10-K/A 1 tenkrevisededgarvtwo.txt 10-K/A AMENDMENT NO. 2 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A (AMENDMENT NO. 2) -------------------------------------------- (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ..................to......................... 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 . Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting shares held by non-affiliates of the Registrant as of March 29, 2001 was $3,009,150 (computed by reference to the average bid and asked prices of such shares on such date). Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. CLASS OUTSTANDING AT MARCH 29, 2001 ----- ----------------------------- Common Stock, par value $0.01 per share 1,774,186 DOCUMENTS INCORPORATED BY REFERENCE None. Note: The purpose of this amendment is due to SEC Staff comments to a Proxy Statement filed by the Company.

*In 1996, the Company changed its method of accounting for the recognition of revenues relating to advanced deposits. Effective with the change, revenues are recognized over the course of the programs based on the Company's historical and expected redemption percentages. The effect of the accounting change in 1996 was to increase income before income taxes and cumulative effect of change in accounting principle by $209,190. **The financial statements have been restated for the effect of warrants. See financial statement notes for additional information. The Company has not declared or paid any cash dividends on the Common Stock since it was spun off from Pages, Inc. at the close of business on December 31, 1996. BALANCE SHEET DATA: Working capital $ 4,920 $ 4,787 $ 4,606 $ 7,202 $ 5,025 Total assets 16,544 17,344 18,843 16,148 18,249 Long-term debt 2,054 2,190 2,413 4,900 4,125 Stockholders' equity 6,586 6,250 5,880 5,188 3,328 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Selected Financial Data and the Financial Statements and Notes contained elsewhere herein. The Company's results of operations have been, and in certain cases are expected to continue to be, affected by certain general factors. CAUTIONARY STATEMENT Statements included in this Management's Discussion and Analysis of Financial Condition and Results of Operations, in other sections of this Annual Report, and in future filings by the Company with the Securities and Exchange Commission, in the Company's press releases and in oral statements made with the approval of an authorized executive officer which are not historical or current facts including, without limitation, not discussed its ability to grow through acquisition and strategic alliances and through expanding its current market share and entering new markets, the adequacy of the company's cash resources to fund its current operations, the decreased effect of seasonality on the Company the anticipated renewal of the Company's credit facility, 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 competitive conditions that currently exist in the Company's industry, which could adversely impact sales and erode gross margins; (ii) many of the Company's competitors are significantly larger and better capitalized than the Company; (iii) the Company's loan agreement contains a number of significant covenants that restrict the ability of the Company to engage in certain activities, including the payment of dividends and requires that the Company maintain specified financial ratios, including a minimum capital base, and minimum pretax profits from operations; and (iv) the inability to carry out marketing and sales plans would have a materially adverse impact on the Company's profitability. The foregoing list should not be construed as exhaustive and the Company disclaims any obligations subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. RESULTS OF OPERATIONS The table below sets forth certain financial data expressed as a percentage of revenues (Percentage may not total 100% due to rounding):

YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999. Revenues for the year ended December 31, 2000 approximated $23.5 million, compared to $24.2 million in revenues for the year ended December 31, 1999, a decrease of 2.7% or approximately $654,000. The decrease is attributable to one-time incentive sales in 1999 that did not repeat in 2000 as well as the Company's strategic decision to exit some low margin specialty accounts and the continued decline in the holiday revenue. Cost of goods sold for the year ended December 31, 2000 approximated $12.6 million, compared to approximately $13.3 million of cost of goods sold for the year ended December 31, 1999, a decrease of 5.1% or approximately $683,000. 