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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the Fiscal Year May 31, 1999 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
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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,
1999 was 6,884,844.
As of June 30, 1999, the aggregate market value of the shares of Common Stock
held by non-affiliates of the registrant was approximately $6,159,975.*
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 1,956,864 shares deemed to be held by officers and directors,
and stockholders whose ownership exceeds ten percent of the shares outstanding
at June 30, 1999. 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.
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CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
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PART I
ITEM 1. BUSINESS
INTRODUCTION AND HISTORY OF THE COMPANY
Continental Information Systems Corporation ("the Company") currently has three
main lines of business:
- leasing, sales and management of commercial aircraft and aircraft
engines ("the Air Group Business");
- providing other financing services, including commercial real estate
financing ("the Finance Business"); and,
- developing and commercializing an Internet-enabled portal to
facilitate securities trading for institutional equity traders ("the
Electronic Execution Portal Business").
The Company is in the initial stages of developing its Electronic Execution
Portal Business. Although the Company will continue to operate its Air
Group and Finance Businesses, a substantial percentage of its resources will be
shifted to the Electronic Execution Portal Business during the coming fiscal
quarters. As part of this transition, changes will and have occurred in the
Company's business focus, management, employees and allocation of other
resources. (See "Business Strategy"; "Employees"; and "Financing".)
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 in November 1994. In 1997, the
Board of Directors undertook a restructuring of senior management. The new
management included the appointment of a representative of the Company's
largest shareholder as Chief Executive Officer. After conducting a review of
the Company's operations, management undertook to focus on and expand upon the
Company's core Air Group Business. In connection with this, the Company
disposed of or discontinued other unrelated lines of business, including
telecommunications-related business units and its laser printing business. In
August 1999, the Board of Directors authorized the Company to focus on
developing and commercializing the Electronic Execution Portal Business. (See
"Electronic Execution Portal Business"). In connection with this strategic
decision, the Company has begun to wind down portions of its other businesses.
Also in August 1999, the Company announced that it would no longer enter into
new equipment leases (See "Equipment Leasing 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. In recent periods,
CIS Air's activities have consisted primarily of acquiring aircraft engines and
then selling, leasing or selling them subject to lease. CIS Air finances its
portfolio acquisitions with cash flow from operations or through borrowings
under CIS Air's revolving credit facility.
Engines, which are acquired from brokers, airlines, and dealers, are in various
states of used condition and frequently need substantial repair or refurbishing.
The Company, when necessary, 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 airworthiness.
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.
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CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
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CIS Air conducts its sales and leasing activities of aircraft and engines
through in-house sales personnel, brokers and consignees. The Company typically
enters into short-term triple net operating leases typically with terms of up
to two years. Air Group Business customers are primarily small to medium-sized
commercial air carriers 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 respectively. 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. was suspended in September 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 general partners of the JetStream partnerships have developed a plan to
sell the Partnerships' remaining aircraft and subsequently terminate the
Partnerships. This liquidation plan will require the approval of more than
50% of the unitholders entitled to vote. It is anticipated that a consent
solicitation statement requesting such approval will be forwarded to
investors during the third or fourth quarter of this year.
The Company is also the owner of a Boeing 737-200 aircraft and has two 737-200
airframes on consignment for part out. The Company has financed aviation related
spare part purchases for others, taking back notes collateralized by the
financed inventory.
BUSINESS STRATEGY. The Company's operating strategy is to employ its
expertise in the aviation, leasing and finance industries to expand and
actively manage its aircraft and aircraft engine portfolio. Its focus is to
identify segments of the engine resale market that management believes offer
greater potential for profitable sales and leasing opportunities. The Company
utilizes its existing relationships with other aviation industry
participants, a diverse customer base as well as its technical expertise, to
identify and evaluate acquisitions, sales and leasing opportunities. The
availability of its revolving credit facility allows the Company to leverage
its investments in the business. The Company in August 1999 replaced its Air
Group management team including the executive in charge of the Air Group and
certain other employees and restructured its Air Group business operations.
The success of the Air Group Business will be dependent on the ability of a
new management team to broaden the customer base and profitably acquire,
lease, and trade engines, the economic environment, the aviation idustry in
general and aircraft supply and demand, among other factors. The Company will
manage the Air Group Business out of its New York City headquarters.
In the normal course of business CIS Air may sell, lease, and finance 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, financing or
selling on account to foreign companies that operate outside the United States
may also present regulatory or administrative obstacles to repossession of
engines 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.
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CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
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INDUSTRY CONDITIONS. The commercial aviation industry has recently
experienced a period of sustained growth and record-breaking financial
performance. Historically, air traffic demand has increased as economic
activity increases and real income levels rise. Traffic demand has risen
despite higher prices of air transportation. In 1997, the latest full year
for which data is publicly available, international scheduled traffic climbed
7.0% and domestic traffic rose 4% over the previous year. Because a
substantial portion of business and especially leisure airline travel is
discretionary, the industry has tended to suffer during economic downturns.
The Company's business remains dependent upon the overall economic condition
of the airline industry, which historically has been volatile.
Leasing aircraft engines and aircraft 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 or engines 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 or engines 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 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 or engines. As described above,
the cost of such compliance may be reduced to the extent that current or future
lessees of aircraft or engines 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 aircraft which do
not comply with Stage 2 of the noise abatement standards ("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 many 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 speedier recovery of CIS Air's investment. The ability
to renew leases or to sell the aircraft owned by CIS Air is dependent upon
among other factors: (a) general economic and market conditions at lease end;
(b) regulatory changes; (c) cost to refurbish the asset, (d) technological
changes; (e) any cost required to conform the aircraft to future Stage 3
noise restrictions; and (f) competition. 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.
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CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
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FINANCE BUSINESS
The Company diversified 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, 1999, the Company's investment
in such transactions was approximately $862,000. 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.
Changes in market conditions however, may result in additional investments.
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.
EQUIPMENT LEASING BUSINESS
In August 1999, the Company announced that its subsidiary, CIS Corporation
would no longer enter into new equipment leases. Additionally, the Company has
sold a substantial portion of its remaining lease portfolios. The Company has
retained certain leases in its portfolio and will continue to administer those
for as long as is economically advantageous for it to do so.
ELECTRONIC EXECUTION PORTAL BUSINESS
On August 8, 1999, the Company announced that the Board of Directors had
authorized the Company to focus on developing and commercializing the
Electronic Execution Portal Business. Through its newly created subsidiary,
CIS Portal Corporation, a New York corporation, the Company will design,
develop and market an Internet-based software interface service, the
"Electronic Execution Portal Business". The Electronic Execution Portal will
allow institutional securities traders and buy-side personnel to find the
best prices for their trades on a real-time basis and to route their trades
to the best priced settlement facility through Internet-based direct access
to various trading platforms. The Company intends that the Electronic
Execution Portal will automate essentially all steps of the trading process
across various trading platforms. The Electronic Execution Portal, in its
current formulation, will be designed to support an existing trading
environment and to interface with virtually any trading system via
Internet-based direct access. The Company envisions that users will benefit
not only from the ability to find prices efficiently on a real-time basis,
but also from the elimination of paper flow, double entry of data and
redundant terminals. The Company believes that these benefits will reduce
trading risks and errors while more efficiently managing the trading process.
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CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
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CUSTOMERS AND MARKETING
The Company obtains its customers from many sources including in-house sales,
brokers, vendor relationships and advertising. The Company's management believes
that its business is not dependent on any single customer or any single source
for the engines marketed by the Company. One customer in fiscal 1999 accounted
for 18.5% of the Company's revenues.
In connection with the establishment of the Electronic Execution Portal
Business, the Company may seek to engage in strategic market relationships with
other vendors, brokers, dealers or other market participants. There can be no
assurance, however, that the Company will be able to establish the necessary
strategic market relationships, or, if such relationships are established, that
they will be successful.
