===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
---------------
For the Fiscal Year May 31, 2001 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 Identification No.)
of incorporation)
45 Broadway Atrium, Suite 1105, New York, New York 10006
- -------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(212) 771-1000
--------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The number of the registrant's shares of Common Stock outstanding on June 30,
2001 was 5,883,881.
As of June 30, 2001, the aggregate market value of the shares of Common Stock
held by non-affiliates of the registrant was approximately $3,001,644.*
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Continental Information Systems Corporation's Notice of Annual
Meeting of Stockholders and Proxy Statement, to be filed within 120 days after
the end of the registrant's fiscal year, are incorporated into Part III of this
Annual Report.
* Excludes 2,882,237 shares deemed to be held by officers and directors, and
stockholders whose ownership exceeds ten percent of the shares outstanding at
June 30, 2001. Exclusion of shares held by any person should not be construed
to indicate that such person possesses the power, directly or indirectly, to
direct or cause the direction of the management or policies of the registrant,
or that such person is controlled by or under common control with the
registrant.
===============================================================================
CONTINENTAL INFORMATIONS SYSTEMS CORPORATION
2001 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
PART I
Item 1. Business 3-7
Item 2. Properties 7
Item 3. Legal Proceedings 7-8
Item 4 Submission of Matters to a Vote of Security Holders 8
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 8-9
Item 6. Selected Financial Data 9-10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-14
Item 7a. Quantitative and Qualitative Disclosures About Market Risk 14
Item 8. Financial Statements and Supplementary Data 15-36
Item 9. Changes In and Disagreements with Accountants
On Accounting and Financial Disclosure 37
PART III
Item 10. Directors and Executive Officers of the Registrant 37
Item 11. Executive Compensation 37
Item 12. Security Ownership of Certain Beneficial
Owners and Management 37
Item 13. Certain Relationships and Related Transactions 37
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 38
- 2 -
FORWARD LOOKING STATEMENTS
All statements contained herein that are not historical facts,
including but not limited to, statements regarding anticipated future capital
requirements, Continental Information Systems Corporation's with its
subsidiaries (the "Company") future development 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 and the
potential impact on asset realization; competitive factors, such as the
introduction of new technologies and competitors that may compete with the
Company's T1Xpert Corp. subsidiary; risks generally associated with development
technology projects, including design, concept and implementation; risks
associated with regulations concerning the securities industry conversion to a
next day settlement cycle as well as the path chosen by the securities industry
in adopting new technology solutions to deal with compressed settlement cycles;
risks associated with collecting on the Company's notes receivable arising out
of various settlements in the aviation business, risks attendant to the
Company's finance activities generally, including the risks of leverage, risks
of borrower default, general economic and real estate market conditions, and
pricing pressures which could affect the value of the Company's assets; changes
in labor, equipment and capital costs; future acquisitions; general business,
economic and regulatory conditions; and the other risk factors described from
time to time in the Company's reports filed with the Securities and Exchange
Commission ("SEC"). The Company cautions readers not to place undue reliance on
any such forward looking statements, which are made pursuant to the Private
Securities Litigation Reform Act of 1995 and, as such, speak only as of the date
made. The Company undertakes no obligation to update such forward-looking
statements.
PART I
ITEM 1. BUSINESS
INTRODUCTION AND HISTORY
Continental Information Systems Corporation is a New York Corporation
that was organized in 1968. Together with its Subsidiaries (the "Company") was a
specialized financial services company that engaged in the leasing, sales and
management of commercial aircraft and engines, among other assets, and was also
engaged in other financing activities, including commercial real estate
financing. In August 1999, the Company ceased entering into new equipment leases
and sold a substantial portion of its remaining lease portfolio. Since then, the
Company has disposed of the balance of its remaining lease portfolio. In July
2000 the Company's subsidiary, CIS Air Corporation, exited the aviation
business.
The Company has changed its focus to the development and
commercialization of an Internet-enabled electronic securities processing
software platform which would use proprietary technology and which would be
adapted to changes in the securities industry including operational changes
related to increased volume, the ability to effect trades through the Internet,
Electronic Crossing Networks, decimalization, expanded trading hours, various
rule changes and the shift from settling trades in three days to settling trades
in one day. This latter shift is commonly referred to as "T+1". The newly
created subsidiary that was formed to engage in this line of business, CIS
Portal Corporation, changed its name to T1Xpert.com Corp. ("T1Xpert.com") to
more properly reflect its business focus. On April 5, 2001, the name T1Xpert.com
Corp. was changed to T1Xpert Corp. ("T1Xpert").
The financial statements contained herein have been prepared by management
assuming that the Company will continue as a going concern. However, the Company
is in the initial stages of developing its securities processing software
business and its products have not yet been completed or tested for
functionality. There currently is no demonstrated market for the products that
the Company is developing and the Company does not yet have any significant
revenue from clients which raises substantial doubt about the Company's ability
to continue as a going concern. The financial statements contained herein do not
include any adjustments that might result from the outcome of this uncertainty.
- 3 -
SECURITIES PROCESSING SOFTWARE BUSINESS
The Company's sole operating focus is the development and
commercialization of software for the securities industry. The Company conducts
this activity through its T1Xpert subsidiary.
T1Xpert is developing a suite of middle and back office brokerage
products and solutions. The products and solutions are being designed to serve
as a software platform for risk reduction for the next generation of real time
systems and in preparation for the expected SEC/SIA mandated shortening of the
securities industry settlement cycle from three days to one day (T + 1). The
Company's product development strategy is to develop T1Xpert incrementally, with
a series of independent products that, in total, constitute a full real-time
straight through transaction processing, balancing, and risk-management system.
Each product would build on the functions and infrastructure of the previous
products. T1Xpert has expended approximately $4.5 million from its inception in
August 1999 through May 2001. The Company completed alpha testing, (i.e.,
internal testing without guidance from a potential client/licensee), of the
first component of its Real-Time Middle Office Balancing System, the P&S module,
in March 2001. Beta infrastructure build-out of the P&S module began in July
2001. This build-out consists of installing, for a financial services firm
client, the necessary hardware, software and telecommunications systems to
complete testing in a real-time environment (i.e., use with live data by such
client/licensee) prior to production rollout.
The Company believes it has sufficient cash on hand to meet current
operating needs until the projected development of its initial products through
completion of the beta stage, which it currently projects to be at the end of
the first calendar quarter of 2002. The successful and timely completion of the
beta stage is dependent, among other items, upon the Company successfully
executing the Company's operating plan which can not be assured.
The Company anticipates that, to develop and operate past the beta
stage, it will need substantial additional funds to meet its financial needs.
There can be no assurance that the Company will be able to generate such funds
after June 2002. If the Company raises funds from third parties for investment
in T1Xpert, the effect of such outside investment on the current shareholders of
the Company cannot be determined, but it may be dilutive, perhaps substantially,
to them. In the interim, the Company has allocated all its available resources
to continue funding T1Xpert. This may result in the Company selling assets at
below market prices in order to raise funds. Without additional funding there
can be no assurance that the Company will be able to meet its financial needs
after it passes the beta stage of development.
CUSTOMERS AND MARKETING
The current marketing strategy for T1Xpert is focused on being an
early entrant with a new product that management believes will create effective
solutions for intelligently managing full real-time straight through transaction
processing and T+1. Establishing early product credibility will be essential to
the success of the business. The Company believes that it will be unable to
establish such credibility if testing of the product does not meet expectations
or the Company is unable to meet current product timing and development goals.
The Company's marketing strategy includes direct sales through its
staff and indirect sales through channel partners. Channel partner alliances
include consulting firms, who are overseeing conversions at self-clearing
brokers, and who are searching for a strong product to expand their brokerage
solutions offerings.
As part of the marketing plans of T1Xpert, the Company may seek to
engage in strategic market relationships with vendors, brokers, dealers or other
market participants. There can be no assurance, however, that the Company will
be able to establish the necessary strategic market relationships, or, if such
relationships are established, that they will be successful.
In February 2001, T1Xpert entered into the first phase of a project to
implement the T1Xpert P&S solution at a global investment bank. The first phase
was successfully completed. In August 2001, T1Xpert signed a Beta License with
the global investment bank for such bank to assist T1Xpert in testing and
evaluating T1Xpert's software applications under development.
In July 2001 T1Xpert was engaged by a different global investment bank
to develop a customized solution for the bank's institutional trade processing
needs. This solution is based on T1Xpert's Allocation module, a part of its P&S
module. The bank and T1Xpert are also in preliminary negotiations about the bank
using T1Xpert's P&S module in a production environment. There can be no
assurance that the bank will ultimately decide to use the P&S solution. Failure
to successfully implement this project may have a negative effect on T1Xpert.
- 4 -
The financial statements contained herein do not include any
adjustments that might result from the outcome of this uncertainty.
COMPETITION
T1Xpert may face competition from systems developed by other, much
larger companies, and its success will depend on the ability of the Company to
position itself as the preferred product solution. This, in turn, will depend on
the speed with which the Company can develop and commercialize its products to
its target users. Potential competitors may have access to greater resources or
better technology.
The Company's continued ability to compete effectively is also
materially affected by its ability to attract and retain qualified personnel and
by the availability of financing on competitive terms and conditions. Many of
the Company's potential competitors have substantially greater financial
resources, economies of scale and lower capital costs than the Company and, as a
result, no assurance can be given that the Company will be successful in
operating profitably or in obtaining access to competitive capital sources or
other means of financing its product development.
The Company intends to compete primarily on its use of the most
current technology platforms, its understanding of the securities industry, its
capability to meet customer needs, its flexibility in structuring transaction
terms, its reliability in meeting commitments and the degree of knowledge and
competence of key employees and advisors.
PROPRIETARY RIGHTS
The Company currently has no patents, however, it is in the process of
filing several United States patent applications. The Company's ability to
succeed will depend on the development of related proprietary technologies and
specialized processes either alone or in conjunction with others. These
proprietary technologies and processes will require the Company to secure
patents and trademarks to protect its systems and services. There can be no
assurance that the Company will be successful in doing so. The Company may use
licenses from other relevant technology providers that may be important to the
Company's business.
