UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
..................to.........................
For the fiscal year ended December 31, 2000
Commission File Number 0-21717
CASCO INTERNATIONAL, INC.
-------------------------
(Exact Name of Registrant as specified in its charter)
Delaware 56-0526145
- ------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13900 Conlan Circle, Suite 150, Charlotte, NC 28277
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(Address of principal executive offices)(Zip Code)
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:
Common Stock, $0.01 par value
-----------------------------
(Title of Class)
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. [ ]
The aggregate market value of the voting shares held by non-affiliates of the
Registrant as of March 29, 2001 was $9,138,900 (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 29, 2001: 1,774,186 Common Shares.
PART I
ITEM 1. BUSINESS.
GENERAL
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. 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. 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".
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.
THE BUSINESS
The Company's programs fall into two broad categories; service recognition
and safety incentive and recognition. The programs 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 its
products and increase its penetration into specific markets.
MERCHANDISE SELECTION AND BROCHURES
The Company's programs feature brand name merchandise from industry leading
manufacturers such as Sony, Philips Magnavox, Waterford, Bulova, Canon, and
Bushnell and Black & Decker. 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 existing clients, as well as prospective clients.
SAFETY AWARENESS/INCENTIVE AND RECOGNITION PROGRAMS
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 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.
FULFILLMENT
In 2000 the Company engaged an investment banker to assist it in raising
capital to fund a subsidiary of the company in the business of providing
fulfillment services to ecommerce businesses. At this time the Company has
determined not to pursue development of an e-fulfillment business and had tabled
its efforts to raise funds for that purpose.
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 National Bank and Intel.
LARGE CUSTOMERS
The Company has relationships with certain customers that the loss of these
cusomters could have a material adverse effect on the Company. No one individual
customer accounts for greater than 10% of the Company's total revenue. See
SK101(c)(viii)
BACKLOG
As of March 20, 2001 the Company had a backlog of orders totaling
$1,098,025 compared to a backlog of $1,098,615 on March 20, 2000. All of these
orders are expected to ship within the next thirty day period.
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 2000, the Company revamped its sales and marketing strategy. It has
differentiated itself from the competition, which markets corporate symbolism to
personal recognition, which combines corporate symbolism and individual
recognition. The Company clearly defined and identified target prospects in
strategic markets across the country. The Company's mission is: "To have the
best trained, most responsive, performance based sales force in America." The
Company plans on accomplishing these initiatives by utilizing a fully staffed
inside sales group, employee full time sales representatives and the use of
independent sales representatives throughout the country.
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.
EMPLOYEES
As of March 15, 2001 the Company employed a total of 120 regular employees.
The number of seasonal employees fluctuated during 2000 from a low of 5 to a
high of 43 in the months of November, December and January when the Company
generates approximately thirty six percent of its revenues and most of its
profits. 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 March 15, 2001, the Company's health care plan covered 93 of
its employees.
ITEM 2. PROPERTIES.
Owned
Location Use Size Leased
-------- --- ---- ------
Shelby, North Carolina ......... Warehouse & Office 134,000 sq. ft. Owned
Charlotte, North Carolina ...... Office 10,000 sq. ft. Leased
Shelby, North Carolina ......... Warehouse Outlet 4,000 sq. ft. Leased
These facilities are located in appropriately designed buildings which are
kept in good repair. The property owned by the Company is pledged to a lender.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not involved in any material pending legal proceedings,
other than ordinary, routine litigation incidental to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company's common stock and warrants trade on The Nasdaq SmallCap Market
under the symbols "CASC" and "CASCW". The following table sets forth, for the
periods indicated, the high and the low bid prices for shares of the Company's
common stock and warrants. Prices represent inter-dealer quotations without
adjustment for retail markups, markdowns or commissions and may not represent
actual transactions.
Trade Price
Calendar Year Ended December 2000 1999
---------------- -----------------
High Low High Low
Fourth Quarter
CASC ................... 1.250 1.156 3.500 1.625
CASCW .................. 0.219 0.031 0.688 0.281
Third Quarter
CASC ................... 1.625 1.406 4.500 1.750
CASCW ................... 0.594 0.250 1.094 0.406
Second Quarter
CASC .................... 3.344 3.344 2.125 0.813
CASCW ................... 1.125 0.375 0.500 0.188
First Quarter
CASC .................... 4.719 4.469 1.750 0.875
CASCW ................... 1.625 0.281 0.438 0.250
As of March 29, 2001, the Company had approximately 551 holders of record
of its Common Stock.
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.
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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2000 1999 1998 1997 1996
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STATEMENT OF OPERATIONS DATA:
Revenues ............. $ 23,545 $ 24,199 $ 21,718 $ 19,333 $ 21,959
Costs and expenses .. 22,952 23,549 22,102 20,007 22,542
----------- --------- --------- --------- --------
Income (loss) before income taxes and
cumulative effect of change in
accounting principle 593 650 (384) (674) (583)
Benefit (Provision) for
income taxes (252) (293) 146 256 195
----------- ---------- ---------- --------- --------
Income (loss) before extraordinary gain and
cumulative effect of change in
accounting principle 341 357 (238) (418) (388)
Cumulative effect of change in
accounting principle * -- -- -- -- 597
Extraordinary gain on
retirement of debt -- -- 930 -- --
----------- -------- --------- --------- ---------
Net income (loss) $ 341 357 692 (418) 209
=========== ======== ========= ========= =========
PRO FORMA PER SHARE DATA:
Income (loss) before cumulative effect of
change in accounting
principle $ 0.19 $ 0.20 $ (0.13) $ (0.34) $ (0.39)
Cumulative effect of change in accounting
principle -- -- -- -- 0.59
Extraordinary gain on
retirement of debt -- -- -- -- 0.52
----------- -------- --------- --------- ---------
Income (loss) per
common share $ 0.19 0.20 0.39 (0.34) 0.20
=========== ======== ========= ========= =========
Weighted average common and common
equivalent shares 1,782,237 1,783,200 1,783,200 1,225,447 1,003,431
=========== ========= ========= ========= =========
*In 1996, the Company changed its method of accounting for the recognition of
revenues relating to advanced deposits. Effective with the change, revenues are
recognized over the course of the programs based on the Company's historical and
expected redemption percentages. The effect of the accounting change in 1996 was
to increase income before income taxes and cumulative effect of change in
accounting principle by $209,190.
