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SCHEDULE 14C INFORMATION
Information Statement Pursuant to Section 14(c) of the
Securities Exchange Act of 1934
Check the appropriate box:
[X] Preliminary Information Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14c-5(d)(2))
[ ] Definitive Information Statement
Pages, Inc.
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(Name of Registrant As Specified in Charter)
Payment of Filing Fee (Check the appropriate box):
[ ] No Fee required.
[X] Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock, $.01 par value
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(2) Aggregate number of securities to which transaction applies:
6,101,955
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
Approximately $2.30 per share. Proforma book value of each of the
915,293 shares to be distributed as per Reg. Sec.240.0-11(c)(2)(i), and
Sec.240.0-11(a)(4).
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(4) Proposed maximum aggregate value of transaction:
Approximately $2,106,622.90
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(5) Total fee paid:
$421.32
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[ ] Fee paid previously with preliminary materials
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
- --------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
- --------------------------------------------------------
(3) Filing Party:
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(4) Date Filed:
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SUBJECT TO COMPLETION, DATED DECEMBER 17, 1996
INFORMATION STATEMENT FOR INFORMATION ONLY
PRELIMINARY COPY
CA SHORT COMPANY
(A wholly-owned subsidiary of Pages, Inc.)
This Information Statement is being furnished to stockholders of Pages,
Inc., a Delaware corporation ("Pages") in connection with the distribution (the
"Distribution") by Pages to its stockholders of substantially all of the shares
of Common Stock of its wholly owned subsidiary, CA Short Company ("CA Short
Company" or the "Company").
The Distribution will occur on December 31, 1996, to holders of record of
the outstanding shares of common stock of Pages, $.01 par value per share (the
"Pages Common Stock"), at the close of business on December 31, 1996, on the
basis of one and one-half shares of the common stock of CA Short Company, $.01
par value per share (the "Short Common Stock"), for every ten shares of the
common stock of Pages, $.01 par value per share ("Pages Common Stock") held. The
Distribution will result in substantially all of the outstanding shares of Short
Common Stock being distributed to holders of the outstanding shares of Pages
Common Stock on a pro rata basis.
No consideration will be required to be paid by Pages stockholders for the
shares of Short Common Stock to be received by them in the Distribution, nor
will they be required to surrender or exchange shares of Pages common stock to
receive Short Common Stock.
The Short Common Stock will be traded on the "pink sheets" and on the
National Association of Securities Dealers, Inc. OTC Bulletin Board Service.
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IN REVIEWING THIS INFORMATION STATEMENT, YOU SHOULD
CAREFULLY CONSIDER THE MATTERS DESCRIBED
UNDER THE CAPTION "RISK FACTORS."
NO STOCKHOLDER APPROVAL OF THE DISTRIBUTION IS REQUIRED OR
SOUGHT. WE ARE NOT ASKING YOU FOR A PROXY AND YOU
ARE REQUESTED NOT TO SEND US A PROXY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
INFORMATION STATEMENT.
The date of this Information Statement is ____________, 1996
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SUMMARY
This Summary is qualified in its entirety by the more detailed information
appearing elsewhere in this Information Statement, which should be read in its
entirety. Unless the context indicates, or it is specifically indicated
otherwise, the information in this Information Statement gives effect to the
Distribution and assumes that the Distribution has occurred. Certain data
included herein applies to a distribution ratio for the Distribution of one and
one-half shares of Short Common Stock for every ten outstanding shares of Pages
Common Stock, which is the distribution ratio that has been established by the
Board of Directors of Pages. Capitalized terms used but not defined in this
Summary are defined elsewhere in this Information Statement.
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THE COMPANY
The Company creates markets, and administers safety, sales incentive,
service recognition, and holiday gift awards programs for businesses. The
Company markets its awards programs throughout the United States.
Once viewed as a holiday gift business, the recognition awards industry has
been revitalized by the increasing emphasis on improving employee morale. The
Company has been quick to capitalize on this trend by developing a professional
sales approach to large corporate customers, and by offering collections of
quality merchandise in addition to more traditional items of emblematic jewelry
and gifts. The Company customizes its recognition awards to meet each client's
specific management challenge (generally either to recognize, educate or modify
behavior). In a typical program, a client's employee accrues performance
credits toward an award. Upon achieving the specified level of performance, the
employee is entitled to receive an award, which he or she may then select from
attractive brochures prepared by the Company. The client purchases the
merchandise from the Company, which then ships the merchandise either directly
to the client or to the designated recipient. The Company's growth strategy
focuses on increasing year-round sales, broadening geographic markets, and
developing expanded awards programs.
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THE DISTRIBUTION
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DISTRIBUTING COMPANY . . . . . . . . . . . . Pages publishes, markets, and distributes reasonably priced,
leisure-based children's literature.
DISTRIBUTED COMPANY . . . . . . . . . . . . . CA Short creates, markets, and administers safety, sales incentive,
service recognition, and holiday gift awards programs for businesses.
See "Business."
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THE DISTRIBUTION . . . . . . . . . . . . . . Based on the number of shares of Pages Common Stock outstanding on
September 30, 1996 (and assuming outstanding Pages stock options
are not exercised), Pages estimates that it will distribute
approximately 915,923 shares of Short Common Stock. Pages will
distribute one and one-half shares of Short Common Stock for every
ten shares of Pages Common Stock outstanding as of the Record Date
described below. Immediately following the Distribution, Pages will
not own any shares of Short Common Stock and the holders of Pages
Common Stock on the Record Date will own approximately 915,923
shares of Short Common Stock, which will represent approximately
100% of the outstanding shares of Short Common Stock.
REASONS FOR THE DISTRIBUTION . . . . . . . . The Pages Board of Directors believes that the Distribution will
benefit both the Company's business and Pages' other business and,
therefore, is in the best interests of the stockholders of Pages
for a number of reasons. Among these are: (a) focusing the
management of each company on the core business of each company
without regard to the corporate objectives and policies of the
other company, (b) offering incentives more attractive and
appropriate for the motivation and retention of key employees of
each company, and (c) permitting a more objective evaluation of
each of the companies by the capital markets.
RECORD DATE . . . . . . . . . . . . . . . . . December 31, 1996 (close of business).
DISTRIBUTION DATE . . . . . . . . . . . . . . December 31, 1996.
DISTRIBUTION AGENT . . . . . . . . . . . . . The Huntington National Bank, 41 S. High Street, 11th Floor, Columbus,
Ohio 43216, telephone (800) 225-1242.
FRACTIONAL SHARES . . . . . . . . . . . . . . No fractional shares will be issued in the Distribution; in lieu
thereof, the Distribution Agent will aggregate all fractional
interests in shares of Short Common Stock, sell such shares in the
public trading market and distribute the net proceeds thereof to
the holders of Pages Common Stock entitled thereto. Pages
stockholders receiving cash from the sale of fractional shares
will be taxed upon the receipt of such cash. See "The
Distribution -- Manner of Effecting Distribution: Fractional
Shares."
MANNER OF DISTRIBUTION . . . . . . . . . . . After the Distribution Date, the Distribution Agent will commence
mailing certificates representing shares of Short Common Stock to
holders of record (as of the Record Date) of outstanding shares of
Pages Common Stock. See "The Distribution -- Manner of Effecting
Distribution: Fractional Shares."
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CERTAIN TAX CONSEQUENCES . . . . . . . . . . In general, it is anticipated that Pages, CA Short Company, and the
Pages stockholders should not recognize any taxable gain or income
solely as a result of the Distribution. As a condition of the
Distribution, Pages will receive a tax opinion from Johnson,
Blakely, Pope, Bokor, Ruppel & Burns, P.A., Tampa, Florida, to the
effect that the Company may reasonably report the Distribution of
Short Common Stock to Pages stockholders as a tax-free distribution
for federal income tax purposes. The tax opinion will be subject to
certain qualifications and assumptions, the accuracy of which are
critical to the Distribution qualifying as a tax-free distribution.
See "The Distribution -- Certain Federal Income Tax Consequences of
the Distribution."
TRADING MARKET . . . . . . . . . . . . . . . Although the Company intends to apply for a listing if it becomes
eligible, the Company does not expect to be eligible for listing of
its Common Stock on the Nasdaq Small Cap Market upon completion of
the Distribution. Trading, if any, in the Company's Common Stock
will be conducted in the over-the-counter market on the Nasdaq
Electronic Bulletin Board Service or in what are commonly referred
to as the "pink sheets." See "Risk Factors -- Absence of Public
Market; Possible Illiquidity of Trading Market and Possible
Volatility of Stock Price."
RISK FACTORS . . . . . . . . . . . . . . . . Stockholders should carefully consider each of the matters
discussed under the section entitled "Risk Factors" in this
Information Statement.
DIVIDENDS . . . . . . . . . . . . . . . . . . The CA Short Board of Directors anticipates that the Company will
retain any earnings and will not pay dividends to its stockholders
in the foreseeable future. See "The Distribution -- Dividends on
Short Common Stock."
PRINCIPAL OFFICE OF THE COMPANY . . . . . . . 4205 East Dixon Boulevard, Shelby, North Carolina 28150, telephone
(704) 482-9591.
TRANSFER AGENT AND REGISTRAR FOR
SHORT COMMON STOCK . . . . . . . . . . . . The Huntington National Bank, 41 S. High Street, Columbus, Ohio 43216,
will act as CA Short's Transfer Agent and Registrar for the Short
Common Stock.
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RELATIONSHIP WITH PAGES AFTER
THE DISTRIBUTION . . . . . . . . . . . . . Except for certain matters provided for in the Distribution
Agreement, including the execution and delivery by the Company of a
subordinated promissory note payable to Pages in the principal
amount of $5 million, it is expected that Pages and the Company
will cease to have any material contractual or other relationships
with each other. S. Robert Davis, Chairman of the Board and
President of Pages will continue to be Chairman of the Board of the
Company. Charles R. Davis, a director and the President of the
Company, will continue to be a director of Pages and will be an
Executive Vice President and the Secretary of Pages. See "The
Distribution -- Relationship Between Pages and the Company After
the Distribution."
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INFORMATION STATEMENT
FOR THE STOCKHOLDERS OF
CA SHORT COMPANY
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INTRODUCTION
CA Short Company (the "Company") is a Delaware corporation and a subsidiary
of Pages, Inc., a Delaware corporation ("Pages"). Pages is distributing all of
the outstanding shares of common stock, par value $.01 per share (the "Short
Common Stock") of the Company owned by Pages to the holders of the outstanding
shares of common stock, par value $.01 per share (the "Pages Common Stock"), of
Pages (the "Distribution"). Pages currently owns all of the shares of the Short
Common Stock. Immediately after the Distribution, Pages will own no shares of
Short Common Stock and the holders of Pages Common Stock on the Record Date
will own substantially all of the outstanding shares of Short Common Stock.
The business of the Company is the creation, marketing and administration
of safety, sales, incentive, service recognition, and holiday gift awards
programs for businesses. The Company markets its awards programs throughout the
United States, however, its customer base is concentrated in the Southeastern
United States. The executive offices of the Company are located at 4205 East
Dixon Boulevard, Shelby, North Carolina 28150, and its telephone number is
(704) 482-9591.
THE DISTRIBUTION
REASONS FOR THE DISTRIBUTION
The Pages Board of Directors believes that the value and potential of the
publishing business of Pages and the awards program business of the Company may
be better realized as separate public companies and that the Distribution will
benefit both the Company's business and Pages' business and, therefore, is in
the best interests of the stockholders of Pages. The consummation of the
Distribution is contingent upon several matters, including the receipt by the
Pages Board of Directors of the advice of and a fairness opinion from an
investment banking firm. The Distribution is designed to separate the
businesses of Pages and the Company, which have distinctly different products
and services, markets, opportunities, and investment, financial and operating
characteristics so that each can adopt strategies and pursue objectives
appropriate to its specific business. The Distribution will permit the
management of each company to concentrate its attention and resources on the
challenges faced by their respective core businesses without regard to
corporate objectives, policies, and investment standards of the other. In
addition, the Pages Board of Directors believes that, although there can be no
assurance that either Pages or the Company will have access to capital in the
future, the access of both companies to private and the public capital markets
may be enhanced by the Distribution. After the Distribution, each business
could be more objectively evaluated by the capital markets, on the basis of its
individual merits. Separating the companies should allow for increased
executive focus for both Pages and the Company and more effective incentive
programs for key employees of each company. The Distribution should also permit
investors, customers, regulatory agencies and other constituencies to evaluate
the respective businesses of Pages and the Company more effectively.
