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 August 31, 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 September 30,
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 - August 31, 1996 and May 31,
1996
Consolidated Statements of Operations and Retained Earnings
(Accumulated Deficit) - for the three months ended August 31,
1996 and 1995
Consolidated Statements of Cash Flows - for the three months
ended August 31, 1996 and 1995
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)
August 31, May 31,
1996 1996
-------- --------
Assets:
Cash and cash equivalents ................................... $ 6,050 $ 5,382
Accounts receivable, net .................................... 2,815 2,300
Notes receivable ............................................ 2,766 2,688
Inventory ................................................... 5,421 3,639
Net investment in direct financing leases ................... 16,192 15,783
Rental equipment, net ....................................... 10,539 11,148
Furniture, fixtures and equipment, net ...................... 525 625
Accrued interest and other assets ........................... 1,315 1,965
Goodwill, net ............................................... 3,806 3,940
Deferred tax assets ......................................... 5,994 6,080
-------- --------
Total assets .................................... $ 55,423 $ 53,550
======== ========
Liabilities and Shareholders' Equity:
Liabilities:
Accounts payable and other liabilities ................. $ 3,353 $ 2,949
Net liabilities of discontinued operations (Note 3) .... 88 106
Discounted lease rental borrowings ..................... 16,085 14,738
Notes payable to former owners of acquired company ..... 2,304 2,304
-------- --------
Total liabilities ............................... 21,830 20,097
-------- --------
Shareholders' Equity:
Common Stock, $.01 par value; authorized 10,000,000 shares,
issued and outstanding 6,999,040, excluding 960 treasury
shares (Notes 4 and 6) ................................ 70 70
Additional paid-in capital .................................. 34,930 34,930
Accumulated deficit ......................................... (1,407) (1,547)
-------- --------
Total shareholders' equity ...................... 33,593 33,453
-------- --------
Total liabilities and shareholders' equity ...... $ 55,423 $ 53,550
======== ========
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS AND
ACCUMULATED DEFICIT
(Unaudited)
For the Three
Months ended
August 31,
1996 1995
Revenues:
Equipment rentals ........................................ $ 1,401 $ 1,842
Income from direct financing leases ...................... 457 266
Equipment sales .......................................... 4,645 4,858
Interest, fees and other income .......................... 590 614
------- -------
7,093 7,580
------- -------
Costs and Expenses:
Depreciation of rental equipment ......................... 850 800
Cost of sales ............................................ 3,438 3,430
Interest expense ......................................... 325 100
Other operating expenses ................................. 499 293
Selling, general and administrative expense .............. 1,755 2,324
------- -------
6,867 6,947
------- -------
Income from continuing operations before taxes ........... 226 633
Provision for income tax ................................. 86 240
------- -------
Income from continuing operations ........................ 140 393
Income from discontinued operations, net of tax (Note 3) . -- 73
------- -------
Net income ............................................... 140 466
Accumulated deficit, beginning of period ................. (1,547) (1,613)
------- -------
Accumulated deficit, end of period ....................... $(1,407) $(1,147)
======= =======
Net income per share (Note 4)
Income from continuing operations ................... $ .02 $ .06
Income from discontinued operations ................. -- .01
------- -------
Net income ................................ $ .02 $ .07
======= =======
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three
Months ended
August 31,
1996 1995
---- ----
Cash flows from operating activities:
Net income ..................................................... $ 140 $ 466
Less: Net income from discontinued operations ................. -- 73
------- --------
Net income from continuing operations .......................... 140 393
------- --------
Adjustments to reconcile net income to net cash
provided by operating activities:
Proceeds from sale of equipment subject to operating leases .... 676 1,232
Amortization of unearned income ................................ (457) (266)
Collections of rentals on direct financing leases .............. 1,383 883