BALANCE SHEET DATA:
Working capital .... $ 4,920 $ 4,787 $ 4,606 $ 7,202 $ 5,025
Total assets ....... 16,544 17,344 18,843 16,148 18,249
Long-term debt ..... 2,054 2,190 2,413 4,900 4,125
Stockholders' equity 6,560 6,237 5,880 5,188 3,328
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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.
CAUTIONARY STATEMENT
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 including, without limitation, not discussed its ability to grow through
acquisition and strategic alliances and through expanding its current market
share and entering new markets, the adequacy of the company's cash resources to
fund its current operations, the decreased effect of seasonality on the Company
the anticipated renewal of the Company's credit facility, the Company's
expectation with respect to expenditures for property and equipment, and the
Company's expectations with respect to the diminished effect of seasonality on
its business 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.
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
---------------------------------------
Twelve Twelve Twelve
Months Months Months
Ended Ended Ended
December 31, December 31, December 31,
2000 1999 1998
---------------------------------------
Total revenue .......................... 100.0% 100.0% 100.0%
Cost of goods sold ..................... 53.7% 55.0% 58.6%
----- ----- -----
Gross profit ........................... 46.3% 45.0% 41.4%
Selling, general, and administrative ... 39.3% 37.8% 38.6%
Interest ............................... 1.3% 1.5% 1.6%
Depreciation and amortization .......... 3.2% 3.0% 2.4%
Loss on Sale of Building ............... -- -- 0.7%
----- ----- -----
----- ----- -----
Income (loss) from continuing operations
before income taxes .................... 2.5% 2.7% (1.7%)
===== ===== =====
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999.
Revenues for the year ended December 31, 2000 approximated $23.5 million,
compared to $24.2 million in revenues for the year ended December 31, 1999, a
decrease of 2.7% or approximately $654,000. The decrease is attributable to
one-time incentive sales in 1999 that did not repeat in 2000 as well as the
Company's strategic decision to exit some low margin specialty accounts and the
continued decline in the holiday revenue.
Cost of goods sold for the year ended December 31, 2000 approximated $12.6
million, compared to approximately $13.3 million of cost of goods sold for the
year ended December 31, 1999, a decrease of 5.1% or approximately $683,000. 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 54% in 2000 from 55%
in 1999. The 1.0% decrease in cost of goods sold was principally attributable to
a change in product mix, as well as increased sales in new programs.
Selling, general, and administrative expense for the year ended December
31, 2000 approximated $9.3 million, compared to approximately $9.1 million for
the year ended December 31, 1999, an increase of 1.3% or approximately $118,000.
The increase in selling, general and administrative expenses was due to the
expansion of the employee based sales force as well as the expansion of the
marketing department. As a percentage of revenues, selling, general and
administrative increased to 39.3% in 2000 from 37.8% in 1999. The 1.5% increase
as a percentage of revenues was principally attributable to the expansion of the
employee based sales force into new markets.
Interest expense was approximately $302,000 for the year ended December 31,
2000, compared to $372,000 for the year ended December 31, 1999, a decrease of
18.9% or approximately $70,500. The decrease was attributable to a lower average
outstanding debt by month in 2000. The average outstanding debt by month in 2000
approximated $3.6 million compared to $4.7 million for 1999. Additionally, the
average interest rate for 2000 approximated 8.39% compared to approximately
7.94% for 1999.
Depreciation and amortization expense was approximately $761,300 for the
year ended December 31, 2000, compared to $722,100 for the year ended December
31, 1999, an increase of 5.43% or approximately $39,200. The increase in
depreciation and amortization expense was principally attributable to the
depreciation of newly acquired assets in 1999 and 1998.
Income tax provision was $252,000 for the year ended December 31, 2000,
compared to an income tax provision of $293,000 for the year ended December 31,
1999. The provisions for income tax were calculated through the use of estimated
income tax rates based upon the income before income taxes.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998.
Revenues for the year ended December 31, 1999 approximated $24.2 million,
compared to $21.7 million in revenues for the year ended December 31, 1998, an
increase of 11.4% or approximately $2.5 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.
Cost of goods sold for the year ended December 31, 1999 approximated $13.3
million, compared to approximately $12.7 million of cost of goods sold for the
year ended December 31, 1998, an increase of 4.7% or approximately $601,000. 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 55% in 1999 from 58.6%
in 1998. The 3.6% decrease in cost of goods sold was principally attributable to
a change in product mix, an improved purchasing strategy and systems, as well as
the increased sales in new programs.
Selling, general, and administrative expense for the year ended December
31, 1999 approximated $9.1 million for the year ended December 31, 1999,
compared to approximately $8.4 million for the year ended December 31, 1998, an
increase of 9.1% or approximately $759,000. 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 37.8% in 1999 from 38.6% in 1998. The 0.8% decrease
as a percentage of revenues was principally attributable to benefits obtained
from aggressive cost containment policies and efficiencies gained from the new
computer processing system.
Interest expense was approximately $372,000 for the year ended December 31,
1999, compared to $336,000 for the year ended December 31, 1998, an increase of
10.9% or approximately $36,000. The increase was attributable to the interest on
the Company's line of credit which was used to finance the acquisitions in 1998.
The average outstanding debt by month in 1999 approximated $4.7 million compared
to $3.4 million for 1998. Additionally, the average interest rate for 1999
approximated 7.94% compared to approximately 8.91% for 1998 on the debt.
Depreciation and amortization expense was approximately $722,100 for the
year ended December 31, 1999, compared to $520,000 for the year ended December
31, 1998, an increase of 38.9% or approximately $202,100. 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.
Income tax provision was $293,000 for the year ended December 31, 1999,
compared to an income tax benefit of $145,500 for the year ended December 31,
1998. The provisions for income tax were calculated through the use of estimated
income tax rates based upon the income (loss) before income taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity have been cash generated from
operating activities and amounts available under its existing credit facility.
The Company's primary uses of funds consist of financing inventory and
receivables.
