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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For the fiscal year ended December 31, 1997
Commission File Number 0-21717
CASCO INTERNATIONAL, INC.
(formerly CA Short Company)
- --------------------------------------------------------------------------------
(Exact Name of Registrant as specified in its charter)
Delaware 56-0526145
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4205 East Dixon Boulevard, Shelby, North Carolina 28150
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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
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(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 18, 1998 was $4,768,250 (computed by reference to the
average bid and asked prices of such shares on such date).
Number of Common Shares, each with $0.01 par value, of the Registrant
outstanding as of date: March 18, 1998: 1,783,200 Common Shares.
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PART I
ITEM 1. BUSINESS.
GENERAL
CASCO INTERNATIONAL, INC., formerly CA Short Company, (the "Company")
was formed as a North Carolina corporation in 1950. Pages, Inc., a Delaware
Corporation ("Pages"), acquired all of the issued and outstanding common stock
of the Company in February, 1990. In November, 1996, the Company reincorporated
in the State of Delaware by merging into Clyde A. Short Incorporated, a Delaware
corporation which was the surviving corporation in the merger and which, in
conjunction with the merger, changed its name to CA Short Company. Effective at
the close of business on December 31, 1996, Pages distributed all of the
Company's common stock $.01 par value ("common stock") to its shareholders. From
January 1, 1997 until May 30, 1997 the common stock was traded on the OTC
Bulletin Board under the symbol "CASC". On June 2, 1997, the common stock began
trading on The Nasdaq SmallCap market under the same symbol. The Company's
common stock and warrants are traded on The Nasdaq SmallCap Market under the
symbols "CASC" and "CASCW". In 1997, the Company changed its name from CA Short
Company to CASCO INTERNATIONAL, INC., but the Company does business under the CA
Short Company name.
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. They include safety, sales
incentive, quality control, production, service recognition, attendance,
birthday, and corporate holiday gift programs. The common objective of all the
Company's programs is to satisfy a client's specific needs. Changes in the
premium incentive industry have permitted the Company to redefine its
strategies, focus on specific product lines, and exploit certain
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niches within its market. The Company's adjustments include the installment of a
total quality management program, the development of a strategic marketing
group, the implementation of an aggressive cash management program, and the
development of new core capabilities necessary to promote growth. The Company
believes that with intense marketing and the employment of a skilled,
well-managed field sales organization, the Company will be able to increase the
brand recognition of it's products and increase it's penetration into specific
markets.
MERCHANDISE SELECTION AND BROCHURES
The Company's programs feature brand name merchandise from industry
leading manufacturers such as Sony(R), RCA, Waterford(R), Bulova(R), Minolta,
and Bushnell(R). The items in a client's program are separated into various
price levels, thus allowing the client to select price levels that fit their
budget. Featured in full color brochures, items are presented by award level.
The Company partners with clients to design and produce brochures that
reflect the client's corporate identity. These brochures are designed and
produced in-house by the Company's creative services department. The Company
also produces a catalog of pre-selected merchandise, arranged in various price
levels, from which clients may build programs.
SERVICE RECOGNITION PROGRAMS
In the past, there was a deeply ingrained corporate standard stating
"longevity-equals-seniority" -- the idea that the longer you work for a company,
the more seniority you earn. For decades, service recognition programs were
designed to reinforce this paradigm.
Today, as companies re-engineer and reorganize they realize that it has
never been more important to recognize their associates for their loyalty and
hard work. The standard has changed to "individual performance-equals-longevity"
- -- the better an associate performs, the more valuable he or she is to their
company. With this in mind, the entire recognition industry is changing, and
different types of programs are required to redefine recognition. As more and
more companies outsource the handling of recognition programs, the Company is
strategically positioning itself as the leader for the complete design,
administration, and fulfillment of innovative and effective recognition
programs. The Company's primary goal as it partners with its clients to develop
their own custom program is to increase "Recognitional Impact(TM)" --- the level
of satisfaction each client experiences with their program. Recognitional
Impact(TM) establishes a performance index that allows the Company to measure
the added value it provides both existing clients, as well as prospective
clients.
SAFETY AWARENESS/INCENTIVE AND RECOGNITION PROGRAMS
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,
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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.
CLIENTS
The Company's client list represents a wide spectrum of performance
driven organizations throughout the United States. The Company's cross section
of industry representation minimizes cyclical downturns traditionally found in
industry specific business models. The client list includes DuPont, Pfizer,
Huntington Bank and Intel.
GROWTH STRATEGY
The Company has divided the country into specific territories. The
territories were defined by existing accounts and target prospects within each
area. Each territory is serviced by a full-time, Company- employed recognition
consultant. Within each territory area the Company has segmented the potential
clients into specific prospect groups based on size and type of program. Each
prospect group will be marketed in the method proven most likely to engage the
client. All recognition consultants receive intense training and are measured on
a number of criteria including sales performance and territory market share
penetration. The Company continues to work markets on a proactive, well planned,
systematic basis. The Company intends to augment internal growth through
value-added acquisitions and strategic alliances designed to increase
penetration in key market areas.
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SALES AND MARKETING
The Company has redefined the way in which it goes to market. It has
made a transition from independent sales reps to full-time company associates.
Further, the Company has clearly defined and identified target prospects in
strategic markets across the country. In addition to prospecting activities, the
marketing and sales group has developed an aggressive account initiative
involving account retention. This change in the Company's philosophy was needed
due to a significant change in its mission: "To have the best trained, most
responsive, performance based sales force in America." The Company realized the
existing sales force would never be able to take the Company to the next level
of performance. In the past 18 months the Company has identified major markets
and replaced 90% of its independent sales staff with employed full-time sales
people. The Company has prepared for any short term ramifications by developing
a fully staffed inside sales group to assist in regulating the change to an
employed field sales group, and will utilize independent field representatives
in special situations.
COMPETITION
The recognition industry includes two completely different markets that
must be sold and managed individually. The service recognition market is
approaching a billion dollar industry with three major competitors: O.C. Tanner,
Jostens, and The Robbins Company which have combined annual sales of $400-$500
million. All three of these competitors are strong companies with large jewelry
manufacturing facilities. The safety recognition industry is estimated to be a
billion-dollar industry. The industry is fragmented and there is no dominant
player in this industry. The Company is not aware of any competitor in the
safety industry possessing the same core competencies as the Company. The
Company competes on the basis of program design, customer service, product
quality, full program administration and flexibility.
EMPLOYEES
As of February 18, 1998 the Company employed a total of 140 regular
employees. The number of seasonal employees fluctuated during 1997 from a high
of 83 in the months of November, December and January when the Company generates
approximately forty percent of its revenues and all of its profits to a low of 9
due to the seasonal nature of the Company's business. As a result the Company's
working capital requirements are highest during November and December. None of
the Company's employees are represented by a labor union. The Company considers
its relationship with its employees to be excellent. As of February 18, 1998,
the Company's health care plan covered 93 of its employees.
ITEM 2. PROPERTIES.
Owned
Location Use Size Leased
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Shelby, North Carolina Warehouse & 134,000 sq. ft. Owned
Office
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Kings Mountain, North Carolina Warehouse 167,000 sq. ft. Owned
These facilities are located in appropriately designed buildings which
are kept in good repair. All of the properties owned by the Company are pledged
to various lenders. On March 4, 1998, the Company sold its 167,000 square foot
Kings Mountain warehouse. The Company sold the warehouse for $425,000.
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 was a wholly-owned subsidiary of Pages, Inc. until Pages,
Inc. distributed all of the shares of Company Common Stock to its stockholders,
effective at the close of business on December 31, 1996. The distribution was
made pursuant to a Securities and Exchange Commission no-action letter stating,
among other things, that the Securities and Exchange Commission will not
recommend enforcement action if the Common Stock is distributed without
registration under the Securities Act of 1933.
Effective January 14, 1997, the Company's common stock began trading on
the NASD OTC Bulletin Board service under the symbol "CASC". On June 2, 1997,
the common stock began trading on the Nasdaq SmallCap market under the same
symbol. On September 19, 1997, the Company completed a public offering of
780,000 units, each unit consisting of one share of common stock and two
redeemable Class A Warrants. The units traded under the symbol CASCU from
September 19, 1997 until October 21, 1997. On October 21, 1997 the units
separated and the common stock continued to trade under the symbol CASC and the
warrants began trading under the symbol CASCW. The following table sets forth,
for the periods indicated the high and the low sale prices for shares of the
common stock, units and warrants. Bulletin Board prices represent inter-dealer
quotations, without adjustment for retail markup, markdown or commissions and
may not represent actual transactions.
Trade Price
Calendar Year Ended December 1997 High Low
Fourth Quarter
CASC 6 7/16 2 5/8
CASCW 3 5/8
CASCU 9 8 1/4
Third Quarter
CASC 5 5/8 4 5/8
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CASCW N/A N/A
CASCU 8 1/4 7 7/8
Second Quarter
CASC 4.83 2.99
CASCW N/A N/A
CASCU N/A N/A
First Quarter
CASC 4.14 3.22
CASCW N/A N/A
CASCU N/A N/A
As of March 18, 1998, 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 The Huntington
National Bank (the "Loan Agreement") does not allow the Company to pay cash
dividends which total in excess of $100,000 on its Common Stock and only then
when the Company is not in default under the Loan Agreement.
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ITEM 6. SELECTED FINANCIAL DATA.
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Year Year Year Year
Ended Ended Ended Ended Ended
December December December December December
31, 31, 31, 31, 31,
-----------------------------------------------------------------------------------
1997 1996 1995 1994 1993
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<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $ 19,333 $ 21,959 $ 22,620 $ 25,158 $ 28,909
Cost and expenses 20,007 22,542 23,296 25,635 28,759
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes and
cumulative effect of change in
accounting principle (674) (583) (676) (477) 150
(Provision) benefit for income taxes 256 195 249 193 (57)
----------- ----------- ----------- ----------- -----------
Income (loss) before cumulative effect of
change in accounting principle (418) (388) (427) (284) 93
Cumulative effect of change in accounting
principle, net of tax of $398 -- 597 -- -- --
----------- ----------- ----------- ----------- -----------
Net income (loss) $ (418) $ 209 $ (427) $ (284) $ 93
=========== =========== =========== =========== ===========
PRO FORMA PER SHARE DATA:
Income (loss) before cumulative effect of
change in accounting principle $ (0.34) $ (0.39) $ (0.43) $ (0.28) $ (0.09)
Cumulative effect of change in
accounting principle -- 0.59 -- -- --
----------- ----------- ----------- ----------- -----------
Income (loss) per common share (1) $ (0.34) $ 0.20 $ (0.43) $ (0.28) $ (0.09)
=========== =========== =========== =========== ===========
Pro forma weighted average common
and common equivalent shares 1,225,447 1,003,431 1,003,431 1,003,431 1,003,431
=========== =========== =========== =========== ===========
BALANCE SHEET DATA:
Working capital $ 7,202 $ 5,025 $ 3,774 $ (1,790) $ (1,810)
Total assets 16,148 18,249 19,512 23,584 22,572
Stockholders' equity 5,188 3,328 3,119 3,547 3,831
</TABLE>
(1) Represents pro forma earnings per common and potential common shares
both on a basic and a diluted basis.
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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 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None
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RESULTS OF OPERATIONS
The table below sets forth certain financial data expressed as a
percentage of revenues (percentage may not total 100% due to rounding):
<TABLE>
<CAPTION>
Percentage of Revenues
------------------------------------------
Twelve Months Twelve Months Twelve Months
Ended Ended Ended
December 31, December 31, December 31,
1997 1996 1995
------------------------------------------
<S> <C> <C> <C>
Total revenue 100.0% 100.0% 100.0%
Cost of goods sold 59.1% 61.6% 61.3%
----- ----- -----
Gross profit 40.9% 38.4% 38.7%
Selling, general, and administrative 40.1% 36.7% 36.1%
Interest 2.4% 0.6% 1.8%
Depreciation and amortization 1.9% 1.5% 1.6%
Management Fee -- 2.3% 2.2%
----- ----- -----
Loss from continuing operations before income taxes (3.5%) (2.7%) (3.0%)
===== ===== =====
</TABLE>
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YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996.
Revenues for the year ended December 31, 1997 approximated $19.3
million, compared to $22.0 million in revenues for the year ended December 31,
1996, a decrease of 12% or approximately $2.7 million. The decline in revenue
was due to disappointing year-end holiday sales and a decrease in volume on
certain existing customers coupled with delayed redemption on new accounts, as
well as the Company repositioning itself in more profitable business segments.
Cost of goods sold for the year ended December 31, 1997 approximated
$11.4 million, compared to approximately $13.5 million of cost of goods sold for
the year ended December 31, 1996, a decrease of 15.6% or approximately $2.1
million. The decrease in cost of goods sold was attributable to the decrease in
revenues. As a percentage of revenues, cost of goods sold decreased to 59.1% in
1997 from 61.6% in 1996. The 2.51% decrease in cost of goods sold was
principally attributable to a change in product mix.
Selling, general, and administrative expense for the year ended December
31, 1997 approximated $7.8 million for the year ended December 31, 1997,
compared to approximately $8.1 million for the year ended December 31, 1996, a
decrease of 3.7% or approximately $300,000. The decrease in selling, general and
administrative expenses was due to decreased sales and continued cost reduction
efforts implemented by the Company.
Interest expense was approximately $469,000 for the year ended December
31, 1997, compared to $129,000 for the year ended December 31, 1996, an increase
of 264% or approximately $340,000. The average outstanding debt on the credit
facility by month in 1997 approximated $1.1 million compared to $1.9 million for
1996. The average outstanding balance on the subordinated debenture by month in
1997 approximated $5 million compared to $0 in 1996. Additionally, the average
interest rate for 1997 approximated 9.42% compared to approximately 9.15% for
1996 on the credit facility. The interest rate on the subordinated debenture for
1997 approximated 7% compared to 0% in 1996. The increase in interest was mainly
attributable to the interest paid on a subordinated debenture given to Pages,
Inc. when the Company was spun off.
Depreciation and amortization expense was approximately $359,000 for the
year ended December 31, 1997, compared to $338,200 for the year ended December
31, 1996, a increase of 6.2% or approximately $21,000. The increase in
depreciation and amortization expense was principally attributable to the
depreciation of newly acquired assets in 1996.
Income tax benefit was $256,000 for the year ended December 31, 1997,
compared to $195,100 for the year ended December 31, 1996. The provisions for
income tax benefit were calculated through the use of estimated income tax rates
based upon the loss before taxes.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995.
Revenues were approximately $22.0 million for the year ended December
31, 1996, compared to $22.6 million for the year ended December 31, 1995, a
decrease of 3% or approximately $660,000. The decline in revenue was due to a
disappointing year-end holiday sales and a decrease in volume on certain
existing customers coupled with delayed redemption on new accounts.
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Cost of goods sold was approximately $13.5 million for the year ended
December 31, 1996, compared to approximately $13.9 million for the year ended
December 31, 1995, a decrease of 2.8% or approximately $400,000. The decrease in
cost of goods sold was attributable to the decrease in revenues. As a percentage
of revenues, cost of goods sold increased to 61.6% in 1996 from 61.3% in 1995.
