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
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ..................to........................
For the quarter ended September 30, 2001
Commission File Number 0-21717
CASCO INTERNATIONAL, INC.
-------------------------
(Exact Name of Registrant as specified in its charter)
Delaware 56-0526145
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13900 Conlan Circle, Suite 150, Charlotte, NC 28277
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code (704) 482-9591
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
-----------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO __.
The aggregate market value of the voting shares held by non-affiliates of the
Registrant as of November 9, 2001 was $3,388,695 (computed by reference to the
average bid and asked prices of such shares on such date).
Number of Common Shares, each with $0.01 par value, of the Registrant
outstanding as of date: November 9, 2001: 1,774,186 Common Shares.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CASCO INTERNATIONAL, INC.
BALANCE SHEETS
September 30, 2001 and December 31, 2000
ASSETS 2001 2000
------------ ------------
(unaudited)
Current Assets:
Cash ........................................ $ 1,263,681 $ 4,551
Accounts receivable ......................... 2,573,912 4,955,595
Inventory ................................... 4,463,516 4,316,076
Prepaid expenses ............................ 995,092 959,623
Deferred tax asset .......................... 102,000 102,000
----------- -----------
Total current assets ............ 9,398,201 10,337,845
Buildings and equipment:
Buildings ................................... 2,657,263 2,657,263
Equipment ................................... 3,640,467 3,537,335
----------- -----------
6,297,730 6,194,598
Less accumulated depreciation ............... (3,571,162) (3,137,550)
----------- -----------
2,726,568 3,057,048
Land ............................................. 111,468 111,468
----------- -----------
Total property and equipment, net 2,838,036 3,168,516
Other assets:
Cost in excess of net assets acquired, net of
accumulated amortization of $717,210 and
$615,471 respectively ....................... 2,168,859 2,270,598
Other ............................................ 779,752 767,167
----------- -----------
2,948,611 3,037,765
----------- -----------
TOTAL ASSETS ..................................... $ 15,184,848 $ 16,544,126
=========== ===========
The accompanying notes are an integral part of the financial statements.
CASCO INTERNATIONAL, INC.
BALANCE SHEETS
September 30, 2001 and December 31, 2000
LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2000
------------ -------------
(unaudited)
Liabilities:
Accounts payable ............................ $ 1,061,629 $ 488,726
Short-term debt obligations ................. 148,845 1,858,485
Accrued liabilities ......................... 138,972 329,858
Advanced deposits-current ................... 2,615,550 2,615,550
Accrued taxes payable ....................... -- 125,000
----------- ------------
Total current liabilities ....... 3,964,996 5,417,619
----------- ------------
Long-term debt ................................... 1,949,217 2,054,236
Advanced deposits-noncurrent ..................... 1,915,079 1,966,003
Deferred tax liability ........................... 557,875 519,775
----------- ------------
Total Liabilities ................................ 8,387,167 9,957,633
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 .............. 6,511,584 6,484,584
Retained earnings ........................... 286,293 102,105
----------- -----------
6,815,709 6,604,521
Less treasury stock, at cost 9,014 shares ... (18,028) (18,028)
----------- -----------
Total stockholders' equity ...... 6,797,681 6,586,493
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ....... $ 15,184,848 $ 16,544,126
=========== ===========
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, 2001 and 2000
Unaudited
Three Months Nine Months
------------------------ ---------------------------
2001 2000 2001 2000
--------- ----------- ------------ -----------
(RESTATED) (RESTATED)
Revenue $ 4,800,633 $ 4,551,050 $ 15,429,348 $ 15,148,564
Operating costs and expenses:
Cost of
goods sold 2,322,357 2,323,023 7,587,942 7,884,661
Selling, general
and
administrative 2,226,028 2,290,980 6,845,066 6,869,295
Depreciation and
amortization 175,108 190,531 550,373 571,125
--------- --------- --------- ----------
Total operating
costs and
expenses 4,723,493 4,804,534 14,983,381 15,325,081
Operating income (loss) 77,140 (253,484) 445,967 (176,517)
Other income and (expenses)
Interest expense (40,230) (83,233) (127,679) (214,609)
--------- --------- ---------- -----------
Total other income
and (expenses) (40,230) (83,233) (127,679) (214,609)
Income (loss) before
income taxes 36,910 (336,717) 318,288 (391,126)
Benefit (provision) for
income taxes (15,500) 135,100 (134,100) 157,500
--------- --------- --------- ----------
Net Income (loss) $ 21,410 $ (201,617) $ 184,188 $ (233,626)
========= ========= ========= ==========
EARNINGS PER SHARE BASIC
Net Income (loss) $ 0.01 $ (0.11) $ 0.10 $ (0.13)
========= ========= ========= ==========
EARNINGS PER SHARE DILUTIVE
Net Income (loss) $ 0.01 $ (0.11) $ 0.10 $ (0.13)