Net working capital increased to $4,920,000 as of December 31, 2000 from
net working capital of $4,787,000 as of December 31, 1999. The increase was
primarily attributed to the Company's ability to pay down its line of credit
during 2000.
The Company has adopted a growth strategy which will be accomplished
through increased efforts of the Company's existing highly trained sales force
and the use of independent field representatives in order to expand current
market share and enter into new markets. As a result of a change in market
conditions, the Company discontinued its efforts to enter the e-fulfillment
business.
The Company anticipates that operating cash flows during the next twelve
months, coupled with its ability to borrow under the credit facility 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, 2001. Although the lender
has not issued a commitment to do so, the Company's relationship with its lender
is favorable and the Company anticipates that the credit facility will be
renewed when due.
Current assets decreased approximately $429,000 due mostly from decreases
in inventory ($398,000). The decrease in inventory is due to an improved
purchasing strategy coupled with an improved processing and inventory ordering
system. Current liabilities decreased approximately $562,000 due mostly from
decreases in short-term debt obligations ($642,000), and accounts payable and
accrued liabilities ($451,000), and taxes payable ($230,000) offset by an
increase of advance deposits ($760,765). The decrease in short-term debt
obligations was due to the pay down of the line of credit from the excess cash
generated from operations. The decrease in accounts payable was due to the
decreased inventory purchases. The increase in advance deposits was due to the
change in the mix of prepaid deposits from noncurrent to current.
Cash decreased approximately $2,200. Net cash provided from operating
activities was approximately $1,136,000. Net cash used in investing activities
was approximately $343,000 due to payments for purchases of new information
systems. Net cash used by financing activities was approximately $795,000, which
was due to the reduction on the line of credit and the purchase of 9,014 shares
of Company stock at $2 per share..
The Company does not anticipate any material expenditures for property and
equipment during the next twelve months, out of the ordinary course of business.
Management believes that present resources will meet anticipated requirements
for its current operations.
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 in the
short term. The Company is concerned with the uncertainty of the economy and the
uncertainty of the increased unemployment rates in recent months. If these
trends would continue it could affect the liquidity in an adverse way over an
extended period of time. 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.
SEASONALITY
The Company's business is highly seasonal, with approximately 36% 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.
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.
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, 2000 was 9.5 percent compared to 8.5 percent at
December 31, 1999. 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.
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.
PART III
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) 62 Chairman of the Board 1990
Charles R. Davis (1) 39 President and Director 1990
Jeffrey A. Ross .... 33 Chief Financial Officer and Secretary 1996
David J. Richards .. 48 Director 1997
Michael P. Beauchamp 54 Director 1997
Randall J. Asmo .... 36 Director 1999
Rodney L. Taylor ... 45 Director 1999
Philip Shasteen .... 52 Director 2000
(1) S. Robert Davis is the father of Charles R. Davis.
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 Media Source,
Inc., a Company with a class of securities registered pursuant to Section 12 of
the Securities Exchange Act of 1934 ("Media Source"). Prior to his election to
the Board of Directors of Media Source, he served as Assistant to the President
of Media Source 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 been an investor and been
an officer of several private businesses involving the developing, sale and/or
leasing of real estate but devotes substantially all of his business time to the
Company. He is also a director of Media Source.
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 is Chief Executive Officer and President of Preventive
Imaging Technologies, Inc. Preventive Imaging Technologies, Inc., is not a
parent, subsidiary or other affiliate of the Company.
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.
RANDALL J. ASMO was elected Director on February 19, 1999. He currently
serves as Executive Vice President, Secretary and Director of Media Source, Inc.
Since 1992, Mr. Asmo has served as Vice President of Media Source, Inc. and
Director since 1997. Prior to that, he served as Assistant to the President for
two years. Additionally, since 1987, Mr. Asmo has served as Vice President of
Mid-States Development Corp., a privately-held real estate development and
leasing company, as Vice President of American Home Building Corp., a
privately-held real estate development company, and as an officer of several
other small business enterprises.
RODNEY L. TAYLOR was elected Director on February 19, 1999. He currently
serves as General Manager of Family Ford Lincoln Mercury in Columbus, Ohio a
position he assumed in 1997. From 1994 to 1997 Mr. Taylor was General Sales
Manager at Bobb Chevrolet. Additionally, Mr. Taylor also owned an automotive and
equipment leasing company based out of Columbus, OH.
PHILIP M. SHASTEEN was elected Director on March 22, 2000. Since 1992 he
has been an attorney with and shareholder and director of Johnson Blakely Pope
Bokor Ruppel & Burns, P.A., a law firm located in Tampa, Florida. He is also a
director of Dixon Ticonderoga Company, an American Stock Exchange traded
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, except that Mr. Shasteen was delinquent in the filing of his Form
3 when he became a board member.
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 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 40,000 shares of Company common stock upon such terms as are
determined by the Board in its discretion.
EXECUTIVE COMPENSATION
The following table shows, for the fiscal years ended December 31, 2000,
1999, and 1998 the cash compensation paid by the Company, as well as certain
other compensation paid for those years to the Company's President and Chief
Executive Officer (the "Named Executive Officer"). No other executive officers
serving as such during and at the end of the Company's last fiscal year had
total salary and bonus that exceeded $100,000. 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 Securities
Principal Position Year Salary Bonus Compensation Underlying
------------------ ---- ------ ----- ------------ Options (1)
------------
Charles R. Davis ...... 2000 $250,000 $25,000 $0 0
President and ......... 1999 $250,000 $ 0 $0 200,000
Chief Executive Officer 1998 $178,325 $ 0 $0 50,000
(1) Stock options previously granted to the named the Executive Officer, by
their terms, automatically adjust to reflect certain changes in the
outstanding Common Shares of the Company, including stock dividends.
Stock Option Grants in Last Fiscal Year
- -------------------------------------------------------------------------------
Individual Grants
----------------------------------------
Potential Realized Value
at Assumed Annual
Rates of Stock
Number of % of Total Price Appreciation
Underlying Options Granted to Exercise for Option
Options Employees Price Expiration Term
Name Granted in 1999 per Share Date 5% 10%
---- ------- ------- --------- ---- -- ---
Charles R. Davis 0 0 N/A N/A N/A N/A
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 Options at FY-End Options at FY-End
on Value ----------------- -----------------
Name Exercised Realized Exercisable Unexercisable Exercisable Unexercisable
---- --------- -------- ----------- ------------- ----------- -------------
Charles R.