The 0.3% increase in cost of goods sold is principally attributable to a change
in product mix.
Selling, general, and administrative expense was approximately $8.1
million for the year ended December 31, 1996, compared to approximately $8.2
million for the year ended December 31, 1995, a decrease of 1% or approximately
$100,000. The decrease in selling, general and administrative expenses was due
to decreased sales and cost reduction efforts implemented by the Company.
Interest expense was approximately $129,000 for the year ended December
31, 1996, compared to $416,000 for the year ended December 31, 1995, a decrease
of 69% or approximately $287,000. The average outstanding debt by month in 1996
approximated $1.9 million compared to $3.9 million for 1995. Additionally, the
average interest rate for 1996 approximated 9.15% compared to approximately 9.3%
for 1995.
Depreciation and amortization expense was approximately $338,200 for the
year ended December 31, 1996, compared to $362,500 for the year ended December
31, 1995, a decrease of 7% or approximately $24,300. The decrease in
depreciation and amortization expense was principally attributable to the
amortization of the remaining deferred loan cost during 1996.
Income tax benefit was $195,100 for the year ended December 31, 1996,
compared to $248,600 for the year ended December 31, 1995. The provisions for
income tax benefit were calculated through the use of estimated income tax rates
based upon the loss before 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 and proceeds from the public offering of units consisting of common
stock and warrants during the third quarter of 1997. The Company's primary uses
of funds consist of financing inventory and receivables.
Net working capital increased to $7,202,000 as of December 31, 1997 from
net working capital of $5,025,000 as of December 31, 1996. The increase was
primarily attributed to reduced borrowings in 1997 and the proceeds from the
public offering, as well as a reduction in inventory carrying levels.
The Company has adopted a growth strategy which will be accomplished
through increased efforts of the Company's existing highly trained sales force
in order to expand current market share and enter into new markets.
The Company anticipates that operating cash flows during the next
twelve months, coupled with its ability to borrow under the credit facility and
the proceeds from the sale of the Kings Mountain warehouse and the first deed of
trust on the Shelby facilities, will cover operating expenditures and meet the
short-term debt obligations. The Company's credit facility is due and payable in
full on June 30, 1998. Although the lender has not issued a commitment to do so,
the Company's relationship with it's lender is favorable and
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the Company anticipates that the credit facility will be renewed when due.
Effective at the close of business on December 31, 1996, a tax free
spin off of the Company's common stock from it's parent, Pages, was completed
(the "Distribution"). In the Distribution, for every ten shares of Pages common
stock outstanding on the record date, one and one-half shares of the Company's
common stock was distributed to Pages' stockholders. The Company entered into a
$5 million, 7% subordinated debenture with Pages simultaneously with the
Distribution in satisfaction of amounts due to Pages by the Company. The excess
of the amount due to Pages as of the Distribution over the $5 million
subordinated debenture was recorded as paid in capital. Principal payments
will be $100,000 per year for the first four years, and a final payment due at
the end of the fifth year for the remaining principal balance. Interest is at 7%
per annum, payable quarterly. Based on the consummation of the Distribution
effective January 1, 1997, the amounts due to Pages previously recorded as
current have been reclassified to long term, thus significantly increasing the
Company's net working capital, as described earlier in this section. The Company
discharged the debenture in full in January 1998 for $3.5 million.
The Company does not anticipate any material expenditures for property
and equipment during the next twelve months.
The Company is aware of no trends or demands, commitments or
uncertainties that will result in, or that management believes are reasonably
likely to result in, the Company's liquidity increasing or decreasing in any
material way. The Company is aware of no legal or other contingencies, the
effect of which are believed by management to be reasonably likely to have a
material adverse effect on the Company's financial statements.
SEASONALITY
The Company's business is highly seasonal, with approximately 39% of
its revenues and most of its profits recorded in the months of November,
December, and January. As a result, the Company's working capital requirements
are highest during November and December when the combination of receivables and
inventory are at peak levels. The Company typically experiences losses in its
second and third quarters.
As the results from the Company's growth strategy develop, the effects
of seasonality should be diminished. The business segments on which the Company
has chosen to focus offer steadier revenue flows, as well as more consistent
requirements for working capital.
INFLATION
Although the Company cannot determine the precise effects of inflation,
inflation has an influence on the cost of the Company's products and services,
supplies, salaries, and benefits. The Company attempts to minimize or offset the
effects of inflation through increased sales volumes and sales prices, improved
productivity, alternative sourcing of products and supplies, and reduction of
other costs. The Company generally has been able to offset the impact of price
increases from suppliers by increases in the selling prices of the Company's
products and services.
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ITEM 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.
A report on Form 8K was dated and filed on July 23, 1997, reporting
under Item 4 the dismissal of Deloitte & Touche, LLP as the Company's principal
independent accountant, and the engagement of Hausser + Taylor, LLP as its new
independent accountants.
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:
<TABLE>
<CAPTION>
Director or
Executive
Name Age Position Officer Since
---- --- -------- -------------
<S> <C> <C> <C>
S. Robert Davis (1) 59 Chairman of the Board 1990 (2)
Charles R. Davis (1) 36 President and Director 1990 (2)
Robert V. Boylan 34 Chief Operating Officer and Director 1997
Jeffrey A. Ross 30 Chief Financial Officer and Secretary 1996
David J. Richards 45 Director 1997
Michael P. Beauchamp 51 Director 1997
</TABLE>
(1) S. Robert Davis is the father of Charles R. Davis.
(2) Including the period prior to the Company's domicile change merger in
1996.
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.
14
<PAGE> 15
BUSINESS EXPERIENCE OF DIRECTORS AND EXECUTIVE OFFICERS
S. ROBERT DAVIS is the Chairman of the Board and President of Pages,
Inc., a Company with a class of securities registered pursuant to Section 12 of
the Securities Exchange Act of 1934 ("Pages"). Prior to his election to the
Board of Directors of Pages, he served as Assistant to the President of Pages
from January, 1988, to March, 1990, on a part-time basis. Additionally, during
the past five years Mr. Davis has operated several private businesses involving
the developing, sale, and/or leasing of real estate.
CHARLES R. DAVIS was elected President of the Company in September,
1992. Additionally, during the past five years Mr. Davis has operated several
private businesses involving the developing, sale and/or leasing of real estate
but devotes substantially all of his business time to the Company.
ROBERT V. BOYLAN joined the Company in August, 1996, as Executive Vice
President of Sales, and was promoted to Chief Operating Officer in March of 1997
and was elected to the board of directors in May, 1997. Prior to joining the
Company, Mr. Boylan served in various sales and marketing capacities with
Certainteed Corporation, a diversified building products manufacturer.
Certainteed is not a parent, subsidiary, or other affiliate of the Company. Mr.
Boylan has also served as a contract consultant for the American Management
Association, as well as Beauvestco Consulting, specializing in sales development
and sales management. Mr. Boylan received his MBA from Wake Forest University.
JEFFREY A. ROSS is a certified public accountant. He joined the Company
as its controller in June, 1993. Mr. Ross was employed as an accountant by
Hausser + Taylor LLP, a large public accounting and consulting firm from
September, 1989, until June, 1993.
DAVID J. RICHARDS has been the President and a director of NetMed, Inc.
for over five years. NetMed is not a parent, subsidiary or other affiliate of
the Company. NetMed is a company with a class of securities registered pursuant
to section 12 of the Securities Exchange Act of 1934.
MICHAEL P. BEAUCHAMP has been the President of Beauvestco, a management
consulting firm, since 1989. Beauvestco is not a parent, subsidiary, or other
affiliate of the Company.
SECTION 16 (a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended
(the"Exchange Act") requires the Company's officers and directors, and persons
who own more than ten percent of a registered class of the Company's equity
securities, to file reports of ownership and changes in ownership of equity
securities of the Company with the Securities and Exchange Commission ("SEC").
Officers, directors, and greater than ten percent shareholders are required by
SEC regulations to furnish the Company with copies of all Section 16 (a) forms
they file.
Based solely upon a review of such forms furnished to the Company
pursuant to Rule 16a-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.
15
<PAGE> 16
ITEM 11. EXECUTIVE COMPENSATION.
DIRECTOR COMPENSATION
Each director who is not an officer of the Company will receive a fee of
$500 for attendance at each Board meeting, a fee of $250 for attendance at each
telephonic Board meeting, and a fee of $250 for attendance at each meeting of a
Board committee of which he is a member. Directors who are also officers of the
Company receive no additional compensation for their services as directors. The
Company has adopted a Non-Employee Director Stock Option Plan, which provides
for the grant, at the discretion of the Company's Board of Directors, of options
to purchase up to 40,000 shares of Company common stock upon such terms as are
determined by the Board in its discretion. In June, 1997, options to purchase
10,000 shares of common stock at a purchase price of $4.50 per share were
granted under the Director Option Plan.
EXECUTIVE COMPENSATION
The following table shows, for the fiscal years ended December 31, 1997;
1996; and 1995 the cash compensation paid by the Company, as well as certain
other compensation paid for those years to the Company's President and C.E.O.
and to the Chief Operating Officer. No other executive officers had total salary
and bonus that exceeded $100,000 during the years ended 1997, 1996 and 1995.
None of the Company's executive officers have employment agreements with the
Company.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
----------------------------- ----------------------
Name and Other Annual Number of
Principal Position Year Salary Bonus Compensation Options Awarded (1)
------------------ ---- ------ ----- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Charles R. Davis 1997 $155,000 $25,000 $ 0 35,000 (3)
President & C.E.O. 1996 $132,315 $0 $134,040 (2) 0
1995 $147,896 $0 $103,389 (2) 0
Robert V. Boylan 1997 $107,000 $ 1,000 $ 0 12,500
Chief Operating Officer
</TABLE>
(1) Stock options previously granted to the named Executive Officers, by
their terms, automatically adjust to reflect certain changes in the
outstanding Common Shares of the Company, including stock dividends.
(2) Reflects the difference between the fair market value of the Common
Shares received and the stock option exercise price on the date of
exercise.
(3) On July 17, 1997, the Company agreed to grant to Mr. Davis performance
options to purchase 200,000 shares of Company common stock, 50,000 of
which will be granted if the Company has pre-tax earnings of at least $1
million in any fiscal year, 75,000 of which will
16
<PAGE> 17
be granted if the Company has pre-tax earnings of at least $1.5 million
in any fiscal year, and 75,000 of which will be granted if the Company
has pre-tax earnings of at least $2 million in any fiscal year, in each
case as long as Mr. Davis was employed by the Company at the end of the
applicable fiscal year. The performance options are exercisable at the
market price of the common stock at the date of grant, which will be
the date the Company files its Form 10-K with its audited financial
statements showing that the required earnings plateau is satisfied.
<TABLE>
<CAPTION>
Stock Option Grants in Last Fiscal Year
- -----------------------------------------------------------------------------------------------------------------------------
Individual Grants
------------------------------------------------------------- Potential Realized Value
Number of Percent of at Assumed Annual Rate of Stock
Options Total Options Exercise or Price Appreciation for Option Term (1)
Granted Granted in Employees Base Price Expiration --------------------------------------
Name in 1997 in 1997 per Share Date 5% 10%
---- ------- ------- --------- ---- -- ---
<S> <C> <C> <C> <C> <C> <C>
Charles R. Davis 35,000 (2) 40% $3.50 3/12/07 42,000 195,300
Robert V. Boylan 7,500 (2) 8.60% $4.00 1/17/07 18,900 47,850
5,000 5.70% $3.50 3/12/07 6,000 27,900
</TABLE>
(1) These assumed appreciation rates are not derived from the historical or
projected prices of the Company's Common Stock or results of operations
or financial condition and they should not be viewed as a prediction of
possible prices of value for the Company's Common Stock in the future.
(2) The stock options were granted under the Company's 1996 Incentive Stock
Option Plan, and are exercisable commencing January 17, 1998 and March
12, 1998.
Aggregated Options/SAR Exercises with Las Fiscal Year
and Fiscal Year End Options/SAR Values
<TABLE>
<CAPTION>
Number of Shares Value of Unexercised
Underlying Unexercised In-the-Money
Options/SAR's at FY End Options/SAR's at FY End
Shares Acquired Value ------------------------- -------------------------
Name or Exercised Realized Exercisable Unexercisable Exercisable Unexercisable
---- ------------ -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Charles R. Davis None N/A 35,000 0 N/A N/A
Robert V. Boylan None N/A 12,500 0 N/A N/A
</TABLE>
No options at year end were in the money options.
1996 AND 1997 INCENTIVE STOCK OPTION PLAN
The Company has adopted a 1996 Incentive Stock Option Plan and a 1997
Employee Stock Option Plan (the "Incentive Plans") which provide for the grant,
at the discretion of the Board of Directors, of options to purchase up to 85,000
and 150,000 shares, respectively, of Common Stock to key employees of the
Company. It is intended that options granted under the Incentive Plans qualify
as incentive stock options under Section 422 of the Internal Revenue Code of
1986, as amended. The selection of participants, allotment of shares,
determination of exercise price and other considerations relating to the grant
of options
17
<PAGE> 18
under the Incentive Plans is determined by the Board of Directors, at its
discretion. Options granted under the Incentive Plans are exercisable for a
period of up to ten years and five years, respectively, after the date of grant
at an exercise price which is not less than the fair market value of the shares
on the date of grant, except that the term of an incentive stock option granted
under the Incentive Plans to a shareholder owning more than 10% of the
outstanding shares may not exceed five years and its exercise price may not be
less than 110% of the fair market value of the shares on the date of grant. In
January, 1997, the Company granted options under the Incentive Plan to purchase
29,500 shares of Common Stock at a purchase price of $4.00 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 $4.00
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. Options currently outstanding under the 1996 Incentive Plan are not
exercisable until the expiration of one year after the date of grant. Options
currently outstanding under the 1997 Incentive Plan are exercisable based on the
following schedule.
<TABLE>
<CAPTION>
Cumulative Percentage of Aggregate
Number of Shares of Stock Covered
Exercise Period by an Option Which May be Exercised
- --------------- -----------------------------------
<S> <C>
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%*
</TABLE>
* less, in the case of each exercise period, the number of Shares, if
any, previously purchased under the Option.
COMMITTEES OF THE BOARD OF DIRECTORS
In May of 1997 the Company formed a compensation committee. The
Compensation Committee consisted of S. Robert Davis, David J. Richards, and
Michael P. Beauchamp during the last fiscal year. Neither Mr. Davis, Mr.
Richards or Mr. Beauchamp serves as an employee of the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Prior to the distribution by Pages of the common stock of the Company to
the Pages shareholders, effective at the close of business on December 31, 1996,
Pages owned all of the outstanding shares of the Company's common stock. 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 Short Common Stock, (ii) each director of the
Company, (iii) the President and Chief Operating Officer of the Company (the
only executive officers of the Company whose cash and non-cash compensation for
services rendered to the Company for the year ended December 31, 1997, exceeded
$100,000) and (iv) directors and executive
18
<PAGE> 19
officers of the Company as a group:
<TABLE>
<CAPTION>
Amount and Nature of Percent of
Name and Address Beneficial Ownership (1) Class (2)
- ---------------- ------------------------ ---------
<S> <C> <C>
S. Robert Davis 213,020 (3) 11.9%
801 94th Avenue North
St. Petersburg, Florida 33702
Charles R. Davis 140,016 (4) 7.9%
4205 East Dixon Blvd.
Shelby, North Carolina 28150
Robert V. Boylan 17,036 1 %
4205 East Dixon Blvd.
Shelby, North Carolina 28150
All directors and executive officers 420,843 (5) 23.6%
as a group (4 persons)
</TABLE>
(1) Represents sole voting and investment power unless otherwise indicated.
