UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1999
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 0-12293
CANISCO RESOURCES, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 54-0952207
(State of Incorporation) (IRS Employer Identification No.)
300 Delaware Avenue, Suite 714, Wilmington, Delaware 19801
(Address of Principal Executive Offices) (Zip Code)
302-777-5050
(Registrant's Telephone Number, Including Area Code)
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 whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act subsequent to the distribution of securities under a plan
confirmed by the court. Yes (X) No ( )
Common Stock, par value $.0025 per share 2,526,565 shares outstanding as of
September 30, 1999.
CANISCO RESOURCES, INC.
PART I ITEM 1
FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 1999 and March 31, 1999
Consolidated Statements of Operations for the Three Month Periods Ended
September 30, 1999 and 1998
Consolidated Statements of Operations for the Six Month Periods Ended
September 30, 1999 and 1998
Consolidated Statements of Cash Flows for the Six Month Periods Ended
September 30, 1999 and 1998
Notes to Consolidated Financial Statements
PART I ITEM 2
Management's Discussion and Analysis of Financial Condition and Results of
Operations
PART I ITEM 2
Quantitative and Qualitative Disclosures About Market Risk
PART II
Item 1 Legal Proceedings
Item 2 Changes in Securities and Use of Proceeds
Item 3 Defaults Upon Series Securities
Item 4 Submission of Matters to a Vote of Security Holders
Item 5 Other Information
ITEM 6 Exhibits and Reports on Form 8-K
PART I ITEM 1 FINANCIAL STATEMENTS
CANISCO RESOURCES, INC.
Consolidated Balance Sheets
Assets
September 30, March 31,
1999 1999
(Unaudited)
Current assets:
Cash $ 1,456,996 $1,944,053
Accounts receivable, net
Billed 13,286,435 12,181,791
Unbilled 487,654 398,944
Other 168,682 268,420
Total accounts receivable 13,942,771 12,849,155
Inventory 373,778 424,020
Deferred income taxes 288,000 366,000
Other prepaid expenses and current assets 356,062 404,660
Costs and estimated earnings in excess
of billings on uncompleted contracts 1,476,149 1,427,806
Total current assets 17,893,756 17,415,694
Property and equipment:
Land 804,000 804,000
Buildings and improvements 851,766 785,663
Machinery and equipment 6,122,409 6,025,828
Furniture and fixtures 495,601 494,022
Vehicles 1,164,917 1,091,481
Total property and equipment 9,438,693 9,200,994
Less accumulated depreciation (3,057,370) (2,624,997)
Property and equipment, net 6,381,323 6,575,997
Intangible pension asset 750,634 802,402
Deferred income taxes 770,000 804,000
Other assets 788,533 1,228,685
Goodwill 4,770,591 4,899,753
Total assets $31,354,837 $31,726,531
CANISCO RESOURCES, INC.
Consolidated Balance Sheets
Liabilities and Shareholders' Equity
September 30, March 31,
1999 1999
(Unaudited)
Current liabilities:
Current portion of long-term debt $ 1,824,711 $ 1,824,711
Accounts payable 4,198,132 3,291,920
Other accrued expenses 2,314,139 3,070,977
Billings in excess of costs and estimated
earnings on uncompleted contracts 1,322,427 732,058
Total current liabilities 9,659,409 8,919,666
Long-term debt, less current portion 6,239,211 7,139,282
Accrued pension cost 819,835 846,582
Note payable to bank 10,539,090 10,754,785
Total liabilities 27,257,545 27,660,315
Shareholders' equity:
Common stock, $.0025 par value, authorized
10,000,000 shares; issued
and outstanding 2,526,565 shares 6,972 6,972
Additional paid-in-capital 3,688,764 3,688,764
Retained earnings 4,353,093 4,322,017
Treasury stock, at cost (3,951,537) (3,951,537)
Total shareholders' equity 4,097,292 4,066,216
Total liabilities & shareholders'equity $31,354,837 $31,726,531
CANISCO RESOURCES, INC.
