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 February 29, 1996 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Transition period from _________ to __________
Commission file number: 0-25104
CONTINENTAL INFORMATION SYSTEMS CORPORATION
-------------------------------------------
(Exact name of registrant as specified in its charter)
New York 16-0956508
-------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
One Northern Concourse, P.O. Box 4785, Syracuse, NY 13221-4785
- --------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(315) 455-1900
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ X ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: As of March 31,
1996, the registrant has 6,999,040 shares of common stock, par value $.01 per
share, outstanding.
CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets -
February 29, 1996 and May 31, 1995
Consolidated Statements of Operations and Accumulated
Deficit - for the three and nine months
ended February 29, 1996 (Reorganized
Company), for the three months ended
February 28, 1995 (Reorganized Company) and
for the six months ended November 30, 1994
(Predecessor Company)
Consolidated Statements of Cash Flows - for the nine
months ended February 29, 1996 (Reorganized
Company), for the three months ended
February 28, 1995 (Reorganized Company) and
for the six months ended November 30, 1994
(Predecessor Company)
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
SIGNATURES
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Continental Information Systems Corporation
and its Subsidiaries
In Thousands (Except per Share Data)
- ----------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
(Unaudited)
February 29, May 31,
1996 1995
-------- --------
Assets:
Cash and cash equivalents ............................................. $ 6,093 $ 13,015
Accounts receivable, net .............................................. 2,951 2,220
Inventory ............................................................. 4,364 3,352
Net investment in direct financing leases ............................. 13,675 5,437
Rental equipment, net ................................................. 8,515 8,324
Net assets of discontinued operations (Note 2) ........................ 1,264 351
Furniture, fixtures and equipment, net ................................ 727 1,059
Accrued interest and other assets ..................................... 2,642 1,292
Deferred tax assets ................................................... 5,691 6,080
-------- --------
Total assets ................................................ $ 45,922 $ 41,130
======== ========
Liabilities and Shareholders' Equity:
Liabilities:
Accounts payable and other liabilities ............................ $ 1,512 $ 2,076
Discounted lease rental borrowings ................................ 10,188 2,126
Income tax liability .............................................. 64 150
Note payable to Liquidating Estate ................................ 136 3,391
-------- --------
Total liabilities ............................................. 11,900 7,743
-------- --------
Shareholders' Equity:
Common stock , $.01 par value; authorized 10,000,000 shares; issued and
outstanding 6,999,040 and 7,000,000, excluding 960 treasury
shares in 1996 and none in 1995, respectively (Notes 5 and 6) .... 70 70
Additional paid-in capital ............................................ 34,930 34,930
Accumulated deficit ................................................... (978) (1,613)
-------- --------
Total shareholders' equity ....................................... 34,022 33,387
-------- --------
Total liabilities and shareholders' equity ....................... $ 45,922 $ 41,130
======== ========
The accompanying notes are an integral part of these financial statements.
Continental Information Systems Corporation
and its Subsidiaries
In Thousands (Except per Share Data)
- ------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS AND
ACCUMULATED DEFICIT
(Unaudited)
| Predecessor
Reorganized Company | Company
-------------------------------------------------------| -----------------
For the three For the nine For the three | For the six
months ended months ended months ended | months ended
February 29, 1996 February 29, 1996 February 28, 1995| November 30, 1994
----------------- ----------------- -----------------| -----------------
Revenues: |
Equipment rentals ..................................... $ 1,432 $ 5,083 $ 2,588 | $ 9,500
Income from direct financing leases ................... 385 898 336 | 705
Equipment sales ....................................... 3,717 12,603 2,310 | 10,771
Interest, fees and other income ....................... 763 1,921 1,172 | 4,731
--------- --------- --------- | ---------
6,297 20,505 6,406 | 25,707
--------- --------- --------- | ---------
Costs and Expenses: |
Depreciation of rental equipment ...................... 768 2,548 830 | 2,865
Cost of sales ......................................... 2,892 9,035 1,506 | 5,562
Interest on secured liabilities ....................... 164 350 133 | 137
Investor share, sublease and other operating |
expenses .............................................. 362 939 395 | 3,627
Selling, general and administrative expense ........... 1,832 6,209 1,806 | 5,310
--------- --------- --------- | ---------
6,018 19,081 4,670 | 17,501
--------- --------- --------- | ---------
Income from continuing operations before |
reorganization items, income taxes, fresh |
start adjustments and extraordinary item .......... 279 1,424 1,736 | 8,206
--------- --------- --------- | ---------
Reorganization Items: |
Earnings from accumulated cash resulting |
from Chapter 11 proceedings ....................... -- -- -- | 3,527
Bankruptcy related professional fees .................. -- -- -- | (5,572)
Gain on settlement of bankruptcy issues ............... -- -- -- | 10,990
--------- --------- --------- | ---------
-- -- -- | 8,945
--------- --------- --------- | ---------
Income from continuing operations before |
income taxes, fresh start adjustments and |
extraordinary item ................................ 279 1,424 1,736 | 17,151
Provision for income tax .............................. 106 541 660 | 45
--------- --------- --------- | ---------
(Continued)
Continental Information Systems Corporation
