10-Q 1 cis3q0302.txt QUARTERLY REPORT 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, 2003 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) 50 Battery Place, Suite 7F, New York, New York 10280 ---------------------------------------------- ----- (Address of principal executive offices) (Zip Code) (212) 945-2080 -------------- (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 March 31, 2003, the registrant has 4,375,712 shares of common stock, par value $.01 per share, outstanding. CONTINENTAL INFORMATION SYSTEMS CORPORATION AND ITS SUBSIDIARIES ------------------------------------------------------------------------------- TABLE OF CONTENTS Page PART I - FINANCIAL INFORMATION 3 Item 1. Financial Statements -------------------- Consolidated Balance Sheets - February 28, 2003 and May 31, 2002 3 Consolidated Statements of Operations - Three and Nine Months Ended February 28, 2003 and 2002 4 Consolidated Statements of Cash Flows - Nine Months Ended February 28, 2003 and 2002 5 Notes to Consolidated Financial Statements 6-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-11 --------------------------------------------------------------- Item 3 Quantitative and Qualitative Disclosures About Market Risk 11 ---------------------------------------------------------- Item 4 Controls and Procedures 12 ----------------------- PART II- OTHER INFORMATION 13 Item 1. Legal Proceedings 13 ----------------- Item 6. Exhibits and Reports on Form 8-K 13-14 -------------------------------- SIGNATURES 15 CERTIFICATIONS 16 - 2 - CONTINENTAL INFORMATION SYSTEMS CORPORATION AND ITS SUBSIDIARIES -------------------------------------------------------------------------------- PART I - FINANCIAL INFORMATION Item 1. Financial Statements -------------------- CONSOLIDATED BALANCE SHEETS In Thousands (Except Number of Shares) --------------------------------------------------------------------------------

~~November~~February 3028, May 31, ~~2002~~2003 2002 ------------ ---------~~---~~ (unaudited) ASSETS: Current assets: Cash and cash equivalents $ ~~1,048~~861 $ 1,386 Accounts receivable - 33 Notes receivable, net of allowance for doubtful accounts of $1,000 ~~637~~597 747 Investment in mortgage participation notes 197 197 Other current assets 4339 208 ------------ ------------ Total current assets 1,~~925~~694 2,571 ------------ ------------ Property, plant and equipment, net 4943 37 ------------ ------------ Other assets: Notes receivable, net of current portion ~~292~~195 577 Real estate held for sale, net ~~337~~303 337 Other 4 - ------------ ------------ Total other assets ~~633~~502 914 ------------ ------------ Total assets $ 2,~~607~~239 $ 3,522 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY: Current liabilities: Accounts payable and other liabilities $ ~~590~~623 $ 529 ------------ ------------ Total current liabilities ~~590~~623 529 ------------ ------------ Commitment and contingencies SHAREHOLDERS' EQUITY: Common stock, $.01 par value; authorized 20,000,000 shares; issued 7,101,668 shares 71 71 Additional paid-in capital 35,233 35,233 Accumulated deficit (31,~~154~~531) (30,250) ------------ ------------ 43,~~150~~773 5,054 Treasury stock, at cost: 2,~~555~~726,~~453~~356 shares at ~~November~~February 3028, ~~2002~~2003 and 1,935,516 shares at May 31, 2002 (2,~~133~~157) (2,061) ------------ ------------ Total shareholders' equity 21,~~017~~616 2,993 ------------ ------------ Total liabilities and shareholders' equity $ 2,~~607~~239 $ 3,522 ============ ============

-------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements. - 3 - CONTINENTAL INFORMATION SYSTEMS CORPORATION AND ITS SUBSIDIARIES ------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) In Thousands (Except Per Share Information) --------------------------------------------------------------------------------

Three Months Ended ~~Six~~Nine Months Ended ~~November~~February 3028, ~~November~~February 3028, ------------------------ ---------------------~~---~~ 2003 2002 ~~2001~~2003 2002 ~~2001~~ --------- --------- --------- --------- REVENUES: ~~Interest,~~Equipment ~~fees~~rentals ~~and~~$ ~~other~~- ~~income~~ $ ~~193~~8 $ 71- $ ~~254~~23 $Income ~~146~~from ~~Equipment~~direct ~~rentals~~financing leases - 71 - 154 ~~Income~~Interest, ~~from~~fees ~~direct~~and ~~financing~~other ~~leases~~income -37 162 -291 3208 --------- --------- --------- --------- ~~193~~37 7971 ~~254~~291 ~~164~~235 --------- --------- --------- --------- COSTS AND EXPENSES: ~~Depreciation of rental equipment - - - 5~~ Other operating expenses 234 288 2629 8795 Research and development - ~~625~~218 - 1,~~477~~695 Write-down (recovery) of investment (87) - (87) - Selling, general and administrative expenses ~~600~~438 ~~447~~933 1,~~132~~630 ~~877~~1,815 --------- --------- --------- --------- ~~623~~355 1,~~100~~159 1,~~158~~572 23,~~446~~605 --------- --------- --------- --------- Net loss $ (~~430~~318) $ (1,~~021~~088) $ (~~904~~1,281) $ (23,~~282~~370) ========= ========= ========= ========= Basic and diluted net loss per share $(Note 3): Net loss per share $(.0907) $ (.1720) $ (.1826) $ (.3859) ========= ========= ========= ========= Weighted average number of shares of common stock outstanding 4,~~908~~460 5,~~859~~359 54,~~037~~847 5,~~930~~741 ========= ========= ========= =========

