10-Q/A 1 revised10q2ndqtr2001.txt 10-Q SECOND QTR 2001 AMENDED 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 June 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 August 13, 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: August 10, 2001: 1,774,186 Common Shares. PART I - FINANCIAL INFORMATION ITEM 1. 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 six months ended June 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:

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 June 30, 2001and 2000. The impact to the financial statements is as follows:

ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Quarter Ended June 30, 2001 Compared to Quarter Ended June 30, 2000: Revenues for the three months ended June 30, 2001 approximated $5.29 million, compared to $5.35 million in revenues for the three months ended June 30, 2000, a decrease of 1.16% or approximately $60,000. The decrease is attributable to the increased rate of unemployment and the reduction of workforces at existing customers. Revenues for the six months ended June 30, 2001 approximated $10.63 million, compared to $10.60 million in revenues for the six months ended June 30, 2000, an increase of 0.29% or approximately $30,000. The increase is attributable to new customers in the new markets with employed account managers. Cost of goods sold for the three months ended June 30, 2001 approximated $2.65 million, compared to approximately $2.83 million for cost of goods sold for the three months ended June 30, 2000, a decrease of 6.27% or approximately $177,000. The decrease in cost of goods sold was attributable to the decrease in revenue, 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 50.04% for the three months ended June 30, 2001, from 52.77% for the three months ended June 30, 2000. The 2.73% 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 six months ended June 30, 2001 approximated $5.27 million, compared to approximately $5.56 million for cost of goods sold for the six months ended June 30, 2000, a decrease of 5.32% or approximately $296,000. 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 49.54% for the six months ended June 30, 2001, from 52.48% for the six months ended June 30, 2000. The 2.94% 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 June 30, 2001 approximated $2.16 million, compared to $2.30 million for the three months ended June 30, 2000, a decrease of 6.10% or approximately $139,000. The decrease in selling, general, and administrative expense was principally attributable to the decrease in revenues as well as the Company's decision to outsource its marketing functions. As a percentage of revenues, selling, general and administrative decreased to 40.78% for the three months ended June 30, 2001, from 42.90% for the three months ended June 30, 2000. The 2.12% decrease as a percentage of revenues was principally attributable to the decrease in revenues as well as the Company's decision to outsource its marketing functions, and the elimination of the costs associated with preparations to launch the Company's efulfillment subsidiary in 2000. Selling, general, and administrative expense for the six months ended June 30, 2001 approximated $4.62 million, compared to $4.58 million for the six months ended June 30, 2000, an increase of 0.89% or approximately $41,000. As a percentage of revenues, selling, general and administrative increased to 43.46% for the six months ended June 30, 2001, from 43.20% for the six months ended June 30, 2000. The 0.26% increase as a percentage of revenues were principally attributable to the costs associated with the potential merger with Davis Holdings of North Carolina. Interest expense was approximately $40,000 for the three months ended June 30, 2001, compared to $66,500 for the three months ended June 30, 2000, a decrease of approximately $26,500. For the six months ended June 30, 2001, interest expense was approximately $87,500 compared to approximately $131,000 for the six months ended June 30, 2000, a decrease of approximately $43,500. 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 2001 approximated $2.166 million compared to $3.311 million for the first six months in 2000. Additionally, the average interest rate for the first six months in 2001 approximated 7.69% compared to approximately 8.23% for the same period in 2000. Depreciation and amortization expense was approximately $186,000 for the three months ended June 30, 2001, compared to $192,000 for the three months ended June 30, 2000, a decrease of 2.99% or approximately $6,000. Depreciation and amortization expense was approximately $375,000 and $381,000 for the six months ended June 30, 2001 and 2000 respectively, an increase of 1.40% or approximately $6,000. Income tax provision was $118,600 for the six months ended June 30, 2001, compared to an income tax benefit of $22,400 for the six months ended June 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. The lender has committed to extending the credit facility until July 1, 2002. Current assets decreased approximately $1,422,000 due mostly from decreases in accounts receivable ($2,365,000) and inventory ($417,000) offset by an increase in cash ($1,269,000). 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 decrease in inventory is due to an improved purchasing strategy coupled with an improved processing and inventory ordering system. Current liabilities decreased approximately $2,090,000 due mostly from decreases in short-term debt obligations ($1,712,000), and accounts payable and accrued liabilities ($253,000), and taxes payable ($125,000). 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 decrease in accounts payable was due to the decreased inventory purchases. Cash increased approximately $1,269,000. Net cash provided from operating activities was approximately $3,107,000. Net cash used in investing activities was approximately $58,000 due to payments for purchases of new information systems equipment and warehouse equipment. Net cash used by financing activities was approximately $1,780,000, 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, 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 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. 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 June 30, 2001 was 6.75 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: August 10, 2001 By: /s/ Jeffrey A. Ross ------------------------- Jeffrey A. Ross Principal Financial and Accounting Officer

CASCO INTERNATIONAL INC 10-Q/A