and its Subsidiaries
In Thousands (Except per Share Data)
- ------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS AND
ACCUMULATED DEFICIT -- Continued
(Unaudited)
| Predecessor
Reorganized Company | Company
-------------------------------------------------------| -----------------
For the three For the nine For the three | For the six
months ended months ended months ended | months ended
February 29, 1996 February 29, 1996 February 28, 1995| November 30, 1994
----------------- ----------------- -----------------| -----------------
Income before discontinued operations, fresh |
start adjustments and extraordinary item ......... 173 883 1,076 | 17,106
Loss from discontinued operations, |
net of tax benefit (Note 2) ...................... (140) (248) (424) | (4,882)
--------- --------- --------- | ---------
Income before fresh start adjustments and |
extraordinary item ............................... 33 635 652 | 12,224
Fresh start adjustments ............................... -- -- -- | (3,264)
--------- --------- --------- | ---------
Income before extraordinary item ...................... 33 635 652 | 8,960
Extraordinary item - forgiveness of debt .............. -- -- -- | 96,317
--------- --------- --------- | ---------
Net Income ............................................ 33 635 652 | 105,277
Retained earnings (Accumulated deficit), |
beginning of period ............................. (1,011) (1,613) -- | (140,408)
Elimination of accumulated deficit .................... -- -- -- | 35,131
--------- --------- --------- | ---------
Retained earnings (Accumulated deficit), |
end of period ................................... $ (978) $ (978) $ 652 | $ --
========= ========= ========= | =========
Net income per share (Note 3): |
Income from continuing operations ................ $ .02 $ .13 $ .15 |
Income from discontinued operations .............. (.02) (.04) (.06) |
--------- --------- --------- |
Net income ................................ $ -- $ .09 $ .09 |
========= ========= ========= |
|
The accompanying notes are an integral part of these financial statements.
Continental Information Systems Corporation
and its Subsidiaries
In Thousands
- ------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Predecessor
Reorganized Company | Company
---------------------------------------- | -----------------
For the nine For the three | For the six
months ended months ended | months ended
February 29, 1996 February 28, 1995 | November 30, 1994
----------------- ----------------- | -----------------
Cash flows from operating activities: |
Net income ......................................... $ 635 $ 652 | $ 105,277
Less: Net loss from discontinued operations ....... (248) (424) | (4,882)
-------- -------- | ---------
Net income from continuing operations .......... 883 1,076 | 110,159
-------- -------- | ---------
Adjustments to reconcile net income |
to net cash provided by operating activities: |
Reorganization related adjustments- |
Gain on forgiveness of debt ................ -- -- | (96,317)
Fresh start adjustments .................... -- -- | 3,043
Cash transferred to Liquidating Estate ..... -- -- | (106,554)
Gain on settlement of lease, bank and |
institution financing ................. -- -- | (8,012)
-------- -------- | ---------
Reorganization related adjustments . -- -- | (207,840)
-------- -------- | ---------
|
Other adjustments- |
Proceeds from sale of equipment subject to |
operating leases ...................... 1,759 2,443 | 2,449
Amortization of unearned income ............. (898) (336) | (705)
Collections of rentals on direct |
financing leases ......................... 3,362 879 | 2,092
Depreciation and amortization expense ....... 2,897 945 | 3,309
Effect on cash flows of changes in: |
Marketable debt securities .............. -- -- | 25,829
Accounts receivable ..................... (777) (618) | (1,050)
Inventory ............................... (1,012) 1,206 | 1,964
Accrued interest and other assets ....... (1,975) (90) | (43)
Accounts payable and other liabilities .. (2) (481) | (1,133)
Income tax liability .................... 281 225 | (16,567)
Deferred tax asset ...................... 389 435 | --
-------- -------- | ---------
Other adjustments ............ 4,024 4,608 | 16,145
-------- -------- | ---------
(Continued)
Continental Information Systems Corporation
and its Subsidiaries
In Thousands
- ------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS -- Continued
(Unaudited)
| Predecessor
Reorganized Company | Company
---------------------------------------- | -----------------
For the nine For the three | For the six
months ended months ended | months ended
February 29, 1996 February 28, 1995 | November 30, 1994
----------------- ----------------- | -----------------
Net cash provided by (used in) |
continuing operations ................... 4,907 5,684 | (81,536)
Net cash provided by (used in) |
discontinued operations ................. (1,542) 2,524 | (4,760)
-------- -------- | ---------
Net cash provided by (used in) |
operations ....................... 3,365 8,208 | (86,296)
-------- -------- | ---------
Cash flows from investing activities: |
Purchase of rental equipment ....................... (16,121) (1,156) | (4,503)
Purchase of property and equipment ................. (39) (57) | (871)
Net cash provided by the sale of TLP subsidaries ... 754 -- | --
-------- -------- | ---------
Net cash used in investing activities ... (15,406) (1,213) | (5,374)
-------- -------- | ---------
Cash flows from financing activities: |
Payments on note payable to Liquidating Estate ..... (3,255) (1,168) | --
Proceeds from lease, bank and institution financings 9,893 254 | 845
Payments on lease, bank and institution financings . (1,519) (490) | (2,666)
-------- -------- | ---------
Net cash provided by (used in) |
financing activities ............... 5,119 (1,404) | (1,821)
-------- -------- | ---------
Net increase (decrease) in cash and |
equivalents ........................ (6,922) 5,591 | (93,491)
Cash and cash equivalents at beginning of period ... 13,015 6,793 | 100,284
-------- -------- | ---------
Cash and cash equivalents at end of period ......... $ 6,093 $ 12,384 | $ 6,793
======== ======== | =========
The accompanying notes are an integral part of these financial statements.
