SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
---------------------
For the Fiscal Year May 31, 1997 Commission File Number 0-25104
CONTINENTAL INFORMATION SYSTEMS
CORPORATION
(Exact name of registrant)
New York 16-0956508
(State of incorporation) (I.R.S. Employer Identification Number)
One Northern Concourse, P.O. Box 4785, Syracuse, New York 13221-4785
(Address of principal executive offices and zip code)
(315) 455-1900
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The number of the registrant's shares of Common Stock outstanding on July 31,
1997 was 7,010,827.
As of July 31, 1997, the aggregate market value of the shares of Common Stock
held by non-affiliates of the registrant was approximately $12,621,953.*
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Continental Information Systems Corporation's Notice of Annual
Meeting of Stockholders and Proxy Statement, to be filed within 120 days after
the end of the registrant's fiscal year, are incorporated into Part III of this
Annual Report.
* Excludes 1,552,685 shares deemed to be held by officers and directors,
and stockholders whose ownership exceeds ten percent of the shares outstanding
at July 31, 1997. Exclusion of shares held by any person should not be construed
to indicate that such person possesses the power, direct or indirect, to direct
or cause the direction of the management or policies of the registrant, or that
such person is controlled by or under common control with the registrant.
<PAGE>
Continental Information Systems Corporation
and its Subsidiaries
PART I
ITEM 1. BUSINESS
General
The Company is engaged in the buying and selling of commercial aircraft,
telecommunications equipment, high speed production laser printing systems, and
certain other industrial equipment, provides leasing services in connection with
such equipment, and is engaged in providing real estate financing. From its
founding in 1968, the Company had been primarily engaged in the sale and
marketing of International Business Machines Corporation ("IBM") mainframe and
peripheral computer equipment. However, in more recent years, the computer
industry has undergone a fundamental transformation highlighted by technological
advances, increased competition, increased demand for open computing systems,
and a shift in market demand toward distributed computing and client/server
technology and away from mainframe computing. The result has been an erosion of
margins and a growing focus by customers on information processing solutions
rather than on hardware. As a result, the Company has attempted to expand into
other more attractive capital markets.
For the twelve months ending May 31, 1997, approximately 77% of the Company's
revenues from continuing operations were derived from its buying and selling
("buy/sell") activities, approximately 16% from its leasing activities and
approximately 7% from interest, fees and other income.
During the current fiscal year, the Company made a strategic decision to
diversify into real estate financing as an extension of its historical financing
business. In conjunction with this effort, in the second and third quarters of
fiscal 1997, the Company sold a substantial portion of its portfolio of leased
equipment to provide capital to facilitate the expansion of the Company's
strategic business units which are comprised of aircraft, leasing, equipment
trading businesses and real estate finance. Additionally, the Company is
currently engaged in negotiations to sell its telecommunications business unit.
Subsequent to year end, on July 3, 1997, the Company announced that it had
entered into a joint investment agreement with Emmes Investment Management Co.
LLC ("Emmes") to provide high-yield, short-term financing for commercial real
estate transactions. The Company's commitment is up to $8 million in approved
transactions. The transaction with Emmes is part of an ongoing restructuring of
the Company's broad based asset lending activities. In addition, the Company
anticipates committing additional resources to its existing aircraft and leasing
businesses.
The Company currently conducts its operations through four principal operating
subsidiaries: CIS Corporation ("CIS"), a New York corporation, CMI Corporation
("CMI"), a Michigan corporation, GMCCCS Corp. ("LaserAccess"), a California
corporation and CIS Air Corporation ("CIS Air"), a Delaware corporation. Both
CIS and CMI conduct some of their operations through subsidiaries including, in
the case of CIS, LaserAccess and CIS Air. Although CIS and CMI have not been
merged, their operations have been integrated with the Company's principal
executive offices located at One Northern Concourse, Syracuse, New York
13221-4785. The Company's subsidiaries have offices throughout the United
States.
<PAGE>
On November 29, 1994 (the "Confirmation Date"), the United States Bankruptcy
Court for the Southern District of New York (the "Bankruptcy Court") modified
and confirmed the Company's Joint Plan of Reorganization (the "Plan of
Reorganization"). The Company emerged from bankruptcy when the Plan of
Reorganization became effective and the transactions contemplated thereby were
consummated on December 21, 1994 (the "Effective Date").
CIS Air Corporation
Through its wholly-owned subsidiary CIS Air, the Company participates in the
worldwide market for the acquisition, sale and leasing of used, primarily
narrow-bodied, aircraft subject to short-term operating leases. CIS Air's
participation in this market is largely conducted through its acquisition of
whole aircraft and/or aircraft engines that are then sold, leased or dismantled
and sold as replacement parts. The Company believes that it can compete
successfully in this market since larger companies are generally not active in
this end of the market, the Company has a stronger financial position than some
of its competitors, and the Company is able to enter into short term leases and
rentals of aircraft and engines.
In addition, a subsidiary of CIS Air manages a portfolio of aircraft on behalf
of the JetStream L.P. and JetStream II L.P. limited partnerships that were
formed in 1987, the units of which are publicly held. The subsidiary, CIS
Aircraft Partners, Inc., serves as the managing general partner of the limited
partnerships while Jet Aircraft Leasing, Inc. (a Lehman Brothers, Inc.
affiliate) acts as the administrative general partner. The limited partnerships
are engaged in the business of managing a portfolio of used commercial aircraft
subject to triple net operating leases with commercial air carriers.
Although the recent improvement in the airline industry has contributed to a
modest improvement in the demand for certain types of aircraft, overall
conditions in the aircraft industry remain competitive. Additionally, future
sales and leasing opportunities for the types of aircraft the Company deals in
may be limited as a result of the implementation of noise compliance regulations
which take full effect in the year 2000. Also, recent airline industry accidents
may prompt regulatory actions by the Federal Aviation Administration or other
governmental bodies that may affect this market.
Real Estate Financing
As noted previously, on July 3, 1997, the Company announced that it had entered
into a joint investment agreement (the "Emmes Agreement") with Emmes Investment
Management Co. LLC ("Emmes") to provide high-yield, short-term financing for
commercial real estate transactions. The Company's commitment is up to $8
million in approved transactions. Under the Emmes Agreement, Emmes will
identify, negotiate and service proposed transactions. The Company will make its
own independent determination whether to participate in a proposed transaction.
It is expected that the Company will co-invest in each transaction with other
funds managed by Emmes, and that the transactions will be leveraged through
borrowings under a senior credit facility obtained by Emmes. The Company's
investments will be pledged to secure its portion of such borrowings, but the
loans will otherwise be non-recourse to the Company. The Company will pay a
management fee to Emmes equal to a percentage of total assets under management
(including leverage) plus a portion of profits on the investments to the extent
that total return on the Company's invested capital exceeds specified
<PAGE>
thresholds. The term of the Agreement is three years, unless earlier terminated
in accordance with its terms. The Emmes Agreement is expected to involve
transactions which do not meet the underwriting standards of a traditional
lender, and instances where there are unusual time constraints. Emmes, founded
in 1992 by individuals who have been involved in commercial real estate dating
back to the early 1970s, provides high-yield, short-term real estate financing
as well as a broad range of other special opportunity real estate investments.
Management believes that the real estate finance business represents a logical
extension of the Company's historic business focus and skills as a financial
intermediary for asset-based transactions; however, the Company itself has no
direct experience in real estate. Accordingly, the Company will be dependent on
the expertise of Emmes and will need to employ qualified management to oversee
the investment. The Company will also be subject to the risks attendant to real
estate finance generally, including the risks of leverage, risks of borrower
default, general economic and real estate market conditions, and competition for
attractive real estate finance investments; in particular, the risks of borrower
default may be high given the nature of its contemplated investments.
Laser Printing Systems Equipment
On March 8, 1996, the Company, through its CIS subsidiary, completed the
acquisition of 100% of the outstanding shares of LaserAccess. LaserAccess is a
San Diego, California based buy/sell technical sales and marketing business
specializing in marketing previously-owned Xerox High Speed Laser Printing
Systems. The Company had been a marketing partner of LaserAccess since 1991. The
consideration consisted of a combination of cash and notes approximating $4.6
million, and the terms of the agreement provide for future incentive payments,
assuming LaserAccess achieves certain earnings levels. LaserAccess had revenue
of $5.4 million for the year ended December 31, 1995, and pretax income for the
year then ended of $1.2 million. (See Note 3 to the Company's Financial
Statements.) LaserAccess had not been subject to Federal and State income taxes
since it was a Subchapter S Corporation prior to the acquisition by the Company.
Recently, sales and margins for the Company's laser printing business have been
adversely impacted, and may continue to be impacted, as a result of increased
activity in the used high speed printer market by Xerox Corporation, the
manufacturer of the Company's laser printers, and another large financial
services company that has entered the market.
The Company will continue to buy and sell high and low end, new and used, laser
printing systems. Through its LaserAccess technical and engineering facility,
the Company now has the added capability to completely refurbish and maintain an
inventory of Xerox High Speed Laser Printing Systems. LaserAccess provides
customer assurance and guarantees each system to be eligible for either a Xerox
or third party maintenance contract. These capabilities may give the Company an
advantage over many of its competitors.
<PAGE>
Equipment Leasing
The Company has conducted its leasing business in a manner designed to conserve
working capital and minimize credit exposure. The Company generally enters into
lease transactions with creditworthy companies whose leases can be readily
discounted, on a non-recourse basis, with banks or finance companies. The
Company's credit standards reflect the then current and anticipated market for
transactions of the type originated by the Company. The creditworthiness of an
individual customer is evaluated through a review of the customer's public debt
rating and/or an analysis of the customer's financial statements and credit
references. After the debt is repaid over the term of the initial lease, the
subsequent re-lease or remarketing of the equipment generates additional cash
flow for the Company. The Company currently intends to offer a leasing
alternative to its customers as a means of sales support.
On November 30, 1996, the Company, through certain wholly-owned subsidiaries,
sold a substantial portion of its leased equipment to an institutional investor
for a sales price of approximately $20 million, payable in cash of approximately
$7.4 million and the assumption by the investor of the Company's related
outstanding non-recourse lease rental borrowings of approximately $12.5 million.
The gain on the transaction of approximately $2.5 million, exclusive of income
taxes, was included in results from continuing operations for the fiscal quarter
ended November 30, 1996. Additionally, on February 28, 1997, the Company sold an
additional portion of its leased equipment to the same institutional investor
for a sales price of approximately $2 million, payable in cash of approximately
$775,000, a short-term note of approximately $560,000, the assumption by the
investor of the Company's related outstanding non-recourse lease rental
borrowings of approximately $343,000 and the payment of the Company's related
outstanding recourse lease rental borrowings of approximately $379,000. The gain
on the transaction of approximately $341,000, exclusive of income taxes, was
included in results from continuing operations for the fiscal quarter ended
February 28, 1997. The Company is acquiring additional equipment, subject to
lease, which it intends to sell on an ongoing basis, as market conditions
permit. The Company's future revenue and earnings from the sale of leased
equipment will be affected by a number of factors, including the Company's
ability to identify and market equipment leases to equipment lessees, conditions
in the secondary market for equipment leases, which may be affected by such
factors as the availability of institutional investment capital and interest
rates, and competition from other entities seeking to resell equipment leases.
Telecommunications Equipment
During the current fiscal year, the Company's efforts in the
telecommunications/telephony market continued to be focused on providing both
new and used AT&T, Rolm and Northern Telecom equipment to a nationwide customer
base of users with mid-size or larger phone systems. While margins in this
business unit remain stable, the Company to date has not achieved significant
increases in volume from this business. The Board of Directors has decided to
sell this business unit and the Company is currently engaged in negotiations
with a potential buyer.
<PAGE>
Customers and Marketing
A majority of the Company's sales are with repeat customers under normal
commercial terms. The Company's management believes that its business is not
dependent on any single customer or any single source for the equipment marketed
by the Company.
Competition
The Company competes with other companies in each aspect of its business. These
firms include other equipment dealers, brokers, leasing companies and financing
institutions, including commercial banks, investment banking firms and real
estate investors.
With respect to other capital equipment such as aircraft, the Company competes
with aircraft manufacturers, distributors, airlines and other operators,
equipment managers, leasing companies, financial institutions and other parties
engaged in leasing, managing, marketing or remarketing aircraft.
The Company's continued ability to compete effectively is also materially
affected by its ability to attract and retain well-qualified personnel and by
the availability of financing at competitive interest rates. Many of the
Company's competitors have greater financial resources, economies of scale and
lower capital costs than the Company and, as a result, no assurance can be given
that the Company will be successful in operating profitably or in obtaining
access to competitive capital sources.
Employees
As of August 1, 1997, the Company had approximately 39 full-time employees,
including 23 in administration and 16 in sales and sales support. Of the
employees engaged in sales and sales support, 12 are marketing representatives
who are compensated substantially on a commission basis.
Seasonality and Backlogs
Revenues have historically shown a seasonal fluctuation, based largely on the
staggered fiscal years of its customer base as many lease and purchase decisions
are made on the basis of customer budget constraints, but the Company's business
is not seasonal in nature. The Company does not have a significant amount of
backlog orders as a result of its operations.
ITEM 2. PROPERTIES
The Company is leasing office space for its corporate headquarters on a month to
month basis, commencing August 1, 1997. The offices are located in North
Syracuse, New York and the Company is occupying approximately 6,000 square feet
of floor space at a cost of $9,167 per month. The Company intends to move its
corporate offices to another location in the Greater Syracuse, New York area
during Fiscal 1998.
<PAGE>
LaserAccess leases approximately 7,900 square feet of warehouse space in La
Jolla, California. This space houses LaserAccess's printer refurbishing and
technical operations. The monthly rent for the warehouse facility is $4,978 and
the lease expires on January 31, 1998. In addition, LaserAccess leases
approximately 700 square feet of office space at its headquarters in San Diego,
California. The headquarters location is leased on a month to month basis at a
total monthly rental of $1,850. Finally, LaserAccess maintains one additional
sales office in Minneapolis, Minnesota which is rented for a non-material rental
amount. Likewise, the square footage of this office is not significant.
The Company's telecommunications group operates out of leased space which
consists of approximately 17,000 square feet of combined warehouse and office
space in Syracuse, New York at a cost of approximately $4,800 per month. The
lease for this facility is scheduled to expire on May 31, 1998 and is expected
to be assumed by any potential buyer of the Telecommunications Business Unit
(see Item 1. "Business").
The Company maintains an administrative office in New York, New York and a sales
office in Los Angeles, California, both of which are rented for non-material
rental amounts. Likewise, the square footage of these offices is not
significant. The Company intends to move to expanded administrative office space
in New York, New York during Fiscal 1998.
ITEM 3. LEGAL PROCEEDINGS
The Company is not party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders during the
fourth quarter of its fiscal year.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
After emerging from reorganization, the Company's Common Stock began trading on
the NASDAQ Small-Cap Market under the symbol CISC on May 16, 1995. The high and
low bid information for the last two fiscal years is as follows:
<TABLE>
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter
--------------- ---------------- ---------------- -------------------
Low High Low High Low High Low High
--- ---- --- ---- --- ---- --- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fiscal Year ended
May 31, 1997
$ 1.63 $ 2.00 $ 1.69 $ 2.25 $ 1.75 $ 3.13 $ 1.88 $ 2.88
Fiscal Year ended
May 31, 1996
$ 2.13 $ 3.50 $ 1.75 $ 2.63 $ 1.88 $ 2.38 $ 1.50 $ 2.44
</TABLE>
As of July 31, 1997, there were 1,408 record holders of the Company's Common
Stock. No cash dividends have been paid on the Common Stock to date.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA:
The following table sets forth a summary of selected financial data for
Continental Information Systems Corporation and its Subsidiaries (the "Company")
as of the dates and for each of the periods stated. To distinguish between the
operations of the Company after reorganization (sometimes referred to as the
"Reorganized Company") and operations prior to reorganization, the term
"Predecessor Company" will be used when reference is made to the
pre-reorganization periods. Due to the application of "Fresh Start" accounting
as of November 30, 1994 (the "Fresh Start Date"), the financial data as of and
for the fiscal year ended May 31, 1995 is presented in two parts: the six month
period commencing after the fresh start date and ending May 31, 1995 and the six
months period ending on the fresh start date, which was the end of the
Predecessor Company's second fiscal quarter.
This information should be read in conjunction with the Company's historical
financial statements, the related notes, and the other information contained
herein, including the information set forth in "ITEM 7. MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." The financial
data for the Reorganized Company is generally not comparable to the financial
data for the Predecessor Company due to the application of "fresh start"
accounting upon emergence from Chapter 11 pursuant to the Plan of
Reorganization.
<PAGE>
<TABLE>
<CAPTION>
(Dollars in thousands except per share amounts)
Reorganized Company | Predecessor Company
--------------------------------------- | ------------------------------------------
Fiscal Year Ended For the Six | For the Six Fiscal Year Ended
May 31, Months Ended | Months Ended May 31,
Period Data: 1997 1996 May 31, 1995 | November 30, 1994 1994 1993
- ------------ ---- ---- ------------ | ----------------- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Total Revenues .......................... $ 31,301 $ 26,822 $ 11,762 | $ 25,707 $ 54,193 $ 94,624
Costs and expenses ...................... 29,662 25,211 9,529 | 17,501 54,941 108,371
--------- --------- --------- | --------- --------- ---------
Income (loss) from continuing |
operations before reorganization items, |
income taxes, fresh start adjustments |
and extraordinary item ................ 1,639 1,611 2,233 | 8,206 (748) (13,747)
Reorganization items .................... -- -- -- | 8,945 134,224 31,715
--------- --------- --------- | --------- --------- ---------
Income (loss) from continuing |
operations before income taxes, |
fresh start adjustments and |
extraordinary item .................... 1,639 1,611 2,233 | 17,151 133,476 17,968
Income taxes ............................ 623 611 849 | 45 100 100
--------- --------- --------- | --------- --------- ---------
Income (loss) from continuing |
operations before fresh start |
adjustments and extraordinary item .... 1,016 1,000 1,384 | 17,106 133,376 17,868
Income (loss)from discontinued |
operations, net of tax ................ 70 (934) (2,997) | (4,882) (575) (1,138)
--------- --------- --------- | --------- --------- ---------
Income (loss) before fresh start |
adjustments and extraordinary item ... 1,086 66 (1,613) | 12,224 132,801 16,730
Fresh start adjustments ................. -- -- -- | (3,264) -- --
--------- --------- --------- | --------- --------- ---------
Income (loss) before extraordinary ..... 1,086 66 (1,613) | 8,960 132,801 16,730
item |
Extraordinary item-Forgiveness of |
debt .................................. -- -- -- | 96,317 -- --
--------- --------- --------- | --------- --------- ---------
|
Net income (loss) ....................... $ 1,086 $ 66 $ (1,613) | $ 105,277 $ 132,801 $ 16,730
========= ========= ========= | ========= ========= =========
|
|
Net Income (Loss) Per Common Share: |
Income from continuing operations........ $ .14 $ .14 $ .20 |
Income (loss) from discontinued |
operations............................... .01 (.13) (.43) |
--------- --------- --------- |
Net income (loss)............ $ .15 $ .01 $ (.23) |
========= ========= ========== |
</TABLE>
Note: Net income (loss) per share data are not presented for Predecessor
Company due to the general lack of comparability as a result of the
revised capital structure of the Reorganized Company.
<PAGE>
<TABLE>
<CAPTION>
(Dollars in thousands)
Reorganized Company | Predecessor Company
------------------------------------------------------------------ | -----------------------
Fiscal Year Fiscal Year For the Six For the Six | Fiscal Year Ended
Balance Sheet Data Ended Ended Months Ended Months Ended | May 31,
(at period end): May 31, 1997 May 31, 1996 May 31, 1995 November 30, 1994 | 1994 1993
------------ ------------ ------------ ----------------- | ---- ----
<S> <C> <C> <C> <C> <C> <C>
Total assets $ 44,077 $ 53,550 $ 41,130 $ 47,323 | $ 231,173 $ 244,151
Liabilities not subject |
to compromise 9,476 20,097 7,743 12,323 | 72,142 73,969
Liabilities subject to |
compromise - - - - | 268,258 412,210
Shareholders' equity |
(deficit) 34,601 33,453 33,387 35,000 | (109,227) (242,028)
</TABLE>
<PAGE>
ITEM 7. 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 which appear elsewhere in this Form
10-K.
All statements contained herein that are not historical facts, including but not
limited to, statements regarding anticipated future capital requirements, the
Company's future development and acquisition plans, the Company's ability to
obtain additional debt, equity or other financing, and the Company's ability to
generate cash from operations and further savings from existing operations, 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 the following: the availability of sufficient capital to finance
the Company's business plan on terms satisfactory to the Company; competitive
factors, such as the introduction of new technologies and competitors into the
telecommunications equipment, laser printing systems, and commercial aircraft
industries; the risks attendant to real estate finance generally, including the
risks of leverage, risks of borrower default, general economic and real estate
market conditions, and competition for attractive real estate finance
investments; pricing pressures which could affect demand for the Company's
service; change in labor, equipment and capital costs; future acquisitions;
general business, economic and regulatory conditions; and the other risk factors
described from time to time in the Company's reports filed with the Securities
and Exchange Commission ("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.
The Company emerged from Chapter 11 pursuant to a Plan of Reorganization which
was confirmed by the Bankruptcy Court on November 29, 1994. For financial
reporting purposes, the emergence from bankruptcy protection was recorded as of
November 30, 1994. The Plan of Reorganization provided for the distribution of
all of the Company's assets, except for specifically identified assets and
liabilities having a net fair tangible value of $30 million, and the Company's
newly-issued common stock, to a Liquidating Estate for distribution to the
creditors. In addition, all liabilities subject to compromise and certain
postpetition liabilities were assumed by the Liquidating Estate. The Plan of
Reorganization provided that no further recourse to the Company or any of its
subsidiaries may be had by any person with respect to any prepetition claims or
postpetition liabilities assumed by the Liquidating Estate. As a result of the
reorganization and application of "fresh start" accounting, financial
information before and after November 30, 1994 are not comparable. To
distinguish between the operations of the Company prior to reorganization and
operations after reorganization, the term "Predecessor Company" will be used for
the pre-reorganization periods. The following discussion should be read in
conjunction with the historical financial statements of the Company.
<PAGE>
The Reorganized Company applied the "fresh start" provisions of AICPA Statement
of Position No. 90-7 ("SOP 90-7") as of November 30, 1994 and, accordingly, the
assets retained by the Reorganized Company were adjusted as of that date to
reflect their fair value. The reorganization value of $35 million approximated
the fair value of the Reorganized Company's net assets, including net deferred
tax assets of $5 million, and accordingly, no excess reorganization value over
amount allocable to identifiable assets has been recognized.
On May 25, 1995, the Company announced its decision to discontinue NC3, Inc.,
the Company's excess inventory business unit located in Syracuse, New York.
Additionally, on April 3, 1996, the Company announced its decision to
discontinue an operation, including its wholly-owned subsidiary, Aviron, that
purchased and sold used computer equipment and provided related technical
services. These discontinued operations will be reviewed separately from
continuing operations in the following discussion.
Due to the application of "fresh start" accounting as of November 30, 1994 (the
"Fresh Start Date"), the results of operations for the twelve months ended May
31, 1995 are presented in the accompanying Consolidated Statements of Operations
in two parts: the six month period commencing after the Fresh Start Date and
ending May 31, 1995 and the six month period ending on the Fresh Start Date,
which is the end of the Predecessor Company's second fiscal quarter. Since this
presentation increases the difficulty in making meaningful year to year
comparisons, the following unaudited pro forma Consolidated Statements of
Continuing Operations for Fiscal 1995, as compared to historical Fiscal 1997 and
1996, are provided for management discussion purposes. The pro forma statements
are based on historical data adjusted as follows: (i) interest expense on
discounted leases for the Predecessor Company has been adjusted to eliminate
interest on debt obligations of the Liquidating Estate and, (ii) interest
expense has been increased to reflect the interest cost on the estimated average
principal balance outstanding on the note payable to the Liquidating Estate.
Reorganization items and loss from discontinued operations have been excluded
from the data presented to more closely represent normal operations.
