UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-21717
CASCO INTERNATIONAL, INC.
Incorporated - Delaware I.R.S. Identification No. 56-0526145
13900 Conlan Circle, Suite 150, Charlotte, NC 28277
Registrant's Telephone Number (704) 482-9591
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of latest practicable date 1,783,200 common shares outstanding,
each with par value $0.01, as of November 9, 2000.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CASCO INTERNATIONAL, INC.
BALANCE SHEETS
September 30, 2000 and December 31, 1999
ASSETS 2000 1999
--------- ----------
(unaudited)
Current Assets:
Cash ....................................... $ 5,067 $ 6,797
Accounts receivable ........................ 2,932,690 4,910,886
Inventory .................................. 4,643,366 4,714,063
Prepaid expenses ........................... 1,014,415 1,033,274
Deferred tax asset ......................... 102,000 102,000
---------- ----------
Total current assets ........... 8,697,538 10,767,020
Buildings and equipment:
Buildings .................................. 2,664,065 2,627,727
Equipment .................................. 3,475,758 3,223,615
----------- ----------
6,139,823 5,851,342
Less accumulated depreciation .............. (2,985,888) (2,540,828)
----------- ----------
3,153,935 3,310,514
Land ............................................ 111,468 111,468
----------- ----------
Total property and equipment, net 3,265,403 3,421,982
Other assets:
Cost in excess of net assets acquired, net of
accumulated amortization of $581,558 and
$479,819 respectively ..................... 2,304,511 2,406,250
Other .......................................... 764,648 748,376
----------- ----------
3,069,159 3,154,626
----------- ----------
TOTAL ASSETS ................................... $ 15,032,100 $ 17,343,628
=========== ==========
The accompanying notes are an integral part of the financial statements.
CASCO INTERNATIONAL, INC.
BALANCE SHEETS
September 30, 2000 and December 31, 1999
Unaudited
LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999
----------- ---------
(unaudited)
Liabilities:
Accounts payable ............................ $ 474,266 $ 965,112
Short-term debt obligations ................. 1,686,504 2,500,465
Accrued liabilities ......................... 147,263 304,273
Advanced deposits-current ................... 1,854,785 1,854,785
Accrued taxes payable ....................... -- 355,000
---------- ---------
Total current liabilities ....... 4,162,818 5,979,635
---------- ---------
Long-term debt ................................... 2,093,066 2,189,716
Advanced deposits-noncurrent ..................... 2,434,039 2,402,975
Deferred tax liability ........................... 323,275 533,775
---------- ---------
Total Liabilities ................................ 9,013,198 11,106,101
Commitments and contingencies .................... -- --
Stockholders' equity:
Preferred Shares: $.01 par value; authorized
300,000 shares; none issued and outstanding -- --
Common Shares par value $.01, authorized
5,000,000, issued 1,783,200 ............... 17,832 17,832
Capital in excess of par value .............. 6,417,586 6,417,586
Accumulated deficit ......................... (416,516) (197,891)
---------- ---------
Total stockholders' equity ...... 6,018,902 6,237,527
---------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ....... $ 15,032,100 $ 17,343,628
=========== ==========
The accompanying notes are an integral part of the financial statements.
