FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For the fiscal year ended December 31, 1999
Commission File Number 0-21717
CASCO INTERNATIONAL, INC.
(Exact Name of Registrant as specified in its charter)
Delaware 56-0526145
- ------------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4205 East Dixon Boulevard, Shelby, North Carolina 28150
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code (704) 482-9591 Securities
registered pursuant to Section 12(b) of the Act: None Securities registered
pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the voting shares held by non-affiliates of the
Registrant as of March 27, 2000 was $9,138,900 (computed by reference to the
average bid and asked prices of such shares on such date).
Number of Common Shares, each with $0.01 par value, of the Registrant
outstanding as of date: March 27, 2000: 1,783,200 Common Shares.
<PAGE>
PART I
ITEM 1. BUSINESS.
GENERAL
CASCO INTERNATIONAL, INC., (the "Company") was formed as a North
Carolina corporation in 1950. Pages, Inc., a Delaware Corporation ("Pages"),
acquired all of the issued and outstanding common stock of the Company in
February, 1990. In November, 1996, the Company reincorporated in the State of
Delaware by merging into Clyde A. Short Incorporated, a Delaware corporation
which was the surviving corporation in the merger and which, in conjunction with
the merger, changed its name to CA Short Company. Effective at the close of
business on December 31, 1996, Pages distributed all of the Company's common
stock $.01 par value ("common stock") to its shareholders. In 1997, the Company
changed its name from CA Short Company to CASCO INTERNATIONAL, INC., but the
Company does business under the CA Short Company name. From January 1, 1997
until May 30, 1997 the common stock was traded on the OTC Bulletin Board under
the symbol "CASC". On June 2, 1997, the common stock began trading on The Nasdaq
SmallCap market under the same symbol. The Company's common stock and warrants
are traded on The Nasdaq SmallCap Market under the symbols "CASC" and "CASCW".
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. The programs include safety,
sales incentive, quality control, production, service recognition, attendance,
birthday, and corporate holiday gift programs. The common objective of all the
Company's programs is to satisfy a client's specific needs. Changes in the
premium incentive industry have permitted the Company to redefine its
strategies, focus on specific product lines, and exploit certain niches within
its market. The Company's adjustments include the installment of a total quality
management program, the development of a strategic marketing group, the
implementation of an aggressive cash management program, and the development of
new core capabilities necessary to promote growth. The Company believes that
with intense marketing and the employment of a skilled, well-managed field sales
organization, the Company will be able to increase the brand recognition of its
products and increase its penetration into specific markets.
<PAGE>
MERCHANDISE SELECTION AND BROCHURES
The Company's programs feature brand name merchandise from industry
leading manufacturers such as Sony, RCA, Waterford, Bulova, Minolta, and
Bushnell. The items in a client's program are separated into various price
levels, thus allowing the client to select price levels that fit their budget.
Featured in full color brochures, items are presented by award level.
The Company partners with clients to design and produce brochures that
reflect the client's corporate identity. These brochures are designed and
produced in-house by the Company's creative services department. The Company
also produces a catalog of pre-selected merchandise, arranged in various price
levels, from which clients may build programs.
SERVICE RECOGNITION PROGRAMS
In the past, there was a deeply ingrained corporate standard stating
"longevity-equals-seniority" -- the idea that the longer you work for a company,
the more seniority you earn. For decades, service recognition programs were
designed to reinforce this paradigm.
Today, as companies re-engineer and reorganize they realize that it has
never been more important to recognize their associates for their loyalty and
hard work. The standard has changed to "individual performance-equals-longevity"
- -- the better an associate performs, the more valuable he or she is to their
company. With this in mind, the entire recognition industry is changing, and
different types of programs are required to redefine recognition. As more and
more companies outsource the handling of recognition programs, the Company is
strategically positioning itself as the leader for the complete design,
administration, and fulfillment of innovative and effective recognition
programs. The Company's primary goal as it partners with its clients to develop
their own custom program is to increase "Recognitional Impact(TM)" --- the level
of satisfaction each client experiences with their program. Recognitional
Impact(TM) establishes a performance index that allows the Company to measure
the added value it provides existing clients, as well as prospective clients.
SAFETY AWARENESS/INCENTIVE AND RECOGNITION PROGRAMS
Accidents in the workplace injure thousands of workers each year and cost
billions of dollars in worker's compensation premiums, health care costs, and
lost productivity. The Company designs, implements and administers safety
programs to reduce the direct and indirect costs associated with accidents or
lack of safety awareness. Coupled with worker safety training and work place
safety initiatives, safety incentive and recognition programs have proven to be
an essential contributor to overall safety awareness. By increasing awareness
and recognizing those in the workplace who have safe work habits, the successful
clients can achieve huge returns on their incentive investments. Because each
client has its own unique set of safety concerns, the Company designs each
safety awareness and recognition program to meet the specific needs and goals of
the client. A typical safety program would grant an award for each recipient who
met the client's specific goal. As a consequence of the present regulatory
environment, clients are placing increasing emphasis on safety and the Company
has received a number of client testimonials regarding the efficiency of the
safety programs it has designed. The Company's market share of this industry is
minimal.
<PAGE>
OTHER PROGRAMS
The Company utilizes its reputation in both outstanding merchandise
selection and the timely delivery of such merchandise to design, administer and
fulfill numerous types of customer specific programs for its clients. These
ancillary programs include attendance, holiday, birthday, sales incentive, and
generic points programs that add incremental revenue without diluting the
Company's focus on its core business. In developing close ties with the
Company's clients many opportunities for these types of programs become
apparent. The Company intends to continue to work in these ancillary markets as
long as its client's needs demand its services.
FULFILLMENT
The Company is researching the establishment of an internet fulfillment
subsidiary, that will provide back-end support, information services, full
service packaging and product fulfillment to internet retailers, direct
marketing firms and other companies focused on selling and delivering directly
to the consumer.
CLIENTS
The Company's client list represents a wide spectrum of performance
driven organizations throughout the United States. The Company's cross section
of industry representation minimizes cyclical downturns traditionally found in
industry specific business models. The client list includes DuPont, Pfizer,
Huntington National Bank and Intel.
GROWTH STRATEGY
The Company has divided the country into specific territories. The
territories were defined by existing accounts and target prospects within each
area. Each territory is serviced by a full-time, Company- employed recognition
consultant. Within each territory area the Company has segmented the potential
clients into specific prospect groups based on size and type of program. Each
prospect group will be marketed in the method proven most likely to engage the
client. All recognition consultants receive intense training and are measured on
a number of criteria including sales performance and territory market share
penetration. The Company continues to work markets on a proactive, well planned,
systematic basis. The Company intends to augment internal growth through
value-added acquisitions and strategic alliances designed to increase
penetration in key market areas.
SALES AND MARKETING
In 1997, the Company redefined the way in which it markets its
services. It made a transition from independent sales reps to full-time company
associates. Further, the Company clearly defined and identified target prospects
in strategic markets across the country. In addition to prospecting activities,
the marketing and sales group developed an aggressive account initiative
involving account retention. This change in the Company's philosophy was needed
due to a significant change in its mission: "To have the best trained, most
responsive, performance based sales force in America." The Company realized the
existing sales force would never be able to take the Company to the next level
of performance. 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.
<PAGE>
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 28, 2000 the Company employed a total of 127 regular
employees. The number of seasonal employees fluctuated during 1999 from a low of
5 to a high of 60 in the months of November, December and January when the
Company generates approximately thirty percent of its revenues and all of its
profits. As a result, the Company's working capital requirements are highest
during November and December. None of the Company's employees are represented by
a labor union. The Company considers its relationship with its employees to be
excellent. As of February 18, 1999, the Company's health care plan covered 95 of
its employees.
ITEM 2. PROPERTIES.
Owned
Location Use Size Leased
- ---------------------- ------------------ -------------- ------
Shelby, North Carolina ........... Warehouse & Office 134,000 sq. ft. Owned
Charlotte, North Carolina ........ Office 10,000 sq. ft. Leased
Kings Mountain, North Carolina ... Warehouse Outlet 4,000 sq. ft. Leased
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.
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.
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company's common stock and warrants trade on the Nasdaq SmallCap
market under the symbols "CASC" and "CASCW". The following table sets forth, for
the periods indicated, the high and the low sale prices for shares of the
Company's common stock and warrants.
<TABLE>
<CAPTION>
Calendar Year
Ended December Trade Price
1999 1998
------------- -------------
High Low High Low
<S> <C> <C> <C> <C>
Fourth Quarter
CASC .... 3.500 1.625 1.625 1.594
CASCW ... 0.688 0.281 .406 .406
Third Quarter
CASC .... 4.500 1.750 1.594 1.594
CASCW ... 1.094 0.406 .188 .188
Second Quarter
CASC .... 2.125 0.813 2.500 2.375
CASCW ... 0.500 0.188 .438 .438
First Quarter
CASC .... 1.750 0.875 4.063 4.063
CASCW ... 0.438 0.250 .688 .688
</TABLE>
As of March 27, 2000, the Company had approximately 551 holders of
record of its Common Stock.
The Company has not declared or paid any cash dividends on the Common
Stock since it was acquired by Pages, Inc. in 1990. The Company anticipates that
for the foreseeable future it will retain earnings in order to finance the
expansion and development of its business, and no cash dividends will be paid on
its Common Stock. The Loan Agreement between the Company and Branch Banking &
Trust (the "Loan Agreement") does not allow the Company to pay cash dividends
which total in excess of $100,000 on its Common Stock and only then when the
Company is not in default under the Loan Agreement.