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Continuing Operations
(Unaudited)
(Dollars in thousands) Historical Pro Forma
------------------------------------- -----------------
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
May 31, 1997 May 31, 1996 May 31, 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Equipment sales ............................ $21,393 $16,657 $15,342
Gain from sale of equipment subject to lease 2,816 -- --
Equipment rentals .......................... 3,829 6,540 14,226
Income from direct financing leases ........ 1,188 1,347 1,326
Interest, fees and other income ............ 2,075 2,278 6,575
------- ------- -------
31,301 26,822 37,469
------- ------- -------
Costs and Expenses:
Cost of sales .............................. 17,145 11,966 9,058
Depreciation of rental equipment ........... 2,130 3,445 4,330
Interest expense ........................... 975 551 471
Other operating expenses ................... 2,310 1,344 4,500
Selling, general and administrative expense 7,102 7,905 8,728
------- ------- -------
29,662 25,211 27,087
------- ------- -------
Income from continuing operations before
income taxes .......................... $ 1,639 $ 1,611 $10,382
======= ======= =======
</TABLE>
<PAGE>
RESULTS OF OPERATIONS
Continuing Operations
During the current fiscal year, the Company made a strategic decision to
diversify into real estate financing as an extension of its historical financing
business. In conjunction with this effort, in the second and third quarters of
fiscal 1997, the Company sold a substantial portion of its portfolio of leased
equipment to provide capital to facilitate the expansion of the Company's
strategic business units which are comprised of aircraft, leasing, equipment
trading businesses and real estate finance. Subsequent to year end, on July 3,
1997, the Company announced that it had entered into a joint investment
agreement (the "Emmes Agreement") with Emmes Investment Management Co. LLC
("Emmes") to provide high-yield, short-term financing for commercial real estate
transactions. Under the agreement the Company may provide up to $8 million in
financing, subject to management's approval of each loan. The transaction with
Emmes is part of an ongoing restructuring of the Company's asset lending
activities. In addition, the Company anticipates committing additional resources
to its existing aircraft and leasing businesses.
The Emmes Agreement is expected to involve transactions which do not meet the
underwriting standards of a traditional lender, and instances where there are
unusual time constraints. Emmes, founded in 1992 by individuals who have been
involved in commercial real estate dating back to the early 1970s, provides high
yield, short-term real estate financing as well as a broad range of other
special opportunity real estate investments. Under the Emmes Agreement, Emmes
will identify, negotiate and service proposed transactions, and will present to
the Company the opportunity to participate in such transactions. The Company
will make its own independent determination whether to participate in a
transaction.
For the three fiscal years being reviewed, total revenues increased to $31.3
million in fiscal 1997 from $26.8 million in fiscal 1996, while decreasing from
$37.4 million in fiscal 1995. Equipment sales increased in each of the three
years, from $15.3 million in fiscal 1995 to $16.6 million in fiscal 1996 and to
$21.3 million in fiscal 1997. The significant increase (28.4%) during the
current fiscal year is principally attributable to the addition of LaserAccess'
results of operations for the current twelve month period, after being acquired
on March 8, 1996.
On November 30, 1996, the Company, through certain wholly-owned subsidiaries,
sold a substantial portion of its leased equipment to an institutional investor
for a sales price of approximately $20 million, payable in cash of approximately
$7.4 million and the assumption by the investor of the Company's related
outstanding non-recourse lease rental borrowings of approximately $12.5 million.
The gain on the transaction of approximately $2.5 million, exclusive of income
taxes, was included in results from continuing operations for the fiscal quarter
ended November 30, 1996. Additionally, on February 28, 1997, the Company sold an
additional portion of its leased equipment to the same institutional investor
for a sales price of approximately $2 million, payable in cash of approximately
$775,000, a short-term note of approximately $560,000, the assumption by the
investor of the Company's related outstanding non-recourse lease rental
borrowings of approximately $343,000 and the payment of the Company's related
outstanding recourse lease rental borrowings of approximately $379,000. The gain
<PAGE>
on the transaction of approximately $341,000, exclusive of income taxes, was
included in results from continuing operations for the fiscal quarter ended
February 28, 1997. The Company is acquiring additional equipment, subject to
lease, which it intends to sell on an ongoing basis, as market conditions
permit. The Company's future revenue and earnings from the sale of leased
equipment will be affected by a number of factors, including the Company's
ability to identify and market equipment leases to equipment lessees, conditions
in the secondary market for equipment leases, which may be affected by such
factors as the availability of institutional investment capital and interest
rates, and competition from other entities seeking to resell equipment leases.
Sales and margins for the Company's laser printing business have been adversely
impacted, and may continue to be impacted, as a result of increased activity in
the used high speed printer market by Xerox Corporation, the manufacturer of the
Company's laser printers, and another large leasing company that has entered the
market. While margins in the Company's telecom equipment buy/sell business
remain stable, the Company to date has not achieved significant increases in
volume from this business. The Board of Directors has decided to seek a buyer
for the Company's telecom equipment buy/sell business. The disposition of the
telecom business is not expected to have a material effect on the Company's
financial position or results of operations. Sales and earnings from the
aircraft business are likely to continue to vary quarter-to-quarter, based on
the volume of transactions.
Equipment rentals and income from direct financing leases decreased to $5.0
million in fiscal 1997 from $7.9 million in fiscal 1996 and $15.6 million in
fiscal 1995. The significant decrease (49.3%) from fiscal 1995 to fiscal 1996
primarily reflects a "running out" of the old lease portfolio, developed prior
to and during the bankruptcy proceeding. The decrease from fiscal 1996 to fiscal
1997 is directly related to the previously described sale of a substantial
portion of the Company's leased equipment to an institutional investor in the
second and third quarters of the current fiscal year.
Interest, fees and other income decreased from $6.5 million in fiscal 1995 to
$2.2 million in fiscal 1996 to $2.0 million in fiscal 1997. The significant
decrease (65.3%) from fiscal 1995 to fiscal 1996 principally reflects a decline
in management fees received from income funds. Effective as of December 31,
1995, the Company sold TLP Leasing Programs, a group of wholly-owned
subsidiaries, to the current management of TLP.
Costs and expenses increased to $29.6 million in fiscal 1997 from $25.2 million
in fiscal 1996 while decreasing from $27.0 million in fiscal 1995 to $25.2
million in fiscal 1996. Cost of sales increased in each of the three years from
$9.1 million in fiscal 1995 to $11.9 million in fiscal 1996 and to $17.1 million
in fiscal 1997. The significant increase (43.3%) during the current fiscal year,
is directly related to additional sales contributed by LaserAccess since its
acquisition. Cost of sales as a percentage of sales for the fiscal years ended
May 31, 1997, 1996 and 1995, was 80.0%, 71.8% and 59.0%, respectively. These
yearly variances are primarily the result of product mix, with the aircraft
business unit generating significant margins on a relatively few large
transactions and the telecommunications and printing business units generating
comparably lesser margins on a greater number of transactions. Depreciation of
rental equipment decreased from $4.3 million in fiscal 1995 to $3.4 million in
fiscal 1996 and to $2.1 million in fiscal 1997. The decrease of $885,000 from
<PAGE>
fiscal 1995 to fiscal 1996 is related to the previously described "running out"
of the old lease portfolio, developed prior to and during the bankruptcy
proceeding. The decrease of $1.3 million from fiscal 1996 to fiscal 1997 is
directly related to the sale of a substantial portion of the Company's leased
equipment to an institutional investor in the second and third quarters of
fiscal 1997. Interest expense increased from $471,000 in fiscal 1995 to $551,000
in fiscal 1996 and to $975,000 in fiscal 1997. These yearly increases were
primarily the result of increases in the average debt outstanding during these
periods, prior to the assumption of approximately $12.8 million in non-recourse
lease rental borrowings by an institutional investor in the second and third
quarters, relative to the sale of equipment subject to lease. Other operating
expenses decreased from $4.5 million in fiscal 1995 to $1.3 million in fiscal
1996. This decrease occurred primarily in expenses associated with leases and
was impacted by the "running out" of the old lease portfolio. Other operating
expenses increased by $1.0 million to $2.3 million in fiscal 1997. This increase
was principally due to (i) a write off of certain assets associated with the
Company's telecommunications and other leasing business units in the fourth
quarter of fiscal 1997, (ii) additional equipment refurbishment expenses related
to LaserAccess' results of operations for the current twelve month period, after
being acquired on March 8, 1996 and (iii) a full twelve months amortization in
fiscal 1997 of goodwill associated with the acquisition of LaserAccess. Selling,
general and administrative expenses decreased from $8.7 million in fiscal 1995
to $7.9 million in fiscal 1996 and to $7.1 million in fiscal 1997. These yearly
decreases are principally due to cost containment efforts and staff reductions
between the periods.
For the following discussion of reorganization items, discontinued operations
and income taxes, please refer to the table contained in "ITEM 6. SELECTED
FINANCIAL DATA" on page 8.
Reorganization Items
Reorganization items represented income and expenses incurred by the Predecessor
Company resulting from bankruptcy and specific to the reorganization process.
These amounts are presented separately because of their non-operating nature.
Discontinued Operations
On April 3, 1996, the Company announced its decision to discontinue an
operation, including its wholly-owned subsidiary, Aviron, that purchased and
sold used computer equipment and provided related technical services. After that
date, the Company attempted to locate a buyer for the operation. On June 5,
1996, the Company announced it had abandoned its efforts to sell the operations
and would instead liquidate the assets which consisted principally of used
computer equipment inventories and fixed assets. The net loss from discontinued
operations for the year ended May 31, 1996, was $1,177,000 (net of $698,000
deferred tax benefit). In May 1995, the Company had attempted to change the
products and marketing strategies of Aviron to make it more competitive in the
current market. These actions resulted in a restructuring charge to operations
of $800,000 in the quarter ended May 31, 1995, for employee severance programs
affecting 13 employees, lease termination costs for excess facilities, and the
write-off of certain deferred costs relating to non-compete and consulting
arrangements having a book value of approximately $218,000. The restructuring
reserve had been completely utilized as of May 31, 1996, as a result of cash
payments for severance and excess facilities costs.
<PAGE>
A summary of the results of operations of the discontinued buy/sell operation
follows (in thousands):
<TABLE>
<CAPTION>
Reorganized Company | Predecessor Company
----------------------------------------------- | --------------------
For the Year For the Year For the Six | For the Six
Ended Ended Months Ended | Months Ended
May 31, 1997 May 31, 1996 May 31, 1995 | November 30, 1994
------------ ------------ ------------ | -----------------
<S> <C> <C> <C> <C>
Revenues ....................... $ -- $ 5,491 $ 5,352 | $ 10,580
Costs and expenses ............. (24) 6,661 7,890 | 12,110
-------- -------- -------- | --------
Income (loss) from discontinued |
operations ............... 24 (1,170) (2,538) | (1,530)
Loss on disposal of discontinued |
operations ............... -- (705) -- | --
-------- -------- -------- | --------
Income (loss) before income tax |
(tax benefit) ............. 24 (1,875) (2,538) | (1,530)
Income tax (tax benefit) ....... 9 (698) (971) | --
-------- -------- -------- | --------
Net income (loss) from |
discontinued operations ... $ 15 $ (1,177) $ (1,567) | $ (1,530)
======== ======== ======== | ========
</TABLE>
Additionally, on May 25, 1995, the Board of Directors approved the
discontinuance of NC3, Inc., the Company's excess inventory business unit
located in Syracuse, New York. The Company recorded a provision of $1,137,000
(net of $763,000 deferred tax benefit) in the quarter ended May 31, 1995,
relative to the disposal of NC3 assets and other charges related to the
discontinuance of the business unit. As of May 31, 1996, the Company had exited
the business and liquidated substantially all of the assets. A total of 14
employees were terminated in connection with the closing of this business.
Liabilities of the discontinued operation decreased from $744,000 at May 31,
1995 to none as of May 31, 1997, due to cash payments principally for severance
and facilities costs totaling approximately $325,000 and a net reduction of
$419,000 to adjust the amounts estimated for the loss on the inventories,
receivables, fixed assets and leased facility obligations. The adjustment of the
liability in the amount of $230,000 was recorded as a gain from discontinued
operations, net of deferred tax expenses of $87,000 in the quarter ended August
31, 1995. An additional adjustment of the liability in the amount of $100,000
was recorded as an offset to the loss on disposal of discontinued operations in
the quarter ended May 31, 1996. A final adjustment of the liability in the
amount of $89,000 was recorded as income from discontinued operations in the
quarter ended May 31, 1997.
<PAGE>
A summary of the results of operations of the discontinued NC3 business unit
follows (in thousands):
<TABLE>
<CAPTION>
Reorganized Company | Predecessor Company
-----------------------------------------------| --------------------
For the Year For the Year For the Six | For the Six
Ended Ended Months Ended | Months Ended
May 31, 1997 May 31, 1996 May 31, 1995| November 30, 1994
------------ ------------ ------------| -----------------
<S> <C> <C> <C>
Revenues .................... $ -- $ -- $ 1,285 | $ 4,019
Costs and expenses .......... (89) -- 1,773 | 7,371
------- ------- ------- | -------
Income (loss) from |
discontinued operations.. 89 -- (488) | (3,352)
Income (loss) on disposal of |
discontinued operations.. -- 330 (1,900) | --
------- ------- ------- | -------
Income (loss) before income |
tax (tax benefit) ...... 89 330 (2,388) | (3,352)
Income tax (tax benefit) ... 34 87 (958) | --
------- ------- ------- | -------
Net income (loss) from |
discontinued operations.. $ 55 $ 243 $(1,430) | $(3,352)
======= ======= ======= | =======
</TABLE>
Income Taxes
For the fiscal years ended May 31, 1997 and 1996 and for the six months ended
May 31, 1995, a provision for deferred income tax expense on income from
continuing operations was recorded in the amounts of $623,000, $611,000 and
$849,000, respectively. Additionally, for the fiscal year ended May 31, 1997, a
deferred income tax expense on income from discontinued operations was recorded
in the amount of $43,000, while for the fiscal year ended May 31, 1996 and for
the six months ended May 31, 1995, a deferred income tax benefit on loss from
discontinued operations was recognized in the amounts of $611,000 and
$1,929,000, respectively. For the six months ended November 30, 1994, a
provision for state tax on income from continuing operations was recorded in the
amount of $45,000. No provision for federal income tax was required in this
period due to the effects of the Predecessor Company's net operating loss
("NOL") carryforwards. In connection with applying "fresh start" accounting as
of November 30, 1994, the Reorganized Company recognized deferred tax assets of
approximately $5 million, net of a valuation allowance of approximately $7
million, relating principally to NOL carryforwards. Net deferred tax assets
increased to $6,080,000 as of May 31, 1995 due to the Reorganized Company's
operating losses during the six months then ended. For the fiscal year ended May
31, 1997, $666,000 of deferred tax assets were utilized to offset deferred tax
liabilities of a like amount. The pre-reorganization Federal NOL carryforwards
giving rise to deferred tax assets expire during the years 2004 to 2010.
Utilization of the Company's pre-organization Federal NOL carryforwards is
limited to approximately $2 million per year. Management will periodically
evaluate the realizability of the deferred tax assets based principally on
actual and expected operating results. In the event that an adjustment is
required to reduce the reorganized deferred tax asset in the future, such
adjustment will be charged to operations. Any future recognition of the tax
benefits from the Company's pre-reorganization net operating loss carryforwards
in excess of the net $5 million initially recorded will be recognized as a
direct credit to shareholders' equity as required under SOP 90-7.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations for the fiscal years ended May 31, 1997 and 1996 and
the six months ended May 31, 1995, was $11.7 million, $6.8 million and $12.3
million, respectively. Cash used in operations by the Predecessor Company for
the six months ended November 30, 1994, was $86.3 million. The significant
increase in cash provided by continuing operations for the current fiscal year
was primarily due to the proceeds generated by two sales of equipment subject to
lease in the aggregate amount of $8.7 million in the second and third quarters.
In addition to the cash payments and a short-term note of approximately
$560,000, the buyer assumed approximately $12.8 million of the Company's related
outstanding non-recourse lease rental borrowings and approximately $379,000 of
the Company's related outstanding recourse lease rental borrowings were paid
off. The sales of this leased equipment accelerated the earnings and cash flow
from the leases, which would have been received over time, into the second and
third quarters of the current fiscal year. These funds provide capital to
facilitate the expansion of the Company's strategic business units which are
comprised of aircraft, leasing, equipment trading businesses and real estate
finance. Inventory increased by $3.9 million during the current fiscal year.
This increase was primarily attributable to the acquisition of used aircraft
equipment and certain laser printing systems to support planned increases in
business activity in these business units. New investment in rental equipment
was $11.4 million for the fiscal year ended May 31, 1997 as compared to $22.8
million for the prior fiscal year. The significant investment in rental
equipment in fiscal 1996 initiated the Company's strategy of originating leases
on acquired rental equipment and subsequently selling them to investors, as was
accomplished in the second and third quarters of the current fiscal year.
Because a note payable to the Liquidating Estate was paid in full in March 1996,
there were no additional payments made on the note for the fiscal year ended May
31, 1997 as compared to the comparable fiscal period in 1996 when the Company
made principal payments of $3.3 million. Proceeds from lease, bank and
institution financings were $12.8 million in fiscal 1997 as compared to $15.3
million in fiscal 1996. Payments on lease, bank and institution financings were
$8.7 million in fiscal 1997 as compared to $2.4 million in fiscal 1996. The
significant increase in payments in the current fiscal year primarily represents
increased payments on discounted lease rental borrowing prior to the sale of the
related equipment subject to lease.
The Company expects that operations will generate sufficient cash to meet its
operating expenses and current obligations for the foreseeable future. In April
1996, the Company finalized a revolving loan agreement with an institution to
provide interim and recourse/limited recourse lease financing in the total
amount of $5 million. On March 14, 1997, the Company was notified by this
institution that it was terminating the credit line due primarily to minimal use
of the facility. The Company believes that the termination of this facility will
not have a material effect on the Company's liquidity or ability to finance its
current businesses. In July 1996, the Company finalized two revolving loan
agreements with institutions to provide (1) warehouse lease financing in the
amount of $5 million and (2) inventory financing for LaserAccess and CIS Air in
the amount of $7 million. At May 31, 1997, approximately $1.0 million in loans
payable were outstanding under these lines of credit. The LaserAccess and CIS
<PAGE>
Air loan agreements contain various covenants including limitations on
additional indebtedness and the maintenance of minimum levels of net worth/net
earnings. At May 31, 1997, LaserAccess did not meet the minimum net worth/net
earnings requirement. In August 1997, a waiver relative to this covenant was
obtained from the lending institution. In July 1997, the Company signed letters
of intent with two institutions to provide lease and inventory financing in the
total amount of $20 million for CIS Air. The Company is currently engaged in
negotiations relative to the terms of the proposed lines of credit and due
diligence reviews with the institutions.
On May 27, 1997, the Company announced that its Board of Directors had
authorized the expenditure of up to $500,000 for the repurchase of its common
stock. The Company commenced a voluntary odd lot program through June 30, 1997,
which was extended through July 31, 1997. Shareholders owning less than 100
shares of the Company's common stock were offered the opportunity to sell all
their shares at the closing price of the common stock on the NASDAQ Small-Cap
Market on May 23, 1997, which was $2.25 per share. Approximately 20,000 shares
were repurchased by the Company at an aggregate cost of approximately $45,000.
Subsequent to the odd lot repurchase program, the Company intends to repurchase
from time to time additional shares of its common stock up to the balance of
$500,000 remaining after the odd lot program. The Company may repurchase the
additional shares at prevailing prices in the open market or in negotiated or
other permissible transactions at the discretion of management. The Company will
hold all repurchased shares of common stock in its treasury.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements:
(a) (1) Financial Statements
Reports of Independent Accountants
Consolidated Balance Sheets
May 31, 1997 and 1996
Consolidated Statements of Operations
Years ended May 31, 1997 and 1996 and six months ended
May 31, 1995 and November 30, 1994
Consolidated Statements of Shareholders' Equity
Years ended May 31, 1997 and 1996 and six months ended
May 31, 1995 and November 30, 1994
Consolidated Statements of Cash Flows
Years ended May 31, 1997 and 1996 and six months ended
May 31, 1995 and November 30, 1994
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
Valuation and Qualifying Accounts (Schedule II)
All other schedules are omitted because they are not
applicable or the required information is shown in the
financial statements or notes thereto.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Continental Information Systems Corporation
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Continental Information Systems Corporation (the "Company") and its subsidiaries
at May 31, 1997 and 1996, and the results of their operations and their cash
flows for the years ended May 31, 1997 and 1996 and the six months ended May 31,
1995, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
As discussed in Note 1, on November 29, 1994, the United States Bankruptcy Court
for the Southern District of New York confirmed the Company's Plan of
Reorganization (the "Plan"). Confirmation of the Plan resulted in distribution
of all of the Company's assets in settlement of all of the Company's liabilities
through a Liquidating Estate, except for specifically identified assets and
liabilities having a net tangible fair value of $30 million retained by the
Company, and substantially terminates all rights and interests of equity
security holders as provided for in the Plan. The Plan was confirmed on November
29, 1994 and the Company emerged from bankruptcy. In connection with its
emergence from bankruptcy, the Company adopted fresh start reporting as of
November 30, 1994.
/s/Price Waterhouse LLP
- -----------------------
PRICE WATERHOUSE LLP
July 18, 1997
Syracuse, New York
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Continental Information Systems Corporation
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the results of operations and
cash flows of Continental Information Systems Corporation (the "Predecessor
Company") and its subsidiaries for the six months ended November 30, 1994, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 1, on January 13, 1989, the Predecessor Company filed a
petition with the United States Bankruptcy Court for the Southern District of
New York for reorganization under the provisions of Chapter 11 of the Bankruptcy
Code. The Predecessor Company's Plan of Reorganization was confirmed on November
29, 1994 and the Company emerged from Bankruptcy. In connection with its
emergence from bankruptcy, the Company adopted fresh start reporting.
