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, 1999 or
[ ] Transition report pursuant to section 13 of 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________ to ________
Commission file number: 0-25104
CONTINENTAL INFORMATION SYSTEMS CORPORATION
------------------------------------------------------
(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)
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, 1999, the registrant has 6,884,844 shares of common stock, par value $.01
per share, outstanding.
<PAGE>
CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Number
------
<S> <C> <C>
PART I. FINANCIAL INFORMATION: 3
Item 1. Unaudited Consolidated Financial Statements 3
Consolidated Balance Sheets -
February 28, 1999 and May 31, 1998 3
Consolidated Statements of Operations -
for the three and nine months ended February 28, 1999 and 1998 4
Consolidated Statements of Cash Flows -
for the three and nine months ended February 28, 1999 and 1998 5
Notes to Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-13
PART II. OTHER INFORMATION: 14
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
--------------------------------
SIGNATURES 15
</TABLE>
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<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Continental Information Systems Corporation
and its Subsidiaries
In Thousands (Except Number of Shares)
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
February 28, May 31,
1999 1998
---- ----
<S> <C> <C>
Assets:
Cash and cash equivalents $5,851 $ 3,211
Accounts receivable, net 987 636
Notes receivable 3,386 6,870
Investment in mortgage participation notes 852 1,522
Inventory 6,185 3,755
Net investment in direct financing leases 6,083 4,658
Rental equipment, net (Note 7) 11,429 18,118
Furniture, fixtures and equipment, net 401 398
Other assets 875 620
Deferred tax assets 5,414 5,414
--------- ----------
Total assets $ 41,463 $ 45,202
========= =========
Liabilities and Shareholders' Equity:
Liabilities:
Accounts payable and other liabilities $ 1,844 $ 2,377
Discounted lease rental borrowings 291 2,594
Note payable to institution -collateralized 6,068 4,429
Net liabilities of discontinued operations (Note 2) 810 866
Deferred lease revenue 3,722 5,976
--------- ----------
Total liabilities 12,735 16,242
--------- ---------
Shareholders' Equity:
Common stock, $.01 par value; authorized 20,000,000 shares,
issued 7,101,668 shares 71 71
Additional paid-in capital 35,129 35,129
Accumulated deficit (6,017) (5,834)
--------- ----------
29,183 29,366
Treasury stock, at cost; 211,810 shares (455) (406)
--------- ----------
Total shareholders' equity 28,728 28,960
--------- ----------
Total liabilities and shareholders' equity $ 41,463 $ 45,202
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-3-
<PAGE>
Continental Information Systems Corporation
and its Subsidiaries
(In Thousands except per share amounts)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
February 28, February 28,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenues:
Equipment sales $2,221 $2,171 $5,423 $7,697
Equipment rentals 1,657 1,071 5,285 2,834
Income from direct financing leases 322 190 761 559
Gain from sale of equipment subject to lease 318 0 318 78
Interest, fees and other income 253 507 1,117 1,586
------ ------ ------ ------
4,771 3,939 12,904 12,754
------ ------ ------ ------
Costs and Expenses:
Cost of sales 2,014 2,005 4,900 6,663
Depreciation of rental equipment 1,315 542 4,125 1,404
Interest expense 156 141 456 398
Other operating expenses 268 132 792 640
Selling, general and administrative expense 1,008 951 2,926 3,004
------ ------ ------ ------
4,761 3,771 13,199 12,109
------ ------ ------ ------
Income (loss) from continuing operations before income taxes 10 168 (295) 645
Provision (credit) for income tax 4 64 (112) 245
------ ------ ------ ------
Income (loss) from continuing operations 6 104 (183) 400
Loss from discontinued operations, net of tax benefit (Note 2) 0 (99) 0 (535)
------ ------ ------ ------
Net Income (loss) $ 6 $ 5 ($183) ($135)
====== ====== ====== ======
Basic and diluted net income (loss) per share (Note 1):
Income from continuing operations - 0.01 (0.03) 0.06
Income (loss) from discontinued operations - (0.01) - (0.08)
------ ------ ------ ------
Net Income - - (0.03) (0.02)
====== ====== ====== ======
Weighted average number of shares of common stock 6,933 6,990 6,937 6,999
outstanding ====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
February 28,
1999 1998
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ($183) ($135)
Less: Net income (loss form continuing operations 0 (535)
------- -------
Net income (loss) form continuing operations (183) 400
------- -------
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Accrued interest on mortgage participation notes (180) (166)
Gain from sale of equipment subject to lease (318) (78)
Depreciation and amortization expense 4,198 1,588
Effect on cash flows of changes in:
