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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
---------------------
For the Fiscal Year May 31, 1996 Commission File Number 0-25104
CONTINENTAL INFORMATION SYSTEMS
CORPORATION
(Exact name of registrant)
New York 16-0956508
(State of incorporation) (I.R.S. Employer Identification Number)
One Northern Concourse, P.O. Box 4785, Syracuse, New York 13221-4785
(Address of principal executive offices and zip code)
(315) 455-1900
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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 the 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 number of the registrant's shares of Common Stock outstanding on July 31,
1996 was 6,999,040.
As of July 31, 1996, the aggregate market value of the shares of Common Stock
held by non-affiliates of the registrant was approximately $10,939,421.*
* Excludes 1,164,682 shares deemed to be held by officers and directors, and
shareholders whose ownership exceeds ten percent of the shares outstanding at
July 31, 1996. Exclusion of shares held by any person should not be construed to
indicate that such person possesses the power, direct or indirect, to direct or
cause the direction of the management or policies of the registrant, or that
such person is controlled by or under common control with the registrant.
PART I
ITEM 1. BUSINESS
General
The Company is engaged in the business of buying and selling telecommunications
equipment, high speed production laser printing systems, and commercial
aircraft, and provides leasing services in connection with the sale of such
equipment. From its founding in 1968, the Company had been primarily engaged in
the sale and marketing of International Business Machines Corporation ("IBM")
mainframe and peripheral computer equipment. However, in more recent years, the
computer industry has undergone a fundamental transformation highlighted by
technological advances, increased competition, increased demand for open and
interoperable computing systems, and a shift in market demand toward distributed
computing and client/server technology and away from mainframe computing. The
result has been an erosion of margins and a growing focus by customers on
information processing solutions rather than on hardware. As a result, the
Company has departed the computer market and has expanded into other more
attractive capital equipment markets including commercial aircraft,
telecommunications, and laser printing systems.
For the twelve months ending May 31, 1996, approximately 62% of the Company's
revenues from continuing operations were derived from its buying and selling
("buy/sell") activities, approximately 29% from its leasing activities and
approximately 9% from interest, fees and other income.
More recently, the Company has adjusted its strategic direction to focus its
efforts on the buying and selling of capital equipment in existing and new
markets. This decision follows an evaluation of the capital intensive nature of
the leasing business, the opportunity for utilization of existing tax loss
carryforwards, and the need to reduce the Company's operating cost structure and
increase operating profitability. Accordingly, the Company has decided to pursue
expansion of the equipment sales business and curtail its leasing operations. As
a result, management intends to sell substantially all of its lease portfolio
and utilize the proceeds to support its expansion of the equipment sales
business. Such expansion is expected to occur through the growth of existing
business lines as well as through external means by acquisition of businesses
engaged in the distribution of new and refurbished capital equipment. The
Company intends to identify acquisition candidates that can complement and
broaden the Company's existing product lines and equipment sales activity, and
expand the Company's marketing capabilities. The Company will continue to offer
a leasing alternative to its customers, when and as needed, as a means of sales
support.
The Company currently conducts its operations through four principal operating
subsidiaries: CIS Corporation ("CIS"), a New York corporation, CMI Corporation
("CMI"), a Michigan corporation, GMCCCS Corp. ("LaserAccess"), a California
corporation and CIS Air Corporation ("CIS Air"), a Delaware corporation. Both
CIS and CMI conduct some of their operations through subsidiaries including, in
the case of CIS, LaserAccess and CIS Air. Although CIS and CMI have not been
merged, their operations have been integrated with the Company's principal
executive offices located at One Northern Concourse, Syracuse, New York
13221-4785. The Company's subsidiaries have offices throughout the United
States.
On November 29, 1994 (the "Confirmation Date"), the United States Bankruptcy
Court for the Southern District of New York (the "Bankruptcy Court") modified
and confirmed the Company's Joint Plan of Reorganization (the "Plan of
Reorganization"). The Company emerged from bankruptcy when the Plan of
Reorganization became effective and the transactions contemplated thereby were
consummated on December 21, 1994 (the "Effective Date").
Acquisition Strategy
The Company's acquisition strategy is to acquire profitable equipment
refurbishment and distribution businesses with strong management and well
developed market positions and customer franchises. Acquisitions will generally
be defined as either a filler or new market acquisition. Filler acquisitions
generally represent new sales territories within existing product groups which
are easily combined with current operations. New market acquisitions represent
the addition of new product groups or the entry into new geographic markets, or
both. The recent acquisition of GMCCCS Corp. (doing business as LaserAccess) is
an example of a new market acquisition that provides the Company's initial entry
into the refurbishment and distribution of high speed production laser printing
systems.
The Company has retained the services of an outside financial advisory firm to
assist in the identification of acquisition candidates.
Laser Printing Systems Equipment
On March 8, 1996, the Company, through its CIS subsidiary, completed the
acquisition of 100% of the outstanding shares of LaserAccess. LaserAccess is a
San Diego, California based buy/sell technical sales and marketing business
specializing in marketing previously-owned Xerox High Speed Laser Printing
Systems. The Company had been a marketing partner of LaserAccess since 1991. The
consideration consists of a combination of cash and notes approximating $4.6
million, and the terms of the agreement provide for future incentive payments,
assuming LaserAccess achieves certain earnings levels. LaserAccess had revenue
of $5.4 million for the year ended December 31, 1995, and pretax income for the
year then ended of $1.2 million. (See Note 2 to the Company's Financial
Statements.) LaserAccess had not been subject to Federal and State income taxes
since it was a Subchapter S Corporation prior to the acquisition by the Company.
The Company believes that this transaction is representative of the new business
strategy it has adopted. LaserAccess operates in a focused market and has
established a presence in a relatively short period of time. The addition of
LaserAccess also complements the Company's existing product lines and further
broadens the Company's equipment sales activity.
The Company will continue to buy and sell high and low end, new and used, laser
printing systems. Through its LaserAccess technical and engineering facility,
the Company now has the added capability to completely refurbish and maintain an
inventory of Xerox High Speed Laser Printing Systems. LaserAccess provides
customer assurance and guarantees each system to be eligible for either a Xerox
or third party maintenance contract. These capabilities give the Company an
advantage over many of its competitors.
Telecommunications Equipment
The Company's efforts in the telecommunications/telephony market will continue
to be focused on providing both new and used AT&T, Rolm and Northern Telecom
equipment to a nationwide customer base of users with mid-size or larger phone
systems. By specializing in equipment manufactured by these vendors, the Company
is positioned to sell to approximately 60% of the PBX and key systems users
throughout the US. In addition, the Company's concentration of its efforts
within these product lines allows it to provide high levels of marketing and
technical support not available from all of the Company's competitors.
The Company actively seeks opportunities to purchase telecommunications
equipment from dealers, telephone companies, leasing companies and end users. By
actively soliciting used equipment, the Company is often able to obtain
equipment at below market prices giving it the potential to increase sales
revenues as a result.
CIS Air Corporation
Through its wholly-owned subsidiary CIS Air, the Company participates in the
worldwide market for the acquisition, sale and leasing of used, primarily
narrow-bodied, aircraft subject to short-term operating leases. CIS Air's
participation in this market is largely conducted through its acquisition of
whole aircraft and/or aircraft engines that are then sold, leased or dismantled
and sold as replacement parts. The Company believes that it can compete
successfully in this market since larger companies are generally not active in
this end of the market, the Company has a stronger financial position than some
of its competitors, and the Company is able to enter into short term leases and
rentals of aircraft and engines.
In addition, a subsidiary of CIS Air manages a portfolio of aircraft on behalf
of the JetStream L.P. and JetStream II L.P. limited partnerships that were
formed in 1987, the units of which are publicly held. The subsidiary, CIS
Aircraft Partners, Inc., serves as the managing general partner of the limited
partnerships while Jet Aircraft Leasing, Inc. (a Lehman Brothers, Inc.
affiliate) acts as the administrative general partner. The limited partnerships
are engaged in the business of managing a portfolio of used commercial aircraft
subject to triple net operating leases with commercial air carriers.
Although the recent improvement in the airline industry has contributed to a
modest improvement in the demand for certain types of aircraft, overall
conditions in the aircraft industry remain competitive. Additionally, future
sales and leasing opportunities for the types of aircraft the Company deals in
may be limited as a result of the implementation of noise compliance regulations
which take full effect in the year 2000. Also, recent airline industry accidents
may prompt regulatory actions by the Federal Aviation Administration or other
governmental bodies that may affect this market.
Equipment Leasing
As noted previously, the Company has decided to pursue expansion of the
equipment sales business and curtail its leasing operations. The Company will
continue to offer a leasing alternative to its customers as a means of sales
support, however the origination of leases will not be a primary objective.
The Company has conducted its leasing business in a manner designed to conserve
working capital and minimize credit exposure. The Company generally enters into
lease transactions with creditworthy companies whose leases can be readily
discounted, on a non-recourse basis, with banks or finance companies. The
Company's credit standards reflect the then current and anticipated market for
transactions of the type originated by the Company. The creditworthiness of an
individual customer is evaluated through a review of the customer's public debt
rating and/or an analysis of the customer's financial statements and credit
references. After the debt is repaid over the term of the initial lease, the
subsequent re-lease or remarketing of the equipment generates additional cash
flow for the Company. During Fiscal 1996, the Company entered into a vendor
leasing arrangement with C-Cam International, Inc., a manufacturer of intermodal
tank containers designed for transport on a variety of platforms throughout the
world. To date, no equipment financings have occurred in connection with this
arrangement.
Financing
In July 1996, CIS Air and LaserAccess completed a $7 million secured revolving
working capital facility with a unit of Norwest Bank, N.A. Advances under the
Norwest agreement are collateralized by inventory and receivables of CIS Air and
LaserAccess. In connection with its existing leasing operations, the Company
finalized a $5 million secured revolving multifacility loan agreement with the
Vendor Finance Division of Heller Financial, Inc. in April 1996. The Company
also completed, in July 1996, a $5 million secured revolving credit facility
with CoreStates Bank, N.A. Advances under the Heller and CoreStates agreements
are secured by equipment leases.
Discontinued and Sold Businesses
The Company had conducted a portion of its business through its Aviron Computer
Technologies, Inc. ("Aviron") and TLP Leasing Programs, Inc. ("TLP")
subsidiaries for all or part of the Company's fiscal year ended May 31, 1996
("Fiscal 1996"). As described below, the Company sold its TLP group of companies
to a group led by former TLP managers in January 1996, and announced the
discontinuation of operations of a business which included Aviron in April 1996.
Aviron Computer Technologies, Inc.- On April 3, 1996, the Company announced its
decision to discontinue an operation, including Aviron, that purchased and sold
used computer equipment and provided related technical services. After that
date, the Company attempted to locate a buyer for the operation. On June 5,
1996, the Company announced it had abandoned its efforts to sell the operations
and had decided instead to liquidate the assets which consisted principally of
used computer equipment inventories and fixed assets. The Company reported a
loss of $1,177,000 (net of $698,000 deferred tax benefit) for Fiscal 1996 from
the discontinuance of these operations. (See Note 3 to the Company's Financial
Statements.)
TLP Leasing Programs, Inc.- The TLP operations were sold on January 9, 1996 to a
group led by members of TLP's former management. The Company concluded that (i)
the Company would no longer be engaging in the types of business which TLP could
support by creating new income funds as a financing source for the Company and
(ii) the market was not favorable for TLP to profitably acquire transactions on
its own from third party originators for placement in new income funds or
similar investment structures. The TLP businesses were sold for $2,208,000 cash
at closing plus a 90 day note for $300,000. The 90 day note was paid in full on
April 1, 1996. The sale price of the TLP companies approximated their book value
and, therefore, did not significantly affect the results of operations of the
Company for Fiscal 1996. (See Note 4 to the Company's Financial Statements.)