The market for Internet-based trading facilitation services, such as the
Electronic Execution Portal, is in its initial stage of development. Demand and
market acceptance for newly introduced, Internet-based products and services are
subject to a high level of uncertainty. Sales of the Electronic Execution Portal
service will depend on the Company's ability to successfully develop and market
the Electronic Execution Portal and to attract institutional users. Demand for
the Electronic Execution Portal will depend on target users adopting the
Internet as a preferred method for facilitating securities trades. The Company
plans to devote a significant amount of its administrative, operational,
financial and other resources over the next twelve month period to product and
market development.
The technologies and computer programs associated with the Electronic Execution
Portal system are in development and have not been subject to real-world
performance conditions. There can be no assurance that the Electronic Execution
Portal system will ultimately function as the Company envisions.
FINANCING
The Company's financing strategy had been primarily to use its own capital,
periodically sell leases to selected institutions on a non-recourse basis, and
develop relationships with financial organizations to provide lease financing
on a recourse and non-recourse basis. The Company's decision to discontinue
origination of new leases will reduce this source of financing going forward.
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.
The Company's expansion into a new line of business may place significant
demands on its current financial resources. The Company may need to arrange for
additional financing to aid in the development and commercialization of the
Electronic Execution Portal.
CONCENTRATION OF CREDIT RISK
The Company extends credit through financing and leasing transactions to its
customers located both within and outside the United States. The underlying
collateral secures the financing of direct financing and operating leases.
The Company's notes receivable balance of $3,205,000 at May 31, 1999, 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. The
credit risk associated with these customers is mitigated by the Company's policy
requiring collateral on all airline transactions; however a substantial portion
of such collateral is outside the United States, thereby creating potential
difficulties of recovery of collateral in case of default.
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CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
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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
dependent upon many factors (See "Air Group Business"). The Air Group Business
competes with distributors, leasing companies, financial institutions and
other parties engaged in leasing, managing, and marketing engines. Such
competitors may lease or sell engines at lower rates or prices than CIS Air
and provide benefits, such as engine management programs and support
services, which CIS Air cannot provide.
The Electronic Execution Portal Business may face competition from systems
developed by other, much larger companies and its success may depend on the
ability of the Company to position itself as the preferred Internet-based
trading facilitation service provider for institutional users. This, in turn,
will depend on the speed with which the Company can develop and commercialize
the Electronic Execution Portal to its target users. Larger competitors may
have access to greater resources or better technology.
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 or other means of financing
its product development.
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 and advisors.
PROPRIETARY RIGHTS
The Company currently has no patents or registered trademarks. The Company
utilizes software licensed from third parties for certain of its financing and
leasing operations. In connection with the Electronic Execution Portal Business,
the Company believes that its success and ability to compete will be dependent
on the development of related proprietary technologies. These proprietary
technologies will require the Company to secure patents and trademarks to
protect its systems and services.
EMPLOYEES
As of June 30, 1999, the Company had 18 full-time employees, none of whom
were employed under a collective bargaining agreement. Ten of these employees
worked in administration, and eight were engaged in sales and sales support.
Of the employees engaged in sales and sales support, three were marketing
representatives who are compensated substantially on a commission basis. As
of August 30, 1999, eight of the Company's employees had received notices of
termination. The Company has hired a managing director for its new Electronic
Execution Portal Business. The Company anticipates adding 10 employees for
its Electronic Execution Portal Business phased in over the first year of
development.
ITEM 2. PROPERTIES
The Company's executive offices are located in New York, New York. The Company
maintains offices located in Syracuse, New York and in Los Angeles, California.
The Company leases these offices, which
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CONTINENTAL INFORMATION SYSTEMS CORPORATION AND ITS
SUBSIDIARIES
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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 has been engaged in litigation with the former owners and executives
of its discontinued LaserAccess business. The complaint, as amended, sought
damages for various claims, including defamation. This litigation was settled
in June 1999. In consideration of a cash payment, the Company received a
complete release of all claims against it and released all claims against the
owners and executives. As a result, all litigation pending between the
parties was dismissed with prejudice. The Company had previously reserved
amounts believed sufficient to cover the estimated settlement cost. The
actual settlement was for less than the amount reserved and the Company has
reversed to income from discontinued operations the excess of such accrual or
$1,086,000, after taxes.
On June 1, 1999, CIS Air commenced an action against EastWind Airlines, Inc.
seeking $840,329 in damages resulting from EastWind's failure to pay monies
owed under a lease of one Boeing-737 Aircraft and two jet engines. On July
20, 1999, EastWind answered the complaint and denied liability. Thereafter,
CIS moved to amend its complaint to seek $1,325,261 in damages for the
aircraft lease arrearage and $287,500 for monies owed under these leases,
each lease being for one commercial jet engine. The amendment also seeks to
add EastWind's corporate parent, UM Holdings, Inc. as a party defendant
responsible to pay whatever liability is assessed against EastWind. The
Company also filed suit in the Superior Court of Guilford County, North
Carolina for return of the aircraft and engines. The Company has reached
agreement with Eastwind for return of the aircraft and engines, without
prejudice to its monetary claims. As the market value of the aircraft is less
than its carrying value, failure to collect on the monetary claim against
Eastwind would result in a loss.
CIS Air is currently in litigation with Interglobal, Inc. ("Interglobal") and
Aero California S.A. de C.V. ("Aero California") in the Superior Court of the
State of California for the County of Orange. Aero California and Interglobal
filed separate actions on April 13 and 14, 1999 seeking damages for an
alleged breach of warranty of merchantability for an aircraft which
Interglobal leased to Aero California on an "as is - where is" basis and for
an alleged breach of contract for failing to negotiate in good faith to sell
a second aircraft to Interglobal. CIS filed a cross-complaint against Aero
California seeking to recover lease and maintenance payments which have
not been made and against Interglobal for the accelerated amount due on the
note and to foreclose on certain security pledged to secure the debts. The
cases were consolidated. On July 1, 1999, the court found that CIS' claims
are probably valid and issued a right to attach order permitting the marshal
to seize assets of Interglobal and Aero California to secure the debt. The
parties are currently engaged in settlement negotiations, but no agreement
has been reached.
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.
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CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades on the Nasdaq Small-Cap Market under the
symbol CISC. The high and low bid information for the last two fiscal years
is as follows:
August 31 November 30 February 28 May 31
--------- ------------ ----------- ------
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- -------------- --------------
Low High Low High Low High Low High
--- ---- --- ---- --- ---- --- ----
Fiscal Year ended
May 31, 1999 $ 1.53 $ 2.19 $ 1.25 $ 1.875 $ 1.125 $ 1.75 $ 1.22 $ 1.47
Fiscal Year ended
May 31, 1998 $ 2.13 $ 3.25 $ 2.50 $ 3.56 $ 2.13 $ 2.94 $ 2.16 $ 3.00
As of June 30, 1999, there were 1,289 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 consolidated financial
data for the Company and its Subsidiaries 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 October
1, 1994 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
consolidated 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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CONTINENTAL INFORMATION SYSTEMS CORPORATION AND ITS
SUBSIDIARIES
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(Dollars in thousands except per share amounts)
PREDECESSOR
REORGANIZED COMPANY COMPANY
---------------------------------------------------------- -----------------
FISCAL YEAR ENDED
-----------------
FOR THE SIX FOR THE SIX
MAY 31, MONTHS ENDED MONTHS ENDED
1999 1998 1997 1996 MAY 31, 1995 NOVEMBER 30, 1994
---- ---- ---- ---- ------------ -----------------
PERIOD DATA:
Total Revenues $ 16,856 $ 18,419 $ 26,233 $ 24,997 $ 11,762 $ 25,707
Costs and expenses 19,321 17,441 23,453 23,611 9,529 17,501
--------- --------- --------- --------- --------- ---------
Income (loss) from continuing
operations before reorganization
items, income, taxes, fresh start
adjustments and extraordinary item (2,465) 978 2,780 1,386 2,233 8,206
Reorganization items -- -- -- -- -- 8,945
--------- --------- --------- --------- --------- ---------
Income (loss) from continuing operations
before income taxes, fresh start
adjustments and extraordinary item (2,465) 978 2,780 1,386 2,233 17,151
Income taxes 5,448 371 1,056 526 849 45
--------- --------- --------- --------- --------- ---------
Income (loss) from continuing operations
before fresh start adjustments and
Extraordinary item (7,913) 607 1,724 860 1,384 17,106
Income (loss) from discontinued
operations, net of tax 1,086 (5,980) (638) (794) (2,997) (4,882)
--------- --------- --------- --------- --------- ---------
Income (loss) before fresh start
adjustments and extraordinary item (6,827) (5,373) 1,086 66 (1,613) 12,224
Fresh start adjustments -- -- -- -- -- (3,264)
--------- --------- --------- --------- --------- ---------
Income (loss) before extraordinary item (6,827) (5,373) 1,086 66 (1,613) 8,960
Extraordinary item-Forgiveness of debt -- -- -- -- -- 96,317
--------- --------- --------- --------- --------- ---------
Net income (loss) $ (6,827) $ (5,373) $ 1,086 $ 66 $ (1,613) $ 105,277
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
BASIC AND DILUTED NET INCOME (LOSS)
PER COMMON SHARE:
Income from continuing operations $ (1.14) $ .09 $ .24 $ .12 $ .20
Income (loss) from discontinued operations 0.15 (.86) (.09) (.11) (.43)
--------- --------- --------- -------- ---------
Net income (loss) $ (0.99) $ (.77) $ .15 $ .01 $ (.23)
--------- --------- --------- -------- ---------
--------- --------- --------- -------- ---------
NOTE: Net income (loss) per share data is not presented for Predecessor
Company due to the general lack of comparability as a result of the
revised capital structure of the Reorganized Company.