FEDERAL REGULATION
T1Xpert is not registered as a broker dealer, nor does it engage in
activities that management believes require it to register as such. At present
there is no known regulation governing T1Xpert's activities, other than those
that affect all businesses generally. It does intend, however, to provide
services to registered broker dealers, and assist them with complying with
various laws and regulations. Its product offering is intended to assist broker
dealers in meeting a variety of such regulations. Failure to properly develop
products in compliance with such laws and regulations could have a negative
impact on the Company's business.
DISCONTINUED OPERATIONS
Through its wholly owned subsidiary, CIS Air Corporation, a Delaware
corporation ("CIS Air"), the Company participated in the worldwide market for
the sale and leasing of used, commercial aircraft and aircraft engines. In
recent periods, CIS Air's activities have consisted primarily of acquiring
aircraft engines and then selling, leasing or selling them subject to lease. CIS
Air financed its portfolio acquisitions with cash flows from operations or
through borrowings under CIS Air's revolving credit facility.
- 5 -
Engines, which were acquired from brokers, airlines and dealers, were
used and frequently in need of substantial repair or refurbishing. The Company,
when necessary, contracted with outside vendors to complete this upgrade process
before reselling or leasing the equipment to its customers. Aircraft acquired by
the Company were in various stages of airworthiness. Repairs and upgrades to the
aircraft were sometimes required prior to leasing the aircraft. CIS Air's leases
required the lessee to maintain the aircraft in accordance with FAA-approved
maintenance programs and contained specific return conditions.
In July 2000, the Company sold a portion of its engine portfolio and
began to liquidate the balance of its engine portfolio and other aviation
assets. The proceeds of the sales were used to pay down CIS Air's existing
credit facility with its lender. As of June 21, 2001, the balance on the credit
facility was fully paid. The Company is treating the aviation business as a
discontinued operation with appropriate disclosure and valuation under
accounting principles generally accepted in the United States of America.
In addition to CIS Air's sales and leasing activities, a subsidiary of
CIS Air, CIS Aircraft Partners, Inc., had managed a portfolio of commercial
aircraft on behalf of two publicly held limited partnerships, JetStream, L.P.
and JetStream II, L.P. since their inception in 1987 and 1988 respectively. As
managing general partner, CIS Aircraft Partners, Inc. acquired the portfolio on
behalf of the partnerships, arranged leases of the aircraft and engaged in
ongoing management activities including remarketing to preserve and protect the
value of the portfolio. The payment of management fees to CIS Aircraft Partners,
Inc. from JetStream, L.P. was suspended in December 1997, and the payment of
management fees from JetStream II, L.P. was suspended in September 1998, because
under the terms of the respective limited partnership agreements, these fees
were subordinate in right of payment to a preferred rate of return to the
limited partners.
The general partners of the JetStream Partnerships solicited and
received unitholders' approval for the liquidation of the JetStream Partnerships
and for the payment of a marketing fee upon the sale of each of the
Partnerships' assets. The marketing of the assets began in January 2000 and as
of February 28, 2001 all the assets of the portfolios were sold by the
Partnerships generating marketing fees of approximately $670,000 for the
Company.
In August 1999, the Company's subsidiary, CIS Corporation, ceased
entering into new equipment leases and sold a substantial portion of its
remaining lease portfolio.
OTHER FINANCE ACTIVITIES
In July 1997, the Company entered into a Joint Investment Agreement
with Emmes Investment Management Co. LLC to provide up to $8 million in
high-yield, short-term funding for commercial real estate transactions. The
Company has ceased making additional investments under the Agreement and has no
obligation to make any additional investments under the Agreement. At May 31,
2001, the Company's sole remaining investment in such transactions was
approximately $367,000, net of a reserve for loss on investment of $122,400.
The Company has made loans or loan guarantees to borrowers with
profiles that did not meet the requirements of traditional lending institutions.
Based on the unique nature of the loan the Company received fees, equity
interests or other forms of remuneration in addition to traditional interest.
The Company is in the process of managing, collecting and liquidating several
such loans and loan guarantees. In exchange for a collateralized loan guarantee
made by the Company, the Company received warrants in a high technology company,
which the Company currently carries at zero valuation. Due to weak market
conditions and based on management's assessment of the probability of
collection, the Company has written down its investments in high technology
companies by $1.3 million.
FINANCING
The Company's financing strategy had been primarily to use its own
capital, except in the aviation subsidiary where the Company also had a
collateralized, revolving loan agreement with an institution to provide lease
and inventory financing for aircraft engines for CIS Air in the amount of
$10,000,000. The facility bore interest at prime plus 1/4% and expired in
December 2000. The Company arranged for several extensions with its lender. On
June 21, 2001, the debt was fully paid with proceeds from the sale of the
engines.
- 6 -
The Company's T1Xpert subsidiary will need substantial additional
funds. There can be no assurance that the Company will be able to generate such
funds. If the Company raises funds from third parties for investment in T1Xpert,
the effect of such outside investment on the current shareholders of the Company
cannot be determined, but it will be dilutive, perhaps substantially.
CONCENTRATION OF CREDIT RISK
As T1Xpert is in the development stage it has no revenue producing
customers. Initially the Company anticipates that it may have only a few
customers. The Company's potential customers will be concentrated in the
financial services industry; however, the Company believes that it competes in
an industry in which many of its potential customers are under regulatory
guidelines which require that such entity maintains a prescribed level of
capital in the operations of its business.
Of the Company's notes receivable balance of $1.8 million, $1.6
million is owed by one customer in the aviation business. Thus, the Company is
directly affected by the well being of this one company and the airline industry
in general. The credit risk associated with this customer is mitigated by the
note being collateralized; however a substantial portion of such collateral is
outside the United States, thereby creating potential difficulties for the
recovery of collateral in case of default.
EMPLOYEES
As of June 30, 2001, the Company had 23 full-time employees, none of
whom were employed under a collective bargaining agreement. Four of these
employees work in administration and 19 of these employees are full-time
employees of T1Xpert. In connection with T1Xpert, the Company's plan is to add
employees, but it may be hampered if there are limitations in the pool of
eligible available personnel in the technology job market in which the Company
operates and by the Company's cash requirements.
ITEM 2. PROPERTIES
The Company's executive offices are located in New York, New York. The
Company occupies this office under a lease which is in the aggregate
approximately 6,000 square feet, for an aggregate monthly rental of
approximately $14,000. The Company is currently also leasing a small one person
office in Syracuse, New York as part of its wind down of discontinued
operations.
ITEM 3. LEGAL PROCEEDINGS
On September 19, 2000, the Company and the other petitioning creditors
reached a settlement agreement with Eastwind Airlines and UM Holding, Inc. This
agreement was approved by the Bankruptcy Court on October 20, 2000. The material
provisions of the final agreement resulted in the Company and the other
petitioning creditors combined receiving consideration worth $4 million in a
package that includes $3 million in cash and a $1 million, 1-year unsecured note
(6% interest rate and maturing in March 2002 with monthly payments of principal
and interest), and the dismissal of CIS Air's lawsuit in North Carolina State
Court against AeroTurbine and AeroTurbine's dismissal of its counterclaims.
After payment of professional fees incurred in reaching this settlement as well
as payments to co-petitioning creditors the Company realized a gain in the
amount of approximately $2.4 million. This gain presumes collection of the note,
which management believes to be likely. As the transaction relates to the
Company's now discontinued operations, the gain is recorded therein.
On July 24, 2000 CIS Air settled its previously reported lawsuit
against Cigna Insurance in exchange for the payment by Cigna to CIS Air's
institutional lender as loss payee, the full value of the policy less the
policy's deductible.
- 7 -
On March 3, 2000, Dallas AeroSpace, Inc. ("Dallas") of Texas filed
suit in the United States District Court for the Southern District of New York
against CIS Air for breach of contract and other causes of action in connection
with the sale of an engine to Dallas in August 1997. Dallas is seeking damages
for the purchase price of the engine in the amount of $1,150,000. CIS Air has
denied any liability to Dallas on any of the causes of action, and has asserted
its defenses. Extensive discovery has been completed and the case is ready for
trial.
On April 24, 2000 CIS Air filed suit in the United States District
Court for the Northern District of New York against American Air Ventures, Inc.
("American Air"), a Florida corporation. The suit seeks reimbursement in
connection with losses incurred in joint venture agreements between the parties
for the purchase and sale of engines. The suit further seeks indemnification
from American Air should CIS Air be found liable to Dallas Aerospace, because
CIS Air purchased the engine sold to Dallas AeroSpace from American Air. The
parties settled their lawsuit under the joint venture agreement but left open
all issues related to the Dallas matter.
On March 7, 2000 CIS Air filed suit against Express One International,
Inc. a Delaware Corporation in the Supreme Court, State of New York, County of
New York. The suits seek damages in an amount no less than $47,500 for engine
rent and maintenance reserve payments and $70,639 for engine repairs. The suit
is in the final discovery phase of litigation.
In July 2001 CIS Air filed suit in State Court of Florida, Broward
County against Aviation Systems International ("ASI") and the TIMCO division of
Aviation Sales Company relating to damage sustained by a CIS aircraft. The
aircraft was parked at TIMCO's maintenance facility when it was struck and
severely damaged by two other aircraft owned by ASI. CIS Air has been reimbursed
for a portion of the damages by its insurance carrier, and is seeking to recover
the $500,000 deductible and other unpaid costs from TIMCO and ASI. No
proceedings have yet occurred in the case.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders
during the fourth quarter of its fiscal year.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades on the Nasdaq Small-Cap Market under
the symbol CISC. The high and low bid information for the last two fiscal years
is as follows:
August 31 November 30 February 28 May 31
---------------- ---------------- ---------------- ----------------
First Quarter Second Quarter Third Quarter Fourth Quarter
---------------- ---------------- ---------------- ----------------
Low High Low High Low High Low High
------ ------ ------ ------ ------ ------ ------ ------
Fiscal year ended
May 31, 2001 $ .63 $ 1.25 $ .75 $ 1.19 $ .94 $ 1.19 $ .50 $ 1.13
Fiscal year ended
May 31, 2000 $ 1.16 $ 1.25 $ 1.16 $ 1.38 $ 1.19 $ 2.75 $ 1.25 $ 2.81
As of June 30, 2001, there were 1,203 record holders of the Company's
Common Stock. No cash dividends have been paid on the Common Stock to date and
the Company does not anticipate paying a dividend in the foreseeable future, as
the Board of Directors intends to retain any earnings for use in the business.