CASCO INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
For the three months and the nine months ended
September 30, 2000 and 1999
Unaudited
Three Months Nine Months
----------------------- ------------------------
2000 1999 2000 1999
--------- --------- ---------- ----------
Revenue ......... $ 4,551,050 $ 4,268,691 $ 15,148,564 $ 16,103,572
Operating costs and expenses:
Cost of goods sold 2,323,023 2,258,246 7,884,661 8,565,521
Selling, general and
administrative 2,281,980 2,175,653 6,842,295 6,724,679
Depreciation and
amortization 190,531 182,954 571,125 535,709
------------ ------------ ------------ ------------
Total operating
costs and
expenses 4,795,534 4,616,853 15,298,081 15,825,909
Operating income (loss) .....(244,484) (348,162) (149,517) 277,663
Other income and (expenses)
Interest expense ........(83,233) (100,650) (214,609) (289,759)
------------ ------------ ------------ ------------
Total other income
and (expenses) (83,233) (100,650) (214,609) (289,759)
Income (loss) before
income taxes ........ (327,717) (448,812) (364,126) (12,096)
Benefit (provision) for
income taxes ....... 131,100 179,550 145,500 4,800
------------ ------------ ------------ ------------
Net Income (loss) .......$ (196,617) $ (269,262) $ (218,626) $ (7,296)
============ ============ ============ ============
EARNINGS PER SHARE BASIC AND DILUTIVE
Net Income (loss) .......$ (0.11) $ (0.15) $ (0.12) $ 0.00
============ ============ ============ ============
Weighted average common
shares outstanding . 1,783,200 1,783,200 1,783,200 1,783,200
============ ============ ============ ============
The accompanying notes are an integral part of the financial statements.
CASCO INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2000 and 1999
Unaudited
2000 1999
---------- ----------
Cash flows from operating activities:
Net (loss) income ......................... $ (218,626) $ (7,296)
Adjustments to reconcile net (loss) income to cash
provided by operating activities:
Depreciation and amortization .......... 571,125 535,709
Deferred provision (benefit) .. ........ (210,500) (4,800)
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable ................. 1,978,196 2,671,023
Inventory ........................... 70,697 523,646
Prepaid expenses and other assets ... (21,738) (12,142)
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities (647,856) (1,288,896)
Taxes Payable ........................... (355,000) --
Advance deposits ........................ 31,064 (283,080)
--------- ---------
Total adjustments ..................... 1,415,988 2,141,460
--------- ---------
Net cash provided by operating activities ...... 1,197,362 2,134,164
--------- ---------
Cash flows from investing activities:
Payments for purchases of property and equipment (288,481) (323,685)
--------- ---------
Cash used in investing activities .....................(288,481) (323,685)
Cash flows from financing activities:
Proceeds from debt obligation ............. 13,962,517 12,968,643
Principal payments on debt ................ (14,873,128) (14,861,125)
----------- -----------
Cash used in financing activities .....................(910,611) (1,892,482)
Increase (decrease) in cash ..................... (1,730) (82,003)
Cash, beginning of period ....................... 6,797 107,482
----------- -----------
Cash, end of period .............................. $ 5,067 $ 25,479
=========== ===========
Other Cash Flow Information:
Cash payments during the year for:
Interest ..................................$ 87,803 $ 275,986
Income taxes, net of refunds .............. 420,000 23,418
The accompanying notes are an integral part of the financial statements.
CASCO INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
Unaudited
The accompanying financial statements have not been audited, but reflect
all adjustments which, in the opinion of management, are necessary for a fair
presentation of financial position, results of operations and cash flows for the
periods presented. All adjustments are of a normal and recurring nature. These
financial statements should be read in conjunction with the Company's audited
financial statements and notes thereto for the fiscal year ended December 31,
1999.
During the three months ended September 30, 2000, options were granted
under the Company's 2000 Incentive Stock Option Plan as shown on the following
table. The ending and average market price of the Company's Stock for the three
months ended September 30, 2000 was $1.406 and $2.507 respectively.
Date Shares
Granted or Reserved and Exercise
Issued Exercisable Price
- ----------------------------- ------------------- --------------
NON-QUALIFIED STOCK OPTION PLAN
July 31, 2000 5,000 $2.61
Effects of Recent Accounting Pronouncements - In December 1999, the
Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No.
101, "Revenue Recognition in Financial Statements." The guidance in SAB 101 must
be adopted during the fourth quarter of fiscal 2000 and the effects, if any, are
required to be recorded through a retroactive, cumulative-effect adjustment as
of the beginning of the fiscal year, with a restatement of all prior interim
quarters in the year. Management has not completed its evaluation of the
effects, if any, that SAB 101 will have on its income statement presentation,
operating results, or financial position.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Quarter Ended September 30, 2000 Compared to Quarter Ended September 30, 1999:
Revenues for the three months ended September 30, 2000 approximated
$4.55 million, compared to $4.27 million in revenues for the three months ended
September 30, 1999, an increase of 6.6% or approximately $280,000. The increase
is attributable to new customers in the new markets with employed account
managers.