-------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements. -4- CONTINENTAL INFORMATION SYSTEMS CORPORATION AND ITS SUBSIDIARIES ------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) In Thousands --------------------------------------------------------------------------------

For the ~~Six~~Nine Months Ended ~~November~~February 3028, ------------------------- 2003 2002 ~~2001~~ ----------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (~~904~~1,281) $ (23,~~282~~370) ----------- ---------- Adjustments to reconcile net loss from continuing operations to net cash provided by (used in) operating activities: Depreciation and amortization expense 1825 5784 Recovery of investment, net (87) - Loss on disposal of fixed assets - 48 Effect on cash flows of changes in: Accounts receivable, net 33 (49) Notes receivable ~~395~~566 ~~189~~347 Other assets ~~161~~252 ~~173~~35 Accounts payable and other liabilities 6194 (~~328~~182) ----------- ---------- ~~668~~883 87323 ----------- ---------- Net cash used in continuing operations (~~236~~398) (23,~~195~~047) Net cash provided by discontinued operations - 3,775 ----------- ---------- Net cash provided by (used in) operating activities (~~236~~398) ~~1,580~~728 ----------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (3031) (5) Proceeds from investment in mortgage participation notes - 4 ----------- ---------- Net cash used in by investing activities (3031) (1) ----------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Purchase of treasury stock (7296) (26501) ----------- ---------- Net cash used in financing activities (7296) (26501) ----------- ---------- Net increase (decrease) in cash and cash equivalents (~~338~~525) ~~1,553~~226 CASH AND CASH EQUIVALENTS: Beginning of period 1,386 1,545 ----------- ---------- End of period $ 861 $ 1,~~048~~771 =========== ========== SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES: Transfer of inventory from discontinued operations to other assets $ ~~3,098~~- $ 52 =========== ========== Transfer of other assets from discontinued operations to other assets $ - $ 5 =========== ========== Transfer of payable from discontinued operations to accounts payable $ - $ (282) =========== ==========

-------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements. - 5 - CONTINENTAL INFORMATION SYSTEMS CORPORATION AND ITS SUBSIDIARIES -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation --------------------- The accompanying unaudited consolidated financial statements of Continental Information Systems Corporation ("Company") have been prepared in accordance with accounting principles generally accepted in the United States of America 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 accounting principles generally accepted in the United States of America 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 nine months ended February 28, 2003 are not necessarily indicative of the results that may be expected for the year ending May 31, 2003. These statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-KA for the year ended May 31, 2002. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. However, the Company has ceased daily operations and has ceased additional funding of its subsidiary T1Xpert Corp., has sustained substantial operating losses and has used substantial amounts of working capital in its operations. These conditions raise substantial doubt about its ability to continue as a going concern. In view of these matters, realization of the assets of the Company is dependent upon the Company's ability to meet its financing requirements and the success of future operations. The financial statements do not include adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence. 2. The Company ----------- The Company is a New York corporation that was organized in 1968. In August 1999, the Board of Directors authorized the Company to focus on developing and commercializing specialized software for the securities industry that focuses on the securities processing business of clearing firms generally, especially in connection with proposed shortening of trading cycles from settlement occurring three days after the trade date to one day after the trade date. This change is commonly referred to as "T+1". The newly created subsidiary that was formed to engage in this line of business