------------------------------------------------------
Cost in excess of net assets acquired are amortized on a straight line
basis over 40 and 15 years. Management periodically evaluates its accounting for
cost in excess of net assets acquired by considering such factors as historical
performance, current operating results and future operating income. At each
balance sheet date, the Company evaluates the realizability of cost in excess of
net assets acquired based upon estimated nondiscounted cash flows. Based upon
its most recent analysis, the Company believes that no material impairment of
cost in excess of net assets acquired exists at December 31, 1998. Based on this
periodic review, management believes that the carrying value of cost in excess
of net assets acquired is reasonable and the amortization period is appropriate.
Amortization expense on cost in excess of net assets acquired for the years
ended December 31, 1998, 1997 and 1996 totaled $77,274, $34,162 and $34,162,
respectively.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
Other assets include cash surrender value of life insurance, deferred loan
costs and non-compete agreements. The deferred loan costs are amortized using
the straight line method over the terms of the related contracts. Amortization
expense totaled $7,071, $0 and $1,240, for the years ended December 31, 1998,
1997 and 1996, respectively.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
INCOME TAXES
- -------------------------------------------------------------------
The Company employs Statement of Financial Accounting Statements ("SFAS")
No. 109, "Accounting for Income Taxes". Under SFAS No. 109, the liability method
is used in accounting for income taxes. Deferred income taxes reflect the net
tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes, and are measured using the enacted tax rates and laws that will be in
effect when the differences are expected to reverse. As noted above, the Company
was a wholly-owned subsidiary of Pages through December 31, 1996 when a tax-free
spin off was completed. The Company was included in Pages consolidated tax
returns for 1996.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
PER SHARE DATA
- -------------------------------------------------------------------
- -------------------------------------------------------------------
Per share amounts have been computed based on the weighted average number
of common shares outstanding during the period and have been adjusted to give
retroactive effect to the distribution of shares to Pages' stockholders and to
the 8% stock dividend paid to stockholders of record on July 16, 1997. The
potential common stock outstanding at December 31, 1998 and 1997 would be
antidilutive for the years then ended. There was no potential common stock
outstanding for the year ended December 31, 1996. Therefore, basic earnings per
share equal earnings per share as previously recorded.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
PROFIT SHARING PLANS
- -------------------------------------------------------------------
The Company has a noncontributory profit sharing retirement plan (the
"Plan"), covering a significant number of employees for which accrued costs are
funded. Company contributions to the Plan are discretionary. There were no
Company contributions for the years ended December 31, 1998, 1997 and 1996.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
LONG-LIVED ASSETS
- -------------------------------------------------------------------
The Company utilizes SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" which required
adoption in 1996. The general requirements of SFAS No. 121 apply to the fixed
and intangible assets of the Company and require impairment to be considered
whenever assets are disposed of or whenever events or change in circumstances
indicate that the carrying amount of the asset will not be recoverable based on
expected future cash flows of the asset. The Company periodically evaluates the
recoverability of long-lived assets and measures the amount of impairment if
any. There were no impairment adjustments at December 31, 1998, 1997 and 1996.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
FAIR VALUE OF FINANCIAL INSTRUMENTS
- -------------------------------------------------------------------
The estimated fair value of amounts reported in the financial statements
have been determined using available market information and valuation
methodologies, as applicable. The carrying value of all current assets and
liabilities approximates the fair value because of their short term nature. The
fair values of non-current assets and liabilities approximate their carrying
value based on current market prices. (Refer to Note 8 for purchase of
subordinated debenture after December 31, 1998.)
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No.
15, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options. Under APB 25,
because the exercise prices of employee stock options equals the market price of
the underlying stock on the date of grant, no compensation expense is recorded.
The company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" (Statement 123).