(2) Based on 1,783,200 shares of Company common stock outstanding as of
December 31, 1997, plus, as to each person listed, that portion of the
63,500 unissued shares of Company common stock subject to outstanding
options which may be exercised by such person within the next 60 days;
and as to all directors and executive officers as a group, unissued
shares of common stock as to which the members of such group have the
right to acquire beneficial ownership upon the exercise of stock
options within the next 60 days.
(3) Includes 4,066 shares owned by Mr. Davis' wife as to which Mr. Davis
disclaims beneficial ownership.
(4) Includes 936 shares owned by Mr. Davis' wife and 725 shares owned by
Mr. Davis' children as to which Mr. Davis disclaims beneficial
ownership and includes 35,000 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.
(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 10,000 unissued shares of Common
Stock as to which the Company's two non-employee directors have the
right to acquire beneficial ownership upon the exercise of stock
options within the next 60 days, 26,709 shares of Common Stock owned by
Mr. Richards, a director of the Company, and 5,967 shares of Common
Stock owned by Mr. Beauchamp, a director of the Company, 4,536 shares
of Common Stock owned by Robert V. Boylan, an executive officer and
director of the Company, and includes 12,500 unissued shares of Company
Common Stock as to which Mr. Boylan has the right to acquire beneficial
ownership upon the exercise of stock options within the next 60 days
and 2,095 shares of Common Stock owned by Jeffrey A. Ross, an executive
officer of the Company and includes 6,000 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.
19
<PAGE> 20
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
As of December 31, 1997, the Company was indebted to Pages in the
principal amount of $5,000,000 pursuant to a subordinated debenture dated
December 31, 1996 executed by the Company in conjunction with the distribution
by Pages of the common stock of the Company to the Pages shareholders. S. Robert
Davis is a director, officer and shareholder of Pages. On January 23, 1998, the
Company purchased the subordinated debenture in the original principal amount of
$5 million for $3.5 million.
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 Huntington Loan Documents:
20
<PAGE> 21
10.3.1 Loan and Security Agreement 1
10.3.2 Revolving Note 1
10.3.3 Commercial Letter of Credit
Reimbursement Agreement 1
10.3.4 Deed of Trust, Assignment of
Rents and Security Agreement 1
10.3.5 Debt Subordination and
Intercreditor Agreement 1
10.3.6 Third Amendment to Loan
and Security Agreement 3
10.3.7 Third Note Modification
and Extension Agreement 3
10.4 Non-Employee Director Stock Option Plan 1
10.5 Amendment to 1996 Incentive Stock Option Plan 2
10.6 1997 Incentive Stock Option Plan 3
10.7 Charles R. Davis' Performance Option Agreement 2
27 Financial Data Schedule 3
1 Incorporated by reference to the Company's registration statement on
Form 10, file number 0-21717, filed in Washington, D.C.
2 Incorporated by reference to the Company's registration statement of
Form 10-Q for the quarter ended March 31, 1997, filed in Washington,
D.C.
3 Filed herewith.
(b) Reports on Form 8-K
A report on Form 8K was dated and filed on July 23, 1997, under Item 4
dismissing Deloitte & Touche, LLP as its principal independent accountant, and
the engagement of Hausser + Taylor as its new independent accountants.
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.
21
<PAGE> 22
CASCO INTERNATIONAL, INC.
(Registrant)
Dated: March 30, 1998 By: /s/ Charles R. Davis
------------------------ ------------------------------------
Charles R. Davis
President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Dated: March 30, 1998 By: /s/ S. Robert Davis
------------------------ ------------------------------------
S. Robert Davis
Chairman of the Board, and Director
Dated: March 30, 1998 By: /s/ Charles R. Davis
------------------------ ------------------------------------
Charles R. Davis
President, and Director
(principal executive officer)
Dated: March 30, 1998 By: /s/ Robert V. Boylan
------------------------ ------------------------------------
Robert V. Boylan
Chief Operating Officer, and Director
Dated: March 30, 1998 By: /s/ Jeffrey A. Ross
------------------------ ------------------------------------
Jeffrey A. Ross
Chief Financial Officer, and Secretary
(Principal Accounting and
Financial Officer)
22
<PAGE> 23
CASCO INTERNATIONAL, INC.
(formerly CA Short Company)
INDEX TO FINANCIAL STATEMENTS
Page
Independent Auditors' Report-- 24
Hausser + Taylor LLP - for the years ended
December 31, 1997, 1996 and 1995.
Statements of operations-- 25
Years ended December 31, 1997, 1996 and 1995.
Balance sheets-- 26
December 31, 1997 and December 31, 1996.
Statements of cash flows-- 28
Years ended December 31, 1997, 1996 and 1995.
Statements of stockholders' equity-- 29
Years ended December 31, 1997, 1996 and 1995
Notes to the financial statements-- 30
Years ended December 31, 1997, 1996 and 1995.
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.
23
<PAGE> 24
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"), formerly CA Short Company, as of December 31, 1997 and 1996,
and the related statements of operations, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1997. 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, 1997 and
1996, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
/s/ Hausser + Taylor LLP
Columbus, Ohio
March 4, 1998
24
<PAGE> 25
CASCO INTERNATIONAL INC.
(formerly CA Short Company)
STATEMENT OF OPERATIONS
For the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenues $ 19,332,922 $ 21,959,396 $ 22,620,011
------------ ------------ ------------
Costs and Expenses:
Cost of goods sold 11,417,111 13,523,932 13,862,313
Selling, general and administrative 7,761,328 8,051,446 8,155,260
Interest 469,355 128,965 416,189
Depreciation and amortization 358,855 338,234 362,523
Management fee paid to Pages -- 500,000 500,000
------------ ------------ ------------
20,006,649 22,542,577 23,296,285
------------ ------------ ------------
Loss before income taxes and cumulative
effect of change in accounting principle (673,727) (583,181) (676,274)
Benefit for income taxes 256,000 195,100 248,600
------------ ------------ ------------
Income (loss) before cumulative effect of
change in accounting principle (417,727) (388,081) (427,674)
Cumulative effect of change in accounting
principle, net of tax of $397,850 -- 596,814 --
------------ ------------ ------------
NET INCOME (LOSS) $ (417,727) $ 208,733 $ (427,674)
============ ============ ============
PROFORMA INCOME (LOSS) PER COMMON SHARE - BASIC:
Loss before cumulative effect of
change in accounting principle $ (0.34) $ (0.39) $ (0.43)
Cumulative effect of change in accounting
principal -- 0.59 --
============ ============ ============
Net Income (loss) (0.34) 0.20 (0.43)
============ ============ ============
PROFORMA AMOUNTS ASSUMING THE NEW ACCOUNTING
METHOD IS APPLIED RETROACTIVELY:
Net loss $ (417,727) $ (388,081) $ (169,802)
============ ============ ============
Loss per common share $ (0.34) $ (0.39) $ (0.17)
============ ============ ============
Proforma weighted average common and
common equivalent shares $ 1,225,447 $ 1,003,200 $ 1,003,200
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
25
<PAGE> 26
CASCO INTERNATIONAL INC.
(formerly CA SHORT COMPANY)
BALANCE SHEETS
December 31, 1997 and 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
------------ ------------
<S> <C> <C>
Current assets:
Cash $ 73,516 $ 130,971
Accounts receivable 5,043,423 4,644,027
Inventory 4,545,752 6,968,365
Prepaid expenses 973,329 818,108
------------ ------------
Total current assets 10,636,020 12,561,471
------------ ------------
Building and equipment:
Buildings 3,194,058 3,194,058
Equipment 2,025,552 1,866,122
------------ ------------
5,219,610 5,060,180
Less accumulated depreciation (1,664,540) (1,339,848)
------------ ------------
3,555,070 3,720,332
Land 211,468 211,468
------------ ------------
Total property and equipment, net 3,766,538 3,931,800
------------ ------------
Other assets:
Cost in excess of net assets acquired, net of accumulated
amortization of $267,608 and $233,444, respectively 1,098,859 1,133,023
Other 646,256 622,256
------------ ------------
1,745,115 1,755,279
------------ ------------
TOTAL ASSETS $ 16,147,673 $ 18,248,550
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
26
<PAGE> 27
CASCO INTERNATIONAL, INC.
(formerly CA SHORT COMPANY)
BALANCE SHEETS
December 31, 1997 and 1996
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
1997 1996
------------ ------------
<S> <C> <C>
Liabilities:
Accounts payable $ 1,062,112 $ 1,572,020
Short-term debt obligations -- 3,669,746
Short-term subordinated debenture 100,000 --
Accrued liabilities 320,157 342,156
Advanced deposits-current 1,951,471 1,952,317
------------ ------------
Total current liabilities 3,433,740 7,536,239
------------ ------------
Due to Pages -- 4,124,975
Advanced deposits-noncurrent 2,558,517 2,935,626
Subordinated debenture 4,900,000 --
Deferred tax liability 67,650 323,650
------------ ------------
Total Liabilities 10,959,907 14,920,490
------------ ------------
Commitments and contingencies -- --
Stockholders' equity:
Preferred shares: $.01 par value, 300,000 authorized
none issued and outstanding -- --
Common shares: par value $.01, authorized 5,000,000, issued
1,783,200 and 334.91 shares respectively 17,832 3
Capital in excess of par value 6,417,586 4,157,982
Accumulated deficit (1,247,652) (829,925)
------------ ------------
Total stockholders' equity 5,187,766 3,328,060
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 16,147,673 $ 18,248,550
============ ============
</TABLE>
27
<PAGE> 28
CASCO INTERNATIONAL, INC.
(formerly CA SHORT COMPANY)
STATEMENTS OF CASH FLOWS For the years ended
December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (417,727) $ 208,733 $ (427,674)
Adjustments to reconcile
net income (loss) to cash provided
by (used in) operating activities
Depreciation and amortization 358,855 338,234 362,523
Deferred tax provision (benefit) (256,000) 202,750 (248,600)
Changes in assets and liabilities
Increase (decrease) in assets:
Accounts receivable (399,396) 1,457,602 1,176,556
Inventory 2,422,613 (187,953) 2,929,577
Prepaid expenses and other assets (179,221) (18,377) (22,151)
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities (531,907) 243,124 (2,151,502)
Advance deposits (377,955) (760,164) 1,433,220
------------ ------------ ------------
Total adjustments 1,036,989 1,275,216 3,479,623
------------ ------------ ------------
Net cash provided by operating activities 619,262 1,483,949 3,051,949
------------ ------------ ------------
Cash flows from investing activities:
Payments for purchases of property
and equipment (159,430) (421,740) (161,676)
------------ ------------ ------------
Cash used in investing activities (159,430) (421,740) (161,676)
------------ ------------ ------------
Cash flows from financing activities:
Due to Pages -- -- (2,488,397)
Proceeds from debt obligation 14,905,007 24,813,186 30,982,347
Principal payments on debt (18,574,753) (25,971,102) (31,170,959)
Issuance of Common Stock Units 3,152,459 -- --
------------ ------------ ------------
Cash used in financing activities (517,287) (1,157,916) (2,677,009)
------------ ------------ ------------
Increase (decrease) in cash (57,455) (95,707) 213,264
Cash, beginning of year 130,971 226,678 13,414
------------ ------------ ------------
Cash, end of year $ 73,516 $ 130,971 $ 226,678
============ ============ ============
Other Cash Flow Information:
Cash payments during the year for:
Interest $ 469,355 $ 166,657 $ 442,638
Income taxes, net of refunds -- -- --
Noncash Financing Activities:
Subordinated debenture with Pages
assumed at spinoff $ 5,000,000 $ -- $ --
Due to Pages replaced with subordinated
debenture $ 4,124,975 $ -- $ --
Decrease to APIC and common stock from
spinoff $ 875,025 $ -- $ --
</TABLE>
The accompanying notes are an integral part of the financial statements.
28
<PAGE> 29
CASCO INTERNATIONAL, INC.
(formerly CA SHORT COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY For the
years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Capital in
Common Excess of Accumulated
Shares Stock Par Value Deficit Total
------ ----- --------- ------- -----
<S> <C> <C> <C> <C> <C>
Balance December 31, 1994 334.91 $ 33,491 $ 4,124,494 $ (610,984) $ 3,547,001
Net loss (427,674) (427,674)
---------- --------- ----------- ----------- -----------
Balance December 31, 1995 334.91 33,491 4,124,494 (1,038,658) 3,119,237
Change in par value of common
stock (33,488) 33,488
Net income 208,733 208,733
---------- --------- ----------- ----------- -----------
Balance December 31, 1996 334.91 3 4,157,982 (829,925) 3,328,060
Spinoff from Pages (334.91) (3) (884,313) (884,316)
Distribution to Pages stockholders 929,103 9,291 9,291
Stock Dividend 74,097 741 (741)
Offering 780,000 7,800 3,144,658 3,152,458
Net loss -- -- -- (417,727) (417,727)
---------- --------- ----------- ----------- -----------
Balance December 31, 1997 1,783,200 $ 17,832 $ 6,417,586 $(1,247,652) $ 5,187,766
========== ========= =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
29
<PAGE> 30
CASCO INTERNATIONAL, INC.
(Formerly CA Short Company)
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
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.
Effective at the close of business on December 31, 1996, a tax free spin
off of the Company's common stock from it's parent, Pages, was completed (the
"Distribution"). In the Distribution, for every ten shares of Pages common stock
outstanding on the record date, one and one-half shares of the Company's common
stock was distributed to Pages' stockholders.
USE OF MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires that management make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. The reported amounts of revenues and expenses during the reporting
period may be affected by the estimates and assumptions management is required
to make. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenues from the sale of incentive awards are generally recognized upon
shipment and delivery of the related merchandise except for revenue recognized
relating to advanced deposits. Revenues from services are insignificant. Returns
from the sales of incentive awards and from services are insignificant.
Effective January 1, 1996, the Company changed its method of accounting for
the recognition of revenues relating to advanced deposits. Previously, the
Company recognized such deferred revenue at the conclusion of the respective
prepaid safety award programs. Effective with the change, revenues are
recognized over the course of the programs based on the Company's historical and
expected redemption percentages. The corresponding deferred commission costs
have also been recognized in association with this change in the same direct
proportion as the revenue recognition.
The effect of this accounting change in 1996 was to increase income before
income taxes and cumulative effect of change in accounting principle by
$209,190, net of associated commission expense of $32,704 for the year ended
December 31, 1996.
30
<PAGE> 31
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, 1997 and 1996 include $651,359 and
$701,021, respectively, of prepaid selling costs that include costs for
commissions paid to salespeople that relate to advanced deposits for the sales
of incentive and recognition awards programs. Such costs are directly
attributable to obtaining specific future commitments and are expensed in the
year the related revenue is recorded.