In June, 1999, the Company granted to R. L. Renck & Co., Inc., a
warrant to purchase 30,000 shares of Company common stock in return for
consulting services, 10,000 shares of which vested immediately with the
remainder vesting at the rate of 2,500 shares per month. The warrant exercise
price is $2.75 per share. The warrant expires on May 27, 2004. The Company
claimed an exemption from registration under Securities Act Section 4(2) for the
grant of the warrant, which was granted to a company with sophisticated
principals who were knowledgeable about the Company and were not in need of the
protection afforded by registration.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Year Year Year Year
Ended Ended Ended Ended Ended
December December December December December
31, 31, 31, 31, 31,
----------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ..$ 24,199 $ 21,718 $ 19,333 $ 21,959 $ 22,620
Cost and
expenses . 23,549 22,102 20,007 22,542 23,296
----------- ----------- ----------- ----------- ----------
Income (loss) before
income taxes
and cumulative
effect of change
in accounting
principle 650 (384) (674) (583) (676)
taxes (293) 146 256 195 249
----------- ----------- ----------- ----------- ----------
Income (loss) before extraordinary gain and
cumulative effect of change in
accounting
principle 357 (238) (418) (388) (427)
Cumulative effect of change in
accounting
principle * -- -- -- 597 --
Extraordinary gain on retirement
of debt -- 930 -- -- --
----------- ----------- ----------- ----------- ----------
Net income
(loss) $ 357 $ 692 $ (418) $ 209 $ (427)
=========== =========== =========== =========== ==========
PRO FORMA PER SHARE DATA:
Income (loss) before cumulative effect
of change in accounting
principle $ 0.20 $ (0.13) $ (0.34) $ (0.39) $ (0.43)
Cumulative effect of change in
accounting
principle -- -- -- 0.59 --
Extraordinary gain on
retirement
of debt -- 0.52 -- -- --
----------- ----------- ----------- ----------- ----------
Income (loss) per
common
share $ 0.20 $ 0.39 $ (0.34) $ 0.20 $ (0.43)
=========== =========== =========== =========== ==========
Weighted average common and
common equivalent
shares 1,783,200 1,783,200 1,225,447 1,003,431 1,003,431
=========== =========== =========== =========== ==========
*The Company changed its method of accounting for the recognition of
revenues relating to advanced deposits. Effective with the change, revenues are
recognized over the course of the programs based on the Company's historical and
expected redemption percentages. The effect of the accounting change in 1996 was
to increase income before income taxes and cumulative effect of change in
accounting principle by $209,190.
BALANCE SHEET DATA:
Working
capital $ 4,787 $ 4,606 $ 7,202 $ 5,025 $ 3,774
Total assets 17,344 18,843 16,148 18,249 19,512
Long-term debt 2,190........2,413. 4,900 4,125 4,125
Stockholders'
equity 6,237 5,880 5,188 3,328 3,119
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Selected Financial Data and the Financial Statements and Notes contained
elsewhere herein. The Company's results of operations have been, and in certain
cases are expected to continue to be, affected by certain general factors.
CAUTIONARY STATEMENT
Statements included in this Management's Discussion and Analysis of
Financial Condition and Results of Operations, in other sections of this Annual
Report, and in future filings by the Company with the Securities and Exchange
Commission, in the Company's press releases and in oral statements made with the
approval of an authorized executive officer which are not historical or current
facts including, without limitation, the Company's ability to increase brand
recognition, its ability to effectively and efficiently offer fulfillment
services to internet companies, its ability to grow through acquisition and
strategic alliances and through expanding its current market share and entering
new markets, the adequacy of the company's cash resources to fund its current
operations, the decreased effect of seasonality on the Company 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.
<PAGE>
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 Twelve Twelve
Months Months Months
Ended Ended Ended
December 31, December 31, December 31,
1999 1998 1997
---------------------------------------
<S> <C> <C> <C>
Total revenue .......................... 100.0% 100.0% 100.0%
Cost of goods sold ..................... 55.0% 58.6% 59.1%
----- ----- -----
Gross profit ........................... 45.0% 41.4% 40.9%
Selling, general, and administrative ... 37.8% 38.6% 40.1%
Interest ............................... 1.5% 1.6% 2.4%
Depreciation and amortization .......... 3.0% 2.4% 1.9%
Loss on Sale of Building ............... -- 0.7% --
----- ----- -----
----- ----- -----
Income (loss) from continuing operations
before income taxes .................... 2.7% (1.7%) (3.5%)
===== ===== =====
</TABLE>
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998.
Revenues for the year ended December 31, 1999 approximated $24.2
million, compared to $21.7 million in revenues for the year ended December 31,
1998, an increase of 11.4% or approximately $2.5 million. The increase is
attributable to strong retention of existing customers coupled with new
customers in the new markets with employed recognition consultants and the
acquisitions made by the Company in 1998.
Cost of goods sold for the year ended December 31, 1999 approximated
$13.3 million, compared to approximately $12.7 million of cost of goods sold for
the year ended December 31, 1998, an increase of 4.7% or approximately $601,000.
The increase in cost of goods sold was attributable to the increase in revenues.
As a percentage of revenues, cost of goods sold decreased to 55% in 1999 from
58.6% in 1998. The 3.6% decrease in cost of goods sold was principally
attributable to a change in product mix, an improved purchasing strategy and
systems, as well as the increased sales in new programs.
Selling, general, and administrative expense for the year ended December
31, 1999 approximated $9.1 million for the year ended December 31, 1999,
compared to approximately $8.4 million for the year ended December 31, 1998, an
increase of 9.1% or approximately $759,000. The increase in selling, general and
administrative expenses was due to increased sales and the expansion of the
employee based sales force. As a percentage of revenues, selling, general and
administrative decreased to 37.8% in 1999 from 38.6% in 1998. The 0.8% decrease
as a percentage of revenues was principally attributable to benefits obtained
from aggressive cost containment policies and efficiencies gained from the new
computer processing system.
<PAGE>
Interest expense was approximately $372,000 for the year ended December
31, 1999, compared to $336,000 for the year ended December 31, 1998, an increase
of 10.9% or approximately $36,000. The increase was attributable to the interest
on the Company's line of credit which was used to finance the acquisitions in
1998. The average outstanding debt by month in 1999 approximated $4.7 million
compared to $3.4 million for 1998. Additionally, the average interest rate for
1999 approximated 7.94% compared to approximately 8.91% for 1998 on the debt.
Depreciation and amortization expense was approximately $722,100 for the
year ended December 31, 1999, compared to $520,000 for the year ended December
31, 1998, an increase of 38.9% or approximately $202,100. The increase in
depreciation and amortization expense was principally attributable to the
depreciation of newly acquired assets in 1997 and 1998. The increase was also
attributable to the amortization of the goodwill on the acquisitions made by the
Company in 1998.
Income tax provision was $293,000 for the year ended December 31, 1999,
compared to an income tax benefit of $145,500 for the year ended December 31,
1998. The provisions for income tax were calculated through the use of estimated
income tax rates based upon the income (loss) before income taxes.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997.
Revenues for the year ended December 31, 1998 approximated $21.7
million, compared to $19.3 million in revenues for the year ended December 31,
1997, an increase of 12.4% or approximately $2.4 million. The increase is
attributable to strong retention of existing customers coupled with new
customers in the new markets with employed recognition consultants and the
acquisitions made by the Company in 1998.
Cost of goods sold for the year ended December 31, 1998 approximated
$12.7 million, compared to approximately $11.4 million of cost of goods sold for
the year ended December 31, 1997, an increase of 11.4% or approximately $1.3
million. The increase in cost of goods sold was attributable to the increase in
revenues. As a percentage of revenues, cost of goods sold decreased to 58.6% in
1998 from 59.1% in 1997. The 0.50% decrease in cost of goods sold was
principally attributable to a change in product mix.
Selling, general, and administrative expense for the year ended December
31, 1998 approximated $8.4 million for the year ended December 31, 1998,
compared to approximately $7.8 million for the year ended December 31, 1997, an
increase of 7.9% or approximately $600,000. The increase in selling, general and
administrative expenses was due to increased sales and the expansion of the
employee based sales force. As a percentage of revenues, selling, general and
administrative decreased to 38.6% in 1998 from 40.1% in 1997. The 1.5% decrease
as a percentage of revenues was principally attributable to benefits obtained
from aggressive cost containment policies.
Interest expense was approximately $336,000 for the year ended December
31, 1998, compared to $469,000 for the year ended December 31, 1997, a decrease
of 28% or approximately $133,000. The average outstanding debt by month in 1998
approximated $3.4 million compared to $1.1 million for 1997. The average
outstanding balance on the subordinated debenture by month in 1998 was $0
compared to $5 million in 1997. Additionally, the average interest rate for 1998
approximated 8.91% compared to approximately 9.42% for 1997 on the debt. The
interest rate on the subordinated debenture for 1998 and 1997 approximated 7%.
The decrease in interest was mainly attributable to the interest paid in 1997 on
a subordinated debenture given to Pages, Inc. when the Company was spun off.
<PAGE>
- -------------------
Depreciation and amortization expense was approximately $520,000 for the
year ended December 31, 1998, compared to $359,000 for the year ended December
31, 1997, an increase of 44.9% or approximately $161,000. The increase in
depreciation and amortization expense was principally attributable to the
depreciation of newly acquired assets in 1997 and 1998. The increase was also
attributable to the amortization of the goodwill on the acquisitions made by the
Company in 1998.
