UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(AMENDMENT NO. 2)
--------------------------------------------
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ..................to.........................
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
---------------------------------------------------
(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 $3,009,150 (computed by reference to the
average bid and asked prices of such shares on such date).
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT MARCH 29, 2001
----- -----------------------------
Common Stock, par value $0.01 per share 1,774,186
DOCUMENTS INCORPORATED BY REFERENCE
None.
Note: The purpose of this amendment is due to SEC Staff comments to a Proxy
Statement filed by the Company.
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,
------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------
(Restated)(Restated)
** **
STATEMENT OF OPERATIONS DATA:
Revenues $ 23,545 $ 24,199 $ 21,718 $ 19,333 $ 21,959
Costs and expenses 22,989 23,579 22,102 20,007 22,542
--------- -------- -------- -------- --------
Income (loss) before income
taxes and cumulative effect
of change in accounting
principle 556 620 (384) (674) (583)
Benefit (Provision) for
income taxes (238) (281) 146 256 195
--------- -------- ------- ------- --------
Income (loss) before extraordinary gain and
cumulative effect of change in
accounting principle 318 339 (238) (418) (388)
Cumulative effect of change in
accounting principle * ----- ----- ----- ----- 597
Extraordinary gain on retirement
of debt ----- ----- 930 ----- -----
--------- -------- ------ ------ -------
Net income (loss) $ 318 $ 339 $ 692 $ (418) $ 209
========= ======== ======= ======= ========
PER SHARE DATA:
Income (loss) before cumulative effect of
change in accounting
principle $ 0.18 $ 0.19 $ (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 $ 0.18 $ 0.19 $ 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.
**The financial statements have been restated for the effect of warrants. See
financial statement notes for additional information.
The Company has not declared or paid any cash dividends on the Common Stock
since it was spun off from Pages, Inc. at the close of business on December 31,
1996.
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 6,586 6,250 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 December December
31, 31, 31,
2000 1999 1998
--------------------------------------
(RESTATED) (RESTATED)
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 39.5% 37.9% 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% 2.6% (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 $9.2 million for
the year ended December 31, 1999, an increase of 1.4% or approximately $124,000.
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 39.5% in 2000 from 37.9% in 1999. The 1.6% 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 $238,000 for the year ended December 31, 2000,
compared to an income tax provision of $281,000 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 $9.2 million for the year ended December 31, 1999,
compared to approximately $8.4 million for the year ended December 31, 1998, an
increase of 9.4% or approximately $789,000. 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 37.9% in 1999 from 38.6% in 1998. The 0.9% 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 $281,000 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 $1,145,000. Net cash used in investing activities
was approximately $352,000 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.
CASCO INTERNATIONAL, INC.
INDEX TO FINANCIAL STATEMENTS
Page
Independent Auditors' Report-- 29
Hausser + Taylor LLP - for the years ended December 31, 2000, 1999 and 1998.
Statements of operations-- 30
Years ended December 31, 2000, 1999 and 1998.
Balance sheets-- 31
December 31, 2000 and December 31, 1999.
Statements of cash flows-- 33
Years ended December 31, 2000, 1999 and 1998.
Statements of stockholders' equity-- 34
Years ended December 31, 2000, 1999 and 1998.
Notes to the financial statements-- 35
Years ended December 31, 2000, 1999 and 1998.
Financial Statement Schedule 27
Schedule II - Valuation and Qualifying Accounts and Reserves
All other schedules are omitted, not applicable under the related
instructions, 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. Our audits also included the financial
statement schedule listed in the Index to the Financial Statements. These
financial statements and financial statement schedule 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 auditing standards generally accepted
in the United States of America. 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 and financial statement schedule
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 accounting principles generally accepted in the United Sates of
America.
As discussed in Note 11 to the financial statements, these financial statements
have been restated for the accounting for warrants issued to a non-employee.
/s/ Hausser + Taylor LLP
Columbus, Ohio
March 19, 2001, except for Note 11 as to which the date is October 18, 2001
CASCO INTERNATIONAL, INC.