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 54% in 2000 from 55% in 1999. The 1.0% decrease in cost of goods sold was principally attributable to a change in product mix, as well as increased sales in new programs. Selling, general, and administrative expense for the year ended December 31, 2000 approximated $9.3 million, compared to approximately $9.2 million for the year ended December 31, 1999, an increase of 1.4% or approximately $124,000. The increase in selling, general and administrative expenses was due to the expansion of the employee based sales force as well as the expansion of the marketing department. As a percentage of revenues, selling, general and administrative increased to 39.5% in 2000 from 37.9% in 1999. The 1.6% increase as a percentage of revenues was principally attributable to the expansion of the employee based sales force into new markets . Interest expense was approximately $302,000 for the year ended December 31, 2000, compared to $372,000 for the year ended December 31, 1999, a decrease of 18.9% or approximately $70,500. The decrease was attributable to a lower average outstanding debt by month in 2000. The average outstanding debt by month in 2000 approximated $3.6 million compared to $4.7 million for 1999. Additionally, the average interest rate for 2000 approximated 8.39% compared to approximately 7.94% for 1999. Depreciation and amortization expense was approximately $761,300 for the year ended December 31, 2000, compared to $722,100 for the year ended December 31, 1999, an increase of 5.43% or approximately $39,200. The increase in depreciation and amortization expense was principally attributable to the depreciation of newly acquired assets in 1999 and 1998. Income tax provision was $238,000 for the year ended December 31, 2000, compared to an income tax provision of $281,000 for the year ended December 31, 1999. The provisions for income tax were calculated through the use of estimated income tax rates based upon the income before income taxes. YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998. Revenues for the year ended December 31, 1999 approximated $24.2 million, compared to $21.7 million in revenues for the year ended December 31, 1998, an increase of 11.4% or approximately $2.5 million. The increase is attributable to strong retention of existing customers coupled with new customers in the new markets with employed recognition consultants and the acquisitions made by the Company in 1998. Cost of goods sold for the year ended December 31, 1999 approximated $13.3 million, compared to approximately $12.7 million of cost of goods sold for the year ended December 31, 1998, an increase of 4.7% or approximately $601,000. The increase in cost of goods sold was attributable to the increase in revenues. As a percentage of revenues, cost of goods sold decreased to 55% in 1999 from 58.6% in 1998. The 3.6% decrease in cost of goods sold was principally attributable to a change in product mix, an improved purchasing strategy and systems, as well as the increased sales in new programs. Selling, general, and administrative expense for the year ended December 31, 1999 approximated $9.2 million for the year ended December 31, 1999, compared to approximately $8.4 million for the year ended December 31, 1998, an increase of 9.4% or approximately $789,000. The increase in selling, general and administrative expenses was due to increased sales and the expansion of the employee based sales force. As a percentage of revenues, selling, general and administrative decreased to 37.9% in 1999 from 38.6% in 1998. The 0.9% decrease as a percentage of revenues was principally attributable to benefits obtained from aggressive cost containment policies and efficiencies gained from the new computer processing system. Interest expense was approximately $372,000 for the year ended December 31, 1999, compared to $336,000 for the year ended December 31, 1998, an increase of 10.9% or approximately $36,000. The increase was attributable to the interest on the Company's line of credit which was used to finance the acquisitions in 1998. The average outstanding debt by month in 1999 approximated $4.7 million compared to $3.4 million for 1998. Additionally, the average interest rate for 1999 approximated 7.94% compared to approximately 8.91% for 1998 on the debt. Depreciation and amortization expense was approximately $722,100 for the year ended December 31, 1999, compared to $520,000 for the year ended December 31, 1998, an increase of 38.9% or approximately $202,100. The increase in depreciation and amortization expense was principally attributable to the depreciation of newly acquired assets in 1997 and 1998. The increase was also attributable to the amortization of the goodwill on the acquisitions made by the Company in 1998. Income tax provision was $281,000 for the year ended December 31, 1999, compared to an income tax benefit of $145,500 for the year ended December 31, 1998. The provisions for income tax were calculated through the use of estimated income tax rates based upon the income (loss) before income taxes. 