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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, 1998 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)
45 Broadway Atrium, Suite 1105, New York, New York 10006
(Address of principal executive offices and zip code)
(212) 771-1000
(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 June 30,
1998 was 6,939,060.
As of June 30, 1998, the aggregate market value of the shares of Common Stock
held by non-affiliates of the registrant was approximately $10,361,114.*
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Continental Information Systems Corporation's Notice of Annual
Meeting of Stockholders and Proxy Statement, to be filed within 120 days after
the end of the registrant's fiscal year, are incorporated into Part III of this
Annual Report.
* Excludes 1,676,940 shares deemed to be held by officers and directors, and
stockholders whose ownership exceeds ten percent of the shares outstanding at
June 30, 1998. 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.
Continental Information Systems Corporation
and its Subsidiaries
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PART I
ITEM 1. BUSINESS
Introduction
The Company is a specialized financial services company that, through its
operating subsidiaries, is currently engaged in the leasing, sales and
management of commercial aircraft and aircraft engines (the "Air Group
Business"), equipment leasing (the "Equipment Leasing Business") and other
financing activities, including commercial real estate financing (the "Finance
Business").
Organization and History of the Company
The Company is a New York corporation that was organized in 1968. In January
1989, the Company and nine of its affiliated subsidiaries filed for protection
under Chapter 11 of the United States Bankruptcy Code. The Company emerged from
Chapter 11 pursuant to a Plan of Reorganization (the "Plan"), which was
confirmed by the Bankruptcy Court on November 29, 1994. The Plan became
effective, and the transactions contemplated thereby were consummated, on
December 21, 1994 (the "Effective Date"). Following confirmation of the Plan,
the Company continued to engage in certain financing and financing-related
business activities it had engaged in prior to filing for bankruptcy. These
activities included buying, selling, remarketing and leasing capital assets such
as computers, aircraft, railcars, telecommunications equipment, medical
diagnostic and production equipment and electronic office equipment
Beginning in 1997, the Board of Directors initiated a restructuring of senior
management, which was completed in July 1997. The Board installed new
management, including the appointment of a representative of the Company's
largest shareholder as Chief Executive Officer. New management conducted a
review of the Company's operations and developed plans to focus on and expand
upon the Company's core businesses of buying and selling commercial aircraft and
engines and the leasing of certain other capital equipment. In addition, the
Company expanded its specialized financing services, to include real estate
finance and other special purpose lending activities. Accordingly, the Company
has disposed of several non-core business units. On August 31, 1997, the Company
sold its Telecommunications Business Unit, a telecommunications equipment resale
business, to Meridian Leasing Corporation of Deerfield, Illinois. On May 29,
1998, the Company announced its decision to discontinue and liquidate its
LaserAccess laser printing business.
Air Group Business
Through its wholly-owned subsidiary, CIS Air Corporation, a Delaware corporation
("CIS Air"), the Company participates in the worldwide market for the sale and
leasing of used, commercial aircraft and aircraft engines. CIS Air generally
acquires whole aircraft or aircraft engines and then sells, leases or dismantles
them for resale as replacement parts. CIS Air finances its portfolio
acquisitions with cash flow from operations or through borrowings under CIS
Air's revolving credit engine facility. Engines, which are acquired from
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brokers, airlines, and dealers, are in various used condition and frequently
need substantial repair or refurbishing. The Company contracts with outside
vendors to complete this upgrade process before reselling or leasing the
equipment to its customers. Aircraft acquired by the Company may be in various
stages of air worthiness. Repairs and upgrades may be required to the aircraft
prior to leasing the aircraft. CIS Air's leases require the lessee to maintain
the aircraft in accordance with FAA-approved maintenance programs and contain
specific return conditions.
CIS Air conducts its sales and leasing activities of aircraft, engines and
replacement parts through in-house sales personnel, brokers and consignees.
The Company enters into both short-term and long-term triple net operating
leases. Short-term operating leases have terms of up to two years, while
long-term leases may have initial terms of up to five years. The Company also
sells aircraft and engines and finances such sales. Air Group Business customers
are primarily small to medium-sized commercial air carriers, both inside and
outside the United States.
In addition to CIS Air's sales and leasing activities, a subsidiary of CIS Air,
CIS Aircraft Partners, Inc., has managed a portfolio of commercial aircraft on
behalf of two publicly held limited partnerships, JetStream, L.P. and JetStream
II, L.P. since their inception in 1987 and 1988 in offerings which collectively
raised $195 million. As Managing General Partner, CIS Aircraft Partners, Inc.
acquired the portfolio on behalf of the partnerships, arranged leases of the
aircraft and engages in ongoing management activities including remarketing to
preserve and protect the value of the portfolio. The payment of management fees
to CIS Aircraft Partners, Inc. from Jet Stream, L.P. was suspended in December
1997, and the payment of management fees from JetStream II, L.P. is expected to
be suspended in December 1998, because under the terms of the respective limited
partnership agreements, these fees are subordinate in right of payment to a
preferred rate of return to the limited partners. The partnerships continue to
accrue payment of such fees to CIS Aircraft Partners, Inc. All or part of the
accrued fees may be paid retroactively depending on future cash distributions to
the limited partners and the final rates of return achieved upon the
partnerships' termination.
Business Strategy. The Company's operating strategy is to employ its
management's expertise in the aviation, leasing and finance industries to expand
and actively manage its aircraft and aircraft engine portfolio, which is focused
on the narrowbody segment of the aircraft resale market. Company management
believes that narrowbody aircraft offer greater potential for profitable leasing
opportunities than the widebody segment of the market because of the extensive
customer base for such aircraft and their relatively stable market values.
Company management utilizes its existing relationships with other aviation
industry participants, as well as its technical expertise, to identify and
evaluate profitable acquisition, sale and leasing opportunities.
By steadily increasing its asset base through profitable acquisitions, the
Company expects to increase its cash flow. By reinvesting this cash flow while
managing investment risk, the Company hopes to achieve capital growth. The
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Company is actively examining ways to expand the scale and scope of its
activities in this business. In addition, the Company seeks to maximize the
residual value of its portfolio by actively managing its assets. Asset
management includes inspections prior to and during the lease term and
monitoring of lessee compliance with maintenance and return provisions.
In the normal course of business CIS Air sells and leases to customers with
credit histories that are below AAA, including a number of foreign companies
with less stringent record keeping controls than their counterparts in the
United States. While the Company believes that these credits offer higher yields
than larger, more creditworthy customers do, they also present an inherent
degree of collection difficulty. Leasing or selling on account to foreign
companies that operate outside the United States may also present regulatory or
administrative obstacles to repossession of aircraft in the event of default.
Management has established guidelines to minimize the risk of lessee defaults.
Under these guidelines, the Company conducts initial and ongoing analyses of
each lessee's creditworthiness and the economic environment in the countries in
which they operate.
Industry Conditions. Demand for aircraft, aircraft engines and engine parts is
driven primarily by flying hours or cycles (defined as a take-off or landing)
because FAA regulations require that parts be serviced or replaced at scheduled
intervals, often after specified flight hours or cycles. Thus, the demand for
replacement engines and parts is a function of the current level of world air
travel. The airline industry has experienced significant growth in air travel in
the past five to six years, primarily due to a world economic recovery. Although
this recent industry improvement has modestly increased the demand for certain
types of aircraft, overall conditions in the industry remain competitive. The
Company's business remains dependent upon the overall economic condition of the
airline industry, which historically has been volatile.
Leasing aircraft, aircraft engines or parts offers CIS Air customers the
opportunity to lower their overhead or working capital requirements. Some
carriers who do not wish to maintain a pool of spare engines use short-term
leases of engines to manage their fleet. Many larger carriers are increasing
their use of leased aircraft as they upgrade their fleets, and many of the new
carriers have limited capital resources and therefore prefer to lease rather
than own engines.
Federal Regulation.
Aging Aircraft Maintenance. The Federal Aviation Administration (the "FAA"), has
adopted a series of Airworthiness Directives ("ADs"). ADs are mandates requiring
the airline to perform a specific maintenance task within a specified period of
time. The FAA imposes strict requirements governing aircraft inspection and
certification, maintenance, equipment requirements, corrosion control, noise
levels and general operating and flight rules. In negotiating future leases or
in selling aircraft CIS Air may be required to bear some or all of the costs of
compliance with future ADs or ADs that have been issued but which did not
mandate action during the previous lessee's lease term or in respect of which
the previous lessee failed to comply. The aggregate effect of compliance with
these standards is not determinable at this time and will depend
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upon a variety of factors, including, but not limited to, the state of the
commercial aircraft market, the extent of the AD, the availability of capable
repair facilities and the effect, if any, that such compliance may have on the
service lives of the affected aircraft. As described above, the cost of such
compliance may be reduced to the extent that current or future lessees of
aircraft effect such modifications under the terms of the current or future
operating leases.
Aircraft Noise. Effective November 6, 1990, Congress passed the
Airport Noise and Capacity Act of 1990 (the "Act"), which required the
development of a National Noise Policy. On September 25, 1991, final regulations
(the "Regulations") were announced and became effective immediately. The
Regulations provide generally, among other things, for the phase-out of Stage 2
aircraft in the United States by December 31, 1999, unless hushkitted. Only
Stage 3 or Stage 2 hushkitted aircraft will be allowed to fly in the United
States after December 31, 1999.