NC3, Inc.- NC3, also known as the National Commodity Clearance Center, began
operating in October, 1993. NC3's operations were commenced to take advantage of
the "aftermarket" in used, new returned and new excess inventory of high quality
brand-name computer equipment and other electronic office products consisting
mainly of personal computers, printers, terminals and photocopiers. In May 1995,
the Board decided to discontinue all NC3 operations effective immediately. As a
result of the Board's action, the remaining NC3 inventory was sold through a
formal bid process, and, except for the resolution of its office lease (see ITEM
2. "PROPERTIES"), NC3's operations were entirely discontinued in Fiscal 1996.
The Company took a $1,137,000 charge (net of $763,000 deferred tax benefit) for
the disposal of NC3's assets for the six months ended May 31, 1995. (See Note 3
to the Company's Financial Statements.)
Customers and Marketing
A majority of the Company's sales are with repeat customers under normal
commercial terms. The Company's management believes that its business is not
dependent on any single customer or any single source for the equipment marketed
by the Company.
Competition
The Company competes with other companies in each aspect of its business. These
firms include other equipment dealers, brokers, leasing companies and financing
institutions, including commercial banks and investment banking firms.
With respect to other capital equipment such as aircraft, the Company competes
with aircraft manufacturers, distributors, airlines and other operators,
equipment managers, leasing companies, financial institutions and other parties
engaged in leasing, managing, marketing or remarketing aircraft.
The Company's continued ability to compete effectively is also materially
affected by its ability to attract and retain well-qualified personnel and by
the availability of financing at competitive interest rates. Many of the
Company's competitors have greater financial resources, economies of scale and
lower capital costs than the Company and, as a result, no assurance can be given
that the Company will be successful in operating profitably or in obtaining
access to competitive capital sources.
Employees
As of August 1, 1996, the Company had approximately 74 full-time employees,
including 25 in administration and 49 in sales and sales support. Of the
employees engaged in sales and sales support, 25 are marketing representatives
who are compensated substantially on a commission basis.
Seasonality and Backlogs
Revenues have historically shown a seasonal fluctuation, based largely on the
staggered fiscal years of its customer base as many lease and purchase decisions
are made on the basis of customer budget constraints, but the Company's business
is not seasonal in nature. The Company does not have a significant amount of
backlog orders as a result of its operations.
ITEM 2. PROPERTIES
The Company is leasing its corporate headquarters facility for a period of three
years (commencing August 1, 1994) with options to: (i) renew for 1, 2, 3 or 4
years at the end of the lease term, and; (ii) reduce the amount of occupied
space on the effective date of such renewal. The facility is located in North
Syracuse, New York, and has approximately 27,000 square feet of usable floor
space, all of which was being utilized by the Company at the end of Fiscal 1996,
at a cost of $25,575 per month.
Aviron's lease of approximately 14,700 square feet of space at its Mine Hill,
New Jersey location and its lease of approximately 43,000 square feet of space
at its Westmont, Illinois facility were terminated effective June 30, 1996. The
New Jersey lease was for Aviron's headquarters and warehouse space. The
headquarters comprised approximately 14,700 square feet of office, equipment
refurbishing and warehouse space and was rented for $9,000 per month on a month
to month basis at the end of Fiscal 1996. The Westmont, Illinois lease comprised
approximately 43,000 square feet of warehouse, office and refurbishment areas
and was rented for $16,000 per month on a month to month basis at the end of
Fiscal 1996. A payment of $32,000 was required to terminate this lease.
LaserAccess leases approximately 7,900 square feet of warehouse space in La
Jolla, California. This space houses LaserAccess's printer refurbishing and
technical operations. The monthly rent for the warehouse facility is $4,787 and
the lease expires on January 31, 1998. In addition, LaserAccess leases
approximately 700 square feet of office space at its headquarters in San Diego,
California. The headquarters location is leased on a month to month basis at a
total monthly rental of $1,645. Finally, LaserAccess maintains one additional
sales office in Minneapolis, Minnesota which is rented for a non-material rental
amount. Likewise, the square footage of this office is not significant.
The Company's telecommunications group operates out of leased space formerly
occupied by NC3 which consists of approximately 63,000 square feet of combined
warehouse and office space in Syracuse, New York at a rate of $10,500 per month.
The Company's telecommunications operations account for approximately 14,000
square feet of office, technical and warehouse space. The remainder of the
facility is fully subleased to three separate sub-tenants for a total monthly
rental income to the Company of $6,700. One sublease, however, is scheduled to
expire on November 5, 1996, so that the ongoing rental received by the Company
for its sublease of the excess space is anticipated to be $6,100 from November
6, 1996 through the anticipated expiration date of its lease. The lease for this
facility is scheduled to expire on May 31, 1997.
The Company maintains one additional sales office in Stamford, Connecticut and a
second sales office in Los Angeles, California, both of which are rented for
non-material rental amounts. Likewise, the square footage of these offices is
not significant.
ITEM 3. LEGAL PROCEEDINGS
The Company is not party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders during the
fourth quarter of its fiscal year.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
After emerging from reorganization, the Company's Common Stock began trading on
the NASDAQ SmallCap Market under the symbol CISC on May 16, 1995. The Company's
Common Stock was traded on a limited basis on the over-the-counter market
between March 29 and May 15, 1995. Bid information was obtained from NASDAQ and
the National Quotation Bureau, Inc. The high and low bid information for the
period March 29, 1995 through May 31, 1996 is as follows:
First Quarter Second Quarter Third Quarter Fourth Quarter
----------------- ------------------ ------------------- ---------------------
Low High Low High Low High Low High
--- ---- --- ---- --- ---- --- ----
Fiscal Year ended May
31, 1996 $ 2.13 $ 3.50 $ 1.75 $ 2.63 $ 1.88 $ 2.38 $ 1.50 $ 2.44
Fiscal Year
ended May 31, 1995 N/A N/A N/A N/A N/A N/A $ 2.00 $ 4.00
As of July 31, 1996, there were 1,558 record holders of the Company's Common
Stock. No cash dividends have been paid on the Common Stock to date.
Continental Information Systems Corporation and its Subsidiaries
ITEM 6. SELECTED FINANCIAL DATA:
The following table sets forth a summary of selected financial data for
Continental Information Systems Corporation and its Subsidiaries (the "Company")
as of the dates and for each of the periods stated. To distinguish between the
operations of the Company after reorganization (sometimes referred to as the
"Reorganized Company") and operations prior to reorganization, the term
"Predecessor Company" will be used when reference is made to the
pre-reorganization periods. Due to the application of "Fresh Start" accounting
as of November 30, 1994 (the "Fresh Start Date"), the financial data as of and
for the fiscal year ended May 31, 1995 is presented in two parts: the six month
period commencing after the fresh start date and ending May 31, 1995 and the six
months period ending on the fresh start date, which was the end of the
Predecessor Company's second fiscal quarter.
This information should be read in conjunction with the Company's historical
financial statements, the related notes, and the other information contained
herein, including the information set forth in "ITEM 7. MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." The financial
data for the Reorganized Company is generally not comparable to the financial
data for the Predecessor Company due to the application of "fresh start"
accounting upon emergence from Chapter 11 pursuant to the Plan of
Reorganization.
(Dollars in thousands except per share amounts)
|
Reorganized Company | Predecessor Company
---------------------------|----------------------------------------------------
| For the six
Fiscal Year For the six | months ended Fiscal Year Ended
ended months ended | November 30, May 31,
Period Data: May 31, 1996 May 31, 1995 | 1994 1994 1993 1992
- ------------ ------------ ------------ --------- --------- --------- ---------
Total Revenues ................................... $ 26,822 $ 11,762 | $ 25,707 $ 54,193 $ 94,624 $ 132,001
Costs and expenses ............................... 25,211 9,529 | 17,501 54,941 108,371 182,035
-------- -------- | --------- --------- --------- ---------
Income (loss) from continuing operations |
before reorganization items, income |
taxes, fresh start adjustments and |
extraordinary item .......................... 1,611 2,233 | 8,206 (748) (13,747) (50,034)
Reorganization items ............................. -- -- | 8,945 134,224 31,715 47,463
-------- -------- | --------- --------- --------- ---------
Income (loss) from continuing operations |
before income taxes, fresh start |
adjustments and extraordinary item .......... 1,611 2,233 | 17,151 133,476 17,968 (2,571)
Income taxes ..................................... 611 849 | 45 100 100 150
-------- -------- | --------- --------- --------- ---------
Income (loss) from continuing operations |
before fresh start adjustments and |
extraordinary item ......................... 1,000 1,384 | 17,106 133,376 17,868 (2,721)
Loss from discontinued operations, net of tax.. (934) (2,997) | (4,882) (575) (1,138) (1,799)
-------- -------- | --------- --------- --------- ---------
Income (loss) before fresh start |
adjustments and extraordinary item .......... 66 (1,613) | 12,224 132,801 16,730 (4,520)
Fresh start adjustments .......................... -- -- | (3,264) -- -- --
-------- -------- | --------- --------- --------- ---------
|
Income (loss) before extraordinary item .......... 66 (1,613) | 8,960 132,801 16,730 (4,520)
Extraordinary item-Forgiveness of debt ........... -- -- | 96,317 -- -- --
-------- -------- | --------- --------- --------- ---------
|
Net income (loss) ................................ $ 66 $ (1,613) | $ 105,277 $ 132,801 $ 16,730 $ (4,520)
======== ======== | ========= ========= ========= =========
Net Income (Loss) Per Common Share:
Income from continuing operations ................ $ .14 $ .20
Loss from discontinued operations ................ (.13) (.43)
--------- ---------
Net income (loss) .................... $ .01 $ (.23)
========= =========
Note: Net income (loss) per share data are not presented for Predecessor
Company due to the general lack of comparability as a result of the
revised capital structure of the Reorganized Company.
(Dollars in thousands)
Reorganized Company | Predecessor Company
------------------- | -------------------
|
Fiscal Year For the six For the six | Fiscal Year Ended
Balance Sheet Data ended months ended months ended | May 31,
(at period end): May 31, 1996 May 31, 1995 November 30, 1994 | 1994 1993 1992
------------ ------------ ----------------- | ---- ---- ----
Total assets .......................... $53,550 $41,130 $47,323 | $ 231,173 $ 244,151 $ 289,298
Liabilities not subject to |
compromise ....................... 20,097 7,743 12,323 | 72,142 73,969 130,243
Liabilities subject to |
compromise ....................... -- -- -- | 268,258 412,210 417,815
Shareholders' equity .................. 33,453 33,387 35,000 | (109,227) (242,028) (258,760)
(deficit)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion and analysis of the financial condition and results of
operations of the Company should be read in conjunction with the consolidated
financial statements and the notes thereto which appear elsewhere in this Form
10-K.