Consolidated Statements of Operations
(Unaudited)
Three Months Ended
September 30,
1999 1998
Revenues from services $ 17,071,813 $ 17,826,729
Cost of services 13,532,564 14,339,389
Gross margin 3,539,249 3,487,340
General and administrative expenses 3,402,739 2,456,350
Income from operations 136,510 1,030,990
Interest expense (420,626) (481,284)
Other (expense) income, net (28,904) 8,510
Income (loss) before income taxes (313,020) 558,216
Income tax (benefit) expense (86,343) 243,308
Net (loss) earnings $ (226,677) $ 314,908
Earnings (loss) per share (basic) ($0.09) $0.12
Weighted average common shares (basic) 2,526,565 2,526,565
Earnings (loss) per share (diluted) ($0.09) $0.12
Weighted average common shares (diluted) 2,642,153 2,699,803
CANISCO RESOURCES, INC.
Consolidated Statements of Operations
(Unaudited)
Six Months Ended
September 30,
1999 1998
Revenues from services $ 34,478,492 $ 36,433,878
Cost of services 27,590,808 29,625,998
Gross margin 6,887,684 6,807,880
General and administrative expenses 5,876,916 4,800,696
Income from operations 1,010,768 2,007,184
Interest expense (830,893) (951,938)
Other (expense) income, net (41,973) 34,000
Income before income taxes 137,902 1,089,246
Income tax expense 106,826 475,739
Net earnings $ 31,076 $ 613,507
Earnings per share (basic) $0.01 $0.25
Weighted average common shares (basic) 2,526,565 2,496,053
Earnings per share (diluted) $0.01 $0.23
Weighted average common shares (diluted) 2,611,877 2,670,188
CANISCO RESOURCES, INC.
Consolidated Statements of Cash Flows
Unaudited
Six Months Ended
September 30,
1999 1998
Cash flows from operating activities:
Net earnings $ 31,076 $613,507
Adjustments to reconcile net
earnings to net cash provided by
(used in) operating activities:
Depreciation and amortization 687,853 546,349
Deferred income taxes 112,000 489,000
Change in assets and liabilities
net of effects from purchases
of subsidiaries:
(Increase) in accounts receivable (1,093,616) (3,691,900)
Decrease in inventory 50,242 62,765
(Increase) in costs and estimated
earnings in excess of billings
on uncompleted contracts (48,343) (33,282)
Decrease in other assets 414,200 533,801
Increase (decrease) in accounts payable 906,212 (174,696)
Decrease in accrued expenses (783,585) (457,327)
Increase in billings in excess
of costs and estimated earnings on
uncompleted contracts 590,369 40,474
Net cash provided by (used in)
operating activities 866,408 (2,071,309)
Cash flows from investing activities:
Purchase of property and equipment (237,699) (353,209)
Purchase of company (net of
cash acquired) -- (6,704,373)
Net cash (used in)
investing activities (237,699) (7,057,582)
Cash flows from financing activities:
Net (payments) borrowings on notes payable (215,695) 3,923,728
Proceeds from long term debt -- 6,284,633
Principal payments on long-term debt (900,071) (1,320,998)
Proceeds from sale of common stock -- 816,441
Net cash (used in) provided by
financing activities (1,115,766) 9,703,804
Net (decrease) increase in cash (487,057) 574,913
Cash at beginning of period 1,944,053 1,188,393
Cash at end of period $1,456,996 $1,763,306
See the accompanying notes to the consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
NOTE 1
The accompanying unaudited interim consolidated financial statements
have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission pertaining to interim financial
information and do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. These financial statements should be read in
conjunction with the consolidated financial statements and accompanying
notes included in the Company's Annual Report for the year ended March
31, 1999. In the opinion of management, all adjustments consisting
only of normal recurring adjustments considered necessary for a fair
presentation of financial position and results of operations have been
included therein. The results for the period ended September 30, 1999 are
not necessarily indicative of the results that may be expected for a
full fiscal year.
NOTE 2:
In April 1998, the Company expanded its credit facility to a three year
secured $25,000,000 facility. Borrowings under this agreement are
secured by substantially all assets of the Company. This loan
agreement, among other things, requires the Company to meet various
covenants including minimum levels of working capital and tangible net
worth. The Company was in compliance with these covenants, as amended,
at September 30, 1999 and management believes that such compliance will
continue through September 30, 2000.