Continental Information Systems Corporation
and its Subsidiaries
- --------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements
1. Basis of Presentation
The accompanying unaudited financial statements of Continental Information
Systems Corporation and its Subsidiaries (the "Company") contain all
adjustments which are, in the opinion of management, necessary for a fair
statement of results for the interim periods presented. While certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted, the Company believes that the
disclosures herein are adequate to make the information not misleading. 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. The results of
operations for the three months and nine months ended February 29, 1996
(Reorganized Company) are not necessarily indicative of the results for the
full year. These statements should be read in conjunction with the
consolidated financial statements and notes thereto included for the fiscal
year ended May 31, 1995 appearing in the Company's Form 10-K.
On January 13, 1989, the Predecessor Company and certain of its
subsidiaries filed voluntary petitions for reorganization under Chapter 11
of the United States Bankruptcy Code. On November 29, 1994 (the
"Confirmation Date"), the Bankruptcy Court confirmed the Company's Plan of
Reorganization. The Plan of Reorganization became effective on December 21,
1994 and the Reorganized Company, and its subsidiaries which had filed
petitions for relief, emerged from Chapter 11. For financial reporting
purposes, the emergence from bankruptcy protection was recorded as of
November 30, 1994, the end of the Predecessor Company's second quarter.
The assets and liabilities of the Company were adjusted as of November 30,
1994 in accordance with the "fresh start" provisions of AICPA Statement of
Position No. 90-7 ("SOP 90-7"), Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code. Under "fresh start" accounting,
all assets and liabilities are restated to reflect their fair value at the
date of reorganization and any accumulated deficit immediately prior to
applying "fresh start" accounting is eliminated. The Company's
reorganization value was determined to be $35 million, which approximated
the fair value of the net assets retained by the Reorganized Company. The
reorganization value was determined by independent advisors and in
consideration of several factors and based on various valuation methods,
including discounted cash flows and price/earnings and other applicable
ratios.
As a result of the reorganization and "fresh start" reporting, the results
of operations for the nine months ended February 29, 1996 are not
comparable to the same fiscal period in 1995.
2. Discontinued Operations
On April 3, 1996, the Company announced its decision to discontinue an
operation, including its wholly-owned subsidiary, Aviron Computer
Technologies, Inc. ("Aviron"), that purchased and sold used computer
equipment and provided related technical services. The Company is seeking a
buyer for the operation and presently does not anticipate a material net
loss from the proposed sale or from operations through the expected date of
disposal, which is anticipated to be within six months from the above
announcement date. In May, 1995, the Company had attempted to change the
products and marketing strategies of Aviron to make it more competitive in
the current marketplace. These actions resulted in a restructuring charge
to operations of $800,000 in the quarter ended May 31, 1995 for employee
severance programs affecting 13 employees, lease termination costs for
excess facilities, and the write-off of certain deferred costs relating to
non-compete and consulting arrangements having a book value of
approximately $218,000. The restructuring reserve has been reduced to
$142,000 as of February 29, 1996 as a result of cash payments for severance
and excess facilities costs. The remaining balance relates to excess
facilities and is expected to be paid out by June 30, 1996.
Additionally, on May 25, 1995, the Board of Directors approved the
discontinuance of NC3, Inc., the Company's excess inventory business unit
located in Syracuse, New York. The Company recorded a provision of
$1,137,000 (net of $763,000 deferred tax benefit) in the quarter ended May
31, 1995 relative to the disposal of NC3 assets and other charges related
to the discontinuance of the business unit. As of February 29, 1996, the
Company has exited the business and liquidated substantially all of the
assets. A total of 14 employees were terminated in connection with the
closing of this business. Liabilities of the discontinued operation
decreased from $744,000 at May 31, 1995 to $290,000 as of February 29,
1996, due to cash payments principally for severance and facilities costs
totaling approximately $224,000 and a net reduction of $230,000 to adjust
the amounts estimated for the loss on the inventories, receivables, fixed
assets and leased facility obligations. The remaining liability of $290,000
at February 29, 1996 is expected to be liquidated by cash payments
extending through approximately May 31, 1997. The adjustment of the
liability in the amount of $230,000 was recorded as a gain from
discontinued operations, net of deferred tax expenses of $87,000 in the
quarter ended August 31, 1995.