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CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
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(Dollars in thousands)
BALANCE SHEET DATA
(AT PERIOD END): MAY 31, 1999 MAY 31, 1998 MAY 31, 1997 MAY 31, 1996 MAY 31, 1995
------------ ------------ ------------ ------------ ------------
Total assets $ 35,344 $ 45,202 $ 42,986 $ 52,881 $ 41,130
Liabilities 13,268 16,242 8,385 19,428 7,743
Shareholders' equity 22,076 28,960 34,601 33,453 33,387
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; risks described above attendant to the Company's
Electronic Execution Portal Business, 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 services; changes 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.
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CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
- ------------------------------------------------------------------------------
RESULTS OF OPERATIONS
CONTINUING OPERATIONS
REVENUES
For the three fiscal years being reviewed, total revenues decreased to $16.8
million in fiscal 1999 from $18.4 million in fiscal 1998, while decreasing from
$26.2 million in fiscal 1997. Equipment sales followed the same pattern,
decreasing to $7 million in fiscal 1999 from $10.8 million in fiscal 1998, and
decreasing from $16.4 million in fiscal 1997. With the discontinuation of lease
originations in August, 1999, equipment sales are expected to be immaterial in
fiscal 2000. The significant decrease (35.1%) in sales during the fiscal year
1998 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 fiscal year 1998
because of a greater focus on lease originations. Sales by Air Group
decreased by $3.9 million for the current fiscal year. The average selling
price was much lower during the current period as a result of slightly older
engines sold in fiscal 1999 as compared to fiscal 1998. Air group revenues
increased by $2.0 million in 1998 as compared to fiscal 1997.
Equipment rentals and income from direct financing leases increased to $8.3
million in fiscal 1999 from $5.4 million in fiscal 1998 and from $5.0 million
in fiscal 1997. The increase in fiscal 1999 is chiefly attributable to an
increase in Leasing Group and Air Group rentals to the extent of approximately
$3 million and $1 million respectively for the fiscal year 1999. Also an
increase in net investment in direct finance leases made in fiscal 1998 fourth
quarter contributed to the increase in fiscal 1999 as only 3 months income was
recorded in fiscal 1998 as compared to 12 months in fiscal 1999.
Interest, fees and other income decreased to $1.2 million in fiscal 1999 from
$2.1 million in fiscal 1998, and from $1.9 million in fiscal 1997. The decrease
in fiscal 1999 is principally due to decline in Equipment Management Income fee
and other fee income for CIS Air as a result of the suspension of management
fees from the Jet Stream Partnerships in fiscal 1999 to $170,000 as compared to
$637,000 in fiscal 1998.
COSTS AND EXPENSES
Costs and expenses increased to $19.3 million in fiscal 1999 from $17.4 million
in fiscal 1998 and decreased from $23.4 million in fiscal 1997. Cost of Sales
decreased to $6.4 million in fiscal 1999 from $9.6 million in fiscal 1998 and
from $13.5 million in fiscal 1997. The decrease is a direct result of the 35.1%
decrease in sales. Significant decrease in cost of sales occurred in CIS Air
to the extent of $3.5 million in fiscal 1999. Cost of sales as a percentage of
sales for the fiscal years ended May 31, 1999, 1998 and 1997 was 91.0%, 88.1%
and 81.9%, 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 engine 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 and the age of
engines. In fiscal 1999 the average selling price was lower due to the
cyclical nature of the market environment and slightly older engines.
Depreciation of rental equipment increased to $5.4 million in fiscal 1999 from
$2.6 million in fiscal 1998 and from $2.1 million in fiscal 1997. This increase
is directly related to the addition of $7.6 million in rental equipment in
March 1998 resulting in an increase in depreciation of $2.2 million in fiscal
1999.
Interest expense increased to $513,000 in fiscal 1999 from $438,000 in fiscal
1998 and decreased from $670,000 in fiscal 1997. These variances reflect the
changes in the average debt outstanding during the respective periods. In
fiscal 1999 $1.6 million debt was paid off in conjunction with an
equipment sale.
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CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
- ------------------------------------------------------------------------------
Other operating expenses increased to $2,195,000 in fiscal 1999 from $922,000
in fiscal 1998 and from $1,207,000 in fiscal 1997. These expenses, which are
principally related to leased equipment, will vary from period to period
based on the timing and volume of leasing transactions. In fiscal 1999, an
inventory write off of $719,000 and a bad debt expense of $200,000 were due
to the bankruptcy of Geotek, a large lessee of the Company; CIS Air sublease
expense was $460,000 for 1999 as compared to $180,000 for 1998, and operating
incentives was $225,000 for 1999 as compared to $204,000 for 1998, which
contributed to the increase in the other operating expenses. With the
discontinuation of lease originations in August, 1999, operating expenses
associated with leased equipment are expected to be immaterial in fiscal 2000.
Selling, general and administrative expenses increased to $4,783,000 in fiscal
1999 from $3,957,000 in fiscal 1998 and decreased from $5,946,000 in fiscal
1997. The increase in fiscal 1999 is due to payments made for state franchise
taxes in the amount of $675,000. These decreases in 1998 were principally due
to cost containment efforts and staff reductions between the periods.
INCOME TAXES
For the fiscal years ended May 31, 1999, 1998 and 1997, a provision for
deferred income tax expense on income from continuing operations, was
recorded in the amounts of $5,414,000, $371,000 and $1,056,000, respectively.
For the fiscal years ended May 31, 1998 and 1997, a deferred income tax
benefit on income from discontinued operations was recognized in the amounts
of $371,000 and $390,000, respectively offsetting the related expenses.
In connection with applying "Fresh Start" accounting upon its reorganization
in bankruptcy, the Company had recognized deferred tax assets of
approximately $5 million, net of valuation allowance of $7 million, relating
principally to net operating loss (NOL) carryforwards. The Company recognized
additonal deferred tax assets as a result of subsequent net operating losses.
