SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended February 28, 1997 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Transition period from _________ to __________
Commission file number: 0-25104
CONTINENTAL INFORMATION SYSTEMS CORPORATION
-------------------------------------------
(Exact name of registrant as specified in its charter)
New York 16-0956508
-------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
One Northern Concourse, P.O. Box 4785, Syracuse, NY 13221-4785
- --------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(315) 455-1900
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ X ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: As of March 31,
1997, the registrant has 7,014,040 shares of common stock, par value $.01 per
share, outstanding.
<PAGE>
CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets -
February 28, 1997 and May 31, 1996
Consolidated Statements of Operations and Retained
Earnings (Accumulated Deficit) - for the three
months and nine months ended February 28, 1997
and February 29, 1996
Consolidated Statements of Cash Flows -
for the nine months ended February 28, 1997 and
February 29, 1996
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II. OTHER INFORMATION:
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
Continental Information Systems Corporation
and its Subsidiaries
In Thousands (Except per Share Data)
CONSOLIDATED BALANCE SHEETS
(Unaudited)
February 28, May 31,
1997 1996
---- ----
<S> <C> <C>
Assets:
Cash and cash equivalents .......................................... $ 10,711 $ 5,382
Accounts receivable, net ........................................... 3,857 2,295
Notes receivable ................................................... 4,568 3,457
Inventory .......................................................... 6,801 2,875
Net investment in direct financing leases (Note 2) ................. 2,250 15,783
Rental equipment, net (Note 2) ..................................... 3,985 11,148
Furniture, fixtures and equipment, net ............................. 326 625
Other assets ....................................................... 1,129 1,965
Goodwill, net (Note 3) ............................................. 3,606 3,940
Deferred tax assets ................................................ 4,903 6,080
--------- ----------
Total assets ............................................. $ 42,136 $ 53,550
========= ==========
Liabilities and Shareholders' Equity:
Liabilities:
Accounts payable and other liabilities ........................ $ 1,389 $ 2,949
Net liabilities of discontinued operations (Note 4) ........... 121 106
Discounted lease rental borrowings (Note 2) ................... 2,153 14,738
Note payable to institution - secured ......................... 766 -
Notes payable to former owners of acquired company (Note 3) ... 2,304 2,304
--------- ----------
Total liabilities ........................................ 6,733 20,097
--------- ----------
Shareholders' Equity:
Common stock, $.01 par value; authorized 10,000,000 shares, issued
and outstanding 7,014,040 and 6,999,040, excluding 960 treasury
shares (Notes 5 and 7) ......................................... 70 70
Additional paid-in capital ......................................... 34,959 34,930
Retained earnings (accumulated deficit) ............................ 374 (1,547)
--------- ----------
Total shareholders' equity ............................... 35,403 33,453
--------- ----------
Total liabilities and shareholders' equity ............... $ 42,136 $ 53,550
========= ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Continental Information Systems Corporation
and its Subsidiaries
In Thousands (Except per Share Data)
CONSOLIDATED STATEMENTS OF OPERATIONS
AND RETAINED EARNINGS (ACCUMULATED DEFICIT)
(Unaudited)
For the Three For the Nine
months ended months ended
-------------------------- ----------------------------
February 28, February 29, February 28, February 29,
1997 1996 1997 1996
------ -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Equipment sales ...................................... $4,962 $ 3,717 $ 18,019 $ 12,603
Gain from sale of equipment subject
to lease (Note 2) ............................... 341 -- 2,816 --
Equipment rentals .................................... 564 1,432 3,184 5,083
Income from direct financing leases .................. 131 385 1,020 898
Interest, fees and other income ...................... 567 763 1,598 1,921
------ -------- -------- --------
6,565 6,297 26,637 20,505
------ -------- -------- --------
Costs and Expenses:
Cost of sales ........................................ 3,811 2,892 13,940 9,035
Depreciation of rental equipment ..................... 216 768 1,822 2,548
Interest expense ..................................... 137 164 832 350
Other operating expenses ............................. 415 362 1,318 939
Selling, general and administrative expense .......... 1,703 1,832 5,293 6,209
Amortization of goodwill ............................. 101 -- 334 --
------ -------- -------- --------
6,383 6,018 23,539 19,081
------ -------- -------- --------
Income from continuing operations before taxes ....... 182 279 3,098 1,424
Provision for income tax ............................. 69 106 1,177 541
------ -------- -------- --------