Revenues for the nine months ended September 30, 2000 approximated
$15.15 million, compared to $16.10 million in revenues for the nine months ended
September 30, 1999, a decrease of 5.93% or approximately $955,000. The decrease
is attributable to some one-time incentive sales in 1999 as well as the
Company's strategic decision to exit some low margin specialty accounts.
Cost of goods sold for the three months ended September 30, 2000
approximated $2.32 million, compared to approximately $2.26 million of cost of
goods sold for the three months ended September 30, 1999, an increase of 2.87%
or approximately $65,000. The increase in cost of goods sold was attributable to
the increase in revenues. As a percentage of revenues, cost of goods sold
decreased to 51.04% for the three months ended September 30, 2000, from 52.90%
for the three months ended September 30, 1999. The 1.86% decrease in the cost of
goods sold, as a percentage of revenues was principally attributable to a change
in product mix as well as the Company's decision to exit some low margin
specialty accounts.
Cost of goods sold for the nine months ended September 30, 2000
approximated $7.88 million, compared to approximately $8.57 million of cost of
goods sold for the nine months ended September 30, 1999, a decrease of 7.95% or
approximately $681,000. The decrease in cost of goods sold was attributable to
the decrease in revenues. As a percentage of revenues, cost of goods sold
decreased to 52.05% for the nine months ended September 30, 2000, from 53.19%
for the nine months ended September 30, 1999. The 1.14% decrease in the cost of
goods sold, as a percentage of revenues was principally attributable to a change
in product mix as well as the Company's strategic decision to exit some low
margin specialty accounts.
Selling, general, and administrative expense for the three months ended
September 30, 2000 approximated $2.28 million, compared to $2.18 million for the
three months ended September 30, 1999, an increase of 4.89% or approximately
$106,000. The increase in selling, general, and administrative expense was
principally attributable to the expansion of the internal sales force. As a
percentage of revenues, selling, general and administrative decreased to 50.14%
for the three months ended September 30, 2000, from 50.97% for the three months
ended September 30, 1999. The 0.83% decrease as a percentage of revenues was
principally attributable to the increased revenues generated by the internal
sales force.
Selling, general, and administrative expense for the nine months ended
September 30, 2000 approximated $6.84 million, compared to $6.72 million for the
nine months ended September 30, 1999, an increase of 1.75% or approximately
$118,000. As a percentage of revenues, selling, general and administrative
increased to 45.17% for the nine months ended September 30, 2000, from 41.76%
for the nine months ended September 30, 1999. The 3.41% increase as a percentage
of revenues were principally attributable to the continued expansion of the
Company's sales force and the costs associated with preparations to launch the
Company's efulfillment subsidiary.
Interest expense was approximately $83,000 for the three months ended
September 30, 2000, compared to $101,000 for the three months ended September
30, 1999, a decrease of approximately $18,000. For the nine months ended
September 30, 2000, interest expense was approximately $215,000 compared to
approximately $290,000 for the nine months ended September 30, 1999, a decrease
of approximately $75,000. The decrease in interest expense was primarily due to
a decreased average balance on the Company's line of credit and the reduction of
the Company's long-term debt. The average outstanding debt for the first nine
months in 2000 approximated $3.4 million compared to $4.7 million for the first
nine months in 1999. Additionally, the average interest rate for the first nine
months in 2000 approximated 8.32% compared to approximately 7.86% for the same
period in 1999.
Depreciation and amortization expense was approximately $191,000 for the
three months ended September 30, 2000, compared to $183,000 for the three months
ended September 30, 1999, an increase of 4.14% or approximately $8,000.