Davis None N/A 287,800 0 0 N/A
STOCK OPTION PLANS
The Company has adopted a 1996 Incentive Stock Option Plan, a 1997, 1999
and 2000 Employee Stock Option Plans (the "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 600,000 and 100,000 shares, respectively, of Common Stock to key
employees of the Company. Under the 1999 Plans it is intended that options
granted under the 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 Plans is determined by the Board of
Directors, at its discretion. Options granted under the Plans are exercisable
for a period of up to ten years 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 31,860 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 options to purchase 40,000 shares of Common Stock at a purchase
price of $2.8125 per share. On March 10, 1998, the Company granted options to
purchase 3,000 shares of common stock at a purchase price of $3.00 per share. On
April 1, 1998, the Company granted options to purchase 6,000 shares of Common
Stock at a purchase price of $3.50 per share. On one occasion in 1998 the
Company granted options under the 1998 Incentive Stock Option Plan. In October,
the Company granted options to purchase 5,000 shares of Common Stock at a
purchase price of $1.00 per share. In May 1999, the Company granted options to
purchase 396,500 shares of Common Stock at a purchase price of $1.75 per share
under the 1999 Incentive plan and options to purchase 15,000 shares of Common
Stock under the 1997 Incentive plan at a purchase price of $1.75 per share. In
October 1999, the Company granted options to purchase 10,000 shares of Common
Stock under the 1999 Incentive plan at a purchase price of $2.3800 per share. In
January 2000, the Company granted options to purchase 20,000 shares of Common
Stock under the 1999 Incentive plan at a purchase price of $2.06 per share. In
February 2000, the Company granted options to purchase 20,000 shares of Common
Stock under the 1999 Incentive plan at a purchase price of $2.13 per share. In
March 2000, the Company granted options to purchase 20,000 shares of Common
Stock under the 1999 Incentive plan at a purchase price of $3.97 per share. In
April 2000, the Company granted options to purchase 10,000 shares of Common
Stock under the 1999 Incentive plan at a purchase price of $4.13 per share and
1,000 shares of Common Stock under the 1999 Incentive Plan at a purchase price
of $4.24 per share . In July 2000, the Company granted options to purchase 5,000
shares of Common Stock under the 2000 Incentive plan at a purchase price of
$2.61 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 and 1999 and 2000 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 1999 and 2000 Incentive Plan are
not exercisable until the expiration of six months after the date of grant.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company's committees are its Compensation Committee, Audit Committee
and a committee formed in 2000 to evaluate an offer from Messers. S. Robert
Davis and Charles R. Davis to acquire the company. During 2000, the Compensation
Committee consisted of S. Robert Davis, David J. Richards, and Michael P.
Beauchamp. 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 Compensation Committee of the Board of
Directors has prepared the following report for inclusion in this Annual Report.
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 Compensation Committee 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
are established on a case-by-case basis by the Compensation Committee, 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 are reviewed annually by the Compensation Committee.
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. 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 policies and consideration
enumerated above with respect to compensation decisions regarding the President,
Charles R. Davis. Mr. Davis' 2000 base salary and bonus was determined primarily
by reference to historical compensation, scope of responsibility, and the
Company's desire to retain his 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
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., its former
parent. The Company paid an 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.
CASCO 1/15/97 6/30/97 12/31/97 6/30/98 12/31/98
100 149.00 90.00 80.00 52.00
6/30/99 12/31/99 3/31/00 6/30/00 9/30/00
63.00 68.00 146.00 110.00 46.00
12/31/00
39.00
Nasdaq 1/15/97 6/30/97 12/31/97 6/30/98 12/31/98
Composite 100 108.00 117.69 142.00 164.39
6/30/99 12/31/99 3/31/00 6/30/00 9/30/00
201.00 305.00 343.00 297.00 275.00
12/31/00
185.00
Nasdaq 1/15/97 6/30/97 12/31/97 6/30/98 12/31/98
Industrials 100 103.00 106.73 117.00 113.99
6/30/99 12/31/99 3/31/00 6/30/00 9/30/00
143.00 196.00 212.00 184.00 179.00
12/31/00
130.00
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) and President 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, 2000, 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 Ownership (1) Class (2)
- ---------------- ------------------------ ---------
S. Robert Davis 375,820 (3) 16.0%
15350 Amberly Drive
Suite 2014
Tampa, Florida 33647
Charles R. Davis 412,066 (4) 17.5%
4205 East Dixon Blvd.
Shelby, North Carolina 28150
David J. Richards 65,609 (5) 2.7%
6189 Memorial Drive
Dublin, OH 43017
Michael P. Beauchamp 46,480 (5) 2.0%
7422 Carmel Executive Park
Suite 107
Charlotte, NC 28226
Randall J. Asmo 61,525 (5) 2.6%
5720 Avery Road
Dublin, OH 43016
Rodney L. Taylor 23,000 (5) 0%*
P. O. Box 725
Marietta, OH 45750
Philip M. Shasteen 11,713 (5) 0%*
100 N. Tampa Street
Suite 1800
Tampa, FL 33602
Jeffrey A. Ross 53,575 (5) 2.3%
2242 Mt. Isle Harbor Drive
Charlotte, NC 28214
All directors and executive
officers as a group 1,049,788 (5) 44.6%
(8 persons)
*Less than 1%.
1) Represents sole voting and investment power unless otherwise indicated.
2) Based on 1,774,186 shares of Company common stock outstanding as of
December 31, 2000, plus, as to each person listed, that portion of the
572,480 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 4,714 shares owned by Mr. Davis' wife as to which Mr. Davis
disclaims beneficial ownership and includes 110,000 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 10,000 shares owned by Mr. Davis' wife and 2,411 shares owned
by Mr. Davis' children as to which Mr. Davis disclaims beneficial
ownership and includes 287,800 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 123,500 unissued shares of Common
Stock as to which the Company's five non-employee directors have the
right to acquire beneficial ownership upon the exercise of stock
options within the next 60 days, 30,209 shares of Common Stock owned
by Mr. Richards, a director of the Company, 11,080 shares of Common
Stock owned by Mr. Beauchamp, a director of the Company, and 38,825
shares of Common Stock owned by Mr. Asmo, a director of the Company
and 3,000 shares of Common Stock owned by Mr. Taylor, a director of
the Company and 1,713 shares of Common Stock beneficially owned by Mr.