========= ========= ========= ==========
Weighted average common shares
outstanding - basic 1,774,186 1,783,200 1,774,186 1,783,200
========= ========= ========= ==========
Weighted average common shares
outstanding - dilutive 1,839,294 1,783,200 1,776,201 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, 2001 and 2000
Unaudited
2001 2000
----------- -----------
(RESTATED)
Cash flows from operating activities:
Net (loss) income ......................... $ 184,188 $ (233,626)
Adjustments to reconcile net (loss) income to cash
provided by operating activities:
Depreciation and amortization .......... 550,373 571,125
Deferred provision (benefit) ........... 38,100 (222,500)
Warrant compensation expense ........... 27,000 27,000
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable ................. 2,381,683 1,978,196
Inventory ........................... (147,440) 70,697
Prepaid expenses and other assets ... (63,076) (21,738)
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities 382,017 (647,856)
Taxes Payable ........................... (125,000) (355,000)
Advance deposits ........................ (50,924) 31,064
---------- ----------
Total adjustments ..................... 2,992,733 1,415,988
---------- ----------
Net cash provided by operating activities .......... 3,176,921 1,197,362
---------- ----------
Cash flows from investing activities:
Sale of equipment ............................. -- --
Payments for purchases of property and equipment (103,132) (288,481)
---------- ----------
Cash used in investing activities ................... (103,132) (288,481)
Cash flows from financing activities:
Proceeds from debt obligation ............. 13,962,517 13,962,517
Principal payments on debt ................ (15,777,176) (14,873,128)
----------- -----------
Cash used in financing activities .............. (1,814,659) (910,611)
Increase (decrease) in cash .................... 1,259,130 (1,730)
Cash, beginning of period ...................... 4,551 6,797
---------- -----------
Cash, end of period ............................ $ 1,263,681 $ 5,067
========== ==========
Other Cash Flow Information:
Cash payments during the year for:
Interest ............................... $ 118,476 $ 87,803
Income taxes, net of refunds ........... 322,200 420,000
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,
2000.
OPTIONS
During the nine months ended September 30, 2001, no options were granted
under the Company's 2000 Incentive Stock Option Plan. The Company has not
declared or paid any cash dividends on the Common Stock.
EARNINGS PER SHARE
Basic income per share is calculated as income available to common
stockholders divided by the weighted average of common shares outstanding.
Diluted earnings per share is calculated as diluted income available to common
stockholders divided by the diluted weighted average number of common shares.
Diluted weighted average number of common shares has been calculated using the
treasury stock method for Common stock equivalents, which includes Common Stock
issuable pursuant to stock options and Common Stock warrants. The following is
provided to reconcile the earnings per share calculations:
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
------- -------- ------- -------
(RESTATED) (RESTATED)
Income (loss) applicable to
common shares ............. $ 21,410 $ (201,617) $ 184,188 $(233,626)
========= ========= ========== =========
Weighted average common
Shares outstanding - basic 1,774,186 1,783,200 1,774,186 1,783,200
Effect of dilutive stock
options ................... 65,108 -- 2,015 --
--------- --------- --------- ---------
Weighted average shares
outstanding - diluted ..... 1,839,294 1,783,200 1,776,201 1,783,200
========= ========= ========= =========
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 reviewed
their policies for revenue recognition in comparison to the requirements in SAB
101and no change occurred to its income statement presentation, operating
results or financial position as a result of implementing SAB 101.
PRIOR PERIOD ADJUSTMENT
The financial statements and related notes have been restated to reflect
compensation expense, net of tax for warrants issued to R.L. Renck and Co., Inc.
for the three months and six months ended September 30, 2001and 2000. The impact
to the financial statements is as follows:
September 30, 2000
Three Months Ended Nine Months Ended
As filed Restated As filed Restated
---------- --------- -------- ---------
Operating Income (loss) $(244,484) $ (253,484) $ (149,517) $ (176,517)
Net income (loss) .......... $(196,617) $ (201,617) $ (218,626) $ (233,626)
Earnings (Loss) Per Share:
Basic .................... $ (0.11) $ (0.11) $ (0.12) $ (0.13)
Diluted ...................$ (0.11) $ (0.11) $ (0.12) $ (0.13)
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Quarter Ended September 30, 2001 Compared to Quarter Ended September 30, 2000:
Revenues for the three months ended September 30, 2001 approximated $4.80
million, compared to $4.55 million in revenues for the three months ended
September 30, 2000, an increase of 5.48% or approximately $250,000. The increase
is attributable to new customers in the new markets with employed account
managers, as well as increased revenues from existing customers.