Depreciation and amortization expense was approximately $571,000 and $536,000
for the nine months ended September 30, 2000 and 1999 respectively, an increase
of 6.61% or approximately $35,000. The increase in depreciation and amortization
expense was principally attributable to the depreciation of newly acquired
assets in 1999 and 1998.
Income tax benefit was $145,500 for the nine months ended September 30,
2000, compared to an income tax benefit of $4,800 for the nine months ended
September 30, 1999. The provisions for income tax were calculated through the
use of estimated income tax rates based upon the income before taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity have been cash generated from
operating activities and amounts available under its existing credit facility.
The Company's primary uses of funds consist of financing inventory, receivables
and acquisitions.
The Company has adopted a growth strategy which will be accomplished
through increased efforts of the Company's existing highly trained sales force
in order to expand current market share and enter into new markets. The Company
has determined not to pursue development of an e-fulfillment business at this
time and has tabled its efforts to raise funds for that purpose.
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 short-term debt obligations. The Company's
credit facility is due and payable in full on July 30, 2001. Although the lender
has not issued a commitment to do so, the Company's relationship with its lender
is favorable and the Company anticipates that the credit facility will be
renewed when due.
On July 30, 1998 the Company entered into an agreement with Awards & Gifts,
Inc. ("Awards & Gifts") and Richard W. Terlau, Jr., providing for the purchase
of substantially all assets and certain liabilities of Awards & Gifts by the
Company. Under the terms of the Asset Purchase Agreement, the assets included
Awards & Gifts' customer list, machinery and equipment, inventories, Awards &
Gifts' intellectual property assets, prepaid expenses, and a real property
lease. The purchase price for the assets was $1.5 million with certain
adjustments made for pro-rated items, with $1.3 million paid in cash and a
$200,000 promissory note. The note is secured by an Irrevocable Standby Letter
of Credit issued by Branch Banking & Trust Company. The purchase price under the
Asset Purchase Agreement was determined by arm's length negotiations between the
parties based on the market value of the assets purchased and sold. The goodwill
acquired in this transaction will be amortized over fifteen years using the
straight-line method. The acquisition was financed with proceeds from the
Company's revolving credit facility with Branch Banking & Trust Company.
On October 1, 1998 the Company entered into an agreement with American
Awards & Gifts, Inc. ("American Awards and Gifts") and Frank G. and Judith J.
McGinnis, providing for the purchase of substantially all assets and certain
liabilities of American Awards & Gifts by the Company. Under the terms of the
Asset Purchase Agreement, the assets included American Awards & Gifts' customer
list, machinery and equipment, tools and dies, inventories, intellectual
property assets, and general intangibles, the liabilities included the
assumption of certain accounts payable. The purchase price for the assets was
$255,177 with $100,000 in cash and a $155,177 promissory note. The purchase
price under the Asset Purchase Agreement was determined by arm's length
negotiations between the parties based on the market value of the assets
purchased and sold. The goodwill acquired in this transaction will be amortized
over fifteen years using the straight-line method.
Management believes that present resources will meet anticipated
requirements for operations of its core business.
The Company does not anticipate any material expenditures out of the
ordinary course of business for property and equipment during the next twelve
months. There can be no assurance that the funds will be available.
The Company is aware of no trends or demands, commitments or uncertainties
that will result in, or that management believes are reasonably likely to result
in, the Company's liquidity increasing or decreasing in any material way. The
Company is aware of no legal or other contingencies, the effect of which are
believed by management to be reasonably likely to have a material adverse effect
on the Company's financial statements.
SEASONALITY
The Company's business is highly seasonal, with approximately 30% of its
revenues and most of its profits recorded in the months of November, December,
and January. As a result, the Company's working capital requirements are highest
during November and December when the combination of receivables and inventory
are at peak levels. The Company typically experiences losses in its second and
third quarters.
As the results of the Company's growth strategy develop, the effects of
seasonality should be diminished. The business segments on which the Company has
chosen to focus offer steadier revenue flows, as well as more consistent
requirements for working capital.
