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 quarter period ended August 31, 1997 or
[ ] Transition report pursuant to section 13 of 15(d) of the Securities Exchange
Act of 1934 for the Transition period from ________ to ________
Commission file number: 0-25104
CONTINENTAL INFORMATION SYSTEMS CORPORATION
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(Exact name of registrant as specified in its charter)
New York 16-0956508
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(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
One Northern Concourse, P.O. Box 4785, Syracuse, NY 13221-4785
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(Address of principal executive offices) (Zip Code)
(315) 455-1900
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(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, 1997, the registrant has 6,939,259 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, 1997 and May 31, 1997
Consolidated Statements of Operations and Retained
Earnings (Accumulated Deficit) - for the three months
ended August 31, 1997 and 1996
Consolidated Statements of Cash Flows -
for the three months ended August 31, 1997 and 1996
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,
1997 1997
-------- --------
Assets:
Cash and cash equivalents ................................. $ 4,496 $ 9,005
Accounts receivable, net .................................. 4,346 2,485
Notes receivable .......................................... $ 3,666 5,094
Inventory.................................................. 4,240 6,980
Net investment in direct financing leases (Note 2) ........ 6,872 3,446
Rental equipment, net (Note 2) ............................ 7,802 7,505
Furniture, fixtures and equipment, net .................... 122 218
Other assets .............................................. 779 446
Goodwill, net ............................................. 3,573 3,632
Deferred tax assets ....................................... 5,353 5,414
-------- --------
Total assets .............................................. $ 41,249 $ 44,225
======== ========
Liabilities and Shareholders' Equity:
Liabilities:
Accounts payable and other liabilities .................... $ 1,928 $ 1,450
Discounted lease rental borrowings (Note 2) ............... 2,181 5,633
Note payable to institution - secured ..................... 1,140 1,005
Notes payable to former owners of acquired company ........ 1,536 1,536
-------- --------
Total liabilities ......................................... 6,785 9,624
-------- --------
Shareholders' Equity:
Common stock, $.01 par value; authorized 10,000,000 shares,
issued 7,031,667 shares ................................ 70 70
Additional paid-in capital ................................ 34,992 34,992
Accumulated deficit ....................................... (362) (461)
-------- --------
34,700 34,601
Treasury stock, at cost; 92,408 shares at August 31, 1997,
960 shares at May 31, 1997 (Note 4) (236) --
-------- --------
Total shareholders' equity ................................ 34,464 34,601
-------- --------
Total liabilities and shareholders' equity ................ $ 41,249 $ 44,225
======== ========
Continental Information Systems Corporation
and its Subsidiaries
In Thousands (Except per Share Data)
CONSOLIDATED STATEMENTS OF OPERATIONS
AND RETAINED EARNINGS (ACCUMULATED DEFICIT)
(Unaudited)
For the Three Months
Ended
August 31,
1997 1996
------- -------
Revenues:
Equipment sales ............................................. $ 4,644 $ 4,645
Equipment rentals ........................................... 969 1,401
Income from direct financing leases ......................... 187 457
Gain from sale of equipment subject to lease (Note 2) ....... 78 --
Interest, fees and other income ............................. 544 590
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6,422 7,093
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Costs and Expenses:
Cost of sales ............................................... 3,693 3,438
Depreciation of rental equipment ............................ 480 850
Interest expense ............................................ 209 325
Other operating expenses .................................... 491 499
Selling, general and administrative expense ................. 1,389 1,755
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6,262 6,867
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Income from operations before taxes ......................... 160 226
Provision for income tax .................................... 61 86
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Net income .................................................. 99 140
Retained earnings (accumulated deficit), beginning of period (461) (1,547)
------- -------
Retained earnings (accumulated deficit), end of period ...... $ (362) $(1,407)
======= =======
Net income per share of common stock (Note 5) ............... $ .01 $ .02
======= =======
Weighted average number of shares of common stock outstanding 7,016 6,999
======= =======
Continental Information Systems Corporation
and its Subsidiaries
In Thousands
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the
Three Months Ended
August 31,
1997 1996
------- -------
Cash flows from operating activities:
Net income .............................................. $ 99 $ 140
------- -------
Adjustments to reconcile net income to net cash
provided by operating activities:
Proceeds from sale of equipment subject to lease ... 850 --
Gain from sale of equipment subject to lease ....... (78) --
Proceeds from sale of other leased equipment ....... 39 676
Amortization of unearned income .................... (187) (457)