BUILDINGS AND EQUIPMENT
Buildings and equipment are recorded at cost and depreciated over their
estimated useful life on the straight-line method. Estimated useful lives range
from three to thirty-one years. Major repairs and betterments are capitalized;
minor repairs are expensed as incurred. Depreciation expense for the years ended
December 31, 1997, 1996 and 1995, totaled $324,691, $302,832 and $278,254,
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 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, 1997. 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, 1997, 1996 and 1995 totaled $34,162, $34,162 and $34,162,
respectively.
Other assets include cash surrender value of life insurance and deferred
loan costs. The deferred loan costs are amortized using the straight line method
over the terms of the related contracts. Amortization expense totaled $0, $1,240
and $50,107, for the years ended December 31, 1997, 1996 and 1995, respectively.
DUE TO PAGES
Amounts due to Pages at December 31, 1996 are net borrowings which
occurred in the ordinary course of business. No interest has been recorded on
the outstanding balance (See Notes 4 and 7).
INCOME TAXES
The Company employs Statement of Financial Accounting Statements ("SFAS")
No. 109, "Accounting for Income Taxes". Under SFAS No. 109, the liability method
is used in accounting for income taxes. Deferred income taxes reflect the net
tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes, and are
31
<PAGE> 32
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. As noted above, the Company was a
wholly-owned subsidiary of Pages through December 31, 1996 when a tax-free spin
off was completed. The Company was included in Pages consolidated tax returns
for 1996 and 1995.
PER SHARE DATA
Per share amounts have been computed based on the weighted average number
of common shares outstanding during the period and have been adjusted to give
retroactive effect to the distribution of shares to Pages' stockholders and to
the 8% stock dividend paid to stockholders of record on July 16, 1997. The
potential common stock outstanding at December 31, 1997 would be antidilutive
for the year ended December 31, 1997. There were no potential common stock
outstanding for the years ended December 31, 1996 and 1995. Therefore, basic
earnings per share equal earnings per share as previously recorded.
PROFIT SHARING PLANS
The Company has a noncontributory profit sharing retirement plan (the
"Plan"), covering a significant number of employees for which accrued costs are
funded. Company contributions to the Plan are discretionary. There were no
Company contributions for the years ended December 31, 1997, 1996 and 1995.
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-lives assets and measures the amount of impairment if
any. There were no impairment adjustments at December 31, 1997, 1996 and 1995.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of amounts reported in the financial statements
have been determined using available market information and valuation
methodologies, as applicable. The carrying value of all current assets and
liabilities approximates the fair value because of their short term nature. The
fair values of non-current assets and liabilities approximate their carrying
value based on current market prices. (Refer to Note 8 for purchase of
subordinated debenture after December 31, 1997.)
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No.
15, "Accounting for Stock Issued to Employees (APB 25) and related
interpretations in accounting for its employee stock options. Under APB 25,
because the exercise prices of employee stock options equals the market price of
the underlying stock on the date of grant, no compensation expense is recorded.
The company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation (Statement 123).
ACCOUNTING PRONOUNCEMENT FOR 1998
The FASB has issued three pronouncements for fiscal years beginning after
December 15, 1997 -- SFAS No. 130 -- "Reporting of Comprehensive Income"; SFAS
No. 131 -- "Disclosures about Segments of an Enterprise and Related
Information", and SFAS No. 132 -- "Employers' Disclosures about Pensions and
Other Postretirement Benefits". The Company believes that the effect of the
adoption of the above will not be material to its financial position or results
of operations.
2. STOCK OPTIONS AND WARRANTS
At December 31, 1997, 235,000 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 plan and 1,560,000 shares were
reserved under outstanding warrants. Additionally, 200,000
32
<PAGE> 33
common shares of the Company were reserved under a performance option plan for
the President.
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Incentive Stock Option Plan
Outstanding, beginning of year 0 N/A
Granted 87,500 N/A
Canceled None N/A
Exercised None N/A
---------- ----------
Outstanding, end of year 87,500 N/A
---------- ----------
Exercise price range of options outstanding $3.0625 N/A
to to
$4.0000 N/A
Non-Employee Director Option Plan
Outstanding, beginning of year 0 N/A
Granted 10,000 N/A
Canceled None N/A
Exercised None N/A
---------- ----------
Outstanding, end of year 10,000 N/A
---------- ----------
Exercise price range of options outstanding $4.50 N/A
to to
$4.50 N/A
</TABLE>
There were no options granted at December 31, 1996.
The incentive stock options are exercisable at the fair market value on the
date of grant, and were available from the 1996 and 1997 stock option plans. The
options outstanding at December 31, 1997 are exercisable through January 17,
2002 and December 29, 2002, respectively.
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, 1997 are exercisable through June 25, 2002.
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.
<TABLE>
<CAPTION>
Proceeds
Shares Exercise to Company
Date Granted or Issued Exercisable Price Upon Exercise
Incentive ---------------------- ----------- -------- -------------
Stock Options:
- -------------
<C> <C> <C> <C> <C>
1996 Plan January 17, 1997 29,500 $4.0000 $118,000
1996 Plan March 26, 1997 5,000 4.0000 20,000
1996 Plan March 12, 1997 40,000 3.5000 140,000
1997 Plan December 29, 1997 13,000 3.0625 39,813
</TABLE>
33
<PAGE> 34
<TABLE>
<CAPTION>
Proceeds
Shares Exercise to Company
Date Granted or Issued Exercisable Price Upon Exercise
Non-Employee ---------------------- ----------- -------- -------------
Director Options:
- ----------------
<C> <C> <C> <C> <C>
1996 Plan June 25, 1997 10,000 $4.50 45,000
--------- ----------
97,500 362,813
Warrants: September 19, 1997 1,560,000 $5.50 8,580,000
--------- ----------
Total 1,657,500 $8,942,813
========= ==========
</TABLE>
Subsequent to December 31, 1997, the Company issued 65,000 options of the
1997 stock option plan with an option price of $2.875 per share which was the
fair market price at the date of grant. Additionally, 30,000 options of the
Non-Employee Stock Option Plan with an option price of $2.875 per share which
was the fair market price at the date of grant were issued.
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-Scholes option pricing model with the following weighted average
assumptions for 1997. There were no options outstanding at 1996.
1997
----
Risk-free interest rate 6 %
Dividend yield 0 %
Volatility factor 82.7%
Weighted average expected life in years 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 loss and earnings per share were as follows:
1997
----
Net loss as reported $(417,727)
Net loss-pro forma (430,727)
Loss per common share-as reported $ (0.34)
Loss per common share-pro forma (.35)
Weighted average fair value of
options granted during the year $ 2.60
The pro forma effect of these options on net loss and loss per common share
was not material. These pro forma calculations only include the effects of 1997
grants. As such, the impacts are not necessarily indicative of the effects on
reported net income of future years.
34
<PAGE> 35
3. STOCK DIVIDENDS
On June 1, 1997, the Company declared an 8% stock dividend on its common
stock for stockholders of record on July 16, 1997. The payment date for the
stock dividend was August 1, 1997. As a result of the stock dividend, 74,097
additional shares were issued, capital in excess of par value was reduced by
$741. There was no distribution or cash payment relating to fractional shares.
4. DEBT OBLIGATIONS
Debt obligations consisted of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Line of credit with interest at prime plus 1 percent;
interest payable monthly, maturing on June 30, 1998,
collateralized by substantially all assets of the
Company ($2,000,000 available at December 31, 1997). -------- $3,669,746
Subordinated debenture due to Pages, $5 million 7%
subordinated debenture, principle payments will be
$100,000 per year for the first four years, with a
balloon payment due at the end of the fifth year for
the remaining principle balance. (See Note 8.) $5,000,000 $ --
---------- ----------
$5,000,000 $3,669,746
Current portion 100,000 3,669,746
========== ==========
Long term portion $4,900,000 --------
========== ==========
</TABLE>
The interest rate for the line as of December 31, 1997 and 1996 was prime
plus 1 percent and prime plus 1/2 percent, respectively.
The prime interest rate at December 31, 1997 and 1996 was 8 1/2 and 8 3/4
percent, respectively. The carrying amount of the Company's short term debt
obligations approximates fair value.
The line of credit facility has an expiration date of June 30, 1998 and
will bear interest at the lender's prime rate of interest plus one percent,
floating daily. All business assets of the Company are pledged as collateral for
the credit facility. The credit facility also includes certain financial
covenants, including covenants that the Company maintain certain financial
ratios including a minimum tangible capital base and a minimum net profit from
operations. In addition, the credit facility will contain limitations on capital
expenditures, fixed asset sales, loans and/or advances to shareholders and
employees and restrictions on operating leases.
5. 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 $125,570, $144,719
and $151,608, for the years ended December 31, 1997, 1996 and 1995,
respectively. The approximate future minimum rentals under non-cancelable
operating leases during subsequent fiscal years are as follows:
35
<PAGE> 36
YEAR ENDED
DECEMBER 31,
1998 $ 110,862
1999 79,317
2000 50,784
----------
$ 240,963
==========
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.
6. INCOME TAXES
As discussed in Note 1, the Company was included in Pages consolidated
income tax return for 1996 and 1995.
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 benefit for income taxes consisted of the
following.
<TABLE>
<CAPTION>
December 31 December 31, December 31,
1997 1996 1995
----------- ------------ ------------
<S> <C> <C> <C>
Current ----- ----- -----
Deferred
Federal $(217,000) $(165,850) $(211,300)
State and Local (39,000) (29,250) (37,300)
--------- --------- ---------
Net deferred benefit $(256,000) $(195,100) $(248,600)
Net benefit for taxes $(256,000) $(195,100) $(248,600)
========= ========= =========
</TABLE>
For the years presented, a reconciliation of income taxes based upon the
application of the federal statutory tax rate is as follows:
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Benefit for taxes at statutory rate $(229,100) $(198,300) $(229,000)
Goodwill amortization 13,650 13,650 13,650
State taxes net of federal benefit (40,400) (34,950) (40,550)
Other (150) 24,500 7,300
--------- --------- ---------
Total benefit for income taxes $(256,000) $(195,100) $(248,600)
========= ========= =========
</TABLE>
The components of net deferred taxes are as follows:
36
<PAGE> 37
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Assets:
Inventory costs capitalized for tax purposes $ 67,900 $ 101,150
Accruals and reserves to be expensed as paid
for tax purposes 150,000 85,200
Other 3,050 7,850
Net operating loss carry forwards 727,300 207,850
----------- ---------
Deferred tax asset 948,250 402,050
Liabilities:
Revenues to be earned net of cost (316,900) --
Excess of tax over financial accounting
depreciation and amortization (699,000) (725,700)
----------- ---------
Deferred tax liability (1,015,900) (725,700)
----------- ---------
Net deferred tax liability $ (67,650) $(323,650)
=========== =========
</TABLE>
At December 31, 1997, operating loss carryforwards of approximately $1,818,000
are available, which will expire, if unused, beginning in 2010.
7. RELATED PARTY TRANSACTIONS
For all periods presented prior to 1997, Pages has provided services to and
incurred costs on behalf of the Company. Prior to the Distribution, Pages'
management fee was intended to encompass the element of Pages' financing costs
to provide non-interest bearing advances to the Company. Such element
approximated $450,000 and $450,000 respectively, based on the prime interest
rate as applied to the average outstanding balance due to Pages the years ended
December 31, 1996 and 1995. The remaining costs are for certain services,
including, but not limited to, administrative services, transportation, tax
services, accounting and reporting, management consultation, legal services, and
general corporate expenses, which have also been allocated to the Company. The
allocation of costs and expenses for these services were based on methods that
management believes are reasonable. The portion of such costs which management
believes will continue to be incurred subsequent to the Distribution
approximates $30,000. The balance of nonrecurring costs relates to duplicative
management responsibilities for financing and operating activities, as well as
other transportation and administrative costs which will be eliminated by the
Distribution.
Pages allocated general corporate expenses to the Company for the years
ended December 31, 1997, 1996, and 1995 in the amounts of $0, $500,000 and
$500,000, respectively.
8. SUBSEQUENT EVENTS
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.
Also on January 23, 1998, Huntington National Bank increased the Company's
line of credit from $2 million to $5.5 million from which funds became
available to redeem the subordinated debenture due to Pages.
On March 4, 1998 the Company sold its 167,000 sq. ft. Kings Mountain
warehouse. The sale netted the Company $425,000. Also on March 4, 1998 the
Company obtained financing from First National Bank secured by a first deed of
trust on the Shelby facilities. The loan is in the amount of $2,362,500 at an
interest rate of prime plus 1/2% and will not increase or decrease more than
two percent. The term of the loan is
37
<PAGE> 38
fifteen years, callable after 5 years.
38
<PAGE> 1
CLASS A WARRANTS
VOID AFTER SEPTEMBER 15, 2002
STOCK PURCHASE WARRANT CERTIFICATE FOR PURCHASE OF COMMON STOCK
CASCO INTERNATIONAL, INC.
NO. WA 0012 CUSIP 147399 11 7
THIS CERTIFIES THAT FOR VALUE RECEIVED
SPECIMEN
or registered assigns (the "Registered Holder") is the owner of the number of
Class A Redeemable Common Stock Purchase Warrants ("Warrants") specified above.
Each Warrant initially entitles the Registered Holder to purchase, subject to
the terms and conditions set forth in this Certificate and the Warrant Agreement
(as hereinafter defined), one fully paid and nonassessable share of Common
Stock, $.01 par value ("Common Stock"), of CASCO INTERNATIONAL, INC., a Delaware
corporation (the "Company"), at any time between the Separation Date (as herein
defined) and the Expiration Date (as hereinafter defined), upon the presentation
and surrender of this Warrant Certificate with the Subscription Form on the
reverse hereof duly executed, at the corporate office of American Stock Transfer
and Trust Company, as Warrant Agent, or its successor (the "Warrant Agent"),
accompanied by payment of $5.50 per share (the "Purchase Price") in lawful money
of the United States of America in cash or by official bank or certified check
made payable to CASCO INTERNATIONAL, INC.
This Warrant Certificate and each warrant represented hereby are issued
pursuant to and are subject in all respects to the terms and conditions set
forth in the Warrant Agreement (the "Warrant Agreement") dated September 15,
1997, by and between the Company and the Warrant Agent.
In the event of certain contingencies provided for in the Warrant
Agreement, the Purchase Price and/or the number of shares of Common Stock
subject to purchase upon the exercise of each Warrant represented hereby are
subject to modifications or adjustment.
Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional shares of Common Stock will be issued in
the case of the exercise of less than all the Warrants represented hereby, the
Company shall cancel this Warrant Certificate upon the surrender hereof and
shall execute and deliver a new Warrant Certificate or Warrant Certificates of
like tenor which the Warrant Agent shall countersign, for the balance of such
Warrants.
The term "Separation Date" shall mean September 15, 1998, subject to
earlier separability in the discretion of Biltmore Securities, Inc.
The term "Expiration Date" shall mean 5:00 p.m. (New York time) on
September 15, 2002, or such earlier date as the Warrants shall be redeemed. If
such date shall in the State of New York be a holiday or a day on which the
banks are authorized to close, then the Expiration Date shall mean 5:00 p.m.