was T1Xpert Corp. ("T1Xpert"). On December 27, 2001, the Company ceased active operations and product development in its T1Xpert subsidiary and ultimately cancelled the product development due to the events of September 11, 2001. The ability of the Company to obtain necessary financing during the economic environment post-September 11, 2001 was greatly hampered. The Company believed it had sufficient insurance coverage to allow it to continue development and installation under an existing contract and sufficient funding to locate a substitute customer to replace a contract cancelled due to the events of September 11, 2001 had it received sufficient insurance proceeds. Efforts to date to collect under the Company's insurance policies have been unsuccessful and, as a result, all operations related to T1Xpert have ceased. The Company is currently engaged in managing its portfolio of various assets, reducing where possible such assets to cash. The Company is also settling its liabilities and contingencies, including tax audits. Finally, the Company is engaged in substantial legal proceedings as discussed in Part II of this Form 10-Q. -6- CONTINENTAL INFORMATION SYSTEMS CORPORATION AND ITS SUBSIDIARIES -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Risks and Uncertainties of T1Xpert ---------------------------------- The Company is now considering various strategic alternatives without the use of additional Company funds to continue the business of its subsidiary T1Xpert. These alternatives include the sale of T1Xpert or finding a strategic partner to undertake commercialization of T1Xpert's products. A sale would likely result in minimal realized value. If T1Xpert is successful in finding a strategic partner, it will likely result in a substantial dilution of the Company's interest in T1Xpert. While the Company has been pursuing these alternatives, to date it has been unsuccessful. There can be no assurance that the Company will be successful in any of its efforts, in which case no value is likely to be realized from its T1Xpert subsidiary. The Company is seeking other strategic opportunities going forward to maximize shareholder value after the cessation of operations of T1Xpert. Such opportunities may include, but are not limited to, a business combination with another entity. Under the terms of any such opportunity, current shareholders may suffer substantial dilution of their interests. There can also be no assurance that the Company will be successful in its efforts to find such strategic opportunities or, if it does, that any such new business combination will be successful. 3. Net Income (Loss) Per Share --------------------------- Earnings (loss) 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 or loss per share. Basic and diluted net loss per share for the nine months ended February 28, 2003 and 2002, were computed based on the weighted average number of shares of common stock outstanding during the periods. As of February 28, 2003, the Company had no issued and outstanding options to purchase shares of common stock (see Note 7). 4. Estimates --------- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. 5. Concentration of Credit Risk ---------------------------- Financial instruments which potentially subject the Company to credit risk consist principally of cash with financial institutions and notes receivable. The Company maintains cash deposits with major banks and financial institutions which may exceed federally insured limits. The Company periodically assesses the financial condition of the institutions and believes the risk of any loss is minimal. At February 28, 2003, cash in excess of federally insured limits amounted to approximately $661,000. Of the Company's notes receivable balance of $792,000, $761,316 is owed by one customer in the aviation business. Thus, the Company is directly affected by the financial condition of this company and the airline industry in general. The airline industry is experiencing severe financial problems due to current economic conditions and the effect of the hostilities in Iraq. The customer has requested a temporary postponement of certain payments. The credit risk associated with this customer is somewhat mitigated by the note being collateralized; however, a substantial portion of such collateral is outside the United States, thereby creating potential difficulties of recovery of collateral in case of default. - 7 - CONTINENTAL INFORMATION SYSTEMS CORPORATION AND ITS SUBSIDIARIES -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 6. Reclassifications ----------------- Certain prior period balances in the financial statements have been reclassified to conform to the current period financial statement presentation. 7. Stock Option Plan ----------------- In 1995, the Board of Directors adopted and the stockholders approved the Continental Information Systems Corporation 1995 Stock Compensation Plan (the "1995 Plan"). The 1995 Plan provides for the issuance of options covering up to 1,000,000 shares of common stock and stock grants of up to 500,000 shares of common stock to non-employee directors of the Company and, at the discretion of the Board of Directors, employees of and independent contractors and consultants to the Company. A summary of the status of the 1995 Plan as of February 28, 2003:

Weighted Number of Average Exercise Options Price Per Option ------------- ---------------- Outstanding at May 31, 2002 (154,950 exercisable) 154,950 $ 2.02 Granted - $ - Exercised - $ - Forfeited/expired (88,473) $ 2.17 ------------- Outstanding at August 31, 2002 (66,477 exercisable) 66,477 $ 1.81 Granted - $ - Exercised - $ - Forfeited/expired (34,337) $ 2.27 ------------- Outstanding at November 30, 2002 32,140 $ 1.32 Granted - $ - Exercised - $ - Forfeited/expired (32,140) $ 1.32 ------------- Outstanding at February 28, 2003 - $ - =============

As of February 28, 2003, there were no options outstanding. In 2000, the Board of Directors of T1Xpert adopted the T1Xpert Corp. Stock Compensation Plan (the "T1X 2000 Plan"). The T1X 2000 Plan provides for the issuance of stock options covering up to 2,000,000 shares of common stock to employees and advisory board members of T1Xpert. As of May 31, 2002 stock option grants representing 1,642,500 shares had been issued to employees at an option price of $.0675 per share under the T1X 2000 Plan. During the year ended May 31, 2002, 1,142,500 options were forfeited/ expired with a weighted average exercise price of $.0675 per share. During the period ended February 28, 2003, the remaining outstanding 500,000 options were forfeited/expired with a weighted average exercise price of $.0675. The T1X 2000 Plan is immaterial to the earnings of the Company. - 8 - CONTINENTAL INFORMATION SYSTEMS CORPORATION AND ITS SUBSIDIARIES -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 8. Discontinued Operations ----------------------- On July 14, 2000, the Company announced that it was offering for sale its commercial aircraft engine portfolio by competitive bid, that upon completion of the sale it would be exiting the aviation business, and that it would account for and report the Air Group Business as a discontinued operation. As of November 30, 2001, the majority of the assets and liabilities relating to the Air Group Business were sold or settled. - 9 - 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, 2002, appearing in the Company's annual report on Form 10-KA. 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 Nine Months Ended February 28, 2003 and 2002 ------------------------------------------------------------------------ Revenues -------- For the nine months ended February 28, 2003 total revenue increased to $291,000 from $235,000 for the comparable period in 2002. For the three months ended February 28, 2003, total revenues decreased to $37,000 from $71,000 for the comparable fiscal quarter in 2002. For the nine months ended February 28, 2003, interest, fees and other income increased to $291,000 as compared to $208,000 for the corresponding prior year period. For the three month period ended February 28, 2003 interest fees and other income decreased to $37,000 from $62,000 for the comparable period in 2002. The increase during the nine month period in 2003 is due to the receipt of a $150,000 World Trade Center Business Recovery Grant which was offset by lower interest income earned on notes receivable and from cash balances during the period. Interest income for the three and nine months ended February 28, 2003 was $36,000 and $129,000, respectively, compared to $60,000 and $204,000, respectively, for the corresponding prior year periods. The decrease was due to lower interest income earned on notes receivable and from cash balances during the period. There were no equipment rentals, nor income from direct financing leases, for the three and nine months ended February 28, 2003 compared to $9,000 and $27,000, respectively, for the comparable fiscal periods in 2002. The decrease is primarily attributable to the sale of the balance of the lease portfolio during the fiscal year 2002. Costs and Expenses ------------------ Costs and expenses decreased to $355,000 and $1.6 million, respectively, for the three and nine months ended February 28, 2003 from $1.2 million and $3.6 million, respectively, for the comparable fiscal periods in 2002. The decrease is primarily due to the cessation of operations at T1Xpert in December 2001, resulting in no material research and development expenses being incurred by T1Xpert in the three and nine month periods ended February 28, 2003, as compared to $218,000 and $1.7 million for the comparable periods in 