SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended August 31, 2000 or
/ / Transition report pursuant to section 13 of 15(d) of the Securities Exchange
Act of 1934 for the transition period from ________ to ________
Commission file number: 0-25104
CONTINENTAL INFORMATION SYSTEMS CORPORATION
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(Exact name of registrant as specified in its charter)
New York 16-0956508
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation)
45 Broadway Atrium, Suite 1105, New York, New York 10006
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(Address of principal executive offices) (Zip Code)
(212) 771-1000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: As of September 30,
2000, the registrant has 6,576,244 shares of common stock, par value $.01 per
share, outstanding.
CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
TABLE OF CONTENTS
Page
Number
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PART I. FINANCIAL INFORMATION: 3
Item 1. FINANCIAL STATEMENTS 3
Consolidated Balance Sheets -
August 31, 2000 and May 31, 2000 3
Consolidated Statements of Operations -
for the three months ended August 31, 2000 and 1999 4
Consolidated Statements of Cash Flows -
for the three months ended August 31, 2000 and 1999 5
Notes to Consolidated Financial Statements 6-8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9-10
PART II. OTHER INFORMATION: 11
Item 1. LEGAL PROCEEDINGS 11
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 12
SIGNATURES 13
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
In Thousands (Except Number of Shares)
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CONSOLIDATED BALANCE SHEETS
August 31, May 31,
2000 2000
(Unaudited)
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ASSETS:
Cash and cash equivalents $ 3,919 $ 3,382
Accounts receivable, net 361 1,095
Notes receivable 2,425 2,567
Investment in mortgage participation notes 592 1,108
Restricted cash 900 900
Net investment in direct financing leases 536 1,092
Rental equipment, net 487 96
Property, plant and equipment, net 235 260
Other assets 436 229
Net assets of discontinued operations 3,524 3,524
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Total assets $ 13,415 $ 14,253
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LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Accounts payable and other liabilities $ 553 $ 509
Discounted lease rental borrowings 147 163
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Total liabilities 700 672
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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 (21,619) (20,753)
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13,581 14,447
Treasury stock, at cost; 525,424 shares in 2000 (866) (866)
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Total shareholders' equity 12,715 13,581
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Total liabilities and shareholders' equity $ 13,415 $ 14,253
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The accompanying notes are an integral part of these financial
statements.
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CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
In Thousands (Except per Share Data)
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CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended
August 31,
--------------------
2000 1999
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REVENUES:
Equipment sales $ 58 $ 1,835
Equipment rentals 41 928
Income from direct financing leases 21 113
Interest income 162 134
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282 3,010
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COSTS AND EXPENSES:
Cost of sales 50 1,685
Depreciation of rental equipment 9 832
Interest expense 4 4
Other operating expenses 53 62
Selling, general and administrative expense 1,032 795
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1,148 3,378
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Loss from continuing operations (866) (368)
Loss from discontinued operations, net of tax benefit -- (245)
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Net loss $ (866) $ (613)
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Basic and diluted net loss per share (Note 2):
Loss from continuing operations $ (0.13) $ (0.05)
Loss from discontinued operations -- (0.04)
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Net loss per share $ (0.13) $ (0.09)
======= =======
Weighted average number of shares of common
stock outstanding 6,576 6,885
======= =======
The accompanying notes are an integral part of these financial
statements.
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CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
(In Thousands)
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CONSOLIDATED STATEMENTS OF CASH FLOWS
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THREE MONTHS ENDED AUGUST 31,
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2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (866) $ (613)
Less: Loss from discontinued operations -- (245)
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Loss from continuing operations (866) (368)
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Adjustments to reconcile net loss from continuing operations
to net cash provided by (used in) operating activities:
Gain from sale of equipment subject to lease (8) (150)
Depreciation and amortization expense 30 954
Effect on cash flows of changes in:
Accounts receivable, net 734 (37)
Notes receivable 142 220
Other assets (207) (42)
Accounts payable and other liabilities 44 44
Deferred lease revenue -- (732)
Other 25 17
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760 274
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Net cash used in continuing operations (106) (94)
Net cash used in discontinued operations -- (1,174)
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Net cash used in operating activities (106) (1,268)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment 58 1,834
Purchase of rental equipment -- (176)
Purchase of property and equipment -- (5)
Collections of rentals on direct financing leases net of
amortization of unearned income 85 198
Proceeds of (investment in) mortgage participation notes 516 (210)
Restricted cash -- --
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Net cash provided by investing activities 659 1,641
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CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on lease, bank and institution financings
and cash used in financing activities (16) (164)
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Net increase in cash and cash equivalents 537 209
Cash and cash equivalents at beginning of period 3,382 5,616
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Cash and cash equivalents at end of period $ 3,919 $ 5,825
======= =======
Cash paid for interest $ 4 $ 4
Non-cash transfers of equipment which came off lease 449 54
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The accompanying notes are an integral part of these
financial statements.