(New York time) the next following day which in the State of New York is not a
holiday or a day on which banks are authorized to close.
The Company shall not be obligated to deliver any securities pursuant to
the exercise of this Warrant unless a registration statement under the
Securities Act of 1933, as amended, with respect to such securities is
effective. The Company has covenanted and agreed that it will file a
registration statement and will use its best efforts to cause the same to
become effective and to keep such registration statement current while any of
the Warrants are outstanding and the exercise price of the Warrants is less
than the market price of the Common Stock. This Warrant shall not be
exercisable by a Registered Holder in any state where such exercise would be
unlawful.
The Warrant Certificate is exchangeable, upon the surrender hereof by the
Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to represent
such number of Warrants as shall be designated by such Registered Holder at the
time of such surrender. Upon due presentment with any transfer fee in addition
to any tax or other governmental charge imposed in connection therewith, for
registration of transfer of this Warrant Certificate at such office, a new
Warrant Certificate or Warrant Certificates representing an equal aggregate
number of Warrants will be issued to the transferee in exchange therefor,
subject to the limitations provided in the Warrant Agreement.
Prior to the exercise of any Warrant represented hereby, the Registered
Holder shall not be entitled to any rights of a stockholder of the Company
including, without limitation, the right to vote or to receive dividends or
other distributions and shall not be entitled to receive any notice of any
proceedings of the Company, except as provided in the Warrant Agreement.
This Warrant may be redeemed at the option of the Company, at a redemption
price of $.05 per Warrant, at an time after one (1) year from the Effective
Date, provided the closing bid price for the Common Stock issuable upon
exercise of such Warrant shall equal or exceed 175% of the initial public
offering price of the Company's Common Stock for twenty (20) consecutive
trading days ending within ten (10) days of the notice of redemption. Notice
of redemption shall be given not later than the thirtieth day before the date
fixed for redemption, all as provided in the Warrant Agreement. On and after
the date fixed for redemption, the Registered Holder shall have no rights with
respect to this Warrant except to receive the $.05 per Warrant upon surrender
of this Certificate.
Prior to due presentment for registration of transfer hereof, the Company
and the Warrant Agent may deem and treat the Registered Holder as the absolute
owner hereof and of each Warrant represented hereby (notwithstanding any
notations of ownership or writing hereon made by anyone other than a duly
authorized officer of the Company or the Warrant Agent) for all purposes and
shall not be affected by any notice to the contrary.
This Warrant Certificate shall be governed by and construed in accordance
with the laws of the State of New York.
This Warrant Certificate is not valid unless countersigned by the Warrant
Agent.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed, manually or in facsimile by two of its officers thereunto duly
authorized and a facsimile of its corporate seal to be imprinted hereon.
Date: CASCO INTERNATIONAL, INC.
[SEAL] By: By:
COUNTERSIGNED:
AMERICAN STOCK TRANSFER & TRUST COMPANY Jeffrey A. Ross Charles R. ?????
as Warrant Agent
By
/s/ Authorized Officer Secretary President
<PAGE> 2
SUBSCRIPTION FORM
To Be Executed by the Registered Holder in Order to Exercise Warrants
THE UNDERSIGNED REGISTERED HOLDER hereby irrevocably elects to exercise
___________________ Warrants represented by this Warrant Certificate, and to
purchase the securities issuable upon the exercise of such Warrants, and
requests that certificates for such securities shall be issued in the name of
______________________________________________________________________
(please insert taxpayer identification or other identifying number)
and be delivered to
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
(please print or type name and address)
and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of, and delivered to, the Registered Holder
at the address stated below:
______________________________________________________________________
______________________________________________________________________
(Address)
______________________________________________________________________
(Date)
______________________________________________________________________
(Taxpayer Identification Number)
SIGNATURE GUARANTEED
ASSIGNMENT
To Be Executed by the Registered Holder in Order to Assign Warrants
FOR VALUE RECEIVED, hereby sells, assigns and transfers unto
______________________________________________________________________
(please insert taxpayer identification or other identifying number)
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
(please print or type name and address)
of the Warrants represented by this Warrant Certificate, and hereby irrevocably
constitutes and appoints
______________________________________________________________________ Attorney
to transfer this Warrant Certificate on the books of the Company, with full
power of substitution in the premises.
______________________________________________________________________
(Date)
SIGNATURE GUARANTEED
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO
THE NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND
MUST BE GUARANTEED BY A COMMERCIAL BANK OR TRUST COMPANY OR A MEMBER FIRM OF
THE AMERICAN STOCK EXCHANGE, NEW YORK STOCK EXCHANGE, PACIFIC STOCK EXCHANGE OR
MIDWEST STOCK EXCHANGE.
<PAGE> 1
EXHIBIT 4.4
WARRANT
THE SECURITIES REPRESENTED BY THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, APOTHECATED,
DONATED, OR OTHERWISE TRANSFERRED, WHETHER OR NOT FOR CONSIDERATION, UNLESS
EITHER THE SECURITIES HAVE BEEN REGISTERED UNDER SUCH ACT OR AN EXEMPTION FROM
SUCH REGISTRATION REQUIREMENT IS AVAILABLE. IF THE SECURITIES ARE TO BE SOLD
OR TRANSFERRED PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENT, THE
COMPANY MAY REQUIRE A WRITTEN OPINION OF COUNSEL, IN FORM AND CONTENT
SATISFACTORY TO THE COMPANY, TO THE EFFECT THAT REGISTRATION IS NOT REQUIRED OR
THAT SUCH TRANSFER WILL NOT VIOLATE SUCH ACT OR APPLICABLE STATE SECURITIES
LAWS.
CASCO INTERNATIONAL, INC.
WARRANT TO PURCHASE SHARES OF COMMON STOCK
Void After 5:00 P.M. Eastern Standard Time on February 27, 2003
-------------------------
THIS WARRANT TO PURCHASE SHARES OF COMMON STOCK CERTIFIES THAT, for value
received, R.L. Renck & Co., Inc., an Illinois corporation (referred to herein,
together with any subsequent holder of the Warrant, the "Warrant Holder" or
"Holder of the Warrant"), is entitled to subscribe to and purchase from CASCO
INTERNATIONAL, INC., a Delaware corporation (hereinafter called the "Company"),
an aggregate of thirty thousand (30,000) shares (subject to adjustment as
specified in Section 4 hereof) of the fully paid and nonassessable Common Stock
of the Company (the "Warrant Stock"), at the price of $3.00 per share (such
price, and such other price as shall result, from time to time, from the
adjustments specified in Section 4 hereof, is referred to herein as the
"Exercise Price"), subject to the provisions and upon the terms and conditions
set forth herein.
1. VESTING; TERM.
1.1 VESTING. The purchase rights hereunder shall vest with respect to
2,500 shares each month commencing on February 28, 1998 and continuing through
January 31, 1999. Provided, however, if the consulting agreement between the
Company and R.L. Renck & Co., Inc. evidenced by a letter agreement dated as of
February 27, 1998 is terminated for any reason, all purchase rights which are
unvested on the date of termination shall terminate and shall be null and
void.
<PAGE> 2
1.2 TERM. The term of this Warrant shall be five years. The purchase
rights vested and exercisable hereunder shall expire at 5:00 p.m., Eastern
Standard Time on February 27, 2003 and may no longer be exercised.
2. METHOD OF EXERCISE, PAYMENT; ISSUANCE OF NEW WARRANT.
Subject to Section 1 hereof, the purchase right represented by this
Warrant may be exercised at any time, and from time to time, by the surrender
of this Warrant (with the Notice of Exercise form attached hereto as Exhibit
"A" duly executed) at the principal office of the Company and by the payment to
the Company, by check in an amount equal to the then applicable Exercise Price
per share multiplied by the number of shares of the Warrant Stock then being
purchased. In the event of any exercise of the rights represented by this
Warrant, certificate(s) for the shares of the Warrant Stock so purchased shall
be delivered to the Warrant Holder within a reasonable time, but not later than
twenty (20) business days after exercise. A Warrant shall be deemed to have
been exercised immediately prior to the close of business on the date of its
surrender for exercise as provided above, and the person entitled to receive
the shares of the Warrant Stock issuable upon such exercise shall be treated
for all purposes as the holder of such shares of record as of the close of
business on such date. Unless this Warrant has been fully exercised or has
expired, a new Warrant representing the number of shares with respect to which
this Warrant shall not then have been exercised shall also be issued to the
Warrant Holder within such reasonable time, but not later than ten (10)
business days after exercise.
3. STOCK FULLY PAID; RESERVATION OF SHARES.
All Warrant Stock which may be issued upon the exercise of the rights
represented by this Warrant will, upon issuance, be fully paid and
nonassessable, and free from all liens, and charges with respect to the issue
thereof. During the period within which the rights represented by this Warrant
may be exercised, the Company will at all times have authorized, and reserved
for the purpose of the issue upon exercise of the purchase rights evidenced by
this Warrant, a sufficient number of shares of its fully paid and nonassessable
Common Stock to provide for the exercise of the rights represented by this
Warrant.
4. ADJUSTMENT OF PURCHASE PRICE AND NUMBER OF SHARES.
The number and kind of securities purchasable upon the exercise of this
Warrant and the Exercise Price shall be subject to adjustment, from time to
time, upon the happening of the following events:
4.1 RECLASSIFICATION, CONSOLIDATION, OR MERGER. If any capital
reorganization or reclassification of the capital stock of the Company, or
consolidation or merger of the Company with another corporation, or the sale of
all or substantially all of its assets to another corporation shall be
effected, the successor corporation (if other than the Company) resulting from
such consolidation or merger or the corporation purchasing such assets shall,
unless it has assumed the obligations of the Company generally as a matter of
law, assume by written instrument executed and mailed or delivered to the
registered holder thereof at the last address of such holder
2
<PAGE> 3
appearing on the books of the Company, this Warrant, and lawful and adequate
provision shall be made whereby the holder hereof shall thereafter have the
right to purchase and receive in lieu of the shares of the Common Stock of the
Company immediately theretofore purchasable and receivable upon the exercise of
the rights represented hereby, such shares of stock or assets as may be issued
or payable with respect to or in exchange for a number of outstanding shares of
such Common Stock equal to the number of shares of such Common Stock
immediately theretofore purchasable and receivable upon the exercise of the
rights represented hereby had such reorganization, reclassification,
consolidation, merger, or sale not taken place, and in any such case
appropriate provision shall be made with respect to the rights and interests of
the Holder of this Warrant to the end that the provision hereof (including
without limitation provisions for adjustment of the warrant purchase price and
of the number of shares purchasable and receivable upon the exercise of this
Warrant) shall thereafter be applicable, as nearly as may be, in relation to
any shares of stock, securities, or assets thereafter deliverable upon the
exercise hereof.
4.2 SUBDIVISION OR COMBINATION OF SHARES. If the Company at any time
while this Warrant remains outstanding and unexpired shall subdivide or combine
its Common Stock, the Exercise Price shall be proportionately decreased in the
case of a subdivision or increased in the case of a combination.
4.3 STOCK DIVIDENDS. If the Company at any time while this Warrant is
outstanding and unexpired shall pay a dividend, or make any other distribution
to its stockholders (except any distribution specifically provided for in the
foregoing Section 4.1 or 4.2) payable in Common Stock, then the Exercise Price
shall be adjusted, from and after the date of determination of stockholders
entitled to receive such dividend or distribution, to that price determined by
multiplying the Exercise Price in effect immediately prior to such date of
determination by a fraction (i) the numerator of which shall be the total
number of shares of Common Stock outstanding immediately prior to such dividend
or distribution, and (ii) the denominator of which shall be the total number of
shares of Common Stock outstanding immediately after such dividend or
distribution.
4.4 ADJUSTMENT OF NUMBER OF SHARES. Upon each adjustment in the Exercise
Price as a result of the events set forth in Section 4.2 or 4.3 above, the
number of shares of Warrant Stock purchasable hereunder shall be adjusted, to
the nearest whole share, to the product obtained by multiplying such number of
shares purchasable immediately prior to such adjustment in the Exercise Price
by a fraction, the numerator of which shall be the Exercise Price immediately
prior to such adjustment and the denominator of which shall be the Exercise
Price immediately thereafter.
4.5 COVENANT NOT TO AVOID TERMS OF THE WARRANT. The Company covenants
that it will not, by amendment of its Certificate of Incorporation or through
any reorganization, transfer of assets, consolidation, merger, dissolution,
issue or sale of securities, or any other voluntary action, avoid or seek to
avoid the observance or performance of any of the terms of this Warrant, but
will at all times in good faith assist in carrying out all those terms and in
taking all action
3
<PAGE> 4
necessary or appropriate to protect the right of the Warrant Holder against
dilution or other impairment.
5. NOTICE OF ADJUSTMENTS.
Whenever any Exercise Price shall be adjusted pursuant to Section 4
hereof, the Company shall promptly as practicable prepare a certificate signed
by its Chief Financial Officer setting forth, in reasonable detail, the event
requiring the adjustment, the amount of the adjustment, the method by which such
adjustment was calculated, the Exercise Price(s) after giving effect to such
adjustment, and the number of shares which may be purchased upon exercise of a
Warrant which immediately prior thereto could be exercised to purchase one
share, and shall cause a copy of such certificate to be mailed (by first class
mail, postage prepaid) to the Holder of the Warrant.
6. FRACTIONAL SHARES.
No fractional shares of the Warrant Stock will be issued in connection
with any subscription hereunder. In the event an adjustment in the number of
shares issuable upon exercise of this Warrant made pursuant to Section 4 hereof
results in a number of shares issuable upon exercise which includes a fraction,
this Warrant may be exercised for the next larger whole number of shares.
7. COMPLIANCE WITH SECURITIES ACT; TRANSFER OF WARRANT AND WARRANT STOCK.
7.1 COMPLIANCE WITH SECURITIES LAWS. The Warrant Holder, by acceptance
of this Warrant, agrees that this Warrant and the shares of the Warrant Stock
to be issued upon exercise hereof are being acquired in a non-public offering
and that it will not offer, sell, or otherwise dispose of this Warrant and any
shares of the Warrant Stock to be issued upon exercise hereof except under
circumstances which will not result in a violation of the Securities Act of
1933, as amended (the "33 Act"), or applicable state securities laws. Upon
exercise of this Warrant, the holder hereof shall, if requested by the Company,
confirm in writing, in a form satisfactory to the Company, that the shares of
the Warrant Stock so purchased are not being acquired for distribution except
in compliance with all applicable securities laws.
7.2 TRANSFERABILITY AND OWNERSHIP OF THIS WARRANT. All the covenants and
provisions of this Warrant by or for the benefit of the Company or the Warrant
Holder shall bind and inure to the benefit of their respective successors and
assigns hereunder. This Warrant may be assigned only in accordance with
applicable securities laws and, unless registered under the '33 Act and
applicable state securities laws or, in the opinion of counsel for the Company
or, if required by the Company in its discretion, the opinion of counsel to the
Warrant Holder (the identity of which counsel shall be reasonably acceptable to
the Company), such transfer will not be in violation of the registration
provisions of the '33 Act and any applicable state securities laws. This
Warrant, if properly assigned, may be exercised by a new holder without first
having a new Warrant issued. Any such assignment shall be on the form of
assignment attached hereto as Exhibit "B."
