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 December 31, 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, DE 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 ( )
Common Stock, par value $.0025 per share 2,536,565 shares outstanding as of
December 31, 1999.
CANISCO RESOURCES, INC.
PART I ITEM 1
FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1999 and March 31, 1999
Consolidated Statements of Operations for the Three Month Periods Ended
December 31, 1999 and 1998
Consolidated Statements of Operations for the Nine Month Periods Ended
December 31, 1999 and 1998
Consolidated Statements of Cash Flows for the Nine Month Periods Ended
December 31, 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 3
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 Senior 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
Assets December 31, March 31,
1999 1999
(Unaudited)
Current assets:
Cash $ 1,337,467 $1,944,053
Accounts receivable, net
Billed 13,274,613 12,181,791
Unbilled 608,475 398,944
Other 323,743 268,420
Total accounts receivable 14,206,831 12,849,155
Inventory 377,903 424,020
Deferred income taxes 288,000 366,000
Other prepaid expenses and current assets 269,652 404,660
Costs and estimated earnings in excess
of billings on uncompleted contracts 1,512,485 1,427,806
Total current assets 17,992,338 17,415,694
Property and equipment:
Land 804,000 804,000
Buildings and improvements 853,661 785,663
Machinery and equipment 6,135,843 6,025,828
Furniture and fixtures 511,229 494,022
Vehicles 1,168,403 1,091,481
Total property and equipment 9,473,136 9,200,994
Less accumulated depreciation 3,314,912 2,624,997
Property and equipment, net 6,158,224 6,575,997
Intangible pension asset 724,750 802,402
Deferred income taxes 618,000 804,000
Other assets 749,102 1,228,685
Goodwill, net 4,680,491 4,899,753
Total assets $30,922,905 $31,726,531
CANISCO RESOURCES, INC.
Consolidated Balance Sheets
Liabilities and Shareholders' Equity
December 31, March 31,
1999 1999
(Unaudited)
Current liabilities:
Current portion of long-term debt $ 1,824,711 $ 1,824,711
Accounts payable 2,881,996 3,291,920
Other accrued expenses 2,447,148 3,070,977
Billings in excess of costs and estimated
earnings on uncompleted contracts 1,788,380 732,058
Total current liabilities 8,942,235 8,919,666
Long-term debt, less current portion 5,797,858 7,139,282
Accrued pension cost 779,586 846,582
Note payable to bank 11,137,392 10,754,785
Total liabilities 26,657,071 27,660,315
Shareholders' equity:
Common stock, $.0025 authorized
10,000,000 shares; issued and
outstanding 2,536,565 and
2,526,565, respectively 6,997 6,972
Additional paid-in-capital 3,552,939 3,688,764
Retained earnings 4,506,635 4,322,017
Treasury stock, at cost (3,800,737) (3,951,537)
Total shareholders' equity 4,265,834 4,066,216
Total liabilities and
shareholders'equity $30,922,905 $31,726,531
CANISCO RESOURCES, INC.
Consolidated Statements of Operations
(Unaudited)
Three Months Ended December 31,
1999 1998
Revenues from services $18,594,752 $17,616,476
Cost of services 14,812,856 14,047,943
Gross margin 3,781,896 3,568,533
General and administrative expenses 2,992,136 2,753,255
Income from operations 789,760 815,278
Interest expense (504,802) (451,812)
Other income (expense), net 31,009 ( 58,229)
Income before income taxes 315,967 305,237
Income tax expense 162,425 82,055
Net earnings 153,542 223,182
Basic earnings per share $0.06 $0.09
Weighted average common shares (basic) 2,531,565 2,526,565
Diluted earnings per share $0.06 $0.09
Weighted average common shares (diluted) 2,641,844 2,589,259
CANISCO RESOURCES, INC.
Consolidated Statements of Operations
(Unaudited)
Nine Months Ended December 31,
1999 1998
Revenues from services $53,073,244 $54,050,354
Cost of services 42,403,664 43,673,941
Gross margin 10,669,580 10,376,413
General and administrative expenses 8,869,052 7,553,951
Income from operations 1,800,528 2,822,462
Interest expense (1,335,695) (1,403,750)
Other (expense), net (10,964) ( 24,229)
Income before income taxes 453,869 1,394,483
Income tax expense 269,251 557,794
Net earnings 184,618 836,689
Basic earnings per share $0.07 $0.34
Weighted average common shares (basic) 2,529,065 2,433,553
Diluted earnings per share $0.07 $0.32
Weighted average common shares (diluted) 2,619,292 2,579,857
CANISCO RESOURCES, INC.