Any future determination of dividends will depend upon any dividend restrictions
applicable to the Company, its financial condition, results of operations and
such other factors as the Board of Directors deems relevant.
- 8 -
The Company announced that it had received a NASDAQ Staff
Determination on May 16, 2001 indicating that it was not in compliance with the
minimum bid price requirements for continued listing set forth in Marketplace
Rule 4310(c)(4), and that its securities were, therefore, subject to delisting.
The Company requested an oral hearing before a NASDAQ Listing Qualifications
Panel to review the Staff Determination. The hearing request automatically
stayed the delisting of the Company's common stock. A hearing before the NASDAQ
Listing Qualifications Panel was scheduled for Thursday, June 14, 2001.
By letter dated June 4, 2001, from the office of the Chief Counsel for
NASDAQ Listing Qualification Hearings, the Company was informed that the hearing
was no longer necessary as the Company has evidenced compliance with the bid
price requirement and all other requirements necessary for continued listing on
the NASDAQ Small Cap Market.
As of August 20, 2001, the Company's stock price had fallen below the
minimum bid requirements and has continued to remain there. There can be no
assurance that the Company will be able to maintain its listing on the NASDAQ
Small Cap Market.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth a summary of selected consolidated
financial data for the Company and its Subsidiaries as of the dates and for each
of the years stated.
This information should be read in conjunction with the Company's
historical consolidated financial statements, the related notes, and the other
information contained herein, including the information set forth in "ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
For the Year Ended May 31,
Period Data 2001 2000 1999 1998 1997
------- ------- ------- ------- -------
(Dollars in thousands except per share amounts)
Total revenues $ 1,272 $ 8,465 $ 8,797 $ 6,347 $16,055
Costs and expenses 7,500 10,854 11,720 7,243 15,764
------- ------- ------- ------- -------
(Loss) income from continuing
operations before provision
(benefit) for income taxes (6,228) (2,389) (2,923) (896) 291
Provision (benefit) for
income taxes - - 5,448 (341) 111
------- ------- ------- ------- -------
(Loss) income from
continuing operations (6,228) (2,389) (8,371) (555) 180
Income (loss) from discontinued
operations, net of taxes 743 (5,703) 1,544 (4,818) 906
------- ------- ------- ------- -------
Net (loss) income $(5,485) $(8,092) $(6,827) $(5,373) $ 1,086
======= ======= ======= ======= =======
Basic and Diluted Net (Loss)
Income Per Common Share:
- -------------------------
(Loss) income from continuing
operations $ (1.00) $ (0.36) $ (1.21) $ (0.08) $ 0.03
Income (loss) from discontinued
operations 0.12 (0.85) 0.22 (0.69) 0.12
------- ------- ------- ------- -------
Net (loss) income $ (0.88) $ (1.21) $ (0.99) $ (0.77) $ 0.15
======= ======= ======= ======= =======
- 9 -
Year Ended May 31,
---------------------------------------------------
Balance Sheet Data 2001 2000 1999 1998 1997
------- ------- ------- ------- -------
(Dollars in thousands)
Total assets $ 8,815 $14,253 $25,218 $39,861 $42,204
Liabilities 1,413 672 3,142 10,901 7,603
Shareholders' equity 7,402 13,581 22,076 28,960 34,601
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion and analysis of the financial condition and
results of operations of the Company should be read in conjunction with the
consolidated financial statements and the notes thereto which appear elsewhere
in this Form 10-K.
RESULTS OF OPERATIONS
CONTINUING OPERATIONS
REVENUES
For the three fiscal years ended May 31, 2001, total revenues
decreased to $1.3 million in fiscal 2001 from $8.5 million in fiscal 2000 and
decreased from $8.8 million in fiscal 1999. Equipment sales decreased to
$633,000 in fiscal 2001 from $4.7 million in fiscal 2000, and from $2.6 million
in fiscal 1999. With the discontinuation of lease originations in August 1999
and sale of a substantial portion of the portfolio in fiscal 2000, equipment
sales are expected to be minimal in fiscal 2002. The significant decrease
(86.5%) in sales during the fiscal year 2001 is due to the sale of the majority
of computer equipment leases for $2.6 million to one lessee at the end of their
lease term during the third and fourth quarters of fiscal 2000. The Company
recorded a gain of $608,000, net of remarketing fees in the amount of $155,000
in fiscal 2000 for sales of previously leased computers. In August 1999, a
substantial portion of the general equipment lease portfolio was sold for $1.7
million.
Equipment rentals and income from direct financing leases decreased to
$110,000 in fiscal 2001 from $3.0 million in fiscal 2000 and from $5.4 million
in fiscal 1999. The decreases in fiscal 2001 and 2000 are primarily attributable
to the sale of the lease portfolio during the fiscal year 2000.
Interest, fees and other income decreased to $529,000 in fiscal 2001
from $750,000 in fiscal 2000, and from $764,000 in fiscal 1999. The decrease is
the result of lower cash balances because of the funding of T1Xpert operations.
COSTS AND EXPENSES
Costs and expenses decreased to $7.5 million in fiscal 2001 from $10.9
million in fiscal 2000 and $11.7 million in fiscal 1999. Cost of sales decreased
to $1.0 million in fiscal 2001 from $3.7 million in fiscal 2000 and $2.1 million
in fiscal 1999. The decrease is a direct result of the 86.5% decrease in sales.
Cost of sales as a percentage of sales for the fiscal years ended May 31, 2001,
2000 and 1999 was 158.8%, 79.6% and 81.7%, respectively. The increase in fiscal
2001 is due to certain losses on the sale of equipment.
Depreciation of rental equipment decreased to $26,000 in fiscal 2001
from $2.4 million in fiscal 2000 and from $4.2 million in fiscal 1999. These
decreases are due to a decrease in the amounts of owned rental equipment as a
result of the sale of the leasing portfolio.
Interest expense decreased to $5,000 in fiscal 2001 from $16,000 in
fiscal 2000 and $127,000 in fiscal 1999. These variances reflect the changes in
the average debt outstanding during the respective periods. In fiscal 1999 $1.6
million of debt was paid off in conjunction with an equipment sale.
- 10 -
Selling, general and administrative expenses increased to $4.9 million
in fiscal 2001 from $4.1 million in fiscal 2000 and from $3.9 million in fiscal
1999. In fiscal 2001 and 2000 the increase in selling, general and
administrative expenses was mainly attributable to T1Xpert's start-up expenses
which amounted to $2,795,000 in fiscal 2001 compared to $1,611,000 in fiscal
2000. These increases were offset by a decrease in general and administrative
expenses in the amount of $322,000 in fiscal 2001 and $1,470,000 in fiscal 2000.
These decreases were principally due to cost containment efforts and staff
reduction between the periods.
As T1Xpert further develops its product, the Company expects that
costs will increase as the Company assembles a marketing and business
development program. Additional costs are expected to be incurred as the Company
develops its products in a production environment and develops additional suites
of its modules. Further unanticipated costs may also arise. General and
administrative costs relating to the Company's prior operations are expected to
decrease, but will be subject to a certain fixed cost of operating the Company
at certain necessary minimum levels. Further, some Company personnel may serve
in functions necessary to T1Xpert.
INCOME TAXES
For the fiscal year ended May 31, 1999, a provision for deferred
income tax expense on income from continuing operations, was recorded in the
amounts of $5,414,000. The realizability of the deferred tax assets is dependent
on the Company generating future taxable earnings, the income taxes on which
would be offsettable by the Company's NOL carryforwards. The NOL carryforwards
resulted from the Company's emergence from bankruptcy pursuant to a chapter 11
plan of reorganization in November 1996. The Company provided a full valuation
allowance for these deferred tax assets as of May 31, 1999, 2000 and 2001 since,
in management's opinion, the future realizability of the deferred tax assets is
uncertain in light of its actual operating results since reorganization. This
action does not impair the availability of the NOL carryforwards to offset any
future taxable earnings. The pre-reorganization NOL carryforwards expire during
the years 2004 to 2010. Utilization of the pre-reorganization NOL carryforwards
is limited to approximately $2 million per year. The Company periodically
reviews the adequacy of the valuation allowance for NOL carryforwards and will
recognize benefits only if a reassessment indicates that it is more likely than
not that the benefits will be realized.
DISCONTINUED OPERATIONS
In July 2000, the Company placed its commercial aircraft engine
portfolio up for competitive bid with plans to exit the aviation business. The
Company accounts for the aviation business as a discontinued operation. The
Company recorded a provision of $4,071,000 in the year ended May 31, 2000,
relative to the disposal of CIS Air assets, including $2,679,000 representing
estimated losses on sale of equipment, and other revenues and charges related to
the discontinuance of the business unit.
During the year ended May 31, 2001, in the opinion of management,
there was further price erosion in the aviation industry relating to assets
carried by CIS Air, and management recorded an additional provision relative to
the disposal of CIS Air's assets in the amount of $2.3 million, which includes
an inventory valuation allowance of $735,276 and other revenue and charges
related to the discontinuance of the business unit. As a result of the
settlement of legal proceedings against Eastwind Airlines and UM Holding Inc.
(the "Eastwind settlement"), a gain of $3.0 million was recorded by CIS Air.
This gain is attributable to activities by CIS Air in connection with its
leasing of engines and aircraft and is accordingly shown in the discontinued
operations section of CIS Air's financial statements.
- 11 -
A summary of the results of operations of the discontinued CIS Air
business unit follows (in thousands):
For the Year Ended May 31,
-----------------------------
2001 2000 1999
------- ------- -------
Revenues $ 3,005 $ 4,135 $ 8,630
Costs and expenses 2,262 5,767 8,172
------- ------- -------
Income (loss) from discontinued operations 743 (1,632) 458
Loss on disposal of discontinued operations - (4,071) -
------- ------- -------
Income (loss) before provision for income taxes 743 (5,703) 458
Provision for income taxes - - -
------- ------- -------
Net income (loss) from discontinued operations $ 743 $(5,703) $ 458
======= ======= =======
In May 1998, the Company discontinued and liquidated its Laser Access
laser printing business.