Revenues for the nine months ended September 30, 2001 approximated $15.43
million, compared to $15.15 million in revenues for the nine months ended
September 30, 2000, an increase of 1.85% or approximately $280,000. The increase
is attributable to new customers in the new markets with employed account
managers, as well as increased revenues from existing customers.
Cost of goods sold for the three months ended September 30, 2001
approximated $2.32 million, compared to approximately $2.32 million for cost of
goods sold for the three months ended September 30, 2000. As a percentage of
revenues, cost of goods sold decreased to 48.38% for the three months ended
September 30, 2001, from 51.04% for the three months ended September 30, 2000.
The 2.67% decrease in the cost of goods sold, as a percentage of revenues was
principally attributable to the Company's decision to implement yearly price
increases to existing customers, as well as an increase in the number of new
accounts sold at the current price level and the continued exiting of low margin
custom accounts.
Cost of goods sold for the nine months ended September 30, 2001
approximated $7.59 million, compared to approximately $7.88 million for cost of
goods sold for the nine months ended September 30, 2000, a decrease of 3.76% or
approximately $290,000. The decrease in cost of goods sold was attributable to
the increase in the number of new accounts sold at the current price level and
the continued exiting of low margin custom accounts. As a percentage of
revenues, cost of goods sold decreased to 49.18% for the nine months ended
September 30, 2001, from 52.05% for the six months ended September 30, 2000. The
2.87% decrease in the cost of goods sold, as a percentage of revenues was
principally attributable to the Company's decision to implement yearly price
increases to existing customers, as well as an increase in the number of new
accounts sold at the current price level and the continued exiting of low margin
custom accounts.
Selling, general, and administrative expense for the three months ended
September 30, 2001 approximated $2.23 million, compared to $2.29 million for the
three months ended September 30, 2000, a decrease of 2.84% or approximately
$65,000. The decrease in selling, general, and administrative expense was
principally attributable to the Company's decision to outsource its marketing
functions and the reduction of the Company's employed account managers in
nonproducing markets. As a percentage of revenues, selling, general and
administrative decreased to 46.37% for the three months ended September 30,
2001, from 50.34% for the three months ended September 30, 2000. The 3.97%
decrease as a percentage of revenues was principally attributable to the
Company's decision to outsource its marketing functions, the elimination of the
costs associated with preparations to launch the Company's efulfillment
subsidiary in 2000, and the reduction of the Company's employed account managers
in nonproducing markets.
Selling, general, and administrative expense for the nine months ended
September 30, 2001 approximated $6.85 million, compared to $6.87 million for the
nine months ended September 30, 2000, a decrease of 0.35% or approximately
$20,000. As a percentage of revenues, selling, general and administrative
decreased to 44.36% for the nine months ended September 30, 2001, from 45.35%
for the nine months ended September 30, 2000. The 0.98% decrease as a percentage
of revenues were principally attributable to the Company's decision to outsource
its marketing functions, the elimination of the costs associated with
preparations to launch the Company's efulfillment subsidiary in 2000, and the
reduction of the Company's employed account managers in nonproducing markets,
offset by the increased costs associated with the potential merger with Davis
Holdings of North Carolina.
Interest expense was approximately $40,000 for the three months ended
September 30, 2001, compared to $83,000 for the three months ended September 30,
2000, a decrease of approximately $43,000. For the nine months ended September
30, 2001, interest expense was approximately $128,000 compared to approximately
$215,000 for the nine months ended September 30, 2000, a decrease of
approximately $87,000. 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 2001 approximated $2.1 million compared to $3.4 million for the first
nine months in 2000. Additionally, the average interest rate for the first nine
months in 2001 approximated 7.69% compared to approximately 8.32% for the same
period in 2000.
Depreciation and amortization expense was approximately $175,000 for the
three months ended September 30, 2001, compared to $191,000 for the three months
ended September 30, 2000, a decrease of 8.09% or approximately $15,000.
Depreciation and amortization expense was approximately $550,000 and $571,000
for the nine months ended September 30, 2001 and 2000 respectively, a decrease
of 3.63% or approximately $21,000.
Income Tax provision was $15,500 for the three months ended September 30,
2001 compared to an income tax benefit of $135,100 for the three months ended
September 30, 2000. Income tax provision was $134,100 for the nine months ended
September 30, 2001, compared to an income tax benefit of $145,500 for the nine
months ended September 30, 2000. 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 focuses on increased
efforts of the Company's existing sales force and the use of independent field
representatives in order to expand current market share and enter into new
markets.