STATEMENT OF OPERATIONS
For the years ended December 31, 2000, 1999 and 1998
2000 1999 1998
----------- ----------- -----------
(RESTATED) (RESTATED)
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 9,290,735 9,166,905 8,377,665
Depreciation and amortization ...... 761,347 722,104 520,027
Total operating costs and ---------- ---------- ----------
expenses 22,687,041 23,207,124 21,614,432
Operating income ............ 858,369 992,359 103,781
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 .............. 556,510 619,981 (383,234)
Benefit (provision) for income taxes (238,000) (281,000) 145,500
---------- ---------- ----------
Income (loss) before extraordinary gain on
retirement of debt ................. 318,510 338,981 (237,734)
Extraordinary gain on retirement of debt (less
income taxes of $570,000) -- -- 930,000
---------- ---------- ----------
Net Income (Loss) .............. $ 318,510 $ 338,981 $ 692,266
========== =========== ============
EARNINGS PER SHARE - BASIC
Income (loss) before extraordinary
item $ 0.18 $ 0.19 $ (0.13)
Extraordinary gain on retirement
of debt -- -- 0.52
------------ ------------ ------------
Net Income (Loss) .............. $ 0.18 $ 0.19 $ 0.39
============ ============ ============
EARNINGS PER SHARE - DILUTIVE
Income (loss) before extraordinary
item .......... $ 0.16 $ 0.19 $ (0.13)
Extraordinary gain on retirement of debt -- -- 0.52
------------ ------------ ------------
$ 0.16 $ 0.19 $ 0.39
============ ============ ============
Weighted average common shares outstanding
Common ....................... 1,782,237 1,783,200 1,783,200
============ ============ ============
Diluted ...................... 1,972,400 1,826,442 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
----------- -----------
(RESTATED) (RESTATED)
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
------------ ------------
(RESTATED) (RESTATED)
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 ...................... 519,775 521,775
------------ ------------
Total Liabilities ................... 9,957,633 11,094,101
------------ ------------
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.............. 6,484,584 6,448,100
Retained earnings (deficit)................. 102,105 (216,405)
------------ ------------
6,604,521 6,249,527
Less treasury stock, at cost 9,014 shares .. (18,028) --
------------ ------------
Total stockholders' equity .......... 6,586,493 6,249,527
------------ ------------
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
--------- --------- ---------
(RESTATED) (RESTATED)
Cash flows from operating activities:
Net income (loss) ............. $ 318,510 $ 338,981 $ 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) (2,000) (74,000) 424,500
Warrant compensation cost ... 36,484 30,514 --
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 ......... 826,931 1,595,021 (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
Warrant Compensation Cost 30,514 30,514
Net Income (RESTATED)
-- -- -- 338,981 -- 338,981
Balance December 31, 1999
(RESTATED) .1,783,200 17,832 6,448,100 (216,405) -- 6,249,527
Net Income(RESTATED)
-- -- -- 318,510 -- 318,510
Warrant Compensation Cost 36,484 36,484
Purchase of 9,014 shares
(9,014) -- -- -- (18,028) (18,028)
---------- -------- ------- ------- ---------- ---------
Balance December 31, 2000
(RESTATED) 1,774,186 $17,832 $6,484,584 $ 102,105 $(18,028) $ 6,586,493
========= ======= ========== ========= ========= ===========
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 identified in the
agreements in accordance with Accounting Principles Board ("APB") No. 16,
"Business Combination".
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 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, and an assumption of a real property operating 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
fair 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. The Buyer and the Seller mutually
agreed on the following allocation of the purchase price among the Assets:
Seller (1) Adjustments (2) Buyer (3)
Inventory $335,944 $ (213,112) $122,832
Computer Equipment 28,572 (18,572) 10,000
Office Equipment --- 10,000 10,000
Furniture and Fixtures --- 30,000 30,000
Goodwill --- 1,326,633 1,326,633
(1) Represents Awards & Gifts financial statement
(2) Represents adjustments to record assets acquired at fair market value at
date of acquisition. Goodwill was recorded for the difference between the
purchase price and the fair market value of assets acquired.