A summary of the results of operations of the discontinued Laser
Access Business Unit follows (in thousands):
Year Ended
May 31, 1999
------------
Revenues $ -
Costs and expenses -
-------
Loss from discontinued operations -
Gain on disposal of discontinued operations 1,086
-------
Income before benefit for income taxes 1,086
Benefit for income taxes -
-------
Net income from discontinued operations $ 1,086
=======
EQUIPMENT LEASING BUSINESS
In August 1999, the Company's subsidiary had sold a substantial
portion of its remaining lease portfolio and ceased entering into new equipment
leases. The Company has outsourced the administration of its remaining lease
portfolio, the termination dates of which exceed one year. In October 2000, the
Company sold all but one of the remaining equipment leases to the Administrator.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operations for the year ended May 31, 2001 was $2.2
million as compared to $5.6 million for the year ended May 31, 2000, and $1.5
million was provided by operations for the year ended May 31, 1999; net cash
used in continuing operations for the year ended May 31, 2001 was $3.0 million
as compared to net cash used in continuing operations in the amount of $3.4
million for the year ended May 31, 2000, and cash provided by continuing
operations of $5.6 million for the year ended May 31, 1999. Net cash provided by
discontinued operations for the year ended May 31, 2001 was $717,000, as
compared to net cash used in discontinued operations for the years ended May 31,
2000 and 1999, of $2.2 million and $4.1 million, respectively. During the year
ended May 31, 2001, the Company received proceeds, net of legal and other costs,
of $3.0 million from the settlement of the Eastwind claim.
- 12 -
Net cash provided by investing activities for the year ended May 31,
2001 was $1.3 million compared to $3.8 million and $4.4 million for the years
ended May 31, 2000 and 1999. The Company's investment in mortgage participation
notes generated $517,000 in proceeds during the year ended May 31, 2001, as
compared to disbursements of $336,000 from mortgage participation notes for the
year ended May 31, 2000 and proceeds of $850,000 from mortgage participation
notes for the year ended May 31, 1999.
As of May 31, 2001, the Company had $1.5 million in cash and cash
equivalents, as compared to $3.4 million at May 31, 2000. In August 1999
proceeds of $2.9 million were received by CIS in connection with the sale of
leased equipment. The Company established the CIS Air Loan Facility with a
financing institution to provide lease and inventory financing for aircraft
engines for its operating subsidiary CIS Air, in the amount of $10,000,000. The
facility had a three-year term that expired in December 2000 and permitted
borrowing equal to a percentage of the appraised value of the aircraft engines
financed. The CIS Air Loan Facility bears interest at prime plus 1/4%. The
facility was not renewed, but repayment had been extended beyond the original
expiration date. Substantially all of the assets of CIS Air were pledged as
collateral for the loan. At May 31, 2001, $765,542 of this facility was being
utilized and was paid off in June 2001.
On November 20, 2000, the Company completed a repurchase of 607,158
shares of outstanding common stock from The Chase Manhattan Bank and its wholly
owned subsidiaries. The reacquired shares represented 9.30% of the 6,527,344
shares then outstanding. The shares were purchased at $ .9882 per share, which
was less than the market price.
On May 27, 1997, the Company announced that its Board of Directors had
authorized the expenditure of up to $500,000 for the repurchase of its common
stock. The Company commenced a voluntary odd lot repurchase program through June
30, 1997, which was extended through July 31, 1997. Shareholders owning less
than 100 shares of the Company's common stock were offered the opportunity to
sell all their shares at the closing price of the common stock on the Nasdaq
Small-Cap Market on May 23, 1997, which was $2.25 per share. Approximately
20,000 shares were repurchased by the Company at an aggregate cost of
approximately $45,000. Subsequent to the odd lot repurchase program, the Company
repurchased from time to time additional shares of its common stock up to the
balance of $500,000 remaining after the odd lot program. In February 1999, the
Company announced that its Board of Directors had authorized the expenditure of
an additional $500,000 for the repurchase of its common stock. The Company will
hold all repurchased shares of common stock in its treasury. Subject to approval
from the Board of Directors, the Company may repurchase the additional shares at
prevailing prices in the open market or in negotiated or other transactions. As
of May 31, 2001, approximately 1,217,800 shares (including the purchase of the
Chase shares) had been repurchased by the Company at an aggregate cost of
approximately $1,560,000.
The Company believes it has sufficient cash on hand to meet current
operating needs until the projected development of its initial products through
completion of the beta stage, which it currently projects to be at the end of
the first calendar quarter of 2002. The successful and timely completion of the
beta stage is dependent, among other items, upon the Company successfully
executing the Company's operating plan, which can not be assured.
The Company anticipates that, to develop and operate past the beta
stage, it will need substantial additional funds. There can be no assurance that
the Company will be able to generate such funds. If the Company raises funds
from third parties for investment in T1Xpert, the effect of such outside
investment on the current shareholders of the Company cannot be determined, but
it will be dilutive, perhaps substantially, to them. In the interim, the Company
has allocated all its available resources to continue funding T1Xpert. This
funding may result in the Company selling assets at below market prices in order
to raise funds. Without additional funding there can be no assurance that the
Company will be able to meet its financial needs after it passes the beta stage
of development.
The Company does not anticipate entering into financing arrangements
with financial institutions, involving collateralizing and/or leveraging the
Company's assets.
- 13 -
NEW ACCOUNTING PRONOUNCEMENT, ISSUED BUT NOT YET EFFECTIVE
In July 2001, the Financial Accounting Standards Board issued FASB
Statements Nos. 141 and 142 (SFAS 141 and SFAS 142), "Business Combinations" and
"Goodwill and Other Intangible Assets." SFAS 141 replaces Accounting Principles
Board Opinion No. 16 (APB 16), "Business Combination," and eliminates
pooling-of-interests accounting prospectively. It also provides guidance on
purchase accounting related to the recognition of intangible assets and
accounting for negative goodwill. SFAS 141 changes the accounting for goodwill
from an amortization method to an impairment-only approach. Under SFAS 142,
goodwill will be tested annually and whenever events or circumstances occur
indicating that goodwill might be impaired. SFAS 141 and SFAS 142 are effective
for all business combinations completed after June 30, 2001. Upon adoption of
SFAS 142, amortization of goodwill recorded for business combinations
consummated prior to July 1, 2001 will cease, and intangible assets acquired
prior to July 1, 2001 that do not meet the criteria for recognition under SFAS
141 will be reclassified to goodwill. Companies are required to adopt SFAS 142
for fiscal years beginning after December 15, 2001. In connection with the
adoption of SFAS 142, companies will be required to perform a transitional
goodwill impairment assessment. The Company believes that the adoption of SFAS
No. 142 beginning on January 1, 2002 will have no effect on the Company's
financial position and results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK DISCLOSURES
The Company is exposed to risks associated with interest rate changes.
The Company does not foresee any significant changes in its exposure to
fluctuations in interest rates in the near future. At May 31, 2001, the
Company's total outstanding debt consisted of a secured, revolving loan facility
in the amount of $765,542 which was paid off in June 2001. The facility has a
floating interest rate of prime plus 1/4%.