2. STOCK OPTIONS AND WARRANTS
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
At December 31, 1998, 335,000 common shares of the Company were reserved
for issuance under the incentive stock option plans, 90,000 shares were reserved
under the non-employee director stock option plans and 1,560,000 shares were
reserved under outstanding warrants. Additionally, 200,000 common shares of the
Company were reserved under a performance option plan for the President.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
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December 31, December 31,
1998 1997
Incentive Stock Option Plan -------------- -------------
Outstanding, beginning of year ............... 93,460 0
Granted ...................................... 189,000 93,460
Canceled ..................................... 9,320 None
Exercised .................................... None None
------- -------
Outstanding, end of year ....................... 273,140 93,460
------- -------
Exercise price range of ........................ $1.0000 $3.0625
options outstanding ............................ to to
$3.7037 $3.7037
Non-Employee Director Option Plan
Outstanding, beginning of year ............... 10,800 0
Granted ...................................... 45,000 10,800
Canceled ..................................... None None
Exercised .................................... None None
------- -------
Outstanding, end of year ....................... 55,800 10,800
------- -------
Exercise price range of ........................ $ 2.00 $ 4.17
options outstanding ............................ to to
$ 4.17 $ 4.17
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There were no options granted at December 31, 1996.
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The incentive stock options are exercisable at the fair market value on
the date of grant, and were available from the 1996, 1997 and 1998 stock option
plans. The options outstanding at December 31, 1998 are exercisable through
January 17, 2002, December 29, 2002 and September 2, 2003 respectively.
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The non-employee Director options are exercisable at the fair market value
on the date of grant. The non-employee Director options outstanding at December
31, 1998 are exercisable through October 12, 2003.
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Warrants to purchase 1,560,000 shares of CASCO INTERNATIONAL, INC. common
stock were issued in September 1997 as part of the unit offering. The warrants
are exercisable for five years from the date of issuance at $5.50 per share.
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Proceeds
Date Granted Shares Exercise to Company
or Issued Exercisable Price Upon Exercise
Incentive ------------ ----------- ------ -------------
Stock Options:
1996 Plan January 17, 1997 27,540 $3.7037 $102,000
1996 Plan March 26, 1997 5,400 3.7037 20,000
1996 Plan March 12, 1997 43,200 3.2407 139,998
1997 Plan December 29, 1997 9,000 3.0625 27,563
1997 Plan January 20, 1998 70,000 2.8750 201,250
1997 Plan March 3, 1998 40,000 2.8125 112,500
1997 Plan March 10, 1998 3,000 3.0000 9,000
1997 Plan April 1, 1998 5,000 3.5000 17,500
1998 Plan September 2, 1998 65,000 2.0000 130,000
1998 Plan October 12, 1998 5,000 1.0000 5,000
Proceeds
Date Granted Shares Exercise to Company
or Issued Exercisable Price Upon Exercise
Non-Employee ------------ ----------- -------- -------------
Director
Options:
1996 Plan June 25, 1997 10,800 $4.1667 45,000
1996 Plan January 20, 1998 30,000 2.8750 86,250
1998 Plan September 2, 1998 15,000 2.0000 30,000
Warrants: September 19, 1997 1,560,000 $5.50 8,580,000
--------- ------------
Total 1,888,940 $9,506,061
========= ============
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Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of that Statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholl's option pricing model with the following weighted average
assumptions for 1998 and 1997. There were no options outstanding at 1996.
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1998 1997
----- -----
Risk-free interest rate 6% 6%
Dividend yield 0% 0%
Volatility factor 107.7% 82.7%
Weighted average expected 5 5
life in years
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For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma net income (loss) and earnings per share were as follows:
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1998 1997
Net income (loss) as reported $ 692,266 (417,727)
Net income (loss)-pro forma 677,866 (430,727)
Income (loss) per
common share-as reported $ 39 $ (0.34)
Income (loss) per
common share-pro forma .38 (.35)
Weighted average fair value of $ 2.04 $ 2.60
options granted during the year
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The pro forma effect of these options on net loss and loss per common share
was not material. These pro forma calculations only include the effects of 1998
and 1997 grants. As such, the impacts are not necessarily indicative of the
effects on reported net income of future years.
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3. STOCK DIVIDENDS
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On June 1, 1997, the Company declared an 8% stock dividend on its common
stock for stockholders of record on July 16, 1997. The payment date for the
stock dividend was August 1, 1997. As a result of the stock dividend, 74,097
additional shares were issued, capital in excess of par value was reduced by
$741. There was no distribution or cash payment relating to fractional shares.
