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 November 30, 1998 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.)
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 December 31,
1998, the registrant has 6,939,060 shares of common stock, par value $.01 per
share, outstanding.
CONTINENTAL INFORMATION SYSTEMS CORPORATION
AND ITS SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets -
November 30, 1998 and May 31, 1998
Consolidated Statements of Operations - for the three and
six months ended November 30, 1998 and 1997
Consolidated Statements of Cash Flows - for the three and
six months ended November 30, 1998 and 1997
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Continental Information Systems Corporation
and its Subsidiaries
In Thousands (Except Number of Shares)
CONSOLIDATED BALANCE SHEETS
(Unaudited)
November 30, May 31,
1998 1998
-------- --------
Assets:
Cash and cash equivalents $ 4,694 $ 3,211
Accounts receivable, net 1,091 636
Notes receivable 4,331 6,870
Investment in mortgage participation notes 1,002 1,522
Inventory 3,712 3,755
Net investment in direct financing leases 4,857 4,658
Rental equipment, net (Note 6) 15,263 18,118
Furniture, fixtures and equipment, net 404 398
Other assets 876 620
Deferred tax assets 5,414 5,414
-------- --------
Total assets $ 41,644 $ 45,202
======== ========
Liabilities and Shareholders' Equity:
Liabilities:
Accounts payable and other liabilities $ 2,120 $ 2,377
Discounted lease rental borrowings 2,105 2,594
Note payable to institution - collateralized 3,383 4,429
Net liabilities of discontinued operations (Note 2) 598 866
Deferred lease revenue 4,667 5,976
-------- --------
Total liabilities 12,873 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 (6,023) (5,834)
-------- --------
29,177 29,366
Treasury stock, at cost; 162,608 shares (406) (406)
-------- --------
Total shareholders' equity 28,771 28,960
-------- --------
Total liabilities and shareholders' equity $ 41,644 $ 45,202
======== ========
The accompanying notes are an integral part of these financial statements.
Continental Information Systems Corporation
and its Subsidiaries
(In Thousands)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three For the Six
Months Ended Months Ended
November 30, November 30,
1998 1997 1998 1997
------ ------ ------ ------
Revenues:
Equipment sales $ 104 $2,090 $3,202 $5,526
Equipment rentals 1,757 794 3,628 1,763
Income from direct financing leases 233 182 439 369
Gain from sale of equipment subject to lease - - - 78
Interest, fees and other income 361 563 864 1,079
------ ------ ------ ------
2,455 3,629 8,133 8,815
------ ------ ------ ------
Costs and Expenses:
Cost of sales 190 1,946 2,886 4,658
Depreciation of rental equipment 1,389 382 2,810 862
Interest expense 136 80 300 257
Other operating expenses 224 204 524 508
Selling, general and administrative expense 998 904 1,918 2,053
------ ------ ------ ------
2,937 3,516 8,438 8,338
------ ------ ------ ------
Income (loss) from continuing operations before income taxes (482) 113 (305) 477
Provision (credit) for income tax (183) 43 (116) 181
------ ------ ------ ------
Income (loss) from continuing operations (299) 70 (189) 296
Loss from discontinued operations, net of tax benefit (Note 2) - 309 - 436
------ ------ ------ ------
Net Income (loss) ($299) ($239) ($189) ($140)
====== ====== ====== ======
Basic and diluted net income (loss) per share (Note 1):
Income from continuing operations (.04) .01 (.03) .04
Income (loss) from discontinued operations - (.04) - (.06)
------ ------ ------ ------
Net Income (.04) (.03) (.03) (.02)
====== ====== ====== ======
Weighted average number of shares of common stock
outstanding 6,939 6,990 6,939 7,003
====== ====== ====== ======
The accompanying notes are an integral part of these financial statements.
Continental Information Systems Corporation
and its Subsidiaries
(In Thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months Ended
November 30,
------------------------
1998 1997
------- -------
Cash flows from operating activities:
Net (loss) $ (189) $ (140)
Less: Net loss from discontinued operations - (436)
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Net income (loss) from continuing operations (189) 296
------- -------
Adjustments to reconcile net income (loss) from continuing operations
To net cash provided by operating activities:
Proceeds from sale of equipment subject to lease - 850
Gain from sale of equipment subject to lease - (78)
Proceeds from sale of other leased equipment 191 58
Proceeds from sale of telecommunications assets - 895
Amortization of unearned income (439) (369)
Collections of rentals on direct financing leases 1,132 1,210
Depreciation and amortization expense 2,857 1,033
Effect on cash flows of changes in:
Accounts receivable (455) 847
Notes receivable 2,539 1,593
Inventory 43 (922)
Other assets (256) (262)
Accounts payable and other liabilities (257) (54)
Deferred lease revenue (1,309) 45
Deferred tax assets - (86)
Other (78) 191
------- -------
3,968 4,951
------- -------
Net cash provided by continuing operations 3,779 5,247
Net cash used in discontinued operations (268) (622)
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Net cash provided by operations 3,511 4,625
------- -------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months Ended
November 30,
------------------------
1998 1997
------- -------
Cash flows from investing activities:
Purchase of rental equipment (1,090) (7,295)
Purchase of property and equipment (53) (84)
Proceeds from investment in mortgage participation notes 650 (1,123)
------- -------
Net cash (used in) investing activities (493) (8,502)
------- -------
Cash flows from financing activities:
Proceeds from lease, bank and institution financings 8,110 1,169
Payments on lease, bank and institution financings (9,645) (1,372)
Proceeds from exercise of stock options - 138
Purchase of treasury stock - (236)
------- -------
Net cash used in financing activities (1,535) (301)
------- -------
Net increase (decrease) in cash and cash equivalents 1,483 (4,178)
Cash and cash equivalents at beginning of period 3,211 8,968
------- -------
Cash and cash equivalents at end of period $ 4,694 $ 4,790
======= =======
The accompanying notes are an integral part of these financial statements.