The value of these deferred tax assets is dependent on the Company generating
future operating earnings, the income taxes on which would be offset by the
Company's NOL carryforwards. The Company provided a full valuation allowance
for these deferred tax assets as of May 31, 1999, since, in management's
opinion, the future realizability of the deferred tax assets is uncertain in
light of its actual operating results since reorganization. This action does
not inmpair the availability of the NOL carryforwards to offset the future
operating earnings. The pre-reorganization NOL carryforwards expire during
the years 2004 to 2010. Utilization of the pre-reorganization NOL
carryforwards is limited to approximately $2 million per year. The Company
periodically reviews the adequacy of the valuation allowance for NOL
carryforwards and will recognize benefits only if a reassessment indicates
that it is more likely than not that the benefits will be realized.
DISCONTINUED OPERATIONS
On May 29, 1998, the Company announced its decision to discontinue and
liquidate its LaserAccess laser printing business. 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. See "ITEM 3. LEGAL PROCEEDINGS" for a discussion of litigation
related to LaserAccess. As a result of the settlement of this litigation, the
Company reversed previously recorded accruals in the amount of $1,086,000,
net of taxes, representing the amount by which the Company's reserves
exceeded the amount of the settlement.
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CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
- ------------------------------------------------------------------------------
A summary of the results of operations of the discontinued LaserAccess Business
Unit follows (in thousands):
YEAR ENDED MAY 31,
-----------------------------
1999 1998 1997
------- ------- -------
Revenues $ -- $ 4,281 $ 5,068
Costs and expenses -- 5,677 6,209
------- ------- -------
Loss from discontinued operations -- (1,396) (1,141)
Income (loss) on disposal of discontinued operations 1,086 (4,955) --
------- ------- -------
Income (loss) before benefit for income taxes 1,086 (6,351) (1,141)
Income tax benefit -- (371) (433)
------- ------- -------
Net income (loss) from discontinued operations $ 1,086 $(5,980) $ (708)
------- ------- -------
------- ------- -------
EQUIPMENT LEASING BUSINESS
In August 1999, the Company announced that its subsidiary, CIS Corporation
would no longer enter into new equipment leases. Additionally, the Company has
sold a substantial portion of its remaining lease portfolios. The Company
will continue to administer its remaining leases for as long as is
economically advantageous for it to do so.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
Cash provided by operations for the fiscal year ended May 31, 1999 of $842,000
was composed of cash from continuing operations of $957,000 with $115,000 being
used in discontinued operations. Cash provided by continuing operations for the
fiscal year ended May 31, 1998 was $9.0 million and cash used in continuing
operations for the fiscal year ended May 31, 1997, was $2.0 million. In fiscal
1999 deferred lease revenues had a negative impact of $3.3 million on cash flows
as compared to positive cash flow of $5.9 million in fiscal 1998. An increase
of inventory levels of $3.2 million had a negative effect on cash flow for
1999. A decrease in inventory levels of $720,000 had a positive effect on cash
flows in fiscal 1998, where as an increase in inventory levels of approximately
$3.6 million had a negative effect on the cash flows in fiscal 1997 as compared
to fiscal 1998. The significant increase in cash provided by continuing
operations for the fiscal year 1998 was primarily due to deferred lease revenue
of $5.9 million generated by prepaid lease transactions. The proceeds were used
to purchase rental equipment.
INVESTING ACTIVITIES
Purchases of rental equipment decreased to $4.3 million in fiscal 1999 from
$23.8 million in fiscal 1998 and from $11.4 million in fiscal 1997. During
fiscal 1999 rental equipment was purchased by CIS Air, consisting of engines
for lease. During fiscal 1999 net proceeds from mortgage participation notes
amounted to $850,000, whereas during the fiscal 1998 period, the Company
invested approximately $1.3 million in mortgage participation notes under the
Emmes Agreement. Net cash provided by investing activities in fiscal 1999
amounted to $1.1 million as compared to net cash used in investing activities
during fiscal 1998 in the amount of $15.0 million. Net cash provided by
investing activities was $15.5 million for fiscal 1997. The decrease in
fiscal 1998 reflects additional equipment acquired with the proceeds of the
prepaid lease transactions,proceeds from the sale of equipment subject to
leases, and the purchase of rental equipment. In fiscal 1997,
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CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
- ------------------------------------------------------------------------------
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.
FINANCING ACTIVITIES
Proceeds from lease, bank and institution financings for the fiscal years ended
May 31, 1999, 1998 and 1997, were $17.5 million, $14.1 million and $8.2 million,
respectively, while payments on lease, bank and institution financings for the
fiscal years ended May 31, 1999, 1998 and 1997, were $16.8 million, $12.7
million and $17.3 million, respectively.
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 repurchase 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 repurchased 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.
In February 1999, the Company announced that its Board of Directors had
authorized the expenditure of an additional $500,000 for the repurchase of its
common stock. The Company will hold all repurchased shares of common stock in
its treasury. As of May 31, 1999, approximately 217,000 shares had been
repurchased by the Company in this manner at an aggregate cost of approximately
$463,000.
The Company expects that operations will generate sufficient cash to meet its
operating expenses and current obligations for the foreseeable future. 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, 1999, $7,515,000 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. In 1998, the Company had 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.
The Company has authorized in its first year of development the expenditure of
$3 million in start up operating expenses for its Electronic Execution Portal
Business. During such period the Company does not anticipate generating any
revenue in connection with such business. The Company currently has adequate
funds on hand to finance such activities. There can be no assurance that
additional funds will not be
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CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
- ------------------------------------------------------------------------------
necessary to continue the operation prior to revenue being generated. The
Company may need to finance such additional expenses or may seek to issue debt
or equity securities. Alternatively, the Company may choose to seek outside
strategic investors in return for equity stakes in its portal subsidiary.
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 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 completed conversion to
the updated release of its vendor's lease billing software and new accounting
software, which are year 2000 compliant. 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 concluded its 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.
As part of this review, the Company has obtained assurances from each of such
parties, whose dealings with
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CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
- ------------------------------------------------------------------------------
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 information obtained by
the Company is accurate from such parties so as such to determine whether it may
be materially adversely affected by the software or systems of such parties.
The Company currently believes that its systems will be Year 2000 compliant
during the remainder of 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.
NEW ACCOUNTING PRONOUNCEMENT, ISSUED BUT NOT YET EFFECTIVE
On June 15, 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities (FAS 133). FAS 133 is
effective for all fiscal quarters of all fiscal years beginning after June
15, 2000 (June 1, 2001 for the Company). FAS 133 requires that all derivative
instruments be recorded on the balance sheet at their fair market value.
Changes in the value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, the type of hedge
transaction. The Company does not presently have derivative instruments and
does not believe that the adoption of FAS 133 will have a significant impact
on its earnings or statement of financial position.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK DISCLOSURES
The Company is exposed to risks associated with interest rate changes. The
Company does not foresee any significant changes in its exposure to fluctuations
in interest rates in the near future. At May 31, 1999, the Company's total
outstanding debt consisted of a secured, revolving loan facility in the amount
of $7,515,000. The facility has a floating interest rate of prime plus 1/4% and
expires in December 2000. If interest rates were to rise dramatically, the cost
of servicing this loan would also increase. Based on weighted average borrowings
outstanding under the credit facility during fiscal year 1999, a 1/8 percentage
point change in the weighted average interest rate would have caused the
interest expense to increase or decrease by approximately $6,000.
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CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
- ------------------------------------------------------------------------------
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements: PAGE
----
(a) (1) Financial Statements
Report of Independent Accountants 19
Consolidated Balance Sheets
May 31, 1999 and 1998 20
Consolidated Statements of Operations
Years ended May 31, 1999, 1998 and 1997 21
Consolidated Statements of Shareholders' Equity
Years ended May 31, 1999, 1998 and 1997 22
Consolidated Statements of Cash Flows
Years ended May 31, 1999, 1998 and 1997 23
Notes to the Consolidated Financial Statements 24-37
(2) Financial Statement Schedules
Valuation and Qualifying Accounts (Schedule II) 38
All other schedules are omitted because they are not
applicable or the required information is shown in the
financial statements or notes thereto.