Income from continuing operations .................... 113 173 1,921 883
Loss from discontinued operations,
net of tax (Note 4) ............................. -- (140) -- (248)
------ -------- -------- --------
Net income ........................................... 113 33 1,921 635
Retained earnings (accumulated deficit),
beginning of period ............................. 261 (1,011) (1,547) (1,613)
------ -------- -------- --------
Retained earnings (accumulated deficit), end of period $ 374 $ (978) $ 374 $ (978)
====== ======== ======== ========
<PAGE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
AND RETAINED EARNINGS (ACCUMULATED DEFICIT)
(Unaudited)
(continued)
For the Three For the Nine
months ended months ended
-------------------------- ----------------------------
February 28, February 29, February 28, February 29,
1997 1996 1997 1996
------ -------- -------- --------
<S> <C> <C> <C> <C>
Net income per share (Note 5):
Income from continuing operations .............. $ .01 $ .02 $ .27 $ .13
Loss from discontinued operations .............. -- (.02) -- (.04)
------ -------- -------- --------
Net income ........................ $ .01 $ -- $ .27 $ .09
====== ======== ======== ========
Weighted average number of shares
of common stock outstanding .................... 7,014 6,999 7,005 7,000
====== ======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Continental Information Systems Corporation
and its Subsidiaries
In Thousands
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine
months ended
-----------------------------
February 28, February 29,
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income .............................................. $ 1,921 $ 635
Less: Net loss from discontinued operations ............. -- (248)
-------- --------
Income from continuing operations ....................... 1,921 883
-------- --------
Adjustments to reconcile net income to net cash
provided by operating activities:
Proceeds from sale of equipment subject to lease ........ 7,367 --
Gain from sale of equipment subject to lease ............ (2,816) --
Proceeds from sale of other leased equipment ............ 3,684 1,759
Amortization of unearned income ......................... (1,020) (898)
Collections of rentals on direct financing leases ....... 3,058 3,362
Dealer profit from sales-type lease ..................... (142) --
Depreciation and amortization expense ................... 2,478 2,897
Other ................................................... 29 --
Effect on cash flows of changes in:
Accounts receivable ................................ (787) (381)
Notes receivable ................................... (550) (2,446)
Inventory .......................................... (3,926) (1,012)
Other assets ....................................... 836 (120)
Accounts payable and other liabilities ............. (387) 93
Deferred tax assets ................................ 1,177 389
-------- --------
9,001 3,643
-------- --------
Net cash provided by continuing operations .............. 10,922 4,526
Net cash provided by (used in) discontinued operations .. 15 (1,161)
-------- --------
Net cash provided by operations ......................... 10,937 3,365
-------- --------
Cash flows from investing activities:
Purchase of rental equipment ............................ (5,940) (16,121)
Purchase of property and equipment ...................... (23) (39)
Net cash provided by the sale of TLP subsidiaries ....... -- 754
-------- --------
Net cash used in investing activities .............. (5,963) (15,406)
-------- --------
<PAGE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(continued)
For the Nine
months ended
-----------------------------
February 28, February 29,
1997 1996
-------- --------
<S> <C> <C>
Cash flows from financing activities:
Payments on note payable to Liquidating Estate .......... -- (3,255)
Proceeds from lease, bank and institution financings .... 7,498 9,893
Payments on lease, bank and institution financings ...... (7,143) (1,519)
-------- --------
Net cash provided by (used in) financing activities 355 5,119
-------- --------
Net increase (decrease) in cash and cash equivalents 5,329 (6,922)
Cash and cash equivalents at beginning of period ........ 5,382 13,015
-------- --------
Cash and cash equivalents at end of period .............. $ 10,711 $ 6,093
======== ========
</TABLE>
<PAGE>
Continental Information Systems Corporation
and its Subsidiaries
Notes to the Consolidated Financial Statements
1. Basis of Presentation
The accompanying unaudited financial statements of Continental
Information Systems Corporation and its subsidiaries (the "Company")
contain all adjustments which are, in the opinion of management,
necessary for a fair statement of results for the interim periods
presented. While certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted, the
Company believes that the disclosures herein are adequate to make the
information not misleading. The results of operations for the nine months
ended February 28, 1997, are not necessarily indicative of the results
for the full year. These statements should be read in conjunction with
the consolidated financial statements and notes thereto included for the
fiscal year ended May 31, 1996 appearing in the Company's Form 10-K.