Shasteen, a director of the Company and 2,095 shares of Common Stock
owned by Jeffrey A. Ross, an executive officer of the Company and
includes 51,180 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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Messrs. S. Robert Davis and Charles R. Davis, the Chairman and President,
respectively, of the Company have offered to acquire the Company through a cash
merger. Messrs. S. Robert and Charles R. Davis have indicated that they may
include others in their buyout group. The Special Committee of the outside
directors formed to consider the offer has indicated that it will recommend for
approval this last offer of $2.10 per share for the outstanding shares of common
stock.
Mr. Shasteen, who joined the company as a director in May, 2000, is a
director and shareholder of Johnson, Blakely, Pope, Bokor, Ruppel & Burns, P.A.,
a law firm which served as legal counsel to the company in 2000 and serves as
legal counsel to the Company in 2001.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements:
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 Asset Purchase Agreement Awards & Gifts 2
*10.10 1999 Stock Option Plan 4
*10.11 2000 Stock Option Plan 4
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. Incorporated by reference to the Company's registration statement of Form
10-K for the year ended December 31, 1999 filed in Washington, D. C.
4. Incorporated by reference to the Company's proxy statement, file number
0-271717, filed in Washington D.C.
5. Filed herewith.
*Compensatory Plan.
(b) Reports on Form 8-K
None
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 29, 2001 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 29, 2001 By: /s/ S. Robert Davis
------------------------- --------------------------------------
S. Robert Davis
Chairman of the Board,
and Director
Dated: March 29, 2001 By: /s/ Charles R. Davis
------------------------- -------------------------------------
Charles R. Davis
President, and Director
(Principal Executive
Officer)
Dated: March 29, 2001 By: /s/ Randall J. Asmo
------------------------- -------------------------------------
Randall J. Asmo
Director
Dated: March 29, 2001 By: /s/ Michael P. Beauchamp
------------------------- -------------------------------------
Michael P. Beauchamp
Director
Dated: March 29, 2001 By: /s/ David J. Richards
------------------------- -------------------------------------
David J. Richards
Director
Dated: March 29, 2001 By: /s/ Rodney L. Taylor
------------------------- -------------------------------------
Rodney L. Taylor
Director
Dated: March 29, 2001 By: /s/ Philip M. Shasteen
------------------------- ------------------------------------
Philip M. Shasteen
Director
Dated: March 29, 2001 By: /s/ Jeffrey A. Ross
------------------------- ------------------------------------
Jeffrey A. Ross
Chief Financial Officer,
and Secretary
(Principal Accounting and
Financial Officer)
CASCO INTERNATIONAL, INC.
INDEX TO FINANCIAL STATEMENTS
Page
Independent Auditors' Report-- 28
Hausser + Taylor LLP - for the years ended December 31, 2000,
1999 and 1998.
Statements of operations-- 29
Years ended December 31, 2000, 1999 and 1998.
Balance sheets-- 30
December 31, 2000 and December 31, 1999.
Statements of cash flows-- 32
Years ended December 31, 2000, 1999 and 1998.
Statements of stockholders' equity-- 33
Years ended December 31, 2000, 1999 and 1998.
Notes to the financial statements-- 34
Years ended December 31, 2000, 1999 and 1998.
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, 2000 and 1999, and the related statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 2000. 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, 2000 and
1999, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 2000 in conformity with generally
accepted accounting principles.
/s/ Hausser + Taylor LLP
Columbus, Ohio
March 19, 2001
CASCO INTERNATIONAL, INC.
STATEMENT OF OPERATIONS
For the years ended December 31, 2000, 1999 and 1998
2000 1999 1998
------------- ------------- -------------
Revenue ............... ....... $ 23,545,410 $ 24,199,483 $ 21,718,213
Operating costs and expenses:
Cost of goods sold ........ 12,634,959 13,318,115 12,716,740
Selling, general and
administrative .. 9,254,251 9,136,391 8,377,665
Depreciation and amortization . 761,347 722,104 520,027
------------ ------------ ------------
Total operating costs
and expenses . 22,650,557 23,176,610 21,614,432
Operating income .................... 894,853 1,022,873 103,781
Other expense:
Interest expense ............. 301,859 372,378 335,871
Loss on sale of building
-- -- 151,144
------------ ------------ ------------
Total other expenses.. 301,859 372,378 487,015
Income (loss) before income taxes and
extraordinary item......... 592,994 650,495 (383,234)
Benefit (provision) for income taxes (252,000) (293,000) 145,500
------------ ------------ ------------
Income (loss) before extraordinary gain on
retirement of debt ........ 340,994 357,495 (237,734)
------------ ------------ ------------
Extraordinary gain on retirement of debt (less
income taxes of $570,000) --- --- 930,000
------------ ------------ ------------
Net Income (Loss) .............. $ 340,994 $ 357,495 $ 692,266
============ ============ ============
EARNINGS PER SHARE - BASIC
Income (loss) before
extraordinary item $ 0.19 $ 0.20 $ (0.13)
Extraordinary gain on retirement of debt -- -- 0.52
------------ ------------ ------------
Net Income (Loss) ........ $ 0.19 $ 0.20 $ 0.39
============ ============ ============
EARNINGS PER SHARE - DILUTIVE
Income (loss) before
extraordinary item ...... $ 0.17 $ 0.20 $ (0.13)
Extraordinary gain on retirement of debt -- -- 0.52
------------ ------------ ------------
$ 0.17 $ 0.20 $ 0.39
============ ============ ============
Weighted average common
shares outstanding ... 1,782,237 1,783,200 1,783,200
============ ============ ============
The accompanying notes are an integral part of the financial statements.
CASCO INTERNATIONAL, INC.