MANNER OF EFFECTING THE DISTRIBUTION; FRACTIONAL SHARES
The Distribution will be made on the basis of one and one-half shares of
Short Common Stock for every ten shares of Pages Common Stock outstanding on
the Record Date. The Huntington National Bank, as distribution agent (the
"Distribution Agent"), will commence mailing the certificates representing
shares of the Short Common
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Stock after the Distribution Date to holders of record of Pages Common Stock on
the Record Date. Brokers and other nominees will have one week following the
Record Date in which to notify the Distribution Agent of their requirements for
stock certificates. It is anticipated that, after the Record Date and prior to
receipt of such stock certificates, holders of shares of the Short Common Stock
will be able to sell their shares on a "when-issued" basis, for settlement
after receipt of such certificates; there can be no assurance, however, that a
"when-issued" market in shares of the Short Common Stock will develop or that
shareholders will be able to sell their shares of Short Common Stock prior to
the receipt of their certificates representing such shares. All shares of Short
Common Stock distributed in the Distribution will be fully paid and
nonassessable and the holders thereof will not have preemptive rights. See
"Description of Capital Stock."
No certificates or scrip representing fractional shares of Short Common
Stock will be issued to Pages stockholders as part of the Distribution. In lieu
of receiving fractional shares, each holder of Pages Common Stock who would
otherwise be entitled to receive a fractional share of Short Common Stock will
receive cash for such fractional interest. On or after the Distribution Date,
but not later than forty-five business days after the Distribution Date (the
"Final Date"), the Distribution Agent will cause all fractional shares of the
Short Common Stock to which Pages stockholders would otherwise be entitled to
be aggregated and the resulting shares sold for the account of such
stockholders. On or before the Final Date, the Distribution Agent will compute
the average price per share of Short Common Stock resulting from all such sales
and will remit to each stockholder of Pages entitled to a fractional share of
Short Common Stock an amount equal to such average price multiplied by his or
her fractional interest (after making appropriate deductions of any amount
required for tax withholding purposes and after deducting an amount equal to
all brokerage charges, commissions, and transfer taxes attributed to such
sale).
An aggregate of approximately 915,293 shares of Short Common Stock is
expected to be distributed in the Distribution to approximately 443 holders of
record, based on the number of shares, and holders of record of shares, of
Pages Common Stock outstanding on September 30, 1996 (assuming that outstanding
Pages employee stock options are not exercised) prior to the Record Date.
Holders of Pages Common Stock on the Record Date will not be required to
pay cash or any other consideration for the shares of the Short Common Stock
received in the Distribution or to surrender or exchange certificates
representing shares of Pages Common Stock in order to receive shares of the
Short Common Stock. The Distribution does not affect the number of, or the
rights attaching to, the outstanding shares of Pages Common Stock.
TRADING MARKET FOR SHORT COMMON STOCK
A "when issued" trading market in the Short Common Stock may develop prior
to the Distribution. A "when issued" trading market occurs when trading in
shares begins prior to the time stock certificates are actually available or
issued.
There has been no public trading market for the Short Common Stock.
Although the Company intends to apply for a listing if it becomes eligible, the
Company does not expect to be eligible for listing of its Common Stock on the
Nasdaq Small Cap Market upon the completion of the Distribution. However, at
least one member of the National Association of Securities Dealers, Inc.
("NASD") has agreed to register as a market maker and to enter quotations of
the Short Common Stock on the NASD OTC Bulletin Board Service and trading may
be conducted in what are commonly referred to as the "pink sheets." There can
be no assurance that an active trading market for the Short Common Stock will
develop after the Distribution. Market making activity may be discontinued at
any time. The prices at which the Short Common Stock will trade cannot be
predicted and may fluctuate significantly. Such prices will be determined in
the marketplace and may be influenced by many factors, including the
performance of the Company, investor expectations for the Company, the trading
volume in Short Common Stock, and general economic and market conditions. See
"Risk Factors -- Absence of Public Market; Possible Illiquidity of Trading
Market and Possible Volatility of Stock Price." Based on the number of record
holders of Pages Common Stock as of September 30, 1996, the Company is expected
to have approximately 443 stockholders of record at the Distribution Date.
There are no outstanding options to purchase Short Common Stock.
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Shares of the Short Common Stock received by the holders of Pages Common
Stock in the Distribution will be freely transferable, except for shares
received by persons who may be deemed "affiliates" of the Company under the
Securities Act of 1933, as amended (the "Securities Act"). Persons who may be
deemed affiliates of the Company after the Distribution generally include
individuals or entities that control, are controlled by or are under common
control with the Company, and may include the directors, executive officers and
principal stockholders of the Company. Persons who are affiliates of the
Company will be permitted to sell the Short Common Stock only pursuant to an
effective registration statement under the Securities Act or an exemption from
the registration requirements thereunder.
RELATIONSHIP BETWEEN PAGES AND THE COMPANY AFTER THE DISTRIBUTION
For purposes of governing certain of the ongoing relationships between
Pages and the Company after the Distribution and to provide for an orderly
transition to the status of two separate companies, prior to the Distribution,
Pages and the Company will enter into a Distribution Agreement. The form of the
Distribution Agreement summarized in this section is included as an exhibit to
the Company's Registration Statement on Form 10, of which this Information
Statement forms a part, and the following summary is qualified in its entirety
by reference to the Distribution Agreement as filed with the Securities and
Exchange Commission.
The Distribution Agreement will provide, among other things, for
cooperation between Pages and the Company prior to the Distribution, the
indemnification by each party of the other against certain liabilities,
including certain tax liabilities. In addition, the Distribution Agreement will
provide for the execution and delivery by the Company to Pages of a subordinated
debenture in the principal amount of $5 million bearing interest at 7% per annum
payable quarterly, with principal payments of $100,000 each due at the end of
each of the first four years, and a final payment of $4,600,000 due at the end
of the fifth year. The Distribution Agreement also will provide that Pages
and the Company will be granted access to certain records and information in
the possession of the other, and will require the retention by each for a
period of five years following the Distribution of all such information in its
possession.
The Distribution Agreement also will provide for the allocation of certain
taxes. In general, Pages will be responsible for filing all tax returns and
paying all taxes relating to the Company for periods through the Distribution
Date, and the Company will be responsible for filing all such tax returns and
paying all such taxes for period beginning after the Distribution Date. Pages
and the Company will agree to cooperate with one another and to share
information in preparing such tax returns and in dealing with other tax
matters.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION
The following discussion sets forth a summary of the material federal
income tax consequences under the Internal Revenue Code of 1986, as amended
(the "Code"), to holders of Pages Common Stock with respect to the receipt of
the Short Common Stock pursuant to the Distribution. The summary is based on
the opinion of Johnson, Blakely, Pope, Bokor, Ruppel & Burns, P.A. ("Counsel"),
a copy of which is included as exhibit 8 to the Company's Registration
Statement on Form 10, of which this Information Statement is a part. The
discussion may not address all federal income tax consequences that may be
relevant to particular Pages stockholders, e.g., foreign persons, dealers in
securities and persons who received Pages Common Stock in compensatory
transactions. In addition, the discussion does not address any state, local or
foreign tax considerations relative to the Distribution. ACCORDINGLY, ALL
HOLDERS OF PAGES COMMON STOCK ARE URGED TO CONSULT THEIR OWN TAX ADVISORS.
Pages has not requested a ruling from the Internal Revenue Service (the
"Service") with respect to the federal income tax consequences of the
Distribution. However, as a condition of the consummation of the Distribution,
Pages will receive an opinion of Counsel that: (i) for federal income tax
purposes, there is a reasonable basis for treating the Distribution as a
transaction qualifying under Section 355 of the Code; and (ii) this discussion
insofar as it relates to the statements of law or legal conclusions is correct
in all material respects.
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In rendering the tax opinion, Counsel will rely upon certain
representations and covenants made by Pages, certain of its stockholders, and
the Company, including the following: (a) following the Distribution, the
holders of Pages common stock must maintain a substantial continuing ownership
interest in the Short Common Stock they receive in the Distribution; and (b)
the Company and Pages must continue their historic businesses. The tax opinion
will be explicitly conditioned upon the accuracy of such representations and
covenants and upon certain assumptions critical to the Distribution qualifying
as a tax-free spin-off under Section 355 of the Code. The tax opinion does not
bind the Service nor does it preclude the Service from adopting a contrary
position from that taken in the tax opinion. In the event the representations
or assumptions are not accurate or the covenants are breached, then Pages and
the Company will be unable to rely on the tax opinion. Assuming the
Distribution qualifies as a tax-free spin-off under Section 355, the following
tax consequences will result:
(1) No gain or loss will be recognized by or includable in the income of a
holder of Pages Common Stock solely as a result of the receipt of Short Common
Stock pursuant to the Distribution;
(2) No gain or loss will be recognized by Pages or the Company solely as a
result of the Distribution;
(3) The tax basis of Pages Common Stock held by a Pages stockholder
immediately before the Distribution will be apportioned between such Pages
Common Stock and the Short Common Stock received by such stockholder in the
Distribution based upon the relative fair market value of such Pages Common
Stock and Short Common Stock on the Distribution Date; and
(4) Assuming that Pages Common Stock held by a Pages stockholder is held
as a capital asset, the holding period for the Short Common Stock received in
the Distribution will include the period during which such Pages Common Stock
was held.
Notwithstanding the opinion of Counsel referred to above, the application
of Section 355 of the Code to the Distribution is complex and may be subject to
differing interpretation. In particular, the Service may challenge the tax-free
status of the Distribution on the grounds that it lacks an adequate "business
purpose" or that the active business requirement of Section 355(b) of the Code
(which requires the continuation after the Distribution of a business conducted
for at least five years prior to the Distribution) is not satisfied.
Accordingly, there can be no assurance that the Service will not successfully
assert that the Distribution is a taxable event.
If the Distribution does not qualify as a tax-free spin-off under Section
355 of the Code, then: (i) Pages would recognize capital gain equal to the
difference between the fair market value of the Short Common Stock on the
Distribution Date and Pages' tax basis in such stock; (ii) each stockholder
receiving shares of Short Common Stock in the Distribution may be treated as
having received a distribution equal to the value of the Short Common Stock
received which would be taxable as ordinary income to the extent of Pages'
current and accumulated earnings and profits; (iii) the holding period for
determining capital gain treatment of the Short Common Stock received in the
Distribution would commence on the Distribution Date; and (iv) each Stockholder
would have a tax basis in the shares of Short Common Stock received in the
Distribution equal to the fair market value of such shares. Corporate
stockholders may be eligible for a dividends-received deduction (subject to
certain limitations) with respect to the portion of the Distribution
constituting a dividend, and may be subject to the Code's extraordinary
dividend provisions which, if applicable, would require a reduction in such
holder's tax basis in his or her Short Common Stock to the extent of such
deduction.
THE FOREGOING IS A SUMMARY OF MATERIAL FEDERAL INCOME TAX CONSIDERATIONS OF
THE DISTRIBUTION UNDER CURRENT LAW. EACH STOCKHOLDER SHOULD CONSULT HIS OR HER
TAX ADVISOR AS TO THE PARTICULAR CONSEQUENCES OF THE DISTRIBUTION TO SUCH
STOCKHOLDER, IN LIGHT OF HIS OR HER PERSONAL CIRCUMSTANCES, INCLUDING THE
APPLICATION OF STATE, LOCAL AND FOREIGN TAX LAWS.
DIVIDENDS ON SHORT COMMON STOCK
The Company anticipates that future earnings will be used principally to
support operations and to finance continued expansion and, thus, the Company
does not intend to pay cash dividends on the Short Common Stock
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for the foreseeable future. The payment of cash dividends in the future will be
at the discretion of the Company's Board of Directors and will depend upon such
factors as earnings levels, capital requirements, the Company's financial
condition, and other factors deemed relevant by the Company's Board of
Directors.
QUESTIONS RELATING TO THE DISTRIBUTION
Questions relating to the Distribution or ownership of Common Stock of the
Company should be directed to the President, CA Short Company, 4205 East Dixon
Boulevard, Shelby, North Carolina 28150, telephone (704) 482-9591.
RISK FACTORS
An investment in Short Common Stock involves certain risks, including those
described below, which could adversely affect the value of the Short Common
Stock. Neither Pages nor the Company makes, nor is any other person authorized
to make, any representation as to the future market value of the Short Common
Stock.