Income tax benefit was $145,500 for the year ended December 31, 1998,
compared to $256,000 for the year ended December 31, 1997. The provisions for
income tax benefit were calculated through the use of estimated income tax rates
based upon the loss before taxes.
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, receivables and acquisitions.
Net working capital increased to $4,787,000 as of December 31, 1999 from
net working capital of $4,606,000 as of December 31, 1998. The increase was
primarily attributed to the Company's ability to pay down the line of credit
during 1999.
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 will cover
operating expenditures and meet the short-term debt obligations. The Company's
credit facility is due and payable in full on July 30, 2000. Although the lender
has not issued a commitment to do so, the Company's relationship with its lender
is favorable and the Company anticipates that the credit facility will be
renewed when due.
Current assets decreased approximately $1,243,000 due mostly from
decreases in accounts receivable ($629,000), inventory ($552,000), prepaid
expenses ($28,000) and in cash ($101,000). The decrease in accounts receivable
is due to the increased emphasis on collections and a new strategy of contacting
delinquent accounts the Company implemented in August of 1999. The decrease in
inventory is due to an improved purchasing strategy coupled with an improved
processing and inventory ordering system. The decrease in cash is due to closing
of the cash accounts associated with the acquisitions. Current liabilities
decreased approximately $1,424,000 due mostly from decreases in short-term debt
obligations ($1,382,000) and accounts payable and accrued liabilities ($326,000)
offset by an increase of accrued taxes payable ($355,000). The decrease in
short-term debt obligations was due to the pay down of the line of credit from
the excess cash generated from operations. The decrease in accounts payable was
due to the decreased inventory purchases.
Cash decreased approximately $101,000. Net cash provided from operating
activities was approximately $1,934,000. Net cash used in investing activities
was approximately $429,000 due to payments for purchases of the information
systems. Net cash used by financing activities was approximately $1,605,000,
which was due to the pay downs on the line of credit.
<PAGE>
On July 30, 1998 the Company entered into an agreement with Awards &
Gifts, Inc. and Richard W. Terlau, Jr., providing for the purchase of
substantially all assets and certain liabilities of Awards & Gifts by the
Company. Under the terms of the Asset Purchase Agreement, the assets included
Awards & Gifts customer list, machinery and equipment, inventories, Awards &
Gifts intellectual property assets, prepaid expenses, and a real property lease.
The purchase price for the assets was $1.5 million with certain adjustments made
for pro-rated items, with $1.3 million paid in cash and a $200,000 promissory
note. The note is secured by an Irrevocable Standby Letter of Credit issued by
Branch Banking & Trust Company. The purchase price under the Asset Purchase
Agreement was determined by arm's length negotiations between the parties based
on the market value of the assets purchased and sold. The goodwill acquired in
this transaction will be amortized over fifteen years using the straight-line
method. The acquisition was financed with proceeds from the Company's revolving
credit facility with Branch Banking & Trust Company.
On October 1, 1998 the Company entered into an agreement with American
Awards & Gifts, Inc. and Frank G. and Judith J. McGinnis, providing for the
purchase of substantially all assets and certain liabilities of American Awards
& Gifts, Inc. by the Company. Under the terms of the Asset Purchase Agreement,
the assets included American Awards & Gifts customer list, machinery and
equipment, tools and dies, inventories, intellectual property assets, and
general intangibles, the liabilities included the assumption of certain accounts
payable. The purchase price for the assets was $255,177 with $100,000 in cash
and a $155,177 promissory note. The purchase price under the Asset Purchase
Agreement was determined by arm's length negotiations between the parties based
on the market value of the assets purchased and sold. The goodwill acquired in
this transaction will be amortized over fifteen years using the straight-line
method.
Effective at the close of business on December 31, 1996, a tax free spin
off of the Company's common stock from its parent, Pages, was completed (the
"Distribution"). In the Distribution, for every ten shares of Pages common stock
outstanding on the record date, one and one-half shares of the Company's common
stock was distributed to Pages' stockholders. The Company entered into a $5
million, 7% subordinated debenture with Pages simultaneously with the
Distribution in satisfaction of amounts due to Pages by the Company. The excess
of the amount due to Pages as of the Distribution over the $5 million
subordinated debenture was recorded as paid in capital. Principal payments will
be $100,000 per year for the first four years, and a final payment due at the
end of the fifth year for the remaining principal balance. Interest is at 7% per
annum, payable quarterly. Based on the consummation of the Distribution
effective January 1, 1997, the amounts due to Pages previously recorded as
current have been reclassified to long term, thus significantly increasing the
Company's net working capital, as described earlier in this section. The Company
discharged the debenture in full in January 1998 for $3.5 million. The Company
realized an extraordinary gain on retirement of debt of $1.5 million on this
transaction.
The Company does not anticipate any material expenditures for property
and equipment during the next twelve months, out of the ordinary course of
business. Although the Company will require additional capital to expand its
fulfillment operations, management believes that present resources will meet
anticipated requirements for its current operations.
The Company is aware of no trends or demands, commitments or uncertainties
that will result in, or that management believes are reasonably likely to result
in, the Company's liquidity increasing or decreasing in any material way. 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.
<PAGE>
A potential problem existed for all companies that relied on computers
as the year 2000 approached. The "Year 2000" problem is the result of the past
practice in the computer industry of using two digits rather than four to
identify the applicable year. The Company addressed its Year 2000 compliance
needs by implementing a new Enterprise Resource Planning (ERP) application on a
new IBM AS/400 platform. The Company experienced no internal problems or
problems with third parties in regards to the "Year 2000" problem. The Company
spent approximately $45,000 on external consultants to ensure Year 2000
compliance.
SEASONALITY
The Company's business is highly seasonal, with approximately 30% of its
revenues and most of its profits recorded in the months of November, December,
and January. As a result, the Company's working capital requirements are highest
during November and December when the combination of receivables and inventory
are at peak levels. The Company typically experiences losses in its second and
third quarters.
As the results from the Company's growth strategy develop, the effects
of seasonality should be diminished. The business segments on which the Company
has chosen to focus offer steadier revenue flows, as well as more consistent
requirements for working capital.
INFLATION
Although the Company cannot determine the precise effects of inflation,
inflation has an influence on the cost of the Company's products and services,
supplies, salaries, and benefits. The Company attempts to minimize or offset the
effects of inflation through increased sales volumes and sales prices, improved
productivity, alternative sourcing of products and supplies, and reduction of
other costs. The Company generally has been able to offset the impact of price
increases from suppliers by increases in the selling prices of the Company's
products and services.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to the impact of interest rate changes on its
debt obligations. The Company is not exposed to foreign currency exchange rate
risk or investment risk.
The Company's exposure to market rate risk for changes in interest rates
relates primarily to the Company's short-term debt obligation line of credit.
The interest rate on this line of credit is prime plus 1/2 percent. The prime
interest rate at December 31, 1999 was 8.5 percent compared to 7.75 percent at
December 31, 1998. The Company's line of credit is renewable and negotiable
yearly. The fluctuation of the interest rate may increase interest expense if
the prime interest rate increases before the line of credit could be
renegotiated to a fixed rate loan.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Index to Financial Statements and Financial Statement schedule.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
- --
The following table sets forth certain information concerning the
directors and executive officers of the Company:
Director or
Executive
Name Age Position Officer Since
---- --- -------- -------------
S. Robert Davis (1) 61 Chairman of the Board 1990
Charles R. Davis (1) 38 President and Director 1990
Jeffrey A. Ross 32 Chief Financial Officer
and Secretary 1996
David J. Richards 47 Director 1997
Michael P. Beauchamp 53 Director 1997
Randall J. Asmo 35 Director 1999
Rodney L. Taylor 44 Director 1999
(1) S. Robert Davis is the father of Charles R. Davis.
Executive officers are elected by the Board of Directors and serve until their
successors are duly elected and qualify, subject to earlier removal by the Board
of Directors. Directors are elected at the annual meeting of shareholders to
serve for one year and until their respective successors are duly elected and
qualify, or until their earlier resignation, removal from office, or death. The
remaining directors may fill any vacancy in the Board of Directors for an
unexpired term.
<PAGE>
BUSINESS EXPERIENCE OF DIRECTORS AND EXECUTIVE OFFICERS
S. ROBERT DAVIS is the Chairman of the Board and President of Media
Source, Inc., a Company with a class of securities registered pursuant to
Section 12 of the Securities Exchange Act of 1934 ("Media Source"). Prior to his
election to the Board of Directors of Media Source, he served as Assistant to
the President of Media Source from January 1988, to March 1990, on a part-time
basis. Additionally, during the past five years Mr. Davis has operated several
private businesses involving the developing, sale, and/or leasing of real
estate.
CHARLES R. DAVIS was elected President of the Company in September 1992.
Additionally, during the past five years Mr. Davis has 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.
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 was 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.
RANDALL J. ASMO was elected Director on February 19, 1999. He currently
serves as Executive Vice President, Secretary and Director of Media Source, Inc.
Since 1992, Mr. Asmo has served as Vice President of Media Source, Inc. and
Director since 1997. Prior to that, he served as Assistant to the President for
two years. Additionally, since 1987, Mr. Asmo has served as Vice President of
Mid-States Development Corp., a privately-held real estate development and
leasing company, as Vice President of American Home Building Corp., a
privately-held real estate development company, and as an officer of several
other small business enterprises.