BALANCE SHEETS
December 31, 2000 and 1999
ASSETS 2000 1999
------------ -----------
Current Assets:
Cash ....................................... $ 4,551 $ 6,797
Accounts receivable ......................... 4,955,595 4,910,886
Inventory ................................... 4,316,076 4,714,063
Prepaid expenses ............................ 959,623 1,033,274
Deferred tax asset .......................... 102,000 102,000
------------ ------------
Total current assets ............ 10,337,845 10,767,020
------------ ------------
Buildings and equipment:
Buildings ................................... 2,657,263 2,627,727
Equipment ................................... 3,537,335 3,223,615
------------ ------------
6,194,598 5,851,342
Less accumulated depreciation ............... (3,137,550) (2,540,828)
------------ ------------
3,057,048 3,310,514
Land ............................................. 111,468 111,468
------------ ------------
Total property and equipment, net 3,168,516 3,421,982
------------ ------------
Other assets:
Cost in excess of net assets acquired, net of
accumulated amortization of $615,471 and
$479,819 respectively .................... 2,270,598 2,406,250
Other ....................................... 767,167 748,376
------------ ------------
3,037,765 3,154,626
------------ ------------
TOTAL ASSETS ..................................... $ 16,544,126 $ 17,343,628
============ ============
The accompanying notes are an integral part of the financial statements.
CASCO INTERNATIONAL, INC.
BALANCE SHEETS
December 31, 2000 and 1999
LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999
------------ ------------
Liabilities:
Accounts payable ............................ $ 488,726 $ 965,112
Short-term debt obligations ................. 1,858,485 2,500,465
Accrued liabilities ......................... 329,858 304,273
Advanced deposits-current ................... 2,615,550 1,854,785
Accrued taxes payable ....................... 125,000 355,000
------------ ------------
Total current liabilities........ 5,417,619 5,979,635
------------ ------------
Long-term debt ................................... 2,054,236 2,189,716
Advanced deposits-noncurrent ..................... 1,966,003 2,402,975
Deferred tax liability ........................... 545,775 533,775
------------ ------------
Total Liabilities ............... 9,983,633 11,106,101
------------ ------------
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
Retained earnings (deficit) ................. 143,103 (197,891)
------------ ------------
6,578,521 6,237,527
Less treasury stock, at cost 9,014 shares ... (18,028) ---
------------ ------------
Total stockholders' equity ...... 6,560,493 6,237,527
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ....... $ 16,544,126 $ 17,343,628
============ ============
The accompanying notes are an integral part of the financial statements.
CASCO INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
For the years ended December 31, 2000, 1999 and 1998
2000 1999 1998
----------- ---------- -----------
Cash flows from operating activities:
Net income (loss) ................. $ 340,994 $ 357,495 $ 692,266
Adjustments to reconcile net income (loss) to cash provided by
operating activities:
Depreciation and amortization .... 761,347 722,104 520,027
Loss of sale of building --- --- 151,144
Extraordinary gain on retirement
of debt --- --- (1,500,000)
Deferred provision (benefit) 12,000 (62,000) 424,500
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable ...... (44,709) 629,276 (496,739)
Inventory ................. 397,987 551,734 (595,713)
Prepaid expenses and other assets 34,830 28,246 (174,792)
Increase (decrease) in liabilities:
Accounts payable and accrued
liabilities (680,801) 29,146 212,970
Advanced deposits ............ 323,793 (321,999) 69,771
----------- ---------- ----------
Total adjustments ........... 804,447 1,576,507 (1,388,832)
------------ ---------- ----------
Net cash provided by (used in)
operating activities 1,145,441 1,934,002 (696,566)
------------ ---------- ----------
Cash flows from investing activities:
Sale of building ..................... --- --- 421,187
Sale of equipment ............... 17,890 --- ---
Payments for purchases of property
and equipment ............. (370,089) (429,445) (731,436)
------------ ---------- ----------
Cash used in investing activities .........(352,199) (429,445) (310,249)
Cash flows from financing activities:
Proceeds from debt obligation .... 20,082,765 18,677,466 13,759,044
Principal payments on debt ..... (20,860,225) (20,282,708) (12,718,263)
Payment for purchase of common stock (18,028) --- ---
------------ ---------- ----------
Cash provided by (used in) financing
activities ..... (795,488) (1,605,242) 1,040,781
Increase (decrease) in cash ......... (2,246) (100,685) 33,966
Cash, beginning of year .............. 6,797 107,482 73,516
------------ ----------- ----------
Cash, end of year .................... $ 4,551 $ 6,797 $ 107,482
============ =========== ==========
Other Cash Flow Information:
Cash payments during the year for:
Interest .....................$ 298,805 $ 386,069 $ 307,156
Income taxes, net of refunds . 545,678 7,000 --
Noncash Financing Activities:
Payment of subordinated debt ..$ -- $ -- $ 3,500,000
Subordinated debt replaced with
line of credit ............ $ -- $ -- $ 3,500,000
Acquisitions of assets and
goodwill .................. $ -- $ -- $ 1,745,642
Increase in line of credit
for acquisitions .......... $ -- $ -- $ 1,745,642
The accompanying notes are an integral part of the financial statements.
CASCO INTERNATIONAL, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
For the years ended December 31, 2000, 1999 and 1998
Capital in Retained
Common Excess of Earnings Treasury
Shares Stock Par Value (Deficit) Stock Total
--------- --------- --------- --------- -------- ----------
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
Net Income
-- -- -- 357,495 -- 357,495
--------- ------- ---------- ----------- ----------- -----------
Balance December 31, 1999
1,783,200 17,832 6,417,586 (197,891) 6,237,527
Net Income
-- -- -- 340,994 -- 340,994
Purchase of 9,014 shares
-- -- -- -- (18,028) (18,028)
--------- ------- ---------- ----------- ----------- -----------
Balance December 31, 2000
1,774,186 $17,832 $6,417,586 $ 143,103 $ (18,028) $ 6,560,493
========= ======= ========== =========== =========== ===========
The accompanying notes are an integral part of the financial statements.
CASCO INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
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.
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.