/s/Price Waterhouse LLP
- -----------------------
PRICE WATERHOUSE LLP
January 20, 1995
Syracuse, New York
<PAGE>
<TABLE>
<CAPTION>
Continental Information Systems Corporation
and its Subsidiaries
In Thousands (Except Per Share Data)
CONSOLIDATED BALANCE SHEETS
May 31,
----------------------
1997 1996
-------- --------
<S> <C> <C>
Assets:
Cash and cash equivalents ............................................... $ 9,005 $ 5,382
Accounts receivable, net of allowance for
doubtful accounts of $50 and $53 .................................... 2,485 2,295
Notes receivable ........................................................ 5,094 3,457
Inventory ............................................................... 6,832 2,875
Net investment in direct financing leases (Note 6) ...................... 3,446 15,783
Rental equipment, net (Note 7) .......................................... 7,505 11,148
Furniture, fixtures and equipment, net (Note 8) ......................... 218 625
Other assets ............................................................ 446 1,965
Goodwill, net of amortization of $519 and $67 (Note 3) .................. 3,632 3,940
Deferred tax assets (Note 13) ........................................... 5,414 6,080
-------- --------
Total assets .................................................. $ 44,077 $ 53,550
======== ========
Liabilities and Shareholders' Equity:
Liabilities:
Accounts payable and other liabilities .............................. $ 1,302 $ 2,949
Net liabilities of discontinued operations (Note 4) ................. -- 106
Discounted lease rental borrowings (Note 9) ......................... 5,633 14,738
Notes payable to former owners of acquired company (Note 3) ......... 1,536 2,304
Note payable to institution - secured (Note 10) ..................... 1,005 --
-------- --------
Total liabilities ............................................... 9,476 20,097
-------- --------
Shareholders' Equity:
Common stock, $.01 par value; authorized 10,000,000 shares, issued and
outstanding 7,030,707 and 6,999,040, excluding
960 treasury shares in 1997 and 1996 (notes 11 and 12) .............. 70 70
Additional paid-in capital .............................................. 34,992 34,930
Accumulated deficit ..................................................... (461) (1,547)
-------- --------
Total shareholders' equity ......................................... 34,601 33,453
-------- --------
Total liabilities and shareholders' equity ......................... $ 44,077 $ 53,550
======== ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Continental Information Systems Corporation
and its Subsidiaries
In Thousands (Except Number of Shares)
CONSOLIDATED STATEMENTS OF OPERATIONS
Reorganized | Predecessor
Company | Company
---------------------------------------------------| -------------
For the Year For the Year For the Six | For the Six
Ended Ended Months Ended | Months Ended
May 31, 1997 May 31, 1996 May 31, 1995 | November 30, 1994
------------ ------------ -------------- -----------------
<S> <C> <C> <C> <C>
Revenues: |
Equipment sales ........................................ $ 21,393 $ 16,657 $ 4,571 | $ 10,771
Gain from sale of equipment subject to lease (Note 2)... 2,816 -- -- | --
Equipment rentals ...................................... 3,829 6,540 4,726 | 9,500
Income from direct financing leases .................... 1,188 1,347 621 | 705
Interest, fees and other income ........................ 2,075 2,278 1,844 | 4,731
--------- --------- -------- | ---------
31,301 26,822 11,762 | 25,707
--------- --------- -------- | ---------
|
Costs and Expenses: |
Cost of sales .......................................... 17,145 11,966 3,496 | 5,562
Depreciation of rental equipment ....................... 2,130 3,445 1,465 | 2,865
Interest expense ....................................... 975 551 277 | 137
Other operating expenses ............................... 2,310 1,344 873 | 3,627
Selling, general and admiistrative expenses ............ 7,102 7,905 3,418 | 5,310
--------- --------- -------- | ---------
29,662 25,211 9,529 | 17,501
--------- --------- -------- | ---------
|
Income from continuing operations before |
reorganization items, income taxes, fresh start |
adjustments and extraordinary issues ................ 1,639 1,611 2,233 | 8,206
--------- --------- -------- | ---------
|
Reorganization Items: |
Earnings from accumulated cash resulting from |
Chapter 11 proceedings .............................. -- -- -- | 3,527
Bankruptcy related professional fees ................... -- -- -- | (5,572)
Gain on settlement of bankruptcy issues ................ -- -- -- | 10,990
Other .................................................. -- -- -- | --
--------- --------- -------- | ---------
-- -- -- | 8,945
--------- --------- -------- | ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Continental Information Systems Corporation
and its Subsidiaries
In Thousands (Except Number of Shares)
CONSOLIDATED STATEMENTS OF OPERATIONS
(continued)
Reorganized | Predecessor
Company | Company
---------------------------------------------------| -------------
For the Year For the Year For the Six | For the Six
Ended Ended Months Ended | Months Ended
May 31, 1997 May 31, 1996 May 31, 1995 | November 30, 1994
------------ ------------ -------------- -----------------
<S> <C> <C> <C> <C>
Income from continuing operations before income |
taxes, fresh start adjustments and extraordinary item 1,639 1,611 2,233 | 17,151
Provision for income tax ............................... 623 611 849 | 45
--------- --------- -------- | ---------
Income before discontinued operations, fresh |
start adjustments and extraordinary item ............ 1016 1,000 1,384 | 17,106
--------- --------- -------- | ---------
Income (loss) from discontinued operations, net of tax . 70 (725) (1,860) | (4,882)
Income (loss) on disposal of discontinued |
operations, net of tax............................... -- (209) (1,137) | --
--------- --------- -------- | ---------
Net income (loss) from discontinued operations |
(Note 4) ............................................ 70 (934) (2,997) | (4,882)
--------- --------- -------- | ---------
Income (loss) before fresh start adjustments and |
extraordinary item .................................. 1,086 66 (1,613) | 12,224
Fresh start adjustments ................................ -- -- -- | (3,264)
--------- --------- -------- | ---------
Income (loss) before extraordinary item ................ $ 1,086 66 (1,613) | 8,960
Extraordinary item - forgiveness of debt ............... -- -- -- | 96,317
--------- --------- -------- | ---------
Net income (loss)....................................... $ 1,086 $ 66 $ (1,613) | $ 105,277
========= ========= ======== | =========
|
Net income (loss) per share (Note 1) |
Income from continuing operations.................... $ .14 $ .14 $ .20 |
Income (loss) from discontinued operations .01 (.13) (.43) |
--------- --------- -------- |
Net income (loss)................................ $ .15 $ .01 $ (.23) |
========= ========= ======== |
|
Weighted average number of shares of common |
stock outstanding..................................... 7,008 6,999 7,000 |
========= ========= ======== |
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Continental Information Systems Corporation
and its Subsidiaries
In Thousands (Except Number of Shares)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Retained
Common Stock Additional Earnings
------------ Paid-In (Accumulated
Shares Amount Capital Deficit)
------ ------ ------- --------
Predecessor Company
- -------------------
<S> <C> <C> <C> <C>
Balance - May 31, 1994 ................... 12,761,875 $ 383 $ 30,798 $ (140,408)
Net Income .......................... -- -- -- 105,277
Elimination of the historical capital
structure of the Company upon
Reorganization ...................... (12,761,875) (383) (30,798) 35,131
Reorganized Company
- -------------------
"Fresh-Start" Reorganized
capital structure .................. 7,000,000 70 34,930 --
----------- ----------- ----------- -----------
Balance - November 30, 1994 .............. 7,000,000 70 34,930 --
Net loss ............................ -- -- -- (1,613)
----------- ----------- ----------- -----------
Balance - May 31, 1995 ................... 7,000,000 70 34,930 (1,613)
Net income .......................... -- -- -- 66
Acquisition of treasury shares ...... (960) -- -- --
----------- ----------- ----------- -----------
Balance - May 31, 1996 ................... 6,999,040 70 34,930 (1,547)
Net income .......................... -- -- -- 1,086
Stock options exercised ............. 16,667 -- 33 --
Stock issued as compensation ........ 15,000 -- 29 --
----------- ----------- ----------- -----------
Balance - May 31, 1997 ................... 7,030,707 $ 70 $ 34,992 $ (461)
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Continental Information Systems Corporation
and its Subsidiaries
In Thousands
CONSOLIDATED STATEMENTS OF CASH FLOWS
Reorganized | Predecessor
Company | Company
--------------------------------------------------- |-----------------
For the Year For the Year For the Six | For the Six
Ended Ended Months Ended | Months Ended
May 31, 1997 May 31, 1996 May 31, 1995 November 30, 1994
------------ ------------ ------------ -----------------
<S> <C> <C> <C> <C>
Cash flows from operating activities: |
Net income (loss) ............................................... $ 1,086 $ 66 $ (1,613) | $ 105,277
Less: Net income (loss) from discontinued operations ............ 70 (934) (2,997) | (4,882)
--------- --------- --------- | ---------
Net income from continuing operations ........................... 1,016 1,000 1,384 | 110,159
--------- --------- --------- | ---------
|
Adjustments to reconcile net income |
to net cash provided by operating activities: |
Reorganization related adjustments- |
Gain on forgiveness of debt ................................... -- -- -- | (96,317)
Fresh start adjustments ....................................... -- -- -- | 3,043
Cash transferred to Liquidating Estate ........................ -- -- -- | (106,554)
Gain on settlement of lease, bank and institution financing ... -- -- -- | (8,012)
--------- --------- --------- | ---------
Reorganization related adjustments ........................ -- -- -- | (207,840)
--------- --------- --------- | ---------
|
Other adjustments- |
Proceeds from sale of equipment subject to lease ................ 8,703 -- -- | --
Gain on sale of equipment subject to lease ...................... (2,816) -- -- | --
Proceeds from sale of other leased equipment ................... 3,763 2,155 3,066 | 2,449
Amortization of unearned income ................................. (1,188) (1,347) (621) | (705)
Collections of rentals on direct financing leases ............... 3,524 4,665 1,761 | 2,092
Depreciation and amortization expense ........................... 3,012 3,967 1,699 | 3,309
Effect on cash flows of changes in: |
Marketable debt securities ................................... -- -- -- | 25,829
Accounts receivable .......................................... (190) (317) 1,215 | (2,436)
Notes receivable ............................................. (1,637) (2,420) 186 | (7)
Inventory .................................................... (3,957) 291 1,668 | 3,526
Other assets ................................................. 1,519 (1,157) 159 | 911
Accounts payable and other liabilities ....................... (474) 1,077 958 | (17,582)
Deferred tax assets .......................................... 666 -- (1,080) | --
Other ........................................................ (209) -- -- | --
--------- --------- --------- | ---------
Other adjustments ......................................... 10,716 6,914 9,011 | 17,386
--------- --------- --------- | ---------
Net cash provided by (used in) continuing operations . 11,732 7,914 10,395 | (80,295)
|
Net cash provided by (used in) discontinued operations 7 (1,088) 1,950 | (6,001)
--------- --------- --------- | ---------
Net cash provided by (used in) operations ............ 11,739 6,826 12,345 | (86,296)
--------- --------- --------- | ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Continental Information Systems Corporation
and its Subsidiaries
In Thousands
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
Reorganized | Predecessor
Company | Company
-------------------------------------------------|-----------------
For the Year For the Year For the Six | For the Six
Ended Ended Months Ended | Months Ended
May 31, 1997 May 31, 1996 May 31, 1995 November 30, 1994
------------ ------------ ------------ -----------------
<S> <C> <C> <C> <C>
Cash flows from investing activities: |
Purchase of rental equipment .................................... (11,432) (22,800) (2,444) | (4,503)
Purchase of property and equipment .............................. (23) (36) (70) | (871)
Net cash provided by the sale of TLP subsidiaries ............... -- 754 -- | --
Net cash used in the acquisition of LaserAccess subsidiary ...... -- (1,910) -- | --
--------- --------- --------- | ---------
Net cash used in investing activities .................... (11,455) (23,992) (2,514) | (5,374)
--------- --------- --------- | ---------
|
Cash flows from financing activities: |
Payments on note payable to Liquidating Estate .................. -- (3,391) (2,632) | --
Proceeds from lease, bank and institution financings ............ 12,852 15,368 254 | 845
Payments on lease, bank and institution financings .............. (8,778) (2,444) (1,231) | (2,666)
Payments on notes payable to former owners of acquired company .. (768) -- -- | --
Proceeds from exercise of stock options ......................... 33 -- -- | --
--------- --------- --------- | ---------
Net cash provided by (used in) financing activities ........ 3,339 9,533 (3,609) | (1,821)
--------- --------- --------- | ---------
|
Net increase (decrease) in cash and cash equivalents ....... 3,623 (7,633) 6,222 | (93,491)
|
Cash and cash equivalents at beginning of period ................ 5,382 13,015 6,793 | 100,284
--------- --------- --------- | ---------
Cash and cash equivalents at end of period ...................... $ 9,005 $ 5,382 $ 13,015 | $ 6,793
========= ========= ========= | =========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
Continental Information Systems Corporation
and its Subsidiaries
Notes to the Financial Statements
1. Summary of Significant Accounting Policies
Continental Information Systems Corporation and its Subsidiaries (the
"Company") are engaged in the business of buying and selling commercial
aircraft, telecommunications equipment, high speed production laser
printing systems, and certain other industrial equipment, provides leasing
services in connection with such equipment and is engaged in providing
real estate financing.
To distinguish between the operations of the Company after reorganization
(sometimes referred to as the "Reorganized Company") and operations prior
to reorganization, the term "Predecessor Company" will be used when
reference is made to the pre-reorganization periods. On January 13, 1989,
the Predecessor Company and certain of its subsidiaries filed voluntary
petitions for reorganization under Chapter 11 of the United States
Bankruptcy Code. On November 29, 1994 (the "Confirmation Date"), the
Bankruptcy Court confirmed the Company's Plan of Reorganization. The Plan
of Reorganization became effective on December 21, 1994 and the
Reorganized Company, and its subsidiaries which had filed petitions for
relief, emerged from Chapter 11. For financial reporting purposes, the
emergence from bankruptcy protection was recorded as of November 30, 1994,
the end of the Predecessor Company's second fiscal quarter. As a result of
the reorganization and "fresh start" reporting, the financial statements
of the Predecessor Company are not comparable to the financial statements
subsequent to November 30, 1994.
Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All intercompany accounts
have been eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents include checking and money market accounts with
financial institutions having original maturities of 90 days or less.
Concentration of Credit Risk
The Company extends credit through trade accounts receivable and leasing
transactions to its customers located throughout the U.S. Direct financing
and operating leases are secured by the underlying equipment. The Company
generally does not require collateral for trade accounts receivable.
Inventory and Related Revenue Recognition
Inventory consists of various printing, telecommunication, and aircraft
equipment purchased on a speculative basis for future sale or lease and is
stated at the lower of cost or market, cost being determined on a specific
identification basis. Revenues from the sale of equipment and the related
cost of the equipment are reflected in earnings at the time title to the
equipment passes to the customer which generally occurs upon shipment.
The Company performs ongoing analysis, at least quarterly, of the carrying
value of inventories on a specific identification basis and records
adjustments, as considered necessary, to reduce the carrying value of
inventories to estimated market value in the period such determination is
made. These adjustments are recorded as direct writedowns in the carrying
value of the inventory.
<PAGE>
Lease Accounting Policies
Statement of Financial Accounting Standards No. 13 requires that a lessor
account for each lease by the direct financing method, sales-type method
or operating method. Presently, the Company has primarily direct
financing and operating leases; the dollar value and number of sales-type
leases are considered immaterial. Net investment in direct financing
leases consists of the present value of the future minimum lease payments
plus the present value of the unguaranteed residual, representing the
estimated fair market value at lease termination. At the end of the lease
term, the recorded residual value of equipment under direct financing
leases is reclassified to rental equipment and is depreciated over its
estimated remaining useful life.
Lease income from direct financing leases consists of interest earned on
the present value of the lease payments and residual value. Revenue is
recognized over the lease term using the interest method.
Rental equipment consists of equipment under operating leases. Rental
equipment is depreciated on a straight-line basis to its residual value
over the estimated remaining useful life of such equipment. The original
useful lives generally range from three to seven years. Operating lease
revenues consist of the contractual lease payments and are recognized on
a straight-line basis over the lease term. Costs associated with
operating leases principally consist of depreciation of the equipment.
The Company makes adjustments to the carrying value of leased assets, if
necessary, when market conditions have resulted in value that is below
net book value. In accordance with "fresh start" reporting, the Company's
investment in direct financing leases and rental equipment were adjusted
to reflect fair value, and accumulated depreciation of rental equipment
was eliminated, as of November 30, 1994.
Deferred Commissions and Initial Direct Costs
Commissions and initial direct costs related to lease transactions are
capitalized as a component of the corresponding investment in direct
financing leases or rental equipment and amortized over the estimated
average lease term. Costs relating to investment in direct financing
leases are amortized using an interest method and costs relating to
rental equipment are amortized using the straight-line method.
Furniture, Fixtures and Equipment
In accordance with "fresh start" reporting, the Company's furniture,
fixtures and equipment was adjusted to reflect fair value and accumulated
depreciation was eliminated as of November 30, 1994. Additions after
November 30, 1994 are recorded at cost. Furniture, fixtures and equipment
are being depreciated using the straight-line method over the estimated
useful lives of such assets which range from three to five years.
Goodwill
Goodwill is the excess of the purchase price over the net assets of
GMCCCS Corp. (dba "LaserAccess") acquired March 8, 1996. Goodwill is
being amortized on a straight-line basis over 10 years. Amortization
charged to continuing operations in the current fiscal year amounted to
$452,000. The Company periodically reviews the value of its goodwill to
determine if an impairment has occurred. The Company measures the
potential impairment of recorded goodwill by the undiscounted value of
expected future operating cash flows in relation to its net capital
investment in the subsidiary. Based on its review, the Company does not
believe that an impairment of its goodwill has occurred.
<PAGE>
Income Taxes
The Company accounts for income taxes under the asset and liability
method required by Financial Accounting Standard No. 109 (FAS 109),
Accounting for Income Taxes. FAS 109 requires the recording of assets and
liabilities for the future tax effects of temporary differences between
the bases of all assets and liabilities for financial reporting purposes
and their tax bases. When net deferred tax assets exist, FAS 109 requires
the recording of a valuation allowance to reduce tax assets to the amount
which is more likely than not to be realized.
Net Income (Loss) Per Share
Net income (loss) per share for the Reorganized Company for the years
ended May 31, 1997 and 1996 and the six months ended May 31, 1995 was
computed based on the weighted average number of shares of common stock
outstanding during the periods, which were 7,008,440, 6,999,399 and
7,000,000, respectively. As of May 31, 1997, the Company had outstanding
options to purchase 284,000 shares of common stock (see note 12). The
potential dilution of these options is immaterial in the computation of
net income per share. Net income (loss) per share data are not presented
for the Predecessor Company due to the general lack of comparability as a
result of the revised capital structure of the Reorganized Company.
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 period. Actual results could differ from those
estimates.
Reclassifications
Certain prior period balances in the financial statements have been
reclassified to conform to the current period financial statement
presentation.
2. Sale of Equipment Subject to Lease
On November 30, 1996, the Company, through certain wholly-owned
subsidiaries, sold a substantial portion of its leased equipment to an
institutional investor for a sales price of approximately $20 million,
payable in cash of approximately $7.4 million and the assumption by the
investor of the Company's related outstanding non-recourse lease rental
borrowings of approximately $12.5 million. The gain on the transaction of
approximately $2.5 million, exclusive of income taxes, was included in
results from continuing operations for the fiscal quarter ended November
30, 1996. Additionally, on February 28, 1997, the Company sold an
additional portion of its leased equipment to the same institutional
investor for a sales price of approximately $2 million, payable in cash
of approximately $775,000, a short-term note of approximately $560,000,
the assumption by the investor of the Company's related outstanding
non-recourse lease rental borrowings of approximately $343,000 and the
payment of the Company's related outstanding recourse lease rental
borrowings of approximately $379,000. The gain on the transaction of
approximately $341,000, exclusive of income taxes, was included in
results from continuing operations for the fiscal quarter ended February
28, 1997.
<PAGE>
3. Acquisition
On March 8, 1996, the Company, through its wholly-owned subsidiary, CIS
Corporation, acquired 100% of the capital stock of GMCCCS Corp. (dba
"LaserAccess") for a purchase price of approximately $4,608,000, payable
in cash of approximately $2,304,000 at closing and the balance of
approximately $2,304,000 in the form of notes payable in three equal
annual installments, commencing March 8, 1997, with interest at the prime
rate (currently 8.5%) on the unpaid principal balance. The first annual
principal installment, plus accrued interest, was paid on a timely basis.
In addition to the purchase price to be paid in cash and notes, CIS
Corporation is obligated to pay the sellers an annual earn out payment for
each of the first four years following the March 8, 1996 sale. The earn
out payment is based upon the annual pretax income of LaserAccess and is
charged to income when earned. LaserAccess is engaged in the sales and
marketing of remanufactured Xerox High Speed Laser Printing Systems.
The acquisition has been accounted for using the purchase method of
accounting. Allocations of the purchase price have been determined based
upon estimates of fair market value. The excess of the purchase price,
over the net tangible assets acquired, of approximately $4.0 million, is
considered goodwill and is being amortized on a straight line basis over
ten years. LaserAccess' results of operations since the date of the
acquisition are included in the accompanying consolidated statements of
operations of the Company.
Unaudited pro forma data giving effect to the purchase as if it had been
acquired at the beginning of Fiscal 1996, with adjustments, primarily for
imputed interest charges attributable to notes payable to the former
owners and amortization of goodwill follows:
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
For the Year
Ended
May 31, 1996
------------
<S> <C>
Total Revenues ............................................ $ 30,599
==========
Income from continuing operations ......................... $ 1,410
==========
Income per share from continuing operations ............... $ .20
==========
Weighted average number of shares
outstanding ......................................... 6,999,040
==========
</TABLE>
Note:Reorganization items and loss from discontinued operations have
been excluded from the pro forma results.
<PAGE>
4. Discontinued Operations
On April 3, 1996, the Company announced its decision to discontinue an
operation, including its wholly-owned subsidiary, Aviron, that purchased
and sold used computer equipment and provided related technical services.
After that date, the Company had attempted to locate a buyer for the
operation. On June 5, 1996, the Company announced it had abandoned its
efforts to sell the operation and would instead liquidate the assets which
consisted principally of used computer equipment inventories and fixed
assets. The net loss from discontinued operations for the year ended May
31, 1996, was $1,177,000 (net of $698,000 deferred tax benefit). In May,
1995, the Company had attempted to change the products and marketing
strategies of Aviron to make it more competitive in the current market.
These actions resulted in a restructuring charge to operations of $800,000
in the quarter ended May 31, 1995, for employee severance programs
affecting 13 employees, lease termination costs for excess facilities, and
the write-off of certain deferred costs relating to non-compete and
consulting arrangements having a book value of approximately $218,000. The
restructuring reserve had been completely utilized as of May 31, 1996, as
a result of cash payments for severance and excess facilities costs.
Additionally, on May 25, 1995, the Board of Directors approved the
discontinuance of NC3, Inc., the Company's excess inventory business unit
located in Syracuse, New York. The Company recorded a provision of
$1,137,000 (net of $763,000 deferred tax benefit) in the quarter ended May
31, 1995, relative to the disposal of NC3 assets and other charges related
to the discontinuance of the business unit. As of May 31, 1996, the
Company had exited the business and liquidated substantially all of the
assets. A total of 14 employees were terminated in connection with the
closing of this business. Liabilities of the discontinued operation
decreased from $744,000 at May 31, 1995 to none as of May 31, 1997, due to
cash payments principally for severance and facilities costs totaling
approximately $325,000 and a net reduction of $419,000 to adjust the
amounts estimated for the loss on the inventories, receivables, fixed
assets and leased facility obligations. The adjustment of the liability in
the amount of $230,000 was recorded as a gain from discontinued
operations, net of deferred tax expenses of $87,000 in the quarter ended
August 31, 1995. An additional adjustment of the liability in the amount
of $100,000 was recorded an as offset to the loss on disposal of
discontinued operations in the quarter ended May 31, 1996. A final
adjustment of the liability in the amount of $89,000 was recorded as
income from discontinued operations in the quarter ended May 31, 1997.
<PAGE>
The Consolidated Statements of Operations for all periods presented have
been reclassified to report the results of discontinued operations
separately from continuing operations. A summary of the results of
discontinued operations follows (in thousands):
<TABLE>
<CAPTION>
| Predecessor
Reorganized Company | Company
----------------------------------------- | -----------------
For the Year For the Year For the Six | For the Six
Ended Ended Months Ended | Months Ended
May 31, 1997 May 31, 1996 May 31, 1995 | November 30, 1994
------------ ------------ ------------ | -----------------
<S> <C> <C> <C>
Revenues .................................... $ -- $ 5,491 $ 6,637 | $ 14,599
Costs and expenses .......................... (113) 6,661 9,663 | 19,481
-------- -------- -------- | --------
Income (loss) from discontinued operations .. 113 (1,170) (3,026) | (4,882)
Loss on disposal of discontinued |
operations ............................ -- (375) (1,900) | --
-------- -------- -------- | --------
|
Income (loss) before income tax (tax benefit) 113 (1,545) (4,926) | (4,882)
Income tax (tax benefit) .................... 43 (611) (1,929) | --
-------- -------- -------- | --------
Net income (loss) from discontinued |
operations ............................ $ 70 $ (934) $ (2,997) | $ (4,882)
======== ======== ======== | ========
</TABLE>
The Consolidated Balance Sheets as of May 31, 1997 and 1996, have been
reclassified to report the net assets of discontinued operations
separately from the assets and liabilities of continuing operations. A
summary of the assets and liabilities of discontinued operations follows
(in thousands):
<TABLE>
<CAPTION>
May 31,
-----------------
1997 1996
---- ----
<S> <C> <C>
Assets:
Cash and cash equivalents ................................ $ -- $ 159
Accounts receivable, net ................................. -- 55
Inventory ................................................ -- 115
Furniture, fixtures and equipment, net ................... -- 58
Accrued interest and other assets ........................ -- 16
------ -----
Total assets ................................... -- 403
------ -----
Liabilities:
Accounts payable and accruals ............................ -- 44
Other liabilities ........................................ -- 465
------ -----
Total liabilities ............................... -- 509
------ -----
Net Liabilities of Discontinued Operations $ -- $(106)
====== =====
</TABLE>
<PAGE>
5. Sale of Subsidiaries
As of December 31, 1995, the Company sold TLP Leasing Programs ("TLP"), a
group of former subsidiaries located in Boston, Massachusetts, to TLP's
current management. TLP manages various income funds and partnerships. The
sales price approximated TLP's book value of approximately $2,500,000 and
therefore did not significantly affect the results of operations of the
Company for the fiscal year ended May 31, 1996.