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 increased to $4,920,000 as of December 31, 2000 from net working capital of $4,787,000 as of December 31, 1999. The increase was primarily attributed to the Company's ability to pay down its line of credit during 2000. The Company has adopted a growth strategy which will be accomplished through increased efforts of the Company's existing highly trained sales force and the use of independent field representatives in order to expand current market share and enter into new markets. As a result of a change in market conditions, the Company discontinued its efforts to enter the e-fulfillment 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 the 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. Current assets decreased approximately $429,000 due mostly from decreases in inventory ($398,000). The decrease in inventory is due to an improved purchasing strategy coupled with an improved processing and inventory ordering system. Current liabilities decreased approximately $562,000 due mostly from decreases in short-term debt obligations ($642,000), and accounts payable and accrued liabilities ($451,000), and taxes payable ($230,000) offset by an increase of advance deposits ($760,765). The decrease in short-term debt obligations was due to the pay down of the line of credit from the excess cash generated from operations. The decrease in accounts payable was due to the decreased inventory purchases. The increase in advance deposits was due to the change in the mix of prepaid deposits from noncurrent to current. Cash decreased approximately $2,200. Net cash provided from operating activities was approximately $1,145,000. Net cash used in investing activities was approximately $352,000 due to payments for purchases of new information systems. Net cash used by financing activities was approximately $795,000, which was due to the reduction on the line of credit and the purchase of 9,014 shares of Company stock at $2 per share. The Company does not anticipate any material expenditures for property and equipment during the next twelve months, out of the ordinary course of business. Management believes that present resources will meet anticipated requirements for its current operations. The Company is aware of no trends or demands, commitments or uncertainties that will result in, or that management believes are reasonably likely to result in, the Company's liquidity increasing or decreasing in any material way in the short term. 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 from the Company's growth strategy develop, the effects of seasonality should be diminished. The business segments on which the Company has chosen to focus offer steadier revenue flows, as well as more consistent requirements for working capital. INFLATION Although the Company cannot determine the precise effects of inflation, inflation has an influence on the cost of the Company's products and services, supplies, salaries, and benefits. The Company attempts to minimize or offset the effects of inflation through increased sales volumes and sales prices, improved productivity, alternative sourcing of products and supplies, and reduction of other costs. The Company generally has been able to offset the impact of price increases from suppliers by increases in the selling prices of the Company's products and services. CASCO INTERNATIONAL, INC. INDEX TO FINANCIAL STATEMENTS Page Independent Auditors' Report-- 29 Hausser + Taylor LLP - for the years ended December 31, 2000, 1999 and 1998. Statements of operations-- 30 Years ended December 31, 2000, 1999 and 1998. Balance sheets-- 31 December 31, 2000 and December 31, 1999. Statements of cash flows-- 33 Years ended December 31, 2000, 1999 and 1998. Statements of stockholders' equity-- 34 Years ended December 31, 2000, 1999 and 1998. Notes to the financial statements-- 35 Years ended December 31, 2000, 1999 and 1998. Financial Statement Schedule 27 Schedule II - Valuation and Qualifying Accounts and Reserves All other schedules are omitted, not applicable under the related instructions, and therefore have been omitted. REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholders of CASCO INTERNATIONAL, INC. Shelby, North Carolina We have audited the accompanying balance sheets of CASCO INTERNATIONAL, INC., (the "Company"), as of December 31, 2000 and 1999, and the related statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. Our audits also included the financial statement schedule listed in the Index to the Financial Statements. These financial statements and financial statement schedule 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 auditing standards generally accepted in the United States of America. 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 and financial statement schedule present fairly, in all material respects, the financial position of the Company as of December 31, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United Sates of America. As discussed in Note 11 to the financial statements, these financial statements have been restated for the accounting for warrants issued to a non-employee. /s/ Hausser + Taylor LLP Columbus, Ohio March 19, 2001, except for Note 11 as to which the date is October 18, 2001

The accompanying notes are an integral part of the financial statements.

The accompanying notes are an integral part of the financial statements.

The accompanying notes are an integral part of the financial statements.

The accompanying notes are an integral part of the financial statements.

