SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
Commission File Number: 0-15457
C.I.S. TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 73-1199382
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
6100 South Yale, Suite 1900, Tulsa, Oklahoma 74136
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 918/496-2451
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
The Registrant has one class of common stock, $0.01 par value. The number of
shares of common stock outstanding as of May 8, 1996 was 30,189,589.
Total Pages: 17
Exhibit Index Page: 11
C.I.S. TECHNOLOGIES, INC.
INDEX TO FORM 10-Q
Part I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 1996
(Unaudited) and December 31, 1995 (Unaudited) . . . . . . . . . 3
Consolidated Statements of Operations for the three
months ended March 31, 1996 and 1995 (Unaudited) . . . . . . . 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 1996 and 1995 (Unaudited) . . . . . . . 5
Notes to the Consolidated Financial Statements (Unaudited) . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . 7-10
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 11
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2
C.I.S. TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 1996 December 31, 1995
(Unaudited) (Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 283,574 $ 598,072
Accounts receivable:
Trade, net of allowance for doubtful accounts 10,873,847 12,607,913
Charge recovery 4,376,634 4,476,270
Related party receivables 96,157 97,733
Prepaid expenses 779,876 650,288
Deferred tax asset 599,309 599,309
Other current assets 801,234 723,132
Total current assets 17,810,631 19,752,717
NON-CURRENT ASSETS:
Related party receivables 54,228 54,228
Property and equipment, net 13,784,003 14,990,925
Intangible assets, net 19,081,535 24,737,423
Deferred tax asset 3,523,697 1,940,181
Other non-current assets 744,394 877,460
Total non-current assets 37,187,857 42,600,217
TOTAL ASSETS $ 54,998,488 $ 62,352,934
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 4,305,026 $ 3,265,416
Borrowings under line of credit 4,258,393 3,738,169
Current maturities of long-term debt 7,209,736 2,230,568
Current portion of capital leases 150,564 192,462
Deferred revenue 1,316,503 1,651,443
Total current liabilities 17,240,222 11,078,058
NON-CURRENT LIABILITIES:
Long-term debt 2,123,533 7,413,806
Capital lease obligations 157,065 166,498
Deferred income taxes 270,453 270,453
Total non-current liabilities 2,551,051 7,850,757
STOCKHOLDERS' EQUITY:
Preferred stock 23,842 23,842
Common stock 317,173 317,173
Paid in capital in excess of par 53,236,381 53,236,381
Treasury stock (at cost) (1,830,826) (1,827,513)
Accumulated deficit (16,539,355) (8,325,764)
Total stockholders' equity 35,207,215 43,424,119
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 54,998,488 $ 62,352,934
See accompanying notes to consolidated financial statements.
3
C.I.S. TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Three months Three months
ended ended
March 31, 1996 March 31, 1995
(Unaudited) (Unaudited)
REVENUE $ 9,963,489 $ 8,396,113
OPERATING EXPENSES:
Technical operations 1,168,059 856,373
Sales and client service 8,902,989 4,008,260
General and administrative 1,676,445 1,745,689
Depreciation and amortization 1,292,475 897,053
Provision to reduce the carrying value
of long-lived assets 6,396,184 -
Total operating expenses 19,436,152 7,507,375
OPERATING INCOME (LOSS) (9,472,663) 888,738
Interest expense, net (325,069) (5,538)
Other income (expense) 5,144 21,113
INCOME (LOSS) BEFORE INCOME TAXES (9,792,588) 904,313
Provision (benefit) for income taxes (1,578,997) 51,692
NET INCOME (LOSS) $ (8,213,591) $ 852,621
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING 32,573,571 32,495,677
EARNINGS (LOSS) PER COMMON SHARE,
PRIMARY AND FULLY-DILUTED: $ (.25) $ .03
See accompanying notes to consolidated financial statements.