In addition to FAA activity in noise abatement, other countries have adopted or
are considering adopting noise compliance standards which would have a similar
effect of reducing the ability of an airline to operate Stage 2 aircraft in such
jurisdictions. These regulations may disrupt the market for Stage 2 aircraft at
December 31, 1999. CIS Air believes its current portfolio will not be materially
affected by these regulations.
Since much of CIS Air's assets are subject to operating leases, CIS Air will be
required to re-lease or sell such assets after the expiration of the current
lease terms. Such sale or re-lease must be done in a timely manner to minimize
off-lease time and allow recovery of CIS Air's investment. The ability to renew
leases or to sell the Aircraft owned by the CIS Air is dependent upon among
other factors: (a) general economic conditions and market conditions affecting
the airline industry in particular; (b) regulatory changes; (c) costs to
refurbish assets which is dependent upon the condition the asset was returned
in; (d) technological changes; (e) any cost required to conform the aircraft to
future Stage 3 noise restrictions; (f) the availability to the lessee or
potential lessee of other similar aircraft from CIS Air's competition; and (g)
the ability to effectively market the aircraft. It is possible that CIS Air may
therefore not realize the residual value anticipated or alternatively it may
only be able to re-lease assets at lower lease rates.
Dependence on Key Personnel. The Air Group Business at present is substantially
dependent on the efforts and abilities of a number of its current key management
personnel. The success of the Air Group Business will depend to a large extent
on the Company's ability to retain or attract key employees. The loss of certain
of these employees or the Company's inability to retain or attract key employees
in the future could have an adverse effect on the Company's operations. The
Company has an employment contract with the head of its CIS Air subsidiary that
runs through fiscal year end 1999.
Equipment Leasing Business
The Company's Equipment Leasing Business, which is conducted through its
operating subsidiary CIS Corporation, a New York Corporation ("CIS"), leases a
wide range of equipment, including computers, printers and telecommunications
equipment. The Company participates in the leasing market by originating new
leases, financing other equipment brokers and engaging in leveraged leasing.
Continental Information Systems Corporation
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The Company offers customers the flexibility of buying or leasing equipment.
Leasing can be an attractive financing mechanism for customers acquiring
equipment for various reasons, including: (i) the flexibility given lessees to
replace equipment at the end of the initial lease term in the event that the
equipment has become technologically obsolete or the lessees' equipment
requirements change; (ii) the smaller initial cash outlay that leasing, as
opposed to purchasing, requires; and (iii) the benefits that off-balance sheet
financing may provide. The Company does not maintain inventories of new
equipment, as lease contracts typically involve lessee-identified equipment.
Equipment Finance Contracts
General. Leasing revenues are primarily derived from the origination and sale of
equipment finance contracts pursuant to which the Company provides financing for
the purchase of various types of equipment. Substantially all finance contracts
are non-cancelable for a specified lease term. Some of the contracts are
structured so that the Company generally receives scheduled payments sufficient,
in the aggregate, to cover borrowing costs and the costs of the underlying
equipment, and to provide an appropriate profit margin. The initial
non-cancelable term of the contract is equal to or less than the estimated
economic life of the equipment. A portion of the lease contracts are structured
so that the Company needs to look to the residual value at the end of the lease
term in order to fully recover the cost for the equipment and borrowing costs.
Initial terms for new equipment lease contracts generally range from three to
five years.
Terms and Conditions. The terms and conditions of the Company's equipment
finance contracts, which are generally structured principally as operating or
direct finance leases, vary somewhat from lease to lease. In substantially all
cases, however, the Company's customers are required to (i) maintain, service
and operate the equipment in accordance with the manufacturer's and
government-mandated procedures; (ii) insure the equipment against property and
casualty loss; (iii) pay all taxes associated with the equipment; and (iv) make
all scheduled contract payments regardless of the performance of the equipment.
The Company's standard equipment lease contract provides that, in the event of a
default by the customer, the Company can require payment of liquidated damages
to make the Company whole and can seize and remove the equipment for subsequent
sale, refinancing or other disposal at its discretion.
Credit Policies and Procedures. Management believes the credit underwriting
policies and procedures have been effective in the selection of appropriate
lessees and in minimizing the risks of delinquencies and credit losses. The
underwriting guidelines generally require a credit investigation of an equipment
lessee, and an analysis of the equipment so as to estimate value in case of a
repossession or residual value where the Company has assumed residual value
risk.
Most customers of the Equipment Leasing Business are small businesses located
almost exclusively within the United States. Most of these customers have credit
histories that are below AAA. These credits offer a higher interest rate than
AAA credits but have inherently higher risks of default.
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The Company also acts as a funding source for leases originated by other leasing
equipment brokers. The same procedures and policies are utilized in determining
whether to fund such leases.
Residual Values. Some of the equipment leasing provided by the Company is
structured such that the full cost of the equipment and all financing costs are
not repaid during the initial financing term. A residual interest is usually
maintained in the equipment at the end of the initial lease term. At the end of
the lease the Company will own the underlying equipment which may be worth more
or less than the residual value on the Company's books. At the end of the lease
several options are available, which include extending the original lease,
releasing the equipment to a different end user or selling the equipment to the
original lessee or in the open market.
The Company also purchases leases originated by other lessors, where the payment
stream on the lease is paid during the term of the lease to the vendor or an
institution that financed the lease. The Company's intention is that the value
of the equipment will be worth more at the end of the lease than its cash
investment in the lease. The Company may also, as it has in the past, sell this
lease to another company willing to purchase this lease if the current market
conditions provide an opportunity to recognize profit on such a sale.
Allowance for Doubtful Accounts. The Company maintains an allowance for doubtful
accounts in connection with payments due under equipment finance contracts held
in the portfolio at a level which it deems sufficient to meet future receivable
writedowns, based on an analysis of the delinquencies, problem accounts, and
overall risks and probable losses associated with such contracts, together with
a review of the historical loss experience. There can be no assurance that this
allowance will prove to be adequate.
Finance Business
During the prior fiscal year, the Company decided to diversify into real estate
financing as an extension of its historical aircraft and equipment financing
business. On July 3, 1997, the Company announced that it had entered into a
Joint Investment Agreement (the "Emmes Agreement") with Emmes Investment
Management Co. LLC ("Emmes") to provide up to $8 million to be invested in
high-yield, short-term financing for commercial real estate transactions. At May
31, 1998, the Company's investment in such transactions was approximately $1.5
million. Due to increased availability of real estate financing from more
traditional sources that makes the financing structured by Emmes less rewarding,
the Company does not anticipate making substantial additional investments under
the Emmes Agreement in the near future.
From time to time the Company makes loans to borrowers with profiles that do not
meet the requirements of traditional lending institutions. The Company's
determination whether to make the loan will depend on a number of factors, some
of which include: an evaluation of the borrower, the purpose of the loan,
collateral held by the Company, if any, the nature of the Company's security
interest and the time expected to repayment. Based on the unique nature of the
loan the Company may receive fees, equity interests or other forms of
remuneration in addition to traditional interest.
Continental Information Systems Corporation
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Customers and Marketing
The Company obtains its customers from many sources including in-house sales,
equipment brokers, vendor relationships and advertising. A customer will
typically sign a single master lease agreement. Additional subsequent leases
with that customer will be financed under the original master lease agreement by
executing a schedule of additional equipment. 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.
Financing
The Company's financing strategy has been to use its own capital, periodically
sell leases to selected institutions on a non-recourse basis, and develop
leasing relationships with financial organizations to provide lease financing on
a recourse and non recourse basis.
Certain equipment leases are financed by assigning the rentals to various
lending institutions at fixed rates on a recourse and non-recourse basis. The
Company has in the past also utilized various credit facilities, including bank
lines of credit and is currently in negotiations with a commercial bank to
establish a $3 million "warehouse" line of credit. It is also negotiating for a
program to sell its leases on a continuing basis.
The Company also has a secured, revolving loan agreement with another
institution to provide lease and inventory financing for aircraft engines for
CIS Air in the amount of $10,000,000. The facility bears interest at prime plus
1/4% and expires in December 2000.
Concentration of Credit Risk
The Company extends credit through trade accounts receivable and leasing
transactions to its customers located primarily in the United States. The
underlying equipment secures direct financing and operating leases. The Company
generally does not require collateral for trade accounts receivable.
The Company's notes receivable balance of $6,870,000 at May 31, 1998 is with two
companies in the airline industry. Thus, the Company is directly affected by the
well-being of these two companies and the airline industry in general. However,
the credit risk associated with these notes receivable is mitigated by the
Company's policy requiring collateral on all airline notes receivable.
All direct financing and operating leases are evaluated under a
management-approved credit policy that restricts lending on certain assets and
to certain industries. An evaluation of the creditworthiness of an individual
customer involves a review of both industry- and company-specific information
submitted at the time of lease application. All financing requests follow an
approved credit approval process that involves at least one credit committee
member and escalates based upon transaction size. The Company believes that its
lending criteria reflect current industry leasing standards.
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Competition
The Company competes with other companies in each aspect of its business.