DEPENDENCE UPON KEY PERSONNEL
The Company's future success depends to a significant degree upon the
continued service of key senior management personnel, none of whom is bound by
an employment agreement or covered by an insurance policy of which the Company
is the beneficiary. The Company's future success also depends on its continuing
ability to attract, retain and motivate highly qualified, managerial and sales
personnel. Competition for such personnel is intense, and there can be no
assurance that the Company will be able to retain its existing employees or
attract, retain and motivate highly qualified personnel in the future. If the
Company is unable to hire the necessary personnel, its ability to market the
Company's products could be impaired. Such impairment could have a material
adverse effect upon the Company's business, financial condition and results of
operations.
UNCERTAINTY OF TAX CONSEQUENCES
As a condition to the completion of the Distribution, Pages and the Company
will receive an opinion from Johnson, Blakely, Pope, Bokor, Ruppel & Burns,
P.A., to the effect that, Pages and the Company have a reasonable basis for the
position that the Distribution will qualify as a tax-free spin-off under
Section 355 of the Internal Revenue Code. This tax opinion is offered in
reliance on a number of assumptions, covenants and representations made by
Pages, the Company, and certain Pages stockholders, including the following:
(a) following the Distribution, the holders of Pages Common Stock must maintain
a substantial continuing ownership interest in the Short Common Stock they
receive in the Distribution; and (b) the Company must continue its historic
business. These assumptions, representations, and covenants are critical to the
Distribution qualifying as a tax-free spin-off under Section 355 of the
Internal Revenue Code. If any of the representations or covenants are breached
or any of the assumptions are incorrect, then the factual foundation of the tax
opinion would be flawed and it may not be relied upon.
Further, as reflected in the tax opinion, the applicability of Section 355
to the Distribution is complex and may be subject to differing interpretations.
In particular, the Internal Revenue Service may challenge the tax-free status
of the Distribution on the grounds that (a) it lacks an adequate "business
purpose", or (b) that the active business requirement of Section 355(b)1 of the
Code (which requires the continuation after the Distribution of a business
conducted for at least five years prior to the Distribution) is not satisfied.
Accordingly, even if the representations and the covenants are not breached,
there can be no assurance that the Internal Revenue Service will not
successfully challenge the applicability of Section 355 to the Distribution, or
assert that the Distribution fails the requirements of Section 355 on the basis
of facts either existing at the time of the Distribution, or which may arise
after the Distribution Date.
Neither Pages nor the Company has undertaken any obligation to refrain from
any act that may be inconsistent with the Distribution qualifying as a tax-free
distribution under Section 355 or to indemnify each other
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or Pages stockholders for any tax liability (including interest or penalties)
arising out of an act causing the Distribution to fail to so qualify. See "The
Distribution -- Certain Federal Income Tax Consequences of the Distribution."
ABSENCE OF PUBLIC MARKET; POSSIBLE ILLIQUIDITY OF TRADING MARKET AND POSSIBLE
VOLATILITY OF STOCK PRICE
There has been no previous trading market for Short Common Stock and there
can be no assurance that a public market for the Common Stock will develop or
be sustained after the Distribution. The Company does not expect to be eligible
for listing of its Common Stock on the Nasdaq Small Cap Market upon completion
of the Distribution. Trading, if any, in the Company's Company Stock will be
conducted in the over-the-counter market on the NASD's Electronic Bulletin
Board System or in what are commonly referred to as the "pink sheets." See
"Risk Factors -- Absence of Public Market; Possible Illiquidity of Trading
Market and Possible Volatility of Stock Price." Such trading may cause the
Short Common Stock to be significantly less liquid than common stock or other
securities listed on the Nasdaq National Market or the Nasdaq Small Cap Market.
As a result, an investor may find it difficult to dispose of, or to obtain
accurate quotations as to the price of, the Company's securities. In addition,
the Company's securities may be subjected to so-called "penny stock" rules that
impose additional sales practice and market making requirements on
broker-dealers who sell and/or make a market in such securities. This could
affect the ability or willingness of broker-dealers to sell and/or make a
market in the Company's securities and the ability of holders of the Company's
securities to sell their securities in the secondary market.
There can be no assurances regarding the prices at which the Short Common
Stock will trade before or after the Distribution Date. The market prices for
securities of emerging companies have historically been highly volatile. Future
announcements concerning the Company or its competitors' results, as well as
investor perception of the Company and industry and general economic and market
conditions, may have a significant impact on the market price of Short Common
Stock. In addition, the stock market is subject to price and volume
fluctuations that affect the market prices for companies in general, and small
capitalization companies in particular, and are often unrelated to their
operating performance.
RESTRICTIONS IMPOSED BY THE CREDIT FACILITY
The credit facility to be obtained by the Company upon the consummation of
the Distribution will contain a number of significant covenants that will,
among other things, restrict the ability of the Company to dispose of assets,
merge, incur debt, pay dividends, repurchase or redeem capital stock and
indebtedness, create liens, make capital expenditures and make certain
investments or acquisitions and otherwise restrict corporate activities. In
addition, the credit facility will contain, among other covenants, requirements
that the Company maintain specified financial ratios, including a minimum
capital base, and minimum pre-tax profits from operations. The ability of the
Company to comply with such provisions may be affected by events beyond the
Company's control. The breach of any of these covenants would result in a
default under the credit facility. In the event of any such default, the lender
could elect to declare all amounts borrowed under the credit facility, together
with accrued interest and other fees, to be due and payable. If the
indebtedness under the credit facility were to be accelerated, there can be no
assurance that the assets of the Company would be sufficient to repay such
indebtedness in full. See "Business -- Financing."
THE COMPANY'S DIVIDEND POLICY
In addition to the restrictions contained in the credit facility on the
payment of dividends, the payment and level of cash dividends, if any, by the
Company after the Distribution will be at the discretion of the Company's Board
of Directors, based primarily upon the earnings, cash flow and financial
requirements of its business. The Company currently does not anticipate paying
cash dividends on Company Common Stock in the foreseeable future. The future
dividend policy will be determined on the basis of various factors, including
the Company's results of operations, financial condition, capital requirements,
and investment opportunities. See "Description of Capital Stock -- Dividends on
Common Stock."
6
<PAGE> 13
EFFECTS ON PAGES STOCK
After the Distribution, the Pages Common Stock will continue to be listed
and traded on the Nasdaq National Market. As a result of the Distribution, the
trading prices of Pages Common Stock are expected to be correspondingly lower
than the trading prices of Pages Common Stock immediately prior to the
Distribution. The combined trading prices of Pages Common Stock and Short
Common Stock after the Distribution may be less than, equal to or greater than
the trading prices of Pages Common Stock prior to the Distribution.
CONTINUING CONTROL OF THE COMPANY BY MANAGEMENT
S. Robert Davis, the Chairman of the Board and President of Pages, and the
Chairman of the Board of the Company, and Charles R. Davis, a director of Pages
and the Company, the President of the Company, and the Executive Vice President
and Secretary of Pages, currently own beneficially 1,345,359 and 687,003
shares, respectively, of Pages Common Stock, including options to purchase
43,750 and 43,750 shares, respectively, of Pages Common Stock exercisable within
the next sixty days. If they would exercise all of such options after the
Distribution, their holdings would represent approximately 21.87% and 11.18%,
respectively, of the issued and outstanding Pages Common Stock prior to any
adjustment of their outstanding options as a result of the Distribution. They
will receive their pro rata share of Short Common Stock in the Distribution.
Accordingly, Mr. Robert Davis and Mr. Charles Davis will, after the
Distribution, own 195,241 and 96,487 shares, or 21.33% and 10.54%, respectively,
of the Short Common Stock. As a result of their holdings, they currently exert,
and are likely to continue to exert, significant control over Pages and the
Company.
COMPETITION
The Company's business is highly competitive. Many of the Company's
competitors are significantly larger and better capitalized than the Company.
See "Business -- Competition."
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited Pro Forma Balance Sheet of the Company as of
September 30, 1996 and the Pro Forma Condensed Statements of Operations of the
Company for the year ended December 31, 1995 and the nine months ended
September 30, 1996, present the financial position and results of operations of
the Company assuming the Distribution had been completed as of September 30,
1996 and as of the beginning of 1995, respectively. In the opinion of
management, they include all material adjustments necessary to restate the
Company's historical results. The pro forma adjustments are described in the
accompanying notes to the pro forma financial information which should be read
in conjunction with such unaudited pro forma financial statements. Such pro
forma statements should also be read in conjunction with the Company's
financial statements and notes thereto included elsewhere herein. The following
unaudited pro forma condensed statements of operations do not purport to be
indicative of the actual results of the Company that would have occurred had
the Distribution actually been consummated on January 1, 1995 or of future
results of operations which will be obtained as a result of the consummation of
the Distribution.
7
<PAGE> 14
CA SHORT COMPANY
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
----------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(In thousands, except per share data)
<S> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . $22,620 $22,620
Costs and expenses
Costs of goods sold . . . . . . . . . . . . . . . . 13,862 13,862
Selling, general, and administrative . . . . . . . 8,155 30 (a) 8,185
Interest . . . . . . . . . . . . . . . . . . . . . 416 350 (b) 766
Depreciation and amortization . . . . . . . . . . . 363 363
Management fees paid to Pages . . . . . . . . . . . 500 (500)(c) -
------ -------
23,296 23,176
------ -------
Loss from continuing operations . . . . . . . . . . . 676 556
Benefit for income taxes . . . . . . . . . . . . . . (249) 44 (d) (205)
------ -------
Net loss . . . . . . . . . . . . . . . . . . . . . . 427 351
Loss per common share . . . . . . . . . . . . . . . . .38
Weighted average common shares outstanding . . . . . 915,293
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1996
------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(In thousands, except per share data)
<S> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . $13,694 $13,694
Costs and expenses
Costs of goods sold . . . . . . . . . . . . . . . . 8,396 8,396
Selling, general and administrative . . . . . . . . 5,722 24 (a) 5,746
Interest . . . . . . . . . . . . . . . . . . . . . 58 257 (b) 315
Depreciation and amortization . . . . . . . . . . . 252 252
Management fee paid to PAGES . . . . . . . . . . . 375 (375)(c) -
------ -------
14,803 14,709
Loss from continuing operations . . . . . . . . . . . 1,109 1,015
Benefit for income taxes . . . . . . . . . . . . . . (121) (21)(d) (142)
Net loss . . . . . . . . . . . . . . . . . . . . . . 988 873
Loss per common share . . . . . . . . . . . . . . . . .95
Weighted average common shares outstanding . . . . . 915,293
</TABLE>
8
<PAGE> 15
CA SHORT COMPANY
UNAUDITED PRO FORMA BALANCE SHEET
AS OF SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
September 30, Pro Forma
1996 Adjustments Pro Forma
---- ----------- ---------
ASSETS (Unaudited)
<S> <C> <C> <C>
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . $ 77 - $ 77
Accounts receivable . . . . . . . . . . . . . . . . . 2,169 - 2,169
Inventory . . . . . . . . . . . . . . . . . . . . . . 6,650 - 6,650
Prepaid expenses . . . . . . . . . . . . . . . . . . 944 - 944
-------- ----------
Total current assets . . . . . . . . . . . . . . 9,840 9,840
-------- ----------
Building and equipment:
Buildings . . . . . . . . . . . . . . . . . . . . . . 3,187 - 3,187
Equipment . . . . . . . . . . . . . . . . . . . . . . 1,839 - 1,839
-------- ----------
5,026 - 5,026
Less accumulated depreciation . . . . . . . . . . . . (1,262) - (1,262)
-------- ----------
3,764 - 3,764
Land . . . . . . . . . . . . . . . . . . . . . . . . 212 - 212
-------- ----------
Total property and equipment, net . . . . . . . 3,976 - 3,976
-------- ----------
Other assets:
Cost in excess of net assets acquired . . . . . . . . 1,142 - 1,142
Other . . . . . . . . . . . . . . . . . . . . . . . . 616 - 616
-------- ----------
1,758 - 1,758
-------- ----------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . $ 15,574 $ 15,574
======== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . $ 658 - $ 658
Short-term debt obligations . . . . . . . . . . . . . 2,448 - 2,448
Accrued liabilities . . . . . . . . . . . . . . . . . 272 - 272
Due to PAGES . . . . . . . . . . . . . . . . . . . . 4,125 (4,125)(e) -
Advance deposits . . . . . . . . . . . . . . . . . . 5,940 - 5,940
-------- ----------
Total current liabilities . . . . . . . . . . . . 13,443 - 9,318
-------- ----------
Deferred tax liability . . . . . . . . . . . . . . . . - - -
Note payable to PAGES . . . . . . . . . . . . . . . . - 5,000 (f) 5,000
-------- --------- ----------
Stockholder's equity:
Common shares . . . . . . . . . . . . . . . . . . . . 34 (25)(g) 9
Capital in excess of par value . . . . . . . . . . . . 4,124 (850)(g) 3,274
Accumulated deficit . . . . . . . . . . . . . . . . . (2,027) - (2,027)
</TABLE>
9
<PAGE> 16
CA SHORT COMPANY
NOTES TO THE UNAUDITED PRO FORMA FINANCIAL INFORMATION
The pro forma adjustments to the accompanying financial information as of
and for the nine months ended September 30, 1996, and for the year ended
December 31, 1995, are described below:
a. To reflect the additional stand alone general and administrative
costs associated with the Distribution
b. To reflect the interest expense on the $5,000,000 debt payable
to Pages. Interest on the debt is 7% per annum.
c. To reflect the elimination of the management fees paid to Pages.
d. To record the estimated income tax benefit of pro forma
adjustments at the combined federal, state, and local income tax
rate of 40%.
e. To reflect the elimination of the "Due to Pages" upon entering
into a $5 million subordinated debenture with Pages at the
Distribution.
f. To reflect the debt that will be payable to Pages as a result of
the elimination of the amount due to Pages as of the
Distribution.
g. To reflect the changes in stockholder's equity resulting a) from
the excess of note payable to Pages over the amount due to Pages
that will be eliminated, and b) from the recapitalization of
common stock for the Distribution by way of the elimination of
the 334.91 common shares at $100 par value and the issuance of
the 915,293 common shares at $0.01 par value. These amounts are
($875,000) and $25,000, respectively.