-18-
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Continental Information Systems Corporation
In our opinion, the consolidated financial statements listed in the
accompanying index on page 18 hereof present fairly, in all material
respects, the financial position of Continental Information Systems
Corporation and its subsidiaries (the "Company") at May 31, 1999 and 1998,
and the results of their operations and their cash flows for each of the
three years in the period ended May 31, 1999, in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedule listed in the accompanying index presents fairly, in all
material respects, the information set forth therein when considered in
relation to the basic consolidated financial statements taken as a whole.
These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements and financial statement schedule
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
August 18, 1999
Syracuse, New York
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CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------------------------
May 31,
- ----------------------------------------------------------------------------------------
1999 1998
---- ----
Assets:
Cash and cash equivalents $ 5,800 $ 3,211
Accounts receivable, net of allowance for doubtful
accounts of $352 and $76 at May 31, 1999 and 1998 304 636
Notes receivable (Note 3) 3,205 6,870
Investment in mortgage participation notes (Note 4) 862 1,522
Inventory 6,961 3,755
Net investment in direct financing leases (Note 5) 4,807 4,658
Rental equipment, net (Note 6) 11,818 18,118
Property, plant and equipment, net (Note 7) 375 398
Other assets 1,212 620
Deferred tax assets (Note 12) -- 5,414
-------- --------
Total assets $ 35,344 $ 45,202
-------- --------
-------- --------
Liabilities and Shareholders' Equity:
Liabilities:
Accounts payable and other liabilities $ 1,852 $ 1,058
Discounted lease rental borrowings (Note 8) 207 2,594
Note payable to institution (Note 9) 7,515 4,429
Net liabilities of discontinued operations (Note 2) 984 2,185
Deferred lease revenue 2,710 5,976
-------- --------
Total liabilities 13,268 16,242
-------- --------
Commitments and Contingencies (Notes 2, 3, 14 and 17)
Shareholders' Equity:
Commonstock, $.01 par value; authorized 20,000,000 shares at
May 31, 1999 and 1998; issued 7,101,668 shares at
May 31, 1999 and 1998 (Notes 10 and 11) 71 71
Additional paid-in capital 35,129 35,129
Accumulated deficit (12,661) (5,834)
-------- --------
22,539 29,366
Treasury stock, at cost:216,824 shares at May 31, 1999,
162,608 shares at May 31, 1998 (Note 10) (463) (406)
-------- --------
Total shareholders' equity 22,076 28,960
-------- --------
Total liabilities and shareholders' equity $ 35,344 $ 45,202
-------- --------
-------- --------
- -----------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
-20-
CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
IN THOUSANDS (EXCEPT PER SHARE DATA)
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------------------------------
YEARS ENDED MAY 31,
- --------------------------------------------------------------------------------------------------------
1999 1998 1997
-------- -------- --------
Revenues:
Equipment sales $ 7,044 $ 10,855 $ 16,480
Equipment rentals 7,276 4,666 3,829
Income from direct financing leases 1,040 760 1,188
Gain from sale of equipment subject to lease 318 78 2,816
Interest, fees and other income 1,178 2,060 1,920
-------- -------- --------
16,856 18,419 26,233
-------- -------- --------
Costs and Expenses:
Cost of sales 6,407 9,566 13,500
Depreciation of rental equipment 5,423 2,558 2,130
Interest expense 513 438 670
Other operating expenses 2,195 922 1,207
Selling, general and administrative expense 4,783 3,957 5,946
-------- -------- --------
19,321 17,441 23,453
-------- -------- --------
(Loss) income from continuing operations before income taxes (2,465) 978 2,780
Provision for income taxes 5,448 371 1,056
-------- -------- --------
(Loss) income from continuing operations (7,913) 607 1,724
-------- -------- --------
Discontinued Operations (Note 2):
Loss from discontinued operations, net of taxes -- (1,025) (638)
Income (loss) on disposal of discontinued operations 1,086 (4,955) --
-------- -------- --------
Income (loss) from discontinued operations 1,086 (5,980) (638)
-------- -------- --------
Net (loss) income $ (6,827) $ (5,373) $ 1,086
-------- -------- --------
-------- -------- --------
Basic and diluted net (loss) income per share (Note 1):
(Loss) income from continuing operations $ (1.14) $ .09 $ .24
Income (loss) from discontinued operations .15 (.86) (.09)
-------- -------- --------
Net (loss) income $ (.99) $ (.77) $ .15
-------- -------- --------
-------- -------- --------
Weighted average number of shares of common stock outstanding 6,922 6,984 7,008
-------- -------- --------
-------- -------- --------
- --------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
-21-
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, 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
Net loss -- -- (6,827) -- -- --
Acquisition of
treasury shares -- -- -- 57 (54,216) --
---------- ---------- ---------- ---------- ---------- ----------
Balance - May 31, 1999 $ 71 $ 35,129 $ (12,661) $ 463 216,824 7,101,668
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
The accompanying notes are an integral part of these financial statements.
22
CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
IN THOUSANDS (EXCEPT NUMBER OF SHARES)
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------------------
YEARS ENDED MAY 31,
- ---------------------------------------------------------------------------------------------------------------------
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
Net (loss) income $ (6,827) $ (5,373) $ 1,086
Less: Income (loss) from discontinued operations 1,086 (5,980) (638)
-------------- ----------- ------------
Income (loss) from continuing operations (7,913) 607 1,724
------------ ----------- ----------
Adjustments to reconcile income (loss) from continuing operations
to net cash provided by (used in) operating activities:
Gain on sale of equipment subject to lease (318) (78) (2,816)
Write off of equipment 719
Depreciation and amortization expense 5,522 2,765 2,557
Effect on cash flows of changes in:
Accounts receivable 332 1,111 (557)
Notes receivable 3,665 (1,776) (1,637)
Inventory (3,206) 720 (3,607)
Other assets (596) (284) 1,604
Accounts payable and other liabilities 794 (58) (40)
Deferred lease revenue (3,266) 5,877 -
Deferred tax assets 5,414 - 666
Other (190) 148 114
----------- ---------- -------------
8,870 8,425 (3,716)
----------- ----------- -----------
Net cash provided by (used in) continuing operations 957 9,032 (1,992)
Net cash used in discontinued operations (115) (942) (794)
-------------- ------------ ------------
Net cash provided by (used in) operating activities 842 8,090 (2,786)
---------------- ----------- -----------
Cash flows from investing activities:
Proceeds from sale of equipment subject to lease 2,498 4,321 20,877
Proceeds from sale of other leased equipment 721 3,828 3,763
Proceeds from sale of Telecommunications Business Unit assets - 895 -
Purchase of rental equipment (4,314) (23,833) (11,432)
Purchase of property and equipment (76) (404) (15)
Collections of rentals on direct financing leases net of
amortization of unearned income 1,426 1,525 2,336
Proceeds of (investment in) mortgage participation notes 850 (1,299) -
------------- ----------- -----------
Net cash provided by (used in) investing activities 1,105 (14,967) 15,529
------------ ----------- ----------
Cash flows from financing activities:
Proceeds from lease, bank and institution financings 17,453 14,098 8,222
Payments on lease, bank and institution financings (16,754) (12,709) (17,326)
Purchase of treasury stock (57) (406) -
Proceeds from exercise of stock options - 137 33
------------- ----------- -------------
Net cash provided by (used in) financing activities 642 1,120 (9,071)
--------------- ------------- ------------
Net increase (decrease) in cash and cash equivalents 2,589 (5,757) 3,672
Cash and cash equivalents at beginning of period 3,211 8,968 5,296
-------------- ---------- ----------
Cash and cash equivalents at end of period $ 5,800 $ 3,211 $ 8,968
============== ========== ==========
- ----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
23
CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
IN THOUSANDS
- ------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Continental Information Systems Corporation and its Subsidiaries (the
"Company") is a specialized financial services company that is engaged
in the leasing, sales and management of commercial aircraft and engines
and other financing activities, including commercial real estate
financing. The Company is in the initial stage of developing an
Electronic Execution Portal System. Although the Company will continue
to operate its Air Group and Finance Businesses, a substantial
percentage of its resources will be shifted to the Electronic
Execution Portal business during the coming fiscal quarters. As part of
this transition, changes have and will continue to occur in the
Company's business focus, management, employees and allocation of its
resources. Demand and market acceptance for newly introduced,
Internet-based products and services are subject to a high level of
uncertainty. Sales of the Electronic Execution Portal service will
depend on the Company's ability to successfully develop and market and
to attract institutional users to its product. Demand for the
Electronic Execution Portal will depend on target users adopting the
Internet as the preferred method for facilitating securities trades.