The aircraft leasing industry is competitive and the success of any lessor is
largely dependent upon the nature of the aircraft within its portfolio. The Air
Group Business competes with aircraft manufacturers, distributors, airlines,
leasing companies, financial institutions and other parties engaged in leasing,
managing, and marketing aircraft. Such competitors may lease or sell aircraft at
lower rates or prices than CIS Air and provide benefits, such as direct
maintenance crews, and support services which CIS Air cannot provide.
In the Equipment Leasing Business, the Company competes with other equipment
manufacturers, dealers, brokers, leasing companies, commercial banks, investment
banking firms and other financial institutions. The Real Estate Finance Loan
Business also competes with an array of financial institutions, including banks,
mortgage lenders and real estate investors.
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 substantially 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.
The Company believes it competes primarily on the basis of price, capability to
meet customer needs, flexibility in structuring transaction terms, reliability
in meeting commitments and the degree of knowledge and competence of key
employees.
Seasonality and Backlogs
Revenues historically have 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.
Proprietary Rights
The Company has no patents or registered trademarks. The Company utilizes
software licensed from third parties for certain of its financing and leasing
operations.
Employees
As of June 30, 1998, the Company had approximately 25 full-time employees, none
of whom is employed under a collective bargaining agreement. Seventeen of these
employees work in administration, and eight are engaged in sales and sales
support. Of the employees engaged in sales and sales support, three are
marketing representatives who are compensated substantially on a commission
basis.
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ITEM 2. PROPERTIES
The Company's executive offices are located in New York, New York, and its
operating headquarters are located in Syracuse, New York. The Company also
maintains a small sales office in Los Angeles, California. The Company leases
these offices, which occupy approximately 12,000 square feet, under short-term
leases for an aggregate monthly rental of approximately $20,000.
ITEM 3. LEGAL PROCEEDINGS
The Company is currently engaged in litigation with the former owners and
executives of its discontinued LaserAccess business. In March 1998, the Company
prepaid remaining amounts due to the former owners and exercised a right to set
off approximately $1.1 million against amounts due on promissory notes in
connection with the purchase of LaserAccess. The Company has also terminated
these individuals under their employment agreements. On April 7, 1998, the
former owners filed suit in Superior Court of California, County of San Diego,
seeking to recover damages allegedly arising from the Company's set-off of
amounts due. Additionally, the former owners are seeking to recover
approximately $733,000 in damages arising from the Company's termination of
their employment contracts. The complaint, as amended, seeks damages for various
other claims, including defamation. The Company has asserted crossclaims and
intends to vigorously contest these actions.
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 Small-Cap Market under the symbol CISC on May 16, 1995. The high and
low bid information for the last two fiscal years is as follows:
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
Low High Low High Low High Low High
--- ---- --- ---- --- ---- --- ----
Fiscal Year ended
May 31, 1998 $ 2.13 $ 3.25 $ 2.50 $ 3.56 $ 2.13 $ 2.94 $ 2.16 $ 3.00
Fiscal Year ended
May 31, 1997 $ 1.63 $ 2.00 $ 1.69 $ 2.25 $ 1.75 $ 3.13 $ 1.88 $ 2.88
Continental Information Systems Corporation
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As of June 30, 1998, there were 1,236 record holders of the Company's Common
Stock. No cash dividends have been paid on the Common Stock to date and the
Company does not anticipate paying a dividend in the foreseeable future, as the
Board of Directors intends to retain earnings for use in the business. Any
future determination of dividends will depend upon any dividend restrictions
applicable to the Company, the Company's financial condition, the Company's
results of operations and such other factors as the Board of Directors deems
relevant.
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
month 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.
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(Dollars in thousands except per share amounts)
Reorganized Company | Predecessor Company
------------------------------------------------------- | ----------------------------
Fiscal Year Ended | Fiscal Year
May 31, For the Six | For the Six Ended
---------------------------------------- Months Ended | Months Ended May 31,
Period Data: 1998 1997 1996 May 31, 1995 | November 30, 1994 1994
--------- --------- --------- --------- | --------- ---------
Total Revenues ........................... $ 18,419 $ 26,233 $ 24,997 $ 11,762 | $ 25,707 $ 54,193
Costs and expenses ....................... 17,563 23,648 23,659 9,529 | 17,501 54,941
--------- --------- --------- --------- | --------- ---------
Income (loss) from continuing |
operations before reorganization |
items, income taxes, fresh start |
adjustments and extraordinary item ... 856 2,585 1,338 2,233 | 8,206 (748)
Reorganization items ..................... -- -- -- -- | 8,945 134,224
--------- --------- --------- --------- | --------- ---------
Income (loss) from continuing operations |
before income taxes, fresh start |
adjustments and extraordinary item ... 856 2,585 1,338 2,233 | 17,151 133,476
Income taxes ............................. 325 982 508 849 | 45 100
--------- --------- --------- --------- | --------- ---------
Income (loss) from continuing operations |
before fresh start adjustments and |
extraordinary item ................. 531 1,603 830 1,384 | 17,106 133,376
Income (loss) from discontinued |
operations, net of tax ............... (5,904) (517) (764) (2,997)| (4,882) (575)
--------- --------- --------- --------- | --------- ---------
Income (loss) before fresh start |
adjustments and extraordinary item .. (5,373) 1,086 66 (1,613)| 12,224 132,801
Fresh start adjustments .................. -- -- -- -- | (3,264) --
--------- --------- --------- --------- | --------- ---------
Income (loss) before extraordinary item .. (5,373) 1,086 66 (1,613)| 8,960 132,801
Extraordinary item-Forgiveness of debt ... -- -- -- -- | 96,317 --
--------- --------- --------- --------- | --------- ---------
Net income (loss) ........................ $ (5,373) $ 1,086 $ 66 $ (1,613)| $ 105,277 $ 132,801
========= ========= ========= ========= | ========= =========
Basic and Diluted Net Income (Loss) |
Per Common Share: |
Income from continuing operations $ ...... $ .08 $ .23 $ .12 $ .20 |
|
Income (loss) from discontinued operations (.85) (.08) (.11) (.43)|
--------- --------- --------- --------- |
Net income (loss) ............ $ (.77) $ .15 $ .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.
Continental Information Systems Corporation
and its Subsidiaries
- --------------------------------------------------------------------------------
(Dollars in thousands)
| Predecessor
Reorganized Company | Company
-------------------------------------------------------------------------------- -------------
| Fiscal Year
Fiscal Year Fiscal Year Fiscal Year For the Six For the Six | Ended
Balance Sheet Data Ended Ended Ended Months Ended Months Ended | May 31,
(at period end): May 31, 1998 May 31, 1997 May 31, 1996 May 31, 1995 November 30, 1994 | 1994
------------ ------------ ------------ ------------ ----------------- ----
Total assets ................. $ 45,202 $ 42,986 $ 52,881 $ 41,130 $ 47,323 | $ 231,173
Liabilities not subject to |
compromise .............. 16,242 8,385 19,428 7,743 12,323 | 72,142
Liabilities subject to |
compromise .............. -- -- -- -- -- | 268,258
Shareholders' equity (deficit) 28,960 34,601 33,453 33,387 35,000 | (109,227)
Continental Information Systems Corporation
and its Subsidiaries
- --------------------------------------------------------------------------------
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
commercial aircraft industries; the risks attendant to real estate finance
generally, including the risks of leverage, risks of borrower default, general
economic and real estate market conditions, and competition for attractive real
estate finance investments; 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 Securities and Exchange Commission ("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.
Continental Information Systems Corporation
and its Subsidiaries
- --------------------------------------------------------------------------------
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.
RESULTS OF OPERATIONS
Continuing Operations
Revenues
For the three fiscal years being reviewed, total revenues decreased to $18.4
million in fiscal 1998 from $26.2 million in fiscal 1997, while increasing from
$25.0 million in fiscal 1996. Equipment sales followed the same pattern,
decreasing to $10.9 million in fiscal 1998 from $16.5 million in fiscal 1997,
while increasing from $14.9 million in fiscal 1996. The significant decrease
(34.1%) in sales during the current fiscal year is in part due to the sale of
the Telecommunications Business Unit on August 31, 1997. Additionally, sales of
equipment in conjunction with the Leasing Business Unit's trading activity
decreased for the current fiscal year.
Equipment rentals and income from direct financing leases increased to $5.4
million in fiscal 1998 from $5.0 million in fiscal 1997. However, this revenue
category decreased significantly (36.2%) to $5.0 million in fiscal 1997 from
$7.9 million in fiscal 1996. The decrease in fiscal 1997 is chiefly attributable
to the sale of a substantial portion of the Company's leased equipment to an
institutional investor in the second and third quarters of fiscal 1997 for a
gain of approximately $2.8 million.
Interest, fees and other income increased to $2.1 million in fiscal 1998 from
$1.9 million in fiscal 1997. However, this revenue category decreased to $1.9
million in fiscal 1997 from $2.3 million in 1996. The decrease in fiscal 1997
principally reflects a decline in management fees received from income funds.
Costs and Expenses
Costs and expenses decreased to $17.6 million in fiscal 1998 from $23.6 million
in fiscal 1997 and $23.7 million in fiscal 1996. Cost of sales as a percentage
of sales for the fiscal years ended May 31, 1998, 1997 and 1996 was 88.1%, 81.9%
and 72.9%, respectively. These variances are directly related to the results of
operations of the Air Group Business Unit and reflect the competitive conditions
in the used aircraft/engines marketplace. Revenues and earnings from the
aircraft business are likely to continue to vary quarter-to-quarter, based on a
number of factors, including the volume of transactions.