6. Net Investment in Direct Financing Leases
The components of the net investment in direct financing leases as of May
31 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Minimum lease payments receivable $ 3,921 $ 17,044
Initial direct costs and deferred commissions 34 303
Estimated unguaranteed residual values 630 2,483
Less: Unearned income (1,139) (4,047)
----------- -----------
Net investment in direct financing leases $ 3,446 $ 15,783
========== ==========
</TABLE>
<PAGE>
Future minimum lease payments to be received under direct financing leases
for fiscal years ending May 31 are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1998 $ 1,756
1999 1,191
2000 659
2001 242
2002 73
Beyond 2002 -
----------
$ 3,921
==========
</TABLE>
Approximately 29% of these future lease streams are allocable to lenders
under financing agreements.
7. Rental Equipment
Rental equipment consists of the following as of May 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Computer equipment ............................... $ 4,130 $ 7,565
Capital equipment ................................ 6,105 2,856
Telecommunication equipment ...................... 240 1,942
Aircraft equipment ............................... 1,338 3,485
Printing equipment ............................... 548 --
Deferred commissions and initial direct costs .... 64 211
-------- --------
12,425 16,059
Less: accumulated depreciation .................. (4,920) (4,911)
-------- --------
$ 7,505 $ 11,148
======== ========
</TABLE>
Future minimum lease payments to be received under operating leases for
the fiscal years ended May 31 are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1998 $ 2,453
1999 1,765
2000 1,353
2001 801
2002 702
Beyond 2002 137
----------
$ 7,211
==========
</TABLE>
Approximately 63% of these future lease streams are allocable to lenders
under financing agreements.
<PAGE>
8. Furniture, Fixtures and Equipment
Furniture, fixtures and equipment consist of the following as of May 31
(in thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Leasehold improvements ........................... $ 423 $ 423
Computer equipment and software .................. 719 707
Furniture, fixtures and office equipment ......... 253 249
------- -------
1,395 1,379
Less: accumulated depreciation .................. (1,177) (754)
------- -------
$ 218 $ 625
======= =======
</TABLE>
9. Discounted Lease Rental Borrowings
The Company finances certain leases by assigning the rentals to various
lending institutions at fixed rates on a recourse and non-recourse basis.
Discounted lease rental borrowings represent the present value of the
lease payments discounted at the rate charged by the lending institution.
Discounted lease rental borrowings are reduced on a monthly basis as the
corresponding lease rental stream is collected (generally by the lending
institutions). Amounts due under recourse borrowings are obligations of
the Company which are secured by the leased equipment and assignments of
lease receivables. Amounts due under non-recourse borrowings are secured
by the leased equipment and assignments of lease receivables with no
recourse to the general assets of the Company.
The Company finances leases on a one-on-one basis with a number of
institutions. Additionally, the Company has a revolving loan agreement
with an institution to provide warehouse lease financing in the amount of
$5,000,000. The loan agreement contains various covenants including
limitations on incurring additional liens and encumbrances and prohibiting
certain transactions with affiliates or subsidiaries. At May 31, 1997, the
Company is in compliance with all debt covenants. At May 31, 1997, none of
this facility was being utilized. Interest on the facility is at 1% above
the prime rate.
Discounted lease rental borrowings as of May 31 are as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Non-recourse borrowings .................. $ 5,383 $14,488
Recourse borrowings ...................... 250 250
------- -------
$ 5,633 $14,738
======= =======
</TABLE>
The Company paid interest related to discounted lease borrowings of
$652,000 and $433,000 for the fiscal years ended May 31, 1997 and 1996,
respectively.
<PAGE>
Discounted lease rental borrowings for the fiscal years ending May 31 are
payable as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1998 $ 1,415
1999 1,448
2000 1,163
2001 685
2002 656
Beyond 2002 266
---------
$ 5,633
=========
</TABLE>
10. Note Payable to Institution
The Company has a revolving loan agreement with an institution to provide
inventory financing in the amount of $7,000,000 to two of its wholly-owned
subsidiaries, CIS Air Corporation and LaserAccess. The loan agreement
contains various covenants including limitations on additional
indebtedness and the maintenance of minimum levels of net worth/net
earnings. At May 31, 1997, LaserAccess did not meet the minimum net
worth/net earnings requirement. In August 1997, a waiver relative to this
covenant was obtained from the lending institution. At May 31, 1997,
$1,005,000 of this facility was being utilized. Interest on the facility
is at 3/4% above the prime rate. The Company paid interest related to this
facility of $127,000 in fiscal 1997.
11. Common Stock
The Company's authorized capital stock consists of 10,000,000 shares of
Common Stock, $.01 par value. To the extent required by section 1123(a)(6)
of the Bankruptcy Code, the Company will not issue nonvoting equity
securities. In connection with the Plan of Reorganization, 7,000,000
shares were issued to the Liquidating Estate for distribution to the
creditors and former shareholders of the Predecessor Company. In October
1995, a wholly-owned subsidiary of the Company acquired 960 shares of the
Company's Common Stock as a result of a partial distribution by the
Liquidating Estate of the Predecessor Company. The partial distribution
was in relation to a prepetition claim against the Predecessor Company by
certain partnerships in which the wholly-owned subsidiary acted as general
partner. The Company has classified the 960 shares as Treasury Stock in
the accompanying balance sheet. Each share of Common Stock entitles the
holder to one vote on all matters submitted to a vote of shareholders. The
Company does not anticipate the payment of dividends on the Common Stock
for the foreseeable future.
12. 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 Compensation Committee, employees of and
independent contractors and consultants to the Company. Options granted to
<PAGE>
non-employee directors of the Company in any year become exercisable at
the next annual stockholders' meeting while those granted to employees of
and independent contractors and consultants to the Company are subject to
vesting periods determined by the Compensation Committee. Options granted
to employees in fiscal 1997 become exercisable in installments of 33 1/3
percent at the grant date and at each subsequent fiscal year end. The
Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for the 1995 Plan.
Accordingly, no compensation cost has been charged against income for the
stock option plan. Had compensation cost for the 1995 Plan been determined
based on the fair value at the grant dates for awards under the Plan,
consistent with the requirements of FASB Statement No. 123, "Accounting
for Stock-Based Compensation," the Company's net income and net income per
share would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
(in thousands, except per share amounts)
1997 1996
---- ----
<S> <C> <C> <C>
Net income .................. - As reported $ 1,086 $ 66
- Pro forma $ 894 $ 50
Net income per share ........ - As reported $ .15 $ .01
- Pro forma $ .13 $ .01
</TABLE>
The fair value of each stock option grant has been estimated on the date
of each grant using the Black-Scholes option pricing model with the
following weighted average assumptions:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Risk-free interest rate ........................ 6.6% 6.3%
Expected life (months) ......................... 46 60
Expected volatility ............................ 42% 42%
Expected dividend yield ........................ -- --
</TABLE>
The weighted-average grant date fair values of options granted during
fiscal 1997 and 1996 were $.80 and $1.40 per share, respectively.
<PAGE>
A summary of the status of the 1995 Plan as of May 31, 1996 and 1997, and
changes during the years ending on those dates is presented below:
<TABLE>
<CAPTION>
Weighted Average
Number of Exercise Price
Options Per Option
------- ----------
<S> <C> <C>
Outstanding at
May 31, 1995 (none exercisable) ........ 15,000 $ 3.50
Granted ...................................... 9,000 $ 2.50
Exercised .................................... -- $ --
Forfeited/expired ............................ (9,000) $ 3.50
-------
Outstanding at
May 31, 1996 (6,000 exercisable) ....... 15,000 $ 2.90
Granted ...................................... 319,000 $ 1.97
Exercised .................................... (16,667) $ 1.97
Forfeited/expired ............................ (33,333) $ 1.97
-------
Outstanding at
May 31, 1997 (188,337 exercisable) .... 284,000 $ 2.02
=======
</TABLE>
The following table summarizes information about stock options
outstanding at May 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------- ---------------------------------
Range of Weighted-Average
Exercise Number of Remaining Weighted-Average Number of Weighted-Average
Prices Options Contractual Life Exercise Price Options Exercise Price
------ ------- ---------------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C>
$3.50 6,000 3.0 $ 3.50 6,000 $ 3.50
2.50 9,000 3.3 2.50 9,000 2.50
1.97 260,000 4.0 1.97 173,337 1.97
1.84 9,000 4.4 1.84 - 1.84
------- -------
Total 284,000 188,337
======= =======
</TABLE>
<PAGE>
13. Income Taxes
The Company and its domestic subsidiaries file a consolidated federal
income tax return. In April 1994, the Predecessor Company reached a
settlement with the Internal Revenue Service relating to taxes for fiscal
years through May 1992. The liability associated with this settlement as
well as the liability for claims against the Predecessor Company for state
income taxes, have been assumed by the Liquidating Estate in connection
with the Plan of Reorganization. As part of the aforementioned settlement,
the Company is entitled to exclude approximately $141 million of otherwise
taxable income from gross income for the years 1990 through 2005 ("safe
harbor income"). However, if the terms of the agreements governing the
safe harbor income are substantially modified or if certain other changes
take place, the IRS is entitled to seek to include the safe harbor income
in the Company's taxable income after Fiscal 1993. Management considers
the prospects for such changes and resultant actions to be remote and
accordingly has not provided an income tax liability for such income.
As of November 30, 1994, $5 million in net deferred tax assets were
recorded under "fresh start" accounting (net of a valuation allowance of
$7 million) to reflect the amount of deferred tax assets which Management
believed more likely than not to be realized. The Company's total gross
deferred tax assets as of the Effective Date were approximately $12
million. The deferred tax assets relate principally to the net operating
loss carryforwards available to offset future taxable income of the
Reorganized Company, subject to an annual limitation of approximately $2
million (limited in the aggregate to approximately $35 million). These
carryforwards expire during the years 2004 to 2010.
In determining the amount of deferred tax benefits which are more likely
than not to be realized, the Company has projected that a minimum of
approximately $5.4 million of tax benefits will be generated by operations
during the fiscal periods ended through May 31, 2004. In order to realize
this level of tax benefit, cumulative pretax income for the periods
through 2004 will have to be approximately $14.2 million, which the
Company believes to be achievable. While the Company believes that it will
have a long operating life and continue to generate profits from
operations beyond that period, Management believes, in the context of the
"more likely than not" criteria of FAS 109, that the recognition of
benefits in excess of $6 million would be inappropriate in the
circumstances. Any future realization of tax benefits relating to
pre-reorganization net operating loss carryforwards in excess of the net
$5 million initially recorded will be recognized as a direct credit to
stockholders' equity as required under SOP 90-7.
<PAGE>
The components of the provision for income taxes for both continuing and
discontinued operations are as follows (in thousands):
<TABLE>
<CAPTION>
Reorganized Company | Predecessor Company
----------------------------------------------------- | ----------------------------------
For the Year For the Year For the Six | For the Six For the Year
Ended Ended Months Ended | Months Ended Ended
May 31, 1997 May 31, 1996 May 31, 1995 | November 30, 1994 May 31, 1994
------------ ------------ ------------ | ----------------- ------------
<S> <C> <C> <C> <C> <C>
Current
Federal $ -- $ -- $ -- | $ -- $ --
State . -- -- -- | 45 100
------- ------- ------- | ------- -------
-- -- -- | 45 100
Deferred .... 666 -- (1,080) | -- --
------- ------- ------- | ------- -------
$ 666 $ -- $(1,080) | $ 45 $ 100
======= ======= ======= | ======= =======
</TABLE>
A reconciliation of income tax expense (benefit) at the statutory rate to
reported income tax expense (benefit) for continuing operations follows
(in thousands):
<TABLE>
<CAPTION>
Reorganized Company | Predecessor Company
------------------------------------------------ | -----------------------------------
For the Year For the Year For the Six | For the Six For the Year
Ended Ended Months Ended | Months Ended Ended
May 31, 1997 May 31, 1996 May 31, 1995 | November 30, 1994 May 31, 1994
------------ ------------ -------- ---- | ----------------- ------------
<S> <C> <C> <C> <C> <C>
U.S. Federal statutory rate |
applied to pretax income (loss) |
from continuing operations $ 557 $ 548 $ 759 | $ 5,311 $ 46,515
|
|
State income taxes, net of |
federal benefit 66 63 90 | 45 100
|
Effect of permanent differences |
and changes in the valuation |
allowance - - - | (5,311) (46,515)
-------- --------- ------------ | --------- -----------
$ 623 $ 611 $ 849 | $ 45 $ 100
======== ========= ========== | ========= ============
</TABLE>
<PAGE>
The income tax effect of the significant temporary differences and
carryforwards which give rise to deferred tax assets and liabilities are
as follows as of May 31 (in thousands)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Assets
Net operating losses ............... $ 15,735 $ 16,422
Other .............................. 426 1,014
Valuation allowance ................ (10,541) (10,125)
Liabilities
Leased assets ...................... (206) (1,231)
-------- --------
$ 5,414 $ 6,080
======== ========
</TABLE>
14. Employee Benefit Plans
The Company maintains a defined contribution 401(k) plan covering
substantially all of its employees under which it is obligated to make
matching contributions at the rate of 50% of the first 2% of participant
earnings contributed to the plan and which provides for an annual
discretionary contribution based on participants' eligible compensation.
Matching and discretionary contributions made by the Company vest over a
five-year period. Company contributions to the plan for the fiscal year
ended May 31, 1997 and 1996, were $116,000 and $76,000, respectively.
15. Management and Services Agreement
In connection with the Plan of Reorganization, the Company entered into a
Management and Services Agreement pursuant to which the Company provided
certain administrative services to the Liquidating Estate. In exchange for
such services, the Company was paid a fee comprised of the allocable share
of the Company's direct costs required to perform the agreed upon services
plus a 10% markup and reasonable out-of-pocket expenses. The agreement was
terminated in February 1997. The Company received approximately $539,000
and $537,000, pursuant to this agreement, in the fiscal years ended May
31, 1997 and 1996, respectively.
16. Commitments and Contingencies
Rental Commitments
The Company has various operating lease agreements for offices and office
equipment. These leases generally have provisions for renewal at varying
terms. The Company recorded rental expense of $442,000 for the year ended
May 31, 1997, $717,000 for the year ended May 31, 1996, $597,000 for the
six months ended May 31, 1995 and $663,000 for the six months ended
November 30, 1994.
The future minimum lease payments required under operating leases for the
fiscal years ended May 31 are as follows (in thousands):
1998 $ 231
1999 2
<PAGE>
Contingencies
The Company is a defendant in certain legal actions arising in the normal
course of business. Management believes that the outcome of these actions
will have no material effect on the Company's financial position or
results of operations.
17. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Cash and cash equivalents and notes receivable - The carrying value
approximates fair value because of the short maturity of those
instruments.
Discounted lease rental borrowings, notes payable to former owners of
acquired company and note payable to institution - Fair value of
discounted lease rental borrowings, notes payable to former owners of
acquired company and note payable to institution are based on the
borrowing rates currently available to the Company for bank loans with
similar terms and average maturities. At May 31, 1997, the fair value of
discounted lease rental borrowings, notes payable to former owners of
acquired company and note payable to institution approximate their
carrying values.
The estimated fair values of the Company's financial instruments at May
31, 1997 are as follows:
<TABLE>
<CAPTION>
Carrying Value Fair Value
-------------- ----------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 9,005 $ 9,005
Notes receivable 5,094 5,094
Liabilities:
Discounted lease rental borrowings 5,633 5,633
Notes payable to former owners of
acquired company 1,536 1,536
Note payable to institution 1,005 1,005
</TABLE>
18. Subsequent Event
The Board of Directors has decided to sell the Telecommunications
Equipment Business Unit and the Company is currently engaged in
negotiations with a potential buyer. The sale is subject, among other
conditions, to satisfactory due diligence and negotiation and execution of
satisfactory sales documentation. The sales price is expected to
approximate the business unit's book value and therefore should not
significantly affect the results of operations of the Company for Fiscal
1998. The net assets and results of operations of the Telecommunications
Equipment Business Unit are not considered material to the consolidated
net assets and results of operations of the Company.
<PAGE>
SCHEDULE II
<TABLE>
<CAPTION>
CONTINENTAL INFORMATION SYSTEMS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED MAY 31, 1997
(Dollars in thousands)
Charged Charged
Beginning to costs to other Ending
Balance and expenses accounts Deductions Balance
-------- -------- ------------- -------- --------
<S> <C> <C> <C> <C> <C>
1995:
Accounts receivable -
allowance for doubtful
accounts
- - six months ended
November 30, 1994
(Predecessor Company) $(20,468) $ (222) $ -- $ 20,562* $ (128)
-------- -------- ------------- -------- --------
- - six months ended
May 31, 1995
(Reorganized Company) (128) (103) -- 61 (170)
-------- -------- ------------- -------- --------
1996:
Accounts receivable -
allowance for doubtful
accounts
(Reorganized Company) . (170) (34) -- 151 (53)
-------- -------- ------------- -------- --------
1997:
Accounts receivable -
allowance for doubtful
accounts
(Reorganized Company) . $ (53) $ (34) $ -- $ 37 $ (50)
-------- -------- ------------- -------- --------
*In connection with the Plan of Reorganization confirmed as of November 29,
1994, a transfer of assets to the Liquidating Estate resulted in a
significant reduction in the allowance for doubtful accounts.
</TABLE>
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company incorporates herein by reference the information concerning
directors and executive officers contained in its Notice of Annual Meeting of
Stockholders and Proxy Statement to be filed within 120 days after the end of
the Company's fiscal year (the "1997 Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The Company incorporates herein by reference the information concerning
executive compensation contained in the 1997 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The Company incorporates herein by reference the information concerning security
ownership of certain beneficial owners and management contained in the 1997
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company incorporates herein by reference the information concerning certain
relationships and related transactions contained in the 1997 Proxy Statement.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a) The following documents are filed as part of this Annual Report:
Financial Statements. See "ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA" for Index to Financial Statements and Schedules
included in this Form 10-K.
Exhibit No.
-----------
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.
2.3** Stock Purchase Agreement among CIS Corporation,
GMCCCS Corp. (dba LaserAccess), Greg M. Cody and
Charles C. Sinks, dated March 8, 1996 (Filed as
Exhibit 2.1 to the Company's Form 8-K filed March
21, 1996 and incorporated herein by reference).
3.1* Restated Certificate of Incorporation.
3.2** Restated Bylaws (Filed as Exhibit 3.2 to the
Company's Form 10-Q for the quarter ended August 31,
1995 and incorporated herein by reference).
10.1* Lease dated May 5, 1994 between B.G. Sulzle, Inc.
and the Trustee.
10.2** 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).
10.3** Employment Agreement between CIS Corporation and
Greg M. Cody, dated March 8, 1996 (Filed as Exhibit
10.1 to the Company's Form 8-K filed March 21, 1996
and incorporated herein by reference).
10.4** Employment Agreement between CIS Corporation and
Charles C. Sinks, dated March 8, 1996 (Filed as
Exhibit 10.2 to the Company's Form 8-K filed March
21, 1996 and incorporated herein by reference).
10.5** Loan and Security Agreement between CIS Corporation
and CoreStates Bank, N.A., dated July 9, 1996 (Filed
as Exhibit 10.17 to the Company's Form 10-K for the
Fiscal Year ended May 31, 1996 and incorporated
herein by reference).
<PAGE>
10.6** Revolving credit facility between CIS Air
Corporation and Norwest Business Credit, Inc., dated
July 31, 1996 (Filed as Exhibit 10.2 to the
Company's Form 10-Q for the quarter ended August 31,
1996 and incorporated herein by reference).
10.7** Revolving credit facility between GMCCCS Corp.
(doing business as "LaserAccess") and Norwest
Business Credit, Inc., dated July 31, 1996 (Filed as
Exhibit 10.3 to the Company's Form 10-Q for the
quarter ended August 31, 1996 and incorporated
herein by reference).
10.8** Letter Agreement regarding severance with John R.
Campbell dated October 23, 1996 (Filed as Exhibit
10.1 to the Company's Form 10-Q for the quarter
ended November 30, 1996 and incorporated herein by
reference).
10.9** Letter Agreement regarding severance with Frank J.
Corcoran dated October 23, 1996 (Filed as Exhibit
10.2 to the Company's Form 10-Q for the quarter
ended November 30, 1996 and incorporated herein by
reference).
10.10** Letter Agreement regarding severance with James J.
Mosher dated October 23, 1996 (Filed as Exhibit 10.3
to the Company's Form 10-Q for the quarter ended
November 30, 1996 and incorporated herein by
reference).
10.11 Letter Agreement regarding employment with Thomas J.
Prinzing dated May 20, 1997.
10.12 Letter Agreement regarding employment with Jonah M.
Meer dated June 9, 1997.
10.13 Advisory Agreement for Real Estate Related
Investments between Continental Information Systems
Corporation and Emmes Investment Management Co. LLC
dated June 30, 1997.
23.1 Consent of Independent Accountants.
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) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the last
quarter of the Company's fiscal year.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
BY: /s/ MICHAEL L. ROSEN
--------------------
Michael L. Rosen
President, Chief Executive Officer
and Director
BY: /s/ JONAH M. MEER
-----------------
Jonah M. Meer
Senior Vice President,
Chief Operating Officer
and Chief Financial officer
Dated: August 20, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and the dates indicated:
Signature Title Date
--------- ----- ----
/s/ DR. LEON H. BLOOM Director August 20, 1997
- ---------------------
Dr. Leon H. Bloom
/s/ JAMES P. HASSETT Director and August 20, 1997
- --------------------- Chairman of the Board
James P. Hassett
/s/ PAUL M. SOLOMON Director August 20, 1997
- --------------------
Paul M. Solomon
Continental Information Systems Corporation
One Northern Concourse
Post Office Box 4785
Syracuse, New York 13221-4785
(315) 455-1900
FAX: 315-455-4713
Internet: [email protected]
May 20, 1997
Mr. Thomas J. Prinzing
8237 Penstock Way
Manlius, NY 13104
Dear Mr. Prinzing:
This letter sets forth the agreement between Continental
Information Systems Corporation (the "Company") and Thomas J. Prinzing
("Prinzing") with respect to the terms on which Prinzing will serve as President
of the CIS Air Group, effective June 1, 1997.
The Company and Prinzing mutually agree as follows:
1. Employment
(a) The Company hereby employs Prinzing, and Prinzing agrees
upon the terms and conditions herein set forth herein to serve as President of
the CIS Air Group, and in such capacity Prinzing will have overall
responsibility for the management and operations of the CIS Air Group (CIS Air,
CIS Aircraft Partners, Inc. and all other aircraft assets owned or managed by
the Company or its subsidiaries), subject to the additional provisions set forth
in Schedule 1. Prinzing shall report to the Chief Executive Officer of the
Company. For so long as the Company employs Prinzing, he shall, except as the
Company may otherwise agree from time to time in writing pursuant to authority
granted by a Board resolution, devote his full time and attention to the
performance of his duties hereunder, shall faithfully serve the Company, shall
in all respects conform to and comply with the lawful and good faith directions
and instructions given to him by the Chief Executive Officer and the Board, and
shall use his best efforts to promote and serve the interests of the Company.
(b) The term of employment under this Agreement shall begin on
June 1, 1997 and end on May 31, 1999 (the "Term"), unless earlier terminated in
accordance with Exhibit A.
2. Compensation.
Effective June 1, 1997, and during the Term, Prinzing shall
receive compensation determined in accordance with, and subject to the
conditions of, Schedule 1 of this Agreement.
<PAGE>
3. Severance; Non-competition.
(a) Upon the occurrence of a Severance Event (as defined in
Exhibit A), Prinzing shall be entitled to receive until the earlier of eighteen
(18) months from the date of the Severance Event or the commencement by Prinzing
of full time employment by another employer, the following: (1) a monthly
severance payment equal to the greater of (A) $18,750, and (B) one-eighteenth of
the difference between (i) the Compensation Amount (as defined in Schedule 1),
calculated from the beginning of the fiscal year in which the Severance Event
occurs through the end of the calendar month preceding the Severance Event, and
(ii) the total amount of compensation paid to Prinzing by the Company from the
beginning of the fiscal year in which the Severance Event occurs through the
Severance Event, and (2) Continued Benefits (as defined in Exhibit A).
(b) Upon the occurrence of an Alternative Severance Event (as
defined in Exhibit A), Prinzing shall be entitled to receive until the earlier
of six (6) months from the date of the Alternative Severance Event or the
commencement by Prinzing of full time employment by another employer, the
following: (1) a monthly severance payment of $18,750, and (2) Continued
Benefits (as defined in Exhibit A).