Collections of rentals on direct financing leases .. 546 1,383
Depreciation and amortization expense .............. 688 1,091
Effect on cash flows of changes in:
Accounts receivable ............................ (1,169) (515)
Notes receivable ............................... 1,428 (78)
Inventory ...................................... 1,909 (1,782)
Other assets ................................... (333) 650
Accounts payable and other liabilities ......... 477 404
Deferred tax assets ............................ 61 86
Other .......................................... (53) (18)
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4,178 1,440
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Net cash provided by operations ......................... 4,277 1,580
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Cash flows from investing activities:
Purchase of rental equipment ............................ (8,699) (2,252)
Purchase of property and equipment ...................... (5) (7)
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Net cash used in investing activities .............. (8,704) (2,259)
------- -------
Cash flows from financing activities:
Proceeds from lease, bank and institution financings .... 2,094 3,281
Payments on lease, bank and institution financings ...... (1,940) (1,934)
Purchase of treasury stock .............................. (236) --
------- -------
Net cash provided by (used in) financing activities (82) 1,347
------- -------
Net increase (decrease) in cash and cash equivalents (4,509) 668
Cash and cash equivalents at beginning of period ........ 9,005 5,382
------- -------
Cash and cash equivalents at end of period .............. $ 4,496 $ 6,050
======= =======
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.
The results of operations for the three months ended August 31, 1997, 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,
1997 appearing in the Company's Form 10-K.
2. Sale of Equipment Subject to Lease and Telecommunications Business Unit
On August 31, 1997, the Company, through a wholly-owned subsidiary, sold a
portion of its leased equipment to a corporate investor for a sales price
of approximately $4.4 million, payable in cash of approximately $850,000
and the assumption by the investor of the Company's related outstanding
non-recourse lease rental borrowings of approximately $3.5 million.
Additionally, on August 31, 1997, the Company, through a wholly-owned
subsidiary, sold its Telecommunications Business Unit to Meridian Leasing
Corporation of Deerfield, Illinois. The sales price approximated the
Business Unit's book value and therefore did not significantly affect the
results of operations for the quarter ended August 31, 1997.
3. Real Estate Financing
On June 30, 1997, the Company announced that it had entered into a Joint
Investment Agreement (the "Emmes Agreement") with Emmes Investment
Management Co. LLC ("Emmes") to provide high-yield, short-term financing
for commercial real estate transactions. Under the agreement the Company
may provide up to $8 million in financing, subject to management's
approval of each loan. The transaction with Emmes is part of an ongoing
restructuring of the Company's asset lending activities.
The Emmes Agreement is expected to involve transactions which do not meet
the underwriting standards of a traditional lender, and instances where
there are unusual time constraints. Emmes, founded in 1992 by individuals
who have been involved in commercial real estate dating back to the early
1970s, provides high-yield, short-term real estate financing as well as a
broad range of other special opportunity real estate investments. Under
the Emmes Agreement, Emmes will identify, negotiate and service proposed
transactions, and will present to the Company the opportunity to
participate in such transactions. The Company will make its own
independent determination whether to participate in a transaction. In
September 1997, the Company made an initial investment of approximately $1
million in two approved transactions.
Continental Information Systems Corporation
and its Subsidiaries
Notes to the Consolidated Financial Statements
4. Treasury Stock
On May 27, 1997, the Company announced that its Board of Directors had
authorized the expenditure of up to $500,000 for the repurchase of its
common stock. The Company commenced a voluntary odd lot program through
June 30, 1997, which was extended through July 31, 1997. Shareholders
owning less than 100 shares of the Company's common stock were offered the
opportunity to sell all their shares at the closing price of the common
stock on the NASDAQ Small-Cap Market on May 23, 1997, which was $2.25 per
share. Approximately 20,000 shares were repurchased by the Company at an
aggregate cost of approximately $45,000. Subsequent to the odd lot
repurchase program, the Company intends to repurchase from time to time
additional shares of its common stock up to the balance of $500,000
remaining after the odd lot program. The Company may repurchase the
additional shares at prevailing prices in the open market or in negotiated
or other permissible transactions at the discretion of management. The
Company will hold all repurchased shares of common stock in its treasury.
At August 31, 1997, approximately 72,000 shares were repurchased by the
Company in this manner at an aggregate cost of approximately $191,000.
5. 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. As of August 31,
1997, the Company had outstanding options to purchase 459,000 shares of
common stock (see Note 7). The potential dilution of these options is
immaterial in the computation of net income per share.