10
<PAGE> 17
SELECTED FINANCIAL DATA
(In thousands, except per share data)
The following table summarizes certain historical financial
information of the Company that has been derived from the financial statements
of the Company for the five years ended December 31, 1995 and the nine month
periods ended September 30, 1996 and September 30, 1995. The historical
financial information may not be indicative of the Company's future performance
as a stand-alone company. The information set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's Pro Forma Combined Financial
Information and Notes thereto included elsewhere herein
<TABLE>
<CAPTION>
Ten Months
Period Ended Period Ended Year Ended Year Ended Year Ended Ended Year Ended
September 30 September 30 December 31 December 31 December 31 December 31 February 28,
1996 1995 1995 1994 1993 1992 1992
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenues $ 13,695 $ 12,641 $ 22,620 $ 25,158 $ 28,909 $ 17,889 $ 21,405
Costs and expenses 14,804 14,231 23,296 25,635 28,759 17,952 21,475
---------- ---------- ---------- --------- --------- --------- ---------
Income (loss) from continuing
operations before income taxes (1,109) (1,590) (676) (477) 150 (63) (70)
(Provision) benefit for income taxes 121 510 249 193 (57) - -
---------- ---------- ---------- --------- --------- --------- ---------
Income (loss) from continuing
operations (988) (1,080) (427) (284) 93 (63) (70)
---------- ---------- ---------- --------- --------- --------- ---------
Net income (loss) $ (988) $ (1,080) $ (427) $ (284) $ 93 $ (63) $ (70)
========== ========== ========== ========= ========= ========= =========
PRO FORMA PER SHARE DATA:
Income (loss) from continuing
operations $ (1.08) $ - $ (0.47) - - - -
Pro forma weighted average common and
common equivalent shares 915,293 - 915,293 - - - -
CONSOLIDATED BALANCE SHEET DATA:
Working capital $ (1,603) $ (3,288) $ (2,338) $ (1,790) $ (1,810) $ (1,378) $ (796)
Total assets 15,574 16,368 19,512 23,584 22,572 17,034 11,385
Stockholder's equity 2,131 2,467 3,119 3,547 3,831 3,738 3,808
</TABLE>
11
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following is a discussion and analysis of the historical results of
operations and financial condition of the Company and factors affecting the
Company's financial resources. The discussion should be read in conjunction with
the Company's financial statements, including the notes thereto, appearing
elsewhere herein.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity have been cash generated from
operating activities and amounts available under its existing credit
facility. The Company's primary uses of funds consist of financing inventory
and receivables.
Net working capital deficit increased to $3,603,000 as of September 30, 1996
from $2,338,000 as of December 31, 1995. The increase was primarily attributed
to reductions in trade accounts from collections which exceeded the decrease in
the level of borrowings.
The Company has adopted a growth strategy which will be accomplished
through increased efforts of the Company's existing highly trained sales force
to further expand current market share and by enlarging the existing sales
force in order to expand 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 also plans to enter into a $5 million, 7% subordinated debenture with
Pages subsequent to the Distribution in satisfaction of amounts due to Pages by
the Company. Any excess of the amount due to Pages as of the Distribution over
the $5 million subordinated debenture will be recorded as paid in capital. As a
result, the Company's working capital will become significantly positive.
Principal payments will be $100,000 per year for the first five years, $200,000
per year for the second five years with a balloon payment due the tenth year for
the remaining principal balance. Interest will be 7% per annum and the interest
will be payable quarterly. See "Capitalization."
The Company does not anticipate any material expenditures for property and
equipment during the next twelve months.
The Company is aware of no trends or demands, commitments or uncertainties
that will result in, or that management believes are reasonably likely to result
in, the Company's liquidity increasing or decreasing in any material way. The
Company is aware of no legal or other contingencies, the effect of which are
believed by management to be reasonably likely to have a material adverse
effect on the Company's financial statements.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1995. Revenues were approximately $13.7 million for the nine
months ended September 30, 1996, compared to $12.6 million for the same period
in 1995 -- an increase of approximately $1.1 million or 9%. The increase in
revenues is principally attributable to maintaining the volume on certain
existing customers coupled with increasing volume from new accounts.
Cost of goods sold for the nine months ended September 30, 1996 was
approximately $8.4 million compared to approximately $7.8 million for the
comparable period in 1995. This 8% increase in cost of goods sold is a result
of an increase in revenues for the nine months ended September 30, 1996.
Selling, general, and administrative expense for the nine months ended
September 30, 1996 was approximately $5.7 million, compared to $5.5 million
for the same period in 1995 -- an increase of 3.6%, or approximately $200,000.
The increase in selling, general, and administrative expense is primarily due
to the Company's expansion and increased focus in sales and marketing.
Interest expense was approximately $58,000 for the nine months ended
September 30, 1996, compared to $286,000 for the nine months ended September
30, 1995 -- a decrease of 79.7% or approximately $228,000. The decrease is due
to a lower level of borrowings. The average outstanding debt for the nine
months ended September 30, 1996 approximated $1.5 million compared to $3.8
million for the nine months ended September 30, 1995. Additionally, the average
interest rate for the nine months ended September 30, 1996 approximated 8.55%
compared to 9.41% for the nine months ended September 30, 1995.
12
<PAGE> 19
Depreciation and amortization expense was approximately $252,000 for the
nine months ended September 30, 1996, compared to $281,000 for the nine months
ended September 30, 1995 -- a decrease of 10% or approximately $29,000. The
decrease in depreciation and amortization expense is principally attributable
to the amortization of the remaining deferred loan costs during 1996.
Income tax benefit was approximately $121,000 for the nine months ended
September 30, 1996, compared to approximately $510,000 for the nine months
ended September 30, 1995. The provisions for income tax benefit were calculated
through the use of normal income tax rates. The Company was able to continue
recognizing an income tax benefit through September 30, 1996, based on the net
deferred tax liabilities that were in existence through that date. However, at
September 30, 1996, the remaining net deferred tax asset, liability is zero
after the establishment of a valuation allowance for the resulting net deferred
tax asset. Recognition of any income tax benefit for future losses will be
subject to the recognition provisions under SFAS No. 109.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994.
Revenues were approximately $22.6 million for the year ended December 31, 1995,
compared to $25.2 million for the year ended December 31, 1994 -- a decrease of
10% or approximately $2.6 million. The decline in revenue was due to a decrease
in volume on certain existing customers coupled with delayed redemption on new
accounts.
Cost of goods sold was approximately $13.9 million for the year ended
December 31, 1995, compared to approximately $15.5 million for the year ended
December 31, 1994 -- a decrease of 10% or approximately $1.6 million. The
decrease in cost of goods sold was attributable to the decrease in revenues. As
a percentage of revenues, cost of goods sold improved to 61.3% in 1995 from
61.7% in 1994. The 0.1% decrease in cost of goods sold is principally
attributable to a change in product mix.
Selling, general, and administrative expense was approximately $8.2 million
for the year ended December 31, 1995, compared to approximately $8.9 million
for the year ended December 31, 1994 -- a decrease of 8% or approximately
$700,000. The decrease in selling, general and administrative expenses was due
to decreased sales and cost reduction efforts implemented by the Company.
Interest expense was approximately $416,000 for the year ended December 31,
1995, compared to $430,000 for the year ended December 31, 1994 -- a decrease
of 3% or $14,000. The decrease was due to lower levels of borrowings. The
average outstanding debt by month in 1995 approximated $3.9 million compared to
$5.9 million for 1994. Additionally, the average interest rate for 1995
approximated 9.3% compared to approximately 7.9% for 1994.
Depreciation and amortization expense was approximately $362,500 for the
year ended December 31, 1995, compared to $297,500 for the year ended December
31, 1994 -- a decrease of 22% or approximately $65,000. The decrease in
depreciation and amortization expense is principally attributable to the
amortization of additional deferred loan costs recorded as a result of certain
credit facility refinancing by Pages, the parent.
Income tax benefit was approximately $248,600 for the year ended December
31, 1995, compared to approximately $193,500 for the year ended December 31,
1994. The provisions for income tax benefit were calculated through the use of
estimated income tax rates based on annualized income.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993.
Revenues were approximately $25.2 million for the year ended December 31, 1994,
compared to $28.9 million for the year ended December 31, 1993 -- a decrease of
12.8% or approximately $3.7 million. The decline in revenue was due to a
decrease in volume on certain existing customers coupled with delayed redemption
on new accounts.
13
<PAGE> 20
Cost of goods sold was approximately $15.5 million for the year ended
December 31, 1994, compared to approximately $19 million for the year ended
December 31, 1993 -- a decrease of 18.4% or approximately $3.5 million. The
decrease in cost of goods sold was attributable to the decrease in revenues. As
a percentage of revenues, cost of goods sold improved to 61.7% in 1994 from
65.6% in 1993. The decrease in cost of goods sold is principally attributable
to a change in product mix.
Selling, general, and administrative expense was approximately $8.9 million
for the year ended December 31, 1994, compared to approximately $8.0 million
for the year ended December 31, 1993 -- an increase of 11% or approximately
$900,000. The increase in selling, general and administrative expenses was due
to a substantial shift from non-commissioned sales to commissioned sales which
accounted for approximately $500,000 of the increase. Additionally, the selling,
general and administrative expenses includes approximately $400,000 of staffing
and marketing costs associated with anticipated fourth quarter sales which did
not materialize.
Interest expense was approximately $430,000 for the year ended December 31,
1994, compared to $252,500 for the year ended December 31, 1993 -- an increase
of 70% or $177,500. The increase was due to higher levels of borrowings. The
average outstanding debt by month in 1994 approximated $5.9 million compared to
$3.5 million for 1993. Additionally, the average interest rate for 1994
approximated 7.9% compared to approximately 7.0% for 1993.
Depreciation and amortization expense was approximately $297,500 for the
year ended December 31, 1994, compared to $265,000 for the year ended December
31, 1993 -- an increase of 48% or approximately $32,500. The increase in
depreciation and amortization expense was primarily due to acquisitions of
office equipment.
Income tax benefit was approximately $193,500 for the year ended December
31, 1994, compared to the income tax provision of approximately $57,000 for the
year ended December 31, 1993. The provisions for income tax benefit were
calculated through the use of estimated income tax rates based on annualized
income.
SEASONALITY
The Company's business is highly seasonal, with approximately one-half 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 and the Company typically experiences losses
in its second and third quarters.
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.
BUSINESS
GENERAL
The Company was formed as a North Carolina corporation in 1950. 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
14
<PAGE> 21
Company. The Company creates, markets, and administers recognition programs
which address specific needs in employee motivation and recognition. Programs
offered by the Company include safety, service recognition, attendance,
birthday, and corporate holiday gift programs. Virtually every program employs
merchandise (alternatively, jewelry) as the principal incentive for the
reinforcement or modification of employee behavior. The common objective of all
the Company's programs is to reduce client operating costs by increasing
employee productivity.
The Company begins a typical assignment by helping the client to determine
realistic performance goals and to establish an appropriate budget. Next, the
Company selects and recommends to the client an assortment of merchandise
which, in the Company's experience, will serve as an effective incentive to the
client's employees. Upon approval, the Company publishes and distributes all
materials (including appealing, full-color catalogues or brochures) necessary
to communicate the program's benefits. As the client's employees become
eligible to receive awards, the Company processes their requests and, in most
cases, ships the items directly to the employees from the Company's
distribution center in Shelby, North Carolina. The Company then invoices the
client at prices approximating comparable retail, as the merchandise is
shipped.