(c) Prinzing agrees that, during the Restriction Period, he
will not engage, directly or indirectly, whether as principal or as director,
officer, employee, agent, consultant, beneficial owner of an excess of three
percent (3%) of any outstanding class of publicly-traded equity securities, or
otherwise, alone or in association with any other person, corporation, or other
entity, in any Competing Business. "Competing Business" means any person,
corporation, or other entity that is engaged, in direct competition with the CIS
Air Group, in the sale of any products or services that are the same as or
similar to the products and services sold by the CIS Air Group. "Restriction
Period" means the period beginning on June 1, 1997 and ending on the earlier of
(i) May 31, 1999, or (ii) if Prinzing's employment is terminated as a result of
a Severance Event or an Alternative Severance Event, the date of such Severance
Event or Alternative Severance Event. Prinzing further agrees that, during the
Restriction Period, he will not, directly or indirectly, in competition with the
CIS Air Group, solicit the trade of, or trade with, any customer of the CIS Air
Group, and will not, without the consent of the Company, directly or indirectly,
solicit or induce, or attempt to solicit or induce, any employee of the Company
or CIS Air Group to leave its employ for any reason whatsoever nor hire any such
employee away from the Company, CIS Air Group and their affiliates. Without
limiting the remedies available to the CIS Air Group or the Company, Prinzing
acknowledges that any breach of these covenants may result in material
irreparable injury to the Company and its affiliates for which there is no
adequate remedy at law, and that it will not be possible to measure damages for
such injuries precisely. Prinzing agrees that, in the event of such a breach or
threat thereof, the Company will be entitled to obtain a temporary restraining
order and/or a preliminary or permanent injunction restraining you from engaging
in activities prohibited by any those covenants or such other relief as may be
required to specifically enforce any of those covenants.
(d) If Prinzing dies or becomes disabled after a Severance
Event or Alternative Severance Event, he or his estate shall continue to receive
the remaining benefits to which he is entitled, subject to the terms of any plan
included in the Continued Benefits.
<PAGE>
4. General Provisions
(a) Binding Effect. This Agreement shall be binding upon, and
inure to the benefit of, the parties hereto, any successors to or assigns of the
Company and Prinzing's heirs and the personal representatives of Prinzing's
estate.
(b) Arbitration. Any disputes, controversies, or claims
arising out of or related to this Agreement ("Disputes") shall be resolved by
binding arbitration in accordance with the provisions of Exhibit B.
(c) Amendment; Waiver. This Agreement may not be modified,
amended or waived in any manner except by an instrument in writing signed by
both parties hereto; provided, however, that any such modification, amendment or
waiver on the part of the Company shall have been previously approved by the
Board. The waiver by either party of compliance with any provision of this
Agreement by the other party shall not operate or be construed as a waiver of
any other provision of this Agreement or of any subsequent breach by such party
of a provision of this Agreement.
(d) Tax Withholding. Payments to Prinzing of all compensation
contemplated under this Agreement shall be subject to all applicable legal
requirements with respect to the withholding of taxes and social security
contributions.
(e) Governing Law. All matters affecting this Agreement,
including the validity thereof, are to be governed by, and interpreted and
construed in accordance with, the laws of the State of New York applicable to
contracts executed in and to be performed in that State.
(f) Notices. Any notice hereunder by either party to the other
shall be given in writing by personal delivery or certified mail, return receipt
requested. If addressed to Prinzing, the notice shall be delivered or mailed to
Prinzing at the address first set forth above, or if addressed to the Company,
the notice shall be delivered or mailed to Continental Information Systems
Corporation, One Northern Concourse, North Syracuse, New York 13212, Attention:
Chief Executive Officer, or such other address as the Company or Prinzing may
designate by written notice at any time or from time to time to the other party.
A notice shall be deemed given, if by personal delivery, on the date of such
delivery or, if by certified mail, on the date shown on the applicable return
receipt.
(g) Effect on Previous Agreements. Effective June 1, 1997,
this Agreement supersedes all prior oral or written employment agreements
between Prinzing and the Company, and all prior or contemporaneous negotiations,
commitments, agreements, and writings with respect to the subject matter hereof;
all such other negotiations, commitments, agreements, and writings will have no
further force or effect; and the parties to any such other negotiation,
commitment, agreement, or writing will have no further rights or obligations
thereunder.
<PAGE>
(h) Counterparts. Either of the parties hereto may execute
this Agreement in counterparts, each of which shall be deemed to be an original,
but all such counterparts shall together constitute one and the same instrument.
(i) Headings. The headings of sections herein are included
solely for convenience of reference and shall not control the meaning or
interpretation of any of the provisions of this Agreement.
If you are in agreement with the foregoing, please execute in
the space provided below for your signature, whereupon this Agreement shall
constitute a binding Agreement between Prinzing and the Company.
CONTINENTAL INFORMATION SYSTEMS CORPORATION
By: /s/ JAMES P. HASSETT
--------------------
Name: James P. Hassett, Chairman
Authorized Signatory
ACCEPTED AND AGREED:
/s/ THOMAS J. PRINZING
- ----------------------
Thomas J. Prinzing
Date: 5/21/97
<PAGE>
EXHIBIT A
Definitions
1. Severance Event: During the Term, termination by the
Company of Prinzing's employment other than for Cause or upon an Alternative
Severance Event, or resignation by Prinzing from the Company for Good Reason.
2. Alternative Severance Event: After November 30, 1997 and
prior to the expiration of the Term, termination by the Company of Prinzing's
employment if the aggregate Air Group Net Earnings (as defined in Schedule 1 and
calculated in accordance therewith) for the three most-recently completed fiscal
quarters, does not, on an annualized basis, yield a return on equity invested by
the Company in the CIS Air Group of at least 15%.
3. Cause: Termination by the Company of Prinzing's employment
upon (a) Prinzing's willful and continued failure to substantially perform his
duties with the Company (other than any such failure resulting from his
incapacity due to physical or mental illness), or (b) Prinzing's willfully
engaging in misconduct that is materially injurious to the Company, monetarily
or otherwise. For purposes of this paragraph, no act, or failure to act, on
Prinzing's part shall be considered "willful" unless done, or omitted to be
done, by him not in good faith and without reasonable belief that his action or
omission was in the best interest of the Company. Notwithstanding the foregoing,
Prinzing shall not be deemed to have been terminated for Cause unless and until
there shall have been delivered to Prinzing a copy of a Notice of Termination
from the Board, after reasonable notice to Prinzing and an opportunity for him
and his counsel to be heard before the Board, finding that in the good faith
opinion of the Board he has engaged in conduct warranting termination for cause
under clauses (a) and (b) above.
4. Good Reason: Prinzing's resignation of his employment with
the Company within 120 days following the occurrence of any of the following
events:
(a) Reduction of Prinzing's compensation below that
determined in accordance with Schedule 1;
(b) Without Prinzing's written consent and measured
against his status as of June 1, 1997, a reduction in
his reporting responsibilities, titles, or offices,
or any removal of him from or any failure to re-elect
him to any such positions (other than as a member of
the Company's Board of Directors), except in
connection with the termination of his employment for
Cause, disability, or retirement or as a result of
his death, or by him other than for Good Reason;
<PAGE>
(c) The Company does not allow Prinzing to participate in
any employee benefit plan on the same terms and
conditions made available to other senior executive
personnel; provided, that the foregoing shall not
restrict the Board's discretion to award bonuses,
stock options or other incentive compensation in such
amounts as it determines; or
(d) The Company fails to comply with its obligations
under section 3 of Schedule 1.
In the event that Prinzing does not resign within 120 days of the occurrence of
any of the foregoing events, his rights with respect to such Good Reason shall
be deemed waived by Prinzing.
5. Notice of Termination: A written notice which shall
indicate the specific termination provision in this Agreement that is relied
upon by the party terminating Prinzing's employment and which shall summarize
the basis for termination of Prinzing's employment. Any purported termination by
the Company for Cause, or Prinzing's resignation for Good Reason shall be
communicated by Notice of Termination to the other party hereto.
6. Date of Termination: (a) if Prinzing's employment is
terminated for Cause, the date specified by the Company in the Notice of
Termination, and (b) if Prinzing's employment is terminated by Prinzing for Good
Reason, the date on which the Notice of Termination is given.
7. Continued Benefits: The following benefits, which shall be
maintained in full force and effect by the Company for the benefit of Prinzing
and his surviving dependents for the applicable period: all life insurance,
medical, health and accident, and disability plans, programs or arrangements in
which Prinzing was entitled to participate immediately prior to the Severance
Event or Alternative Severance Event, as the case may be, provided that
Prinzing's continued participation is possible under the general terms and
provisions of such plans and programs. In the event that Prinzing's
participation in any such plan or program is barred, the Company shall make
reasonable efforts to obtain insurance for Prinzing that would provide him with
benefits substantially similar to those which Prinzing is entitled to receive
under such plans and programs, but the Company shall not provide those benefits
directly if they cannot be obtained through insurance and shall not be obligated
to pay premiums in excess of two (2) times the group rate previously paid on his
behalf. Prinzing agrees that any such coverage will reduce the applicable period
for which coverage might have to be offered under applicable federal or state
laws. Nothing in this provision shall provide eligibility for bonuses, vacation,
or pension or profit-sharing programs after the Severance Event or Alternative
Severance Event, as the case may be, except as otherwise required by the
generally-applicable terms of those programs.
<PAGE>
EXHIBIT B
Arbitration Provisions
1. Any arbitration required under Section 3(b) of this
Agreement shall be administered by the American Arbitration Association ("AAA"),
and shall be conducted in accordance with the Commercial Arbitration Rules of
the American Arbitration Association (the "Rules"), as such Rules may be amended
from time to time, with the hearing locale to be the state and county in which
the Company's headquarters are located, unless some other location and/or
arbitrator are chosen by mutual consent of the Company and Prinzing.
2. A single neutral arbitrator shall preside over the
arbitration and decide the Dispute (the "Decision"). The AAA shall use its
normal procedures pursuant to the Rules for selection of an arbitrator.
3. The Decision shall be binding, and the prevailing party may
enforce such decision in any court of competent jurisdiction.
4. The parties shall cooperate with each other in causing the
arbitration to be held in as efficient and expeditious a manner as practicable
and in this connection to furnish such documents and make available such persons
as the Arbitrator may request.
5. The parties have selected arbitration in order to expedite
the resolution of Disputes and to reduce the costs and burdens associated with
litigation. The parties agree that the Arbitrator should take these concerns
into account when determining whether to authorize discovery and, if so, the
scope of permissible discovery and other hearing and pre-hearing procedures.
6. Without limiting any other remedies that may be available
under applicable law, the Arbitrator shall have no authority to award punitive
damages.
7. The Arbitrator shall render a Decision within ninety (90)
days after accepting an appointment to serve as Arbitrator unless the parties
otherwise agree or the Arbitrator makes a finding that a party has carried the
burden of showing good cause for a longer period.
8. All proceedings and decisions of the Arbitrator shall be
maintained in confidence, to the extent legally permissible, and shall not be
made public by any party or any Arbitrator without the prior written consent of
all parties to the arbitration, except as may be required by law.
9. Each party shall bear its own costs and attorneys' fees,
and the parties shall equally bear the fees, costs, and expenses of the
Arbitrator and the arbitration proceedings; provided, however, that the
Arbitrator may exercise discretion to award costs, but not attorneys' fees, to
the prevailing party.
<PAGE>
Schedule 1
Compensation Plan
1. Definitions. For purposes of this schedule,
"Compensation Amount" means, for any fiscal period, .33 times
the difference between (1) Air Group Net Earnings, and (2)
Minimum Return on Equity.
"Air Group Net Earnings" means, for any period, (i) net
earnings before taxes of the Company's Air Group, after
payment of all expenses attributable to the Air Group (other
than corporate overhead and Prinzing's compensation),
including interest on funds borrowed for purposes of financing
the Air group's business, plus (ii) any fees received which
are earned for managing the Jetstream income funds in
conjunction with Lehman Brothers and which are not included in
pretax income. Air Group Net Earnings shall be calculated
based on Air Group financial statements prepared using
methodology consistent with that employed in calculating net
earnings before taxes of the Air for purposes of the Company's
audited financial statements for the fiscal year ended May 31,
1997.
"Minimum Return on Equity" means, for any period, an amount
equal to a cumulative return on equity invested in the Air
Group of 20% per annum, subject to adjustment as set forth
below. Provided that Prinzing satisfies the requirements of
section 3 of this schedule prior to September 1, 1997, then
for purposes of determining the Compensation Amount, for the
period June 1, 1997 to August 31, 1997, the Company will be
deemed to have invested equity equal to $5 million in the Air
Group and the remaining equity invested in the Air Group will
be treated as debt bearing an interest rate equal to the Prime
Rate (as reported in the "Money Rates" column of the Wall
Street Journal) plus 75 basis points. If the Air Group Net
Earnings for any fiscal year during the Term is less than the
Minimum Return on Equity as calculated pursuant to the
foregoing formula, then an amount equal to the difference
between the Minimum Return on Equity for such fiscal year and
Air Group Net Earnings, then Minimum Return on Equity for the
next fiscal year shall also include such difference plus a
rate of return of 20% per annum.
2. Payment of Compensation. (a) During the Term, Prinzing will
receive a non-refundable advance against the Compensation Amount of $225,000 per
year ("Base Compensation Advance"), payable periodically in accordance with the
Company's standard payroll procedures. For each fiscal year during the Term,
Prinzing will be entitled to receive compensation ("Compensation") equal to the
greater of the Base Compensation Advance for such fiscal year and the
Compensation Amount for the period from June 1, 1997 to the end of such fiscal
year.
(b) With respect to each of the first three quarters of any
fiscal year, if the Compensation Amount for the fiscal year through the end of
such quarter exceeds $225,000, then Prinzing will receive a refundable advance
(an "Interim Compensation Advance") equal to (i)
<PAGE>
50% of (ii) the amount by which the Compensation Amount for the fiscal year
through the end of such quarter, minus any payments of Interim Compensation
Advances for prior quarters of the fiscal year, exceeds $225,000. Any Interim
Compensation Advances payable under this section will be calculated and paid to
Prinzing within 5 days after the filing of the Company's quarterly financial
statements with the Securities and Exchange Commission, but in any event no
later than 50 days after the end of the quarter.
(c) Following the end of any fiscal year, Prinzing will be
paid an amount equal to the excess, if any, of the Compensation Amount for for
the fiscal year over all Base and Interim Compensation Advances paid to him
pursuant to this schedule. If the amounts of Compensation Advances received by
Prinzing during the fiscal year exceed the Compensation Amount for such fiscal
year minus the Base Compensation Advance, Prinzing will repay the excess to the
Company, or the Company may offset such amounts due against any other payments
due to Prinzing. Any payments due to or from Prinzing pursuant to this section
will be calculated and paid within 5 days after completion of the audit of the
Company's financial statements for the fiscal year in question.
(d) Annex 1.1 to this schedule contains examples illustrating
the application of the foregoing formulas.
3. Capitalization of Air Group. The Company presently has
approximately $11 million in equity invested in the Air Group. The Company and
Prinzing intend that the capitalization of the Air Group will consist of $5
million in equity contributed by the Company, and up to $10 million in debt
financing. Accordingly, the Company will maintain throughout the Term an
investment of equity capital in the Air Group of at least $5 million, but may
withdraw capital from the Air Group in excess of that amount. Prinzing will seek
to obtain debt financing in replacement of the remaining equity over $5 million
now invested in the Air Group, and additional debt financing as he deems
necessary to achieve the Air Group's financial goals. Prinzing shall be deemed
to have satisfied this requirement if he presents to the Company a commitment
for debt financing described in the preceding sentence on market terms for
comparable loans and containing customary non-financial terms and conditions.
The Company will take such actions as are reasonably required to consummate up
to $10 million in debt financing meeting the foregoing requirements.
4. Oversight. Any proposed Air Group transaction, or series of
related transaction, involving the expenditure of more than $1 million, shall be
subject to the approval of the Chief Executive Officer of the Company. If the
Chief Executive Officer does not approve such a proposed transaction, Prinzing
shall have the right to request that the full Board of Directors review and
approve or disapprove the proposed transaction.
<PAGE>
ANNEX 1.1 to Schedule 1
Examples of Compensation Formula
Example 1:
Assumptions:
Equity $5 million
FY 1998 Minimum Return on Equity = $1 million per year,
$250,000 per quarter FY 1998 Quarterly Air Group Net Earnings
as follows:
1st Q = $ 500,000
2nd Q = $ 500,000
3rd Q = $ 500,000
4th Q = $ 500,000
Total = $2,000,000
Analysis:
FY 1998 Compensation Amount is $330,000, calculated
as .33 times Air Group Net Earnings of $2,000,000
minus Minimum Return on Equity of $1,000,000.
Compensation is paid as follows:
Base Compensation Advance of $225,000, paid
periodically Interim Advances and Final Payment Paid
as follows:
<TABLE>
<CAPTION>
Minimum Interim
Air Group Net Return on Compensation Advance/Final
FY 1998 Earnings Equity Amount (1) Payment (2)
- ------- -------- ------ ---------- -----------
<S> <C> <C> <C> <C>
3 months $ 500,000 $ 250,000 $ 82,500 $ 0
6 months $1,000,000 $ 500,000 $165,000 $ 0
9 months $1,500,000 $ 750,000 $247,500 $11,250
Full Year $2,000,000 $1,000,000 $330,000 $93,750
</TABLE>
Notes:
(1) .33 times cumulative excess of Air Group Net Earnings over
Minimum Return on Equity
(2) For first 3 quarters, 50% of cumulative excess, if any, of
Compensation Amount over $225,000. Final Payment equals
Compensation Amount minus $225,000 and all Interim Advances.
<PAGE>
Example 2:
Assumptions:
Equity $5 million
FY 1998 Minimum Return on Equity= $1,000,000 or $250,000 per
quarter FY 1998 Quarterly Air Group Net Earnings as follows:
1st Q = $200,000
2nd Q = $200,000
3rd Q = $200,000
4th Q = $200,000
Total = $800,000
FY 1999 Minimum Return on Equity = $1,240,000 (20% on
$5 million + $200,000 FY 1998 shortfall + 20% on
shortfall) or $310,000 per quarter
FY 1999 Quarterly Air Group Net Earnings as follows:
1st Q = $ 600,000
2nd Q = $ 600,000
3rd Q = $ 600,000
4th Q = $ 600,000
Total = $2,400,000
Analysis:
FY 1998 Compensation is $225,000, equal to
non-refundable compensation advance
FY 1999 Compensation Amount is $382,800, calculated
as .33 times Air Group Net Earnings of $2,400,000
minus Minimum Return on Equity of $1,240,000.
Compensation is paid as follows:
Base Compensation Advance of $225,000, paid
periodically Interim Advances and Final Payment Paid
as follows:
<PAGE>
<TABLE>
<CAPTION>
Minimum Interim
Air Group Net Return on Compensation Advance/Final
FY 1999 Earnings Equity Amount (1) Payment (2)
- ------- -------- ------ ----------- -----------
<S> <C> <C> <C> <C>
3 months $ 600,000 $ 310,000 $ 95,700 $ 0
6 months $1,200,000 $ 620,000 $191,400 $ 0
9 months $1,800,000 $ 930,000 $287,100 $ 31,050
Full year $2,400,000 $1,240,000 $382,800 $126,750
</TABLE>
Notes:
(1) .33 times cumulative excess of Air Group Net Earnings over
Minimum Return on Equity
(2) For first 3 quarters, 50% of cumulative excess, if any, of
Compensation Amount over $225,000. Final Payment equals
Compensation Amount minus $225,000 and all Interim Advances.
Continental Information Systems Corporation
One Northern Concourse
Post Office Box 4785
Syracuse, New York 13221-4785
(315) 455-1900
FAX: 315-455-4713
Internet: [email protected]
June 9, 1997
Mr. Jonah M. Meer
1488 East 27th Street
Brooklyn, NY 11210
Dear Mr. Meer:
This letter sets forth the agreement (this "Agreement")
between Continental Information Systems Corporation (the "Company") and Jonah M.
Meer ("Meer") with respect to the terms and conditions upon which Meer will
serve as Chief Financial Officer and Chief Operating Officer of the Company,
effective June 30, 1997 (the "Commencement Date").
In consideration of the mutual covenants contained herein and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the Company and Meer mutually agree as follows:
1. Employment.
The Company hereby employs Meer, and Meer hereby agrees upon
the terms and conditions set forth herein to serve as Chief Financial Officer
and Chief Operating Officer of the Company, and in such capacity Meer shall have
the duties assigned to him by the Board of Directors and the Chief Executive
Officer of the Company. Meer shall report to the Chief Executive Officer of the
Company. For so long as the Company employs Meer, he shall, except as the
Company may otherwise agree from time to time in writing pursuant to authority
granted by a resolution of the board of directors of the Company (the "Board"),
devote his full time and attention to the performance of his duties hereunder,
shall faithfully serve the Company, shall in all respects conform to and comply
with the lawful and good faith directions and instructions given to him by the
Chief Executive Officer and the Board, and shall use his best efforts to promote
and serve the interests of the Company.
2. Term.
Meer's term of employment under this Agreement shall begin on
the Commencement Date and end on June 30, 1999 (the "Term"), unless earlier
terminated in accordance with Exhibit A.
<PAGE>
3. Compensation; Benefits; Stock Options.
(a) Effective the Commencement Date, for each fiscal year
during the Term, Meer shall be entitled to receive an annual base salary of
$200,000 payable in accordance with the Company's normal payroll procedure or
such greater amount approved by the Board. Meer shall also be eligible to
receive bonuses to be negotiated in good faith by Meer and the Company
subsequent to the Commencement Date.
(b) Effective the Commencement Date, Meer shall, during the
Term, be covered by all applicable pension and profit sharing programs and
insurance benefits in effect for all salaried employees of the Company, together
with any future improvements in such programs and benefits. In addition, Meer
shall be entitled, during the Term (and thereafter to the extent provided herein
or in any such plan or program), to receive such other and further benefits,
including without limitation benefits under all life insurance, medical, dental,
health and accident, and disability plans or programs, as shall be generally
made applicable to senior executive personnel of the Company, and such
additional benefits as may be granted to Meer from time to time by the Board.
Notwithstanding the foregoing, Meer shall have the right to waive the benefits
provided under this section 3(b) and to continue to be covered by his previous
employer's benefits for no more than six (6) months after the Commencement Date.
The Company shall reimburse Meer for costs he incurs to continue to be covered
by his previous employer's benefits in an amount not to exceed the costs the
Company would have incurred if Meer had been covered by the Company's benefits.
(c) Meer shall be permitted such vacations and other time off,
including paid holidays, as are consistent with the Company's general rules and
practices regarding vacations for senior executive personnel.
(d) Effective the Commencement Date, Meer shall receive
options to purchase 75,000 shares of the Company's Common Stock. The options
shall be exercisable on or after the Commencement Date for up to 25,000 shares
of the Company's Common Stock. The options shall be exercisable as to an
additional 25,000 shares on the first anniversary of the Commencement Date. The
options shall be exercisable as to the remaining 25,000 shares on the second
anniversary of the Commencement Date. The term of the options shall be three (3)
years from the date that the options become exercisable. The exercise price of
the options shall be the closing price of the Company's Common Stock on the
Commencement Date. All other terms and conditions shall be set forth in, and the
options shall be issued pursuant to, the Company's standard stock option
agreement, as executed by Meer.
4. Severance; Non-competition.
(a) Subject to Section 4(b), upon the occurrence of a
Severance Event (as defined in Exhibit A), Meer shall be entitled to receive,
until the earlier of three months from the date of the Severance Event or the
commencement by Meer of full time employment by another employer, the following:
(1) a monthly severance payment equal to one-twelfth of Meer's annual base
salary as in effect on the date of the Severance Event, and (2) Continued
Benefits (as defined in Exhibit A).
<PAGE>
(b) If within one year after the Commencement Date, there
occurs a Change of Control Event (as defined in Exhibit A), and then a Severance
Event, then Meer shall be entitled to receive from the date of the Severance
Event until the earlier of the date that is one year after the date of the
Change of Control Event or the commencement by Meer of full time employment by
another employer, the following: (1) a monthly severance payment equal to
one-twelfth of Meer's annual base salary as in effect on the date of the
Severance Event but in no event less than three (3) months of severance, and (2)
Continued Benefits.