4
<PAGE> 5
7.3 RESTRICTIONS ON TRANSFER OR DISPOSITION OF WARRANT STOCK. No transfer
of the Warrant Stock will be valid or recognized by the Company unless such
stock is registered under the '33 Act and applicable state securities laws or,
in the opinion of counsel for the Company or, if required by the company in its
discretion, the opinion of counsel to the Warrant Holder (the identity of which
counsel shall be reasonably acceptable to the Company), such transfer will not
be in violation of the registration provisions of the '33 Act or any applicable
state securities laws.
7.4 LEGEND ON WARRANT STOCK CERTIFICATES. Certificates representing shares
of Warrant Stock will bear a legend restricting transfer as provided herein, and
appropriate stop-transfer instructions will be given to the Company's transfer
agent.
8. NO RIGHTS AS STOCKHOLDERS.
The Warrant Holder shall not be entitled by virtue of the terms hereof to
vote or receive dividends or be deemed the holder of Common Stock or any other
securities of the Company which may at any time be issuable on the exercise
hereof for any purpose, nor shall anything contained herein be construed to
confer upon the Warrant Holder, as such, any of the rights of a stockholder of
the Company or any right to vote for the election of directors upon any matter
submitted to stockholders at any meeting thereof, or to give or withhold consent
to any corporate action (whether upon any recapitalization, issuance of stock,
reclassification of stock, change of par value or change of stock to no par
value, consolidation, merger, conveyance, or otherwise) or to receive notice of
meetings, or to receive dividends or subscription rights or otherwise until the
Warrant shall have been exercised and the Warrant Stock shall have become
deliverable as provided herein.
9. REPLACEMENT OF THIS WARRANT.
Upon receipt of evidence reasonably satisfactory to the Company of the
loss, theft, destruction, or mutilation of this Warrant and, in the case of any
such loss, theft, or destruction, upon delivery of indemnity reasonably
satisfactory in form and amount to the Company or, in the case of any such
mutilation, upon surrender and cancellation of this Warrant, the Company, at
Warrant Holder's expense, will execute and deliver, in lieu hereof, a new
Warrant of like tenor.
10. GOVERNING LAW.
This Warrant shall be construed and interpreted in accordance with and
governed in all respects by the laws of the State of Delaware.
11. NOTICE.
All notices, demands, requests, and other communications which any party
hereto desires or is required to deliver or otherwise give to any other party
hereunder shall be in writing and shall be deemed to have been delivered, given,
and received when personally given or on the
5
<PAGE> 6
third day after it is mailed by registered or certified mail, postage prepaid,
return receipt requested, addressed as follows:
Notices to the Company: CASCO INTERNATIONAL, INC.
4205 East Dixon Boulevard
Shelby, North Carolina 28150
Attention: President
Notices to the Warrant Holder: R.L. Renck & Co., Inc.
2 Rector Street, 25th Floor
New York, New York 10006
Notices to the Warrant Holder shall be to the address set forth above. Notice
of a change in the Warrant Holder's address shall be given to the Company in
accordance with this Section 11.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by
its officers duly authorized as of the date set forth below.
CASCO INTERNATIONAL, INC.
Dated as of February 27, 1998 By: /s/ Charles R. Davis
----------------------------
Charles R. Davis, President
6
<PAGE> 7
EXHIBIT "A" TO WARRANT
NOTICE OF EXERCISE
To: CASCO INTERNATIONAL, INC.
4205 East Dixon Boulevard
Shelby, North Carolina 28150
Attention: President
Please be advised that______________________________ (the "Warrant Holder")
hereby exercises the Warrant to purchase_____________________________
(____________) shares of common stock of CASCO INTERNATIONAL, INC. at a purchase
price of __________ ($________) per share. Enclosed is a check payable to
"CASCO INTERNATIONAL, INC." for _____________ as payment for the aforementioned
common stock. Also enclosed herewith is my original Warrant to purchase such
common stock.
Please mail the stock certificate for my common stock to my attention at
the following address:
-------------------------------
-------------------------------
-------------------------------
Sincerely,
---------------------------------
(Name of the Warrant Holder)
By:
-----------------------------
Its:
-----------------------------
<PAGE> 8
EXHIBIT "B" TO WARRANT
FORM OF ASSIGNMENT
(To be signed only upon transfer of the Warrant)
For value received, the undersigned hereby sells, assigns, and transfers
unto ___________________________________ the rights represented by the within
Warrant to purchase ____________________ (_________) shares of Common Stock of
CASCO INTERNATIONAL, INC. to which the within Warrant relates, and appoints
____________________________ attorney to transfer such Warrant on the books of
CASCO INTERNATIONAL, INC., with full power of substitution in the premises.
Dated:______________
EXHIBIT ONLY - DO NOT SIGN
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant)
--------------------------------------
--------------------------------------
(Address)
<PAGE> 9
EXHIBIT "B" TO WARRANT
FORM OF ASSIGNMENT
(To be signed only upon transfer of the Warrant)
For value received, the undersigned hereby sells, assigns, and transfers
unto ___________________________________ the rights represented by the within
Warrant to purchase ____________________ (_________) shares of Common Stock of
CASCO INTERNATIONAL, INC. to which the within Warrant relates, and appoints
____________________________ attorney to transfer such Warrant on the books of
CASCO INTERNATIONAL, INC., with full power of substitution in the premises.
Dated:
--------------
EXHIBIT ONLY - DO NOT SIGN
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant)
--------------------------------------
--------------------------------------
(Address)
<PAGE> 1
EXHIBIT 10.3.6
THIRD AMENDMENT TO
LOAN AND SECURITY AGREEMENT
THIS THIRD AMENDMENT (this "Amendment") to Loan and Security Agreement
is entered into as of the ____ day of January, 1998, by and between CASCO
International, Inc., fka CA Short Company (the "Borrower") and The Huntington
National Bank (the "Bank").
RECITALS:
A. As of December 31, 1996, the Borrower and the Bank executed a
certain Loan and Security Agreement which has been modified and amended pursuant
to a First Amendment to Loan and Security Agreement dated as of June 30, 1997,
and a Second Amendment to Loan and Security Agreement dated as of September 30,
1997 (herein collectively the "Loan Agreement"), and which sets forth the terms
of a certain extension of credit to the Borrower; and
B. As of December 31, 1996, the Borrower executed and delivered to the
Bank, inter alia, a Revolving Note in the original principal sum of Four Million
Five Hundred Thousand Dollars ($4,500,000.00) which has been modified and
amended pursuant to a certain Note Modification and Extension Agreement dated as
of June 30, 1997, and a certain Note Modification Agreement dated as of
September 30, 1997 (hereinafter collectively the "Note"); and
C. In connection with the Loan Agreement and the Note, the Borrower
executed and delivered to the Bank certain other loan documents, a lockbox
agreement, consents, assignments, security agreements, an open-end deed of trust
and security agreement, agreements, instruments and financing statements in
connection with the indebtedness referred to in the Loan Agreement (all of the
foregoing, together with the Note and the Loan Agreement, are hereinafter
collectively referred to as the "Loan Documents"); and
D. The Borrower has requested that the Bank amend and modify certain
terms in the Loan Agreement, and the Bank is willing to do so upon the terms
and conditions contained herein.
NOW, THEREFORE, in consideration of the mutual covenants, agreements
and promises contained herein, the receipt and sufficiency of which are hereby
acknowledged, and intending to be legally bound, the parties hereto for
themselves and their successors and assigns do hereby agree, represent and
warrant as follows:
1. Definitions. All capitalized terms not otherwise defined herein
shall have the meanings ascribed to such terms in the Loan Agreement.
2. Section 1, "The Loans," of the Loan Agreement is hereby amended to
recite in its entirety as follows:
1. The Loans. The Bank, subject to the terms and conditions hereof,
will extend to the Borrower up to the aggregate principal sum of
$5,500,000.00, which will include extensions of credit for commercial
letters of credit up to the maximum aggregate stated value outstanding
of $100,000.00 (the "Letters of Credit") (collectively the "Loan").
43
<PAGE> 2
3. Section 1.1, "The Revolving Loan and Borrowing Base," of the Loan
Agreement is hereby amended to recite in its entirety as follows:
1.1 The Revolving Loan and Borrowing Base. The Loan shall be comprised
of a revolving credit facility under which the Bank shall make, subject
to the terms and conditions hereof, loans and advances on a revolving
basis up to the principal sum of $5,500,000.00 (the "Revolving Loan");
provided, however, that upon the release by the Bank of its deed of
trust against the real property owned by the Borrower and located in
Cleveland County, North Carolina upon terms and conditions satisfactory
to the Bank (the "Real Estate Release"), the principal balance of the
Revolving Loan plus the aggregate stated value of all issued and
outstanding Letters of Credit shall not exceed $3,300,000.00, and the
value of the Eligible Real Estate shall be zero. In addition, the
principal balance of the Revolving Loan plus the aggregate stated value
of all issued and outstanding Letters of Credit shall not exceed an
amount equal to the sum of (i) the lesser of up to 60% of Eligible
Inventory or the Inventory Cap, plus (ii) up to 80% of Eligible
Accounts, plus (iii) up to 75% of Eligible Real Estate (collectively
the "Borrowing Base"). The Bank, in its sole discretion, reserves the
right upon 30 days prior written notice to the Borrower to increase or
decrease the foregoing percentages or the Inventory Cap. "Inventory
Cap" shall mean (a) prior to the Real Estate Release, up to the sum of
(1) $3,500,000.00 for the months of January through and including May
of each calendar year, and (2) $4,500,000.00 for the months of June
through and including December of each calendar year, and (b) on and
after the Real Estate Release, (1) up to the sum of $2,750,000.00 for
the months of January through and including May of each calendar year,
and (2) up to the sum of $3,000,000.00 for the months of June through
and including December of each calendar year.
4. Section 3.1, "Interest Rates and Fees," of the Loan Agreement is
hereby amended to recite in its entirety as follows:
3.1 Interest Rates and Fees. The Borrower agrees to pay the Bank (a)
each month interest on the unpaid balance of the Loan at the rates of
interest set forth in the note or notes evidencing the Loan; (b) no
later than the execution of this Agreement, an arrangement fee of
$5,000.00; and (c) each quarter, a fee in respect of the Revolving Loan
equal to 1/2 of 1% per annum of the difference, if any, between (i) the
Maximum Revolving Loan Amount and (ii) the daily principal balance of
the Revolving Loan during any full or partial calendar quarter the
Revolving Loan is in effect, payable quarterly in arrears, beginning on
the first day of January, 1998, and continuing on the first day of each
April, July, October and January thereafter during the time the
Revolving Loan is in effect. For purposes of calculating the fee
described in Section 3.1(c) above, "Maximum Revolving Loan Amount"
shall mean (i) $2,000,000.00 through and including January 12, 1998,
(ii) $5,500,000.00 beginning January 13, 1998, and continuing through
and including the Real Estate Release, and (iii) $3,300,000.00 after
the Real Estate Release.
5. Section 6.5, "Other Borrowing and Contingent Liabilities," of the
Loan Agreement is hereby amended to recited in its entirety as follows:
44
<PAGE> 3
6.5 Other Borrowings and Contingent Liabilities. Except for the Loan
and a certain real estate loan by First National Bank of Cleveland
County or other lender satisfactory to the Bank, in connection with the
real property located in Cleveland County, North Carolina, the Borrower
will not (a) create or incur Indebtedness, or (b) guarantee, indorse or
otherwise become surety for or upon any indebtedness of others, except
by indorsement of negotiable instruments for deposit or collection in
the ordinary course of business, certain indemnification provisions
contained in a certain Distribution Agreement dated December 31, 1996,
between the Borrower and Pages, Inc. and indemnification to S. Robert
Davis in connection with a certain Transaction Validity Agreement dated
of even date herewith. "Indebtedness," as applied to the Borrower or
any other entity shall mean, at any time, (a) all indebtedness,
obligations or other liabilities (i) for borrowed money or evidenced by
debt securities, debentures, acceptances, notes or other similar
instruments, and any accrued interest, fees and charges relating
thereto, (ii) under profit payment agreements or in respect of
obligations to redeem, repurchase or exchange any securities or to pay
dividends in respect of any stock, (iii) with respect to letters of
credit issued, (iv) to pay the deferred purchase price of property or
services, except accounts payable and accrued expenses arising in the
ordinary course of business, or (v) in respect of capital leases; (b)
all indebtedness, obligations or other secured by a lien on any
property, whether or not such indebtedness, obligations or liabilities
are assumed by the owner of the same, all as of such time; and (c) all
contingent contractual obligations with respect to any of the
foregoing.
6. Section 6.12, "Adjusted Tangible Capital Base," of the Loan
Agreement is hereby redesignated "Tangible Capital Base," and is amended to
recite in its entirety as follows:
6.12 Tangible Capital Base. The Borrower shall maintain as of the
following specified dates a Tangible Capital Base of not less than (a)
$5,250,000.00 as of December 31, 1997, (b) $5,350,000.00 as of March
31, 1998, (c) $4,750,000.00 as of June 30, 1998, (d) $4,450,000.00 as
of September 30, 1998, and (e) $5,750,000.00 as of December 31, 1998,
and continuing at all times thereafter. In addition to the foregoing
requirements, the Borrower shall maintain at all times a "Tangible
Capital Base" of not less than $4,450,000.00.
"Tangible Capital Base" shall mean the Borrower's shareholders' equity
(excluding treasury stock), minus the sum of all of the following: (i)
the excess of cost over the value of net assets of purchased
businesses, rights, and other similar intangibles, (ii) organizational
expenses, (iii) intangible assets (to the extent not reflected in the
foregoing), (iv) goodwill, (v) deferred charges or deferred financing
costs, (vi) loans or advances to and/or accounts or notes receivable
from Affiliates, (vii) leasehold improvements, (viii) non-compete
agreements, and (ix) any other asset not directly related to the
operation of the business of the Borrower.
7. Section 6.13, "Minimum Pretax Operating Profit or Maximum Pretax
Operating Loss," of the Loan Agreement is hereby amended to recite in its
entirety as follows:
6.13 Minimum Pretax Operating Profit or Maximum Pretax Operating Loss.
45
<PAGE> 4
Beginning with the fiscal quarter ending December 31, 1996, and
continuing as of the end of each fiscal quarter thereafter, the
Borrower shall, as the case may be, either (a) achieve an Accumulated
Operating Profit during any fiscal year on a year-to-date basis of not
less than the amount set forth below, or (b) not incur an Accumulated
Operating Loss during any fiscal year on a year-to-date basis in excess
of the amount set forth below:
As of December 31, 1997, Accumulated Operating Loss not to
exceed $775,000.00;
As of March 31, 1998, Accumulated Operating Profit of not less
than $100,000.00; and
As of June 30, 1998 Accumulated Operating Loss not to exceed
$500,000.00.
As of September 30, 1998, Accumulated Operating Loss not to
exceed $800,000.00.
As of December 31, 1998 Accumulated Operating Profit of not
less than $500,000.00.