Continental Information Systems Corporation
and its Subsidiaries
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 six months ended November 30, 1998, 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):
Continental Information Systems Corporation
and its Subsidiaries
For the Six Months Ended
November 30,
------------------------
1998 1997
------- -------
Revenues $ -- $ 1,998
Costs and expenses -- 2,701
------- -------
Loss from discontinued operations -- (703)
Income tax benefit -- (267)
------- -------
Net loss from discontinued operations $ -- ($ 436)
======= =======
The Consolidated Balance Sheets as of November 30, 1998 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):
November 30, May 31,
1998 1998
------- -------
Assets:
Cash and cash equivalents $ 172 $ 19
Accounts receivable, net 228 198
Inventory 65 779
Furniture, fixtures and equipment, net -- 12
Other assets -- 58
------- -------
Total assets 465 1,066
------- -------
Liabilities:
Accounts payable and accruals 1,063 1,504
Note payable -- 428
------- -------
Total liabilities 1,063 1,932
------- -------
Net (Liabilities) of
Discontinued Operations $ (598) $ (866)
======= =======
Continental Information Systems Corporation
and its Subsidiaries
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 six months ended November 30, 1998 and 1997, was
computed based on the weighted average number of shares of common stock
outstanding during the periods. As of November 30, 1998, the Company had
outstanding options to purchase 431,674 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.
Continental Information Systems Corporation
and its Subsidiaries
A summary of the status of the 1995 Plan as of November 30, 1998 and
changes since inception is presented below:
Weighted Average
Number of Exercise Price
Options Per Option
------- ----------
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
=======
6. Lessee Bankruptcy
In October, one of the Company's largest general equipment lessees which had
previously filed for protection from creditor under Chapter 11 of the Bankruptcy
Act 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. As a result of this bankruptcy the Company failed to receive
lease payments of approximately $150,000 during the second quarter. The Company
also sold or contracted to sell certain of the repossessed equipment for a loss
of $169,000 that is included in the second quarter. Remaining equipment which is
included in rental equipment, amounts to $896,080. The Company is actively
trying to sell or lease this equipment. 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.
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,
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.
Results of Operations
Comparison of the Three and Six Months Ended November 30, 1998 and 1997
Continuing Operations
Revenues
Total revenues decreased 32% to $2.5 million for the three months ended November
30, 1998 from $3.6 million for the comparable fiscal quarter in 1997. For the
six months ended November 30, 1998, total revenues decreased 8% to $8.1 million
from $8.8 million for the comparable fiscal period in 1997. Within this
category, equipment sales decreased 95% to $104,000 for the three months ended
November 30, 1998 from $2.1 million for the comparable fiscal quarter in 1997.
This decrease is directly attributable to the Air Group business unit closing no
engine sale transactions during the current quarter compared to $2.0 million of
sales for the prior year fiscal quarter. Sales and margins from the Air Group
business unit will vary quarter to quarter based on the volume and timing of
transactions. For the six months ended November 30,1998, equipment sales
decreased 42% to $3.2 million from $5.5 million for the comparable prior year
period. This decrease reflects the lower results for the Air Group business unit
and inclusion in the prior year period of three months of operations for the
telecommunications business unit, which was sold on August 31, 1997. Equipment
rentals and income from direct financing leases for the three and six months
ended November 30, 1998, increased $1.0 million (104%) and $1.9 million (91%)
respectively from the comparable periods in 1997. These increases reflect the
cumulative effect of the Company's acquisition of general purpose and aircraft
rental equipment during the previous and current fiscal years. Interest, fees
and other income for the three and six months ended November 30, 1998, were
$361,000 and $864,000, respectively compared to $563,000 and $1,079,000 for the
corresponding prior year periods. The respective decreases of 36% and 20%
primarily reflect a decline in management fees received from income funds and
fees generated by brokered transactions.