RECOGNITION PROGRAMS
SAFETY 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's safety
programs are designed to reduce these costs by increasing awareness and
promoting safe work habits. Because each client has its own unique set of
safety concerns, the Company designs each safety program to meet the specific
needs and goals of the client. A typical safety program would grant an award
for accident-free operations over a specified period of time. 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 efficacy of the safety programs it has designed. Safety programs
accounted for approximately 56% of the Company's revenues in each of the last
three fiscal years.
SALES INCENTIVE PROGRAMS. Sales incentive programs are designed to achieve
the client's specific goals, such as gaining market share, launching new
products or services, improving profitability, encouraging early ordering,
opening new territories, or boosting overall sales. When those goals are met,
the responsible employees are provided with awards.
SERVICE RECOGNITION PROGRAMS. Service award programs grant awards based on
years of service with the employer. Service awards are designed to improve
morale, increase productivity, and reduce costly employee turnover by
delivering messages of recognition and strengthening bonds of loyalty between
employees and employers. The Company's experience is that employee recognition
is near the top of the list of motivating factors that create on-the-job
satisfaction. Service award programs accounted for approximately 22% of the
Company's revenues in each of the last three fiscal years.
QUALITY CONTROL PROGRAMS. Quality control programs are designed to create
and increase quality awareness and motivate workers to make a personal
commitment to quality. Participants are rewarded when corporate goals and
objectives are met. Effective programs result in reducing rework and downtime,
retaining existing business, and earning new business through increased
customer satisfaction.
PRODUCTION PROGRAMS. Production programs are designed to motivate workers
by offering incentive awards for achieving corporate production quotas and
goals. By creating increased productivity awareness, thus increasing
production, the client is able to reduce its cost per unit and enhance
profitability.
ATTENDANCE PROGRAMS. The costs incurred by clients resulting from
absenteeism include loss of production, decrease in quality, downtime, extra
wages to replace absent workers, and added administration. Attendance
recognition programs are designed to reduce excessive absenteeism by providing
incentive awards to workers with perfect attendance.
15
<PAGE> 22
BIRTHDAY AND HOLIDAY GIFT PROGRAMS. Although a declining portion of the
Company's incentive/recognition business, many employers continue to have a
long-standing tradition of giving holiday gifts to employees as a way of
thanking them for their commitment and dedication throughout the year. Finding
the right gift has frequently posed a challenge for those responsible for
administration of the program. The Company's gift-giving solution provides
clients with a program that allows employees to select exactly the gift they
want, while eliminating the administrative burden associated with other types
of holiday gift programs. Holiday gift programs accounted for approximately 21%
of the Company's revenues in each of the last three fiscal years.
MERCHANDISE SELECTION AND BROCHURES.
The Company presents the merchandise available for selection by its
clients' employees in a full-color catalog/brochure designed and produced by
the Company's art department. Except for apparel, the selection of which is
limited, the merchandise offered by the Company is similar to that found in a
large retail department store, including consumer electronics, housewares,
hardware, lawn and garden merchandise, sportswear, costume jewelry, and
manufactured fine jewelry. Unlike some of its competitors in the service award
business which manufacture the merchandise offered as awards, the Company has
no "product bias," allowing it to find the most reasonably priced, highest
quality supplier of merchandise for its programs. Merchandise is separated into
over twenty different price levels. This allows the client to select price
levels which fit its budget. The items in each of the price levels selected by
the client are presented to employees in separate brochures corresponding to
the applicable award level. The selection of merchandise within each price
level is carefully chosen to appeal to a wide segment of the industry work
force. Products are grouped by the Company within a particular price level
based on the Company's determination of the relative value of all merchandise
offered by the Company, rather than on the Company's cost of those items. This
results in different markups over the Company's cost for each item.
SALES AND MARKETING.
The Company markets its incentive/recognition awards programs through a
combination of approximately one hundred independent commissioned sales
representatives, sales consultants, telephone sales representatives and by
direct mail, trade show participation, and trade journal advertising. The
Company is evaluating converting some independent sales representative
positions to employee sales positions. The Company employs a "consultative
selling" or "partner" approach to marketing its programs which relieves from
the client much of the design responsibilities associated with the programs.
This often requires personal client contact over extended periods of time. The
Company's proprietary computer software allows its sales consultants to monitor
and administer the programs of its clients, relieving the client from much of
the administrative burden associated with the program. Approximately 10% of the
independent commissioned sales representatives are exclusive to the Company in
all their business activities and 90% are non-exclusive and may represent a
competitor. Sales consultants and telephone sales representatives are Company
employees.
GROWTH STRATEGY.
The Company intends to add additional sales representatives in order to
penetrate geographic markets in the United States outside of the Southeastern
market in which its sales are now concentrated. Many of the Company's clients
participate in only one or two of the programs offered by the Company. As part
of its growth strategy, the Company also intends to expand its awards programs
and actively cross-sell its broad range of programs to its existing clients.
SEASONALITY
The Company's business is highly seasonal, with approximately one-half 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, and the Company typically experiences losses
in its second and third quarters. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Seasonality and Quarterly
Data."
16
<PAGE> 23
COMPETITION
The incentive/recognition awards business is highly competitive, but
fragmented, with no company dominating the industry. The Company competes on
the basis of customer service, product quality and diversity, and competitive
pricing.
EMPLOYEES
As of September 30, 1996, the Company employed a total of 106 permanent and
35 seasonal persons. None of the Company's employees is represented by a labor
union.
PROPERTIES
The Company owns a 134,000 square foot office and warehouse building
located in Shelby, North Carolina and a 163,700 square foot warehouse located
in Kings Mountain, North Carolina. Both properties are in good condition. The
properties and all other Company assets collateralize its revolving line of
credit facility with a maximum availability of $4,500,000.
FINANCING
The Company has received a proposal from the Huntington National Bank to
provide to it a credit facility in the form of a $4.5 million revolving line of
credit. Under the proposal, borrowings will be limited to the sum of 80% of
accounts receivable less than 90 days old plus 60% of eligible inventory, plus
75% of the appraised value of the Company's real estate located 4205 East Dixon
Boulevard, in Shelby, North Carolina. Eligible inventory is limited to $3.5
million from January through May, and $6.5 million from June through December.
The credit facility will have an expiration date of June 30, 1997 and will bear
interest at the lender's prime rate of interest plus one percent, floating
daily. All business assets of the Company will be pledged as collateral for the
credit facility. The credit facility will also include certain financial
covenants, including covenants that the Company maintain certain financial
ratios including a minimum tangible capital base and a minimum pre-tax profit
from operations. In addition, the credit facility will contain limitations on
capital expenditures, fixed asset sales, loans and/or advances to shareholders
and employees and restrictions on operating leases. The proposal does not
constitute a commitment on the part of the lender. A commitment is subject to
further due diligence by the lender and the completion of the bank's formal
credit approval process. The consummation of the Distribution is contingent
upon, among other things, the receipt of a commitment for a credit facility
acceptable to the Board of Pages.
CAPITALIZATION
The following table sets forth, as of September 30, 1996, the
historical capitalization of the Company and the pro forma capitalization of
the Company to reflect the Distribution. This information should be read in
conjunction with the Company's financial statements and the related notes
thereto included herein.
<TABLE>
<CAPTION>
September 30, 1996
------------------
Actual Pro Forma
------ ---------
<S> <C> <C>
Current liabilities:
Due to Pages . . . . . . . . . . . . . . . . . . . $ 4,124,975 $ --
Note payable to Pages--noncurrent . . . . . . . . . -- 5,000,000
Stockholder's equity:
Common stock, par-value $100 per share
(actual) $.01 per share (pro forma)
334.91 shares authorized, 334.91 shares
issued and outstanding (actual) 915,293
shares issued and outstanding (pro forma) . . . . 33,491 9,152
Capital in excess of par value . . . . . . . . . 4,124,494 3,273,808
Accumulated deficit . . . . . . . . . . . . . . . (2,026,991) (2,026,991)
----------- ----------
Total Stockholder's Equity . . . . . . . . . . 2,130,994 1,255,969
----------- ----------
Total Capitalization . . . . . . . . . . . . . . . . $ 6,255,969 $6,255,969
=========== ==========
</TABLE>
17
<PAGE> 24
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information with respect to each person
who is a director or an executive officer of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
S. Robert Davis (1) 58 Chairman of the Board
Charles R. Davis (1) 35 President and Director
Jeffrey A. Ross 29 Chief Financial Officer and Secretary
Robert V. Boylan 33 Executive Vice President of Sales
</TABLE>
(1) S. Robert Davis is the father of Charles R. Davis.
S. ROBERT DAVIS is the Chairman of the Board and President of Pages. Prior
to his election to the Board of Directors of Pages, he served as Assistant to
the President of Pages from January, 1988, to March, 1990, on a part-time
basis. Additionally, during the past five years Mr. Davis has operated several
private businesses involving the developing, sale, and/or leasing of real
estate, but devotes substantially all of his business time to Pages.
CHARLES R. DAVIS Mr. Davis was elected President of the Company in
September, 1992. Mr. Davis is also a Director and the Executive Vice President
and Secretary of Pages. 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 a large
public accounting and consulting firm from September, 1989, until June, 1993.
ROBERT V. BOYLAN joined the Company in August, 1996, as Executive Vice
President of Sales. From April 1988 until August 1996, Mr. Boylan managed North
American sales and marketing activities of a large, diversified building
products manufacturer. Mr. Boylan has also served as a contract consultant for
the American Management Association, as well as Beauvestco Consulting,
specializing in sales development, and sales management. Mr. Boylan has also
served as a general partner of a closely held real estate management firm
located in North Carolina.
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. The next annual meeting of the Company's shareholders will take
place during 1997.
COMPENSATION OF DIRECTORS
Each director who is not an officer of the Company will receive a fee of
$500 for attendance at each non-telephonic Board meeting, a fee of $250 for
attendance of 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 will receive no additional compensation for their
services as directors.
18
<PAGE> 25
The Company has adopted a Non-Employee Director Stock Option Plan, which
provides for the grant, at the discretion of the Company's Board of Directors,
of options to purchase up to 40,000 shares of Short Common Stock upon such
terms as are determined by the Board in its discretion. No options have been
granted under the Plan.
EXECUTIVE COMPENSATION
The Company's President, Charles R. Davis, was paid a salary of $147,890,
$140,000, and $140,000 in each of the 1995, 1994, and 1993 fiscal years,
respectively. Mr. Davis exercised options to purchase Pages Common Stock during
1995, the difference between the fair market value of the Pages Common Stock
received and the option exercise price of which was $103,389. He did not
receive any other compensation from the Company in those years and he did not
receive any grants of options to purchase Pages Common Stock in those years. He
has not received any Company option grants. Mr. Davis is paid a salary of
$155,000 during fiscal 1996. No other executive officer of the Company received
compensation exceeding $100,000 during fiscal 1995.
CA SHORT COMPANY 1996 STOCK OPTION PLAN
The Company has adopted a 1996 Incentive Stock Option Plan which provides
for the grant, at the discretion of the Board of Directors, of options to
purchase up to 45,000 shares of Short Common Stock to key employees of the
Company. It is intended that options granted under such Plan qualify as
incentive stock options under Section 422 of the Internal Revenue Code of 1986,
as amended. No options have been granted under the Plan.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company has no committees of the Board of Directors.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Prior to the Distribution, Pages owns all of the outstanding shares of
Short Common Stock. Assuming the completion of the Distribution and that the
Pages stockholders continue to own beneficially on the Record Date the same
number of shares believed by Pages to be owned beneficially by such persons on
September 30, 1996, the following table sets forth certain information with
respect to the beneficial ownership of shares of Short Common Stock that will
be owned beneficially by (i) each person who beneficially owns more than 5% of
the outstanding Short Common Stock, (ii) each director of the Company, (iii)
the President of the Company (the only executive officer of the Company whose
cash and non-cash compensation for services rendered to the Company for the
year ended December 31, 1995, exceeded $100,000) and (iv) directors and
executive officers of the Company as a group:
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL PERCENT
NAME AND ADDRESS OWNERSHIP(1) OF CLASS(2)
---------------- ------------ ----------
<S> <C> <C>
S. Robert Davis . . . . . . . . . . . . 1,345,359(3) 21.89%
801 94th Avenue North
St. Petersburg, Florida 33702
Charles R. Davis . . . . . . . . . . . . 687,003(4) 11.18%
4205 East Dixon Boulevard
Shelby, North Carolina 28150
All directors and executive officers
as a group (4 persons) . . . . . . . . . 2,080,712(5) 33.37%
</TABLE>
19
<PAGE> 26
- ----------
(1) Represents sole voting and investment power unless otherwise indicated.