All statements contained herein that are not historical facts, including but not
limited to, statements regarding anticipated future capital requirements, the
Company's future development and acquisition plans, the Company's ability to
obtain additional debt, equity or other financing, and the Company's ability to
generate cash from operations and further savings from existing operations, are
based on current expectations. These statements are forward looking in nature
and involve a number of risks and uncertainties. Actual results may differ
materially. Among the factors that could cause actual results to differ
materially are the following: the availability of sufficient capital to finance
the Company's business plan on terms satisfactory to the Company; competitive
factors, such as the introduction of new technologies and competitors into the
telecommunications equipment, laser printing systems, and commercial aircraft
industries; pricing pressures which could affect demand for the Company's
service; change in labor, equipment and capital costs; future acquisitions;
general business, economic and regulatory conditions; and the other risk factors
described from time to time in the Company's reports filed with the SEC. The
Company wishes to caution readers not to place undue reliance on any such
forward looking statements, which statements are made pursuant to the Private
Securities Litigation Reform Act of 1995 and, as such, speak only as of the date
made.
The Company emerged from Chapter 11 pursuant to a Plan of Reorganization which
was confirmed by the Bankruptcy Court on November 29, 1994. For financial
reporting purposes, the emergence from bankruptcy protection was recorded as of
November 30, 1994. The Plan of Reorganization provided for the distribution of
all of the Company's assets, except for specifically identified assets and
liabilities having a net fair tangible value of $30 million, and the Company's
newly-issued common stock, to a Liquidating Estate for distribution to the
creditors. In addition, all liabilities subject to compromise and certain
postpetition liabilities were assumed by the Liquidating Estate. The Plan of
Reorganization provided that no further recourse to the Company or any of its
subsidiaries may be had by any person with respect to any prepetition claims or
postpetition liabilities assumed by the Liquidating Estate. As a result of the
reorganization and application of "fresh start" accounting, financial
information before and after November 30, 1994 are not comparable. To
distinguish between the operations of the Company prior to reorganization and
operations after reorganization, the term "Predecessor Company" will be used for
the pre-reorganization periods. The following discussion should be read in
conjunction with the historical financial statements of the Company.
The Reorganized Company applied the "fresh start" provisions of AICPA Statement
of Position No. 90-7 ("SOP 90-7") as of November 30, 1994 and, accordingly, the
assets retained by the Reorganized Company were adjusted as of that date to
reflect their fair value. The reorganization value of $35 million approximated
the fair value of the Reorganized Company's net assets, including net deferred
tax assets of $5 million, and accordingly, no excess reorganization value over
amount allocable to identifiable assets has been recognized.
On May 25, 1995, the Company announced its decision to discontinue NC3, Inc.,
the Company's excess inventory business unit located in Syracuse, New York.
Additionally, on April 3, 1996, the Company announced its decision to
discontinue an operation, including its wholly-owned subsidiary, Aviron, that
purchased and sold used computer equipment and provided related technical
services. These discontinued operations will be reviewed separately from
continuing operations in the following discussion.
Due to the application of "fresh start" accounting as of November 30, 1994 (the
"Fresh Start Date"), the results of operations for the twelve months ended May
31, 1995 are presented in the accompanying Consolidated Statements of Operations
and Accumulated Deficit in two parts: the six month period commencing after the
Fresh Start Date and ending May 31, 1995 and the six month period ending on the
Fresh Start Date, which is the end of the Predecessor Company's second fiscal
quarter. Since this presentation increases the difficulty in making meaningful
year to year comparisons, the following unaudited pro forma Consolidated
Statements of Continuing Operations for Fiscal 1995 and 1994, as compared to
historical Fiscal 1996, are provided for management discussion purposes. The pro
forma statements are based on historical data adjusted as follows: (i) interest
expense on discounted leases for the Predecessor Company has been adjusted to
eliminate interest on debt obligations of the Liquidating Estate and, (ii)
interest expense has been increased to reflect the interest cost on the
estimated average principal balance outstanding on the note payable to the
Liquidating Estate. Reorganization items and loss from discontinued operations
have been excluded from the data presented to more closely represent normal
operations.
Consolidated Statements of Continuing Operations
(Unaudited)
(Dollars in thousands) Historical Pro Forma
---------- ---------
Fiscal Year Ended Fiscal Year Ended Fiscal year Ended
May 31, 1996 May 31, 1995 May 31, 1994
------------ ------------ ------------
Revenues:
Equipment rentals ................................................... $ 6,540 $14,226 $25,280
Income from direct financing leases ................................. 1,347 1,326 1,122
Equipment sales ..................................................... 16,657 15,342 22,806
Interest, fees and other income ..................................... 2,278 6,575 4,985
------- ------- -------
26,822 37,469 54,193
------- ------- -------
Costs and Expenses:
Depreciation of rental equipment .................................... 3,445 4,330 11,947
Cost of sales ....................................................... 11,899 9,058 14,922
Interest on secured liabilities ..................................... 551 471 302
Investor share, sublease and other operating expenses ............... 1,411 4,500 10,215
Selling, general and administrative expense ......................... 7,905 8,728 16,260
------- ------- -------
25,211 27,087 53,646
------- ------- -------
Income from continuing operations before income taxes ............... $ 1,611 $10,382 $ 547
======= ======= =======
RESULTS OF OPERATIONS
Continuing Operations
Recently, the Company has adjusted its strategic direction to focus its efforts
on the buying and selling of capital equipment in existing and new markets. This
decision follows an evaluation of the capital intensive nature of the leasing
business, the opportunity for utilization of existing tax loss carryforwards,
and the need to reduce the Company's operating cost structure and increase
operating profitability. Accordingly, the Company has decided to pursue
expansion of the equipment sales business and curtail its leasing operations. As
a result, management intends to sell substantially all of its lease portfolio
and utilize the proceeds to support its expansion of the equipment sales
business. Such expansion is expected to occur through the growth of existing
business lines as well as through external means by acquisition of businesses
engaged in the distribution of new and refurbished capital equipment. The
Company intends to identify acquisition candidates that can complement and
broaden the Company's existing product lines and equipment sales activity, and
expand the Company's marketing capabilities.
Total revenues decreased to $26.8 million in Fiscal 1996 from $37.5 million in
Fiscal 1995 and $54.2 million in Fiscal 1994. Equipment rentals and income from
direct financing leases decreased to $7.9 million in Fiscal 1996 from $15.6
million in Fiscal 1995 and $26.4 million in Fiscal 1994. These decreases
primarily reflect a "running out" of the old lease portfolio, developed prior to
and during the bankruptcy proceeding. Equipment sales increased by $1.4 million
in Fiscal 1996 to $16.7 million, from $15.3 million in Fiscal 1995. This
increase is principally attributable to higher sales in the aircraft business
unit and additional sales contributed by LaserAccess, since its acquisition on
March 8, 1996. Equipment sales decreased by $7.5 million in Fiscal 1995 to $15.3
million, from $22.8 million in Fiscal 1994. This decline was chiefly due to a
reduced volume of available equipment previously on lease to customers.
Interest, fees and other income decreased by $4.3 million in Fiscal 1996 to $2.3
million, from $6.6 million in Fiscal 1995. This decrease reflects a decline in
management fees received from income funds and a decrease in fees generated by
brokered transactions. Effective as of December 31, 1995, the Company sold TLP
Leasing Programs, a group of wholly-owned subsidiaries, to the current
management of TLP. These subsidiaries previously managed various income funds
and partnerships. Interest, fees and other income increased by $1.6 million in
Fiscal 1995 to $6.6 million, from $5.0 million in Fiscal 1994, due primarily to
an increase in management fees received from income funds and an increase in
fees generated by brokered transactions.
Costs and expenses decreased to $25.2 million in Fiscal 1996 from $27.1 million
in Fiscal 1995 and $53.6 million in Fiscal 1994. Within this category,
depreciation decreased to $3.4 million in Fiscal 1996 from $4.3 million in
Fiscal 1995 and $11.9 million in 1994. Additionally, investor share, sublease
and other operating expenses decreased to $1.4 million in Fiscal 1996, from $4.5
million in Fiscal 1995 and $10.2 million in Fiscal 1994. Depreciation, investor
share, and other operating expenses are associated with the portfolio of rental
equipment and the decrease in these items is directly related to the diminishing
portfolio of this equipment, as noted above. Cost of sales increased by $2.8
million in Fiscal 1996 to $11.9 million from $9.1 million in Fiscal 1995. This
increase is directly related to the increased sales in the aircraft business
unit and additional sales contributed by LaserAccess, since its acquisition.
Cost of sales decreased by $5.9 million in Fiscal 1995 to $9.1 million from
$14.9 million in Fiscal 1994. This decline is directly attributable to a
decrease in sales of equipment previously on lease to customers. Cost of sales
as a percentage of sales for the fiscal years ended May 31, 1996, 1995 and 1994,
was 71.4%, 59.0% and 65.4%, respectively. These yearly variances are primarily
the result of product mix, with the aircraft business unit generating
significant margins on a relatively few large transactions and the
telecommunications and printing business units generating comparably lesser
margins on a greater number of transactions. Interest on secured liabilities was
$.6 million for Fiscal 1996, $.5 million for Fiscal 1995 and $.3 million for
Fiscal 1994. These yearly increases are the result of increased yearly average
debt outstanding. Selling, general and administrative expenses decreased to $7.9
million in Fiscal 1996 from $8.7 million in Fiscal 1995 and $16.3 million in
Fiscal 1994. These yearly decreases are principally due to staff reductions
between the periods.
For the following discussion of reorganization items, discontinued operations
and income taxes, please refer to the table contained in "ITEM 6. SELECTED
FINANCIAL DATA" on page 8.
Reorganization Items
Reorganization items represented income and expenses incurred by the Predecessor
Company resulting from bankruptcy and specific to the reorganization process.
These amounts are presented separately because of their non-operating nature.
Discontinued Operations
On April 3, 1996, the Company announced its decision to discontinue an
operation, including its wholly-owned subsidiary, Aviron, that purchased and
sold used computer equipment and provided related technical services. After that
date, the Company attempted to locate a buyer for the operation. On June 5,
1996, the Company announced it had abandoned its efforts to sell the operations
and would instead liquidate the assets which consisted principally of used
computer equipment inventories and fixed assets. The net loss from discontinued
operations for the year ended May 31, 1996, was $1,177,000 (net of $698,000
deferred tax benefit). In May 1995, the Company had attempted to change the
products and marketing strategies of Aviron to make it more competitive in the
current market. These actions resulted in a restructuring charge to operations
of $800,000 in the quarter ended May 31, 1995, for employee severance programs
affecting 13 employees, lease termination costs for excess facilities, and the
write-off of certain deferred costs relating to non-compete and consulting
arrangements having a book value of approximately $218,000. The restructuring
reserve has been completely utilized as of May 31, 1996, as a result of cash
payments for severance and excess facilities costs.
A summary of the results of operations of the discontinued buy/sell operation
follows (in thousands):
Reorganized Company | Predecessor Company
------------------- | -------------------
For the year For the six | For the six For the year
ended months ended | months ended ended
May 31, 1996 May 31, 1995 | November 30, 1994 May 31, 1994
------------ ------------ | ----------------- ------------
Revenues ............................................. $ 5,491 $ 5,352 | $ 10,580 $ 26,308
Costs and expenses ................................... 6,661 7,890 | 12,110 26,824
------- ------- | -------- --------
Loss from discontinued operations .................... (1,170) (2,538) | (1,530) (516)
Loss on disposal of discontinued |
operations ..................................... (705) -- | -- --
------- ------- | -------- --------
Loss before income tax benefit ....................... (1,875) (2,538) | (1,530) (516)
Income tax benefit ................................... (698) (971) | -- --
------- ------- | -------- --------
Net loss from discontinued |
operations ..................................... $(1,177) $(1,567) | $ (1,530) $ (516)
======= ======= | ======== ========
Additionally, on May 25, 1995, the Board of Directors approved the
discontinuance of NC3, Inc., the Company's excess inventory business unit
located in Syracuse, New York. The Company recorded a provision of $1,137,000
(net of $763,000 deferred tax benefit) in the quarter ended May 31, 1995,
relative to the disposal of NC3 assets and other charges related to the
discontinuance of the business unit. As of May 31, 1996, the Company had exited
the business and liquidated substantially all of the assets. A total of 14
employees were terminated in connection with the closing of this business.