NOTE 3:
On August 9, 1999, the Company was advised by SCC Investment I L.P. and
Sterling City Capital that they were terminating the previously
announced agreement under which they had agreed to purchase $8 to $10
million of newly issued preferred stock from the Company (reference is
made to Form 8-K filed August 27, 1999).
PART I ITEM 2 FINANCIAL STATEMENTS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999
COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1998
Revenues for the period were Seventeen Million Seventy Two Thousand
($17,072,000) compared to Seventeen Million Eight Hundred Twenty Seven Thousand
($17,827,000) in the prior year. A decrease of Seven Hundred Fifty Five
Thousand ($755,000) or four percent (4%). This decline was primarily due to
the completion of several substantial shutdowns performed in the prior fiscal
quarter.
The power generation market accounted for twenty three (23%) of total revenues
compared to twenty percent (20%) of total revenues for the same period last
year. The petro-chemical business as compared to last year remained constant
at thirty percent (30%) of second quarter revenues. The pulp and paper market
decreased to twenty one percent (21%) of second quarter 1998 revenues compared
to twenty seven percent (27%) for the same period a year ago. The revenue
contribution of all other markets collectively was twenty six percent (26%)
compared to twenty three percent (23%) from the same period last year.
The gross margin for the period was Three Million Five Hundred Thirty Nine
Thousand ($3,539,000) compared to Three Million Four Hundred Eighty Seven
Thousand ($3,487,000) for the same period a year ago. As a percent or revenue,
the gross margin for the current period was twenty one percent (21%) compared
to twenty percent (20%) during the period ended September 30, 1998. The power
generation market margin contribution was twenty percent (20%) versus twenty
five percent (25%) for the same period last year. The margin contribution for
the petro-chemical business increased to twenty nine percent (29%) compared to
fifteen percent (15%)a year ago. The pulp and paper industry accounted for
twenty five percent (25%) of gross margin compared to thirty two percent (32%)
during the same period last year. All other markets contributed twenty six
percent (26%) of gross margin compared to twenty eight percent (28%) in the
comparable period a year ago. The variance in margin contribution is
attributable to shift in market mix.
The substantial increase in general and administrative expense was due
primarily to transaction costs and professional fees. The Company had
capitalized approximately $300,000 of expenses related to the expected
investment by Sterling Capital. These charges were written off in the second
quarter (of current fiscal year) when the transaction failed to close.
Additionally, approximately $120,000 of fees and expenses were incurred in the
second quarter with respect to professional fees and for the search and change
to new management described below.
Additionally, expansion, in certain areas, resulted in additional salaries,
benefits and equipment leases totaling approximately $325,000.
Income from operations was One Hundred Thirty Seven Thousand ($137,000)
compared to One Million Thirty One Thousand ($1,031,000) for the same period
last year.
Interest expense decreased Sixty Thousand ($60,000) to Four Hundred Twenty One
Thousand ($421,000) from the same period a year ago. This decrease was due to
reduction in debt and reduced interest rates. Other expense, expenses net of
income, was Twenty Nine Thousand ($29,000) compared to other income net of
expenses of Nine Thousand ($9,000) a year ago.
Income tax benefit of Eighty Six Thousand ($86,000) were for the period
compared to expense of Two Hundred Forty Three Thousand ($243,000) for the same
period a year ago.
The net loss was approximately Two Hundred Twenty Seven Thousand ($227,000) or
$0.09/share compared to net earnings of Three Hundred Fifteen Thousand
($315,000) or $0.12/share for the same period last year.
SIX MONTHS ENDED SEPTEMBER 30, 1999
COMPARED TO THE SIX MONTHS ENDED SEPTEMBER 30, 1998
Revenues for the period were Thirty Four Million Four Hundred Seventy Eight
Thousand ($34,478,000) compared to Thirty Six Million Four Hundred Thirty Four
Thousand ($36,434,000) for the prior year. The power generation market
accounted for twenty eight percent (28%) of total revenues compared to twenty
two percent (22%) of total revenues for the same period last year. The petro-
chemical market provided revenues of twenty seven percent (27%) compared to
twenty six percent (26%) for the six months ended September 1998. The pulp and
paper market accounted for twenty percent (20%) of revenues compared to thirty
one percent (31%) for the same period last year. The revenue contribution of
all other markets collectively was twenty five percent (25%) compared to twenty
one percent (21%) a year ago. This decrease is primarily due to completion of
a substantial contract and several shutdowns of the prior year.