- 14 -
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
Report of Independent Accountants 16
Financial Statements:
Consolidated Balance Sheets
May 31, 2001 and 2000 17
Consolidated Statements of Operations
Years ended May 31, 2001, 2000 and 1999 18
Consolidated Statements of Shareholders' Equity
Years Ended May 31, 2001, 2000 and 1999 19
Consolidated Statements of Cash Flows
Years Ended May 31, 2001, 2000 and 1999 20-21
Notes to the Consolidated Financial Statements 22-35
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts 36
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
- 15 -
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Continental Information Systems Corporation:
In our opinion, the consolidated financial statements listed in the accompanying
index on page 17 present fairly, in all material respects, the consolidated
financial position of Continental Information Systems Corporation and its
subsidiaries (the "Company") at May 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
May 31, 2001 in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the financial statement
schedule listed in the accompanying index presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and the
financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company is in the initial stages of developing its
securities processing software business, the product, T1Xpert, has not yet been
released or tested for functionality. There is currently no demonstrated market
for this product and the Company does not have any contracted clients which
raises substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
PRICE WATERHOUSECOOPERS LLP
New York, New York
August 17, 2001
- 16 -
CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
In Thousands (Except Share Data)
May 31, 2001 and 2000
- --------------------------------------------------------------------------------
2001 2000
-------- --------
ASSETS:
Cash and cash equivalents $ 1,545 $ 3,382
Accounts receivable, net of allowance for doubtful accounts of
$108 at May 31, 2000 (Note 4) 5 1,095
Notes receivable, net of allowance for doubtful accounts of
$1,000 in 2001 and 2000 1,811 2,567
Investment in mortgage participation notes 201 1,108
Real estate held for sale, net (Note 5) 367 -
Restricted cash 900 900
Net investment in direct financing leases (Note 6) - 1,092
Net rental equipment (Note 7) 20 96
Property, plant and equipment, net (Note 8) 177 260
Other assets 239 229
Net assets of discontinued operations (Note 3) 3,550 3,524
-------- --------
Total assets $ 8,815 $ 14,253
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Accounts payable and other liabilities $ 513 $ 509
Discounted lease rental borrowings - 163
Loan guarantee 900 -
-------- --------
Total liabilities 1,413 672
-------- --------
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value; authorized 20,000,000 shares,
at May 31, 2001 and 2000; issued and outstanding 7,101,668
shares at May 31, 2001 and 2000 (Notes 9 and 10) 71 71
Additional paid-in capital 35,129 35,129
Accumulated deficit (26,238) (20,753)
-------- --------
8,962 14,447
Treasury stock, at cost: 1,217,782 shares at May 31, 2001
and 525,424 shares at May 31, 2000 (Note 9) (1,560) (866)
-------- --------
Total shareholders' equity 7,402 13,581
-------- --------
Total liabilities and shareholders' equity $ 8,815 $ 14,253
======== ========
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
- 17 -
CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
In Thousands (Except Per Share Data)
Years Ended May 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
2001 2000 1999
------- ------- -------
REVENUES:
Equipment sales $ 633 $ 4,671 $ 2,620
Equipment rentals 76 2,747 4,804
Income from direct financing leases 34 297 609
Interest, fees and other income 529 750 764
------- ------- -------
1,272 8,465 8,797
------- ------- -------
COSTS AND EXPENSES:
Cost of sales 1,005 3,718 2,140
Depreciation of rental equipment 26 2,445 4,189
Interest expense 5 16 127
Other operating expenses 189 612 1,324
Loss on investments 1,450 - -
Research and development 2,795 1,611 -
Selling, general and administrative expenses 2,030 2,452 3,940
------- ------- -------
7,500 10,854 11,720
------- ------- -------
Loss from continuing operations before
provision for income taxes (6,228) (2,389) (2,923)
Provision for income taxes (Note 11) - - 5,448
------- ------- -------
Loss from continuing operations (6,228) (2,389) (8,371)
------- ------- -------
Discontinued operations (Note 3):
(Loss) income from discontinued operations - (1,632) 458
Gain (loss) on disposal of discontinued
operations, net of income taxes 743 (4,071) 1,086
------- ------- -------
743 (5,703) 1,544
------- ------- -------
Net loss $(5,485) $(8,092) $(6,827)
======= ======= =======
Basic and diluted net loss per share (Note 10):
Loss from continuing operations $ (1.00) $ (0.36) $ (1.21)
Income (loss) from discontinued operations 0.12 (0.85) 0.22
------- ------- -------
Net loss per share $ (0.88) $ (1.21) $ (0.99)
======= ======= =======
Weighted average number of shares
of common stock outstanding 6,222 6,696 6,922
===== ===== =====
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
- 18 -
CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
In Thousands (Except Number of Shares)
Years Ended May 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
Common Additional Treasury
Shares Common Paid-In Accumulated Treasury Common
Issued Stock Capital Deficit Stock Shares
--------- ------ ------- ----------- -------- ---------
Balance - May 31, 1998 7,101,668 $ 71 $35,129 $ (5,834) $ 406 (162,608)
Net loss - - - (6,827) - -
Acquisition of
treasury shares - - - - 57 (54,216)
--------- ---- ------- -------- ------ ---------
Balance - May 31, 1999 7,101,668 71 35,129 (12,661) 463 (216,824)
Net loss - - - (8,092) - -
Acquisition of treasury
shares - - - - 403 (308,600)
--------- ---- ------- -------- ------ ---------
Balance - May 31, 2000 7,101,668 71 35,129 (20,753) 866 (525,424)
Net loss - - - (5,485) - -
Acquisition of treasury
shares - - - - 694 (692,358)
--------- ---- ------- -------- ------ ---------
Balance - May 31, 2001 7,101,668 $ 71 $35,129 $(26,238) $1,560 1,217,782
========= ==== ======= ======== ====== =========
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
- 19 -
CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
In Thousands
Years Ended May 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
2001 2000 1999
------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(5,485) $(8,092) $(6,827)
Less: gain (loss) from discontinued operations 743 (5,703) 1,544
------- ------- -------
Loss from continuing operations (6,228) (2,389) (8,371)
------- ------- -------
Adjustments to reconcile loss from continuing
operations to net cash provided by (used
in) operating activities:
(Gain) loss on sale of equipment 372 (953) (480)
Write off of equipment - - 719
Loss on investments 1,450 - -
Depreciation and amortization expense 130 2,850 4,288
Effect on cash flows of changes in:
Net accounts receivable 1,090 (1,002) 243
Notes receivable 328 638 3,665
Inventory - - 15
Other assets (10) (241) 3,369
Accounts payable and other liabilities 4 (48) (61)
Deferred lease revenue - (2,378) (3,126)
Deferred tax assets - - 5,414
Other - 123 (28)
------- ------- -------
3,364 (1,011) 14,018
------- ------- -------
Net cash (used in) provided by
continuing operations (2,964) (3,400) 5,647
Net cash provided by (used in)
discontinued operations 717 (2,220) (4,123)
------- ------- -------
Net cash (used in) provided by
operating activities (2,247) (5,620) 1,524
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment 634 4,671 3,042
Purchase of rental equipment - (158) (494)
Purchase of property and equipment (15) (10) (76)
Collections of rentals on direct financing leases,
net of amortization of unearned income 131 566 1,087
Proceeds of (investment in) mortgage
participation notes 417 (336) 850
Restricted cash - (900) -
------- ------- -------
Net cash provided by investing
activities 1,167 3,833 4,409
------- ------- -------
- --------------------------------------------------------------------------------
(Continued)
- 20 -
CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
In Thousands
Years Ended May 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
2001 2000 1999
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from lease, bank and institution financings $ - $ 205 $ -
Payments on lease, bank and institution financings (163) (249) (2,387)
Purchase of treasury stock (694) (403) (57)
------- ------- -------
Net cash used in financing activities (857) (447) (2,444)
Net (decrease) increase in cash and cash
equivalents (1,837) (2,234) 3,489
CASH AND CASH EQUIVALENTS:
Beginning of year 3,382 5,616 2,127
------- ------- -------
End of year $ 1,545 $ 3,382 $ 5,616
======= ======= =======
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest $ 5 $ 16 $ 127
======= ======= =======
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
- 21 -
CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
------------------------------------------
Continental Information Systems Corporation and its Subsidiaries (the
"Company") was a specialized financial services company that engaged in the
leasing, sales and management of, among others, commercial aircraft and engines
and other financing activities, including commercial real estate financing.
The Company has changed its focus and is in the early stages of
developing software for the securities industry to deal with the processing of
securities transactions in a real time environment. Management intends that the
system, an Internet-enabled electronic securities processing software platform,
will make use of state of the art software using proprietary work process
control methods.
Consolidation
-------------
The accompanying consolidated financial statements include the accounts
of Continental Information Systems Corporation and its wholly owned
subsidiaries. All intercompany accounts have been eliminated in consolidation.
Cash and Cash Equivalents
-------------------------
Cash and cash equivalents include checking and money market accounts and
short term commercial paper with financial institutions having original
maturities of 90 days or less.
Restricted Cash
---------------
Restricted cash comprises funds on deposit for two letters of credit
hypothecated to one United States bank and one Israeli bank which guarantee a
loan made to an unrelated high technology company. In connection with this loan
guarantee, the Company received warrants to purchase stock in the high
technology company. The Company has valued these warrants at zero as there are
no reasonable means to estimate value and there is presently no expectation that
the high technology company will successfully complete further rounds of
financing. During the year ended May 31, 2001, the Company provided a liability
against the full value of the restricted cash. In July 2001, the letters of
credit were called and the restricted cash was used to satisfy such demand.
Accordingly, at May 31, 2001, the Company recorded a loss in the amount of such
guarantee payments.
Concentration of Credit Risk
----------------------------
T1Xpert is in the development stage. Initially the Company anticipates
that it may have only a few customers in the securities industry.
Of the Company's notes receivable balance, $2.6 million is owed by one
customer in the aviation business. Thus, the Company is directly affected by the
financial condition of this company and the airline industry in general. The
credit risk associated with this customer is mitigated by the note being
collateralized; however a substantial portion of such collateral is outside the
United States, thereby creating potential difficulties of recovery of collateral
in case of default. The note bears interest at 6% and will mature in 2005.
Investment in Mortgage Participation Notes
------------------------------------------
Investment in mortgage participation notes represents investments in
high-yield, short-term commercial real estate transactions and are carried at
the lower of cost or market. Interest income on the notes is recorded monthly
using the weighted average estimated yields on these investments.
- 22 -
CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
Lease Accounting Policies
-------------------------
Statement of Financial Accounting Standards No. 13 requires that a lessor
account for each lease by the direct financing method, sales-type method or
operating method. At May 31, 2001, the Company had primarily direct financing
and operating leases; the dollar value and number of sales-type leases are
considered immaterial. Net investment in direct financing leases consists of the
future minimum lease payments plus unguaranteed residual less unearned income
net of unamortized initial direct costs. At the end of the lease term, the
recorded residual value of equipment under direct financing leases is
reclassified to rental equipment and is depreciated over its estimated remaining
useful life if the related asset is released.
Unearned income is amortized to lease income by the interest method using
a constant periodic rate over the lease term.
Rental equipment consists of equipment under operating leases. Rental
equipment is depreciated on a straight-line basis to their estimated residual
values over the remaining useful lives of such equipment. Operating lease
revenues consist of the contractual lease payments which are recognized on a
straight-line basis over the lease term. Costs associated with operating leases
principally consist of depreciation of the equipment.
The Company makes adjustments to the carrying value of leased assets, if
necessary, when market conditions have resulted in values that are below net
book value. At the time assets are disposed of, cost and accumulated
depreciation as to each investment are removed from the accounts and the
difference, net of proceeds, is recognized as a gain or loss.
Deferred Commissions and Initial Direct Costs
---------------------------------------------
Commissions and other initial direct costs related to lease transactions
are capitalized as a component of the corresponding investment in direct
financing leases or rental equipment and amortized over the estimated average
lease term as an adjustment of yield. Costs relating to direct financing leases
were amortized using the interest method and costs relating to operating lease
equipment are amortized using the straight-line method.
Write Downs
-----------
The Company wrote off a note receivable from a wireless technology
company of approximately $426,000 due to the investee's significant cash flow
deficiencies.
Property, Plant and Equipment
-----------------------------
Property, plant and equipment are recorded at cost and are being
depreciated using the straight-line method over the estimated useful lives of
such assets. Leasehold improvements are depreciated over three to seven years
being the lesser of the lease term or useful life of the asset. Computer
equipment and software is depreciated over three to five years and furniture,
fixtures and office equipment over seven years and aircraft engines over seven
years from the date of purchase.