The accompanying notes are an integral part of the financial statements. CASCO INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 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 identified in the agreements in accordance with Accounting Principles Board ("APB") No. 16, "Business Combination". On July 30, 1998 the Company entered into an agreement with Awards & Gifts, Inc. and Richard W. Terlau, Jr., providing for the purchase of substantially all assets of Awards & Gifts by the Company. The Company utilized purchase accounting for this acquisition. Under the terms of the Asset Purchase Agreement, the assets included Awards & Gifts customer list, machinery and equipment, inventories, and an assumption of a real property operating lease. The purchase price for the assets was $1.5 million with certain adjustments made for pro-rated items, with $1.3 million in cash and a $200,000 promissory note. The note is secured by an Irrevocable Standby Letter of Credit issued by Branch Banking & Trust Company. The purchase price under the Asset Purchase Agreement was determined by arm's length negotiations between the parties based on the fair market value of the assets purchased and sold. The goodwill acquired in this transaction will be amortized over fifteen years using the straight-line method. The acquisition was financed with proceeds from its revolving credit facility with Branch Banking & Trust Company. The Buyer and the Seller mutually agreed on the following allocation of the purchase price among the Assets: Seller (1) Adjustments (2) Buyer (3) Inventory $335,944 $ (213,112) $122,832 Computer Equipment 28,572 (18,572) 10,000 Office Equipment --- 10,000 10,000 Furniture and Fixtures --- 30,000 30,000 Goodwill --- 1,326,633 1,326,633 (1) Represents Awards & Gifts financial statement (2) Represents adjustments to record assets acquired at fair market value at date of acquisition. Goodwill was recorded for the difference between the purchase price and the fair market value of assets acquired. (3) Represents the Company. None of the Seller's liabilities were assumed by the Buyer. On October 1, 1998 the Company entered into an agreement with American Awards & Gifts, Inc. and Frank G. and Judith J. McGinnis, providing for the purchase of substantially all assets of American Awards & Gifts, Inc. by the Company. The Company utilized purchase accounting for this acquisition. Under the terms of the Asset Purchase Agreement, the assets included American Awards & Gifts customer list, machinery and equipment, tools and dies, and inventories. 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 fair 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 Buyer and the Seller mutually agreed on the following allocation of the purchase price among the Assets: Seller (4) Adjustments (5) Buyer (6) Inventory $ --- $1,500 $1,500 Tools & Dies --- 12,000 12,000 Furniture and Fixtures --- 30,000 30,000 Non-Competition Agreement --- 36,000 36,000 Goodwill --- 195,677 195,677 (4) Represents American Awards & Gifts financial statements which were maintained on a cash basis. (5) Represents adjustments to record assets acquired at fair market value at date of acquisition. Goodwill was recorded for the difference between the purchase price and the fair market value of assets acquired. (6) Represents the Company. None of the Seller's liabilities were assumed by the Buyer. USE OF MANAGEMENT ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires that management make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. The reported amounts of revenues and expenses during the reporting period may be affected by the estimates and assumptions management is required to make. Actual results could differ from those estimates. REVENUE RECOGNITION Revenues from the sale of incentive awards are generally recognized upon shipment and delivery of the related merchandise except for revenue recognized for advanced deposits for certain programs. Advance deposits are recognized upon shipment and delivery of the related goods. Additionally, management has estimated, based on prior experience, the percentage of programs that will never ship. These revenues are recognized as revenue over the contract period. Revenues from services are insignificant. Returns from the sales of incentive awards and from services are insignificant. ADVANCE DEPOSITS The Company receives cash advance deposits from customers for several of its incentive programs. These advance deposits represent deferred revenue which will be recorded in accordance with the revenue recognition policy as noted above. The following summarizes the activity in the advance deposit accounts for the years ended December 31, 2000, 1999 and 1998, respectively: 2000 1999 1998 Balance beginning of year $4,257,760 $4,579,759 $4,509,988 Cash receipts 3,608,635 3,629,535 3,529,062 Revenue recognized (3,284,842) (3,951,534) (3,459,291) ---------- ---------- ----------- Balance end of year $4,581,553 $4,257,769 $4,579,759 ========== ========== ========== Advance deposits, end of year: Current $2,615,550 $1,854,785 $1,926,406 Long-term 1,966,003 2,402,975 2,653,353 Total $4,581,553 $4,257,760 $4,579,759 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. The Company has not provided any allowance for sales, returns and allowances based on management's estimates of collection. Returns from the sales of incentive awards and from services are insignificant. The Company has elected to record bad debts using the direct write-off method. Generally Accepted Accounting Principles require that the allowance method be used to recognize