The gross margin for the period increased Eighty Thousand ($80,000) to Six
Million Eight Hundred Eighty Eight Thousand ($6,888,000) when compared to the
same period a year ago. As a percent of revenue, the gross margin for the
current period increased one percent (1%) to twenty percent (20%). The power
generation market margin contribution was twenty six percent (26%) compared to
twenty one percent (21%) in the comparable period last year. The margin
contribution of the petro-chemical business increased to twenty four percent
(24%) from twenty one percent (21%) a year ago. The pulp and paper industry
accounted for twenty three percent (23%) of gross margin, down from thirty
three percent (33%) during the same period last year. All other markets
contributed twenty seven percent (27%) of gross margin compared to twenty five
percent (25%) in the comparable period a year ago. Shifts in gross margin
contribution reflect shifts in market concentration, which is predominately
attributable to the Mansfield acquisition.
General and administrative expenses for the first six months increased One
Million Seventy Six Thousand ($1,076,000) to Five Million Eight Hundred Seventy
Seven Thousand ($5,877,000) compared to the same period last year. As a
percentage of revenue general & administrative expenses increased to seventeen
percent (17%) from thirteen percent (13%) and occurred during the Company's
second fiscal quarter. The increase is attributable to the same factors
discussed above in connection with the second quarter.
Income from operations was One Million Eleven Thousand ($1,011,000) compared to
Two Million Seven Thousand ($2,007,000) for the same period last year.
Interest expense decreased approximately One Hundred Twenty One Thousand
($121,000) to Eight Hundred Thirty One Thousand ($831,000) compared to the same
period a year ago. The decrease was due to reduced debt load and reduction in
interest rates.
The Company had other (expense) net of income, of Forty Two Thousand ($42,000)
compared to other income net of (expense) of Thirty Four Thousand ($34,000),
for the same period a year ago.
Income taxes of One Hundred Seven Thousand ($107,000) were accrued for the
period compared to Four Hundred Seventy Six Thousand ($476,000) for the same
period a year ago.
Net earnings for the first six months of fiscal year 1999 were approximately
Thirty One Thousand ($31,000) or $0.01/share compared Six Hundred Fourteen
Thousand ($614,000) or $0.25/share for the same period last year.
MANAGEMENT CHANGES
When the equity investment expected by Sterling Capital failed to close, the
outside directors of the Board began a search for new management. Among other
factors, directors sought to identify management best suited to improving the
performance of the Company. After numerous discussions and interviews, a
committee of the Board decided to retain Mr. J. L. Huitt, Jr. and the McShane
Group as interim turnaround managers. Thomas McShane, a Company Director, is a
principal of the McShane Group. Mr. Huitt is also a principal in the McShane
Group and he has 20 years experience managing and consulting for under-
performing companies. The McShane Group is a management consulting firm that
specializes in workout and turnaround services. Mr. Huitt was appointed
president and chief executive officer of Canisco on September 8, 1999. On
October 25, 1999 he also assumed the office of president of Cannon Sline, Inc.
For the services of its personnel, including Mr. Huitt, the McShane Group will
be entitled to basic compensation of $30,000 per month. See Exhibit 10.21 to
this report for information on additional cash consulting fees in operational
improvement success fees payable in warrants that may become due to the McShane
Group.
The Company has begun to implement a number of management and restructuring
changes, including the sale of the Company's IceSolv subsidiary. The Company
cannot yet accurately estimate the total costs of the above changes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's ability to generate cash adequate to meet its needs depends
primarily upon payments for its services and periodic bank borrowings. These
sources of liquidity are reduced by the payment of direct costs, taxes,
purchase of property and equipment and periodic repayment of the Company's
revolving lines of credit and long term debt.
Effective April 17, 1998, the Company amended its credit facility with its
current lender, GMAC Commercial Credit (formerly BNY Financial Corporation).
The amended credit facility consists of a three-year commitment with automatic
extensions for two additional years for a $25,000,000 credit facility. The
amended facility included a $5,000,000 acquisition credit loan, which was
utilized for the Mansfield acquisition. Capital expenditures for equipment and
expansion of facilities are expected to be funded from cash flow from
operations and supplemented as necessary by borrowings under the credit
facility.