Depreciation of rental equipment increased to $2.6 million in fiscal 1998 from
$2.1 million in fiscal 1997. However, this expense category decreased
significantly (38.2%) to $2.1 million in fiscal 1997 from $3.4 million in fiscal
1996. This decrease is directly related to the sale of a substantial portion of
the Company's leased equipment to an institutional investor in the second and
third quarters of fiscal 1997.
Continental Information Systems Corporation
and its Subsidiaries
- --------------------------------------------------------------------------------
Interest expense decreased to $560,000 in fiscal 1998 from $865,000 in fiscal
1997. However, interest expense increased to the fiscal 1997 level of $865,000
from $551,000 in fiscal 1996. These variances reflect the changes in the average
debt outstanding during the respective periods.
Other operating expenses decreased from $1,260,000 in fiscal 1996 to $1,207,000
in fiscal 1997 and to $922,000 in fiscal 1998. These expenses, which are
principally related to leased equipment, will vary from period to period based
on the timing and volume of leasing transactions.
Selling, general and administrative expenses decreased to $4.0 million in fiscal
1998 from $5.9 million in fiscal 1997 and $7.6 million in fiscal 1996. These
yearly decreases are principally due to cost containment efforts and staff
reductions between the periods.
Income Taxes
For the fiscal years ended May 31, 1998, 1997 and 1996, a provision for deferred
income tax expense on income from continuing operations was recorded in the
amounts of $325,000, $982,000 and $508,000, respectively. Additionally, for the
fiscal years ended May 31, 1998, 1997 and 1996, a deferred income tax benefit on
loss from discontinued operations was recognized in the amounts of $325,000,
$316,000 and $508,000, respectively. 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. For the
fiscal year ended May 31, 1997, $666,000 of deferred tax assets were utilized to
offset deferred tax liabilities of a like amount. 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-organization 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.
Discontinued Operations
On May 29, 1998, the Company announced its decision to discontinue and liquidate
its LaserAccess laser printing business. The Board of Directors concluded that
the printing business was unlikely to operate profitably in the foreseeable
future. The Company also decided not to pursue a previously announced joint
venture with another company in the laser printing business. The Board concluded
after additional review that the venture, which would require a substantial
infusion of capital from the Company, would not generate returns sufficient to
justify the additional capital.
Continental Information Systems Corporation
and its Subsidiaries
- --------------------------------------------------------------------------------
The Company recorded a provision of $4,955,000 in the quarter ended May 31,
1998, relative to the disposal of LaserAccess' assets, including the write-off
of goodwill, in the amount of $3,258,000, and other charges related to the
discontinuance of the business unit. The remaining net assets of the
discontinued unit consist principally of used laser printing equipment and
accounts receivable. See "ITEM 3. LEGAL PROCEEDINGS" for a discussion of
litigation related to LaserAccess.
A summary of the results of operations of the discontinued LaserAccess Business
Unit follows (in thousands):
Year Ended May 31,
---------------------------------------
1998 1997 1996
--------- ----------- -----------
Revenues $ 4,281 $ 5,068 $ 1,825
Costs and expenses 5,555 6,014 1,552
-------- -------- --------
Income (loss) from discontinued operations (1,274) (946) 273
Loss on disposal of discontinued operations (4,955) - -
--------- ----------- -----------
Income (loss) before income tax (tax benefit) (6,229) (946) 273
Income tax (tax benefit) (325) (359) 103
--------- ---------- ---------
Net income (loss) from discontinued operations $ (5,904) $ (587) $ 170
========= ========= ========
Also, 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 had been completely utilized as of May 31, 1996, as a result of cash
payments for severance and excess facilities costs.
Continental Information Systems Corporation
and its Subsidiaries
- --------------------------------------------------------------------------------
A summary of the results of operations of the discontinued buy/sell operations
follows (in thousands):
Year Ended May 31,
----------------------------------------
1998 1997 1996
---------- -------- -------
Revenues $ - $ - $ 5,491
Costs and expenses - (24) 6,661
---------- -------- -------
Income (loss) from discontinued operations - 24 (1,170)
Loss on disposal of discontinued operations - - (705)
---------- --------- ---------
Income (loss) before income tax (tax benefit) - 24 (1,875)
Income tax (tax benefit) - 9 (698)
---------- -------- ---------
Net income (loss) from discontinued operations $ - $ 15 $ (1,177)
========== ======= =========
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 none as of May 31, 1997, due to cash payments principally for severance
and facilities costs totaling approximately $325,000 and a net reduction of
$419,000 to adjust the amounts estimated for the loss on the inventories,
receivables, fixed assets and leased facility obligations. 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 final adjustment of the liability in the
amount of $89,000 was recorded as income from discontinued operations in the
quarter ended May 31, 1997.
Continental Information Systems Corporation
and its Subsidiaries
- --------------------------------------------------------------------------------
A summary of the results of operations of the discontinued NC3 business unit
follows (in thousands):
Year Ended May 31,
---------------------------------------
1998 1997 1996
--------- --------- ---------
Revenues $ - $ - $ -
Costs and expenses - (89) -
--------- --------- ---------
Income (loss) from discontinued operations - 89 -
Loss on disposal of discontinued operations - - 330
--------- ---------- -------
Income (loss) before income tax (tax benefit) - 89 330
Income tax (tax benefit) - 34 87
--------- -------- --------
Net income (loss) from discontinued operations $ - $ 55 $ 243
========= ======== =======
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations for the fiscal year ended May 31, 1998 of $15.4
million was composed of cash from continuing operations of $16.0 million with
$600,000 being used in discontinued operations. Cash provided by continuing
operations for the fiscal years ended May 31, 1997 and 1996, was $12.6 million
and $9.4 million respectively. The significant increase in cash provided by
continuing operations for the current fiscal year was primarily due to deferred
lease revenue of $5.9 million generated by prepaid lease transactions. The
proceeds were used to purchase rental equipment. In fiscal 1997, significant
cash was generated by two sales of equipment subject to lease in the aggregate
amount of $8.7 million in the second and third quarters. In addition to the cash
payments and a short-term note of approximately $560,000, the buyer assumed
approximately $12.8 million of the Company's related outstanding non-recourse
lease rental borrowings and approximately $379,000 of the Company's related
outstanding recourse lease rental borrowings were paid off. The sales of this
leased equipment accelerated the earnings and cash flow from the leases, which
would have been received over time, into the second and third quarters of the
1997 fiscal year.
Purchases of rental equipment increased to $23.8 million in fiscal 1998 from
$11.4 million in fiscal 1997 and $23.0 million in fiscal 1996. The current year
increase reflects additional equipment acquired with the proceeds of the
aforementioned prepaid lease transactions. Additionally, during the current
period, the Company invested approximately $1.3 million in mortgage
participation notes under its Joint Investment Agreement with Emmes Investment
Management Co. LLC.
Final payments of $3.4 million on a note payable to the Liquidating Estate were
made in fiscal 1996. Proceeds from lease, bank and institution financings for
the fiscal years ended May 31, 1998, 1997 and 1996, were $14.1 million, $8.2
million and $15.4 million, respectively, while payments on lease, bank and
institution financings for the fiscal years ended May 31, 1998, 1997 and 1996,
were $9.2 million, $5.2 million and $2.4 million, respectively.
Continental Information Systems Corporation
and its Subsidiaries
- --------------------------------------------------------------------------------
On May 27, 1997, the Company announced that its Board of Directors had
authorized the expenditure of up to $500,000 for the repurchase of its common
stock. The Company commenced a voluntary odd lot program through June 30, 1997,
which was extended through July 31, 1997. Shareholders owning less than 100
shares of the Company's common stock were offered the opportunity to sell all
their shares at the closing price of the common stock on the Nasdaq Small-Cap
Market on May 23, 1997, which was $2.25 per share. Approximately 20,000 shares
were repurchased by the Company at an aggregate cost of approximately $45,000.
Subsequent to the odd lot repurchase program, the Company intends to repurchase
from time to time additional shares of its common stock up to the balance of
$500,000 remaining after the odd lot program. The Company may repurchase the
additional shares at prevailing prices in the open market or in negotiated or
other permissible transactions at the discretion of management. The Company will
hold all repurchased shares of common stock in its treasury. As of May 31, 1998,
approximately 143,000 shares had been repurchased by the Company in this manner
at an aggregate cost of approximately $361,000. Additionally, on October 28,
1997, at the Company's Annual Meeting, the stockholders approved the amendment
of the Company's Restated Certificate of Incorporation to increase the number of
authorized shares from 10 million to 20 million. The Company currently has no
plans to issue any additional shares (other than pursuant to the Company's 1995
Stock Compensation Plan).
The Company expects that operations will generate sufficient cash to meet its
operating expenses and current obligations for the foreseeable future. To expand
its operations, the Company may in the future issue debt or equity securities.