The technologies and computer programs associated with the Electronic
Execution Portal are in development and have not been subject to
real-world performance conditions. There can be no assurance that the
Electronic Execution Portal system will ultimately function as the
Company envisions, or that the Company will be successful in marketing
the product profitably and in obtaining access to competitive capital
sources or other means of financing its product development.
Additionally, in August 1999, the Company announced that it would no
longer enter into new equipment leases, and that it sold a substantial
portion of its remaining equipment lease portfolio in CIS Corporation,
its equipment lease subsidiary, and terminated employees in this
segment.
CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Continental Information Systems Corporation 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 financing and leasing transactions to
its customers located both within and outside of the United States. The
underlying lease assets collateralize the financing of direct financing
and operating leases.
The Company's notes receivable balance of $3,205,000 at May 31, 1999, 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. The credit risk associated with these customers is mitigated by
the Company's policy requiring collateral on all airline transactions,
however a substantial portion of such collateral is outside the United
States thereby creating potential difficulties of recovery of collateral in
case of default.
One customer in fiscal 1999 accounted for 18.5% of the Company's revenues.
INVESTMENT IN MORTGAGE PARTICIPATION NOTES
Investment in mortgage participation notes represents investments and
are carried at the lower of cost or market 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.
INVENTORY AND RELATED REVENUE RECOGNITION
Inventory consists of various aircraft equipment purchased 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.
24
CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
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 future minimum lease payments plus unguaranteed residual less
unearned income net of unamortized initial direct costs. 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, if the related asset is released.
Unearned income is amortizated to lease income by the interest method
using a constant periodic rate over the lease term.
Rental equipment consists of equipment under operating leases. Rental
equipment are depreciated on a straight-line basis to their estimated
residual value over the remaining useful lives of such equipment. Operating
lease revenues consist of the contractual lease payments which 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 values that are below
net book value. At the time assets are disposed of, cost and accumulated
depreciation as to each investment are removed from the accounts and the
difference, net of proceeds, are recognized as a gain or loss.
DEFERRED COMMISSIONS AND INITIAL DIRECT COSTS
Commissions and other 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 direct financing leases are
amortized using the interest method and costs relating to operating lease
equipment are amortized using the straight-line method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost and are being
depreciated using the straight-line method over the estimated useful lives
of such assets. Leasehold improvements are depreciated over three to seven
years. Computer equipment and software is depreciated over three to five
years and furniture, fixtures and office equipment over seven years and
aircraft engines over seven years from the date of purchase.
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 deferred
tax assets and liabilities for the future tax effects of temporary
differences between the bases of all assets and liabilities for
financial reporting purposes and tax purposes. Valuation allowances
are established when necessary to reduce deferred tax assets to the
amount expected to be realized. The Company periodically reviews the
adequacy of the valuation allowance and will recognized benefits only if
reassessment indicates that it is more likely than not that the benefits
will be realized. A valuation allowance for the full amount of deferred
tax assets was provided for in income tax expense in 1999.
25
CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NET INCOME (LOSS) PER SHARE
EARNINGS PER SHARE, are calculated in accordance with Financial
Accounting Standard No. 128 (SFAS 128), EARNINGS PER SHARE, which
specifies 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, 1999, 1998 and 1997, was computed based on the
weighted average number of shares of common stock outstanding during the
periods. As of May 31, 1999, the Company had issued and outstanding
options to purchase 421,674 shares of common stock (see Note 11). The
effect of these options is antidilutive in the computation of diluted
net income (loss) per share.
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
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, 1999, the
Company does not have any items of comprehensive income and therefore,
the adoption of this Statement did not have an impact on the
Company's financial statements.
2. DISCONTINUED OPERATIONS
On May 29, 1998, the Company announced its decision to discontinue and
liquidate its LaserAccess laser printing business. 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.
In June 1999, the Company settled litigation with the former owners and
executives of its discontinued LaserAccess business (See note 17).
26
CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
The actual settlement was for less than the amount reserved and the
Company has reversed to income from discontinued operations the excess of
such revenue, or $1,086,000, after taxes.
The Consolidated Balance Sheet and Statements of Operations for all
periods presented have been reclassified to report the results of
discontinued operations separately from those of continuing operations.
A summary of the financial position and results of discontinued operations
follows (in thousands):
YEAR ENDED MAY 31,
--------------------------------------------
1999 1998 1997
------------ --------- ---------
Revenues - $ 4,281 $ 5,068
Costs and expenses - 5,677 6,096
------------ --------- ---------
Loss from discontinued operations - (1,396) (1,141)
Income (loss) on disposal of discontinued operations 1,086 (4,955) -
------------ ----------- ------------
Income (loss) before benefit for income taxes 1,086 (6,351) (1,141)
Income tax benefit - (371) (390)
------------ ----------- ----------
Net income (loss) from discontinued operations $ 1,086 $ (5,980) $ (638)
------------ ----------- -----------
------------ ----------- -----------
MAY 31,
--------------------------
1999 1998
--------- --------
S>
ASSETS:
Cash and cash equivalents $ 6 $ 19
Accounts receivable, net 198
Inventory 779
Net investment in direct financing leases -
Furniture, fixtures and equipment, net 12
Other assets 58
Goodwill, net - -
------ -------
Total assets 6 1,066
------ -------
LIABILITIES:
Accounts payable and accruals 990 2,788
Note payable to institution - 463
------- -------
Total liabilities 990 3,251
------- -------
Net liabilities of discontinued operations $ (984) $(2,185)
------- --------
------- --------
3. NOTES RECEIVABLE
Notes receivable include $2,530,000 from Interglobal/AeroCalifornia,
which is subject to litigation (See note 17). Also included is $675,000
representing the balance remaining from the Company's financing of a
McDonnell Douglas DC-10 spare parts inventory purchased by a third party
aircraft parts supplier. The loan is collateralized by the inventory.
The original loan balance bears interest at 11%, increasing to 20% after
one year from the date of
27
CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
funding. The Company receives 80% of net sales proceeds of the inventory
until the loan is repaid. After the loan is paid in full the Company has
a 50% equity interest in any future sales proceeds.
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, 1999, the Company's investment in such
transactions was approximately $862,000. Due to increased availability
of real estate financing from more traditional sources, the financing
structured by Emmes is less rewarding. Consequently, the Company does
not anticipate making substantial additional investments under the
Emmes Agreement in the near future. Changes in market conditions,
however, may result in additional investments.
5. NET INVESTMENT IN DIRECT FINANCING LEASES (SEE ALSO NOTE 8)
The components of the net investment in direct financing leases as of May
31 are as follows (in thousands):
1999 1998
---- ----
Minimum lease payments receivable $ 4,529 $ 5,395
Initial direct costs and deferred commissions 35 67
Estimated unguaranteed residual values 1,575 750
Less: Unearned income (1,332) (1,554
------------- ----------
Net investment in direct financing leases $ 4,807 $ 4,658
------------ ----------
------------ ----------
Future minimum lease payments to be received under direct financing leases
for fiscal years ending May 31 are as follows (in thousands):
2000 $ 2,097
2001 1,385
2002 741
2003 301
2004 5
--------
$ 4,529
--------
--------
6. RENTAL EQUIPMENT (SEE ALSO NOTE 8)
Rental equipment consists of the following as of May 31 (in thousands):
1999 1998
---- ----
Computer equipment $ 9,594 $ 11,758
Capital equipment 2,600 3,992
Telecommunication equipment 218 888
Aircraft equipment 9,011 6,556
Printing equipment 760 818
Other 86 226
-------- --------
22,269 24,238
Less: accumulated depreciation (10,451) (6,120)
-------- --------
$ 11,818 $ 18,118
-------- --------
-------- --------
28
CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Rental equipment includes $4.1 million in two-year prepaid leases with a
large public company covering computer equipment. The leases which expire
in April 2000 amortize to $1.7 million, which represents the Company's
equity investment in such leases. At the end of the lease term the lessee
may return the equipment, buy selected portions of the equipment, or ask
for lease extensions. There can be no assurance that the Company will be
able to realize the carrying value of the equipment at lease termination.