Continental Information Systems Corporation
and its Subsidiaries
Costs and Expenses
Costs and expenses for the three and six months ended November 30, 1998,
decreased by $579,000 (16%) and increased by $100,000 (1%), respectively, from
the comparable periods in 1997. Within this category, cost of sales, as a
percentage of sales, for the three and six months ended November 30, 1998, were
183% and 90%, respectively, as compared to 93% and 84% for the comparable prior
year periods. The percentage for the three months ended November 30, 1998 is
directly attributable to the one time impact of selling equipment repossessed
from a lessee for an amount less than the then current book value of the
equipment. This transaction, in addition to the results of operations of the Air
Group business unit, also directly impacts the percentage variance for the
comparative six-month periods. Revenues and earnings from the aircraft business
are expected to vary from quarter to quarter based on a number of factors,
including the volume of transactions. Depreciation of rental equipment for the
three and six months ended November 30, 1998, increased to approximately $1.4
million and $2.8 million from $.4 million and $.9 million, respectively, for the
comparable periods for 1997. These increases are directly related to the
cumulative effect of the Company's acquisition of general purpose and aircraft
rental equipment during the previous and current fiscal years. Interest expense
for the three and six months ended November 30, 1998, was $136,000 and $300,000,
respectively, as compared to $80,000 and $257,000 for the comparable periods in
1997. The increases of 70% and 17%, 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 slightly by $20,000 (10%) and $16,000 (3%), respectively, for the
three and six months ended November 30, 1998 from the year earlier periods.
Selling, general and administrative expenses for the three months ended November
30, 1998, were $998,000 as compared to $904,000 for the comparable three months
in 1997. The increase is attributable to nonrecurring expenditures related to
the transfer of finance and administrative functions to the Company's
headquarters in New York City. For the six months ended November 30, 1998, the
selling, general and administrative expenses decreased to approximately $1.9
million from approximately $2.1 million for the prior year comparable period.
This decrease is principally due to cost containment and staff reductions
between the periods.
Income Taxes
For the three and six months ended November 30, 1998, a provision for deferred
income tax benefit on loss from continuing operations was recorded, at an
effective tax rate of 38%, in the amount of $183,000 and $116,000, respectively.
For the three and six months ended November 30, 1997, a provision for deferred
income tax expense on income from continuing operations was recorded, at an
effective rate of 38%, in the amount of $43,000 and $181,000 respectively.
Additionally, for the three and six months ended November 30, 1998, a provision
for deferred income tax benefit on loss from discontinued operations was
recorded, at an effective tax rate of 38%, in the amount of $190,000 and
$267,000 respectively.
Continental Information Systems Corporation
and its Subsidiaries
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):
For the Six Months Ended
November 30,
-------------------------
1998 1997
------- -------
Revenues $ -- $ 1,998
Costs and expenses -- 2,701
------- -------
Loss from discontinued operations -- (703)
Income tax benefit -- (267)
------- -------
Net loss from discontinued operations $ -- $ (436)
======= =======
Liquidity and Capital Resources
Cash provided by operations for the six months ended November 30, 1998, was $3.5
million as compared to $4.6 million for the comparable period in 1997. The
decrease was primarily due to no proceeds being generated by the sale of
equipment subject to lease in the current period as compared to approximately
$.9 million in the prior year period. Additionally, the sale of the assets of
the Telecommunications business unit in the prior year period generated $.9
million of proceeds. Significant funds were generated in the current period by
net collections of rentals on direct financing leases of $1.1 million and notes
receivable of $2.5 million. The Company purchased $1.1 million of additional
rental equipment for lease transactions during the current period as compared to
$7.3 million for the comparable period in 1997. 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. The Company received net proceeds of approximately $.7 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 six months ended November 30, 1998 and 1997, were $8.1
million and $1.2 million, respectively, while payments on these financings were
$9.6 million and $1.4 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 November 30, 1998, $3,383,000 of this facility was outstanding.
Continental Information Systems Corporation
and its Subsidiaries
As of November 30, 1998, the Company had $4.7 million in cash and cash
equivalents, as compared to $4.8 million at November 30, 1997.
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. The
Company has finalized the terms of a $3,000,000 "warehouse" line of credit. The
loan agreement contains various covenants, including limitations on incurring
additional liens and encumbrances and prohibiting certain transactions with
affiliates or subsidiaries.
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 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 will be able to obtain financing for its acquisition
and growth plans, there can be no assurance that such financing will be
available on acceptable terms.
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.
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.
Continental Information Systems Corporation
and its Subsidiaries
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 residual value of such equipment.
No assurance can be given that such decrease in residual value would not have a
material adverse effect on the Company's business or results of operations.
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
in any given year.
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
six months ended November 30, 1998.
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: January 14, 1999 By: /s/ Michael L. Rosen
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Michael L. Rosen
President, Chief Executive Officer
and Director
Date: January 14, 1999 By: /s/ Jonah M. Meer
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Jonah M. Meer
Senior Vice President,
Chief Operating Officer
and Chief Financial Officer