(3) Represents the Company.
None of the Seller's liabilities were assumed by the Buyer.
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 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, and inventories.
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
fair 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 Buyer and the Seller mutually agreed on the following allocation of
the purchase price among the Assets:
Seller (4) Adjustments (5) Buyer (6)
Inventory $ --- $1,500 $1,500
Tools & Dies --- 12,000 12,000
Furniture and Fixtures --- 30,000 30,000
Non-Competition Agreement --- 36,000 36,000
Goodwill --- 195,677 195,677
(4) Represents American Awards & Gifts financial statements which were
maintained on a cash basis.
(5) Represents adjustments to record assets acquired at fair market value at
date of acquisition. Goodwill was recorded for the difference between the
purchase price and the fair market value of assets acquired.
(6) Represents the Company.
None of the Seller's liabilities were assumed by the Buyer.
USE OF MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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
for advanced deposits for certain programs. Advance deposits are recognized upon
shipment and delivery of the related goods. Additionally, management has
estimated, based on prior experience, the percentage of programs that will never
ship. These revenues are recognized as revenue over the contract period.
Revenues from services are insignificant. Returns from the sales of incentive
awards and from services are insignificant.
ADVANCE DEPOSITS
The Company receives cash advance deposits from customers for several of
its incentive programs. These advance deposits represent deferred revenue which
will be recorded in accordance with the revenue recognition policy as noted
above. The following summarizes the activity in the advance deposit accounts for
the years ended December 31, 2000, 1999 and 1998, respectively:
2000 1999 1998
Balance beginning of year $4,257,760 $4,579,759 $4,509,988
Cash receipts 3,608,635 3,629,535 3,529,062
Revenue recognized (3,284,842) (3,951,534) (3,459,291)
---------- ---------- -----------
Balance end of year $4,581,553 $4,257,769 $4,579,759
========== ========== ==========
Advance deposits, end of year:
Current $2,615,550 $1,854,785 $1,926,406
Long-term 1,966,003 2,402,975 2,653,353
Total $4,581,553 $4,257,760 $4,579,759
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. The
Company has not provided any allowance for sales, returns and allowances based
on management's estimates of collection. Returns from the sales of incentive
awards and from services are insignificant. The Company has elected to record
bad debts using the direct write-off method. Generally Accepted Accounting
Principles require that the allowance method be used to recognize bad debts;
however, Management believes that the amounts of accounts receivable that are
directly written off are not material. The amount of direct write-offs were
$46,872, $13,990 and $28,958 at December 31, 2000, 1999 and 1998 respectively.
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 ACCOUNTING 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. The warrants are valued at
the fair market value of the common stock at the date of grant.
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. The fair
market value of common stock at the date of grant was $1.94.
For the R. L. Renck & Co., Inc. warrants, compensation cost, net of tax, of
$22,484 and $18,864 was recorded for the years ended December 31, 2000 and 1999,
respectively.
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
---- ---- ----
(Restated) (Restated)
Net income as reported $318,510 $338,981 $692,266
Net income-pro forma 299,813 315,253 623,266
Income per common share -
as reported $ .18 $ .19 $ .39
Income per common shares -
pro forma $ .17 $ .18 $ .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 treasury stock was
purchased from a third-party stockholder at the fair market value at the date of
the purchase. The bank waiver was a one-time waiver for the year ended December
31, 2000 and when the line of credit was renegotiated in July 2001, this loan
covenant was removed from the loan agreement. As the line of credit was due in
July 2001, it was included in the current portion of long-term debt in the
financial statements.
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 non-cancelable 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
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, depreciation
and compensation expense rewarded for warrants issued.