At September 30, 1999, the Company had borrowed approximately $10,539,000 on
its revolving credit line and had an outstanding principal balance of
$5,640,000 on its long term secured loan obligation. The Company is in
compliance with the debt covenants of its Credit Agreement, as amended from
time to time.
At September 30, 1999, the Company had working capital of approximately
$8,235,000 compared to working capital of $8,496,000 for fiscal year end 1999.
The decrease in working capital was due primarily to the increase in accounts
payable offset somewhat by the increase in accounts receivable.
RECENTLY ISSUED ACCOUNTING STANDARD
In June 1999, the FASB issued SFAS No. 137 "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 137). Deferral of the effective date
of FASB Statement No. 133, and amendment of FASB Statement No. 133. This
pronouncement defers the effective date of SFAS 133, as amended, and is now
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000. This statement establishes accounting and reporting standards requiring
that every derivative instrument be recorded in the balance sheet as either an
asset or liability measured at its fair value. The Company expects that
adoption of SFAS 137 will not have a material impact on the Company's financial
condition or results of operations.
YEAR 2000 ISSUE
Many computer systems were based upon using two digits rather than four to
define the applicable year. As a result, those systems are time sensitive and
recognize a date using "00" as the year 1900 rather than the year 2000. This
could cause a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
The Company believes that they are compliant with the Year 2000 issue, although
unanticipated difficulties are possible.
In addition to risks associated with the Company's own computer systems and
equipment, the Company has relationships with, and is to varying degrees
dependent upon, a number of third parties that provide goods, services and
information to the Company. These include suppliers, licensees, vendors, and
financial institutions. If any of these third parties experience failures in
their computer systems or equipment, which systems and equipment are outside
the control of the Company, due to Year 2000 non-compliance, it could affect
the Company's ability to engage in normal business activities. Although the
Company has minimal computer interface with third parties, the Company is in
the process of making contact with all of its significant customers, suppliers
and partners to determine the extent, if any, to which the Company is
vulnerable should these third parties experience a Year 2000 failure of their
system and to ascertain their Year 2000 compliance and risks. The Company has
multiple suppliers who provide materials and supplies, and believes that it
could quickly find alternative sources for these products. To date, the
Company has incurred minor expenses, primarily for assessment of the Year 2000
issue, development of a modification plan, and preparation for the installation
of a year 2000 compliant version of its financial, inventory, and job costing
software.
The cost of the project and the dates on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates.
However, there can be no guarantee that these estimates will be achieved.
CAUTIONARY STATEMENT
Statements in this Report on Form 10-Q which express the "belief",
"anticipation" or "expectation", as well as other statements which are not
historical fact, are forward-looking statements within the meaning of the
Private Securities Litigation Reform Action of 1995 and involve risks and
uncertainties that could cause actual results to differ materially from those
projected. Certain factors such as competitive market pressures, material
changes in demand from larger customers, changes in weather, availability of
labor, changes in government policies and changes in economic conditions could
cause actual results to differ materially from those in the forward-looking
statements.
PART II
Item 1 Legal Proceedings
None
Item 2 Changes in Securities and Use of Proceeds
None
Item 3 Defaults Upon Series Securities
None
Item 4 Submission of Matters to a Vote of Security Holders
None
Item 5 Other Information
None
Item 6 Exhibits and Reports on Form 8-K
(A) Exhibits
Exhibit Number Description of Document
2.1 Plan and Agreement of Merger by and among
Nuclear Support services, Inc., NSS of Delaware,
Inc. and Canisco Resources, Inc. (Incorporated
herein by reference to Exhibit 2.1 to the
Company's Form 8-B filed May 24, 1996).
3.1 Articles of Incorporation of the Company, as
amended (Incorporated herein by reference to
Exhibit 3.1 to Form 8-B filed May 24, 1996).
3.2 By-laws of the Company (Incorporated herein by
reference to Exhibit 3.2 to Form 8-B filed
May 24, 1996).
10.1 1990 Stock Option Plan (Incorporated herein by
reference to Exhibit 28.2 to Registration
Statement on Form S-8 (No. 33-33180))
10.10 1998 Stock Option/incentive Plan (Incorporated
herein by reference to the Company's Definitive
Proxy Statement on Form 14A filed
July 28, 1998).