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CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
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Notes to Consolidated Financial Statements
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Continental
Information Systems Corporation have been prepared in accordance with
generally accepted accounting principles for interim financial information
and in accordance with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting only of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three months
ended August 31, 2000 are not necessarily indicative of the results that may
be expected for the year ended May 31, 2001. These statements should be read
in conjunction with the consolidated financial statements and footnotes
thereto included in the Company's annual report on Form 10-K for the year
ended May 31, 2000.
2. NET INCOME PER SHARE
EARNINGS PER SHARE, are calculated in accordance with Financial Accounting
Standard 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 three months ended August 31, 2000 and
1999, was computed based on the weighted average number of shares of common
stock outstanding during the periods. As of August 31, 2000, the Company had
issued and outstanding options to purchase 213,616 shares of common stock
(See Note 5). The effect of these options is anti-dilutive in the
computation of diluted net income (loss) per share.
3. ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles 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 periods. Actual results could differ from those estimates.
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.
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CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
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A summary of the status of the 1995 Plan as of August 31, 2000 and changes
during the years ended on those dates is presented below:
Weighted Average
Number of Exercise Price
Options Per Option
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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
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Outstanding at
May 31, 1998 (234,002 exercisable) 366,342 $ 2.22
Granted 72,000 $ 1.92
Exercised -- --
Forfeited/expired (16,668) $ 1.97
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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 -- --
Exercised -- --
Forfeited/expired (101,667) $ 2.17
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Outstanding at
August 31, 2000 (200,336 exercisable) 213,616 $ 2.18
--------
6. 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 will be exiting the aviation business, and that it
would account for and report the Air Group Business as a discontinued
operation.
CIS Air has a revolving loan agreement (the "CIS Air Loan facility") with an
institution to provide lease and inventory financing for aircraft engines,
in the amount of $10,000,000. The facility has a three-year term and permits
borrowings 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 August 31, 2000, $1,449,000 of this facility was
being utilized. The CIS Air Loan facility bears interest at prime plus 1/4%
(9.75% at August 31, 2000) and expires in December 2000. Interest related to
this facility was $95,000 and $152,000 for the quarter ended August 31, 2000
and 1999, respectively. Proceeds of sale are used to permanently pay down
the loan. The Company's lender had been notified, and the CIS Air Loan
facility will not be renewed. Upon pay down of the CIS Air Loan facility,
and in connection with CIS Air's exiting from the aviation business,
proceeds from the disposition of Air assets will be available for general
corporate purposes. As of September 30, 2000, $1,405,000 of the facility was
unpaid.
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CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
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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.
For the Three Months Ended
August 31,
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2000 1999
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Revenues $ -- $ 1,828
Costs and expenses -- 2,073
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Loss from discontinued operations -- (245)
Income tax benefit -- --
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Net loss from discontinued operations $ -- $ (245)
======== =======
A summary of the assets and liabilities of discontinued operations follows
(in thousands):
August 31, 2000 May 31, 2000
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ASSETS:
Cash and cash equivalents $ 474 $ 336
Accounts receivable, net 104 991
Inventory 4,495 5,254
Net investment in direct financing leases 815 907
Rental equipment 728 5,663
Other assets 4 4
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Total assets 6,620 13,155
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LIABILITIES:
Accounts payable and costs of discontinuance 1,395 2,229
Other Liabilities 252 483
Note payable to institution 1,449 6,919
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Total liabilities 3,096 9,631
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Net assets of discontinued operations $ 3,524 $ 3,524
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-8-
CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
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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,
2000, appearing in the Company's annual report on 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.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED AUGUST 31, 2000 AND 1999
CONTINUING OPERATIONS
REVENUES
Total revenues decreased 96.8% to $58,000 for the three months ended August 31,
2000 from $1,835,000 for the comparable fiscal quarter in 1999. Within this
revenue category, equipment sales decreased 95.6% to $41,000 for the three
months ended August 31, 2000 from $928,000 for the comparable fiscal quarter in
1999. Equipment rentals and income from direct financing leases decreased 94.0%
to $62,000 for the quarter ended August 31, 2000 from $1,041,000 for the quarter
ended August 31, 1999. The decrease in total revenues and sales are attributable
to the Company ceasing the origination of new equipment leases and the sale of a
substantial portion of the Company's lease portfolio as of August 31, 1999.
Interest, fees and other income increased 20.9% to $162,000 for the three months
ended August 31, 2000 from $134,000 for the comparable fiscal quarter in 1999.
This increase is principally due to increase in the interest on notes receivable
in the amount of $12,000 and increase in the interest on bank and short-term
investments in the amount of $16,000 compared to prior year period.