The Consolidated Statements of Operations for all periods presented have
been reclassified to report the results of discontinued operations
separately from continuing operations. A summary of the results of
discontinued operations follows (in thousands):
| Predecessor
Reorganized Company | Company
--------------------------------------------------------------------- | -------------------
For the three For the nine For the three | For the six
months ended months ended months ended | months ended
February 29, 1996 February 29, 1996 February 28, 1995 | November 30, 1994
-------------------- ---------------------- ------------------ | ------------------
Total Revenues ........... $ 1,539 $ 4,786 $ 4,286 | $ 14,599
Total Costs and Expenses . 1,764 5,186 4,935 | 19,481
------- ------- ------- | --------
Loss before |
income tax benefit (225) (400) (649) | (4,882)
Income Tax benefit ... (85) (152) (225) | --
------- ------- ------- | --------
Net Loss from Discontinued |
Operations ............ $ (140) $ (248) $ (424) | $ (4,882)
======= ======= ======= | ========
The Consolidated Balance Sheets as of February 29, 1996 and May 31, 1995
have been reclassified to report the net assets of discontinued operations
separately from the assets and liabilities of continuing operations. A
summary of the assets and liabilities of discontinued operations follows
(in thousands):
February 29, May 31,
1996 1995
------ ------
Assets:
Cash and cash equivalents ................................ $ 90 $ 253
Accounts receivable, net ................................. 236 441
Inventory ................................................ 1,022 744
Furniture, fixtures and equipment, net ................... 321 397
Accrued interest and other assets ........................ 166 137
------ ------
Total assets ................................... 1,835 1,972
------ ------
Liabilities:
Accounts payable and accruals ........................ 139 295
Other liabilities .................................... 290 744
Accrued restructuring charge, net .................... 142 582
------ ------
Total liabilities ................................ 571 1,621
------ ------
Net Assets of Discontinued Operations ...... $1,264 $ 351
====== ======
3. Net Income Per Share
Net income per share for the Reorganized Company was computed based on the
weighted average number of shares of common stock outstanding during the
periods. For the three months ended February 29, 1996, the nine months
ended February 29, 1996, and the three months ended February 28, 1995, the
weighted average number of outstanding shares were 6,999,040, 6,999,520,
and 7,000,000, respectively. At February 29, 1996, the Company had granted
options to purchase 24,000 shares of common stock (see Note 6). Since the
exercise price of these options is in excess of the average market price of
the common stock for the three and nine months ended February 29, 1996, the
options are considered anti-dilutive and are not included in the
computation of net income per share. Net income per share data are not
presented for the Predecessor Company due to the general lack of
comparability as a result of the revised capital structure of the
Reorganized Company.
4. Reclassifications
Certain prior period balances in the financial statements have been
reclassified to conform to the current period financial statement
presentation.
5. Treasury Stock
In October, 1995, a wholly-owned subsidiary of the Company acquired 960
shares of the Company's common stock as the result of a partial
distribution by the Liquidating Estate of the Predecessor Company. The
partial distribution was in relation to a prepetition claim against the
Predecessor Company by certain partnerships in which the wholly-owned
subsidiary acted as general partner.
6. Stock Option Plan
On July 6, 1995, the Board of Directors adopted the Continental Information
Systems Corporation 1995 Stock Compensation Plan (the "1995 Plan"). The
1995 Plan was approved by stockholders at the annual meeting held September
27, 1995 in Syracuse, New York. The 1995 Plan provides for the issuance of
options covering up to 1,000,000 shares of common stock and stock grants of
up to 500,000 shares of common stock to non-employee directors of the
Company and, in the discretion of the Compensation Committee, employees of
and independent contractors and consultants to the Company. As of February
29, 1996, nonqualified stock options for shares of common stock had been
granted to non-employee directors as follows:
Number Exercise Fair Market Value
Date Granted of Options Price at Date of Grant
------------ ---------- ----- ----------------
May 16, 1995 15,000 $ 3.50 $52,500
September 27, 1995 9,000 2.50 22,500
------ -------
Balance - February 29, 1996 24,000 $75,000
====== +======
As of February 29, 1996, options for 15,000 shares were exercisable.
7. Sale of Subsidiaries
As of December 31, 1995, the Company sold TLP Leasing Programs ("TLP"), a
group of former subsidiaries located in Boston, Massachusetts, to TLP's
current management. TLP manages various income funds and partnerships. The
sales price approximated TLP's book value and generated in excess of
$1,000,000 in additional cash to the Company.
8. Subsequent Event
On March 8, 1996, the Company acquired 100% of the capital stock of GMCCCS
Corp. (dba "LaserAccess") for a purchase price of approximately $4,608,000,
payable in cash of approximately $2,304,000 at closing and the balance of
approximately $2,304,000 in the form of notes payable in three equal annual
installments, commencing March 8, 1997, with interest at the rate of 8.25%
on the unpaid principal balance. In addition to the purchase price to be
paid in cash and notes, CIS Corporation is obligated to pay the sellers an
annual earn out payment for each of the first four years following the
March 8, 1996 sale. The earn out payment is based upon the annual pretax
income of CIS Corporation and its subsidiaries. LaserAccess was a privately
held California corporation engaged in the sales and marketing of
remanufactured Xerox High Speed Laser Printing Systems. LaserAccess is
headquartered in San Diego, California.
The acquisition has been accounted for using the purchase method of
accounting. Allocations of the purchase price have been determined based
upon preliminary estimates of Fair Market Value and, therefore, are subject
to change. The excess of the purchase price, over the net tangible assets
acquired, of approximately $3.5 million, is considered goodwill and is
being amortized on a straight line basis over fifteen years.
Unaudited pro forma data giving effect to the purchase as if it had been
acquired at the beginning of fiscal 1995, with adjustments, primarily for
imputed interest charges attributable to notes payable to the former owners
and amortization of goodwill follows:
(in Thousands, except per share amounts)
Nine Months Nine Months
Ended Ended
February 29, 1996 February 28, 1995*
----------------- -----------------
Total Revenues $22,796 $33,740
======= =======
Income from continuing operations $1,161 $5,832
====== ======
Income per share from continuing operations $.17 $.83
==== ====
Weighted average number of shares
outstanding 7,000 7,000
===== =====
*The pro forma results of operations for the nine months ended February 28, 1995
include the results of continuing operations of the predecessor company for the
six months ended November 30, 1994, as if the reorganization had taken place at
the beginning of the nine-month period. Reorganization items and loss from
discontinued operations have been excluded from the pro forma results.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations:
Introduction
Continental Information Systems Corporation ("CIS" or "the Company")
emerged from Chapter 11 pursuant to a Plan of Reorganization which was confirmed
by the Bankruptcy Court on November 29, 1994. For financial reporting purposes,
the emergence from bankruptcy protection was recorded as of November 30, 1994.