10.11 Stock Purchase Agreement dated April 22, 1998
(Incorporated by reference to Exhibit 1 to the
Company's Current Report on Form 8-K filed
May 7, 1998).
10.12 Form of Stock Purchase Warrant issued to Teddy
Mansfield (Incorporated herein by reference to Exhibit
2 to the Company's Current Report on Form 8-K
filed May 7, 1998).
10.13 Form of Stock Purchase Warrant issued to R. Dean
Mansfield (Incorporated herein by reference to Exhibit
3 to the Company's Current Report on Form 8-K
filed May 7, 1998).
10.14 Amended and Restated Credit and Security
Agreement with The BNY Financial Corporation
dated as of April 17, 1998 (Incorporated herein by
reference to Exhibit 4 to the Company's Current
Report on Form 8-K filed May 7, 1998).
10.2 Securities Purchase Agreement, dated as of
October 16, 1998, by and among Mellon Ventures,
L.P. and Morse Partners, Ltd, and Canisco
Resources, Inc. (Incorporated herein by reference to
Exhibit 10.2 to the Company's Current Report on
Form 8-K filed October 30, 1998).
10.20 Securities Purchase Agreement, dated as of April
16, 1999, by and among SCC Investment I, L.P.,
Sterling City Capital LLC and Canisco Resources,
Inc. (Incorporated herein by reference to Exhibit 10.2
to the Company's Amended Current Report on Form
8-K filed May 11, 1999).
10.21 Letter agreement dated September 2, 1999 with the
McShane Group.
22 Subsidiaries of the Registrant (Incorporated by
reference to Exhibit 22 to the Company's Annual
Report on Form 10-K for fiscal 1999 filed
July 15, 1999).
27 Financial Data Schedule for the Six-Month
Period Ended September 30, 1999.
B. Reports on Form 8-K.
(b) On May 3, 1999, the Company filed an 8-K related to the execution
of a Securities Purchase Agreement for the sale of preferred
stock to SCC Investment I, L.P. and Sterling City Capital, LLC.
(c) On August 27, 1999, the Company filed an 8-K related to the termination
of a Securities Purchase Agreement for the sale of preferred stock to SCC
Investment I, L.P. and Sterling City Capital, LLC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed by the
undersigned thereunto duly authorized.
Date: November 16, 1999 CANISCO RESOURCES, INC.
/s/ Jimmie L. Huitt, Jr.
Jimmie L. Huitt, Jr.
President and CEO
/s/ Michael J. Olson
Michael J. Olson
Chief Financial Officer
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September 2, 1999
The Board of Directors
Canisco Resources, Inc.
300 Delaware Avenue
Suite 714
Wilmington, DE 19801
Dear Directors,
I appreciate the time that Joe Quick and Tom McShane spent with me
reviewing the current situation at Canisco Resources, Inc., to be
referred to as "Canisco" or "the Company" throughout the remainder of
this letter. I understand and respect the concern that was expressed on
behalf of the interests of the stockholders of Canisco over the
declining financial performance.
I also thank you for the opportunity to propose my services to assist
the Company at this time. As we discussed, I am a principal in McShane
Group which has considerable experience in working with financially
troubled companies. Accordingly, I am confident in our ability to
provide the assistance that Canisco requires at this time.
The purpose of this letter is to set forth the terms and to confirm the
engagement of myself and McShane Group to provide financial and
management consulting services to Canisco.
ENGAGEMENT SCOPE
McShane is being engaged to provide executive leadership to the
management of the business affairs of Canisco. In addition to the
management of the day-to-day business of Canisco, McShane will evaluate
the overall strengths and weaknesses and the options available to the
Company and make recommendations to the Board of Directors. Options to
be evaluated will include business turnaround, raising additional
capital and sale of the business.
Our objective is to develop strategies and action plans that address the
current problems facing the Company and to assist in the achievement of
the highest enterprise value of Canisco for the stockholders and other
stakeholders.
McShane shall provide as an interim executive manager, Jimmie L. Huitt,
Jr. ("President") to serve as Chief Executive Officer and President. He
shall be responsible for the overall management of the business affairs
of Canisco and such other duties as directed by the Board of Directors
of Canisco ("Board of Directors"). Mr. Huitt shall devote an average of
4 days per week to his duties hereunder.