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended December 31,
1999 1998
Cash flows from operating activities:
Net earnings $ 184,618 $ 836,689
Adjustments to reconcile net
earnings to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,099,329 922,362
Deferred income taxes 264,000 570,000
Change in assets and liabilities
net of effects from purchase of business:
(Increase) in accounts
receivable (1,357,676) (2,080,252)
Decrease (increase) in inventory 46,117 (12,929)
(Increase) in costs
and estimated earnings in excess
of billings on uncompleted
contracts (84,679) (389,238)
Decrease in other assets 502,091 548,424
(Decrease) increase in accounts
payable (409,924) 73,139
(Decrease) in accrued expenses (690,825) (1,275,655)
Increase in billings in excess of
costs and estimated earnings on
uncompleted contracts 1,056,322 110,955
Net cash provided by (used in)
operating activities 609,373 (696,505)
Cash flows from investing activities:
purchases of property
and equipment (272,142) (532,630)
Purchase of business (net of cash
acquired) - (6,793,564)
Net cash (used in) investing activities (272,142) (7,326,194)
Cash flows from financing activities:
Net borrowings on notes payable 382,607 3,173,951
Proceeds from long term debt - 6,284,633
Principal payments on
long-term debt (1,341,424) (2,248,884)
Proceeds of sale of common stock - 816,441
Issuance of treasury stock 15,000 -
Net cash (used in) provided by
financing activities (943,817) 8,026,141
Net (decrease) increase in cash (606,586) 3,442
Cash at beginning of period 1,944,053 1,188,393
Cash at end of period $ 1,337,467 $ 1,191,835
See the accompanying notes to the consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 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 December 31, 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 December 31, 1999 and management believes that
such compliance will continue through December 31, 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).
NOTE 4:
In September 1999, the Company entered into a letter agreement with a
consulting firm, of which a Company director is a principal, for strategic
advisory services. The terms of the agreement include monthly fees of $30,000
to be paid. In December 1999, the agreement was modified in connection with
management changes within the Company, reducing the amount to be paid beginning
January 2000.
The letter agreement includes a provision for the granting of stock
appreciation rights. Each Right permits the holder to receive cash on exercise
equal to the amount by which the fair market value of the Company's common
stock on the date of exercise exceeds the exercise price. As of December 31,
1999, 100,000 Rights had been awarded to the consulting firm at an exercise
price of $1.50 per share. The Rights expire one year from the date of grant.
Additional Rights with exercise prices ranging from $1.00 to $1.50 may be
granted upon approval of the board of directors.
NOTE 5:
On January 31, 2000, the Company sold certain assets of its IceSolv subsidiary,
(primarily equipment and contracts in progress) with net book value of
approximately $50,000 for $130,000 in cash and a note receivable (including
interest) for $120,000 payable over the next 12 months.
PART I, ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO THE THREE MONTHS ENDED
DECEMBER 31, 1998
Revenues for the period were Eighteen Million Five Hundred Ninety Five Thousand
($18,595,000) compared to Seventeen Million Six Hundred Sixteen Thousand
($17,616,000) in the prior year.
The power generation market accounted for twenty five percent (25%) of total
revenues compared to eighteen percent (18%) of total revenues for the same
period last year. The petro-chemical business accounted for twenty four
percent (24%) of 1999 third quarter revenues, compared to thirty eight percent
(38%) for the quarter ended December 31, 1998. The pulp and paper market
accounted for thirty one percent (31%) of revenues compared to fifteen
percent (15%) in the comparable period a year ago. The revenue contribution
of all other businesses collectively was twenty percent (20%) compared to
twenty nine percent (29%) for the same period last year.
The gross margin for the period was Three Million Seven Hundred Eighty Two
Thousand ($3,782,000) compared to Three Million Five Hundred Sixty
Nine Thousand ($3,569,000) for the same period last year. As a percent of
revenue, the gross margin remained constant at twenty percent (20%) when
compared to the period ended December 31, 1998. The power generation market
margin contribution was twenty eight percent (28%) versus twenty percent (20%)
for the same period last year. The margin contribution for the petro-chemical
business decreased to thirty one percent (31%) from forty six percent (46%) a
year ago. The pulp and paper industry accounted for forty one percent (41%) of
gross margin, up from twelve percent (12%) during the same period last year.
All other markets contributed zero (0%) of gross margin compared to twenty two
percent (22%) in the comparable period a year ago. This decline in the gross
margin, by all other market sectors, was attributed to two large contracts that
suffered losses during the period. Changes in margin contribution were related
to shifts in revenues between market sectors.
General and administrative expenses for the quarter were Two Million Nine
Hundred Ninety Two Thousand ($2,992,000) compared to Two Million Seven Hundred
Fifty Three Thousand ($2,753,000) the same period last year. As a percentage
of revenue General and Administrative expenses remained constant at sixteen
percent (16%). The increase in general and administrative expenses was due
primarily to professional fees described below (in the nine month comparison).
Income from operations was Seven Hundred Ninety Thousand ($790,000) compared to
Eight Hundred Fifteen Thousand ($815,000) for the same period last year.
Interest expense for the period was Five Hundred Five Thousand ($505,000)
compared to Four Hundred Fifty Two Thousand ($452,000) for the same period a
year ago. The increase was due to increased interest rates in the quarter.
Other income, net of other expense, was Thirty One Thousand ($31,000) compared
to other expense, net of other income, of Fifty Eight Thousand ($58,000) for
the same period a year ago.