(c) If Meer dies or becomes disabled after a Severance Event,
he or his estate shall continue to receive the remaining benefits to which he is
entitled, subject to the terms of any plan included in the Continued Benefits.
(d) Meer agrees that, during the Restriction Period, he will
not engage, directly or indirectly, whether as principal or as director,
officer, employee, agent, consultant, beneficial owner of an excess of three
percent (3%) of any outstanding class of publicly-traded equity securities, or
otherwise, alone or in association with any other person, corporation, or other
entity, in any Competing Business. "Competing Business" means any person,
corporation, or other entity that is engaged, in direct competition with the
Company, in the sale of any products or services that are the same as or similar
to the products and services sold by the Company. "Restriction Period" means the
period beginning on the Commencement Date and ending on the earlier of (i) June
30, 1999, or (ii) if Meer's employment is terminated as a result of a Severance
Event, the date of such Severance Event. Meer further agrees that, during the
Restriction Period, he will not, directly or indirectly, in competition with the
Company, solicit the trade of, or trade with, any customer of the Company, and
will not, without the consent of the Company, directly or indirectly solicit or
induce, or attempt to solicit or induce, any employee of the Company to leave
his or her employ for any reason whatsoever nor hire any such employee away from
the Company. Without limiting the remedies available to the Company, Meer
acknowledges that any breach of these covenants may result in material
irreparable injury to the Company and its affiliates for which there is no
adequate remedy, at law, and that it will not be possible to measure damages for
such injuries precisely. Meer agrees that, in the event of such a breach or
threat thereof, the Company will be entitled to obtain a temporary restraining
order and/or a preliminary or permanent injunction restraining Meer from
engaging in activities prohibited by any of those covenants or such other relief
as may be required to specifically enforce any of those covenants.
5. General Provisions.
(a) Binding Effect. This Agreement shall be binding upon, and
inure to the benefit of, the parties hereto, any successors to or assigns of the
Company and Meer's heirs and the personal representatives of Meer's estate.
(b) Arbitration. Any disputes, controversies, or claims
arising out of or related to this Agreement ("Disputes") shall be resolved by
binding arbitration in accordance with the provisions of Exhibit B.
<PAGE>
(c) Amendment; Waiver. This Agreement may not be modified,
amended or waived in any manner except by an instrument in writing signed by
both parties hereto; provided, however, that any such modification, amendment or
waiver on the part of the Company shall have been previously approved by the
Board. The waiver by either party of compliance with any provision of this
Agreement by the other party shall not operate or be construed as a waiver of
any other provision of this Agreement or of any subsequent breach by such party
of a provision of this Agreement.
(d) Tax Withholding. Payments to Meer of all compensation
contemplated under this Agreement shall be subject to all applicable legal
requirements with respect to the withholding of taxes and social security
contributions.
(e) Governing Law. All matters affecting this Agreement,
including the validity thereof, are to be governed by, and interpreted and
construed in accordance with, the laws of the State of New York applicable to
contracts executed in and to be performed in that State.
(f) Notices. Any notice hereunder by either party to the other
shall be given in writing by personal delivery or certified mail, return receipt
requested. If addressed to Meer, the notice shall be delivered or mailed to Meer
at the address first set forth above, or if addressed to the Company, the notice
shall be delivered or mailed to Continental Information Systems Corporation, One
Northern Concourse, North Syracuse, New York 13212, Attention: Chief Executive
Officer, or such other address as the Company or Meer may designate by written
notice at any time or from time to time to the other party. A notice shall be
deemed given, if by personal delivery, on the date of such delivery or, if by
certified mail, on the date shown on the applicable return receipt.
(g) Effect on Previous Agreements. This Agreement supersedes
all prior oral or written employment agreements between Meer and the Company,
and all prior or contemporaneous negotiations, commitments, agreements, and
writings with respect to the subject matter hereof; all such other negotiations,
commitments, agreements, and writings will have no further force or effect; and
the parties to any such other negotiation, commitment, agreement, or writing
will have no further rights or obligations thereunder.
(h) Counterparts. Either of the parties hereto may execute
this Agreement in counterparts, each of which shall be deemed to be an original,
but all such counterparts shall together constitute one and the same instrument.
(i) Headings. The headings of sections herein are included
solely for convenience of reference and shall not control the meaning or
interpretation of any of the provisions of this Agreement.
<PAGE>
This Agreement shall constitute a binding agreement between
Meer and the Company upon execution by each of Meer and the Company; provided,
that if the Company does not execute this Agreement after thirty (30) days of
the execution by Meer, this Agreement shall be null and void.
CONTINENTAL INFORMATION SYSTEMS CORPORATION
By: /s/ James P. Hassett
--------------------
Name: JAMES P. HASSETT, Chairman
Authorized Signatory
Date: 6/9/97
By: /s/ JONAH M. MEER
-----------------
Name: JONAH M. MEER
Date: 6/9/97
<PAGE>
EXHIBIT A
Definitions
1. Severance Event: During the Term, termination by the Company of
Meer's employment other than for Cause, or resignation by Meer from the Company
for Good Reason.
2. Cause: Termination by the Company of Meer's employment upon (a)
Meer's willful and continued failure to substantially perform his duties with
the Company (other than any such failure resulting from his incapacity due to
physical or mental illness), or (b) Meer's willfully engaging in misconduct that
is materially injurious to the Company, monetarily or otherwise. For purposes of
this paragraph, no act, or failure to act, on Meer's part shall be considered
"willful" unless done, or omitted to be done, by him not in good faith and
without reasonable belief that his action or omission was in the best interest
of the Company. Notwithstanding the foregoing, Meer's employment shall not be
deemed to have been terminated for Cause unless and until there shall have been
delivered to Meer a copy of a Notice of Termination from the Board, after
reasonable notice to Meer and an opportunity for him and his counsel to be heard
before the Board, finding that in the good faith opinion of the Board he has
engaged in conduct warranting termination for Cause under clauses (a) and (b)
above.
3. Good Reason: Meer's resignation of his employment with the Company
within 120 days following the occurrence of any of the following events:
(a) Reduction of Meer's annual base salary below $200,000;
(b) Without Meer's written consent and measured against his status
as of the Commencement Date, a reduction in his reporting
responsibilities, titles, or offices, or any removal of him
from or any failure to re-elect him to any such positions,
except in connection with the termination of his employment
for Cause, disability, or retirement or as a result of his
death, or by him other than for Good Reason, provided, that in
the event there occurs a Change of Control Event consisting of
a decision to liquidate substantially all the assets of the
Company, it shall not constitute Good Reason if Meer is
requested by the Board of Directors to remain employed by the
Company to assist in the liquidation for a period of up to six
(6) months at the annual salary of $200,000 (or such greater
amount in effect) plus benefits; or
(c) The Company does not allow Meer to participate in any employee
benefit plan on the same terms and conditions made available
to other senior executive personnel; provided, that the
foregoing shall not restrict the Board's discretion to award
bonuses, stock options or other incentive compensation in such
amounts as it determines.
In the event that Meer does not resign within 120 days of the occurrence of any
of the foregoing events, his rights with respect to such Good Reason shall be
deemed waived by Meer.
<PAGE>
4. Notice of Termination: A written notice which shall indicate the
specific termination provision in this Agreement that is relied upon by the
party terminating Meer's employment and which shall summarize the basis for
termination of Meer's employment. Any purported termination by the Company for
Cause, or Meer's resignation for Good Reason shall be communicated by Notice of
Termination to the other party hereto.
5. Date of Termination: (a) if Meer's employment is terminated for
Cause, the date specified by the Company in the Notice of Termination, and (b)
if Meer's employment is terminated by Meer for Good Reason, the date on which
the Notice of Termination is given.
6. Continued Benefits: The following benefits, which shall be
maintained in full force and effect by the Company for the benefit of Meer and
his surviving dependents for the applicable period: all life insurance, medical,
dental, health and accident, and disability plans or programs in which Meer was
entitled to participate immediately prior to the Severance Event; provided, that
Meer's continued participation is possible under the general terms and
provisions of such plans and programs. In the event that Meer's participation in
any such plan or program is barred, the Company shall make reasonable efforts to
obtain insurance for Meer that would provide him with benefits substantially
similar to those which Meer is entitled to receive under such plans and
programs, but the Company shall not provide those benefits directly if they
cannot be obtained through insurance and shall not be obligated to pay premiums
in excess of two (2) times the group rate previously paid on his behalf. Meer
agrees that any such coverage will reduce the applicable period for which
coverage might have to be offered under applicable federal or state laws.
Nothing in this provision shall provide eligibility for bonuses, vacation, or
pension or profit sharing programs after the Severance Event, except as
otherwise required by the generally-applicable terms of those programs.
7. Change of Control Event: Either (i) any change in the composition of
the Board of Directors of the Company resulting in a majority of the directors
on the Commencement Date, or persons elected by or on the recommendation of a
majority of the directors on such date, not constituting a majority of the Board
of Directors; or (ii) a decision by the Board of Directors or the shareholders
to liquidate substantially all the assets of the Company.
<PAGE>
EXHIBIT B
Arbitration Provisions
1. Any arbitration required under section 5(b) of this
Agreement shall be administered by the American Arbitration Association ("AAA"),
and shall be conducted in accordance with the Commercial Arbitration Rules of
the American Arbitration Association (the "Rules"), as such Rules may be amended
from time to time, with the hearing locale to be New York, New York, unless some
other location and/or arbitrator are chosen by mutual consent of the Company and
Meer.
2. A single neutral arbitrator shall preside over the
arbitration and decide the Dispute (the "Decision"). The AAA shall use its
normal procedures pursuant to the Rules for selection of an arbitrator.
3. The Decision shall be binding, and the prevailing party may
enforce such decision in any court of competent jurisdiction.
4. The parties shall cooperate with each other in causing the
arbitration to be held in as efficient and expeditious a manner as practicable
and in this connection to furnish such documents and make available such persons
as the Arbitrator may request.
5. The parties have selected arbitration in order to expedite
the resolution of Disputes and to reduce the costs and burdens associated with
litigation. The parties agree that the Arbitrator should take these concerns
into account when determining whether to authorize discovery and, if so, the
scope of permissible discovery and other hearing and pre-hearing procedures.
6. Without limiting any other remedies that may be available
under applicable law, the Arbitrator shall have no authority to award punitive
damages.
7. The Arbitrator shall render a Decision within ninety (90)
days after accepting an appointment to serve as Arbitrator unless the parties
otherwise agree or the Arbitrator makes a finding that a party has carried the
burden of showing good cause for a longer period.
8. All proceedings and decisions of the Arbitrator shall be
maintained in confidence, to the extent legally permissible, and shall not be
made public by any party or any Arbitrator without the prior written consent of
all parties to the arbitration, except as may be required by law.
9. Each party shall bear its own costs and attorneys' fees,
and the parties shall equally bear the fees, costs, and expenses of the
Arbitrator and the arbitration proceedings; provided, however, that the
Arbitrator may exercise discretion to award costs, but not attorneys' fees, to
the prevailing party.
ADVISORY AGREEMENT FOR
REAL ESTATE RELATED INVESTMENTS
Dated
as of June 30, 1997
Between
EMMES INVESTMENT MANAGEMENT CO. LLC
and
CONTINENTAL INFORMATION SYSTEMS CORPORATION
<PAGE>
TABLE OF CONTENTS
SECTION I. APPOINTMENT OF EMMES; PARTICIPATION BY INVESTOR...............
1.1 Appointment and Management Fees of Emmes......................
1.2 Power of Attorney.............................................
1.3 Expenses......................................................
1.4 Participation by Investor.....................................
SECTION II. SERVICES TO BE PROVIDED BY EMMES...................................
2.1 Duties and Authorization......................................
2.2 Additional Services...........................................
2.3 Agents and Representatives....................................
2.4 Further Limitations...........................................
2.5 Limitation on Emmes's Responsibilities........................
SECTION III. TERMINATION; RESIGNATION OF EMMES.................................
3.1 Termination...................................................
3.2 Resignation of Emmes..........................................
SECTION IV. REPRESENTATIONS AND WARRANTIES.....................................
4.1 Representations and Warranties of Investor....................
4.2 Representations and Warranties of Emmes.......................
SECTION V. INDEMNIFICATION.....................................................
5.1 Indemnification by Investor...................................
SECTION VI. MISCELLANEOUS......................................................
6.1 Notices.......................................................
6.2 Entire Agreement, Modification................................
6.3 Counterparts..................................................
6.4 Severability of Provisions....................................
6.5 Binding; Benefit..............................................
6.6 Governing Law; Jurisdiction...................................
6.7 No Other Agency...............................................
6.8 Arbitration...................................................
<PAGE>
ADVISORY AGREEMENT FOR REAL ESTATE RELATED INVESTMENTS
This ADVISORY AGREEMENT FOR REAL ESTATE RELATED INVESTMENTS, made as of
the ____ day of June, 1997 by and between Emmes Investment Management Co. LLC, a
Delaware limited liability company with offices at 420 Lexington Avenue, Suite
2702, New York, New York 10170 ("Emmes") and Continental Information Systems
Corporation, a New York corporation, having an office at One Northern Concourse,
Syracuse, New York 13221 (referred to herein as "Investor" and in Exhibit A
hereto as "CIS").
W I T N E S S E T H:
WHEREAS, Emmes is engaged in the business of evaluating, structuring,
administering and servicing, on behalf of its clients, various types of real
estate and real estate based investments (including, but not limited to,
purchases and sales of real estate and real estate based securities,
transactions involving the leasing of real estate and financings of real estate
transactions); and
WHEREAS, Investor desires Emmes to afford it opportunities, from time
to time, to participate in certain investments, as more specifically described
in Exhibit A hereto ("Investments"); and
WHEREAS, Emmes is willing to offer such opportunities to Investor, on
and subject to (i) the terms and conditions set forth below, and (ii) the
further limitations, as appropriate, set forth in Exhibits A and B hereto (which
Exhibits are hereby incorporated by reference herein and made a part hereof and
the terms of which shall be determinative in the event of conflict with any of
the terms and provisions set forth hereinbelow).
NOW, THEREFORE, in consideration of the premises and the mutual terms
and conditions herein contained, and for other good and valuable consideration,
the receipt and sufficiency of which is hereby acknowledged, Investor and Emmes
hereby agree as follows:
SECTION I. APPOINTMENT OF EMMES; PARTICIPATION BY INVESTOR
1.1 Appointment and Management Fees of Emmes. Investor hereby retains
Emmes and Emmes hereby agrees, (i) to analyze, recommend and offer to Investor
opportunities to participate in Investments to be made from time to time by
various clients of Emmes ("Clients"); and (ii) to supervise, administer and
perform other services with respect to the origination, management,
restructuring, liquidation and disposition of those Investments in which
Investor elects to participate, all as more particularly described herein. Emmes
shall be entitled to receive, for the performance of its duties hereunder, a
management fee in the amount set forth in Exhibit A attached hereto, to be
determined and paid quarterly in arrears.
<PAGE>
1.2 Power of Attorney. Investor hereby irrevocably appoints Emmes, and
any officer or agent of Emmes, with full power of substitution, its true and
lawful attorney-in-fact with full, irrevocable power and authority in Investor's
place and stead and in Investor's name and on Investor's behalf or in Emmes's
own name, from time to time and at any time until the termination of this
Agreement pursuant to Section II hereof, to do any and all things in Emmes's
absolute discretion required or desirable to be done to carry out the terms or
to accomplish the purposes of this Agreement, consistent with the scope of the
authority granted to Emmes under the terms of this Agreement. Nothing contained
in this Section 1.2 shall be construed to expand the scope of authority granted
to Emmes under this Agreement. Investor hereby ratifies all actions taken by or
on behalf of Investor pursuant to this power of attorney or otherwise as
provided in this Agreement and neither Emmes nor any of its officers, employees
or agents shall be liable for any acts or omissions or for any error of judgment
or mistake of fact or law, except for willful misconduct or gross negligence in
its or their capacity as attorney-in-fact. This power of attorney is coupled
with an interest and shall be irrevocable until this Agreement is terminated.
The powers conferred on Emmes hereunder are solely to protect its interest and
shall not impose any duty upon it to exercise any of such powers.
1.3 Expenses. As set forth in Exhibit A, Investor shall reimburse
Emmes, quarterly in arrears, for its allocable share of all costs and expenses
incurred by Emmes in connection with a particular Investment, including, without
limitation, all filing, registration and transactional costs, all costs and
expenses (including reasonable attorneys' fees) incurred in connection with the
enforcement of any Investment Document (defined below), and all costs and
expenses incurred in connection with the procurement by Emmes of services by
outside professionals in connection therewith.
1.4 Participation by Investor. (a) Emmes shall, from time to time,
submit to Investor written proposals ("Investment Summaries") identifying and
setting forth the terms and conditions of Investments in which Investor may
participate consistent with the investment parameters established under Exhibit
A. Such Investment Summaries shall specify the nature and terms of the
Investments, the other proposed Clients involved the amounts proposed to be
contributed by (each of) such Client(s) and by Investor, each of such Clients'
percentage share of the total amount of the Investment and Investor's percentage
share (the "Investor's Share") of the total amount of the Investment. To the
extent that certain Clients may not consent to use of their names, the
Investment Summary shall only set forth the amounts proposed to be invested by
such Clients and such Clients' respective percentage shares of such Investment.
The Investment Summary shall be supplied to Investor as soon as it shall become
available, but in any event at the time the prospective borrower has provided an
application fee to Emmes.
(b) Investor shall notify Emmes in writing as to whether it
elects to participate in the Investment as set forth in each Investment Summary
within two (2) business days following receipt of the Investment Summary. In the
event that Emmes does not receive such notification from Investor within such
two business day period, then Investor will be deemed to have elected not to
participate in the Investment described in such Investment Summary.
<PAGE>
(c) In the event that Investor elects to participate in an
Investment pursuant to its receipt of an Investment Summary from Emmes, then:
(i) Within one (1) business day thereafter, Emmes
shall provide an updated Investment Summary to Investor, setting forth the names
of all Clients participating in such Investment (to the extent permitted) and
the respective percentage shares of such Investment being provided by each such
Client and by Investor;
(ii) Emmes will provide Investor with true and
complete copies of any and all available documentation and/or information
relating to such Investment, including, without limitation, copies of any and
all agreements, notes, mortgages, security agreements, assignments (and any and
all other documents and instruments to be delivered pursuant thereto)
(collectively, (Investment Documents");
(iii) Investor will promptly (i) take all steps, if
any, necessary to authorize the Investment, (ii) duly execute all Investment
Documents (if any) required to be executed by it; (iii) return such executed
Investment Documents, together with certified copies of all authorizing
resolutions and such other documentation as Emmes may reasonably request, and
pay over to Emmes, by wire transfer to an account designated by Emmes, the full
amount to be contributed or otherwise invested by Investor, at such time and in
such amounts as shall be specified in such Investment Summary; and
(iv) upon its receipt of the foregoing, Emmes shall
execute, on behalf of Investor and as its agent and attorney-in-fact, all
Investment Documents which Emmes, by virtue of this Agreement, is authorized to
so execute and cause Investor's payment to be invested as contemplated by such
Investment Summary.
(d) Thereafter, for so long as such Investment (or any portion
or refinancing thereof) remains outstanding, Emmes shall (i) provide Investor
with financial and performance reports, prepared both quarterly and annually, as
to the status of such Investment, and (ii) upon the written request of Investor
therefor, provide Investor with true and complete copies of all amendments and
additions to the Investment Documents (if any) promptly following Emmes's
receipt thereof. Investor agrees, in each such case, to duly authorize such
Investment Documents and, where required, to execute and return to Emmes all of
such amendments and additions, which, once properly executed by all requisite
parties, shall thereupon become and thenceforth be considered as part of the
Investment Documents. Investor hereby authorizes Emmes, as its agent and
attorney-in-fact, to enter into and execute on its behalf any and all of such
amendments and additions, except where the personal signature of Investor is
required. Nothing contained in this Section 1.4 shall detract in any way from
Investor's right to approve all waivers or modifications of the terms of any
Investment.
SECTION II. SERVICES TO BE PROVIDED BY EMMES.
2.1 Duties and Authorization. (a) Investor hereby appoints and
authorizes Emmes to act with respect to all Investments in which Investor
participates. It is hereby acknowledged that the parties intend that Emmes shall
manage and perform all routine, day-to-day administration and servicing of such
Investments (including all Investment Documents and collateral given with
<PAGE>
respect thereto) in Emmes's reasonable judgment and consistent with its
customary business practices. Emmes shall not have any authority to make any
other decisions with respect to any such Investment (or the Investment Documents
or the collateral given with respect thereto) without the written consent of all
Clients participating in such Investment. Subject to the foregoing and, where
applicable, to the other limitations set forth in Exhibit B hereto, Emmes shall,
with respect to each Investment in which Investor participates:
(i) hold all Investment Documents (if any) at its
office at 420 Lexington Avenue, Suite 2702, New York, New York 10170 for the
benefit of Investor;
(ii) administer such Investment in accordance with
Emmes's customary business practices and procedures;
(iii) advise Investor of all significant information
received by Emmes concerning such Investment reasonably promptly after Emmes's
receipt thereof; and
(iv) take or cause to be taken any other lawful
action in connection with such Investment and the Investment Documents (if any),
as directed by the written approval of Investor.
2.2 Additional Services. Emmes shall also provide the additional
services, subject to the additional limitations, set forth in Section II of
Exhibit B.
2.3 Agents and Representatives. Emmes may perform any of its
obligations or duties hereunder (including those duties and obligations listed
in Exhibit B hereto) by or through its agents, employees or attorneys, provided
that no such delegation shall relieve Emmes of any liability or responsibility
therefor.
2.4 Further Limitations. Emmes's actions hereunder shall be subject to
the further terms and conditions set forth in Exhibit A attached hereto and made
a part hereof.
2.5 Limitation on Emmes's Responsibilities. Except as expressly
provided herein and so long as Emmes has complied with its obligations set forth
in Section 2.1 of Exhibit B hereto, Emmes shall not be responsible for the
authenticity, accuracy, completeness, value, validity, effectiveness, due
execution, legality, genuineness, enforceability or sufficiency of any
Investment Documents or any other agreements, certificates, financial
statements, projections, notices, schedules or opinions of counsel executed or
delivered pursuant thereto, or for the collectibility of any Investment or the
creditworthiness of the borrower or value of the collateral thereunder and shall
have no further duties or responsibilities to provide services.
SECTION III. TERMINATION; RESIGNATION OF EMMES
3.1 Termination. (a) This Agreement shall be terminable as provided in
Exhibit A hereto as to all future Investments and Investment Summaries therefor;
provided, however, that this Agreement shall continue in full force and effect
with respect to any existing Investments in which Investor has participated
until such time as such Investments have been liquidated or paid, and all
<PAGE>
proceeds therefrom distributed to the Clients participating in such Investment
in accordance with the terms thereof. In the event of termination, Investor's
obligations under any Investment with respect to any monies advanced by Emmes or
by any other Client participating in such Investment on Investor's behalf
pursuant hereto shall continue in full force and effect until satisfied in full.
(b) If at any time during which Investments (or any portions
or refinancings thereof) are outstanding Emmes (i) makes an assignment for the
benefit of creditors, (ii) files a voluntary petition in bankruptcy, (iii) is
adjudicated a bankrupt or insolvent, or has entered against it an order for
relief in any bankruptcy or insolvency proceeding, (iv) files a petition or
answer seeking for itself any reorganization, arrangement, readjustment,
liquidation, dissolution or similar relief under any statute, law or regulation,
(v) files an answer or other pleading admitting or failing, to contest the
material allegations of a petition filed against it in any proceeding of the
nature described in subdivision (iv) above, or (vi) seeks, consents to or
acquiesces in the appointment of a trustee, receiver or liquidator of Emmes or
of all or any substantial part of its properties; or if, within 90 days after
the commencement of any proceeding against Emmes seeking reorganization,
arrangement, composition, readjustment, liquidation, dissolution or similar
relief under any statute, law or regulation, the proceeding has not been
dismissed; or if, within 60 days after the appointment, without its consent or
acquiescence, of a trustee, receiver or liquidator of Emmes or of all or any
substantial part of its properties, the appointment is not vacated or stayed; or
if, within 60 days after the expiration of any such stay, the appointment is not
vacated; then Investor may terminate this Agreement, in which extent the rights
and obligations of Emmes hereunder shall thereupon terminate and a successor
shall be appointed by Investor. In any such event, Emmes shall assign and
transfer to such successor or its designee all instruments, documents, funds and
causes of action which it then holds or supervises hereunder, shall account to
Investor for all sums received and distributed and shall take or cause to be
taken any other action necessary or desirable to give effect to such assignment
and transfer, all in form and substance reasonably satisfactory to Investor;
provided, that Emmes shall be entitled to receive all amounts due to it
hereunder to the date of such termination, when and if such amounts become due
and payable.