Liabilities of the discontinued operation decreased from $744,000 at May 31,
1995 to $175,000 as of May 31, 1996, due to cash payments principally for
severance and facilities costs totaling approximately $239,000 and a net
reduction of $330,000 to adjust the amounts estimated for the loss on the
inventories, receivables, fixed assets and leased facility obligations. The
remaining liability of $175,000 as of May 31, 1996 is expected to be liquidated
by cash payments extending through approximately May 31, 1997. The adjustment of
the liability in the amount of $230,000 was recorded as a gain from discontinued
operations, net of deferred tax expenses of $87,000 in the quarter ended August
31, 1995. An additional adjustment of the liability in the amount of $100,000
was recorded as an offset to the loss on disposal of discontinued operations in
the quarter ended May 31, 1996.
A summary of the results of operations of the discontinued NC3 business unit
follows (in thousands):
Reorganized Company | Predecessor Company
------------------- | -------------------
For the year For the six | For the six For the year
ended months ended | months ended ended
May 31, 1996 May 31, 1995 | November 30, 1994 May 31, 1994
------------ ------------ | ----------------- ------------
Revenues ................................................... $-- $ 1,285 | $ 4,019 $ 1,742
Costs and expenses ......................................... -- 1,773 | 7,371 1,801
---- ------- | ------- -------
Loss from discontinued operations .......................... -- (488) | (3,352) (59)
Income (loss) on disposal of |
discontinued operations ............................... 330 (1,900) | -- --
---- ------- | ------- -------
Income (loss) before income |
tax (benefit) ......................................... 330 (2,388) | (3,352) (59)
Income tax (benefit) ....................................... 87 (958) | -- --
---- ------- | ------- -------
Net income (loss) from |
discontinued operations ............................... $243 $(1,430) | $(3,352) $ (59)
==== ======= | ======= =======
Income Taxes
For the year ended May 31, 1996 and for the six months ended May 31, 1995, a
provision for deferred income tax expense on income from continuing operations
was recorded in the amounts of $611,000 and $849,000, respectively.
Additionally, for the year ended May 31, 1996 and for the six months ended May
31, 1995, a deferred income tax benefit on loss from discontinued operations was
recognized in the amounts of $611,000 and $1,929,000, respectively. For the six
months ended November 30, 1994 and for the year ended May 31, 1994, a provision
for state income tax on income from continuing operations was recorded in the
amounts of $45,000 and $100,000, respectively. No provision for federal income
tax was required in these periods due to the effects of the Predecessor
Company's net operating loss ("NOL") carryforwards. In connection with applying
"fresh start" accounting as of November 30, 1994, the Reorganized Company
recognized deferred tax assets of approximately $5 million, net of a valuation
allowance of approximately $7 million, relating principally to NOL
carryforwards. Net deferred tax assets increased to $6,080,000 as of May 31,
1995 due to the Reorganized Company's operating losses during the six months
then ended. The pre-reorganization Federal NOL carryforwards giving rise to
deferred tax assets expire during the years 2004 to 2010. Utilization of the
Company's pre-reorganization Federal NOL carryforwards is limited to
approximately $2 million per year. Management will periodically evaluate the
realizability of the deferred tax assets based principally on actual and
expected operating results. In the event that an adjustment is required to
reduce the reorganized deferred tax asset in the future, such adjustment will be
charged to operations. Any future recognition of the tax benefits from the
Company's pre-reorganization net operating loss carryforwards in excess of the
net $5 million initially recorded will be recognized as a direct credit to
shareholders' equity as required under SOP 90-7.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations for the year ended May 31, 1996 of $6.8 million was
composed of cash provided by continuing operations of $7.9 million with $1.1
million being used in discontinued operations. Cash provided by continuing
operations arose primarily from net income of $1.0 million less non-cash
amortization of unearned income of $1.3 million plus non-cash depreciation and
amortization expense of $3.9 million, in addition to collections of rentals on
direct financing leases of $4.7 million. Cash provided by proceeds from sale of
equipment subject to operating leases of $2.2 million was offset by an increase
in accounts receivable and notes receivable and accrued interest and other
assets. The net change in balance sheet accounts has been adjusted for the
acquisition of LaserAccess and the sale of the TLP subsidiaries. New investment
in rental equipment for the year ended May 31, 1996 was $22.8 million as
compared to $2.4 million for the six months ended May 31, 1995, $4.5 million for
the six months ended November 30, 1994 and $11.8 million for the year ended May
31, 1994. The significant increase in rental equipment in the current period
resulted from the Company's acquisition of equipment subject to lease. Net cash
provided by the Company's sale of its TLP subsidiaries amounted to $.8 million.
Net cash used in the acquisition of LaserAccess was $1.9 million, in addition to
the issuance of notes payable in the amount of $2.3 million, payable in three
equal annual installments, commencing March 8, 1997, with interest at the rate
of 8.25% on the unpaid principal balance. During the year ended May 31, 1996,
the Reorganized Company made principal payments of $3.4 million on a note
payable to the Liquidating Estate, paying the note in full in March 1996.
Proceeds from lease, bank and institution financings were $15.4 million for the
year ended May 31, 1996, as compared to $.3 million for the six months ended May
31, 1995, $.8 million for the six months ended November 30, 1994 and none for
the year ended May 31, 1994. The significant increase in the current period
primarily represents discounted lease rental borrowings associated with the
purchase of rental equipment subject to lease.
Reorganization related adjustments for the six months ended November 30, 1994,
in the amount of $207.8 million, represent cash flows of the Predecessor Company
resulting from bankruptcy and specific to the reorganization process. During
this period, a $15.0 million payment was made to the Internal Revenue Service.
The $15.0 million balance due to the Internal Revenue Service, required under
the Settlement Agreement, was assumed by the Liquidating Estate and paid in
December 1994.
As noted previously, the Company has adjusted its strategic direction to focus
its efforts on the buying and selling of capital equipment in existing and new
markets. This decision follows an evaluation of the capital intensive nature of
the leasing business, the opportunity for utilization of existing tax loss
carryforwards, and the need to reduce the Company's operating cost structure,
and increase operating profitability. Accordingly, the Company has decided to
pursue expansion of the equipment sales business and curtail its leasing
operations. As a result, management intends to sell substantially all of its
lease portfolio and utilize the proceeds to support its expansion of the
equipment sales business. Such expansion is expected to occur through the growth
of existing business lines as well as through external means by acquisition of
businesses engaged in the distribution of new and refurbished capital equipment.
The Company expects that operations will generate sufficient cash to meet its
operating expenses and current obligations. The cash retained by the Company
pursuant to the Plan of Reorganization has been used to provide liquidity to
fund investment in new leases, inventory, and other investment opportunities.
Typically, companies in the business engaged in by the Company employ leverage
to enhance their returns. In April 1996, the Company finalized a revolving loan
agreement with an institution to provide interim and recourse/limited recourse
lease financing in the total amount of $5 million. At May 31, 1996,
approximately $.9 million was outstanding on the limited recourse portion of
this facility. Additionally, in July 1996, the Company finalized two revolving
loan agreements with institutions to provide (1) warehouse lease financing in
the amount of $5 million and (2) inventory financing for LaserAccess and CIS Air
in the amount of $7 million. The Company believes that the Company's asset base
will enable the Company to obtain sufficient capital to operate its business.
Failure to obtain, or delay in obtaining, debt financing at competitive rates
could affect the Company's ability to improve earnings, grow its buy/sell
business and finance acquisitions.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements:
(a) (1) Financial Statements
Reports of Independent Accountants
Consolidated Balance Sheets-May 31, 1996 and 1995
Consolidated Statements of Operations and Accumulated
Deficit-Year ended May 31, 1996, six months ended May
31, 1995 and November 30, 1994 and year ended May 31,
1994
Consolidated Statements of Cash Flows-Year ended May 31,
1996, six months ended May 31, 1995 and November 30,
1994 and year ended May 31, 1994
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
Valuation and Qualifying Accounts (Schedule II)
All other schedules are omitted because they are not
applicable or the required information is shown in the
financial statements or notes thereto.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Continental Information Systems Corporation
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Continental Information Systems Corporation (the "Company") and its subsidiaries
at May 31, 1996 and 1995, and the results of their operations and their cash
flows for the year ended May 31, 1996 and the six months ended May 31, 1995, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
As discussed in Note 1, on November 29, 1994, the United States Bankruptcy Court
for the Southern District of New York confirmed the Company's Plan of
Reorganization (the "Plan"). Confirmation of the Plan resulted in distribution
of all of the Company's assets in settlement of all of the Company's liabilities
through a Liquidating Estate, except for specifically identified assets and
liabilities having a net tangible fair value of $30 million retained by the
Company, and substantially terminates all rights and interests of equity
security holders as provided for in the Plan. The Plan was confirmed on November
29, 1994 and the Company emerged from bankruptcy. In connection with its
emergence from bankruptcy, the Company adopted fresh start reporting as of
November 30, 1994.
PRICE WATERHOUSE LLP
July 11, 1996
Syracuse, New York
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Continental Information Systems Corporation
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the results of operations and
cash flows of Continental Information Systems Corporation (the "Predecessor
Company") and its subsidiaries for the six months ended November 30, 1994 and
the year ended May 31, 1994, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audits 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
As discussed in Note 1, on January 13, 1989 the Predecessor Company filed a
petition with the United States Bankruptcy Court for the Southern District of
New York for reorganization under the provisions of Chapter 11 of the Bankruptcy
Code. The Predecessor Company's Plan of Reorganization was confirmed on November
29, 1994 and the Company emerged from Bankruptcy. In connection with its
emergence from bankruptcy, the Company adopted fresh start reporting.