2. Sale of Equipment Subject to Lease
On November 30, 1996, the Company, through certain wholly-owned
subsidiaries, sold a substantial portion of its leased equipment to an
institutional investor for a sales price of approximately $20 million,
payable in cash of approximately $7.4 million and the assumption by the
investor of the Company's related outstanding non-recourse lease rental
borrowings of approximately $12.5 million. The gain on the transaction of
approximately $2.5 million, exclusive of income taxes, is included in
results from continuing operations for the fiscal quarter ended November
30, 1996. Additionally, on February 28, 1997, the Company sold an
additional portion of its leased equipment to the same institutional
investor for a sales price of approximately $2 million, payable in cash
of approximately $775,000, a short-term note of approximately $560,000,
the assumption by the investor of the Company's related outstanding
non-recourse lease rental borrowings of approximately $343,000 and the
payment of the Company's related outstanding recourse lease rental
borrowings of approximately $379,000. The gain on the transaction of
approximately $341,000, exclusive of income taxes, is included in results
from continuing operations for the fiscal quarter ended February 28,
1997.
3. Acquisition
On March 8, 1996, the Company, through its wholly-owned subsidiary, CIS
Corporation, acquired 100% of the capital stock of GMCCCS Corp. (dba
"LaserAccess") for a purchase price of approximately $4,608,000, payable
in cash of approximately $2,304,000 at closing and the balance of
approximately $2,304,000 in the form of notes payable in three equal
annual installments, commencing March 8, 1997, with interest at the rate
of 8.25% on the unpaid principal balance. The first annual principal
installment, plus accrued interest, was paid on a timely basis. In
addition to the purchase price to be paid in cash and notes, CIS
Corporation is obligated to pay the sellers an annual earn out payment
for each of the first four years following the March 8, 1996 sale. The
earn out payment is based upon the annual pretax income of LaserAccess.
LaserAccess is engaged in the sales and marketing of remanufactured Xerox
High Speed Laser Printing Systems.
<PAGE>
The acquisition has been accounted for using the purchase method of
accounting. Allocations of the purchase price have been determined based
upon preliminary estimates of fair market value and, therefore, are
subject to change. The excess of the purchase price, over the net
tangible assets acquired, of approximately $4.0 million, is considered
goodwill and is being amortized on a straight line basis over ten years.
LaserAccess' results of operations are included in the accompanying
consolidated statements of operations of the Company for the nine months
ended February 28, 1997.
Unaudited pro forma data giving effect to the purchase as if it had been
acquired at the beginning of Fiscal 1996, with adjustments, primarily for
imputed interest charges attributable to notes payable to the former
owners and amortization of goodwill follows:
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
For the nine
months ended
February 29, 1996
-----------------
<S> <C>
Total revenues ............................................. $ 22,796
==========
Income from continuing operations .......................... $ 1,161
==========
Income per share from continuing operations ................ $ .17
==========
Weighted average number of shares outstanding .............. 7,000,000
==========
Note: Reorganization items and income from discontinued operations have been
excluded from the pro forma results.