- 23 -
CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
Income Taxes
------------
The Company accounts for income taxes under the asset and liability
method required by Statement of Financial Accounting Standards No. 109 ("SFAS
109"), Accounting for Income Taxes. SFAS 109 requires the recording of deferred
tax assets and liabilities for the future tax effects of temporary differences
between the bases of all assets and liabilities for financial reporting purposes
and tax purposes. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. The Company
periodically reviews the adequacy of the valuation allowance and will recognize
benefits only if reassessment indicates that it is more likely than not that the
benefits will be realized. A valuation allowance for the full amount of deferred
tax assets was provided for in income tax expense in 2001, 2000 and 1999.
Net Income (Loss) Per Share
---------------------------
EARNINGS PER SHARE, is calculated in accordance with Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), Earnings Per Share, which
specifies standards for computing and disclosing net income (loss) per share.
Basic and diluted net income (loss) per share for the fiscal years ended May 31,
2001, 2000 and 1999, was computed based on the weighted average number of shares
of common stock outstanding during the periods. As of May 31, 2001, the Company
had issued and outstanding options to purchase 222,616 shares of common stock
(see Note 10). The effect of these options is antidilutive and was not included
in the computation of diluted net income (loss) per share.
Estimates
---------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ materially
from those estimates. The most significant estimates relate to the carrying
value of discontinued operations and notes receivable.
Reclassifications
-----------------
The financial statements have been reclassified to conform to the current
period presentation.
Research and Development Expenditures
-------------------------------------
Research and development expenditures in connection with the development
of the Internet-enabled electronic securities processing software platform are
expensed as incurred. When the Company enters a production environment and
technological feasibility is achieved future capital costs will be capitalized
in accordance with FASB Statement No. 86 "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed".
2. T1Xpert Corp.
-------------
The Company has changed its focus to the development and commercializing
of an Internet-enabled electronic securities processing software platform which
would use proprietary technology and which would be adapted to changes in the
securities industry including operational changes related to increased volume,
the ability to effect trades through the Internet, Electronic Crossing Networks,
decimalization, expanded trading hours, various rule changes and the shift from
settling trades in three days to settling trades in one day. This latter shift
is commonly referred to as "T+1". The newly created subsidiary that was formed
to engage in this line of business, CIS Portal Corporation, changed its name to
T1Xpert.com Corp. ("T1Xpert.com") to more properly reflect its business focus.
On April 5, 2001, the name T1Xpert.com Corp. was changed to T1Xpert Corp.
("T1Xpert").
- 24 -
CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
There can be no assurance, however, that the Company's product goals will
be met or, if they are, that the resulting products will meet current
expectations. In addition, there is currently no established market for these
services and there can be no assurance that the Company will be able to create a
market for its products.
T1Xpert is developing a suite of middle and back office brokerage products
and solutions. The products and solutions are being designed to serve as a
software platform for risk reduction for the next generation of real time
systems and preparation for T + 1. The Company's product development strategy is
to develop T1Xpert incrementally, with a series of independent products that, in
total, constitute a full real-time straight through transaction processing,
balancing, and risk-management system. Each product will build on the functions
and infrastructure of the previous products. T1Xpert has expended approximately
$4.5 million from its inception in August 1999 through May 2001. The Company
completed alpha testing (i.e., internal testing without guidance from a
potential client/licensee) of the first component of its Real-Time Middle Office
Balancing System, the P&S module, in March 2001. Beta, or testing at a potential
client/licensee with its guidance, infrastructure build-out began in July 2001.
The successful and timely completion of the beta stage is dependent,
among other items, upon the Company successfully executing the Company's
operating plan, which can not be assured.
Risks and Uncertainties
-----------------------
The Company anticipates that, to develop and operate past the beta
stage, it will need substantial additional funds to meet its financial needs.
There can be no assurance that the Company will be able to generate such funds
after June 2002. If the Company raises funds from third parties for investment
in T1Xpert, the effect of such outside investment on the current shareholders of
the Company cannot be determined, but it may be dilutive, perhaps substantially,
to them. In the interim, the Company has allocated all its available resources
to continue funding T1Xpert. This may result in the Company selling assets at
below market prices in order to raise funds. Without additional funding there
can be no assurance that the Company will be able to meet its financial needs
after it passes the beta stage of development.
3. Discontinued Operations
-----------------------
On July 14, 2000, the Company announced that it was offering for sale its
commercial aircraft engine portfolio by competitive bid, that upon completion of
the sale it would exit the aviation business, and that it would account for and
report the Air Group Business as a discontinued operation. In the quarter ended
May 31, 2000, the Company wrote down CIS Air's assets by $4,071,000, including
$2,679,000 representing estimated losses on sale of equipment, and other
revenues and charges related to the discontinuance of the business unit.
During the year ended May 31, 2001, in the opinion of management, there
has been further price erosion in the aviation industry relating to assets
carried by CIS Air and management has recorded an additional provision relative
to the disposal of CIS Air's assets in the amount of $2.2 million, which
includes an inventory valuation allowance of $735,276. As a result of the
settlement of legal proceedings against Eastwind Airlines and UM Holding Inc.
(the "Eastwind settlement"), a gain of $3.0 million was recorded by CIS Air.
This gain is shown in the discontinued operations section of the Company's
financial statements.
The Company had a revolving loan agreement (the "CIS Air Loan facility")
with an institution to provide lease and inventory financing for aircraft
engines for CIS Air, in the amount of $10,000,000. The facility had a three-year
term and permitted borrowings equal to a percentage of the appraised value of
the aircraft engines financed. Substantially all of the assets of CIS Air were
pledged as collateral for the Loan. At May 31, 2001, $765,542 of this facility
was being utilized. The CIS Air Loan facility bore interest at prime plus 1/4%
(7.25%, 9.75% and 8.0% at May 31, 2001, 2000, and 1999 respectively) and expired
in December 2000. The Company arranged for several extensions of the facility so
as to allow sufficient time for an orderly paydown. The Company paid interest
related to this facility of $199,516, $619,000 and $513,000 in fiscal 2001, 2000
and 1999, respectively. Proceeds of sale were used to permanently pay down the
loan. On June 21, 2001, the facility was completely repaid.
- 25 -
CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
The Consolidated Balance Sheet and Statements of Operations for all
periods presented have been reclassified to report the results of discontinued
operations separately from those of continuing operations. The income (loss)
from and net assets of discontinued operations reflected on the accompanying
Consolidated Financial Statements consist of the following (in thousands):
Year Ended May 31,
--------------------------------------
2001 2000 1999
-------- -------- --------
Revenues $ - $ 4,135 $ 8,630
Costs and expenses - 5,767 8,172
-------- -------- --------
Income (loss) from discontinued operations - (1,632) 458
(1) (2)
(Loss) gain on disposal of discontinued operations 743 (4,071) 1,086
-------- -------- --------
Income (loss) before provision for income
taxes 743 (5,703) 1,544
Provision for income taxes - - -
-------- -------- --------
Net income (loss) from discontinued
operations $ 743 $ (5,703) $ 1,544
======== ======== ========
<FN>
(1) The principal components of this balance are $2,679 representing loss on
the sale of remaining equipment and $1,257 representing expenses during the
wind-down.
(2) Relative to Laser Access discontinuance in 1998.
</FN>
May 31,
-----------------------
2001 2000
-------- --------
Assets:
Cash and cash equivalents $ 3,066 $ 336
Accounts receivable 660 991
Inventory, net 745 5,254
Net investment in direct financing leases 250 907
Rental equipment - 5,663
Other assets 119 4
-------- --------
Total assets 4,840 13,155
-------- --------
Liabilities:
Accounts payable and costs of discontinuance 524 2,229
Other liabilities - 483
Note payable to institution 766 6,919
-------- --------
Total liabilities 1,290 9,631
-------- --------
Net assets of discontinued operations $ 3,550 $ 3,524
======== ========
In June 2001 a portion of the Company's inventory portfolio was sold.
- 26 -
CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
4. Accounts Receivable
-------------------
At May 31, 2000, accounts receivable include $983,000 due from a lessee
pursuant to the sale of computer leases in the fourth quarter. As of May 31,
2001, a significant portion of this receivable was collected and the remaining
balance of $108,000 was written off.
5. Real Estate Held for Sale
-------------------------
On July 3, 1997, the Company announced that it had entered into a Joint
Investment Agreement with Emmes Investment Management Co. LLC to provide up to
$8 million in high-yield, short-term financing for commercial real estate
transactions. At May 31, 2001, the Company's sole remaining investment in such
transactions was approximately $367,000, net of a reserve for loss on investment
of $122,400. During the year ended May 31, 2001, the underlying property was
foreclosed and is therefore included in real estate held for sale on the
accompanying balance sheet.
6. Net Investment In Direct Financing Leases (See also Note 9)
-----------------------------------------
The components of the net investment in direct financing leases as of May
31 are as follows (in thousands):
2001 2000
-------- --------
Minimum lease payments receivable $ 25 $ 1,259
Initial direct costs - 22
Estimated unguaranteed residual values - 93
Less:
Unearned income (4) (227)
Write off (21) (55)
-------- --------
Net investment in direct financing
leases $ - $ 1,092
======== ========
The future minimum lease payment to be received under direct financing
leases for the fiscal year ending May 31 is as follows (in thousands):
Minimum
Fiscal Year Ending Lease
May 31, Payment
------------------ -------
2002 $ 25
=======
- 27 -
CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
7. Rental Equipment (See also Note 9)
----------------
Rental equipment consists of the following as of May 31 (in thousands):
2001 2000
-------- --------
Computer equipment $ - $ 196
Telecommunication equipment - 122
Printing equipment 84 275
-------- --------
84 593
Less accumulated depreciation (64) (497)
-------- --------
$ 20 $ 96
======== ========
Rental equipment in 1999 included $4.1 million of computer equipment
under two-year, prepaid leases. The leases expired in April 2000. The underlying
equipment was sold to the lessee for $2.2 million as of May 31, 2000. The
Company recognized a gain thereunder of approximately $608,000.