Depreciation and amortization expense .......................... 1,091 920
Effect on cash flows of changes in:
Accounts receivable ....................................... (515) 608
Notes receivable .......................................... (78) (185)
Inventory ................................................. (1,782) 134
Accrued interest and other assets ......................... 650 (468)
Accounts payable and other liabilities .................... 404 (1,035)
Income tax liability ...................................... -- 193
Deferred tax assets ....................................... 86 285
------- --------
1,458 2,301
------- --------
Net cash provided by continuing operations ..................... 1,598 2,694
Net cash provided by (used in) discontinued operations ......... (18) (232)
------- --------
Net cash provided by operations ................................ 1,580 2,462
------- --------
Cash flows from investing activities:
Purchase of rental equipment ................................... (2,252) (1,124)
Purchase of property and equipment ............................. (7) (14)
------- --------
Net cash used in investing activities ............ (2,259) (1,138)
------- --------
Cash flows from financing activities:
Payments on note payable to Liquidating Estate ................. -- (1,229)
Proceeds from lease, bank and institution financings ........... 3,281 280
Payments on lease, bank and institution financings ............. (1,934) (356)
------- --------
Net cash provided by (used in) financing activities 1,347 (1,305)
------- --------
Net increase in cash and cash equivalents ......... 668 19
Cash and cash equivalents at beginning of period ............... 5,382 13,015
------- --------
Cash and cash equivalents at end of period ..................... $ 6,050 $ 13,034
======= ========
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 ended August 31,
1996, 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, 1996 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.
2. Acquisition
On March 8, 1996, the Company, through its wholly-owned subsidiary, CIS
Corporation, acquired 100% of the capital stock of GMCCCS Corp. (dba
"LaserAccess") for a purchase price of approximately $4,608,000, payable
in cash of approximately $2,304,000 at closing and the balance of
approximately $2,304,000 in the form of notes payable in three equal
annual installments, commencing March 8, 1997, with interest at the rate
of 8.25% on the unpaid principal balance. In addition to the purchase
price to be paid in cash and notes, CIS Corporation is obligated to pay
the sellers an annual earn out payment for each of the first four years
following the March 8, 1996 sale. The earn out payment is based upon the
annual pretax income of LaserAccess. LaserAccess is engaged in the sales
and marketing of remanufactured Xerox High Speed Laser Printing Systems.
The acquisition has been accounted for using the purchase method of
accounting. Allocations of the purchase price have been determined based
upon preliminary estimates of fair market value and, therefore, are
subject to change. The excess of the purchase price, over the net
tangible assets acquired, of approximately $4.0 million, is considered
goodwill and is being amortized on a straight line basis over ten years.
LaserAccess' results of operations are included in the accompanying
consolidated statements of operations of the Company for the three months
ended August 31, 1996.
Unaudited pro forma data giving effect to the purchase as if it had been
acquired at the beginning of Fiscal 1996, with adjustments, primarily for
imputed interest charges attributable to notes payable to the former
owners and amortization of goodwill follows:
(In thousands, except per share amounts)
For the three
months ended
August 31, 1995
---------------
Total revenues ............................................... $ 9,211
==========
Income from continuing operations ............................ $ 634
==========
Income per share from continuing operations .................. $ .09
==========
Weighted average number of shares outstanding ................ 7,000,000
==========
Note: Reorganization items and income from discontinued operations have
been excluded from the pro forma results.
3. Discontinued Operations
As previously reported, 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.
After that date, the Company had attempted to locate a buyer for the
operation. On June 5, 1996, the Company announced it had abandoned its
efforts to sell the operation and would instead liquidate the assets
which consisted principally of used computer equipment inventories and
fixed assets. The net loss from discontinued operations for the year
ended May 31, 1996, was $1,177,000 (net of $698,000 deferred tax
benefit).