Income tax expense was One Hundred Sixty Two Thousand ($162,000) for the
period compared to Eighty Two Thousand ($82,000) for the same period a year
ago.
The Company posted net earnings of One Hundred Fifty Four Thousand $154,000 or
$0.06 (Basic) per share compared to Two Hundred Twenty Three Thousand $223,000
or $0.09 (Basic) per share for the same period in the prior year.
NINE MONTHS ENDED DECEMBER 31, 1999
COMPARED TO THE NINE MONTHS ENDED DECEMBER 31, 1998
Revenues for the period were Fifty Three Million Seventy Three Thousand
($53,073,000) compared to Fifty Four Million Fifty Thousand ($54,050,000) for
the prior year.
The power generation market accounted for twenty seven percent (27%) of total
revenues compared to twenty one percent (21%) percent of total revenues for the
same period last year. The petro-chemical business was twenty six percent
(26%) compared to thirty nine percent (39%) of revenues for the same period
last year. The pulp and paper market accounted for twenty three percent (23%)
of revenues compared to sixteen percent (16%) for the same period last year.
The revenue contribution of all other businesses collectively was unchanged
at twenty-four percent (24%) compared to the same period last year.
The gross margin when compared to the same period a year ago increased Two
Hundred Ninety Three Thousand ($293,000) to Ten Million Six Hundred Seventy
Thousand ($10,670,000). As a percent of revenue, the gross margin for the nine
months ended December 31, 1999 was twenty percent (20%) compared to nineteen
percent (19%) for the prior year. The power generation market margin
contribution was twenty eight percent (28%) versus twenty one percent (21%) for
the same period last year. The margin contribution of the petro-chemical
business decreased to twenty five percent (25%) from forty one percent (41%) a
year ago. The pulp and paper industry accounted for twenty eight percent (28%)
of gross margin, up from fourteen percent (14%) during the same period last
year. All other markets contributed nineteen percent (19%) of gross margin
compared to twenty four percent (24%) in the comparable period a year ago.
This decline in the gross margin, by all other market sectors, was attributed
to two large contracts that suffered losses during the period.
General and administrative expenses compared to the first nine months last year
increased One Million Three Hundred Fifteen Thousand ($1,315,000) to Eight
Million Eight Hundred Sixty Nine Thousand ($8,869,000). As a percentage of
revenue General and Administrative expenses increased to seventeen percent
(17%) from fourteen percent (14%) a year ago.
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 $341,000 of fees and expenses were incurred in
the second quarter and third 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 Million Eight Hundred One Thousand ($1,801,000)
compared to Two Million Eight Hundred Twenty Two Thousand ($2,822,000) for the
same period last year. The Company believes this reduction is attributed to
General and Administrative expenses incurred during the year.
Interest expense was One Million Three Hundred Thirty Six Thousand ($1,336,000)
compared to One Million Four Hundred Four Thousand ($1,404,000) the same period
a year ago.
Other expenses, net of income, was Eleven Thousand ($11,000) compared to Twenty
Four Thousand ($24,000) a year ago.
Income taxes of Two Hundred Sixty Nine Thousand ($269,000) were accrued for the
period compared to Five Hundred Fifty Eight Thousand ($558,000) for the same
period a year ago.
The net earnings for the first nine months of fiscal year 1999 was
approximately One Hundred Eight Five Thousand $185,000 or $0.07 per share
(Basic) compared to Eight Hundred Thirty Seven Thousand $837,000 or $0.34
per share (Basic) 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 was
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 stock appreciation rights that have been or
may be granted to the McShane Group. On December 20, 1999, Mr. Ted Mansfield
was appointed President and Chief Executive Officer of Canisco. Mr. Mansfield
will also continue in the capacity as President of Mansfield Industrial
Coatings, Inc. Mr. Mark Chuplis was appointed President of Cannon Sline, Inc.
on December 20, 1999. Mr. Huitt will continue to act as consultant to the
Company with respect to further implementation of a profit improvement plan and
strategic planning.
The Company is continuing to implement a number of management and restructuring
changes. 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 December 31, 1999, the Company had borrowed approximately $11,137,000 on its
revolving credit line and had an outstanding principal balance of $5,309,000 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 December 31, 1999, the Company had working capital of approximately
$9,050,000 compared to working capital of $8,496,000 for fiscal year end 1999.
The increase in working capital was due primarily to the increase in accounts
receivable decrease in accounts payable and other accrued expenses offset
somewhat by the decrease in inventory and other prepaid expenses and current
assets and increase in billings in excess of costs and estimated earnings on
uncompleted contracts.
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.
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 Senior 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 Nine Month
Period Ended December 31, 1999.
B. Reports on Form 8-K.
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: February 14, 2000 CANISCO RESOURCES, INC.
/s/ Ted L. Mansfield
Ted L. Mansfield
President and CEO
/s/ Michael J. Olson
Michael J. Olson
Chief Financial Officer
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