The Plan of Reorganization provided for the distribution of all of the Company's
assets, except for specifically identified assets and liabilities having a net
fair tangible value of $30 million, and the Company's newly-issued common stock
to a Liquidating Estate for distribution to the creditors. In addition, all
liabilities subject to compromise and certain postpetition liabilities were
assumed by the Liquidating Estate. The Plan of Reorganization provides that no
further recourse to the Company or any of its subsidiaries may be had by any
person with respect to any prepetition claims or postpetition liabilities
assumed by the Liquidating Estate. As a result of the reorganization and
application of "fresh start" accounting, financial information before and after
November 30, 1994 are not comparable. To distinguish between the operations of
the Company prior to reorganization and operations after reorganization, the
terms "Predecessor Company" and "Reorganized Company" will be used for the
respective periods. The following discussion should be read in conjunction with
the historical financial statements of the Company.
The Reorganized Company applied the "fresh start" provisions of AICPA
Statement of Position No. 90-7 ("SOP 90-7") as of November 30, 1994 and,
accordingly, the assets retained by the Reorganized Company were adjusted as of
that date to reflect their fair value. The reorganization value of $35 million
approximated the fair value of the Reorganized Company's net assets, including
$5 million in deferred tax assets, and accordingly, no excess reorganization
value over the amount allocable to identifiable assets has been recognized.
Due to the application of "fresh start" accounting as of November 30,
1994 (the "Fresh Start Date"), the results of operations for the comparative
nine months ended February 28, 1995 are discussed in two parts: the three month
period commencing after the Fresh Start Date and ending February 28, 1995 and
the six month period ending on the Fresh Start Date, which as noted above, is
the end of the Predecessor Company's second fiscal quarter. The following
unaudited summary of selected financial data for these periods has been prepared
based on the historical financial statements of the Company (in thousands):
| Predecessor
Reorganized Company | Company
-------------------------------------------------------| -----------------
For the three For the three For the six | For the six
months ended months ended months ended | months ended
February 29, 1996 February 28, 1995 November 30, 1995| November 30, 1994
----------------- ----------------- -----------------| -----------------
Revenues: |
Equipment rentals ........................... $ 1,432 $ 2,588 $ 3,651 | $ 9,500
Income from direct financing leases ......... 385 336 513 | 705
Equipment sales ............................. 3,717 2,310 8,886 | 10,771
Interest, fees and other income ............. 763 1,172 1,158 | 4,731
------- -------- -------- | ---------
6,297 6,406 14,208 | 25,707
------- -------- -------- | ---------
Costs and Expenses: |
Depreciation of rental equipment ............ 768 830 1,780 | 2,865
Cost of sales ............................... 2,892 1,506 6,143 | 5,562
Interest on secured liabilities ............. 164 133 186 | 137
Investor share, sublease and other |
operating expenses ...................... 362 395 577 | 3,627
Selling,general and administrative expense .. 1,832 1,806 4,377 | 5,310
------- -------- -------- | ---------
6,018 4,670 13,063 | 17,501
------- -------- -------- | ---------
Income from continuing operations before |
reorganization items, income taxes, fresh |
start adjustments and extraordinary item 279 1,736 1,145 | 8,206
------- -------- -------- | ---------
Reorganization items: |
Earnings from accumulated cash resulting |
from Chapter 11 proceedings ............. -- -- -- | 3,527
Bankruptcy related professional fees ........ -- -- -- | (5,572)
Gain on settlement of bankruptcy issues ..... -- -- -- | 10,990
------- -------- -------- | ---------
-- -- -- | 8,945
------- -------- -------- | ---------
Income from continuing operations before |
income taxes, fresh start adjustments and |
extraordinary item ....................... 279 1,736 1,145 | 17,151
Provision for income tax .................... 106 660 435 | 45
------- -------- -------- | ---------
Income before discontinued operations, fresh |
start adjustments and extraordinary item 173 1,076 710 | 17,106
Loss from discontinued operations, |
net of tax benefit ...................... (140) (424) (108) | (4,882)
------- -------- -------- | ---------
Income before fresh start adjustments and |
extraordinary item ...................... 33 652 602 | 12,224
Fresh start adjustments ..................... -- -- -- | (3,264)
------- -------- -------- | ---------
Income before extraordinary item ............ 33 652 602 | 8,960
Extraordinary item-forgiveness of debt ...... -- -- -- | 96,317
------- -------- -------- | ---------
Net Income .................................. $ 33 $ 652 $ 602 | $ 105,277
======= ======== ======== | =========
Results of Operations - Comparison of the Three Months Ended February 29, 1996
and February 28, 1995
Continuing Operations
Total revenues decreased 1.7% to $6.3 million for the three months
ended February 29, 1996 from $6.4 million for the same fiscal quarter in 1995.