Additionally, on May 25, 1995, the Board of Directors approved the
discontinuance of NC3, Inc., the Company's excess inventory business unit
located in Syracuse, New York. The Company recorded a provision of
$1,137,000 (net of $763,000 deferred tax benefit) in the quarter ended
May 31, 1995, relative to the disposal of NC3 assets and other charges
related to the discontinuance of the business unit. As of May 31, 1996,
the Company had exited the business and liquidated substantially all of
the assets. A total of 14 employees were terminated in connection with
the closing of this business. Liabilities of the discontinued operation
decreased from $744,000 at May 31, 1995 to $158,000 as of August 31,
1996, due to cash payments principally for severance and facilities costs
totaling approximately $256,000 and a net reduction of $330,000 to adjust
the amounts estimated for the loss on the inventories, receivables, fixed
assets and leased facility obligations. The remaining liability of
$158,000 as of August 31, 1996 is expected to be liquidated by cash
payments extending through approximately May 31, 1997. The adjustment of
the liability in the amount of $230,000 was recorded as a gain from
discontinued operations, net of deferred tax expenses of $87,000 in the
quarter ended August 31, 1995. An additional adjustment of the liability
in the amount of $100,000 was recorded as an offset to the loss on
disposal of discontinued operations in the quarter ended May 31, 1996.
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):
For the Three
months ended
August 31,
1996 1995
---- ----
Revenues ........................................... $ -- $1,666
Costs and expenses ................................. -- 1,548
-------- ------
Income from discontinued operations ................ -- 118
Income tax ......................................... -- 45
-------- ------
Net income from discontinued operations ............ $ -- $ 73
======== ======
The Consolidated Balance Sheets as of August 31, 1996 and May 31, 1996, 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):
August 31, 1996 May 31, 1996
--------------- ------------
Assets:
Cash and cash equivalents ................................................................ $ 61 $ 159
Accounts receivable, net ................................................................. -- 55
Inventory ................................................................................ 100 115
Furniture, fixtures and equipment, net ................................................... -- 58
Accrued interest and other assets ........................................................ 16 16
----- -----
Total assets ................................................................... 177 403
----- -----
Liabilities:
Accounts payable and accruals ............................................................ 1 44
Other liabilities ........................................................................ 264 465
----- -----
Total liabilities .............................................................. 265 509
----- -----
Net Assets (Liabilities) of Discontinued
Operations ................................................................ $ (88) $(106)
===== =====
4. Net Income Per Share
Net income per share was computed based on the weighted average number of
shares of common stock outstanding during the periods. For the three
months ended August 31, 1996 and 1995, the weighted average number of
outstanding shares were 6,999,040 and 7,000,000, respectively. As of
August 31, 1996, the Company had granted options to purchase 334,000
shares of common stock (see Note 6). Since the average exercise price of
these options is in excess of the average market price of the common
stock for the three months ended August 31, 1996, the options are
considered anti-dilutive and are not included in the computation of net
income per share.
5. Reclassifications
Certain prior period balances in the financial statements have been
reclassified to conform to the current period financial statement
presentation.
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 August 31, 1996, incentive stock options for shares of
common stock had been granted to employees and non-qualified stock
options for shares of common stock had been granted to non-employee
directors as follows:
Number of Exercise Fair Market Value
Description Date Granted Options Price at Date of Grant
----------- ------------ ------- ----- ----------------
Non-Qualified Stock Options May 16, 1995 15,000 $3.50 $ 52,500
Non-Qualified Stock Options September 27, 1995 9,000 2.50 22,500
Incentive Stock Options July 11, 1996 310,000 1.97 610,700
------- ---------
Balance - August 31, 1996 334,000 $685,700
======= ========
As of August 31, 1996, options for 118,333 shares were exercisable.
Continental Information Systems Corporation
and its Subsidiaries
Item 2. 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 for the fiscal year ended May 31,
1996, appearing in the Company's Form 10-K.
All statements contained herein that are not historical facts, including but not
limited to, statements regarding anticipated future capital requirements, the
Company's future development and acquisition plans, the Company's ability to
obtain additional debt, equity or other financing, and the Company's ability to
generate cash from operations and further savings from existing operations, are
based on current expectations. These statements are forward looking in nature
and involve a number of risks and uncertainties. Actual results may differ
materially. Among the factors that could cause actual results to differ
materially are the following: the availability of sufficient capital to finance
the Company's business plan on terms satisfactory to the Company; competitive
factors, such as the introduction of new technologies and competitors into the
telecommunications equipment, laser printing systems, and commercial aircraft
industries; pricing pressures which could affect demand for the Company's
service; change in labor, equipment and capital costs; future acquisitions;
general business, economic and regulatory conditions; and the other risk factors
described from time to time in the Company's reports filed with the SEC. The
Company wishes to caution readers not to place undue reliance on any such
forward looking statements, which statements are made pursuant to the Private
Securities Litigation Reform Act of 1995 and, as such, speak only as of the date
made.