Accumulated Operating Loss and Accumulated Operating Profit shall be
determined on a fiscal year-to-date basis, beginning on the first day
of each fiscal year and shall be calculated through the date of
determination. "Accumulated Operating Loss" shall mean, with respect to
the period of determination, the following calculation, provided that
such calculation results in a number less than zero: (a) the sum of the
Borrower's net income (or loss) after taxes as determined in accordance
with GAAP, plus, the sum of all extraordinary losses (and any unusual
losses arising outside the ordinary course of business not included in
extraordinary losses determined in accordance with GAAP), minus (b) the
sum of all extraordinary gains (and any unusual gains arising outside
the ordinary course of business not included in extraordinary gains
determined in accordance with GAAP). "Accumulated Operating Profit"
shall mean, with respect to the period of determination, the following
calculation, provided that such calculation results in a number greater
than zero: (a) the sum of the Borrower's net income (or loss) after
taxes as determined in accordance with GAAP, plus, the sum of all
extraordinary losses (and any unusual losses arising outside the
ordinary course of business not included in extraordinary losses
determined in accordance with GAAP), minus (b) the sum of all
extraordinary gains (and any unusual gains arising outside the ordinary
course of business not included in extraordinary gains determined in
accordance with GAAP).
8. Conditions of Effectiveness. This Amendment shall become effective
as of January 13, 1998, upon satisfaction of all of the following conditions
precedent:
(a) The Bank shall have received two duly executed copies of the Third
Amendment to Loan and Security Agreement and a certain Third Note Modification
and Extension Agreement, and such other certificates, instruments, documents,
agreements, and opinions of counsel as may be required by the Bank, each of
which shall be in form and substance satisfactory to the Bank and its
46
<PAGE> 5
counsel; and
(b) The Borrower shall have obtained (i) cancellation and discharge of
all indebtedness under that certain Subordinated Indenture dated December 31,
1996, executed by the Borrower in favor of Pages, Inc. (the "Subordinated
Indenture"), and (ii) the release of all security therefor, and shall deliver
evidence of such cancellation and release to the Bank; and
(c) The representations contained in paragraph 9 below shall be true
and accurate.
9. Representations. The Borrower represents and warrants that after
giving effect to this Amendment (a) each and every one of the representations
and warranties made by or on behalf of the Borrower in the Loan Agreement or the
Loan Documents is true and correct in all respects on and as of the date hereof,
except to the extent that any of such representations and warranties related, by
the expressed terms thereof, solely to a date prior hereto; (b) the Borrower has
duly and properly performed, complied with and observed each of its covenants,
agreements and obligations contained in the Loan Agreement and Loan Documents;
and (c) no event has occurred or is continuing, and no condition exists which
would constitute an Event of Default or a Pending Default.
10. Amendment to Loan Agreement. (a) Upon the effectiveness of Section
2 through Section 7 hereof, each reference in the Loan Agreement to "Loan
Agreement," "Agreement," the prefix "herein," "hereof," or words of similar
import, and each reference in the Loan Documents to the Loan Agreement, shall
mean and be a reference to the Loan Agreement as amended hereby. (b) Except as
modified herein, all of the representations, warranties, terms, covenants and
conditions of the Loan Agreement, the Loan Documents and all other agreements
executed in connection therewith shall remain as written originally and in full
force and effect in accordance with their respective terms, and nothing herein
shall affect, modify, limit or impair any of the rights and powers which the
Bank may have thereunder. The amendment set forth herein shall be limited
precisely as provided for herein, and shall not be deemed to be a waiver of,
amendment of, consent to or modification of any of the Bank's rights under or of
any other term or provisions of the Loan Agreement, any Loan Document, or other
agreement executed in connection therewith, or of any term or provision of any
other instrument referred to therein or herein or of any transaction or future
action on the part of the Borrower which would require the consent of the Bank,
including, without limitation, waivers of Events of Default which may exist
after giving effect hereto. The Borrower ratifies and confirms each term,
provision, condition and covenant set forth in the Loan Agreement and the Loan
Documents and acknowledges that the agreement set forth therein continue to be
legal, valid and binding agreements, and enforceable in accordance with their
respective terms.
11. Authority. The Borrower hereby represents and warrants to the Bank
that (a) the Borrower has legal power and authority to execute and deliver the
within Amendment; (b) the officer executing the within Amendment on behalf of
the Borrower has been duly authorized to execute and deliver the same and bind
the Borrower with respect to the provisions provided for herein; (c) the
execution and delivery hereof by the Borrower and the performance and observance
by the Borrower of the provisions hereof do not violate or conflict with the
articles of incorporation, regulations or by-laws of the Borrower or any law
applicable to the Borrower or result in the breach of any provision of or
constitute a default under any agreement, instrument or document binding upon or
enforceable against the Borrower; and (d) this Amendment constitutes a valid and
legally binding obligation upon the Borrower in every respect.
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<PAGE> 6
12. Counterparts. This Amendment may be executed in two or more
counterparts, each of which, when so executed and delivered, shall be an
original, but all of which together shall constitute one and the same document.
Separate counterparts may be executed with the same effect as if all parties had
executed the same counterparts.
13. Governing Law. This Amendment shall be governed by and construed in
accordance with the law of the State of Ohio.
IN WITNESS WHEREOF, the Borrower and the Bank have hereunto
set their hands as of the date first set forth above.
THE BORROWER:
CASCO INTERNATIONAL, INC.
By:
---------------------------------
Its:
--------------------------------
THE BANK:
THE HUNTINGTON NATIONAL BANK
By:
---------------------------------
Its:
--------------------------------
48
<PAGE> 1
EXHIBIT 10.3.7
THIRD NOTE MODIFICATION AND EXTENSION AGREEMENT
This Third Note Modification and Extension Agreement (this "Agreement")
is entered into as of the ____ day of January, 1998, by and between The
Huntington National Bank (hereinafter the "Bank") and CASCO International, Inc.,
fka CA Short Company (hereinafter the "Borrower").
WITNESSETH:
A. As of December 31, 1996, the Bank and the Borrower entered into and
executed a certain Loan and Security Agreement which has been modified and
amended pursuant to a First Amendment to Loan and Security Agreement dated as of
June 30, 1997, a Second Amendment to Loan and Security Agreement dated as of
September 30, 1997, and a Third Amendment to Loan and Security Agreement dated
as of even date herewith (hereinafter collectively the "Loan Agreement"); and
B. As of December 31, 1996, the Borrower executed and delivered to the
Bank, inter alia, a certain Revolving Note in the original principal amount of
Four Million Five Hundred Thousand Dollars ($4,500,000.00) which has been
modified and amended pursuant to a Note Modification and Extension Agreement
dated as of June 30, 1997, and a Note Modification Agreement dated as of
September 30, 1997 (hereinafter collectively the "Note"); and
C. To secure the repayment of the Note, the Borrower granted to the
Bank (a) a security interest in the collateral described in the Loan Agreement,
and (b) a deed of trust upon certain real property owned by the Borrower and
located in Cleveland County, North Carolina, (hereinafter collectively the "Real
and Personal Property"); and
D. The Bank's security interests and deed of trust in the Real and
Personal Property were perfected properly by the filing of financing statements
and the recording of a deed of trust and security agreement with various
recording authorities; and
E. In connection with the Loan Agreement and the Note, the Borrower
executed and delivered to the Bank certain other loan documents, a lockbox
agreement, consents, assignments, security agreements, a deed of trust and
security agreement, agreements, instruments and financing statements in
connection with the indebtedness referred to in the Loan Agreement (all of the
foregoing, together with the Note and the Loan Agreement, are hereinafter
collectively referred to as the "Loan Documents"); and
F. The Borrower remains the owner of the Real and Personal Property and
the Bank holds the Loan Documents; and
G. The Borrower and the Bank desire and are willing to amend and modify
the terms of the Note.
NOW, THEREFORE, in consideration of the mutual covenants, agreements
and promises contained herein, the receipt and sufficiency of which are hereby
acknowledged, and intending to be legally bound, the Borrower and the Bank, for
themselves and their successors and assigns do hereby agree, recite, represent
and warrant as follows:
39
<PAGE> 2
1. The first paragraph on page 1 of the Note is hereby amended to
recite in its entirety that:
$5,500,000.00 Columbus, Ohio December 31, 1996
FOR VALUE RECEIVED, the undersigned promises to pay
to the order of The Huntington National Bank (hereinafter
called the "Bank," which term shall include any holder hereof)
at such place as the Bank may designate or, in the absence of
such designation, at any of the Bank's offices, the sum of
Five Million Five Hundred Thousand Dollars ($5,500,000.00) or
so much thereof as shall have been advanced by the Bank at any
time and not thereafter repaid (hereinafter referred to as
"Principal Sum") together with interest as hereinafter
provided and payable at the time and in the manner hereinafter
provided. Notwithstanding the foregoing, upon and after the
release by the Bank of its deed of trust against the real
property owned by the undersigned and located in Cleveland
County, North Carolina, the Principal Sum shall not at any
time exceed Three Million Three Hundred Thousand Dollars
($3,300,000.00). The proceeds of the loan evidenced hereby may
be advanced, repaid and readvanced in partial amounts during
the term of this revolving note (this "Note") and prior to
maturity. Each such advance shall be made to the undersigned
upon receipt by the Bank of the undersigned's application
therefor and disbursement instructions, which shall be in such
form as the Bank shall from time to time prescribe. The Bank
shall be entitled to rely on any oral or telephonic
communication requesting an advance and/or providing
disbursement instructions hereunder, which shall be received
by it in good faith from anyone reasonably believed by the
Bank to be the undersigned, or the undersigned's authorized
agent. The undersigned agrees that all advances made by the
Bank will be evidenced by entries made by the Bank into its
electronic data processing system and/or internal memoranda
maintained by the Bank. The undersigned further agrees that
the sum or sums shown on the most recent printout from the
Bank's electronic data processing system and/or on such
memoranda shall be rebuttably presumptive evidence of the
amount of the Principal Sum and of the amount of any accrued
interest.
2. The second paragraph on page 1 of the Note is hereby amended to
recite in its entirety that:
This Note is executed and the advances contemplated
hereunder are to be made pursuant to a Loan and Security
Agreement by and between the undersigned and the Bank dated
December 31, 1996, and all amendments, modifications, and
supplements thereto from time to time, including without
limitation a certain First Amendment to Loan and Security
Agreement dated as of June 30, 1997, a certain Second
Amendment to Loan and Security Agreement
40
<PAGE> 3
dated as of September 30, 1997, and a certain Third Amendment
to Loan and Security Agreement dated as of January ____, 1998
(hereinafter collectively called the "Loan Agreement"), and
all the covenants, representations, agreements, terms, and
conditions contained therein, including but not limited to
additional conditions of default, are incorporated herein as
if fully rewritten.
3. The section titled "Manner of Payment" of the Note is hereby amended
to recite in its entirety that:
MANNER OF PAYMENT
The Principal Sum shall be due and payable on January
1, 1999, and at maturity, whether by demand, acceleration or
otherwise. Accrued interest shall be due and payable monthly
beginning on February 1, 1997, and continuing on the 1st day
of each month thereafter, and at maturity, whether by demand,
acceleration or otherwise.
4. The Borrower hereby covenants and agrees that the Bank's agreement
in this Agreement to extend the maturity of the Note shall not be construed and
shall not be the Bank's agreement to further modify or extend the Note.
5. The Borrower represents and warrants that no "Event of Default," as
defined in the Loan Agreement, has occurred and is continuing, nor will any such
Event of Default occur immediately after the delivery of this Agreement by the
performance or observance of any provision hereof.
6. Nothing contained in this Agreement shall be construed to affect,
modify, or cure in any manner, or effect a waiver of the occurrence and/or
continuance of any Event of Default, or default or breach of any term,
condition, covenant or agreement contained in the Loan Agreement, the Note, the
Loan Documents, or any other agreement executed in connection therewith.
7. Except as modified herein, the Note, the Loan Agreement, the Loan
Documents and all other agreements as to payment, guarantee of payment or
security executed in connection therewith shall remain as written originally and
in full force and effect in all respects, and nothing herein shall affect,
modify, limit or impair any of the rights and powers which the Bank may have
thereunder.
8. The Borrower agrees to perform and observe all of the covenants,
agreements, stipulations, and conditions to be performed under the Note, the
Loan Agreement, Loan Documents, and all other related agreements, as amended
hereby. Except as modified by this Agreement, all the terms, conditions and
covenants of the Note, the Loan Agreement, the Loan Documents and any other
related agreements shall remain as originally written.
9. The Borrower agrees to execute such continuation statements,
financing statements, or other documents, if any, as may be necessary or
desirable to continue in full force and effect the security interest granted to
the Bank.
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<PAGE> 4
10. THIS AGREEMENT shall become effective only upon its execution by
all parties hereto.
IN WITNESS WHEREOF, the Borrower and the Bank have hereunto set their
hands as of the date first set forth above.
BORROWER:
CASCO INTERNATIONAL, INC.
By:
--------------------------
Its:
-------------------------
BANK:
THE HUNTINGTON NATIONAL BANK
By:
--------------------------
Its:
-------------------------
42
<PAGE> 1
EXHIBIT 10.6
CASCO INTERNATIONAL, INC.
1997 EMPLOYEE STOCK OPTION PLAN
SECTION 1 - PURPOSE:
1.1 The purpose of this Employee Stock Option Plan ("Plan") is to further
the success of CASCO International, Inc., a Delaware corporation
("Company") by making available Common Stock of the Company for
purchase by certain officers and employees of the Company and its
affiliates, and thus to provide an additional incentive to such
individuals to continue in the service of the Company or its affiliates
and to give them a greater interest as Stockholders in the success of
the Company. Subject to compliance with the provisions of the Plan and
the Internal Revenue Code of 1986, as amended, Incentive Stock Options
as authorized by Section 422 of the Code and stock options which do not
qualify under Section 422 of the Code are authorized and may be granted
under the Plan.
SECTION 2 - DEFINITIONS:
2.1 As used in this Plan, the following terms shall have the meanings
indicated as follows:
2.1.1 "Board" means the Board of Directors of the Company.
2.1.2 "Code" means the Internal Revenue Code of 1986, as amended.
2.1.3 "Committee" means the Committee administering the Plan
described in Section 3 hereof.
2.1.4 "Common Stock" means the Company's Common Stock, par value
$.01 per share.
2.1.5 "Date of Grant" means the date on which an option is granted
under a written option agreement executed by the Company and a
Participant pursuant to the Plan.
2.1.6 "Effective Date" means the effective date of this Plan
specified in Paragraph 13 hereof.
2.1.7 "Exchange Act" means the Securities Exchange Act of 1934, as
it may be amended from time to time.
2.1.8 "Incentive Stock Option" means an option qualifying under
Section 422 of the Code.
2.1.9 "Non-Employee Director" means a person who meets the
definition of a "non-Employee Director" as defined in Rule
16b-3 promulgated under the Exchange Act or any successor
provision.
2.1.10 "Parent" means a parent corporation of the Company as defined
in Section 424(e) of the Code.
2.1.11 "Participants" means the employees and officers of the
Company, its Subsidiaries and
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<PAGE> 2
its Parents, and those directors of the Company who are also
employees of the Company, its subsidiaries or its Parents.