Equipment rentals and income from Direct Financing Leases for the three months
ended February 29, 1996, decreased by $1.1 million from the same fiscal quarter
in 1995. This decrease primarily reflects lower earnings associated with the
lower level of equipment on lease. During the nine months ended February 29,
1996, the Company acquired a significant amount (approximately $16 million) of
equipment subject to lease. The Company expects that rentals generated from
these new leases will mitigate the decrease in revenues from the current
portfolio of leased equipment. Equipment sales increased 60.9% to $3.7 million
for the three months ended February 29, 1996, from $2.3 million for the same
fiscal quarter in 1995. This increase is principally attributable to higher
sales in the Aircraft business unit. Interest, fees, and other income decreased
34.9% to $.8 million for the three months ended February 29, 1996 from $1.2
million for the same fiscal quarter in 1995. This decrease reflects a decline in
management fees received from income funds and a decrease in fees generated by
brokered transactions. As announced previously, as of December 31, 1995, the
Company sold TLP Leasing Programs, a group of wholly-owned subsidiaries, to the
current management of TLP. These subsidiaries previously managed various income
funds and partnerships.
Costs and expenses increased 28.9% to $6.0 million for the three months
ended February 29, 1996, from $4.7 million for the same fiscal quarter in 1995.
Within this category, depreciation decreased 7.5% to $768,000 from $830,000 for
the same fiscal quarter in 1995. Additionally, investor share, sublease and
other operating expenses decreased 8.4% to $362,000 from $395,000 for the same
fiscal quarter in 1995. Depreciation, investor share, sublease and other
operating expenses are associated with the portfolio of rental equipment and the
decrease in these items is directly related to the diminishing portfolio of this
equipment, as noted above. Cost of sales for the three months ended February 29,
1996, increased by 92.0% to $2.9 million from $1.5 million for the three months
ended February 28, 1995. This increase is related to the increase in sales of
aircraft equipment between the periods. Cost of sales as a percentage of sales
for the three months ended February 29, 1996, was 77.8% as compared to 65.2% for
the same quarter in 1995. This percentage increase was primarily the result of
product mix. Selling, general and administrative expenses remained essentially
the same between the periods.
Results of Operations - Comparison of the Six Months Ended November 30, 1995
and 1994
Continuing Operations
Total revenues decreased 44.7% to $14.2 million for the six months
ended November 30, 1995 from $25.7 million for the same fiscal period in 1994.
Equipment rentals and income from Direct Financing Leases for the six months
ended November 30, 1995, decreased by $6.0 million from the same period in 1994.
This decrease primarily reflects the lower level of equipment on lease. During
the six months ended November 30, 1995, the Company acquired a significant
amount (approximately $10 million) of equipment subject to lease. As rentals are
generated from these new leases, it will mitigate the decrease in revenues from
the current portfolio of leased equipment. Equipment sales decreased 17.5% to
$8.9 million for the six months ended November 30, 1995 from $10.8 million for
the same fiscal period in 1994. This decline is principally attributable to
reduced volume of available equipment previously on lease to customers.
Interest, fees and other income decreased 75.5% to $1.2 million for the six
months ended November 30, 1995 from $4.7 million for the same fiscal period in
1994. This decrease reflects a reduction in management fees received from income
funds and a decrease in fees generated by brokered transactions.
Costs and expenses decreased 25.4% to $13.1 million for the six months
ended November 30, 1995, from $17.5 million for the same fiscal period in 1994.
Within this category, depreciation decreased 37.9% to $1.8 million for the six
months ended November 30,1995 from $2.9 million for the six months ended
November 30, 1994. Additionally, investor share, sublease and other operating
expenses decreased 84.1% to $.6 million for the six months ended November 30,
1995 from $3.6 million for the same fiscal period in 1994. Depreciation,
investor share, sublease and other operating expenses are associated with the
portfolio of rental equipment and the decrease in these items is directly
related to the diminishing portfolio of this equipment, as noted above. Cost of
sales for the six months ended November 30, 1995, increased by 10.4% to $6.1
million from $5.6 million for the same fiscal period in 1994. Cost of sales as a
percentage of sales for the six months ended November 30, 1995, was 69.1% as
compared to 51.6% for the same fiscal period in 1994. This percentage increase
was primarily the result of product mix. Selling, general and administrative
expenses decreased by 17.6% to $4.4 million for the six months ended November
30, 1995 from $5.3 million for the six months ended November 30, 1994. This
decrease was principally due to staff reductions between the periods.
Reorganization items of $8.9 million for the six months ended November
30, 1994 represent income and expenses incurred by the Predecessor Company
resulting from bankruptcy and specific to the reorganization process. These
amounts are presented separately because of their non-operating nature.
The "fresh start" adjustments recorded in the six months ended November
30, 1994 are discussed in Note 1 to the accompanying financial statements. The
adjustments principally reflected the reduction from book value to fair value of
rental equipment and furniture, fixtures and equipment. The extraordinary credit
for forgiveness of debt reflects the amount of liabilities assumed by the
Liquidating Estate, net of the cash and other assets and common stock
distributed to the Liquidating Estate.