Future minimum lease payments to be received under operating leases for
the fiscal years ended May 31 are as follows (in thousands):
2000 $4,366
2001 168
2002 60
2003 5
2004 --
------
$4,599
------
Approximately 17% of these future lease streams are pledged to lenders
as collateral under financing agreements.
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following as of May 31 (in
thousands):
1999 1998
---- ----
Leasehold improvements $ 184 $ 136
Computer equipment and software 765 783
Furniture, fixtures and office equipment 15 15
------- -------
964 934
------- -------
Less: Accumulated depreciation (589) (536)
------- -------
$ 375 $ 398
------- -------
------- -------
8. DISCOUNTED LEASE RENTAL BORROWINGS
The Company financed 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 and 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 collateralized by the leased equipment and
assignments of lease receivables. Amounts due under non-recourse
borrowings are collateralized by the leased equipment and assignments of
lease receivables with no recourse to the general assets of the Company.
Discounted lease rental borrowings as of May 31 are as follows (in
thousands):
1999 1998
----- ----
Non-recourse borrowings $ 64 $2,346
Recourse borrowings 143 248
------ ------
$ 207 $2,594
------ ------
------ ------
29
CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
The Company paid interest related to discounted lease borrowings of
$126,000, $272,000 and $652,000 for the fiscal years ended May 31,
1999, 1998 and 1997, respectively.
Discounted lease rental borrowings for the fiscal years ending May 31 are
payable as follows (in thousands):
2000 $167
2001 40
----
$207
----
----
In August 1999, CIS Corporation sold substantially all of its general
equipment leasing portfolio to a third party for $1,694,000 in cash and
recorded a gain on sale of $174,000. As a result of such sale, the above
borrowings were repaid either through assumption by the purchaser or
direct payment by the Company.
9. 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 revolving facility has a three-year term and permits borrowing equal
to a specified percentage of the 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, 1999, $7,515,000 of this
facility was being utilized. Interest on the facility is at 1/4% above
the prime rate (8.0% at May 31, 1999). The Company paid interest related
to this facility of $387,000, $166,000 and $127,000 in fiscal 1999, 1998
and 1997, respectively. The loan agreement for the line of credit contains
various covenants, including limitations on incurring additional liens and
encumbrances and prohibiting certain transactions with affiliates or
subsidiaries.
10. COMMON STOCK
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 repurchased from time to time additional
shares of its common stock up to the balance of $500,000 remaining after
the odd lot program. As of May 31, 1999, approximately 217,000 shares had
been repurchased by the Company in this manner at an aggregate cost of
approximately $463,000. In February 1999, the Company announced that its
Board of Directors had authorized the expenditure of an additional $500,000
for the repurchase of its common stock. 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.
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.
30
CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
11. 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, at the discretion of the Compensation Committee or the Board of
Directors, 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 or the Board of Directors. Options granted
to employees in fiscal 1999 become exercisable in installments of
33 1/3 percent at the grant date and at each subsequent fiscal year end
except for options granted to two executive officers which become fully
exercisable one year from the grant date. The 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 (loss) and net
income (loss) per share would have reflected the pro forma amounts
indicated below:
(in thousands, except per share amounts)
1999 1998 1997
---- ---- ----
Net (Loss) income - As reported $ (6,827) $ (5,373) $ 1,086
- Pro forma $ (6,965) $ (5,613) $ 894
Basic and diluted net
(Loss) income per share - As reported $ (.99) $ (.77) $ .15
- Pro forma $ (1.01) $ (.80) $ .13
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:
1999 1998 1997
---- ---- ----
Risk-free interest rate 4.3% 6.3% 6.6%
Expected life (months) 50 46 46
Expected volatility 44% 42% 42%
Expected dividend yield -- -- --
The weighted-average grant date fair values of options granted during
fiscal 1999, 1998 and 1997 were $.67, $.92 and $.80 per share,
respectively.
31
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, 1997, 1998 and 1999,
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, 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
Granted 72,000 $ 1.92
Exercised -- --
Forfeited/expired (16,668) $ 1.97
-------
Outstanding at
May 31, 1999 (298,008 exercisable) 421,674 $ 2.18
-------
-------
The following table summarizes information about stock options outstanding
at May 31, 1999:
Options Outstanding Options Exercisable
-------------------------------------------------- --------------------------------
Weighted-Average
Exercise Number of Remaining Number of
Prices Options Contractual Life Exercise Price Options Exercise Prices
------ ------- ---------------- -------------- ------- ---------------
$3.50 6,000 1.0 $ 3.50 6,000 $ 3.50
3.00 15,674 3.4 3.00 15,674 3.00
2.50 9,000 1.3 2.50 9,000 2.50
2.38 100,000 2.2 2.38 66,667 2.38
2.25 75,000 2.1 2.25 50,000 2.25
2.00 50,000 3.9 2.00 -- 2.00
1.97 135,000 2.0 1.97 135,000 1.97
1.95 10,000 3.0 1.95 6,667 1.95
1.84 9,000 2.4 1.84 9,000 1.84
1.59 12,000 3.9 1.59 -- 1.59
------- -------
Total 421,674 298,008
------- -------
------- -------
32
CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
12. INCOME TAXES
The components of the provision for income taxes are as follows
(in thousands):
YEAR ENDED MAY 31,
------------------------------------------------
1999 1998 1997
---- ---- ----
Current
Federal -- -- --
State $ 34 -- --
--------- --------- ---------
34 -- --
Deferred (491) -- 666
Valuation allowance 5,905
--------- --------- ---------
$ 5,905 -- 666
--------- --------- ---------
--------- --------- ---------
The difference between the effective income tax rate and the provision
resulting from the application of the federal statutory income tax
rate is primarily due to utilization of net operating losses, state and
local taxes and the change in the valuation allowance in 1999.
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,
----------------------------------
1999 1998 1997
------- ------- -------
U.S. Federal statutory rate applied to pretax
(loss) income from continuing operations $ (838) $ 334 $ 950
State income taxes, net of federal benefit (99) 37 106
Other, pricipally temporary differences 480
Change in the valuation allowance 5,905 -- --
------- ------- -------
$ 5,448 $ 371 $ 1,056
------- ------- -------
------- ------- -------
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):
1999 1998
-------- --------
Net operating losses $ 16,429 $ 14,219
Prepaid lease revenue 1,030 2,271
Discontinued operations 29 2,004
Other 168 52
Valuation allowance (18,791) (12,886)
Leased assets 1,135 (246)
-------- --------
$ 0 $ 5,414
-------- --------
-------- --------
A full valuation allowance was provided for such deferred tax assets
since, in management's opinion, the realizability of such assets was
uncertain in light of the Company's actual operating results since
reorganization. The Company periodically reviews the adequacy of the
valuation allowance and will recognize benefits
33
CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
only if a reassessment indicates that it is more likely than not that the
benefits will be realized. The net change during the year in the total
valuation allowance was a increase of $5,905,000. As of May 31, 1999, the
Company had a net operating loss carry-forwards for future tax, taxable
income in the amount of approximately $43 million which will expire in 2005
thru 2011.