RODNEY L. TAYLOR was elected Director on February 19, 1999. He currently
serves as General Manager of Family Ford Lincoln Mercury in Columbus, Ohio. From
1994 to 1997 Mr. Taylor was General Sales Manager at Bobb Chevrolet.
Additionally, Mr. Taylor also owned an automotive and equipment leasing company
based out of Columbus, OH.
SECTION 16 (a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires the Company's officers and directors, and persons who
own more than ten percent of a registered class of the Company's equity
securities, to file reports of ownership and changes in ownership of equity
securities of the Company with the Securities and Exchange Commission ("SEC").
Officers, directors, and greater than ten percent shareholders are required by
SEC regulations to furnish the Company with copies of all Section 16 (a) forms
they file.
Based solely upon a review of such forms furnished to the Company
pursuant to Rule16a-3 under the Exchange Act, the Company believes that all such
forms required to be filed pursuant to Section 16 (a) of the Exchange Act were
timely filed, as necessary, by the officers, directors and security holders
required to file the same.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
DIRECTOR COMPENSATION
Each director who is not an officer of the Company receives a fee of
$500 for attendance at each Board meeting, a fee of $250 for attendance at each
telephonic Board meeting, and a fee of $250 for attendance at each meeting of a
Board committee of which he is a member. Directors who are also officers of the
Company receive no additional compensation for their services as directors. The
Company has adopted Non-Employee Director Stock Option Plan, which provides for
the grant, at the discretion of the Company's Board of Directors, of options to
purchase up to 40,000 shares of Company common stock upon such terms as are
determined by the Board in its discretion. In June 1997, options to purchase
10,800 shares of common stock at a purchase price of $4.17 per share were
granted under the Director Option Plan.
In June 1997 and January 1998 options to purchase 10,800 and 30,000
shares of common stock, respectively at a purchase price of $4.17 and $2.8125,
respectively were granted under the Non-Employee Director Stock Option Plan. In
September 1999 options to purchase 180,000 shares of common stock at a purchase
price of $1.75.
EXECUTIVE COMPENSATION
The following table shows, for the fiscal years ended December 31,
1999, 1998, and 1997 the cash compensation paid by the Company, as well as
certain other compensation paid for those years to the Company's President and
Chief Executive Officer. No other executive officers serving as such during and
at the end of the Company's last fiscal year had total salary and bonus that
exceeded $100,000. None of the Company's executive officers have employment
agreements with the Company.
<TABLE>
<CAPTION>
Summary Compensation Table
Long-Term
Annual Compensation Compensation
------------------------- -------------
Securities
Name and Other Annual Underlying
Principal Position Year Salary Bonus Compensation Options (1)
------------------ ---- ------ ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Charles R. Davis ...... 1999 $250,000 $ 0 $ 0 200,000
President and ......... 1998 $178,325 $ 0 $ 0 50,000
Chief Executive Officer 1997 $155,000 $ 25,000 $ 0 37,800(2)
</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) On July 17, 1997, the Company agreed to grant to Mr. Davis performance
options to purchase 200,000 shares of Company common stock, 50,000 of which
will be granted if the Company has pre-tax earnings of at least $1 million
in any fiscal year, 75,000 of which will be granted if the Company has
pre-tax earnings of at least $1.5 million in any fiscal year, and 75,000 of
which will be granted if the Company has pre-tax earnings of at least $2
million in any fiscal year, in each case as long as Mr. Davis was employed
by the Company at the end of the applicable fiscal year. The performance
options are exercisable at the market price of the common stock at the date
of grant, which will be the date the Company files its Form 10-K with its
audited financial statements showing that the required earnings plateau is
satisfied. No performance options were granted in 1999.
<PAGE>
<TABLE>
<CAPTION>
Stock Option Grants in Last Fiscal Year
Individual Grants
-----------------------------------------
Potential Realized
Value At Assumed
Annual Rates of Stock
Number of % of Total Price Appreciation
Underlying Options Granted Exercise for Option
Options to Employees Price Expiration Term (1)
Name Granted in 1999 per Share Date 5% 10%
---- ------- ------- --------- ---- -- ---
<S> <C> <C> <C> <C> <C> <C>
Charles R. Davis 200,000(2) 33.3% $1.75 05/27/04 96,699 213,679
</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 1999 Employee Stock
Option Plan, and are exercisable commencing May 27, 1999.
<TABLE>
<CAPTION>
Aggregated Options/SAR Exercises with Last Fiscal Year
And Fiscal Year End Options/SAR Values
Number of Shares Value of Unexercised
Shares Underlying Unexercised In-the-Money
on Acquired Value Options at FY-End Options at FY-End
Name Exercised Realized Exercisable Unexercisable Exercisable Unexercisable
---- --------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Charles R.
Davis None N/A 287,800 0 $62,000 N/A
</TABLE>
<PAGE>
STOCK OPTION PLANS
The Company has adopted a 1996 Incentive Stock Option Plan, a 1997 and
a 1999 Employee Stock Option Plan (the "Plans") which provide for the grant, at
the discretion of the Board of Directors, of options to purchase up to 85,000
and 150,000 and 600,000 shares, respectively, of Common Stock to key employees
of the Company. Under the 1999 Plans it is intended that options granted under
the Plans qualify as incentive stock options under Section 422 of the Internal
Revenue Code of 1986, as amended. The selection of participants, allotment of
shares, determination of exercise price and other considerations relating to the
grant of options under the Plans is determined by the Board of Directors, at its
discretion. Options granted under the Plans are exercisable for a period of up
to ten years after the date of grant at an exercise price which is not less than
the fair market value of the shares on the date of grant, except that the term
of an incentive stock option granted under the Incentive Plans to a shareholder
owning more than 10% of the outstanding shares may not exceed five years and its
exercise price may not be less than 110% of the fair market value of the shares
on the date of grant. In January, 1997, the Company granted options under the
1996 Incentive Plan to purchase 31,860 shares of Common Stock at a purchase
price of $3.7037 per share, on two different occasions in March 1997, the
Company granted options under the 1997 Employee Plan to purchase 40,000 shares
of Common Stock at a purchase price of $3.50 per share and 5,000 shares of
Common Stock at a purchase price of $3.7037 per share. In December 1997, the
Company granted options under the Incentive Plan to purchase 13,000 shares of
Common Stock at a purchase price of $3.0625 per share. On four different
occasions in 1998 the Company granted options under the 1997 Incentive Stock
Option Plan. In January 1998, the Company granted 70,000 shares of Common Stock
at a purchase price of $2.875 per share. On March 3, 1998, the Company granted
options to purchase 40,000 shares of Common Stock at a purchase price of $2.8125
per share. On March 10, 1998, the Company granted options to purchase 3,000
shares of common stock at a purchase price of $3.00 per share. On April 1, 1998,
the Company granted options to purchase 6,000 shares of Common Stock at a
purchase price of $3.50 per share. On one occasion in 1998 the Company granted
options under the 1998 Incentive Stock Option Plan. In October, the Company
granted options to purchase 5,000 shares of Common Stock at a purchase price of
$1.00 per share. In May 1999, the Company granted options to purchase 396,500
shares of Common Stock at a purchase price of $1.75 per share under the 1999
Incentive plan and options to purchase 15,000 shares of Common Stock under the
1997 Incentive plan at a purchase price of $1.75 per share. In October 1999, the
Company granted options to purchase 10,000 shares of Common Stock under the 1999
Incentive plan at a purchase price of $2.3800 per share. Options currently
outstanding under the 1996 Incentive Plan are not exercisable until the
expiration of one year after the date of grant. Options currently outstanding
under the 1997 and 1999 Incentive Plan are exercisable based on the following
schedule.
Cumulative Percentage of Aggregate
Number of Shares of Stock Covered
Exercise Period by an Option Which May be Exercised
- --------------- -----------------------------------
Beginning on the one year anniversary date
from date of grant 33%*
Beginning on the seond anniversary date
from date of grant. 33%*
Beginning on the third anniversary date
from date of grant 33%*
*less, in the case of each exercise period, the number of Shares, if
any, previously purchased under the Option.
Options currently outstanding under the 1999 Incentive Plan are not
exercisable until the expiration of six months after the date of grant.
<PAGE>
COMMITTEES OF THE BOARD OF DIRECTORS
The Company's committees are its Compensation Committee and its Audit
Committee. During 1999, the Compensation Committee consisted of S. Robert Davis,
David J. Richards, and Michael P. Beauchamp. Neither Mr. Davis, Mr. Richards or
Mr. Beauchamp serves as an employee of the Company. During 1999, the Audit
Committee consisted of David J. Richards, Randall J. Asmo and Rodney L. Taylor.
Neither Mr. Richards, Mr. Asmo or Mr. Taylor serves as an employee of the
Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Under the Rules of the Securities and Exchange Commission, the Company
is required to provide certain information concerning compensation provided to
the Company's Chief Executive Officer and its executive officers. The disclosure
requirements for the executive officers include the use of tables in a report of
the committee responsible for compensation decisions for the named executive
officers, explaining the rationale and considerations that lead to those
compensation decisions. Therefore, the Compensation Committee of the Board of
Directors has prepared the following report for inclusion in this Proxy
Statement.
The Compensation Committee has designed its executive compensation
policies to provide incentives to its executives to focus on both current and
long-term Company goals, with an overriding emphasis on the ultimate objective
of enhancing stockholder value. The Compensation Committee has followed an
executive compensation program, comprised of cash and equity-based incentives,
which recognizes individual achievement and encourages executive loyalty and
initiative. The Compensation Committee considers equity ownership to be an
important factor in providing executives with a closer orientation to the
Company and its shareholders. Accordingly, the Compensation Committee encourages
equity ownership by its executives through the grant of options to purchase
Common Stock.