bad debts; however, Management believes that the amounts of accounts receivable that are directly written off are not material. The amount of direct write-offs were $46,872, $13,990 and $28,958 at December 31, 2000, 1999 and 1998 respectively. INVENTORY Inventory consists of general retail merchandise. Inventory is valued at the lower of cost or market using the first-in, first-out (FIFO) method. PREPAID EXPENSES Prepaid expenses at December 31, 2000 and 1999 include $651,076 and $629,263, respectively, of prepaid selling costs that include costs for commissions paid to sales people that relate to advanced deposits for the sales of incentive and recognition awards programs. Such costs are directly attributable to obtaining specific future commitments and are expensed in the year the related revenue is recorded. BUILDINGS AND EQUIPMENT Buildings and equipment are recorded at cost and depreciated over their estimated useful life on the straight-line method. Estimated useful lives range from three to thirty-one years. Major repairs and betterments are capitalized; minor repairs are expensed as incurred. Depreciation expense for the years ended December 31, 2000, 1999 and 1998, totaled $605,667, $566,424, and $438,681, 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 and 15 years. Management periodically evaluates its accounting for cost in excess of net assets acquired by considering such factors as historical performance, current operating results and future operating income. At each balance sheet date, the Company evaluates the realizability of cost in excess of net assets acquired based upon estimated nondiscounted cash flows. Based upon its most recent analysis, the Company believes that no material impairment of cost in excess of net assets acquired exists at December 31, 2000. Based on this periodic review, management believes that the carrying value of cost in excess of net assets acquired is reasonable and the amortization period is appropriate. Amortization expense on cost in excess of net assets acquired for the years ended December 31, 2000, 1999 and 1998 totaled $135,650 $135,650 and $77,274, respectively. Other assets include cash surrender value of life insurance, deferred loan costs and non-compete agreements. The deferred loan costs are amortized using the straight line method over the terms of the related contracts. Amortization expense totaled $20,030, $20,030, and $7,071, for the years ended December 31, 2000, 1999 and 1998, respectively. INCOME TAXES The Company utilizes Statement of Financial Accounting Statements ("SFAS") No. 109, "Accounting for Income Taxes". Under SFAS No. 109, the liability method is used in accounting for income taxes. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. PROFIT SHARING PLANS The Company has a noncontributory profit sharing retirement plan (the "Plan"), covering a significant number of employees for which accrued costs are funded. Company contributions to the Plan are discretionary. There were no Company contributions for the years ended December 31, 2000, 1999 and 1998. LONG-LIVED ASSETS The Company utilizes SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" which required adoption in 1996. The general requirements of SFAS No. 121 apply to the fixed and intangible assets of the Company and require impairment to be considered whenever assets are disposed of or whenever events or change in circumstances indicate that the carrying amount of the asset will not be recoverable based on expected future cash flows of the asset. The Company periodically evaluates the recoverability of long-lived assets and measures the amount of impairment if any. There were no impairment adjustments at December 31, 2000, 1999 and 1998. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value of amounts reported in the financial statements have been determined using available market information and valuation methodologies, as applicable. The carrying value of all current assets and liabilities approximates the fair value because of their short term nature. The fair values of non-current assets and liabilities approximate their carrying value based on current market prices. STOCK-BASED COMPENSATION The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations in accounting for its employee stock options. Under APB 25, because the exercise prices of employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recorded. The company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation". For stock based compensation other than employees, the Company utilizes the fair value method as provided for in FASB #123. 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 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 101 and no change occurred to its income statement presentation, operating results or financial position as a result of implementing SAB 101. 