13. EMPLOYEE BENEFIT PLANS
The Company maintains a defined contribution 401(k) plan covering
substantially all of its employees under which it is obligated to make
matching contributions at the rate of 50% of the first 6% 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, 1999, 1998 and 1997, were $21,000, $38,000 and $92,000,
respectively.
14. 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 $279,000, $243,000 and
$442,000 in the fiscal years ended May 31, 1999, 1998 and 1997,
respectively.
The future minimum lease payments required under operating leases for the
fiscal years ended May 31 are as follows (in thousands):
2000 $ 227
2001 229
2002 239
2003 194
2004 163
Beyond 2004 136
-----
$ 1188
-----
-----
CONTINGENCIES
The Company is involved in certain legal proceedings more fully described
in note 17.
15. 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 AND NOTE PAYABLE TO INSTITUTION - Fair
value of discounted lease rental borrowings 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, 1999 and 1998, the fair value of such borrowings approximate
their carrying values.
34
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,
1999 and 1998 are as follows (in thousands):
1999 1998
---- ----
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----- ----- ----- -----
ASSETS:
Cash and cash equivalents $5,800 $5,800 $3,211 $3,211
Notes receivable 3,205 3,035 6,870 6,870
Investment in mortgage
participation notes 862 862 1,522 1,522
LIABILITIES:
Discounted lease rental
borrowings 207 207 2,594 2,594
Note payable to institution 7,515 7,515 4,429 4,429
16. SEGMENT FINANCIAL DATA The Company adopted SFAS No. 131, DISCLOSURE ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, as required, in fiscal
1999. The Company's operating subsidiaries are classified into two
principal operating segments on the basis of strategic business units
within the operating subsidiaries, which require different investment
and marketing strategies.
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.
EQUIPMENT LEASING BUSINESS: The Company's Equipment Leasing Business, which
was conducted through its operating subsidiary CIS Corporation, a New York
Corporation ("CIS"), leased a wide range of equipment, including computers,
printers and telecommunications equipment. The Company participated in the
leasing market principally by originating new leases and financing other
equipment brokers. In August 1999, the Company announced CIS would no
longer enter into new equipment leases.
35
CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
OPERATING SEGMENTS
- ----------------------------------------------------------------------------------
YEARS ENDED MAY 31,
- ----------------------------------------------------------------------------------
1999 1998 1997
---- ---- ----
REVENUES (000'S)
Air Group Segment $ 8,972 $ 12,444 $ 10,438
Equipment Leasing Segment 7,492 5,419 15,440
Corporate and other 392 556 355
-------- -------- --------
Consolidated 16,856 18,149 26,233
-------- -------- --------
OPERATING INCOME (LOSS) (000'S)
Air Group Segment 1,188 2,391 2,786
Equipment Leasing Segment 343 1,570 5,219
Corporate-Interest Income and other (3,483) (2,545) (4,555)
-------- -------- --------
Consolidated (1,952) 1,416 3,450
-------- -------- --------
INTEREST EXPENSE (000'S)
Air Group Segment 386 166 17
Equipment Leasing Segment 127 272 653
Corporate and other -- -- --
-------- -------- --------
Consolidated 513 438 670
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES (000'S)
Air Group Segment 802 2,225 2,769
Equipment Leasing Segment 216 1,298 4,566
Corporate and other (3,483) (2,545) (4,555)
-------- -------- --------
Consolidated (2,465) 978 2,780
-------- -------- --------
DEPRECIATION AND AMORTIZATION (000'S)
Air Group Segment 1,234 490 295
Equipment Leasing Segment 4,189 2,068 1,835
-------- -------- --------
Consolidated 5,423 2,558 2,130
-------- -------- --------
IDENTIFIABLE ASSETS (000'S)
Air Group Segment 20,149 $ 18,996
Equipment Leasing Segment 7,911 16,400
Corporate and other 7,284 9,806
-------- --------
Consolidated $ 35,344 $ 45,202
-------- --------
- -------------------------------------------------------------------------------------
17. SUBSEQUENT EVENTS
The Company has been engaged in litigation with the former owners and
executives of its discontinued LaserAccess business. The complaint, as
amended, sought damages for various claims, including defamation. This
litigation was settled in June 1999. In consideration of a cash payment, the
Company received a complete release of all claims against it and released all
claims against the owners and executives. As a result, all litigation pending
between the parties was dismissed with prejudice. The Company had previously
reserved amounts believed sufficient to cover the estimated settlement cost.
The actual settlement cost was for less than the amount reserved and the
Company has reversed to income from discontinued operations the excess of
such accrual or $1,086,000, after taxes.
36
CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
On June 1, 1999, CIS Air commenced an action against EastWind Airlines, Inc.
seeking $840,329 in damages resulting from EastWind's failure to pay monies
owed under a lease of one Boeing-737 Aircraft and two jet engines. On July
20, 1999, EastWind answered the complaint and denied liability. Thereafter,
CIS moved to amend its complaint to seek $1,325,261 in damages for the
aircraft lease arrearage and $287,500 for monies owed under four leases, each
lease being for one commercial jet engine. The amendment also seeks to add
EastWind's corporate parent, UM Holdings, Inc., as a party defendant
responsible to pay whatever liability is assessed against EastWind.
The Company also filed suit in the Superior Court of Gilford County, North
Carolina for return of the aircraft and engines. The Company has reached
agreement with Eastwind for return of the aircraft and engines, without
prejudice to its monetary claims. As the market value of the aircraft is less
than its carrying value, failure to collect on the market monetary claim
against Eastwind would result in a loss.
CIS Air is currently in litigation with Interglobal, Inc. ("Interglobal") and
Aero California S.A. de C.V. ("Aero California") in the Superior Court of the
State of California for the County of Orange. Aero California and Interglobal
filed separate actions on April 13 and 14, 1999 seeking damages for an
alleged breach of warranty of merchantability for an aircraft which
Interglobal leased to Aero California on an "as is - where is" basis and for
an alleged breach of contract for failing to negotiate in good faith to sell
a second aircraft to Interglobal. CIS filed a cross-complaint against Aero
California seeking to recover lease and maintenance payments which have not
been made and against Interglobal for the accelerated amount due on the note
and to foreclose on certain security pledged to secure the debts. The cases
were consolidated. On July 1, 1999, the court found that CIS' claims are
probably valid and issued a right to attach order permitting the marshal to
seize assets of Interglobal and Aero California to secure the debt. The
parties are currently engaged in settlement negotiations, but no agreement
has been reached.
37
SCHEDULE II
CONTINENTAL INFORMATION SYSTEMS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED MAY 31, 1999
(DOLLARS IN THOUSANDS)
CHARGED CHARGED
BEGINNING TO COSTS TO OTHER DEDUCTIONS ENDING
BALANCE AND EXPENSES ACCOUNTS (RECOVERIES) BALANCE
------- ------------ -------- ------------ -------
1997:
Accounts receivable -
Allowance for doubtful
Accounts $ (53) $ (34) -- $ 37 $ (50)
----- ----- --------- ----- -----
1998:
Accounts receivable -
Allowance for doubtful
Accounts $ (50) $ (10) -- $ (16) $ (76)
----- ----- --------- ----- -----
1999:
Accounts receivable -
Allowance for doubtful
Accounts $ (76) $(408) $ -- $ 132 $(352)
----- ----- --------- ----- -----
38
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 "1999 Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The Company incorporates herein by reference the information concerning
executive compensation contained in the 1999 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 1999
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 1999 Proxy Statement.
39
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.
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 as amended through October 20, 1998.
10.1** 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).
10.2** 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).
10.3** 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).
10.4** 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).
10.5** 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).
40
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
No reports on Form 8-K were filed by the Company during the fiscal year
1999.
41
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 30, 1999
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/ JAMES P. HASSETT Director and Chairman of the Board August 30, 1999
- -----------------------
James P. Hassett
/s/ GEORGE H. HEILBORN Director August 30, 1999
- ----------------------
George H. Heilborn
/s/ PAUL M. SOLOMON Director August 30, 1999
- -----------------------
Paul M. Solomon
42