2.1.12 "Subsidiary" means a subsidiary corporation of the Company as
defined in Section 424(f) of the Code.
SECTION 3 - ADMINISTRATION OF THE PLAN:
3.1 The Board of Directors of the Company shall appoint a committee
("Committee") comprised of two (2) or more directors to administer the
Plan. Only directors who are Non-Employee Directors shall be eligible
to serve as members of the Committee. The Committee shall report all
action taken by it to the Board which shall review and ratify or
approve those actions that are, by law, required to be so reviewed and
ratified or approved by the Board. The Committee shall have full and
final authority in its discretion, subject to the provisions of the
Plan, to determine the Participants to whom, and the time or times at
which options shall be granted and the number of shares and purchase
price of Common Stock covered by each option; to construe and interpret
the Plan and any agreements made pursuant to the Plan; to determine the
terms and provisions (which need not be identical or consistent with
respect to each Participant) of the respective option agreements and
any agreement ancillary thereto including, but without limitation,
terms covering the payment of the option price; and to make all other
determinations and to take all other actions deemed necessary or
advisable for the proper administration of the Plan. All such actions
and determinations shall be conclusively binding for all purposes and
upon all persons.
SECTION 4 - OPTIONS AUTHORIZED:
4.1 The options granted under this Plan may be Incentive Stock Options or
stock options that do not qualify as Incentive Stock Options (sometimes
referred to as "non-qualified options" or "non-qualified stock
options"). The Committee shall have the full power and authority to
determine which options shall be non-qualified stock options and which
shall be Incentive Stock Options; to grant only Incentive Stock Options
or, alternatively, only non-qualified stock options; and to, in its
sole discretion, grant to the holder of an outstanding option in
exchange for the surrender and cancellation of such option, a new
option having purchase price lower than that provided in the option so
surrendered and cancelled and containing such other terms and
conditions as the Committee may prescribe in accordance with the
provisions of the Plan. No options may be granted under the Plan prior
to the Effective Date. In addition to any other limitations set forth
herein, the aggregate fair market value, determined in accordance with
Paragraph 7(A) of the Plan as of the time the option is granted, of the
stock with respect to which Incentive Stock Options are exercisable for
the first time by a Participant in any calendar year (under all plans
of the Company and of any Parent or Subsidiary) shall not exceed
$100,000.
SECTION 5 - COMMON STOCK SUBJECT TO OPTIONS:
5.1 The aggregate number of shares of the Company's Common Stock which may
be issued upon the exercise of options shall not exceed one hundred
fifty thousand (150,000), subject to adjustment under the provisions of
Paragraph 8. The shares of Common Stock to be issued upon the exercise
of options may be authorized but unissued shares, or shares issued
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<PAGE> 3
and reacquired by the Company. In the event any option shall, for any
reason, terminate or expire or be surrendered without having been
exercised in full, the shares subject to such option shall again be
available for options to be granted under the Plan, except that shares
for which relinquished options (or portions thereof) are exercisable
shall not again be available for options under the Plan.
SECTION 6 - PARTICIPANTS:
6.1 Except as hereinafter provided, options may be granted under the Plan
to any Participant. In determining the Participants to whom options
shall be granted and the number of shares to be covered by such option,
the Committee may take into account the nature of the services rendered
by the respective Participants, their present and potential
contributions to the Company's success, and such other factors as the
Committee, in its discretion, shall deem relevant. A participant who
has been granted an option under the Plan may be granted an additional
option(s) under the Plan, in the Committee's discretion.
SECTION 7 - TERMS AND CONDITIONS OF OPTIONS:
7.1 The grant of an option under the Plan shall be evidenced by a written
agreement executed by the Company and the applicable participant and
shall contain such terms and be in such form as the Committee may, from
time to time, approve, subject to the following limitations and
conditions:
7.1.1 OPTION PRICE: The option price per share with respect to each
option shall be determined by the Committee, but shall in no
instance be less than the par value of the shares subject to
the option. In addition, the option price per share with
respect to Incentive Stock Options granted hereunder shall in
no instance be less than the fair market value of the shares
of Common Stock subject to the option as determined by the
Committee. The Committee shall, in good faith, determine the
fair market value of the shares of Common Stock (without
regard to any restrictions other than a restriction which, by
its terms, will never lapse) based upon a reasonable method of
valuation adopted by the Committee, or such other method as
may be permitted by the Code, or regulations or rulings
promulgated thereunder. The Committee may permit the option
purchase price to be payable by any of the following means or
any combination thereof: (i) cash; (ii) certified or cashier's
check payable to the Company; (iii) the delivery of whole
shares of Common Stock owned by the Option holder; or (iv) by
requesting that the Company withhold whole shares of Common
Stock then issuable upon exercise of the Option (for purposes
of such a transaction the value of the shares of Common Stock
shall be deemed to be equal to the fair market value, as
determined by the Committee in good faith, of the shares on
the date of the exercise of the Option) in which case the
Option with respect to the shares withheld shall be deemed to
be surrendered and cancelled.
7.1.2 PERIOD OF OPTION: The expiration date of each option shall be
fixed by the Committee but, notwithstanding any provision of
the Plan to the contrary, such expiration date shall not be
more than five (5) years after the Date of Grant.
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<PAGE> 4
7.1.3 VESTING OF STOCKHOLDER RIGHTS: Neither the optionee nor
his/her successor in interest shall have any of the rights
of a Stockholder of the Company until the shares relating to
the option hereunder are issued by the Company and are
properly delivered to such optionee or successor.
7.1.4 EXERCISE OF OPTION: Each option shall be exercisable from
time to time, but not less than six (6) months after the
Date of Grant, over such period and upon such terms and
conditions as the Committee shall determine, but not at any
time as to less than twenty-five (25) shares unless the
remaining shares which have become so purchasable are less
than twenty-five (25) shares. After the death of the
optionee, an option may be exercised as provided in
Paragraph 15 hereof.
7.1.5 NON-TRANSFERABILITY OF OPTION: No option shall be
transferable or assignable by an optionee, other than by
will or the laws of descent and distribution or pursuant to
a qualified domestic relations order and each option shall
be exercisable, during the optionee's lifetime, only by
him/her or, during periods of legal disability, by his/her
legal representative. No option shall be subject to
execution, attachment, or similar process.
7.1.6 DISQUALIFYING DISPOSITION: The option agreement evidencing
any Incentive Stock Options granted under this Plan shall
provide that if the optionee makes a disposition, within the
meaning of Section 424(c) of the Code and regulations
promulgated thereunder, of any share(s) of Common Stock
issued to him/her pursuant to exercise of the option within
the two (2) year period commencing on the day after the date
of issuance of the share(s) to him/her pursuant to the
exercise of such option, he/she shall, within ten (10) days
after such disposition date, notify the company of the sales
price or other value ascribed to or used to measure the
disposition of the share(s) thereof and immediately deliver
to the Company any amount of federal income tax withholding
required by law.
7.1.7 LIMITATION ON GRANTS TO CERTAIN STOCKHOLDERS: An Incentive
Stock Option may be granted to a participant only if such
Participant, at the time the option is granted, does not
own, after application of the attribution rules of Code
Section 424, stock possessing more than ten percent (10%) of
the total combined voting power of all classes of Common
Stock of the company or of its parent or Subsidiary. The
preceding restriction shall not apply if at the time the
option is granted, the option price is at least one hundred
ten percent (110%) of the fair market value, as defined in
Paragraph 7(A) above, of the common Stock subject to the
option and such option by its terms is not exercisable after
the expiration of five (5) years after the Date of Grant.
7.1.8 CONSISTENCY WITH CODE: Notwithstanding any other provision
in this Plan to the contrary, the provisions of all
agreements granting incentive stock options pursuant to the
Plan shall not violate the requirements of the Code
applicable to the Incentive Stock Options authorized
hereunder.
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<PAGE> 5
SECTION 8 - ADJUSTMENTS:
8.1 The Committee, in its discretion, may make such adjustments in the
option price and the number of shares covered by outstanding options
that are required to prevent any dilution or enlargement of the rights
of the holders of such options that would otherwise result from any
reorganization, recapitalization, stock split, stock dividend,
combination of shares, merger, consolidation, issuance of rights, or
any other change in the capital structure of the Company. The
Committee, in its discretion, may also make such adjustments in the
aggregate number of shares that may be the subject of options which are
appropriate to reflect any transaction or event described in the
preceding sentence.
SECTION 9 - RESTRICTION OF ISSUING SHARES:
9.1 The exercise of each option shall be subject to the condition that if
at any time the company shall determine, in its discretion, that the
satisfaction of withholding tax or other withholding liabilities, or
that the listing, registration, or qualification of any shares
otherwise deliverable upon such exercise upon any securities exchange
or under any state or federal law, or that the consent or approval of
any regulatory body is necessary or desirable as a condition of, or in
connection with, such exercise or the delivery or purchase of shares
pursuant thereto, then in any such event, such exercise shall not be
effective unless such withholding, listing, registration,
qualification, consent, or approval shall have been effected or
obtained free of any conditions not acceptable to the Company.
SECTION 10 - USE OF PROCEEDS:
10.1 The proceeds received by the Company from the sale of Common Stock
pursuant to the exercise of options granted under the Plan shall be
added to the Company's general funds and used for general corporate
purposes.
SECTION 11 - AMENDMENT, SUSPENSION, AND TERMINATION OF PLAN:
11.1 The Board may, at any time, suspend or terminate the Plan or may amend
it from time to time in such respects as the Board may deem advisable
in order that the options granted thereunder may conform to any changes
in the law or in any other respect that the Board may deem to be in the
best interests of the Company provided, however, that without approval
by the Stockholders of the Company voting the proper percentage of its
voting power, no such amendment shall make any change in the Plan for
which Stockholder approval is required of the Company in order to
comply with:
11.1.1 The Code or regulatory provisions dealing with Incentive Stock
Options;
11.1.2 Any rules for listed companies promulgated by any national
stock exchange on which the Company's stock is traded; or
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<PAGE> 6
11.1.3 Any other applicable rule of law.
11.2 Unless sooner terminated hereunder, the Plan shall terminate ten (10)
years after the Effective Date. No option may be granted during any
suspension or after the termination of the Plan. Except as provided in
Paragraph 12, no amendment, suspension, or termination of the Plan
shall, without an optionee's consent, impair or negate any of the
rights or obligations under any option theretofore granted to such
optionee under the Plan.
SECTION 12 - TAX WITHHOLDING:
12.1 The Committee may, in its sole discretion:
12.1.1 Require an optionee to remit to the Company a cash amount
sufficient to satisfy, in whole or in part, any federal,
state, or local withholding tax requirements prior to the
delivery of any certificate for shares pursuant to the
exercise of an option hereunder; or,
12.1.2 Satisfy such withholding requirements through another lawful
method.
SECTION 13 - EFFECTIVE DATE OF PLAN:
13.1 This Plan shall become effective (the "Effective Date") upon adoption
by the Board, and in the case of Incentive Stock Options, subject to
approval within twelve (12) months after such adoption by holders of a
majority of the shares of Common Stock present in person or by proxy
and entitled to vote at a duly held Stockholders meeting. Options,
including Incentive Stock Options, may be granted under the Plan prior
to the receipt of such approval.
SECTION 14 - TERMINATION OF EMPLOYMENT:
14.1 In the event of the retirement, with the written consent of the
Company, or other termination of the employment of an employee to whom
an option has been granted under the Plan other than:
14.1.1 A termination that is either (i) for cause or (ii) voluntary
on the part of the employee and without the written consent of
the Company; or,
14.1.2 A termination by reason of death.
14.2 The employee may, unless otherwise provided in his/her option
agreement, exercise his/her option at any time within three (3) months
after such retirement or other termination of employment (or within one
(1) year after termination of employment due to disability within the
meaning of Code Section 422(c)(6), or within such other time as the
Committee shall authorize, but in no event after five (5) years after
the date of granting thereof, or such lesser period as may be specified
in the stock option agreement), but only to the extent of the number of
shares of which his/her options were exercisable by him/her at the date
of the termination of his/her employment.
14.3 In the event of the termination of the employment of an employee to
whom an option has
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<PAGE> 7
been granted under the Plan that is either for cause, or voluntary on
the part of the employee and without the written consent of the
company, any option held by him/her under the Plan, to the extent not
previously exercised, shall forthwith terminate on the date of such
termination of employment. Options granted under the Plan shall not be
affected by any change of employment so long as the holder continues to
be an employee of the Company, a Subsidiary, or Parent. The option
agreement may contain such provisions as the Committee shall approve
with respect to the effect of approved leaves of absence. Nothing in
the Plan, or in any option granted pursuant to the Plan, shall confer
on any individual any right to continue in the employ of the Company or
any of its Subsidiaries or Parents, or interfere in any way with the
right of the Company or any of its Subsidiaries or Parents to terminate
his employment at any time.
SECTION 15 - DEATH OF HOLDER OF OPTION:
15.1 In the event an employee to whom an option has been granted under the
Plan dies during or within three (3) months after the termination of
his/her employment by the Company or a subsidiary or Parent, such
option, unless it shall have been previously terminated pursuant to the
provision of the Plan, or unless otherwise provided in his/her option
agreement, may be exercised to the extent of the entire number of
shares covered by the option whether or not purchasable by the employee
at the date of his/her death, by the executor or administrator of the
optionee's estate or by the person(s) to whom the optionee shall have
transferred such option by will or by the laws of descent and
distribution, at any time within a period of one (1) year after this
death, but not after the exercise termination date set forth in the
relevant stock option agreement.
SECTION 16 - LOANS TO ASSIST IN EXERCISE OF OPTIONS:
16.1 If approved by the Board, the Company or any Parent or Subsidiary may
lend money or guarantee loans by third parties to an individual to
finance the exercise of any option granted under the Plan to carry
Common Stock thereby acquired. No such loans to finance the exercise of
an Incentive Stock Option shall have an interest rate or other terms
that would cause any part of the principal amount to be characterized
as interest for purpose of the Code.
SECTION 17 - RULE 16b-3 PLAN:
17.1 This Plan is intended and has been drafted to comply in all respects
with Rule 16b-3, as amended, under the Exchange Act. If any provision
of this Plan does not comply with Rule 16b-3, as amended, this Plan
shall be automatically amended to comply with Rule 16b-3, as amended.
SECTION 18 - INDEMNIFICATION:
18.1 The members of the Committee shall be indemnified by the Corporation
against the reasonable expenses incurred in connection with the defense
of any action, suit or proceeding, or in connection with any appeal
thereof, to which they or any of them may be a party by reason of any
action taken or failure to act under or in connection with the Plan or
any Option, and against all amounts paid by them in settlement thereof
(provided such settlement is approved by legal counsel selected by the
Corporation) or paid by them in
55
<PAGE> 8
satisfaction of a judgment in any such action, suit or proceeding. A
member of the Committee shall not be entitled to indemnification with
respect to any matter or claim arising out of gross negligence or
willful misconduct by such member in the performance of his duties. As
a condition of any indemnification, a Committee member shall in writing
offer the Corporation the opportunity, at its own expense, to handle
and defend any suit or claim against him/her.
56
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
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