Certain equipment leases are financed by assigning the rentals to various
lending institutions at a fixed rate on a recourse and non-recourse basis. The
Company has in the past also utilized various credit facilities, including bank
lines of credit and is currently in negotiations with a commercial bank to
establish a $3 million "warehouse" line of credit. The loan agreement for the
line of credit is expected to contain various covenants, including limitations
on incurring additional liens and encumbrances and prohibiting certain
transactions with affiliates or subsidiaries. Additionally, the Company has a
revolving loan agreement (the "CIS Air Loan Facility") with an institution to
provide lease and inventory financing for aircraft engines for its operating
subsidiary CIS Air, in the amount of $10,000,000. The facility has a three-year
term and permits borrowing equal to a percentage of the appraised value of the
aircraft engines financed. Substantially all of the assets of CIS Air are
pledged as collateral for the loan. At May 31, 1998, $4,429,000 of this facility
was being utilized. The CIS Air Loan Facility bears interest at prime plus 1/4%
and expires in December 2000. A revolving loan agreement to provide inventory
financing in the amount of $2,500,000, for the discontinued LaserAccess laser
printing business was terminated on July 31, 1998. At May 31, 1998, $428,000 of
this facility was being utilized; this outstanding balance was paid in full by
July 31, 1998. The Company currently has invested approximately $10.9 million in
capital (equity and intercompany advances) in the Air Group Business, which has
invested those funds in aircraft and aircraft engines. The Company's ability to
invest in other activities is constrained by its ability to upstream funds from
CIS Air, which is limited by certain covenants in the CIS Air Loan Facility.
Continental Information Systems Corporation
and its Subsidiaries
- --------------------------------------------------------------------------------
Year 2000
As the year 2000 approaches, a critical issue has emerged for all companies,
including the Company, with respect to whether application software programs and
operating systems utilized by a company and the companies with which it does
business can accommodate this date value. In brief, many existing application
software products in the marketplace were designed only to accommodate a
two-digit date position which represents the year (e.g., "95" is stored on the
system and represents the year 1995). As a result, the year 1999 (i.e., "99")
could be the maximum date value these systems will be able to process
accurately.
The Company has, for several months, been engaged in a review of the software
and information systems it uses in an effort to determine whether it or its
operations may be materially adversely affected by this so-called "Year 2000"
conversion. As a result of that review, the Company upgraded and replaced its
hardware systems with systems that are Year 2000 compliant. In addition, the
Company has engaged a vendor to provide new lease billing software and has
identified another vendor to replace its accounting software. The Company
expects that this software will be installed by the middle of 1999. The Company
has inquired of, and generally obtained the assurances of, the providers of such
software with respect to its being Year 2000 compliant. Based on its review the
Company does not presently believe that Year 2000 compliance issues with respect
to its software and systems will cause any material disruptions, malfunctions or
failures of its business. However, no assurances can be given that such review
uncovered every potential adverse effect of the Year 2000 conversion in
connection with any of such software or systems.
With respect to assets other than its computer hardware and software systems,
the Company is aware that some of the equipment it leases may have embedded
technology that is not Year 2000 compliant. Under the terms of the leases,
however, the Company is not responsible for the maintenance and repair of this
equipment, and the leases are non-cancelable. Failure to achieve Year 2000
compliance may materially adversely affect the residual value of such equipment.
No assurance can be given that such decrease in residual value would not have a
material adverse effect on the Company's business or results of operations.
The Company has only recently begun a review of whether the software and systems
of the vendors, financing sources, customers, equipment manufacturers or
distributors or other parties with which it deals may, as a result of the Year
2000 conversion, have a materially adverse effect on the Company or its
operations. Accordingly, it is too early for the Company to be able to predict
whether such software and systems of such parties may have such effect. As part
of this review, the Company will attempt to obtain assurances from each of such
parties, whose dealings with the Company are material to the Company or its
operations, that such party does not and will not utilize software or systems
that may interfere with the Company, or are or will be important to the
operations of such party, that may cause problems to such party or the Company
as a result of the Year 2000 conversion. However, no assurances can be given
that the Company will be able to obtain the information from such parties
necessary for the Company to determine whether it may be materially adversely
affected by the software or systems of such parties.
Continental Information Systems Corporation
and its Subsidiaries
- --------------------------------------------------------------------------------
The Company currently believes that its systems will be Year 2000 compliant
during 1999 and therefore has not developed a contingency plan. Nevertheless,
the Company will maintain an ongoing effort to recognize and evaluate potential
exposure relating to the Year 2000 conversion arising from its use of software
supplied by other parties or its dealings with other parties. The total cost to
the Company of these Year 2000 compliance activities has not been, and is not
anticipated to be, material to its financial position or results of operations
in any given year.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
Continental Information Systems Corporation
and its Subsidiaries
- --------------------------------------------------------------------------------
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements:
(a) (1) Financial Statements
Report of Independent Accountants
Consolidated Balance Sheets
May 31, 1998 and 1997
Consolidated Statements of Operations
Years ended May 31, 1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity
Years ended May 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows
Years ended May 31, 1998, 1997 and 1996
Notes to the 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 accompanying consolidated balance sheets and the related
consolidated statements of operations and consolidated statements of
shareholders' equity and of cash flows 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,
1998 and 1997, and the results of their operations and their cash flows for each
of the three years in the period ended May 31, 1998, 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 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
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
July 17, 1998
Syracuse, New York
Continental Information Systems Corporation
and its Subsidiaries
In Thousands (Except Per Share Data)
CONSOLIDATED BALANCE SHEETS
May 31,
---------------------------
1998 1997
--------- ----------
Assets:
Cash and cash equivalents $ 3,211 $ 8,968
Accounts receivable, net of allowance for doubtful
accounts of $76 and $50 at May 31, 1998 and 1997 636 1,950
Notes receivable 6,870 5,094
Investment in mortgage participation notes (Note 4) 1,522 -
Net assets of discontinued operations (Note 2) - 4,761
Inventory 3,755 5,306
Net investment in direct financing leases (Note 6) 4,658 3,446
Rental equipment, net (Note 7) 18,118 7,505
Furniture, fixtures and equipment, net (Note 8) 398 206
Other assets 620 336
Deferred tax assets (Note 13) 5,414 5,414
--------- ----------
Total assets $ 45,202 $ 42,986
========= =========
Liabilities and Shareholders' Equity:
Liabilities:
Accounts payable and other liabilities $ 2,377 $ 1,117
Discounted lease rental borrowings (Note 9) 2,594 5,633
Note payable to institution - secured (Note 10) 4,429 -
Notes payable to former owners of acquired company (Note 16) - 1,536
Net liabilities of discontinued operations (Note 2) 866 -
Deferred lease revenue 5,976 99
---------- -----------
Total liabilities 16,242 8,385
--------- ---------
Shareholders' Equity:
Common stock, $.01 par value; authorized 20,000,000 shares at May 31, 1998,
10,000,000 shares at May 31, 1997; issued 7,101,668 shares at May 31,
1998, 7,031,667 shares
at May 31, 1997 (Notes 11 and 12) 71 70
Additional paid-in capital 35,129 34,992
Accumulated deficit (5,834) (461)
---------- -----------
29,366 34,601
Treasury stock, at cost:162,608 shares at May 31, 1998,
960 shares at May 31, 1997 (Note 11) (406) -
----------- ------------
Total shareholders' equity 28,960 34,601
--------- ----------
Total liabilities and shareholders' equity $45,202 $ 42,986
======= =========
The accompanying notes are an integral part of these financial statements.
Continental Information Systems Corporation
and its Subsidiaries
In Thousands (Except Number of Shares)
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended May 31,
---------------------------------------------
1998 1997 1996
--------- -------- ---------
Revenues:
Equipment sales $ 10,855 $ 16,480 $ 14,862
Equipment rentals 4,666 3,829 6,540
Income from direct financing leases 760 1,188 1,320
Gain from sale of equipment subject to lease 78 2,816 -
Interest, fees and other income 2,060 1,920 2,275
--------- -------- ---------
18,419 26,233 24,997
--------- -------- ---------
Costs and Expenses:
Cost of sales 9,566 13,500 10,839
Depreciation of rental equipment 2,558 2,130 3,445
Interest expense 560 865 551
Other operating expenses 922 1,207 1,260
Selling, general and administrative expense 3,957 5,946 7,564
--------- -------- ---------
17,563 23,648 23,659
--------- --------- ---------
Income from continuing operations before income taxes 856 2,585 1,338
Provision for income tax 325 982 508
--------- -------- ---------
Income from continuing operations 531 1,603 830
--------- -------- ---------
Discontinued Operations (Note 2):
Loss from discontinued operations, net of tax (949) (517) (555)
Loss on disposal of discontinued operations (4,955) - (209)
--------- -------- ---------
Net loss from discontinued operations (5,904) (517) (764)
--------- -------- ----------
Net income (loss) $ (5,373) $ 1,086 $ 66
========== ======== ==========
Basic and diluted net income (loss) per share (Note 1):
Income from continuing operations $ .08 $ .23 $ .12
Income (loss) from discontinued operations (.85) (.08) (.11)
--------- -------- ---------
Net income (loss) $ (.77) $ .15 $ .01
========== ========= ==========
Weighted average number of shares of common
stock outstanding 6,984 7,008 6,999
===== ===== =====
The accompanying notes are an integral part of these financial statements.