The future minimum lease payment to be received under operating leases
for the fiscal year ending May 31 is as follows (in thousands):
Minimum
Fiscal Year Ending Lease
May 31, Payment
------------------ -------
2002 $ 30
=======
8. Property, Plant and Equipment
-----------------------------
Property, plant and equipment consist of the following as of May 31 (in
thousands):
2001 2000
-------- --------
Leasehold improvements $ 129 $ 129
Computer equipment and software 355 344
Furniture, fixtures and office equipment 19 15
-------- --------
503 488
Less accumulated depreciation (326) (228)
-------- --------
$ 177 $ 260
======== ========
9. Common Stock
------------
Each share of common stock entitles the holder to one vote on all matters
submitted to a vote of shareholders. The Company does not anticipate the payment
of dividends on the common stock for the foreseeable future.
On November 20, 2000, the Company completed a repurchase of 607,158
shares of outstanding common stock from The Chase Manhattan Bank and its wholly
owned subsidiaries. The reacquired shares represented 9.30% of the 6,527,344
shares outstanding. The shares were purchased at $ .9882 per share, which was
less than the market price.
- 28 -
CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
The repurchase was approved by the Company's Board of Directors at a
regularly scheduled meeting held on the same date.
Pursuant to an odd lot repurchase program established by the Company in
prior years, the Company repurchased from time to time additional shares of its
common stock up to a balance of $500,000 remaining after the odd lot program. In
February 1999, the Company announced that its Board of Directors had authorized
the expenditure of an additional $500,000 for the repurchase of its common
stock. As of May 31, 2001, approximately 1,217,800 shares (including the Chase
stock) had been repurchased by the Company at an aggregate cost of approximately
$1,560,000. Subject to approval from the Board of Directors, the Company may
repurchase the additional shares at prevailing prices in the open market or in
negotiated or other transactions. The Company will hold all repurchased shares
of common stock in its treasury.
10. Stock Option Plan
-----------------
In 1995, the Board of Directors adopted and the stockholders approved the
Continental Information Systems Corporation 1995 Stock Compensation Plan (the
"1995 Plan"). The 1995 Plan provides for the issuance of options covering up to
1,000,000 shares of common stock and stock grants of up to 500,000 shares of
common stock to non-employee directors of the Company and, at the discretion of
the Compensation Committee or the Board of Directors, employees of and
independent contractors and consultants to the Company. Options granted to
non-employee directors of the Company in any year become exercisable at the next
annual stockholders' meeting while those granted to employees of and independent
contractors and consultants to the Company are subject to vesting periods
determined by the Compensation Committee or the Board of Directors. Options
granted to employees in fiscal 1999 become exercisable in installments of 33-1/3
percent at the grant date and at each subsequent fiscal year end except for
options granted to two executive officers which become fully exercisable one
year from the grant date. The Company applies APB Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations in accounting for
the 1995 Plan. Accordingly, no compensation cost has been charged against income
for the stock option plan. Had compensation cost for the 1995 Plan been
determined based on the fair value at the grant dates for awards under the Plan,
consistent with the requirements of FASB Statement No. 123, "Accounting for
Stock-Based Compensation," the Company's net income (loss) and net income (loss)
per share would have reflected the pro forma amounts indicated below:
(In thousands, except per share amounts)
2001 2000 1999
-------- -------- --------
Net loss - as reported $ (5,485) $ (8,092) $ (6,827)
- pro forma $ (5,507) $ (8,174) $ (6,965)
Basic and diluted
net loss per share - as reported $ (.88) $ (1.21) $ (.99)
- pro forma $ (.89) $ (1.22) $ (1.01)
The fair value of each stock option grant has been estimated on the date
of each grant using the Black-Scholes option-pricing model with the following
weighted average assumptions:
2001 2000 1999
-------- -------- --------
Risk-free interest rate 5.4% 5.4% 4.3%
Expected life (months) 48 60 50
Expected volatility 68% 58% 44%
Expected dividend yield - - -
- 29 -
CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
The weighted-average grant date fair values of options granted during
fiscal 2001, 2000 and 1999 were $.58, $.61 and $.67 per share, respectively.
A summary of the status of the 1995 Plan as of May 31, 1999, 2000 and
2001, and changes during the years ending on those dates is presented below:
Weighted
Average
Exercise
Number of Price Per
Options Option
--------- ---------
Outstanding at
May 31, 1998 (234,002 exercisable) 366,342 $ 2.22
Granted 72,000 $ 1.92
Exercised - -
Forfeited/expired (16,668) $ 1.97
-------- ------
Outstanding at
May 31, 1999 (298,008 exercisable) 421,674 $ 2.18
Granted 13,280 $ 1.40
Exercised - -
Forfeited/expired (119,671) $ 2.10
-------- ------
Outstanding at
May 31, 2000 (302,003 exercisable) 315,283 $ 2.18
Granted 15,000 $ 1.06
Exercised
Forfeited/expired (107,667) $ 2.19
-------- ------
Outstanding at
May 31, 2001 (207,616 exercisable) 222,616 $ 2.09
======== ======
The following table summarizes information about stock options
outstanding at May 31, 2001:
Options Outstanding Options Exercisable
---------------------------------- -------------------
Weighted-
Average
Remaining
Exercise Number of Contractual Exercise Number of Exercise
Prices Options Life Price Options Prices
- -------- --------- ----------- -------- --------- --------
$ 3.00 9,337 1.4 $ 3.00 9,337 $ 3.00
2.38 66,666 0.6 2.38 66,666 2.38
2.25 50,000 0.6 2.25 50,000 2.25
2.00 50,000 1.4 2.00 50,000 2.00
1.97 3,333 0.0 1.97 3,333 1.97
1.84 6,000 0.4 1.84 6,000 1.84
1.59 9,000 2.4 1.59 9,000 1.59
1.56 4,280 3.7 1.56 4,280 1.56
1.32 9,000 3.4 1.32 9,000 1.32
1.0625 15,000 4.4 1.0625 - 1.0625
------- -------
Total 222,616 207,616
======= =======
- 30 -
CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
In 2000, the Board of Directors of T1Xpert adopted the T1Xpert Corp.
Stock Compensation Plan (the "T1X 2000 Plan"). The T1X 2000 Plan provides for
the issuance of stock options covering up to 2,000,000 shares of common stock to
employees and advisory board members of T1Xpert. Options granted typically do
not become exercisable until at least one year from the date of commencement of
employment and vest ratably over periods of time as provided at the discretion
of the Board of T1Xpert. Option grants expire ten years from date of grant, or
upon termination of the employee's employment with T1Xpert.
As of May 31, 2001 stock option grants representing 1,357,500 shares had
been issued to employees at an option price of $.0675 per share under the T1X
2000 Plan. During the year ended May 31, 2001 253,000 options were forfeited/
expired with a weighted average exercise price of $0.675 per share. The T1X
2000 Plan is immaterial to the earnings of the Company.
11. Income Taxes
------------
The components of the provision (benefit) for income taxes from
continuing and discontinuing operations are as follows (in thousands):
Year Ended May 31,
--------------------------------
2001 2000 1999
-------- -------- --------
Current
Federal $ - $ - $ -
State - - 34
-------- -------- --------
- - 34
Deferred (102) (2,176) (491)
Valuation allowance 102 2,176 5,905
-------- -------- --------
$ - $ - $ 5,448
======== ======== ========
The difference between the effective income tax rate and the provision
resulting from the application of the federal statutory income tax rate is
primarily due to utilization of net operating losses, state and local taxes and
the change in the valuation allowance in 2000.
A reconciliation of income tax expense (benefit) at the statutory rate to
reported income tax expense (benefit) for continuing operations follows (in
thousands):
Year Ended May 31,
--------------------------------
2001 2000 1999
-------- -------- --------
U.S. federal statutory rate
applied to pretax (loss)
income from continuing
operations $ (2,180) $ (836) $ (838)
State income taxes, net of
federal benefit - - (99)
Other, principally temporary
differences 2,078 (1,340) 480
Change in the valuation
allowance 102 2,176 5,905
-------- -------- --------
$ - $ - $ 5,448
======== ======== ========
- 31 -
CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
The income tax effect of the significant temporary differences and
carry-forwards which give rise to deferred tax assets (liabilities) are as
follows as of May 31 (in thousands):
2001 2000 1999
-------- -------- --------
Assets
Net operating loss $ 19,204 $ 17,525 $ 16,429
Prepaid lease revenue - 184 1,030
Discontinued operations 1,547 1,178 29
Other 2 331 168
Leased assets 1,465 2,898 1,135
Valuation allowance (22,218) (22,116) (18,791)
-------- -------- --------
$ - $ - $ -
======== ======== ========
A full valuation allowance was provided for such deferred tax assets
since, in management's opinion, the realizability of such assets was uncertain
in light of the Company's actual operating results since reorganization. The
Company periodically reviews the adequacy of the valuation allowance and will
recognize benefits only if a reassessment indicates that it is more likely than
not that the benefits will be realized. As of May 31, 2001, the Company had a
net operating loss carry-forwards for future taxable income in the amount of
approximately $51 million which will expire from 2005 - 2021.
12. Employee Benefit Plans
----------------------
The Company maintains a defined contribution 401(k) plan covering
substantially all of its employees under which it is obligated to make matching
contributions at the rate of 50% of the first 6% of participant earnings
contributed to the plan and which provides for an annual discretionary
contribution based on participants' eligible compensation. Employees generally
became eligible to participate in the plan after the completion of one full year
of employment. Matching and discretionary contributions made by the Company vest
over a five-year period. Matching Company contributions to the plan for the
fiscal years ended May 31, 2001, 2000 and 1999, were $26,000, $26,000 and
$21,000, respectively. The Company made no discretionary contribution.
13. Commitments and Contingencies
-----------------------------
Rental Commitments
------------------
The Company has various operating lease agreements for offices and office
equipment. These leases generally have provisions for renewal at varying terms.
The Company recorded rental expense of $191,000, $243,000 and $279,000 in the
fiscal years ended May 31, 2001, 2000 and 1999, respectively.