Accounts receivable (351) 1,013
Notes receivable 3,484 (802)
Inventory (2,430) 2,537
Other assets (259) (431)
Accounts payable and other liabilities (533) (264)
Defered lease revenue (2,254) 888
Defered tax assets - (82)
Other - 327
------- -------
1,357 4,530
------- -------
Net cash provided by continuing operations 1,174 4,930
Net cash provided by used in discontinued operations (56) (813)
------- -------
Net cash provided by (used in) operations 1,118 4,117
------- -------
Cash flows from investing activities:
Proceeds from sale of equipment subject to lease 2,498 4,321
Proceeds from sales of other leased equipment 586 1,248
Proceeds from sales of telecommunications assets - 895
Purchase of rental equipment (2,692) (15,330)
Collections of rentals on direct financing leases net of
amortization of unearned income 1,069 1,175
Net proceeds from (invested in) mortgage participation notes 850 (1,524)
Purchase of property and equipment (76) (356)
------- -------
Net cash provided by (used in) investing activities 2,235 (9,571)
------- -------
Cash flows from financing activites:
Proceeds from lease, bank and institution financings 13,443 7,957
Payments on lease, bank and institution financings (14,107) (5,433)
Proceeds from excercise of stock options 0 137
Purchase of treasury stock (49) (313)
------- -------
Net cash provided by (used in) financing activites (713) 2,348
------- -------
Net increase (decrease) in cash and equivlents 2,640 (3,106)
Cash and cash equivalents at beginning of period 3,211 8,968
Cash and cash equivalents at end of period $5,851 5,862
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE>
Continental Information Systems Corporation
and its Subsidiaries
1. Basis of Presentation
The accompanying unaudited consolidated 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 28,1999, 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, 1998, appearing in the Company's Form 10-K.
2. Discontinued Operations
On May 29, 1998, the Company announced its decision to discontinue and
liquidate its LaserAccess laser printing business. The Company recorded a
provision of $4,955,000 in the quarter ended May 31, 1998, relative to the
disposal of LaserAccess' assets, including the write-off of goodwill, in
the amount of $3,258,000, and other charges related to the discontinuance
of the business unit.
The Company is currently engaged in litigation with the former owners and
executives of its discontinued LaserAccess business. In March 1998, the
Company prepaid remaining amounts due to the former owners and exercised a
right to set-off approximately $1.1 million against amounts due on
promissory notes in connection with the purchase of LaserAccess. The
Company has also terminated these individuals under their employment
agreements. On April 7, 1998, the former owners filed suit in Superior
Court of California, County of San Diego, seeking to recover damages
allegedly arising from the Company's set-off of amounts due. Additionally,
the former owners are seeking to recover approximately $733,000 in damages
arising from the Company's termination of their employment contracts. The
complaint, as amended, seeks damages for various other claims, including
defamation. The Company has asserted crossclaims and is vigorously
contesting these actions.
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):
<PAGE>
<TABLE>
<CAPTION>
For the Nine Months Ended
February 28,
1999 1998
-------- --------
<S> <C> <C>
Revenues $ - $ 3,662
Costs and expenses - 4,524
-------- --------
Loss from discontinued operations - (862)
Income tax benefit - (327)
-------- --------
Net loss from discontinued operations $ - ($535)
======== ========
</TABLE>
-6-
<PAGE>
The Consolidated Balance Sheets as of February 28, 1999 and May 31, 1998 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,
1999 1998
--------- ---------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 59 $ 19
Accounts receivable, net 12 198
Inventory 65 779
Furniture, fixtures and equipment, net - 12
Other assets - 58
--------- ---------
Total assets 136 1,066
--------- ---------
Liabilities:
Accounts payable and accruals 946 1,504
Note payable - 428
--------- ---------
Total liabilities 946 1,932
--------- ---------
Net (Liabilities) of
Discontinued Operations $ (810) $ (866)
========= =========
</TABLE>
3. Net Income Per Share
In fiscal 1998, the Company adopted Financial Accounting Standard No. 128
(SFAS 128), Earnings Per Share. SFAS 128 specified new standards for
computing and disclosing net income per share. Basic and diluted net
income per share for the nine months ended February 28, 1999 and 1998, was
computed based on the weighted average number of shares of common stock
outstanding during the periods. As of February 28, 1999, the Company had
outstanding options to purchase 421,674 shares of common stock (See Note
5). The potential dilution of these options is immaterial in the
computation of diluted net income per share.