(2) Based on 6,101,955 shares of Pages Common Stock outstanding as of September
30, 1996, plus, as to each person listed, that portion of the 602,800 unissued
shares of Pages Common Stock subject to outstanding options which may be
exercised by such person, and as to all directors and executive officers as a
group, unissued shares of Pages 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 25,100 shares owned by Mr. Davis' wife as to which Mr. Davis
disclaims beneficial ownership and includes 43,750 shares of Pages 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 781 shares owned by Mr. Davis' wife and 4,474 shares owned by Mr.
Davis' children as to which Mr. Davis disclaims beneficial ownership and
includes 43,750 unissued shares of Pages 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 Pages Common Stock
listed above plus 3,000 shares of Pages Common Stock owned and 25,000 unissued
shares of Pages Common Stock as to which Robert V. Boylan, an executive officer
of the Company, has the right to acquire beneficial ownership upon exercise of
stock options within the next 60 days and 350 shares of Pages Common Stock and
20,000 unissued shares of Pages Common Stock as to which Jeffrey A. Ross, an
executive officer of the Company, has the right to acquire beneficial ownership
upon exercise of stock options within the next 60 days.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pages has provided services to the Company including, but not limited to
services related to administration, transportation, tax services, accounting
and reporting, and management consultation. Pages has also incurred costs
related to the services rendered to the Company by Pages, and also related to
legal services and general corporate expenses which have been allocated to the
Company. Pages has also incurred financing costs to provide non-interest
bearing advances to the Company, which costs approximated $263,000, $263,000,
$450,000, $450,000, and $400,000, respectively based on the prime interest rate
as applied to the average outstanding balance due to Pages during the nine
month periods ended September 30, 1996, and 1995 and during the years ended
December 31, 1995, 1994 and 1993. All of the foregoing have been embodied in
management fees charged by Pages to the Company. Those fees for the nine month
periods ended September 30, 1996, and 1995 and for the years ended December 31,
1995, 1994 and 1993 were in the amounts of $375,000, $375,000, $500,000,
$500,000 and $1,287,019, respectively. The allocation of costs and expenses by
Pages to the Company was based on methods Pages believes are reasonable. The
portion of such costs which CA Short believes will continue to be incurred
after the Distribution is approximately $30,000 per year. The balance of such
costs which are not expected to continue after the Distribution relates to
duplicative management responsibilities for financing and operating activities
and transportation and administration costs which will be eliminated by the
Distribution.
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED SHARES
Under the Company's Certificate of Incorporation ("Certificate" or
"Certificate of Incorporation"), the authorized capital stock of the Company
consists of 5,000,000 shares of Short Common Stock, par value $.01 per share,
and 300,000 shares of preferred stock, $.01 par value per share (the "Short
Preferred Stock"). Pages currently owns all outstanding shares of Short Common
Stock. No shares of Short Preferred Stock have been issued. Immediately after
the Distribution, based on the number of shares of Pages Common Stock
outstanding as of September 30, 1996 (and assuming a distribution ratio of one
and one-half shares of Short Common Stock for every ten shares of Pages Common
Stock), approximately 915,293 shares of Short Common Stock and no shares of the
Short Preferred Stock will be issued and outstanding. Pages will own no shares
of Common Stock after the Distribution.
COMMON STOCK
Holders of Short Common Stock are entitled to one vote for each share on
all matters voted on by stockholders. All shares of Short Common Stock to be
distributed will be fully paid and nonassessable. Holders of Short Common Stock
do not have any subscription, redemption or conversion privileges. Subject to
the preferences or other rights of any Short Preferred Stock that may issued
from time to time, holders of common stock are entitled to participate ratably
in dividends on the Short Common Stock as are declared by the Board of
Directors. Holders of Short Common Stock are entitled to share ratably in all
assets available for distribution to stockholders in the event of liquidation
or dissolution of the Company, subject to distribution of the preferential
amount, if any, to be distributed to holders of Short Preferred Stock.
20
<PAGE> 27
PREFERRED STOCK
The Company's Certificate of Incorporation authorizes the Board, without
any vote or action by the holders of Short Common Stock, to issue Short
Preferred Stock from time to time in one or more series. The Board is
authorized to determine the number of shares and designation of any series of
Short Preferred Stock and the dividend rights, dividend rate, conversion rights
and terms, voting rights (full or limited, if any), redemption rights and
terms, liquidation preferences and sinking fund terms of any series of Short
Preferred Stock. Issuance of Short Preferred Stock would be subject to the
applicable rules of the NASD or other organizations on whose systems the stock
of the Company may then be quoted or listed. Depending upon the terms of Short
Preferred Stock established by the Board, any or all series of Short Preferred
Stock could have preference over the Short Common Stock with respect to
dividends and other distributions and upon liquidation of the Company. Issuance
of any such shares with voting powers, or issuance of additional shares of
Short Common Stock, would dilute the voting power of the outstanding Short
Common Stock.
NO PREEMPTIVE RIGHTS
No holder of any capital stock of the Company has any preemptive right to
subscribe for or purchase any securities of any class or kind of the Company.
TRADING OF SHORT COMMON STOCK
No current public trading market exists for Short Common Stock, although a
"when issued" market may develop prior to the Distribution Date. Although the
Company intends to apply for a listing if it is eligible, the Company does not
expect to be eligible for listing of its common stock on the Nasdaq Small Cap
Market upon completion of the Distribution. Trading, if any, in the Short
Common Stock will be conducted in the over-the-counter market on the NASD's OTC
Electronic Bulletin Board Service or in what are commonly referred to as the
"pink sheets." The extent of the market for the Short Common Stock and the
prices at which Short Common Stock may trade prior to or after the Distribution
cannot be predicted. See "Risk Factors -- Absence of Public Market; Possible
Illiquidity of Trading Market; Possible Volatility of Stock Price."
Stockholders should refer any questions concerning trading in either Short
Common Stock or Pages Common Stock to their brokers.
Shares of Short Common Stock distributed to stockholders of Pages will be
freely transferable, except for shares received by persons who may be deemed to
be "affiliates" of the Company under the Securities Act. Persons who may be
deemed to be affiliates of the Company after the Distribution generally include
individuals or entities that control, are controlled by or are under common
control with the Company. Affiliates of the Company may sell their Short Common
Stock only pursuant to an effective registration statement under the Securities
Act of 1933, or an exemption from the registration requirements of the
Securities Act.
TRANSFER AGENT AND REGISTRAR
The Huntington National Bank, Columbus, Ohio, will be the transfer agent and
registrar for the Short Common Stock immediately following the Distribution.
ANTITAKEOVER EFFECTS OF THE COMPANY'S CERTIFICATE
Certain of the provisions of the Company's Certificate of Incorporation may
discourage certain types of transactions that may involve an actual or
threatened change of control of the Company and encourage any person who might
seek to acquire control of the Company to negotiate with the Company's Board of
Directors. Management of Pages and the Company believe that generally the
interests of the Company's stockholders would be served best if any change in
control results from negotiations with its Board of the proposed terms, such as
the price to be paid, the form of consideration and the anticipated tax effects
of the transaction.
21
<PAGE> 28
The provisions described herein may reduce the vulnerability of the Company
to an unsolicited proposal for a takeover of the Company that does not
contemplate the acquisition of all its outstanding shares of capital stock at
an adequate price or is otherwise unfair to its stockholders or an unsolicited
proposal for the restructuring or sale of all or part of the Company.
Management of Pages and the Company believe that, as a general rule, such
proposals would not be in the best interests of the Company and its
shareholders. However, to the extent that these provisions do not discourage
takeover attempts, they could make it more difficult to accomplish transactions
that are opposed by the incumbent Board and could deprive stockholders of
opportunities to realize temporary takeover premiums for their shares or other
advantages that large accumulations of stock would provide.
The description below is a summary of material terms and is qualified in
its entirety by reference to the Company's Certificate of Incorporation filed
as an exhibit to the Company's Registration Statement on Form 10 of which this
Information Statement is a part.
PREFERRED STOCK AND ADDITIONAL COMMON STOCK
Under the Company's Certificate of Incorporation, the Board has authority
to provide by resolution for issuance of shares of one or more series of Short
Preferred Stock. The Board is authorized to fix by resolution the terms and
conditions of each series. See "Description of Capital Stock -- Preferred
Stock." The Board also may issue additional shares of authorized but unissued
shares of Short Common Stock.
The Company believes that the availability of Short Preferred Stock will
provide the Company with increased flexibility to facilitate possible future
financings and acquisitions and will allow the Company to better meet other
corporate needs that might arise. The authorized shares of Short Preferred
Stock, as well as authorized but unissued shares of Short Common Stock, will be
available for issuance without the expense and delay of stockholder action,
unless stockholder action is required by applicable law or the rules of the
NASD or other stock exchange or organization on which any class of stock of the
Company may then be quoted or listed.
These provisions give the Board of Directors the power to approve the
issuance of a series of Short Preferred Stock, or additional Short Common
Stock, with terms that could either impede or facilitate the completion of a
merger, tender offer or other takeover attempt. For example, the issuance of
new shares might impede a business combination if the terms of those shares
include series voting rights that would enable a holder to block business
combinations, or the issuance of new shares might facilitate a business
combination if those shares have general voting rights sufficient to cause an
applicable percentage vote required to be satisfied. The Board of Directors of
the Company will make any determination regarding issuance of additional shares
based on its judgment as to the best interest of its stockholders, customers,
employees, or other constituencies.
CONTROL SHARE ACQUISITION STATUTE
The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203). Section 203 prohibits a publicly held Delaware corporation
from engaging in a "business combination" with an "interested stockholder" for
a period of three years after the date of the transaction in which the person
became an interested stockholder, unless (i) prior to such time, the Board of
Directors of the corporation approves either the business combination or the
transaction which resulted in the stockholder becoming an interested
stockholder, (ii) upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested stockholder owns
at least 85% of the outstanding voting stock excluding certain shares held by
employee director and employee stock plans, or (iii) at or subsequent to such
time the business combination is approved by the Board of Directors and by the
affirmative vote of at least 66 2/3% of the outstanding voting stock that is
not owned by the interested stockholder. For purposes of Section 203, a
"business combination" includes, among other things, a merger, asset sale or
other transaction resulting in a financial benefit to the interested
stockholder, and an "interested stockholder" is generally a person who,
together with affiliates and associates, owns (or within three years, owned)
15% or more of the Company's voting stock.
22
<PAGE> 29
LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 145(a) of the Delaware General Corporation Law (the "DGCL")
provides in relevant part that "a corporation shall have power to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the corporation) by reason of the fact that he is or was a director,
officer, employee or agent of the corporation, partnership, joint venture,
trust or other enterprise, against expenses (including attorneys' fees),
judgments fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful." With
respect to derivative actions, Section 145(b) of the DGCL provides in relevant
part that "[a] corporation shall have power to indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor...[by reason of his service in one of the capacities
specified in the preceding sentence] against expenses (including attorney's
fees) actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was bought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper." The Company's Certificate of Incorporation provides for
such indemnification to the fullest extent provided for by the DGCL.
The Company's Certificate of Incorporation provides that no director of the
Company shall be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director except as limited
by the DGCL. The Certificate of Incorporation also provides that no amendment
or repeal of such provision shall apply to or have any effect on the right to
indemnification permitted thereunder with respect to claims arising from acts
or omissions occurring in whole or in part before the effective date of such
amendment or repeal whether asserted before or after such amendment or repeal.
The Company's Bylaws provide that the Company shall indemnify to the full
extent authorized by law each of its directors and officers against expenses
incurred in connection with any proceeding arising by reason of the fact that
such person is or was an agent of the corporation.
The Company has entered into indemnification agreements with its directors
and certain of its officers and has received a binder for officer and director
liability insurance in the amount of $3,000,000.
PRICE RANGE OF PAGES COMMON STOCK
The Pages Common Stock is traded on the Nasdaq National Market under the
symbol "PAGZ". The following table sets forth for the periods indicated the
high and low sales prices of the Pages Common Stock as reported by the Nasdaq
National Market.