2. STOCK OPTIONS AND WARRANTS At December 31, 2000, 935,000 common shares of the Company were reserved for issuance under the incentive stock option plans, 40,000 shares were reserved under the non-employee director stock option plans and 1,620,000 shares were reserved under outstanding warrants. The 2000 option plan of 100,000 shares includes both employees and directors. The 1999 option plan of 600,000 shares includes both employees and directors. Additionally, 200,000 common shares of the Company were reserved under a performance option plan for the President. December 31, 2000 December 31, 1999 ------------------------ ---------------------- Weighted Average Weighted Average Incentive Stock Option Plan Number Exercise Price Number Exercise Price Outstanding, beginning ------ -------------- ------ -------------- of year 601,140 $2.0212 273,140 $2.8001 Granted 66,000 $2.7347 421,500 $1.7649 Canceled 117,360 $2.1302 93,500 $2.3529 Exercised None ----- None ----- ---------------------- ----------------------- Outstanding, end of year 549,780 $2.2177 601,140 $2.1438 ---------------------- ----------------------- Exercise price range of options outstanding $1.0000 $1.0000 to to $4.2400 $3.7037 Non-Employee Director Option Plan Outstanding, beginning of year 220,800 $2.0212 55,800 $2.8094 Granted 10,000 $4.1250 180,000 $1.7500 Canceled None ----- 15,000 $2.0000 Exercised None ----- None ----- ---------------------- ----------------------- Outstanding, end of year 230,800 2.1124 220,800 $2.0212 ---------------------- ----------------------- Exercise price range of options outstanding $1.75 $1.75 to to $4.17 $4.17 The weighted average remaining life on options outstanding at December 31, 2000 is 4.19 years. The incentive stock options are exercisable at the fair market value on the date of grant, and were available from the 1996, 1997, 1999 and 2000 stock option plans. The options outstanding at December 31, 2000 are exercisable from January 17, 2002, through July 31, 2005. The non-employee Director options are exercisable at the fair market value on the date of grant. The non-employee Director options outstanding at December 31, 2000 are exercisable through October 12, 2003. Warrants to purchase 1,560,000 shares of CASCO INTERNATIONAL, INC. common stock were issued in September 1997 as part of the unit offering. The warrants are exercisable for five years from the date of issuance at $5.50 per share. Warrants to purchase 30,000 shares of CASCO International, Inc., common stock were issued February 28, 1998 to R. L. Renck & Co., Inc. The Warrants vest at 2,500 per month commencing on February 28, 1998 and continuing through January 31, 1999 at an exercise price of $3.00 per share. The warrants are exercisable for five years from the date of issuance. The warrants are valued at the fair market value of the common stock at the date of grant. Additional warrants to purchase 30,000 shares of CASCO International, Inc., common stock were issued June 27, 1999 to R. L. Renck & Co., Inc. The warrants vest at 10,000 shares on June 27, 1999 then at a rate of 2,500 shares per month from June 27, 1999 to February 26, 2000 at an exercise price of $2.75 per share. The warrants are exercisable for five years from the date of issuance. The fair market value of common stock at the date of grant was $1.94. For the R. L. Renck & Co., Inc. warrants, compensation cost, net of tax, of $22,484 and $18,864 was recorded for the years ended December 31, 2000 and 1999, respectively. Proceeds Date Granted or Shares Exercise to Company Issued Exercisable Price Upon Exercise --------------- ----------- -------- ------------- Incentive Stock Options: -------------- 1996 Plan January 17, 1997 14,580 $3.7037 $54,000 1996 Plan March 26, 1997 5,400 3.7037 20,000 1996 Plan March 12, 1997 37,800 3.2407 122,498 1997 Plan December 29, 1997 7,000 3.0625 21,438 1997 Plan January 20, 1998 60,000 2.8750 172,500 1997 Plan March 3, 1998 20,000 2.8125 56,250 1997 Plan April 1, 1998 5,000 3.5000 17,500 1997 Plan October 12, 1998 5,000 1.0000 5,000 1997 Plan May 27, 1999 349,000 1.7500 610,750 1999 Plan January 19, 2000 20,000 2.0600 41,200 1999 Plan February 1, 2000 20,000 2.1300 42,600 1999 Plan April 25, 2000 1,000 4.2400 4,240 2000 Plan July 31, 2000 5,000 2.6100 13,050 Non-Employee Director Options: ---------------- 1996 Plan June 25, 1997 10,800 $4.1667 45,000 1996 Plan January 20, 1998 30,000 2.8750 86,250 1997 Plan May 27, 1999 180,000 1.7500 315,000 1999 Plan April 5, 2000 10,000 4.1300 41,300 Warrants: --------- September 19, 1997 1,560,000 $5.50 8,580,000 February 28, 1998 30,000 3.00 90,000 June 27, 1999 30,000 2.75 82,500 --------- ------- --------- Total 2,400,580 $10,421,076 ========= =========== Pro forma information regarding net income and earnings per share is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholl's option pricing model with the following weighted average assumptions for 2000, 1999, and 1998. 2000 1999 1998 ---- ---- ---- Risk-free interest rate 6% 6% 6% Dividend yield 0% 0% 0% Volatility factor 105.0% 104.4% 107.7% Weighted average expected life in years 3.3 5 5 For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma net income (loss) and earnings per share were as follows: 2000 1999 1998 ---- ---- ---- (Restated) (Restated) Net income as reported $318,510 $338,981 $692,266 Net income-pro forma 299,813 315,253 623,266 Income per common share - as reported $ .18 $ .19 $ .39 Income per common shares - pro forma $ .17 $ .18 $ .35 Weighted average fair value of options granted during the year $ 2.73 $ 1.76 $ 2.53 These pro forma calculations only include the effects of 2000, 1999, and 1998 grants. As such, the impacts are not necessarily indicative of the effects on reported net income of future years. 