</TABLE>
4. Discontinued Operations
On April 3, 1996, the Company announced its decision to discontinue an
operation, including its wholly-owned subsidiary, Aviron Computer
Technologies, Inc. ("Aviron"), that purchased and sold used computer
equipment and provided related technical services. After that date, the
Company attempted to locate a buyer for the operation. On June 5, 1996,
the Company announced it had abandoned its efforts to sell the operation
and would instead liquidate the assets which consisted principally of
used computer equipment inventories and fixed assets. The net loss from
discontinued operations for the year ended May 31, 1996, was $1,177,000
(net of $698,000 deferred tax benefit).
<PAGE>
Additionally, on May 25, 1995, the Board of Directors approved the
discontinuance of NC3, Inc., the Company's excess inventory business
unit. The Company recorded a provision of $1,137,000 (net of $763,000
deferred tax benefit) in the quarter ended May 31, 1995, relative to the
disposal of NC3 assets and other charges related to the discontinuance of
the business unit. As of May 31, 1996, the Company had exited the
business and liquidated substantially all of the assets. Liabilities of
the discontinued operation decreased from $744,000 at May 31, 1995 to
$99,000 as of February 28, 1997, due to cash payments principally for
severance and facilities costs totaling approximately $315,000 and a net
reduction of $330,000 to adjust the amounts estimated for the loss on the
inventories, receivables, fixed assets and leased facility obligations.
The remaining liability of $99,000 as of February 28, 1997 is expected to
be liquidated by cash payments extending through approximately May 31,
1997. The adjustment of the liability in the amount of $230,000 was
recorded as a gain from discontinued operations, net of deferred tax
expenses of $87,000 in the quarter ended August 31, 1995. An additional
adjustment of the liability in the amount of $100,000 was recorded as an
offset to the loss on disposal of discontinued operations in the quarter
ended May 31, 1996.
The Consolidated Statements of Operations for all periods presented have
been reclassified to report the results of discontinued operations
separately from continuing operations. A summary of the results of
discontinued operations follows (in thousands):
<TABLE>
<CAPTION>
For the nine
months ended
February 28, February 29,
------------ ------------
1997 1996
------------ -------
<S> <C> <C>
Revenues ..................................... $ -- $ 4,786
Costs and expenses ........................... -- 5,186
------------ -------
Loss from discontinued operations ............ -- (400)
Income tax benefit ........................... -- (152)
------------ -------
Net loss from discontinued operations ........ $ -- $ (248)
============ =======
</TABLE>
<PAGE>
The Consolidated Balance Sheets as of February 28, 1997 and May 31, 1996,
have been reclassified to report the net assets of discontinued
operations separately from the assets and liabilities of continuing
operations. A summary of the assets and liabilities of discontinued
operations follows (in thousands):
<TABLE>
<CAPTION>
February 28, May 31,
1997 1996
----- -----
<S> <C> <C>
Assets:
Cash and cash equivalents ................................ $-- $ 159
Accounts receivable, net ................................. -- 55
Inventory ................................................ 13 115
Furniture, fixtures and equipment, net ................... -- 58
Other assets ............................................. 16 16
----- -----
Total assets ................................... 29 403
----- -----
Liabilities:
Accounts payable and accruals ............................ -- 44
Other liabilities ........................................ 150 465
----- -----
Total liabilities .............................. 150 509
----- -----
Net Assets (Liabilities) of Discontinued
Operations ................................ $(121) $(106)
===== =====
</TABLE>
5. Net Income Per Share
Net income per share was computed based on the weighted average number of
shares of common stock outstanding during the periods. As of February 28,
1997, the Company had outstanding options to purchase 334,000 shares of
common stock (see Note 7). The potential dilution of these options is
immaterial in the computation of net income per share.
6. Reclassifications
Certain prior period balances in the financial statements have been
reclassified to conform to the current period financial statement
presentation.