Continental Information Systems Corporation
and its Subsidiaries
In Thousands (Except Number of Shares)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Shareholders' Equity
-----------------------------------------------------
Additional Treasury Common
Common Paid-In Accumulated Treasury Common Shares
Stock Capital Deficit Stock Shares Issued
------ --------- --------- --------- ------- ---------
Balance - May 31, 1995 $ 70 $ 34,930 $ (1,613) $ - - 7,000,000
Net income - - 66 - - -
Acquisition of
treasury shares - - - - (960) -
------ --------- --------- --------- ------- ---------
Balance - May 31, 1996 70 34,930 (1,547) - (960) 7,000,000
Net income - - 1,086 - - -
Stock options exercised - 33 - - - 16,667
Stock issued as
compensation - 29 - - - 15,000
------ --------- --------- --------- ------- ---------
Balance - May 31, 1997 70 34,992 (461) - (960) 7,031,667
Net loss - - (5,373) - - -
Acquisition of
treasury shares - - - 406 (161,648) -
Stock options exercised 1 137 - - - 70,001
------ --------- --------- ------- -------- ---------
Balance - May 31, 1998 $ 71 $ 35,129 $ (5,834) $ 406 (162,608) 7,101,668
====== ========= ========== ======= ========= =========
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
Year Ended May 31,
------------------------------------
1998 1997 1996
-------- -------- --------
Cash flows from operating activities:
Net income (loss) $ (5,373) $ 1,086 $ 66
Less: Net loss from discontinued operations (5,904) (517) (764)
-------- -------- --------
Income from continuing operations 531 1,603 830
-------- -------- --------
Adjustments to reconcile income from continuing operations
to net cash provided by operating activities:
Proceeds from sale of equipment subject to lease 850 8,703 --
Gain on sale of equipment subject to lease (78) (2,816) --
Proceeds from sale of other leased equipment 3,828 3,763 2,155
Proceeds from sale of Telecommunications Business Unit assets 895 -- --
Amortization of unearned income (760) (1,188) (1,320)
Collections of rentals on direct financing leases 2,285 3,524 4,651
Depreciation and amortization expense 2,765 2,557 3,900
Effect on cash flows of changes in:
Accounts receivable 1,111 (557) (191)
Notes receivable (1,776) (1,637) (2,420)
Inventory 720 (3,607) 459
Other assets (284) 1,604 (1,182)
Accounts payable and other liabilities 267 (40) 2,511
Deferred lease revenue 5,877 -- --
Deferred tax assets -- 666 --
Other (223) 40 --
-------- -------- --------
15,477 11,012 8,563
-------- -------- --------
Net cash provided by continuing operations 16,008 12,615 9,393
Net cash provided by (used in) discontinued operations (602) 169 (1,893)
-------- -------- --------
Net cash provided by operations 15,406 12,784 7,500
-------- -------- --------
Cash flows from investing activities:
Purchase of rental equipment (23,833) (11,432) (22,977)
Purchase of property and equipment (404) (15) (43)
Investment in mortgage participation notes (1,299) -- --
Net cash provided by the sale of TLP subsidiaries -- -- 754
Net cash used in the acquisition of LaserAccess subsidiary -- -- (2,486)
-------- -------- --------
Net cash used in investing activities (25,536) (11,447) (24,752)
-------- -------- --------
Continental Information Systems Corporation
and its Subsidiaries
In Thousands
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Year Ended May 31,
------------------------------------
1998 1997 1996
-------- -------- --------
Cash flows from financing activities:
Payments on note payable to Liquidating Estate -- -- (3,391)
Proceeds from lease, bank and institution financings 14,098 8,222 15,368
Payments on lease, bank and institution financings (9,238) (5,152) (2,444)
Payments on notes payable to former owners of acquired company (218) (768) --
Purchase of treasury stock (406) -- --
Proceeds from exercise of stock options 137 33 --
-------- -------- --------
Net cash provided by financing activities 4,373 2,335 9,533
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (5,757) 3,672 (7,719)
Cash and cash equivalents at beginning of period 8,968 5,296 13,015
-------- -------- --------
Cash and cash equivalents at end of period $ 3,211 $ 8,968 $ 5,296
======== ======== ========
The accompanying notes are an integral part of these financial statements.
Continental Information Systems Corporation
and its Subsidiaries
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
Continental Information Systems Corporation and its Subsidiaries (the
"Company") are a specialized financial services company that is currently
engaged in the leasing, sales and management of commercial aircraft and
engines, equipment leasing and other financing activities, including
commercial real estate financing.
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 primarily in the United States. The
underlying equipment secures direct financing and operating leases. The
Company generally does not require collateral for trade accounts
receivable.
The Company's notes receivable balance at May 31, 1998 is with two
companies in the airline industry. Thus, the Company is directly affected
by the well-being of these two companies and the airline industry in
general. However, the credit risk associated with these notes receivable
is mitigated by the Company's policy requiring collateral on all airline
notes receivable.
Investment in Mortgage Participation Notes
Investment in mortgage participation notes represent investments in
high-yield, short-term commercial real estate transactions. Interest
income on the notes is recorded monthly using the weighted average
estimated yields on these investments.
Continental Information Systems Corporation
and its Subsidiaries
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
Inventory and Related Revenue Recognition
Inventory consists of various 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.
The Company performs ongoing analyses, 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 primarily direct
financing and operating leases; the dollar value and number of sales-type
leases are considered immaterial. 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
investments 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.
Continental Information Systems Corporation
and its Subsidiaries
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
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.
Income Taxes
The Company accounts for income taxes under the asset and liability
method required by Financial Accounting Standard No. 109 (SFAS 109),
Accounting for Income Taxes. SFAS 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, SFAS
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
In fiscal 1998, the Company adopted Financial Accounting Standard No. 128
(SFAS 128), Earnings Per Share. SFAS 128 specified new standards for
computing and disclosing net income (loss) per share. Basic and diluted
net income (loss) per share for the fiscal years ended May 31, 1998, 1997
and 1996, was computed based on the weighted average number of shares of
common stock outstanding during the periods which were 6,984,473,
7,008,440 and 6,999,399, respectively. As of May 31, 1998, the Company
had outstanding options to purchase 369,674 shares of common stock (see
Note 12). The potential dilution of these options is immaterial in the
computation of diluted net income (loss) per share. Basic and diluted 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.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, Reporting Comprehensive Income. This statement establishes
standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. This
Continental Information Systems Corporation
and its Subsidiaries
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
statement requires that an entity (a) classify items of other
comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. At May 31, 1998, the
Company does not have any items of comprehensive income and therefore,
the adoption of this Statement is not expected to have an impact on the
Company's financial statements.
In June 1997, the FASB issued SFAS No. 131, Disclosure about Segments of
an Enterprise and Related Information. This statement establishes
standards for the way that enterprises report information relating to
operating segments in annual financial statements and requires selected
information about operating segments in interim financial reports issued
to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. This
statement requires that a public enterprise report financial and
descriptive information about its reportable segments. Operating segments
are components of an enterprise for which separate financial information
is available that is regularly reviewed by the enterprise's chief
operating decision maker in deciding how resources are to be allocated to
the segment and assessing its performance. In the initial year of
application, comparative financial information for earlier years is to be
restated. The Company will be required to implement this statement for
the fiscal year ended May 31, 1999.
2. Discontinued Operations
On May 29, 1998, the Company announced its decision to discontinue and
liquidate its LaserAccess laser printing business. The Board of Directors
concluded that the printing business was unlikely to operate profitably
in the foreseeable future. The Company also decided not to pursue a
previously announced joint venture with another company in the laser
printing business. The Board concluded after additional review that the
venture, which would require a substantial infusion of capital from the
Company, would not generate returns sufficient to justify the additional
capital.
The Company recorded a provision of $4,955,000 in the quarter ended May
31, 1998, relative to the disposal of LaserAccess' assets, including the
write-off of goodwill, in the amount of $3,258,000, and other charges
related to the discontinuance of the business unit. The remaining net
assets of the discontinued unit consist principally of used laser
printing equipment and accounts receivable.
The Company is currently engaged in litigation with the former owners and
executives of its discontinued LaserAccess business. In March 1998, the
Company prepaid remaining amounts due to the former owners and exercised
a right to set off approximately $1.1 million against amounts due on
promissory notes in connection with the purchase of LaserAccess. The
Company has also terminated these individuals under their employment
agreements. On April 7, 1998, the former owners filed suit in Superior
Court of California, County of San Diego, seeking to recover damages
Continental Information Systems Corporation
and its Subsidiaries
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
allegedly arising from the Company's set-off of amounts due.
Additionally, the former owners are seeking to recover approximately
$733,000 in damages arising from the Company's termination of their
employment contracts. The complaint, as amended, seeks damages for
various other claims, including defamation. The Company has asserted
crossclaims and intends to vigorously contest these actions.
Also, 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 had 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 none as of May 31, 1997, due
to cash payments principally for severance and facilities costs totaling
approximately $325,000 and a net reduction of $419,000 to adjust the
amounts estimated for the loss on the inventories, receivables, fixed
assets and leased facility obligations. 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 year ended May 31, 1996. A final
adjustment of the liability in the amount of $89,000 was recorded as
income from discontinued operations in the year ended May 31, 1997.