6. Reclassifications
Certain prior period balances in the financial statements have been
reclassified to conform to the current period financial statement
presentation.
7. Stock Compensation 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 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.
Continental Information Systems Corporation
and its Subsidiaries
Notes to the Consolidated Financial Statements
A summary of the status of the 1995 Plan as of August 31, 1997 and changes
since inception is presented below:
Weighted Average
Number of Exercise Price
Options Per Option
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Outstanding at
May 31, 1995 (none exercisable) ..... 15,000 $ 3.50
Granted ................................... 9,000 $ 2.50
Exercised ................................. -- $ --
Forfeited/expired ......................... (9,000) $ 3.50
-------
Outstanding at
May 31, 1996 (6,000 exercisable) .... 15,000 $ 2.90
Granted ................................... 319,000 $ 1.97
Exercised ................................. (16,667) $ 1.97
Forfeited/expired ......................... (33,333) $ 1.97
-------
Outstanding at
May 31, 1997 (188,337 exercisable) . 284,000 $ 2.02
Granted ................................... 175,000 $ 2.32
-------
Outstanding at
August 31, 1997 (246,671 exercisable) 459,000 $ 2.13
=======
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,
1997, 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 and the
Company's future business plans, 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 those set forth below 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.
On June 30, 1997, the Company announced that it had entered into a Joint
Investment Agreement (the "Emmes Agreement") with Emmes Investment Management
Co. LLC ("Emmes") to provide high-yield, short-term financing for commercial
real estate transactions. Under the agreement the Company may provide up to $8
million in financing, subject to management's approval of each loan. The
transaction with Emmes is part of an ongoing restructuring of the Company's
asset lending activities.
The Emmes Agreement is expected to involve transactions which do not meet the
underwriting standards of a traditional lender, and instances where there are
unusual time constraints. Emmes, founded in 1992 by individuals who have been
involved in commercial real estate dating back to the early 1970s, provides
high-yield, short-term real estate financing as well as a broad range of other
special opportunity real estate investments. Under the Emmes Agreement, Emmes
will identify, negotiate and service proposed transactions, and will present to
the Company the opportunity to participate in such transactions. The Company
will make its own independent determination whether to participate in a
transaction. In September 1997, the Company made an initial investment of
approximately $1 million in two approved transactions.
Results of Operations
Comparison of the Three Months Ended August 31, 1997 and 1996
Total revenues decreased 9.5% to $6.4 million for the three months ended August
31, 1997 from $7.1 million for the comparable fiscal quarter in 1996. Within
this category, equipment rentals and income from direct financing leases
decreased 37.8% to $1.2 million for the three months ended August 31, 1997 from
$1.9 million for the comparable fiscal quarter in 1996. This decrease is
directly related to the sale of a substantial portion of the Company's leased
Continental Information Systems Corporation
and its Subsidiaries
equipment to an institutional investor in the second and third quarters of the
prior fiscal year. Additionally, on August 31, 1997, the Company, through a
wholly-owned subsidiary, sold additional leased equipment to a corporate
investor for a sales price of approximately $4.4 million. The Company is
acquiring additional equipment, subject to lease, which it intends to sell on an
ongoing basis, as market conditions permit. Interest, fees and other income
decreased 7.8% to $544,000 for the quarter ended August 31, 1997 from $590,000
for the comparable fiscal quarter in 1996. This decrease primarily reflects a
decline in management fees received from income funds.
Costs and expenses decreased 8.8% to $6.3 million for the three months ended
August 31, 1997 from $6.9 million for the comparable fiscal quarter in 1996.