The Compensation Committee believes that providing attractive
compensation opportunities is necessary to assist the Company in attracting and
retaining competent and experienced executives. Base salaries for the Company's
executives are established on a case-by-case basis by the Compensation
Committee, based upon current market practices and the executive's level of
responsibility, prior experience, breadth of knowledge, and salary requirements.
The base salaries of executive officers are reviewed annually by the
Compensation Committee. Adjustments to such base salaries have been made
considering: (a) historical compensation levels; (b) the overall competitive
environment for executives; and (c) the level of compensation necessary to
attract and retain executive talent. Stock options have historically been
awarded upon hiring, promotion, or based upon merit considerations. As the value
of a stock option is directly related to the market price of the Company's
Common Stock, the Compensation Committee believes the grant of stock options to
executives encourages executives to take a view toward the long-term performance
of the Company. Other benefits offered to executives are generally the same as
those offered to the Company's other employees.
The Compensation Committee utilizes the policies and consideration
enumerated above with respect to compensation decisions regarding the President,
Charles R. Davis. Mr. Davis' 1999 base salary was determined primarily by
reference to historical compensation, scope of responsibility, and the Company's
desire to retain his services. The Compensation Committee believes its
compensation policies with respect to the Company's executive officers promote
the interests of the Company and its shareholders through current motivation of
the executive officers coupled with an emphasis on the Company's long-term
success.
Compensation Committee:
S. Robert Davis
David J. Richards
Michael P. Beauchamp
Rodney L. Taylor
<PAGE>
Price Performance Graph
The following graph represents a comparison of the cumulative total
shareholder return on the Common Stock, assuming dividend reinvestment, with The
NASDAQ Composite Index and The NASDAQ Industrial Index. This graph assumes that
$100 was invested on January 15, 1997, the first day of trading after the
effective date of the spin-off of the Company from Pages, Inc. The Company paid
an 8 percent stock dividend on August 1, 1997, which was included in the 1997
total shareholder return. The stock price performance shown below is not
necessarily indicative of future performance.
<TABLE>
<CAPTION>
1/15/97 6/30/97 12/31/97 6/30/98 12/31/98 6/30/99 12/31/99
<S> <C> <C> <C> <C> <C> <C> <C>
CASCO ............ 100 149.000 90.000 80.000 52.000 63.000 68.000
Nasdaq Composite . 100 108.000 117.691 142.000 164.393 201.000 305.000
Nasdaq Industrials 100 103.000 106.731 117.000 113.986 143.000 196.000
</TABLE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table sets forth, to the best of the Company's knowledge,
certain information with respect to the beneficial ownership of shares of the
Company's common stock owned beneficially by (i) each person who beneficially
owns more than 5% of the outstanding Common Stock, (ii) each director of the
Company, (iii) and President of the Company (the only executive officers of the
Company whose cash and non-cash compensation for services rendered to the
Company for the year ended December 31, 1999, exceeded $100,000) and (iv) all
directors and executive officers of the Company as a group:
Amount and Nature of Percent of
Name and Address Beneficial Ownership (1) Class (2)
- ---------------- ------------------------ ---------
S. Robert Davis 370,754 (3) 15.9%
15350 Amberly Drive
Suite 2014
Tampa, Florida 33647
Charles R. Davis 412,066 (4) 17.7%
All directors and executive
officers as a group (7 persons) 1,055,059 (5) 45.3%
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, 1999, plus, as to each person listed, that portion of the
547,780 unissued shares of Company common stock subject to outstanding
options which may be exercised by such person within the next 60 days;
and as to all directors and executive officers as a group, unissued
shares of common stock as to which the members of such group have the
right to acquire beneficial ownership upon the exercise of stock
options within the next 60 days.
3) Includes 4,066 shares owned by Mr. Davis' wife as to which Mr. Davis
disclaims beneficial ownership and includes 110,000 unissued shares of
Company Common Stock as to which Mr. Davis has the right to acquire
beneficial ownership upon the exercise of stock options within the
next 60 days.
4) Includes 10,000 shares owned by Mr. Davis' wife and 2,411 shares owned
by Mr. Davis' children as to which Mr. Davis disclaims beneficial
ownership and includes 287,800 unissued shares of Company common stock
as to which Mr. Davis has the right to acquire beneficial ownership
upon the exercise of stock options within the next 60 days.
5) The number of shares of Common Stock beneficially owned by all
directors and executive officers as a group includes all the shares of
Common Stock listed above including 113,500 unissued shares of Common
Stock as to which the Company's four non-employee directors have the
right to acquire beneficial ownership upon the exercise of stock
options within the next 60 days, 28,209 shares of Common Stock owned
by Mr. Richards, a director of the Company, 11,080 shares of Common
Stock owned by Mr. Beauchamp, a director of the Company, and 2,095
shares of Common Stock owned by Jeffrey A. Ross, an executive officer
of the Company and includes 36,480 unissued shares of Company Common
Stock as to which Mr. Ross has the right to acquire beneficial
ownership upon the exercise of stock options within the next 60 days.
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements:
See Index to Financial Statements and Financial Statement Schedule.
2. Financial Statement Schedule:
See Index to Financial Statements and Financial Statement Schedule.
3. Exhibits:
Exhibit Method
Number Description of filing
1 Underwriting Agreement 1
2 Agreement and Plan of Merger 1
3 (i) .1 Certificate of Incorporation 1
3 (i) .2 Certificate of Amendment to
Certificate of Incorporation 1
3 (ii) Bylaws 1
4.1 Form of Stock Certificate 1
4.2 Warrant Agreement 1
4.3 Form of Warrant Certificate 3
4.4 Form of Warrant-R.L. Renck & Company 3
*10.1 1996 Incentive Stock Option Plan 1
*10.2 Employee Stock Option Plan 1
*10.3 Non-Employee Director Stock Option Plan 1
*10.4 Amendment to 1996 Incentive Stock Option Plan 2
*10.5 1997 Incentive Stock Option Plan 3
*10.6 Charles R. Davis'
Performance Option Agreement 2
10.7 First National Bank Loan Document 2
10.8 Branch Banking and Trust Loan Document 2
10.9 Asset Purchase Agreement Awards & Gifts 2
*10.10 1999 Stock Option Plan 4
27 Financial Data Schedule 5
1. Incorporated by reference to the Company's registration statement on Form
10, file number 0-21717, filed in Washington, D.C.
2. Incorporated by reference to the Company's registration statement of Form
10-Q for the quarter ended September 30, 1998, filed in Washington, D.C.
3. Incorporated by reference to the Company's registration statement of Form
10K for the year ended December 31, 1998 filed in Washington, D. C.
4. Incorporated by reference to the Company's proxy statement file number
0-271717, filed in Washington D.C.
5. Filed herewith.
*Compensatory Plan.
(b) Reports on Form 8-K
None
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
CASCO INTERNATIONAL, INC.
(Registrant)
Dated: March 27, 2000 By: /s/ Chares 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 27, 2000 By: /s/ S. Robert Davis
------------------------- ---------------------------
S. Robert Davis
Chairman of the Board,
and Director
Dated: March 27, 2000 By: /s/ Charles R. Davis
------------------------- ---------------------------
Charles R. Davis
President, and Director
(Principal Executive Officer)
Dated: March 27, 2000 By: /s/ Randall J. Asmo
------------------------- --------------------------
Randall J. Asmo
Director
Dated: March 27, 2000 By: /s/ Michael P. Beauchamp
------------------------- ---------------------------
Michael P. Beauchamp
Director
Dated: March 27, 2000 By: /s/ Jeffrey A. Ross
------------------------- ---------------------------
Jeffrey A. Ross
Chief Financial Officer,
and Secretary
(Principal Accounting
and Financial Officer)
<PAGE>
CASCO INTERNATIONAL, INC.
INDEX TO FINANCIAL STATEMENTS
Page
Independent Auditors' Report-- 30
Hausser + Taylor LLP - for the years ended December 31, 1999,
1998 and 1997.
Statements of operations-- 31
Years ended December 31, 1999, 1998 and 1997.
Balance sheets-- 32
December 31, 1999 and December 31, 1998.
Statements of cash flows-- 34
Years ended December 31, 1999, 1998 and 1997.
Statements of stockholders' equity-- 35
Years ended December 31, 1999, 1998 and 1997.
Notes to the financial statements-- 36
Years ended December 31, 1999, 1998 and 1997.
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.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
CASCO INTERNATIONAL, INC.
Shelby, North Carolina
We have audited the accompanying balance sheets of CASCO INTERNATIONAL, INC.,
(the "Company"), as of December 31, 1999 and 1998, and the related statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1999. 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, 1999 and
1998, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1999 in conformity with generally
accepted accounting principles.
/s/ Hausser + Taylor LLP
Columbus, Ohio
March 16, 2000
<PAGE>
<TABLE>
<CAPTION>
CASCO INTERNATIONAL, INC.