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):
Continental Information Systems Corporation
and its Subsidiaries
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
Year Ended May 31,
---------------------------------
1998 1997 1996
------- ------- -------
Revenues $ 4,281 $ 5,068 $ 7,316
Costs and expenses 5,555 5,901 8,213
------- ------- -------
Loss from discontinued operations (1,274) (833) (897)
Loss on disposal of discontinued operations (4,955) -- (375)
------- ------- -------
Loss before income tax benefit (6,229) (833) (1,272)
Income tax benefit (325) (316) (508)
------- ------- -------
Net loss from discontinued operations $(5,904) $ (517) $ (764)
======= ======= =======
The Consolidated Balance Sheets as of May 31, 1998 and 1997, have been
reclassified to report the net assets (liabilities) 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,
--------------------
1998 1997
------- -------
Assets:
Cash and cash equivalents $ 19 $ 37
Accounts receivable, net 198 535
Inventory 779 1,674
Net investment in direct financing leases -- --
Furniture, fixtures and equipment, net 12 12
Other assets 58 110
Goodwill, net -- 3,632
------- -------
Total assets 1,066 6,000
------- -------
Liabilities:
Accounts payable and accruals 1,469 235
Note payable to institution 463 1,004
------- -------
Total liabilities 1,932 1,239
------- -------
Net assets (liabilities) of discontinued operations $ (866) $ 4,761
======= =======
Continental Information Systems Corporation
and its Subsidiaries
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
3. Sale of Business Unit
On August 31, 1997, the Company, through a wholly-owned subsidiary, sold
its Telecommunications Business Unit to Meridian Leasing Corporation of
Deerfield, Illinois. The sales price approximated the Business Unit's book
value and therefore did not significantly affect the results of operations
of the Company for the fiscal year ended May 31, 1998.
4. Investment in Mortgage Participation Notes
On July 3, 1997, the Company announced that it had entered into a Joint
Investment Agreement with Emmes Investment Management Co. LLC to provide
up to $8 million in high-yield, short-term financing for commercial real
estate transactions. At May 31, 1998, the Company's investment in such
transactions was approximately $1.5 million.
5. 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.
6. 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):
1998 1997
------- -------
Minimum lease payments receivable $ 5,395 $ 3,921
Initial direct costs and deferred commissions 67 34
Estimated unguaranteed residual values 750 630
Less: Unearned income (1,554) (1,139)
------- -------
Net investment in direct financing leases $ 4,658 $ 3,446
======= =======
Future minimum lease payments to be received under direct financing leases
for fiscal years ending May 31 are as follows (in thousands):
1999 $ 2,005
2000 1,494
2001 991
2002 629
2003 276
--------
$ 5,395
========
Approximately 11% of these future lease streams are allocable to lenders
under financing agreements.
Continental Information Systems Corporation
and its Subsidiaries
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
7. Rental Equipment
Rental equipment consists of the following as of May 31 (in thousands):
1998 1997
-------- --------
Computer equipment $ 11,758 $ 4,130
Capital equipment 3,992 6,105
Telecommunication equipment 888 240
Aircraft equipment 6,556 1,338
Printing equipment 818 548
Deferred commissions and initial direct costs 226 64
-------- --------
24,238 12,425
Less: accumulated depreciation (6,120) (4,920)
-------- --------
$ 18,118 $ 7,505
======== ========
Future minimum lease payments to be received under operating leases for
the fiscal years ended May 31 are as follows (in thousands):
1999 $ 6,529
2000 5,060
2001 914
2002 430
2003 5
----------
$ 12,938
==========
Approximately 17% of these future lease streams are allocable to lenders
under financing agreements.
8. Furniture, Fixtures and Equipment
Furniture, fixtures and equipment consist of the following as of May 31
(in thousands):
1998 1997
------- -------
Leasehold improvements $ 136 $ 420
Computer equipment and software 783 719
Furniture, fixtures and office equipment 15 207
------- -------
934 1,346
Less: accumulated depreciation (536) (1,140)
------- -------
$ 398 $ 206
======= =======
Continental Information Systems Corporation
and its Subsidiaries
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
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 finances leases on a one-on-one basis with certain
institutions. Additionally, the Company is currently in negotiations with
a commercial bank to establish a $3 million "warehouse" line of credit.
Discounted lease rental borrowings as of May 31 are as follows (in
thousands):
1998 1997
------ ------
Non-recourse borrowings $2,346 $5,383
Recourse borrowings 248 250
------ ------
$2,594 $5,633
====== ======
The Company paid interest related to discounted lease borrowings of
$272,000 and $652,000 for the fiscal years ended May 31, 1998 and 1997,
respectively.
Discounted lease rental borrowings for the fiscal years ending May 31 are
payable as follows (in thousands):
1999 $ 933
2000 688
2001 612
2002 361
--------
$ 2,594
========
10. Note Payable to Institution
The Company has a revolving loan agreement with an institution to provide
lease and inventory financing for aircraft engines for CIS Air Corporation
(a wholly-owned subsidiary), in the amount of $10,000,000. The facility
has a three-year term and permits borrowing equal to a percentage of the
Continental Information Systems Corporation
and its Subsidiaries
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
appraised value of the aircraft engines financed. Substantially all of the
assets of CIS Air Corporation are pledged as collateral for the loan. At
May 31, 1998, $4,429,000 of this facility was being utilized. Interest on
the facility is at 1/4% above the prime rate. The Company paid interest
related to this facility of $166,000 in fiscal 1998.
11. Common Stock
On October 28, 1997, at the Company's Annual Meeting, the stockholders
approved the amendment of the Company's Restated Certificate of
Incorporation to increase the number of authorized shares from 10 million
to 20 million. The Company currently has no plans to issue any additional
shares (other than pursuant to the Company's 1995 Stock Compensation
Plan).
On May 27, 1997, the Company announced that its Board of Directors had
authorized the expenditure of up to $500,000 for the repurchase of its
common stock. The Company commenced a voluntary odd lot program through
June 30, 1997, which was extended through July 31, 1997. Shareholders
owning less than 100 shares of the Company's common stock were offered the
opportunity to sell all their shares at the closing price of the common
stock on the Nasdaq Small-Cap Market on May 23, 1997, which was $2.25 per
share. Approximately 20,000 shares were repurchased by the Company at an
aggregate cost of approximately $45,000. Subsequent to the odd lot
repurchase program, the Company intends to repurchase from time to time
additional shares of its common stock up to the balance of $500,000
remaining after the odd lot program. The Company may repurchase the
additional shares at prevailing prices in the open market or in negotiated
or other permissible transactions at the discretion of management. The
Company will hold all repurchased shares of common stock in its treasury.
As of May 31, 1998, approximately 143,000 shares had been repurchased by
the Company in this manner at an aggregate cost of approximately $361,000.
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.
12. Stock Option Plan
In 1995, the Board of Directors adopted and the stockholders approved the
Continental Information Systems Corporation 1995 Stock Compensation Plan
(the "1995 Plan"). 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. Options granted to
non-employee directors of the Company in any year become exercisable at
the next annual stockholders' meeting while those granted to employees of
and independent contractors and consultants to the Company are subject to
vesting periods determined by the Compensation Committee. Options granted
to employees in fiscal 1998 become exercisable in installments of 33 1/3
percent at the grant date and at each subsequent fiscal year end. The
Continental Information Systems Corporation
and its Subsidiaries
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for the 1995 Plan.
Accordingly, no compensation cost has been charged against income for the
stock option plan. Had compensation cost for the 1995 Plan been determined
based on the fair value at the grant dates for awards under the Plan,
consistent with the requirements of FASB Statement No. 123, "Accounting
for Stock-Based Compensation," the Company's net income and net income per
share would have been reduced to the pro forma amounts indicated below:
(in thousands, except per share amounts)
1998 1997 1996
--------- -------- -------
Net income (loss) - As reported $ (5,373) $ 1,086 $ 66
- Pro forma $ (5,613) $ 894 $ 50
Basic and diluted net
income (loss) per share - As reported $ (.77) $ .15 $ .01
- Pro forma $ (.80) $ .13 $ .01
The fair value of each stock option grant has been estimated on the date
of each grant using the Black-Scholes option pricing model with the
following weighted average assumptions:
1998 1997 1996
---- ---- ----
Risk-free interest rate 6.3% 6.6% 6.3%
Expected life (months) 46 46 60
Expected volatility 42% 42% 42%
Expected dividend yield -- -- --
The weighted-average grant date fair values of options granted during
fiscal 1998, 1997 and 1996 were $.92, $.80 and $1.40 per share,
respectively.