7. Stock Compensation Plan
On July 6, 1995, the Board of Directors adopted the Continental
Information Systems Corporation 1995 Stock Compensation Plan (the "1995
Plan"). The 1995 Plan was approved by stockholders at the annual meeting
held September 27, 1995 in Syracuse, New York. The 1995 Plan provides for
the issuance of options covering up to 1,000,000 shares of common stock
and stock grants of up to 500,000 shares of common stock to non-employee
<PAGE>
directors of the Company and, in the discretion of the Compensation
Committee, employees of and independent contractors and consultants to
the Company. As of February 28, 1997, outstanding incentive stock options
(for shares of common stock) that have been granted to employees and
outstanding non-qualified stock options (for shares of common stock) that
have been granted to non-employee directors are as follows:
<TABLE>
<CAPTION>
Number of Exercise Fair Market Value
Description Date Granted Options Price at Date of Grant
----------- ------------ ------- ----- ----------------
<S> <C> <C> <C> <C>
Non-Qualified Stock Options May 16, 1995 6,000 $3.50 $ 21,000
Non-Qualified Stock Options September 27, 1995 9,000 2.50 22,500
Incentive Stock Options July 11, 1996 310,000 1.97 610,700
Non-Qualified Stock Options October 23, 1996 9,000 1.84 16,560
------- -----------
Balance - February 28, 1997 334,000 $ 670,760
======= ==========
</TABLE>
As of February 28, 1997, options for 118,333 shares were exercisable.
<PAGE>
Continental Information Systems Corporation
and its Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
The following discussion and analysis of the financial condition and results of
operations of the Company should be read in conjunction with the consolidated
financial statements and the notes thereto for the fiscal year ended May 31,
1996, appearing in the Company's Form 10-K.
All statements contained herein and in "Item 5 - Other Information" that are not
historical facts, including but not limited to, statements regarding anticipated
future capital requirements and the Company's future business plans, are based
on current expectations. These statements are forward looking in nature and
involve a number of risks and uncertainties. Actual results may differ
materially. Among the factors that could cause actual results to differ
materially are those set forth below and in Item 5, and the other risk factors
described from time to time in the Company's reports filed with the SEC. The
Company wishes to caution readers not to place undue reliance on any such
forward looking statements, which statements are made pursuant to the Private
Securities Litigation Reform Act of 1995 and, as such, speak only as of the date
made.
Results of Operations
Comparison of the Three Months and Nine Months
Ended February 28, 1997 and February 29, 1996
Continuing Operations
Total revenues increased 4.3% to $6.6 million for the three months ended
February 28, 1997 from $6.3 million for the comparable fiscal quarter in 1996.
For the nine months ended February 28, 1997, total revenues increased 29.9% to
$26.6 million from $20.5 million for the comparable fiscal period in 1996.
Equipment sales for the three and nine months ended February 28, 1997, increased
by $1.2 million (33.5%) and $5.4 million (43.0%), respectively, over comparable
periods in 1996. These increases are principally attributable to the addition of
LaserAccess' results of operations for the current nine month period, after
being acquired March 8, 1996. On November 30, 1996, the Company, through certain
wholly-owned subsidiaries, sold a substantial portion of its leased equipment to
an institutional investor for a sales price of approximately $20 million,
payable in cash of approximately $7.4 million and the assumption by the investor
of the Company's related outstanding non-recourse lease rental borrowings of
approximately $12.5 million. The gain on the transaction of approximately $2.5
million, exclusive of income taxes, is included in results from continuing
operations for the fiscal quarter ended November 30, 1996. Additionally, on
February 28, 1997, the Company sold an additional portion of its leased
equipment to the same institutional investor for a sales price of approximately
$2 million, payable in cash of approximately $775,000, a short-term note of
approximately $560,000, the assumption by the investor of the Company's related
outstanding non-recourse lease rental borrowings of approximately $343,000 and
<PAGE>
the payment of the Company's related outstanding recourse lease rental
borrowings of approximately $379,000. The gain on the transaction of
approximately $341,000, exclusive of income taxes, is included in results from
continuing operations for the fiscal quarter ended February 28, 1997. The
Company is acquiring additional equipment, subject to lease, which it intends to
sell on an ongoing basis, as market conditions permit. However, it is not likely
that the magnitude of these sales can be replicated during the remainder of the
current fiscal year, since the leased equipment sold took in excess of twelve
months to accumulate. The Company's future revenue and earnings from the sale of
leased equipment will be affected by a number of factors, including the
Company's ability to identify and market equipment leases to equipment lessees,
conditions in the secondary market for equipment leases, which may be affected
by such factors as the availability of institutional investment capital and
interest rates, and competition from other entities seeking to resell equipment
leases.