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
---- ---- ----
(RESTATED) (RESTATED)
Current $240,000 $355,000 -----
Deferred
Federal (4,000) (68,000) (130,300)
State and Local 2,000 (6,000) (15,200)
---------- ---------- -----------
Net deferred expense (benefit) (2,000) (74,000) (145,500)
Net deferred expense (benefit)
for taxes $238,000 $281,000 $(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 $218,000 $238,000 $(145,700)
Goodwill amortization 13,000 13,000 13,650
State taxes net of federal benefit 26,000 26,000 (15,300)
Other (19,000) (4,000) 1,850
--------- -------- ---------
Total income tax expense
(benefit) $238,000 $281,000 $(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, current 102,000 102,000
Liabilities:
Warrant compensation cost 26,000 12,000
-------- --------
Excess of tax over financial accounting depreciation
and amortization (545,775) (533,775)
--------- --------
Deferred tax liability, long-term (519,775) (521,775)
--------- --------
Net deferred tax liability $(417,775) $(419,775)
========== ==========
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 $318,510 $338,981
======== ========
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 1,826,442
========= =========
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.
10. QUARTERLY RESULTS (Unaudited)
Summary data relating to the results of operations for each quarter of the
years ended December 31, 2000 and 1999 follows (in thousands except per share
amounts):
Three Months Ended
Mar. 31 Jun. 30 Sept. 30 Dec. 31
-------------------------------------------------------------------------------
(Restated) (Restated) (Restated) (Restated)
Fiscal year 2000
Net Revenue $5,243 $5,355 $4,551 $8,397
Gross profit 2,507 2,529 2,228 3,646
Income (loss) from
continuing operations 37 40 (253) 1,035
Net income (loss) (16) (16) (203) 554
Income (loss) from
continuing operations
per common share
Basic $ .02 $ .02 $(.14) $ .58
Diluted $ .02 $ .02 $(.14) $ .51
Net income
Basic $ (.01) $ (.01) $(.11) $ .31
Diluted $ (.01) $ (.01) $(.11) $ .28
Fiscal year 1999
Net Revenue $5,966 $5,869 $4,268 $8,095
Gross profit 2,942 2,586 2,010 3,343
Income (loss) from
continuing operations 575 37 (356) 737
Net income (loss) 284 (30) (274) 360
Basic and diluted
income (loss) from
continuing operations
per common share $ .32 $ .02 $ (.20) $ .41
Net income
Basic $ .16 $ (.01) $ (.15) $ .20
Diluted $ .16 $ (.01) $ (.15) $ .20
------------------------------------------------------------------------------
11. PRIOR PERIOD ADJUSTMENT
The financial statements and related notes have been restated to reflect
compensation expense, net of tax for warrants issued to R.L. Renck and Co., Inc.
for the years ended December 31, 2000 and 1999. The impact to the financial
statements is as follows:
2000 1999
As filed Restated As filed Restated
-------- -------- -------- --------
Operating Income $894,369 $858,369 $1,022,873 $992,359
Net income $340,994 $318,510 $ 357,495 $338,981
Earnings Per Share:
Basic $ 0.19 $ 0.18 $ 0.20 $ 0.19
Diluted $ 0.17 $ 0.16 $ 0.20 $ 0.19
Deferred tax liability $545,775 $519,775 $533,775 $521,775
Capital in excess of
Par value $6,417,586 $6,484,584 $6,417,586 $6,448,100
Retained earnings
(deficit) $143,103 $102,105 $(197,891) $(216,405)
SCHEDULE II
Valuation and Qualifying Accounts and Reserves
for the years ended December 31, 2000, 1999 and 1998
Additions
-----------------------
Charged to
Balance at Charged to other Balance at
Beginning costs and accounts- Deductions- End of
Description of period expenses describe describe period
-------------------------------------------------------------------------------
2000 Inventory Reserve 90,656 200,000 0 200,000(1) 90,656
1999 Inventory Reserve 90,656 85,000 0 85,000(1) 90,656
1998 Inventory Reserve 260,656 30,000 0 200,000(1) 90,656
(1) Slow moving inventory identified in reserve sold at net realizable value.