COSTS AND EXPENSES
Depreciation of rental equipment decreased 99% to $9,000 for the quarter ended
August 31, 2000 from $832,000 for the comparable fiscal quarter in 1999. This
decrease is due to a decrease in the cost of rental equipment from $3,476,000 to
$727,000 as a result of the sale of substantial portion of the portfolio in
August 1999.
Selling, general and administrative expenses increased 29.8% to $1,032,000 for
the three months ended August 31, 2000 from $795,000 for the comparable fiscal
period in 1999. This increase is attributable to the Company's start up
subsidiary T1Xpert.com, which expenses amounted to $604,000 for the quarter.
This increase was offset by decrease in general and administrative expenses in
the amount of $367,000. These decreases were principally due to cost containment
efforts and staff reduction between the periods.
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CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
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INCOME TAXES
For the quarter ended August 31, 2000, provision for deferred income tax benefit
on income from continuing operations was not recorded, because, in management's
opinion, the realizability of the deferred tax asset was uncertain in light of
the Company's actual operating results since reorganization.
LIQUIDITY AND CAPITAL RESOURCES
Proceeds from lease, bank and institution financings for the three months ended
August 31, 2000 and 1999 were $16,000 and $164,000, respectively. In August 1999
a substantial portion of the general equipment lease portfolio was sold
resulting in paying down majority of the debt balance.
As of August 31, 2000, the Company had $3.9 million in cash and cash
equivalents, as compared to $5.8 million at August 31, 1999 and $3.4 million at
May 31, 2000.
T1Xpert.com had expended $2,215,000 from inception in August 1999 through August
31, 2000. The Company believes it has sufficient cash on hand to meet current
operating needs until the projected development of an alpha product.
The Company anticipates that, in developing past the alpha stage, it will need
substantial additional funds. In connection therewith, the Company will be
seeking investments from strategic client/investors and/or venture capital
investors. The form of investment will depend upon terms and conditions to be
negotiated. The Company may co-invest with such investors or, failing to find
such investors, the Company may decide to fund such expenditures from its own
resources, as then available. There can be no assurance that the Company will be
able to meet its financial needs after it passes the alpha stage of development.
The Company does not anticipate entering into financing arrangements with
financial institutions, involving collateralizing and/or leveraging the
Company's assets.
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CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported, the Company's Airgroup subsidiary, CIS Air Corporation,
has three actions pending against Eastwind Airlines ("Eastwind"), a lessee of
aircraft and engines, and its parent UM Holding, Inc. The main action is an
involuntary bankruptcy petition brought in the Bankruptcy Court in Delaware
against Eastwind Airlines by CIS Air and two other petitioning creditors.
Subsequently, three other creditors joined the petition. The petitioning
creditors' claims amounted to in excess of $7 million. The Company also has an
action pending against AeroTurbine, Inc. in North Carolina state court.
On September 19, 2000, the Company and the other petitioning creditors reached a
settlement agreement with Eastwind Airlines and UM Holding, Inc. The material
provisions of the final agreement will result (i) 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; (ii) the dismissal of CIS Air's lawsuit against AeroTurbine and
AeroTurbine's dismissal of its counterclaims; and (iii) cross-releases by
Eastwind and JetStream L.P., an entity managed by CIS Air, in exchange for
engine parts to be received by CIS Air. The agreement and receipt of the above
consideration is subject to, among other things, the entry of a final
non-appealable order of the Bankruptcy Court dismissing the pending actions that
arise out of or relate to the operation of Eastwind Airlines.
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. The litigation is in its initial stages.
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 suit is in the
initial phase of litigation.
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 discovery phase of litigation.
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CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS - The following documents are filed as part of this Quarterly
Report:
Exhibit No.
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2.1* Disclosure Statement with respect to Trustee's Joint Plan of
Reorganization dated October 4, 1994.
2.2* November 29, 1994 Order Confirming Trustee's Joint Plan of
Reorganization dated October 4, 1994.
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 October 20, 1998 (Filed as
exhibit 3.2 to the Company's Form 10-K for the fiscal year ended May
31, 1999 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).
10.5** Loan and Security Agreement between CIS Air Corporation and Heller
Financial, Inc. dated December 19, 1997 (Filed as Exhibit 10.1 to
the Company's 10-Q for the quarter ended February 28, 1998 and
incorporated herein by reference).
27.1 Financial Data Schedule.
* 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) REPORT ON FORM 8-K - The Company filed the following report on
Form-8K on the date indicated during the quarter ended August 31,
2000.
Date Description
---- -----------
August 14, 2000 The Company announced that it was
exiting the aviation business.
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CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONTINENTAL INFORMATION SYSTEMS CORPORATION
Date: October 16, 2000 By: /s/ Michael L. Rosen
--------------------
Name: Michael L. Rosen
Title: President, Chief Executive Officer
and Director
Date: October 16, 2000 By: /s/ Jonah M. Meer
-----------------
Name: Jonah M. Meer
Title: Senior Vice President, Chief
Operating Officer and Chief
Financial Officer
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