STATEMENT OF OPERATIONS
For the years ended December 31, 1999, 1998 and 1997
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Revenue ........................ $ 24,199,483 $ 21,718,213 $ 19,332,922
Operating costs and expenses:
Cost of goods sold ........ 13,318,115 12,716,740 11,417,111
Selling, general and
administrative .... . 9,136,391 8,377,665 7,761,328
Depreciation and amortization 722,104 520,027 358,855
------------ ------------ ------------
Total operating costs
and expenses . 23,176,610 21,614,432 19,537,294
Operating income (loss) .......... 1,022,873 103,781 (204,372)
Other expense:
Interest expense ............. 372,378 335,871 469,355
Loss on sale of building ........ ---- 151,144 ----
------------ ------------ ------------
Total other expenses .... 372,378 487,015 469,355
Income (loss) before income taxes and
extraordinary item ........... 650,495 (383,234) (673,727)
Benefit (provision) for income taxes ..(293,000) 145,500 256,000
------------ ------------ ------------
Income (loss) before extraordinary gain on
retirement of debt ....... 357,495 (237,734) (417,727)
------------ ------------ ------------
Extraordinary gain on retirement of debt (less
income taxes of $570,000) .. ---- 930,000 ----
------------ ------------ ------------
Net Income (Loss) .............. $ 357,495 $ 692,266 $ (417,727)
============ ============ ============
EARNINGS PER SHARE BASIC AND DILUTIVE
Income (loss) before
extraordinary item ...... $ 0.20 $ (0.13) $ (0.34)
Extraordinary gain on
retirement of debt -- 0.52 --
------------ ------------ ------------
Net Income (Loss) ... $ 0.20 $ 0.39 $ (0.34)
============ ============ ============
Weighted average common
shares outstanding ... 1,783,200 1,783,200 1,225,447
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial
statements.
<PAGE>
<TABLE>
<CAPTION>
CASCO INTERNATIONAL, INC.
BALANCE SHEETS
December 31, 1999 and 1998
ASSETS 1999 1998
------------- ------------
<S> <C> <C>
Current Assets:
Cash ...................... $ 6,797 $ 107,482
Accounts receivable ......................... 4,910,886 5,540,162
Inventory ................................... 4,714,063 5,265,797
Prepaid expenses ............................ 1,033,274 1,096,277
Deferred tax asset .......................... 102,000 --
------------ ------------
Total current assets ............ 10,767,020 12,009,718
------------ ------------
Buildings and equipment:
Buildings ................................... 2,627,727 2,602,793
Equipment ................................. 3,223,615 2,819,104
------------ ------------
5,851,342 5,421,897
Less accumulated depreciation ............. (2,540,828) (1,974,403)
------------ ------------
3,310,514 3,447,494
Land ........................................... 111,468 111,468
------------ ------------
Total property and equipment, net 3,421,982 3,558,962
------------ ------------
Other assets:
Cost in excess of net assets acquired, net of
accumulated amortization of $479,819 and
$342,244 respectively .................... 2,406,250 2,541,899
Other ....................................... 748,376 732,024
------------ ------------
3,154,626 3,273,923
------------ ------------
TOTAL ASSETS ................................... $ 17,343,628 $ 18,842,603
============ ============
</TABLE>
The accompanying notes are an integral part of the financial
statements.
<PAGE>
<TABLE>
<CAPTION>
CASCO INTERNATIONAL, INC.
BALANCE SHEETS
December 31, 1999 and 1998
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
------------ ------------
<S> <C> <C>
Liabilities:
Accounts payable .......................... $ 965,112 $ 1,234,869
Short-term debt obligations ............... 2,500,465 3,882,269
Accrued liabilities ....................... 304,273 360,370
Advanced deposits-current ................. 1,854,785 1,926,406
Accrued taxes payable ..................... 355,000 --
------------ ------------
Total current ................... 5,979,635 7,403,914
liabilities
------------ ------------
Long-term debt ................................... 2,189,716 2,413,154
Advanced deposits-noncurrent ..................... 2,402,975 2,653,353
Deferred tax liability ........................... 533,775 492,150
------------ ------------
Total Liabilities ............. 11,106,101 12,962,571
------------ ------------
Commitments and contingencies -- --
Stockholders' equity:
Preferred shares: $.01 par value; authorized
300,000 shares; none issued and outstanding -- --
Common shares par value $.01, authorized
5,000,000, issued 1,783,200 ............... 17,832 17,832
Capital in excess of par value .............. 6,417,586 6,417,586
Accumulated deficit ......................... (197,891) (555,386)
------------ ------------
Total stockholders' equity .... 6,237,527 5,880,032
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..... $ 17,343,628 $ 18,842,603
============ ============
</TABLE>
The accompanying notes are an integral part of the financial
statements.
<PAGE>
<TABLE>
<CAPTION>
CASCO INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
For the years ended December 31, 1999, 1998 and 1997
1999 1998 1997
--------------- -------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 357,495 $ 692,266 $ (417,727)
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Depreciation and amortization 722,104 520,027 358,855
Loss of sale of building ........ -- 151,144 --
Extraordinary gain on
retirement of debt -- (1,500,000) --
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable ....... 629,276 (496,739) (399,396)
Inventory . .......... 551,734 (595,713) 2,422,613
Prepaid expenses and
other assets ................28,246 (174,792) (179,221)
Increase (decrease) in liabilities:
Accounts payable and
accrued liabilities ... 29,146 212,970 (531,907)
Advanced deposits ...........(321,999) 69,771 (377,955)
------------ ------------ ------------
Total adjustments .......1,576,507 1,388,832 1,036,989
------------ ------------ ------------
Net cash provided by (used in)
operating activities ......... 1,934,002 (696,566) 619,262
------------ ------------ ------------
Cash flows from investing activities:
Sale of building -- 421,187 --
Payments for purchases of
property and equipment .. (429,445) (731,436) (159,430)
------------ ------------ ------------
Cash used in investing activities . (429,445) (310,249) (159,430)
Cash flows from financing activities:
Proceeds from debt obligation 18,677,466 13,759,044 14,905,007
Principal payments on debt . (20,282,708) (12,718,263) (18,574,753)
Issuance of Common Stock Units -- -- 3,152,459
------------ ------------ ------------
Cash provided by (used in)
financing activities ............(1,605,242) 1,040,781 (517,287)
Increase (decrease) in cash ..........(100,685) 33,966 (57,455)
Cash, beginning of year ....... 107,482 73,516 130,971
------------ ------------ ------------
Cash, end of year . $ 6,797 $ 107,482 $ 73,516
============ ============ ============
Other Cash Flow Information:
Cash payments during the year for:
Interest $ 386,069 $ 307,156 $ 469,355
Income taxes, net of refunds 7,000 -- --
Noncash Financing Activities:
Payment of subordinated debt ..$ -- $ 3,500,000 $ --
Subordinated debt replaced
with line of credit . $ -- $ 3,500,000 $ --
Acquisitions of assets
and goodwill $ -- $ 1,745,642 $ --
Increase in line of credit
for acquisitions . $ -- $ 1,745,642 $
Subordinated debt with Pages
assumed at spin-off $ -- $ -- $ 5,000,000
Due to Pages replaced with
subordinated debt .. $ -- $ -- $ 4,124,975
Decrease in capital in excess
of par value and ... $ -- $ -- $ 875,025
common stock from spin-off
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
<TABLE>
<CAPTION>
CASCO INTERNATIONAL, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1999, 1998 and 1997
Capital in
Common Excess of Accumulated
Shares Stock Par Value Deficit Total
------- ------ --------- --------- ---------
<S> <C> <C> <C> <C> <C>
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
Net Income ..................---- ---- ---- 692,266 692,266
----------- ------- ---------- -------- ---------
Balance
December 31, 1998 .. 1,783,200 17,832 6,417,586 (555,386) 5,880,032
Net Income ..................---- ---- ---- 357,495 357,495
----------- ------ ----------- --------- -----------
Balance
December 31, 1999 .. 1,783,200 $17,832 $ 6,417,586 $(197,891) $ 6,237,527
=========== ======= =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of the
financial statements.
<PAGE>
CASCO INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
The Company is engaged in the design, implementation, and fulfillment
of incentive awards and recognition programs for businesses throughout the
United States. The Company's corporate headquarters is located in Shelby, North
Carolina.
BASIS OF PRESENTATION
On February 28, 1990, in a transaction accounted for as a purchase, all
of the outstanding stock of the Company was acquired by Pages, Inc. ("Pages").
These financial statements were prepared under the resulting new basis of
accounting that reflects the fair values of assets acquired and liabilities
assumed.
On July 30, 1998 the Company entered into an agreement with Awards &
Gifts, Inc. and Richard W. Terlau, Jr., providing for the purchase of
substantially all assets and certain liabilities of Awards & Gifts by the
Company. The Company utilized purchase accounting for this acquisition. Under
the terms of the Asset Purchase Agreement, the assets included Awards & Gifts
customer list, machinery and equipment, inventories, Awards & Gifts intellectual
property assets, prepaid expenses, and a real property lease. The purchase price
for the assets was $1.5 million with certain adjustments made for pro-rated
items, with $1.3 million in cash and a $200,000 promissory note. The note is
secured by an Irrevocable Standby Letter of Credit issued by Branch Banking &
Trust Company. The purchase price under the Asset Purchase Agreement was
determined by arm's length negotiations between the parties based on the market
value of the assets purchased and sold. The goodwill acquired in this
transaction will be amortized over fifteen years using the straight-line method.
The acquisition was financed with proceeds from its revolving credit facility
with Branch Banking & Trust Company.