<TABLE>
<CAPTION>
SALES PRICES
HIGH LOW
---- -----
<S> <C> <C>
CALENDAR YEAR THROUGH SEPTEMBER 30, 1996
Third Quarter.............................. 2 1/2 1 1/4
Second Quarter............................. 3 1
First Quarter.............................. 2 1/8 1 1/8
CALENDAR YEAR ENDING DECEMBER 31, 1995
Fourth Quarter............................. 13 3/4 9 1/2
Third Quarter.............................. 11 7/8 9 5/8
Second Quarter............................. 10 1/4 6
First Quarter.............................. 7 5 7/8
CALENDAR YEAR ENDED DECEMBER 31, 1994
Fourth Quarter............................. 9 3/4 6 1/2
Third Quarter.............................. 7 4
Second Quarter............................. 11 8 1/4
First Quarter.............................. 12 1/4 10 1/4
</TABLE>
On November 12, 1996, Pages announced that it intended to pursue the
spin-off of the Company, subject to certain conditions precedent. On November
11, 1996, the last trading day before the announcement, the Pages Common Stock
traded at prices ranging from a low of $2.125 per share to a high of $2.50 per
share.
23
<PAGE> 30
INDEPENDENT AUDITORS
The Board of Directors of the Company has selected Deloitte & Touche LLP to
audit the Company's financial statements for the year ending December 31, 1996.
The financial statements as of December 31, 1995 and 1994 and for the years
then ended, included in this Information Statement, have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report
appearing herein. The financial statements as of December 31, 1993 and for the
year then ended, also included in this Information Statement, have been audited
by Hausser & Taylor, independent auditors, as stated in their report appearing
herein.
On October 28, 1994, Pages dismissed both Hausser & Taylor as its
principal independent accountants and Arthur Andersen as its independent
auditor of its U.K. subsidiary, School Book Fairs Limited. The reports of
Hausser & Taylor on the financial statements for the prior two fiscal years
contained no adverse opinion or disclaimer of opinion and were not qualified
or modified as to uncertainty, audit scope or accounting principles. The
report dated March 25, 1994, of Hausser & Taylor on the 1993 and 1992 financial
statements expressed an unqualified opinion with reliance on the audit report
of Author Andersen regarding their audits of the combined financial statements
of School Book Fairs Limited. The reports of Arthur Andersen on the financial
statements for the prior two fiscal years contained no adverse opinion or
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principle. The Pages Audit Committee participated in
and approved the decision to change independent accountants.
In connection with the audits of Pages for fiscal years ended December 31,
1992, and 1993 and through October 28, 1994, there were no disagreements with
Hausser & Taylor on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements if
not resolved to the satisfaction of Hausser & Taylor would have caused them to
make reference thereto in their report on the financial statements for such
years.
In connection with the audits of Pages for fiscal years ended December 31,
1992, and 1993 and through October 28, 1994, there were no disagreements with
Arthur Andersen on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements if not
resolved to the satisfaction of Arthur Andersen would have caused them to make
reference thereto in their report on the financial statements for such years.
During fiscal years ended December 31, 1992, and 1993 and through October
28, 1994, there were no reportable events (as defined in Securities and
Exchange Commission Regulation S-K Item 304(a)(l)(v)) by either Hausser & Taylor
or Arthur Andersen.
Pages received from both Hausser & Taylor and Arthur Andersen letters
addressed to the Securities and Exchange Commission stating that they agree
with statements substantially similar to the foregoing included in Pages' Form
8-K dated November 2, 1994, which was filed with the Securities and Exchange
Commission.
Pages engaged Deloitte & Touche LLP as its new independent accountants as
of October 28, 1994. During the fiscal years ended December 31, 1992, and 1993
and through October 28, 1994, Pages had not consulted with Deloitte & Touche
LLP on items which (i) were or should have been subject to Statement on
Auditing Standards No. 50 or (ii) concerned the subject matter of a
disagreement or reportable event with the former auditors.
24
<PAGE> 31
CLYDE A. SHORT COMPANY
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants..................................................................F-2
Independent Auditors' Report..............................................................................F-3
Statement of Operations...................................................................................F-4
Balance Sheets............................................................................................F-5
Statements of Stockholder's Equity........................................................................F-6
Statements of Cash Flows..................................................................................F-7
Notes to Financial Statements.............................................................................F-8
</TABLE>
F-1
<PAGE> 32
[HAUSSER & TAYLOR LETTERHEAD]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholder
Clyde A. Short Company
We have audited the accompanying statements of operations, cash flows and
stockholder's equity of Clyde A. Short Company for the year ended December 31,
1993. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations of Clyde A. Short Company for
the year ended December 31, 1993, in conformity with generally accepted
accounting principles.
/s/ Hausser & Taylor
HAUSSER & TAYLOR
Columbus, Ohio
March 25, 1994
F-2
<PAGE> 33
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Clyde A. Short Company, Inc.
Shelby, North Carolina
We have audited the accompanying balance sheets of Clyde A. Short Company, Inc.
(the "Company") as of December 31, 1995 and 1994, and the related statements of
operations, stockholder's equity, and cash flows for the years then ended.
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, 1995 and
1994, and the results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Tampa, Florida
October 11, 1996
F-3
<PAGE> 34
CLYDE A. SHORT COMPANY
STATEMENTS OF OPERATIONS
For the nine month periods ended September 30, 1996 and
1995 and the years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
September 30, September 30,
1996 1995 December 31, December 31, December 31,
(Unaudited) (Unaudited) 1995 1994 1993
---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $ 13,694,621 $ 12,641,214 $ 22,620,011 $ 25,157,704 $ 28,909,206
-------------- -------------- -------------- -------------- --------------
Costs and expenses:
Cost of goods sold 8,396,341 7,780,654 13,862,313 15,526,961 18,951,332
Selling, general and administrative 5,722,472 5,509,082 8,155,260 8,880,315 8,003,242
Interest 57,929 285,595 416,189 430,376 252,494
Depreciation and amortization 252,112 281,028 362,523 297,506 265,290
Management fee paid to Pages 375,000 375,000 500,000 500,000 1,287,019
-------------- -------------- -------------- -------------- --------------
14,803,854 14,231,359 23,296,285 25,635,158 28,759,377
-------------- -------------- -------------- -------------- --------------
Income/(loss) from continuing
operations (1,109,233) (1,590,145) (676,274) (477,454) 149,829
(Provision)/benefit for income taxes 120,900 509,700 248,600 193,500 (57,000)
-------------- -------------- -------------- -------------- --------------
NET INCOME/ (LOSS) $ (988,333) $ (1,080,445) $ (427,674) $ (283,954) $ 92,829
-------------- -------------- -------------- -------------- --------------
Proforma income/(loss) per
common share $ (1.08) $ - $ 0.47 - -
-------------- -------------- -------------- -------------- --------------
Proforma weighted average common
and equivalent shares 915,293 - 915,293 - -
-------------- -------------- -------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 35
CLYDE A. SHORT COMPANY
BALANCE SHEETS
September 30, 1996 and December 31, 1995 and 1994
<TABLE>
<CAPTION>
September 30, December 31, December 31,
ASSETS 1996 1995 1994
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Current assets:
Cash $ 76,932 $ 226,678 $ 13,414
Accounts receivable 2,168,752 6,101,629 7,278,185
Inventory 6,649,996 6,780,412 9,709,989
Prepaid expenses 944,210 824,967 875,014
------------- ------------- -------------
Total current assets 9,839,890 13,933,686 17,876,602
------------- ------------- -------------
Building and equipment:
Buildings 3,186,680 3,186,680 3,180,131
Equipment 1,840,095 1,451,760 1,296,633
------------- ------------- -------------
5,026,775 4,638,440 4,476,764
Less accumulated depreciation (1,262,264) (1,037,014) (758,766)
------------- ------------- -------------
3,764,511 3,601,426 3,717,998
Land 211,468 211,468 211,468
------------- ------------- -------------
Total property and equipment, net 3,975,979 3,812,894 3,929,466
------------- ------------- -------------
Other assets:
Cost in excess of net assets acquired, net of
accumulated amortization of $224,902,
$199,280 and $165,116, respectively 1,141,565 1,167,187 1,201,351
Other 616,257 598,256 576,165
------------- ------------- -------------
1,757,822 1,765,443 1,777,516
------------- ------------- -------------
TOTAL ASSETS $ 15,573,691 $ 19,512,023 $ 23,583,584
============= ============= =============
<CAPTION>
September 30, December 31, December 31,
LIABILITIES AND 1996 1995 1994
STOCKHOLDER'S EQUITY ---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Current liabilities:
Accounts payable $ 657,816 $ 1,276,197 $ 3,431,220
Short-term debt obligations 2,447,680 4,827,662 5,016,270
Accrued liabilities 271,983 394,855 391,334
Due to Pages 4,124,975 4,124,975 6,613,372
Advance deposits 5,940,243 5,648,107 4,214,887
------------- ------------- -------------
Total current liabilities 13,442,697 16,271,796 19,667,083
------------- ------------- -------------
Deferred tax liability - 120,900 369,500
------------- ------------- -------------
Commitments and contingencies (note 3) - - -
Stockholder's equity:
Common shares: $100 par value; authorized 33,491 33,491 33,491
334.91 shares; 334.91 issued and outstanding
Capital in excess of par value 4,124,494 4,124,494 4,124,494
Accumulated deficit (2,026,991) (1,038,658) (610,984)
------------- ------------- -------------
Total stockholder's equity 2,130,994 3,119,327 3,547,001
------------- ------------- -------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 15,573,691 $ 19,512,023 $ 23,583,584
============= ============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE> 36
CLYDE A. SHORT COMPANY
STATEMENTS OF STOCKHOLDER'S EQUITY
For the nine month period ended September 30, 1996 (unaudited) and for the
years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Capital in
Common Excess of Accumulated
Shares Stock Par Value Deficit Total
------ ----- --------- ------- -----
<S> <C> <C> <C> <C> <C>
Balance December 31, 1992 $334.91 33,491 $ 4,124,494 $ (419,859) $ 3,738,126
Net Income 92,829 92,829
-------- ----------- ----------- ----------- -----------
Balance December 31, 1993 334.91 33,491 4,124,494 (327,030) 3,830,955
Net loss (283,954) (283,954)
-------- ----------- ----------- ----------- -----------
Balance December 31, 1994 334.91 33,491 4,124,494 (610,984) 3,547,001
Net loss (427,674) (427,674)
-------- ----------- ----------- ----------- -----------
Balance December 31, 1995 334.91 33,491 4,124,494 (1,038,658) 3,119,327
Net loss (988,333) (988,333)
-------- ----------- ----------- ----------- -----------
Balance September 30, 1996 334.91 $ 33,491 $ 4,124,494 $(2,026,991) $ 2,130,994
======== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE> 37
CLYDE A. SHORT COMPANY
STATEMENTS OF CASH FLOWS
For the nine month periods ended September 30, 1996 and 1995 and for the
years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
September 30, September 30, December 31, December 31, December 31,
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income/(loss) $ (988,333) $ (1,080,445) $ (427,674) $ (283,954) $ 92,829
Adjustments to reconcile net (loss)/income
to cash provided by (used in) operating
activities:
Depreciation and amortization 252,112 281,028 362,523 297,506 265,290
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable 3,932,877 5,574,813 1,176,556 1,425,658 (2,067,555)
Inventory 130,416 1,759,627 2,929,577 (2,150,382) (2,448,138)
Prepaid expenses and other assets (138,484) (112,207) (22,151) (420,470) (482,085)
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities (741,253) (2,853,318) (2,151,502) (196,503) 1,547,200
Advance deposits 292,136 1,217,238 1,433,220 744,191 774,141
Deferred income taxes (120,900) (509,700) (248,600) (193,500) 501,094
------------ ------------ ------------ ------------ ------------
Total adjustments 3,606,904 5,357,481 3,479,623 (493,500) (1,910,053)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
operating activities 2,618,571 4,277,036 3,051,949 (777,454) (1,817,224)
------------ ------------ ------------ ------------ ------------
Cash flows from investing activities:
Payments for purchases of property and
equipment (388,335) (111,382) (161,676) (254,787) (809,364)
------------ ------------ ------------ ------------ ------------
Cash used in investing activities (388,335) (111,382) (161,676) (254,787) (809,364)
------------ ------------ ------------ ------------ ------------
Cash flows from financing activities:
Due to Pages -- (2,488,397) (2,488,397) 2,670,919 28,760
Proceeds from debt obligations 17,433,276 19,737,449 30,982,347 31,842,084 27,642,656
Principal payments on debt (19,813,258) (21,378,260) (31,170,959) (33,571,350) (25,048,672)
------------ ------------ ------------ ------------ ------------
Cash (used in) provided by
financing activities (2,379,982) (4,129,208) (2,677,009) 941,653 2,622,744
------------ ------------ ------------ ------------ ------------
Increase (decrease) in cash (149,746) 36,466 213,264 (90,588) (3,844)
Cash, beginning of year 226,678 13,414 13,414 104,002 107,846
------------ ------------ ------------ ------------ ------------
Cash, end of year $ 76,932 $ 49,860 $ 226,678 $ 13,414 $ 104,002
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-7
<PAGE> 38
CLYDE A. SHORT COMPANY
NOTES TO FINANCIAL STATEMENTS
For the nine month periods ended September 30, 1996 and 1995 (unaudited)
and the years ended December 31, 1995, 1994 and 1993
Information pertaining to the nine month periods ended September 30,
1996 and September 30, 1995, the interim financial statements, is unaudited.