3. DEBT OBLIGATIONS Debt obligations consisted of the following: December 31, December 31, 2000 1999 ---- ---- Line of credit with interest at prime plus 1/4 percent; interest payable monthly, maturing on July 30, 2001, collateralized by accounts receivable and inventory of the Company ($3,280,226 available at December 31,2000). $1,719,774 $2,262,189 First National Bank first deed of trust on the Shelby facilities. Payable in monthly installments of $24,088 including interest (7 1/2 percent) through March of 2013. The term of the loan is fifteen years, callable after five years and guaranteed by the President. 2,101,892 2,209,767 Promissory note payable with interest at 8 percent, payable in two annual installments through July 30, 2000. Collateralized by letter of credit at Branch Banking & Trust. ----- 100,000 Promissory note payable with interest at 6 percent, payable in monthly installments through October 1, 2003. 91,055 118,225 ---------- ----------- 3,912,721 4,690,181 Current portion 1,858,485 2,500,465 ---------- ----------- Long term portion $2,054,236 $2,189,716 ========== ========== The interest rate for the line as of December 31, 2000 and 1999 was prime plus 1/4 percent and prime plus 1/2 percent, respectively. The prime interest rate at December 31, 2000 and 1999 was 9.5 percent and 8.5 percent, respectively. The carrying amount of the Company's short-term debt obligations approximates fair value. The line of credit facility also includes certain financial covenants, including covenants that the Company maintain certain financial ratios. In addition, the credit facility contains limitations on capital expenditures, fixed asset sales, loans and/or advances to shareholders and employees, restrictions on operating leases and limitation on dividends paid on common stock to $100,000 annually. The Company was in violation of one covenant pertaining to purchase of its common stock. The Company has received a waiver for this violation for the year ended December 31, 2000. The treasury stock was purchased from a third-party stockholder at the fair market value at the date of the purchase. The bank waiver was a one-time waiver for the year ended December 31, 2000 and when the line of credit was renegotiated in July 2001, this loan covenant was removed from the loan agreement. As the line of credit was due in July 2001, it was included in the current portion of long-term debt in the financial statements. The aggregate long-term debt payments as of December 31, 2000 for each of the next three years are: 2001 1,858,485 2002 152,266 2003 1,901,970 Total $3,912,721 4. COMMITMENTS AND CONTINGENCIES The Company is obligated under various non-cancelable operating leases. Operating leases are principally for office and warehouse facilities, equipment and vehicles. Rent expense under operating leases amounted to $248,571, $269,962 and $152,128, for the years ended December 31, 2000, 1999 and 1998, respectively. The future minimum rentals under non-cancelable operating leases during subsequent fiscal years are as follows: YEARS ENDING DECEMBER 31, 2001 $ 236,910 2002 123,518 ---------- $ 360,428 5. INCOME TAXES Temporary differences between income for financial reporting purposes and tax reporting purposes relate primarily to accounting methods for inventory costs, revenues earned, accrued and prepaid expenses and reserves, depreciation and compensation expense rewarded for warrants issued. For the years presented, the expense (benefit) for income taxes from continuing operations consisted of the following. December 31, December 31, December 31, 2000 1999 1998 ---- ---- ---- (RESTATED) (RESTATED) Current $240,000 $355,000 ----- Deferred Federal (4,000) (68,000) (130,300) State and Local 2,000 (6,000) (15,200) ---------- ---------- ----------- Net deferred expense (benefit) (2,000) (74,000) (145,500) Net deferred expense (benefit) for taxes $238,000 $281,000 $(145,500) ========== ========== ========== For the years presented, a reconciliation of income taxes from continuing operations based upon the application of the federal statutory tax rate is as follows: December 31, December 31, December 31, 2000 1999 1998 ---- ---- ---- Income tax expense (benefit) at statutory rate $218,000 $238,000 $(145,700) Goodwill amortization 13,000 13,000 13,650 State taxes net of federal benefit 26,000 26,000 (15,300) Other (19,000) (4,000) 1,850 --------- -------- --------- Total income tax expense (benefit) $238,000 $281,000 $(145,500) The components of net deferred taxes are as follows: December 31, December 31, 2000 1999 ---- ---- Assets: Inventory costs capitalized for tax purposes $68,000 $68,000 Accruals and reserves to be expensed as paid for tax purposes 34,000 34,000 -------- -------- Deferred tax assets, current 102,000 102,000 Liabilities: Warrant compensation cost 26,000 12,000 -------- -------- Excess of tax over financial accounting depreciation and amortization (545,775) (533,775) --------- -------- Deferred tax liability, long-term (519,775) (521,775) --------- -------- Net deferred tax liability $(417,775) $(419,775) ========== ========== The Company changed its effective rate to 42.5% in 2000 from 38% in 1999 from 40% in 1997. The Company utilized approximately $0, $780,000 and $1,065,000 of net operating loss carry forward for the years ended December 31, 2000, 1999 and 1998, respectively. 6. EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE Earnings per common and common equivalent share were computed by dividing net income by the weighted average number of shares of common stock outstanding during the year. At December 31, 2000 and 1999, the number of common shares was increased by the number of shares issuable on the exercise of outstanding stock options and warrants when the market price of the common stock exceeds the exercise price of the options and warrants. This increase in the number of common shares was reduced by the number of common shares that are assumed to have been purchased with the proceeds from the exercise of the options; those purchases were assumed to have been made at the average price of the common stock during that part of the year when the market price of the common stock exceeded the exercise price of the options. The following data show the amounts used in computing earnings per share (EPS) and the effect on income and the weighted average number of shares of dilutive potential common stock. December 31, 2000 1999 Income available to common stockholders used in basic EPS and diluted EPS $318,510 $338,981 ======== ======== Weighted average number of common shares used in Basic EPS 1,782,237 1,783,200 Effect of dilutive securities: Stock options and warrants 190,163 43,242 --------- --------- Weighted number of common Shares and dilutive potential Common stock used in diluted EPS 1,972,400 1,826,442 ========= ========= Options and warrants on 1,807,080 and 1,353,940 shares, respectively, of common stock were not included in computing diluted EPS for the years ended December 31, 2000, 1999 and 1998 because their effects were antidilutive. The common equivalent stock outstanding at December 31, 1998 would be antidilutive for the year due to the net operating loss. 7. LOSS ON SALE OF BUILDING On March 4, 1998 the Company sold its 167,000 sq. ft. Kings Mountain Warehouse. The sale netted the Company approximately $425,000. The Company recorded a loss on the sale, which totaled $151,144. 8. EXTRAORDINARY GAIN ON RETIREMENT OF DEBT On January 23, 1998, the Company redeemed at a discount, the subordinated debenture due to Pages on January 1, 2002. The debenture in the original principal amount of $5 million was redeemed for $3.5 million. The Company replaced the Pages debt with proceeds from the line of credit. The debt retirement resulted in an extraordinary gain of $930,000 after tax of $570,000. For the year ended December 31, 1998, the impact of the extraordinary gain on basic and diluted earnings (loss) per share was as follows: Basic Diluted Loss before extraordinary gain $(237,734) $(.13) $(.13) Extraordinary gain on retirement of debt (less income taxes of $570,000) 930,000 .52 .52 --------- ------- ------ Net income $ 692,266 $ .39 $ .39 Options and warrants on 1,807,080, 1,461,815 and 1,353,940 shares, respectively, of common stock were not included in computing EPS for the years ended December 31, 2000, 1999 and 1998 because their effects were antidilutive. The common equivalent outstanding at December 31, 1998 would be antidilutive for the year due to the net loss before extraordinary items. 9. STOCK ACQUISITION PROPOSAL BY RELATED PARTIES The Chairman of the Board and President of the Company have 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 indicated that it will recommend for approval the latest offer of $2.10 per share for the outstanding shares of common stock. 10. QUARTERLY RESULTS (Unaudited) Summary data relating to the results of operations for each quarter of the years ended December 31, 2000 and 1999 follows (in thousands except per share amounts):

11. 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 years ended December 31, 2000 and 1999. The impact to the financial statements is as follows: 2000 1999 As filed Restated As filed Restated -------- -------- -------- -------- Operating Income $894,369 $858,369 $1,022,873 $992,359 Net income $340,994 $318,510 $ 357,495 $338,981 Earnings Per Share: Basic $ 0.19 $ 0.18 $ 0.20 $ 0.19 Diluted $ 0.17 $ 0.16 $ 0.20 $ 0.19 Deferred tax liability $545,775 $519,775 $533,775 $521,775 Capital in excess of Par value $6,417,586 $6,484,584 $6,417,586 $6,448,100 Retained earnings (deficit) $143,103 $102,105 $(197,891) $(216,405) SCHEDULE II Valuation and Qualifying Accounts and Reserves for the years ended December 31, 2000, 1999 and 1998 Additions ----------------------- Charged to Balance at Charged to other Balance at Beginning costs and accounts- Deductions- End of Description of period expenses describe describe period ------------------------------------------------------------------------------- 2000 Inventory Reserve 90,656 200,000 0 200,000(1) 90,656 1999 Inventory Reserve 90,656 85,000 0 85,000(1) 90,656 1998 Inventory Reserve 260,656 30,000 0 200,000(1) 90,656 (1) Slow moving inventory identified in reserve sold at net realizable value.

CASCO INTERNATIONAL INC 10-K/A