PRICE WATERHOUSE LLP
January 20, 1995
Syracuse, New York
Continental Information Systems Corporation
and its Subsidiaries
In Thousands (Except per Share Data)
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
May 31,
1996 1995
---- ----
Assets:
Cash and cash equivalents $ 5,382 $ 13,015
Accounts receivable, net of allowance for
doubtful accounts of $53 and $170 2,300 1,836
Notes receivable 2,688 767
Inventory 3,639 3,352
Net investment in direct financing leases (Note 5) 15,783 5,437
Rental equipment, net (Note 6) 11,148 8,324
Net assets of discontinued operations (Note 3) - 351
Furniture, fixtures and equipment, net (Note 7) 625 1,059
Accrued interest and other assets 1,965 909
Goodwill, net of amortization of $67 (Note 2) 3,940 -
Deferred tax assets (Note 12) 6,080 6,080
------------ -----------
Total assets $ 53,550 $ 41,130
============ ===========
Liabilities and Shareholders' Equity:
Liabilities:
Accounts payable and other liabilities $ 2,949 $ 2,076
Net liabilities of discontinued operations (Note 3) 106 -
Discounted lease rental borrowings (Note 9) 14,738 2,126
Notes payable to former owners of acquired company (Note 2) 2,304 -
Note payable to Liquidating Estate (Note 8) - 3,391
Income tax liability (Note 12) - 150
------------ ------------
Total liabilities 20,097 7,743
------------ ------------
Shareholders' Equity:
Common stock, $.01 par value; authorized 10,000,000 shares, issued and
outstanding 6,999,040 and 7,000,000, excluding 960 treasury shares in 1996
and none in 1995, respectively
(Notes 10 and 11) 70 70
Additional paid-in capital 34,930 34,930
Accumulated deficit (1,547) (1,613)
------------ ------------
Total shareholders' equity 33,453 33,387
------------ ------------
Total liabilities and shareholders' equity $ 53,550 $ 41,130
============ ============
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS AND
ACCUMULATED DEFICIT
Reorganized Company | Predecessor Company
------------------- | -------------------
For the year For the six | For the six For the year
ended months ended | months ended ended
May 31, May 31, | November 30, May 31,
1996 1995 | 1994 1994
-------- -------- | --------- ---------
Revenues: |
Equipment rentals ............................................ $ 6,540 $ 4,726 | $ 9,500 $ 25,280
Income from direct financing leases .......................... 1,347 621 | 705 1,122
Equipment sales .............................................. 16,657 4,571 | 10,771 22,806
Interest, fees and other income .............................. 2,278 1,8444 | 4,731 4,985
-------- -------- | --------- ---------
26,822 11,762 | 25,707 54,193
-------- -------- | --------- ---------
Costs and Expenses: |
Depreciation of rental equipment ............................. 3,445 1,465 | 2,865 11,947
Cost of sales ................................................ 11,899 3,496 | 5,562 14,922
Interest on secured liabilities .............................. 551 277 | 137 1,597
Investor share, sublease and other |
operating expenses ........................................... 1,411 873 | 3,627 10,215
Selling, general and administrative expense .................. 7,905 3,418 | 5,310 16,260
-------- -------- | --------- ---------
25,211 9,529 | 17,501 54,941
-------- -------- | --------- ---------
Income (loss) from continuing operations |
before reorganization items, income taxes, |
fresh start adjustments and extraordinary items .............. 1,611 2,233 | 8,206 (748)
-------- -------- | --------- ---------
|
Reorganization Items: |
Earnings from accumulated cash resulting from
Chapter 11 proceedings ....................................... -- -- | 3,527 4,129
Bankruptcy related professional fees ......................... -- -- | (5,572) (11,830)
Gain on settlement of bankruptcy issues ...................... -- -- | 10,990 139,023
Other ........................................................ -- -- | -- 2,902
-------- -------- | --------- ---------
-- -- | 8,945 134,224
-------- -------- | --------- ---------
|
Income from continuing operations before |
income taxes, fresh start adjustments and |
extraordinary item ........................................... 1,611 2,233 | 17,151 133,476
Provision for income tax ..................................... 611 849 | 45 100
-------- -------- | --------- ---------
|
Income before discontinued operations, |
fresh start adjustments and |
extraordinary item ........................................... 1,000 1,384 | 17,106 133,376
-------- -------- | --------- ---------
CONSOLIDATED STATEMENTS OF OPERATIONS AND
ACCUMULATED DEFICIT
(continued)
Reorganized Company | Predecessor Company
------------------- | -------------------
For the year For the six | For the six For the year
ended months ended | months ended ended
May 31, May 31, | November 30, May 31,
1996 1995 | 1994 1994
-------- -------- | --------- ---------
Loss from discontinued operations, net |
of tax ....................................................... (725) (1,860) | (4,882) (575)
Loss on disposal of discontinued |
operations, net of tax ....................................... (209) (1,137) | -- --
-------- -------- | --------- ---------
Net loss from discontinued operations (Note 3) .............. (934) (2,997) | (4,882) (575)
-------- -------- | --------- ---------
|
Income (loss) before fresh start |
adjustments and extraordinary item ........................... 66 (1,613) | 12,224 132,801
|
Fresh start adjustments ...................................... -- -- | (3,264) --
-------- -------- | --------- ---------
|
Income (loss) before extraordinary item ........................ 66 (1,613) | 8,960 132,801
|
Extraordinary item-forgiveness of debt ....................... -- -- | 96,317 --
-------- -------- | --------- ---------
|
Net income (loss) ............................................ 66 (1,613) | 105,277 132,801
|
Retained earnings (Accumulated deficit), |
beginning of period .......................................... (1,613) -- | (140,408) (273,209)
|
Elimination of accumulated deficit ........................... -- -- | 35,131 --
-------- -------- | --------- ---------
|
Retained earnings (Accumulated deficit), |
end of period ................................................ $ (1,547) $ (1,613) | -- $(140,408)
======== ======== | ========= =========
Net income (loss) per share (Note 1):
Income from continuing operations ............................ $ .14 $ .20
Loss from discontinued operations ............................ (.13) (.43)
--------- ---------
Net income (loss) ........................................... $ .01 $ (.23)
========= =========
The accompanying notes are an integral part of these financial statements.
Continental Information Systems Corporation
and its Subsidiaries
In Thousands
CONSOLIDATED STATEMENTS OF CASH FLOWS
Reorganized Company | Predecessor Company
------------------- | -------------------
For the year For the six | For the six For the year
ended months ended | months ended ended
May 31, May 31, | November 30, May 31,
1996 1995 | 1994 1994
-------- -------- | --------- ---------
Cash flows from operating activities: |
Net income (loss) .................................................... $ 66 $ (1,613) | 105,277 $ 132,801
Less: Net loss from discontinued operations .......................... (934) (2,997) | (4,882) (575)
-------- -------- | --------- ---------
Net income from continuing operations ............................. 1,000 1,384 | 110,159 133,376
-------- -------- | --------- ---------
Adjustments to reconcile net income |
to net cash provided by operating activities: |
Reorganiation related adjustments- |
Gain on forgiveness of debt ....................................... -- -- | (96,317) --
Fresh start adjustments ........................................... -- -- | 3,043 --
Cash transferred to liquidating Estate ............................ -- -- | (106,554) --
Gain on settlement of lease, bank and |
institution financing ............................................. -- -- | (8,012) (114,244)
-------- -------- | --------- ---------
Reorganization related adjustments .............................. -- -- | (207,840) (114,244)
-------- -------- | --------- ---------
|
Other adjustments- |
Proceeds from sale of equipment subject to |
operating leases ............................................... 2,155 3,066 | 2,449 7,262
Amortization of unearned income ................................... (1,347) (621) | (705) (1,122)
Collections of rentals on direct financing loans .................. 4,665 1,761 | 2,092 5,756
Depreciation and amortization expense ............................. 3,967 1,699 | 3,309 14,126
Effect on cash flows of changes in: |
Marketable debt securities ..................................... -- -- | 25,829 39,409
Accounts receivable ............................................ (317) 1,215 | (2,436) 6,623
Notes receivable ............................................... (2,420) 186 | (7) (172)
Inventory ...................................................... 291 1,668 | 3,526 (1,497)
Accrued interest and other assets .............................. (1,157) 159 | 911 647
Accounts payable and other liabilities ......................... 616 (773) | (1,015) (8,709)
Income tax liability ........................................... 461 1,731 | (16,567) --
Deferred tax assets ............................................ -- (1,080) | -- --
-------- -------- | --------- ---------
|
Other adjustments ......................................... 6,914 9,011 | 17,386 62,323
-------- -------- | --------- ---------
Net cash provided by (used in) |
continuing operations .......................................... 7,914 10,395 | (80,295) 81,455
Net cash provided by (used in) |
discontinued operations......................................... (1,088) 1,950 | (6,001) (3,056)
-------- -------- | --------- ---------
Net cash provided by (used in)
operations ..................................................... 6,826 12,345 | (86,296) 78,399
-------- -------- | --------- ---------
CONSOLIDATED STATEMENTS OF CASH FLOWS
Reorganized Company | Predecessor Company
------------------- | -------------------
For the year For the six | For the six For the year
ended months ended | months ended ended
May 31, May 31, | November 30, May 31,
1996 1995 | 1994 1994
-------- -------- | --------- ---------
Cash flows from investing activities: |
Purchase of rental equipment ......................................... (22,800) (2,444) | (4,503) (11,817)
Purchase of property and equipment ................................... (36) (70) | (871) (454)
Net cash provided by the sale of TLP subsidiaries .................... 754 -- | -- --
Net cash used in the acquisition of LaserAccess subsidiary ........... (1,910) -- | -- --
-------- -------- | --------- ---------
Net cash used in investing activities .................... (23,992) (2,514) | (5,374) (12,271)
-------- -------- | --------- ---------
|
|
|
|
Cash flows from financing activities: |
Payments on building lease obligation ................................ -- -- | -- (900)
Payments on note payable to Liquidating Estate ....................... (3,391) (2,632) | -- --
Proceeds from lease, bank and institution financings ................. 15,368 254 | 845 --
Payments on lease, bank and institution financings ................... (2,444) 2,666) | (16,743)
-------- -------- | --------- ---------
|
Net cash provided by (used in) |
financing activities ..................................... 9,533 (3,609) | (1,821) (17,643)
-------- -------- | --------- ---------
|
Net increase (decrease) in cash and |
cash equivalents ......................................... (7,633) 6,222 | (93,491) 48,485
Cash and cash equivalents at beginning of period ..................... 13,015 6,793 | 100,284 51,799
-------- -------- | --------- ---------
Cash and cash equivalents at end of period ........................... $ 5,382 $ 13,015 | $ 6,793 $ 100,284
======== ======== | ========= =========
The accompanying notes are an integral part of these financial statements.
Contintental Information Systems Corporation
and its Subsidiaries
Notes to the Financial Statements
1. Summary of Significant Accounting Policies
Continental Information Systems Corporation and its Subsidiaries (the
"Company") are engaged in the business of buying and selling
telecommunications equipment, printing systems, and commercial aircraft,
and providing leasing services in connection with such equipment, and
certain other industrial equipment.
To distinguish between the operations of the Company after reorganization
(sometimes referred to as the "Reorganized Company") and operations prior
to reorganization, the term "Predecessor Company" will be used when
reference is made to the pre-reorganization periods. On January 13, 1989,
the Predecessor Company and certain of its subsidiaries filed voluntary
petitions for reorganization under Chapter 11 of the United States
Bankruptcy Code. On November 29, 1994 (the "Confirmation Date"), the
Bankruptcy Court confirmed the Company's Plan of Reorganization. The Plan
of Reorganization became effective on December 21, 1994 and the
Reorganized Company, and its subsidiaries which had filed petitions for
relief, emerged from Chapter 11. For financial reporting purposes, the
emergence from bankruptcy protection was recorded as of November 30, 1994,
the end of the Predecessor Company's second fiscal quarter. As a result of
the reorganization and "fresh start" reporting, the financial statements
of the Predecessor Company are not comparable to the financial statements
subsequent to November 30, 1994.
Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All intercompany accounts
have been eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents include checking and money market accounts with
financial institutions having original maturities of 90 days or less.
Concentration of Credit Risk
The Company extends credit through trade accounts receivable and leasing
transactions to its customers located throughout the U.S. Direct financing
and operating leases are secured by the underlying equipment. The Company
generally does not require collateral for trade accounts receivable.
Inventory and Related Revenue Recognition
Inventory consists of various printing, telecommunication, and aircraft
equipment purchased on a speculative basis for future sale or lease and is
stated at the lower of cost or market, cost being determined on a specific
identification basis. Revenues from the sale of equipment and the related
cost of the equipment are reflected in earnings at the time title to the
equipment passes to the customer which generally occurs upon shipment.