On October 1, 1998 the Company entered into an agreement with American
Awards & Gifts, Inc. and Frank G. and Judith J. McGinnis, providing for the
purchase of substantially all assets and certain liabilities of American Awards
& Gifts, Inc. by the Company. The Company utilized purchase accounting for this
acquisition. Under the terms of the Asset Purchase Agreement, the assets
included American Awards & Gifts customer list, machinery and equipment, tools
and dies, inventories, intellectual property assets, and general intangibles,
the liabilities included the assumption of certain accounts payable. The
purchase price for the assets was $255,177 with $100,000 in cash and a $155,177
promissory note. The purchase price under the Asset Purchase Agreement was
determined by arm's length negotiations between the parties based on the market
value of the assets purchased and sold. The goodwill acquired in this
transaction will be amortized over fifteen years using the straight-line method.
<PAGE>
Effective at the close of business on December 31, 1996, a tax free
spin off of the Company's common stock from its parent, Pages, was completed
(the "Distribution"). In the Distribution, for every ten shares of Pages common
stock outstanding on the record date, one and one-half shares of the Company's
common stock was distributed to Pages' stockholders.
USE OF MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires that management make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. The reported amounts of revenues and expenses during the reporting
period may be affected by the estimates and assumptions management is required
to make. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenues from the sale of incentive awards are generally recognized
upon shipment and delivery of the related merchandise except for revenue
recognized relating to advanced deposits. Revenues from services are
insignificant. Returns from the sales of incentive awards and from services are
insignificant.
ACCOUNTS RECEIVABLE
The Company sells its products to numerous commercial and industrial
customers across the United States and Canada. The accounts receivable are well
diversified and are expected to be repaid in the normal course of business.
INVENTORY
Inventory consists of general retail merchandise. Inventory is valued
at the lower of cost or market using the first-in, first-out (FIFO) method.
PREPAID EXPENSES
Prepaid expenses at December 31, 1999 and 1998 include $629,263 and
$694,338, respectively, of prepaid selling costs that include costs for
commissions paid to sales people that relate to advanced deposits for the sales
of incentive and recognition awards programs. Such costs are directly
attributable to obtaining specific future commitments and are expensed in the
year the related revenue is recorded.
BUILDINGS AND EQUIPMENT
Buildings and equipment are recorded at cost and depreciated over their
estimated useful life on the straight-line method. Estimated useful lives range
from three to thirty-one years. Major repairs and betterments are capitalized;
minor repairs are expensed as incurred. Depreciation expense for the years ended
December 31, 1999, 1998 and 1997, totaled $566,424, $438,681 and $324,691,
respectively.
<PAGE>
COST IN EXCESS OF NET ASSETS ACQUIRED AND OTHER ASSETS
Cost in excess of net assets acquired are amortized on a straight line
basis over 40 and 15 years. Management periodically evaluates its accounting for
cost in excess of net assets acquired by considering such factors as historical
performance, current operating results and future operating income. At each
balance sheet date, the Company evaluates the realizability of cost in excess of
net assets acquired based upon estimated nondiscounted cash flows. Based upon
its most recent analysis, the Company believes that no material impairment of
cost in excess of net assets acquired exists at December 31, 1999. 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, 1999, 1998 and 1997 totaled $137,575, $77,274 and $34,162,
respectively.
Other assets include cash surrender value of life insurance, deferred
loan costs and non-compete agreements. The deferred loan costs are amortized
using the straight line method over the terms of the related contracts.
Amortization expense totaled $18,105, $7,071 and $0, for the years ended
December 31, 1999, 1998 and 1997, respectively.
INCOME TAXES
The Company utilizes Statement of Financial Accounting Statements
("SFAS") No. 109, "Accounting for Income Taxes". Under SFAS No. 109, the
liability method is used in accounting for income taxes. Deferred income taxes
reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes, and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse. As noted above, the Company was a wholly-owned subsidiary of Pages
through December 31, 1996 when a tax-free spin off was completed.
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, 1999, 1998 and 1997.
LONG-LIVED ASSETS
The Company utilizes SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" which required
adoption in 1996. The general requirements of SFAS No. 121 apply to the fixed
and intangible assets of the Company and require impairment to be considered
whenever assets are disposed of or whenever events or change in circumstances
indicate that the carrying amount of the asset will not be recoverable based on
expected future cash flows of the asset. The Company periodically evaluates the
recoverability of long-lived assets and measures the amount of impairment if
any. There were no impairment adjustments at December 31, 1999, 1998 and 1997.
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
debentures in 1999.)
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options. Under APB 25,
because the exercise prices of employee stock options equals the market price of
the underlying stock on the date of grant, no compensation expense is recorded.
The company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" (SFAS No. 123).
2. STOCK OPTIONS AND WARRANTS
At December 31, 1999, 835,000 common shares of the Company were
reserved for issuance under the incentive stock option plans, 40,000 shares were
reserved under the non-employee director stock option plans and 1,620,000 shares
were reserved under outstanding warrants. The 1999 option plan of 600,000 shares
includes both employees and directors. Additionally, 200,000 common shares of
the Company were reserved under a performance option plan for the President.
<PAGE>
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
------------------------ ---------------------
Weighted Average Weighted Average
Incentive Stock Option Plan Number Exercise Price Number Exercise Price
- --------------------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Outstanding, beginning of year ...273,140 $ 2.8001 93,460 $ 3.4005
Granted ......................... 421,500 $ 1.7649 189,000 $ 2.5331
Canceled ..........................93,500 $ 2.3529 9,320 $ 3.4067
Exercised ...........................None -- None --
------- ------- ------- -------
Outstanding, end of year ........ 601,140 $ 2.1438 273,140 $ 2.8001
------- ------- ------- --------
Exercise price range of options
outstanding .............. $1.0000 $1.0000
to to
$3.7037 $3.7037
Non-Employee Director Option Plan
Outstanding, beginning of year 55,800 $2.8094 10,800 $4.1700
Granted ..........................180,000 $1.7500 45,000 $2.5833
Canceled ..........................15,000 $2.0000 None --
Exercised .......................... None -- None --
------- ------- ------- -------
Outstanding, end of year ...........220,800 $2.0212 55,800 $2.8904
------- ------- ------- -------
Exercise price range of options
outstanding ........ $ 1.75 $ 2.00
to to
$ 4.17 $ 4.17
</TABLE>
The weighted average remaining life on options outstanding at December
31, 1999 is 4.23 years.
The incentive stock options are exercisable at the fair market value on
the date of grant, and were available from the 1996, 1997 and 1998 stock option
plans. The options outstanding at December 31, 1999 are exercisable through
January 17, 2002, December 29, 2002 and May 5, 2004 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, 1999 are exercisable through October 12, 2003.
<PAGE>
Warrants to purchase 1,560,000 shares of CASCO INTERNATIONAL, INC.
common stock were issued in September 1997 as part of the unit offering. The
warrants are exercisable for five years from the date of issuance at $5.50 per
share.
Warrants to purchase 30,000 shares of CASCO International, Inc., common
stock were issued February 28, 1998 to R. L. Renck & Co., Inc. The Warrants vest
at 2,500 per month commencing on February 28, 1998 and continuing through
January 31, 1999 at an exercise price of $3.00 per share. The warrants are
exercisable for five years from the date of issuance.
Additional warrants to purchase 30,000 shares of CASCO International, Inc.,
common stock were issued June 27, 1999 to R. L. Renck & Co., Inc. The warrants
vest at 10,000 shares on June 27, 1999 then at a rate of 2,500 shares per month
from June 27, 1999 to February 26, 2000 at an exercise price of $2.75 per share.
The warrants are exercisable for five years from the date of issuance.
<TABLE>
<CAPTION>
Proceeds
Date Granted Shares Exercise to Company
or Issued Exercisable Price Upon Exercise
------------- ----------- -------- -------------
Incentive
Stock Options:
<S> <C> <C> <C> <C>
1996 Plan January 17, 1997 19,440 $ 3.7037 $ 72,000
1996 Plan March 26, 1997 5,400 3.7037 20,000
1996 Plan March 12, 1997 37,800 3.2407 122,498
1997 Plan December 29, 1997 9,000 3.0625 27,563
1997 Plan January 20, 1998 65,000 2.8750 186,875
1997 Plan March 3, 1998 30,000 2.8125 84,375
1997 Plan March 10, 1998 3,000 3.0000 9,000
1997 Plan April 1, 1998 5,000 3.5000 17,500
1997 Plan October 12, 1998 5,000 1.0000 5,000
1997 Plan May 27, 1999 15,000 1.7500 26,250
1999 Plan May 27, 1999 396,500 1.7500 693,875
1999 Plan October 20, 1999 10,000 2.3800 23.800
Non-Employee
1996 Plan ..June 25, 1997 10,800 $ 4.1667 45,000
1996 Plan ..January 20, 1998 30,000 2.8750 86,250
1999 Plan ..May 27, 1999 180,000 1.7500 315,000
Warrants: ..September 19, 1997 1,560,000 $ 5.50 8,580,000
February 28, 1998 30,000 3.00 90,000
June 27, 1999 ... 30,000 2.75 82,500
Total ........... 2,441,940 $10,487,486
=============== ===========
</TABLE>
<PAGE>
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of that Statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholl's option pricing model with the following weighted average
assumptions for 1999, 1998 and 1997.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate 6% 6% 6%
Dividend yield 0% 0% 0%
Volatility factor 104.4% 107.7% 82.7%
Weighted average expected
life in years 5 5 5
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma net income (loss) and earnings per share were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income (loss) as reported $ 1,357,000 $ 692,266 $ (417,727)
Net income (loss)-pro forma 357,495 623,266 (430,727)
Income (loss) per
common share-as reported $ .20 $ .39 $ (.34)
Income (loss) per
common share-pro forma $ .13 $ .35 $ (.35)
Weighted average fair value of
options granted during the year $ 1.76 $ 2.53 $ 2.60
</TABLE>
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
1999, 1998 and 1997 grants. As such, the impacts are not necessarily indicative
of the effects on reported net income of future years.