4
C.I.S. TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three months Three months
ended ended
March 31, 1996 March 31, 1995
(Unaudited) (Unaudited)
OPERATING ACTIVITIES:
Net income (loss) $ (8,213,591) $ 852,621
Noncash items:
Depreciation and amortization 1,292,475 897,053
Provision for (recovery of) doubtful accounts 1,401,870 (78,956)
Provision to reduce the carrying value of long-lived
assets 6,396,184 -
Change in deferred tax asset (1,583,516) -
Net change in operating assets and liabilities 560,078 (2,964,394)
Cash provided by (used in) operating activities (146,500) (1,293,676)
INVESTING ACTIVITIES:
Additions to property and equipment (825,850) (822,169)
Acquisition of subsidiary - (50,667)
Cash (used in) investing activities (825,850) (872,836)
FINANCING ACTIVITIES:
Borrowings on line of credit 8,553,651 297,984
Repayment of line of credit (8,033,428) (341,861)
Book overdrafts 500,064 -
Repayment of long- term debt (311,105) (201,504)
Payment of capital lease obligations (51,330) (62,245)
Cash provided by (used in) financing activities 657,852 (307,626)
Net (decrease) increase in cash and cash
equivalents during the period (314,498) (2,474,138)
Cash and cash equivalents at the beginning of
the period 598,072 11,416,151
Cash and cash equivalents at the
end of the period $ 283,574 $ 8,942,013
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 239,735 $ 50,757
Income taxes paid $ 17,999 $ 67,502
Capital lease obligation for computer equipment $ - $ 176,692
See accompanying notes to consolidated financial statements.
5
C.I.S. TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of presentation
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments, all of which were of a normal
recurring nature, necessary to summarize fairly the Company's financial
position and results of operations. The results of operations for the three
months ended March 31, 1996 may not be indicative of the results that may be
expected for the year ending December 31, 1996. The year end consolidated
balance sheet data was derived from audited financial statements, but does not
include all disclosures required by generally accepted accounting principles.
These statements should be read in conjunction with the financial statements
and notes thereto included in the Company's Form 10-K for the year ended
December 31, 1995.
2. Change in Accounting Principles - Impairment of Long-Lived Assets
In the first quarter of 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-
Lived Assets and Long-Lived Assets to Be Disposed Of." This standard requires
that long-lived assets and certain identifiable intangibles held and used by
a n entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.
The Company evaluated its investment in long-lived assets and determined that,
based upon the history of operating results and updated operating projections,
the goodwill related to the acquisition of the Company's subsidiary, AMSC,
Inc. (AMSC) was impaired. Accordingly, the first quarter includes a charge
to operations of $5,202,000 to write down impaired goodwill resulting from the
acquisition of AMSC.
3. Subsequent Event
On April 15, 1996 the Company entered into a definitive agreement to merge the
Company with a subsidiary of National Data Corporation (NDC). Under the terms
of that agreement, CIS shareholders will receive .08682 shares of NDC common
stock for each CIS share owned. CIS shareholders will be issued approximately
2.8 million NDC common shares as a result of this exchange, representing a
transaction value of approximately $97 million, based on the April 15, 1996
closing price of NDC common stock. The transaction, subject to shareholder
approval and other conditions, is structured as a tax free exchange, to be
accounted for as a pooling of interests.
6
C.I.S. TECHNOLOGIES, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
The Company's first quarter 1996 revenue was $9,963,000, an increase of
$1,567,000, or 19%, over the same quarter in 1995. The increase in first
quarter 1996 revenue resulted primarily from the June 1995 acquisition of
Hospital Cost Consultants, Inc. (HCC) which contributed approximately $1.3
million of the increase in revenue. Excluding the revenue from this business,
revenue increased by $286,000, or 3.4%, over the quarter ended March 31, 1995.
Expenses related to operations for the first quarter of 1996 increased $11.9
million, or 159%, compared with the first quarter of 1995. This increase was
the result of the following: (1) the write-down of certain assets in the
first quarter including a charge against goodwill of $5.2 million and a
reduction in software, accounts receivable and other assets totaling $3.3
million ($1.2 million included as a provision to reduce the carrying value of
long-lived assets and $2.1 million included as a charge to sales and client
service); (2) approximately $1.9 million in additional operating expenses
related to HCC; and (3) increases in operating expenses for AMSC of $726,000
and CIS of $890,000; offset by a decrease in the Reimbursement Services
Division's (RSD) operating expenses of $167,000.