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, 2000 and 1999 include $651,076 and
$629,263, respectively, of prepaid selling costs that include costs for
commissions paid to sales people 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, 2000, 1999 and 1998, totaled $605,667, $566,424, and $438,681,
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, 2000. 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, 2000, 1999 and 1998 totaled $135,650 $135,650 and $77,274,
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 $20,030, $20,030, and $7,071, for the years ended December 31,
2000, 1999 and 1998, respectively.
INCOME TAXES
The Company utilizes 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.
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, 2000, 1999 and 1998.
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, 2000, 1999 and 1998.
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.
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No.
25, "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". For stock based compensation other
than employees, the Company utilizes the fair value method as provided for in
FASB #123.
EFFECTS OF RECENT ACCOUNT PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in financial
Statements." The guidance in SAB 101 must be adopted during the fourth quarter
2000 and the effects, if any, are required to be recorded through a retroactive,
cumulative-effect adjustment as of the beginning of the fiscal year, with a
restatement of all prior interim quarters in the year. Management has reviewed
their policies for revenue recognition in comparison to the requirements in SAB
101 and no change occurred to its income statement presentation, operating
results or financial position as a result of implementing SAB 101.
2. STOCK OPTIONS AND WARRANTS
At December 31, 2000, 935,000 common shares of the Company were
reserved for issuance under the incentive stock option plans, 40,000 shares were
reserved under the non-employee director stock option plans and 1,620,000 shares
were reserved under outstanding warrants. The 2000 option plan of 100,000 shares
includes both employees and directors. The 1999 option plan of 600,000 shares
includes both employees and directors. Additionally, 200,000 common shares of
the Company were reserved under a performance option plan for the President.
December 31, 2000 December 31, 1999
--------------------- -----------------------
Weighted Average Weighted Average
Incentive Stock Option Plan Number Exercise Price Number Exercise Price
- --------------------------- ------ -------------- ------ --------------
Outstanding, beginning
of year ............. 601,140 $2.0212 273,140 $2.8001
Granted ...................... 66,000 $2.7347 421,500 $1.7649
Canceled .......................117,360 $2.1302 93,500 $2.3529
Exercised .........................None -- None --
------ ------- ------- -------
Outstanding, end of year .........549,780 $2.2177 601,140 $2.1438
------- ------- ------- -------
Exercise price range of
options outstanding $1.0000 $1.0000
to to
$4.2400 $3.7037
Non-Employee Director Option Plan
Outstanding, beginning
of year .................... 220,800 $2.0212 55,800 $2.8094
Granted .........................10,000 $4.1250 180,000 $1.7500
Canceled ..........................None -- 15,000 $2.0000
Exercised .........................None -- None --
------- ------- ------- -------
Outstanding, end of year ...... 230,800 2.1124 220,800 $2.0212
------- ------- ------- -------
Exercise price range of options
outstanding ............... $1.75 $1.75
to to
$4.17 $4.17
The weighted average remaining life on options outstanding at December 31,
2000 is 4.19 years.
The incentive stock options are exercisable at the fair market value on the
date of grant, and were available from the 1996, 1997, 1999 and 2000 stock
option plans. The options outstanding at December 31, 2000 are exercisable from
January 17, 2002, through July 31, 2005.
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, 2000 are exercisable through October 12, 2003.
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.
Warrants to purchase 30,000 shares of CASCO International, Inc., common
stock were issued February 28, 1998 to R. L. Renck & Co., Inc. The Warrants vest
at 2,500 per month commencing on February 28, 1998 and continuing through
January 31, 1999 at an exercise price of $3.00 per share. The warrants are
exercisable for five years from the date of issuance.
Additional warrants to purchase 30,000 shares of CASCO International, Inc.,
common stock were issued June 27, 1999 to R. L. Renck & Co., Inc. The warrants
vest at 10,000 shares on June 27, 1999 then at a rate of 2,500 shares per month
from June 27, 1999 to February 26, 2000 at an exercise price of $2.75 per share.
The warrants are exercisable for five years from the date of issuance.
Proceeds
Date Granted or Shares Exercise to Company
Issued Exercisable Price Upon Exercise
Incentive --------------- ----------- ------- -------------
Stock Options:
1996 Plan January 17, 1997 14,580 $ 3.7037 $ 54,000
1996 Plan March 26, 1997 5,400 3.7037 20,000
1996 Plan March 12, 1997 37,800 3.2407 122,498
1997 Plan December 29, 1997 7,000 3.0625 21,438
1997 Plan January 20, 1998 60,000 2.8750 172,500
1997 Plan March 3, 1998 20,000 2.8125 56,250
1997 Plan April 1, 1998 5,000 3.5000 17,500
1997 Plan October 12, 1998 5,000 1.0000 5,000
1997 Plan May 27, 1999 349,000 1.7500 610,750
1999 Plan January 19, 2000 20,000 2.0600 41,200
1999 Plan February 1, 2000 20,000 2.1300 42,600
1999 Plan April 25, 2000 1,000 4.2400 4,240
2000 Plan July 31, 2000 5,000 2.6100 13,050
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
1997 Plan May 27, 1999 180,000 1.7500 315,000
1999 Plan April 5, 2000 10,000 4.1300 41,300
Warrants:
September 19, 1997 1,560,000 $5.50 8,580,000
February 28, 1998 30,000 3.00 90,000
June 27, 1999 30,000 2.75 82,500
---------- ------------
Total 2,400,580 $10,421,076
========== ============
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 2000, 1999, and 1998.
2000 1999 1998
---- ---- ----
Risk-free interest rate ............... 6% 6% 6%
Dividend yield ........................ 0% 0% 0%
Volatility factor ..................... 105.0% 104.4% 107.7%
Weighted average expected life in years 3.3 5 5
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:
2000 1999 1998
---- ---- ----
Net income as reported ......... $340,994 $357,495 $692,266
Net income-pro forma ............. $240,594 357,495 623,266
Income per common share -
as reported ................... $ .19 $ .20 $ .39
Income per common shares -
pro forma ..................... $ .13 $ .13 $ .35
Weighted average fair value of
options granted during the year $ 2.73 $ 1.76 $ 2.53
These pro forma calculations only include the effects of 2000, 1999, and
1998 grants. As such, the impacts are not necessarily indicative of the effects
on reported net income of future years.