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4. DEBT OBLIGATIONS
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Debt obligations consisted of the following:
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December 31, December 31,
1998 1997
----------- -----------
Line of credit with interest
at prime plus 1/2 percent;
interest payable monthly, maturing
on July 30, 1999, collateralized
by accounts receivable and
inventory of the Company
($1,355,508 available at
December 31,1998). $3,644,492 ------
Subordinated debenture due to Pages, $5 million 7% subordinated debenture,
principle payments will be $100,000 per year for the first four years, with a
balloon payment due at the end of the fifth year for the remaining principle
balance. (See Note 9.) ------- $5,000,000
First National Bank first deed of trust on the Shelby facilities. Payable in
monthly installments of $24,088 including interest (7 1/2 percent) through March
of 2013. The term of the loan is fifteen years, callable after five years
and guaranteed by the President. 2,302,460 ------
Promissory note payable with interest at 8 percent, payable in two annual
installments through July 30, 2000. Collateralized by letter of credit at
Branch Banking & Trust. 200,000 -------
Promissory note payable with
interest at 6 percent, payable in
monthly installments through
October 1, 2003. 148,471 -------
------------- -------------
6,295,423 5,000,000
Current portion 3,882,269 100,000
============= =============
Long term portion $2,413,154 $4,900,000
============= =============
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The interest rate for the line as of December 31, 1998 and 1997 was prime
plus 1/2 percent and prime plus 1 percent, respectively.
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The prime interest rate at December 31, 1998 and 1997 was 7 3/4 and 8 1/2
percent, respectively. The carrying amount of the Company's short term debt
obligations approximates fair value.
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The line of credit facility also includes certain financial covenants,
including covenants that the Company maintain certain financial ratios. In
addition, the credit facility contains limitations on capital expenditures,
fixed asset sales, loans and/or advances to shareholders and employees,
restrictions on operating leases and limitation on dividends paid on common
stock to $100,000 annually. As of December 31, 1998, the Company was in default
of several of the covenants. The Company received a waiver letter for these
defaults as of December 31, 1998.
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5. COMMITMENTS AND CONTINGENCIES
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The Company is obligated under various noncancelable operating leases.
Operating leases are principally for office and warehouse facilities, equipment
and vehicles. Rent expense under operating leases amounted to $152,128, $125,570
and $144,719, for the years ended December 31, 1998, 1997 and 1996,
respectively. The future minimum rentals under non-cancelable operating leases
during subsequent fiscal years are as follows:
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YEARS ENDING
DECEMBER 31,
1999 $ 102,709
2000 63,678
2001 1,431
-------------
$ 167,818
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The Company is also involved in certain legal proceedings in the ordinary
course of its business which, if determined adversely to the Company would, in
the opinion of management, not have a material adverse effect on the Company or
its operations.
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6. INCOME TAXES
As discussed in Note 1, the Company was included in Pages consolidated
income tax return for 1996.
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Temporary differences between income for financial reporting purposes and
tax reporting purposes relate primarily to accounting methods for inventory
costs, revenues earned, accrued and prepaid expenses and reserves, and
depreciation.
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For the years presented, the benefit for income taxes from continuing
operations consisted of the following.
December 31, December 31, December 31,
1998 1997 1996
Current ----- ----- -----
Deferred
Federal $(130,300) $(217,000) $(165,850)
State and Local (15,200) (39,000) (29,250)
----------- ------------ -----------
Net deferred benefit $(145,500) $(256,000) $(195,100)
Net benefit for taxes $(145,500) $(256,000) $(195,100)
=========== ============ ===========
For the years presented, a reconciliation of income taxes from continuing
operations based upon the application of the federal statutory tax rate is as
follows:
December 31, December 31, December 31,
1998 1997 1996
----------- ----------- -----------
Benefit for taxes at $(145,700) $ (229,100) $ (198,300)
statutory rate
Goodwill amortization 13,650 13,650 13,650
State taxes net of (15,300) (40,400) (34,950)
federal benefit
Other 1,850 (150) 24,500
----------- ------------ -----------
Total benefit for $(145,500) $ (256,000) $ (195,100)
income taxes
=========== ============ ===========
The components of net deferred taxes are as follows:
December 31, December 31,
1998 1997
------------ -----------
Assets:
Inventory costs capitalized for tax ....... $ 73,100 $ 67,900
purposes
Accruals and reserves to be expensed
as paid for tax purposes ............. 81,500 150,000
Other ..................................... 27,850 3,050
Net operating loss carry forwards ......... 296,400 727,300
----------- -----------
Deferred tax assets .......................... 478,850 948,250
Liabilities:
Revenues to be earned net of cost ......... (301,000) (316,900)
Excess of tax over financial
accounting depreciation and ............ (670,000) (699,000)
amortization
----------- -----------
Deferred tax liability ....................... (971,000) (1,015,900)
----------- -----------
Net deferred tax liability ................... $ (492,150) $ (67,650)
=========== ===========
The Company changed its effective rate to 38% in 1998 from 40% in 1997. At
December 31, 1998, operating loss carryforwards of approximately $780,000 are
available, which will expire, if unused, beginning in 2010. The Company utilized
approximately $1,065,000 and $647,000 of net operating loss carryforward for the
years ended December 31, 1998 and 1997, respectively. The Company was included
in Pages consolidated federal tax return for the year ended December 31, 1996.