The Company performs ongoing analysis, at least quarterly, of the carrying
value of inventories on a specific identification basis and records
adjustments, as considered necessary, to reduce the carrying value of
inventories to estimated market value in the period such determination is
made. These adjustments are recorded as direct writedowns in the carrying
value of the inventory.
Lease Accounting Policies
Statement of Financial Accounting Standards No. 13 requires that a lessor
account for each lease by the direct financing method, sales-type method
or operating method. Presently, the Company has only direct financing and
operating leases. Net investment in direct financing leases consists of
the present value of the future minimum lease payments plus the present
value of the unguaranteed residual, representing the estimated fair market
value at lease termination. At the end of the lease term, the recorded
residual value of equipment under direct financing leases is reclassified
to rental equipment and is depreciated over its estimated remaining useful
life.
Lease income from direct financing leases consists of interest earned on
the present value of the lease payments and residual value. Revenue is
recognized over the lease term using the interest method.
Rental equipment consists of equipment under operating leases. Rental
equipment is depreciated on a straight-line basis to its residual value
over the estimated remaining useful life of such equipment. The original
useful lives generally range from three to seven years. Operating lease
revenues consist of the contractual lease payments and are recognized on a
straight-line basis over the lease term. Costs associated with operating
leases principally consist of depreciation of the equipment.
The Company makes adjustments to the carrying value of leased assets, if
necessary, when market conditions have resulted in value that is below net
book value. In accordance with "fresh start" reporting, the Company's
investment in direct financing leases and rental equipment were adjusted
to reflect fair value, and accumulated depreciation of rental equipment
was eliminated, as of November 30, 1994.
Deferred Commissions and Initial Direct Costs
Commissions and initial direct costs related to lease transactions are
capitalized as a component of the corresponding investment in direct
financing leases or rental equipment and amortized over the estimated
average lease term. Costs relating to investment in direct financing
leases are amortized using an interest method and costs relating to rental
equipment are amortized using the straight-line method.
Furniture, Fixtures and Equipment
In accordance with "fresh start" reporting, the Company's furniture,
fixtures and equipment was adjusted to reflect fair value and accumulated
depreciation was eliminated as of November 30, 1994. Additions after
November 30, 1994 are recorded at cost. Furniture, fixtures and equipment
are being depreciated using the straight-line method over the estimated
useful lives of such assets which range from three to five years.
Goodwill
Goodwill is the excess of the purchase price over the net assets of GMCCCS
Corp. (dba "LaserAccess") acquired March 8, 1996. Goodwill is being
amortized on a straight-line basis over 10 years. Amortization charged to
continuing operations in the current fiscal year amounted to $67,000. The
Company periodically reviews the value of its goodwill to determine if an
impairment has occurred. The Company measures the potential impairment of
recorded goodwill by the undiscounted value of expected future operating
cash flows in relation to its net capital investment in the subsidiary.
Based on its review, the Company does not believe that an impairment of
its goodwill has occurred.
Income Taxes
The Company accounts for income taxes under the asset and liability method
required by Financial Accounting Standard No. 109 (FAS 109), Accounting
for Income Taxes. FAS 109 requires the recording of assets and liabilities
for the future tax effects of temporary differences between the bases of
all assets and liabilities for financial reporting purposes and their tax
bases. When net deferred tax assets exist, FAS 109 requires the recording
of a valuation allowance to reduce tax assets to the amount which is more
likely than not to be realized.
Net Income (Loss) Per Share
Net income (loss) per share for the Reorganized Company for the year ended
May 31, 1996 and the six months ended May 31, 1995 was computed based on
the weighted average number of shares of common stock outstanding during
the periods, which were 6,999,399 and 7,000,000, respectively. As of May
31, 1996, the Company had granted options to purchase 24,000 shares of
common stock (see note 11). Since the exercise price of these options is
in excess of the average market price of the common stock for the year
ended May 31, 1996, the options are considered anti-dilutive and are not
included in the computation of net income per share. Net income (loss) per
share data are not presented for the Predecessor Company due to the
general lack of comparability as a result of the revised capital structure
of the Reorganized Company.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make 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 and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
Reclassifications
Certain prior period balances in the financial statements have been
reclassified to conform to the current period financial statement
presentation.
2. Acquisition
On March 8, 1996, the Company, through its wholly-owned subsidiary, CIS
Corporation, acquired 100% of the capital stock of GMCCCS Corp. (dba
"LaserAccess") for a purchase price of approximately $4,608,000, payable
in cash of approximately $2,304,000 at closing and the balance of
approximately $2,304,000 in the form of notes payable in three equal
annual installments, commencing March 8, 1997, with interest at the rate
of 8.25% on the unpaid principal balance. In addition to the purchase
price to be paid in cash and notes, CIS Corporation is obligated to pay
the sellers an annual earn out payment for each of the first four years
following the March 8, 1996 sale. The earn out payment is based upon the
annual pretax income of LaserAccess. LaserAccess is engaged in the sales
and marketing of remanufactured Xerox High Speed Laser Printing Systems.
The acquisition has been accounted for using the purchase method of
accounting. Allocations of the purchase price have been determined based
upon preliminary estimates of fair market value and, therefore, are
subject to change. The excess of the purchase price, over the net tangible
assets acquired, of approximately $4.0 million, is considered goodwill and
is being amortized on a straight line basis over ten years. LaserAccess'
results of operations since the date of the acquisition are included in
the accompanying consolidated statements of operations of the Company.
Unaudited pro forma data giving effect to the purchase as if it had been
acquired at the beginning of Fiscal 1995, with adjustments, primarily for
imputed interest charges attributable to notes payable to the former
owners and amortization of goodwill follows:
(In Thousands, except per share amounts)
For the year For the year
ended ended
May 31, 1996 May 31, 1995*
------------ ------------
Total Revenues $ 30,599 $ 40,346
========= ==========
Income from continuing operations $ 1,410 $ 9,472
========= ===========
Income per share from continuing operations $ .20 $ 1.35
========= ===========
Weighted average number of shares
outstanding 6,999,040 7,000,000
========= ===========
*The pro forma results of operations for the year ended May 31, 1995,
include the results of continuing operations of the Predecessor
Company for the six months ended November 30, 1994, as if the
reorganization had taken place at the beginning of the year.
Reorganization items and loss from discontinued operations have been
excluded from the pro forma results.
3. Discontinued Operations
On April 3, 1996, the Company announced its decision to discontinue an
operation, including its wholly-owned subsidiary, Aviron, that purchased
and sold used computer equipment and provided related technical services.
After that date, the Company had attempted to locate a buyer for the
operation. On June 5, 1996, the Company announced it had abandoned its
efforts to sell the operation and would instead liquidate the assets which
consisted principally of used computer equipment inventories and fixed
assets. The net loss from discontinued operations for the year ended May
31, 1996, was $1,177,000 (net of $698,000 deferred tax benefit). In May,
1995, the Company had attempted to change the products and marketing
strategies of Aviron to make it more competitive in the current market.
These actions resulted in a restructuring charge to operations of $800,000
in the quarter ended May 31, 1995, for employee severance programs
affecting 13 employees, lease termination costs for excess facilities, and
the write-off of certain deferred costs relating to non-compete and
consulting arrangements having a book value of approximately $218,000. The
restructuring reserve has been completely utilized as of May 31, 1996, as
a result of cash payments for severance and excess facilities costs.
Additionally, on May 25, 1995, the Board of Directors approved the
discontinuance of NC3, Inc., the Company's excess inventory business unit
located in Syracuse, New York. The Company recorded a provision of
$1,137,000 (net of $763,000 deferred tax benefit) in the quarter ended May
31, 1995, relative to the disposal of NC3 assets and other charges related
to the discontinuance of the business unit. As of May 31, 1996, the
Company had exited the business and liquidated substantially all of the
assets. A total of 14 employees were terminated in connection with the
closing of this business. Liabilities of the discontinued operation
decreased from $744,000 at May 31, 1995 to $175,000 as of May 31, 1996,
due to cash payments principally for severance and facilities costs
totaling approximately $239,000 and a net reduction of $330,000 to adjust
the amounts estimated for the loss on the inventories, receivables, fixed
assets and leased facility obligations. The remaining liability of
$175,000 as of May 31, 1996 is expected to be liquidated by cash payments
extending through approximately May 31, 1997. The adjustment of the
liability in the amount of $230,000 was recorded as a gain from
discontinued operations, net of deferred tax expenses of $87,000 in the
quarter ended August 31, 1995. An additional adjustment of the liability
in the amount of $100,000 was recorded an as offset to the loss on
disposal of discontinued operations in the quarter ended May 31, 1996.
The Consolidated Statements of Operations for all periods presented have
been reclassified to report the results of discontinued operations
separately from continuing operations. A summary of the results of
discontinued operations follows (in thousands):
Reorganized Company | Predecessor Company
------------------- | -------------------
For the year For the six | For the six For the year
ended months ended | months ended ended
May 31, 1996 May 31, 1995 | November 30, 1994 May 31, 1994
------------ ------------ | ----------------- ------------
Revenues $ 5,491 $ 6,637 | $ 14,599 $ 28,050
Costs and expenses 6,661 9,663 | 19,481 28,625
--------- ---------- | ---------- ---------
Loss from discontinued operations (1,170) (3,026) | (4,882) (575)
Loss on disposal of discontinued |
operations (375) (1,900) | - -
--------- ---------- | ---------- ---------
Loss before income tax benefit (1,545) (4,926) | (4,882) (575)
Income tax benefit (611) (1,929) | - -
--------- ---------- | ---------- ---------
Net loss from discontinued |
operations $ (934) $ (2,997) | $ (4,882) $ (575)
========== ========== | ========== ===========
The Consolidated Balance Sheets as of May 31, 1996 and 1995, have been
reclassified to report the net assets of discontinued operations
separately from the assets and liabilities of continuing operations. A
summary of the assets and liabilities of discontinued operations follows
(in thousands):
May 31,
1996 1995
---- ----
Assets:
Cash and cash equivalents .................................... $ 159 $ 253
Accounts receivable, net ..................................... 55 441
Inventory .................................................... 115 744
Furniture, fixtures and equipment, net ....................... 58 397
Accrued interest and other assets ............................ 16 137
----- ------
Total assets .......................................... 403 1,972
----- ------
Liabilities:
Accounts payable and accruals ................................ 44 295
Other liabilities ............................................ 465 744
Accrued restructuring charge, net ............................ -- 582
----- ------
Total liabilities ..................................... 509 1,621
----- ------
Net Assets (Liabilities) of Discontinued Operations . $(106) $ 351
===== ======
4. Sale of Subsidiaries
As of December 31, 1995, the Company sold TLP Leasing Programs ("TLP"), a
group of former subsidiaries located in Boston, Massachusetts, to TLP's
current management. TLP manages various income funds and partnerships. The
sales price approximated TLP's book value of approximately $2,500,000 and
therefore did not significantly affect the results of operations of the
Company for the fiscal year ended May 31, 1996.
5. Net Investment in Direct Financing Leases
The components of the net investment in direct financing leases as of May
31 are as follows (in thousands):
1996 1995
---- ----
Minimum lease payments receivable ..................... $ 17,044 $ 6,557
Initial direct costs and deferred commissions ......... 303 144
Estimated unguaranteed residual values ................ 2,483 191
Less: Unearned income ................................ (4,047) (1,455)
-------- -------
Net investment in direct financing leases ..... $ 15,783 $ 5,437
======== =======
Future minimum lease payments to be received under direct financing leases
for fiscal years ending May 31 are as follows (in thousands):
1997 $ 5,208
1998 4,742
1999 3,369
2000 2,413
2001 1,248
Beyond 2001 64
----------
$ 17,044
==========
Approximately 63% of these future lease streams are allocable to lenders
under financing agreements.