3.2 Resignation of Emmes. If at any time during which Investments (or
any portions or refinancings thereof) are outstanding, Emmes cannot continue to
act hereunder by virtue of any law or regulation pertaining to Emmes, or for any
other reason beyond Emmes's reasonable control, then and in any such event, the
rights and obligations of Emmes hereunder shall thereupon terminate and a
successor shall be appointed by the unanimous approval of all of the Clients
participating in each such outstanding Investment, unless all Clients
participating in an outstanding Investment shall elect to continue Emmes'
retention with respect to such Investment, in which case Emmes' rights and
obligations hereunder shall continue in full force and effect but only with
respect to such Investment. In the event of disagreement among the Clients
participating in an Investment, the disposition of the Investment shall be
determined as provided in Section 4.5 of Exhibit B hereto. In any such event,
Emmes shall assign and transfer to such successor or its designee all
instruments, documents, funds and causes of action which it then holds or
supervises hereunder, shall account to Investor (and to all other Clients
participating in such Investment) for all sums received and distributed and
shall take or cause to be taken any other action necessary or desirable to give
effect to such assignment and transfer, all in form and substance reasonably
satisfactory to all Clients participating in such Investment; provided, that
Emmes shall be entitled to receive all amounts due to it hereunder to the date
of such termination, when and if such amounts become due and payable.
<PAGE>
SECTION IV. REPRESENTATIONS AND WARRANTIES.
4.1 Representations and Warranties of Investor. With respect to each
Investment in which Investor participates, Investor hereby represents and
warrants to Emmes that:
(a) Investor has been given or has waived adequate opportunity
to review and, except where such right has been waived, has reviewed all
financial and other data and information with respect to the borrower of any
mortgage loan as Investor deemed necessary in order to make a determination to
enter into this Agreement and participate in such Investment as provided herein
and therein and in the Investment Documents (if any).
(b) Investor is sophisticated in financial and business
matters and has a substantial net worth and, as such, understands and is able to
bear the economic risks involved in entering into this Agreement and making the
Investment as provided herein and in the Investment Documents (if any), and does
not anticipate the occurrence of any event which would alter such ability.
(c) Investor has not relied on any representations of Emmes or
any other Client participating in such Investment, as to the financial condition
of any borrower or any guarantor or surety thereunder or the value of any
collateral given therefor, or any other matter relating to such Investment.
(d) Investor will continue to make its own legal, credit and
financial analyses and decisions in taking, or not taking, any action pursuant
to this Agreement and the Investment Documents (if any) relating thereto.
(e) Investor is validly existing and in good standing under
the laws of the state in which it was formed (if Investor is a corporation,
partnership or limited liability company). Investor has all requisite power and
authority to enter into and perform its obligations under this Agreement and the
Investment Documents (if any). This Agreement and any Investment Documents
executed by Investor have been duly executed and delivered by Investor and
constitute the legal, valid and binding obligations of Investor, enforceable in
accordance with their respective terms, except where such enforcement may be
limited by applicable bankruptcy laws, principles of equity and laws relating to
creditors' rights generally.
(f) Investor, to its knowledge, has no other relationship or
transaction with the borrower (including without limitation, any guarantor)
under such Investment or with any affiliate of the foregoing; and Investor
agrees not to enter into any such transaction or relationship without the prior
written consent of Emmes and of all of the other Clients participating in such
Investment.
4.2 Representations and Warranties of Emmes. (a) Investor hereby
acknowledges that, except as set forth in paragraph (b) below, neither Emmes nor
any other Client has made any representation or warranty with respect to any
Investment, borrower or Client, including, without limitation, with respect to
any of the following matters (subject to Emmes's responsibilities and
obligations pursuant to this Agreement):
(i) The truthfulness and accuracy of any of the
representations by any borrower contained in any publicly available information
or Investment Document; or
<PAGE>
(ii) The collectablity of any amount payable under
any Investment Documents; or
(iii) The enforceability, sufficiency or value of any
rights conferred upon the investors under any Investment Documents by way of
security or collateral for obligations owed to such investors under such
Investment Documents; or
(iv) The financial condition of any borrower,
guarantor or surety under any Investment.
(b) Emmes hereby represents and warrants to Investor that with
respect to each Investment in which Investor participates (a) Emmes is validly
existing and in good standing under the laws of the state in which it is formed,
(b) Emmes has all requisite power and authority to enter unto and perform its
obligations under this Agreement and the Investment Documents (if any), (c) this
Agreement and any Investment Documents executed by the Emmes have been duly
executed and delivered by Emmes and constitute the legal, valid and binding
obligation of the Emmes, enforceable in accordance with its terms (except where
such enforceability may be limited by applicable bankruptcy laws, principles of
equity or laws relating to creditors' rights generally) and (d) Emmes, to its
knowledge, has no other relationship or transaction with any borrower under any
Investment made by Investor, nor does Emmes have any other relationship or
transaction with any affiliate of any of the foregoing (including without
limitation, any guarantor); Emmes agrees not to enter into any such transaction
or relationship without the prior written consent of Investor.
SECTION V. INDEMNIFICATION
5.1 Indemnification by Investor. Subject to Section 2.1, Investor
agrees, for itself or, where appropriate, jointly and severally with the other
Clients participating in an Investment, to indemnify Emmes from and against any
and all claims, liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements of any kind or nature
whatsoever (collectively, "liabilities") which may be imposed on, incurred by,
or asserted against Emmes and arising out of any action taken or omitted to be
taken by Emmes in connection with any Investment or Investment Document relating
thereto in accordance with the terms of this Agreement; provided, however, that
Investor shall not be liable for any portion of such claims, liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements resulting from Emmes's bad faith, willful misconduct
or gross negligence; and provided, further, that in no event shall Investor's
indemnification obligations under this Section 5.1 with respect to any
Investment exceed Investor's Share of such Investment. The obligations of
Investor under this provision shall survive the termination of this Agreement.
SECTION VI. MISCELLANEOUS
6.1 Notices. Unless otherwise specified herein, all notices and other
communications provided for hereunder shall be in writing (including telegraphic
communication) and shall be mailed, by first-class mail, return receipt
requested, delivered via a recognized overnight delivery service, telecopied,
telegraphed or personally delivered, to such party at its address set forth
above or at such other address as shall be designated by such party in a notice
to the other parties complying with the terms of this provision. All such
notices and other communications shall be effective upon delivery or refusal.
<PAGE>
6.2 Entire Agreement, Modification. This Agreement, together with
Exhibits A and B hereto, constitutes the entire agreement of the Investor and
Emmes with respect to the matters set forth herein. All previous agreements
between the parties hereto with respect to the subject matter hereof, whether
written or oral, are superseded by this agreement, and are hereby rendered null
and void and of no effect. No modification of this Agreement shall be valid
unless in writing and signed on behalf of the parties hereto by duly authorized
officers thereof. Any waiver hereunder shall be limited to the subject matter
thereof, and shall not constitute a waiver of any other provision.
6.3 Counterparts. This Agreement may be executed in any number of
counterparts and by different parties hereto in separate counterparts, and each
of which when so executed shall be considered an original and all of which taken
together shall constitute the same agreement.
6.4 Severability of Provisions. The invalidity or unenforceability of
any term or provision of this Agreement shall not affect the validity or
enforceability of the remaining terms or provisions hereof, which shall remain
in full force and effect.
6.5 Binding; Benefit; Assignment. This Agreement shall be binding upon
the parties hereto and their respective successors and permitted assigns.
Investor may assign this Agreement to a wholly-owned subsidiary of Investor,
upon five (5) days' prior written notice to Emmes. Emmes may not assign this
Agreement without the consent of Investor. This Agreement shall inure only to
the benefit of the parties hereto and their respective permitted assigns, and
not to successors and other assigns, or any third parties, except as otherwise
expressly provided herein.
6.6 Governing Law; Jurisdiction. This Agreement shall be governed by
and construed in accordance with the laws of the State of New York. Each of the
parties hereto hereby submits to the Jurisdiction of any state or federal court
in New York County in any action or proceeding relating to this Agreement. All
costs and expenses (including attorneys' fees of the parties) relating to each
such action or proceeding shall be borne and promptly paid by the unsuccessful
party(ies) thereto.
6.7 No Other Agency. It is intended that, unless otherwise agreed in
writing, Emmes will act as agent for Investor only in connection with the
transactions contemplated hereby, and only for the purposes set forth herein,
and for no other purpose. This Agreement does not create any partnership or
joint venture between the parties hereto.
6.8 Arbitration. (a) Any dispute, controversy or claim arising out of
or in connection with this Agreement, (collectively, the "Arbitrable Claims"),
shall be determined and settled by arbitration in New York, New York by a panel
of three arbitrators in accordance with the rules of the American Arbitration
Association. Any award rendered in accordance with this Section 6.8 shall be
final and binding upon the parties and their respective legal representatives.
The party or parties against whom any such award is issued shall pay the
expenses of the arbitration, including, but not limited to, reasonable
attorneys' fees incurred by the prevailing party or parties. Such award may be
enforced by the order and judgment of the Supreme Court of the State of New York
for New York County, and the parties hereto hereby waive any objection to such
jurisdiction or venue in any such proceeding commenced in such court.
<PAGE>
(b) No action of law or suit in equity based upon any
Arbitrable Claim shall be instituted in any court except (i) an action to compel
arbitration pursuant to this section; (ii) an action to enforce the arbitration
award rendered in accordance with this section; or (iii) an action brought in
aid of arbitration pursuant to Article 75 of New York's Civil Practice Law and
Rules (collectively, the "Allowed Actions"). If, contrary to the provisions of
paragraph (a), a Client brings an action at law or suit in equity (other than an
Allowed Action) against Emmes, the other Clients participating in an Investment
in which Investor participates, or any of their respective affiliates, agents
and/or employees, and judgment is not rendered in favor of such Client as to all
of them, then such Client shall reimburse each of the aforementioned parties
against whom judgment is not rendered in favor of such Client for all expenses,
including, but not limited to, reasonable attorneys' fees incurred in opposing
or defending such action or suit regardless of whether such action or suit is
dismissed or otherwise terminated other than by judgment in favor of such
Client. Except as expressly provided in this Section 6.8, nothing contained
herein shall entitle a Client to reimbursement for its expenses in connection
with any action or suit brought against Emmes, the other Clients participating
in an Investment in which Investor participates, or any of their respective
affiliates, agents and/or employees, regardless of the outcome of such action or
suit.
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed as of the date first set forth above by having its duly
authorized signatory sign below.
INVESTOR:
CONTINENTAL INFORMATION SYSTEMS
CORPORATION
By: /s/ James P. Hassett
-----------------------
Name: James P. Hassett
Title: Chairman of the Board
EMMES INVESTMENT MANAGEMENT CO. LLC
By: /s/ S. Lawrence Davis
------------------------
Name: S. Lawrence Davis
Title: Authorized Signatory
<PAGE>
EXHIBIT A
to Advisory Agreement For Real Estate Related Investments between
Emmes Investment Management Co. LLC and
Continental Information Systems Corporation
The parties agree that the following terms shall also apply to this
Agreement. If any term in this Exhibit A is inconsistent with the terms of the
above-referenced agreement (the "Advisory Agreement"), the terms and conditions
contained in this Exhibit A shall control. Capitalized terms used and not
otherwise defined herein shall have the meanings assigned to them in the
Advisory Agreement.
Amount to be Up to $8,000,000 (the "Commitment"), subject to
invested: the terms and conditions hereof.
Account: (a) The Account shall consist of cash from
Continental Information Systems Corporation or its
wholly-owned subsidiary ("CIS") (the "Account
Assets") made available to Emmes for making
Investments. The Account Assets shall also include
assets which become part of the Account as a
result of transactions therein or otherwise,
together with any interest or other distributions
thereon and proceeds from any dispositions
thereof. All Account Assets shall be held in trust
for the benefit of CIS, shall not constitute
property of Emmes, and shall be kept segregated
from and not commingled with any other assets of
Emmes' or other funds managed by Emmes.
(b) CIS will transfer Funds to the Account as
required by Emmes to fund Mortgage Investments in
which CIS has elected to participate. All
transfers will be in immediately available funds.
Emmes shall not disburse funds from the Account
except to fund Mortgage Investments or expenses
which CIS is obligated to pay pursuant to Exhibit
B, or to distribute cash to Emmes or CIS pursuant
to this Exhibit A. All proceeds from CIS's
participation in Mortgage Investments shall be
deposited in the Account within two (2) business
days after receipt.
(c) The Account Assets shall be maintained in and
through a bank account maintained by Citibank,
N.A. or such other depository selected by Emmes
and acceptable to CIS established and clearly
specified as being for the benefit CIS. All
arrangements concerning the Account, including
disbursement authority shall be reasonably
satisfactory to CIS.
<PAGE>
Contributions by Emmes, its principals and/or members of their
Emmes and its families have contributed or will contribute an
Affiliates: aggregate of $3,000,000 to the Emmes Real Estate
Opportunity Fund, L.P., Emmes Capital Appreciation
Fund, L.P., Emmes Real Estate Institutional
Investor Fund, L.P. and/or such other funds as
Emmes may, from time to time, manage
(collectively, the "Emmes Funds").
Investment All Investments to be in direct, high-yield real
Parameters: estate loans secured by mortgages ("Mortgage
Investments") and to be structured such that the
exemption afforded by Section 3(c)(5) of the
Investment Company Act of 1940, as amended, will
be available. Additional Investment parameters to
be determined by CIS and delivered to Emmes from
time to time.
Term: Three Years or term of senior financing, whichever
is shorter, subject to termination provisions" set
forth below and in the Advisory Agreement;
provided, however, that the term will expire upon
written notice from CIS beginning eighteen (18)
months after the date on which the first Mortgage
Investment under the Advisory Agreement is made,
(i) if net cash distributions to CIS, after giving
effect to unrealized losses, do not provide a
return on the average amount of invested capital
of at least fifteen (15%) percent per annum during
any four preceding consecutive calendar quarters,
or (ii) Emmes' principals have not maintained in
Emmes Funds at least $3,000,000 in the aggregate;
and (iii) CIS may terminate any remaining
uninvested portion of its Commitment if S.
Lawrence Davis ceases to be affiliated with Emmes,
or ceases to be principally responsible for the
management of the Emmes Funds and to devote such
time as is necessary to carry out such
responsibilities.
In addition, Emmes may terminate the Advisory
Agreement if (i) CIS declines to participate in
any eight (8) consecutive Mortgage Investments
proposed by Emmes, or (ii) CIS declines to
participate in each and every Mortgage Investment
proposed by Emmes in any six (6) consecutive month
period, provided that Emmes has proposed at least
six (6) Mortgage Investments to CIS during such
six (6) month period. In no event will the term of
the Commitment extend beyond three (3) years.
<PAGE>
Delegates: One or more individuals to be designated by each
of Emmes and CIS as its delegate to exercise all
respective rights and duties of the parties under
the Advisory Agreement. S. Lawrence Davis to be
the initial delegate for Emmes, unless otherwise
approved by CIS.
Emmes Management An amount equal to one (1%) percent per annum,
Fee: paid quarterly in arrears, based on the average
Assets Under Management during the preceding
quarter, determined as of the last day of each
month of such quarter. "Assets Under Management"
shall mean the aggregate amount represented by
CIS's percentage share of each Mortgage Investment
in which it has invested (less realized losses and
capital returned), including its pro rata share of
the outstanding principal balance of any
borrowings used to finance such Mortgage
Investment.
For example, if the Average Assets Under
Management for all Clients during a quarter is in
the total amount of $1 million, and CIS's
percentage share of each Mortgage Investment in
which it participates is 25%, then the Management
Fee payable to Emmes for such quarter would be
1/4% of $250,000.
Cash Allocation: All cash received as repayment of principal on
Mortgage Investments in which CIS participates, or
from the sale of Mortgage Investments in which CIS
participates (after payment of expenses incurred
in such sale), up to the outstanding principal
amount or amortized cost of such Mortgage
Investments, will be paid, first, to Emmes to the
extent necessary to pay Emmes's Management Fee set
forth above, and any remaining balance will be
paid to CIS.
All cash received representing payments of
interest, fees, points, or other financing income
(collectively, "Income") in respect of CIS's
interests in Mortgage Investments will be paid as
received, but no later than monthly, and adjusted
to provide for the following allocations of cash
to Emmes and CIS as follows:
First, to Emmes, to the extent required to pay
Emmes's management fee set forth above.
<PAGE>
Second, to CIS until total payments of Income to
CIS during the term of the Advisory Agreement,
minus CIS' respective Investor's Share of any
realized losses or unrealized losses on Mortgage
Investments during the term of the Advisory
Agreement plus all costs advanced by CIS pursuant
to Section 3.1 of Exhibit B and not reimbursed or
recovered, equal an amount sufficient to yield a
cumulative return of CIS' invested capital equal
to ten (10%) per annum.
Third, ninety (90%) percent to CIS and ten (10%)
percent to Emmes until total payments of Income to
CIS during the term of the Advisory Agreement,
minus CIS's respective Investor's Share of any
realized losses or unrealized losses on Mortgage
Investments during the term of the Advisory
Agreement plus all costs advanced by CIS pursuant
to Section 3.1 of Exhibit B to the Advisory
Agreement and not reimbursed or recovered, equal
an amount sufficient to yield a cumulative return
on CIS's invested capital equal to twelve (12%)
percent per annum.
Fourth, eighty (80%) percent to CIS and twenty
(20%) percent to Emmes until total payments of
Income to CIS during the term of the Advisory
Agreement, minus CIS's respective Investor's Share
of any realized losses or unrealized losses on
Mortgage Investments during the term of the
Advisory Agreement plus all costs advanced by CIS
pursuant to Section 3.1 of Exhibit B to the
Advisory Agreement and not reimbursed or
recovered, equal an amount sufficient to yield a
cumulative return on CIS's invested capital equal
to fourteen (14%) percent per annum.
Fifth, seventy-five (75%) percent to CIS and
twenty-five (25%) percent to Emmes until total
payments of Income to CIS during the term of the
Advisory Agreement, minus CIS's respective
Investor's Share of any realized losses or
unrealized losses on Mortgage Investments during
the term of the Advisory Agreement plus all costs
advanced by CIS pursuant to Section 3.1 of Exhibit
B to the Advisory Agreement and not reimbursed or
recovered, equal an amount sufficient to yield a
cumulative return on CIS's invested capital equal
to sixteen (16%) percent per annum.
<PAGE>
Sixth, fifty (50%) percent to CIS and fifty (50%)
percent to Emmes until total payments of Income to
CIS during the term of the Advisory Agreement,
minus CIS's respective Investor's Share of any
realized losses or unrealized losses on Mortgage
Investments during the term of the Advisory
Agreement plus all costs advanced by CIS pursuant
to Section 3.1 of Exhibit B to the Advisory
Agreement and not reimbursed or recovered, equal
an amount sufficient to yield a cumulative return
on CIS's invested capital equal to twenty (20%)
percent per annum; and
Seventh, seventy-five (75%) percent to CIS and
twenty-five (25%) percent to Emmes.
For purposes hereof, any losses realized on
Mortgage Investments will be allocated in the
quarter in which they occur. In addition, in
calculating whether any required return threshold
has been achieved, the amount of any unrealized
losses on any Mortgage Investment will be
determined on a quarterly basis and will be
subtracted from the amounts otherwise allocated to
CIS. For purposes of determining unrealized
losses, Mortgage Investments will be valued at
their amortized costs (outstanding principal plus
costs allocated to the transaction), unless they
become impaired. Mortgage Investments will be
deemed impaired when the mortgagor is in default
on interest or principal payments (without regard
to any waivers or other relief granted by the
mortgagees) and the value of the collateral given
is less than the remaining principal balance or
amortized cost of the Mortgage Investment. In each
instance of impairment, the Mortgage Investment
will be revalued at the amount Emmes and CIS
reasonably expect to be recovered from the
collateral over the remaining term of the Mortgage
Investment. In the event of any disagreement among
the parties with respect to valuation or
revaluation of any Mortgage Investment, such
valuation or revaluation (which shall not require
a formal appraisal) shall be made by an
independent real estate appraiser or other
experienced real estate professional appointed by
both Emmes and CIS. In the event Emmes and CIS
cannot agree within five (5) business days, on an
expert to conduct the valuation, the matter shall
be submitted to arbitration pursuant to Section
6.8 of the Advisory Agreement.
If, upon final disposition of all Mortgage
Investments participated in by CIS, either CIS or
Emmes has received more distributions than it is
entitled to receive pursuant to the formula set
forth above, it will pay the excess to the other
party.
<PAGE>
Distributions: In accordance with the terms of Exhibit B to the
Advisory Agreement, except as set forth herein.
Special Conditions:
(1) CIS may, in its discretion, elect to reinvest
cash distributions. Reinvested amounts will
be treated as invested capital.
(2) During the term of the Advisory Agreement,
Emmes will present to CIS any proposed
Mortgage Investment opportunity that Emmes
offers to the Emmes Funds, and CIS will,
subject to the requirements set forth herein
and in the Advisory Agreement, have the right
to participate, to the extent of CIS's "Total
Percentage Interest", in the proposed
Mortgage Investment unless CIS determines not
to make the Mortgage Investment. If a greater
percentage of any Investment is available,
CIS will have the right, but not the
obligation, to participate at such greater
percentage.
For purposes hereof, CIS's "Total Percentage
Interest" shall be determined as a fraction,
the numerator of which shall be the amount of
CIS' Commitment and the denominator of which
shall be the total amount of all funds
invested or available for investment in
Mortgage Investments ("Funds Under
Management") by all Clients and Emmes Funds,
all determined as of the date of each
Investment Summary. CIS's "Investor's Share"
will be the percentage share of the Mortgage
Investment that it elects to accept pursuant
to the foregoing provisions.
(3) Except as provided below, during the term of
the Advisory Agreement, CIS and its
affiliates will not make any Mortgage
Investments falling within the CIS Investment
parameters except pursuant to the Advisory
Agreement, unless and until CIS has invested
all of its Commitment or its obligations to
invest capital have been terminated. In the
event that, during the term of the Advisory
Agreement, CIS or its affiliates are
presented with an opportunity to make a
Mortgage Investment that falls within CIS's
investment parameters, CIS will present that
opportunity to the Emmes Funds, and, if the
Emmes Funds decide to invest in such
<PAGE>
opportunity, CIS will be entitled to
participate as set forth in the Advisory
Agreement. If the Emmes Funds decline to
participate in such Mortgage Investment, CIS
or its affiliates may make such investment.
Any such investment by CIS will be made from
funds not committed by CIS pursuant to the
Advisory Agreement, and will be administered
separately from Emmes.
Borrower Fees: Any fees received by Emmes or its affiliates in
connection with the origination, underwriting or
servicing of a Mortgage Investment made by CIS
(including origination fees, commitment fees, due
diligence fees, and reimbursement of expenses
payable by CIS, including legal fees, but after
payment of out-of-pocket expenses incurred by
Emmes in connection with the Mortgage Investment),
in an amount proportional to CIS's percentage
interest in the Mortgage Investment, will be
remitted, net of costs and expenses to Emmes, to
CIS or applied against the amounts otherwise
payable to Emmes. Any such fees received by Emmes
or its affiliates in connection with the
origination or underwriting of a proposed Mortgage
Investment that is not made (except for Mortgage
Investments that CIS elects not to participate
in), in an amount proportional to CIS's pro rata
percentage of Funds Under Management or applied
against the amounts otherwise payable to Emmes
shall be remitted, net of costs and expenses to
Emmes, to CIS. The foregoing shall not apply to
any fees which Emmes or its affiliates may receive
in consideration of managing any Investment, so
long as such fees are on terms comparable to those
obtainable from third-party property managers in
the relevant market.