Associated with the adoption of SFAS No. 121, the Company evaluated its
investment in long-lived assets and determined that, based upon the history of
operating results and updated operating projections, the goodwill related to
the acquisition of the Company's subsidiary, AMSC was impaired. Accordingly,
the first quarter includes a charge to operations of $5.2 million to write
down impaired goodwill resulting from the acquisition of AMSC. Software
development costs of $1.2 million were written off as the costs were deemed to
be in excess of the future recoverable value due to obsolescence. Accounts
receivable was reduced by $1.4 million due to the identification of specific
uncollectible accounts, the result of increased cash collection efforts and a
decrease in the collectability of charge recovery receivables.
First quarter 1996 interest expense, net, was $325,000 versus $6,000 in 1995.
The increase in 1996 was due to interest expense incurred related to
additional debt used to acquire HCC.
The three months ended March 31, 1996 and 1995 included a tax benefit of
$1,579,000 and tax expense of $52,000 respectively. The tax benefit
recognized in the first quarter of 1996 resulted from the operating loss.
However, the Company's effective tax rate in the future is expected to be in
excess of the statutory tax rate (federal and state) due to the effect of non-
deductible amortization of intangible assets.
The Company's first quarter 1996 resulted in a net loss of $8,214,000, a
decrease of $9,066,000 from the same quarter in 1996. This change is due
predominately to the write-offs described above. However, excluding write-
offs the Company incurred a loss from operations in the first quarter of
$1,241,000. This loss from operations for the three months ended March 31,
1996 was attributable in part to less than expected contract closings at two
of the Company's most recently acquired businesses, AMSC and HCC.
7
Liquidity and Capital Resources
The Company's short-term cash requirements are currently being met through
internally generated funds and borrowings under its revolving line of credit
facility. The Company's $6.0 million line of credit facility will expire
October 1997. At March 31, 1996 there were borrowings of $4.3 million under
this line of credit facility and the Company's current borrowing capacity on
the line of credit was $4.6 million.
At March 31, 1996 working capital was $570,000 and the current ratio was 1.0
compared to $8.7 million and 1.8 at December 31, 1995. The decrease in the
current ratio in the first quarter was due, in part, to the write-off of
receivables, described above and an increase in accounts payable and accrued
liabilities. In addition, the Company has classified its debt with its
principal lender of $7,139,000 as current due to the requirement of its
principal lender that such obligation be repaid upon completion of the pending
transaction with NDC, as described above, and due to the Company s
noncompliance with certain financial ratio covenants in its credit agreement
with its principal lender.
The results of operations during the last quarter of 1995 and the first
quarter of 1996 have precipitated cash flow constraints. As a result, CIS
obtained deferrals to May 1 and June 4, 1996 of the April 1 principal payment
obligation of $614,000 on long-term debt with its principal lender. The
Company's results for the three months ended March 31, 1996 have also resulted
in the Company s noncompliance with certain financial ratio covenants in its
credit agreement with its principal lender.
Cash used in operating activities was $147,000 for the quarter ended March 31,
1996, compared to $1,294,000 for the same period in 1995. Significant items
affecting first quarter operating activities include: (1) a net loss of
$8,214,000 due to first quarter write-offs, lower than expected revenues, and
increased operating expenses; (2) depreciation and amortization of $1,292,000,
an increase of $395,000 due primarily to the amortization of goodwill arising
from the HCC acquisition; (3) a write-off of $1,402,000 of specifically
identified accounts receivables, the result of increased cash collection
efforts and a decrease in the collectability of charge recovery receivables;
(4) a write-off of impaired assets of $5,202,000 and a write-off of software
development costs of $1,194,000 as previously discussed above; (5) cash
provided of $560,000 due to the net change in operating assets and
liabilities; and (6) a change in the deferred tax asset of $1,584,000
associated with the net loss for the quarter.
Cash used in investing activities decreased $47,000 from the same period in
1995. The Company's investment in software development has remained
relatively consistent in comparison to the same quarter in 1995. These costs
are capitalized in accordance with Statement of Financial Accounting Standards
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed." The Company's 1996 capital budget anticipates $3.7
million for continued software development compared to $2.8 million in 1995.
Cash provided by financing activities was $658,000 during the first quarter of
1996 compared to cash used in financing activities of $308,000 for the same
period in 1995. The net change of $966,000 is due primarily to the Company's
cash needs brought about by the net losses in the fourth quarter of 1995 and
the first quarter of 1996. Net repayments on the Company's line of credit and
book overdrafts were $44,000 during the first quarter of 1995 compared to net
borrowings of $1.0 million in the first quarter of 1996.