4. Reclassifications
Certain prior period balances in the financial statements have been
reclassified to conform to the current period financial statement
presentation.
5. 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, in the discretion of the Board of Directors, employees of and
independent contractors and consultants to the Company.
-7-
<PAGE>
A summary of the status of the 1995 Plan as of February 28, 1999 and
changes since inception is presented below:
<TABLE>
<CAPTION>
Weighted Average
Number of Exercise Price
Options Per Option
------- ----------
<S> <C> <C>
Outstanding at
May 31, 1995 (none exercisable) 15,000 $ 3.50
Granted 9,000 $ 2.50
Exercised -- $ --
Forfeited/expired (9,000) $ 3.50
-------
Outstanding at
May 31, 1996 (6,000 exercisable) 15,000 $ 2.90
Granted 319,000 $ 1.97
Exercised (16,667) $ 1.97
Forfeited/expired (33,333) $ 1.97
-------
Outstanding at
May 31, 1997 (188,337 exercisable) 284,000 $ 2.02
Granted 190,674 $ 2.38
Exercised (70,001) $ 1.97
Forfeited/expired (38,331) $ 1.97
-------
Outstanding at
May 31, 1998 (234,002 exercisable) 366,342 $ 2.22
Granted 10,000 $ 1.95
Forfeited/expired (6,668) $ 1.97
-------
Outstanding at
August 31, 1998 (227,334 exercisable) 369,674 $ 2.22
-------
Granted 62,000 $ 1.92
Exercised -- --
Forfeited/expired
Outstanding at
November 30, 1998 (239,334 exercisable) 431,674 $ 2.18
=======
Granted
Exercised -- --
Forfeited/expired (10,000) $ 1.97
Outstanding at
February 28, 1999 (306,675 exercisable) 421,674 $ 2.18
=======
</TABLE>
-8-
<PAGE>
6. Share Repurchase
In May 1997, the Board of Directors authorized a $500,000 share repurchase
program. Under the prior program the Company conducted an odd lot tender which
after completion was followed by open-market repurchases. Continental has
expended nearly all funds previously authorized under the buyback program,
having bought back 203,768 shares, representing approximately 2.9% of
outstanding shares.
On February 19, 1999 the Company announced that its Board of Directors
authorized the expenditure of an additional $500,000 for the repurchase of its
common stock. Under the buyback program the Company may repurchase additional
shares at prevailing prices in the open market or in negotiated or other
permissible transactions at the discretion of management.
7. Lessee Bankruptcy
As previously reported, in October 1998, one of the Company's largest general
equipment lessees which had previously filed for protection from creditors under
Chapter 11 of the U.S. Bankruptcy Code announced plans to terminate
substantially all of its operations. The leases had been originated from
February 1997 through August 1997. The Company filed claims in Bankruptcy Court
against the lessee and ultimately reached agreement with the lessee for return
of the equipment. The Company is in possession of all the equipment. The Company
also sold or contracted to sell certain of the repossessed equipment for a loss
of $169,000 that was included in the second quarter. Remaining equipment which
is included in rental equipment, amounts to $806,000. The Company is actively
engaged in trying to sell or lease this equipment. In the interim the Company
continues to depreciate the equipment as well as monitor its reserves. There can
be no assurance that the Company will realize full value in its efforts to lease
or sell the remaining equipment. While the Company maintains reserves which it
believes to be reasonable, there can be no assurance that the reserves will be
adequate and fully cover any additional losses on disposal of the equipment.
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,
1998, appearing in the Company's Form 10-K.