- 32 -
CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
The future minimum lease payments required under operating leases for the
fiscal years ended May 31 are as follows (in thousands):
Fiscal Year Minimum
Ending Lease
May 31, Payment
----------- -------
2002 $ 163
2003 163
2004 163
Beyond 2004 136
-------
$ 625
=======
Contingencies
-------------
Legal Proceedings
On September 19, 2000, the Company and the other petitioning creditors
reached a settlement agreement with Eastwind Airlines and UM Holding, Inc. This
agreement was approved by the Bankruptcy Court on October 20, 2000. The material
provisions of the final agreement resulted in the Company and the other
petitioning creditors combined receiving consideration worth $4 million in a
package that includes $3 million in cash and a $1 million, 1-year unsecured note
(6% interest rate and matures in March 2002 requiring monthly payments of
principal and interest), and the dismissal of CIS Air's lawsuit in North
Carolina State Court against AeroTurbine and AeroTurbine's dismissal of its
counterclaims. After payment of professional fees incurred in reaching this
settlement as well as payments to co-petitioning creditors the Company
recognized a gain of approximately $2.4 million. This gain presumes collection
of the note, which management believes to be likely. As the origin of the gain
relates to the Company's now discontinued operations, the gain is recorded
therein.
On July 24, 2000 CIS Air settled its previously reported lawsuit against
Cigna Insurance in exchange for the payment by Cigna to CIS Air's institutional
lender as loss payee, the full value of the policy less the policy's deductible.
On March 3, 2000, Dallas AeroSpace, Inc. ("Dallas") of Texas filed suit
in the United States District Court for the Southern District of New York
against CIS Air for breach of contract and other causes of action in connection
with the sale of an engine to Dallas in August 1997. Dallas is seeking damages
for the purchase price of the engine in the amount of $1,150,000. CIS Air has
denied any liability to Dallas on any of the causes of action, and has asserted
its defenses. Extensive discovery has been completed and the case is ready for
trial.
On April 24, 2000 CIS Air filed suit in the United States District Court
for the Northern District of New York against American Air Ventures, Inc.
("American Air"), a Florida corporation. The suit seeks reimbursement in
connection with losses incurred in joint venture agreements between the parties
for the purchase and sale of engines. The suit further seeks indemnification
from American Air should CIS Air be found liable to Dallas AeroSpace, because
CIS Air purchased the engine sold to Dallas AeroSpace from American Air. The
parties settled their lawsuit under the joint venture agreement but left open
all issues related to the Dallas matter.
On March 7, 2000 CIS Air filed suit against Express One International,
Inc. a Delaware Corporation in The Supreme Court, State of New York, County of
New York. The suits seek damages in an amount no less than $47,500 for engine
rent and maintenance reserve payments and $70,639 for engine repairs. The suit
is in the final discovery phase of litigation.
- 33 -
CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
In July 2001, CIS Air filed suit in State Court of Florida, Broward
County against Aviation Systems International ("ASI") and the TIMCO division of
Aviation Sales Company relating to damage sustained by a CIS aircraft. The
aircraft was parked at TIMCO's maintenance facility when it was struck and
severely damaged by two other aircraft owned by ASI. CIS Air has been reimbursed
for a portion of the damages by its insurance carrier, and is seeking to recover
the $500,000 deductible and other unpaid costs from TIMCO and ASI. No
proceedings have yet occurred in the case.
14. Fair Value of Financial Instruments
-----------------------------------
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
CASH AND CASH EQUIVALENTS, NOTES RECEIVABLE AND INVESTMENT IN MORTGAGE
PARTICIPATION NOTES - The carrying values approximate fair values because of the
short maturity of those instruments.
DISCOUNTED LEASE RENTAL BORROWINGS - The fair value of discounted lease rental
borrowings is based on the borrowing rates currently available to the Company
for loans with similar terms and average maturities. At May 31, 2000, the fair
value of such borrowings approximate its carrying amounts.
15. Segment Financial Data
----------------------
The Company adopted SFAS No. 131, Disclosure About Segments of an
Enterprise and Related Information, as required, in fiscal 2000. The Company's
operating subsidiaries were classified into two principal operating segments on
the basis of the Company's strategic direction and assessment procedures within
the operating subsidiaries, which require different investment and marketing
strategies.
EQUIPMENT LEASING BUSINESS: The Company's Equipment Leasing Business,
which was conducted through its operating subsidiary CIS Corporation, a New York
Corporation ("CIS"), leased a wide range of equipment, including computers,
printers and telecommunications equipment. The Company participated in the
leasing market principally by originating new leases and financing other
equipment brokers. In August 1999, the Company announced CIS would no longer
enter into new equipment leases. In October 2000, the Company sold off all but
one remaining equipment lease.
SECURITIES PROCESSING SOFTWARE BUSINESS: The product is being designed as
an electronic securities processing software platform which would use
proprietary technology and which would be adapted to changes in the financial
market place.
- 34 -
CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
Operating Segments
(In thousands)
2001 2000 1999
-------- -------- --------
Revenues
T1Xpert segment $ 50 $ - $ -
Equipment leasing segment 743 7,960 8,062
Corporate and other 479 505 735
-------- -------- --------
Consolidated 1,272 8,465 8,797
-------- -------- --------
Operating income (loss)
T1Xpert segment (2,740) (1,611) -
Equipment leasing segment (288) 1,091 343
Corporate and other (3,200) (1,853) (3,139)
-------- -------- --------
Consolidated (6,228) (2,373) (2,796)
-------- -------- --------
Interest expenses
T1Xpert segment - - -
Equipment leasing segment - 16 127
Corporate and other 5 - -
-------- -------- --------
Consolidated 5 16 127
-------- -------- --------
Income (loss) before income taxes
T1Xpert segment (2,740) (1,611) -
Equipment leasing segment 455 1,075 216
Corporate and other (3,200) (1,853) (3,139)
-------- -------- --------
Consolidated (5,485) (2,389) (2,923)
-------- -------- --------
Depreciation and amortization
T1Xpert segment - - -
Equipment leasing segment 126 2,445 4,189
-------- -------- --------
Consolidated 126 2,445 4,189
-------- -------- --------
Identifiable assets
T1Xpert segment - - -
Equipment leasing segment 20 2,283 7,911
Corporate and other 7,895 19,970 17,307
-------- -------- --------
Consolidated $ 7,915 $ 14,253 $ 25,218
======== ======== ========
- 35 -
CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
- --------------------------------------------------------------------------------
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED MAY 31, 2001
(In thousands)
Charged to Charged to
Beginning costs and other Deductions Ending
balance expenses accounts (recoveries) balance
--------- ---------- ---------- ------------ -------
1999:
Accounts receivable - allowance
for doubtful accounts $ (76) $ (381) $ - $ 132 $ (325)
2000:
Accounts receivable - allowance
for doubtful accounts $ (325) $ (146) $ - $ 363 $ (108)
2001:
Accounts receivable - allowance
for doubtful accounts $ (108) $ (232) $ - $ 340 $ -
Note receivable - allowance for
doubtful accounts $ - $ (426) $ - $ - $ (426)
- 36 -
CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
- --------------------------------------------------------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company incorporates herein by reference the information concerning
directors and executive officers contained in its Proxy Statement to be filed
within 120 days after the end of the Company's fiscal year (the "2001 Proxy
Statement").
ITEM 11. EXECUTIVE COMPENSATION
The Company incorporates herein by reference the information concerning
executive compensation contained in the 2001 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company incorporates herein by reference the information concerning security
ownership of certain beneficial owners and management contained in the 2001
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company incorporates herein by reference the information concerning certain
relationships and related transactions contained in the 2001 Proxy Statement.
- 37 -
CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
- --------------------------------------------------------------------------------
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report:
Financial Statements. See "ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA" for Index to Financial Statements and Schedules
included in this Form 10-K.
Exhibit No.
- -----------
3.1* Restated Certificate of Incorporation, as amended (Filed as Exhibit
3.1 to the Company's Form 10-Q for the quarter ended November 30, 1997
and incorporated herein by reference).
3.2 Restated Bylaws as amended through February 10, 2000 (Filed as Exhibit
3.2 to the Company's Form 10-K for the fiscal year ended May 31, 2000
and incorporated herein by reference).
10.1** 1995 Stock Compensation Plan (Filed as Exhibit 10.1 to the
Company's Form 10-Q for the quarter ended August 31, 1995 and
incorporated herein by reference).
10.2** Advisory Agreement for Real Estate Related Investments between
Continental Information Systems Corporation and Emmes Investment
Management Co. LLC dated June 30, 1997 (Filed as Exhibit 10.13 to the
Company's Form 10-K for the fiscal year ended May 31, 1997 and
incorporated herein by reference).
21 Subsidiaries of the Registrant.
CIS Corporation
CIS Air Corporation
T1Xpert Corp.
* Filed as an exhibit to the Company's amended Form 10 Registration
Statement (Commission File No. 0-25104), originally filed November 10,
1994 and incorporated herein by reference.
** Incorporated by reference.
(b ) Reports on Form 8-K.
On March 5, 2001, the Company filed a report on Form 8-K reporting
that T1Xpert Corp. and a global investment bank announced that they
had entered into the first phase of a project to implement the T1Xpert
P&S solution at the bank.
On November 28, 2000, the Company filed a report on Form 8-K reporting
that the repurchase of 607,158 shares from the Chase Manhattan Bank.
On September 21, 2000, the Company filed a report on Form 8-K
reporting that it had reached a settlement with Eastwind Airlines and
UM Holdings.
- 38 -
CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
- --------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
CONTINENTAL INFORMATION SYSTEMS CORPORATION
Date: August 29, 2001 By: /s/Michael L. Rosen
-----------------------------------------------
Name: Michael L. Rosen
Title: President, Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
Signature Title Date
- --------- ----- ----
/s/ MICHAEL L. ROSEN President, Chief Executive Officer August 29, 2001
Michael L. Rosen and Director
/s/ JONAH M. MEER Senior Vice President, Chief
Jonah M. Meer Operating Officer and Chief
Financial Officer August 29, 2001
/s/ JAMES P. HASSETT Director and Chairman of the Board August 29, 2001
James P. Hassett
/s/ MICHAEL BRUCK Director August 29, 2001
Michael Bruck
/s/MARK JAINDL Director August 29, 2001
Mark Jaindl
/s/ GEORGE H. HEILBORN Director August 29, 2001
George H. Heilborn
/s/ PAUL M. SOLOMON Director August 29, 2001
Paul M. Solomon
- 39 -