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7. RELATED PARTY TRANSACTIONS
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- -------------------------------------------------------------------
For all periods presented prior to 1997, Pages had provided services to and
incurred costs on behalf of the Company. Prior to the Distribution, Pages'
management fee was intended to encompass the element of Pages' financing costs
to provide non-interest bearing advances to the Company. Such element
approximated $450,000, based on the prime interest rate as applied to the
average outstanding balance due to Pages the years ended December 31, 1996. The
remaining costs are for certain services, including, but not limited to,
administrative services, transportation, tax services, accounting and reporting,
management consultation, legal services, and general corporate expenses, which
have also been allocated to the Company. The allocation of costs and expenses
for these services were based on methods that management believes are
reasonable. The portion of such costs which management believes continued to be
incurred subsequent to the Distribution approximates $30,000. The balance of
nonrecurring costs relates to duplicative management responsibilities for
financing and operating activities, as well as other transportation and
administrative costs which were eliminated by the Distribution.
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Pages allocated general corporate expenses to the Company
for the years ended December 31, 1998, 1997, and 1996 in the amounts of $0, $0
and $500,000, respectively.
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8. LOSS ON SALE OF BUILDING
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On March 4, 1998 the Company sold its 167,000 sq. ft. Kings Mountain
Warehouse. The sale netted the Company approximately $425,000. The Company
recorded a loss on the sale which totaled $151,144.
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9. EXTRAORDINARY GAIN ON RETIREMENT OF DEBT
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- -------------------------------------------------------------------
On January 23, 1998, the Company redeemed at a discount, the subordinated
debenture due to Pages on January 1, 2002. The debenture in the original
principal amount of $5 million was redeemed for $3.5 million. The Company
replaced the Pages debt with proceeds from the line of credit. The debt
retirement resulted in an extraordinary gain of $930,000 after tax of $570,000.
For the year ended December 31, 1998, the impact of the extraordinary gain on
basic and diluted earnings (loss) per share was as follows:
Basic Diluted
Loss before extraordinary gain $ (237,734) $ (.13) $ (.13)
Extraordinary gain on retirement
of debt (less applicable
income taxes of $570,000) 930,000 .52 .52
-----------------------------
Net income $ 692,266 $ .39 $ .39
-----------------------------
- ----
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DIRECTORS: COMPANY OFFICES:
S. Robert Davis, Chairman of the Board Headquarters and Distribution Center:
4205 East Dixon Boulevard
Charles R. Davis, President and CEO Shelby, North Carolina 28150
Robert V. Boylan, Chief Operating Officer
David J. Richards, Director
Michael P. Beauchamp, Director
- ------------------------------- -------------------------------
CORPORATE OFFICERS: AVAILABILITY OF EXHIBITS TO
FORM 10-K:
Charles R. Davis, President
Exhibits to Form 10-K Report are on
Robert V. Boylan, Chief Operating file with the Securities and
Officer Exchange Commission and are
referenced on the Exhibit Index
Jeffrey A. Ross, Chief Financial contained hereinabove. Exhibits are
Officer and Secretary available upon request, at $0.25
per page, representing the
Registrant's reasonable expenses in
furnishing such exhibit(s).
Exhibits may be obtained by
writing to Jeffrey A. Ross,
Secretary, CASCO INTERNATIONAL, INC.
- -------------------------------
STOCK TRANSFER AGENT AND
REGISTRAR:
American Stock Transfer &
Trust Company
40 Wall Street
New York, New York 10005
- -------------------------------
AUDITORS:
Hausser + Taylor LLP
471 East Broad Street
Suite 1200
Columbus, Ohio 43215
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