All statements contained herein that are not historical facts, including but not
limited to, statements regarding anticipated future capital requirements and the
Company's future business plans, are based on current expectations. These
statements are forward looking in nature and involve a number of risks and
uncertainties. Actual results may differ materially. Among the factors that
could cause actual results to differ materially are those set forth below and
the other risk factors described from time to time in the Company's reports
filed with the SEC. The Company wishes to caution readers not to place undue
reliance on any such forward looking statements, which statements are made
pursuant to the Private Securities Litigation Reform Act of 1995 and, as such,
speak only as of the date made.
-9-
<PAGE>
Results of Operations
Comparison of the Three and Nine Months Ended February 28, 1999 and 1998
Continuing Operations
Revenues
Total revenues increased 21% to $4.7 million for the three months ended February
28, 1999 from $3.9 million for the comparable fiscal quarter in 1998. For the
nine months ended February 28, 1999, total revenues increased 1% to $12.9
million from $12.8 million for the comparable fiscal period in 1998. Within this
category, equipment sales increased 2% to $2.2 million for the three months
ended February 28, 1999 from $2.1 million for the comparable fiscal quarter in
1998. For the nine months ended February 28,1999, equipment sales decreased 30%
to $ 5.4 million from $7.7 million for the comparable prior year period. This
decrease reflects the lower results for the Air Group Business Unit. Sales and
margins from the Air Group business unit will vary quarter to quarter based on
the volume and timing of transactions. For the nine months ended February 28,
1999, Air Group business unit sales decreased 30% to $4.4 million from $6.3
million for the comparable period. Equipment rentals and income from direct
financing leases for the three and nine months ended February 28, 1999,
increased $718,000 (57%) and $2.7 million (78%) respectively from the comparable
periods in 1998. These increases reflect the Company's acquisition and placing
on lease of general purpose and aircraft rental equipment during the previous
and current fiscal years. Interest, fees and other income for the three and nine
months ended February 28,1999, were $253,000 and $1,117,000, respectively
compared to $507,000 and $1,586,000 for the corresponding prior year periods.
The respective decreases of 50% and 30% primarily reflect a decline in
management fees received from income funds and fees generated by brokered
transactions.
<PAGE>
Costs and Expenses
Costs and expenses for the three and nine months ended February 28, 1999,
increased by $990,000 (26%) and $1,090,000 (9%), respectively, from the
comparable periods in 1998. Within this category, cost of sales, as a percentage
of sales, for the three and nine months ended February 28, 1999, was 91% and
90%, respectively, as compared to 92% and 87% for the comparable prior year
periods. This variance is directly related to the results of operations of the
Air Group Business Unit and reflect the competitive conditions in the used
aircraft/engines marketplace. Revenues and earnings from the aircraft business
are likely to continue to vary quarter to quarter, based on a number of factors,
including the volume of transactions. Depreciation of rental equipment for the
three and nine months ended February 28, 1999, increased to approximately $1.3
million and $4.1 million from $0.5 million and $1.4 million, respectively, for
the comparable periods for 1998. These increases are directly related to the
Company's acquisition of general purpose and aircraft rental equipment during
the previous and current fiscal years. Interest expense for the three and nine
months ended February 28, 1999, was $156,000 and $456,000, respectively, as
compared to $141,000 and $398,000 for the comparable periods in 1998. The
increases of 11% and 15%, respectively, reflect the impact of increased debt
balances associated with the increased rental equipment portfolio and interest
incurred on the Air Group's revolving loan facility which was not in place
during the prior year comparable periods. Other operating expenses increased by
$136,000 (103%) and $152,000 (24%), respectively, for the three and nine months
ended February 28, 1999 from the year earlier periods. This increase is mainly
due to sub lease expense in the Air Group, for nine months in the current period
as compared to three months in the year earlier periods. Selling, general and
administrative expenses for the three months ended February 28, 1999, were
$1,008,000 as compared to $951,000 for the comparable three months in 1998. The
increase of $57,000 in the current period is attributable to new business
development costs relating to the Company's search for acquisitions and
nonrecurring expenditures related to the transfer of finance and administrative
functions to the Company's headquarters in New York City. For the nine months
ended February 28, 1999, selling, general and administrative expenses was
approximately $2.9 million as compared to approximately $3.0 million for the
prior year comparable period.