8
The Company expects future software development costs and working capital
requirements will be provided by the Company's internally generated cash flow,
funds available under its revolving line of credit facility, or additional
line of credit advances from the Company's principal lender.
The Company's total capitalization (long-term obligations plus stockholders'
equity) was $37.8 million at March 31, 1996 compared with $51.3 million at
December 31, 1995. This decrease was the result of the first quarter net loss
which was largely attributable to certain write-offs as described above.
Looking Forward
The Company will hold a special meeting of stockholders on May 30, 1996 to
consider and vote upon a proposal to adopt an Agreement and Plan of Merger,
dated as of April 15, 1996, with NDC. If consummated, the Company will
become a wholly-owned subsidiary of NDC and each share of the Company's
capital stock will be converted into the right to receive shares of NDC
common stock. If the transaction is consummated, the Company believes
certain restructuring charges may be incurred due to the realization of
synergies between the two companies. This transaction and the related
synergies may improve the profitability of the Company in the future.
If the transaction is not consummated, the Company will address its working
capital needs with its principal lender and anticipates that it will implement
significant operational improvements which it believes will improve the
performance of the Company.
In the normal course of business, the Company, in an effort to keep its
shareholders and the public informed about the Company's operations, may, from
time to time, issue certain statements, either in writing or orally, that
contain forward-looking information. Generally, these statements relate to
projections involving anticipated revenue, operating results of acquired
subsidiaries and contract values. As with any forward-looking statement,
these statements are subject to a number of factors that may tend to influence
the accuracy of the statements and the projections upon which the statements
are based. All phases of the Company's operations are subject to a number of
influences outside the control of the Company, any one of which, or a
combination of which, could materially effect the results of the Company's
operations. In order to provide a more thorough understanding of the possible
effects of some of these influences on any projections made by the Company,
the following discussion sets forth certain factors that in the future could
cause the Company's consolidated results for 1996 and beyond to differ
materially from projections outlined in any such forward-looking statement
made by or on behalf of the Company.
The competitive environment in which the Company operates, as noted above, is
dynamic and ever-changing. The continued consolidation within the industry is
expected to accelerate, and although typical, could result in increased
competition and negatively impact both revenue and operating results. The
consolidation and elimination of healthcare providers, such as hospitals and
p h y s ician practices, is also expected to continue. Although this
consolidation and the creation of integrated delivery services does increase
the opportunities for the Company to sell its full suite of products and
services, the loss of clients through this process and their impact on revenue
and operating results is not easily determined. The companies acquired by CIS
in the last two years are expected to have a significant impact on revenue and
operating results in the future, from the current client base through cross-
9
selling, as well as to new clients. These anticipated results could be
negatively impacted by a number of factors including integration issues,
infrastructure improvements and changes, and changes within the competitive
environment in which they operate.
10
OTHER INFORMATION
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
Page(s) of this Form or
Number Exhibit Description Report previously filed
(10a) First Amendment to Amended and Restated Credit 13
Agreement dated April 1, 1996 by and among C.I.S. Inc.,
C.I.S. Technologies, Inc., and General Electric Capital
Corporation.
(11) Statement re: computation of per share earnings. 17
B. Forms 8-K
1. The Company filed a Form 8-K dated April 22, 1996 to
state that the Company had entered into a definitive agreement to merge the
Company with a subsidiary of National Data Corporation.
2. The Company filed a Form 8-K dated April 30, 1996
declaring that on April 26,1996 the Company filed a Notice of Postponement of
Annual Meeting of Shareholders with the Securities and Exchange Commission
postponing until further notice the annual meeting of the shareholders of the
Company originally scheduled to be held May 9, 1996. The Notice of
Postponement was released for mailing on April 26, 1996 to shareholders of
record as of March 15, 1996.
11
C.I.S. TECHNOLOGIES, INC.
SIGNATURES
Pursuant to the requirements 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.
C.I.S. Technologies, Inc.
/s/ Rebecca L. Speight
Rebecca L. Speight
Director, Finance and Accounting
(Principal Accounting Officer)
Date: May 15, 1996
12