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 June 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 August 11, 2000.
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<CAPTION>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CASCO INTERNATIONAL, INC.
BALANCE SHEETS
June 30, 2000 and December 31, 1999
ASSETS 2000 1999
------------- ------------
(unaudited)
<S> <C> <C>
Current Assets:
Cash ....................................... $ 1,767 $ 6,797
Accounts receivable ........................ 2,979,133 4,910,886
Inventory .................................. 4,615,867 4,714,063
Prepaid expenses ........................... 912,158 1,033,274
Deferred tax asset ......................... 102,000 102,000
------------ ------------
Total current assets ........... 8,610,925 10,767,020
Buildings and equipment:
Buildings .................................. 2,638,115 2,627,727
Equipment .................................. 3,389,255 3,223,615
------------ ------------
6,027,370 5,851,342
Less accumulated depreciation ............... (2,834,637) (2,540,828)
------------ ------------
3,192,733 3,310,514
Land ............................................. 111,468 111,468
------------ ------------
Total property and equipment, net 3,304,201 3,421,982
Other assets:
Cost in excess of net assets acquired, net of
accumulated amortization of $547,645 and
$479,819 respectively ....................... 2,338,424 2,406,250
Other ............................................ 762,130 748,376
------------ ------------
3,100,554 3,154,626
------------ ------------
TOTAL ASSETS ................................... $ 15,015,680 $ 17,343,628
============ ============
The accompanying notes are an integral part of the financial statements.
</TABLE>
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<TABLE>
<CAPTION>
CASCO INTERNATIONAL, INC.
BALANCE SHEETS
June 30, 2000 and December 31, 1999
Unaudited
LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999
------------ ------------
(unaudited)
<S> <C> <C>
Liabilities:
Accounts payable ............................ $ 376,118 $ 965,112
Short-term debt obligations ................. 1,428,281 2,500,465
Accrued liabilities ......................... 261,455 304,273
Advanced deposits-current ................... 1,854,785 1,854,785
Accrued taxes payable ....................... -- 355,000
------------ ------------
Total current liabilities ....... 3,920,639 5,979,635
------------ ------------
Long-term debt ................................... 2,121,188 2,189,716
Advanced deposits-noncurrent ..................... 2,303,959 2,402,975
Deferred tax liability ........................... 454,375 533,775
------------ ------------
Total Liabilities ............................... 8,800,161 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 ......................... (219,899) (197,891)
------------ ------------
Total stockholders' equity ...... 6,215,519 6,237,527
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ...... $ 15,015,680 $ 17,343,628
============ ============
The accompanying notes are an integral part of the financial statements.
</TABLE>
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<TABLE>
<CAPTION>
CASCO INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
For the three months and the six months ended June 30, 2000 and 1999
Unaudited
Three Months Six Months
---------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Revenue .......... $ 5,354,550 $ 5,869,358 $ 10,597,514 $ 11,834,881
Operating costs
and expenses:
Cost of goods
sold ..... 2,825,687 3,283,242 5,561,638 6,307,275
Selling,
general and
administrative 2,288,518 2,362,687 4,560,315 4,549,026
Depreciation and
amortization 191,619 179,230 380,594 352,755
---------- ---------- ---------- ----------
Total operating costs and
expenses 5,305,824 5,825,159 10,502,547 11,209,056
Operating income (loss) 48,726 44,199 94,967 625,825
Other income and (expenses)
Interest expense . (66,565) (87,751) (131,376) (189,109)
---------- ---------- ---------- ---------
Total other income and
(expenses) (66,565) (87,751) (131,376) (189,109)
Income (loss) before
income taxes . (17,839) (43,552) (36,409) 436,716
Benefit (provision) for
income taxes . 7,000 17,350 14,400 (174,750)
--------- --------- --------- ---------
Net Income (loss) $ (10,839) $ (26,202) $ (22,009) $ 261,966
========= ========= ========= =========
EARNINGS PER SHARE BASIC AND DILUTIVE
Net Income (loss) $ 0.00 $ (0.01) $ (0.01) $ 0.15
========= ========= ========= =========
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.
</TABLE>
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<TABLE>
<CAPTION>
CASCO INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
For the six months ended June 30, 2000 and 1999
Unaudited
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss)income............................. $ (22,009) $ 261,966
Adjustments to reconcile net(loss) income to cash
provided by operating activities:
Depreciation and amortization............. 380,594 352,755
Deferred provision (benefit).............. (79,400) 174,750
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable.................... 1,931,753 2,264,742
Inventory 98,196 269,300
Prepaid expenses and other assets...... 88,404 50,706
Increase (decrease)in liabilities:
Accounts payable and accrued liabilities (631,812) (1,068,364)
Taxes Payable (355,000) --
Advance deposits . .................... (99,016) (479,728)
---------- -----------
Total adjustments..................... 1,333,719 1,564,161
---------- -----------
Net cash provided by operating activities......... 1,311,710 1,826,127
---------- -----------
Cash flows from investing activities:
Payments for purchases of property........... (176,208) (228,365)
and equipment
---------- -----------
Cash used in investing activities ................ (176,028) (228,365)
Cash flows from financing activities:
Proceeds from debt obligation................ 9,738,312 9,228,645
Principal payments on debt .................. (10,879,024) (10,886,730)
------------ ------------
Cash used in financing activities................. (1,140,712) (1,658,085)
Increase (decrease) in cash ....... .............. (5,030) (60,323)
Cash, beginning of period......................... 6,797 107,482
------------ ------------
Cash, end of period............................... $ 1,767 $ 47,159
============ ============
Other Cash Flow Information:
Cash payments during the year for
Interest . ................................. $ 146,400 $ 189,131
Income taxes, net of refunds................ 420,000 --
The accompanying notes are an integral part of the financial statements
</TABLE>
<PAGE>
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 consolidated 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 June 30, 2000, options were granted under
the Company's 1999 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 June 30, 2000 was $3.344 and $3.634 respectively.