2002. Selling, general, and administrative expenses were $438,000 and $1.6 million, respectively, for the three and nine months ended February 28, 2003 compared to $933,000 and $1.8 million, respectively, for the comparable periods in 2002. This decrease during the nine months ended February 28, 2003 was principally due to a reduction in selling activities. Management expects that general and administrative costs (including legal and accounting) will not be reduced in future periods because costs relating to the Company's prior operations and its continuance as a publicly traded and reporting company will continue to be incurred by the Company. However, selling costs are anticipated to be minimal since the Company does not expect to resume selling activities. - 10 - CONTINENTAL INFORMATION SYSTEMS CORPORATION AND ITS SUBSIDIARIES -------------------------------------------------------------------------------- Write-down (recovery) of investments represents a $120,000 collection received during the period ended February 28, 2003 relating to an investment in a high technology company which was written down by the Company in a previous year. In addition, the Company wrote down $33,000 on its real estate held for sale during the February 28, 2003 period. Income Taxes ------------ For the nine-month period ended February 28, 2003, 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. Liquidity And Capital Resources ------------------------------- Net cash used in operations for the nine months ended February 28, 2003 was $398,000 compared to cash provided by operations of $728,000 for the comparable period in 2002; net cash used in continuing operations for the nine months ended February 28, 2003 was $398,000 compared to net cash used in continuing operations in the amount of $3.0 million for the comparable period in 2002. Less cash was used for operations in the current period due to the discontinuance of the funding of T1Xpert operations in fiscal 2002. There was no net cash provided by discontinued operations for the nine months ended February 28, 2003, compared to $3.8 million net cash provided by discontinued operations for the nine months ended February 28, 2002. The cash provided by discontinued operations was primarily due to the sale of assets from the discontinued operations. As of February 28, 2003, the Company had $861,000 in cash and cash equivalents, as compared to $1.4 million at May 31, 2002. The decrease is principally due to the use of cash for operations, net of collections of notes receivable. As of February 28, 2003, approximately 2,726,536 shares of stock had been repurchased by the Company at an aggregate cost of approximately $2,157,000. On August 26, 2002, the Board of Directors authorized the expenditure of funds to repurchase up to an additional 20% or 1,033,230 shares of the outstanding shares of its common stock. The Company believes it has sufficient cash on hand to meet current anticipated administrative needs until various claims against the Company can be resolved. There can be no assurance that the Company's estimate as to the validity and valuation of the claims against the Company is accurate, in which case the Company may be unable to meet claims against it. This may result in the Company needing to sell off assets at distressed prices or liens filed against the Company also resulting in distressed asset sales or the Company seeking bankruptcy protection. Any such distressed asset sales may further diminish the Company's ability to meet its obligations. The Company does not have sufficient funds on hand to develop its T1Xpert products. Without the aid of a strategic alternative that will bring the necessary funding, the Company will not be able to complete product development and marketing of these products. A strategic alternative may severely dilute the Company's interest in T1Xpert. The Company does not anticipate entering into financing arrangements with financial institutions which would involve collateralizing and/or leveraging the Company's assets. Item 3. Quantitative and Qualitative Disclosures About Market Risk ---------------------------------------------------------- There have been no significant changes in our exposure to market risk from the information provided in Item 7A - Quantitative and Qualitative Disclosures About Market Risk on our Form 10-KA filed with the Securities and Exchange Commission (the "SEC") on November 4, 2002. - 11 - CONTINENTAL INFORMATION SYSTEMS CORPORATION AND ITS SUBSIDIARIES -------------------------------------------------------------------------------- Item 4. Controls and Procedures ----------------------- (a) Evaluation of disclosure controls and procedures. Within the 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to the Securities Exchange Act of 1934. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic SEC filings. (b) Changes in internal controls. The Company made no significant changes in its internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. - 12 - CONTINENTAL INFORMATION SYSTEMS CORPORATION AND ITS SUBSIDIARIES -------------------------------------------------------------------------------- PART II - OTHER INFORMATION Item 1. Legal Proceedings ----------------- The Company incorporates by reference prior legal matters reported in the Company's Form 10-KA for the fiscal year ended May 31, 2002. The claim referenced in the Company's May 31, 2002 Form 10-KA asserted by Dallas Aerospace against the Company has been resolved with a ruling in favor of the Company granting the Company's summary judgment motion and dismissing all claims raised by Dallas Aerospace. This judgment was entered in the United States District Court for the Southern District of New York. Dallas Aerospace has filed an appeal with the Second Circuit Court of Appeals in New York on November 12, 2002. The claim referenced in the Company's May 31, 2002 Form 10-KA asserted by the Skytrek bankruptcy trustee against the Company has been settled by the parties, and this settlement has been approved by the Court, with CIS Air Corporation returning $17,500 of the deposit received from Skytrek to the trustee. On July 30, 2002, the Company filed suit in the United States District Court for the Southern District of New York against three stockholders of the Company and another party alleging that these parties formed an undisclosed group and wrongfully used material, non-public information concerning the Company in violation of applicable federal securities laws and state statutes. The Company settled with one of these stockholders as of September 3, 2002 and the remaining parties separately on January 31, 2003. As a part of these settlements, mutual releases of the parties, their officers, directors and certain affiliates thereof were exchanged, the stockholders and certain affiliates sold their shares in the Company back to the Company at the prevailing market price or at a discount from market price and the stockholders and certain affiliates agreed not to acquire any additional shares in the Company. Item 6. Exhibits and Reports on Form 8-K -------------------------------- Exhibit No. 3.1* Restated Certificate of Incorporation, as amended (filed as Exhibit 3.1 to the Company's Form 10-Q for the quarter ended November 30, 1997 and incorporated herein by reference). 3.2** Restated Bylaws as amended through August 26, 2002 (filed as Exhibit 3.2 to the Company's Form 10-K for the fiscal year ended May 31, 2002 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 November 30, 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). 10.3** Employment Agreement between the Company and Jonah M. Meer dated June 30, 2002 (filed as Exhibit 10.3 to the Company's Form 10-K for the fiscal year ended May 31, 2002 and incorporated herein by reference). 10.4** Separation and Consulting Agreement between the Company and Michael L. Rosen dated June 30, 2002 (filed as Exhibit 10.4 to the Company's Form 10-K for the fiscal year ended May 31, 2002 and incorporated herein by reference). - 13 - CONTINENTAL INFORMATION SYSTEMS CORPORATION AND ITS SUBSIDIARIES -------------------------------------------------------------------------------- 21 Subsidiaries of the Registrant CIS Corporation, a Delaware corporation. CIS Air Corporation, a Delaware corporation. T1Xpert Corp., a Delaware corporation. * 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. 99. Reports on Form 8-K - During the three month period ended February 28, ------------------- 2003 there were no reports on Form 8K. 99.1 Certification of Chief Executive and Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. - 14 - CONTINENTAL INFORMATION SYSTEMS CORPORATION AND ITS SUBSIDIARIES -------------------------------------------------------------------------------- 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 11, 2003 By: /s/ Jonah M. Meer ------------------------------------- Name: Jonah M. Meer Titles: Chief Executive Officer, Chief Financial Officer, Chief Operating Officer and Director - 15 - CONTINENTAL INFORMATION SYSTEMS CORPORATION AND ITS SUBSIDIARIES -------------------------------------------------------------------------------- CERTIFICATIONS I, JONAH M. MEER, certify that: 1. I have reviewed this quarterly report on Form 10-Q of CONTINENTAL INFORMATION SYSTEMS CORPORATION. 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and I have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: April 11, 2003 By: /s/ Jonah M. Meer ------------------------------------- Name: Jonah M. Meer Titles: Chief Executive Officer, Chief Financial Officer, Chief Operating Officer and Director - 16 -

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