Operating Expenses: Except as provided in Section 1.3 of the Advisory
Agreement, Emmes will bear all overhead expenses
incurred by it in connection with the activities
it performs hereunder (other than attorneys' fees
and other costs of enforcement), except for
accounting costs incurred in connection with CIS'
audit for its public reporting purposes, which
will be borne by CIS.
<PAGE>
Reporting and Emmes will prepare monthly status reports on
Notice: investments and proposed investments, monthly bank
statements, quarterly financial reports and
performance reports, and annual audited financial
reports and tax returns all on a tax basis. Emmes
will provide, at the expense of CIS, such
information as CIS requires in order to report its
results in accordance with GAAP, including
accruals of interest and expenses and potential
reserves for bad loans, and will provide CIS and
its financial personnel and auditors with access
to such documents and information as they require
to enable CIS to comply with its public reporting
obligations, all at CIS's sole cost and expense.
Whenever Emmes provides an Investment Summary to
CIS pursuant to the Advisory Agreement, Emmes will
advise CIS of any changes in the Funds Under
Management by the Emmes Funds, and any
corresponding changes in CIS's Total Percentage
Interest.
Emmes will provide a monthly statement of profit
and loss for each Mortgage Investment made by CIS
pursuant hereto as soon as Emmes begins preparing
such reports for any Emmes Fund which is a
participant in such Mortgage Investment, but in no
event later than December 31, 1997.
<PAGE>
EXHIBIT B
to Advisory Agreement for Real Estate Related Investments
between Emmes Investment Management Co. LLC and
Continental Information Systems Corporation
This Exhibit B to the Advisory Agreement for Real Estate Related
Investments (the "Advisory Agreement") between Emmes Investment Management Co.
LLC and Continental Information Systems Corporation ("Investor") sets forth
additional terms and conditions applicable to mortgage loans ("Loans") made by
Investor under the Advisory Agreement, all of which terms and conditions are
incorporated by reference into the Advisory Agreement. Capitalized terms used
and not otherwise defined herein shall have the meanings assigned to them in the
Advisory Agreement.
SECTION I. INVESTOR'S SHARE; LOAN PARTICIPATION
1.1 Investor's Share. With respect to each transaction in which it
elects to participate, Investor shall own, as a tenant-in-common (but not as a
partner) with the other clients participating therein (such other clients,
together with the Investor, being sometimes referred to herein as the
"Participating Investors"), an undivided, pari passu interest (the "Investor's
Share") in the Loan, the Documents and all collective rights and interests of
the Participating Investors thereunder or arising in connection therewith (the
"Loan Participation"). In each such case, the Investor's Share of a Loan shall
be determined in accordance with the Advisory Agreement and Exhibit A thereto.
Investor's interest in each loan will be evidenced by the execution and delivery
by either Investor or Emmes as the agent of Investor, of a participation
agreement, which shall incorporate, inter alia, the terms and conditions
contained in this Exhibit B and such other terms and conditions as are mutually
satisfactory to Emmes and Investor.
1.2 Loan Participation. With respect to each Loan, the Loan
Participation shall include, without limitation: (i) all rights of the
Participating Investors to payments from the borrower under or arising from any
and all of the Investment Documents; (ii) all duties and obligations of the
Investors under the Investment Documents; (iii) any and all rights of the
Participating Investors with respect to any security given for payment by the
borrower of the Loan (or any portion or refinancing thereof): and (iv) all
costs, expenses, losses and liabilities incurred (including, without limitation,
reasonable attorney's fees and other costs and expenses of collection and
enforcement and losses due to late performance or nonperformance by the borrower
of its obligations under the Investment Documents) by the Participating
Investors in connection with the Loan.
1.3 Payments and Losses. Except as may be otherwise specifically
provided in the Advisory Agreement, Investor shall be entitled, with respect to
each Loan in which it elects to participate, to the Investor's Share of all
payments made by borrower arising from the Loan Participation and shall be
responsible for the Investor's Share of all losses, liabilities and additional
capital arising or required from or in connection with the Loan Participation.
<PAGE>
SECTION II. SERVICES TO BE PROVIDED BY EMMES:
2.1 Duties and Authorization. In addition to those duties set forth in
Section 2.1 of the Advisory Agreement, Emmes shall, and is hereby authorized to,
(i) receive all advances by the Investors and disburse them in
accordance with all applicable provisions of the Investment Documents, the
Investment Summary for such Loan and the Advisory Agreement, including Exhibit A
attached hereto;
(ii) conduct all communications with the borrower on behalf of
the Investors;
(iii) receive all payments made by or on behalf of the
borrower;
(iv) apply all payments received from or on behalf of the
borrower in accordance with the Investment Documents;
(v) distribute all such payments to the Investors in
accordance with the all applicable terms and provisions of the Investment
Summary for such Loan and the Advisory Agreement (including Exhibit A attached
thereto);
(vi) keep records of receipt of all advances made by the
Investors and payments made by or on behalf of the borrower, and of the
applications, distributions, expense and payment thereof;
(vii) distribute to all Investors, reasonably promptly after
its receipt thereof, copies of all significant documentation received by Emmes
concerning the borrower or the Loan Participation;
(viii) advise all Participating Investors of all material
defaults and of all events of default under such Loan of which Emmes has actual
knowledge, reasonably promptly after Emmes becomes aware thereof;
(ix) use reasonable efforts to enforce the rights of the
Participating Investors in connection with such Loan, subject to each
Participating Investor's obligation to fund its pro rata share of costs
associated therewith;
(x) retain counsel and other professionals on behalf of the
Participating Investors for purposes of enforcement or administration of the
Loan Participation and other legal and business matters occurring after funding
of such Loan, subject to each Participating Investor's obligation to fund its
pro rata share of costs associated therewith;
(xi) make any filings and take any actions necessary,
customary or advisable to establish and continue the perfection and priority of
all mortgages, liens and security interests for such Loan; and
(xii) exercise the rights and remedies of the Participating
Investors under the Loan Documents, prior to and after the Participating
Investors have declared an event of default thereunder, and while such default
continues.
<PAGE>
2.2 Limitations on Emmes's Actions.
(a) With respect to any Loan in which Investor participates,
Emmes shall not, without the unanimous written approval of the Participating
Investors:
(i) consent to or accept any cancellation or termination of
any note, any other Loan Document with respect to such Loan, or consent to or
accept any cancellation or termination of any instrument assigned to Emmes or
the Participating Investors as security for such Loan or any part thereto,
except upon satisfaction of conditions precedent to the release of such
collateral (or guaranty or surety, if any), as set forth in the Investment
Documents;
(ii) extend the maturity date of such Loan or the date of any
interest or principal payment thereunder;
(iii) reduce the interest rate of, or otherwise reduce the
amount of any payment of principal of or interest on, any note with respect to
such Loan;
(iv) release, either partially or fully, any substantial part
of the collateral given as security for such Loan, or any part thereof, or any
party liable on a guaranty or any surety (if any) except upon satisfaction of
conditions precedent to the release of such collateral or guaranty or surety,
(if any), as set forth in the Investment Documents;
(v) agree to any material amendments or modifications to any
of the Investment Documents;
(vi) take or refrain from taking any action, or make any
determination, required to be taken or made pursuant to the Investment
Documents, including, without limitation, a foreclosure of any mortgage and
deficiency action in respect of any guaranty; or
(vii) give consents, approvals or waivers in connection with
the Investment Documents, except in the ordinary course of servicing such Loan
prior to an Event of Default.
(b) All requests by Emmes for approvals from the Participating
Investors shall be made to each Participating Investor in writing. Each
Participating Investor shall have three (3) business days following its receipt
of such written request to respond thereto in writing to Emmes. If a
Participating Investor does not so respond, then such Participating Investor
shall be deemed to have granted such approval. Any and all actions, approvals or
consents required of the Participating Investors shall mean the unanimous
written approval or consent of all of the Participating Investors.
(c) If all or any portion of the collateral for any Loan is
acquired by Emmes as a result of foreclosure or the acceptance of a deed or
assignment in lieu of foreclosure or any other method of realizing upon the
Participating Investors' Loan Participation in the collateral for such Loan,
such property shall be held not by Emmes, but by all of the Participating
Investors, which shall be deemed to own the same as tenants-in-common in
accordance with their pro rata shares, unless otherwise directed by the
<PAGE>
Participating Investors. Emmes shall not commence any litigation or other legal
proceeding in its own name to enforce any of the Participating Investors' rights
or remedies, but only in the name of all of the Participating Investors, as
their interests may appear, unless otherwise directed by the Participating
Investors.
SECTION III. ADVANCES, COLLECTIONS, DISTRIBUTIONS, ETC.
3.1 Advances by Investor. Whenever Emmes determines,in its reasonable
judgment, that additional funds are required in connection with the enforcement,
protection, preservation, collection and liquidation of the note and/or other
Investment Documents including, without limitation, any collateral thereunder,
Emmes shall send written notice to Investor stating the total amount then
required, the purpose therefor (it being understood that all expenses and costs
of the day-to-day administration, management and servicing of Loans by Emmes as
set forth in the Advisory Agreement shall be borne by Emmes without
reimbursement) and the amount of Investor's percentage share of such total
amount. Investor shall contribute its percentage share of such funds as set
forth in such notice, by check payable to Emmes (or by certified check or wire
transfer, if deemed necessary by Emmes in its reasonable judgment), which
payment shall be made by the date and time indicated in such notice, except that
such date and time shall be not less than three (3) business days from the time
of receipt of such notice, unless, in the reasonable judgment of Emmes, a
shorter time period is required due to emergency circumstances, in which event
the nature of the emergency shall also be stated in said notice. Emmes may, but
shall be under no obligation to, advance such funds on behalf of Investor, in
which event any such advance shall be repaid to Emmes by the Investor upon
notice in the foregoing manner. Notwithstanding any provisions contained herein
to the contrary, except in the case of an emergency, Emmes shall not incur any
expenses which would require advances to be made by Investor, or other
extraordinary expenses, without first obtaining the unanimous consent of all
Participating Investors with respect to such Loan. Any payments from Investor to
Emmes pursuant hereto shall be immediately deposited and held by Emmes in a
segregated account on behalf and for the benefit of the Participating Investors,
shall not be commingled with any other assets or accounts of Emmes and shall be
disbursed by Emmes on a timely basis only for the purposes set forth in the
notice.
3.2 Collections by Emmes. Emmes shall have the right to collect from
the borrower thereunder all installments of principal and interest due and owing
on any Loan, as well as all fees, expenses and other amounts due under the note
and other Investment Documents relating thereto. Emmes agrees that all amounts
received by it from or on behalf of such borrower, in connection with the
payment of interest, principal or other amounts due under such note and other
Investment Documents, subject to collection, shall be credited to such Loan and
promptly deposited and held by Emmes in a segregated account on behalf of and
for the benefit of the Participating Investors, shall not be commingled with any
other assets or accounts of Emmes and shall be disbursed in a manner consistent
with the Advisory Agreement.
3.3 Distribution of Payments. Unless otherwise provided in Exhibit A to
the Advisory Agreement, whenever Emmes receives, from or on behalf of the
borrower or anyone else, a payment of principal, interest or any other amount in
connection with any Loan, Emmes shall, within five (5) business days of when
good funds are so deposited, pay to Investor in lawful money of the United
States of America, by check or wire transfer, Investor's Share of such payment.
<PAGE>
Payments with respect to interest and principal shall be distributed pro rata to
the Participating Investors in proportion to their respective Percentage
Contributions; payments with respect to expenses shall also be distributed pro
rata in proportion to their respective Percentage Contributions, unless one or
more Participating Investors did not pay its pro rata share thereof; provided,
however, that (i) before making any such distribution, Emmes shall first deduct
the amount of any unpaid costs and expenses incurred in the enforcement,
protection, preservation, collection of the Loan (including legal and other
disbursements incurred by Emmes in accordance with the Advisory Agreement), and
(ii) before making a distribution to any Participating Investor, Emmes shall
first deduct any amounts owed by such Participating Investor to Emmes or any
other Participating Investor pursuant to the Advisory Agreement and Exhibit A
attached thereto. Emmes shall not be required to remit to any Participating
Investor any amounts not actually received by Emmes, whether or not the Loan is
then in default.
3.4 Rescinded Payments. If all or part of any payment from or on behalf
of any borrower to Emmes is rescinded or is required to be returned pursuant to
a final, non-appealable order, in either case pursuant to the order of a court
of competent jurisdiction, and if Emmes has paid to any Participating Investor
its pro rata share thereof, each such Participating Investor shall, upon
telephonic notice from Emmes to be promptly confirmed later in writing, be
required to forthwith pay to Emmes, on the date of such telephonic notice (if
received by such Participating Investor prior to 11:00 a.m., Eastern Time) or on
the next succeeding business day (if such notice is received after 11:00 a.m.,
Eastern Time) an amount equal to that portion of the amount which had previously
been paid to such Participating Investor and which has been rescinded or which
must be returned by Emmes.
Each of the Participating Investors shall also pay to Emmes, on any amounts not
so repaid by such Participating Investor which, because of the absence of
payment by such Participating Investor, Emmes advanced with its own funds on
behalf of such Participating Investor, interest at the per annum rate of
twenty-four percent (24%) or the highest rate permitted by law, whichever is
lower.
3.5 Application of Monies. All monies collected or received by Emmes in
connection with any Loan or the Investment Documents relating thereto shall be
applied as provided in such Investment Documents.
3.6 Retention of Professionals. If an attorney, accountant, appraiser,
insurance company, title company, contractor or other professional is to be
retained in connection with any Loan, the Investment Documents relating thereto
or any collateral thereunder, Emmes may employ any such professional to
represent it and the Participating Investors. Emmes shall seek to cause the
borrower under such Loan to pay the fees and expenses of such professionals, in
accordance with the terms and conditions of the Investment Documents, but if
such borrower fails to pay such fees and expenses or is not required to do so,
each Participating Investor shall pay its pro rata share thereof. If Emmes later
receives reimbursement therefor from such borrower, Emmes shall return to each
Participating Investor which has paid its pro rata share, its pro rata share of
the amount so repaid, without interest, unless such amount is received by Emmes
with interest, in which case each Participating Investor would also receive its
pro rata share of interest. No Participating Investor shall have the right, in
connection with any litigation or proceeding to enforce the Investment
Documents, to retain other counsel, except at the sole cost and expense of such
Participating Investor.
<PAGE>
SECTION IV. INVESTOR'S OBLIGATIONS
4.1 Communications and Acting with borrower and Third Parties. All
communications with the borrower and third parties and actions taken with
respect to any Loan Participation shall be by the Participating Investors, as a
group, through Emmes, except as otherwise provided in the Investment Documents
and in the Advisory Agreement. Except as otherwise provided therein and in the
Advisory Agreement, no Participating Investor shall communicate directly with
the borrower with respect to any Loan, or take action directly with respect to
such borrower or any collateral given with respect to any Loan, except through
Emmes and in accordance with the terms hereof and of the Advisory Agreement.
4.2 Distribution of Documents and Information. Investor shall:
(i) Promptly deliver copies to Emmes of any significant
documentation received by Investor (other than from Emmes) concerning any
borrower or Loan Participation.
(ii) Promptly advise Emmes of all significant information
received by Investor (other than from Emmes) concerning the borrower or Loan
Participation under any such Loan; and
(iii) Promptly advise Emmes of all events of default under any
Loan of which Investor has actual knowledge.
4.3 Sharing of Payments. If Investor shall receive any payment (whether
voluntary, involuntary, through the exercise of any right of setoff or
otherwise) on account of any obligation of the borrower in connection with any
Loan which is in excess of Investor's Percentage Share, Investor shall forthwith
remit such payment to Emmes, to be applied as required hereunder.
4.4 Default. If Investor fails to make any advance or contribution of
funds with respect to any Loan as required hereunder, any other Participating
Investor (including without limitation, Emmes) may, but shall be under no
obligation to, advance such sums on behalf of Investor and, in such event,
Investor shall repay, on demand, the amount so advanced. Any Participating
Investor (or Emmes) that advances any such sums shall be entitled to repayment
of such sums (and interest thereon, if any, collected from the borrower) prior
to Investor's receiving any distributions of any kind (whether for fees,
expenses, interest, principal or otherwise) with respect to such Loan. In
addition, if Investor fails to make such advance or contribution, or to repay
the amount advanced on its behalf by another Participating Investor within five
(5) business days after written request therefor, then Emmes shall have the
right to acquire Investor's Share in such Loan by sending a written notice to
Investor (the "Offer Notice") which Offer Notice shall set forth a purchase
price for the Loan determined by Emmes in its reasonable discretion. The time
and place of closing shall be as is set forth in the Offer Notice.
4.5 Transfer of Interests. (a) Investor may not sell, convey, pledge,
mortgage, hypothecate or otherwise transfer (a "Transfer") all or any part of
Investor's Share in any Loan Participation hereunder, except (i) for a Transfer
to an affiliate, (ii) in accordance with the provisions of paragraph (c)
hereinbelow, (iii) upon prior written notice to and with the prior written
consent of Emmes (such consent not to be unreasonably withheld or delayed), or
(iv) in connection with the grant of one or more subparticipations of Investor's
<PAGE>
Share in and to any Loan Participation hereunder and under the Advisory
Agreement. Moreover, no such Transfer shall be effective (except in the case of
subparagraph (iv)) unless the transferee shall assume the rights and obligations
of the Investor hereunder, and agrees to be bound by all of the terms hereof and
of the Advisory Agreement. Any Transfer in violation hereof shall be void and of
no effect.
(b) Emmes may not transfer, assign, convey, encumber, pledge
or mortgage any of its rights, duties or obligations hereunder and under the
Advisory Agreement, except as set forth in Section 3.2 of the Advisory
Agreement. Any Transfer in violation hereof or thereof shall be void and of no
effect.
(c) If, with respect to any Loan in which Investor
participates, unanimous approval of the Participating Investors cannot be
obtained for any reason whatsoever, (i) with respect to the matters listed in
subdivisions (vi) and (vii) of Section 2.2 or, (ii) from and after the
declaration of an Event of Default or acceleration of the indebtedness under any
Investment Documents, with respect to any other matter listed in Section 2.2
above, then Emmes shall enforce the Investment Documents in accordance with
their terms; provided, however, that if the approvals of at least two-thirds of
such Participating Investors is obtained to modify or amend the terms, then
Emmes shall have the option, exercisable within five (5) business days after
said approval has been obtained, to acquire the Investor's Shares of all
Participating Investors whose approvals are withheld (herein, "Non-consenting
Participating Investors"). Emmes shall initiate such option by sending written
notice thereof (the "Offer Notice") to the such Non-Consenting Participating
Investors within such five (5) business day period, which Offer Notice shall set
forth a purchase price (the "Base Price") for the Loan determined by Emmes in
its reasonable discretion and each Non-consenting Participating Investor's Share
of such Base Price. Within ten (10) business days following Investor's receipt
of any Offer Notice setting forth a Base Price and Investor's Share thereof,
(the "Response Date"), each Non-consenting Participating Investor shall have the
right, at its option to elect either (i) to sell all of its Investor's Share in
such Loan Participation by sending to Emmes a written notice indicating such
election, or (ii) consent to the action approved by two-thirds of the
Participating Investors. In the event that a Non-consenting Participating
Investor elects to sell its Investor's Share pursuant hereto, then Emmes shall
then purchase such Investor's Share of such Loan Participation on the terms and
conditions set forth in the Offer Notice. Failure by a Non-consenting
Participating Investor to respond to an Offer Notice within ten business days
after its receipt shall be deemed to be the consent of such Non-Consenting
Participating Investor to the action for which approval was sought.
4.6 Excess Interest. Notwithstanding any provisions contained herein,
in the applicable Investment Documents or the Advisory Agreement, in no event
shall Investor be entitled to receive, collect or apply, as interest on any
Loan, any amount in excess of the maximum rate of interest permitted to be
charged by applicable law, and, in the event Investor ever receives, collects,
or applies as interest any such excess, such amount which would be excess
interest shall be applied to the reduction of the unpaid principal balance of
such Loan and, if such Loan is paid in full, any remaining excess shall
forthwith be paid to
<PAGE>
4.7 Indemnification. Investor agrees to indemnify, jointly and
severally with the other Participating Investors in such Loan, Emmes (but not as
a participating investor in such Loan, to the extent not reimbursed by the other
parties to such Loan), from and against any and all claims, liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements of any kind or nature whatsoever (collectively,
"liabilities") which may be imposed on, incurred by, or asserted against Emmes
and arising out any action taken or omitted to be taken by Emmes, in connection
with any Transaction, or Transaction Document relating thereto in accordance
with the terms hereof and of the Advisory Agreement; provided, however, that
Investor shall not be liable for any portion of such claims, liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements resulting from Emmes's bad faith, willful misconduct
or gross negligence; and provided, further, that in no event shall Investor's
indemnification obligations under this Section 4.7 with respect to any Loan
exceed Investor's Share of such Loan. The obligation of Investor under this
provision shall survive the termination of the Advisory Agreement, the payment
of such Loan and the payment of all other obligations of the borrower under the
Investment Documents relating thereto.
SECTION V. LEVERAGED FUND TRANSACTIONS
5.1 Leveraged Fund Transactions. Investor may authorize Emmes, from
time to time, to borrow funds ("Borrowings") on its behalf pursuant to a
Revolving Credit Facility Loan Agreement (the "First Boston Credit Facility")
between CS First Boston Capital Corp., or any successor lender, ("First
Boston"), as Lender, and Emmes Real Estate Opportunity Fund, L.P., to be used to
leverage Investor's participation in certain mortgage loan Investments (herein
referred to as "Leveraged Fund Transactions"). Investor hereby acknowledges
that, in each such event, all rights and interests of Investor in such Leveraged
Fund Transactions, and all distributions by Emmes on account thereof, will be
subordinate in right to the rights and interest of First Boston under the First
Boston Credit Facility and subject to the limitations set forth below that the
power of attorney granted to Emmes pursuant to Section 1.2 of the Advisory
Agreement authorizes Emmes, as Investor's agent and attorney-in-fact, to enter
into and execute, on Investor's behalf, all notes, subordination agreements,
pledge agreements, security agreements, financing statements and any other
documents or instruments required by First Boston. Investor further acknowledges
(i) that no distributions will be made with respect to such Leveraged Fund
Transactions until First Boston has received all payments which may be due and
owing to it from time to time under the First Boston Credit Facility and (ii)
that Investor has familiarized itself with the other terms and conditions set
forth on the First Boston Credit Facility, a summary of which is attached hereto
as Annex A and the terms of which are hereby incorporated herein by reference.
Notwithstanding any provision to the contrary, all Borrowings will be
subject to the following: (i) All Borrowings will be non-recourse to Investor,
and First Boston shall look only to Investor's interests in the Loan
Participations for the repayments of any Borrowings to finance any Leveraged
Fund Transaction in which Investor has an interest; (ii) Investor's interests in
Loan Participations shall not secure or be used as a source of repayment of any
Borrowings used to leverage Loans in which Investor does not have an interest;
(iii) Investor's Leveraged Fund Transactions shall not be cross-defaulted to
other Borrowings in which Investor does not have an interest, provided that
Investor's portfolio of Leveraged Fund Transactions may be subject to separate
<PAGE>
debt service ratios and other covenants on the same terms applicable to other
Borrowings under the First Boston Credit Facility; and (iv) Emmes will perform
on Investor's behalf all applicable obligations and covenants under the First
Boston Credit Facility, including, without limitation, making all payments under
the Facility with respect to Borrowings on Investor's behalf, as and when due
from funds available from payments on Loans, provided that Emmes shall not be
required to advance any of its own funds to perform such obligations and
covenants, except to the extent necessary to perform such administrative or loan
servicing functions on Investor's behalf in connection with the Borrowings,
which expenses, if any, shall be borne by Emmes pursuant to Section 3.1 hereof
and the Advisory Agreement.
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the registration
statement (No. 33-80489) on Form S-8 of our reports dated July 18, 1997 and
January 20, 1995 on the financial statements and financial statement schedules
of Continental Information Systems Corporation (the "Company") which appear in
the May 31, 1997 Annual Report on Form 10-K of the Company.
PRICE WATERHOUSE LLP
August 20, 1997
Syracuse, New York
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Continental Information Systems Corporation as of and for the year ended May
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