-10-
<PAGE>
Income Taxes
For the three and nine months ended February 28, 1999, a provision for deferred
income tax expense on income and benefit on loss from continuing operations was
recorded, at an effective tax rate of 38%, in the amount of $4,000 and $112,000,
respectively. For the three and nine months ended February 28, 1998, a provision
for deferred income tax expense on income from continuing operations was
recorded, at an effective rate of 38%, in the amount of $64,000 and $245,000
respectively.
Discontinued Operations
On May 29, 1998, the Company announced its decision to discontinue and liquidate
its LaserAccess laser printing business. The Company recorded a provision of
$4,955,000 in the quarter ended May 31, 1998, relative to the disposal of
LaserAccess' assets, including the write-off of goodwill, in the amount of
$3,258,000, and other charges related to the discontinuance of the business
unit. See "PART II, Item 1. Legal Proceedings" for a discussion of litigation
related to LaserAccess.
A summary of the results of discontinued operations follows (in thousands):
<TABLE>
<CAPTION>
For the Nine Months Ended
February 28,
1999 1998
--------- ---------
<S> <C> <C>
Revenues $ - $ 3,662
Costs and expenses - 4,524
--------- ---------
Loss from discontinued operations - (862)
Income tax benefit - (327)
--------- ---------
Net loss from discontinued operations $ - $ (535)
========= =========
</TABLE>
<PAGE>
Liquidity and Capital Resources
Cash provided by operations for the nine months ended February 28, 1999, was
$1.1 million as compared to $4.1 million for the comparable period in 1998.
Deferred lease revenues had a negative impact of 2.3 million on cash flows in
the current period as compared to a positive cash flow of $0.8 million in the
prior year period. An increase of inventory levels of approximately $2.4 million
in the current period has a negative effect on the cash flow as compared to $2.5
million positive cash flow in prior year period. The Company's investment in
rental equipment varies from period to period based on a number of factors,
including current market conditions and the availability of adequate credit
facilities. Proceeds from sale of equipment subject to lease in the current
period decreased $1.8 million to $2.5 million as compared to $4.3 million in the
prior year period. The Company received net proceeds of approximately $0.9
million from its investment in mortgage participation notes under its agreement
with Emmes Investment Management Co. LLC. Proceeds from lease, bank and
institution financings for the nine months ended February 28, 1999 and 1998,
were $13.4 million and $7.9 million, respectively, while payments on these
financings were $14.1 million and $5.4 million for the current period and the
year prior period. The significant increases for the current period are
primarily attributable to advances and repayments on the $10,000,000 revolving
loan facility of its operating subsidiary CIS Air Corporation. This loan
facility was not in place during the prior year period. The facility has a
three-year term and permits borrowing equal to a percentage of the appraised
value of the aircraft engines financed. Substantially all of the assets of CIS
Air are pledged as collateral for the loan. At February 28, 1999, $6,068,000 of
this facility was outstanding.
-11-
<PAGE>
As of February 28, 1999, the Company had $5.8 million in cash and cash
equivalents, as compared to $3.2 million at February 28, 1998.
The Company announced in October 1998 that it had hired the merchant banking
firm of Helix Capital to assist it in identifying acquisitions and other growth
opportunities. The Company is reviewing various potentional transactions
introduced by Helix Capital. The Company has been managing its cash reserves in
order to accumulate funds for potential acquisition transactions and to finance
internal growth. The Company is also seeking additional sources of financing to
fund acquisitions and internal growth. The availability of any such financing
will be dependent on a number of factors, including the terms of the transaction
being financed, the Company's operating performance, and market conditions.
While the Company believes that it has sufficient cash to fund certain
acquisition targets, the inability to obtain financing for additional
acquisitions and growth may limit the Company's growth strategy. There can be no
assurance that such financing will be available on acceptable terms. The Company
expects that operations will generate sufficient cash to meet its operating
expenses and current obligations for the foreseeable future.
The Company finances certain equipment leases by assigning the rentals to
various lending institutions at a fixed rate on a recourse and non-recourse
basis. During the third quarter, the Company decided not to proceed to close on
a $3,000,000 "warehouse" line of credit that was to cover the Company's general
equipment leasing business. The Company concluded that this facility was not
needed at this time in light of current activity levels of its leasing business,
and that more favorable terms might be obtainable from other sources. The
Company has had preliminary discussions with other lenders to structure a
facility to meet the Company's anticipated credit needs. Such facility will be
dependent on the Company's acquisition and growth strategy.