The Company emerged from Chapter 11 pursuant to a Plan of Reorganization which
was confirmed by the Bankruptcy Court on November 29, 1994. For financial
reporting purposes, the emergence from bankruptcy protection was recorded as of
November 30, 1994. The Plan of Reorganization provided for the distribution of
all of the Company's assets, except for specifically identified assets and
liabilities having a net fair tangible value of $30 million, and the Company's
newly-issued common stock to a Liquidating Estate for distribution to the
creditors. In addition, all liabilities subject to compromise and certain
postpetition liabilities were assumed by the Liquidating Estate. The Plan of
Reorganization provided that no further recourse to the Company or any of its
subsidiaries may be had by any person with respect to any prepetition claims or
postpetition liabilities assumed by the Liquidating Estate. As a result of the
reorganization and application of "fresh start" accounting, financial
information before and after November 30, 1994 are not comparable. To
distinguish between the operations of the Company prior to reorganization and
operations after reorganization, the term "Predecessor Company" will be used for
the pre-reorganization periods. The following discussion should be read in
conjunction with the historical financial statements of the Company.
The Reorganized Company applied the "fresh start" provisions of AICPA Statement
of Position No. 90-7 ("SOP 90-7") as of November 30, 1994 and, accordingly, the
assets retained by the Reorganized Company were adjusted as of that date to
reflect their fair value. The reorganization value of $35 million approximated
the fair value of the Reorganized Company's net assets, including net deferred
tax assets of $5 million, and accordingly, no excess reorganization value over
amount allocable to identifiable assets has been recognized.
Results of Operations
Continuing Operations
As previously reported, the Company has recently adjusted its strategic
direction to focus its efforts on the buying and selling of capital equipment in
existing and new markets. This decision follows an evaluation of the capital
intensive nature of the leasing business, the opportunity for utilization of
existing tax loss carryforwards, and the need to reduce the Company's operating
cost structure and increase operating profitability. Accordingly, the Company
has decided to pursue expansion of the equipment sales business and curtail its
leasing operations. As a result, management intends to sell substantially all of
its lease portfolio and utilize the proceeds to support its expansion of the
equipment sales business. Such expansion is expected to occur through the growth
of existing business lines as well as through external means by acquisition of
businesses engaged in the distribution of new and refurbished capital equipment.
The Company intends to identify acquisition candidates that can complement and
broaden the Company's existing product lines and equipment sales activity, and
expand the Company's marketing capabilities.
Total revenues decreased 6.4% to $7.1 million for the three months ended August
31, 1996 from $7.6 million for the comparable fiscal quarter in 1995. Equipment
rentals and income from direct financing leases decreased 11.9% to $1.9 million
for the three months ended August 31, 1996 from $2.1 million for the comparable
fiscal quarter in 1995. This decrease primarily reflects a "running out" of the
old lease portfolio, developed prior to and during the bankruptcy proceeding.
Equipment sales decreased 4.4% to $4.6 million for the three months ended August
31, 1996 from $4.9 million for the comparable period in 1995. This decrease was
chiefly due to lower sales in the aircraft business unit during the current
period. Interest, fees and other income decreased 3.9% to $590,000 for the three
months ended August 31, 1996 from $614,000 for the comparable period in 1995.
This decrease reflects a decline in management fees received from income funds
and a decrease in fees generated by brokered transactions.
Costs and expenses decreased 1.2% to $6.8 million for the three months ended
August 31, 1996 from $6.9 million for the comparable fiscal quarter in 1995.
Depreciation of rental equipment increased 6.3% to $850,000 for the three months
ended August 31, 1996 from $800,000 for the comparable fiscal period in 1995.