Discontinued Operations
On April 3, 1996, the Company announced its decision to discontinue an
operation, including its wholly-owned subsidiary, Aviron Computer Technologies,
Inc. ("Aviron"), that purchased and sold used computer equipment and provided
related technical services. The Company stated that its decision was made after
considering the nature and extent of the fundamental change that has occurred in
the overall computer industry, and the Company's direction to focus on its more
profitable core businesses. The Company is seeking a buyer for the operation and
presently does not anticipate a material net loss from the proposed sale or from
operations through the expected date of disposal, which is anticipated to be
within six months from the above announcement date. In May, 1995, the Company
had attempted to change the products and marketing strategies of Aviron to make
it more competitive in the current marketplace. These actions resulted in a
restructuring charge to operations of $800,000 in the quarter ended May 31, 1995
for employee severance programs affecting 13 employees, lease termination costs
for excess facilities, and the write-off of certain deferred costs relating to
non-compete and consulting arrangements having a book value of approximately
$218,000. The restructuring reserve has been reduced to $142,000 as of February
29, 1996 as a result of cash payments for severance and excess facilities costs.
The remaining balance relates to excess facilities and is expected to be paid
out by June 30, 1996. A summary of the results of operations of the discontinued
Buy/Sell operation follows (in thousands):
| Predecessor
Reorganized Company | Company
-------------------------------------------------------| -----------------
For the three For the three For the six | For the six
months ended months ended months ended | months ended
February 29, 1996 February 28, 1995 November 30, 1995| November 30, 1994
----------------- ----------------- -----------------| -----------------
Total Revenues ......................................... $1,539 $3,369 $3,247 | $10,580
Total Costs and Expenses ............................... 1,764 3,801 3,652 | 12,110
------ ------ ------ | -------
Loss before |
income tax benefit .............................. (225) (432) (405) | (1,530)
Income Tax benefit ................................. (85) (150) (154) | --
------ ------ ------ | -------
Net Loss ............................................... $ (140) $ (282) $ (251) | $(1,530)
====== ====== ====== | =======
As previously reported, The Board of Directors approved the
discontinuance of NC3, Inc., the Company's excess inventory business unit
located in Syracuse, New York, on May 25, 1995. As of February 29, 1996, the
Company has exited the business and liquidated substantially all of the assets.
A total of 14 employees were terminated in connection with the closing of this
business. Liabilities of the discontinued operation decreased from $744,000 at
May 31, 1995 to $290,000 as of February 29, 1996 due to cash payments
principally for severance and facilities costs totaling approximately $224,000
and a net reduction of $230,000 to adjust the amounts estimated for the loss on
the inventories, receivables, fixed assets and leased facility obligations. The
remaining liability of $290,000 at February 29, 1996 is expected to be
liquidated by cash payments extending through approximately May 31, 1997. The
reduction in the liability had been recorded as a gain from discontinued
operations, net of deferred tax expenses, of $143,000 in the quarter ended
August 31, 1995. A summary of the results of operations of the discontinued
NC(3) business unit follows (in thousands):
| Predecessor
Reorganized Company | Company
-------------------------------------------------------| -----------------
For the three For the three For the six | For the six
months ended months ended months ended | months ended
February 29, 1996 February 28, 1995 November 30, 1995| November 30, 1994
----------------- ----------------- -----------------| -----------------
Total Revenues ......................................... $ -- $ 917 $ -- | $ 4,019
Total Costs and Expenses ............................... -- 1,134 (230) | 7,371
---------- ------ ------ | -------
Income (Loss) before |
income tax (tax benefit) ........................ -- (217) 230 | (3,352)
Income Tax (tax benefit) ........................... -- (75) 87 | --
---------- ------ ------ | -------
Net Income (Loss)....................................... $ -- $ (142) $ 143 | $(3,352)
========== ====== ====== | =======
Income Taxes
For the three months ended February 29, 1996 and February 28, 1995, a
provision for deferred income tax expense on income from continuing operations
was recorded in the amounts of $106,000 and $660,000, respectively. For the six
months ended November 30, 1995, a provision for deferred income tax expense on
income from continuing operations was recorded in the amount of $435,000. In
addition, for the three months ended February 29, 1996 and February 28, 1995, a
deferred income tax benefit on loss from discontinued operations was recognized
in the amounts of $85,000 and $225,000, respectively. For the six months ended
November 30, 1995, a net deferred income tax benefit of $67,000 was recognized
on loss from discontinued operations. A provision for State income tax of
$45,000 was made in the six months ended November 30, 1994. No provision for
Federal income tax was required in the six months ended November 30, 1994 due to
the effects of the Predecessor Company's net operating loss carryforwards. In
connection with applying "fresh start" accounting as of November 30, 1994, the
Reorganized Company recognized deferred tax assets of approximately $5 million,
net of a valuation allowance of approximately $7 million, relating principally
to net operating loss ("NOL") carryforwards. Net deferred tax assets increased
to $6,080,000 as of May 31, 1995 due to the Reorganized Company's operating
losses during the six months then ended. The pre-reorganization Federal NOL
carryforwards giving rise to deferred tax assets expire during the years 2004 to
2009. Utilization of the Company's pre-reorganization Federal NOL carryforwards
is limited to approximately $2 million per year. Management will periodically
evaluate the realizability of the deferred tax assets based principally on
actual and expected operating results. In the event that an adjustment is
required to reduce the recognized deferred tax asset in the future, such
adjustment will be charged to operations. Any future recognition of the tax
benefits from the Company's pre-reorganization net operating loss carryforwards
in excess of the net $5 million initially recorded will be recognized as a
direct credit to stockholders' equity as required under SOP 90-7.