INFLATION
Although the Company cannot determine the precise effects of inflation,
inflation has an influence on the cost of the Company's products and services,
supplies, salaries, and benefits. The Company attempts to minimize or offset the
effects of inflation through increased sales volumes and sales prices, improved
productivity, alternative sourcing of products and supplies, and reduction of
other costs. The Company generally has been able to offset the impact of price
increases from suppliers by increases in the selling prices of the Company's
products and services.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-Q under "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
regarding matters that are not historical facts and "forward looking statements"
(as such term is defined in the Private Securities Litigation Reform Act of
1996) and because such statements involve risks and uncertainties, actual
results may differ materially from those expressed or implied by such
forward-looking statements. Those statements include remarks regarding the
intent, belief, or current expectations of the Company, its directors, or its
officers with respect to, among other things: (i) future operating cash flows;
and (ii) the Company's growth strategy, including the expansion of current
market share and the entrance into new markets. Prospective investors are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, and that actual results may
differ materially from those projected in the forward-looking statements as a
result of various factors. The accompanying information contained in this Form
10-Q, including without limitation and information set forth under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", identifies important factors that could cause such differences.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to the impact of interest rate changes on its debt
obligations. The Company is not exposed to foreign currency exchange rate risk
or investment risk.
Interest Rate Risk. The Company's exposure to market rate risk for changes
in interest rates relates primarily to the Company's short-term debt obligation
line of credit. The interest rate on this line of credit is prime plus 1/2
percent. The prime interest rate at September 30, 2000 was 9.50 percent. The
Company's line of credit is renewable and negotiable yearly. The fluctuation of
the interest rate may increase interest expense if the prime interest rate
increases before the line of credit could be renegotiated to a fixed rate loan.
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
The Company is not involved in any material pending legal proceedings,
other than ordinary, routine litigation incidental to its business.
ITEM 2: CHANGES IN SECURITIES
None
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5: OTHER INFORMATION
None
ITEM 6: EXHIBITS AND REPORTS ON FORM 8K
Exhibit Method
Number Description of filing
1 Underwriting Agreement 1
2 Agreement and Plan of Merger 1
3 (i) .1 Certificate of Incorporation 1
3 (i) .2 Certificate of Amendment to
Certificate of Incorporation 1
3 (ii) Bylaws 1
4.1 Form of Stock Certificate 1
4.2 Warrant Agreement 1
4.3 Form of Warrant Certificate 1
4.4 Form of Warrant-R.L. Renck & Company 3
*10 .1 1996 Incentive Stock Option Plan 1
*10.2 Employee Stock Option Plan 1
*10 .3 Non-Employee Director Stock Option Plan 1
*10.4 Amendment to 1996 Incentive
Stock Option Plan 2
*10.5 1997 Incentive Stock Option Plan 3
*10.6 Charles R. Davis' Performance
Option Agreement 2
10.7 First National Bank Loan Document 2
10.8 Branch Banking & Trust Loan Document 2
10.9 Asset Purchase Agreement Awards & Gifts 2
*10.10 1999 Stock Option Plan 4
*10.11 2000 Stock Option Plan 5
27 Financial Data Schedule 6
1. Incorporated by reference to the Company's registration statement on Form 10,
file number 0-21717, filed in Washington, D.C.
2. Incorporated by reference to the Company's registration statement of Form
10-Q for the quarter ended September 30, 1998, filed in Washington, D.C.
3. Incorporated by reference to the Company's registration statement of Form
10-K for the year ended December 31, 1998 filed in Washington, D. C.
4. Incorporated by reference to the Company's proxy statement, filed in
Washington D.C. on May 10, 1999.
5. Incorporated by reference to the Company's proxy statement, filed in
Washington D.C. on April 24, 2000.
6. Filed herewith.
*Compensatory Plan.
(b) Reports on Form 8-K
None
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CASCO INTERNATIONAL, INC.
Registrant
Date: November 9, 2000 By: /s/ Jeffrey A. Ross
-------------------
Jeffrey A. Ross
Principal Financial and
Accounting Officer