This increase is primarily due to depreciation taken on newly acquired used
equipment subject to short-term operating leases. Cost of sales as a percentage
of sales for the three months ended August 31, 1996 and 1995, was 74.0% and
70.6%, respectively. This variance is primarily the result of product mix, with
the aircraft business unit usually generating significant margins on a
relatively few large transactions and the telecommunications and printing
business units generating comparably lesser margins on a greater number of
transactions. Interest expense increased by $225,000 to $325,000 for the three
months ended August 31, 1996 from $100,000 for the comparable quarter in 1995.
This increase is the result of a significant increase of the average debt
outstanding to $17.7 million during the three months ended August 31, 1996 from
$4.9 million for the comparable quarter in 1995. This significant increase in
the current period primarily represents discounted lease rental borrowings
associated with the purchase of rental equipment subject to lease. Other
operating expenses increased by $206,000 to $499,000 for the three months ended
August 31, 1996 from $293,000 for the comparable quarter in 1995. This increase
was chiefly attributable to the amortization of goodwill relative to the
LaserAccess acquisition; goodwill of approximately $4.0 million is being
amortized on a straight line basis over ten years. Selling, general and
administrative expenses decreased 24.5% to $1.8 million for the three months
ended August 31, 1996 from $2.3 million for the comparable quarter in 1995. This
decrease is principally due to staff reductions between the periods.
Discontinued Operations
As previously reported, 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. After that date, the Company had
attempted to locate a buyer for the operation. On June 5, 1996, the Company
announced it had abandoned its efforts to sell the operation and would instead
liquidate the assets which consisted principally of used computer equipment
inventories and fixed assets. The net loss from discontinued operations for the
year ended May 31, 1996 was $1,177,000 (net of $698,000 deferred tax benefit).
Additionally, on May 25, 1995, the Board of Directors approved the
discontinuance of NC3, Inc., the Company's excess inventory business unit
located in Syracuse, New York. The Company recorded a provision of $1,137,000
(net of $763,000 deferred tax benefit) in the quarter ended May 31, 1995,
relative to the disposal of NC3 assets and other charges related to the
discontinuance of the business unit. As of May 31, 1996, the Company had exited
the business and liquidated substantially all of the assets. A total of 14
employees were terminated in connection with the closing of this business.
Liabilities of the discontinued operation decreased from $744,000 at May 31,
1995 to $158,000 as of August 31, 1996, due to cash payments principally for
severance and facilities costs totaling approximately $256,000 and a net
reduction of $330,000 to adjust the amounts estimated for the loss on the
inventories, receivables, fixed assets and leased facility obligations. The
remaining liability of $158,000 as of August 31, 1996 is expected to be
liquidated by cash payments extending through approximately May 31, 1997. The
adjustment of the liability in the amount of $230,000 was recorded as a gain
from discontinued operations, net of deferred tax expenses of $87,000 in the
quarter ended August 31, 1995. An additional adjustment of the liability in the
amount of $100,000 was recorded as an offset to the loss on disposal of
discontinued operations in the quarter ended May 31, 1996.
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):
For the three
months ended
August 31,
1996 1995
---- ----
Revenues ........................................... $ -- $1,666
Costs and expenses ................................. -- 1,548
-------- ------
Income from discontinued operations ................ -- 118
Income tax ......................................... -- 45
-------- ------
Net income from discontinued operations ............ $ -- $ 73
======== ======
Income Taxes
For the three months ended August 31, 1996 and 1995, a provision for deferred
income tax expense on income from continuing operations was recorded in the
amounts of $86,000 and $240,000, respectively. In addition, for the three months
ended August 31, 1995, a provision for deferred income tax expense on income
from discontinued operations was recorded in the amount of $45,000.