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.
<PAGE>
4. DEBT OBLIGATIONS
Debt obligations consisted of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
---- ----
<S> <C> <C>
Line of credit with interest at
prime plus 1/2 percent; interest payable
monthly, maturing on July 30, 2000, collateralized
by accounts receivable and
inventory of the Company ($2,737,811 available
at December 31,1999). 2,262,189 $3,644,492
First National Bank first deed of trust
on the Shelby facilities. Payable in
monthly installments of $24,088 including
interest (7 1/2 percent) through March of
2013. The term of the loan is fifteen years,
callable after five years and guaranteed by the
President. 2,209,767 2,302,460
Promissory note payable with
interest at 8 percent, payable in
two annual installments through July 30, 2000.
Collateralized by letter of credit at Branch
Banking & Trust. 100,000 200,000
Promissory note payable with interest
at 6 percent, payable in monthly
installments through
October 1, 2003. 118,225 148,471
-------------------- ----------------------
4,690,181 6,295,423
Current portion 2,500,465 3,882,269
-------------------- ----------------------
Long term portion $2,189,716 $2,413,154
==================== ======================
</TABLE>
The interest rate for the line as of December 31, 1999 and 1998 was prime
plus 1/2 percent.
The prime interest rate at December 31, 1999 and 1998 was 8.5 percent and
7.75 percent, respectively. The carrying amount of the Company's short term debt
obligations approximates fair value.
The line of credit facility also includes certain financial covenants,
including covenants that the Company maintain certain financial ratios. In
addition, the credit facility contains limitations on capital expenditures,
fixed asset sales, loans and/or advances to shareholders and employees,
restrictions on operating leases and limitation on dividends paid on common
stock to $100,000 annually. As of December 31, 1999 the Company was in default
on the capital expenditure covenant. The Company received a waiver letter for
the default as of December 31, 1999.
The aggregate long-term debt payments as of December 31, 1999 for each of the
next five years are:
2000 $ 229,582
2001 141,763
2002 152,266
2003 1,901,970
2004 0
------------
Thereafter $2,425,581
==========
<PAGE>
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 $269,962, $152,128
and $125,570, for the years ended December 31, 1999, 1998 and 1997,
respectively. The future minimum rentals under non-cancelable operating leases
during subsequent fiscal years are as follows:
YEARS ENDING
DECEMBER 31,
2000 $ 236,921
2001 151,798
2002 68,460
------------
$ 457,179
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
Temporary differences between income for financial reporting purposes
and tax reporting purposes relate primarily to accounting methods for inventory
costs, revenues earned, accrued and prepaid expenses and reserves, and
depreciation.
For the years presented, the expense (benefit) for income taxes from
continuing operations consisted of the following.
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current ................................ $ 355,000 -- --
Deferred
Federal ............................. (58,000) (130,300) (217,000)
State and Local ..................... (4,000) (15,200) (39,000)
--------- --------- ---------
Net deferred benefit ................... 293,000 (145,500) (256,000)
Net deferred expense (benefit) for taxes $ (62,000) $(145,500) $(256,000)
========= ========= =========
</TABLE>
<PAGE>
For the years presented, a reconciliation of income taxes from
continuing operations based upon the application of the federal statutory tax
<TABLE>
<CAPTION>
rate is as follows:
December 31, December 31, December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Income tax expense (benefit)
at statutory rate $247,000 $(145,700) $(229,100)
Goodwill amortization ...................... 13,000 13,650 13,650
State taxes net of federal benefit ......... 26,000 (15,300) (40,400)
Other ...................................... 7,000 1,850 (150)
-------- --------- ---------
Total income tax expense (benefit) .. $293,000 $(145,500) $(256,000)
======== ========= =========
</TABLE>
The components of net deferred taxes are as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
---- ----
<S> <C> <C>
Assets:
Inventory costs capitalized
for tax purposes ........... $68,000 $ 73,100
Accruals and reserves to be
expensed as paid for tax purposes 34,000 81,500
Other ............................................-- 27,850
Net operating loss carry forwards .............. -- 296,400
--------- ---------
Deferred tax assets ..............................102,000 478,850
Liabilities:
Revenues to be earned net of cost ............... -- (301,000)
Excess of tax over financial accounting
depreciation and amortization .......... (533,775) (670,000)
--------- ---------
Deferred tax liability ..........................(533,775) (971,000)
--------- ---------
Net deferred tax liability .....................$(431,775) $(492,150)
========= =========
</TABLE>
The Company changed its effective rate to 38% in 1998 from 40% in 1997.
The Company utilized approximately $780,000, $1,065,000 and $647,000 of net
operating loss carryforward for the years ended December 31, 1999, 1998 and
1997, respectively.
7. Earnings Per Common and Common Equivalent Share
Earnings per common and common equivalent share were computed by
dividing net income by the weighted average number of shares of common stock
outstanding during the year. At December 31, 1999 and 1998, the number of common
shares was increased by the number of shares issuable on the exercise of
outstanding stock options and warrants when the market price of the common stock
exceeds the exercise price of the options and warrants. This increase in the
number of common shares was reduced by the number of common shares that are
assumed to have been purchased with the proceeds from the exercise of the
options; those purchases were assumed to have been made at the average price of
the common stock during that part of the year when the market price of the
common stock exceeded the exercise price of the options.
The following data show the amounts used in computing earnings per
share (EPS) and the effect on income and the weighted average number of shares
of dilutive potential common stock.
Income available to common
stockholders used in basic
EPS and diluted EPS $ 357,495 $ 692,266
=============== ===============
Weighted average number
of common shares used in
basic EPS 1,783,200 1,783,200
Effect of dilutive securities:
Stock options and warrants 43,242 16,500
-------------- --------------
Weighted number of common
shares and dilutive potential
common stock used in diluted
EPS 1,826,442 1,799,700
============== =============
Options and warrants on 1,461,815 and 1,353,940 shares, respectively,
of common stock were not included in computing diluted EPS for the years ended
December 31, 1999 and 1998 because their effects were antidilutive.
The common equivalent stock outstanding at December 31, 1997 would be
antidilutive for the year due to the net operating loss.
8. LOSS ON SALE OF BUILDING
On March 4, 1998 the Company sold its 167,000 sq. ft. Kings Mountain
Warehouse. The sale netted the Company approximately $425,000. The Company
recorded a loss on the sale, which totaled $151,144.
<PAGE>
9. EXTRAORDINARY GAIN ON RETIREMENT OF DEBT
On January 23, 1998, the Company redeemed at a discount, the
subordinated debenture due to Pages on January 1, 2002. The debenture in the
original principal amount of $5 million was redeemed for $3.5 million. The
Company replaced the Pages debt with proceeds from the line of credit. The debt
retirement resulted in an extraordinary gain of $930,000 after tax of $570,000.
For the year ended December 31, 1998, the impact of the extraordinary
gain on basic and diluted earnings (loss) per share was as follows:
Basic Diluted
Loss before extraordinary gain $ (237,734) $ (.13) $ (.13)
Extraordinary gain on retirement
of debt (less income taxes
of $570,000) 930,000 .52 .52
-------------- ----------- -----------
Net income $ 692,266 $ .39 $ .39
-------------- ----------- ------------
<PAGE>
DIRECTORS: COMPANY OFFICES:
S. Robert Davis, Chairman of the Board Headquarters:
13900 Conlan Circle, Suite 150
Charles R. Davis, President and CEO Charlotte, NC 28277
David J. Richards, Director
Operations and Distribution Center:
Michael P. Beauchamp, Director 4205 East Dixon Boulevard
Shelby, North Carolina 28152
Randall J. Asmo, Director
Rodney L. Taylor, Director
CORPORATE OFFICERS:
Charles R. Davis, President
Jeffrey A. Ross, Chief Financial
Officer and Secretary
AVAILABILITY OF EXHIBITS TO FORM 10-K:
Exhibits to Form 10-K Report are on file with the Securities and Exchange
Commission and are referenced on the Exhibit Index contained herein above.
Exhibits are available upon request, at $0.25 per page, representing the
Registrant's reasonable expenses in furnishing such exhibit(s). Exhibits may be
obtained by writing to Jeffrey A. Ross, Secretary, CASCO INTERNATIONAL, INC.
STOCK TRANSFER AGENT AND REGISTRAR:
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
AUDITORS:
Hausser + Taylor LLP
471 East Broad Street
Suite 1200
Columbus, Ohio 43215
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> year
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Dec-31-1999
<CASH> 6,797
<SECURITIES> 0
<RECEIVABLES> 4,910,886
<ALLOWANCES> 0
<INVENTORY> 4,714,063
<CURRENT-ASSETS> 10,767,020
<PP&E> 5,962,810
<DEPRECIATION> 2,540,828
<TOTAL-ASSETS> 17,343,628
<CURRENT-LIABILITIES> 5,979,635
<BONDS> 0
0
0
<COMMON> 17,832
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 17,343,628
<SALES> 24,199,483
<TOTAL-REVENUES> 24,199,483
<CGS> 13,318,115
<TOTAL-COSTS> 23,176,610
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 372,378
<INCOME-PRETAX> 650,495
<INCOME-TAX> 293,000
<INCOME-CONTINUING> 357,495
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 357,495
<EPS-BASIC> 0.20
<EPS-DILUTED> 0.20
</TABLE>