Date Shares
Granted or Reserved and Exercise
Issued Exercisable Price
------------------------------ ---------------- ----------------------
NON-QUALIFIED STOCK OPTION PLAN
May 30, 2000 .................. 15,000 $ 2.875
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Quarter Ended June 30, 2000 Compared to Quarter Ended June 30, 1999:
Revenues for the three months ended June 30, 2000 approximated $5.35
million, compared to $5.87 million in revenues for the three months ended June
30, 1999, a decrease of 8.77% or approximately $515,000. The decrease is
attributable to some one-time incentive sales in 1999 as well as the Company's
decision to exit some low margin specialty accounts.
Revenues for the six months ended June 30, 2000 approximated $10.60
million, compared to $11.83 million in revenues for the six months ended June
30, 1999, a decrease of 10.46% or approximately $1.24 million. 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 June 30, 2000
approximated $2.83 million, compared to approximately $3.28 million of cost of
goods sold for the three months ended June 30, 1999, a decrease of 13.94% or
approximately $458,000. 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 52.77% for the three months ended June 30, 2000, from 55.94% for
the three months ended June 30, 1999. The 3.17% 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.
<PAGE>
Cost of goods sold for the six months ended June 30, 2000 approximated
$5.56 million, compared to approximately $6.31 million of cost of goods sold for
the six months ended June 30, 1999, a decrease of 11.82% or approximately
$746,000. 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 52.48%
for the six months ended June 30, 2000, from 53.29% for the six months ended
June 30, 1999. The 0.81% decrease in the cost of goods sold, as a percentage of
revenues was principally attributable to the Company's strategic decision to
exit some low margin specialty accounts.
Selling, general, and administrative expense for the three months ended
June 30, 2000 approximated $2.29 million, compared to $2.36 million for the
three months ended June 30, 1999, a decrease of 3.14% or approximately $74,000.
The decrease in selling, general, and administrative expense was principally
attributable to the decrease in commissions due to the decrease in revenues. As
a percentage of revenues, selling, general and administrative increased to
42.74% for the three months ended June 30, 2000, from 40.30% for the three
months ended June 30, 1999. The 2.49% 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.
Selling, general, and administrative expense for the six months ended
June 30, 2000 approximated $4.56 million, compared to $4.55 million for the six
months ended June 30, 1999, an increase of 0.25% or approximately $11,000. As a
percentage of revenues, selling, general and administrative increased to 43.03%
for the six months ended June 30, 2000, from 38.44% for the six months ended
June 30, 1999. The 4.59% 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 $66,500 for the three months ended
June 30, 2000, compared to $88,000 for the three months ended June 30, 1999, a
decrease of approximately $21,500. For the six months ended June 30, 2000,
interest expense was approximately $131,000 compared to approximately $189,000
for the six months ended June 30, 1999, a decrease of approximately $58,000. 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 six months in 2000 approximated
$3.311 million compared to $4.95 million for the first six months in 1999.
Additionally, the average interest rate for the first six months in 2000
approximated 8.23% compared to approximately 7.83% for the same period in 1999.
Depreciation and amortization expense was approximately $192,000 for
the three months ended June 30, 2000, compared to $179,000 for the three months
ended June 30, 1999, an increase of 6.91% or approximately $12,000. Depreciation
and amortization expense was approximately $381,000 and $353,000 for the six
months ended June 30, 2000 and 1999 respectively, an increase of 7.89% or
approximately $28,000. The increase in depreciation and amortization expense was
principally attributable to the depreciation of newly acquired assets in 1998.
Income tax benefit was $14,400 for the six months ended June 30, 2000,
compared to an income tax expense of $174,750 for the six months ended June 30,
1999. The provisions for income tax were calculated through the use of estimated
income tax rates based upon the income before taxes.
<PAGE>
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. Pending
raising the necessary capital, the Company is also preparing to launch the
Company's efulfillment business.
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 exclusive of
expenditures required by the Company's proposed efulfillment business. 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. Additional capital will be
required to launch the Company's efullfillment business.
<PAGE>
The Company does not anticipate any material expenditures out of the
ordinary course of business for property and equipment during the next twelve
months, excluding any expenditures required to launch the Company's efulfillment
business. The Company intends to continue its efforts to raise capital for that
purpose. 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.
<PAGE>
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;
(ii) the Company's financing plans, (iii) the Company's growth strategy,
including the expansion of current market share and the entrance into new
markets, and (iv) the Company's plans to raise funds to capitalize its
efulfillment business. 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 June 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.
<PAGE>
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 Company has terminated the engagement of an investment banker,
which was to have raised $25 million to fund the Company's
efulfillment business. However, the Company intends to continue
its efforts to raise capital for that purpose. There can be no
assurance that the funds will be available.
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
<PAGE>
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: August 11, 2000 By: /s/ Jeffrey A. Ross
-------------------
Jeffrey A. Ross
Principal Financial and
Accounting Officer