6. Rental Equipment
Rental equipment consists of the following as of May 31 (in thousands):
1996 1995
---- ----
Computer equipment .................................. $ 7,565 $ 3,754
Capital equipment ................................... 2,856 1,671
Telecommunication equipment ......................... 1,942 1,216
Aircraft equipment .................................. 3,485 2,887
Deferred commissions and initial direct costs ....... 211 261
-------- -------
16,059 9,789
Less: accumulated depreciation ..................... (4,911) (1,465)
-------- -------
$ 11,148 $ 8,324
======== =======
Future minimum lease payments to be received under operating leases for
the fiscal years ended May 31 are as follows (in thousands):
1997 $ 4,171
1998 2,788
1999 1,770
2000 525
2001 202
Beyond 2001 -
----------
$ 9,456
==========
Approximately 63% of these future lease streams are allocable to lenders
under financing agreements.
7. Furniture, Fixtures and Equipment
Furniture, fixtures and equipment consist of the following as of May 31
(in thousands):
1996 1995
---- ----
Leasehold improvements ........................... $ 423 $ 404
Computer equipment and software .................. 707 688
Furniture, fixtures and office equipment ......... 249 265
------- -------
1,379 1,357
Less: accumulated depreciation .................. (754) (298)
------- -------
$ 625 $ 1,059
======= =======
8. Note Payable to Liquidating Estate
In connection with the Plan of Reorganization, the Company executed a note
payable to the Liquidating Estate in the original amount of $6,023,000.
The note was paid in full in March 1996. The Company paid interest of
$118,000 for the fiscal year ended May 31, 1996, and $169,000 for the six
months ended May 31, 1995, relating to this note payable.
9. Discounted Lease Rental Borrowings
The Company finances certain leases by assigning the rentals to various
lending institutions at fixed rates on a recourse and non-recourse basis.
Discounted lease rental borrowings represent the present value of the
lease payments discounted at the rate charged by the lending institution.
Discounted lease rental borrowings are reduced on a monthly basis as the
corresponding lease rental stream is collected (generally by the lending
institutions). Amounts due under recourse borrowings are obligations of
the Company which are secured by the leased equipment and assignments of
lease receivables. Amounts due under non-recourse borrowings are secured
by the leased equipment and assignments of lease receivables with no
recourse to the general assets of the Company.
The Company has been financing leases on a one-on-one basis with a number
of institutions. However, in April 1996, the Company finalized a revolving
loan agreement with an institution to provide interim and recourse/limited
recourse lease financing in the total amount of $5,000,000. At May 31,
1996, approximately $948,000 was outstanding on the limited recourse
portion of this facility. Interest rates on the facility range from prime
rate plus 2% on the interim facility to 3.5% plus the weekly average
matched term rate for U.S. Treasury Bills on the recourse/limited recourse
facility. The institution has also agreed to provide non-recourse
financing on a one-on-one basis.
Discounted Lease Rental Borrowings as of May 31 are as follows (in
thousands):
1996 1995
---- ----
Non-recourse borrowings ..................... $14,488 $2,126
Recourse borrowings ......................... 250 --
------- ------
$14,738 $2,126
======= ======
The Company paid interest of $433,000 for the fiscal year ended May 31,
1996, and $108,000 for the six months ended May 31, 1995, relating to
discounted lease borrowings.
Discounted lease rental borrowings for the fiscal years ended May 31 are
payable as follows (in thousands):
1997 $ 4,106
1998 4,077
1999 2,948
2000 2,263
2001 1,344
Beyond 2001 -
----------
$ 14,738
==========
10. Common Stock
The Company's authorized capital stock consists of 10,000,000 shares of
Common Stock, $.01 par value. To the extent required by section
1123(a)(6) of the Bankruptcy Code, the Company will not issue nonvoting
equity securities. In connection with the Plan of Reorganization,
7,000,000 shares were issued to the Liquidating Estate for distribution
to the creditors and former shareholders of the Predecessor Company. In
October 1995, a wholly-owned subsidiary of the Company acquired 960
shares of the Company's Common Stock as a result of a partial
distribution by the Liquidating Estate of the Predecessor Company. The
partial distribution was in relation to a prepetition claim against the
Predecessor Company by certain partnerships in which the wholly-owned
subsidiary acted as general partner. The Company has classified the 960
shares as Treasury Stock in the accompanying balance sheet. Each share of
Common Stock entitles the holder to one vote on all matters submitted to
a vote of shareholders. The Company does not anticipate the payment of
dividends on the Common Stock for the foreseeable future.
11. Stock Option Plan
On July 6, 1995, the Board of Directors adopted the Continental
Information Systems Corporation 1995 Stock Compensation Plan (the "1995
Plan"). The 1995 Plan was approved by stockholders at the annual meeting
held September 27, 1995, in Syracuse, New York. The 1995 Plan provides
for the issuance of options covering up to 1,000,000 shares of Common
Stock and stock grants of up to 500,000 shares of Common Stock to
non-employee directors of the Company and, in the discretion of the
Compensation Committee, employees of and independent contractors and
consultants to the Company. As of May 31, 1996, nonqualified stock
options for shares of Common Stock had been granted to non-employee
directors as follows:
Number of Exercise Fair Market Value at Date
Date Granted Options Price of Grant
------------ ------- ----- -------------------------
May 16, 1995 15,000 $ 3.50 $ 52,500
September 27, 1995 9,000 2.50 22,500
------- ------
Balance - May 31, 1996 24,000 $ 75,000
======= ==========
As of May 31, 1996, options for 15,000 shares were exercisable.
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard No. 123 (FAS 123), "Accounting
for Stock-Based Compensation." This Statement defines a "fair value based
method" of accounting for an employee stock option or similar equity
instrument and encourages all entities to adopt that method of accounting
for all their employee stock option plans. However, it also allows an
entity to continue to measure compensation cost for those plans using the
"intrinsic value based method" of accounting prescribed by APB Opinion
No. 25, "Accounting for Stock Issued to Employees." Entities electing to
remain with the accounting in Opinion 25 must make pro forma disclosures
of net income and earnings per share as if the fair value based method of
accounting defined in this Statement had been applied. These pro forma
disclosure requirements are effective for financial statements for fiscal
years beginning after December 15, 1995. Presently, the Company intends
to continue to measure compensation cost for the 1995 Plan using the
"intrinsic value based methods" of accounting and present the appropriate
disclosures in Fiscal 1997. The differences between the methods are
presently not considered material to the financial position or results of
operations of the Company.
12. Income Taxes
The Company and its domestic subsidiaries file a consolidated federal
income tax return. In April 1994, the Predecessor Company reached a
settlement with the Internal Revenue Service relating to taxes for fiscal
years through May 1992. The liability associated with this settlement as
well as the liability for claims against the Predecessor Company for
state income taxes, have been assumed by the Liquidating Estate in
connection with the Plan of Reorganization. As part of the aforementioned
settlement, the Company is entitled to exclude approximately $141 million
of otherwise taxable income from gross income for the years 1990 through
2005 ("safe harbor income"). However, if the terms of the agreements
governing the safe harbor income are substantially modified or if certain
other changes take place, the IRS is entitled to seek to include the safe
harbor income in the Company's taxable income after Fiscal 1993.
Management considers the prospects for such changes and resultant actions
to be remote and accordingly has not provided an income tax liability for
such income.
As of November 30, 1994, $5 million in net deferred tax assets were
recorded under "fresh start" accounting (net of a valuation allowance of
$7 million) to reflect the amount of deferred tax assets which Management
believed more likely than not to be realized. The Company's total gross
deferred tax assets as of the Effective Date were approximately $12
million. The deferred tax assets relate principally to the net operating
loss carryforwards available to offset future taxable income of the
Reorganized Company, subject to an annual limitation of approximately $2
million (limited in the aggregate to approximately $35 million). These
carryforwards expire during the years 2004 to 2010. As of May 31, 1995,
deferred tax assets increased to $6,080,000 as a result of temporary
differences arising in the six months ended May 31, 1995.
In determining the amount of deferred tax benefits which are more likely
than not to be realized, the Company has projected that a minimum of
approximately $6 million of tax benefits will be generated by
post-reorganization operations during the fiscal periods ended through
May 31, 2001. In order to realize this level of tax benefit, cumulative
pretax income for the periods through 2001 will have to be at least
approximately $15 million, which the Company believes to be achievable.
While the Company believes that it will have a long operating life and
continue to generate profits from operations beyond that period,
Management believes, in the context of the "more likely than not"
criteria of FAS 109, that the recognition of benefits in excess of $6
million would be inappropriate in the circumstances. Any future
realization of tax benefits relating to pre-reorganization net operating
loss carryforwards in excess of the net $5 million initially recorded
will be recognized as a direct credit to stockholders' equity as required
under SOP 90-7.
The components of the provision for income taxes for both continuing and
discontinued operations are as follows (in thousands):
Reorganized Company | Predecessor Company
------------------- | -------------------
For the year For the six | For the six For the year For the year
ended months ended | months ended ended ended
May 31, May 31, | November 30, May 31, May 31,
1996 1995 | 1994 1994 1993
------- ------- | ---- ---- ----
Current |
Federal ........................ $ -- $ -- | $-- $-- $--
State .......................... -- -- | 45 100 100
------- ------- | ---- ---- ----
-- -- | 45 100 100
Deferred .............................. -- (1,080) | -- -- --
------- ------- | ---- ---- ----
$ -- $(1,080) | $ 45 $100 $100
======= ======= | ==== ==== ====
A reconciliation of income tax expense (benefit) at the statutory rate to
reported income tax expense (benefit) for continuing operations follows
(in thousands):
Reorganized Company | Predecessor Company
------------------- | -------------------
For the year For the six | For the six For the year For the year
ended months ended | months ended ended ended
May 31, May 31, | November 30, May 31, May 31,
1996 1995 | 1994 1994 1993
---- ---- | ---- ---- ----
|
U.S. Federal statutory rate |
applied to pretax income (loss) |
from continuing operations ........................ $548 $759 | $ 5,311 $ 46,515 $ 5,806
|
State income taxes, net of federal |
benefit ........................................... 63 90 | 45 100 100
|
Effect of permanent differences |
and changes in the valuation |
allowance ......................................... -- -- | (5,311) (46,515) (5,806)
---- ---- | ------- -------- -------
$611 $849 | $ 45 $ 100 $ 100
==== ==== | ======= ======== =======
The income tax effect of the significant temporary differences and
carryforwards which give rise to deferred tax assets and liabilities are
as follows as of May 31 (in thousands)
1996 1995
---- ----
Assets
Net operating losses ................... $ 16,422 $ 12,000
Other .................................. 1,014 1,441
Valuation allowance .................... (10,125) (7,361)
Liabilities
Leased assets .......................... (1,231) --
-------- --------
$ 6,080 $ 6,080
======== ========
13. Employee Benefit Plans
The Company maintains a defined contribution 401(k) plan covering
substantially all of its employees under which it is obligated to make
matching contributions at the rate of 50% of the first 2% of participant
earnings contributed to the plan and which provides for an annual
discretionary contribution based on participants' eligible compensation.