Sales and margins for the Company's laser printing business have been adversely
impacted, and may continue to be impacted, as a result of increased activity in
the used high speed printer market by Xerox Corporation, the manufacturer of the
Company's laser printers, and another large leasing company that has entered the
market. While margins in the Company's telecom equipment buy/sell business
remain stable, the Company to date has not achieved significant increases in
volume from this business. The Board of Directors has decided to seek a buyer
for the Company's telecom equipment buy/sell business. Sales and earnings from
the aircraft business are likely to continue to vary quarter-to-quarter, based
on the volume of transactions.
Equipment rentals and income from direct financing leases for the three and nine
months ended February 28, 1997, decreased by $1.1 million (61.8%) and $1.8
million (29.7%), respectively, from comparable periods in 1996. These decreases
are directly related to the sale of a substantial portion of the Company's
leased equipment to an institutional investor in the second and third quarters
of the current fiscal year. Interest, fees and other income for the three and
nine months ended February 28, 1997, decreased by $196,000 (25.7%) and $323,000
(16.8%), respectively, from comparable periods in 1996. These decreases
primarily reflect a decline in management fees received from income funds.
Costs and expenses increased 6.1% to $6.4 million for the three months ended
February 28, 1997 from $6.0 million for the comparable quarter in 1996. For the
nine months ended February 28, 1997, costs and expenses increased 23.4% to $23.5
million from $19.1 million for the comparable fiscal period in 1996. Cost of
sales, as a percentage of sales, for the three and nine months ended February
28, 1997, were 76.8% and 77.4%, respectively, as compared to 77.8% and 71.7% for
the comparable periods in 1996. These variances are primarily the result of
product mix, with the aircraft business unit usually generating significant
margins on a relatively few large transactions and the telecommunications and
printing business units generating comparably lesser margins on a greater number
of transactions. Depreciation of rental equipment for the three and nine months
ended February 28, 1997, decreased by $.6 million (71.9%) and $.7 million
(28.5%), respectively, from comparable periods in 1996. These decreases are
directly related to the sale of a substantial portion of the Company's portfolio
of leased equipment in the second and third quarters of the current fiscal year.
Interest expense for the nine months ended February 28, 1997, increased $.5
million (137.7%) to $.8 million from $.3 million for the comparable period in
1996. This increase was primarily the result of a significant increase in the
average debt outstanding during the current nine month period, prior to the
<PAGE>
assumption of approximately $12.5 million in non-recourse lease rental
borrowings by an institutional investor in the second quarter, relative to the
aforementioned sale of equipment subject to lease. Other operating expenses for
the three and nine months ended February 28, 1997, increased by $53,000 (14.6%)
and $379,000 (40.4%), respectively, over comparable periods in 1996. These
increases are primarily attributable to refurbishment expenses related to
LaserAccess's results of operations for the current nine month period, after
being acquired March 8, 1996. Selling, general and administrative expenses for
the three and nine months ended February 28, 1997, decreased by $129,000 (7.0%)
and $916,000 (14.7%), respectively, from comparable periods in 1996. These
decreases were principally due to cost containment efforts and staff reductions
between the periods. Amortization of goodwill for the three and nine months
ended February 28, 1997, was $101,000 and $334,000, respectively. Goodwill of
approximately $4.0 million, relative to the LaserAccess acquisition, is being
amortized on a straight-line basis over 10 years.
See "Item 5 - Other Information" for a discussion of the Company's consideration
of strategic alternatives.