McShane will additionally provide, to the extent determined necessary by
the President and the Board of Directors, management and consulting
services by other McShane Group consultants to support Mr. Huitt in
developing and implementing plans for the management of Canisco.
It is understood that the President, as a principal of McShane Group,
may, without the prior written consent of the Board of Directors,
engage, from time to time, in other business activities of McShane
provided that those activities do not interfere with the President's
responsibilities to Canisco.
FEE STRUCTURE AND STAFFING
Time Charges: A basic management fee of $30,000 per month will be
charged for the interim President's services to be provided by Mr.
Huitt. He will be assisted by other McShane Group consultants as
needed. Other consultants fees will be charged on an hourly basis at
rates ranging from $225 to $150 per hour. Total monthly fee shall not
exceed $45,000 without prior approval of the Turnaround Committee of the
Board of Directors.
Engagement Expenses: Out-of-pocket costs, including travel and lodging
will be passed along without mark-up.
Operations Improvement Success Fee: In addition to time charges Canisco
agrees to grant Stock Appreciation Rights to McShane upon the execution
of this agreement as follows:
? 50,000 shares exercisable at $1.50 per share for a period
extending 1 year after termination of this agreement upon
acceptance of a turnaround plan by the Board of Directors.
? 50,000 shares exercisable at $1.50 per share for a period
extending 1 year upon substantial implementation of the plan.
? 50,000 shares exercisable at $1.50 per share for a period
extending 1 year after termination of this agreement at the
absolute discretion of the Board of Directors.
Payment Terms: Invoices are prepared on the 15th and last days of each
month. Payment is due when submitted. A $30,000 retainer will be
required to initiate the engagement. The retainer will be held and
applied to final engagement invoices.
OTHER MATTERS
The Company or McShane Group may terminate this Agreement with or
without cause with thirty days notice.
Canisco shall defend and indemnify McShane and its officers, directors,
stockholders, employees, and subcontractors from and against any and all
claims, liabilities or damages arising as a result of McShane's
performance of its duties, including any Canisco shareholder actions,
hereunder except to the extent the liability or damages are attributable
to the gross negligence or willful act or omission of McShane. Canisco
will reimburse McShane and any other party entitled to be indemnified
hereunder for all reasonable and necessary expenses (including
reasonable fees of counsel) as they are incurred by McShane or any such
other indemnified party in connection with investigating, preparing for
or defending any such action or claim. This provision shall survive the
termination of this agreement. Additionally Canisco represents that it
currently has in force a $5 million officers and directors liability
policy.
We do not anticipate any future issues to arise between us, but it is
always prudent to provide an amicable process to resolve any that may
occur. Therefore, we mutually agree that we will use all reasonable
efforts to resolve amicably any controversy or claim arising out of, or
relating to this Agreement. In the event any controversy or claim
cannot be resolved by agreement, we mutually agree to mediation in
Baltimore, MD. If either of us do institute any action or proceeding
respecting this Agreement, the prevailing party will be entitled to
reasonable fees, costs and expenses of attorneys, accountants, and other
professionals and consultants.
CONFIDENTIAL INFORMATION
We understand that the Company's customer lists and other technical and
business information are confidential. Unless specifically authorized
by the Company, both during and after termination of our relationship,
we will not use such information for our benefit or the benefit of
anyone other than the Company or disclose this information to anyone
outside of the Company except for and in the proper course of the
Company's business and its efforts to obtain replacement financing. We
will always use our best efforts to keep all information confidential.
CONCLUSION
Over the years McShane Group has been highly successful in assisting
companies through difficult periods. Our professionals are skilled and
experienced businessmen who are prepared to deliver the services the
Company requires at this time.
We trust that the foregoing is satisfactory to you. Please confirm your
acceptance by dating and signing the enclosed copy of this letter where
indicated, and returning it to us for our files.
We at McShane Group are looking forward to working with you to achieve
success on this engagement.
Very truly yours,
J. L. Huitt, Jr.
Principal
TPM:mlm
We hereby engage McShane Group under the terms specified herein
By:___________________________________________Date_____________________
An officer of Canisco pursuant to a resolution of the Board of
Directors:
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