The accompanying interim financial statements reflect all adjustments which
are, in the opinion of management, necessary for a fair statement of the
results for the interim periods presented. Such adjustments consist solely of
normal recurring accruals. Results for interim periods are not necessarily
indicative of results for a full year. Effective November 12, 1996, Clyde A.
Short Company (the "Company") changed its name to CA Short Company and
reincorporated in the State of Delaware from North Carolina.
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.
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 recognized upon shipment
and delivery of the related merchandise. 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.
F-8
<PAGE> 39
INVENTORY
Inventory consists of finished goods which are comprised 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 September 30, 1996 and December 31, 1995 and 1994
include $893,919, $747,233 and $788,047, respectively, of prepaid selling costs
that include costs for commissions paid to salespeople that relate to advance
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 sales occur.
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 nine month
periods ended September 30, 1996 and 1995 and for the years ended December 31,
1995, 1994 and 1993, totaled $225,250, $205,298, $278,254, $248,480 and
$217,104, respectively.
COST IN EXCESS OF NET ASSETS ACQUIRED AND OTHER ASSETS
Cost in excess of net assets acquired are amortized on a straight line
basis over 40 years. Management periodically evaluates its accounting for cost
in excess of net assets acquired by considering such factors as historical
performance, current operating results and future operating income. At each
balance sheet date, the Company evaluates the realizability of goodwill based
upon expectation of nondiscounted cash flows and operating income. Based upon
its most recent analysis, the Company believes that no material impairment of
goodwill exists at September 30, 1996. 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 nine month periods
ended September 30, 1996 and 1995 and for the years ended December 31, 1995,
1994 and 1993 and totaled $25,622, $25,622, $34,162 and $34,162 and $34,162,
respectively.
Other assets include cash surrender value of life insurance and
deferred loan costs. The deferred loan costs are amortized using the straight
line method over the terms of the related contracts. Amortization expense
totaled $1,240, $50,108, $50,107, $14,864 and $14,024, for the nine month
periods ended September 30, 1996 and 1995 and for the years ended December 31,
1995, 1994 and 1993, respectively.
DUE TO PARENT
Amounts due to parent are net borrowings which occurred in the ordinary
course of business. No interest has been recorded on the outstanding balance
(See Note 6).
ADVANCE DEPOSITS
Advance deposits represents customer prepayments for goods and services
that the Company will deliver in the future. Upon delivery of such goods and
services, advance deposits are recognized as revenues.
F-9
<PAGE> 40
PER SHARE DATA
Per share amounts have been computed based on the weighted average
number of common shares outstanding during the period.
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 Plans are discretionary. There were no
Company contributions for the nine month periods ended September 30, 1996 and
1995 and for the years ended December 31, 1995, 1994 and 1993.
LONG-LIVED ASSETS
FASB has issued SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" which requires
adoption in 1996. The general requirements of SFAS No. 121 apply to the fixed
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 does not anticipate that the adoption of
SFAS No. 121 will have a material impact on its financial position or results of
operations.
2. DEBT OBLIGATIONS
Debt obligations consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31, December 31,
1996 1995 1994
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Line of credit with interest at prime plus
1 percent; interest payable monthly,
maturing on June 7, 1997, collateralized by substantially
all assets of the Company ($2,552,320 available
at September 30, 1996) $2,447,680 $4,827,622 $5,016,272
</TABLE>
The interest rate for the line as of December 31, 1995 and 1994 was prime + 1/2
percent and prime + 1/2 percent, respectively. As of December 31, 1995, the line
was due in full by June 1, 1996, subject to annual renewals. As of December 31,
1994, the line was due in full by June 1, 1995, subject to annual renewals.
The prime interest rate at September 30, 1996 and December 31, 1995 and 1994,
was 8 1/4, 8 1/2 and 8 1/2 percent, respectively. The carrying amount of the
Company's short term debt obligations approximates fair value.
F-10
<PAGE> 41
On March 27, 1996, the Company's parent, Pages, entered into a $16
million long-term revolving credit facility which replaced the previous multiple
credit lines that totaled $25 million, of which the above debt obligations as of
December 31, 1995 and 1994 represent the Company's portion. The maximum line
amount is calculated, in part, based on Pages eligible borrowing base that
includes inventory and other eligible accounts. The credit agreement contains
certain restrictive provisions for Pages including, among others, maintaining a
minimum tangible net worth, limitation on dividends paid on common stock to
$100,000 annually and certain other restrictions on actions which require lender
pre-approval.
The Company has received a proposal from the same creditor to provide
to it a credit facility in the form of a $4.5 million revolving line of credit.
Under the proposal, borrowings will be limited to the sum of 80% of accounts
receivable less than 90 days old plus 60% of eligible inventory, plus 75% of
the appraised value of the Company's real estate. Eligible inventory is limited
to $3.5 million from January through May, and $6.5 million from June through
December. The credit facility will have an expiration date of June 30, 1997 and
will bear interest at the lender's prime rate of interest plus one percent,
floating daily. All business assets of the Company will be pledged as
collateral for the credit facility. The credit facility will also include
certain financial covenants, including covenants that the Company maintain
certain financial ratios including a minimum tangible capital base and a
minimum net profit from operations. In addition, the credit facility will
contain limitations on capital expenditures, fixed asset sales, loans and/or
advances to shareholders and employees and restrictions on operating leases.
There can be no assurances that the Company will ultimately receive a
commitment from the creditor that will be accepted by the Company.
The Company also plans to enter into a $5 million 7 percent
subordinated debenture with Pages subsequent to the Distribution in
satisfaction of amounts due to Pages by the Company. Any excess of the amount
due to Pages as of the Distribution over the $5 million subordinated debenture
will be recorded as paid in capital. Principal payments will be $100,000 per
year for the first four years, with a balloon payment due at the end of the
fifth year for the remaining principle balance. Interest will be 7 percent
per annum and the interest will be payable quarterly.
3. 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 $109,295,
$109,480, $151,608, $76,037 and $102,500, for the six month periods ended
June 30, 1996 and 1995 and for the years ended December 31, 1995, 1994 and
1993, respectively. Future minimum lease payments under leases are as follows:
<TABLE>
<CAPTION>
Year Ended
December 31, Operating
------------ ---------
<S> <C>
1996 $118,418
1997 54,261
1998 8,778
</TABLE>
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.
4. INCOME TAXES
The Company employs 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. Under SFAS No. 109, if on the basis of available evidence,
it is more likely than not that all or a portion of the deferred tax asset will
not be realized, the asset must be reduced by a valuation allowance. Based on
available evidence, a valuation allowance has been established for an amount of
the asset that more likely than not will not be recognized.
Temporary differences between income for financial reporting purposes
and tax reporting purposes relate primarily to accounting methods for inventory
costs, accrued and prepaid expenses and reserves, and depreciation.
F-11
<PAGE> 42
For the periods presented, the (benefit) provision for income taxes consisted
of the following:
<TABLE>
<CAPTION>
September 30, September 30, December 31, December 31, December 31,
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Current - - - - $ 19,000
------------ ------------ ------------ ------------ ------------
Deferred
Federal $ (102,800) $ (433,300) $ (211,300) $ (164,500) 30,000
State and local (18,100) (76,400) (37,300) (29,000) 8,000
------------ ------------ ------------ ------------ ------------
Net deferred benefit (provision) (120,900) (509,700) (248,600) (193,500) 38,000
------------ ------------ ------------ ------------ ------------
Net (benefit) provision for taxes $ (120,900) $ (509,700) $ (248,600) $ (193,500) $ 57,000
============ ============ ============ ============ ============
</TABLE>
For the periods presented, a reconciliation of income taxes based upon the
application of the federal statutory tax rate is as follows:
<TABLE>
<CAPTION>
September 30, September 30, December 31, December 31, December 31,
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Benefit for taxes at statutory rate $ (343,300) $ (447,300) $ (229,900) $ (162,350) $ 51,000
Change in effective tax rate: -- -- -- (25,100) (9,000)
Goodwill amortization 10,300 10,300 13,650 13,650
State taxes net of federal benefit (60,600) (78,900) (40,550) (28,650) 11,000
Change in valuation allowance 266,500 - - - -
Other 6,200 6,200 8,200 8,950 4,000
------------ ------------ ------------ ------------ ------------
Total (benefit) provision for income taxes $ (120,900) $ (509,700) $ (248,600) $ (193,500) $ 57,000
============ ============ ============ ============ ============
</TABLE>
As of the periods presented, the components of net deferred taxes are as
follows:
<TABLE>
<CAPTION>
September 30, September 30, December 31, December 31,
1996 1995 1995 1994
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Assets;
Inventory costs capitalized for
tax purposes $ 108,400 $ 129,600 $ 100,000 $ 146,100
Accruals and reserves to be
expensed as paid for tax
purposes 73,200 73,200 73,200 45,200
Other 7,700 5,000 5,650 2,950
Net operating loss carryforwards 820,200 654,550 427,600 142,750
Valuation allowance (266,500) - - -
------------ ------------ ------------ ------------
Deferred tax asset 743,000 862,350 606,450 337,000
Liabilities:
Excess of tax over financial
accounting depreciation
and amortization (743,000) (722,150) (727,350) (706,500)
------------ ------------ ------------ ------------
Net deferred tax (liability) $ - $ 140,200 $ (120,900) $ (369,500)
============ ============ ============ ============
</TABLE>
F-12
<PAGE> 43
At December 31, 1995 and 1994, respectively, operating loss
carryforwards of approximately $1,069,000 and $357,000 offset future taxable
income and will expire during the years 2009 through 2010.
5. SUPPLEMENTAL DISCLOSURE FOR CASH FLOW INFORMATION
Cash paid for interest during the six month periods ended June 30, 1996
and 1995 and for the years ended December 31, 1995, 1994 and 1993 aggregated
$84,105, $349,736, $442,638, $366,236 and $253,745 and cash paid for taxes was
$0, $0, $0, $18,000 and $0 respectively.
6. RELATED PARTY TRANSACTIONS
For all periods presented Pages has provided services to and incurred
costs on behalf of the Company. Prior to the Distribution, Pages' management fee
was intended to encompass the element of Pages' financing costs to provide
non-interest bearing advances to the Company. Such element approximated
$263,000, $263,000, $450,000, $450,000 and $400,000, respectively, based on the
prime interest rate as applied to the average outstanding balance due to Pages
during the nine month periods ended September 30, 1996 and 1995 and during the
years ended December 31, 1995, 1994 and 1993. The remaining costs are for
certain services, including, but not limited to, administrative services,
transportation, tax services, accounting and reporting, management consultation,
legal services, and general corporate expenses, which have also been allocated
to the Company. The allocation of costs and expenses for these services were
based on methods that management believes are reasonable. The portion of such
costs which management believes will continue to be incurred subsequent to the
Distribution approximates $30,000. The balance of nonrecurring costs relates to
duplicative management responsibilities for financing and operating activities,
as well as other transportation and administrative costs which will be
eliminated by the Distribution.
Pages allocated general corporate expenses to the Company for the nine
month periods ended September 30, 1996 and 1995 and for the years ended
December 31, 1995, 1994 and 1993 in the amounts of $375,000, $375,000,
$500,000, $500,000 and $1,287,019, respectively.
7. SUBSEQUENT EVENT
The Company has adopted a 1996 Incentive Stock Option Plan which provides
for the grant, at the discretion of the Board of Directors, of options to
purchase up to 45,000 shares of Short Common Stock to key employees of the
Company. It is intended that options granted under such Plan qualify as
incentive stock options under Section 422 of the Internal Revenue Code of 1986,
as amended. No options have been granted under the plan.
The Company has also adopted a Non-Employee Director Stock Option
Plan, which provides for the grant, at the discretion of the Company's Board of
Directors, of options to purchase up to 40,000 shares of Short Common Stock
upon such terms as are determined by the Board in its discretion. No options
have been granted under the Plan.
F-13