Discontinued Operations
On April 3, 1996, the Company announced its decision to discontinue an
operation, including its wholly-owned subsidiary, Aviron Computer Technologies,
Inc. ("Aviron"), that purchased and sold used computer equipment and provided
related technical services. After that date, the Company attempted to locate a
buyer for the operation. On June 5, 1996, the Company announced it had abandoned
its efforts to sell the operation and would instead liquidate the assets which
consisted principally of used computer equipment inventories and fixed assets.
The net loss from discontinued operations for the year ended May 31, 1996, was
$1,177,000 (net of $698,000 deferred tax benefit).
Additionally, on May 25, 1995, the Board of Directors approved the
discontinuance of NC3, Inc., the Company's excess inventory business unit. The
Company recorded a provision of $1,137,000 (net of $763,000 deferred tax
benefit) in the quarter ended May 31, 1995, relative to the disposal of NC3
assets and other charges related to the discontinuance of the business unit. As
of May 31, 1996, the Company had exited the business and liquidated
substantially all of the assets. Liabilities of the discontinued operation
decreased from $744,000 at May 31, 1995 to $99,000 as of February 28, 1997, due
to cash payments principally for severance and facilities costs totaling
approximately $315,000 and a net reduction of $330,000 to adjust the amounts
estimated for the loss on the inventories, receivables, fixed assets and leased
facility obligations. The remaining liability of $99,000 as of February 28, 1997
is expected to be liquidated by cash payments extending through approximately
May 31, 1997. The adjustment of the liability in the amount of $230,000 was
recorded as a gain from discontinued operations, net of deferred tax expenses of
$87,000 in the quarter ended August 31, 1995. An additional adjustment of the
liability in the amount of $100,000 was recorded as an offset to the loss on
disposal of discontinued operations in the quarter ended May 31, 1996.
<PAGE>
The Consolidated Statements of Operations for all periods presented have been
reclassified to report the results of discontinued operations separately from
continuing operations. A summary of the results of discontinued operations
follows (in thousands):
<TABLE>
<CAPTION>
For the nine
months ended
February 28, February 29,
------------ ------------
1997 1996
------- -------
<S> <C> <C>
Revenues ..................................... $ -- $ 4,786
Costs and expenses ........................... -- 5,186
------- -------
Loss from discontinued operations ............ -- (400)
Income tax benefit ........................... -- (152)
------- -------
Net loss from discontinued operations ........ $ -- $ (248)
======= =======
</TABLE>
Income Taxes
For the three and nine months ended February 28, 1997, a provision for deferred
income tax expense on income from continuing operations was recorded, at an
effective rate of 38%, in the amounts of $69,000 and $1,177,000, respectively,
as compared to $106,000 and $541,000 for the comparable periods in 1996. In
addition, for the three and nine months ended February 29, 1996, a provision for
deferred income tax benefit on loss from discontinued operations was recorded,
at an effective rate of 38%, in the amounts of $85,000 and $152,000,
respectively.
Liquidity and Capital Resources
Cash provided by operations for the nine months ended February 28, 1997 was
$10.9 million as compared to $3.4 million for the comparable period in 1996. The
increase was primarily due to the proceeds generated by two sales of equipment
subject to lease of $7.4 million in the second and third fiscal quarters. In
addition to the cash payments and a short-term note of approximately $560,000,
the buyer assumed approximately $12.8 million of the Company's related
outstanding non-recourse lease rental borrowings and approximately $379,000 of
the Company's related outstanding recourse lease rental borrowings were paid
off. The sales of this leased equipment accelerated the earnings and cash flow
from the leases, which would have been received over time, into the second and
third quarters of the current fiscal year. These funds provide the capital to
facilitate the expansion of the Company's buy/sell businesses and support
alternative strategic directions being considered by the Board of Directors; see
"Item 5 - Other Information." Inventory increased by $3.9 million during the
nine months ended February 28, 1997 over the comparable period in 1996. This
<PAGE>
increase was primarily attributable to the acquisition of used aircraft
equipment and certain Laser Printing systems to support increased business
activity in these business units. New investment in rental equipment was $5.9
million for the nine months ended February 28, 1997 as compared to $16.1 million
for the comparable period in 1996. The significant investment in rental
equipment in 1996 initiated the Company's strategy of originating leases on
acquired rental equipment and subsequently selling them to investors, as was
accomplished in the second and third quarters of the current fiscal year.