As of November 30, 1994, $5 million in net deferred tax assets were recorded
under "fresh start" accounting (net of a valuation allowance of $7 million) to
reflect the amount of deferred tax assets which management believed more likely
than not to be realized. The Company's total gross deferred tax assets as of the
Effective Date were approximately $12 million. The deferred tax assets relate
principally to the net operating loss carryforwards available to offset future
taxable income of the Reorganized Company, subject to an annual limitation of
approximately $2 million (limited in the aggregate to approximately $35
million). These carryforwards expire during the years 2004 to 2010. Any future
realization of tax benefits relating to pre-reorganization net operating loss
carryforwards in excess of the net $5 million initially recorded will be
recognized as a direct credit to stockholders' equity as required under SOP
90-7.
Liquidity and Capital Resources
Cash provided by operations for the three months ended August 31, 1996 of
$1,580,000 was composed of cash provided by continuing operations of $1,598,000
with $18,000 being used in discontinued operations. Cash provided by continuing
operations arose primarily from net income of $140,000 less non-cash
amortization of unearned income of $457,000 plus non-cash depreciation and
amortization expense of $1,091,000, in addition to proceeds from sale of
equipment subject to operating leases of $676,000. Cash provided by collections
of rentals on direct financing leases of $1,383,000 was offset primarily by the
net change in other balance sheet accounts. New investment in rental equipment
for the three months ended August 31, 1996 was $2.3 million as compared to $1.1
million for the comparable period in 1995. The significant increase in rental
equipment in the current period resulted from the Company's acquisition of
equipment subject to lease. Because a note payable to the Liquidating Estate was
paid in full in March 1996, there were no payments made on the note for the
three months ended August 31, 1996, as compared to the comparable period in 1995
when the Company made principal payments of $1.2 million. Proceeds from lease,
bank and institution financings were $3.3 million for the three months ended
August 31, 1996, as compared to $.3 million for the comparable period in 1995.
The significant increase in the current period primarily represents discounted
lease rental borrowings associated with the purchase of rental equipment subject
to lease. Additionally, payments on lease, bank and institution financings
increased to $1.9 million for the three months ended August 31, 1996 from $.4
million for the comparable period in 1995.
As noted previously, the Company has adjusted its strategic direction to focus
its efforts on the buying and selling of capital equipment in existing and new
markets. As a result, management intends to sell substantially all of its lease
portfolio and utilize the proceeds to support its expansion of the equipment
sales business. Such expansion is expected to occur through the growth of
existing business lines as well as through external means by acquisition of
businesses engaged in the distribution of new and refurbished capital equipment.
The Company expects that operations will generate sufficient cash to meet its
operating expenses and current obligations. The cash retained by the Company
pursuant to the Plan of Reorganization has been used to provide liquidity to
fund investment in new leases, inventory, and other investment opportunities. In
April 1996, the Company finalized a revolving loan agreement with an institution
to provide interim and recourse/limited recourse lease financing in the total
amount of $5 million. Additionally, in July 1996, the Company finalized two
revolving loan agreements with institutions to provide (1) warehouse lease
financing in the amount of $5 million and (2) inventory financing for
LaserAccess and CIS Air in the amount of $7 million. The Company believes that
the Company's asset base will enable the Company to obtain sufficient capital to
operate its business.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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10.1*Loan and Security Agreement between CIS Corporation and
CoreStates Bank, N.A. dated July 9, 1996.
10.2 Revolving credit facility between CIS Air Corporation and
Norwest Business Credit, Inc., dated July 31, 1996.
10.3 Revolving credit facility between GMCCCS Corp. (doing
business as "LaserAccess") and Norwest Business Credit,
Inc., dated July 31, 1996.
27.1 Financial Data Schedule.
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* Filed as Exhibit 10.17 to the Company's Form 10-K filed
August 26, 1996 and incorporated herein by reference.
(b) Reports on Form 8-K - The Company filed the following reports on
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Form 8-K on the date indicated during the quarter ended August
31, 1996:
Date Description
---- -----------
June 10, 1996 Press Release announcing fourth
quarter charge.
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: October 7, 1996 By: /s/ Thomas J. Prinzing
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Thomas J. Prinzing
President and
Chief Executive Officer
Date: October 7, 1996 By: /s/ Frank J. Corcoran
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Frank J. Corcoran
Senior Vice President,
Chief Financial Officer,
Treasurer and Secretary