Matching and discretionary contributions made by the Company vest over a
five-year period. Company contributions to the plan for the fiscal year
ended May 31, 1996, and the six months ended May 31, 1995, were $76,000
and $26,000, respectively.
On January 4, 1995, the Company's Board of Directors authorized the
Company to enter into "change of control" agreement with six key
management employees. If there is a "change of control", as defined in
the agreements, and a reduction in duties, title or compensation of the
executives, and if the executive leaves (except with cause or due to
death or disability) within the 12 months after such change of control,
these agreements provide for a payment of 18 months base salary to the
executives.
14. Management and Services Agreement
In connection with the Plan of Reorganization, the Company entered into a
Management and Services Agreement pursuant to which the Company will
provide certain administrative services to the Liquidating Estate. In
exchange for such services, the Company will be paid a fee comprised of
the allocable share of the Company's direct costs required to perform the
agreed upon services plus a 10% markup and reasonable out-of-pocket
expenses. The Trustee of the Liquidating Estate can, at his sole
discretion, terminate the agreement at any time. Management expects the
agreement will be in place through the closing of the Chapter 11 case in
approximately two years. The Company received approximately $537,000 and
$412,000, pursuant to this agreement, in the fiscal year ended May 31,
1996, and the six months ended May 31, 1995, respectively.
15. Commitments and Contingencies
Rental Commitments
The Company has various operating lease agreements for offices and office
equipment. These leases generally have provisions for renewal at varying
terms. The Company recorded rental expense of $717,000 for the year ended
May 31, 1996, $597,000 for the six months ended May 31, 1995, $663,000
for the six months ended November 30, 1994 and $1,362,000 for the year
ended May 31, 1994.
The future minimum lease payments required under operating leases for the
fiscal years ended May 31 are as follows (in thousands):
1997 $ 536
1998 97
Contingencies
The Company is a defendant in certain legal actions arising in the normal
course of business. Management believes that the outcome of these actions
will have no material effect on the Company's financial position or
results of operations.
16. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
Cash and cash equivalents and notes receivable - The carrying value
approximates fair value because of the short maturity of those
instruments.
Discounted lease rental borrowings and notes payable to former owners of
acquired company - Fair value of discounted lease rental borrowings and
notes payable to former owners of acquired company are based on the
borrowing rates currently available to the Company for bank loans with
similar terms and average maturities. At May 31, 1996, the fair value of
discounted lease rental borrowings and notes payable to former owners of
acquired company approximates its carrying value.
The estimated fair values of the Company's financial instruments at May
31, 1996 are as follows:
Carrying Fair
Value Value
-------- -----
Assets:
Cash and cash equivalents ...................... $ 5,382 $ 5,382
Notes receivable ............................... 2,688 2,688
Liabilities:
Discounted lease rental borrowings ............. 14,738 14,738
Notes payable to former owners of
acquired company ............................... 2,304 2,304
SCHEDULE II
CONTINENTAL INFORMATION SYSTEMS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED MAY 31, 1996
(Dollars in thousands)
Charged Charged
Beginning to costs to other Ending
Balance and expenses accounts Deductions Balance
-------- ------------ -------- ---------- --------
1994:
Accounts receivable -
allowance for doubtful
accounts
(Predecessor Company) ....................... $(21,971) $(1,778) $ -- $ 3,281 $(20,468)
-------- ------- ------------- ------- --------
1995:
Accounts receivable -
allowance for doubtful
accounts
- - six months ended
November 30, 1994
(Predecessor Company) ..................... (20,468) (222) -- 20,562* (128)
-------- ------- ------------- ------- --------
- - six months ended
May 31, 1995
(Reorganized Company) ..................... (128) (103) -- 61 (170)
-------- ------- ------------- ------- --------
1996:
Accounts receivable -
allowance for doubtful
accounts
(Reorganized Company) ....................... (170) (34) -- 151 (53)
-------- ------- ------------- ------- --------
*In connection with the Plan of Reorganization confirmed as of November
29, 1994, a transfer of assets to the Liquidating Estate resulted in a
significant reduction in the allowance for doubtful accounts.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company incorporates herein by reference the information concerning
directors and executive officers contained in its Notice of Annual Stockholder's
Meeting and Proxy Statement to be filed within 120 days after the end of the
Company's fiscal year (the "1996 Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The Company incorporates herein by reference the information concerning
executive compensation contained in the 1996 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The Company incorporates herein by reference the information concerning security
ownership of certain beneficial owners and management contained in the 1996
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company incorporates herein by reference the information concerning certain
relationships and related transactions contained in the 1996 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a) The following documents are filed as part of this Annual Report:
Financial Statements. See "ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA" for Index to Financial Statements and Schedules
included in this Form 10-K.
Exhibit No.
2.1* Disclosure Statement with respect to Trustee's Joint Plan of
Reorganization dated October 4, 1994.
2.2* November 29, 1994 Order Confirming Trustee's Joint Plan of
Reorganization dated October 4, 1994.
2.3** Stock Purchase Agreement among CIS Corporation, GMCCCS Corp. (dba
Laser Access), Greg M. Cody and Charles C. Sinks, dated March 8, 1996
(Filed as Exhibit 2.1 to the Company's Form 8-K filed March 21, 1996
and incorporated herein by reference).
3.1* Restated Certificate of Incorporation.
3.2** Restated Bylaws (Filed as Exhibit 3.2 to the Company's Form 10-Q
for the quarter ended August 31, 1995 and incorporated herein by
reference).
10.1* Security Agreement dated December 21, 1994.
10.2* Management and Services Agreement dated December 21, 1994.
10.3* Senior Secured Promissory Note dated December, 1994.
10.4** Letter Agreement Relating to Management and Services Agreement
dated December 21, 1994 (Filed as Exhibit 10.4 to the Company's Form
10-Q for the quarter ended November 30, 1994 and incorporated herein by
reference).
10.5* Lease dated May 5, 1994 between B.G. Sulzle, Inc. and the
Trustee.
10.6* Lease dated April 1, 1993 between John Crimi and Aviron
(including renewal letter).
10.7* Extension Agreement dated April 1, 1994 between John Crimi and
Aviron.
10.8* Lease dated July 1, 1994 between LaSalle National Trust, N.A. and
Aviron.
10.9* Employment Agreement with Richard B. Lasken.
10.10* Change in Control Agreements with Key Management Employees.
10.11** Separation Agreement and Release dated July 6, 1995 between
Richard B. Lasken and the Company (Filed as Exhibit 10.12 to the
Company's Form 10-K for the fiscal year ended May 31, 1995 and
incorporated herein by reference).
10.12** 1995 Stock Compensation Plan (Filed as Exhibit 10.1 to the
Company's Form 10-Q for the quarter ended August 31, 1995 and
incorporated herein by reference).
10.13** Severance Agreement with Thomas J. Prinzing dated December 6,
1995 (Filed as Exhibit 10.1 to the Company's Form 10-Q for the quarter
ended November 30, 1995 and incorporated herein by reference).
10.14** Employment Agreement between CIS Corporation and Greg M. Cody,
dated March 8, 1996 (Filed as Exhibit 10.1 to the Company's Form 8-K
filed March 21, 1996 and incorporated herein by reference).
10.15** Employment Agreement between CIS Corporation and Charles C.
Sinks, dated March 8, 1996 (Filed as Exhibit 10.2 to the Company's Form
8-K filed March 21, 1996 and incorporated herein by reference).
10.16 Multi-facility Loan and Security Agreement between CIS
Corporation and Heller Financial, Inc., dated March 27, 1996.
10.17 Loan and Security Agreement between CIS Corporation and
CoreStates Bank, N.A., dated July 9, 1996.
22.1 Subsidiaries of the Company.
23.1 Consent of Independent Accountants.
27.1 Financial data schedule.
- ----------------------------
* Filed as an exhibit to the Company's amended Form 10 Registration
Statement (Commission File No. 0-25104), originally filed November 10,
1994 and incorporated herein by reference.
** Incorporated by reference.
(b) Reports on Form 8-K
The Company filed the following reports on Form 8-K on the dates
indicated during the last quarter of the Company's fiscal year:
Date Description
---- -----------
March 21, 1996 The Company reported it acquired, through its
wholly-owned subsidiary CIS Corporation, 100% of the
capital stock of GMCCCS (dba "LaserAccess"), a
privately held California corporation. The capital
stock was acquired from the two former owners of the
business; (1) Greg M. Cody of Rancho Santa Fe,
California, and (2) Charles C. Sinks of San Diego,
California for a purchase price of approximately
$4,608,000. The items reported in this filing were
Item 2 "Acquisition or Disposition of Assets" and
Item 7 "Financial Statements and Exhibits" and the
following financial statements of GMCCCS (dba
"LaserAccess") were filed therewith:
FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
Report of Independent Accountants.
Balance Sheets of GMCCCS Corp. (dba LaserAccess) as of
December 31, 1995 and 1994.
Statements of Operations and Retained Earnings
(Accumulated deficit) of GMCCCS Corp. (dba LaserAccess)
for the year ended December 31, 1995, the seven months
ended December 31, 1994, the year ended May 31, 1994
and the year ended May 31, 1993.
Statements of Cash Flows of GMCCCS Corp. (dba
LaserAccess) for the year ended December 31, 1995, the
seven months ended December 31, 1994, the year ended
May 31, 1994 and the year ended May 31, 1993.
Notes to Financial Statements.
On May 7, 1996, the Company amended this Form 8-K by
filing Form 8-K/A. The item reported in such amendment
was Item 7 "Financial Statements and Exhibits" and the
following pro forma financial information of the
Company and GMCCCS (dba LaserAccess) were filed
therewith:
Pro Forma Financial Information.
Unaudited Pro Forma Consolidated Balance Sheet as of
February 29, 1996.
Unaudited Pro Forma Consolidated Statement of
Operations for the nine months ended February 29, 1996.
Unaudited Pro Forma Consolidated Statement of
Operations for the year ended May 31, 1995.
Notes to Unaudited Pro Forma Consolidated Statements.
April 26, 1996 Press Release Announcing Financial Facility and
Vendor Program.
June 10, 1996 Press Release Announcing Fourth Quarter Charge.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
CONTINENTAL INFORMATION SYSTEMS
CORPORATION
BY: /s/ THOMAS J. PRINZING
-----------------------
Thomas J. Prinzing
President, Chief Executive Officer and Director
BY: /s/ FRANK J. CORCORAN
----------------------
Frank J. Corcoran
Senior Vice President, Chief Financial Officer,
Treasurer and Secretary
Dated: August 15, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and the dates indicated:
Signature Title Date
--------- ----- ----
/s/ DR. LEON H. BLOOM Director August 15, 1996
- ---------------------
Dr. Leon H. Bloom
/s/ ARTHUR R. BREHM Director August 15, 1996
- ---------------------
Arthur R. Brehm
/s/ JAMES P. HASSETT Director and Chairman of the Board August 15, 1996
- ---------------------
James P. Hassett
/s/ MICHAEL L. ROSEN Director August 15, 1996
- ---------------------
Michael L. Rosen
/s/ PAUL M. SOLOMON Director August 15, 1996
- ---------------------
Paul M. Solomon
INDEX TO EXHIBITS
Exhibit
No. Description
- ------- -----------
10.16 Multi-facility Loan and Security Agreement between
CIS Corporation and Heller Financial, Inc., dated
March 27, 1996.
10.17 Loan and Security Agreement between CIS Corporation and
CoreStates Bank, N.A., dated July 9, 1996.
22.1 Subsidiaries of the Company.
23.1 Consent of Independent Accountants.
27.1 Financial data schedule.