The Company anticipates that operating cash flows during the next twelve
months, coupled with its ability to borrow under the credit facility, will cover
operating expenditures and meet the short-term debt obligations. The Company's
credit facility was due and payable in full on July 30, 2001. At September 30,
2001 the Company had 5,000,000 available on it's credit facility. The lender has
committed to extending the credit facility until April 15, 2003.
Current assets decreased approximately $940,000 due mostly from decreases
in accounts receivable ($2,382,000) offset by an increase in cash ($1,259,000)
and inventory ($147,000). The decrease in accounts receivable is due to the
seasonality of sales being greater in the fourth quarter due to holiday sales in
November and December. The increase in inventory is due to the build up of
inventory for the greater sales in the fourth quarter. Current liabilities
decreased approximately $1,453,000 due mostly from decreases in short-term debt
obligations ($1,720,000), and taxes payable ($125,000) offset by an increase in
accounts payable and accrued liabilities ($382,000). The decrease in short-term
debt obligations was due to the pay down of the line of credit from the excess
cash generated from operations. The increase in accounts payable was due to the
increased inventory purchases.
Cash increased approximately $1,259,000. Net cash provided from operating
activities was approximately $3,177,000. Net cash used in investing activities
was approximately $103,000 due to payments for purchases of new information
systems equipment and warehouse equipment. Net cash used by financing activities
was approximately $1,815,000, which was due to the reduction on the line of
credit.
The Company does not anticipate any material expenditures out of the
ordinary course of business for property and equipment during the next twelve
months. Management believes that present resources will meet anticipated
requirements.
On May 8, 2001 the Company announced that it has entered into an Agreement
and Plan of Merger with Davis Holdings of North Carolina, Inc. and Davis
Acquisition of North Carolina, Inc., (the "Davis Group"). The completion of the
merger will have an effect on the Company's liquidity and capital structure. The
Company is concerned with the uncertainty of the economy and the uncertainty of
the increased unemployment rates in recent months. If these trends would
continue it could affect the liquidity in an adverse way over an extended period
of time. The Company is aware of no legal or other contingencies, the effect of
which are believed by management to be reasonably likely to have a material
adverse effect on the Company's financial statements.
SEASONALITY
The Company's business is highly seasonal, with approximately 36% of its
revenues and most of its profits recorded in the months of November, December,
and January. As a result, the Company's working capital requirements are highest
during November and December when the combination of receivables and inventory
are at peak levels. The Company typically experiences losses in its second and
third quarters.
As the results 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.
CAUTIONARY STATEMENT
Statements included in this Management's Discussion and Analysis of
Financial Condition and Results of Operations, in other sections of this Annual
Report, and in future filings by the Company with the Securities and Exchange
Commission, in the Company's press releases and in oral statements made with the
approval of an authorized executive officer which are not historical or current
facts including, without limitation, its ability to grow through acquisition and
strategic alliances and through expanding its current market share and entering
new markets, the adequacy of the company's operating cash flows and its ability
to borrow under its credit facility to fund its current operations, the
Company's expectation with respect to expenditures for property and equipment,
and the Company's expectations with respect to the diminished effect of
seasonality on its business are "forward-looking statements" made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995 and are subject to certain risks and uncertainties that could cause actual
results to differ materially from historical results and those presently
anticipated or projected. Readers are cautioned not to place undue reliance on
any such forward-looking statements, which speak only as of the date made. The
following important factors, among others, in some cases have affected and in
the future could affect the Company's actual results and could cause the
Company's actual financial performance to differ materially from that expressed
in any forward-looking statement: (i) the continued downturn in the U.S. economy
and the increase in unemployment; (ii) the competitive conditions that currently
exist in the Company's industry, which could adversely impact sales and erode
gross margins (many of the Company's competitors are significantly larger and
better capitalized than the Company); (iii) restrictions in the Company's loan
agreements on the ability of the Company to engage in certain activities,
including the payment of dividends and requirements that the Company maintain
specified financial ratios, including a minimum capital base, and minimum pretax
profits from operations; and (iv) the inability to carry out marketing and sales
plans, would have a materially adverse impact on the Company's profitability.
The foregoing list should not be construed as exhaustive and the Company
disclaims any obligations subsequently to revise any forward-looking statements
to reflect events or circumstances after the date of such statements or to
reflect the occurrence of anticipated or unanticipated events.
ITEM 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 1/4
percent. The prime interest rate at September 30, 2001 was 6.00 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
The Davis Group has offered to acquire all of the outstanding shares of the
Company not currently held by them. A Special Committee of the outside directors
was formed to consider the offer and has recommend for approval the latest offer
of $2.10 per share for the outstanding shares of common stock not owned by
members of the Davis Group.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8K
(a) Exhibits.
None
(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, 2001 By: /s/ Jeffrey A. Ross
------------------------
Jeffrey A. Ross
Principal Financial and
Accounting Officer