3. DEBT OBLIGATIONS
Debt obligations consisted of the following:
December 31, December 31,
2000 1999
---- ----
Line of credit with interest
at prime plus 1/4 percent;
interest payable monthly,
maturing on July 30, 2001,
collateralized by accounts
receivable and inventory of
the Company ($3,280,226 available
at December 31,2000). $1,719,774 $2,262,189
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. 2,101,892 2,209,767
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. ----- 100,000
Promissory note payable with interest
at 6 percent, payable in monthly
installments through October 1, 2003. 91,055 118,225
------------- ------------
3,912,721 4,690,181
Current portion 1,858,485 2,500,465
------------- -------------
Long term portion $2,054,236 $2,189,716
============= =============
The interest rate for the line as of December 31, 2000 and 1999 was prime
plus 1/4 percent and prime plus 1/2 percent, respectively.
The prime interest rate at December 31, 2000 and 1999 was 9.5 percent and
8.5 percent, respectively. The carrying amount of the Company's short-term debt
obligations approximates fair value.
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. The Company was in violation of one covenant
pertaining to purchase of its common stock. The Company has received a waiver
for this violation for the year ended December 31, 2000.
The aggregate long-term debt payments as of December 31, 2000 for each of the
next three years are:
2001 1,858,485
2002 152,266
2003 1,901,970
---------
Total $3,912,721
==========
4. COMMITMENTS AND CONTINGENCIES
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 $248,571, $269,962
and $152,128, for the years ended December 31, 2000, 1999 and 1998,
respectively. The future minimum rentals under non-cancelable operating leases
during subsequent fiscal years are as follows:
YEARS ENDING
DECEMBER 31,
2001 $ 236,910
2002 123,518
-------
$ 360,428
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.
5. INCOME TAXES
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.
For the years presented, the expense (benefit) for income taxes from
continuing operations consisted of the following.
December 31, December 31, December 31,
2000 1999 1998
---- ---- ----
Current ................................ $240,000 $ 355,000 ---
Deferred
Federal ............................. 8,000 (58,000) (130,300)
State and Local ..................... 4,000 (4,000) (15,200)
-------- --------- --------
Net deferred expense (benefit) ......... 12,000 62,000 (145,500)
Net deferred expense (benefit) for taxes $252,000 $293,000 $(145,500)
======== ========= ========
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,
2000 1999 1998
---- ---- ----
Income tax expense (benefit) at statutory
rate $ 225,000 $247,000 $(145,700)
Goodwill amortization ....................... 13,000 13,000 13,650
State taxes net of federal benefit .......... 26,000 26,000 (15,300)
Other ....................................... (12,000) 7,000 1,850
--------- -------- ---------
Total income tax expense (benefit) $ 252,000 $293,000 $(145,500)
========= ======== =========
The components of net deferred taxes are as follows:
December 31, December 31,
2000 1999
---- ----
Assets:
Inventory costs capitalized for tax purposes $ 68,000 $ 68,000
Accruals and reserves to be expensed as paid for tax
purposes .......................................... 34,000 34,000
--------- ---------
Deferred tax assets 102,000 102,000
Liabilities:
Excess of tax over financial accounting depreciation and
amortization ...................................... (545,775) (533,775)
--------- ---------
Deferred tax liability ............................... (545,775) (533,775)
--------- ---------
Net deferred tax liability ........................... $(443,775) $(431,775)
========= =========
The Company changed its effective rate to 42.5% in 2000 from 38% in 1999
from 40% in 1997. The Company utilized approximately $0, $780,000 and $1,065,000
of net operating loss carry forward for the years ended December 31, 2000, 1999
and 1998, respectively.
6. Earnings Per Common and Common Equivalent Share
Earnings per common and common equivalent share were computed by dividing
net income by the weighted average number of shares of common stock outstanding
during the year. At December 31, 2000 and 1999, the number of common shares was
increased by the number of shares issuable on the exercise of outstanding stock
options and warrants when the market price of the common stock exceeds the
exercise price of the options and warrants. This increase in the number of
common shares was reduced by the number of common shares that are assumed to
have been purchased with the proceeds from the exercise of the options; those
purchases were assumed to have been made at the average price of the common
stock during that part of the year when the market price of the common stock
exceeded the exercise price of the options.
The following data show the amounts used in computing earnings per share
(EPS) and the effect on income and the weighted average number of shares of
dilutive potential common stock.
December 31,
-----------------------
2000 1999
---------- ----------
Income available to common
stockholders used in basic EPS
and diluted EPS .... $ 340,894 $ 357,495
========== ==========
Weighted average number
of common shares used in
Basic EPS .......... 1,782,237 1,783,200
Effect of dilutive securities:
Stock options and warrants 190,163 43,242
---------- ----------
Weighted number of common
Shares and dilutive potential
Common stock used in diluted
EPS ................ 1,972,400 1,783,200
========== ==========
Options and warrants on 1,807,080 and 1,353,940 shares, respectively, of
common stock were not included in computing diluted EPS for the years ended
December 31, 2000, 1999 and 1998 because their effects were antidilutive.
The common equivalent stock outstanding at December 31, 1998 would be
antidilutive for the year due to the net operating loss.
7. LOSS ON SALE OF BUILDING
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.
8. EXTRAORDINARY GAIN ON RETIREMENT OF DEBT
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 income taxes
of $570,000) 930,000 .52 .52
-------------- ----------- ------------
Net income $ 692,266 $ .39 $ .39
-------------- ----------- ------------
Options and warrants on 1,807,080, 1,461,815 and 1,353,940 shares, respectively,
of common stock were not included in computing EPS for the years ended December
31, 2000, 1999 and 1998 because their effects were antidilutive.
The common equivalent outstanding at December 31, 1998 would be antidilutive for
the year due to the net loss before extraordinary items.
9. STOCK ACQUISITION PROPOSAL BY RELATED PARTIES
The Chairman of the Board and President of the Company have offered to
acquire all of the outstanding shares of the Company not currently held by them.
A Special Committee of the outside directors was formed to consider the offer
and has indicated that it will recommend for approval the latest offer of $2.10
per share for the outstanding shares of common stock.