Continental Information Systems Corporation
and its Subsidiaries
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
A summary of the status of the 1995 Plan as of May 31, 1996, 1997 and
1998, and changes during the years ending on those dates is presented
below:
Weighted Average
Number of Exercise Price
Options Per Option
------- ----------
Outstanding at
May 31, 1995 (none exercisable) 15,000 $ 3.50
Granted 9,000 $ 2.50
Exercised -- $ --
Forfeited/expired (9,000) $ 3.50
-------
Outstanding at
May 31, 1996 (6,000 exercisable) 15,000 $ 2.90
Granted 319,000 $ 1.97
Exercised (16,667) $ 1.97
Forfeited/expired (33,333) $ 1.97
-------
Outstanding at
May 31, 1997 (188,337 exercisable) 284,000 $ 2.02
Granted 190,674 $ 2.38
Exercised (70,001) $ 1.97
Forfeited/expired (38,331) $ 1.97
-------
Outstanding at
May 31, 1998 (234,002 exercisable) 366,342 $ 2.22
=======
The following table summarizes information about stock options outstanding
at May 31, 1998:
Options Outstanding Options Exercisable
-------------------------------------------------------- ---------------------------------
Range of Weighted-Average
Exercise Number of Remaining Weighted-Average Number of Weighted-Average
Prices Options Contractual Life Exercise Price Options Exercise Price
------ ------- ---------------- -------------- ------- --------------
$3.50 6,000 2.0 $ 3.50 6,000 $ 3.50
3.00 15,674 4.4 3.00 - 3.00
2.50 9,000 2.3 2.50 9,000 2.50
2.38 100,000 3.2 2.38 33,334 2.38
2.25 75,000 3.1 2.25 25,000 2.25
1.97 151,668 3.0 1.97 151,668 1.97
1.84 9,000 3.4 1.84 9,000 1.84
------- --------
Total 366,342 234,002
======= ========
Continental Information Systems Corporation
and its Subsidiaries
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
13. 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.
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 $5.4 million of tax benefits will be generated by operations
during the fiscal periods ended through May 31, 2004. In order to realize
this level of tax benefit, cumulative pretax income for the periods
through 2004 will have to be approximately $14.2 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 $5.4 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.
Continental Information Systems Corporation
and its Subsidiaries
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
The components of the provision for income taxes for both continuing and
discontinued operations are as follows (in thousands):
Year Ended May 31,
-------------------------------------------------
1998 1997 1996
--------- --------- ---------
Current
Federal $ - $ - $ -
State - - -
--------- --------- ---------
- - -
Deferred - 666 -
--------- --------- ---------
$ - $ 666 $ -
========= ========= =========
A reconciliation of income tax expense (benefit) at the statutory rate to
reported income tax expense (benefit) for continuing operations follows
(in thousands):
Year Ended May 31,
----------------------
1998 1997 1996
---- ---- ----
U.S. Federal statutory rate applied to pretax
income (loss) from continuing operations $291 $879 $455
State income taxes, net of federal benefit 34 103 53
Effect of permanent differences and
changes in the valuation allowance -- -- --
---- ---- ----
$325 $982 $508
==== ==== ====
Continental Information Systems Corporation
and its Subsidiaries
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
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):
1998 1997
-------- --------
Assets
Net operating losses $ 14,219 $ 15,735
Prepaid lease revenue 2,271 --
Discontinued operations 2,004 --
Other 52 426
Valuation allowance (12,886) (10,541)
Liabilities
Leased assets (246) (206)
-------- --------
$ 5,414 $ 5,414
======== ========
14. 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 years
ended May 31, 1998 and 1997, were $79,000 and $116,000, respectively.
15. 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 provided
certain administrative services to the Liquidating Estate. In exchange for
such services, the Company was 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 agreement was
terminated in February 1997. The Company received approximately $539,000
and $537,000, pursuant to this agreement, in the fiscal years ended May
31, 1997 and 1996, respectively.
16. 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 $243,000 and $442,000 in the
fiscal years ended May 31, 1998 and 1997, respectively.
Continental Information Systems Corporation
and its Subsidiaries
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
The future minimum lease payments required under operating leases for the
fiscal years ended May 31 are as follows (in thousands):
1999 $ 233
2000 227
2001 229
2002 239
2003 194
Beyond 2003 299
-------
$ 1,421
=======
Contingencies
The Company is currently engaged in litigation with the former owners and
executives of its discontinued LaserAccess business. In March 1998, the
Company prepaid remaining amounts due to the former owners and exercised a
right to set off approximately $1.1 million against amounts due on
promissory notes in connection with the purchase of LaserAccess. The
Company has also terminated these individuals under their employment
agreements. On April 7, 1998, the former owners filed suit in Superior
Court of California, County of San Diego, seeking to recover damages
allegedly arising from the Company's set-off of amounts due. Additionally,
the former owners are seeking to recover approximately $733,000 in damages
arising from the Company's termination of their employment contracts. The
complaint, as amended, seeks damages for various other claims, including
defamation. The Company has asserted crossclaims and intends to vigorously
contest these actions.
17. 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, notes receivable and investment in mortgage
participation notes - The carrying value approximates fair value because
of the short maturity of those instruments.
Discounted lease rental borrowings, notes payable to former owners of
acquired company and note payable to institution - Fair value of
discounted lease rental borrowings, notes payable to former owners of
acquired company and note payable to institution are based on the
borrowing rates currently available to the Company for bank loans with
similar terms and average maturities. At May 31, 1998 and 1997, the fair
value of discounted lease rental borrowings, notes payable to former
owners of acquired company and note payable to institution approximate
their carrying values.
Continental Information Systems Corporation
and its Subsidiaries
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
The estimated fair values of the Company's financial instruments at May
31, 1998 and 1997 are as follows (in thousands):
1998 1997
---------------------------- ----------------------------
Carrying Value Fair Value Carrying Value Fair Value
-------------- ---------- -------------- ----------
Assets:
Cash and cash equivalents $3,211 $3,211 $8,968 $8,968
Notes receivable 6,870 6,870 5,094 5,094
Investment in mortgage
participation notes 1,522 1,522 -- --
Liabilities:
Discounted lease rental
borrowings 2,594 2,594 5,633 5,633
Note payable to institution 4,429 4,429 -- --
Notes payable to former
owners of acquired company -- -- 1,536 1,536
SCHEDULE II
CONTINENTAL INFORMATION SYSTEMS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED MAY 31, 1998
(Dollars in thousands)
Charged Charged
Beginning to costs to other Deductions Ending
Balance and expenses accounts (Recoveries) Balance
1996:
Accounts receivable -
allowance for doubtful
accounts $ (170) $ (34) $ - $ 151 $ (53)
-------- -------- -------- ------- --------
1997:
Accounts receivable -
allowance for doubtful
accounts (53) (34) - 37 (50)
-------- -------- -------- ------- --------
1998:
Accounts receivable -
allowance for doubtful
accounts $ (50) $ (10) $ - $ (16) $ (76)
-------- --------- -------- -------- --------
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 Meeting of
Stockholders and Proxy Statement to be filed within 120 days after the end of
the Company's fiscal year (the "1998 Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The Company incorporates herein by reference the information concerning
executive compensation contained in the 1998 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 1998
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 1998 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 LaserAccess), 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, as amended
(Filed as Exhibit 3.1 to the Company's Form 10-Q
for the quarter ended November 30, 1997 and
incorporated herein by reference).
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* Lease dated May 5, 1994 between B.G. Sulzle, Inc.
and the Trustee.
10.2** 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).
10.3** 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).
10.4** 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).
10.5** Loan and Security Agreement between CIS Corporation
and CoreStates Bank, N.A., dated July 9, 1996
(Filed as Exhibit 10.17 to the Company's Form 10-K
for the Fiscal Year ended May 31, 1996 and
incorporated herein by reference).
10.6** Letter Agreement regarding employment with Thomas
J. Prinzing dated May 20, 1997 (Filed as Exhibit
10.11 to the Company's Form 10-K for the fiscal
year ended May 31, 1997 and incorporated herein by
reference).
10.7** Letter Agreement regarding employment with Jonah M.
Meer dated June 9, 1997 (Filed as Exhibit 10.12 to
the Company's Form 10-K for the fiscal year ended
May 31, 1997 and incorporated herein by reference).
10.8** Advisory Agreement for Real Estate Related
Investments between Continental Information Systems
Corporation and Emmes Investment Management Co. LLC
dated June 30, 1997 (Filed as Exhibit 10.13 to the
Company's Form 10-K for the fiscal year ended May
31, 1997 and incorporated herein by reference).
10.9** Loan and Security Agreement between CIS Air
Corporation and Heller Financial, Inc. dated
December 19, 1997 (Filed as Exhibit 10.1 to the
Company's 10-Q for the quarter ended February 28,
1998 and incorporated herein by reference).
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
date indicated during the last quarter of the Company's fiscal
year:
Date Description
---- -----------
May 29, 1998 The Company announces discontinuance
of its Laser Printing Business Unit.
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/MICHAEL L. ROSEN
----------------
Michael L. Rosen
President, Chief Executive Officer
and Director
BY: /s/JONAH M. MEER
-------------
Jonah M. Meer
Senior Vice President,
Chief Operating Officer
and Chief Financial Officer
Dated: August 24, 1998
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/ JULIUS S. ANREDER Director August 24, 1998
- ---------------------
Julius S. Anreder
/s/ DR. LEON H. BLOOM Director August 24, 1998
- ---------------------
Dr. Leon H. Bloom
/s/ JAMES P. HASSETT Director and August 24, 1998
- -------------------- Chairman of the Board
James P. Hassett
/s/ GEORGE H. HEILBORN Director August 24, 1998
- ----------------------
George H. Heilborn
/s/ PAUL M. SOLOMON Director August 24, 1998
- -------------------
Paul M. Solomon