Within this category, cost of sales, as a percentage of sales, for the three
months ended August 31, 1997 and 1996 was 79.5% and 74.0%, respectively. These
variances are 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. On August 31,
1997 the Company, through a wholly-owned subsidiary, sold its Telecommunications
Business Unit to Meridian Leasing Corporation of Deerfield, Illinois. The sales
price approximated the Business Unit's book value and therefore did not
significantly affect the results of operations for the quarter ended August 31,
1997. Sales and margins for the Company's laser printing business have been
adversely impacted, and may continue to be impacted, as a result of increased
activity in the used high speed printer market by Xerox Corporation, the
manufacturer of the Company's laser printers, and another large leasing company
that has entered the market. Sales and earnings from the aircraft business are
likely to continue to vary quarter-to-quarter, based on the volume of
transactions. Depreciation of rental equipment decreased 43.5% to $480,000 for
the three months ended August 31, 1997 from $850,000 for the comparable fiscal
quarter in 1996. This decrease is directly related to the aforementioned sale of
a substantial portion of the Company's portfolio of leased equipment in the
second and third quarters of the prior fiscal year. Interest expense decreased
35.7% to $209,000 for the three months ended August 31, 1997 from $325,000 for
the comparable fiscal quarter in 1996. This decrease was primarily the result of
a decrease in the average debt outstanding during the current quarter ended
August 31, 1997. Other operating expenses decreased 1.6% to $491,000 for the
three months ended August 31, 1997 from $499,000 for the comparable fiscal
quarter in 1996. This decrease is chiefly the result of a decrease in machine
refurbishment expenses for the laser printing business unit. Selling, general
and administrative expenses decreased 20.9% to $1.4 million for the three months
ended August 31, 1997 from $1.8 million for the comparable fiscal quarter in
1996. This decrease was principally due to cost containment efforts and staff
reductions between the periods. For the three months ended August 31, 1997 and
1996, a provision for deferred income tax on income from operations was
recorded, at an effective rate of 38%, in the amounts of $61,000 and $86,000,
respectively.
Continental Information Systems Corporation
and its Subsidiaries
Liquidity and Capital Resources
Cash provided by operations for the three months ended August 31, 1997 was $4.3
million as compared to $1.6 million for the comparable period in 1996. The
increase was primarily due to a decrease in the Company's investment in
inventory of $1.9 million and the proceeds generated by the sale of equipment
subject to lease of $850,000. In addition to the cash payment of $850,000
relative to the sale of leased equipment, the buyer assumed approximately $3.5
million of the Company's related outstanding non-recourse lease rental
borrowings. The Company purchased approximately $8.7 million of additional
rental equipment during the current quarter, which it intends to sell on an
ongoing basis, as market conditions permit. Proceeds from lease, bank and
institution financings decreased by approximately $1.2 million to $2.1 million
for the three months ended August 31, 1997 from $3.3 million for the comparable
fiscal quarter in 1996. This decrease is primarily the result of a decrease in
the discounting of lease rentals with lending institutions.
On May 27, 1997, the Company announced that its Board of Directors had
authorized the expenditure of up to $500,000 for the repurchase of its common
stock. The Company commenced a voluntary odd lot program through June 30, 1997,
which was extended through July 31, 1997. Shareholders owning less than 100
shares of the Company's common stock were offered the opportunity to sell all
their shares at the closing price of the common stock on the NASDAQ Small-Cap
Market on May 23, 1997, which was $2.25 per share. Approximately 20,000 shares
were repurchased by the Company at an aggregate cost of approximately $45,000.
Subsequent to the odd lot repurchase program, the Company intends to repurchase
from time to time additional shares of its common stock up to the balance of
$500,000 remaining after the odd lot program. The Company may repurchase the
additional shares at prevailing prices in the open market or in negotiated or
other permissible transactions at the discretion of management. The Company will
hold all repurchased shares of common stock in its treasury. At August 31, 1997,
approximately 72,000 shares were repurchased by the Company in this manner at an
aggregate cost of approximately $191,000.
The Company expects that operations will generate sufficient cash to meet its
operating expenses and current obligations for the foreseeable future. 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. At
August 31, 1997, approximately $1.1 million in loans payable were outstanding
under these lines of credit. The LaserAccess and CIS Air loan agreements contain
various covenants including limitations on additional indebtedness and the
maintenance of minimum levels of net worth/net earnings. At August 31, 1997,
LaserAccess did not meet the minimum net worth/net earnings requirement; a
waiver relative to this covenant was obtained from the lending institution. In
July 1997, the Company signed letters of intent with two institutions to provide
lease and inventory financing in the total amount of $20 million for CIS Air.
The Company is currently engaged in negotiations relative to the terms of the
proposed lines of credit, including the potential effect on existing lines, and
due diligence reviews with the institutions.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K - No reports on Form 8-K were filed by the
Company during the quarter ended August 31, 1997.
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 1, 1997 By: /s/ Michael L. Rosen
--------------------
Michael L. Rosen
President, Chief Executive Officer
and Director
Date: October 1, 1997 By: /s/ Jonah M. Meer
-----------------
Jonah M. Meer
Senior Vice President,
Chief Operating Officer
and Chief Financial Officer