Year 2000
As the year 2000 approaches, a critical issue has emerged for all companies,
including the Company, with respect to whether application software programs and
operating systems utilized by a company and the companies with which it does
business can accommodate this date value. In brief, many existing application
software products in the marketplace were designed only to accommodate a
two-digit date position which represents the year (e.g., "95" is stored on the
system and represents the year 1995). As a result, the year 1999 (i.e., "99")
could be the maximum date value these systems will be able to process
accurately.
<PAGE>
The Company has been engaged in a review of the software and information systems
it uses in an effort to determine whether it or its operations may be materially
adversely affected by this so-called "Year 2000" conversion. As a result of that
review, the Company upgraded and replaced its hardware systems with systems that
are Year 2000 compliant. In addition, the Company has completed conversion to
the updated release of its vendor's lease billing software. It is currently in
the testing and conversion phase to replace its accounting software. The Company
expects that this software will be fully operational by the middle of 1999. The
Company has inquired of, and generally obtained the assurances of, the providers
of such software with respect to its being Year 2000 compliant. Based on its
review the Company does not presently believe that Year 2000 compliance issues
with respect to its software and systems will cause any material disruptions,
malfunctions or failures of its business. However, no assurances can be given
that such review uncovered every potential adverse effect of the Year 2000
conversion in connection with any of such software or systems.
With respect to assets other than its computer hardware and software systems,
the Company is aware that some of the equipment it leases may have embedded
technology that is not Year 2000 compliant. Under the terms of the leases,
however, the Company is not responsible for the maintenance and repair of this
equipment, and the leases are non-cancelable. Failure to achieve Year 2000
compliance may materially adversely affect the value of such equipment. No
assurance can be given that such decrease in value would not have a material
adverse effect on the Company's business or results of operations.
-12-
<PAGE>
The Company has begun a review of whether the software and systems of the
vendors, financing sources, customers, equipment manufacturers or distributors
or other parties with which it deals may, as a result of the Year 2000
conversion, have a materially adverse effect on the Company or its operations.
As part of this review, The Company is obtaining assurances from each of such
parties, whose dealings with the Company are material to the Company or its
operations, that such party does not and will not utilize software or systems
that are or will be important to the operations of such party, that may cause
problems to such party or the Company as a result of the Year 2000 conversion.
However, no assurances can be given the information provided to the Company is
accurate and that such other party will be Year 2000 compliant.
The Company currently believes that its systems will be Year 2000 compliant
during 1999. It nonetheless has begun developing a contingency plan. The Company
will maintain an ongoing effort to recognize and evaluate potential exposure
relating to the Year 2000 conversion arising from its use of software supplied
by other parties or its dealings with other parties. The total cost to the
Company of these Year 2000 compliance activities has not been, and is not
anticipated to be material to its financial position or results of operations.
-13-
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is currently engaged in litigation with the former
owners and executives of its discontinued LaserAccess business. In
March 1998, the Company prepaid remaining amounts due to the former
owners and exercised a right to set-off approximately $1.1 million
against amounts due on promissory notes in connection with the
purchase of LaserAccess. The Company has also terminated these
individuals under their employment agreements. On April 7, 1998,
the former owners filed suit in Superior Court of California,
County of San Diego, seeking to recover damages allegedly arising
from the Company's set-off of amounts due. Additionally, the former
owners are seeking to recover approximately $733,000 in damages
arising from the Company's termination of their employment
contracts. The complaint, as amended, seeks damages for various
other claims, including defamation. The Company has asserted
crossclaims and is vigorously contesting these actions.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K - No reports on Form 8-K were filed by the
Company during the nine months ended February 28, 1999.
-14-
<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 15, 1999 By: /s/ Michael L. Rosen
--------------------
Michael L. Rosen
President, Chief Executive Officer and Director
Date: April 15, 1999 By: /s/ Jonah M. Meer
-----------------
Jonah M. Meer
Senior Vice President, Chief Operating Officer
and Chief Financial Officer
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