Liquidity and Capital Resources
Cash provided by operations for the nine months ended February 29, 1996
of $3.4 million was composed of cash provided by continuing operations of $4.9
million with $1.5 million being used in discontinued operations. Cash provided
by continuing operations arose primarily from net income of $883,000, less
amortization of unearned income of $898,000, plus non-cash depreciation and
amortization expense of $2.9 million, in addition to proceeds from sale of
equipment subject to operating leases of $1.8 million. Cash provided by
collections of rentals on Direct Financing Leases of $3.4 million was offset by
increases in accounts receivable, inventory and accrued interest and other
assets of $.8 million, $1.0 million and $2.0 million, respectively. Net cash
used in discontinued operations was $1.5 million for the nine months ended
February 29, 1996. New investments in rental equipment for the current nine
month period were $16.1 million as compared to $5.7 million for the same period
in 1995. This significant increase in rental equipment resulted from the
Company's strategy to replenish its portfolio of equipment subject to lease. Net
cash provided by the Company's sale of its TLP subsidiaries amounted to $.8
million. Proceeds from lease, bank and institution financings were $9.9 million
for the nine months ended February 29, 1996 as compared to $1.1 million for the
same nine month period in 1995. This increase primarily represents discounted
lease rental borrowings associated with the purchase of rental equipment subject
to lease. Payments on lease, bank and institutional financings were $1.5 million
for the nine months ended February 29, 1996. The Reorganized Company made
payments of $3.3 million to the Liquidating Estate during the nine months ended
February 29, 1996. The principal outstanding on this note was $136,000 at
February 29, 1996 and the note was subsequently paid in full in March, 1996.
Reorganization related adjustments for the six months ended November
30, 1994, in the amount of $207.7 million, represent cash flows of the
Predecessor Company resulting from bankruptcy and specific to the reorganization
process. During this period, a $15.0 million payment was made to the Internal
Revenue Service. The $15.0 million balance due to the Internal Revenue Service,
required under the Settlement Agreement, was assumed by the Liquidating Estate
and paid in December, 1994.
The Company expects that operations will generate sufficient cash to
meet its operating expenses and current obligations. The cash retained by the
Company pursuant to the Plan of Reorganization has been used to provide
liquidity to fund investment in new leases, inventory, and other investment
opportunities. Typically, companies in the business engaged in by the Company
employ leverage to enhance their returns. The Company is actively discussing
appropriate borrowing facility arrangements with a number of potential lenders
and has received a commitment from one potential lender for $5 million in
recourse/limited recourse lease financing and has substantially completed
negotiation of loan documentation. Additionally, the Company has begun
negotiation of loan documentation with another potential lender for a warehouse
lending facility of $5 million. The Company believes that the Company's asset
base will enable the Company to obtain sufficient capital to operate its
business. Failure to obtain, or delay in obtaining, debt financing at
competitive rates could affect the Company's ability to improve earnings.
On March 8, 1996, the Company acquired 100% of the capital stock of
GMCCCS Corp. (dba "LaserAccess") for a purchase price of approximately
$4,608,000, payable in cash of approximately $2,304,000 at closing and the
balance of approximately $2,304,000 in the form of notes payable in three equal
annual installments, commencing March 8, 1997, with interest at the rate of
8.25% on the unpaid principal balance. In addition to the purchase price to be
paid in cash and notes, CIS Corporation is obligated to pay the sellers an
annual earn out payment for each of the first four years following the March 8,
1996 sale. The earn out payment is based upon the annual pretax income of CIS
Corporation and its subsidiaries. LaserAccess was a privately held California
corporation engaged in the sales and marketing of remanufactured Xerox High
Speed Laser Printing Systems. LaserAccess is headquartered in San Diego,
California.
PART II -- OTHER INFORMATION
Item 5. Other Information
On March 8, 1996, the Company consummated the acquisition of GMCCCS
Corp. (dba "LaserAccess"). See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources".
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
2.1* Stock Purchase Agreement among CIS Corporation, GMCCCS
Corp. (dba LaserAccess), Greg M. Cody and Charles C.
Sinks, dated March 8, 1996.
10.1* Employment Agreement between CIS Corporation and Greg M.
Cody, dated March 8, 1996.
10.2* Employment Agreement between CIS Corporation and Charles
C. Sinks, dated March 8, 1996.
27.1 Financial Data Schedule
---------------------
* Incorporated by reference from the Company's Form 8-K filed
March 21, 1996 and filed under the same Exhibit numbers.
(b) Reports on Form 8-K
The Company filed the following reports on Form 8-K on the
date indicated during the quarter ended February 29, 1996:
Date Description
---- -----------
December 18, 1995 The Board of Directors of the Company
selected Thomas J. Prinzing to serve
as its permanent President and Chief
Executive Officer.
The Company announced its intention to
acquire GMCCCS (dba "LaserAccess").
The Company also announced it has
entered into a Letter of Intent to
sell its TLP Leasing Programs, Inc.
subsidiary ("TLP") to TLP's current
management.
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.
CONTINENTAL INFORMATION SYSTEMS
CORPORATION
Date: April 11, 1996 By: /s/ Thomas J. Prinzing
----------------------
Thomas J. Prinzing
President and
Chief Executive Officer
Date: April 11, 1996 By: /s/ Frank J. Corcoran
---------------------
Frank J. Corcoran
Senior Vice President,
Chief Financial Officer
and Treasurer