Because a note payable to the Liquidating Estate was paid in full in March 1996,
there were no additional payments made on the note for the nine months ended
February 28, 1997 as compared to the comparable period in 1996 when the Company
made principal payments of $3.3 million. Proceeds from lease, bank and
institution financings were $7.5 million for the nine months ended February 28,
1997, as compared to $9.9 million for the comparable period in 1996. The
significant proceeds generated in the 1996 period are directly related to the
increase in rental equipment during that period and the discounting of lease
rentals associated with such equipment. Payments on lease, bank and institution
financings were $7.1 million for the nine months ended February 28, 1997 as
compared to $1.5 million for the comparable period in 1996. The increase in the
current nine month period primarily represents accelerated payments on certain
lines of credit and increased payments on discounted lease rental borrowings
prior to the sale of the related leased equipment.
The Company expects that operations will generate sufficient cash to meet its
operating expenses and current obligations. In April 1996, the Company finalized
a revolving loan agreement with an institution to provide interim and
recourse/limited recourse lease financing in the total amount of $5 million. On
March 14, 1997, the Company was notified by this institution that it was
terminating the credit line due primarily to minimal use of the facility. The
Company believes that the termination of this facility will not have a material
effect of the Company's liquidity or ability to finance its current businesses.
In July 1996, the Company finalized two revolving loan agreements with
institutions to provide (1) warehouse lease financing in the amount of $5
million and (2) inventory financing for LaserAccess and CIS Air in the amount of
$7 million. At February 28, 1997, approximately $1.2 million in loans payable
were outstanding under these lines of credit.
<PAGE>
PART II - OTHER INFORMATION
Item 5. Other Information
The Company's Board of Directors is continuing its ongoing evaluation of the
prospects of the Company's existing businesses and alternative strategic
directions. As part of this process, the Board of Directors has decided to seek
a buyer for the Company's telecom equipment buy/sell business. It is continuing
to pursue a possible real estate finance venture with a private real estate
finance company, as previously disclosed, but no agreement has been reached to
date, and there can be no assurance that any such transaction can be
consummated.
Effective April 11, 1997, Frank J. Corcoran, the Company's Chief Financial
Officer and Senior Vice President is leaving the Company ("Severance Event").
Pursuant to the terms of a letter agreement with the Company dated October 23,
1996, Mr. Corcoran is entitled to receive the following severance benefits: (i)
a severance payment of $75,000, which is equal to six months base salary as in
effect on the date of the Severance Event, payable at Corcoran's option in a
lump sum or in six equal monthly installments; and (ii) certain continued
benefits (life insurance, medical, health and accident, and disability
arrangements) until the earlier of six months from the date of the Severance
Event or the commencement by Corcoran of full time employment by another
employer. Bruce W. Lewis, Jr., Director of Accounting and Tax, has been
appointed Treasurer of the Company, and James J. Mosher, Vice President and
Controller, has been appointed Secretary of the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K - No reports on Form 8-K were filed by
the Company during the quarter ended February 28, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONTINENTAL INFORMATION SYSTEMS
CORPORATION
Date: April 8, 1997 By: /s/ Thomas J. Prinzing
----------------------
Thomas J. Prinzing
President and
Chief Executive Officer
Date: April 8, 1997 By: /s/ Frank J. Corcoran
---------------------
Frank J. Corcoran
Senior Vice President,
Chief Financial Officer,
Treasurer and Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
CONTINENTAL INFORMATION SYSTEMS CORPORATION AS OF AND FOR THE NINE MONTHS ENDED
FEBRUARY 28, 1997.
</LEGEND>
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<S> <C>
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<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> FEB-28-1997
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